Market Update: May 22, 2017

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Last Week’s Market Activity

  • After hitting a new record on Tuesday, the S&P 500 Index sold off -1.8% Wednesday on fears the growing controversies around the Trump Administration will cause a delay in the pro-growth policy agenda, including tax reform, deregulation and infrastructure spending.
  • Stocks stabilized on Thursday and Friday, recovering ~1.0%, but pared gains both days going into the close of trading.
  • For the week, major U.S. equity indexes fell ~-0.5% as investors’ focus switched from political headline risks to positive fundamentals supporting economic and profit growth.
  • Financials were the worst performing sector (-1.0%) on the week, followed by industrials (-0.3%); defensives and dividend paying sectors in favor, with real estate (+1.2%), consumer staples (+0.5%) and utilities (+0.5%) leading.
  • The yield on the 10-year Treasury held steady around 2.24%, while the U.S. dollar lost -1.6% for its worst week since July.
  • Despite expectations for a June rate hike, the market does not fear an aggressive stance by the Federal Reserve (Fed).
  • COMEX Gold was +2.0% on the week; copper also climbed 2.0% Friday.
  • WTI crude oil rose +2.0% to $50/barrel on Friday, +5.0% on the week in anticipation of further Organization of the Petroleum Exporting Countries (OPEC) production cuts at meeting in Vienna on 5/25.

Overnight & This Morning

  • Stocks in Asia were mostly positive as MSCI EMG had biggest climb (+0.90%) in two weeks, led by commodity producers.
  • North Korea fired another missile, yet Korean won moved higher on naming of new finance minister.
  • Japanese shares were boosted by weaker yen and exports rose for a 5th consecutive month in April, up 7.5% year over year.
  • Hong Kong’s Hang Seng closed at its highest level since July 2015.
  • Australian stocks rose despite S&P reducing credit ratings for many of their banks on concerns over property prices and potential rise in credit losses.
  • In Europe, shares were up ~0.2% with gains in real estate, energy and mining shares.
  • German bunds slipped to 0.38% on the 10-year and euro held around $1.11.
  • European Union ministers are meeting in Brussels to discuss Greek bailout and refine plans for Brexit negotiations.
  • In UK election, the Tory lead over Labour has narrowed considerably, from almost 20 points last month to just 10 points this morning.
  • Commodities – WTI crude oil +0.9% to $51.10/barrel; COMEX gold slipped to $1254/oz. while copper is higher by 0.20%.
  • Major U.S. indexes up slightly along with Treasury yields as investors judge recent selloff on political turmoil may have been excessive.

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Key Insights

  • U.S. fiscal policy needs to become primary growth driver for 2018. President Trump releases his administration’s budget plans Tuesday, including economic projections and spending plans for federal agencies and entitlement programs. Congressional Republicans must first agree on a budget if they want to achieve tax reform this year; intraparty fighting must cease if Republicans want to maintain majority after next year’s midterms. History is littered with examples of “wave” elections after one party assumes power. However, if Republicans see an expiration date on their majority; similar to Democrats in 2010 and Republicans in 2006, these developments may result in more legislation passing. We are likely to see an infrastructure plan in the coming weeks and the Senate appears to have progressed on tax reform plan, which doesn’t include BAT or removal of corporate interest deduction.
  • Despite paring losses Thursday and Friday, risk-off vibe still apparent with dollar weakness, yield curve flattening, VIX higher, and bank, small cap and transport stocks all underperforming. However, there is little stress evident in U.S. credit markets with credit default swaps, investment grade and high yield spreads all contained. The economy continues to benefit from pent up demand in capital expenditures, housing and an inventory rebuild from a Q1 drawdown.

Macro Notes

  • Unofficial last week of an excellent earnings season. With just 28 S&P 500 companies left to report results, S&P 500 earnings growth for the first quarter is tracking to a very strong +15.2% year-over-year increase, 5% above prior (4/1/17) estimates (thanks to a 75% beat rate), and +11.1% excluding energy. Technology jumped ahead of financials and materials last week into second place in the earnings growth rankings (energy is first), while industrials, energy and materials have produced the most upside to prior estimates. This week 19 S&P 500 companies are slated to report.

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  • Guidance may be the most impressive part of earnings season. We were very impressed that company outlooks were positive enough to keep estimates for the balance of 2017 firm, amidst heightened policy uncertainty and the slowdown in economic growth in the first quarter. Consumer discretionary, industrials, technology, financials and healthcare sectors have all seen consensus estimates for 2017 and 2018 rise, as has the S&P 500, over the past month; and consensus estimates reflect a solid 9% increase in earnings over the next four quarters versus the prior four.
  • This week, we try to help investors stay focused on fundamentals. Market participants became increasingly worried that the Trump administration’s agenda was in danger last week following the latest news surrounding the investigation into the Trump campaign’s ties to Russia. After its biggest one-day drop in nearly a year on Wednesday, the S&P 500 recovered nicely Thursday and Friday to end the week less than 1% off its all-time closing high. We don’t know what will happen with the Russia investigation, but we think we have a pretty good handle on the basic fundamentals of the economy and corporate profits, which look good right now, tend to drive stocks over time, and are where we think investors should be focused.
  • This week, we also take a look at inflation. With the unemployment rate unlikely to go much lower, Fed watchers are becoming increasingly focused on the other half of the Federal Reserve’s dual mandate, low and stable inflation. Despite disappointing gross domestic product (GDP) growth in the first quarter, consensus forecasts indicate expectations of better growth over the rest of the year, which would likely be accompanied by an uptick in inflation above the Fed’s 2% target. However, there are still many factors that limit the possibility of runaway inflation. Better growth would likely give us enough inflation for the Fed to follow through on raising rates twice more in 2017, but we don’t expect inflation to reach a level that would push the Fed to move faster.
  • What does the large drop on Wednesday mean? The S&P 500 Index fell 1.8% on Wednesday and has bounced back the past two days. Nonetheless, Wednesday was the worst one-day drop since September and given it happened within 0.5% of all-time highs, the question is: What does a large drop near all-time highs mean?

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  • This week’s domestic economic calendar includes data on preliminary purchasing manager surveys (manufacturing and services) from Markit, housing, trade, durable goods, and revised first quarter gross domestic product (GDP). The Fed will remain in focus with minutes from the May 3 Federal Open Market Committee (FOMC) meeting due out Wednesday (May 24) and several Fed speakers on the docket-a roughly even balance of hawks and doves. We believe the market is correctly pricing in a June 14 rate hike. Overseas economic calendars are busy with a series of data in Europe, including first quarter German and U.K. GDP, German business confidence, and Eurozone purchasing manager surveys; and in Japan (trade, manufacturing and inflation data). Political troubles in Brazil may continue to weigh on emerging market indexes.

 Monday

  • Chicago Fed National Activity Index (Apr)

 Tuesday

  • New Home Sales (Apr)
  • Richmond Fed Report (May)
  • Germany: GDP (Q1)
  • Germany: Ifo (May)
  • France: Mfg. Confidence (May)
  • BOJ: Kuroda
  • Japan: All Industry Activity Index (Mar)
  • Japan: Machine Tool Orders (Apr)
  • Japan: Nikkei Japan Mfg. PMI (May)

 Wednesday

  • Markit Mfg. PMI (May)
  • Markit Services PMI (May)
  • Existing Home Sales (Apr)
  • FOMC Meeting Minutes (May 3)
  • France: Markit Mfg. & Services PMI (May)
  • Germany: Markit Mfg. & Services PMI (May)
  • Eurozone: Markit Mfg. & Services PMI (May)
  • Canada: BOC Rate Decision (May 24)

 Thursday

  • Advance Goods Trade Balance (Apr)
  • Wholesale Inventories (Apr)
  • Initial Jobless Claims (May 20)
  • UK: GDP (Q1)
  • Italy: Industrial Orders & Sales (Mar)
  • Japan: CPI (Apr)
  • Japan: Tokyo CPI (May)

 Friday

  • GDP (Q1)
  • Personal Consumption (Q1)
  • Durable Goods Orders (Apr)
  • Capital Goods Shipments & Orders (Apr)
  • Italy: Business Confidence in the Mfg. Sector (May)
  • Italy: G7 Leaders Meet in Sicily

Saturday

  • BOJ: Kuroda

 

 

 

 

 

 

Disclosures: Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better. Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk. Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate. Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. This research material has been prepared by LPL Financial LLC.

Market Impact of a Trump Presidency

Donald Trump emerged as the winner last night of a hotly contested presidential campaign and will be inaugurated as the 45th president of the United States on Friday, January 20, 2017. The transition to a Republican presidency and Trump’s rejection of politics as usual, which drew so many voters, naturally lead to questions about his impact on the economy and markets. Today on our blog we provide a high level overview of our thoughts of the significance of a Trump presidency.

ECONOMY

Does Trump’s win change LPL’s view on the economy over the remainder of 2016 and into 2017?

The election results have not changed our long-term outlook for the U.S. economy. We will continue to monitor many important economic indicators, including the Five Forecasters, the Current Conditions Index, and the Recession Watch Dashboard, and will keep you updated in the event of any changes to our views.

Will the election results cause a recession?

Elections do not in and of themselves cause recessions. Policies can, however, and we need to wait to see which policies Trump moves forward with and the details of those policies.

Our Recession Watch Dashboard continues to point to an overall low risk of recession within the next year.

What impact might the election have on overseas economies and markets?

Trade has been a major theme in this election, yet a president’s ability to impact trade directly and immediately is somewhat limited. Trump has been outspoken in favor renegotiating NAFTA terms and has been opposed to the TransPacific Partnership (TPP), which has little chance of passing. The Trump victory raises some concern across foreign markets about U.S. trade.

FED

Will the election results impact Fed monetary policy later this year and in 2017?

We do not believe the election results have changed the Fed’s outlook. Furthermore, we believe the Fed is much less sensitive to financial markets than most people think. As it stands, we believe the Fed is on course to increase rates at its December meeting, with another 2-3 increases in 2017. It would take a major market disruption or a change in the economic fundamentals for the Fed to alter this course.

EQUITIES & FIXED INCOME

Will the election result cause a bear market in equities?

Just as an election does not cause a recession, it does not cause a bear (or bull) market. Government policies alone do not change the market’s long-term trend, although they are a factor.

Shorter term, elections are rarely a harbinger for a sell-off, and when they have been, the election has not been the primary cause. In election years since 1952, the S&P 500 has returned an average of 2.5% in November and December and has been higher 75% of the time. From Election Day until Inauguration Day, the S&P 500 has averaged a gain of 1.0% and has been higher 69% of the time. The median return jumps to 3.0% because of a nearly 20% drop in 2008 that skews the average return, but 2008 returns were fundamentally driven by the recession, not Obama’s election. The bottom line is some near-term volatility is likely, but a massive sell-off absent an economic recession has never happened in the period between the election and inauguration.

Are the near-term results impacted by the party of the President?

There doesn’t appear to be much of a difference in equity performance over the short term. Since the election in 1952, the final two months of the year have returned 2.6% when a Republican wins and 2.4% when a Democrat wins. Looking at the largest drops the final two months of an election year in 2000 (Republican victory) and 2008 (Democrat victory) stand out, as the S&P 500 dropped 7.6% and 6.8%, respectively. Both times the economy was either in a recession (2008) or about to fall into a recession (2000) – which greatly contributed to the equity weakness. With the end of the earnings recession, improving consumer confidence, and the best quarterly GDP print in two years – we presently have an improving economic backdrop, which should help contain any large downside moves in equities the rest of 2016.

Which sectors would likely benefit under Trump?

Biotech and Pharmaceuticals: Although Trump has stated his desire to repeal the ACA and has favored drug re-importation from other countries, controlling drug prices is unlikely to be as high of a priority for him as it would have been for Clinton. As a result, biotech and pharmaceutical companies may get a bump. We believe the market may have overreacted to perceived policy risk and we continue to favor the healthcare sector, which has historically performed well after elections.

Energy: Trump is likely to be positive for fossil fuels. He has promised less regulation on drilling, along with expansion of drilling areas. The segment of the industrials sector that services the energy sector may also benefit.

Financials: The Trump administration is likely to be easier on financial regulation than Clinton would have been. Trump has indicated he would like to roll back financial regulations, including the Dodd-Frank legislation enacted as a result of the financial crisis. Trump has also suggested bringing back Glass-Steagall, which would separate traditional banking from investment banking, a move we see as very unlikely.

How will the election impact the dollar and bonds?

Dollar: Trump’s policies are likely to be relatively negative for the U.S. dollar. His comments on renegotiating U.S. debt held by foreigners may limit the attractiveness of bonds to foreign investors.

Bonds: We saw an initial Treasury rally as stocks sold off overnight, but yields have since moved higher. We expect there may continue to be additional volatility as markets digest the news, but we broadly believe markets may be pricing in a rise in deficit spending, which is pushing yields higher; though continuation of low rates overseas is an offsetting factor, potentially keeping rates somewhat range bound over the near-term.

Will Trump’s policies lead to a debt downgrade?

Trump had mentioned last spring the possibility of renegotiating our debt and paying back less than the full amount if the economy were to falter. This idea, if implemented, would almost certainly lead to a debt downgrade. However, he backed away from this idea a few days after he floated it.

More realistically, Trump has signaled higher deficit spending. While deficit spending was a contributing factor to the U.S. debt downgrade by S&P in August of 2011, it wasn’t the only reason. The main driver of the downgrade was the debt ceiling crisis, as Republicans demanded a deficit reduction package before they were willing to join Democrats in raising the debt ceiling. Divided government and partisan politics led to months of debate and an eleventh hour deal that avoided a default. With Republicans keeping control of the Senate and the House, a fight over the debt ceiling fight that could threaten the U.S. credit rating is unlikely.

COMMODITIES

What is the election impact on gold?

Gold can thrive in chaotic environments and the uncertainty surrounding Trump’s policies could offer some support to the commodity.

What is election impact on oil?

When discussing oil, it is important to remember that oil stocks and crude oil can have very different performance, even though investors often expect similar returns.

Trump’s victory is likely a positive for oil stocks, especially in the short run. He has promised reduced regulations on oil and gas production, which would improve profitability of existing projects and may result in a very marginal increase in U.S. production. Note, this may be a negative for energy prices.

VOLATILITY

Will volatility increase due to the election outcome?

We expect that market volatility will likely increase. Equity markets have experienced abnormally low volatility recently, in part because of central bank intervention. As those interventions decrease, volatility should increase. However, we view that increase as a healthy aspect of equity markets. The degree to which the election results impact volatility will depend a great deal on which policies are actually enacted as a result of the changes in Washington.

 

 

 

 

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments. Because of its narrow focus, investing in a single sector, such as energy or manufacturing, will be subject to greater volatility than investing more broadly across many sectors and companies. The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. This research material has been prepared by LPL Financial LLC.

Meet the 30-Year-Old Prince Emerging as Oil Market’s ‘Ultimate Disrupter’

Meet the 30-year-old titan emerging as oil market’s new top dog: Mohammed bin Salman, Saudi Arabia’s 30-year-old deputy crown prince
Provided by MarketWatch

The crude-oil market may have a new boss.

The failure of world oil producers to reach a deal on a production freeze in Doha, Qatar, shouldn’t have been a major surprise. But the way the Sunday talks collapsed is underlining notions of a significant shift, with Saudi Arabia’s 30-year-old deputy crown prince, Mohammed bin Salman, playing a dominant role in setting policy for the world’s largest oil exporter.

Oil futures trimmed sharp declines but remain lower, with the U.S. benchmark futures contract  ending down 1.4%, while Brent futures settled off 0.4%.

Prince Mohammed, who serves as the kingdom’s defense minister, appeared to win the day on Sunday, according to some analysts. Previously, Saudi oil minister Ali al-Naimi had left the door open to an agreement without the participation of Iran, whose unwillingness to strike a deal wasn’t a surprise. In the end, it was the prince’s hard-line call that prevailed.

On the eve of the meeting, Prince Mohammed told Bloomberg that Iranian participation was a must, and warned that the Saudis were capable of ramping up production by another one million barrels a day. Iran, of course, had no intention—nor had it signaled otherwise—of participating in a freeze, focusing instead on pushing production back to presanction levels.

In a Monday note, commodity analysts led by Helima Croft at RBC Capital Markets, deemed Prince Mohammed the “ultimate disrupter.”

The royal’s stance put Saudi Arabia at odds with its key Gulf allies, such as Qatar and Kuwait, “which normally stand shoulder to shoulder with the Kingdom on oil policy,” they wrote. It was Iran’s refusal to budge that likely hardened the Saudi resolve to stick to its guns, the RBC analysts said, leaving the assembled oil ministers to try their best to put a positive spin on the outcome.

Phil Flynn, senior market analyst at Price Futures Group, said the Sunday outcome was a “sign that the politics of OPEC have changed forever.” The 80-year-old Naimi, who has served as oil minister for nearly two decades, had long focused on ensuring Saudi Arabia’s reputation as a reliable supplier. Naimi’s focus on stable oil markets had once led him to be called “the Alan Greenspan of OPEC.”

Not everyone is convinced that there has been a major shift in Naimi’s role. The Saudis, after all, had made relatively clear that the odds of a deal were low unless Iran and others went along, said Sarah Ladislaw, director of the energy and national security program at the Center for Strategic and International Studies, a Washington think tank.

Prince Mohammed’s rising profile, however, does show that there has been “a fairly significant shift in how Saudi Arabia”is thinking about the role of oil and the shape of its economy going forward,” she said.

Prince Mohammed earlier this year this year said Riyadh was weighing selling part of state-owned Saudi Aramco, the world’s largest oil producer, in an initial public offering—a move seen as part of a broader reform of the kingdom’s economy.

Flynn, however, sees the prince’s ascendancy as a sign the Saudis are no longer reluctant to use oil as a diplomatic weapon. Indeed, many analysts view Saudi Arabia’s intensifying geopolitical rivalry with Iran as the motivating factor behind Riyadh’s hard line.

“We can no longer look to Saudi Arabia as a reliable supplier in times of crises as we have in the past. It seems this new crew of princes are more aggressive, more abrupt, less interested in oil politics and more interested in sending a message to their enemies,” Flynn wrote.

In other words, Prince Mohammed isn’t the same as the old boss. And the rest of the world will need to adjust accordingly.

Written by William Watts of MarketWatch

(Source: MarketWatch)

Oil Giants Draining Reserves at Faster Pace

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LONDON–The world’s biggest oil companies are draining their petroleum reserves faster than they are replacing them–a symptom of how a deep oil-price decline is reshaping the energy industry’s priorities.

In 2015, the seven biggest publicly traded Western energy companies, including Exxon Mobil Corp. and Royal Dutch Shell PLC, replaced just 75% of the oil and natural gas they pumped, on average, according to a Wall Street Journal analysis of company data. It was the biggest combined drop in inventory that companies have reported in at least a decade.

For Exxon, 2015 marked the first time in more than two decades it didn’t fully replace production with new reserves, according to the company. It reported replacing 67% of its 2015 output.

In the past, shrinking reserves could send investors and executives into a panic over a company’s future prospects.

These days, with ultralow oil prices, “it becomes less important” to replenish stockpiles, said Luca Bertelli, chief exploration officer at Italian oil producer Eni SpA. Eni has shifted spending away from high-risk, high-reward projects in favor of squeezing more out of fields that are already producing, he said.

That shift shows how producers are responding to low prices by pulling back on new exploration in favor of maximizing profits. The risk is that cutting back on new projects now, when prices are low, could lead to shortages and price spikes in the future.

Historically, energy companies spent heavily in the present to find resources for the future–new wells that would replace the barrels they pump every day. When they decide they can extract the oil and gas economically, firms book those resources as proved reserves, untapped inventories to be exploited at a profit down the road.

The current oil glut has forced companies to cut spending wherever they can. So they have pulled back on exploratory drilling and spending on new projects. Across the oil sector last year, companies approved just six new developments, according to Morgan Stanley researchers.

That is in contrast to the past decade, when high prices led energy firms to explore in far-flung regions. They spent billions of dollars on so-called megaprojects, in part to keep their inventories brimming for decades. And those investments helped to fuel today’s market glut.

Because of accounting rules, there is another drain on the “proved reserves” that companies book and report to investors: low oil prices. The U.S. Securities and Exchange Commission defines proved reserves as the volume of oil and natural gas that a company can expect to tap at a profit.

Some of the reserves companies added are too expensive to extract profitably at today’s prices. That has forced some companies to remove barrels from their books, and in some cases to write down the value of those assets.

Shell wrote off billions of dollars from the value of its assets last year, and low prices contributed to a decision to cancel a project in Canada’s high-cost oil sands. The company didn’t replace any of the oil it pumped last year. Overall its reserves shrank by 20%.

Despite lower reserves, big oil companies aren’t about to run out of crude. Exxon, for instance, retains enough reserves to last 16 years at the current rate of production. And in addition to their still-considerable proved reserves, the companies have access to other resources that could become viable to pump if oil prices rise.

Exxon Chief Executive Rex Tillerson told analysts earlier this month the company’s failure to fully replace the oil and gas it produced last year reflects its focus on “deploying capital efficiently to create that long-term shareholder value, even if it means interrupting a 21-year trend.”

SEC rules require oil companies to report “proved” reserves based on an average price each year. On a year-to-year basis, proved reserves can be volatile based on oil-price swings. Last year’s sharp price drop forced some companies to reduce their proved reserves, though falling costs helped offset the reductions. Some companies’ reserves also benefited from contracts that grant them a larger share of production when prices are low.

Among the largest oil companies, only Chevron Corp., Eni and France’s Total SA last year added more new barrels than they pumped. BP PLC replaced 61% of its production last year–excluding the impact of sales and acquisitions–and Norway’s Statoil ASA replaced 55%. While Shell’s reserves fell, the company this year completed a roughly $50 billion acquisition of BG Group PLC that is expected to boost reserves by around 25% from their levels at the end of 2014.

Companies’ reserve volumes are facing other potential threats beyond low oil prices. Some investors have expressed concern recently that legislation to curb global warming–such as taxing carbon emissions–could hasten a shift to cleaner energy and make fossil fuels more expensive to burn. That could make some oil reserves impossible to pump profitably. Oil companies counter that the world will need large volumes of oil and gas for decades.

In a sign of their focus on profitability over finding more oil, some investors have welcomed companies’ spending cuts despite the falling reserves.

“When the house is burning you’re not worrying if you need to paint the outside,” said Christopher Wheaton, a fund manager at Allianz Global Investors, which holds stock in several of the large oil companies including Shell, Total and BP. “It’s crisis management at the moment.”

That attitude marks a shift from the early 2000s, when companies responded to investor pressure to grow with aggressive drilling and, in some cases, aggressive accounting. Shell in 2004 admitted to overstating its reserves by more than 20%. Its share price dropped, senior executives left, and the company paid hefty fines. Shell declined to comment.

In the years after the Shell scandal, companies raced to find more crude and poured tens of billions of dollars into projects to increase production–helping fuel the current glut and prompting Shell to shift its strategy. In 2014 Shell stopped using growth in oil and gas production as a performance metric for executive bonuses, instead emphasizing return on capital.

Written by Sarah Kent of MarketWatch

(Source: MarketWatch)

Cramer Remix: Is the Biotech Bear Market Over?

Provided by CNBC

Amid news of explosions in Belgium’s capital on Tuesday, stocks were justifiably down at the open, but then rallied for most of the afternoon and pulled back shortly before the close.

Jim Cramer explained the action on the market, stating “We call it the underlying bid. That is a term that means buyers are lurking underneath current prices and when those prices drop, people start buying.”

By the end of the day, the stocks affected were those directly related to travel and leisure as they will have the most have a loss of business. Cramer added that the rest of the market was able to mount a comeback because there has been an underlying bid since stocks bottomed in mid-February.

Beyond that, Cramer noted that another event occurred to suggest stocks are undervalued currently. Tremendously negative commentary emerged from both Transocean (RIG) and Schlumberger (SLB), with the companies stating that it could take years before things get better.

But these stocks barely budged; Cramer interpreted this as resilience.

The technology sector also displayed resilience; the group continued to climb though there hasn’t been any big news lately.

Even the health care bear market seemed to be coming to an end, or at least show promise. Pharmaceuticals were once even more loathed than the banks after political attention turned their attention to the issue of price gouging.

“I don’t want to pronounce the big bear market over in all of health care. However, it does seem to be the case that the pressure is off for now, with both big pharma and fast growing biotech stocks having reached levels where the sellers seem to have gone away,” Cramer said.

In the wake of Tuesday’s terrorist attacks in Brussels, Cramer did some serious thinking. He noticed a pattern that every time a terrible attack occurs, every stock in the travel and leisure space goes lower.

“That is just a fact, and an understandable one at that,” the “Mad Money” host said.

However, Cramer also noticed the pattern that eventually investors stop being scared, and the travel stocks rebound.

“On a day when this whole group went down, let me tell you why it could be smart to own an airline stock or a company like Priceline, but it could be foolish to bet on a cruise company like Carnival (CCL) or Royal Caribbean(RCL),” Cramer said.

The difference for Cramer was related to another story in the headlines recently — Zika virus. The stocks Cramer found were most immune to Zika were airlines and online travel agents, with Delta, United, American and Southwest (LUV) all trading at cheap levels.

Cramer also noted that Yum Brands, the parent of KFC, Taco Bell and Pizza had has roared 20 percent in the past six weeks.

He attributed the success to Yum reporting a strong quarter in February, and because Yum broke itself up in a move that Cramer thinks could unlock immense value.

“So if you have been sitting on the sidelines watching this stock rally, I’ve got news for you: it is not too late to buy Yum,” Cramer said.

Provided by CNBC

 

Provided by CNBC

Since the market bottomed in mid-February, commodities have dramatically rebounded from their lows. Cramer has watched as everything from copper, iron ore, aluminum to oil have worked their way higher.

While the rally took a break on Tuesday, commodities have been on the decline for years, leading Cramer to ask if this is a genuine rally or simply a long overdue, oversold bounce.

Cramer turned to the help of Carley Garner to look at the charts and assess what the future of the commodity complex could look like. Garner is a technician and commodities expert who is the co-founder of DeCarley Tradingand a colleague of Cramer’s at RealMoney.com.

Garner found that while it has been tough to be bullish on commodities in the past, the group could finally be showing promise. This is significant to Cramer, as the strength in commodities is a huge reason why the stock market has been able to roar higher since February.

Cramer was also saddened by the news of the passing of Andy Grove, one of the founders of Intel, who understood the business better than anyone he had ever met.

“Thank you, Andy Grove, for all you did to make it so everyone could afford computing. Thank you for all you did to create so much wealth for so many. Thank you for showing that raw intelligence, hard work and honesty can indeed pay off in this great country,” Cramer said.

In the Lightning Round, Cramer gave his take on a few caller-favorite stocks:

Michael Kors: “The accessory stocks are doing better, and I like Kors, but I think Coach is in better shape. I would pick up some Coach right here.”

Advanced Micro Devices: “The personal computer space is hurting. It’s even hurting for Intel, so that’s certainly bad news for AMD. I would not take advantage of this recent rally other than to sell the stock.”

Written by Abigail Stevenson of CNBC

(Source: CNBC)

Oil Suffers its Biggest Weekly Drop in 8 Months

© Kevin Law/Getty Images

Oil fell more than 2 percent Friday, extending the week’s loss to the largest in eight months, pressured by swelling storage of crude on both land and sea.

Prices slipped slightly after Baker Hughes reported the number of oil rigs operating in the United States rose for the first time in 11 weeks.

The weekly count ticked up by 2 rigs to a total of 574, compared with 1,578 at this time last year.

U.S. crude traded slightly above $40 a barrel, while benchmark Brent was less than $2 from setting new 6½-year lows. The slump widened to oil products with U.S. gasoline tumbling to 10-month lows.

Oil prices have fallen in seven of the last eight sessions, with losses accelerating after U.S. government data on Thursday affirmed a seventh weekly rise in U.S. crude inventories that took stockpiles near April’s record highs.

The International Energy Agency (IEA) added to the bearish sentiment on Friday, saying there was a record 3 billion barrels of crude and oil products in tanks worldwide.

U.S. crude’s spot contract for December was at its widest discount in nearly three months to crude slated for delivery in a year. The global glut has prompted traders to store more oil with the hope of selling later at higher prices.

The entire strip of futures prices for the next six months has weakened over the past four weeks as focus shifted back from strong oil demand toward oversupply.

Options trading has spiked with a soaring number of options taken to sell crude if prices fall to $40 or even $25.

“The evolving bearish global balances that we alluded to all year are acquiring increased transparency,” said Jim Ritterbusch of Chicago-based oil consultancy Ritterbusch & Associates.

U.S. crude closed $1.01 lower, or 2.42 percent, at $40.74 a barrel. It fell about 8 percent on the week, its most since March.

Brent was off 46 cents, or 1.04 percent, at $43.60 a barrel. Its downside was limited by the impending expiry of its front month December contract at Friday’s settlement. For the week, Brent was down nearly 8 percent, also its most since March.

Oil was caught in a larger commodities selloff on Friday. The Thomson Reuters/Core Commodity CRB Index, a global benchmark, was near its lowest since 2002.

An estimated crude oversupply of between 0.7 million and 2.5 million barrels per day has resulted in prices dropping almost two thirds since June 2014.

The IEA said a mild 2016 winter could cause the overhang to rise in coming months.

Tens of millions of barrels are sitting on tankers at sea, looking for buyers and threatening logistical paralysis.

Written by Barani Krishna of Reuters 

(Source: MSN)

Hershey to Offer Healthier Kisses This Holiday Season

© REUTERS/Mike Blake
© REUTERS/Mike Blake

Chocolate maker Hershey Co said it would launch Hershey’s Kisses and milk chocolate bars made with no artificial flavors for the holiday season as it looks to cater to a growing demand for less-processed food.

Hershey, founded in 1894, said it would also launch a mobile tool, called SmartLabel, that will provide information on nutritional facts, ingredients and allergens.

The new Kisses and milk chocolate bars will be made using locally sourced milk, cane sugar and contain natural flavors, the company said.

Neil Saunders, chief executive of retail research firm Conlumino, said this was a good move ahead of the holiday season as people tend to buy better quality chocolates for personal consumption than during Halloween, when chocolates are mostly distributed.

Hershey had said in February that it planned to use simpler ingredients starting this year.

Food companies are focusing more on offering products perceived as healthier, yielding to a general shift in consumer preference away from processed food.

Oreo cookie maker Mondelez International Inc expects to generate half of its revenue from snacks seen as healthier in the next five years, the company’s chief growth officer had said in an interview with Reuters.

Nestle USA, General Mills Inc and Yum Brands Inc are also catering to the changing tastes.

It wouldn’t be surprising if Hershey brings all of its chocolates under the classification of being natural and simple in about a year, Saunders said.

Written Yashaswini Swamynathan of Reuters

(Source: Reuters)

Experts: El Nino Will Keep Energy Stocks Cool This Winter

© (Getty Images)
© (Getty Images) 

The strongest El Nino weather system in almost two decades, combined with the warmest temperatures in four years, will mean a relatively warm winter in the Midwest and on the East Coast, keeping a lid on energy prices and potentially capping stock prices for companies that produce natural gas.

This year’s El Nino, which occurs when Pacific Ocean waters are unusually warm, will be the strongest since the winter of 1997-1998, says Matt Rogers, a meteorologist at Commodity Weather Group in Bethesda, Maryland. Temperatures are expected to be the warmest, on average, since the winter of 2011-2012, he said.

While those who like outdoor activities should enjoy the warmer weather, it doesn’t bode well for companies that provide natural gas, such as Chesapeake Energy Corp. (ticker: CHK) and Cabot Oil & Gas Corp. (COG), which already are facing near-record reserves.

“There’s no question the warmer weather is going to effect the energy sector,” says Jason Wangler, a managing director at Wunderlich Securities in Houston. “It’s another leg down for the space that comes at the worst time possible.”

During the summer, companies such as Chesapeake and Cabot do what they do best – produce natural gas. In early November, when winter usually arrives, they tend to switch from putting product into storage to taking it out.

Without the usual cold weather, however, none is taken out and reserves continue to build, cutting into prices.

“We’re close to full, so now we’re waiting for winter to arrive,” says Robert Morris, managing director of oil and gas exploration and production equity research at Citi Research in New York. “The problem is, we haven’t had any winter yet. With these weather forecasts really warm, there’s no demand.”

Natural gas stockpiles rose to 3.93 trillion cubic feet in the week that ended on Oct. 30, tying a record set in 2012, according to data from the Energy Information Administration.

That’s pushed prices below $2, only the third time in 13 years that’s happened, says Phil Flynn, a senior market analyst at Price Futures Group in Chicago.

Cabot Oil & Gas, an independent company that explores and develops oil and gas properties in the U.S., says it will reduce its capital expenditures to $850 million as it attempts to improve operating efficiencies. The company also says it plans to reduce rig count at one of its sites by the end of the year.

Growth in 2016 likely will be from 2 percent to 10 percent, depending on whether natural gas prices remain low or begin to rise. Even with low prices, the company said it plans to accelerate production growth in 2017.

Investment banking firm Howard Weil lowered its target for COG stock from $33 to $31.

Chesapeake Energy earlier this month lowered its capital guidance by 14 percent to $3.4 billion, saying lower natural gas and oil prices present “many challenges” for the energy industry. About 70 percent of the company’s revenue comes from natural gas.

The company lost $83 million in the third quarter, or 5 cents per diluted share, versus net income of $251 million, or 38 cents a share, in the same quarter a year earlier. Revenue dropped by almost half to $2.89 billion.

Chesapeake’s other issue is the company is heavily leveraged, so each 10-cent move in natural gas prices has about a 5 percent effect on the company’s bottom line, Morris says. That’s about three times the industry average of 1.5 percent, he says.

It’s not all bad news for the company, however. Despite the headwinds it faces, Wangler rates CHK stock as a “buy” because it says Chesapeake is better positioned than many of its counterparts to survive the downturn in energy prices. “The main thing is survival,” he says. “It’s getting through the downturn and emerging with the ability to take advantage of the upturn. Chesapeake has enough assets and cash flow to where they can get to the other side. A lot of the other companies don’t have that ability.”

Range Resources Corp. (RRC), another company whose bottom line ebbs and flows with natural gas prices, also has some upside potential after it unloaded its Nora assets in Virginia – about 3,500 operated wells on 460,000 acres – for $876 million on Nov. 4. That caused stock prices to jump nearly 10 percent the day the sale was announced.

The sale will reduce debt by 24 percent and reduce operating expenses, Range says. Morris said Citi upgraded RRC stock to a “buy” after it recently fell to a 52-week low, and the asset sale will only help the company’s bottom line.

Still, it’s not just low natural gas prices that are threatening to hurt companies further – most can weather the storm when one commodity plunges. This year, however, energy prices across the board are low, blocking alternate sources of revenue, Flynn says.

U.S. crude oil, called West Texas Intermediate, in August fell to the lowest price in more than six years and is down 43 percent in the past year. Propane prices have fallen to the lowest in a decade.

That leaves companies, including Chesapeake and Cabot, with no safe haven should forecasters’ prognostications come true and the U.S. winter truly is warmer than normal, Flynn says.

“In recent years it wasn’t as bad for these companies as it is now,” he says. “Even if they’re not making money producing natural gas, they could produce oil and other liquids. Now they have lower oil prices and lower liquid prices. There’s nowhere to go and nowhere to hide for these companies.”

Written by Tony Dreibus of U.S. News & World Report

(Source: U.S. News & World Report)

Weekly Advisor Analysis: November 9, 2015

The equity market strained its eyes last week with all of the intense Fed watching. The gains posted early in the week began to crack on Wednesday when Federal Reserve Chair Janet Yellen hinted at a “live possibility” of a rate hike following its mid-December meeting. The market’s enthusiasm was also held in check on Friday following the promising jobs report, which many believe will make a rate liftoff in December a slam dunk. Despite this, stocks still managed to post gains for the week. The S&P 500 index rose 1 percent, the Dow Jones Industrial Average climbed 1.4 percent, and the NASDAQ composite jumped 1.9 percent.

Impressive Jobs Report Paints Fed Into Corner

No matter how you slice it, the October jobs report was strong. Non-farm payrolls added 271,000 jobs. This not only blew away the consensus estimates but pushed the monthly average above 206,000 new jobs for 2015. This is the second highest figure since 1999. On top of this, the unemployment rate dipped to 5 percent, its lowest level since 2008. Even the broader measure of underemployed workers, which includes part-time employees who are seeking full-time gigs, fell below 10 percent for the first time in seven years. The manufacturing sector displayed some weakness, but almost every other industry showed strength. In fact, the dispersion index – a measure of the breadth of job growth – expanded to 61.8 percent from below 54 percent last month. Most importantly, wages are finally starting to rise. Earnings jumped 2.5 percent on a year-over-year basis. This is the fastest rate in six years and shows steady improvement each month for the past three. The impressive jobs report has pushed the odds of a December rate hike by the Federal Reserve to 70 percent. This was below 60 percent the day before the jobs report release and just 38 percent one month ago.

http://blogs.wsj.com/economics/2015/11/06/the-october-jobs-report-in-12-charts/
http://blogs.wsj.com/economics/2015/11/06/the-october-jobs-report-in-12-charts/

The Dollar Bulks Up Ahead of Rate Rise 

The increased prospect of a Federal Reserve liftoff in December has pushed the value of the U.S. dollar to its highest level in almost 13 years. The Wall Street Journal Dollar Index, which values the dollar against a basket of 16 currencies, jumped 1.2 percent on Friday following the positive jobs report. This is its highest level since December 2002. Individually, emerging market currencies suffered the most. The Mexican peso fell 1.2 percent, the Russian ruble declined 0.9 percent, and the South African rand collapsed 2 percent. A stronger dollar tends to hurt commodity-based emerging economies by making exports more expensive. Additionally, emerging countries tend to issue a significant chunk of debt denominated in dollars, and a rising greenback makes it harder to repay.

http://www.wsj.com/articles/dollar-rallies-on-strong-u-s-jobs-data-1446818202?alg=y
http://www.wsj.com/articles/dollar-rallies-on-strong-u-s-jobs-data-1446818202?alg=y

The Bull Bounces Back in China 

Late last week China officially entered a bull market when the Shanghai Composite Index closed more than 20 percent above the lows posted on August 26. Investors have returned to the market after the rout experienced in late August. Margin loans are increasing and daily trading volume is rebounding as efforts by the Chinese government to stabilize the markets appeared to have worked, for now. The return of the market has prompted the government to lift its temporary ban on initial public offerings. The China Securities Regulatory Commission recently approved 10 companies for listing, and shares are expected to begin trading within a few weeks.

http://www.wsj.com/articles/japan-shares-rise-on-yen-weakness-1446688340
http://www.wsj.com/articles/japan-shares-rise-on-yen-weakness-1446688340

Fun Story of the Week

The falling leaves and shorter days are sure signs the autumnal equinox has passed. More commonly known as the first full day of fall, we are more than a month beyond this annual milestone. However, last week marked a much more rare event: the “sports equinox”. This rare occasion occurs when the stars align for sports fans and all four major U.S. leagues host at least one game on the same day. Sunday, November 1 included game 5 of the World Series, 12 NFL games, seven NBA contests, and five NHL matchups. There have only been fifteen such occurrences in history, and this year marks the first “sports equinox” since 2010.

This Is the Worst U.S. Earnings Season Since 2009

Bloomberg

This U.S. earnings season is on track to be the worst since 2009 as profits from oil & gas and commodity-related companies plummet.

So far, about three-quarters of the S&P 500 have reported results, with profits down 3.1 percent on a share-weighted basis, data compiled by Bloomberg shows. This would be the biggest quarterly drop in earnings since the third quarter 2009, and the second straight quarter of profit declines. Earnings growth turned negative for the first time in six years in the second quarter this year.

The damage is the biggest in commodity-related industries, with the energy sector showing a 54 percent drop in quarterly earnings per share so far in the quarter, with profits in the materials sector falling 15 percent.

The picture is brighter for the telecom services and consumer discretionary sectors, with EPS growth of 23 percent and 19 percent respectively so far this quarter.

When compared with analyst expectations, about 72 percent of companies have beaten profit forecasts. That’s only because the consensus has been sharply cut in the past few months, Jeanne Asseraf-Bitton, head of global cross-asset research at Lyxor Asset Management says in a telephone interview.

For the year as a whole, S&P 500 earnings are expected to fall 0.5 percent, data compiled by Bloomberg shows. For 2016, earnings growth is now seen at 7.9 percent, down from 10.9 percent in late July.

Next year’s consensus is “still very optimistic,” Asseraf-Bitton says, citing the lack of positive catalyst seen for U.S. stocks in 2016 as well as the negative impact from the sharp slowdown in the U.S. energy sector.

By contrast, the euro-zone is the only region worldwide where earnings are expected to “grow significantly” in 2015, according to a note from Societe Generale Head of European Equity Strategy Roland Kaloyan.

Euro Stoxx 50 earnings are expected to rise 10 percent in 2015 and 5.7 percent in 2016, data compiled by Bloomberg shows.

Written by Blaise Robinson of Bloomberg

(Source: Bloomberg)