Natural gas update – EIA sees rising prices

Commodities

Warren Buffet just made a $10bn bet on natural gas after prices hit a 25-year low. In the long term, he seems to think gas will play a key part in the energy mix. But where will natural gas prices head in the medium-term?

In its latest Short-Term Energy Outlook, the US Energy Information Administration argued that prices could rise further over the coming months.

The EIA expects US natural gas consumption will decline by 3% in 2020, largely due to lower consumption in the industrial sector because of lockdown efforts and ensuing reductions in economic activity, which will mean working natural gas in storage could hit record levels by October.

“Forecast US natural gas consumption declines by 5% in 2021 as a result of expected rising natural gas prices. The rising prices will reduce the use of natural gas in the electric power sector, which will more than offset increases in natural gas consumption in the industrial, commercial, and residential sectors,” the EIA said.

Whilst the spot price briefly hit a 25-year low before the last contract expired, average prices also very weak on an historic basis. The Henry Hub natural gas spot price averaged $1.63 per million British thermal units (MMBtu) in June, which the EIA notes was the lowest inflation-adjusted price since at least 1989. The EIA said it expects falling production to put upward pressure on natural gas prices through the end of 2021, forecasting Henry Hub spot prices to average $1.93/MMBtu in 2020 and $3.10/MMBtu in 2021.

Warren Buffett slashes Goldman Sachs position

Equities

Warren Buffett dramatically cut his position in Goldman Sachs during the first quarter. Berkshire Hathaway’s latest regulatory filing revealed that the conglomerate sold 84% of its stake in GS, dropping the size of its position from 12 million shares to 1.9 million.

It’s another unsettling sign from the Oracle of Omaha, who famously rode to the rescue of market sentiment during the financial crisis, pumping a huge amount of money into companies to help shore up market confidence.

Goldman Sachs was one of these companies, with Berkshire making an investment of $5 billion through preferred stock. Buffett also invested $3 billion into General Electric, $5 billion into Bank of America, and bought Burlington Northern Santa Fe Railway for $26 billion.

Buffett sells Goldman Sachs, dumps airline stocks

The news that Buffett has dramatically cut his position in Goldman Sachs comes just after the company’s annual general meeting, in which he revealed that he closed his positions on the big four US airlines.

Berkshire had been among the three largest shareholders of American Airlines, United Airlines, Delta, and Southwest Airlines. Buffett stood behind the “four excellent CEOs” of the companies, but said that the outlook for air travel was a lot less clear thanks to the coronavirus pandemic.

Is Warren Buffett planning on sitting out this crisis?

Buffett’s response to the current market downturn couldn’t be more different to that of 2008-9. Berkshire Hathaway is sitting on a record cash pile of around $137 billion. Buffett bought very little in the first quarter and hasn’t found any interesting potential candidates for one of his famous multibillion-dollar acquisitions.

This has weighed on Berkshire Hathaway stock, which is down around 22% year-to-date, compared to a 9% decline for the S&P 500.

Is Goldman Sachs a sell?

Warren Buffett was not the only hedge fund manager selling Goldman Sachs during the first quarter. The Marketsx Hedge Fund Confidence tool shows that Ray Dalio of Bridgewater Associates closed his position. Greenlight Capital’s David Einhorn, however, opened a position worth $11 million.

Overall, hedge fund managers sold around 30 million shares in Goldman Sachs during Q1 (a third of which was Buffett), suggesting negative sentiment amongst the world’s leading money managers.

However, Wall Street analysts rate the stock a “Buy”, according to the Analyst Recommendations tool. The average price target at the time of writing represents an impressive 17% upside at $212.87. Nine analysts rate the stock a “Buy”, while seven rate it a “Hold”.

Warren Buffett dumps airlines, Berkshire posts biggest quarterly loss

CFD Trading
Equities

Is Warren Buffett losing his touch? Stock in Berkshire Hathaway, the legendary company founded by the Oracle of Omaha, is down 22% year-to-date, compared to a 12% loss for the S&P 500. It’s the company’s worst performance against the benchmark index in a decade.

On top of that, earnings released over the weekend revealed a near $50 billion loss in the first quarter; the company’s biggest ever.

According to Berkshire Hathaway, up until the coronavirus pandemic hit the US proper many of its businesses were showing year-on-year revenue and earnings growth, but that quickly changed in April:

As efforts to contain the spread of the COVID-19 pandemic accelerated in the second half of March and continued through April, most of our businesses were negatively affected, with the effects to date ranging from relatively minor to severe,” the company said in its regulatory filing.

Chart: Berkshire Hathaway (blue) performance versus the S&P 500 cash market (purple) since January 1st 2020, Marketsx.

Turbulence for airline stocks hits Berkshire earnings

Buffett announced during the company’s AGM that he had sold off his stakes in American Airlines, Delta Airlines, Southwest Airlines and United Airlines. “Our airline position was a mistake,” Buffett told investors during the virtual gathering, after disclosing that he sold the airline stocks for $6.1 billion, much less than he paid for them.

The news sent AAL down 7.7%, DAL down 6.4%, LUV down 5.7%, and UAL down 5.1% on Monday. Buffett put the blame for the sale squarely on the pandemic, stating that he believes the companies are well-managed, but that “the airline business… changed in a very major way” and that the future was much less certain.

Even if passenger volumes do return to normal within the next few years, airlines could  struggle with the repercussion of taking billions of dollars in loans as part of the US government’s bailout package. As well as repaying these, the Treasury now has warrants to acquire their shares at a discount if it chooses to exercise the right.

Why isn’t Berkshire Hathaway snapping up cheap stocks?

Berkshire had a record $137 billion in cash at the end of the first quarter. The company’s shareholders have been wondering why the Oracle of Omaha hasn’t taken advantage of the huge drop in stock prices on the back of the COVID-19 pandemic. By March 23rd the S&P 500 was down 35% from the February 19th record.

Buying while others are selling is a classic Buffett move, after all. One of his (many) famous suggestions is to be greedy while others are fearful. He used the financial crisis to snap up shares in major US banks like Bank of America and Goldman Sachs for cheap.

But currently he doesn’t “see anything that attractive”. He told investors during the AGM that Berkshire is “willing to do something very big” should the right opportunity come along.

I mean you could come to me on Monday morning with something that involved $30, or $40 billion or $50 billion,” Buffett said. “And if we really like what we are seeing, we would do it.”

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European markets tumble in catchup trade, Trump bashes China

Morning Note

On the plus side, the UK is sketching out how it plans to end the lockdown. On the minus side, it’s going to take a long time to get back to normal. This, in a nutshell, is the problem facing the global economy and it is one reason why equity markets are not finding a straight line back to where they were pre-crisis.

Indices on mainland Europe are catching up with the losses sustained in London and New York today, having been shut Friday. The DAX retreated 3% on the open to take a look again at 10,500, whilst the FTSE 100 extended losses to trade about 20 points lower. Hong Kong turned sharply lower ahead of its GDP report.

Whilst monetary and fiscal stimulus sustained a strong rally through April – the best monthly gain for Wall Street since 1987 – it’s harder to see how it can continue to spur gains for equity markets. Moreover, US-China tensions are resurfacing as a result of the outbreak, which is weighing on sentiment. Donald Trump spoke of a ‘very conclusive’ report on China – the demand for reparations will grow, and trade will suffer as the easiest policy lever for the White House to pull. This is an election year so I’d expect Trump to beat on the Chinese as hard as he can without actually going to war. Trade Wars 2.0 will be worse than the original.

And as I pointed out in yesterday’s note, equity indices are showing signs of a potential reversal with the gravestone doji formations on the weekly candle charts looking ominous.

Warren Buffet doesn’t see anything worth investing in. Berkshire Hathaway has $137bn in cash but the Oracle of Omaha hasn’t found anything attractive, he said on Sunday’s shareholder meeting. His advice: buy an index fund and stop paying for advice.

In FX, today’s slate is rather bare but there are some European manufacturing PMIs likely to print at the low end. The US dollar is finding bid as risk appetite weakens, favouring further downside for major peers. EURUSD retreated further having bounced off the 100-day SMA just above 1.10 to find support around 1.09250. GBPUSD has further pulled away from 1.25 to 1.2460.

Front month WTI retreated further away from $20. CFTC figures show speculative long trades in WTI jumped 35% – the worry is traders are trying to pick this market and the physical market is still not able to catch up with the speculators. The move in speculative positioning and price action raises concerns about volatility in the front month contract heading into the rest of May.

BT Group shares dropped more than 3% on reports it’s looking to cut its dividend this week. Quite frankly they ought to have cut it months ago. I rehash what I said in January: Newish CEO Philip Jansen should have done a kitchen sink job and cut the dividend from the start. The cost of investment in 5G and fibre is crippling, despite the cutbacks and cost savings. Net debt ballooned to more than £18.2bn – up £7.2bn from March 31st 2019. How can BT justify paying over £1bn in dividends when it needs to sort this debt out, get a grip on the pension deficit and do the kind of capex needed for 5G and mass fibre rollout? Given the current environment, a dividend cut seems assured.

What to watch this week

NFP – Friday’s nonfarm payrolls release is likely to be a history-making event. Last month’s -701k didn’t reflect many days of lockdown, so the coming month’s print will be seismic. However, this is backward looking data – we know that in the last initial jobless claims have totalled around 30m in six weeks – the NFP number could be as high as 22m according to forecasts. The unemployment rate will soar to 16-17%. The main focus remains on exiting lockdown and finding a cure.

BOE – The Bank of England may well choose this meeting to expand its QE programme by another £200bn, but equally it may choose to sit it out and simply say that it stands ready to do more etc. The Bank will update forecasts in the latest Monetary Policy Report, with the main focus likely to be on how bad they think Q2 will be. Estimates vary, but NIESR said Thursday the contraction will be 15-25%.

RBA – The Australian dollar is our best risk proxy right now. The collapse in AUDJPY on Thursday back to 68.5 after it failed to break 70 was a proxy for equity market sentiment. We will wait to see whether the Reserve Bank of Australia meeting on Tuesday gives any fresh direction to AUD, however there is not going to be a change in policy.

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