October is always a great month for oil and gas discussion, and today is no different as a torrent of earnings came out in the last 24 hours for Q3.  Some highlights:

1. Exxon confirmed their dividend, which I’ll admit was surprising.
2. CNX released their earnings with absolutely 0 management comments, which is weird in the least and suspicious in the most (so much for subtlety).
3. Oil hit my year end target of $35/bbl (Mark Rossano and I talk about it a lot the last time I had Mark on) which was when I said in June that I would cover my E&P short, which I did (also, not investment advice).  I still think all these guys go down 50% from here minimum as there isn’t anything to be bullish about for oil (and therefore valuation) until H2 2021 (you can see that thread here on Twitter) but I hit my target and expect choppiness.  I will short it again when people surge into energy “seeing value” but for now, I’m back to cash.

But today, I want to dip my toe into a topic of significant importance and even greater controversy.  While out and about yesterday, I had the opportunity to have two very long and in depth discussions with two people who, to be frank, aren’t on the same page as me when it comes to political views and because of the core value of “individual freedoms” (republican) and “collective good” (democrat), it is no surprise our views on the response to COVID were divergent.

I’m not going to belabor all the points made, but two things struck me, one from each conversation, and I thought they were worth sharing.  The first, with a lovely woman around 55 (she may have been between 45 and 65, I couldn’t tell with the mask on), revolved around the government response and what had changed in the last 7 months, and what would change in the near future.  Our conversation led to “the vaccine” and I was surprised that she didn’t know what I consider the most important point on this topic. Here it is.

An efficacy figure of 50% would compare somewhat favorably to flu vaccine efficacy in the last decade, which has ranged from 19% to 60% since 2010, according to the CDC. 

Think about that.  People are waiting for a vaccine that is expected to be 50% effective, that is being rushed to market, on a virus, and unlike the flu, we are still learning about.  Regardless of your view on getting the vaccination, 50% effective is very different than 95%.  Can you image if wearing a condom led to a pregnancy 50% of the time?  Yeah.

The second conversation end up talking about the economy and it’s relationship/disconnect to the stock market.  Yes, I understand that we were trading at all time highs and yes, I understand that your financial advisor is telling you the recession is over because the economy grew 33% last quarter.  It’s true, but it doesn’t tell even part of the story.  We are still 8% below where we where.  A picture says 1000 words.

I understand that financial advisors are trying to tell you that “Biden will be good for the stock market because of the stimulus” and I understand the point, I just don’t agree.  Spending $2.2 trillion on another bailout will put a lot of money into the system, but this isn’t productive money.  These are loans to businesses like airlines and restaurants to keep paying employees when, in the former case, 60% less people are flying and in the latter case, government is restricting capacities to the point where restaurants cannot survive.  I am not diving down the rabbit hole of why people aren’t doing these activities, I’m making the point that stimulus is a band aid, not a solution.  Eviction moratoriums put the burden of loss on the land owner, not the renter, because the land owner doesn’t have the ability to collect (like the government who can garnish wages). That will lead to bankruptcies, failed loans, banking issues, homelessness, reduced house prices, and more problems because of leverage in the system.  But that’s not the point either.  Here’s the point as it pertains to the stock market.

Biden has said that if he gets elected, he WILL RAISE TAXES.  Capital gains is the most obvious change, making long term gains taxed at the rate of income (roughly a change from 20% to 40%).  This means sellers will sell gains in 2020 to save taxes and the stocks with the most gains are big tech: Amazon, Apple, Facebook, Microsoft, Google.  These stocks also account for 30% of the S&P.  Take this scenario one step further, if Biden does get elected, as the Vegas odds suggest, the chances that the Trump administration or Republican senate pass any stimulus bill until February are very, very low.  So the “hopes for a stimulus” that are baked into valuations are removed from the equation so those selling the stocks, have no compelling reason to buy them until they are “priced appropriately”.  As the stocks fall, and the Robinhood-ers who bought on the run up find that they are in a loss position (now that prices are below their entry price), they add to the selling and wash sale rules prevent them from repurchasing for 30 days. Short sellers step in…. and the cycle continues. Which brings us to the ultimate defense of lower capital gains rates for long term holdings: does the lower tax rate incentivize investing?  If so, the risk premium for owning shares may increase, yet again lowering there value.

Could this be a short term phenomena?  Sure.  It’s complicated, and nuanced.  Could an investor sell “Amazon” stock at a gain and immediately buy “Amazon” resetting the basis and incur the tax?  For sure.  But… if stimulus is the reason the market is higher than it was pre-pandemic when the economy was working… no stimulus until February is a big problem.

The point is, the rising market has offset the reality that main street is suffering because 401Ks are higher and people feel richer.  But, unemployment has been kept artificially low by loans to businesses that aren’t working, and the sunshine and lollipops view of the economy and market makes no sense.  A vaccine at 50% efficiency isn’t a solution.  Printing money isn’t a solution.  Restrictions on businesses that make profitability impossible isn’t a solution.  There is only one solution I see but no one is willing to say it out loud: COVID is here forever.  Like the flu.  And the sooner the media stops scaring you, focusing on the numbers and truly identifying the at risk and THE AGES AND COMORBIDITIES OF THOSE IN THE HOSPITAL, the sooner we can get back to being better than “I’m fine, considering.”