Quitaly or Not to Quitaly
DOW + 68 = 19,191
SPX – 7 = 2191
NAS – 72 = 5251
RUT – 8 = 1313
10 Y+ .07 = 2.44%
OIL + 1.52 = 51.86
GOLD – 1.40 = 1172.60
Another Dow record high close.
Yesterday, OPEC agreed to its first production cut in eight years; that pushed prices over $51 a barrel. But the higher prices might not last. Production cuts early in the year are a normal response to a low-demand season in February and March when Asian refiners typically shut for maintenance.
Even without increased supplies from elsewhere, if OPEC and Russia do reduce production by 1.2 million barrels per day as pledged, the cuts probably would not be deep enough to shrink a glut that began to build in mid-2014. Meanwhile, higher oil prices and lower production costs are encouraging US shale operators to increase output, and rig count has been rising.
Bonds had a terrible November. Global bonds lost $1.7 trillion of value in November as they suffered through their worst month since at least 1990. The sell-off is continuing the first day of December, with the US 10-year yield up another 5 basis points at 2.43%, its highest since July 2015. The outlook isn’t great for fixed income either, with European sovereign debt looking vulnerable, Chinese rates continuing to rise, and Treasuries under pressure from the administration change.
Almost all yield investments have been hammered as rates raced higher. Panic among investors has been seen in Treasuries, corporate bonds, REITs, preferred shares and several dividend champions. Of course, there has been some carnage in the utility sector as well as some investors treat them as a proxy for bonds. There are a few arguments for why rates are increasing so substantially, but the strongest case may simply be that no one wants to get in the way of the herd.
Economic activity in the manufacturing sector expanded in November, according to The Institute for Supply Management, and the overall economy grew for the 90th consecutive month. U.S. manufacturing index hit 53.2 in November, up from 51.9 in October.
Construction spending increased in October to a seven-month high with gains in home building and public outlays, and estimates for the prior two months were revised sharply higher, pointing to strength in the sector. The Commerce Department said construction spending increased 0.5% in October to $1.173 trillion, the highest since March 2016. Spending on private construction projects slipped 0.2%. Public construction spending jumped 2.8%
The number of Americans filing for unemployment benefits rose more than expected last week, hitting the highest level in five months, but the underlying trend remained consistent with a healthy labor market. Initial claims for state unemployment benefits increased 17,000 to a seasonally adjusted 268,000 for the week ended November 26.
Despite the increase, claims remained below the 300,000 threshold for the 91st straight week. That is the longest run since 1970. Yesterday we saw a very strong report from ADP showing 216,000 net new private sector jobs were added last month, which might indicate a very strong jobs report from the Labor Department tomorrow morning but this news on unemployment benefits tamps down expectations slightly. The estimate for tomorrow’s jobs report is 180,000 new jobs.
In a separate report, global outplacement consultancy Challenger, Gray & Christmas said employers announced plans to lay off 26,936 workers last month, down from the 30,740 job cuts announced in October. Jobs cuts in November were concentrated in the retail sector, with 4,850 announced layoffs, most of which stemmed from the bankruptcy of American Apparel. The retail losses were, however, more than offset by a surge in holiday hiring.
Carrier announced late Tuesday that it had reached a deal with President-elect Donald Trump and Vice President-elect Mike Pence, who is currently governor of Indiana, to keep about 1,000 of 1,400 jobs at its Indianapolis plant, rather than move them to Mexico. Today, Trump and Pence went to Indiana to celebrate the Carrier jobs deal. The company said state “incentives” from Indiana were an “important consideration” to its decision to stay put.
Carrier is getting $7 million in financial incentives over the next 10 years. It will also get about $200,000 a year to retrain workers, funding which is generally provided by the state. Carrier had said it would move all the jobs from the plant to Mexico to save $65 million.
Carrier parent United Technologies is a major defense contractor, with $5.6 billion in revenue from federal government contracts, or 10% of its total revenue. The government also pays for $1.5 billion of its research and development costs. So, the $7 million subsidy was likely not the only math in the equation.
Pledging to come clean about secret assets, Credit Suisse has frozen dozens of accounts as it tries to determine if U.S. clients are hiding money from the IRS. The bank is looking at indicators such as phone numbers or powers of attorney to determine whether Americans are the true owners of accounts not disclosed to the tax agency. Any client activity on these accounts now requires approval by a group within Credit Suisse.
Italians will vote Sunday in a crucial referendum that could – in one scenario – force the prime minister’s resignation, spark a banking crisis and ultimately push Italy out of the Eurozone. Such a scenario would require a line of political dominoes to fall in just the right way. Italians are being asked to vote on a sweeping series of constitutional reforms championed by Prime Minister Matteo Renzi.
The reforms would reduce the size and power of the Senate. The upper house currently has equal power to the lower house, the Chamber of Deputies, which regularly results in legislative gridlock as laws are batted back and forth. Rather than being directly elected as the majority of Senators currently are, the new Senate would be made up of regional councilors who would not be salaried.
The president will be able to appoint five senators to serve for seven years each, replacing the five lifetime Senators there are currently. The chamber would retain veto on constitutional matters but lose the power to block everyday laws. Renzi says the changes are vital to end political gridlock and revive Italy’s stagnant economy, and has pledged to resign if voters reject them.
A “No” vote would probably not result in huge changes; Renzi would resign, Italy would remain in the Eurozone, and life and the euro go on – at least in theory. Europe has faced far more problematic and challenging situations. Still, it would be a major victory for the populist parties.
And the immediate risk stems from the country’s troubled banks, which are saddled with about $383 billion in non-performing loans, roughly a third of the Eurozone total. The sector is already in distress, but the prospect of a political crisis would probably make matters worse.
Monte dei Paschi – the world’s oldest operating bank – is likely to serve as the proverbial canary in the coal mine. The bank is racing to raise new funds, and its plan could be upended by a sudden change in government. Its stock has lost 86% so far, this year, and other heavyweights such as Unicredit have fared little better. And if the Italian banks fail, just outright fail, well things could get dicey.
Parker Hannifin announced an agreement to buy Clarcor in a cash deal that values the maker of filtration products at about $4 billion. Parker will pay $83 for each Clarcor share outstanding, which is an 18% premium to Wednesday’s closing price. The deal is expected to close during the third quarter of 2017.
Howard Schultz, the CEO of Starbucks, will be stepping down next year. Schultz is being replaced by former Microsoft senior exec Kevin Johnson, who will become the new CEO. In a statement, Schultz said the move “ideally positions Starbucks to continue profitably growing our core business around the world into the future.” Schultz famously returned to Starbucks in 2008 to help guide the coffee giant through the recession and restore growth at the company. Starbucks dropped about 3% in after-hours trade.
Americans snapped up new vehicles at a rapid pace in November, giving the auto industry a chance of breaking its all-time record for full-year sales. Auto sales rose 3.7% compared with a year ago, according to Autodata. On an annualized basis, that equaled a rate of 17.87 million units. Last year, the industry sold a record 17.47 million.
Even as auto lending continues to boom at a near record pace, regulators are airing “significant concern” about the millions of Americans who are falling behind on their car loans. The Federal Reserve Bank of New York reports increasing distress among auto borrowers with shaky credit, as subprime delinquencies rose in the third quarter. In the third quarter, 2 percent of subprime auto loan balances became at least 90 days delinquent, up from 1.6 percent in the third quarter of 2014.
A massive network of high-speed fiber optic internet is coming to 20 states over the next five years, according to an announcement from Altice, the cable company behind Optimum, Lightpath and Suddenlink. Altice’s planned 10-gigabit per second connection far outpaces Google Fiber’s current 1-gigabit per second connection, as well as Verizon Fios.