By Land and Sea
Financial Review by Sinclair Noe for 01-11-2016
DOW + 52 = 16,398
SPX + 1 = 1923
NAS – 5 = 4637
10 Y + .03 = 2.16%
OIL – 2.04 = 31.12
GOLD – 10.40 = 1095.20
Chinese stocks saw another big drop. China’s Shanghai Composite tumbled 5.3% on Monday, bringing its 2016 loss to 14.8%. The sell-off did not trigger circuit breakers because the Chinese exchanges gave up on that idea after last week’s big declines. The decline came even after the yuan gained following a second intervention from the central bank.
Oil prices are sharply lower to start off the week as concerns over demand from China impact trading again, along with some fresh worries. Morgan Stanley is the latest major investment firm to forecast oil prices could fall into the $20s with the U.S. dollar continuing to strengthen against major currencies. WTI crude futures dropped under $32 a barrel; that is a 12 year low. And remember this is at a time of increased tension in the Middle East; forget the fear premium, at least unless shipments are actually disrupted. Meanwhile, oil is being pumped out of the ground as if price doesn’t matter. Maybe we need to re-think the idea that oil-dependent economies like Saudi Arabia aren’t so much pumping oil now to defend market share but to get oil out of the ground while it has any value at all.
Arch Coal filed for Chapter 11 bankruptcy. The company said it has an agreement with a majority of its lenders to erase $4.5 billion in debt from its balance sheet and allow it to keep operating without interruption. The bankruptcy court filing listed $5.8 billion in assets and $6.5 billion in debt. Coal’s share of electricity generation in the US fell to 30 percent in April, as the historically popular fuel was overtaken by gas for the first time. Coal still generated more than 40 percent of electricity globally.
If you want to see how much of a slowdown we are really seeing, look to the rails. Analysts at Bank of America say railroad cargo in the US dropped the most in six years in 2015. According to the research note, “Carloads have declined more than 5 percent in each of the past 11 weeks on a year-over-year basis. While one-off volume declines occur occasionally, they are generally followed by a recovery shortly thereafter. The current period of substantial and sustained weakness, including last week’s -10.1 percent decline, has not occurred since 2009.” And the BofA researchers put the data in historic perspective: “Similar periods of weakness have occurred in only five other instances since 1985: (1) the majority of 1988, (2) the first half of 1991, (3) several weeks in early 1996, (4) late 2000 and early 2001, and (5) late 2008 and the majority of 2009 … all either overlapped with a recession, or preceded a recession by a few quarters.”
You could argue that a shift away from coal, the slowdown in the industrial sector, and weakness in the oil patch would lead to fewer goods being moved by rail. So, for confirmation, look to the sea. Commerce between Europe and North America has literally come to a halt. Over the weekend, not one cargo ship was in-transit in the North Atlantic between Europe and North America. All of them (hundreds) were either anchored offshore or in-port. Nothing was moving. The reason commerce has stopped is simple: People are not buying things. The Baltic Dry Index, an assessment of the price of moving major raw materials by sea, dropped to 468, the lowest since the index began in 1985.
After the close of trade today, Alcoa kicked off the unofficial start to earnings reporting season. Profit excluding one-time items was 4 cents a share, beating estimates of 2-cents per share. Sales dropped to $5.2 billion. With aluminum trading near six-year lows, the company is planning to separate its manufacturing units from its legacy smelting and refining business, creating two companies later this year. Raw-aluminum prices have fallen over 25% in the past year. To cope with falling aluminum prices amid rising low-cost output from China, Alcoa has divested, closed or curtailed about a third of its global smelting capacity since 2007. Meanwhile demand from aerospace companies, Alcoa’s largest source of revenue after primary metals, has increased along with soaring aircraft production. This morning Alcoa announced it has struck a $1.5 billion long-term supply contract with General Electric’s aviation unit to supply it with advanced nickel-based superalloys, titanium and aluminum components for engines and for engine parts made by GE.
Expectations for earnings season are low, with strategists expecting a 5.3% decline in earnings in Q4, which would mark the third straight quarter of year-on-year declines for corporate profits, the first such period since 2009.
For-profit education provider Apollo Education Group said today it will consider selling itself among other options. Apollo, which had a market value of $714 million as of Friday, has been struggling with increased regulatory scrutiny that has squeezed federal aid. High debt loads and poor job prospects have kept students away. The company also reported a drop in revenue for the 18th straight quarter as new degree enrollments at University of Phoenix fell 38%. The stock lost more than three-quarters of its value in the past year.
Drugmaker Shire Plc says Baxalta International has agreed to a $32 billion cash and stock offer. The London-listed Shire first approached the US-based Baxalta with an all-stock offer in July. Shareholders will receive cash and stock with an implied total value of $45.57 per share based on Jan. 8 prices. The deal marks a strong start to mergers and acquisitions (M&A) in healthcare in 2016 after the sector saw its biggest deal-making streak in history last year, with global deals totaling $673 billion.
Asahi Group Holdings is expected to make an offer for SABMiller’s Grolsch and Peroni beer brands as early as this week. The beer properties could be sold to Asahi for as much as $3.4 billion. Grolsch and Peroni are seen as necessary merger casualties due to acquirer’s Anheuser-Busch’s deep penetration in Europe.
The Supreme Court heard oral arguments today in the case of Friedrichs v. California Teachers Association, where the plaintiff seeks to bar public-sector unions from collecting “fair-share” fees from non-members, a move known as free-riding, that could reduce union membership drastically and drain union coffers. The fair share or “agency” fee is widely seen as a compromise between the First Amendment rights of public employees who may not wish to join a union and the material interest of the unions, which are required by law to bargain on behalf of all members of a given unit, regardless of membership status. A 1977 decision known as Abood, ruled the fees constitutional. Freidrichs is a teacher in California, and along with other teachers recognized in the case they say they don’t want to underwrite union activities that are contrary to their beliefs.
Should the Supreme Court rule for the plaintiffs, the result will hit the labor movement hard. That’s because members in non-right-to-work states will find themselves newly able to receive the benefits of a union contract without having to pay for them. Public-sector unions are the only part of the labor movement that’s thrived in recent decades: Nearly 36 percent of public-sector workers are unionized, compared to less than 7 percent of private sector workers.
A decision for the Friedrichs plaintiffs would not affect private sector unions because most of these are governed separately under the National Labor Relations Act, from which public-sector workers are excluded. Nor would it necessarily lead to a later decision applying the same reasoning to private unions, because the link to First Amendment rights might be less clear in a private-sector context.
General Motors is set to go to trial today in a lawsuit over its 2014 recall of millions of vehicles for a faulty ignition switch linked to nearly 400 injuries and deaths. In the lawsuit, plaintiff Robert Scheuers claims he was injured in an accident and the air bag did not deploy, which Scheuer blamed on the switch. It is the first of six trials this year before U.S. District Judge Jesse Furman in the Southern District of New York, who oversees litigation from crash victims and from customers who say their cars lost value. While not binding on other cases, the verdict will provide insight into the strengths of both sides’ evidence as GM looks to wrap up the remaining switch litigation. It has already agreed to pay roughly $2 billion in civil and criminal penalties and settlements over the switch.
Apple Music is reported to now have more than 10 million paying subscribers. Back in October, Apple reported 6.5 million subscribers. Industry leader Spotify said in June it has 20 million paying subs. Spotify needed six whole years to attract its first 10 million paying customers, but it took Apple Music just a few months to hit the same milestone. Looking at the bigger picture, though, Apple Music’s milestone becomes somewhat less impressive. Apple preinstalls the Apple Music app on every iPhone, and there are about 90 million iPhones in the US alone. No matter how Apple got there, it looks bad for Spotify.
The College Football Championship game between Alabama and Clemson kicks off in about 2 hours, and the winner is … Nike. The brand renewed its deal with Clemson in August, signing an eight-year contract reportedly worth $23 million to the school. Alabama is even pricier: Nike signed an eight-year, $30 million deal with the school in 2010. That means Nike gets to grab all the television eyeballs for itself. And college football’s biggest stage draws many, many eyeballs. Last year 33 million watched. Good news for the Valley of the Sun as well.