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Thursday, January 14, 2016

Financial Review

Headwinds and Tailwinds

DOW + 227 = 16,379
SPX + 31 = 1921
NAS + 88 = 4615
10 Y + .03 = 2.10
OIL + .66 = 31.14
GOLD – 15.00 = 1079.50

Global stocks have lost almost $3.2-trillion in market value since the start of 2016, pushing all major US indexes into correction or bear market territory. Asian markets (except for China) and European exchanges were mostly lower. Even with a bounce, we’re trending lower, short-term.

The Bank of England this morning kept its key interest rate at a record low of 0.5% and made no changes to its $540 billion asset purchase program. Both decisions were widely expected.

The Hong Kong dollar sank by the most in more than a decade overnight and speculation mounted in the options market that the city’s 32-year-old currency peg will soon come to an end, as investors lost confidence in Chinese assets. Other currencies also took a hit. The loonie fell to its lowest level since April 2003, fueling speculation the Bank of Canada could cut interest rates as early as next week.

The average number of people who applied for jobless benefits in the past month climbed in early 2016 to the highest level since last July. Initial jobless claims for the first full week of January, meanwhile, rose by 7,000 to a seasonally adjusted 284,000; the four-week average rose to 278,750.

The prices the U.S. paid for imported goods fell 1.2% in December, and dropped 8.2% for all of 2015. Even if oil prices are set aside, import prices have been falling. The cost of all imports excluding fuel slid 3.4% in 2015, marking the only decline since the government began keeping track in 2001. At the same time, export prices sank 1.1% in December. For the full year, export prices sank 6.5%, the biggest decline since the government first began keeping records in 1983.

JPMorgan Chase said fourth-quarter profit rose 10 percent. Net income rose to $5.4 billion, or $1.32 a share, from $4.9 billion, or $1.19, a year earlier. Revenue rose 1 percent to $22.9 billion in the fourth quarter. Earnings rose as the bank cut expenses from litigation and employee compensation shrank. Now there’s a business model for you.

We didn’t see much in the way of positive surprises in the earnings report, unless you consider not paying the lawyers and the regulators more to be a surprise. Still, they beat estimates. JPMorgan was up .86 at 58.20 today. Flat is the new up in investment bank land.

JPMorgan kicks off a parade of bank earnings reports. Wells Fargo and Citigroup report on Friday. A few analysts think the big banks have already taken their licks and are so far into oversold territory that there might not be much downside left. The KBW Nasdaq bank index shows bank shares down 17% from their July 2015 highs, down 15% since December, and down almost 10% so far in 2016.

If the big banks are going to climb out of their hole, they’ll need a lot better news than JPMorgan delivered today. One of the bright spots was from advisory fees on M&A. Mergers and Acquisitions in the fourth quarter reached near record levels, capping a record year. Globally, M&A activity topped $4.9 trillion in 2015, outpacing the previous record of $4.6 trillion set back in 2007. In a rising interest rate environment, it is hard to imagine 2016 will be a better year for M&A.

JPMorgan’s advisory revenue was up 43% to $622 million. Not bad but not outrageously great; and it was about the only strong area and not a surprise. Meanwhile trading revenue fell 3%, equity trading fell 7%, and credit underwriting disappeared.

And the headwinds are more problematic than the tailwinds are helpful. There’s no question debt and credit trading was difficult in fourth quarter. High-yield debt in general hit the skids hard, and nowhere was that more prevalent than in the energy sector. The Federal Reserve’s most recent Shared National Credits exam noted that 74% of the increase in classified loans were oil and gas loans, “where near default loans increased four times.”

JPMorgan nearly doubled its loss provisions in the fourth quarter, mostly due to bad energy loans. Asked on the earnings call if the bank is setting aside too little, Dimon says he’d put up more if he could, but accounting rules dictate what can be done.

I’m not sure which rules Dimon was referencing but we do know that every 10 basis points of expense increases for loan loss provisions will knock about 4% off banks’ earnings. Bottom line: a decent report from JPMorgan but it doesn’t look like enough to lift the banking sector.

Following the collapse of the Third Avenue Focused Credit Fund last month, the SEC has launched a review of the entire junk-bond fund complex. Reuters reports the agency “sent detailed requests” to mutual fund and ETF managers following the Third Avenue liquidation plan in which investors could wait a year or more to get their money. Regulators are “seeking information about how they price less liquid securities, and whether certain parties have ever challenged those prices.”

Intel reported a small increase in quarterly revenue, reversing two quarters of declines, as growth in its data center business more than offset weak sales to PC makers. Net income fell to $3.61 billion for the fourth quarter, from $3.66 billion, a year earlier. Net revenue rose to $14.91 billion from $14.72 billion. On a per share basis, earnings were flat at 74 cents. The fourth quarter of 2015 marked the fifth consecutive quarter of worldwide PC shipment decline. Intel was up .83 at 32.74, but they are down over $1 in after-hours trade.

GoPro shares were clobbered, down 26%. The wearable camera maker said on Wednesday it expected revenue of about $435 million for the fourth quarter, well below the average analyst estimate of $512 million.

Renault shares dropped more than 20% after a union said French fraud investigators seized computers from the automaker, apparently as part of a probe into emissions testing. The French government said tests on nearly two dozen Renault models and other automakers found several that exceeded the country’s air quality standards but so far found no evidence of technology designed to cheat on emissions tests, except a couple of VW models.

Volkswagen and EPA officials remain at an impasse following yesterday’s talks between VW CEO Matthias Müller and EPA chief Gina McCarthy, casting doubt over a quick resolution of the automaker’s emissions cheating scandal. The two sides gave no indication of any progress during a meeting at EPA offices in Washington, D.C.

Trading in Fiat Chrysler was halted several times today in Milan Italy, as prices dropped by 10% or more on a report from Automotive News, saying that two Chicago car dealerships have filed a lawsuit alleging the company offered dealers large amounts of money to report US unsold vehicles as sold. A spokesman for Fiat Chrysler in the U.S. said the auto maker “has not been served with this lawsuit and cannot comment.”

West Texas Intermediate crude oil fell to $29.73 in overnight trade, its lowest level since February 2004; prices bounced from that low. Prices have already tanked 20% this year.  Not a big surprise that there was some support at $30. The question is whether support can hold in the face of a potential new source of supply. The United Nations’ nuclear watchdog is likely to confirm on Friday that Iran has curtailed its nuclear program as agreed with world powers, paving the way for sanctions to be lifted.

The past 18 months have been rough for the oil industry. The low price has caused layoffs in what had been a robust and growing shale oil extraction business. A new report shows the number of jobs in the United States in the solar industry outpaced those in the oil and gas industries for the first time ever. As of November 2015 there were almost 209,000 people who worked in the solar industry, 90 percent of whom only work on solar-related projects. There were only about 185,000 people working in oil and gas in the United States in December 2015, according to the Bureau of Labor Statistics.

The solar industry has seen prices drop, not quite as much as oil, but as the technology becomes cheaper, sales have remained solid. One other key difference for the economy, jobs in solar pay about half what jobs in the oil industry pay, on average.

Meanwhile, renewables just finished another record-breaking year, with more money invested ($329 billion) and more capacity added than ever before (121 gigawatts), according to new data released by Bloomberg New Energy Finance. Spending on clean power declined in Europe, but increased 17% in China, 7.5% in the US, and for the first time, more than half of the world’s annual investment in clean energy came from emerging markets.

And since clean energy is also getting cheaper, the world got more bang for each buck. Investment dollars rose 4 percent last year, while the new capacity added for wind and solar jumped 30 percent. Looking out still further, the International Energy Agency said last year that between now and 2020, renewable energy will be the largest area for growth, and predicts 700 gigawatts of added generating capacity.

Oscar nominations were announced this morning.  “The Revenant” led the nominations with 12 nods, including best picture, and best actor for Leonardo DiCaprio; while the action movie “Mad Max: Fury Road” landed 10 nominations.

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