Tag: news

First Fedex, then Apple, then Delta, then Barnes and Noble, Macys, then American Airlines, then Alibaba, and now Goodyear Tire has just slashed guidance.

In an 8-K filed moments after the tire giant made negative comments at the Detroit auto show, Goodyear warned that full year operating income is now expected to come below the Company’s previous guidance of approximately $1.3 billion, and cautioned that Q4 2018 tire unit volumes declined by approximately 3%. The company blamed the usual suspects, namely the slowing economies in China and  Europe as well as supply constraint in the US, to wit:

1. continued weakening of the OE environment in China and India,
2. declines in the winter tire market in Europe late in the quarter,
3. supply constraints on volume for high-value-added consumer and commercial truck tires in the United States.

The company also noted that while price/mix was positive during the fourth quarter of 2018, it was “less than anticipated due to weaker mix, partially as a result of the supply constraints referred to above.”

In addition, GT added that earnings fell in other tire-related businesses, including with respect to the Company’s U.S. chemical operations.

As a result, Goodyear now expected 2018 net income to be “adversely affected” and the Company’s total segment operating income is expected to be “slightly below” the Company’s previous guidance of approximately $1.3 billion.

The company’s 8-K (found here) is below:

On January 15 and 16, 2019, representatives of The Goodyear Tire & Rubber Company (the “Company”) will present at conferences hosted in conjunction with the Detroit Auto Show and will provide an update on the Company’s preliminary 2018 performance.

As part of those presentations, the Company will announce that fourth quarter of 2018 tire unit volumes declined by approximately 3% due to (1) continued weakening of the OE environment in China and India, (2) declines in the winter tire market in Europe late in the quarter, and (3) supply constraints on volume for high-value-added consumer and commercial truck tires in the United States. Price/mix was positive during the fourth quarter of 2018 but was less than anticipated due to weaker mix, partially as a result of the supply constraints referred to above. In addition, earnings fell in other tire-related businesses, including with respect to the Company’s U.S. chemical operations.

As a result of these factors, for the full year of 2018, Goodyear net income is expected to be adversely affected and the Company’s total segment operating income is expected to be slightly below the Company’s previous guidance of approximately $1.3 billion.

As we said recently, expect many more such guidance cuts as companies finally come clean with economic reality and with what Morgan Stanley said over the weekend, will soon be revealed as an earnings recession.

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PG&E bonds are crashing and its stock just hit a new record low after the company opted not to make an interest payment today on its $800m of 5.4% bonds due Jan. 15, 2040, triggering a 30-day grace period on the note, according to data compiled by Bloomberg.

PG&E is now trading below of the lows of the last bankruptcy (before its bailout)…

And its bonds are cratering…

If PG&E goes bankrupt as expected, it will be the first investment-grade name to default without entering the U.S. high-yield market since MF Global in 2011, Bank of America strategists led by Hans Mikkelsen said in a note.

Additionally, PG&E would be third largest IG default since 1999. Its $17.5b of index-eligible debt puts it behind Lehman ($34.9b) and Worldcom ($22.9b).

As Bloomberg reports, the filing, viewed by some as the worst outcome, may actually help California decide what type of utility is right for a state with an ever-increasing risk of multibillion-dollar wildfires, according to Severin Borenstein, an energy economist at the University of California, Berkeley. Options such as breaking up the utility giant or turning it into government-owned entities are likely to be hashed out in concert with the bankruptcy proceeding, he said.

“It will accelerate the discussion that was being had before bankruptcy, which is what is the appropriate structure of utilities given the increased wildfire risk?” Borenstein said.

“If we are going to have investor-owned utilities, how do we deal with the fact that they may face multibillion liabilities?”

So far, California Governor Gavin Newsom and other lawmakers showed little interest in bailing out the beleaguered company.

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Months of extreme volatility have taken their toll on the pound, with traders declaring the G10 currency “untradeable” during the worst of the withdrawal-deal related chaos last year, as daily swings of multiple percentage points became increasingly common, prompting some traders to muse once again about how the pound – one of the world’s most liquid, heavily traded currencies, was behaving more like the Turkish lira than a designated global reserve currency (as its membership in the IMF’s SDR basket would suggest). 

Now, after months of wrangling in Brussels and Westminster, Theresa May’s supremely unpopular Brexit withdrawal deal is finally coming up for a vote Tuesday night.

On Monday, optimism ahead of the vote, spurred by reports that May might quietly support amendments to put a time limit on the Irish Backstop (which, again, ideally would never take effect in the first place), briefly pushed the pound above $1.29, its highest level since November.

Given the widespread opposition to the deal across party lines, May’s deal has almost no chance of passing. Rather, currency traders will be keeping a close eye on the vote count, with 225, the margin by which May is expected to lose the vote, seen as the crucial demarcation.

In a roundup of comments from currency traders and strategists at some of the big banks that have been paying close attention to Brexit, traders warned that the deal’s defeat wouldn’t necessarily provoke a strong response in GBP. But a massive defeat of a magnitude that could raise the possibility of Theresa May facing – and losing – a no-confidence vote tabled by the opposition could send the pound back toward $1.22 (it was trading around $1.28 on Tuesday ahead of the vote).

Of course, that cuts against the fact that one-week volatility in the pound has surged in recent days, suggesting that traders are bracing for some unruly action before, during and after the vote.

Though others argued that the pound might not react much no matter the outcome of the vote:

• The U.K. currency may not trade anywhere near its cycle lows even if Theresa May faces a big defeat, while any gains should be contained as uncertainty will remain the name of the game even if the prime minister survives the vote with a narrow defeat.

In a story about May’s government facing possibly the worst defeat for a ruling party in nearly a century, Bloomberg included a quote by Neil Jones, head of hedge-fund currency sales at Mizuho Bank, that a defeat by more than 220 votes could send the pound back toward $1.2250.

And many political analysts are still worried that a resounding defeat could topple May’s government.

“I’m not sure a rejection of the prime minister’s deal is a victory for anybody,” Citigroup chief global political analyst Tina Fordham says.

“If the prime minister is wiped out tonight in Parliament, her deal is dead and probably her premiership along with it.”

Below is a guide to the position, technicals and expectations ahead of Tuesday’s note (text courtesy of Bloomberg): 

POSITIONING

• Short-term accounts have either trimmed shorts or put on small long positions on the pound, according to two traders in London and Europe, as a more positive outcome for the pound is steadily being priced in.

• Risk reversals have reversed or greatly narrowed the premium in which pound puts trade over calls in the front- end. The move comes as cable stands 0.9% stronger since Jan. 1 and 3.6% higher since December lows. The vol skew shows investors see pound troubles rising after the current official Brexit deadline expires.

• Options trades this year are almost equally split between upside and downside exposure, data from the Depository Trust & Clearing Corporation show.

• While the market remains structurally short the pound, it is unclear at what spot level long-term players would unwind their holdings, traders say.

TECHNICALS

• Following Jan. 3 flash crash, the pound is sending one bullish signal after the other: Trendstall is no longer bearish on the weekly, cable closes comfortably above its 55-DMA, bulls take control of price action as Fear-Greed indicator shows, DeMark studies have yet to signal bullish bias is to revert.

• Sustaining an extended rally won’t be an easy task as a series of resistance levels lie ahead, with the upper trendline of a channel since September coming near 1.3000.

EXPECTATIONS

• There is almost unanimous agreement by market participants that Theresa May won’t be able to see her Brexit deal approved and thus face the biggest Parliamentary defeat for a British government in almost a century.

• Analysts see a 100-vote loss as the line in the sand for pound longs, with anything bigger than that risking a move south for sterling; a general election could see cable dropping to 1.2000, according to ING, while Credit Agricole sees 1.2500 as a key level.

• One-day volatility in the pound suggests that a large move may be in store – the gauge has risen to its highest level since the U.K. June 20147 elections – yet by no means envisages such deep losses; breakeven on the vote stands at around 160 USD pips, according to single-bank platform pricing.

• Mizuho sees a rally to 1.3350 as possible on a loss by a margin of 20 to 100 votes while Rabobank targets 1.3000 under a similar scenario.

• Pound bulls would have a hard time taking out strong resistance at 1.3175-81, the Nov. 7 high and the 38.2% Fibonacci retracement of cable’s losses since April.

• Demand for tails over the one-week tenor reveals that investors aren’t convinced the pound is up for a wild move in either direction until it gets clarity over whether an Article 50 extension, a second referendum or fresh elections are the next step forward.

• Bloomberg’s FX pricing model suggests there is a 18% chance the pound touches 1.2500 in a week’s time, with 10% for a move to 1.3300.

* * *

Meanwhile, retail brokerages and currency exchanges – with the painful losses from the upset Brexit vote in June 2016 still fresh in their memories, are taking steps to limit any spikes in volatility around Tuesday’s vote. According to Bloomberg, London-based TransferWise is placing a 10,000 pound ($13,000) limit on transfers to and from the UK during a 24-hour period starting 9 am on Tuesday ahead of the House of Commons’ vote on Prime Minister Theresa May’s deal to leave the European Union. That’s far below the usual limit of 1 million pounds ($1.28 million).

Switzerland-based Dukascopy Bank SA is lowering leverage to just 30 times capital on pound trades until any market volatility subsides. Other brokerages and money changers say they will be staffing the office late to field client calls and put out any fires.

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President Trump’s nominee for Attorney General, Bill Barr, told lawmakers during his confirmation hearings on Tuesday that he was “shocked” after reading anti-Trump text messages between former FBI employees Peter Strzok and Lisa Page, and that he had never heard of the FBI launching a counterintelligence investigation on a President based on a political decision, as was reported last Friday by the New York Times. 

Graham reads some of the Peter Strzok/Lisa Page texts criticizing Trump and about stopping him from being elected, and asks what Barr’s reaction was to them. Barr says he was “shocked.” Graham asks if he’ll look into what happened in 2016, and Barr says yes

— Zoe Tillman (@ZoeTillman) January 15, 2019

When asked about the Special Counsel investigation headed up by his “best friend” Robert Mueller, Barr said “I don’t believe Mr. Mueller would be involved in a witch hunt,” and that “On my watch, Bob will be allowed to finish his work.”  

Barr: “I don’t believe Mr. Mueller would be involved in a witch hunt.”

— NBC News (@NBCNews) January 15, 2019

Last week Sen. Lindsey Graham (SC) met with Barr, and said that the AG nominee has a “high opinion” of Mueller, and that Barr told him that he and Mueller worked together when Barr was Bush’s attorney general between 1991 and 1993 when Mueller oversaw the DOJ’s criminal division. Graham added that the two men were “best friends” who have known each other for 20 years, and that their wives have attended Bible study together. 

Mueller also attended the weddings of two of Barr’s daughters.

Developing…

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Authored by Jeffrey Snider via Alhambra Investment Partners,

We are starting to get a better sense of what happened to turn everything so drastically in December. Not that we hadn’t suspected while it was all taking place, but more and more in January the economic data for the last couple months of 2018 backs up the market action. These were no speculators looking to break Jay Powell, probing for weakness in Mario Draghi’s resolve.

There are real economic processes underneath. The more fundamental the market, the closer it is actual economic transactions. These are influenced by the movement of real things, this real economy, not just the transposition of numbers on some detached Wall Street computer screens. Living in the financial services realm can make it seem like none of this is real.

This is where the eurodollar attains its primacy. So many people talk about a reserve currency without ever once considering what it means to be one. It is the ultimate medium, standing in between others so as to facilitate real economy transactions from very far afield.

In the example I often use, a Swedish firm intends to export goods to a Japanese buyer. Trade is made efficient and flexible, therefore probable and manageable, by the eurodollar system in between; it mediates the different characteristics of each disparate system so as to standardize and harmonize the terms. The explosion of globalization and trade alongside the advent of the eurodollar system isn’t dumb luck.

This eurodollar requires banks to be in the middle offering them. But if those banks just happen to notice how Japanese firms suddenly aren’t much interested in Swedish goods, or any goods, that can be a problem for more than Sweden and Japan.

And if banks are already scaling back their eurodollar involvement to then find how it is having an effect on both Sweden and Japan, it isn’t surprising to learn they’d cut back on pretty much everything in between (and maybe do so at great speed, focusing squarely on the exits above all else). This would include purely financial transactions, so-called hot money, otherwise having less or little to do with the real economy transactions of trade.

That’s especially true if the one giving off weak signals for banks in the middle is China rather than just Sweden or Japan. If that one goes into reverse, the pullback from it can become much more generalized. Sweden goes sour, get out of Sweden; China goes sour, get out of everything.

Chinese trade figures for December were bad. Again, this wasn’t unexpected since other markets had been signaling weakness ahead for months before; those obviously close to real fundamentals. Commodity prices had turned to minus signs indicating that market participants were reading real economy softness for some time. This is one chart I showed back in October:

When commodity prices reverse, we should expect in this case real Chinese transactions (imports) to follow at some point in the near future. The near future was December, the chart below the updated version of the one above:

Imports into China, a primary measure of downstream economic strength in the world economy, fell by more than 7% year-over-year last month. This followed just 3% growth in November. It was the first contraction since October 2016. For Q4 as a whole, imports rose just 5% compared to Q4 2017, down sharply from a 20.7% gain in Q3.

It was no better on the other side. China’s export growth turned negative, too. In December, total exports were down 4.4%, the worst month also since 2016. For the quarter, outbound trade was up just 4.5% compared to Q4 2017, the lowest quarterly gain by far since Q1 2017.

The direction of the global economy is pretty clear from these Chinese figures. As I wrote several times in 2014, Federal Reserve officials can keep on claiming the economy is strong but China once more begs to differ.

You better believe that as intermediary eurodollar banks were made privy to fewer goods being moved, and therefore financed, into and out of China they were adjusting themselves for the pretty clear consequences of what that would mean more broadly. There was very likely this fundamental emphasis for the purely financial warning of UST futures right at the end of November. 

Markets were pulled lower not by emotion, not at first, fears over Jay Powell being too hawkish which might at some point in the future catch up with the real economy, they were dragged down starting in the real global economy where it was already taking place.

Since eurodollar banks don’t run matched books, no matter what the textbooks say, they act as contagion spreading first doubt then confirmed weakness into what becomes the self-reinforcing spiral: dealers grow wary, pull back monetary resources, then the real economy grows weak confirming to dealers the prudence of their caution. Round and round it goes.

What we don’t yet know is how many “cycles” may be completed in this game of downturn; just how much economic damage will be visited before something starts to go right again (enough liquidations to square positions, enough deflationary prices to spur new demand in real trade). The speed at which these negative, self-reinforcing processes developed in December does not suggest a very favorable probability spectrum going forward.

All this is the predictable outcome of the flat yield curve, especially around or now under 3% nominal. UST’s and eurodollar futures had been saying all along throughout the entire run of Reflation #3 that the chances the global economy was going to soar were nowhere near the chances it was going to sour. Curves are not just about inversion and recession; in fact, the curves are far more interesting outside of those contexts.

December was extraordinarily sour, with eurodollar banks getting to taste it first and spread it around. 

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With the S&P trading just around 2,600, the risk of a wholesale short squeeze is imminent.

The reason: as we reported yesterday, according to Nomura’s Charlie McElligott who correctly called the December algo-driven rout which saw trend-following algos switch from net long to short for the first time in 3 years, whereas CTAs for the key equity indexes, the S&P, Stoxx and Nikkei are all still in the “Max Short” bucket, all that may be about to reverse, as the first “Buy to Cover” level is right where the S&P is trading now, or at 2,594 (however, it needs to close above this level for the short cover to be triggered).

Additionally, we listed several additional details from the Nomura analyst on where the max pain levels for algo shorts are, and where the market will almost certainly rise to before retesting if the short squeeze can push it even higher, or if a new wave of selling will emerge as Morgan Stanley predicted earlier:

• SPX at 2594, Nasdaq at 6581, Eurostoxx at 3066, DAX at 10827, Hang Seng CH at 10363—all would see current “Max Short” covered down to just “-82% Short” if today closes above those levels

As McElligott also added, late last week saw Russell, FTSE, Hang Seng, ASX and KOSPI all triggered modest short-covers from their prior “Max Short” positioning at the start of the week.

 

Ok, fine, but what happens after some modest short covering is initiated? After all, as Morgan Stanley’s Michael Wilson explained yesterday, there is “massive resistance” just overhead in the S&P, which is why “2600-2650 on the S&P 500 is a good level to start lightening up as we enter what is likely to be a period of negative news flow on earnings and the economy.”

Ironically, one answer comes from Nomura’s “other” quant group, that headed by Masanari Takada, who echoes what McElligott said yesterday, and in a note sent overnight writes that “as a shortage of additional positive drivers and headlines has become evident, the improvement in US equity sentiment has solidified.” Even so, as all major stock price indexes approach technically important levels (e.g. ~2,600 of S&P500, ~1,450 of Russell 2000 etc), “CTAs are being gradually forced to cover their ballooned short positions for now.”

That said, not everyone is buying the rally, as some speculative players that retained a cautious stance due to deteriorating fundamentals – namely risk parity funds – have refused to increase their exposure to the market and may in fact be selling US equities on the rally.

Overall, Takada maintains a view that the current US stock market remains in “a stalemate in terms of the sustainability of the existing risk-on mood, with bullish and bearish players waging a heated offensive and defensive battle, and the US stock market should therefore remain in a struggle over the next few days.”

Meanwhile, going back to McElligott’s point, and the sharp spike in stocks this morning as the S&P finally breached the 2,600 level, Nomura adds otes that “some algo investors” could have started “to buy back US stocks in an automated response to the rebound of market trends as well as the decline in price volatility.” However, relative to the rebound in market momentum, the Nomura quant notes that “fundamental improvements have not been enough and we are somewhat wary of the lack of balance between them.”

In particular, overall political uncertainty due to the US government shut-down and political conflicts are rising.

As a result, Takada concludes that if using past patterns between political uncertainty and US equity performance (long-side), “just systematically following the market uptrend will likely run of the steam under the gloomy US political situation.”

There are two more reasons why Nomura believes that the algo rally is about to fizzle:

The first is that Chinese economic momentum, which the Japanese bank views as one of “reality check” factors, has remained sluggish so far, and “amid concerns over China’s economy, most investors in US equity markets tend to have no choice but to pick stocks using a process of elimination to avoid tilting their portfolio exposure to high-beta names.”

The second reason why an algo rally won’t last is that compared to the past typical market recovery phase, Nomura says that the current risk-rally lacks the sense of “euphoria” that belies the high-pitched rebound in stock prices. If the recovery of preference for momentum names or high-beta stocks comes to nothing, “algo-led buying of US stocks would less likely become spirited”, in Nomura’s view.

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Well that de-escalated quickly…

JPMorgan’s losses weighed on the indices but NFLX price-hike sparked an opening buying frenzy… but that is all gone now as Senator Chuck Grassley said that USTR Lighthizer saw little progress in last week’s China trade talks on structural issues or IP protections.

Stocks tanked…

Grassley says Lighthizer made the comments to him on Friday during a meeting about Soybean purchases.

 

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US equity markets are surging out of the gate as a NFLX price hike trumps dismal bank earnings (welcome to the new normal, America).

The S&P topped 2,600 – a one-month high – but for now remains range-bound between a 50% and 61.8% retrace of the December dump…

Nasdaq is outperforming and testing its 50-day moving average for the first time since November…

It appears the squeeze is just beginning, as we noted previously, here are some more details from the Nomura analyst on where the max pain levels for algo shorts are, and where the market will almost certainly rise to before retesting if the short squeeze can push it even higher, or if a new wave of selling will emerge as Morgan Stanley predicted earlier:

• SPX at 2594, Nasdaq at 6581, Eurostoxx at 3066, DAX at 10827, Hang Seng CH at 10363—all would see current “Max Short” covered down to just “-82% Short” if today closes above those levels

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