Swamponomics: Dividends, OPEC+, and Eggs in the Coronapocalypse

Yield to Dividends

The Dow Jones Industrial Average just enjoyed its best week since 1972, the S&P 500 is up around 20% from its lows, and the Nasdaq Composite Index keeps rebounding. Is this the end of the market rout? It depends on whom you ask. A bear might consider allocating hard-earned dollars and cents into a dividend-paying investment. This would shelter one’s net worth until the dark clouds dissipate and it is all sunshine and lollipops again. Well, not quite.

Federal Reserve Chair Jerome Powell reassured investors that financial institutions are well-capitalized, and they could continue sending out their quarterly dividends check. With trillions of dollars in liquidity pumped into the banking system, this should not even be a question. But are the banks listening? And what about the companies that have been pulverized in this market? Well, many North American and European businesses have suspended their payouts to recover from their losses and make their firms great again.

Bloomberg estimates that about $56 billion in dividend payments have been tossed out the window, and experts anticipate more to come. So far this month, Boeing, Ford, HSBC, Standard Charter, Airbus, and Rolls Royce have been just some of the publicly-traded firms to have canceled plans to complete their dividend payments. Exxon Mobil and Royal Dutch are scraping together a few pennies – capital spending reductions and fundraising – to maintain their dividend promises.

While focusing on dividends is one of the best tactics to employ in any market, it is challenging to envision too many businesses keeping up with their monthly or quarterly payments. Dividends are typically tied to earnings, and with the upcoming seasons guaranteed to be dreadful amid the Coronapocalypse, you cannot fault enterprises for withholding their distributions.

Other jurisdictions are going as far as prohibiting companies from issuing dividends. The Reserve Bank of New Zealand (RBNZ) ordered financial institutions to halt remunerating shareholders or to redeem capital notes. In March, the European Central Bank (ECB) requested banks to suspend dividend payments.

When can investors expect to get their money? That is anyone’s guess by this point.

A Crude Awakening

The April 9 trading session was an interesting one for crude oil. The energy commodity rallied as high as 12% midday, but then the rally ran out of momentum and it finished the session in the red. Black gold is just as vicious as the broader market in these times! If you were betting on an oil-related exchange-traded fund (ETF) to earn you a quick profit before the Easter long weekend, you are probably kicking yourself that you did not sell sooner.

So, what happened? Well, look no further than the Middle East and the Organization of the Petroleum Exporting Countries (OPEC) and its allies.

It was initially reported that the cartel and its oil-rich partners reached an agreement that would see production levels cut by as much as 20 million barrels per day (bpd). While the details were not released (length of reductions and allocation), markets cheered on the news and were waiting for an official announcement. Nothing happened. Once the U.S. market closed, reports surfaced that Mexico blocked an agreement in the nine-hour marathon meeting, prompting officials to restart talks the next day.

The latest development suggests that OPEC+ accepted a ten-million-bpd cut that would last until June. The decrease would taper to eight million bpd for the remainder of 2020. In January 2021, the adjustment would fall to six million bpd and continue until the end of April. The consensus is that this is not enough to rebalance the market since demand is forecast to slump by 16 million bpd this year.

U.S. crude prices have been on a roller coaster ride for more than a month. It has been a two-pronged whammy for the energy sector: COVID-19 and Saudi Arabia-Russia strife. The U.S. energy industry is beginning to adapt to changing market conditions with a mix of capital expenditure modifications and output cuts. OPEC+ is still unhappy, but the U.S. wins either way: Lower energy prices benefit consumers, and higher prices elevate the nation’s market status on the world stage.

We Need the Eggs

There will be inflation on the other side of this pandemiconomy. The Fed is ramping up the money supply and adding to its balance sheet, while the federal government is passing multiple astronomical relief packages. Plus, the U.S. economy needs to pay for all the inflation from the 2008 financial crisis.

Is price inflation already happening? Look to the eggs.

Since the start of the Coronacrisis, egg prices for supermarkets nationwide have averaged a little more than $3 for a carton of 12. At the beginning of last month, a dozen eggs set you back on average 94 cents. This makes sense. The demand is soaring, while supplies are tight. The higher prices are encouraging farmers to accelerate production, investing in new barns, and create bigger inventories of hens.

This might be a sign of the future and lend credence to Treasury Secretary Steven Mnuchin’s comments of “pent-up demand.” Or, as Robert Wenzel of the Economic Policy Journal writes about egg prices:

“This is an extreme example of what I expect to occur after the lockdown, but there will be more money around, it will take time to crank up manufacturing and consumers are going to be making up for months of purchases that they haven't been able to make.”

There is an old joke, which was made famous in Woody Allen’s Annie Hall. A guy walks into a psychiatrist’s office and says that his brother is crazy because he thinks he is a chicken. The doctor asks why he refuses to turn in his brother to the nearest mental hospital. The brother responds he needs the eggs. Allen utilized this joke to highlight his feelings about relationships – crazy, irrational, and absurd – but that is precisely how many traders feel about the market today.

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Read more from Andrew Moran.

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