Financial Review by Sinclair Noe for 01-13-2016
DOW – 364 = 16,151
SPX – 48 = 1890
NAS – 159 = 4526
10 Y – .04 = 2.07%
OIL + .10 = 30.54
GOLD + 7.00 = 1094.50
US markets started trading higher but the gains faded fast. This has been the pattern in 4 of the last 5 trading sessions; early gains collapsing into the close. The next real level of support in the Dow is around 16,000, more specifically 15,981, the lows from September 28. Then the more significant level of support is at 15,370, the low from August 24. That doesn’t mean we will rush down to those levels. I would anticipate markets trying to rally at some point, just because the carnage has been brutal to start the year. Remember that on December 29, the Dow high was 17,750. That means the Dow is down about 1650 and closing in on a 10% correction over the course of the past 2 weeks. You can’t really call it a crash, but it is enough to make plenty of people nervous.
Yesterday, we talked about all the research analysts from the investment banks saying “sell everything” or “sell on rallies”; this kind of recommendation might be a contrarian indicator, or it might be headline grabbing hogwash, or it might be a self-fulfilling prophesy. Moving down the trading chain, RIAs, registered investment advisors, have been making portfolio changes, with more likely on the way. The main trend: reducing exposure to anticipated rising interest rates and the market volatility that could result. TD Ameritrade’s Institutional RIA Sentiment Survey found that 79% of RIAs reported adjusting asset allocations to accommodate what is expected to be a rising interest rate environment in the US.
And while it can be tempting to panic and run, that’s not the correct answer. Before you enter any trade, you should set your exit. If you have been in a position for a while, you should occasionally re-set your exit strategy. If your exit strategy is not hit, you sit tight. If your exit strategy is hit, you are out and you don’t have to think about it. Either way, it should be an automatic decision. If emotion gets involved, you aren’t doing it right. If you are kicked out of a position, you look for a re-entry, and you only re-enter with an exit strategy in place. Lather, rinse, repeat. If you can’t figure this part out, you really should not be in the stock market. Go play the lottery or something. Actually, that might explain a lot.
Late yesterday the American Petroleum Institute reported oil inventories unexpectedly fell last week, sliding 3.9 million barrels to 480 million. This morning crude futures moved higher, but it didn’t last long. Mid-morning, the Energy Information Administration reported US crude inventories rose by 234,000 barrels last week, smaller than the 2 million barrels build that analysts had forecast, but still inventories grew. That brought total US crude stocks to 482.6 million barrels; keeping them near levels not seen for this time of the year in at least the last 80 years. Inventories of gasoline (the same stuff that crude oil ultimately gets refined into) increased by 8.4 million barrels in the week to January 8, following a 10.6 million barrel build the previous week, according to the latest data from the Energy Information Administration. This was much bigger than the 1.6 million barrel build that analysts had projected.
So crude oil started the session higher, dropped, and then eked out a small gain of 10 cents, to settle at $30.54 a barrel. Now, some of the alarmists forecasts are calling for $20 or even $10 oil in the near future, but most of the forecasts are calling for the average price of oil for 2016 around $45 or $50 a barrel, which would mean an increase of 50% to 60%. We know that $20 or $30 oil is unsustainable for a large part of the oil patch, and so we have seen lower investment and we will eventually see lower production, but the real trick is how fast or slow that plays out, and how much damage is done to the oil infrastructure between now and then.
The Federal Reserve published its Beige Book today; this is an anecdotal look at the economy provided by the 12 Fed districts. The report comes two weeks ahead of the Fed’s next policy committee meeting. Modest growth was reported in 9 of its 12 districts. Labor markets were described as tight or tightening in four districts but overall wage pressures “remained subdued.” Nine of the 12 districts reported growth in consumer spending though the holiday season. Nearly half of the 12 districts reported overall declines in manufacturing activity, due to the strong dollar and weak demand from overseas. Inflation “remained minimal during the reporting period.” In other words – why did the Fed hike rates in December?
Anheuser-Busch InBev started offering bonds that will back its takeover of SABMiller in a sale that’s likely to stretch into Europe and become the biggest corporate-debt offering on record. The brewer may sell about $25 billion of dollar-denominated bonds in as many as eight parts. Maturities will range from three to 30 years, according to a regulatory filing. The company has lined up $75 billion of loans to help fund the takeover, and it’s expected to tap debt markets in other regions later.
Apple is apparently considering a purchase of Time Warner. And if you think that Apple is serious about finally launching Apple TV, it makes sense. Time Warner includes: Turner, HBO, and Warner. Now break it down further and those three segments include CNN, the CW, Turner Broadcasting, TNT, TBS, and all the original content and syndicated programs that flow from there; also, HBO, New Line Cinema, Castle Rock Entertainment, DC Comics, and Warner Brothers itself, which includes about 100 years of history in film and television, and interactive games based on some of those films. And while certain parts may be more attractive than the whole, Time Warner has a market cap of $56 billion, which is still pocket change for Apple. There are a couple of problems: first, Time Warner is not for sale, but activists have been urging Time Warner to spin off some assets; second, there might be other potential buyers, including AT&T DirecTV, Amazon, or Google.
MetLife says it is considering spinning off its retail life and annuity business in the United States because regulations enforced after the financial crisis have put it under financial pressure. Two years ago, the Financial Stability Oversight Council named MetLife a systemically important nonbank financial institution, or SiFi. This required more capital to be set aside as a cushion against a substantial decline in financial markets. So MetLife claims they are not too big to fail and to prove it they sued the US government. This is the same MetLife that runs TV ads touting how they are a global conglomerate with millions of clients and trillions in insurance, but if they are labeled systemically important, they would have to hold extra capital. MetLife says they don’t need the extra capital because everything is fine, the government says they should have the extra capital, you know, kind of like insurance in case something goes wrong.
The California Air Resources Board has rejected Volkswagen’s plan to fix 2.0 liter diesel cars equipped with software that allows them to emit up to 40-times legally allowable pollution. The move turns up the pressure on VW before talks this week between CEO Matthias Müller and the EPA’s Gina McCarthy.
Ford announced a special dividend. The automaker announced a $0.25-per-share special dividend, in addition to its regular $0.15-per-share dividend. According to Ford, the $1 billion supplemental dividend “reflects the company’s strong financial performance in 2015 and robust cash and liquidity levels.” The company also announced it expected to earn $10 billion in 2016, about the same as in 2015.
General Motors raised its earnings projection for 2016 by 25 cents a share, increased the size of its share buyback and boosted the dividend to start the year. GM forecast adjusted earnings per share of $5.25 to $5.75 for the year. Anticipating better profits, GM’s board raised the share buyback plan to $9 billion from $5 billion and boosted the dividend to 38 cents a share from 36 cents.
The National Football League is headed back to Los Angeles. After two decades without a team in the nation’s second largest media market, NFL owners voted Tuesday to move the St. Louis Rams back to the city they called home for nearly 50 years. The plan is to build a $2 billion stadium in Inglewood. I still haven’t seen final figures on how much of that will be taxpayer financed, but maybe Los Angeles should buy a lottery ticket. NFL owners also gave the San Diego Chargers the right to join the Rams if the two franchises can work out a deal to share the planned stadium. The Chargers have two months to decide whether they want to move to Los Angeles for the 2016 season and one year to decide whether they will move there at all. The bigger mystery is where the Raiders will play next season, and the possibilities are seemingly endless but may point to a choice between staying in Oakland or moving to San Antonio. The answer will depend on which city offers the most cash.