Financial Review by Sinclair Noe for 12-29-2015
DOW + 192 = 17,720
SPX + 21 = 2078
NAS + 66 = 5107
10 Y + .08 = 2.31%
OIL + 1.06 = 37.87
GOLD + .50 = 1070.00
The Commerce Department reports the trade deficit grew to $60.5 billion in November – a three-month high – as exports declined more than imports. Exports of goods shrank 1.9% to $121 billion, the second straight monthly decline. Imports dropped a slim 0.2% to $181.5 billion in November. Trade has been a drag on growth in five of the last seven quarters, as the strong dollar and weak global economies have limited exports.
Home values in 20 U.S. cities rose at a faster pace in the year ended October as lean inventories of available properties combined with steadily improving demand. The S&P/Case-Shiller index of property values climbed 5.5 percent from October 2014 after rising 5.4 percent in the year ended September. A limited supply of properties for sale has helped prop up home values. Prices in Phoenix were up 0.5% from September to October and up 5.7% over the past 12 months ending in October. At the peak in 2006, prices in Phoenix were up 127% above the January 2000 level. Then prices in Phoenix fell slightly below the January 2000 level, and are now up 55% above January 2000 (55% nominal gain in almost 16 years).
The Conference Board’s consumer confidence index rose to 96.5 in December. In addition, confidence in November was revised higher to 92.6 from 90.4, which was the lowest level in more than a year. Consumers remain positive about the current state of the economy, particularly the job market. The number of people who anticipated more jobs in the months ahead increased slightly while the percentage who expected jobs to be scarce declined.
A new report from Sentier Research takes a look at Census data showing the median annual household income was $56,746 in November. That’s barely above October’s median of $56,688, but it was enough to top the $56,688 reached in December 2007, when the recession began. The bad news is that the median income is 1.1% lower than in January 2000, when record-keeping began. The numbers are inflation adjusted. Still, the labor market has been showing improvement, even if it barely registers as a blip in wages. The unemployment rate is down 4 percentage points from the summer of 2011, to 5.0%; the median duration of unemployment has been cut in half to 10.8 weeks, and a broader measure of underemployment (the U-6) is 9.9%, down from 16.1%.
Saudi Arabia announced plans to shrink its record $98 billion state budget deficit with spending cuts, reforms to energy subsidies and a drive to raise revenues from taxes and privatization. The Saudis are not expected to cut production in 2016. But there are increasing signs that demand might slow much sharper than expected after a spike in 2015. Oil prices higher today after dropping yesterday to near 11 year lows. Still, it looks like oil is settling in to a range of $30 to $50 a barrel. Energy users everywhere are enjoying an annual income boost worth more than $2 trillion. The net result will almost certainly accelerate global growth, because the beneficiaries of this enormous income redistribution are mostly lower- and middle-income households that spend all they earn.
On the flip side, governments of oil producing countries, such as Saudi Arabia, are cutting public spending even as they run down reserves and borrow from financial markets; and major oil companies are forced to cut back, to the tune of $200 billion this year. And Iran is about to come back online. A ship loaded with more than 25,000 pounds of low-enriched uranium has left Iran for Russia as part of a deal aimed to limit Tehran’s nuclear program. In a statement, Secretary of State John Kerry said the move was “one of the most significant steps” in fulfilling last summer’s nuclear accord, and it may be only weeks before the agreement takes effect. On “Implementation Day,” roughly $100 billion in Iranian assets will be unfrozen, and the country will be free to sell oil on world markets and operate in the global financial system.
What this means is that the big oil companies like ExxonMobil, Chevron, BP, Shell, and Total are on the ropes. Iran claims it can pump oil for $1 a barrel, and they will, soon. Saudi Arabia claims they can still make a profit under $20 a barrel. The big Western oil companies can’t compete, at least not when it comes to exploration and development of new fields. Shell learned that lesson when it came to developing Artic oil fields, it just didn’t pencil out and they had to abandon that plan at a cost of about $7 billion. What they could do is provide equipment and technology to oil producing countries, forget about exploration, and maybe go a step beyond and sell their reserves. That is precisely the strategy of self-liquidation that tobacco companies used, to the benefit of their shareholders. If oil managements refuse to put themselves out of business in the same way, activist shareholders or corporate raiders could do it for them.
As clean energy technology improves and environmental restrictions tighten, it is inevitable that much of the world’s oil reserves will be left in the ground, which means that oil companies are sitting on stranded assets that are, or soon will be, worthless. Redirecting just half the $50 billion that oil companies are likely to spend this year on exploring for new reserves would more than double the $10 billion for clean-energy research announced this month by 20 governments at the Paris climate-change conference. The financial returns from such investment would almost certainly be far higher than from oil exploration.
One of the big themes for 2016 will likely be lower commodity prices. I really don’t like to make predictions and your guess is as good as mine, but here is my thinking: first, commodity prices are in a downtrend and a trend in place is more likely to continue than it is to reverse; commodities, raw materials, the very building blocks of our economies, from oil all the way to copper, are being discounted in price. Next, demand ain’t what it used to be. For the past 8 years at least demand for raw materials and especially oil has been driven by low interest rate policy which led to over-leveraging and over-borrowing, which led to over-production and over-capacity. The Federal Reserve threw about $4 or $5 trillion at the economy but they were not alone; the central banks of the Euro Union, Japan, and especially China added in tens of trillions more. In China they built entire cities that sit empty. This over-production is unsustainable and the balloon is now drifting down to earth. And while all the over-production was happening, technology improved efficiency and conservation, further lowering demand. Eventually, commodities prices will more or less stabilize, but at much lower levels.
And the reality for big oil companies is that they are in a dying business, just like the tobacco companies and the coal companies. Imagine for a moment, the coal company CEO who, ten years ago had the foresight to realize that coal was about to be crushed, and instead had sold off reserves, made big payouts to shareholders and re-invested in almost anything other than coal. It didn’t happen and I don’t expect big oil to do it either, even if it is the smart move.
‘Tis the season to return unwanted holiday gifts — and for retailers to lament the impact of all those boomeranging sales on their bottom lines. Approximately $70 billion worth of products may be returned this holiday season. While retailers can resell some of those items or foist them off on liquidators and discount chains, much of the value of returns is lost as they move through the supply chain. Just how much do businesses lose? Last year, Americans returned about $284 billion in merchandise, according to the National Retail Federation, and anywhere from a quarter to half of that value cannot be recouped, leading to tens of billions of dollars of losses. And fraudulent returns are expected to cost retailers $2.2 billion.
Carl Icahn has sweetened his buyout bid for Pep Boys …, again. And this time the Pep Boys board determined activist investor Carl Icahn’s latest buyout offer was superior to the deal it accepted from Bridgestone. Icahn Enterprises’ latest bid of $18.50 per share values Pep Boys at about $1 billion, while Bridgestone’s previous offer of $17 per share valued the company at about $947 million. The U.S. auto parts retailer has now moved to terminate the Bridgestone agreement.
Two of the world’s largest technology firms, IBM and Microsoft, are vying to tap the fast-growing market for forecasting air quality in China. Bouts of smog enveloping Beijing already prompted authorities to declare two unprecedented “red alerts” this month, and while prediction technology won’t be able to make the air better, it could be a step toward helping the city’s 22 million people live with it. IBM and Microsoft’s advances in “cognitive computing” can provide predictions for the air quality index up to 10 days in advance using data on weather, traffic and factory use.