Quick Out of the Gate; Surging Oil; China's Big Bubble
Recapping the day's news and newsmakers through the lens of CNBC.
Good News Ahead of Fed
Shares shot out of the gate Monday, propelled by better-than-expected manufacturing activity in the New York area and optimistic housing numbers.
The New York Federal Reserve's Empire State index registered a 7.84 in June, beating a flat forecast. And the June National Association of Home Builders' housing market index rose to 52, beating a forecasted 45. Of course, not all the details were good. New orders fell, and the employment gauge got worse.
So it's unclear whether the market is interpreting the data as positive (and a strengthening economy), or mixed (meaning no imminent threat of tapering) as we get set for the Federal Reserve's big meeting this week.
"If the economy doesn't pick up as [the Fed] is expecting, as I think we will see, then there won't be tapering. It's all data-dependent."
—Nathan Sheets, Citigroup
"I think we will see a downgrade to growth. The latest forecast was 2.3 percent to 2.8 percent for real GDP growth. To get that forecast, we would need to see almost 3 percent GDP growth in both Q3 and Q4 of this year. That's fairly robust. And that means a real acceleration in growth. I also think the Fed is likely to take down their core inflation forecasts. They have penciled in a bit strong relative to consensus and the trend. But as you know, unemployment is really the primary objective, and that's what the Fed has been focusing most heavily on. They're unlikely to change that very much."—Michelle Meyer of BofA Merrill Lynch
Oil Pumping Up
Middle East tensions, supply disruptions in the North Sea and growing seasonal demand appear to be pointing to oil exceeding $100 a barrel this month. There had been resistance to a crude futures price over $97.50 a barrel … until this week that is And adding to the uncertainty is a report that Iran would send 4,000 troops to support Syria's army against the rebels, countering a U.S. pledge of arms.
"Geopolitical is [issue] No. 1. For two or three months we were quiet on that front. Now you have issues in Syria, wrapping up support for the rebels, and also the election in Iran. What will that bring? It's very important to see what the new president will say about the nuclear program over there. So what these things have done, broke us through the 97.5, which was good resistance and a range we were trading in. Now we're above that. [With] North Sea production, demand in crude oil increases in summertime and strong equities market we can touch $100 in the next month."
—Anthony Grisanti or GRZ Energy
Netflix Gets Shrek
Netflix has scored big, striking its biggest-ever original-content deal with DreamWorks Animation for 300 hours of kids' shows starting in 2014.
DreamWorks has become increasingly dependent on television programming; it produces just a few movies each year, meaning bumpy revenue. The deal gives Netflix exclusive access to new programming based on DreamWorks franchises like Shrek, Kung Fu Panda and The Croods. Both companies saw healthy gains on the news, but not everyone is convinced.
"You don't want to fight in the stock. The momentum is pointed to the upside. The market, since May 22, has had a 3.5 percent correction. You would think a high-flying name like Netflix would come down. It has not. Expectations in terms of earnings, subscriber growth, all beating what the street estimated."
—Joe Terranova of Virtus Investment Partners
"I think the market has overshot it this time. This DreamWorks deal is not that much of a game-changer for Netflix. Netflix got rid of Viacom to make room for the DreamWorks deal. Who picked up Viacom? A little company by the name of Amazon. Netflix does not have the firepower to go head to head with Amazon."
— Mike Murphy, founder and managing partner of Rosecliff Capital
Wither the U.S. Entrepreneur?
America is falling behind the rest of the world when it comes to the creation of entrepreneurial worth. Barclays has found that developing countries now lead the U.S. Some 21 percent of American millionaires have made their fortune from selling a business or from profits from that business. That compares to 68 percent in South Africa, 58 percent in Latin America and 57 percent in Asia-Pacific. Why, you ask? Most entrepreneurs would say excessive red tape and taxes.
"One [explanation] is that this is basically the wealth cycle. Wealth in these countries is newer. It's catching up. So they don't have many years of saved income and they don't have many years of investment, so naturally a higher percentage would be entrepreneurs. Despite the fact that we like to think that wealth in America is entrepreneurial and the recession created all these entrepreneurs, actually we're at a five-year low for the number of entrepreneurs and new business creation, and the number of jobs created from new companies is actually lagging, too."
—CNBC's Robert Rich
Unprecedented China Bubble?
Credit ratings agency Fitch is warning that China's shadow banking system could create a situation where the country finds it hard to grow its way out of credit excesses. China has gotten through periods on economic uncertainty with investment in infrastructure and capacity, mostly on credit. But its $3 trillion in foreign reserves and big reserve requirement give it a lot of leeway.
"The two most important figures are the reserve requirement ratio, which is currently 20 percent—the highest of any large economy around the world and more than double the reserve requirement in the U.S. Also remember that they have $3 trillion of foreign reserves. So we need to worry about the health of the banking sector, we need to worry about the level of nonperforming loans, and we certainly need to worry about shadow banking—but understand that they have those two very strong pillars of support."
— David Riedel of Riedel Research Group
Worth More Cut Up?
Activist investor Starboard Value says pork producer Smithfield Foods should be broken up rather than sold to China's Shuanghui Holdings. Starboard is valuing Smithfield at $45 to $55 per share if cut up into its separate business lines, compared with the $34 offered by Shuanghui. The lofty valuation was called into question, though.
"I've got a lot of questions. One, we're talking about businesses there aren't doing well, so I'm wonder about the valuations. They appear to be quite high. There's leakage on taxes if you were to pursue something like that. In other words, your cost base, how much you actually have to pay in capital gains. There's capital structure breakage, debt on different part of the business. You've got refinancing that adds cost. A $175 million breakup fee. A shareholder vote, that's what it will come down."
—CNBC's David Faber