AN ALTERNATIVE TO MONEY MARKET FUNDS
By Don Ames, Sarasota Family Office Association
June is behind us and July started off with a bang ahead of the 4th of July weekend. Last Thursday’s Nonfarm Payroll Report helped stocks roar ahead as a record 4.8 million jobs were created in June. According to Dow Jones, economists were expecting an increase of 2.9 million jobs. The U-3 unemployment rate fell to 11.1% from 13.3% in May. The U-6 rate, a broader measure of the employment picture widely followed by economists, fell to 18% from 21.2% a month ago. The next unemployment report is scheduled for August 7.
Since bottoming in March, the major equity indices have made an amazing recovery. At its low on March 23, the S&P 500 fell over 35% from its record high in February while the Dow Jones Industrial Average fell over 38%. As of the close of trading on July 2, the NASDAQ index is up 13.76% in 2020. Meanwhile, the Dow Jones industrial Average is down 9.50% while the S&P 500 is down 3.12%, year to date.
The oil market has rallied strongly since crashing into negative territory in April when it reached a record low price of -$37.63 for a barrel of WTI crude oil. As of the close of trading on July 2, West Texas Intermediate crude oil closed @ $40.32/barrel while Brent closed @ $42.80/barrel. Despite the rally, several major oil companies have written down the value of their oil and gas assets. Royal Dutch Shell had a write down of $22 billion along with a large dividend cut. UK oil giant BP announced a $17.5 impairment charge while Occidental expects to take a charge of up to $9 billion. Last Friday, Reuters reported that Exxon may write down the value of its oil and gas assets acquired in its acquisition of XTO in 2010.
Since my last column, there have been a few significant corporate developments to mention. Tesla’s market capitalization eclipsed Toyota’s making Tesla the world’s most valuable auto maker by market capitalization. Although not a member of the S&P 500, Tesla now has a market capitalization that exceeds Disney, Coca Cola, Merck and Exxon. On July 1, FedEx surged over 14% after reporting much better than expected results the night before. According to Bloomberg News, Boeing will cease production of the 747 jet in about two years.
In an unusual financing, BP raised nearly $12 billion in a hybrid debt offering. The funds were raised last month in different currencies and there is no maturity date on the debt. As a result, the funds raised are treated as equity for accounting purposes while the interest payments are fully tax deductible. With interest rates around the globe likely to stay low for years to come, this hybrid security may become a popular way for major corporations to raise equity.