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Stimulus checks, scams, and oil.

By: Devan Robinson


"War is mainly a catalogue of blunders." -Winston Churchill


Stimulus Checks

In case you didn't know: the helicopter money is live.  You can check on the status of your Economic Impact Payment here.  The IRS has provided tools to check on your payment for tax filers and non-filers. 

That link I provided is the ONLY place you should be checking on your payment.  This leads me to my next topic:

Scams

Scammers are out in full-force during the COVID-era.  When helicopter money is flying scammers will be trying to get their hands on it.  Please keep these tips in mind:

  • The IRS will NEVER call, text or email you.  They only communicate via mail.
  • There is no fee to receive your economic impact payment.  You don't need "help" from anyone to get your check.  The overwhelming majority of you will receive it via direct deposit or a check in the mail.
  • You should only interact with the IRS via their .gov website or the mail.

Investment scams are also rampant.  The Securities & Exchange Commission has put out a formal warning regarding COVID-19 investment scams.  In particular they are seeing a surge in COVID-19 related "pump-and-dump" schemes.  

Pump-and-dump scammers will take a stake in small, illiquid, micro-cap (penny stock) companies and convince inexperienced investors to invest.  Often they bring in investors by spreading false or misleading information.  

For example: "penny stock XYZ is on the verge of  a COVID-19 vaccine!" 

Seducing buyers into buying the penny stock will "pump up" the price.  Once the price is pumped scammers will sell their shares for a profit and investors are left with severe losses.  

To compound matters it is often hard to sell penny stocks because they are illiquid.  If nobody wants to buy your house is it really worth what you think it's worth?  That's liquidity.

Pump-and-dump schemes are pervasive on social media and internet newsletters.  They lure investors by suggesting incredible returns - "this company is the next Apple!"  The most common I'm seeing right now are unknown biotech companies scammers claim are on the cusp of the COVID-19 vaccine.  Be extremely wary of situations like these.  

Get rich quick schemes are usually just schemes.  Financial success often comes down to saving money, investing in your career, making good choices, and diversifying your investments.  That roadmap can be a tough pill to swallow at times.

A few tips to avoid schemes like these:

  • If you are contemplating an investment like this run it by your advisor first.  That's what we're here for.  We won't know the ins-and-outs of every company but we have the resources to determine if a stock is a potential scam.
  • Don't buy penny stocks (<$5/share).  Just don't.  If a company had value it wouldn't be a penny stock.  They're fool's gold.
  • If it sounds to good to be true it probably is.

Scams are like war: easy to get in but hell to get out.

Oil

With COVID-19 soaking up headlines less time is dedicated to the other prong of this bear market: oil prices. That changed yesterday!

Oil has had a dramatic decline in price this year.  You have probably noticed when filling up your car.  The price of oil started the year near $70/barrel and currently sits around $20/barrel.  

A brisk -70% decline.

There were bounds of headlines yesterday about the price of oil going negative.  I thought I'd provide some thoughts because this is a confusing topic.  The price is oil is not negative.  It's around $20/barrel for crude, seen below.

Past performance may not be indicative of future results. Indexes are not available for direct investment.

What went negative were April-expiration futures contracts on oil.  My farmers out there probably know this one.  

A futures contract is like pre-ordering your oil.  Farmers use futures contracts to lock-in the price of crops to make their business more predictable.  

So what happened yesterday?

Literal boatloads of oil were set to change hands and nobody wanted to take it driving the futures price negative.  Owners of oil had to pay firms to take it this month.  Storage is scarce for a commodity that has fallen 70% because economies are turned-off.  Nearly three-dozen oil tankers are floating off the coast of California with nowhere to go (Los Angeles Times).

What does low-oil mean for me?

Oftentimes low-oil is great for consumers because it means gas is cheap.  A lower gas price is like a tax-cut straight to the pockets of consumers.  In an ironic twist few are driving enough to enjoy this tax-cut.

Why does the stock market care about the price of oil?

Energy is an important sector of the American economy.  Think Texas, North Dakota, fracking, shale etc.  As the price of oil declines it strains the profitability of oil and gas firms and can impact jobs.  Many smaller oil-and-gas firms have highly-leveraged balance sheets because we will always need oil right?  Uh-oh.

What does this mean for markets?

I don't know.  There are winners and losers to low oil prices.  For businesses that rely on oil such as airlines and trucking this is great news.  For consumers this is great news.  For the oil-and-gas industry this is terrible news.  The big energy companies will probably be just fine and small ones will be in serious danger.

What I know: this is exactly why we diversify our portfolios.  "But oil won't stay this low for long right?"  I would be cautious; stranger things have happened in markets.  Oil-free electric semi-trucks are hitting highways this year.

Some oil history

U.S. Marines drive past burning Kuwaiti oil fields during the first Gulf War

Throughout the 1970's we had several energy-crises.  The oil we relied on to fuel our economy and military was sourced from volatile regions of the world.  We were dependent on cartels like OPEC and unstable nations like Iran for oil.  Many who grew up in the 1970's remember the gas-shortages.  

Following that string of turmoil our military and civilian leadership made energy-independence a key objective for the nation.  The effort was met across several administrations and spanned the spectrum of American politics.  

Flash forward to 2012 and we met that objective: the U.S. is a net-exporter of oil and we have more than we could possibly need.  We became energy independent by encouraging our own thriving oil-and-gas industry.  Nobody does it better than free-markets.  Necessity is the mother of invention and North American oil is flooding markets.

Now that we are energy-independent we are no longer subject to volatile regions of the world, right?

Well...sort of.  Eliminating one weakness gave rise to another.

In the 1970's we were afraid we wouldn't be able to obtain oil when we needed it.  Now we are afraid no one wants to buy it when jobs in Texas depend on selling it.  Our vulnerability has shifted from supply to demand.  In the past we worried about adversaries like Saddam Hussein torching Kuwaiti oil fields.  Now we worry about adversaries like Vladimir Putin crippling U.S. oil-and-gas jobs to hurt the west (Wall Street Journal).

Don't get me wrong: our energy independence is absolutely a good thing.  I just find it interesting how we've come full-circle.  The world is complicated.

Have a great week,

Devan

The foregoing content reflects the opinions of Fairlead Financial Group LLC and is subject to change. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.

Past performance may not be indicative of future results. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful, or that markets will recover or react as they have in the past.