The closing numbers, economic news, and a look at the most important financial story of our time.
Financial Review by Sinclair Noe for 04-22-2016
DOW + 21 = 18,003
SPX + 0.10 = 2091
NAS – 39 = 4906
10 Y + .02 = 1.89%
OIL + .55 = 43.75
GOLD – 15.80 = 1233.20
Most of the session, stocks were in negative territory, and as expected, Alphabet and Microsoft kept the Nasdaq in the red. The stock market hit a wall today. After a rally that pushed the Dow above 18,000 and the S&P 500 above 2100 – close to record high, we have now hit resistance. And we are about to move into May. Remember the old wisdom: sell in May and go away. For the week, the Dow added 0.6 percent, the S&P 500 gained 0.5 percent and the Nasdaq lost 0.6 percent. Oil gained about 11% on the week.
Investors withdrew $7.3 billion from stocks in the week to April 20, the largest outflows in nine weeks, while continuing to shovel money into corporate and emerging market debt. The equity redemptions were led by $4.2 billion of outflows from U.S. stocks and $2.6 billion from Japan.
Caterpillar reported first-quarter earnings that were weaker than forecast, and lowered its expectations for the rest of the year. The company warned in March that its sales and earnings would drop amid low commodity prices, weak demand and the strong dollar.
McDonald’s reported first-quarter earnings of $1.23 per share on $5.90 billion in revenue; beating top line and bottom line estimates. McDonald’s introduced all-day breakfast at its U.S. restaurants in October. The move boosted sales last quarter and appears to be a factor in the Golden Arches’ earnings beat.
General Electric posted an operating profit and higher revenue in the first quarter, compared to a year earlier, but profit fell short of Wall Street’s expectations. GE technically posted a net loss of $98 million in the first quarter, up from a loss of $13.6 billion, although it recorded a profit of $210 million from continuing operations. The company is selling off a substantial portion of its GE Capital unit as it refocuses its efforts on its industrial businesses.
American Airlines said it was disappointed with its first-quarter revenue. Passenger revenue for each seat flown a mile, a benchmark gauge for airlines, will continue falling all year. Still, first-quarter profit topped analysts’ expectations as tumbling jet fuel prices helped reduce operating costs.
The first tech IPO of 2016 is already a disappointment. Dell’s spinoff SecureWorks priced its initial public offering at $14 per share. This was below the $15.50 to $17.50 range that the company was hoping for. The pricing gives the cybersecurity firm a market cap of about $1.13 billion. SecureWorks will trade on the Nasdaq under the ticker ‘SCWX.’ Opened at $14, closed at $14.
Looking to return to profitability, Sears Holdings is closing 68 Kmart stores and 10 Sears stores in late July. The company says that, together with $1.2 billion in debt financing raised earlier this month – to provide capital to execute its transformation and meet its financial obligations – it believes it has taken important steps toward its 2016 objectives. Liquidation sales are expected to start in the coming days.
SunEdison is vowing to press ahead with plans to build solar projects across India, despite filing for Chapter 11 on Thursday. The bankruptcy excluded India, the clean-power giant’s largest market outside the US.
Volkswagen has struck an agreement with the Justice Department to either repair or repurchase approximately 500,000 cars in the US, as part of the reparations for its emissions-cheating scandal. Lawyers in the case are still negotiating details. Volkswagen estimates the cost of the scandal has escalated to more than $18 billion, more than double the amount the company had previously set aside
More emissions trouble… Daimler reported net profit dropped 32% in the quarter, but that was overshadowed by news that the German automaker was reviewing its emissions certification process.
Leaders from 170 nations gathered today in New York for the formal signing of the climate change accord reached in Paris four months ago. The event, at the United Nations headquarters, coincided with Earth Day and marked the largest number of countries ever to sign an international agreement in a single day. The goal of the climate accord is to keep global temperatures “well below” 2-degrees Celsius increase and “to pursue efforts to limit the temperature increase to 1.5-degrees Celsius above pre-industrial levels”. By signing the accord today, leaders from China, Brazil, France, Congo, Italy, Morocco and other nations affirmed that climate change is indeed real and vowed to address it.
Signing the accord is not the same as “joining” it. For it to become law, at least 55 countries representing at least 55% of global emissions have to formally join it by ratifying or approving it within their national governments. There is no fixed timeline for this to happen, but at a minimum it is expected to take several months. The United States and China, which represent about 40% of all emissions, have said they intend to join this year. Different countries have different ways of approving the accord. The United States is among the countries that will enter it through executive action. China’s centralized government is expected to approve it quickly. The European Union, which accounts for about 12%, has met delays in its effort.
The stated goal of the accord is to keep global temperatures well below 2 degrees Celsius, or 3.6 degrees Fahrenheit, above preindustrial levels. That is a level scientists have said could avert the most damaging effects of climate change. Yet other scientists say 2 degrees is too much, prompting a continuing effort to strengthen the goal to 1.5 degrees. But that climate accord might not be enough. The US has said it will reduce its greenhouse gas emissions by 26% to 28% below its 2005 level by 2025, but the plans currently in place fall short of that target. Still, things are starting to change.
The growth in demand for coal has been dropping. Several countries are suspending coal production, or have announced their intention to go coal-free, including China, as have several US states. President Obama announced in January that he would end most new coal leasing on public lands, but his Clean Power Plan to reduce emissions from power plants was temporarily stayed by the Supreme Court in February while a lower court considers a challenge by some states and industries that say the Environmental Protection Agency lacks the authority to enforce it.
Still, the Paris climate accord has accelerated some of the trends that were evident going in. Last year the world spent a record high of $329 billion investing in renewable energy, with more than half coming from developing countries; keep in mind the increase in investment happened while oil prices were crashing, and also as prices for solar photovoltaics were dropping. Moreover, 40 countries have adopted or are planning carbon pricing, and 28 countries are undertaking energy subsidy reforms, helped by lower oil prices. Also, more than 1,000 major companies and investors have indicated they support the carbon pricing approach. The issuance of “green bonds” for sustainable infrastructure has tripled to $37 billion during the past year.
Countries, companies, academic institutions, and others have begun divesting from fossil fuels, and turning to clean energy. JPMorgan, for example, has decided against further financing coal mining projects, and the Rockefeller Family Fund with a long and profitable history of fossil fuel investments, announced last month that it was getting out. Valuation procedures often now include reviewing a company’s environmental impact, including its investment in clean energy.
More than 200 religious leaders gathered in New York this week to say they support the climate change accord negotiated in Paris last week and they want it to be put into effect quickly. They released a statement to the General Assembly of the UN, basically stating that the Earth is a gift, not just a commodity; that we need to consider the long-term protection of life, not just short-term economic gain; and environmental stewardship is a fundamental moral and religious value shared by traditions across the world.
The Paris agreement spurs countries to increase their goals over time. The next target is in 2018. The response to climate change is happening, and that is an irrefutable fact. In the very near future the marketplace for energy will change. The Bank of England and World Bank have warned of the risks to the global economy of climate change and the G20 has asked the international Financial Stability Board to investigate the issue. In January, the World Economic Forum said a catastrophe caused by climate change was the biggest potential threat to the global economy in 2016. A new study, published in the peer-reviewed journal Nature Climate Change, used economic modelling to estimate the impact of unchecked climate change. It found that in that scenario, the assets were effectively overvalued today by $2.5 trillion, but that there was a 1% chance that the overvaluation could be as high as $24 trillion.
If action is taken to tackle climate change, the study found the financial losses would be reduced overall, but that other assets such as fossil fuel companies would lose value. Scientists have shown that most of the coal, oil and gas reserves such companies own will have stay in the ground if the global rise in temperature is to be kept under 2C. The total stock market capitalization of fossil fuel companies today is about $5 trillion. In other words, there is no scenario in which the risk to financial assets are unaffected by climate change. There will be winners and losers. Fortunes will be lost, fortunes will be made. And while climate change is a huge story for science, and nature, and religion. This is, quite simply, the biggest financial story in the world.