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Friday, April 01, 2016

Quarter’s End

Financial Review

Quarter’s End

DOW – 31 = 17,685
SPX – 4 = 2059
NAS + 0.55 = 4869
10 Y – .04 = 1.79%
OIL – .21 – 38.11
GOLD + 7.90 = 1233.20
SILV + .23 = 15.55

This is the final trading day of the month and the first quarter. The Dow Industrials posted a gain of 1.5% for the quarter, and the S&P 500 was up 0.77% for the quarter. The Nasdaq composite had its worst first quarter since 2009 with a 2.75 percent quarterly decline.

All three major averages recovered from an intra-quarter drop of more than 10 percent. The Dow Jones industrial average saw its biggest quarterly comeback since 1933. For the month of March, the Dow gained 7%, the S&P 500 was up 6.6%, and the Nasdaq was up 6.8%.

April is usually a positive month for stocks, and the S&P 500 has been positive 70 percent of the time since 1945, ranking it as the second-best month, after December. But in the past 10 years, April has been the top-performing month. The S&P 500 companies are expected to see a decline of 6.9 percent in first-quarter earnings.

If you are looking for reasons behind the rebound in equities, you might consider the central banks. In the Eurozone, ECB president Mario Draghi unleashed his QE bazooka. In the US, the Fed couldn’t pull the trigger on a follow-up to its December rate hike; earlier this week Janet Yellen took a decidedly dovish tone on future rate hikes.

Investors are also tracking the dollar, which hit a six-week low against the euro, weakening in the wake of recent dovish comments from U.S. Fed Chair Janet Yellen. But it’s not just the euro that’s making gains against the USD, Asian currencies are also getting a big boost. The Australian and New Zealand dollar are near nine-month peaks. The Dollar Index is down 3.7% for March.

Initial jobless claims increased by 11,000 to 276,000 in the week ended March 26, the highest since the end of January. Jobless claims have been below 300,000, a level associated with a healthy labor market, for 56 consecutive weeks. That’s the longest streak since 1973. In a separate report, global outplacement consultancy Challenger, Gray & Christmas said U.S.-based employers announced 48,207 jobs cuts this month, down 21.7 percent from February. On Friday, investors will turn their eyes to the key March jobs report. The consensus guess is that the economy added 205,000 jobs in March.

Consumer prices in the euro-area remained in negative territory in March, weighed down by a sharp fall in the energy sector. Eurostat’s flash estimate showed annual inflation of minus 0.1% against the previous month’s reading of negative 0.2%.

China could be downgraded at S&P. S&P cut its outlook for China’s sovereign credit rating to negative from stable but kept its rating at AA-. The rating agency referred to “economic imbalances in China that are unlikely to diminish at the pace we previously expected.” Just a note here: AA- is still a strong rating.

India hopes to receive one of the first loans issued by the China-led Asian Infrastructure Investment Bank later this year, as it looks to raise $500 million for solar power projects from the newly created lender. The AIIB, which has authorized capital of $100 billion, plans to join global clean-energy initiatives, and could fund eco-friendly investment projects to avoid allegations of promoting pollution.

Argentina’s Senate has approved measures that will allow the government to pay billions of dollars to American hedge funds, a critical step toward settling a 14-year old legal battle. In February, the Macri administration reached a series of agreements with investors including Paul Singer’s NML Capital, Montreux Partners, Dart Management and a group of Italian investors, totaling more than $10 billion in payments.

These funds swooped in after Argentina defaulted and bought bonds for pennies on the dollar, and then they sued Argentina, hoping to cash in at full face value; that didn’t happen but apparently the new deal provides enough profit to stop fighting. Argentina is expected to go on a road show in April to court foreign investors. The country will try to sell up to $15 billion in bonds to pay for the February agreements.

Time now for “Bankers Behaving Badly”; today’s edition takes us south of the equator to Brazil. Brazilian prosecutors on Thursday charged Joseph Safra, the world’s richest banker, in connection with an alleged scheme to pay bribes to government officials in return for waiving tax debts. Safra is a Lebanese-Brazilian billionaire, whose fortune is estimated at about $18 billion: The Safra family owns Banco Safra, and he controls a banking and financial conglomerate that operates in 19 countries.

In a statement, prosecutors said that Safra had knowledge of a 2014 plan by executives at his Banco Safra SA to pay $4.2 million in bribes to federal tax auditors. The accusation is based on tapped phone calls between a Banco Safra executive, João Inácio Puga, and tax officials. Safra was not involved in the bribery negotiations, but the recording show Puga reported to Safra on the bribery talks.

Lenders to the oil and gas industry have been extraordinarily lenient amid the worst downturn in decades, allowing indebted companies to survive a little while longer in hopes of a rebound in oil prices. But the screws are set to tighten just a bit more as the periodic credit re-determination period finishes up. Banks reassess their credit lines to oil and gas firms twice a year, once in the spring and once in the fall.

While the lending arrangements vary from bank to bank and from borrower to borrower, lenders largely punted on both re-determination periods last year, providing a grace period for drillers to wait out the bust in prices. But oil prices have not rebounded much since the original crash in late 2014.  Time could run out for companies that have been hanging on by a thread.

When oil was at $100 a barrel, debt was easy to get. According to The Wall Street Journal, the net debt of publicly-listed global oil and gas companies grew threefold over the past decade, hitting a high of $549 billion last year.

About 51 oil and gas companies from North America have filed for bankruptcy since early 2015, but there are 175 more that are in danger of not being able to meet debt payments. For context, 62 oil and gas companies fell into bankruptcy during the financial crisis in 2008 and 2009. Companies struggling with debt payments and shrinking revenue could see the taps shut off or at least reduced.

Some analysts see cuts to credit lines on the order of 20 to 30 percent. Oil & Gas 360 says that banks are also marketing their troubled debt to hedge funds, marking down distressed debt to cents on the dollars. Hedge funds could buy up discounted debt in hopes of repayment.

Meanwhile, although the credit markets are squeezing drillers, equity markets remain open, at least to some. Reuters reported last week that about 15 companies have announced new equity offerings in 2016. The credit re-determinations are currently wrapping up and the details of many of them could soon be released. The deeper banks cut their credit facilities, the more likely struggling oil and gas companies could be forced into bankruptcy.

General Electric formally asked to be released from supervision by the Federal Reserve, saying it has sufficiently shrunk its once-massive financial services arm so it would no longer pose a systemic threat to the banking system. Being categorized as a “systemically important financial institution,” or SIFI, required GE to submit to financial supervision by Fed staff and rein in leverage, two factors in GE’s decision last year to exit most of its lending business, which until recently provided as much as half of the conglomerate’s profits.

In a filing sent Thursday to the Financial Stability Oversight Council, GE said it had cut its total assets in the financing division by more than half, eliminated the majority of its U.S. operations, and cut the company’s ties to the rest of the financial system that had led to its receiving the SIFI designation.

Tesla’s Model 3 debuts later today. The Model 3’s release is highly anticipated, as the vehicle has a base price of $35,000, making it Tesla’s first vehicle that’s cheap enough to be considered “mass market.” The automaker will unveil the car this evening at an event at its headquarters in Southern California. But buyers were lined up at the Tesla store in Santa Monica today to put down thousand dollar deposits on a car they haven’t even seen yet.

China’s Anbang Insurance Group has abandoned its bid for Starwood Hotels & Resorts, paving the way for Marriott International to buy the Sheraton and Westin hotels operator. Anbang and Marriott had gone back and forth, bidding up shares in Starwood; last week Anbang made an offer of $14 billion, which looked like it would beat Marriott’s offer of $12.2 billion.

When it comes to soccer in the United States, women rule. The women’s national team has won 3 World Cup championships and 4 Olympic championships; the men’s national soccer team…, yea, not so much. Five players on the women’s team filed a federal complaint yesterday, accusing U.S. Soccer (the governing body and paymaster) of wage discrimination because, they said, they earned as little as 40 percent of what players on the United States men’s national team earned even as they marched to the team’s third world championship last year.

The five players, some of the most prominent women’s athletes in sports, said they were shortchanged on everything from bonuses to appearance fees to per diems. The case was submitted to the Equal Employment Opportunity Commission, the federal agency that enforces civil rights laws against workplace discrimination.

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