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Monday, February 08, 2016

Honey for Bears

Financial Review

Honey for Bears

DOW – 177 = 16,027
SPX – 26 = 1853
NAS – 79 = 4283
10 Y – .11 = 1.74%
OIL – .80 = 30.09
GOLD + 15.50 = 1190.00

This was just an ugly session from the start. The Dow opened about 200 points down and then trickled lower; at one point down more than 300 points. The S&P 500 index broke down through the key level of support at 1860 that I warned you about in January and again last week, taking out the August 2015 lows and the October 2014 lows.

The S&P 500 not only took out support from January, but now we look to minor support at 1815, and then, well there isn’t really any support. In other words, the charts look very dangerous here.

And if you prefer fundamentals over technicals; this is what FactSet had to say in its recent report: “For Q4 2015, the blended earnings decline is -3.8%. If the index reports a decline in earnings for Q4, it will mark the first time the index has seen three consecutive quarters of year-over-year declines in earnings since Q1 2009 through Q3 2009.”

The difference this time versus 2009 is that valuations are much higher. FactSet data show expectations for first-quarter per-share earnings have collapsed to a decline of 5.5% as of today. Back in September, that forecast was for growth of 4.8%. By the end of December, it had fallen to growth of just 0.8%.

Chinese stock markets are closed for trade all week to celebrate the Lunar New Year, providing little direction for European stocks at the open. However, data out over the weekend showed China’s foreign-exchange reserves fell to the lowest level in more than three years last month, in another sign of capital flight as the yuan weakens.

European stocks opened lower, extending last week’s losses. The Stoxx Europe 600 index had its lowest close in more than 15 months; banks in the Stoxx Europe 600 Index have dropped about 39 percent since a peak in July. Their slump this year is the worst of any other industry group.

Oil prices kicked off the week in the red. Data on oil demand in the world’s two largest markets, the U.S. and China, has taken a sharp turn lower. U.S. demand for oil products in January fell 3.9% compared with January 2015. In China, although overall oil demand was flat in December and an improvement on November’s outright decline, it still represented the second weakest reading for the year.

Meanwhile, hopes about an agreement between producers within and outside of the Organization of the Petroleum Exporting Countries to cut output and support prices have also faded in recent days. A meeting between Saudi Arabia and Venezuela on Sunday ended without any plans for a production cut. Iran plans to sell 300,000 barrels of crude oil a day to European customers now that Western sanctions are lifted. And within the next few months, Iran wants to ramp up production to 500,000 barrels a day, with the remainder going to Asia.

Chesapeake Energy, the natural gas driller that’s been cutting jobs and investor payouts to conserve dwindling cash flows, lost more than half it stock market value today after a report that it hired a restructuring law firm. The company’s bonds led losses among high-yield debt. Chesapeake’s notes due March 2016 (about $500 million in bonds) tumbled to a record to 74.5 cents, from 95 cents last week, while its bonds maturing in 2017 fell to an all-time low at 34 cents.

Exchange-traded funds that hold US junk bonds slid to their lowest levels in almost seven years. BlackRock’s iShares iBoxx High Yield Corporate Bond exchange-traded fund and SPDR Barclays High Yield Bond ETF both fell to the lowest levels since 2009. In high yield, energy, communications and health care fared the worst. Banks and insurers in Europe led a surge in the cost of insuring corporate bonds to the highest levels since 2013.

European financial firms are taking a beating amid fears of “a chronic profitability crisis that makes it impossible for banks to build up barely-adequate capital bases. None of the fresh wave of selling stems from new news, but the list of negatives is long. Fears surrounding non-performing loans and other deep-rooted issues in the Italian banking sector have driven nerves, while a slew of weak earnings from large banks such as Credit Suisse and Deutsche Bank have added to concerns. The worst of the lot is Deutsche Bank, Germany’s biggest, down about 10% today, and down 40% year-to-date, as its credit default swaps spiked to their highest levels since 2012.

Bank credit default swaps, or contracts that offer protection against the risk of a bond defaulting, have also surged in price, indicating intensifying fears for financial groups’ credit. Deutsche bank’s 5-year senior CDS has jumped 11bps today to a three-and-a-half-year high of 212bps, up from 134bps just over a week ago. The cost of protecting the company’s subordinated debt from default for five years using credit-default swaps has more than doubled since the end of 2015, rising to 438 basis points, a four-year high, from 187. That is just a very, very big selloff.

And what makes it crazier still, is that it looks like Deutsche Bank has more than sufficient reserves set aside for its debt and the interest on its debt, exclusive of operating results. But for now that doesn’t matter; share price has dropped, which increases expectations for more turmoil, which pushes the cost of hedging, which frightens shareholders, who then sell, pushing prices even lower. If it all sounds a bit over-done, it is, but it still demands we pay attention.

And the situation is not unique to Deutsche Bank, which is just one of the extreme examples. Basically all the banks are seeing their credit default swaps trading at the highs of the year. And here in the US, the large cap financials are down almost 12% year-to-date. That means there has been some panic selling. Today, the mega-banks, including Bank of America, Citi, and Wells Fargo all moved to new lows intraday or at the close.

The KBW Bank Index, which consists of 24 banks, is approaching 2008 and 2011 lows relative to the S&P 500. So, the question of the day is: Are the large cap financials cheap or is the rest of the market still overpriced? We may need more time to answer that one, but for now the big banks distress is honey for the bears.

If Congress does not act soon, Puerto Rican officials say major defaults are likely this spring. They are trying to make their case for a law that would allow a broad restructuring of the territory’s multibillion-dollar debt. The officials also said they knew that any legislative help would come at a stiff price: Puerto Rico would have to submit to a federal control board, something viewed by some on the island as colonialist-style interference.

Argentina has offered to pay about $6.5 billion in cash to U.S. holdouts that refused debt restructurings after its 2001 default, implying a haircut of about 25% on the amount bondholders say they are owed. If accepted by all the holdouts, which are led by billionaire Paul Singer’s Elliott Management, the deal would clear the way for Argentina’s return to the international capital markets.

Washington is vowing to ensure the United Nations Security Council imposes serious consequences on North Korea after it launched a space rocket in a purported satellite program widely considered to be a cover for developing ICBMs. The latest launch, which follows North Korea’s Jan. 6 nuclear test, may kick off a rapid buildup of American missile defenses in Asia.

Apollo Education Group, the parent company of the University of Phoenix, will be taken private as it is acquired by a group of investors for $1.1 billion. The investors will pay $9.50 in cash per share, which is 30% above the company’s trailing 30-day volume weighted average stock price. Tony Miller, chief executive of The Vistria Group, one of the investors, will become chairman of the board for the Apollo Education Group once the transaction is completed. The other investors included Apollo Global Management, LLC and Najafi Companies.

The agreement arrives weeks after the company reported a decline in revenue and another round of layoffs at the for-profit college. Phoenix, like other for-profit schools, has been battered by poor enrollment, government investigations and heightened federal regulation.

Chipotle closed its more than 2,000 restaurants today for a few hours to address employees about the food-borne illnesses that have led to lawsuits and a federal investigation. Chipotle used the event to review new food safety protocols and explain the steps the company is taking to improve food safety.

Ford is planning to build a new assembly plant in Mexico to sharply increase output from the country, representing the latest shift of investment abroad by a Detroit automaker following the signing of a costly new labor deal. Ford expects to add 500,000 units of annual Mexican capacity starting in 2018 (more than double what it built in 2015), by constructing a new assembly complex in San Luis Potosí and expanding an existing factory near Mexico City.

You don’t see this every day…Credit Suisse CEO Tidjane Thiam has asked the company’s board to reduce his bonus, days after the Swiss bank reported a fourth-quarter multibillion-dollar loss that sent its share price tumbling. Thiam, who joined the bank in July, did not indicate the size of the cutback, but said his was the largest bonus reduction within the management team.

New Week, Same Uncertainty

Charles Schwab: On the Market
Posted: 2/8/2016 4:15 PM ET

New Week, Same Uncertainty

U.S. equities added to the solid losses seen last week, as the persistent global growth anxiety continues to be exacerbated by heightened Fed rate hike uncertainty. Meanwhile, the relentless decline in crude oil prices continued to pressure sentiment, and financial and consumer discretionary stocks saw solid losses. Treasuries rallied, along with gold, while the U.S. dollar was lower.

The Dow Jones Industrial Average (DJIA) fell 178 points (1.1%) to 16,027, the S&P 500 Index dropped 27 points (1.4%) to 1,853, and the Nasdaq Composite tumbled 79 points (1.8%) to 4,284. In heavy volume, 1.4 billion shares were traded on the NYSE and 2.7 billion shares changed hands on the Nasdaq. WTI crude oil declined $1.20 to $29.69 per barrel and wholesale gasoline lost $0.03 to $0.96 per gallon, while the Bloomberg gold spot price jumped $17.08 to $1,190.48 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 96.63.

Hasbro Inc. (HAS $75) reported 4Q earnings-per-share (EPS) of $1.39, above the $1.30 FactSet estimate, as revenues rose 13.0% year-over-year (y/y) to $1.5 billion, compared to the expected $1.4 billion. HAS' product sales out of its boys, games and preschool categories grew solidly y/y, more than offsetting a decline for its girls segment. The company increased its quarterly dividend by 11.0% to $0.51 per share. Shares were higher. 

Cognizant Technology Solutions Corp. (CTSH $54) finished lower amid the continued selloff in the tech sector and as the consulting and business process outsourcing services company issued 1Q and full-year EPS guidance that missed expectations. The disappointing outlook accompanied its 4Q earnings report, in which it topped profit projections and matched revenue forecasts.

Chesapeake Energy Corp. (CHK $2) fell sharply after the natural gas company said it has no plans to pursue bankruptcy and is aggressively seeking to maximize value for all shareholders. The comments come in response to reports suggesting the company retained a restructuring law firm.

Economic calendar quiet, bond yields continue to drop

Treasuries finished higher, while the U.S. economic calendar was void of any major releases today. The yield on the 2-year note dropped 6 basis points (bps) to 0.66%, while the yield on the 10-year note declined 9 bps to 1.74%, and the 30-year bond rate fell 10 bps to 2.57%. For more on the recently volatile bond markets see our latest video by Schwab's Managing Director of Trading and Derivatives, Randy Frederick, and Fixed Income Director, Collin Martin, CFA, titled, Treasuries Up, Junk Bonds Down, Volatility for All: What's a Bond Investor to Do?, by clicking on the "Insights & Ideas" tab at and continuing to the "Market Commentary" section. Also, follow us on Twitter: @schwabresearch.

The economic calendar will get rolling tomorrow with the NFIB Small Business Optimism Index, forecasted to show a slight downtick to a level of 94.5 for January from the 95.2 posted in December. As well, investors will get the JOLTS Job Openings report, a measure of unmet demand for labor, expected to indicate 5.41 million jobs were available to be filled during December, a tad lower than the 5.43 million the month prior, while wholesale inventories will round out the day, with economists anticipating a 0.2% month-over-month (m/m) decline in December following the 0.3% m/m decrease in November.

However, amid heightened uncertainty regarding further Fed rate hikes and the recession drumbeat picking up tempo, Friday's January retail sales and preliminary February University of Michigan Consumer Sentiment Index reports will headline this week's U.S. economic calendar and shed some light on the all-important consumer, while Federal Reserve Chairwoman Janet Yellen will deliver her semi-annual monetary policy testimony on Wednesday and Thursday in front of Congress.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: Cutting Through the Energy Noise, positives for consumers include, reduced debt loads, continued improving job market and signs wages are starting to increase. Also, energy costs have fallen, which boosts the amount consumers have to spend—although to what extent has been somewhat disappointing to this point. However, consumers seem to be cautious and Americans’ willingness to take on consumer debt appears to have waned. Schwab's Chief Investment Strategist, Liz Ann Sonders notes in her article, Life in the Fast Lane: Look Through the Windshield, Not the Rear View Mirror, recession risk is up, but beware of the cacophony of apocalyptic forecasts. Focus more on leading indicators than lagging indicators. Read both articles at, and follow Schwab and Liz Ann on Twitter: @schwabresearch and @lizannsonders.

Europe sees pressure, Asia mixed as global markets remain skittish 

European stocks finished broadly lower, with financials and technology issues leading to the downside, as the global markets remain volatile on growth/currency concerns, continued oil volatility, and flared-up uncertainty regarding the trajectory of further U.S. Fed rate hikes this year. For more, see the Schwab Center for Financial Research's article Market Volatility: What Investors Should Know, The euro overcame early losses late in the session and ticked higher versus the U.S. dollar, while bond yields in the region were mixed. In economic news, eurozone investor confidence fell more than expected for this month, French January business sentiment came in stronger than projected, and growth in Spanish industrial output slowed in December.

Stocks in Asia finished mixed with the global markets remaining skittish, exacerbated by Friday's mixed U.S. employment report. However, volume was lighter than usual, with markets in mainland China, Hong Kong, and South Korea closed for the lunar new year holidays. Japanese equities rebounded from recent pressure as the yen lost ground during the trading session to the U.S. dollar in the wake of Friday's labor report. For more on the currency markets see Schwab's Director of International Research, Michelle Gibley's, CFA, article, Currency Wars: Is a Weaker Currency Good or Bad?, at, and be sure to follow us on Twitter: @schwabresearch. Australian securities finished flat as weakness in technology and financial stocks was offset by strength in basic materials and oil & gas issues, while Indian stocks fell amid weakness in technology and consumer-related companies, ahead of the release of the country's 4Q GDP report. India's 4Q GDP grew at a 7.3% y/y pace, from the upwardly revised 7.7% expansion posted in 3Q, and compared to estimates of a 7.1% increase. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers a look at India in his article, India Becomes World's Fastest Growing Economy: What Investors Need to Know, at, and follow Jeff on Twitter: @jeffreykleintop.

Items on tap for tomorrow's international economic calendar include retail sales and trade balance from the U.K., and industrial production and the trade balance from Germany.

Schwab Center for Financial Research - Market Analysis Group

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Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.