How Low Did We Go
Financial Review by Sinclair Noe
DOW + 138 = 17,995
SPX +8 = 2079
NAS + 15 = 4942
10 YR YLD – .05 = 2.20%
OIL – 26 = 50.00
GOLD – 1.80 = 1167.90
SILV – .20 = 15.83
“How Low Can Stocks Go?” That was the headline in the Wall Street Journal 6 years ago. The Dow was still slogging through 4 straight weeks of losses to close at 6547. The S&P 500 was at a 12 year low of 676. The Nasdaq Composite closed at 1268.
Not many people called it at the time. A few did. John Bogle called it 2 weeks early. Barack Obama called it 5 days early. Mark Haines called it one day late. Of course, after all four tires go flat you might not make the prediction that there will be a fifth flat tire. Nobody was really confident about a bottom until about the end of the year. The current bull market is the fourth-longest on record; it’s also the fourth strongest. When will the bull market end? No idea. I could call the end of the bull market every day, and one day I would be right but that would be a waste off time for all of us.
For now, we have a nice bounce from the sell-off on Friday. Friday we learned the economy added 295,000 jobs last month and the unemployment rate dropped to 5.5%, which should be good news, but the market is perverse, and it clearly demonstrated that it is afraid of the Fed raising interest rates. Back in 2008, the fed took emergency actions including setting a Zero Interest Rate Policy, which pushed investors into riskier and riskier assets by making the alternatives look less attractive. Remember, cash earns virtually nothing in the bank and bond yields are extremely low, so investors flocked to stocks. If and when the Fed actually raises rates, we can expect a full-fledged tantrum, or at least an 80% probability of a 5% or greater pullback.
The New York Times editorial board wrote an op-ed asking the Fed to delay rate hikes. The article outlined several reasons why the Fed should remain on hold, noting “wages have barely budged throughout the nearly six-year-old recovery” and “the labor market is not as healthy as those figures might suggest.”
You could make the case that we have seen excess when the population is willing to pay up to $10,000 for a watch with an 18 hour battery life. Which means that they are going to sell a boatload of them. The watch is basically like a smartphone, shrunk down to fit on your wrist; it has a phone, and apps, and such. This is not the first smartwatch; there are already versions from LG, Pebblewatch, Motorola, and Samsung; and they are selling well. About 10 million smartwatches shipped last year; about 40 million will ship this year.
The other announcements coming out of the big Apple event today: a new, lighter, skinnier Macbook; HBO is joining the Apple TV line-up; Apple said the iPhone was now the top smartphone in the world, having sold 700 million; Apple has tripled locations accepting Apple Pay to 700,000, including vending machines; and yes, you can Apple Pay with your Apple Watch.
Looking to stimulate the eurozone economy and avert the threat of deflation, the ECB began its €60B per month QE program today by buying German government bonds. The goal of the program is to drive up inflation, which has slipped into negative territory and has raised the specter of deflation, a broad decline in consumer prices that can eventually undercut corporate revenue. The European Central Bank has said bonds will be purchased on the open market — not directly from bond issuers, in part to avoid accusations that it is violating a ban on central bank financing of Eurozone governments. And it will wait several days before buying newly issued bonds to give financial markets time to determine a price.
QE does not spread across all the Eurozone. Greece was not invited to the party. The ECB is providing emergency aid to Greek banks, as long a they remain solvent and capitalized; they could pull the emergency lending at almost any time, and they might. The Greek government has not come up with details of a bailout plan, mainly because any bailout plan that would be acceptable to Germany would be catastrophic for Greece. Greek ministers floated the prospect of a referendum if their reforms are rejected. And so, each day the Greeks come up with a new story for why they haven’t put together a concrete proposal for bailouts. Scheherazade would be proud.
Credit rating agencies are changing the way they calculate credit scores. The three largest credit rating agencies (Equifax, Experian, and TransUnion) will be more proactive in resolving disputes over information contained in credit reports — a process federal watchdogs and consumer advocates have long decried as being stacked against individuals. Most changes will be implemented nationally and will kick in over the next six to 39 months.
GM settles with activist investor, Harry Wilson. Wilson will give up his request for a seat on the automaker’s board, in exchange for the company agreeing to buy back $5 billion dollars’ worth of shares.
Also on the buyback bandwagon, Qualcomm announced $15 billion in buybacks. The company has about $31 billion in cash on hand, but might take on debt for the buyback, because debt is cheap these days. And apparently they have forgotten how to innovate.
Tesla has confirmed that it will cut jobs in China as it continues to grapple with slow sales in the world’s biggest car market. Tesla will eliminate 30% of its Chinese staff, or about 180 of its 600 employees. Tesla only sold 120 cars in China during January.
Documents released by a Brazilian court have now outlined the alleged use of Swiss bank accounts for the payment of bribes in the ever-widening Petrobras scandal. Brazilian prosecutors investigating the Petrobras scandal allege former company executives and politicians mostly from the ruling coalition government colluded with the energy group’s contractors to receive millions of dollars of bribes in exchange for business deals.
The Brazilian attorney-general’s office this week sought permission from the supreme court to investigate 54 people, most of them politicians. In Brazil, only the highest court can deal with criminal charges against sitting congressmen. The alleged use of Swiss bank accounts in the Petrobras case is fuelling efforts in Brasília to investigate accusations of tax avoidance by Brazilians at HSBC in Switzerland. This follows raids by prosecutors last month on HSBC’s offices in Geneva over allegations of tax evasion by wealthy clients of its Swiss private banking arm.
Gasoline rose 21 cents in the past two weeks, with the average hitting $2.54 a gallon, according to the Lundberg survey. Prices bottomed out Jan. 23, but they’re still nearly $1 lower than a year ago. Oil prices were up slightly today, 26 cents to $50 a barrel. Goldman Sachs said it expected oil futures to stay low longer but noted that its earlier forecast for $40 oil may be too low.
OPEC’s top official said Sunday that the cartel’s decision to continue pumping crude in the face of collapsing prices is hurting the U.S. shale-oil industry and that a global pullback on investment could lead to a shortage that will push the market upward again. “Projects are being canceled. Investments are being revised. Costs are being squeezed.” Other top officials at the conference said they would maintain their response of continuing to pump in the face of collapsed prices caused in part by a glut of US shale oil.
Hedge funds cut bets on rising oil prices at the fastest pace since December 2012 as U.S. inventories expanded to the highest in more than three decades. Speculators pared their net-long position in West Texas Intermediate crude by 19 percent in the week ended March 3, U.S. Commodity Futures Trading Commission data show. Short wagers increased to a record for a second week. Oil producers are spending less, idling rigs and delaying wells to stem output that the government predicts will reach a four-decade high this year. That’s having little effect so far, with U.S. crude inventories expanding by 10.3 million barrels in the week ended Feb. 27, the most since 2001.The supply builds are astounding and we’re going to run out of places to put the stuff.
The United States has declared Venezuela a national security threat and ordered sanctions against seven officials from the oil-rich country in the worst bilateral diplomatic dispute since socialist President Nicolas Maduro took office in 2013. Declaring any country a threat to national security is the first step in starting a U.S. sanctions program.
Solar Impulse, an ultralight plane powered only by the sun’s rays, took off from Abu Dhabi this morning in an attempt to fly around the world without using fuel. The 21,000-mile flight is expected to take about 4 months.
Despite all thirty-one global banks passing the first round of the Fed’s stress test last Thursday, a tougher second round test this week, known as the Comprehensive Capital Analysis and Review (CCAR), will either approve or disapprove the lenders’ capital return plans. Last year, Citigroup became the only big U.S. bank to have its plans thrown out, with the Fed citing “insufficient” improvement in areas previously flagged. Other 2014 CCAR losers: Citizens, HSBC, and Santander.
Google has “assembled a team of engineers to build a version of the Android operating system to power virtual-reality applications,” sources told the WSJ. Last year, Google launched Cardboard, a cheap prototype kit meant to get developers to start writing VR apps for Android.
McDonald’s is pursuing an 18-month effort to turn its business around. In July, it announced it would reposition the brand through better value, service, marketing, and menu options. Now, about a third of the way through its turnaround plan, the effort has focused heavily on marketing and has yet to pay off as same-store sales continue to slide. MCD reported a 4 percent decline in domestic same-store sales (sales at stores open at least 13 months) for February and a 1.7 percent decline globally. It blamed aggressive competition. While U.S. same-store sales in December and January were up, it appears now that most of this bump probably resulted from better weather than last year’s. Maybe they should consider changing the slogan from “the fast food joint that made America fat.”