FINANCIAL REVIEW

Good Luck With That

Sinclair Noe — January 29, 2015

Podcast: Play in new window | Download (Duration: 13:17 — 6.1MB)

DOW + 225 = 17,416
SPX + 19 = 2021
NAS + 45 = 4683
10 YR YLD + .02 = 1.75%
OIL + .09 = 44.54
GOLD – 25.20 = 1259.10
SILV – 1.04 = 17.02

Yesterday, the Federal Reserve said it would remain “patient” on raising rates, but indicated it saw the U.S. economy getting stronger. The Fed also said it has seen inflation decline, and it may decline further, but that low oil prices are probably temporary. The FOMC statement said that economic activity has expanded “at a solid pace” and that labor market conditions have improved.

That was certainly the case last week. The fewest Americans in almost 15 years filed applications for unemployment benefits during a holiday-shortened week that typically makes the data more volatile. Jobless claims dropped by 43,000 to 265,000 in the week ended Jan. 24, the lowest since April 2000. No state reported an increase of more than 1,000 in claims for the week ended Jan. 17.

The National Association of Realtors reports its index of pending home sales fell 3.7% in December, though the year-on-year gain was 11.7%, the highest since June 2013. Pending sales measures contracts signed but not yet closed.

The Census Bureau reports the number of owner-occupied households fell by 354,000 from a year earlier as the homeownership rate dropped to its lowest level since 1994. The ownership rate for people under age 35 fell to 35.3%, down 1.5 percentage points from a year earlier and the lowest level in Census data going back to 1982. The number of renter-occupied residences grew by 2 million last year. Vacancy rates for rentals fell to 7% in the fourth quarter, the lowest since 1993. Total households increased 1.66 million. This means that younger people are finally entering the housing market, even if it is as renters rather than owners. That’s good news for landlords, better news for parents.

Denmark’s central bank cut interest rates today to negative 0.5%. Denmark’s rates were already negative, now more so. Denmark operates a currency peg with the euro, which has come under increasing pressure as the single currency has weakened with the recently announce quantitative easing plan.

The German economy has slipped into deflation for the first time in more than five years, and may not see inflation again before the year is out. Prices dropped by 0.3% in the year to January. Eurostat is due to publish inflation figures for the euro area as a whole on Friday. Economists expect these will show prices have fallen faster still, at 0.5% in the year to January.

The Bloomberg Commodity index, which tracks the global prices of 22 different commodities such as gold and oil, dropped to the lowest level since August 2002. The strength of the US dollar has hit commodity prices hard. Because most commodities traded in international markets are quoted in US dollars. When the dollar rises they become more expensive and this hits demand. The US dollar index, which tracks the price of the US dollar against the world’s currencies, has increased by more than 18% within the past six months.

Oil is near a 6-year low as stockpiles surge. The Energy Information Administration reported record-high inventories in the U.S. and raised more anxieties about the global oil glut. Domestic crude inventories rose by almost 9M barrels last week to reach nearly 407M, the highest level since the government began keeping records in 1982.

At the same time that oil price has been declining, we’ve also observed big drops in the price of other commodities like copper, the yield on 10-year US Treasuries, and the value of other currencies relative to the dollar. Certainly part of the reason for the decline in oil is because global demand has dropped, even as supplies remain high, but that isn’t a full explanation for the other commodities dropping.

Markets have been volatile in January. The S&P 500 dropped 1.4 percent Wednesday, bringing its slide this month to 2.8 percent, the most since January 2014. The Chicago Board Options Exchange Volatility Index jumped 32 percent in the previous two days, its biggest gain in almost seven weeks. Earnings season is in high gear as 52 of the S&P 500 companies post results today. Of those that have reported profit so far, 76 percent have exceeded estimates, while 57 percent topped sales projections.

Google posted fourth quarter numbers after the close of trade. They missed on the top line and the bottom line. Revenue (minus traffic acquisition costs) was $14.4 billion versus $14.6 billion estimates. Adjusted EPS was $6.88 vs $7.08 expected. Google’s share of the online-ad market is coming under pressure as more users spend time on smartphones and tablets. The average price of ads fell 3% in the quarter, following a decline of 2 percent in the previous period.

Also after the close, Amazon reported fourth quarter profits. That’s right, a profit not a loss of $214 million, or 45 cents per share, beating estimates of 18 cents. Revenue came in at $29.3 billion, missing estimates of $29.6 billion. Amazon forecast first-quarter sales of $20.9 billion to $22.9 billion, falling short of analysts’ average projection of $23 billion.

Alibaba Group’s quarterly revenue fell short of analysts’ expectations, showing signs of a slowdown in the Chinese e-commerce company’s growth during the holiday shopping season. Revenue rose 40% to $4.2 billion in the December quarter, missing the average analyst estimate of $4.4 billion. But margins increased to 58% from 50% in the prior quarter.

ConocoPhillips, the largest independent oil and gas company, reported a quarterly loss and again slashed its 2015 capital expenditures, citing lower crude prices. ConocoPhillips said its fourth-quarter loss was $39 million or 3 cents per share; excluding one-time items related, ConocoPhillips had a profit of 60 cents. In December, ConocoPhillips announced plans to cut spending 20% including eliminating a $6.5 billion plant in Qatar; now they say they expect to spend $11.5 billion, down from a prior projection of $13.5 billion.

Royal Dutch Shell posted Q4 profit of $4.2 billion, compared with $2.2 billion for same quarter a year earlier, although it said it would lower capex in 2015 and curtail overall spending by a total of $15 billion over the next 3 years.

More than 30,000 job cuts have been announced across the oil industry as companies shrink budgets. Exploration and production spending is expected to fall by more than $116 billion, or 17%.

Qualcomm reduced its outlook for fiscal 2015, saying it expects its newest Snapdragon mobile chip to not be used in a “major customer’s” flagship smartphone. The company also blamed increased competition in China for the reduced guidance. Still showing surprising growth for its latest quarter, Qualcomm reported that first-quarter net income rose 5% from a year ago to $2 billion.

Nokia reported stronger-than-expected quarterly profits this morning lifted by robust sales of latest-generation wireless telecom equipment in North America. Net profit in the three months to end-December quarter was €443M. However, the company stuck to a forecast for weakening profitability.

Confirming the firm’s first annual earnings decline in three years, Samsung Electronics said that October-December profit fell 28% from a year earlier, as strong chip earnings failed to make up for weakness in its mobile division (its fifth consecutive quarter of decline). Samsung issued a statement saying: “Uncertainties for global business conditions will likely grow further in 2015 due to the slowing Eurozone economy and financial risks in emerging countries.”

Deutsche Bank, has a boatload of legal problems and even more investigations but they posted a surprise Q4 net profit today after cutting the reserves it set aside to cover upcoming legal action and on higher investment banking revenue. Net profit of €438M beat expectations of a €289M loss forecast by analysts.

One of those legal investigations involves rigging the $5.3 trillion-a-day foreign exchange markets. Deutsche Bank and 11 other major banks are under investigation. A judge in Manhattan says investors can proceed with their anti-trust lawsuit accusing the big banks of a long running manipulation of closing spot prices, also known as the Fix. According to the 2013 lawsuit, these banks have held an 84 percent global market share in currency trading, and were counterparties in 98 percent of U.S. spot volume. The lawsuit is separate from criminal and civil probes worldwide into whether banks rigged currency rates to boost profit at the expense of customers and investors.

If you go to a restaurant today, chances are the food came from either Sysco or US Foods. The approval for an $8.2 billion Sysco-US Foods deal is being delayed again after the FTC sent a subpoena to a third-party food distributor this week asking for more information. Antitrust concerns are focused on whether the Sysco deal will drive up costs, as the two are the only ones with geographic reach to offer nationwide contracts for a wide variety of goods.

The FCC voted today to classify broadband internet as connections that provide download speeds of at least 25 megabits per second (Mbps) and upload speeds of 3 Mbps. That’s a good move. Those speeds are a lot faster than many people probably get from their internet provider (ISP). By definition, ISPs won’t be able to say they provide broadband unless they can give you at least those speeds.