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Since The Fed hiked rates mid-December, 10Y Treasury yields have plunged around 40bps with today’s 6bps drop taking out 1.9015% Black Monday lows, all the way back to April 2015 lows.
1.8965% lows today is the lowest since April 21st 2015.
Policy-Error?
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It may not be quite as dramatic as halting a dividend for already profusely sweating investors, but when it comes to the impact on the stock price, buybacks traditionally pack far more punch. Or, as the case may be with what until not that long ago was the world’s biggest company by market cap, and is today set to be eclipsed by Facebook and slide into 5th spot after GOOGL, AAPL, MSFT and FB, no longer pack any punch because as XOM announced in its just released Q4 earnings which beat estimates of $0.64 by 3 cents, starting in Q1, Exxon will no longer repurchase stock simply to prop up its stock price.
From the Q4 earnings release:
During the fourth quarter of 2015, ExxonMobil purchased 9.4 million shares of its common stock for the treasury at a gross cost of $754 million. These purchases included $500 million to reduce the number of shares outstanding, with the balance used to acquire shares to offset dilution in conjunction with the company’s benefit plans and programs. In the first quarter of 2016, the corporation will continue to acquire shares to offset dilution in conjunction with its benefit plans and programs, but does not plan on making purchases to reduce shares outstanding.
What is ironic is that with the stock price trading at $74 in the pre-market, this means that the past 7 years of stock buybacks have effectively been a wash as far as management is concerned, due to the blended average repurchase price of $76.91, roughly 4% above the current stock price.
But while the suspension of buybacks is something shareholders will have to stew over, there was more bad news in the Exxon report, this time for Saudi Arabia, because as the chart below shows, not only did the energy giant boost oil production sequentially by 150,000 bpd…
… annual oil production has soared to the highest since 2010.
Hardly validation that the Saudi gambit to crush the marginal oil producer is working.
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Texas Sen. Ted Cruz handily won the first contest of the Republican nomination process last night in Iowa, picking up eight delegates to Donald Trump’s and Marco Rubio’s seven delegates a piece.
What pushed Cruz over the top? According to entrance and exit polls, it was both the size of the record turnout and the character of the folks who turned out. Specifically, nearly two-thirds of Republican voters last night described themselves as “born-again or evangelical Christian.” With the possible exception of non-factor candidates (and past Iowa-caucuses champs) Mike Huckabee and Rick Santorum, Cruz is by far and away the most socially conservative and rhetorically born-again among the GOP contenders. “Any president who doesn’t begin every day on his knees isn’t fit to be commander-in-chief of this country,” Cruz has said, and he pals around Kevin Swanson, a death-to-the-gays pastor, and Kim Davis, the Kentucky county clerk who refused to issue any marriage licenses once same-sex couples were given the ability to marry publicly.
Toss in Cruz’s anti-immigration sentiment along with his relgiosity and there you have it. Forty-four percent of Trump supporters said that immigration was their top concern. Cruz’s supporters had the second-highest total in that category, with 34 percent.
Notes Johm McComack of The Weekly Standard:
In 2012, 57 percent of Iowa GOP caucusgoers were evangelical Christians, but the final Des Moines Register poll that showed Trump winning indicated that only 47 percent of 2016 caucusgoers would be evangelical Christians. “When re-weighted as a scenario test for the higher evangelical turnout seen in 2012 entrance polls, the race is closer, with 26 percent for Trump and 25 percent for Cruz,” Bloomberg reported.
Well, OK then. The race is on for New Hampshire, where RealClear’s aggregated polls show Trump up by 25 points and Cruz and Ohio Gov. John Kasich tied for second (before last night, Rubio was showing fourth in New Hampshire, behind Jeb Bush).
One question for the Republicans is this: How do you win a national election with leading candidates who are at odds with the bulk of the country over immigration? Seventy-two percent of Americans favor some path to legalization, while leading GOP contenders accuse each other of being “pro-amnesty.” When asked about abortion, 55 percent say it should be “legal in all/most cases,” while Republican candidates say it should not be. Something similar goes for pot legalization too, though not as extreme (Cruz, for one, has channeled his situational federalist lately and now says it’s a state issue). The point isn’t that culture war issues decide national elections, but that exactly what puts Republicans over the top in Iowa is likely to alienate them from centrist voters in the general election.
So how do you win a general election if you’re a Republican? Well, you run against a Democrat, especially Hillary Clinton, whose negatives rival those of Trump and Cruz. RealClear’s tally of head-to-head matchups is less up-to-date than its other polls, but the site currently shows both Trump and Cruz either in a dead heat with Hillary Clinton or slightly ahead.
Clinton barely eked out her own “win” over Bernie Sanders, an independent who calls himself a “democratic socialist.” That spells bit trouble for the former senator and secretary of state even if and when she ultimately secures the Democratic Party nomination (more on that in a separate post). But the 2016 general election is already shaping up to be a battle between two incredibly rightly unlikeable candidates who nonetheless perfectly represent all that is awful about the Republican and Democratic Parties. Which is its own sort of victory when you think about it.
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Coming to Japanese bank stocks soon…
European bank stocks are down almost 40% from the day Draghi unleashed NIRP in Europe. Today’s plunge takes out recent lows, pushing prices back to almost “whatever it takes” lows.
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One of the web’s greatest trolls has focused its attention on Republican presidential nominee candidate Donald Trump. Having skewered Kanye West, President Obama, and Al Gore, “Loser.com” has decided today’s biggest non-winner is Iowa’s runner-up…
What you see if you visit Loser.com…
While it may be premature to call him a total loser, his “share price” on PredictIt has collapsed…
Still Trump is trading 8 times higher than Jeb as Rubio soars into the money-wagering lead.
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Very weak January’s have had a tendency to lead to weak long-term returns in the stock market.
Investors must be thinking, “thank God February is here.” Well, before we put the brutal January to rest, we have one more depressing post. We wrote several posts throughout January on the historic weakness and volatility that was occurring during the month. Previous looks at intra-month variations on the “January Barometer” have pointed to weak returns going forward for stocks. This post will just put a bow on things as we look at the dismal month-end tally and whether it suggests weakness as well.
First off, what was the dismal tally? Well, as of last Monday, the stock market was down -8.84%, judging by the Dow Jones Industrial Average. At that point, it would have marked the worst opening month in 116 years. As it happens, the DJIA rallied furiously over the last 2 days of the month. Even with that rally, though, the DJIA still closed the month down -5.6%, the worst since 2009, and 1990 before that (FYI, we are using the DJIA simply because we have the most historical data on the index).
Can anything be gleaned by looking at other weak January’s, historically? Well, with the usual disclaimers that these seasonal patterns are merely averages and past results do not guarantee anything about future returns, etc…,we took a look at the historical stats. Using the DJIA since 1900, there have been 18 other years in which the DJIA lost at least 4%. Since we are trying to find reasonable comparisons to our present case, we thought to weed out years in which the DJIA had already suffered considerable weakness. Somewhat arbitrarily, we eliminated 4 years that saw the index already down over 20% from its 52-week high coming into the year (1941, 1970, 1978 and 2009).
We were then left with 14 years that began with the DJIA within 20% of its 52-week high and experienced January losses in excess of 4%.
1901 (-6.2%)
1910 (-6.5%)
1913 (-5.4%)
1916 (-8.7%)
1939 (-6.9%)
1957 (-4.1%)
1960 (-8.4%)
1962 (-4.3%)
1968 (-5.5%)
1977 (-5.0%)
1990 (-5.9%)
2000 (-4.8%)
2008 (-4.6%)
2014 (-5.3%)
Returns following the majority of these January’s were significantly weak, as the median returns indicate here. This is especially the case over the longer-term, i.e., up to 3 years later.
Here is the performance following these events in table format.
The tendency for weakness following these dismal January’s is especially evident when contrasted with the median performance following all January’s, all “up” January’s – and even versus all “down” January’s.
Again, in table format.
If you believe in these historical, seasonal patterns, there would appear to be something noteworthy about these especially bad January’s. Incidentally, we would rank seasonal factors toward the bottom of our list of investment inputs. That said, the compilation of evidence from all of our posts looking at January weakness makes for a compelling bearish argument – especially over the longer-term, e.g., years.
In other words, if there is validity to the January Barometer, it may more appropriate to call it the January “Bear-ometer” in 2016.
* * *
More from Dana Lyons, JLFMI and My401kPro.
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As a result of the rush to global NIRP, which now sees central banks and their sovereigns accounting for over 25% of global GDP, amounting to around $6 trillion in government bonds, trading with negative yields, a question has emerged: when will corporate bonds follow this govvie juggernaut and how soon until investors pay not government but companies to borrow?
That is the focal piece in today’s note by our favorite DB credit strategist Jim Reid who muses as follows:
There is starting to be chatter as to what the incentive is to buy Euro corporate bonds at a negative yield if it ever happens. It may well be tested very soon as one consequence of the recent ECB/BoJ hint/action has been the strong rally in global fixed income.
A scatter of the European non-financial corporate yield universe (in today’s pdf) shows we have so far resisted such a move (bar 3 bonds with a bid yield a basis point or two sub-zero). There is a perception that investors won’t buy corporates with a negative yield and therefore a deeper rally in Government bonds would be a spread widener. Whilst this makes some sense the evidence of spread behavior as yields have gone lower and lower doesn’t necessarily support this. 1-3yr and 3-5yr Euro AA spreads have been range bound in the last 6 months – a period that 2 and 4 year Bund yields have rallied around 30bp and 40bps respectively and deep into negative territory. So one might have expected some widening if the zero bound was a hard floor for corporates.
Our central view is that zero might be a temporary resistance point if Government yields rally further but that at some point the dam will break and corporates will trade on a spread basis and go sub-zero.
Obviously this all depends on whether a further deeper rally occurs. At the moment 2 year bunds are at -0.47% and 1-3yr AA spreads at +58bps so we’re getting closer to testing the theory, especially for the tighter bonds in the index.
Is Jim Reid right, and will NIRP soon result in paradoxical outcome of companies paying down debt by issuing debt? The answer is a resounding yes, especially if the ECB cuts its deposit rate lower to -0.4% as the market now largely expects, which in turn forces Japan to cut to -0.2%, forces China to devalue more, and so on, as the next deflationary wave is unleashed in the global race to debase.
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The ink was not yet dry on the seemingly endless Monsanto-Syngenta on again/off again takeover drama, when moments ago in a shocking development the newswires were lit up with news that a new, and very much unexpected, bidder has emerged for the Swiss pesticides giant Syngenta: China National Chemical Corp, or ChemChina as it is known, which according to WSJ and BBG is set to pay $43.7 billion to acquire a piece of Swiss corporate history.
According to Bloomberg, China National Chemical Corp. is nearing an agreement to buy Syngenta for CHF 43.7 billion as the state-backed company extends its buying spree with what would be the biggest-ever acquisition by a Chinese firm, said people familiar with the matter.
More details:
ChemChina, as the closely-held company is known, offered about 470 francs a share in cash to acquire Syngenta and a deal could be announced as early as Wednesday when the Swiss company reports earnings, the people said, asking not to be named as the details aren’t public. That’s 24 percent higher than Syngenta’s last close of 378.40 francs on Feb. 1. Its shares rose 7.1 percent to 405.1 francs as of 1:26 p.m. in Zurich.
The deal would help Chairman Ren Jianxin transform ChemChina into the world’s biggest supplier of pesticides and agrochemicals, while snatching an asset coveted by St. Louis-based Monsanto Co. It also underscores the importance China attaches to owning seed and cropcare technology that can boost agricultural output and help feed the world’s biggest population.
Bloomberg notes that if successful, the $43 billion purchase would be the largest acquisition by a Chinese firm, surpassing China Unicom Hong Kong Ltd.’s $29 billion purchase of China Netcom Group Corp. in 2008. It remains to be seen whether Europe’s anti-trust authorities, let alone the Swiss, will greenlight such a massive incursion into the heart of corporate Europe. As a reminder, in recent year major Chinese purchases of both U.S. and Canada-based companies have been frowned upon. Perhaps Europe will decide that it is in its best interest to open its markets to the one country that suddenly is finding it needs to park “hot money” abroad and M&A is just the way to do it.
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Overnight Media Digest
FT
* EasyJet Plc plans to test a hydrogen fuel cell system that could save about 50,000 tonnes of fuel per year and cut carbon emissions. This would mean the airline would no longer need to use its jet engines during lengthy taxi operations, like moving the plane from the runaway to the gate.
* Tony Durrant, chief executive of Premier Oil Plc, said the UK oil regulator should have the power to step in and protect big equipment, such as pipelines or oil refineries. Durrant said such powers were needed to ensure that cash-strapped companies didn’t allow old equipment to decline to the point where entire oilfields must close early.
* Alphabet Inc, Google’s holding company, is set to become the world’s most valuable company when stock market trading begins trading on Tuesday, following results that beat Wall Street estimates.
* Ryanair Holdings Plc plans to return 800 million euros ($871.52 million) to investors through its largest-ever share buyback, highlighting how Europe’s leading budget airline has made significant progress to overhaul its aggressive image and poor customer service
NYT
– Wall Street got its first glimpse of the financial details of a new conglomerate called Alphabet Inc on Monday. Revenue increased 24 percent in the most recent quarter, positioning the outfit formerly known as Google to become the world’s most valuable company. (http://nyti.ms/1KT4MVb)
– A former Yahoo! Inc manager, who lost his job, filed a suit in California on Monday saying the system, which has been used to fire hundreds of employees, is discriminatory and violates the law. (http://nyti.ms/1PRp3lI)
– American International Group Inc is sticking with a strategic plan that aims to streamline the company but falls far short of calls from activist shareholders like Carl Icahn to break into three. (http://nyti.ms/1Q9pvWz)
– SFX Entertainment Inc, the company created four years ago to capitalize on the popularity of dance music festivals, declared bankruptcy on Monday, after a troubled year in which the company’s founder abandoned a takeover bid and its stock plunged by more than 95 percent. (http://nyti.ms/1Pc7Ld6)
Canada
THE GLOBE AND MAIL
** Canada is losing medium skilled jobs at an alarming rate and the system is ill equipped to move workers to where they are needed, including high skilled positions in other industries, according to a new report being released on Tuesday by the CD Howe Institute, a Toronto-based economic think tank. (http://bit.ly/1o1z0k4)
** In a bid to break out of a depressed market for junior miners in general and nickel projects in particular, Royal Nickel Corp announced it was acquiring a stake in Salt Lake Mining, an Australian nickel and gold producer, as well as all of Vancouver-based VMS Ventures Inc, part owner of a copper mine in Manitoba. (http://bit.ly/1o1zo1Z)
** David Baazov, chairman and chief executive of Amaya Inc , owner of the popular PokerStars brand, said on Monday that he and an unnamed group of investors, with whom he is “in discussions”, plan to make a takeover offer for all the shares of the company at C$21 per share, for a total valuation of about C$2.8 billion ($2 billion). (http://bit.ly/1o1zVB4)
NATIONAL POST
** Alberta Economic Development and Trade Minister Deron Bilous and Energy Minister Marg McCuaig-Boyd announced a new program on Monday, which would give companies building new petrochemical plants a total of C$500 million ($357 million) in royalty credits. (http://bit.ly/1o1Alap)
** Canada’s biggest banks are relying more heavily on wholesale funding than their global peers, a situation that tends to raise the risk of periodic difficulties in refinancing debt, according to Moody’s Investors Service. (http://bit.ly/1o1Azi0)
** A pregnant Canadian who travelled to Brazil in December told the National Post that she is facing aborting her baby because she has been refused testing for the Zika virus, which the World Health Organization on Monday declared a global emergency.
Britain
The Times
One of Britain’s biggest retailers, Matalan, has been placed in Lloyds Banking Group’s business support unit, which was set up to help troubled companies. It is understood that the heavily indebted fashion and homewares retailer approached Lloyds late last year and asked to be placed in the bank’s support unit. (http://thetim.es/1PNwq7n)
Clydesdale Bank Plc <IPO-CLBP.L> has cleared the final big legal hurdle for its planned stock market flotation and separation from National Australia Bank. The demerger from its parent was approved by the Supreme Court of Victoria, Australia, Monday, allowing conditional trading in the shares of CYBG, the new entity covering the operations of Clydesdale and Yorkshire banks, to begin Tuesday. (http://thetim.es/1PNwJz0)
The Guardian
The founder of easyJet Plc has opened a discount food store that is selling everyday groceries for 25 pence each. Stelios Haji-Ioannou has launched easyFoodstore in an attempt to take advantage of the fast-growing discount market in the UK, which is led by Aldi and Lidl. (http://bit.ly/1PNClJt)
The Telegraph
BT Group Plc has revealed a management shake-up ahead of its 12.5 billion pounds takeover of Britain’s biggest mobile company, EE, having also posted its best quarterly revenue growth in more than seven years. (http://bit.ly/1PNC0Xj)
EasyJet Plc passengers could be served waste water produced by their plane’s fuel system, after the airline unveiled plans to trial zero-emission hydrogen technology. (http://bit.ly/1PNC4WV)
Sky News
Morrisons has announced plans to cut the cost of more than 1,000 “staple” products – in a move likely to add fuel to the ongoing supermarket price war. The UK’s fourth-largest grocer will slash the prices of many items, including fruit and vegetables, by an average of 19%. (http://bit.ly/1PNyrk2)
Eight new projects in UK have been given 20 million pounds ($1.44 million) to research and develop driverless car technology. The money will be used to help improve the communications systems between vehicles and the urban environment – including “talking car technologies.” (http://bit.ly/1PNALr0)
The Independent
The wealthy Indian Gupta family, which owns Liberty House Group and Simec, is looking at plans to float a minority stake in its international steel-to-industrial empire that could value the business at $1 billion. (http://ind.pn/1PNCAnR)
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