Oil Markets Get Decimated
March 9, 2020
Image Shown: Oil prices have been decimated year-to-date. By Callum Turcan We are following up on our ‘Oil Prices Collapse, Reiterating 2,350-2,750 S&P 500 Target Range; Credit Crunch Looming?’ note (link here) published Sunday, March 8, to provide additional commentary on what’s going on in the shale patch right now. As of this writing, oil prices (BNO, USO) continue to get hammered. Here’s what we had to say in that recent note: The independent upstream producer space (XOP) is careening off a cliff, and that was before the OPEC+ cartel was unable to reach an agreement during their joint meeting (OPEC and non-OPEC members) on March 6. Due to the inability for the oil cartel to reach a deal, largely because Russia
S&P 500 Circuit Breakers Tripped, Dow Jones Opens Down 2,000+ Points
March 9, 2020
Image: The market remains under selling pressure, but the massive sell off the past couple weeks has only amounted to but a blip since the beginning of 2010. There could be more pain ahead. By Brian Nelson, CFA After a pre-market session March 9 that locked futures at “limit down” (futures are limited from dropping more than 5%), most investors were laser-focused on the moves of the S&P 500 ETF (SPY), which pre-market had been hovering around the $276 per-share range, off about 7%. Shortly after market open, circuit breakers were then tripped with the S&P 500 falling 7%, stopping trading for 15 minutes. The Dow Jones Industrial Average fell more than 2,000 points. We are maintaining our S&P 500
Oil Prices Collapse, Reiterating 2,350-2,750 S&P 500 Target Range; Credit Crunch Looming?
March 9, 2020
Image Source: Value Trap: Theory of Universal Valuation From Value Trap: “The banking sector was not the only sector that faced considerable selling pressure during the Financial Crisis of the late 2000s, of course. Other companies that required funding to maintain their business operations faced severe liquidity risk, or a situation where refinancing, or rolling over debt, might be difficult to do on fair terms, making such financing prohibitive in some cases. Those that faced outsize debt maturities during the most severe months of the credit crunch faced a real threat of Chapter 11 restructuring had the lending environment completely seized. In thinking about share prices as a range of probable fair value outcomes, equity prices tend to face pressure as
Coronavirus Crisis Deepens, Italy on Lockdown
March 8, 2020
Image: WHO. The epidemic curve of confirmed COVID-19 cases that have been reported outside of China is steepening. Italy remains a hotspot. By Brian Nelson, CFA The “Coronavirus Crisis” is worsening. According to the latest situation report from the World Health Organization (47), dated March 7, Italy (EWI) reported an increase of 778 new cases and 49 deaths as a result of COVID-19, increases of 20.2% and 24.9%, respectively, from the day prior. Total cases in Italy are now over 4,600 and total deaths now nearly 200, but these numbers are sure to rise in the coming days, if they have not already (the latest unofficial tally in Italy suggests new infections have risen to 5,883). The terrible news prompted
ALERT: Re-establishing “Crash Protection”
March 6, 2020
ALERT: Re-establishing “Crash Protection” — — From Value Trap: Theory of Universal Valuation: — “According to some estimates, fundamental traders, or those trading on firm-specific fundamentals, account for just 10% of trading on the exchanges today. Passive and quantitative investing, or price-agnostic trading, accounts for 6 times as much. Prices are set on the marginal trade, not on the amount of assets under management, and if most market participants aren’t trading on underlying business value, this in turn, can cause widespread dislocations in prices versus reasonably estimated intrinsic values (dislocations that may never fully be reconciled even over long periods of time). In such a scenario, the capital-raising function of markets could become significantly less attractive. What CEO would want the
Buffett Makes Another “Unforced Error” in Airlines
March 5, 2020
Image Source: Value Trap: Theory of Universal Valuation By Callum Turcan The commercial passenger airline industry is nearly impossible, to downright impossible, to generate meaningful shareholder value in. Specifically as it relates to the US, since the Airline Deregulation Act of 1978 (which among other things allowed airlines to set their own routes without always needing to seek regulatory approval which in turn greatly increased competition, lowered fares, and saw a boom in travelers and miles traveled) various airlines have gone under (such as Pan Am in 1991 and Delta Air Lines (DAL) in 2005 along with others) as competitive advantages once created by government barriers no longer existed. This is true globally as well, as rising competition from private
AT&T Provides Another Key Update
March 5, 2020
Image Shown: The blue line represents the share price performance of AT&T Inc and the orange line represents the performance of the S&P 500 Index. Shares of T have outperformed the index on a year-to-date basis as of this writing. By Callum Turcan One of our favorite high yield ideas out there is AT&T Inc (T) — ~5.6% yield — given its stellar free cash flow profile and ongoing corporate initiatives: serious debt reduction, share buybacks, upcoming launch of HBO Max, the rollout of 5G services across the US, cost structure improvements, and upside from AT&T’s public-private partnership FirstNet (billed as the first nationwide network in the US dedicated to entities/groups operating within the realm of public safety i.e. first
A ~0.1% Probability Since 1896
March 4, 2020
Image Source: Wikipedia Commons By Brian Nelson, CFA It was mid-June 2015, and our team released our case on why the midstream MLP space would collapse. To us, it just made sense. We’ve been practicing enterprise valuation for a long time, and to this day, we’ve updated over 20,000+ discounted cash flow models. I used to head up the methodology and valuation infrastructure of a department of over 100 analysts across several continents and all sectors when I used to work at Morningstar. Baptism by fire as they say. This was about 10 years ago now. Since our call in mid-June 2015 through March 2, 2020, on a price basis, the S&P 500 (SPY) has advanced 46%, while the Alerian MLP
Analyzing Three Names Within the Retail Industry
March 4, 2020
By Callum Turcan In this note, we cover one quality retailer and two retailers that were facing a myriad of problems long before the novel coronavirus (‘COVID-19’) epidemic reared its head. Best Buy One of the few retailers out there that has actually been able to mitigate the threats posed by e-commerce giant Amazon Inc (AMZN) is Best Buy Co. Inc. (BBY), and as of this writing, shares of BBY yield a decent ~2.8% on a forward-looking basis. On February 27, Best Buy reported fourth quarter and full-year earnings for fiscal 2020 (period ended February 1, 2020) that beat consensus estimates on both the top- and bottom-lines. ‘Enterprise comparable sales’ growth in the fourth quarter (includes both domestic and international
Covering Oil Markets Ahead of the Upcoming OPEC/OPEC+ Meetings
March 3, 2020
Image Source: Exxon Mobil Corporation – 2019 IR Presentation By Callum Turcan On March 5, the Organization of Petroleum Exporting Countries (‘OPEC’) is holding an “extraordinary” meeting in Vienna, Austria (EWO), which will be followed up by a ministerial meeting between OPEC and non-OPEC members the next day. The group had already agreed to cut oil (USO, BNO) supplies by an additional 0.5 million barrels of per day (‘bpd’) back in December 2019 through an agreement that would last through March 2020 (that was on top of an existing deal to keep 1.2 million bpd off of the market which runs through the end of March 2020 as well). As part of that deal, Saudi Arabia (KSA) offered to “voluntarily”
