Market circuit breakers and electronic trading are the result of efforts to prevent another 1987-style crash. » Read More
A surging IPO from China caused a buzz on the floor of the New York Stock Exchange Wednesday. » Read More
The S&P 500 has not had a drawdown greater than 3 percent this year. Nothing at all seems to move the needle. Why is that? » Read More
Once again we wonder whether overall earnings have peaked and will decline or even go negative in the next quarter or two. » Read More
Recent comments from central banks in Europe and Japan have reminded everyone that markets are still very dependent on stimulus talk.
Last week, European Central Bank President Mario Draghi remarked that he doesn't see a need for further rate decreases. Markets dropped.
On Tuesday night, the head of the Bank of Japan declined further stimulus measures, despite a poor economic outlook. Markets struggled.
The question now is, what signals will the Federal Open Market Committee send about its June meeting?
Lots of discussion over the weekend about the one-month anniversary of the Great Turnaround, that day on Feb. 11 when everything—stocks, commodities, the dollar—reversed.
Stock exchanges do not come up for sale very often; one as large and prestigious as the London Stock Exchange even less often, so there is a lot of interest around this.
Deutsche Borse's attempt to merge with the LSE is reaching a critical stage. Deutsche Borse has until March 22 to make a formal offer.
Here's what this is all about:
1) Forget about stock trading: The money is in the clearing business and the technology/index business. Cash equities is not a high multiple business. Even though most people think of the LSE as a listing and equity trading venue, 60 percent of the revenues are generated by the clearing business and its information and technology business.
I love the clearing business. If I only had to own one piece of the financial world, I'd own clearing. It's boring, it flies below everyone's radar, and it makes money. Every single day. You're a toll keeper. You charge both sides to make sure that the stuff you are buying and selling (like stocks) actually gets delivered. You license other people to use your indexes (or to get access to your data, like stock quotes), and they pay you money every day.
The LSE has a 60 percent stake in LCH.Clearnet (LCH), one of the premier clearing operations in the world (the rest is owned by a consortium of banks).
The LSE owns Russell Investments (think Russell 2000), and the FTSE Group, another large provider of stock market indices.
In other words: These are world-class assets. And they don't come up for sale that often.
2) The synergy potential (i.e. cost savings) for the winner is significant. Reuters reports Deutsche Borse is claiming synergies greater than 300 million euros. That's significant, but I bet they — and maybe ICE — can do even better. When LSE bought Russell, they were reportedly able to achieve 80 percent synergies.
I'll give you another example: A few months ago, ICE spent $5.2 billion to acquire Interactive Data Holdings, which specializes in pricing corporate bonds. ICE is expanding its data business because it's so profitable. These data and indexing businesses can easily integrate back-office functions. It wouldn't be hard to see ICE integrating the LSE's Russell and FTSE together with IDC, where they could likely take out even more of the typical 30 percent synergies.
And remember, if you can demonstrate greater synergy, you can put more debt into the equation.
3) Exchanges have gotten bigger, and the markets have gotten more global. LSE's CEO, Xavier Rolet, has spoken often about the need for further consolidation among exchanges. He expects we could end up with as few as a half-dozen or so big global exchanges, and a few smaller ones. Some of these bigger exchanges would have a "continental" focus (North America, Europe, Asia), rather than a national focus.
4) Money aside, the big issue is politics and whether national regulators will allow these deals to go through. The last great wave of merger attempts about five years ago failed for exactly this reason.
In 2012 the NYSE tried to buy Deutsche Borse, and the European Commission turned it down on anti-trust concerns, specifically that the combined entity would have too much concentration in the interest rate futures market.
In 2011, the LSE was going to buy the Toronto Stock Exchange. Canadian authorities turned them down because the banks didn't want it.
And in 2011, Australia and Singapore were talking about merging. Australian regulatory authorities threw cold water on that deal as well.
So who — if anyone — will win this battle? Two things seem important:
1) The principals have to convince regulators that this is not a "takeover." As noted above, other cross-country deals have failed because no one wants the crown jewel to be traded to another country. That's why this deal with Deutsche Borse and LSE seems to be very carefully pitched as a "merger of equals."
2) The principals will need to convince regulators that they are not creating an anti-competitive environment, which sunk other mergers. If there are concerns, they may have to divest assets. For example, both control important clearinghouses: LCH.Clearnet in the case of the LSE, and Eurex Clearing, the largest European clearing house, in the case of Deutsche Borse.
Who has the edge — ICE or Deutsche Borse? The talks originated with the Deutsche Borse, so it's logical to assume that's where the shareholder sentiment is.
It also makes some sense if you believe that regulators might be more amenable to "continental" mergers (i.e. between two countries on the same continent) than to "trans-continental" mergers, which is what the ICE-LSE deal would be.
But that may not be a universal sentiment. London banks may have good reason to be concerned that the merger with Deutsche Borse may allow Frankfurt to overtake London as the financial center of Europe.
And banks may have a very large say in the deal. The LCH.Clearnet agreement between the LSE and the banks states that banks can terminate any agreement upon a change of control. In other words, the banks appear to have some veto power over the deal, as least as it regards change of control of LCH.Clearnet.
So much of this may depend on whether British banks would prefer to have Deutsche Borse or ICE as partners.
Correction: An earlier version of this story misspelled the name of the LSE's chief executive.
What's next for stocks? The pain trade is still higher. The first seven weeks of the year was a total washout. But things have changed a lot since mid-February:
Since Feb. 11 bottom
S&P 500: up 10%
Eurostoxx 600: up 12.5%
Oil: up 47%
A lot of traders and funds are down 3, 4 ,5 percent or more this quarter, at a time when the S&P is down only 1.4 percent and climbing, sitting at the highest level since the first week of January.
Upside days like this are very important, because we are approaching the end of the quarter, so these types of days will force in traders who are under performing.
What's next? Look at the three biggest issues this year for the markets, and for earnings:
1) slow global growth/recession fears
2) oil weakness
3) dollar strength
Slow global growth is certainly still an issue, but the economic stats in the U.S. certainly do not indicate a recession, and that fear has certainly abated somewhat.
The dollar rise was a major issue for most of last year, but the rise stopped in the middle of last year—it's been mostly sideways since then. Down would be better, but not going up is an improvement.
Oil is the big story, up nearly 50 percent above the $26 level we saw a month ago.
This goes a long way toward explaining the slow melt-up in the markets: recession fears receding, dollar stabilizing, and oil off the lows are all positives for future earnings trends.
If these trends continue, earnings will stabilize, particularly for Energy and Materials. That's big news. And that's why Energy and Materials have outperformed.
The big caveat, of course, is "if" they stabilize. Let's take just one example: oil. We had exactly this conversation about oil stabilizing one year ago. Didn't happen.
In March, 2015, oil hit $45 (from almost $100 six months earlier) amid much wailing and gnashing of teeth. Six weeks later, in early May, it was back at $60, and plenty of people announced that the bottom was in. This was a period of much buying in the Energy Sector ETF as many tried to buy the bottom.
It worked, but only for a while. The XLE topped out in May. By June oil was again moving down. By August it was below $40. Then rallied again through the late summer before bottoming...again...at $26 in mid-February.
In other words, a lot of broken dreams. But those scars may be the best thing going for the markets. Having been so badly burned,
It was one month ago—Feb 11—that the market bottomed. One factor was likely JPMorgan CEO Jamie Dimon's announcement that day that he had purchased $26.5 million of JPM stock.
The buying was at four different prices, but the average price was roughly $53.18. With JPM stock hovering near $59 today, that's a gain of 10.8 percent, slightly outperforming the S&P's roughly 10 percent gain in the same time period.
Not bad. What's next, Jamie Dimon Asset Management?
If you're really bored, here's the amounts Jamie Dimon bought and the prices paid, all on Feb. 11:
330,000 shares at $53.14 $17.53M
45,0000 shares at $53.29 $2.4M
85,000 shares at $53.30 $4.5M
40,000 shares at $53.13 $2.1M
Total $26.53 M
Did Mario Draghi make a communication error?
What happened to our rally? Stocks in the U.S. and Europe initially rose, the euro weakened as Mario Draghi checked all the boxes that were expected:
1) Increased QE from 60 billion euros to 80 billion a month. Check.
2) Extended QE to at least March 2017. Check.
3) Expanded the assets being purchased to include corporate bonds. Check.
4) Lowered the deposit rate by 0.1 points to -0.4%. Check.
5) Announced a new Long-Term Refinancing Operation (LTRO), where a bank can borrow at the deposit rate (that is, borrow at a negative rate: the ECB pays the bank to lend!). Check.
Then—at the end of the conference—he seemed to casually mention that he doesn't anticipate it will be necessary to reduce rates further.
The markets immediately turned around. The euro, in particular, did a full U-turn, going from 1.10 to 1.08, then back to 1.10. Stocks came off their highs. European bond yields, which were down, rose again.
Is this what Draghi wanted? Did he make this comment at the end to satisfy inflation hawks at the Bundesbank, who are surely not happy to see negative interest rates?
Central bank communication errors: a brief history.
They may or may not be "communication errors" but it's likely Yellen and Bernanke both would have phrased their now-famous answers a bit differently.
March, 2014. Janet Yellen's "six month" mistake. Yellen, in her very first press conference, was asked what the phrase "considerable time" meant in the Fed's statement that "it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends."
Yellen replied, "So, the language that we use in the statement is "considerable" period. So, I-you know, this is the kind of term-it's hard to define. But, you know, it probably means something on the order of around six months or that type of thing."
She never again put a timeline on any future Fed action.
June, 2013. Bernanke's "taper tantrum." Bernanke, in a press conference, noted that the economy was improving and then said, "we would expect probably to slow or moderate purchases some time later this year, and then through the middle of-through the early part of next year, and ending, in that scenario, somewhere in the middle of the year."
Bond yields gapped up, stocks gapped down.
Investors in stocks may want to look at the bond market first. The high yield debt market has been on fire the last couple of weeks and that's why stocks have rebounded as well.
In a exclusive video for CNBC Pro subscribers, Bob Pisani explains what junk bonds are and why they matter so much these days.
If you want to look for a lousy business to be in, forget about gold mining. Or aluminum. Or iron ore. How about being a standalone oil and natural gas driller? Not an exploration and production company, but a company that is hired to drill for oil and natural gas.
THAT is a lousy business. And that's what Seadrill, Ensco , Hercules Offshore, Transocean, Rowan and Diamond Offshore do. They drill, mostly offshore. Big rigs that go deep, usually deep into the ocean.
After a huge rally in the past week, they're all down double-digits Tuesday, largely on the Goldman Sachs call pouring cold water on the recent commodity rally.
Seadrill — just to take on example — went from $6 in December to below $2 in mid-February. But in the last couple weeks, it rocketed back to close near $6 Monday. A complete round trip, in three months! Two weeks ago, it was trading like it was going out of business. Similar story for the others. Now, drillers are the comeback kids.
But on Tuesday, Seadrill went back to $5.15 on the Goldman call.
What's it all mean? It means we have no idea how to value any of these companies, because we have absolutely no idea what the business will be like six months from now. Cannaord's analyst Alex Brooks put it succinctly, speaking of Seadrill specifically but it could stand for the Energy industry in general: "the outlook for further work is terrible, and multiple rigs remain uncontracted through 2016 with many more coming off contract in early 2017."
It's been a long, dry spell. The IPO window has been closed since mid-December, with the exception of a small handful of biotech companies. It has been the victim of poor returns — 70 percent of the IPOs last year are trading below their IPO price — and the market downturn from December through mid-February.
But that may be changing. The two most important indicators of the near-term IPO market — recent IPO prices and the overall market — have dramatically turned around. Consider:
1) the S&P 500 is up roughly 10 percent from its Feb. 11 low,
2) and the Renaissance Capital IPO ETF, a basket of the last 60 IPOs, is up roughly 18 percent in that same period.
Markets are up strongly, with IPOs dramatically outperforming. That is a good sign.
Those kinds of numbers, if they hold up for the next week or so, strongly suggest the IPO window will re-open soon.
But will we see a flood of IPOs, as we did early last year, only to have them disappoint, as so many IPOs did late last summer?
The rise in two key commodities — oil and iron ore — has profound implications for the stocks of the companies in those universes.
This has obvious implications for earnings, particularly for energy and materials, but it has also dramatically decreased worries about an out-of-control deflationary spiral.
Look at iron ore, which has gone straight down for two years, to about $40 a ton at the end of February from about $140 a ton. Now, in the space of roughly five trading sessions, iron ore has gone from $40 to $60 on optimism for greater Chinese steel demand (the National People's Congress over the weekend announced a higher than expected growth target of at least 6.5 percent for the next five years), and the ever-present hopes for more stimulus.
For a company like Cliffs Natural Resources , which has roughly a fifth of its revenues from China, the implications are profound: a 50 percent increase in the price of its main commodity will make it much easier to service its $2.3 billion debt load.
It's hard to understate the turnaround in metals: a month ago, CLF was was looking like it was going to trade under $1 — in other words, it was looking like it was going out of business. Today, it's about $3.30, still pretty poor but an astonishing recovery in a month.
Paradoxically, a higher price for its stock — it's up 60 percent this month — may make it more likely they will issue additional capital to service that debt load.
Is this the bottom? The analyst community is certainly not terribly enthusiastic, and with good reason. Just this morning Morningstar's metals analyst David Wang had this to say: "The recent rally in iron ore and miner share prices should prove fleeting, as it stands on weak foundations and does not reflect the deteriorating fundamental outlook for the commodity."
Wang believes iron ore prices will again decline because the market is misreading the signals from China: the announced 6.5 percent growth target is not attainable, he believes.
Of course, there is always hopes for additional stimulus, but what's the effect of throwing more money at companies that are losing money to begin with, even if they are producing more? Adding more debt to losing companies doesn't sound like a winning idea in the long run.
So, I get the argument about not getting too enthusiastic. Regardless, the ferocity of these rallies in iron ore and oil and clearly indicate that:
1) there was an enormous short base in the equities associated with these commodities, and
2) those shorts are clearly betting that some kind of bottom has been put in, even if only for a few months.
You can make the same case with exploration & production (E&P) stocks. Oil is up another 5% today, and has rallied almost 40 percent since the Feb. 11 rally.
A company like Murphy Oil, which gone straight down in the last 18 months or so, from $65 to roughly $15 in the beginning of March, is at $27 today, an 80 percent rise in a few trading sessions.
The Exploration & Production ETF has rallied nearly 25 percent in the last five trading sessions. That is not normal.
They are saying the same thing about oil that metal stocks are saying about iron ore: some kind of at least an intermediate-term bottom has been put in.