No Sense in Wasting Our Time
DOW – 188 = 16,431
SPX – 24 = 1921
NAS – 67 = 4503
10 Y – .02 = 1.75
OIL – 2.09 = 31.30
GOLD + 17.10 = 1226.40
The G20 is meeting this weekend in Shanghai. The US will call on G20 countries later to use fiscal policy in order to boost global demand. American officials will also urge all members to refrain from manipulating exchange rates for competitive purposes, in line with existing G20 commitments.
The world’s oil giants were meeting today. At a conference in Houston, Saudi oil minister Ali Al-Naimi, considered the world’s most powerful energy policymaker, said production cuts will not happen. Last week, Saudi Arabia, Russia, Qatar and Venezuela proposed a freeze that would cap production at January levels.
But Naimi said: “Freeze is the beginning of a process, and that means if we can get all the major producers to agree not to add additional balance, then this high inventory we have now will probably decline in due time. It’s going to take time. It is not like cutting production. That is not going to happen because not many countries are going to deliver even if they say they will cut production, they will not deliver. So there is no sense in wasting our time seeking production cuts.”
Global production is projected to be 95 million barrels a day in the first quarter of 2016, and consumption around 94 million, according to the EIA.
JP Morgan will set aside an additional half a billion dollars to cover potential bad loans to oil and gas companies in the first quarter. According to a study by Deloitte, thousands of jobs have been cut in the U.S. energy sector and roughly a third of oil producers, or 175 companies, are at high risk of slipping into bankruptcy this year, increasing the risk that bank loans will not be repaid.
JP Morgan expects to set aside an additional $500 million for oil and gas loans in the first quarter, on top of the $815 million it had at the end of 2015; they will also increase reserves for metals and mining loan exposure by $100 million to $350 million.
What worries Wall Street types? A hedge fund called Two Sigma surveyed Wall Street analysts, and here’s what has them losing sleep: a market liquidity event, or a rapid draw-down with losses of more than 20% in one or more assets as market participants try to liquidate positions simultaneously; a hard landing for China, with GDP growth dipping below 3%; sustained global deflation, which would be the big 3 economies experiencing consecutive CPI readings below zero; emerging market sovereign debt crisis with one or more emerging markets defaulting on public debt leading to the risk of contagion; and US corporate credit liquidity crisis, which you probably remember from 2008.
BHP Biliton posted a $5.6 billion first half loss, due in part to a massive write-down of US energy assets. The world’s largest mining company by market value cut its midyear dividend by 74% to 16 cents a share.
Other leading miners and energy giants, including Rio Tinto, Glencore and ConocoPhillips, have cut shareholder payouts in recent months. BHP’s first half loss included an $858 million charge against the Samarco iron-ore mine in Brazil, where a wastewater dam collapsed in November, killing 19 people and polluting 400 miles of rivers.
Home Depot reported a profit of $1.4 billion, up from $1.3 billion a year earlier. Revenue grew to $20.9 billion from $19.1 billion. And Home Depot raised guidance for 2016.
Toll Brothers reported first-quarter net income of $73 million. That was down from its year-ago result of $81 million. The results matched analyst estimates. Revenue increased about 10% and came in better than estimates.
European earnings roundup: Standard Chartered shares plunged after full-year underlying operating income fell 15% to $15.4 billion. Swiss Re posted a 31% rise in 2015 net income, announced the retirement of CEO Michel Lies, and declared a dividend hike and €1-billion-euro buyback. Danone reported a rise in sales for the fourth quarter, boosted by a resurgent performance in its fresh dairy unit in the U.S.
Puerto Rico’s much-delayed audited financial statements for 2014 are expected to be finished and issued by April, Governor Alejandro Garcia Padilla said in a letter to House Speaker Paul Ryan, attributing the tardy submission to “complexities posed by our current financial crisis.”
The S&P Case-Shiller 20-city composite was steady in December, with 10 of 20 cities showing increases in prices for existing homes. After seasonal adjustment, prices rose 0.8%. Over the last 12 months, home prices increased 5.7%, with Portland, San Francisco and Denver each posting double-digit gains. Home prices in Phoenix were up 0.5% in December and up 6.3% for the past 12 months.
In a separate report, the National Association of Realtors reported home resales rose 0.4% to an annual 5.47 million rate in January; that topped expectations of 5.3 million. It was higher than year-ago levels by 11%. Tight supplies pushed prices higher. The median price was up 8.2% from a year earlier in January, the fourth straight month of accelerating yearly price gains.
According to the New York Fed’s quarterly report on household debt, mortgage debt outstanding nearly doubled in the period from 2000 and 2006, but has risen only about 1% since 2012. In 2008 Americans had $12.6 trillion in debt outstanding, of which housing debt made up $10 trillion, or 79% of the total. In the fourth quarter of 2015, there was $12.1 trillion in total debt, and housing’s share had dwindled to 72%, or $8.7 trillion.
One reason is that cash-out refinancing has dropped from around $300 billion a year down to around $30 billion a year, and the small amount of cash-out refi going on is almost completely offset by people repaying second mortgages and HELOCs. Also, the pace of home buying has slowed even as Americans are paying down their home loans.
Another reason is that homeowners are paying down mortgage debt much faster than in previous years, and the reason is that more people are holding their mortgages for longer; people aren’t moving as much as in the past and that means that mortgages are getting older; so payments are further along in their amortization process and principal, rather than interest, is being paid down.
Consumers' confidence fell in February to the lowest level in seven months, as American became a bit more pessimistic about job prospects and business conditions. Stock market losses also added to the anxiety. The Conference Board’s consumer confidence index dropped to 92.2 from a revised 97.8 in January. Consumers’ short-term outlook grew more pessimistic, with consumers expressing greater apprehension about business conditions, their personal financial situation, and to a lesser degree, labor market prospects.
Western Digital will buy SanDisk for $15.8 billion, sticking with plans to combine the makers of memory chips after a potential Chinese investor backed out of another deal amid a national security probe. Western Digital will pay $78.50 a share in cash and stock for SanDisk, 16 percent more than Monday’s closing price.
United Technologies has rejected another merger offer from Honeywell International on concerns it will not be approved by antitrust regulators. Honeywell is said to have offered $108 per share for United Technologies last week, a more than 20% premium to the share price at the time.
United Technologies said the two firms only held “preliminary” conversations. A tie up would have created one of the aerospace industry’s largest companies worth more than $160 billion. However, United Technologies broke off talks because a deal “would face insurmountable regulatory obstacles and strong customer opposition”.
Boeing has won an order from United Continental for 25 current-generation 737 aircraft in a transaction that could be worth over $2 billion at list prices. The follow-on deal comes just weeks after United agreed to buy 40 737-700 jets.
Alphabet is shuttering Google Compare, its U.S. comparison-shopping site for auto insurance, credit cards and mortgages after one year. The quick reversal is a setback to the company’s efforts to provide consumers with niche shopping and financial-services tools, and follows the demise of a similar website called Google Advisor that was shuttered in 2011.
Bill Gates weighs in on Apple’s battle with US government. The world’s richest person shared his thoughts on Apple versus the FBI, and says there should be a debate about whether or not the phone of one of the San Bernardino shooters should be unlocked.
Meanwhile, in the latest edition of their annual letter published today, Bill and Melinda Gates argue that the world needs “an energy miracle,” and are willing to bet that such a breakthrough will arrive within 15 years. In the letter, Gates outlines the environmental and economic quandary that the world faces: a growing population, growing demand for services, and increased energy use.
Each of these factors contributes to rising carbon dioxide emissions, a major driver behind climate change, and there’s no sign that their upward trends will reverse. But Gates argues that we could still avert environmental disaster by focusing on the carbon dioxide produced by energy – specifically, by reducing it to zero.
And even though the energy represents a multi-trillion-dollar market, Gates says the normal venture capitalist model that has worked for biotech and worked for software is not quite right here.” He cited the Breakthrough Energy Coalition – a fund he launched late last year with Facebook CEO Mark Zuckerberg – as a promising new model.