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Wednesday, February 03, 2016

Groundhog Day EP

Financial Review

Groundhog Day EP

DOW – 295 = 16,153
SPX – 36 = 1903
NAS – 103 = 4516
10 Y – .10 = 1.86%
OIL – 1.74 = 29.88
GOLD + 1.00 = 1130.00

A big move for stocks and bonds today. While a 295 point drop, or 1.8%, in the Dow will attract some headlines, we also saw a less flashy move in bonds, with the yield on 10-year Treasuries drop 10 basis points, to 1.86% – that’s a 5.2% drop. After hitting resistance levels from October, yields continued dropping to lows last seen in April.

Stocks moved lower again, following the trail of oil prices, which dropped 5.5% today to close below $30 a barrel. Not a big surprise because the trend has been lower, and a trend in place is more likely to continue than it is to reverse. We are definitely in a downtrend. The S&P 500 is now right at 10% below its May record, which means correction territory, not a bear market, although many stocks in the S&P are in bear market territory –  specifically the energy stocks.

The rally last week looks like not much more than end-of-month reshuffling, which happened at the same time the Bank of Japan surprised the markets with negative interest rates, but the BOJ can’t announce negative interest rates every day.

Right now, any rally tends to be short and sharp. In other words, last week’s rally was not enough to reverse the trend. That means we can expect the S&P 500 to re-test the recent closing low of 1859, set on January 20. There should be a strong floor, or support, right around 1860 to 1870. Any breakdown from those levels and it is Katy bar the door, or maybe Katy short the Spiders.

While earnings growth for the S&P 500-stock index is forecast to come in negative, year-over-year, and earnings growth for the MSCI Europe has been stagnant for an astonishing 48 months, the picture brightens considerably once energy is taken away. Excluding the sector, year-on-year earnings growth in both the US and Europe reach 5 percent and 4 percent, respectively.

When you hear that earnings season is terrible, or that corporate earnings are collapsing; the reality is that commodity sector earnings are collapsing and the rest of the market is still seeing moderate growth. And while the breakdown in the commodity sector has the potential to drag down the broader market, particularly as we see asset write-downs and credit defaults; for now, the benefits of lower oil are acting as a counter balance to the negatives.

This is a very busy week for earnings reports, and today featured results of some of the Big Oil companies.

Exxon Mobil, the largest oil company by market cap, reported a 58% drop in quarterly profit and said it would cut spending this year by one-quarter, to around $23 billion.  Capital outlays that peaked at $42.5 billion in 2013 have been reduced by 45%. That represents the leanest spending plan since 2007. Still, the cutbacks have not really served to reduce production yet.

Exxon said its oil and gas output rose 4.8% in the fourth quarter as it pumped more crude oil. Fourth-quarter net income fell to $2.7 billion, or 67 cents a share, from $6.5 billion, or $1.56, a year earlier. The per-share result was 4 cents higher than estimates. Exxon is the only super-major oil company so far to report better-than-expected fourth-quarter results.

One area where Exxon will make big cuts is in its share buyback program.  Exxon has spent more on share buybacks than any other company in the past 10 years, $210 billion. It far surpasses second-place Microsoft Corp, which has bought back $125 billion in that time. For the first time in 15 years, Exxon will only buy back shares to offset dilution as opposed to return cash to shareholders. Exxon will still use some buybacks for employee benefit plans and options programs.

Some investors worry that oil companies will not spend enough on research and development and new tech, either to sustain growth in their core businesses, or to open options in alternative energy sources for a world in which oil and gas consumption is constrained by climate policy or high prices.

Last September, the Rockefeller Brothers Fund, founded by the sons of the great oilman John D Rockefeller, said it planned to sell its holdings in fossil fuel companies, in part because the family believed renewable energy was the business of the future. The fund suggested the successors to John D’s Standard Oil were failing to grasp the opportunities that he would have seized. And even basic oil exploration and drilling has gone high tech, requiring massive computing power to analyze geophysical data from seismic surveys.

Last year Exxon spent just over $1 billion on R&D, or about 0.2% of total revenue, and just a fraction of what it spent on share buybacks. In 2008, Exxon spent $847 million on R&D but $35 billion on share buybacks. All of which raises the question of what Exxon will do if oil prices remain low.

For now, Exxon posted a profit for the quarter, down but still a profit. And lower oil prices lead to lower feed-stock costs, and as a result the margins in the refining segment have improved and should provide some tailwind. Exxon has managed to maintain a steady share price in the face of lower oil prices, but now they won’t be playing that game with share buybacks. Others might not be so lucky.

BP has reported its worst annual loss in 20 years (even weaker than its 2010 results that included the costs of destroying the Gulf of Mexico). For 2015 as a whole, the company announced a loss of $6.5 billion, and a loss of $3.3 billion in the fourth quarter. BP repeated a commitment it made last month to cut 4,000 jobs this year in its exploration and production unit, and that’s in addition to 3,000 workers from its marketing and refining business by the end of 2017.

PetroChina said last week it expects 2015 profit to fall at least 60 percent. Chevron on Friday reported its first quarterly loss since 2002, while Royal Dutch Shell Plc said last month that fourth-quarter profit is likely to drop at least 42 percent.

Standard & Poor’s has lowered its credit rating on Royal Dutch Shell and placed BP, Eni, Repsol, Statoil and Total on ratings watch with potential negative implications.

Dow Chemical blew past fourth-quarter profit and sales estimates. The company said it had net earnings of $3.5 billion in the fourth quarter, up from $734 million in the year earlier period. Lower oil prices meant higher profits for Dow’s plastics unit. Also today, Dow Chemical CEO Andrew Liveris said he would retire by mid-2017, following the merger of the company with fellow chemical and seeds producer DuPont.

United Parcel Service reported better-than-expected earnings in the most recent quarter as growth in international package delivery drove profitability. UPS also offered upbeat earnings guidance for the current year. For the quarter, UPS posted earnings of $1.33 billion, or $1.48 a share, up from $453 million, or 49 cents a share, a year earlier. In the domestic segment, profit rose an adjusted 18%. Daily shipments ticked up 2.4%, helped by strong demand from e-commerce shippers. UPS benefitted from lower fuel costs, but that was offset in part by acquisition costs of Coyote Logistics, as well as headwind from a stronger dollar on international operations.

Pfizer reported better-than-expected results for its fourth quarter thanks to last year’s acquisition of Hospira and strong sales of new drugs, but the pharmaceutical giant offered soft guidance for 2016. The guidance excludes any impact from its inversion deal with Allergan, which would move Pfizer’s headquarters to Ireland.

Michael Kors Holdings reported fiscal third-quarter profit and sales that beat expectations. Despite their beat, Kors’ comparable sales declined 0.9 percent; not as bad as expected, and that was good for a 24% gain today. The handbag bubble seems to have popped: For a variety of reasons, Americans just aren’t buying purses and bags like they used to. Michael Kors and other affordable US luxury brands, such as Coach and Kate Spade, have been hurting, especially as Americans show less willingness to pay full price for their bags. But the company said it found sales in a couple of places, including new store openings, and most notably, online.

Automakers reported January sales today. General Motors, Fiat Chrysler and Nissan reported surprise sales gains instead of the predicted declines, while drops at Ford, Toyota, and Honda were narrower than projected. The annualized selling rate adjusted for seasonal trends came in at a better-than-expected 17.6 million. Volkswagen reported sales dropped 15%.

The clock is ticking for Volkswagen to submit a repair plan covering 80,000 U.S. diesel SUVs and larger cars with emission levels over allowable levels. The California Air Resources Board set a deadline of February 2 for VW to come up with a remedy. Last month, California rejected VW’s proposal to fix 482,000 2.0 liter cars, calling it “substantially deficient.”

After the closing bell, reports from Yahoo and Chipotle.

Yahoo reported a 15% drop in adjusted quarterly revenue as it struggles to keep its share of online search and display advertising. Yahoo’s revenue fell to $1 billion from $1.18 billion. The company reported a loss of $4.43 billion, or $4.70 per share, in the quarter, compared with a net income of $166.3 million, or 17 cents per share, a year earlier. Excluding items, Yahoo earned 13 cents per share, in line with analysts’ average expectations.

Yahoo said it was exploring strategic alternatives in addition to the continued pursuit of the reverse spin-off of its Internet business. The company also said it would cut about 15 percent of its workforce and close offices in five locations. The company said it would simplify its product portfolio and that it had begun to explore divesting non-strategic assets.

Chipotle Mexican Grill reported a decline in quarterly revenue for the first time in its history as a public company, as a string of illness outbreaks linked to its restaurants contributed to a 44% drop in fourth-quarter profit.

Chipotle also said it was served with a subpoena on Jan. 28, widening the scope of a federal probe into an outbreak of foodborne disease disclosed in January. The new subpoena requires Chipotle to produce documents related to companywide food safety dating back to January 2013. Yesterday, the CDC said the two E. coli outbreaks that sickened 60 customers appeared to be over.

Chipotle said revenue fell 6.8% to $997.5 million, narrowly missing the $1 billion estimate. It is the company’s first decline in quarterly sales since going public in 2006.  Chipotle reported a profit of $67 million, or $2.17 a share, down from $121 million, or $3.84 a share, a year earlier.

Yesterday, the World Health Organization declared the Zika outbreak to be a global emergency. Zika also turned out to be bad for a car company in India.  Last year Tata Motors introduced a new hatchback; they touted the car as the next big thing, a good looking zippy car. And that’s how they came up with a name for the car; they shortened and combined zippy and car: Z-I and C-A, Zica. Spelled differently but pronounced the same as the virus. They will introduce a new name for the car in about a week.

On a more serious note, Sanofi has launched a project to develop a vaccine against the Zika virus in the most decisive commitment yet by a major vaccine producer to fight the disease linked to multiple birth defects in Brazil. The French drug maker said its Sanofi Pasteur vaccines division would use its expertise in developing vaccines for similar viruses such as yellow fever, Japanese encephalitis and, most recently, dengue. The closest vaccine prospect so far may be from a consortium including US biotech company Inovio Pharmaceuticals, which could potentially have a vaccine ready for limited emergency use before year-end.

Health authorities in Dallas, Texas said today that a local resident has contracted the Zika virus—the first confirmed case to be transmitted within the United States since the current outbreak began.

Yesterday’s settlements by Barclays and Credit Suisse for misrepresenting their private stock trading sites are unlikely to be the last as regulators continue to pursue abuses in electronic trading. According to the research firm Tabb Group, about 42% of the average daily trade volume is handled in the “dark,” meaning information about trades isn’t publicly known before they are executed. While the pools have existed for decades, they have become more popular in recent years due to the increase in high-frequency trading.

Lumber Liquidators has been ordered by the Department of Justice to pay $10 million for violations of the Lacey Act – a law for the protection of plants, fish and wildlife. The company told U.S. officials the timber for its wood flooring came from Germany rather than the actual source — the habitats of endangered Siberian tigers in Southeast Asia. Lumber Liquidators is also under a separate investigation into charges that its laminate products from China contain excessive levels of formaldehyde.

Yesterday we told you that Alphabet reported better than expected earnings and the stock moved higher in after-hours trade, pushing the market capitalization past Apple, to make Alphabet the most valuable company in the world.

Just in case you were wondering about the other corporate giants, here’s a rundown of the Top 10: Alphabet (formerly Google), Apple, Microsoft, Facebook, Berkshire Hathaway, Exxon Mobil, Johnson & Johnson, General Electric,, and Wells Fargo. It’s not until you get to the 11th spot on the list that you find a foreign company, Nestle, valued at a mere $236 billion.

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