Hooked on Price Hikes
FOMC no change, June still on the table. It looks like the fix is in on oil. Remember Greece? Drug companies addicted to prices.
Financial Review by Sinclair Noe for 04-27-2016
DOW + 51 = 18,041
SPX + 3 = 2095
NAS – 25 = 4863
10 Y – .07 = 1.86%
OIL + 1.29 = 45.33
GOLD + 2.50 = 1246.80
Today is a Fed FOMC day. As expected, the Fed left its benchmark interest rate unchanged at 0.25% to 0.50%. No surprise. Markets were pricing in a 0% chance of a rate hike today. With no news conference from Fed Chair Janet Yellen and no economic projections, the focus was on the wording of the Federal Open Market Committee’s statement. The Fed said the labor market had improved but there were still signs of a broader economic slowdown. Since the beginning of the year, the housing sector has improved further but business fixed investment and net exports have been soft. The Fed removed language about the risk from global markets. Inflation is still expected to rise toward 2% over the medium term. The bottom line is that a rate hike is on the table for the June 15 FOMC meeting. The initial market response was dollar up, stocks and bonds down, but that faded. The dollar index slipped, bonds closed higher and stocks recovered.
There is one notable development since the FOMC’s last meeting: oil prices have started to recover again. This morning West Texas Intermediate futures traded higher than $45 a barrel for the first time since November 2015. The move higher will come as a relief to oil majors that are in the middle of a first-quarter earnings season that is showing collapsing profits from low crude prices. The rise also pushes the price per barrel closer to $50, which is now seen as the ‘magic number’ for getting U.S. production back on stream. The American Petroleum Institute reported a drawdown of nearly 1.1 million barrels in US crude inventories last week versus a 2.4 million-barrel build expected by analysts. Later in the day, the EIA, Energy Information Administration reported US crude inventories climbed 2 million barrels last week to an all-time peak of 540.6 million barrels. If the supply-demand numbers seem a bit suspect, just remember that $50 is the magic number, and there is a concerted effort to push prices to that level.
Net-long positions for the week ending on April 19 rose to their highest level since May 2015. Short positions fell for the week and long positions jumped. Investors are looking for larger exposure to crude oil and showing a continuing willingness to buy on the dips. Speculators could be overextending themselves. Any time there is a run up in bullish bets, the chances that long positions could start to be trimmed rises. Speculators could realize that the rally has run out of steam and then decide to pocket their profits. The liquidation could then spark a correction, forcing prices back down. A macro unwind could cause severe selling, given positioning and the nature of the players in this rally.
The National Association of Realtors’ pending home sales index rose to 110.5; that’s a ten month high. After a downward revision to February data, the index is 1.4% higher than the level it touched both a year ago and a month ago. The index forecasts future sales by tracking real estate transactions in which a contract has been signed, but the deal has not yet closed. The pending sales index for the West declined 1.8% in March.
An early look at U.S. trade patterns in March points to a sharp drop in the nation’s trade deficit. The trade gap in goods — services are excluded — fell 9.5% to $56.9 billion. The goods deficit was $62.8 billion in the prior month. A smaller deficit in March could give first-quarter gross domestic product a nudge upward, though the number is still expected to be weak. A smaller deficit adds to GDP. The U.S. government will release overall trade numbers for March next week, but the size of the trade deficit is generally tied to changes in exports and imports of goods.
Negotiations between Greece and its international creditors ran into trouble over demands for extra austerity measures. The Greek government and the International Monetary Fund are at loggerheads over how to find up to $4 billion in so-called contingency measures, or additional austerity, if Greece misses its budget targets. Greek and some European Union officials had hoped an agreement could be reached quickly and approved by Eurozone finance ministers on Thursday. But that meeting was postponed. Without new rescue money by July, Greece could default on its debts and throw the 19-member Eurozone into another period of chaos. There could also be a domestic upheaval in Greece similar to last summer, when the country had a referendum on the terms accompanying its third bailout, followed by snap general elections.
The UK economy grew 0.4% in the first quarter. The preliminary look was below the 0.6% growth experienced in the fourth quarter, and it suggests the uncertainty over a potential British exit from the European Union might be taking its toll on the UK’s economy.
Spain will hold a repeat general election in June after King Felipe VI yesterday gave up trying to persuade the country’s major parties to form a government following three rounds of talks. A caretaker government has been ruling Spain since an inconclusive vote in December left the two establishment parties too weak to form a new government.
Comcast is in talks to acquire DreamWorks Animation for over $3 billion. Any deal would likely result in a merger of DreamWorks Animation operations with Comcast’s Universal Pictures, which already operates Illumination Entertainment, animator of the “Despicable Me” movies. The offer is at a 30% premium to DreamWorks’ $2.3 billion market cap at Monday’s close.
The world’s three most valuable companies – Apple, Alphabet and Microsoft – have all released disappointing results in the past week; the Apple miss yesterday wiped out $41 billion in market cap.
But this is a busy week for earnings reports, so we move on. Facebook reported adjusted first quarter earnings of 77 cents per share on revenue of about $5.38 billion. Analysts had expected Facebook to report earnings of about 62 cents per share on $5.26 billion in revenue. Most of that growth is attributable to Facebook’s $5.2 billion in advertising revenue, a 57 percent increase year-over-year. Facebook also said it planned to create a new class of non-voting capital stock, known as the Class C capital stock. If the proposal is approved, the company intends to issue two shares of Class C capital stock as a one-time stock dividend in respect of each outstanding share of its Class A and Class B common stock.
Sporting-goods maker Adidas has increased its 2016 outlook for a second time and said that strong brand momentum helped first quarter net profit rise 38% as revenue jumped 17%. Adidas now expects 2016 net profit from continuing operations to grow 15-18% vs a prior forecast of plus 10-12%.
Comcast reported better-than-expected financial results and added video customers again in the first quarter. Its quarterly profit rose to $2.13 billion, or 87 cents a share, up from $2.06 billion, or 81 cents a share, a year ago. Revenue grew 5.3% to $18.79 billion. Both figures exceeded estimates. Comcast’s results add to the cable industry’s comeback after years of losing video subscribers to satellite and phone companies.
Boeing missed first-quarter profit expectations, while beating on sales. Weakness in Boeing’s commercial airplane unit was offset by better-than-expected revenue from the military aircraft, network and space systems and global services and support businesses. Boeing affirmed its 2016 outlook.
Solar panel maker First Solar posted a quarterly profit, compared with a year-earlier loss, helped by higher revenue from the sale of a large California solar power plant to Southern Co. The solar panel maker reported a net profit of $170 million, or $1.66 per share, in the first quarter ended March 31, compared with a loss of $60 million, or 61 cents per share, a year earlier. Revenue rose nearly 81 percent to $848 million.
Ford is recalling nearly 202,000 pickup trucks, SUVs and cars in North America because the automatic transmissions can suddenly downshift to first gear. The transmission recall covers the 2011 and 2012 F-150 and the 2012 Expedition, Mustang and Lincoln Navigator.
Valeant Pharmaceuticals’ outgoing CEO Mike Pearson, the company’s former interim CEO Howard Schiller, and board member and hedge fund billionaire Bill Ackman, testified before the US Senate this afternoon; answering questions about the company’s practice of buying drugs and jacking up their prices. Valeant one of the four companies across the drug industry that the Senate Aging Committee has been investigating for price hikes since December. The House of Representatives is investigating the company for the same matter.
Pearson said that “we have not raised prices at all this year in terms of the neurology and other products.” He also said that it reduced prices for dermatology drugs. This runs counter to a report from Wells Fargo released Wednesday morning that showed that the company raised prices for 16 drugs. Senator Clare McCaskill pointed out that Valeant’s top 30 drugs actually increased in price by 70% from this time last year. McCaskill asked: “Can you find me one drug that Valeant didn’t raise the price on?” Neither Ackman nor Pearson could find one.
The problem of rising drug prices is not limited to Valeant. A report last week by the research firm IMS Health found that in 2015, list prices for drugs increased more than 12 percent, in line with the trend over the five previous years. The same report found that the net price growth – what insurers and employers actually pay for drugs – went up a far more modest 2.8 percent, one of the lowest increases in years; which means the price increases hit the uninsured the hardest.