The Sandbox Daily (9.6.2022)
The Sandbox Daily (9.6.2022)
Strategic Petroleum Reserve, Nord Stream I pipeline, SPACs, and Active vs. Passive
Welcome, Sandbox friends.
Today’s Daily discusses the drawdown efforts of the Strategic Petroleum Reserve (SPR), Russia shutting down the Nord Stream 1 pipeline indefinitely, a SPAC-focused strategy closes down, and comparing the percentage market share of equity-focused active managed funds versus passive.
Let’s dig in.
EQUITIES: S&P 500 -0.41% | Dow -0.55% | Nasdaq 100 -0.72% | Russell 2000 -0.96%
FIXED INCOME: Barclays Agg Bond -0.92% | High Yield -0.27% | 2yr UST 3.509% | 10yr UST 3.347%
COMMODITIES: Brent Crude -0.40% to $92.74/barrel. Gold -0.62% to $1,711.9/oz.
BITCOIN: -4.05% to $18,959
US DOLLAR INDEX: +0.66% to 110.254
CBOE EQUITY PUT/CALL RATIO: 0.81
VIX: +3.54% to 26.91
Drawing down the Strategic Petroleum Reserve (SPR)
America’s crude oil stockpile has fallen below 450 million barrels, marking its lowest level since 1984, as the Biden administration continues to use the Strategic Petroleum Reserve (SPR) to alleviate the premium that Americans are paying at the pumps. First introduced by President Ford in 1975 as a means of mitigating oil supply disruptions in the states, the SPR has functioned more recently as an American price-control tool following the Russian invasion of Ukraine.
The Biden administration pledged to release an average of 1 million barrels of oil a day from the SPR over 6 months, in a plan to tackle rising gas prices which reached well over $5-per-gallon earlier this summer. Whilst multi-million barrel drawdowns aren’t uncommon – previous administrations have used the SPR as an emergency response to the Gulf War and Hurricane Katrina, for example – the stockpile is starting to strain under the weight of this cost-addressing roll out.
Source: Chartr
Russia will not resume gas supplies to Europe until sanctions lifted
Russia will not resume its Natural Gas supplies to Europe until the west lifts its sanctions against Moscow, the Kremlin said over the weekend. The leading Russian energy supplier, state-controlled Gazprom PJSC, announced that a suspension of NatGas supplies heading westwards through the Nord Stream 1 pipeline would be extended indefinitely, citing “malfunctions” on a turbine along the pipeline.
An energy crisis is forming in Europe, triggered by unreliable and falling Russian gas flows, which is throttling electricity prices in the Euro zone region. Russia typically supplies ~40% of Europe's Natural Gas so the large supply gap created by sanctions against Russia has had a dramatic effect on wholesale NatGas prices. The price per megawatt hour was €70.34 at the beginning of the year, while the current market price is €251.55, a 257% increase.
Source: CNBC, Wall Street Journal, The Daily Shot
The SPAC market takes another hit
Interest in Special-Purpose Acquisition Companies (SPAC) surged in 2020, bolstered by lower regulatory barriers, promoted by popular investors, fueled by M2 money growth and lofty valuations, and aided by record low interest rates. While volatile markets caused by macroeconomic uncertainties also played a role, it was the very factors fueling the SPAC surge that caused them to go out of favor in 2021 and 2022. The chart below highlights the precipitous rise and fall in popularity within this short time frame – SPACs raised $0 in the month of July (the first month in five years that no new SPACs raised money) which is in stark contrast to the SPAC issuance during the pandemic and the longer-run average pre-pandemic.
Last week, a SPAC-focused exchange-traded fund – the Defiance Next Gen SPAC Derived ETF (SPAK) – closed down at the recommendation of its Board of Directors and liquidated its portfolio assets. The ETF opened for trading in October 2020 and returned -43.21% since inception.
Source: Renaissance Capital, FactSet, Sandbox Financial Partners
Active vs. Passive, by market share
The challenges that confront actively managed funds in today’s market are well documented: higher expenses (administrative and transaction-based costs), active risk (deviation from its benchmark), high-frequency trading and machine learning systems (arbitrage and reduce price inefficiencies), and the vast wealth of free flowing available information (up-to-the-second financial news outlets and social media reduce informational asymmetries), to name a few.
The recent struggles of active fund managers have been accompanied by a dramatic gain in passively managed fund’s market share – a trend decades in the making that began with Vanguard’s founder Jack Bogle and their industry-disrupting forage into index investing. The percentage of U.S. equity-fund assets (both mutual funds and exchange-traded funds) held by actively managed funds has plummeted to 45% from 98% over the last ~30 years.
Source: Morningstar
That’s all for today.
Blake
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersecting spheres of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily.