Stocks rally to end week as oil logs big gains» Read More
This is an important day. It's important we hold some gain, even a modest one. On Friday, the markets sank, but it's not that they sank, it's where they sank to. We ended essentially at the August lows (let's not quibble about a few points here and there), which were the lows for last year.
Dow: 15,666 (August low)
S&P 500: 1,867 (August low)
Nasdaq: 4,500 (August low)
Now, you can believe in technical analysis or not (a lot of you think it's a bunch of voodoo, I know). That doesn't really matter. What matters is when the trading community is confused on the fundamentals (as they are now), they turn to technicals because it at least offers some guidance on what to do.
And when the major indices are all on the verge of breaking through the lows of last year, that is a big deal.
So much wailing and gnashing of teeth were evident over the weekend.
That's why it was important that we bounce Tuesday. Crashing decisively below the August lows would bring out an even more intense round of wailing and gnashing of teeth. Wall Street is starting to resemble a never-ending Irish wake.
The key, of course, is oil, which does not behave. We are rolling over into a new contract tomorrow, so we will get a modest bounce, but that is not going to fool anyone. Oil stability is a necessary--but not sufficient--element in market stability.
Would even stable oil calm the current spate of gnashing and wailing? My friend Zach Karabell wrote an amusing piece for Politico over the long weekend, "An Economy of Chicken Littles," in which he takes on the sudden surge of "Chicken Little" analysts and strategist predicting the end of the world. He notes that the number of jobs created, modest GDP growth, and lower gas prices are all positive trends.
He acknowledges Wall Street has had a long history of market Cassandras but that the current crop "sound more like Chicken Little, full of hysteria and short on substance...fiction as an electoral strategy does us no good, nor does calling for a collapse in the financial system help manage its challenges. Those tactics are the rhetorical equivalent of shouting fire in that crowded theater, designed to generate panic and fuel hysteria. They are wrong, and they should be called out."
Amen to that. The problem is, the Chicken Littles have been right on oil. And--as every good behavioral economist will tell you--being right on a big event even once gives you a cache you can live off of for years, even if everything else you say is completely wrong. Having been right on one thing, is it any wonder some of these Chicken Littles are strutting?
It's the day after the Powerball lottery. The joke on trading desks all week is that Wall Street has been selling stocks to play the lottery.
Now the lottery is over, and we are rallying. This makes sense, no?
Coming into work, the new joke was that we were rallying but it would all fall apart by midday, because that is all we do anymore Rally at the open, fall apart midday.
It hasn't happened today, thanks to a rally in oil and a set of indicators that have been in oversold territory for days on end, including a high put/call ratio, the VIX in backwardation (the front month contracts are higher priced than contracts further out), and horrible sentiment from rank-and-file traders (the American Association of Individual Investors weekly sentiment indicator hit an 11-year low this week).
So is this a bottom? I doubt it. Traders are grappling with big issues that they can't quite get their heads around. They want:
1) China currency stability
2) Oil stability
3) Good guidance on earnings
4) the Fed to lower its rate hike expectations.
Then there's the biggest head-banger of all: how much is the global economy decelerating?
I am not expecting all these issues to be resolved in the next month, or that stocks can't find a bottom until everything on this list is cured.
But I am saying we haven't fallen enough to create the impression that stocks are a bargain.
Just think about it: right now, we are in the middle of a garden variety correction. The S&P 500 is roughly 10 percent off its historic high it hit in the middle of last year.
But remember, the S&P 5000 went from 700 in 2009 to 2,100 in 2015. Now it's at roughly 1,900.
We're going to rally for seven years and then just get away with a garden-variety 10 percent correction? It doesn't seem enough.
That's why the rally seems tentative. No one is going all in, because there is still too much downside risk.
But we are making progress. Chinese authorities getting control of the currency would be a huge help. Oil holding at $30 would be big. And JPMorgan decent earnings was a big help (S&P futures rallied pre-open when their report came out).
And the Fed? St. Louis Fed President James Bullard said the continuing drop in oil had caused a "worrisome" drop in inflation that may make further rate hikes hard to justify.
THAT is a big help.
I have often used the phrase "earnings recession" to describe the three consecutive quarters of negative earnings growth we have seen:
S&P 500 Earnings:
Q2 2015: -0.7%
Q3 2015: -1.5%
Q4 2015 (est.) -5.5%
But after looking at very early numbers for earnings in the fourth quarter, I've decided I am more concerned about a "revenue recession."
Q1 2015: -2.9%
Q2 2015: -3.3%
Q3 2015: -3.9%
Q4 2015 -3.3%
Why am I more concerned about revenues? Because the trend is implying that global business activity is deteriorating.
With earnings, we can get all sorts of financial engineering, like cost cutting, or buybacks.
But consistent lack of topline growth — which we are seeing — really calls into question the sustainability of earnings growth.
Here's what worries me: so far, 23 S&P 500 companies have reported earnings for the fourth quarter. Of the 23, about 75 percent have beat on the bottom line.
That's not what worries me. What worries me is that 19 of the 23 have missed on revenue growth, according to Earnings Scout.
Strange, no? Three-quarters beat on bottom line, but the same portion misses on topline.
That's disappointing. And we are not talking about a lot of industrials and energy names that have reported. We are talking consumer names. Nike. Bed Bath and Beyond. Walgreen. Autozone. Costco. Federal Express. General Mills.
These companies have two problems: they are multinational — they get much of their revenues overseas, so the global slowdown is really affecting them. And second, the strong dollar is really hurting them. I will be doing a lot of reports around the impact of that dollar on these company's earnings.
Commodity stocks are mostly down again Wednesday. There has been much discussion about how stocks like Freeport McMoran could continue to drop. It's down another 8 percent mid-morning after dropping 4 percent on Tuesday.
The simple answer is they may have great assets but they also have huge amounts of debt. Traders and analysts are now making worst-case assumptions, in this case that "lower for longer" prices in oil and copper will make it increasingly difficult to pay the debt and leave any residual value for shareholders.
In Freeport's case, the company has about $20.7 billion in debt, cash flow (EBIDTA) of about $4.1 billion for 2015, and interest expenses of about $600 million.
For the moment, the cash flow can cover the interest expense, but as oil prices keep dropping it gets tougher.
However, they are burning a lot of cash due to very high capital requirements, so even if prices stay where they are, it's still going to be tough. Bottom line: They need a recovery in commodity prices!
Another down day, saved only by a late day rally on vague hopes that China may act to stabilize its currency.
Short term, there are two things that are moving the markets: 1) oil, and 2) fears of a currency war.
The currency war thing is very real. Notice that China's Shanghai Index was down more than 6 percent overnight. You'd think Europe and the U.S. would open down, but no. The Chinese raised the value of the yuan, and our markets were calm. That's because currency wars are a major concern.
Aside from these two primary drivers ... both of which reflect heightened global risk, the market is also evaluating what the proper price for stocks should be in general. You'll notice no one is picking on a particular sector since the start of the year: energy, materials, financials, health care, technology and industrials are all down 7 to 9 percent.
There is a general de-grossing going on. Traders are taking down positions because, in addition to oil and currency risks, they see:
1) the beginning of Fed tightening,
2) flat to modestly up corporate earnings,
3) strong new jobs but at comparatively low wages,
4) low inflation that shows no signs of rising, and...
5) an election year with highly unpredictable outcome and some leading candidates who are out of the mainstream and the outcome of Trump who could bring a global trade war.
One trader friend of mine, a very astute observer of the markets, messaged me this morning: "Not helpful to think of bulls and bears, this is Mr. Market working through a major reevaluation of the proper equity and bond prices."
I was one of the first reporters to point out the "earnings recession" in the S&P 500. As it stands now, we are poised for at least three consecutive quarters of negative earnings growth.
Q2 2015: -0.7 percent
Q3 2015: -1.5 percent
Q4 2015 (est.): -5.5 percent
S&P earnings for the fourth quarter would be fractionally positive were it not for the 68 percent decline in energy earnings, which were hit by a perfect storm of a continuing decline in oil prices, contract cancellations, and low natural gas prices caused by the record warm weather in December. Materials were also down 26 percent as global growth slowed commodities imploded.
There are two major problems for big, multinational companies, which are the majority of the S&P 500.
The U.S. market is up, Europe is mixed, which can only be described as disappointing. U.S. futures and European markets were up going into the December jobs report and rallied briefly as that number came in well above expectations, but traders quickly sold into the rally.
What to watch for on Friday:
1) China ETFs for a hint of how China might trade tomorrow. ETFs that track overseas stocks are forward-looking pricing mechanisms, not backward-looking. ETFs that track mainland China (ASHR, for example), were down 8 percent at the open, but rallied right after the U.S. open as the Chinese government announced they were suspending circuit breakers there.
They have cut those losses by more than 40 percent midday, but at down roughly 5 percent still anticipate a down open in China.
2) December nonfarm payrolls tomorrow will be a good sign of what the Fed might do short-term. Remember, the trading community is pricing in two, at most three, rate hikes next year. But the Fed consensus is closer to four rate hikes. Right now markets seem to be pricing in a roughly 40 percent chance of a rate hike in March. A number well above consensus (currently 210,000) might very well be met with a negative reaction.
3) A spike in volatility. The CBOE Volatility Index is elevated at 24 (up from 17-18 at the end of the year), but not that much. That contract--which reflects volatility expectations 30 days out—is higher than VIX futures contracts several months out, most of which are around 20.
This condition, known as "backwardation" is unusual for the VIX, and suggests investors think this elevated volatility is not a permanent feature.
As for the absolute level...now at 24...I think it's likely the VIX would be substantially higher (over 30) if there was a feeling that this was all about the U.S., rather than China.
While the sudden moves in the Chinese currency—and the concurrent concern about a slower economy—are the main cause of China's stock market volatility, the country's stock market structure may itself be exacerbating the selloff.
Most of these "restrictions" were put in place to quell the market volatility that occurred in July and August of last year.
There are several issues.
The "doom loop" is shaking up stock markets as worries of negative interest rates in the US may come.
The rivalry between Bill Gross and his former company Pimco looks set to hinge on the U.S. economy this year. FT reports.
Tender issued for euro-denominated unsecured bonds worth 3 billion euros and dollar-denominated bonds worth $2 billion.