Just about everything is up five percent this month» Read More
Global markets are mostly down, awaiting the European Central Bank meeting Thursday. One thing is for sure: traders seem to be expecting a big bazooka from the ECB. They won't be content with $500 billion and out. Some want $1 trillion in bond buying. Others want unlimited liquidity, an open-ended quantitative easing program.
You can see this in the market reaction right after the open to a Dow Jones headline that the ECB was considering proposals for a one-year bond buying program of roughly 50 billion euros a month, which translates to about 600 billion euros a year.
The German stock market rallied, then dropped. The euro dropped, then rallied.
See? Many think 600 trillion as not enough.
Regulators seem a bit anxious. Ewald Nowotny, an Austrian ECB member, was trying to talk everyone down when he said "One should not get overexcited about it."
Big banks disappointing last week, on top of Energy companies dramatically lowering their numbers. On Tuesday, both Morgan Stanley and Regions Financial, a large Alabama-based company, disappointed.
Regions Financial reported a surprising miss on fourth-quarter earnings of 14 cents a share, below consensus of 21 cents a share. Some of that could be attributed to legal accruals and a charge for closing 50 branches a year, but loan growth seems to have been decent, fee income weaker, and there was higher expenses, and a lower tax rate.
They expect 2015 loan growth to total 4-to-6 percent, and deposit growth of 2 percent—similar to 2014. Net interest margins are lower, as they are for all banks, and could decline another 10-to-12 basis points if the 10-year Treasury yield remains in the 1.75-2 percent range.
We had weak earnings from energy stocks, now the financial sector is weaker than expected. Not a good start to earnings season!
The volatile start to the year is spilling into the initial public offering market, which is beginning to price new products after a one-month hiatus.
Or not. Of the three that were scheduled to price last night, two priced below their range, and the third was postponed due to market conditions.
Not a great start to the year.
Patriot National, which provides a workers' compensation marketplace for insurance companies, priced 8.3 million shares at $14, well below the price talk of $16 to $18. This was its second shot at going public. In 2010, when it was known as Patriot Risk Management, the company tried to go public, but the offer was withdrawn due to market conditions.
In a small deal, Country Bancorp, a Wisconsin-based bank, priced 1.2 million shares at $15.75, below the price talk of $16.
Finally, Sutherland Asset Management, a real estate finance company that acquires, originates, manages, services, and finances primarily SBC loans, postponed its IPO due to market conditions.
"Market conditions," by the way, is just an old Wall Street phrase that means "We can't find enough buyers at the price we want."
Wednesday saw a strong close in the energy commodity complex. It seems to have started with oil, with West Texas Intermediate crude up 4.8 percent, and natural gas rose 10 percent. Gasoline climbed almost 6 percent.
It's about time nat gas rallied, considering it normally rallies at the start of a cold snap, which started last week.
But it's harder to explain the timing of the rally, as well as the rally in some energy stocks, which began shortly after 2 p.m., ET.
Energy traders noted that options on crude expire Wednesday, and that may well be the simple answer.
But it's strange—big volume suddenly appeared at 2 p.m. and not just on the commodities. The Oil & Gas Exploration ETF , which hit a 3-year low Wednesday morning, suddenly rallied on big volume at the same time.
The Fed Beige Book came out at 2 p.m, and our Steve Liesman noted the unusual focus on energy. Headlines include:
1) "Some energy firms report hiring freezes, layoffs"
2) "Energy service firms expect 15%-40% decline in demand"
3) "Contacts in the San Francisco District reported that energy demand from manufacturers was solid. The overall output of energy-related products increased."
While the last comment was bullish, my guess is that the rally and the Beige Book is just a coincidence. There is nothing the Fed said that the energy trading community does not know.
One thing that is clear: the Street is very short energy, and open interest in options is fairly significant. With options expiring, and a lot of puts deep in the money, the one thing we do know is that many energy traders will have a markedly different position on Thursday than they did today.
A weak morning got even weaker after 8:30 a.m. ET when December retail sales came in down 0.9 percent, well below consensus estimates of a 0.2-percent drop. It was the largest monthly decline since January 2014.
S&P futures immediately dropped about 10 points, an unusually large move since the retail sales retail typically does not have that kind of market impact.
Why the big drop in stocks? The U.S. consumer is the global engine of growth, so any signs of a slowdown are not going to be well received by the stock market.
But hold on. Much of the drop—not surprisingly—was due to a decline in gas station sales, which were down 6.5 percent from November, the largest month-over-month decline since December 2008, and 14.2 percent from a year earlier.
Spending was up at restaurants, grocery stores, and furniture stores. General merchandising, electronics, and internet sales seem a bit weaker than expected, and my bet is that is what spooked the market. Perhaps the consumer simply saved the money.
Annual retail sales for 2014 were up 4 percent, the smallest annual increase since 2009, but still well ahead of inflation.
My sense is that this does not necessarily reflect the broader strength of the economy. I still see declining gas prices, improving job growth, and relatively strong consumer confidence.
Another morning of extremes, at least in the Treasury and commodity complexes. 10-year bond yields are at 18-month lows. Gold touched a 12-week high. Oil plumbed a nearly 6-year low. Copper is down another 2.5 percent at a 5.5-year low, with similar weakness in Nickel and Zinc. Aluminum has also fallen 1.4 percent.
The drop in copper comes despite good news out of China, where December exports rose 9.7 percent year over year and imports contracted 2.4 percent, both better than expected. However, total Chinese trade increased only 3.4 percent in 2014, well short of the 7.5 percent goal. China should release its annual GDP figure for 2014 next week.
The UAE energy minister again said OPEC would not cut its oil output, reiterating a decision OPEC made at its last meeting in November. There are no prospects for an emergency OPEC meeting, despite pleading from Venezuela and Iran.
The energy minister, Suhail bin Mohammed al-Mazroui, did have one sage comment. He admitted neither he nor anyone else had any idea what oil prices would be in the future: "History tells us whenever we try to predict what will happen we will get it wrong. What I would say is that it is unlikely we will see a sudden rise—it will take some time..."
At least natural gas is up 2.5 percent, as we face another cold snap in the northeast United States.
Europe is strong, with many European banks up two to five percent. The Greek stock market also bouncing.
Tiffany reported flat global holiday sales, well below expectations for a gain of around 4 percent. The Americas segment—which accounts for about half of sales—was down 1 percent.
Of greater concern, the company is lowering the fourth-quarter outlook to between $4.15 and $4.20 a share, versus prior of between $4.20 and $4.30 a share, which is well below FactSet's $4.82 a share consensus. The initial outlook for 2015 sales is again low- to mid-single-digits. Is the strong dollar hurting tourism? Maybe. That seems to be the explanation.
Tiffany Holiday Sales:
Here's the problem: Tiffany is fairly expensive, at nearly 21 times forward earnings. If that drops to, say, 18 times forward earnings (now $4.86 for 2016), we are talking about roughly $87. But that is also assuming a roughly 6-percent gain in revenues; now that Tiffany is talking about low- to mid-single-digit gains, those numbers will be coming down as well.
My guess is that given the decent numbers from other retailers, this may be an anomaly.
Following on JC Penney's strong holiday sales news, a group of retailers reported holiday sales for the November-through-December period were generally better than anticipated. More importantly, five companies raised guidance for the quarter (Most retailers have a November-through-January quarter.):
1) American Eagle: sales were down 2 percent, better than "mid-single digit" declines expected for the quarter, and they guided higher,
2) Aeropostale: sales fell 9 percent, not as bad as feared, and fourth quarter loss will be less than previously indicated,
3) Stage Stores: sales rose 6.5 percent,
4) Cato : sales were up 6 percent, better than the 4.5 percent gain expected,
5) Zumiez: sale jumped 8 percent.
You've got to believe that lower gas and better employment numbers were factors in these better guidance numbers.
We are in rare territory indeed on the oil front. West Texas Intermediate has dropped more than 50 percent in the last six months.
According to our partners at Kensho, this has happened only five times since 1980: 1987, 1991, 1999, 2002, and 2009.
Six months after those events, the S&P 500 was up four of the five times, with an average gain of 3.7 percent. Perhaps more importantly, WTI was positive six months later all five times, and was up 52 percent on average.
Read that carefully: All five times this has happened, WTI has been up six months later. And up 52 percent on average.
That should give some comfort to those who have argued, as I have, that oil is more likely to be in the $50s or $60s in the second half of the year than it is to be in the $30s.
None of this answers the big questions: What's causing the drop?
I mean, nothing else is down 50 percent. This seems very specifically related to oil, not so much the global economy. The conventional explanation that this is a "supply issue"—with a small part of the drop due to lower global demand from a slower China and Europe—makes some sense on the surface.
Another day of LOWS: low oil, low euro, and low bond yields. German bund yields fell 15 percent to 0.44 percent! Wow!
Why take an 0.44 percent yield when you can get roughly two percent with the U.S. 10-year Treasury? And that's what happened. Investors flocked to U.S. bonds of all types, except short-term.
A large swath of the ETF bond universe is sitting at a 52 week high. This includes:
Intermediate-Term Treasuries (IEF)
Long-Term Treasuries: iShares 20+ Treasury Bonds (TLT)
Mortgage bonds: iShares GNMA (GNMA)
Investment-Grade Corporates: iShares Investment Grade Corporates (LQD)
Long-Term Corporates: Vanguard Long-Term Corporate (VCLT)
The iShares Muni Bond ETF (MUB), the largest of the municipal bond ETFs, is not far from a new high (it hit highs back in October).
The market has spoken: a large group of traders are of the opinion that long-term U.S. Treasury yields are not going to go anywhere fast. This means extend duration, and if you don't like Treasuries go into longer term corporates to pick up a little extra yield.
Even interest-rate sensitive equities rose: Utiltities, Telecom, and REITS all were up.
The laggard, of course, has been high yield, with the iShares High Yield Corporate ETF (HYG) down another 0.4 percent today.
Most analysts have rarely met a stock they didn't like, or at least weren't willing to hang out with for a while.
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