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Thursday, July 23, 2015

Rockets and Rocks

Financial Review

Rockets and Rocks

DOW – 119 = 17,731
SPX – 12 = 2102
NAS – 25 = 5146
10 YR YLD – .05 = 2.27%
OIL – .74 = 48.45
GOLD – 3.60 = 1091.40
SILV – .14 = 14.76

Greece can begin bailout talks. Greece’s parliament approved new reforms that pave the way for Prime Minister Alexis Tsipras to begin negotiating his country’s third bailout. Parliament overwhelmingly approved the measures, but roughly a quarter of Tsipras’ Syriza party voted against the reforms. Now Greece and its creditors will begin working out the details of the latest bailout package, the third for Athens in the past five years.

Nearly everyone agrees that Greek debt is unsustainably high, but that’s where the agreement ends. The IMF on July 14th issued a report calling for debt relief, a 180 turn from their earlier demands of austerity. The monetary fund recommended either a “very dramatic extension” of payment deadlines by up to 30 years or “deep upfront haircuts,” banker jargon for write-offs.

Lots of headlines flew out of Asia  overnight: Japan’s exports increased the most in five months in June, fueled by strengthening overseas demand, but imports remained subdued due to the effect of lower commodity prices. South Korea’s economy logged its weakest expansion in six years in Q2, recording just 0.3% growth from the previous quarter, as the country got battered by a MERS outbreak and a severe drought. Heading south: New Zealand’s central bank cut interest rates by a quarter point for the second time in six weeks, stating further easing would likely be necessary to stoke inflation. The cut was less than anticipated, and short sellers were squeezed as the kiwi, the New Zealand dollar unexpectedly rallied.

President Obama is urging lawmakers to renew the charter for the Export-Import Bank before leaving on a break in August, saying both small and large businesses are hurting from the lapse in new loan guarantees and trade insurance. The 81-year-old institution recently saw its charter conclude, after Congress allowed it to expire on June 30. The Ex-Im Bank is still allowed to manage and wind down its portfolio of loans, but cannot enter into any new deals.

The U.S. leading economic index rose 0.6% in June. The Conference Board said the index indicates “continued strength in the economic outlook for the remainder of the year.” A strong reading for housing permits and the interest-rate spread led the LEI’s growth.

New applications for US unemployment benefits declined by 26,000 to 255,000 in the seven days ended July 18 – the lowest level since 1973. New claims have been under key 300,000 since late February, the longest run in 15 years. The data should provide ammunition for those Federal Reserve officials who have been pushing for higher interest rates.

Oil prices have officially moved into bear territory. From the high on June 10th, WTI oil has dropped just over 20%. Of course, oil is still down about 57% from the highs reached a year ago before the crash. And crude is also still above the lows of the crash near $43 per barrel.

Data from the American Petroleum Institute showed a weekly build in inventories that topped forecasts. And the Energy Information Administration’s weekly data showed a build in stockpiles last week after two periods of declines. Meanwhile, 12-member oil cartel OPEC continues to exceed its production targets to maintain its share of the market. OPEC member Iran is gearing up to boost exports following its deal with world powers that would lift economic sanctions.

Here’s the twist. As oil prices dropped over the past year, demand increased by 1.6 million barrels a day, despite the slowdown in China. Meanwhile, since October the number of rigs actively drilling for new oil around the world has declined about 42 percent. More than 70,000 oil workers have lost their jobs globally, and in 2015 alone, listed oil companies have cut about $129 billion in capital expenditures. US oil production did not drop, it just leveled off, even as OPEC has increased production to over-fill the void.

Oil’s fall is also part of a larger rout in commodities. Copper slumped to a six-year low. The number of requests to withdraw copper from London Metal Exchange warehouses relative to the level of global inventories tracked by the bourse dropped this week to the lowest since March 2013. That shows consumption has almost dried up for the stockpiles that have doubled over the past year.

Copper is an industrial metal used in everything from buildings to cars and more, so it serves as an indicator for what’s to come in raw materials and as a gauge of global expansion. Copper prices have long held the position in some investor’s minds as a viable economic indicator. So strong is this belief that many call it ‘Dr. Copper’ (as in PhD in Economics). The reality is somewhat different. Over the past 4 years, copper has been in a nasty downturn, even as the economy and the stock market have been improving. Dr. Copper is not good for predicting economic activity, but it might be good at reflecting speculation in the copper market.

Meanwhile, a chorus of institutional investors are now singing out against the China market. The Chinese government had tried to lure foreign money by creating A-shares, making it easier for foreign investors to buy mainland listed stocks directly; and for a while it worked. The stock exchanges in Shanghai and Shenzen shot up like a rocket (doubling in less than a year), only to fall like a rock. Overseas investors have pulled cash out of Chinese stocks via a trading link between Hong Kong and Shanghai for 12 of the past 13 trading days. The list of hedge fund managers running from Chinese markets reads like a who’s who: Bill Ackman from Pershing Square, Paul Singer from Elliott Management, Richard Perry from Perry Capital, and Ray Dalio from Bridgewater. These are all recent cheerleaders for the Chinese markets.

You could see this coming from miles away. When an index, or even an individual security, experiences a massive spike in price, it becomes disconnected from fundamentals, and it is inevitable that it will stall, rollover, and plummet back to earth. Technical analysts call this a parabolic run or climax run; and it always seem to end the same way. Some agile short-term traders are willing to make that gamble on the hope they can dump stocks at the first sign of weakness. The difference in China is that the government stepped in and essentially halted trading in about half the high-flying stocks.

Between the end of June and early July, the Chinese government announced at least 40 measures to prop up the market, including an interest-rate cut by the central bank and establishing a stabilization fund to outright buy stocks; all at a cost of about 10% of GDP. The rise and fall of the market over the past year may well have convinced many investors that the market is simply not a reliable investment vehicle, at the very least it created a cap on growth moving forward.

Earnings reporting season is in high gear. In the busiest day for profit reports, some 50 companies are releasing results today. Caterpillar missed revenue expectations and cut it its full-year revenue outlook to $49 billion from $50 billion.

3M posted better-than-expected profits at $2.02 a share versus consensus estimates of $2.00 but missed on revenues, as the company lowered its full-year outlook.

American Express reported its second-quarter earnings fell to $1.47 billion, or $1.42 a share; and revenue dropped 4%. Amex beat profit estimates but missed on revenue projections.

McDonald’s said same-store sales were down 2% in the second quarter, reflecting negative traffic in all its major segments.

SanDisk, which makes flash memory chips, reported lower revenue and profit but quarterly results were better than Wall Street’s much-weaker expectations.

Dow Chemical reported better-than-expected profit of $1.2 billion, but revenue of $12.9 billion missed Street estimates.

General Motors’ second quarter profit doubled, beating expectations at $1.1 billion, as the automotive company sold more trucks, SUVs, and crossover vehicles.

Credit Suisse swung to a profit of $1.1 billion in the second quarter, compared with a loss a year earlier, when it was fined $2.6 billion in the U.S. for helping Americans evade taxes.

After the close, Amazon reported a profit, seriously; it was a small profit of $92 million on revenue of $23.2 billion. Shares of Amazon jumped 17% to $565 in after-hours trading, which pushed the market capitalization up by $40 billion; meaning Amazon now has a larger market cap than Wal-Mart. And don’t even look at the P/E ratio; you could get vertigo.

After delivering its third profit warning this year, Qualcomm has declared it may break itself up and announced plans to slash 15% of its workforce (4,500 jobs). The move comes after hedge fund Jana Partners called for the company to spin off its chip business from its highly profitable IP licensing unit. Qualcomm also aims to reduce costs by about $1.4 billion and boost capital returns to shareholders.

Nikkei, the Japanese media group, is paying about $1.3 billion to acquire the FT Group, which includes The Financial Times, as the pink broadsheet’s British parent company, Pearson, exits the newspaper business to focus on its core educational publishing.

LeBron James is taking his acting talents to Warner Brothers. The NBA star and his company, SpringHill Entertainment, have signed a content creation deal with Warner Bros. that includes potential projects in film, television and other digital properties.

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