No, oil is not worthless. No, not every retailer but Amazon (AMZN) is going to zero. No, not every biotech is going to go higher every day. But that's what it feels like. And I don't blame a soul for thinking that none of this makes any sense at all, because in many ways it doesn't.
We are in uncharted waters right now. We are witnessing some historic divergences that don't lend themselves to easy explanation. We have to take them one at a time, because some, namely the price of oil -- negative $37 today -- is almost science fiction.
Let's start with oil because it was, frankly, scary to watch.
At dawn it was down about a dollar and a half. By the time the stock market opened, it was down $11. Then it went negative, meaning that whoever owned the oil last had to pay someone to take it. Next thing you, know it's down ten, then down twenty and finally down $37, which signals a real broken market. That can only mean some financial buyer, someone betting that the market would bounce, perhaps at a couple of dollars when they may have bought it at a dollar, some scalper took some barrels down, ended up being scalped as it never bounced.
Remember that owner or that buyer has to find some place, any place, and in the end the companies that had saved room, had space -- of which there were many who held back -- got paid to take the oil. They might have had empty tanker space. Or maybe they had holes in the ground. They were ready, the owners weren't.
But it was just a financial windfall. Oil, itself, is not worthless. It was just worth as much as it took for that financial buyer to find a home for it other than his own swimming pool and thousands of others to boot...
So, many things are broken, so many prices have gone haywire that the averages themselves are no longer capable of relaying what any publicly traded company is worth. Even more important, the USO exchange-traded fund (USO) apparently owned oil, a financial owner if there ever were one, and the ETF had to sell the oil it owned at any price. More on that later, too.
You could argue, for example, that every single oil company, every single pipeline company, every oil and gas driller or service company, is worthless and that would be wrong. Many of them aren't levered to the near-term prices of oil. Others are well-hedged and, while no doubt aghast at what is happening, they are not jumping out of windows. They certainly wish there were more storage, because they could make fortunes taking oil and being paid for doing so only to be able to sell it at a higher price a month from now, which is what you could do if you had the space. That's right, if you had a place to put the oil, you could have gotten someone to pay you to take it, and you could sell it in the futures market for $20 a barrel. That's a malfunctioning market. It simply shouldn't happen. Things shouldn't go below zero, ever. But it did.
How did Covid-19 effectively destroy the oil market? Because no actual buyers, companies that need oil, surfaced at the end of the day to take advantage of it. Our government could have bought it all and put it in the strategic petroleum reserve, but it didn't look like they were there.
We know who didn't want any: refiners, airlines, utilities. Or hedge funds -- who have been renting space in the big Cushing oil complex or on tankers, as all of tankers seem to be full. The stock of Nordic Amrican Tankers (NAT) , up over 18% just Monday, a stock that should go higher, tells the story.
At the same time, the usual winners, the cruise ships, the airliners the restaurants, aren't losers. There's not enough demand for their products, either.
And it call comes back to what everything comes back to: Covid-19.
Covid-19 has robbed all the traditional buyers of demand. If you are United Airlines (UAL) do you really need any near-term oil? Could you store it anyway? That' s not even your business.
How about traditional gas stations? Why? There roads are empty. You don't need refined product.
It's all Covid-19.
I would love to tell you that the oil stocks are buys. But why? If this kind of nonsense keeps up, these companies won't be able to stay in business. They will be like retailers, who have to close, because of the disease. And some, maybe many, will never open again.
Now, we know that there are plenty of financial companies that are on the hook for loans to these oil companies. Last week, we had the big banks report and they all have made loans to oil companies and I think the banks right now are reassessing their exposure.
There are plenty of companies that do business in the Permian, along the periphery and they will be hurt, too.
But the most important takeaway, I believe, is that you can't ignore something this big. You can't just say, "Oh, that's those wacky oil traders."
What it says is that without real demand, a lot of things go wrong.
Last week, Matt Gallagher, the CEO of Parsley Energy (PE) was on "Mad Money," and he had made a strong gambit to try to get the Texas Railroad Commission, the energy regulator for Texas, to make it so each producer had a quota, kind of like OPEC. The commission will make a determination next week. But it sure made sense. I think Matt could give you an "I told you so."
How about the rest of the market? How in heck could an Amazon be running? How is it possible that a Shopify keeps running? Why is a vertex unstoppable? Or an Abbott (ABT) ?
Pretty simple: They are the other side of the trade. They and their ilk are companies that do well when you can't shop, or do well when you are sick. The latter makes a ton of sense. There is no stopping cystic fibrosis. So why not buy the stock of Vertex, which we have been recommending, because it has a miracle drug that can control CF. Abbott? It's got the test.
Shopify? It's like Amazon.
Do these stocks mock us? Normally, I would say, yes. But we expected that there would be more money coming to small- and medium-sized business coming from Washington, but there was no bill, so there's a sense that Washington is not there to help.
I think we can take a breath. I believe that oil is a total distortion. The oil stocks are saying that.
The main takeaway of today is that our economy is closed. The economy still runs on fossil fuels. And we don't need any.
I rack my brains trying to figure out what business can do well in a time when gasoline is cheap and you can't congregate or go to a theater.
My make-up person came up with it: We need to bring back the drive-in.
Don't know what that is?