Podcast: Play in new window | Play in new window (Duration: 13:16 — 6.1MB)
DOW – 127 = 17,440
SPX – 12 = 2067
NAS – 48 = 5039
10 YR YLD – .04 = 2.23%
OIL – .75 = 47.39
GOLD – 5.00 = 1095.50
SILV – .20 = 14.64
Chinese stocks fell sharply today. The Shanghai Composite fell 8.5% to record its largest one-day drop since June 2007, and the Shenzhen A-shares index lost 7% of its value. Weak manufacturing data revealed that profit at the country's industrial firms dropped 0.3% in June from a year earlier, but the markets appear to be responding to government attempts to stabilize the country's volatile stock markets; it seems like the Chinese government's heavy-handed intervention measures are spooking investors. The fear is that the government will withdraw stimulus measures, and once the support disappears, the market won't be able to stand on its own. In a way, the investors might be front-running the government; getting out before stimulus dries up.
Commodity prices resumed their downward spiral with the CRB commodities index hitting its lowest levels in six years and oil prices hitting a four-month low. Nine of the 10 major S&P 500 sectors were lower with the energy index leading the decliners. Stocks came off session lows in the close. The S&P 500 dipped below its 200-day moving average of 2,064 and closed a few points above it. The energy sector was the worst performer in the S&P 500 as oil extended losses to trade below $48 a barrel. The Dow Jones industrial average closed at its lowest level since February 2.
Commodity prices resumed their downward spiral with big oil, social media stocks and pharma companies scheduled to report this week. Second-quarter S&P 500 earnings have been mixed, with 74 percent of companies beating analysts' profit expectations but just 52 percent surpassing revenue expectations. Adding to the concerns regarding lukewarm earnings, the S&P 500 is relatively expensive, trading at 16.9 times forward 12 months' earnings, above the 10-year median of 14.7 times. Adding to negative sentiment on growth, the number of new lows on the New York Stock Exchange hit the highest level since last October.
The federal reserve FOMC will meet this week to determine monetary policy. With the central bank widely expected to hold policy steady at this week's meeting, Fed watchers are looking to the statement it issues on Wednesday for clues on when they might hike interest rates. Economists surveyed by Bloomberg put the odds of a September rate increase at about 50 percent.
It looks like Greece is on its way some sort of bailout deal, and they might re-open their stock market as soon as tomorrow; it has been closed since June 29. When the Athens exchange reopens, it might be hard to find many buyers. Meanwhile, the International Monetary Fund is telling the European Central Bank that it needs to keep printing money under their QE program to “ensure that banks continue to have access to ample liquidity and maintain orderly conditions in sovereign debt markets”. All this in light of stories that Greece's former finance minister Yanis Varoufakis had set up an alternative monetary system, sort of based on the drachma, just in case negotiations did not work out.
There was a moment where Greece really did look like it was about to face an imminent default, and when negotiations progressed, anyone who hedged in anticipation suddenly found those hedges aggressively hurting their portfolios. The reality is that any sort of hedging or risk management has been punished in the last two years, with the early July action perhaps the most severe in terms of speed. Stocks begin falling AFTER Greece, which seems like bad timing for risk off, and it might serve as a reminder that we're not out of the woods just yet.
Following five long years of negotiations, the Trans-Pacific Partnership will go down to the wire this week, as Pacific Rim officials meet in Hawaii for talks that could make or break the deal. The toughest issues have been left until last, including monopoly periods, preferential treatment for state-owned companies and opening protected markets to competition. TPP would cover 40% of the world's economy, including the U.S., Japan and ten other Pacific nations.
In a rare weekend session, the US Senate voted on Sunday to advance legislation that would resurrect the Export-Import Bank, whose charter expired on June 30 and was not renewed by Congress. The bipartisan vote allowed supporters to attach a measure reauthorizing the federal credit agency to an unrelated three-year highway and infrastructure bill, which was expected to pass in the Senate early this week. Of course, nothing is ever that simple. And it now looks like the House might not approve the 3 year highway package, opting for a 5-month stop-gap package. The Highway Trust Fund has suffered from 33 short-term fixes since 2009, making it harder for states to launch work on needed large-scale transportation projects. The majority of the money for the fund comes from the federal gas tax of 18.4 cents per gallon, which has remained untouched since the early 1990s.
Is it a debt or deficit problem? Puerto Rico's bondholders and three former IMF economists have presented a rival recovery plan for the US commonwealth, stating it could move to a surplus by fiscal 2017. The new study argues that the island could avoid a restructuring by eliminating its deficit, but acknowledges that it is cash strapped in the short term and would need some kind of financing to bridge the gap.
Orders for durable goods climbed 3.4% in June, mostly because of strong bookings for passenger airplanes. But overall business investment remained soft and shipments of goods barely rose. Orders minus transportation rose 0.8%. That's the highest gain since August 2014, but not an especially strong advance. Meanwhile, orders for core capital goods – a reflection of business investment – rose a mild 0.9% in June following two straight declines. Still, core orders are running 3.4% below 2014 levels halfway through the year.
Teva Pharmaceuticals (TEVA) has agreed to buy the generic-drug business of Allergan (AGN) for about $40.5 billion in cash and stock, ending its effort to acquire rival Mylan (MYL). Allergan will receive $33.75B in cash and shares in Teva, giving it a 10% stake in the enlarged company. The acquisition further extends a wave of mergers that has swept over the healthcare industry. Pharmaceutical deals so far this year have topped $180 billion, on pace to beat the $200 billion announced in 2014.
As oil prices slump for a second time this year, the world's biggest energy groups have shelved $200 billion of spending on new projects in an urgent round of cost-cutting aimed at protecting investors' dividends. Among companies postponing big production plans while they wait for costs to come down are BP, Royal Dutch Shell (RDS-A), Chevron (CVX), Statoil (STO) and Woodside Petroleum. Crude prices have now fallen 20% since hitting five-month highs in early May.
General Electric (GE) wants to be a “sizable” player in the market for energy storage systems, a sector the company expects to quadruple to $6 billion by 2020. Demand for industrial battery systems has attracted a wide range of companies, including Tesla Motors (TSLA), which said in April it plans to package batteries for utilities as well as homes and businesses.
Even as stocks struggle, we have some new IPOs ready to hit the market. Planet Fitness filed; they hope to raise about $284 million. Square, the credit card reader for mobile devices is rumored to be going public; no filings yet. Television maker Vizion has filed with the SEC and hopes to raise $172 million in its IPO.
The Apple Watch will be available at more than 100 Best Buy stores in the US starting in August, and more than 300 locations before the holiday season, marking the first time the watch will be sold outside of the Apple retail store.
More M&A is expected in the financial-related media industry. Pearson has moved closer to an exit from business publishing after it announced plans to dispose of its stake in The Economist, just days after the sale of The Financial Times.
McGraw Hill (MHP) says it has reached a deal to buy SNL Financial from private-equity firm New Mountain Capital for $2.2 billion. SNL offers data, analytics and research into a range of areas including real estate, media and banking.
A jury in London has begun deliberations on whether Tom Hayes, the first person to go on trial accused of rigging rates, dishonestly conspired with other bankers and traders to manipulate Libor. Hayes faces 8 counts of conspiracy to defraud, covering a 4 year period when he worked as a trader for UBS and then Citigroup. Hayes initially cooperated with law enforcement, but apparently he couldn't work a deal, so he went to trial, arguing that he was not personally dishonest because Libor rigging was commonplace in the industry and all his actions were transparent with the full knowledge of his bosses and colleagues.
The NHTSA is close to hitting Fiat Chrysler Automobiles (FCAU) with a record $105 million fine for recalls affecting more than 11 million vehicles. The penalties are tied to legal violations in an array of areas, including misleading regulators, inadequate repairs, and failing to alert car owners in a timely manner. Fiat Chrysler is expected to sign a consent order agreeing to the fines. Fiat Chrysler also said that about 193,000 Ram trucks previously recalled for suspension and steering problems had not been repaired and were therefore eligible for the buyback deal negotiated with the National Highway Traffic Safety Administration. That could put Fiat Chrysler on the hook for nearly $3 billion, if the average buyback price is $15,000 per vehicle. But the net cost could be much lower because the car company has the option to repair the trucks and resell them to recoup costs.
