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A Bird's Eye View Blog

Fireside Charts: Rent's Due, the 'Shale Death Zone', and a Warning Signal from the Bond Market

By:BCM Investment Team | Date:May04, 2020 | Category: Equity, Economics, Market Highlights, Fireside Charts

If this month's rent or mortgage payment hurt a little more than usual, you aren't alone. Small businesses are struggling to keep up with expenses following the first full month since "social distancing" entered the lexicon. Only 5% of businesses surveyed made their rent payments in full and the projections of the economic impact of such a change are already in the billions of dollars. How will these effects play out in the long-term? And as airline travel has ground to a halt (along with Warren Buffet's $6 billion investment in the industry), we’re wondering about the potential impact to local economies that depend on tourism and annual influxes of college students to survive. A sustained decrease in air travel is yet another blow to the already precarious oil industry, where WTI oil prices have plummeted below their breakeven points, opening up a "Shale Death Zone" that is likely to spell the end for many small-time producers. Meanwhile, potential fallen angels are at a record high as ratings firms grow more critical—and discerning—in the coronavirus era. And despite surging QE from the Federal Reserve, unrest continues in the bond market where investment grade credit is still lagging and a widening spread to the high yield indicates trouble. 



1. What will the long-term ramifications be?


Source: WSJ Daily Shot, from 5/4/20



2. ...The losses start right away. Will the courts be swamped when they reopen? Most were overburdened before COVID-19...


Source: WSJ Daily Shot, from 5/4/20



3. Vacation destinations, college towns, anywhere that depends on inbound travel for revenue is facing a crisis.


Source: WSJ Daily Shot, from 5/4/20



4. Many smaller producers are not likely to survive. If they fold, the assets are likely to get bought for pennies on the dollar.


5.4 - shale breakevens-2

Source: Princeton Energy Advisors, from 5/1/20



5. As earnings keep coming in, traditional market metrics look expensive. The key is Q3 and Q4 after our anticipated reopening.


5.4 - forward pe expensive-2

Source: Yardeni Research, from 5/1/20



6. Credit ratings are going through requisite COVID-19 adjustments, creating many more "Fallen Angel" possibilities...


Source: WSJ Daily Shot, from 4/30/20



7. Investment-grade credit has yet to fully recover...


Source: The Chart Store, as of 4/30/20



8. ...And junk bonds are still flashing a warning signal as spreads are much wider...


Source: The Chart Store, as of 5/1/20



9. QE "to the Moon, Alice, to the moon!"


Source: The Chart Store, as of 4/29/20



10. The arrival of summer weather will certainly throw fuel on this fire!


4.22 quarantine fatigure - used

Source: NewYorker.com, from 4/22/20





Speaking of the bond market, did you notice fixed income ETFs diverge from their Net Asset Values (NAVs) in March? Check out “Bond ETF’s Price Divergence From NAV: How Do We Tell Which Was ‘Right’?” by BCM Assistant Portfolio Manager Denis Rezendes to dig into what happened and what lessons we can take from it.


What happened to  bond ETF pricing?






Disclosure: The charts and info-graphics contained in this blog are typically based on data obtained from 3rd parties and are believed to be accurate. The commentary included is the opinion of the author and subject to change at any time. Any reference to specific securities or investments are for illustrative purposes only and are not intended as investment advice nor are a recommendation to take any action. Individual securities mentioned may be held in client accounts.