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Morning in Arizona
Rainbows over Canyonlands - Dave Stoker

The Headline Animator

Tuesday, December 08, 2015

Financial Review

Good to be King

DOW – 162 = 17,568
SPX – 13 = 2063
NAS – 3 = 5098
10 YR YLD + .02 = 2.24%
OIL – .08 = 37.57
GOLD + 3.40 = 1075.60

Back to back triple digit losses for the Dow and much of the carnage can be traced to the energy sector and the drop in oil prices. The problem is not just that many energy related companies might suffer losses, but that many of those companies carry big debt loads. Oil prices actually closed above the lows for the day. There was probably profit-taking by some of the shorts and bargain-hunting by those that think we’re going to rise for at least a little bit. Short-term gains in no way negate the bearish implications from this weekend’s OPEC meeting.

OPEC had a collective target of 30 million barrels a day since 2012 but they have been cheating on quotas and producing about 5% more. The important point is that OPEC is no longer the only game on the planet. Most of the global market doesn’t have any ceiling on production. Americans don’t have any ceiling. Russians don’t have any ceiling. Iran has been partially locked out of the global markets and they look to come back with a boatload of supply next month. And the Saudis are fighting a war in Yemen and their national budget is almost entirely based on oil revenue. Unilateral price cuts just won’t cut it.

Intensifying concerns about the world’s second-largest economy, China’s November exports dropped 6.8% for a fifth consecutive month, while imports fell 8.7% over the same period, marking a decline for every month over the past year. The figures leave the country with a trade surplus of $54 billion.

Japan isn’t in a recessionA revision to Japan’s third-quarter gross-domestic-product report has allowed the country’s economy to escape recession. Initially, the Japanese economy was said to have contracted by 0.2% during the quarter, but Tuesday’s revision shows it actually expanded at a 0.3% clip. Annually, Japan’s economy grew a seasonally adjusted 1.0%.  The latest report shows more business investment and consumer spending.

Eurozone growth in the third quarter was boosted by rising inventories and higher household spending as exports suffered from a slowdown in global trade. GDP in the 19-nation bloc rose 0.3% in the three months through September after expanding 0.4% in the prior quarter. The data comes less than a week after the ECB cut one of its main interest rates to a record low and expanded its asset-purchase program for an extra 6 months.

The US budget legislation was supposed to be a done deal, the final act of outgoing Speaker of the House John Boehner; however, the devil is in the details. Days from a Friday midnight deadline, progress has proven elusive for negotiators who also are trying to hammer out a separate measure to renew dozens of expired tax breaks. While the GOP is seeking concessions from the Obama administration and Democrats on the environment, Republicans have dropped demands to cut off federal funds for Planned Parenthood and for implementing Obama’s marquee health care law.

One casualty might be REIT spinoffs, a popular technique that lets companies spin off their property holdings into tax-advantaged real-estate investment trusts. The Internal Revenue Service has raised warnings about some spinoffs and said in September that it was considering new rules. The proposal would prevent the technique and prevent spun-off companies from converting into REITs for 10 years.

The Federal Reserve reports consumer credit growth eased in October as consumers cut back on credit card use. Consumer credit increased 5.5% in October, or by a seasonally adjusted annual rate of $15.9 billion. This is a sharp deceleration from September’s gain of $28.6 billion, or 9.9%, which was the fastest pace since April 2014. Total consumer borrowing, which does not include mortgage debt, now totals $3.5 trillion.

The Labor Department reports there were fewer job openings in October.  The Job Openings and Labor Turnover Survey, also known as JOLTS, shows job openings declined 2.7% in October, to 5.38 million. The number of openings hit an all-time high of 5.67 million in July. If employers continued to search for workers even as so many people were working part-time while wanting full-time jobs, or were counted among the long-term unemployed, or had even left the workforce, perhaps employers needed to sweeten the pot.

It might also signal that workers are willing to demand higher wages before accepting a new job. Meanwhile, October was the third-strongest month for hires since the recession ended in 2009. So October’s data showing a pickup in hiring alongside a slight retreat in openings might be evidence that hiring is hitting its stride.

JOLTS data only goes back to December 2000, and quits averaged 3.22 million per month until the Internet bubble burst in April 2001. Post-financial crisis, workers are a lot more wary; quits have averaged 2.19 million per month since the recession ended, for a larger population than in 2000-2001. That makes October’s number, 2.78 million, the second-best of the recovery, and may foreshadow more job market churn ahead.

The latest survey data from the National Federation of Independent Business saw optimism fall, small-business owners turned less confident about their economic prospects last month, pointing to slower sales and growing inventories as consumers spend more cautiously. The National Federation of Independent Business’s small-business optimism index, based on a survey of about 600 owners, slipped to 94.8 in November from 96.1 in October, but various signs continue to point to rising wages for American workers. The November NFIB report showed that 23% of firms reported an increase in compensation, up two points from October and near an expansion high.

This number has been trending upward since the financial crisis. Moreover, a seasonally-adjusted net 20% of small businesses plan to raise compensation in the coming months, 3 points up from October.  In the wake of the financial crisis, sales were by far the single most important concern for small businesses, but that has seen a huge drop in the last couple of years with the economy improving. Now, there is a larger percentage of firms whose single most important problem is “labor quality” than those whose biggest problem is “sales.”

The U.S. Export-Import Bank may have been reauthorized on Friday, but the fight is still not over for the government’s embattled export credit agency. With three empty seats on its five-member board, the bank lacks a quorum. This means that until President Obama nominates members, and the Senate confirms them, Ex-Im Bank can only approve small export deals, not the big orders for aircraft, satellites and major manufacturing equipment.

The proposed $110 billion merger between AB InBev and SABMiller will get tested before Congress today, with CEOs from AB InBev and Molson Coors testifying before the Senate Judiciary Committee. The panel is reviewing how the merger of the world’s two biggest beer producers would affect competitors and consumers. The combined entity could soon hold the No. 1 or No. 2 positions in 24 of the world’s 30 largest beer markets.  As part of the deal, AB InBev plans to sell SABMiller’s 58% stake in MillerCoors to Molson, and is exploring the sale of European brands Grolsch and Peroni.

The U.S. Federal Trade Commission has filed a complaint aimed at stopping Staples, the nation’s largest office supply store, from buying its top rival, Office Depot. The FTC issued a statement saying, “The commission has reason to believe that the proposed merger between Staples and Office Depot is likely to eliminate beneficial competition.”  Canada’s Competition Bureau also said it would challenge the proposed transaction.

Iron ore prices dropped below $40 a ton. Prices of the raw material have lost 45 percent this year and have plunged 80 percent from their peak in 2011. It is estimated that breakeven prices are between $28 and $39 a ton for the largest producers.

Anglo American, the fifth largest mining company in the world, has announced several restructuring steps that will cut 85,000 jobs. The plan includes asset sales, large cost cuts and a suspension of dividend payments. U.K.-based Anglo, the world’s fifth-largest mining company by market value, said it plans to reduce its portfolio of assets by 60% to focus on a smaller pool of assets that are able to generate cash flow through the commodity price cycle.

Canadian Pacific is expected to revise terms of its $28.4 billion bid for rival Norfolk Southern, with a complex plan that aims to put cash in shareholders’ hands ahead of a regulatory review of the deal. Last week, Norfolk rejected the takeover offer saying the bid would face regulatory hurdles “at any offer price”.

Yahoo will scrap its long-planned spinoff of its stake in Alibaba, a response to mounting pressure from investors who have grown tired of waiting for a turnaround in the Web portal’s main businesses. CNBC reports the company will consider a sale of its Web businesses instead.

Chipotle Mexican Grill said it has temporarily closed a Boston restaurant while it investigates reports that diners fell ill. Thirty Boston College students reported gastrointestinal symptoms after eating at a Chipotle restaurant over the weekend. The incident renews fears about food poisoning at the restaurant chain, which is trying to bounce back from a spate of E. coli illnesses in nine states that sickened at least 47 customers. On Friday, Chipotle said it expected sales to drop between 8-11% in the fourth quarter, marking the first time the figure fell since the company went public in 2006.

Lebron James has signed a lifetime deal with Nike. Nike signed James after he went pro out of high school in 2003. His first contract spanned seven years and was worth $90 million, with a seven-year extension in 2010. Nike has released at least 13 versions of James’s signature shoes. Terms of the new lifetime contract were not revealed but are estimated in the $400 to $500 million range. It’s good to be king.

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