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Monday, February 22, 2016

Spotting Highs and Lows

Financial Review

Spotting Highs and Lows

DOW + 228 = 16,620
SPX + 27 = 1945
NAS + 66 = 4570
10 Y + .02 = 1.77%
OIL + 1.84 = 31.48
GOLD – 17.70 = 1209.30

Stocks across the globe rallied today, sending Dubai shares into a bull market, as oil rebounded and metals advanced. The pound slid as a split in the U.K.’s ruling party over European Union membership increased the potential for an exit from the bloc. The U.K. currency weakened the most in almost seven years against the dollar after London’s Conservative Mayor Boris Johnson said he’ll campaign for Britain’s exit from the EU, opposing Prime Minister David Cameron.

We all know the old saying, “Buy low and sell high.” The problem is picking the highs and lows. John Stoltzfus, Oppenheimer’s chief market strategist has noticed a trend; in a report this morning he looked at the lows over the past year; there were 7 major lows and they all happened as the S&P 500 dipped down to 16.5 to 17 times earnings. That is when stocks looked cheap and buyers stepped in. Of course, this is not a hard and fast rule; it only works until it doesn’t.

The IEA says, “Today’s oil market conditions do not suggest that prices can recover sharply in the immediate future.”  The IEA says oil markets will begin to re-balance in 2017 thanks to falling U.S. production but that decline will prove short-lived as efficiency gains will push U.S. output to new records by the beginning of the next decade. Production of U.S. shale oil is expected to drop by 600,000 barrels per day this year, and a further 200,000 barrels per day next year before gradually recovering.

Within weeks, two low-profile legal disputes may determine whether an unprecedented wave of bankruptcies expected to hit US oil and gas producers this year will imperil the $500 billion pipeline sector as well. In the two court fights, U.S. energy producers Sabine Oil & Gas and Quicksilver Resources are trying to use Chapter 11 bankruptcy protection to drop long-term contracts with the pipeline operators. Pipeline operators have argued the contracts are secure, but restructuring experts say that if the two producers manage to tear up or renegotiate their deals, others will follow.

Exactly how major asset sales and defaults are handled will be a big part of figuring out where oil prices go from here. We really haven’t seen much in the way of major assets sales in the oil patch... yet. There have been some distressed sales and some defaults, and when the banks take over, they are quick to unload assets. Those banks are motivated sellers and will likely keep the market for energy assets depressed for at least a year.

Of course for the big private investors with a long-term time horizon like Blackstone or KKR, this could create a major opportunity. Yet private equity firms are being very disciplined with their capital and are only slowly starting to enter the market for such assets. We haven’t seen much M&A activity, probably because sellers have been clinging to the hope that prices will come back and they will be vindicated for sitting on their assets.

But that might change this year as more sellers are forced by defaults to accept any price they can find, or alternately lose the asset to BK. It will take some time to work through the carnage, probably another year at least. Clearly these are dangerous times for equity investors in the oil patch.

As the U.S. farming sector enters the third year of a downturn caused by a global glut of grains and slumping commodity prices, bankers across the Midwest are starting to tighten lending conditions and even cutting some clients off. Many corn and soybean farmers already are trying to adjust by selling off grain stockpiles, and begging bankers to restructure debt and give them more time to pay it back. Farm sector debt soared past $364 billion last year and is forecast at over $372 billion in 2016.

The flash manufacturing purchasing managers index from Markit fell to 51.0 from 52.4 in January. This matches the lowest level since September 2009. Economists had been expecting a reading of 52.5. While a reading above 50 represents expansion, softer rates of output, new business and employment growth all weighed on the index.

Manufacturing output fell for the third time in the past four months. Markit’s chief economist said: “U.S. factories are reporting the worst business conditions for over three years. Every indicator from the flash PMI survey, from output, order books and exports to employment, inventories and prices, is flashing a warning light about the health of the manufacturing economy.”

CNBC reports that Honeywell and United Technologies have held talks about a merger. A deal would create a company with combined sales of more than $90 billion. It is not a done deal; terms have not been worked out, and there would be some anti-trust hurdles as well.

Sysco has agreed to acquire the Brakes Group, a European food distributor, for $3.1 billion. The deal comes less than a year after Sysco terminated its $3.5 billion deal with US Foods after regulators determined that the combination would be harmful to consumers by leading to higher prices and lower service.

The private banking and asset management firm EFG International has agreed to acquire BSI, the Swiss private-banking arm of the Brazilian investment bank BTG Pactual, for about $1.3 billion; and creating one of the largest private banks in Switzerland with 170 billion francs under management.

HSBC Holdings posted a loss of $858 million, falling far short of analyst expectations for a profit of $1.9 billion. The profit miss is not the only problem facing the bank, the SEC is investigating the company’s Asia Pacific hiring practices. The investigation concerns the bank’s hiring of people that have close government ties.

Fannie Mae is at risk of needing a government bailout that could shake up confidence in the housing finance market, so says the Financial Times.  The reason is because the government does not let Fannie Mae retain profits, its capital buffer (which has dwindled from $30 billion before the financial crisis to $1.2 billion today) is on track to disappear by January 2018. At that point it would be unable to weather quarterly losses and would need to draw on Treasury funds to avoid being placed into receivership.

Highlights from the Mobile World Congress: Samsung Electronics and LG Electronics unveiled their latest flagship devices, seeking to revive sales momentum and buck slowing industry growth. The new Galaxy S7 comes with an improved camera, memory storage, water resistance and a longer battery life, while the LG G5 showed off a similar range of new features.

The biggest news, however, was the firms’ big jumps into virtual reality. Samsung is teaming up with Facebook to push VR elements into phones and social networking, and the two companies unveiled 360 degree recorders, cameras and viewers.

Payment card operators are also taking part in Mobile World Congress. MasterCard is bringing facial recognition services dubbed “selfie pay” to the U.K. to improve identity verification for mobile phone payments. British users will be able to scan fingerprints or snap selfies to validate their identities for completing online purchases. Meanwhile, Visa wants to turn your car into a mobile payments platform, showing off a concept app that will let drivers pay for fuel and parking without leaving their vehicles.

Also on display at the Mobile World Congress in Barcelona: 5G, or the fifth generation of wireless technology, offering mobile Internet speeds that will let people download entire movies within seconds, and it may pave the way for new types of mobile applications. Under plans for 5G, carriers will most likely offer mobile Internet speeds of more than 10 gigabits per second, or roughly 100 times faster than current networks (and significantly quicker than existing broadband). That would allow you to download high-definition movies almost instantaneously, even if you’re on the go.

Such technology will not come cheap. Carriers and telecom equipment makers will have to install new hardware like cellphone towers in rural areas and tiny mobile hot spots in dense urban areas to reach the 10 gigabits per second target. They will also have to increasingly rely on sophisticated software to manage the expected exponential jump in mobile data traffic.

AT&T is partnering with Intel to test and optimize how drones perform on LTE connections beyond line of sight, at higher altitudes, or when faced with external interference. The collaboration is designed to show how a network that has primarily been designed to connect devices (such as smartphones) on the ground can be re-worked for unmanned aerial vehicles.

Apple CEO Tim Cook has sent a new memo to all Apple employees explaining why the company is resisting an FBI request to decrypt an iPhone used by one of the San Bernardino shooters. In the memo, Cook says the FBI should withdraw its demand to force Apple to develop a tool to help it break into the iPhone.

He writes: “At stake is the data security of hundreds of millions of law-abiding people, and setting a dangerous precedent that threatens everyone’s civil liberties.” A court last week ordered Apple to comply, but the company is challenging the order. Apple is calling for the government to launch a commission of experts to examine the effects of encryption technology on law enforcement.

Lumber Liquidators’ flooring, tested for formaldehyde, was found to have a three times higher risk of causing cancer than previously stated. A report released Feb. 10 used incorrect ceiling heights, lowering by about three times the airborne concentration that should have been examined and reducing the danger. According to the Centers for Disease Control and Prevention the estimated risk of tumors is six cases to 30 cases per 100,000 people, and not the two to nine cases in the earlier report.

US auto safety regulators are examining whether an additional 70 million-90 million Takata airbag inflators should be recalled because they may endanger drivers, according to Reuters. That would nearly quadruple the 29 million inflators that have been called back so far. New recalls would translate into billions of dollars in additional costs for the company and also add years to the replacement process.

US authorities have asked Volkswagen to produce electric vehicles in the U.S. as a way of making up for its rigging of emission tests. The plan would see VW manufacture electric cars at its plant in Tennessee, and help build a network of charging stations for electric vehicles. A VW spokesman said, “Talks with the EPA are ongoing.”

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