IEA Warns Oil Prices Could Fall Crude-oil prices could fall even further as the world’s vast oversupply of petroleum only got worse in January with a surge in production from OPEC, a top global energy monitor said.
(…) The cartel flooded the market with an additional 280,000 barrels a day last month, said the International Energy Agency, which tracks oil and gas data for industrialized countries. (…)
Non-OPEC supplies slipped by 0.5 million barrels a day, the IEA said, as lower oil prices forced costly North American producers to shut down some of their production.
Iran boosted its output to 2.99 million barrels a day in January, the IEA said, the first month since 2012 that its crippled oil industry was free of western sanctions over its nuclear program. The 80,000 barrels a day increase represented the first installment in what Iranian officials say will amount to 500,000 barrels of new oil that the country will send to the market in the next few months.
Saudi Arabia also increased its production by 70,000 barrels a day to 10.21 million barrels a day. Meanwhile, Iraq set a new output record of 4.35 million barrels a day thanks to increased production of 50,000 barrels a day. (…)
The IEA said it saw no reason yet to change its demand-growth outlook of 1.2% for the year—a “very respectable rate”—but “economic headwinds suggest that any change will likely be downwards.” (…)
Commercial oil stockpiles rose to more than 3 billion barrels in December, the IEA said. Those inventories will build by 2 million barrels a day in the first three months of 2016, before slowing a bit to 1.5 million barrels a day in the second quarter.
North American oil and natural gas drillers will need to cut an additional 30 percent from their capital budgets to balance their spending with the cash coming in their doors even if crude rises to $40 a barrel, according to an analysis by IHS Inc.
A group of 44 North American exploration and production companies are planning to spend $78 billion on capital projects this year, down from $101 billion last year. Those companies need to cut another $24 billion this year to get their spending in line with a historical 130 percent ratio of spending to cash flow, IHS said Monday.
“These spending cuts will be particularly troublesome for the highly leveraged companies,” said Paul O’Donnell, principal analyst at IHS Energy. “These E&Ps are torn between slashing spending further to avoid additional weakening of their balance sheets, and the need to maintain sufficient production and cash flow to meet financial obligations.”
The analysis is based on IHS’s low-case price scenario of $40-a-barrel oil and $2.50-per-million-cubic-feet natural gas prices. (…)
FYI: Markit’s survey covers the Dubai non-oil private sector economy
Industrial production, adjusted for seasonal swings and calendar effects, fell 1.2% from the preceding month, the economics ministry said Tuesday. Economists polled by The Wall Street Journal had forecast a 0.5% gain. Production data for November were revised to show a 0.1% monthly fall compared with the 0.3% drop previously reported.
“Industrial production went through a dry spell at the end of 2015,” the economics ministry said, but noted that industrial activity should pick up at the start of this year, given the improved orders’ situation.
In a separate publication, the Destatis statistics office said that Germany’s exports in December fell 1.6% from the preceding month, in adjusted terms; imports declined by the same rate.
BANKING ON BANKS!!
Markets have come to doubt the central bank puts and stop the blind “buy on dips” reflex of 2010-2015. This growing realization of questionable leadership has been an important factor for the recent decline in earnings multiples.
Central banks’ ultra-loose monetary policy is putting the world economy at risk, said William White, a senior adviser to the Organization for Economic Cooperation and Development.
Negative interest rates and quantitative-easing programs from the U.S. to Japan may have unintended side effects such as higher debt levels for both sovereigns and consumers, said White, who leads the OECD’s Economic and Development Review Committee. Central bankers have been dragged away from their focus on inflation as governments struggle to generate sustainable growth, he added.
“The objective of that policy has changed totally — it’s trying to stimulate aggregate demand and the honest truth is that it’s not capable of doing that in a sustainable way, ” White said in Bloomberg Television interview on Tuesday. “If people thought we were in a period of deleveraging that would set the scene for a period of robust growth. We haven’t even started yet.” (…)
White said he is “skeptical” about the benefits of such moves because of the strain they put on the banking system.
“Negative rates on reserves are actually squeezing bank profits, and this is something we don’t want in these circumstances, we want them to build up their capital buffefs,” he said. “This is all experimental.”
White said that the global economy needs those governments with budget leeway to boost spending and said policy makers should pay more attention to wage growth, which remains “too low.” He said governments also need to make further structural reforms to boost growth and take a more systematic approach to debt reduction.
Now, people will look for politicians to do something, after having relied on central banks to compensate for politicians’ inertia…
(…) Yellen’s remarks [on Wednesday] will influence the markets’ outlook for the U.S. economy and the prospects for Fed policy, including the potential frequency and timing of future interest rate actions.
Unfortunately, her comments are unlikely to serve — for the moment, at least — as the catalyst for the most urgently required action to ensure sustainable economic prosperity and genuine financial stability: A decision by lawmakers on Capitol Hill to shift U.S. macroeconomic policy away from excessive reliance on the Fed and toward a more comprehensive approach that removes structural impediments to growth, including outdated infrastructure, tax distortions and inadequate investments in human capital. This change also would need to deal with aggregate demand deficiencies, eliminate crushing pockets of over-indebtedness and help restore U.S. leadership thanks to more effective global policy coordination.
- Bank of Canada’s Timothy Lane on Monday:
(…) Thus, it is possible that, in a situation of sustained weak aggregate demand, relying primarily on monetary policy to provide stimulus may lead to financial vulnerabilities that macroprudential policy cannot, or should not, offset. In such circumstances, fiscal policy may be called upon to provide stimulus, particularly since it is likely to be more effective at low interest rates.
(…) “I am concerned that the bank’s introduction of a negative interest rate could lead to a competition with central banks in other countries . . . to lower interest rates deeper into negative territory,” wrote one member of the policy board.
Another board member wrote: “Looking ahead, I am concerned that financial markets would expect further cuts in the interest rate into negative territory, leading to confusion and anxiety among financial institutions and depositors.” (…)
(…) U.S. markets staged a late-day bounce that narrowed the Dow industrials’ decline by more than half, but many of the largest U.S. banks closed lower by at least 4%, including Dow component Goldman Sachs Group Inc. Morgan Stanley dropped 6.9%, while Citigroup Inc. fell 5.1%. (…)
European lenders are also suffering. The Stoxx Europe 600 index fell 3.5% on Monday, with Germany’s Deutsche Bank AG sliding 9.5%. Adding to the jitters abroad, a small German lender, Maple Bank GmbH, defaulted on its debt Monday. (…)
While the outlook for banks’ profits has been soft for years, the advent last month of negative interest rates in Japan has jarred many investors, suggesting to them that a profit recovery for financial firms could be years away.
Adding to investor concerns are the sense that the carnage from the oil-market rout of the past two years could hit bank balance sheets and the fear that banks haven’t fully disclosed all the risks they could face in a broad economic downturn. (…)
On Monday, shares of Chesapeake Energy Corp. lost a third of their value amid concerns about the natural-gas firm’s finances, raising concerns about bank exposure to similar firms. (…)
The bonds issued by U.S. banks continue to perform well, a sign of the firms’ relative robustness and the tighter regulations that mark a sharp contrast with 2008. (…)
The KBW Nasdaq Bank Index of large U.S. lenders is down 19% this year. Among the largest U.S. financial firms, Morgan Stanley is down 29%, Bank of America Corp. and Citigroup are down 27%, Goldman is down 17% and J.P. Morgan Chase & Co. and Wells Fargo & Co. are each down 14%.
As a result, all but Wells trade at a discount to their stated per-share net worth, a measure known as book value. (…)
The broad picture from Bespoke Investment:
The FT has a better analysis:
Out of nowhere, bank stocks in the US and western Europe are in a bear market. Credit default swaps — instruments many had hoped never to hear mentioned again — are back on the agenda, as they show a greater risk of default for Deutsche Bank than at any time during the 2008-09 financial crisis.
Markets do not believe that the Federal Reserve will follow through with higher rates, and instead believe that the tightening that has already happened will intensify deflationary pressures. Hence inflation break-evens — the implicit forecast for inflation over the next decade, derived from the bond market — have fallen to their lowest since 2009.
Most critically, this means that long bond yields have fallen far more sharply than shorter-term interest rates (a “flattening yield curve” in the financial argot). Yields on 10-year treasuries now exceed yields on 2-year bonds by less than at any point during the crisis. The yield curve is at its flattest in almost nine years.
This is dreadful news for banks, which make their money by lending money at high interest rates over the longer term while borrowing it at lower rates in the short term. A steep yield curve was a recipe for boosting their profits and allowing them steadily to rebuild their capital. Now, their profit outlook has sharply worsened.
An extra factor comes from the Bank of Japan’s decision at the end of January to move to negative interest rates on some reserves. This was meant as a signal that it would do whatever it took to weaken the yen. But the yen is now stronger than it was before the BoJ’s announcement, and indeed stronger than it was at any time in 2015.
The message the market appears to have heard is that not only the BoJ but any central bank can keep stimulating the economy by cutting rates further into negative territory. And as negative rates would be surpassingly hard for banks to pass on to consumers, that damages their profit outlook still further. (…)
As the Fed’s chair Janet Yellen prepares for testimony to Congress on Wednesday, she has yet another balancing act to pull off — she must step back from plans to raise rates much further, without stoking fears that negative rates are on the agenda.
(…) Banks have issued about 91 billion euros ($102 billion) of the riskiest notes, calledadditional Tier 1 bonds,since April 2013. The problem is the securities are untested and if a troubled bank fails to redeem them at the first opportunity or halts coupon payments investors may jump ship, sparking a wider selloff in corporate credit markets. (…)
The bonds allow banks to skip interest payments without defaulting, and they turn into equity in times of stress. (…)
The notes were issued in Europe and offer some of the highest yields in credit markets, at an average 7 percent, compared with an average yield for European junk credits of less than 6 percent, according to Bank of America Merrill Lynch indexes.
But critics say banks are too opaque, the notes are too complex to be properly understood, they’re too varied and too much like equity to be considered bonds. With so many unknowns, the risks are high.
“Basically you have the upside of fixed income and the downside of equity,” said Gildas Surry, a portfolio manager at Axiom Alternative Investments. “AT1s are instruments of regulators, by regulators, and for regulators.”
HOW DO YOU LIKE YOUR BEAR, Medium or Well-Done?
About 31% of stocks in the S&P 500 are down 30% or more from their 52-week highs, Citigroup says, close to the figure seen in market selloffs of 2011 and 2012, but well below the 80% figure in the 2008 tumble ahead of the economic slump.
Until recently, few stocks had been bigger winners than Facebook Inc., Amazon.com Inc.,Netflix Inc. and Google Inc.—a group nicknamed the FANG stocks. These shares scored gains averaging nearly 73% last year, including dividends, compared with a 1.4% total return for the S&P 500. As the shares soared, many investors jumped in, eager to invest in some of the few companies seeing heady growth in an otherwise limp economy.
That has all changed this year. The four stocks are down 17.3% so far in 2016—falling 1.6% on Monday alone—compared with a loss of 9.3% for the S&P 500 this year.
The index is off 14% so far this year. The Nasdaq Internet Index has fallen 21%, and cloud stocks tracked by the BVP Cloud Index are off more than 31%. (…)
First, in an era when U.S. companies at large have become steadily more dependent on their foreign operations for sales, tech companies’ overseas exposures stand out.Hewlett-Packard, for example, generates only about a third of its sales in the U.S, whileIntel books less than a fifth of its sales domestically. As a result, many tech companies are taking unusually hard hits from economic weakness abroad. The dollar’s strength against other currencies—the greenback averaged 12% higher on the year on a trade-weighted basis versus other currencies in the fourth quarter—has made a bad situation even worse.
Second, worries about the global economic environment have prompted many companies to rein in capital spending and other investments. This can hurt the flow of new deals that is the lifeblood of software companies that sell cloud-based services. Tableau Software trimmed its full-year forecast last week, citing “softness” in business-tech spending. That sparked a huge selloff that cut Tableau’s market value by more than half and badly damaged many peers. Salesforce.com, Workday and Splunk—which will report results later this month—are off more than 20% in just the past two sessions.
Finally, there is the issue of price. Most cloud and Internet companies carry lofty valuations. Amazon.com is still more than 100 times forward earnings despite losing nearly 30% of its value since the first of the year. The Nasdaq Composite still carries a premium of nearly 24% to the S&P 500 on the same basis. (…)
EARNINGS WATCH
- 80% of the market is on track to report EPS growth of 5% (assuming the current beat rate). Meanwhile, the other 20% ‒ Energy, Materials, and Industrial ex-Airlines ‒ are experiencing earnings declines resulting from commodity-related pressure.
- 320 companies (76.5% of the S&P 500’s market cap) have reported. Earnings are beating by 4.5% while revenues have missed by 0.1%.
- Expectations are for a decline in revenue, earnings, and EPS of -3.4%, -4.8%, and -3.0%. EPS is on pace for -1.9%, assuming the current beat rate for the remainder of the season. This would be +4.2% excluding Energy. (RBC Capital)
Corporate pre-announcements vs same time last year and in Q4’15 (per TR):
Based on this a.m.’s pre-opening of 1835, the Rule of 20 P/E is at 17.7. The last 2 selling climax periods of June 2010 and June 2012 troughed at 15.4 and 15.1 on the Rule of 20 P/E respectively which would be around 1550 on today’s earnings and inflation parameters, a further 15% drop! That would mean an actual P/E of 13.2 on trailing EPS, below the 13.8 L.T. average and median of 13.8 and back to the most recent lows of 1989! Given current interest rates and inflation, that seems like unlikely bargain basement levels.
More likely is a trough in the 16.0-16.5 range on the Rule of 20 scale like in Dec. 2011 and Dec. 2012. That would take the S&P 500 to the 1670 area, nearly 10% below current levels.
Last year was a terrible one for “risk parity”, once one of the hottest strategies in the investment world, as losses mounted and some analysts blamed it for exacerbating market turbulence. So far 2016 has offered little respite.
At its core, the risk parity strategy is about balance. Rather than spread investments according to old-fashioned rules of thumb — such as 60 per cent in equities and 40 per cent in bonds — risk parity funds invest equally in asset classes according to their mathematical volatility, so each contributes equally. (…)
But the performance started to sag in 2014, and nosedived last year, ruining its reputation for resilience in almost any conditions. The Salient Risk Parity index slumped 12 per cent in 2015 and JPMorgan’s gauge of risk parity fund performance fell more than 8 per cent. (…)
While commodities are just one, often minor, component in a typical risk parity fund, “the moves have been so sharp that they’ve had a big, negative impact”.
Adding to the woes, bonds — a big part of risk parity portfolios — have failed to act as a suitable counterweight for the once seemingly bulletproof strategy. (…)
He offers another factor that has contributed to the limp performance: currencies. Most risk parity funds invest globally, but the dollar climbed sharply against most of its counterparts last year, weighing on the returns in dollar terms. (…)
There’s got to be one or two good news out there?
Risk parity strategy shows strain
Bloomberg says he is eyeing 2016 run