WTI Crude ticks lower by about $0.30 on API subscriber release toward $37.50
Closing Market Summary: Technology Leads Today's Rally
The stock market enjoyed a broad-based rally on Tuesday, which lifted the S&P 500 (+1.1%) back into positive territory for the year (+1.0%). The benchmark index was outperformed by the Nasdaq (+1.3%) for the bulk of the day, as technology would lead the advance. Once again it was a very quiet day with fewer than 573 million shares changing hands at the NYSE floor.
Equity indices spiked out of the gate following a jump in oil prices heading into the opening hour. This led to a large initial uptick in commodity-sensitive sectors like energy (+0.7%) and materials (+0.9%). Their rally was short-lived, however, as the struggling sectors couldn't hold the lead. On a related note, WTI crude was able to end its day near its high, climbing 2.8% to $37.86/bbl.
In sectors, technology (+1.3%), health care (+1.2%), consumer discretionary (+1.1%), and financials (+1.1%) lead the pack, while utilities (+0.5%), energy (+0.7%), and telecommunications (+0.7%) rounded out the leaderboard.
The highly-weighted technology sector advanced thanks in large part to a strong showing from large-cap components Apple (AAPL 108.74, +1.92), Alphabet (GOOGL 793.96, +11.72), and Facebook (FB 107.26, 1.33) as the three rallied from 1.3-1.8%. The other major contributor to technology's position atop the leaderboard was the high-beta chipmaker group, which outperformed the broader market with the PHLX Semiconductor Index ending the day higher by 1.2%.
In the health care space, biotechnology was one of the sector's best performers with iShares Nasdaq Biotechnology ETF (IBB 343.11, +5.89) advancing 1.8% on the day. Elsewhere, sector large-caps AbbVie (ABBV 59.45, +0.70) and Pfizer (PFE 32.83, +0.41) kept pace with the sector.
It was a relatively quiet day with economic data being limited to Consumer Confidence and Case-Shiller 20-City Index:
- The Consumer Confidence report for December rose to 96.5 from 90.4 while the consensus expected a reading of 93.5
- The December survey marked the first increase in consumer confidence since September thanks to an improvement in the Present Situation Index (115.3 from 110.9) and the Expectations Index (83.9 from 80.4)
- The Case-Shiller 20-city Index rose 5.5% in October to follow the previous month's 5.5% increase while the consensus expected an increase of 5.4%
Tomorrow's economic data will be limited to last week's MBA Mortgage Index at 7:00 ET and the 10:00 ET release of the Pending Home Sales report for November (consensus +0.5%).
- Nasdaq Composite +7.9% YTD
- S&P 500 +1.0% YTD
- Dow Jones Industrial Average -0.6% YTD
- Russell 2000 -3.7% YTD
Outlook for oil hit by Saudi Arabia budget cuts
The outlook for the oil price next year is under renewed pressure following strong signals from Saudi Arabia that the world’s largest crude exporter is preparing for a long period of low returns and amid expectations that Iran will further flood the global market when sanctions are lifted.
Analysts said plans announced by Saudi Arabia late on Monday to reduce a budget deficit of nearly $98bn through spending cuts, reforms to energy subsidies and a privatisation drive were a sign that Riyadh intends to stick with its policy of not cutting output.
It also shows that Opec’s de facto leader is prepared to accept cheap prices for its crude as it seeks to put pressure on higher cost rivals such as US shale producers and waits for the market to rebalance.
“They are responding to the low-price regime, the duration of which has surprised,” said Ole Hansen at Saxo Bank. “Having gone this far with their pump and dump strategy they sense that victory in the shape of non-Opec production cuts is just around the corner. Offsetting this in the near term will be the extra supply from Iran once sanctions are lifted.”
Another signal that Saudi Arabia is prepared to sustain its strategy of keeping the pumps open came from the chairman of Saudi Aramco, the state-controlled oil company, after the budget was announced on Monday. “We see the market balancing sometime in 2016, we see demand ultimately exceeding supply and soaking up a lot of the excess inventory and prices in due course will respond regardless of when and by how much,” said Khalid al-Falih.
“Saudi Arabia more than anyone else has the capacity to wait out the market until this balancing takes place,” he added.
However, oil prices moved higher on Tuesday supported by forecasts for colder temperatures in the US and as hedge funds and other speculators moved to close bearish bets before the end of the year. Brent, the international oil marker, rose 2.5 per cent to $37.53 a barrel, while West Texas Intermediate, the US benchmark, added 2.4 per cent to $37.68.
But a relentless rise in global oil production and ballooning inventories has resulted in the price of Brent crude falling 35 per cent this year to as low as $35 a barrel — the lowest level in more than a decade.
The market is expected to remain oversupplied in 2016 as Riyadh resists calls for production restraint and Iran, once Opec’s second-largest producer, prepares to increase output once sanctions linked to its nuclear programme are lifted.
Reports that the Iran nuclear deal was on track after Tehran dispatched a shipment of more than 11 tonnes of low-enriched uranium to Russia has renewed focus on the supply glut.
“Iran is gearing up to flood the market with 500,000 barrels a day within weeks of sanctions being lifted while the ceasefire in Libya may also add extra barrels,” Mr Hansen said.
Data showing weaker demand for oil products such petrol and diesel in Europe during October has also affected sentiment. “This is the first year on year decline this year after 10 months of consecutive gains,” noted analysts at consultancy JBC Energy.
“This might be the first indication that further demand gains induced by additional driving on the back of low prices is likely to be limited in 2016,” said JBC.
In the US, falling revenues and rising debt in the oil and gas sector have meant that lay-offs continued despite production declines. Since peaking in October 2014, US oil and gas employment has fallen 14.5 per cent, or by 70,000 jobs, year over year, according to the Federal Reserve Bank of Dallas.
“Job losses and falling energy prices portend continued distress for the oil and gas sector in 2016,” the Dallas Fed said in its latest energy update last month.
Meanwhile oil and gas sector bankruptcies have reached quarterly levels last seen in the Great Recession, with at least nine US oil and gas companies, accounting for more than $2bn in debt, filing for bankruptcy in the fourth quarter of 2015 said the Dallas Fed.
Reckitt Benckiser said to be working with Robey Warshaw on major deal http://bit.ly/1YQAOaK
Rakesh Kapoor, chief executive of FTSE 100-listed Reckitt Benkiser, has been talking up the prospects of doing some major M&A in 2016.
Indeed, a few weeks ago Morgan Stanley analysts quoted Mr Kapoor as saying:
"If any of the interesting consumer-health assets were to come up for today, I believe Reckitt Benkiser has the capacity to do it. Any of them."
That's pretty punchy stuff from Kapoor.
And now it would appear the household goods giant is on the cusp of doing a major deal as City sources recently told me that Reckitt Benckiser has been working with uber investment bankers Robey Warshaw on a sizeable corporate transaction.
As regular readers know, Robey Warshaw - founded by Simon Robey and Simon Warshaw - have picked up two of the largest defence mandates of 2015, advising BG Group on its £40 billion sale to Royal Dutch Shell and SAB Miller on its £75 billion sale to Anheuser-Busch Inbev.
To be clear, I don't have any visibility on which deal Reckitt Benckiser, whose regular advisers are Morgan Stanley and Deutsche Bank, is working on. However, according to my sources, it sounded like the transaction Robey Warshaw has been advising on is more likely to be an acquisition/merger rather than a defence of the business.
Back in September analysts at Exane BNP Paribas theorised that that if Pfizer pursued a merger with another drugmaker (which it subsequently has), then the US drugs giant would sell its consumer health unit, possibly to Reckitt Benckiser. Here is a link to Bryce Elder's stock market report which first reported Exane BNP Paribas's speculation:
Or, perhaps Reckitt Benckiser is working with Robey Warshaw on a completely different deal. I'm sure the market will find out in 2016...
A spokesperson for Reckitt Benkiser declined to comment.
Michael Burry, Real-Life Market Genius From The Big Short, Thinks Another Financial Crisis Is Looming
The movie portrays all of you as kind of swashbuckling heroes in some ways, but McKay suggested to me that you were very troubled by what happened. Is that the case?
I felt I was watching a plane crash. I actually had that dream again and again. I knew what was happening, but there was nothing I, or anyone else, could do to stop it. The last day of 2007, I couldn’t come home. I was in the office till late at night, I couldn’t calm down. I wrote my wife an email and just said, "I can’t come home; it’s just too upsetting what’s happening, and I didn’t want to come home to my kids like this." As for punishment of those responsible, borrowers were punished for their overindulgences — they lost homes and lives. Let’s not forget that. But the executives at the lenders simply got rich.
Were you surprised no one went to jail?
I am shocked that executives at some of the worst lenders were not punished for what they did. But this is the nature of these things. The ones running the machine did not get punished after the dot-com bubble either — all those VCs and dot-com executives still live in their mansions lining the 280 corridor on the San Francisco peninsula. The little guy will pay for it — the small investor, the borrower. Which is why the little guy needs to be warned to be more diligent and to be more suspicious of society’s sanctioned suits offering free money. It will always be seductive, but that’s the devil that wants your soul.
When I spoke to some of the other real-life characters from The Big Short, I was surprised to hear that they thought that financial reform was pretty effective and that the system was much safer. Michael Lewis disagreed. In your opinion, did the crash result in any positive changes?
Unfortunately, not many that I can see. The biggest hope I had was that we would enter a new era of personal responsibility. Instead, we doubled down on blaming others, and this is long-term tragic. Too, the crisis, incredibly, made the biggest banks bigger. And it made the Federal Reserve, an unelected body, even more powerful and therefore more relevant. The major reform legislation, Dodd-Frank, was named after two guys bought and sold by special interests, and one of them should be shouldering a good amount of blame for the crisis. Banks were forced, by the government, to save some of the worst lenders in the housing bubble, then the government turned around and pilloried the banks for the crimes of the companies they were forced to acquire. The zero interest-rate policy broke the social contract for generations of hardworking Americans who saved for retirement, only to find their savings are not nearly enough. And the interest the Federal Reserve pays on the excess reserves of lending institutions broke the money multiplier and handcuffed lending to small and midsized enterprises, where the majority of job creation and upward mobility in wages occurs. Government policies and regulations in the postcrisis era have aided the hollowing-out of middle America far more than anything the private sector has done. These changes even expanded the wealth gap by making asset owners richer at the expense of renters. Maybe there are some positive changes in there, but it seems I fail to see beyond the absurdity.
How do you think all of this affected people's perception of the System, in general?
The postcrisis perception, at least in the media, appears to be one of Americans being held down by Wall Street, by big companies in the private sector, and by the wealthy. Capitalism is on trial. I see it a little differently. If a lender offers me free money, I do not have to take it. And if I take it, I better understand all the terms, because there is no such thing as free money. That is just basic personal responsibility and common sense. The enablers for this crisis were varied, and it starts not with the bank but with decisions by individuals to borrow to finance a better life, and that is one very loaded decision. This crisis was such a bona fide 100-year flood that the entire world is still trying to dig out of the mud seven years later. Yet so few took responsibility for having any part in it, and the reason is simple: All these people found others to blame, and to that extent, an unhelpful narrative was created. Whether it’s the one percent or hedge funds or Wall Street, I do not think society is well served by failing to encourage every last American to look within. This crisis truly took a village, and most of the villagers themselves are not without some personal responsibility for the circumstances in which they found themselves. We should be teaching our kids to be better citizens through personal responsibility, not by the example of blame.
Where do we stand now, economically?
Well, we are right back at it: trying to stimulate growth through easy money. It hasn’t worked, but it’s the only tool the Fed’s got. Meanwhile, the Fed’s policies widen the wealth gap, which feeds political extremism, forcing gridlock in Washington. It seems the world is headed toward negative real interest rates on a global scale. This is toxic. Interest rates are used to price risk, and so in the current environment, the risk-pricing mechanism is broken. That is not healthy for an economy. We are building up terrific stresses in the system, and any fault lines there will certainly harm the outlook.
What makes you most nervous about the future?
Debt. The idea that growth will remedy our debts is so addictive for politicians, but the citizens end up paying the price. The public sector has really stepped up as a consumer of debt. The Federal Reserve’s balance sheet is leveraged 77:1. Like I said, the absurdity, it just befuddles me.
The last line of the movie, printed on a placard, is “Michael Burry is focusing all of his trading on one commodity: Water.” It sounds very ominous. Can you describe this position to me?
Fundamentally, I started looking at investments in water about 15 years ago. Fresh, clean water cannot be taken for granted. And it is not — water is political, and litigious. Transporting water is impractical for both political and physical reasons, so buying up water rights did not make a lot of sense to me, unless I was pursuing a greater fool theory of investment — which was not my intention. What became clear to me is that food is the way to invest in water. That is, grow food in water-rich areas and transport it for sale in water-poor areas. This is the method for redistributing water that is least contentious, and ultimately it can be profitable, which will ensure that this redistribution is sustainable. A bottle of wine takes over 400 bottles of water to produce — the water embedded in food is what I found interesting.
What, if anything, makes you hopeful about the future?
Innovation, especially in America, is continuing at a breakneck pace, even in areas facing substantial political or regulatory headwinds. The advances in health care in particular are breathtaking — so many selfless souls are working to advance science, and this is heartening. Long-term, this is good for humans in general. Americans have so much natural entrepreneurial drive. The caveat is that it is technology that should be a tool making lives better in the real world, and in line with the American spirit of getting better and better at something, whether it’s curing cancer or creating a better taxi service. I am less impressed with the market values assigned to technology that enhances distraction. We don’t want Orwell’s world, but we don’t want Huxley’s world either.
Bankers, Bulls, Activists: The People of Finance to Watch in 2016
These industry figures are likely to play critical roles over the coming year
Business isn’t easy, whether it is contending with upstart competitors, uncooperative markets or corporate foes. Here is a look at some of the bankers, investors and regulators at critical junctures as the new year unfolds:
* The Banker
James “Jes” Staley, who became CEO of Barclays PLC in December, has one of the toughest jobs in banking: to cut the U.K. bank down to a manageable and profitable size. Among the challenges for the former J.P. Morgan executive is getting the 325-year-old institution ready for new rules in the U.S. and the U.K. that could require it to raise more equity. The American must persuade investors that Barclays has finally figured out what to do with its investment bank and that its mishmash of U.K., U.S. and African operations makes strategic sense.
Mr. Staley is in good company. John Cryan took the top job at Deutsche Bank AG over the summer and launched an overhaul of the German bank while working to repair its troubled relationship with regulators in the U.S. and Europe. Tidjane Thiam, meanwhile, is reshaping Credit Suisse Group AG’s investment bank and cutting costs after becoming CEO in July.
* The Oil Bull
Andrew Hall, founder of Astenbeck Capital Management LLC, has been one of the most dominant traders in the oil market since the 1980s. His bullish orientation, coinciding with a steep run-up in crude prices, yielded billions of dollars in trading profits for his employers and clients. He is perhaps best known for being contractually owed a $100 million bonus at Citigroup Inc. at a time when the bank was being bailed out by the U.S. government after the financial crisis.
That bullish bias served well over prior decades, but all good trades come to an end eventually. Mr. Hall’s Astenbeck has suffered mightily amid the 33% collapse in crude prices in 2015. Though Mr. Hall still runs the largest hedge fund in commodity markets, Astenbeck was down 26% in 2015 through November, and assets under management have dwindled to $2.4 billion from nearly $5 billion three years ago. Oil-market watchers are waiting to see if the 65-year-old makes a comeback or throws in the towel.
* The Activist
Jeffrey Smith, CEO of Starboard Value LP, is perhaps the most active activist investor. Mr. Smith’s Starboard Value heads into the new year with several outstanding questions about big investments that are likely to generate headlines.
Among Starboard’s largest positions is Yahoo Inc., which is scrapping a plan to spin off its stake in Alibaba Group Holding Ltd. and instead looking at options for its core Internet business. That plan worries Starboard and other investors who believe the company would be better off selling the business. A fight for board seats remains a possibility.
Meanwhile, Starboard has a stake in Macy’s Inc., which has rebuffed Starboard’s suggestion to spin off its property into a real-estate investment trust. Starboard, which notched a major victory in 2014 when it unseated the entire board of Olive Garden owner Darden Restaurants Inc., also has open campaigns at companies including security provider Brinks Co. and TV-station owner Media General Inc.
*The Regulator
Richard Cordray, director of the Consumer Financial Protection Bureau, will have no shortage of enemies in 2016.
With the implementation of far-reaching mortgage rules in the fall, the CFPB completed its primary tasks imposed by the Dodd-Frank Act to upgrade basic rules for consumer protection. Now, the young agency is venturing more deeply into corners of the financial industry previously overlooked by federal regulators, from auto loans to credit-reporting companies. Each enforcement action and new rule proposal seems to set off more friction with the business community.
Mr. Cordray is set to begin 2016 by rolling out new rules on debt collection, small-dollar loans and overdraft fees. The CFPB also has started debating how to curb mandatory arbitration.
All of this makes Mr. Cordray one of the most divisive figures in Washington. Consumer advocates and liberal politicians praise him and his bureau for protecting ordinary Americans. His detractors, however, see Mr. Cordray as a symbol of government overreach.
* The Entrepreneur
The four largest U.S. banks have a market value of over $1 trillion, a bounty that appears “vulnerable” to Michael Cagney, founder and CEO of Social Finance Inc.
Mr. Cagney is the loudest bank-basher among the crop of entrepreneurs aiming to disrupt Wall Street. While rivals such as LendingClub Corp. seek ways to team up with banks, Mr. Cagney isn’t shy about calling that strategy unambitious.
Social Finance, also known as SoFi, relies, in part, on credit lines from banks and sells them the loans it originates. But by starting with student loans, SoFi hopes to steal away the next generation of high-earning customers from the likes of Wells Fargo & Co., Mr. Cagney’s former employer, before selling them mortgages and, starting in 2016, wealth-management products.
Some rivals argue that SoFi is exploiting loopholes that allow it to operate like a bank without being regulated like one. But with $1 billion raised from SoftBank Group Corp. and over $6 billion in total loans so far, Mr. Cagney and his team are unlikely to back down.
Jon Winkelried, co-CEO of TPG, joined a firm and an industry in transition when he took the job in 2015. Private-equity firms such as TPG are moving away from the big buyouts that made them famous, transforming into diversified asset managers.
TPG hopes the former Goldman Sachs Group Inc. president can help make the transition a success. “Jon’s a business builder and leader,” his co-CEO, TPG co-founder James Coulter, said when the firm announced Mr. Winkelried’s hiring.
In recent years, TPG has dived into debt and real-estate investing, alongside a push into investing in fast-expanding companies like car-sharing service Uber Technologies Inc. and home-rental site Airbnb Inc. The expansion could help TPG better appeal to stock investors if it opts to go public. The firm’s leaders said Mr. Winkelried’s hiring wasn’t tied to plans for an initial public offering, but they have long considered following rivals such as Blackstone Group LP and KKR & Co. to the public markets.
A Bold Few Traders Earn Billions Flouting Rivals
The investors that did the best in 2015 are those that defied conventional wisdom
That uncommon conviction and related bearish bets helped his firm Egerton Capital LLP earn $1.5 billion after fees, making Mr. Armitage one of the few to grab a big score in a year that bewildered many on Wall Street.
Many star traders had a rocky year as consensus predictions persistently came up short.
First a move en masse by hedge-fund and private-equity firms into beaten-down junk-rated energy bonds backfired when oil prices fell further. Then the stock of hedge-fund favorite Valeant Pharmaceuticals International Inc. more than halved following controversy about its business model.
Meanwhile, the U.S. Federal Reserve repeatedly pushed back its long-anticipated interest-rate rise, dragging down funds that specialized in macroeconomic prognostications.
The average hedge fund is down more than 3% this year, according to researcher HFR Inc. It is the latest of several disappointing annual performances for managers who promise to churn out profits even in volatile conditions.
The S&P 500 nears year-end roughly flat following painful swings throughout 2015 and far below the 8.2% growth forecast of bank and money-management strategists polled by researcher Birinyi Associates at the start of the year.
Those who did well defied conventional wisdom. Take Maverick Capital Ltd. founder Lee Ainslie, who formed a contrarian take on Wall Street’s most widely held stock: Apple Inc.
The investor thought Apple was due to disappoint, but he was loath to take a lone stand against the world’s biggest company by market capitalization even as he decided to avoid some shares owned by rival hedge funds beginning in May.
So Maverick’s San Francisco-based technology team found a different way to channel that instinct. Maverick placed bets against makers of parts and accessories for Apple products, including many based in China, people familiar with the matter said.
That stance reaped profits when the country’s economy took a dive this summer and worries mounted about sales growth for Apple products, including the iPhone. Apple shares have fallen 15% in the back half of the year.
The Maverick fund’s 16% gain in the year to date amounts to more than $1 billion in trading profits for 51-year-old Mr. Ainslie, who was initially backed by Texas entrepreneur Sam Wyly.
Other hedge funds now are coming around to Mr. Ainslie’s recent approach by trading against the views of their peers.
“We’re consciously trying to be in areas where there isn’t as much hedge-fund concentration,” said Matthew Iorio, founder of $1 billion hedge-fund firm White Elm Capital LLC.
Mr. Iorio said he is staying away from owning “what’s obvious,” such as big U.S. banks that may benefit from a recent decision by the Federal Reserve to raise interest rates for the first time in nearly a decade.
The direction of oil prices was hardly obvious in early 2015 when the reclusive Mr. Armitage, who rarely speaks in public and prefers to spend his weekends reading company research reports at home, pressed bets against already downtrodden energy stocks that others thought were due to rebound.
He did so because of concerns about emerging markets and the ability of the Organization of the Petroleum Exporting Countries to agree to curb global production.
It turned out to be the right call as commodities continued to crater and companies that provide oil-field services—and had been targeted by Egerton—dived again in value. Mr. Armitage’s $15 billion London firm quietly booked the $1.5 billion profit with its bearish energy wagers and overall pivot to safer markets in the U.S. and Europe.
In currencies, a $5 trillion area that has minted hedge-fund billionaires in decades past, few foresaw the big moves during 2015. But Ray Dalio’s Bridgewater Associates LP, the world’s largest hedge-fund firm, scored a double-digit percentage win early in the year betting against the euro’s drop.
Bridgewater lost money most of the rest of 2015, resulting in a roughly 6% return for its main fund near year-end. That is behind the firm’s usual pace, but ahead of most other peers.
One of the few outsize currency wins belongs to a South Korea-born manager who said she produced a more-than-120% return with bets against the euro, as well as the Australian dollar and Brazilian real as the commodities rout took hold.
Melissa Ko, 48, spoke no English when she moved to the U.S. in her teens. She started her own hedge fund after rising through the ranks at securities firm Bear Stearns & Co. Inc., and continued to invest her own money upon closing the fund two years ago.
This year her gains amounted to $60 million, she said, pushing her personal fortune above $100 million. She used leverage, or borrowed money, of up to eight times to boost returns.
Heading into 2016 she is adding a bearish wager against the Japanese yen and joining peers on a renewed bet against Europe as policy makers’ powers on the continent wane. She said she thinks the euro will fall below parity against the U.S. dollar in the coming year.
“People have become disappointed and soured on the trade,” she said of the of-late reversal for the euro. “But I think it’s just a little blip.”
Gapping down
In reaction to disappointing earnings/guidance: AVXL -6.5% (light volume).
Other news: RIO -1.4% (weakness in overseas trading), SUNE -1.3% (still checking), GSM -0.8% (Adeptus Health will replace Ferroglobe in the S&P SmallCap 600), AV -0.7% (still checking), BIDU -0.4% (Baidu.com's takeout delivery platform is seeking $300-500 mln in funding, according to Marbridge ), WFM -0.3% (settled NYC Dept. of Consumer Affairs overcharging probe yesterday).
Other news: RIO -1.4% (weakness in overseas trading), SUNE -1.3% (still checking), GSM -0.8% (Adeptus Health will replace Ferroglobe in the S&P SmallCap 600), AV -0.7% (still checking), BIDU -0.4% (Baidu.com's takeout delivery platform is seeking $300-500 mln in funding, according to Marbridge ), WFM -0.3% (settled NYC Dept. of Consumer Affairs overcharging probe yesterday).