Tsipras concedes most bailout demands Fresh proposal offered as ECB prepares to raise heat on Greek banks
Oil Declines on Bearish U.S. Inventory Data Oil prices were in the red on bearish U.S. oil inventory data and continuing signs that the world has an oversupply of petroleum that won’t end soon.
August-dated Brent crude, the global oil price benchmark, fell 1.1% to $62.86 a barrel on London’s ICE Futures exchange. On the New York Mercantile Exchange, West Texas Intermediate for delivery in August was trading down 1.5% at $58.59 a barrel.
Late Tuesday, the American Petroleum Institute, an industry group, reported a surprise 1.9-million-barrel build in weekly U.S. oil stockpiles.
The U.S. Energy Information Administration will release its official inventory data later on Wednesday and analysts polled by The Wall Street Journal expect a 1.2 million-barrel drop. (…)
EIA’s report will also be scrutinized for its weekly U.S. oil production estimate. On Tuesday the agency said that U.S. oil output in April rose to 9.7 million barrels a day, the highest level since 1971. (…)
According to JBC Energy, OPEC production has increased by 170,000 barrels a day in June to 31.2 million barrels a day, the highest level since September 2012. (…)
Meanwhile, Iran and the West extended talks over Tehran’s nuclear program for a week past Tuesday’s deadline to reach a deal that can eventually unlock millions of barrels of Iranian crude.
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Crude Calculus: More Pain in Store for Investors Ed Morse, global head of commodities research at Citigroup, doesn’t think oil prices have reached a bottom this year
(…) WSJ: The number of rigs drilling for oil in the U.S. has plunged, but production has remained fairly steady and some shale-oil producers say they can increase output if prices hold above $60 a barrel. What is your outlook for U.S. production?
Mr. Morse: The industry is remarkably robust and responsive and effective. Around 70% or more of production in oil comes from 30% of the wells drilled. And efficiency gains are continuing to grow. You could have the rig count stay where it is and have an acceleration of well completions and still have…production growth for the year.
The higher the price in the second and third quarters, the lower the price will be in the future, because it’s going to potentially get more producers to lock in the price. Eventually we’ll see the signs of the survivors in this game, who are profitable at $60 or $65 a barrel, and those who struggle.
WSJ: With oil prices up from their lows, are consumers still seeing a large benefit?
Mr. Morse: Consumers still have a savings that is not insignificant given where gasoline prices were a year ago. As of January, you might have said that the average household had a $700 benefit [of yearly savings]. Today, it’s more like a $500 annualized benefit. (…)
But I would say the obituary of OPEC may be written. The number of countries willing and able to reduce production has declined, partly because their production has declined.
New unconventional oil, shale oil, oil-sands production and deep-water production gets to be robust at what appears to be a lower and lower number, because the cost of finding and developing stuff has gone down. So even if [OPEC would] like $100 oil, they can’t have it. They’re going to have to find ways to live in a lower-oil-price environment and not be able to enjoy oligopolistic pricing power.
SENTIMENT WATCH
Just as we sit on “20” on the Rule of 20 and on the S&P 500 200 day moving average:
No Easy Way Forward for Markets The stock market has shifted to neutral while bonds have gone into reverse, and investors expect the rest of 2015 to be a bumpy ride.
(…) Major stock benchmarks ended the second quarter on a sour note, pulling back from record levels reached in May. The S&P 500 fell 0.2% during the quarter, snapping nine consecutive quarters of gains. The Dow fell 0.9%, its biggest one-quarter loss since the fourth quarter of 2012. (…)
The Nasdaq Composite Index, however, continued to pull ahead of the pack. During the quarter, the technology-heavy index hit its first records since the height of the tech bubble, underscoring investors’ persistent hunger for faster-growing—if riskier—pockets of the market. The index gained 1.8%, its 10th quarterly rise in a row. (…)
“As we go into the second half of the year, we feel better because we feel that the good economic news will start to show up,” said Susan Bao, portfolio manager of the $13 billion J.P. Morgan U.S. Equity Fund. “We still think the market has more upside from here.” (…)
Another source of anxiety for investors is the fact that rate increases are coming at a time when growth in corporate profits has slowed to a crawl. Big companies have been tripped up by the resurgent dollar, which makes it harder for them to compete overseas. At the same time, the tumble in oil prices has sent energy-company profits into a tailspin, though it has been a boon for airlines and other businesses that benefit from cheap fuel.
The prospect of higher borrowing costs adds another obstacle for companies to contend with.
“The move in the market is going to be a function of earnings growth, and we’ve had really tepid earnings growth,” said Peter Stournaras, portfolio manager of the BlackRock Large Cap Series Funds. “When we look through the market, outside of a few pockets, there aren’t inexpensive areas.” (…)
Companies in the S&P 500 reported profit growth of just 0.8% in the first quarter, according to FactSet. In the second quarter, they are set to shrink 4.5%. Wall Street analysts often undershoot their profit forecasts, so actual profits are likely to come in higher. (…)
The S&P 500 trades at 17.9 times the past 12 months of earnings, up from 17.1 at the start of the year and close to a five-year high, according to FactSet. The average P/E for the last 10 years is 15.7. (…)
Still, many investors believe that the bull market in stocks still has room to continue, even if the gains won’t be as torrid as in years past.
Even as rates rise, they are likely to remain low by historical standards for a while, they said. At the same time, central banks around the world are cutting rates and launching stimulus measures of their own. The European Central Bank in March launched a €60-billion-a-month ($67 billion) bond-buying effort, similar to a program that the Bank of Japan has had in place since 2013. The People’s Bank of China announced fresh rate cuts last weekend. (…)
There you go! Everything thrown at you. Now, make up your mind…after reading this next piece:
Leon Black’s Sell-Everything Call Has Been Heard by His Rivals
When financier Leon Black said his Apollo Global Management LLC was exiting “everything that’s not nailed down” amid rising valuations, he made headlines. Two years later, other private-equity firms are following suit — dumping stakes into the markets at a record clip.
Firms including Blackstone Group LP and TPG Capital Management have been capitalizing on record stock markets around the world to sell shares, mostly in their companies that have already gone public. Globally, buyout firms conducted 97 stock offerings in the second quarter, more than in any other three-month period, according to data compiled by Bloomberg.
Since Black made his comments in April 2013, the MSCI World Index has gained 18 percent, stretching valuations even higher. Headwinds that threaten to rattle global equities are everywhere — from the Greek and Puerto Rican debt crises to an eventual increase in U.S. interest rates.
“It’s clear that we are currently in an environment of frothy valuations,” said Lise Buyer, founder of IPO advisory firm Class V Group. “The insiders — those with the most knowledge — are finding this a very good time to take some money off the table.”
This year, private-equity firms sold $73 billion of their buyouts to the public, a record amount over a six month period, Bloomberg data show. (…)
While the firms have been trimming their stakes in public companies, they’re doing fewer initial offerings in the U.S. PE-backed IPOs have had the slowest start to the year since 2010, selling $8.2 billion in stock.
The reason: Many of the larger companies that were swooped up during the buyout boom that ended in 2007 have already gone public. Today’s selling is largely private-equity owners getting out of those assets. (…)
In an echo of Leon Black, Frank Maturo, vice chairman of equity capital markets at UBS AG, said, “Private equity is selling everything that’s not bolted down. With the robust valuations in today’s market, they are accelerating monetizations of companies they own.”
And yet:
NEW HIGHS PREDICTED Street Sees S&P 500 Scaling the Wall It Hit in Year’s First Half
One solace for bulls after the worst first half for U.S. stocks in five years: every strategist on Wall Street sees the Standard & Poor’s 500 Index rising.
Professional stock forecasters remain bullish, saying the economy is too strong for the second-longest U.S. rally since 1950 to end now. They’re sticking to forecasts for the S&P 500 to rise 8.2 percent by year-end, data compiled by Bloomberg show. (…)
The latest Goldman’s alchemy review mixes realism with cheerleading (via Zerohedge):
We reduce our near-term earnings forecasts to incorporate diminished US GDP growth, a stronger dollar, and lower crude prices. Since October 2014 when we published our previous EPS forecast, expected 2015 real GDP growth has declined by 70 basis points (to 2.4% from 3.1%), the trade-weighted US dollar has strengthened by 9%, and crude prices have dropped by nearly 30%. In response to these macro headwinds and two additional quarters of realized earnings data, we lower our 2015 EPS target by $8 to $114 (from $122) and reduce our 2016 EPS by $5 to $126 (from $131). Energy EPS alone will decline by $8 in 2015, from $13 to $5.
We maintain our 2015 S&P 500 target of 2100. Reduced EPS growth will be offset by a stable P/E. We previously forecast higher earnings with a P/E contraction. Our new EPS forecast is $114 (down from $122) reflecting slower GDP growth than we had originally assumed, a stronger US dollar, and a collapse in Energy company profits. S&P 500 will post just 1% EPS growth in 2015…. Initial Fed hike in December will allow P/E to end 2015 at an elevated 16.7x
We maintain our S&P 500 price target of 2100 for 2015, as the negative impact of our lower EPS is offset by a later-than-previously-expected Fed hike. Our US economics team now believes the first hike will take place in December rather than September. S&P 500 P/E, which is historically rich, will stay elevated through the remainder of 2015, but will compress when the Fed starts its tightening cycle in December. Looking forward, S&P 500 will rise alongside earnings, increasing 5% in 2016 and 2017 to 2200 and 2300, respectively.
We lowered 2015 EPS levels in all 10 sectors, with Energy and internationally-exposed Information Technology declining most. We trimmed nearly $2 from our 2015 Energy EPS estimate after further cutting both expected sales growth and margins (see Exhibit 1). Information Technology EPS was cut by $2, due to the sector’s leverage to diminished economic growth and foreign exchange risk (60% of sector revenues generated abroad versus 33% for S&P 500).
Deadly Start to U.S. Summer as Lightning Kills Most Since 2009