Mind The Gap: SPX

Fed Fighters

An exciting week in the oil markets this past week as there is no Fed to fight when it comes to delivering a physical commodity like oil. If you own a futures contract on the settlement day then a barrel of oil is delivered to your front door and no, the Fed can’t take delivery . Oil prices are also a great barometer of not just supply dynamics but global economic health and right now the message is not so good. In an amazing fashion, the price of West Texas Crude (WTI) settled at a negative price of $37.63 on Monday! The negative price reflects a dramatic fall in economic activity and means that you had to pay someone to take it off your hands this week. Could we see another negative price on settlement day for the June contract?

Help from the Fed. @kiscocap

The stock market traded marginally lower on the week as the plummet in oil prices was countered by another bailout package from Congress. There are trillions in bailout packages and stimulus programs working through the economy so the equity market is digesting whether this money can buoy prices long enough for a turn-around in economic activity to manifest.

If we look at the three year chart below, there has been one of the sharpest rebounds ever from the March low which has paused over the last two weeks. The S&P is still short of its 61.8% retracement which means that a re-test of the March low is very much a possibility.

3 year weekly chart of the S&P 500 Index (SPX) @kiscocap
Mind The Gap on the S&P 500!


If we look at a 3 month chart of the S&P 500, we can observe a few things. First, the two key levels to watch are 2,880/2,725 as the short-term range that needs to be broken to consider the next big leg (up or down) in the S&P. There are also two unfilled gaps below and one above (filled at 2,903) – gaps eventually get filled when you analyze charts, by the way. Finally, the momentum indicators on the bottom indicate a negative divergence as the uptrend runs out of gas.

3 Month chart of the S&P 500 Index (SPX) @kiscocap

These places in the charts are tough spots as you can go either way. On one side is the economy at a standstill and on the other is a central bank working with a government to inflate risk assets. We can’t ignore the price of oil and the clarity of its message that things are not good when it comes to global trade.

One last consideration this week is the ratio of the Whilshire Index of 5000 stocks to GDP where we have exceeded the 2000 peak. Can the stimulus programs defy gravity and keep the stock market elevated? Stay tuned as we will get more information this week as we hear from the Fed on Wednesday, get a GDP reading and see earnings reports from 140 companies in the S&P 500.

Ratio of Wilshire 5000 to GDP. @kiscocap

Chart of the Week!

Price of Oil - WTI crude.

Economic & Central Banking Snippets 

  • The Federal Housing Finance Agency (FHFA) is considering whether to allow Fannie Mae and Freddie Mac, the government-controlled mortgage-finance giants, to buy home loans that recently entered forbearance, according to The Wall Street Journal.
  • More than 80 publicly listed companies have tapped the US Treasury’s $350bn bailout fund for keeping small businesses afloat through the economic shutdown, as the ethics of making use of the scheme are hotly debated in Washington and across corporate America. An analysis of public filings by the Financial Times shows that recipients of the money come from a variety of industries, ranging from radio station operators through to biotechs and coal miners. (FT)
  • More than 4.4m Americans filed for first time unemployment benefits in the fifth week since nationwide lockdowns. The cumulative total of those making claims since mid-March surpassed 26m, more than erasing the number of jobs created by the US since the financial crisis. (FT)
  • Job losses are accelerating throughout Europe as the U.K.’s National Institute of Economic and Social Research expects the unemployment rate to surge to 20% from 3.5%. With the government offering to pay 80% of workers’ salaries, about 27% of the U.K. workforce had been furloughed as of April 5, according to a report from the Office for National Statistics.
  • Markit’s US manufacturing and services composite index fell to 27.4 from 40.9, now about half the level of breakeven. The services component dropped to 27 from 39.8 while manufacturing fell to 36.9 from 48.5. (Boock Report)
  • Millions of U.S. homeowners have already stopped paying their mortgage. Over 3.4 million borrowers, representing 6.4% of all mortgages outstanding, are now in forbearance plans. That’s a jump of 477,000 loans in just one week, or a nearly 9% increase, according to Black Knight, a mortgage data and analytics firm. (Investopedia)

Macro Snippets

  • There’s a shortage of carbon dioxide production, so carbonated beverage producers and brewers are beginning to prepare for a lack of carbonation. What’s happening is that carbon dioxide is largely a byproduct of ethanol, and the collapse of oil prices means that North American producers have shut 34 of 45 ethanol plants. “Everything is so interconnected,” said CEO of the Compressed Gas Association Rich Gottwald. (MovieWeb)
  • Facebook and Google will soon have to pay news media businesses in Australia for the content they produce. “It’s only fair that those that generate content get paid for it,” said Treasurer Josh Frydenberg. A draft of the mandatory code of conduct will be released for consultation by the end of July, according to ABC News. (Investopedia)
  • Harvard University will receive nearly $9 million in aid from the federal government through the CARES Act, the Department of Education announced last week. This act allocates nearly $14 billion to support higher education institutions during the ongoing coronavirus pandemic. Of the $8,655,748 Harvard is slated to receive, the government has mandated that at least half be reserved for emergency financial aid grants to students. (Harvard Crimson)
  • United Airlines said it lost about $100 million in revenue per day in the last two weeks of March compared with the previous year, and it plans to cancel all but 10% of flights in May to match severely diminished demand that it says could linger for months. (Investopedia)
  • Owners of America’s open air shopping centers have collected less than half the rent they are due this month as companies including retailer Bed Bath & Beyond, cinema operator AMC and burger chain Shake Shack join other tenants in seeking relief from landlords. Commercial property researchers at Green Street Advisors told clients that strip mall landlords have been paid only 30-50% of their April rent, highlighting the scale of the disruption to real estate caused by the coronavirus shutdown. The tenants’ unwillingness to pay up puts the owners of the more than 30,000 strip malls across the US on track for far bigger declines in annual income than they endured during the global financial crisis. (FT)
  • Moody’s Investors Service has put 20% of covered collateralized loan obligations (CLOs) on downgrade watch as expected losses for loans underlying the securities have “increased materially” because of the coronavirus pandemic. Investors will get a clearer picture in coming weeks of how much CLOs are worth when managers report asset values. (Bloomberg)
  • Coca-Cola says global demand in terms of volume has declined 25% so far in April. In March it saw a sharp decline in sporting and entertainment events which comprise half of the firm’s revenues. “The ultimate impact on the second quarter and full year 2020 is unknown at this time, as it will depend heavily on the duration of social distancing and shelter-in-place mandates, as well as the substance and pace of macroeconomic recovery,” according tot he company. (Investopedia)
  • Small business owners have filed class action lawsuits against JPMorgan, Bank of America, Wells Fargo and US Bank over their handling of the paycheck protection program. The lawsuits alleges that the banks processed the biggest loan amounts first because it increased their origination fees. (Investopedia)
  • Chinese factories that supply Apple have slowed production and reduced staff as the coronavirus pandemic dents global demand for smartphones and other gadgets. Foxconn, the contract manufacturer, has paused hiring at its huge factory complex in Zhengzhou, which assembles iPhones. (FT)
  • Chipotle Mexican Grill has agreed to pay a fine of $25 million to resolve criminal charges related to food poisoning that affected more than 1,100 people between 2015 and 2018. This is the largest penalty in a food safety case ever, according to the Justice Dept. 
  • Singapore police said they are investigating a major energy trading firm, after revelations that it may have hidden futures losses of $800 million over several years. Last Friday, closely held Hin Leong Trading Pte. Ltd. and an affiliated shipping company, Ocean Tankers Pte. Ltd., filed for protection against creditors for 30 days at the Singapore High Court, according to an executive at one of its creditors. (WSJ)
Oil and the sunset. @kiscocap
  • Tumbling oil prices will have broad regional impacts on the U.S. economy. Wyoming, Alaska, Oklahoma, North Dakota and West Virginia all depend more on mining and energy extraction than Texas, which was the engine of a national energy boom during the past decade. Ohio and Pennsylvania increased their exposures to energy as they jumped on the fracking revolution. Pain in the oil and gas industry will likely ripple through those state economies. People who lose jobs in energy will spend less, with spillovers on housing markets, service industries and state coffers. (WSJ)
Mining and Energy production as a share of output.
  • Netflix ended the first quarter with nearly 16 million new subscribers as people around the globe hunkered down at home. With the pandemic leading to the shutdown of movie theaters, professional sports leagues, concerts and other events, streaming services such as Netflix have emerged as one of the rare video-entertainment options still available. (WSJ)
Netflix (NFLX) new paid subscribers per quarter.
  • Target‘s comparable sales have grown more than 7% so far this fiscal quarter, which began in February. Sales grew 20% in essentials and food & beverage and 16% in hardlines, while declining more than 20% in apparel & accessories. (Investopedia)
  • Delta is looking to raise $3 billion in debt by offering senior secured notes and entering into a new credit facility. The airline, which predicts a 90% drop in revenue in the second quarter, is receiving payroll support of $5.4 billion from the U.S. government. (Investopedia)
  • Amazon employees have used data about independent sellers on the company’s platform to develop competing products, a practice at odds with the company’s stated policies. The online retailing giant has long asserted, including to Congress, that when it makes and sells its own products, it doesn’t use information it collects from the site’s individual third-party sellers—data those sellers view as proprietary. Yet interviews with more than 20 former employees of Amazon’s private-label business and documents reviewed by The Wall Street Journal reveal that employees did just that. (WSJ)
  • Offshore oil drillers have begun shutting off wells in the U.S. Gulf of Mexico following a collapse in crude prices, and some executives worry that the region’s production may take years to fully recover. The offshore oil sector last year accounted for about 15% of U.S. production, or nearly two million barrels a day, a record level, Collin Eaton reports. (WSJ)
  • A record $4.65 trillion is now held in money market funds. That’s around $700 billion more than the peak level seen during the 2007–2009 global financial crisis. Further, the share of that total held by professional money managers has increased to 67%. (WSJ)
Flows into money market funds.

  • J.C. Penney is in advanced talks for bankruptcy funding with a group of lenders, a sign the troubled retailer is about to succumb to the economic collapse caused by the coronavirus pandemic. (WSJ)
  • Gap warned it had burned through half its cash savings, even after drawing down its entire credit line and skipping April rent payments, and would need to raise additional money to fund its operations this year. (WSJ)
  • Google is slashing its marketing budgets by as much as half for the second half of the year, according to internal materials viewed by CNBC. “We are re-evaluating the pace of our investment plans for the remainder of 2020 and will focus on a select number of important marketing efforts,” said a company spokesperson.
  • Franklin Templeton has shut six of its mutual funds in India after the coronavirus pandemic wrought havoc in the country’s bond markets, in a move that traps over $3bn of investors’ funds and raises risks of further turmoil across the asset management industry. That decision, which affects its Indian clients, was made after investors increased redemptions due to alarm at the spread of Covid-19. Asia’s third largest economy has been largely shut down for almost five weeks as part of efforts to combat the virus’s spread. (FT)

That is all for now and thank you for being a subscriber!


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.