Apr 23, 2019

Axios Markets

Dion Rabouin

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Situational awareness:

  • Researchers at Stanford say global warming has increased economic inequality since the 1960s, and the gap between the economic output of the world's richest and poorest countries is 25% larger today than it would have been without global warming. (Stanford)
  • The costs of Social Security are projected to exceed income next year for the first time since 1982. (WSJ)
  • After postponing the global launch of its Galaxy Fold, Samsung is calling for the return of all samples distributed to reviewers to investigate reports of broken screens. (Reuters)
  • After signing a 4-year, $140 million contract, Seattle Seahawks quarterback Russell Wilson gifted his linemen $12,000 each in Amazon stock. (TMZ)
1 big thing: Oil traders fear deja vu in this year's big run

Illustration: Aïda Amer/Axios

Oil prices have skyrocketed so far this year, but traders aren't filling their swimming pools with gold coins just yet.

Driving the news: Crude prices rose 3% yesterday after the State Department said it would not extend waivers allowing nations to bypass U.S. sanctions and import oil from Iran. International standard Brent crude prices have risen upwards of 30% so far this year and U.S. WTI prices close to 40%.

However, this year's rally feels eerily similar to last year when oil prices spiked above $85 a barrel in October, only to crater near $50 in December. Traders were caught on the wrong side of the unwind, with bets that prices would rise outnumbering contracts betting it would fall by 9 to 1.

  • "This is definitely not a crowded trade. ... Everybody still remembers getting burned in Q4," Michael Tran, RBC Capital Markets managing director of global energy strategy told the Financial Post.
  • Tran said the number of long oil contracts currently outnumber shorts by just 4 to 1.

The big picture: The problem is that oil prices aren't rising because the economy is improving and there's increasing demand, Jason Trennert, chairman of Strategas Research, said in an interview with CNBC on Monday. They're rising because of politics. That's not a recipe for a long-term run.

  • Barclays commodities team also expressed doubts about a lasting move higher. "A sustained rally in oil prices would remain subject to structural limits," analysts said in a note to clients. "We do not expect a further reduction in Iranian supplies in and itself to have a material effect on oil prices over the longer term."
  • Goldman Sachs' analysts note they are keeping their price target unchanged because of expectation for "better supplied markets next year and the still high uncertainties" surrounding production.

Yes, but: Much of the 2018 downturn in oil prices came because the U.S. instituted the waivers, and the Trump administration is showing little appetite to keep them in place. And with Venezuela's oil production at historic lows, 2 of the world's major producers are on the sidelines.

The bottom line: For a sustained rally in oil prices, demand will need to pick up globally, which will require healthy manufacturing and industrial economies and citizens looking to travel. Whether oil can sustain its surge this year should provide some clarity on the health of the world economy.

Bonus: The obstacles to crude's continued climb
Expand chart
Data: Markets Insider; Chart: Axios Visuals

Industry analysts say there are a number of headwinds facing the oil market in 2019 that could cool its red hot run. There's substantial supply to fill the market's void thanks to the rapid growth of U.S. shale. Saudi Arabia and its allies also have pledged to provide sufficient supply.

  • China and other U.S. adversaries also may continue importing Iran's oil. The other nations involved in the Iran nuclear deal, Britain, France, Russia and Germany, have all said they oppose the U.S.'s unilateral actions.
  • China and India imported about two-thirds of Iran's oil, Barclays analysts say, and as the largest countries on earth have major oil needs. The U.S. sanctions could provide them an opportunity to secure beneficial financing agreements with Iran, much as China has with Venezuela.
2. Sinclair plots national expansion

Sinclair Broadcast Group, the massive local conservative broadcaster that's been criticized for pushing Pro-Trump talking points, has been hiring a slew of ex-mainstream news anchors as it pushes into national news coverage. It's also reportedly in the running to buy up a handful of Fox's regional sports networks, Axios' Sara Fischer writes.

Why it matters: Sinclair's hiring spree suggests that it's looking to position itself as a national news competitor to Fox News ahead of the 2020 election, and as an overall competitor to big broadcasters with its foray into sports coverage.

  • Sinclair's stock price has risen 65% this year, though it did fall 2.3% Monday.

Flashback: This wasn't always the plan. The company's efforts to push into national news and regional sports comes after an embarrassing defeat in its attempt to expand its local news empire last year after its bid for Tribune fell through.

  • Growing the national news roster: Sinclair has hired several big-name newscasters, like Lara Logan, Eric Bolling and James Rosen in the past few months.
  • Growing the sports roster: The company has reportedly emerged as the front-runner to buy a package of regional sports networks being sold by Walt Disney Co. following a bid of around $10 billion, per Fox Business Network. The deal, if approved, would give Sinclair access to to live sports telecasts, something the local broadcaster hopes to expand on in its streaming service, STIRR.

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3. Whirlpool’s trade war boost
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Data: Company filings; Profit shown is earnings before interest and taxes (EBIT); Chart: Harry Stevens/Axios

Whirlpool is selling fewer appliances in its biggest market, but still raking in record profits, according to its first quarter earnings report, Axios' Courtenay Brown writes.

Why it matters: Whirlpool, whose CEO once praised protectionist trade policies, quickly went from the winning side to the losing side of President Trump's trade war. But it's since fended off waning demand with price hikes on washers and dryers, which in turn, has caused even less demand.

  • The big picture, via the New York Times' Jim Tankersley: "Companies that largely sell imported washers, like Samsung and LG, raised prices to compensate for the tariff costs they had to pay. But domestic manufacturers, like Whirlpool, increased prices, too, largely because they could."

Background: Trump imposed tariffs as high as 50% on imported washing machines in January of last year, which Whirlpool hoped would turn consumers away from its foreign competitors.

  • Months later, the Trump administration announced steel and aluminum tariffs, sending prices for the raw material needed to make appliances higher. "The global steel costs have risen substantially, and in particular, in the US, they have reached unexplainable levels," CEO Marc Bitzer told analysts last year, as CNN reports.

But researchers argue in a paper released this week that the industry's price increases are not a result of higher material costs, but "domestic firms exploiting their market power.”

  • Whirlpool isn't denying that. In a release alongside its earnings report, Blitzer attributed the strong results to "successful execution of price increases" despite "a soft demand environment."
  • Shares of Whirlpool rose 8% in late trading on Monday.
4. Fed doesn't pay enough for Herman Cain

Former Godfather's Pizza CEO and presidential candidate Herman Cain's decision to drop out of the running for the Fed was largely expected, but his reason for doing so was surprising.

Driving the news: Despite saying just last week that it was "not in my DNA" to bow out of a nomination to the Fed, Cain called the White House yesterday to say he didn't want to be considered for the position anymore, according to President Trump.

  • Cain wrote in an op-ed for the Western Journal yesterday that the decision was really about having to "take a pay cut" (Fed governors are paid $183,100 a year), go through vetting and being unable to "advocate on behalf of capitalism, host my radio show or make appearances on Fox Business."

Still happening: The White House is said to still be considering nominating Stephen Moore to the Fed, despite new revelations Moore wrote sexist things about women's participation in sports.

The last word (for now): "Herman Cain was woefully unqualified to be on the Federal Reserve and his failure to garner adequate support should not be used as a pathway by Senate Republicans to approve Stephen Moore, who is equally unqualified, and perhaps more political," Senate Minority Leader Chuck Schumer said in a statement Monday. "Mr. Moore, like Mr. Cain, poses a danger to the economic stability of our country."

My thought bubble: The sexual assault allegations against Cain are disqualifying as is his clear fealty to Trump and lack of economics knowledge. However, he was chairman of the Kansas City Fed's Omaha branch from 1989 to 1991. He was deputy chairman from 1992 to 1994 and chairman of the Kansas City Fed until 1996. That 4 Republican senators came forward to oppose Cain but none have so far publicly opposed Moore is noteworthy is unsurprising.

Dion Rabouin