Most Powerful Might Not Be Enough
Financial Review by Sinclair Noe for 02-03-2016
DOW + 183 = 16,336
SPX + 9 = 1912
NAS – 12 = 4504
10 Y + .02 = 1.88%
OIL + 2.41 = 32.29
GOLD + 13.20 = 1143.20
Activity in the services sector slowed to a near two-year low in January. The Institute for Supply Management (ISM) said its index of non-manufacturing activity fell to 53.5 last month, the lowest level since February 2014, from 55.8 in December. A reading above 50 indicates expansion in the service sector. Service industries reported growth in new orders continued to slow, with export orders contracting last month.
Private-sector employment gains increased in January but at a slower pace than in the prior month. Employers added 205,000 jobs in January, according to Automatic Data Processing Inc. ADP tweaked December’s gain to 267,000 from a prior estimate of 257,000. The ADP report is used as an early predictor of the government’s monthly jobs report, due out Friday morning.
The Fed’s adding a new twist to its severely adverse scenario in this year’s stress test – asking lenders how they would handle a prolonged period of rates below zero. Ninety-day bill rates slipped below 0% a number of times over the past few years, but never stayed there for very long. Negative rates, of course, are breaking out all over Europe, and the Bank of Japan last week introduced negative deposit rates as part of its latest attempt to spur the economy into faster growth.
Japan could introduce more stimulus. Speaking this morning, Bank of Japan governor Haruhiko Kuroda said last week’s decision to introduce negative interest rates was “the most powerful monetary-policy framework in the history of modern central banking.” Kuroda also noted that if the policy weren’t enough to jump-start the economy, new tools could always be invented. Minutes released by the BOJ overnight showed an intense debate by board members over Friday’s sub-zero measures. Nikkei-3.2%.
ChemChina is offering to buy Switzerland’s Syngenta in a deal worth more than $43 billion – which would be the largest ever international takeover by a Chinese company. Syngenta’s board has recommended the 480 francs per share deal (a 20% premium based on Tuesday’s closing price) to shareholders. If completed, the transaction would help ChemChina transform into the world’s biggest supplier of pesticides and agrochemicals, and a major supplier of seeds. China, the world’s largest agricultural market, is looking to secure food supply for its population. Only around 10 percent of Chinese farmland is efficient. Years of intensive farming combined with overuse of chemicals has degraded land and poisoned water supplies, leaving China vulnerable to crop shortages. Syngenta’s portfolio of chemicals and patent-protected seeds fits into Beijing’s plans to modernize agriculture over the next five years.
Home Depot is hiring more than 80,000 workers nationwide for its busy spring season, the same level as in recent years. The retailer estimates that more than half of the temporary workers stay on for permanent employment. The part-time and full-time jobs include sales, operations and cashier positions across all departments in stores as well as jobs at its distribution centers.
Home improvement and appliance giant Lowe’s is buying smaller Canadian counterpart RONA in a $2.3 billion deal. Lowe’s is expected to pay cash and acquire all issued and outstanding common shares of RONA for $24 in Canadian dollars per share. The estimated $2.3 billion transaction represents a premium of 104% to RONA’s closing share price on Tuesday.
General Motors posted a record net profit of $9.7 billion last year; more than double GM’s 2014 earnings and aided by a $3.9 billion fourth-quarter accounting gain because prospects for turning a profit in Europe are good. The company expects to break even there this year. Excluding special items, GM earned $5.02 per share for the year, beating Wall Street estimates of $4.82. Profits were fueled by strong SUV and truck sales largely in North America. Earnings were so strong that most of GM’s 49,600 hourly workers will get $11,000 profit-sharing checks on Feb. 26.
Toyota has issued an official statement that Scion will be killed off and folded into the Toyota brand. As of August, Scion models will be sold as Toyotas. Toyota didn’t specify how the company will support the 1,004 dealers selling Scion vehicles. Resolving franchise agreements with dealers of discontinued brands can be costly.
Sandeep Mathrani, CEO of General Growth Properties, was asked on an earnings call about mall traffic over the holiday season. He answered that traffic was up and attributed some of the increase to the number of items consumers buy online and then return to brick-and-mortar stores. Then he added, “and this case in point, you’ve got Amazon opening bricks and mortar bookstores and their goal is to open as I understand 300 to 400 bookstores.” Amazon said it does not comment on rumors.
Merck, the second-largest US drugmaker behind Pfizer, forecast full-year earnings of $3.60 to $3.75 per share, well below the average estimates. Fourth-quarter revenue fell 3 percent to $10.2 billion, below analysts’ expectations of $10.3 billion. Sales would have risen 4 percent if not for the stronger dollar. Net income fell to $976 million from $7.3 billion. Merck reported disappointing fourth-quarter sales of its Januvia diabetes treatment and its Remicade arthritis drug.
British-based drugmaker GlaxoSmithKline posted a loss of $616 million for the fourth quarter of 2015.
Comcast posted better-than-expected fourth-quarter revenue and added the most video customers in any quarter in eight years.
Just ten days after Moody’s put over half a trillion dollars in energy debt on review for downgrade, S&P decided it wanted to be the first one out of the gate with actual cuts. Companies that saw their ratings cut by one notch: Chevron, Apache, Continental Resources, Devon Energy, EOG Resources, Hess, Hunt Oil, Marathon Oil, Murphy Oil and Southwestern Energy. Oil futures settled below $30 a barrel again yesterday, but prices have taken a positive turn this morning after two days of steep declines.
Looking to return to the international capital markets, Argentina has agreed to pay $1.35 billion to a group of Italian investors whose bonds the country defaulted on in 2001, marking the first time the Latin American nation has reached an accord with holdout creditors. The deal sets a tough precedent for parallel negotiations taking place in New York between Argentina and another group of holdouts led by billionaire Paul Singer’s Elliott Management, who are seeking to be paid around $3.50 on the dollar, or a total of around $9 billion.
The European Union and United States have reached a deal over trans-Atlantic data sharing that would potentially extinguish the risk of costly litigation against companies by consumers worried about their privacy. The two sides have been trying to forge an agreement since October, when Europe’s top court struck down the previous pact in existence since 2000, known as the Safe Harbor agreement. Separately, the EU and U.S. are trying to bring the Transatlantic Trade and Investment Partnership to a close by the summer.
Some of the biggest names on Wall Street have piled into one trade – shorting the Chinese yuan. This, despite the fact that the Chinese government has threatened to punish anyone trying to pull the currency down. These aren’t empty threats, either. China has used its reserves to buy yuan and squeeze short sellers out of their positions. The country has $3 trillion in foreign exchange reserves to do this. And yet no one is afraid – especially guys with huge funds like Pershing Square’s Bill Ackman and Hayman Capital’s Kyle Bass, who have admitted to being on the short side. Barclays thinks that the country will, later this week, announce the largest single-month drop in its reserves in modern history.
This was surely a painful day for yuan-shorts. The dollar had its biggest decline in 7 years, and the drop started right after the ISM report on the service sector. The dollar’s pullback this week has reversed all the yen’s decline against the greenback on Friday when Bank of Japan introduced negative interest rates. Currency traders are catching up to the bond market, where 10-year yields sank to the lowest in a year Wednesday, while futures are sending the strongest signal yet that traders expect the Fed to stand pat this year. The January employment report on Friday may determine whether the dollar selloff will continue. The jobs report will probably show the economy created fewer than 200,000 jobs for the first time since September.
As the dollar dropped, oil prices jumped higher, in part because oil is priced in dollars and a weaker dollar means more dollars to buy the same amount of oil. The markets shrugged off government data showing U.S. crude and gasoline inventories rose to record levels last week. Crude soared 7.8 million barrels higher, topping analysts’ expectations for a rise of 4.8 million barrels, as imports jumped and refiners trimmed throughput. So, there is still a glut of oil. Total U.S. supplies stood at 503 million barrels a day for the week ended Jan. 29. The EIA said that’s “near levels not seen for this time of year in at least the last 80 years.” But now when the price moves, it squeezes the short positions, and that’s why we see so much volatility in oil prices, to the tune of 8% in one session; it is just plain old gambling, and that is a volatile game. And as oil moves it has been dragging stocks with it. Today, Exxon Mobil and Chevron were the big gainers in the Dow Industrials.