Thursday, January 15, 2015

Lower markets on earnings disappointments

Dow dropped 106, decliners over advancers 3-2 & NAZ tumbled 68.  The MLP index bounced back 2+ to the 424s & the REIT index was fractionally higher to 347 (9 below the record high made 8 years ago).  Junk bond funds fell & Treasuries rallied, taking the yield on the 10 year Treasury to 1.77%.  Oil pulled back to the 46s & gold capped the longest rally in more than 6 months as Switzerland’s decision to decouple its currency from the euro roiled currency markets, boosting demand for the metal as a haven.

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CLG15.NYM....Crude Oil Feb 15....46.69 Down ...1.79  (3.7%)

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IMF Managing Director Christine Lagarde said cheap oil prices & a resurgent US economy won’t be enough to help overcome sluggishness elsewhere in global growth.  “The obvious question is this: should lower oil prices and a stronger recovery in the United States make us more upbeat about the prospects for the global economy?” Lagarde said.  “The answer is most likely ‘No,’ since there are still powerful factors that weigh on the downside,”  Lagarde has been warning that the global economy needs bold policies to avoid a “new mediocre” period of weak growth as the world struggles with a disappointing recovery 6 years after the financial crisis.  While low oil prices will provide a boost to expansion, there’s an increased urgency to support demand through actions such as infrastructure spending, she added.  “The oil price and U.S. growth are not a cure for deep-seated weaknesses elsewhere,” Lagarde said.  “Too many countries are still weighed down by the legacies of the financial crisis, including high debt and high unemployment.”  She went on to say global growth is “still too low, too brittle and too lopsided.”  While a “promising” recovery is taking hold in the U.K., growth remains “very low” in the euro region & Japan, & the Chinese economy is slowing.  The IMF trimmed its 2015 global growth outlook in Oct to 3.8%, citing weak demand & residual debt from the financial crisis & it plans to update its forecast next week.  She cited several risks to the global recovery, including the threat that tightening by the Federal Reserve could disrupt emerging markets & financial stability, & the prospect that Europe & Japan could become mired in low growth & low inflation.  Lagarde also said she doesn’t expect Greece to leave the euro currency bloc following a Jan 25 election.  “Negotiations will begin to discuss the economic situation of Greece -- not the exit of Greece,” she said.

Lagarde Says Cheap Oil, Strong U.S. No Cure for Weak Growth

Citigroup's profit tumbled 86%, missing estimates after year-end trading slumped more than forecast.  Q4 EPS was 6¢, sharply below 77¢ a year earlier & under the 9¢ estimate.  Declining fixed-income business cut markets revenue 14%, worse than the 5% drop CEO Michael Corbat predicted a month ago.  Profit slid after markets broke from a period of muted volatility that spanned much of last year & as the dollar strengthened, shrinking earnings from overseas.  While dealers typically like when prices swing because it spurs trading, they prefer “sustained, reasonable levels” that follow a trend, Corbat said.  Total revenue excluding accounting adjustments fell less than 1% over the prior year to $17.8B, missing the $18.6B estimate.  The impact of converting foreign currency to US dollars reduced sales by $458M.  The company boosted Q4 results by taking $441M out of reserves for loan losses.  The bank now has $16B in reserve, or 2.5% of total loans outstanding.  Citi also set aside $655M in the period for repositioning costs such as severance & office closures.  In Oct, the bank adjusted Q3 earnings to add a $600M legal charge that it attributed to fast-moving settlement talks.  Citi Holdings, the bank’s unwanted assets tagged for sale, earned $158M on revenue of $1.31B.  Assets fell 5% from Q3 to $98B.  The stock lost 1.82.  If you would like to learn more about Citi, click on this link:

Citigroup Quarterly Profit Misses Estimates After Year-End Drop in Trading

Citigroup (C)

Lennar reported increased incentives & narrowing margins, adding to concern that the industry is facing reduced profitability.  The company, after reporting an almost 50% increase in fiscal Q4 profit, said that profit margins are being hurt by a reduced ability to raise prices.   “Across the board, we’re seeing intensified competition as builders go out and chase volume,” CEO Stuart Miller said.  Builders have been adding sweeteners to boost sales as rising prices & tight credit, especially for first-time homebuyers, cut into demand.  CFO Bruce Gross said that margins are poised to narrow on less pricing power than expected & an increase in entry-level communities.  The builder forecast gross margins averaging about 24% for the year, with even narrower ones in Q1.  Gross margin on home sales fell to 25.6% in Q4 from 26.8% a year earlier, a decline the company attributed to an increase in materials, labor & land costs.  Sales incentives offered to buyers totaled $23K a home, up from $21K.  Lennar expects to sell 23½K-24K homes this year, compared with 21K in fiscal 2014.  “While a number of macroeconomic factors have contributed to ongoing choppiness in the recovery, with more pressure on sales prices and gross margins, we remain optimistic about the continuation of the recovery,” Miller said.  The stock sank 3.22 (7%).  If you would like to learn more about LEN, click on this link:

Lennar Shares Tumble as Homebuilder Profitability Seen Weakening

Lennar (LEN)

Just this week, as the first earnings reports are released, Dow is down more than 400.  Not a good start in a year that is supposed see the Dow extend its gains from the lows 6 years ago.  Last year, the market had a terrible Jan, but ended with a good gain for the year.  In H2 this year, the Federal Reserve could be raising interest rates & that may not be pretty time for a stock market that is addicted to low interest rates.

Dow Jones Industrials

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