Puerto Rico Screwed
Puerto Rico defaults; TTIP leaks; Ultra, Midstates, and Sports Authority go BK; Sell in May and take a vacation.
Financial Review by Sinclair Noe for 05-02-2016
DOW + 117 = 17,891
SPX + 16 = 2081
NAS + 42 = 4817
10 Y + .05 = 1.86%
OIL – 1.14 = 44.78
Puerto Rico’s governor said Sunday that he had ordered a debt moratorium, blocking a $422 million payment due today. The US Congress continues to debate a legislative fix for Puerto Rico’s $70 billion debt load. The default ratchets up pressure on Congress to find a legislative solution for Puerto Rico, which owes another $1.9 billion of debt on July 1, including about $777 million in general obligation debt backed by its constitution. Meanwhile, Puerto Rico is battling the Zika virus, and hospitals and health clinics are forced to shut down because of debt. New York City has sent one million condoms to help combat the spread of the disease. There is some symbolism there.
The Institute for Supply Management (ISM) said its index of national factory activity fell to 50.8 from 51.8 the month before. A reading above 50 indicates expansion in the manufacturing sector and a reading below 50 indicates contraction. The employment index rose to 49.2 from 48.1 a month earlier. Expectations called for a reading of 49.0. New orders dropped to 55.8 from 58.3. The prices paid index rose to 59.0 from 51.5, compared to expectations of 52.0.
Construction spending increased 0.3 percent to the highest level since October 2007, following an upwardly revised 1.0 percent jump in February. Construction outlays were up 8.0 percent from a year ago. In March, construction spending was supported by a 1.1 percent surge in private construction. Public construction outlays fell 1.9 percent in March.
According to a Federal Reserve survey of senior bank loan officers, credit quality deteriorated in the first quarter on loans to businesses and consumers in energy dependent areas of the country. Low energy prices have led to declining activity in regions of the country where oil and natural gas extraction is a key driver of economic activity. According to the survey 58% of the banks reported that loan quality is going to continue to deteriorate assuming energy prices remain low. About 15% of banks reported that credit quality had worsened on consumer credit card loans and 14% on loans outside of credit card and autos. Commercial real estate loans were a concern for 16% of the banks. And the hardest hit area is auto loans, where 23% of banks reported credit deterioration. Almost half of the banks surveyed said they were tightening lending policies on firms in the energy sector.
Baker Hughes and Halliburton are calling off their megamerger. Opposition from both US and European regulators has caused the two energy giants to call off their $28 billion deal. The deal’s cancellation means Halliburton must pay Baker Hughes a $3.5 billion termination fee by Wednesday. The cash-and-stock acquisition – valued at $34 billion when it was announced in November 2014, and now worth about $28 billion – would have brought together the world’s No. 2 and No. 3 oil services companies, raising concerns about higher prices in the sector.
Oil-and-gas producers Midstates Petroleum and Ultra Petroleum have filed for Chapter 11 bankruptcy protection, joining several companies that have been unable to meet debt obligations after a steep decline in energy prices. Oklahoma-based Midstates and Houston-based Ultra have a combined $5.8 billion in debt. The two join dozens of U.S. oil and gas producers that have filed for bankruptcy since the start of 2015. Following this weekend’s bankruptcies of Ultra Petroleum and Midstates, the energy high-yield default has soared to a record 13% rate, surpassing the 9.7% mark set in 1999, according to Fitch Ratings.
Talks for a free trade deal between the U.S. and Europe face a serious impasse with “irreconcilable” differences, according to leaked negotiating texts discussing the Transatlantic Free Trade Agreement. The leaked documents come from the Dutch chapter of Greenpeace show that American trade negotiators had pressed their European counterparts to loosen important environmental, consumer protection and other provisions. The deal, known as the Transatlantic Trade and Investment Partnership, or TTIP, would cover a huge range of goods and services between the world’s largest national economy and the world’s largest single market, spanning telecommunications, agricultural products, textiles, intellectual property, financial services and regulatory compatibility. The documents were shared in advance with several European publications. When you consider this latest document leak along with the recent Panama Papers, one thing is starting to stand out. Secrecy doesn’t exist in the digital age.
Sports Authority has decided to sell its remaining assets. Rather than attempt to re-organize under Chapter 11 bankruptcy protection, Sports Authority will hold an auction May 16. If a buyer emerges, some locations could be saved. There are 463 Sports Authority stores in 41 states employing more than 14,500. Sports Authority is $1.1 billion in debt and lost $256 million before taxes in fiscal year 2015. In January, Sports Authority failed to make a $20 million debt payment.
Takata shares plunged as much as 16% overnight on reports that the company, already at the center of the biggest safety crisis in automotive history, will soon get hammered by regulators. The NHTSA has told automakers that recalls will expand to all cars with Takata air bags lacking a moisture-absorbing desiccant that keeps the devices from deteriorating. There are more than 100-million such vehicles worldwide.
Verizon is deploying “thousands” of extra personnel, as a strike of nearly 40,000 wireline workers drags on in its third week with few signs of resolution. Some employees are on special assignment and others are coming out of Verizon’s technical training in Virginia. On Thursday, the company made a “last, best and final offer” to leaders of the CWA and IBEW, but union leaders responded that Verizon needs to “get serious about negotiations.”
Hulu is designing a subscription service that would stream feeds of popular broadcast and cable TV channels, in a move that would make the company a competitor to traditional pay-TV providers and other new digital entrants. Until now, Hulu has offered on-demand programming from major networks, similar to Netflix. Hulu wants to offer what is known as a “skinny bundle” of broadcast and cable channels; in particular those operated by 21st Century Fox, the Walt Disney Company and Comcast’s NBCUniversal. Those three media companies co-own Hulu. They hope to launch the service in the first half of 2017. While exact pricing details are still being determined, the new service is expected to cost about $40 a month.
Sony is developing a pair of intelligent contact lenses. The tech nerds are calling them “smart eyes,” and they’re supposed to measure a person’s blink, wink, and tilt of the eye to figure out when to record, save and delete video. Sony’s contacts include a camera, a wireless processing component and a storage unit, and differ from Samsung’s smart lenses patented earlier this month, which rely on a smartphone.
Last week I promised more on the old idea of Sell in May and stay away. Stock market returns are far worse from May through the end of October, than they are during the rest of the year. So as May starts, history suggests that (based on market performance as a whole) you might be smart to sell your shares now, and not bother with markets again until November. Over the past 15 years, stock markets have performed far better between November of one year and April of the next, than between May and October.
MSCI Asia ex-Japan Index, Singapore’s STI, the Hang Seng, Malaysia’s KLCI, the Shanghai Composite and the S&P 500 (as well as the MSCI World) all perform significantly better from November 1to April 30, than from May 1 to October 31.
For example, the MSCI Asia ex-Japan posted a negative return of 1.7 percent, on average, during the May-November period in 2001-2015, and a 9.0 percent return from November through April. Since 2001, on average the STI has fallen 1.9 percent from May through October, and appreciated by 6.7 percent during the period from November to April. The biggest difference in performance for the two periods was for the Shanghai Composite, where shares fell by 6.3 percent on average from May through the end of October, but rose by 10.4 percent during the other period.
The S&P 500 has a negative 1.4% from May through October and a positive return of 5.1% for November to May, for a difference of 6.5%. Over the past 50 years, the average gain for the Dow was less than 1% from May to October. In contrast, the average gain was more than 7% from November to April.
So, the idea was that you sold Friday, and now you can go on vacation until November 1st. Is it really that simple? Well, yes. Since 1950, there have only been 9 years when the DJIA Best Six Months failed to delivery market gains. And if you want to get a bit more specific, there is an extra entry-exit strategy. Sy Harding made some minor adjustments to the six month cycle and added MACD as a timing mechanism (MACD stands for moving average convergence divergence). First, start the bullish cycle on October 16th, which is two weeks earlier. Starting the cycle a little earlier makes sense because there have been several October bottoms in the S&P 500. Second, start the bearish cycle on April 20th. Third, add MACD to time signals near these cycle dates (October 16th and April 20th). So, you would look for a bullish MACD any time after October 16 for you buy signal, or you would look for a bearish MACD any time after April 20 for your sell signal. The S&P 500 crossed its signal line last week on the 26th. As always, momentum indicators and seasonality always takes a back seat to price action. The Sell in May idea is playing probabilities, not a guarantee. The other nice thing is that you can take a summer vacation and you don’t have to worry about the markets.