Tug of War
Financial Review by Sinclair Noe for 01-19-2016
DOW + 27 = 16,016
SPX + 1 = 1881
NAS – 11 = 4476
10 Y un 2.04%
OIL – 1.13 = 28.29
GOLD – 1.30 = 1088.50
Just a reminder that last Friday saw the Dow drop 390 and the S&P too down 41, taking out the August lows of 1867 with an intra-day low of 1857. This morning Wall Street started the session with a bounce, but it didn’t hold; in the afternoon the major averages turned negative; the S&P went back down to test support at 1865. We are seeing an important level of support at 1857 to 1867 on the S&P. We told you on Friday that would need to see confirmation in the form of a close below 1867. It did not happen today. The Nasdaq Composite did close below the September low of 4487. The Dow Industrials are still above the August lows off 15,666. You don’t even want to look at charts of the Russell 2000 index or the Dow Transports; they are just ugly.
And then if you move away from Wall Street, the economy doesn’t look too bad: 70 consecutive months of job growth, the unemployment rate at 5%, GDP growth probably around 2% to 2.5% (not great but compared to the rest of the world it looks decent), oil prices falling, which should be a big positive for the largest consumer of energy in the world. Back on Wall Street, everything we know about everything is reflected in price. And prices have been shocked. Eventually prices will drag down the broader economy or the broader economy will lift prices. Right now, it is a tug of war. In time we will see which side carries the most weight.
Global markets were mainly higher, including Japan, most of Europe and the UK. The Shanghai Composite gained 3.2% today. China’s economy grew at its weakest pace in a quarter of a century last year. Growth for 2015 as a whole hit 6.9 percent after the fourth quarter slowed to 6.8 percent. There was relief in the markets, however, that growth at least matched forecasts, and a growing expectation that the People’s Bank of China would provide further stimulus.
China’s slowdown, along with the slump in commodity prices, prompted the International Monetary Fund to cut its global growth forecasts again on Tuesday, and it said it expected the world’s second-largest economy to see growth of only 6.3 percent in 2016. The IMF expects the global economy to grow at 3.4 percent in 2016 and at 3.6 percent in 2017. The numbers for both the years are 0.2 percentage points less than what IMF had estimated in October.
The International Energy Agency says unseasonably warm weather and rising supply will keep the crude oil market oversupplied until at least late 2016. The IEA left its estimate of growth in global demand for 2016 unchanged from its previous monthly report at around 1.2 million barrels per day. The US and other major powers have removed sanctions on Iran’s exports after the previously isolated Islamic republic complied with the nuclear deal. According to Reuters, the sanctions removed about 2 million barrels per day of production, dropping Iran’s output to just more than 1 million barrels a day. On Monday, Iran issued an order to increase its production by 500,000 barrels a day.
I’ve talked with you about the idea that oil in the ground might be worth-less at some point in the future. It has happened (much faster than I imagined). Bloomberg reports Flint Hills Resources LLC, the refining arm of billionaire brothers Charles and David Koch’s industrial empire, said it offered to pay $1.50 a barrel Friday for North Dakota Sour, a high-sulfur grade of crude. It had previously posted a price of negative 50 cents for a barrel. This is for a low quality of crude that is expensive to refine and it comes from an area where it is expensive to transport, but still this sends a pretty clear message to oil producers to shut down their wells, or at least some of them. Producers outside the US are also feeling pain. The price for Canadian bitumen – the thick, tar-like oil at the center of the debate over the Keystone XL pipeline – fell to $8.35 last week, down from as much as $80 less than two years ago.
Puerto Rico is running out of money faster than expected, leaving an increasing hole in the amount needed to operate and pay back investors. According to an updated fiscal plan, the island now estimates it is $16 billion short of the money it needs to cover debt payments over the next five years, a 15% bigger figure than the one released in September. The gap over 10 years is almost $24 billion, even with planned fiscal adjustments.
Earnings reporting season this week will feature a bunch of the big tech names, including: IBM, Verizon, SAP and Apple. Netflix and IBM reported after the closing bell today. Netflix posted fourth-quarter adjusted earnings of 7 cents per share, down from 10 cents a share in the previous year, but they still beat analysts’ estimates of 2 cents. Revenue was $1.8 billion compared to $1.4 billion a year ago. Netflix added 5.5 million total net subscribers in the quarter, up from 4.3 million additions in the previous year, beating expectations. Netflix has been popular, up 124% over the past year. NFLX up 3.85 today, and in after-hours it gained 7.36 to 107.89.
IBM reported fourth quarter earnings of $4.84 a share on $22.06 billion in revenue; topping estimates for profit and revenue, even though earnings were down 17% from the year earlier period. IBM’s cloud, analytics, mobile, social and security businesses grew 26 percent to $29 billion in 2015; those units now represent 35 percent of IBM’s total revenue. IBM down 1.92 and then down another .91 in after-hours at 127.20
UnitedHealth earned $1.22 billion in the final three months of the year, down from $1.51 billion in the previous year’s quarter. Earnings totaled $1.40 per share, topping estimates by 3-cents. Total revenue jumped 30 percent to $43.6 billion, beating estimates. UnitedHealth is struggling to make money on the ACA health exchanges, but they are making up for it with their Optum division where earnings jumped 50% in the quarter. Optum runs the company’s pharmacy benefits management business. UNH up 3%
Johnson & Johnson is planning to cut about 4% to 6% of the global workforce in its medical devices business over the next two years, as part of a restructuring that aims to save $800 million to $1.0 billion by the end of 2018. JNJ gained 50 cents to 97.50.
Although it expects “tougher market conditions” in 2016, Unilever reported fourth-quarter sales that beat estimates amid higher prices for its goods in Latin America. Revenue rose 4.9%, while core operating profit increased 12%. UNL up 3.9%.
Morgan Stanley posted earnings of $908 million, or 39 cents a share. That compares with a loss of $1.6 billion, or 91 cents a share, in a year-earlier period that included a $2.6 billion settlement over the sale of mortgage bonds. Profit and revenue beat estimates. Morgan Stanley previously announced big cuts to their fixed income business; today they announced the cuts will be even deeper. MS up 1.1%
Bank of America said its fourth-quarter profit rose to $3.3 billion, or 28 cents a share. Revenue rose to $19.5 billion. Profit and revenue beat estimates. Bank of America said its provision for credit losses in global banking increased by $264 million in the quarter ended Dec. 31, mainly due to higher energy-related charge-offs and reserve increases for energy exposure. The bank has $21.3 billion in energy-related loans, representing about 2 percent of total loans. BAC down 1.5%.
Already troubled by lawsuits and official investigations, Deutsche Bank is facing another challenge – it’s about to be sued in British court for using high-speed trading software. That lawsuit asserts the lender used a platform known as Autobahn to take advantage of millisecond changes in exchange rates to give clients worse prices than they were entitled to. Deutsche Bank has denied the claims.
WhatsApp is scrapping its subscription fee and will explore other ways to allow businesses to interact with its users (but will not introduce third-party ads) to make up for the lost revenue. The Facebook-owned app had previously charged an annual renewal fee of $0.99 for all users after their first year.
For the third time in roughly a year, Elon Musk’s SpaceX on Sunday failed to successfully land the main part of a spent rocket on a floating ocean platform, although it came pretty close. The booster maneuvered back to its destination as intended, but touched down harder than planned, causing it to tip over and explode. Last month, SpaceX made a successful, first-of-its-kind return of a used booster that hurtled back from space and made a pinpoint touchdown on land without incurring any significant damage.
French carmaker Renault will recall more than 15,000 vehicles to tweak their engines to ensure that they comply with emissions standards. The company committed to the recall after it was found that the filtration system in some of its vehicles did not comply with emission standards under real world conditions. The announcement comes after French investigators raided Renault’s headquarters near Paris earlier this month. French authorities widened their probe following the Volkswagen emissions cheating scandal, and later found discrepancies between real-world tests and lab results in four Renault models.
The world’s political and business leaders, plus the usual smattering of celebrities are heading to Davos, the Swiss Alpine resort where the World Economic Forum’s annual conference begins this evening. The official theme of the 2016 meeting is “mastering the fourth industrial revolution.” In WEF-speak, that means the “fusion of technologies that is blurring the lines between the physical, digital and biological spheres.” Which raise the question: Has anything worthwhile and meaningful ever come out of the World Economic Forum in Davos?
Glenn Frey, the prolific guitarist, singer, songwriter and founding member of the Eagles, died on Monday at age 67. Frey and Don Henley co-founded the Eagles in 1971 in Los Angeles after playing backup for rock singer Linda Ronstadt. The Eagles album, “Their Greatest Hits 1971-1975,” is the second-best-selling record of all time in the United States.