Podcast: Play in new window | Play in new window (Duration: 13:16 — 6.1MB)
DOW – 12 = 16,014
SPX – 1 = 1852
NAS – 14 = 4268
10 Y – .01 = 1.73%
OIL – 1.41 = 28.28
GOLD – .20 = 1189.80
Japanese stocks crashed 5.4%, making for the biggest daily drop since June 2013. The sell-off has the Nikkei hovering near a 16-month low. The weakness in stocks caused safe-haven buying of the yen, which strengthened to 114.21 per dollar, its strongest level since November 2014.
Japan also became the first G-7 country to see the yield on its 10-year debt fall below zero, finishing at a record-low -0.035%, but the Swiss 10-year note is already at negative -0.37%, and the German 10-year bund is barely positive at 0.2%.
More than $7 trillion of government bonds offered yields below zero globally as of Monday. Bond prices are indicating a hint of panic. What plunging rates tell us is that markets are expecting very weak economies and possibly deflation for years to come, if not full-blown crisis.
Today, Wall Street tried a couple of half-hearted attempts to rally or maybe to sell-off; nothing went very far. The trend is still down; the severity of the downtrend depends on where you look. The Nasdaq Composite is down 17.9% from its July 20, 2015, closing peak of 5,218.86. The drop is far worse than the descent suffered by the Standard & Poor’s 500 stock index, which is down 13% from its May peak.
The general definition of a bear market is a decline of 20% or more from a prior record peak. The Nasdaq is down 14% this year, compared to a drop of about half that for the Dow Industrials. When you’re in a bull market the Nasdaq is going to outperform to the upside. But once it starts coming under attack you’re going to see it go down a lot more than the rest of the market.
Many tech stocks have already succumbed to a bear market, including Amazon (AMZN), Apple (AAPL), Cisco (CSCO), Netflix (NFLX) and Tesla (TSLA). Biotech stocks are also getting crushed, with the closely-watched iShares Nasdaq Biotechnology ETF down 26% so far in 2016.
Certainly, losers are not confined to the Nasdaq; think energy and financials. KBW Bank Shares are down about 20% this year. When investors sell bank shares or bet against the banks in credit markets, it can be a signal that a period of financial turbulence has entered a new, potentially more serious phase. It suggests that banks are becoming more vulnerable to the market volatility and any underlying economic weaknesses. Some of the big US banks have been hammered: Citigroup (C) has lost more than a quarter of its price since the start of the year, same for Bank of America (BAC).
Markets have been nervously watching Deutsche Bank bonds, with CreditSights saying the bank may struggle to pay coupons on some of its riskiest securities next year, if financial results miss expectations. Deutsche Bank (DB) shares dropped 9% yesterday; however, this morning the share price is holding steady after the bank issued a statement saying it has the cash to meet coupon payments, and may even buy back some of its own debt.
Deutsche Bank’s CEO said today the bank is “rock solidâ€, which sounds good but it also sounds eerily similar to pronouncements from Bear Stearns in the days before it collapsed. The problem for Deutsche is CoCo bonds, or contingent convertibles, debt that can be converted into equity in the event of nonpayment; think of it as a bail-in. Before I sound alarmist, remember central banks have become adept at keeping megabanks on life support.
The banks have a problem, several actually. They made loans to energy companies that could result in big losses. European banks lent to other commodities players, not just energy concerns, and many were active in lending in emerging markets (Deutsche Bank, the most under-capitalized of the megabanks, is almost certainly exposed to all these trades, and its stock has been swooning accordingly).
And that’s before you get to the fact that many banks already had corporate loans they had not written down sufficiently and those books can only be getting worse given low growth and borderline deflation in Europe.
The International Energy Agency says there is even more oil coming to market than they estimated. Supply may exceed consumption by an average of 1.75 million barrels-per-day in the first half of 2016, compared with an estimate of 1.5 million last month, and the excess could swell if OPEC members increase production. The IEA report says: “With the market already awash in oil, it is very hard to see how oil prices can rise significantly in the short term.â€
In other energy news: Responding to an earlier report that has cut the share price in half, Chesapeake Energy (CHK) declared it “has no plans to pursue bankruptcy,†but is looking at its restructuring options “to maximize value for all shareholders.†Meanwhile, Cheniere Energy (CQP) is closing its newly formed crude oil trading desk, just two months after the company’s board fired the CEO and promised to increase its focus on core businesses.
The Labor Department’s Job Openings and Labor Turnover Summary, or JOLT, shows job openings rose 5% to 5.6 million in December, the second-highest ever recorded, behind only July 2015, when it touched 5.7 million. Hires rose to 5.36 million from 5.25 million. That shows that employers and workers are matching up. When openings are much higher than hires, it may signal workers don’t have the skills employers need.
The number of Americans leaving jobs voluntarily rose 7% to 3.1 million in December. That was the highest “quits†rate since December 2006, and it shows worker confidence in the ability to find another job is picking up. Job switching is an important source of an individual’s wage growth. In addition to firms having to compete with better wages as the labor market tightens, the bump in wages reflects the presumed productivity enhancements of better matching workers with available jobs.
Janet Yellen goes to Congress tomorrow to deliver the Fed’s semiannual monetary policy report to the House Financial Services Committee on Wednesday and Senate Banking Committee on Thursday. Yellen’s prepared testimony will be released tomorrow morning and then she will subject herself to questioning from the politicians.
Despite the Fed’s constant drumbeats for transparency, Yellen will probably not make any major announcements about monetary policy; rather, look for acknowledgment that the Fed is monitoring global economic and financial developments, and maybe a hint that the Fed is not rushing to more rate hikes.
Meanwhile the San Francisco Fed has just published research showing that an economic expansion doesn’t just die of old age. Glenn Rudebusch, director of research at the San Francisco Fed and author of the study said, “The current recovery is no more likely to end simply because it’s approaching its seventh birthday.†In other words, an 80-month old expansion has the same chance of ending as a 40-month-old expansion.
Coca-Cola (KO) reported net income of $1.23 billion, or 28 cents a share, in the fourth quarter, up from $770 million, or 17 cents a share, in the year-earlier period. The results were a penny better than estimates.
Wendy’s reported fourth-quarter profit that beat expectations as it continues to see benefits from operating fewer of its restaurants itself. The company also said it anticipates same-store sales growth around 3%, slightly above what analysts were expecting, while its earnings forecast was in-line with analyst projections.
Sears Holdings (SHLD) warned that its fourth-quarter revenue would fall short of expectations. Based on the disappointing performance during the holiday shopping season, Sears said it will speed up the shuttering of unprofitable stores and look to further reduce costs. The company has recently flagged 50 stores for closure in the coming months and suggested today that it may raise that number.
In other earnings news:Â 21st Century Fox (TCHC) dropped in after reporting a downbeat full-year outlook. Toymaker Hasbro (HAS) reported earnings topped estimates. YELP dropped 11% yesterday after reporting heavy spending and announcing their CFO was leaving.
Disney (DIS) reported its best earnings ever. Earnings jumped to $2.88 billion, or $1.73 a share, from $2.18 billion, or $1.27 a share, in the same quarter last year. Revenue grew 14%. Top line and bottom line beat estimates. Disney dropped almost 2% in after-hours trade because they don’t have another Star Wars movie ready for release in February I suppose.
SolarCity (SCTY) swung to an adjusted loss of $232 million in the fourth quarter, or $2.37 a share, compared with an adjusted per-share loss $1.47 in the year-ago period. Revenue reached $115 million in the quarter, up from $72 million a year ago.
But installations in the current quarter will drop almost 80% as they close operations in Nevada. SolarCity and other residential solar installers pulled out of Nevada as utility regulators there imposed new rules that made solar less attractive in the state. SolarCity down about 25% in after-hours trade.
Viacom is adding a new phase to a fledgling partnership with Snapchat, allowing it to sell advertising on the mobile app’s behalf. Under the deal, Viacom (VNV) will have exclusive third-party rights to directly sell advertising surrounding Snapchat’s owned and operated content, and will add two new channels to Snapchat Discover, the media-centric story section of the popular service.
So what happened at Chipotle’s all-employee meeting? Co-Chief Executives Steve Ells and Montgomery Moran laid out plans to improve restaurant safety, such as central processing and increased testing of ingredients, while discouraging sick workers from coming to the restaurant by offering paid sick leave.
Chipotle (CMG) also said it would spend about $10M to help local suppliers adhere to the company’s new safety measures. CMG shares have lost nearly a third of their value and sales have plunged about 30% since November, following reports of E. Coli sickness and two separate norovirus outbreaks.
Fiat Chrysler fell to a 52-week low yesterday after the NHTSA released documents that suggested that some of its vehicles can roll away when a driver thinks the transmission has been set to park. The probe into three Fiat Chrysler (FCAU) models affects about 856,000 cars; 121 incidents have led to crashes, with 30 leading to injuries.
CBS fell short of setting a new U.S. television-watching record as its Sunday night broadcast of the 50th Super Bowl averaged 111.9M viewers. The Broncos’ win over the Panthers ranked third in U.S. TV program history, behind last year’s NBC broadcast of the game, which drew 114.4M watchers and the 2014 Super Bowl on Fox, with an audience of 112.2M. Online streams of the game through CBS and the NFL averaged 1.4M viewers per minute.
Can you name the person with the most registered patents? If you guessed Thomas Edison, you are close but no cigar. Edison registered 1,093 patents. Artur Fischer registered 1,100. The German born Fischer passed away last week at the age of 96. He invented such things as the synchronous camera flash and the drywall anchor, plus hundreds of other gadgets and gizmos.
He started as a locksmith who spent much of his time tinkering. In 1948, he founded his own company, the Fischer Group, which today has 42 international subsidiaries, employs 4,000 people worldwide and sells its 14,000 products in more than 100 countries.
