Heisenberg Report

Rotation Stillborn

Ever-elusive, the pro-cyclical rotation trade appears to have been snuffed out yet again.

There are two sides to this story. One one side, Thursday evening’s blockbuster results from US tech titans suggest that, for now, there will be no passing of the leadership baton. On the other, rising jobless claims, D.C. paralysis, and dastardly reports from US energy giants collectively point to further underperformance from perennial laggards, undermining the case for a catch-up trade.

Once again, the adjectives “nascent” and “burgeoning” proved quite apt when describing the fledgling rotation that showed up in late May and early June.

Results from Exxon and Chevron marked a stark juxtaposition with Amazon, Apple, and Facebook.

Last quarter, Exxon reported its first loss in more than three decades, while Chevron said it would cut spending further and shut some 400,000 barrels per day of production.

“When you think about these results, don’t forget that Q1 ended on March 31”, I mused at the time. “Things got considerably worse for oil after that, so one shudders to think what Q2 is going to look like”.

Well, now we know. Exxon rang up a $1.1 billion loss in the second quarter, making what was already unprecedented even more anomalous. You can take the figure (below) back as far as you want — you will not find a comparable quarter.

Chevron’s adjusted loss (i.e., not counting writedowns on its Venezuela investment and other assets) was $3 billion. That too is unprecedented. The last time Chevron logged a net loss was in early 2016, and before that in 2006 and 2002. The company did say that demand and commodity prices have staged a tentative rebound, but not to pre-COVID levels.

Results could suffer well into the third quarter, Chevron conceded. Exxon said the oil demand recovery would only play out “well into 2021”. The following screencap from Exxon’s results is telling.

Caterpillar added insult to injury for those hoping that someone (anyone) might suggest there’s a light at the end of the tunnel for cyclicals and sectors generally associated with the reflation narrative and/or a broad-based pickup in economic activity.

The bellwether did manage to beat profit estimates thanks to cost reductions in the second quarter, but another steep decline in machine sales arguably speaks louder than the bottom-line beat. Globally, sales dropped 23% in June, matching May’s decline, and extending a truly rough stretch. Sales were down in every region except AsiaPac.

The company emphasized the tenuous nature of the operating environment. “Financial results for the remainder of 2020 will be impacted by continued global economic uncertainty due to the COVID-19 pandemic”, reads one passage from the earnings release. Caterpillar yanked guidance in March and provided no fresh forecast on Friday.

“No, there will not be a sustained rotation to energy, banks, or other industries put in the value-stock bucket in the short-term”, Bloomberg’s Andrew Cinko remarked.

“[The] mega-tech earnings blowout combined with sour results from Exxon [and] Chevron… mean the growth/value relationship will safely remain with the hot stocks”, Cinko added, noting that this will likely “negate the recent wobble in growth relative to value, which was the latest false dawn for a rotation”.

He went on to offer some evidence to support the notion that the broad market “is not as lopsided as it may seem”, but the bottom line is that like so many of their predecessors, recent rotations were stillborn.