Slip Sliding Away
Financial Review by Sinclair Noe for 12-09-2015
DOW – 75 = 17,492
SPX – 15 – 2047
NAS – 75 = 5022
10 YR YLD – .03 = 2.21%
OIL – .28 = 37.24
GOLD – 2.10 = 1073.50
Stocks started the day in positive territory but then slipped, and the decline coincided with a drop in oil prices, which also went from positive to negative. Oil prices have buckled following the breakdown of OPEC talks last week. We have a price war breaking out between Saudi Arabia and Iran and US shale producers. At the same time we have Russia, Venezuela, and Brazil all desperate for oil revenues.
But it’s not just oil; iron ore is moving in lockstep with oil, dropping to a 10-year low; Codelco, the Saudi Arabia of copper is refusing to cut output, betting it can outlast rivals and win market share. The major commodity indices have dropped to lows last seen in 1998. While plummeting commodity prices can be a warning sign that the world economy is heading into recession, the latest sell-off has a different character. The slump is chiefly due to excess production, and amounts to a positive supply shock that should boost global recovery.
Dow Chemical and DuPont are in talks to combine, in what would be one of the largest deals of the year. Each company has a market value of about $60 billion and the combination would create the second-biggest chemical company in the world, after BASF, with more than $92 billion in annual sales. They are also talking about breaking up the merged company into three businesses – agricultural chemicals, specialty products, and materials like plastics. For the past year, both companies have been pressured by activist investors unhappy with their financial performance.
Yahoo will abandon its plans to spin off its $31 billion stake in Alibaba. Instead it will look at other options, like selling its core operations or spinning off its stake in Yahoo Japan. The decision is a repudiation of the strategy taken by Marissa Mayer, who was hired to turn the internet company around. She had planned to spin off the 15 percent stake in Alibaba and focus on the core business of selling advertising. But investors, led by the hedge fund Starboard Value, argued that the risk of capital gains tax was too great.
General Electric is in advanced talks to buy the drill-bits and drilling-services divisions of Halliburton, which is divesting assets to win antitrust approval for its takeover of Baker Hughes. GE is also exploring bids for other assets that Halliburton is seeking to unload, including parts of Baker Hughes’ operations.
Freeport-McMoRan said it will suspend its dividend and further reduce its capital spending. Freeport-McMoRan, the U.S.’s biggest miner and a major copper producer, said ending its annual dividend of 20 cents a share would save $240 million a year. The moves come as the company has been in turmoil as falling energy prices have exposed a disastrous investment in oil and gas drilling. A number of other miners have recently cut their dividends in a bid to improve liquidity.
As widely expected, Kinder Morgan has cut its 2016 quarterly dividend to $0.125/share from the current $0.51, marking the company’s first-ever dividend cut. The company said the move will enable it to use a significant portion of its cash flow to fund the equity portion of its expansion capital requirements, eliminate any need to access the equity market for the foreseeable future, and maintain a solid investment grade credit rating.
China cut the yuan’s reference rate to the weakest since 2011, fueling speculation that the central bank is trying to release pent-up depreciation pressure before a potential rate increase by the Federal Reserve. There are signs that the People’s Bank of China has started guiding the yuan lower before the Fed acts. An index of emerging-market currencies dropped to a record low yesterday on fears a Fed rate hike will spur capital outflows. Traders now put the odds of a Fed liftoff next week at 80 percent.
Puerto Rico Governor Alejandro Garcia Padilla is visiting Washington today to again ask for help as the U.S. commonwealth seeks to recover from a nearly decade-long recession. While the U.S. Treasury and some lawmakers have supported legislative fixes for Puerto Rico, the efforts have not gained momentum.
Brazil’s Congress delivered a blow to President Dilma Rousseff by picking members of a special committee that were opposed by her supporters. Rousseff is being accused of tampering with the national budget to illegally disguise poor fiscal performance. The special committee will now gather evidence against the president and hear her defense in the first phase of the impeachment process.
The bill for last month’s catastrophic Samarco dam failure in Brazil could be growing by the day, as the joint venture between Vale and BHP Billiton struggles to formulate an emergency plan demanded by local prosecutors in case of additional accidents. The disaster unleashed an avalanche of mud that killed at least 15 people, destroyed villages downstream, and polluted hundreds of miles of waterways in the Rio Doce basin.
Some of the world’s largest companies, including Unilever, Total, Bank of America, Patagonia and Ikea, announced their commitment on Tuesday to cutting carbon emissions and participating in practices that would support sustainable energy. The pledges came at The New York Times Energy for Tomorrow conference, being held in concurrence with the international climate talks outside Paris. Secretary of State John Kerry announced Wednesday that the United States would double, to about $860 million a year, its grant-based support for vulnerable countries that need to adapt to climate change by 2020. In his first big speech at the United Nations global climate conference in Paris, Kerry talked about the need to pay attention to climate science and act in the interest of future generations. Throughout the Paris climate talks, developing nations have been asking for more money as world leaders work toward a new global climate agreement.
Pep Boys gave Bridgestone three days to top Carl Icahn’s $863 million takeover offer, saying its board had determined that the billionaire investor’s bid is superior to their earlier agreement.
Alphabet is making its biggest bet yet on spreading connectivity across the nation. On top of 20 other metro areas, Google Fiber now plans to come to Los Angeles and Chicago – the second and third-largest U.S. cities by population – if they pass a long review. The latest announcement follows the Alphabet restructuring, which puts Fiber in a separate division from core Google.
Apple has suspended plans to offer an online TV service, and will focus for now on helping media companies directly sell content via the App Store. Apple isn’t completely giving up on providing a live TV service, but notes its original plan to sell skinny bundles, or packages of about channels for $30-$40/month has “run into resistance from media companies that want more money for their programming”, or were unwillingly to un-bundle content. For Apple, the idea was to create TV programming similar to iTunes, where you just buy the songs you want, not the entire album. If Apple gets its way, it means the traditional pay TV package, which averages around 100 channels, will get shrunk by nearly 80 percent. And while TV executives will say that they understand that consumers don’t want to pay for channels they don’t watch, all of them will argue that their channels are must-haves.
A class-action lawsuit in California that has the potential undermine Uber just got a whole lot bigger. The case was certified as class action in September but today a 9th circuit judge expanded the scope of that class action. The suit challenges whether Uber drivers are independent contractors, as the company claims, or employees, which would entitle them to a host of benefits such as health insurance and require Uber to pay on-the-job expenses like gas and maintenance that drivers currently pay themselves. Today’s ruling says that Uber drivers can take part in the California class action over their employment status even if they didn’t opt out of Uber’s arbitration clause. Chen also ruled that drivers in the class will be able to pursue expense reimbursement claims. Basically, that means the case is going to be much bigger.
According to a new study by the NPD Group, the all-day breakfast initiative at McDonald’s is bringing in new customers. The research firm found that 33% of all customers who ordered breakfast items past the normal cut-off time did not visit the restaurant chain in the thirty days before the launch.
Last month, Chipotle closed 43 restaurants in Washington and Oregon after health authorities linked an E. coli outbreak to six restaurants in the area. Since the initial problem, illnesses linked to the chain have been reported in seven more states. On Monday, 30 students at Boston College fell ill after eating at a local Chipotle, leading the company to close yet another restaurant; On Tuesday, the number grew to at least 80 students. Although Boston health officials believe the food-borne illness is norovirus -not E. Coli – and is isolated to a single location, they won’t know for sure until test results are available in a few days. Norovirus is a highly contagious virus. It’s the leading cause of outbreaks from contaminated food in the US, making about 20 million people sick a year. Today comes word that more than 120 Boston College students may be ill from food at Chipotle.
German Chancellor Angela Merkel has been named Time’s Person of the Year, praised by the magazine for her leadership on everything from Syrian refugees to the Greek debt crisis. Time also cited Merkel’s strong response to “Vladimir Putin’s creeping theft of Ukraine.”