Evening Note

Oil got absolutely hammered today; the contract expiring tomorrow closed at -$37/barrel (yes that’s a minus sign, and, yes, they’ll pay you to come pick some up) — a phenomenon that has never occurred. 

I.e., while stocks (SPX -1.76% today) remain disconnected from economic reality, oil — while there are technical aspects to today’s historic move* — is accurately reflecting it.

*While again, the message from oil is ominous, technically it was about the owners of the May futures contract having literally no buyers, and, frankly, they can’t take delivery — as they have no place to store it. So, again, they were willing to pay someone (I presume the present storers) to take those contracts off their hands. Now, the June contract trades at $21.86 as I type, which some would say is more akin to reality. Well, okay, we’ll check back this time next month and see.

More on economic reality — and the corporate debt mess we’ve been commenting on for the past year+ — Moody’s just put 859 CLOs (collateralized loan obligations) up for review for downgrades, that’s $22 billion worth of securities… this is a space that has already been swamped with downgrades.

Back to stocks disconnecting from reality — i.e., trading at valuations that presume a notable level of earnings this year — it’s earnings season, and I always tell people to pay more attention to forward guidance than to last quarter’s earnings. Well, today IBM became the latest to withdraw its forward guidance. And, from what I understand, that’ll be happening in droves. Maybe we should pay attention to the fact that there is no forward guidance??

As I type, equity futures traders are buying today’s dip, which, per the above, doesn’t make sense. However, per human nature*, and, alas, how past bear markets have played out, it absolutely does…

*Like I said this morning:

In a nutshell, with the economy thrust into the deepest recession on modern record, the fact that stocks are trading at current levels is not about the data subtly improving and beginning to discount the recession bottoming; we’ll see that occurring as it develops. It’s about the exact same emotions that have driven the initial retracement rallies of past bear markets; i.e., hope that the data is about to subtly improve, denial of the data and the embedded buy-the-dip mentality, desperation to recover from the initial liquidity crisis-induced selloff, the belief that government actors will save the day, and the fear of missing out by the rest of those who misinterpret what’s driving the rally.


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