Thursday, December 31, 2015

Markets close the year on a down note.

Dow sank 135, decliners over advancers almost 2-1 & NAZ was off 36 (but hanging in above 5K).  The MLP index rose 3+ to the 282s & the REIT index fell 3+ to the 324s.  The MLP index was 459 at the end of 2014 & the REIT index was 327.  Junk bond funds drifted lower in what has been a rough year for them & Treasuries rose as stocks were sold.  Oil was fractionally higher in the 36s & gold was up a tad at 2061.  Both had brutal years.

AMJ (Alerian MLP Index tracking fund)

CLG16.NYM...Crude Oil Feb 16...36.52 Down ...0.08  (0.2%)

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The number of Americans filing applications for unemployment benefits rose more than projected during the Christmas week, reaching the highest level in almost 6 months, perhaps reflecting typical swings during holidays.  Jobless claims jumped 20K to 287K, according to from the Labor Dept.  The forecast called for 270K.  Applications haven't been this high since Jul 4.  While there was nothing unusual in the state-level data, the jump could have been caused by the volatility introduced when the numbers are adjusted for seasonal variations.  Limited layoffs, steady hiring & an unemployment rate at more than a 7-year low underscore job market improvement that allowed the Federal Reserve to lift interest rates this month.  The previous week’s figure was unrevised at 267K.  The 4-week moving average increased to 277K from 272K.  The number continuing to receive jobless benefits rose 3K to 2.2M & the unemployment rate among people eligible for benefits held at 1.6%.

Jobless Claims in U.S. Increase to Highest Level Since July

An index measuring the economy of the Midwest fell to its lowest level in Dec since Jul 2009, underscoring the extent to which manufacturing has become a drag, especially in the manufacturing-heavy Midwest.   The Chicago Business Barometer, commonly known as the Chicago PMI, shrank to 42.9 this month from 48.7 in the prior one.  Readings below 50 indicate contraction.  The barometer's measurement of new orders fell to the lowest level since May 2009, indicating that business in the pipeline for some manufacturers is also slowing.  The barometer had a "particularly volatile year," according to Philip Uglow, chief economist of MNI Indicators, which publishes the report.  The weakness in the report "lends weight to the Fed's gradual approach to tightening, with the flexibility to change direction if needed," Uglow said.  A special question in this month's report showed that 55.1% of respondents expect demand to strengthen in 2016, compared to 14.3% who think it will lower.

Midwest Manufacturing Slips Deeper into Contraction

The People’s Bank of China refrained from offering reverse-repurchase agreements in open-market operations for the first time in 6 months, halting cash injections that helped drive borrowing costs lower amid the slowest economic growth in 2 decades.  The decision to withhold the short-term lending tool comes after their use was scaled back in the Tues auction window, when 10B yuan ($1.5B) of 7-day agreements were made available.  That compares with a total of 70B yuan at the Dec 22 & 24 auctions & resulted in a net 60B yuan being drained from the banking system this week.  Lenders’ demand for funds typically rises in the run-up to year-end liquidity checks by regulators.  The benchmark 7-day repurchase rate fell 11 basis points to 2.32% in Shanghai, extending this year’s decline to a record 264 basis points.  The PBOC drained a net 20B yuan via open-market operations this month, & let 80B yuan of treasury deposits mature, which also pulled funds from the financial system.  It wasn’t all take, however, with the central bank having added 100B yuan using 6-month loans under its Medium-term Lending Facility on Dec 18. 

PBOC Doesn't Offer Reverse Repos for First Time in Six Months

Dow had its first down year since the terrible year of 2008.  The index dropped more than 300 in a year when it tried several time to rally, but those attempts could not be sustained.  Maybe 2016 will be better.  However numerous headwinds are not encouraging.

Best Wishes for the New Year!!

Dow Jones Industrials

stock chart


Wednesday, December 30, 2015

Lower markets on further weakness in oil prices

Dow was off 117 (closing at the lows), decliners over advancers 2-1 & NAZ lost 42.  The MLP index slumped 2+ to 279 & the REIT index lost 1+ to 327.  Junk bond funds were weak & Treasuries rose.  Oil is back to sloshing around the the 36s & gold slid lower, near its yearly lows.

AMJ (Alerian MLP Index tracking fund)

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CLG16.NYM....Crude Oil Feb 16....36.53 Down ...1.34  (3.5%)

Live 24 hours gold chart [Kitco Inc.]

Puerto Rico will default on about $37M in bond payments due Jan 1 & divert revenue to make others, escalating a conflict with investors as Governor Alejandro Garcia Padilla seeks to restructure a $70B debt burden.  The amount is a fraction of the almost $1B in interest due at the start of the year.  The island will miss payments on $35.9M of non-commonwealth guaranteed Puerto Rico Infrastructure Financing Authority debt & $1.4M of Public Finance Corp bonds.  The money is being used to help pay investors who are owned $328M of interest on general-obligation debt.  A skipped general-obligation payment would have marked a turning point in Puerto Rico's debt crisis because the securities are considered to have the strongest legal protections among the island's different issuers.  The constitution states that general-obligation bonds must be repaid before other expenses.  ”My government has the responsibility to protect, as much as possible, Puerto Ricans from grave consequences," Garcia Padilla said.  ”In recent months we have put up a tough fight in Congress, looking for the tools we need. We all know that the creditors have spent a fortune lobbying against Puerto Ricans in Congress.”  Garcia Padilla this month started redirecting revenue used to repay certain agency debt to the central gov coffers.  About half of funds to make the general-obligation bond payment, $164M, is coming from the clawback.  By keeping the commonwealth pledge to those investors, he hopes to continue negotiating with bondholders as Congress works on a plan for the island, he said.

Agencies such as the Highways & Transportation Authority & the Convention Center District Authority had said they’ll use reserves to help pay their investors on Jan 1.  Holders of bonds issued by the Government Development Bank, the Public Buildings Authority, the Employees Retirement System, the Industrial Development Company & the University of Puerto Rico will also receive payments due in Jan.  The Infrastructure Financing Authority, while defaulting on some debt, will make payments that are guaranteed by the commonwealth.  Holders of sales-tax revenue debt will also receive their payments, & for the future. Puerto Rico doesn't have plans to clawback sales-tax collections because the gov doesn't have control over that revenue, Melba Acosta, pres of the GDB, said.

Puerto Rico to Default on $37 Million of Payments Due Jan. 1

ConocoPhillips will supply the first cargo of US shale oil to be exported since a 40-year ban on such shipments was lifted less than 2 weeks ago.  The cargo will be comprised of crude & a type of ultra-light oil known as condensate from wells in the Eagle Ford Shale formation in south Texas.  COP expects the shipment to finish loading at Corpus Christi, Texas, terminal Thurs.

The cargo will be sold to merchant trader Vitol Group, which last week announced plans for a separate 600K-barrel shipment of domestic crude that will load from a Houston terminal during the first week of Jan.  Overseas demand for US crude is expected to remain muted because of a worldwide glut that has pushed oil prices to the lowest in more than a decade.  A 64% surge in American oil production over the past 5 years driven by technological breakthroughs in shale drilling has compounded an oversupply of oil.  Until the export ban was lifted on Dec 18, refiners this year had been willing to pay an average premium of about $5 a barrel for Brent crude, the intl benchmark, over the price of West Texas Intermediate oil.  Since the prohibition ended, that premium has disappeared; West Texas Intermediate, the benchmark by which prices for other types of North American are set, commanded 11¢ currently.  COP is the largest US oil explorer that doesn't also own refineries & chemical plants.  The stock dropped 1.17.  If you would like to learn more about COP, click on this link:

ConocoPhillips Beats Rivals in Race to Export U.S. Shale Crude

ConocoPhillips (COP)

Global economic growth will be "disappointing" next year, the head of the IMF said.  IMF Managing Director Christine Lagarde said the prospect of rising interest rates in the US & an economic slowdown in China were contributing to uncertainty & a higher risk of economic vulnerability worldwide.  In addition, growth in global trade has slowed considerably & a decline in raw material prices is posing problems for economies based on these, while the financial sector in many countries still has weaknesses and financial risks are rising in emerging markets.  "All of that means global growth will be disappointing and uneven in 2016," Lagarde said, adding that low productivity, aging populations & the effects of the global financial crisis were putting the brakes on growth.  She said the start of normalization of US monetary policy & China's shift toward consumption-led growth were "necessary & healthy" changes but needed to be carried out as efficiently & smoothly as possible.  The Federal Reserve hiked interest rates earlier this month & made clear that was a tentative beginning to a "gradual" tightening cycle.  There are "potential spillover effects", with the prospect of increasing interest rates there already having contributed to higher financing costs for some borrowers, including in emerging & developing markets, Lagarde said.  She added that while countries other than highly developed economies were generally better prepared for higher interest rates than they had been in the past, she was concerned about their ability to absorb shocks.  "Most highly developed economies except the USA and possibly Britain will continue to need loose monetary policy but all countries in this category should comprehensively factor spillover effects into their decision-making," Lagarde said.  She warned that rising US interest rates & a stronger dollar could lead to firms defaulting on their payments & that this could then "infect" banks & states.

IMF's Lagarde: Global Growth Will Be Disappointing

Following 2 up days this week, the stock market is giving back some of those gains as it closes out a dismal year.  Volume is light, so that a limited amount of buying or selling can cause larger than usual swings.  And there are plenty of headwinds.  Next year is expected to be another year for only 2%+ GDP growth while China is struggling to activate its growth engine.  GDP for Europe is barely rising.  Oil will continue to feel the effects of oversupply around the globe.  As if that weren't enough, the year will start out with a bankruptcy event.  There are economic reasons for today's modest decline & Dow is down more than 200 in 2015.

Dow Jones Industrials