Thursday, December 10, 2015

Markets rise after 3 down days

Dow advanced 82 (120 below the highs), advancers just below decliners & NAZ added 22.  The MLP index gave up some of yesterday's gains, dropping 7+ to 270, & the REIT index fell 2+ to the 314s.  Junk bond funds slid lower & Treasuries declined.  Oil remained in the 36s on the OPEC forecast (see below) & gold saw more selling.

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CLF16.NYM....Crude Oil Jan 16....36.82 Down ...0.34  (0.9%)

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Americans’ wealth declined in Q3 by the most in 4 years, reflecting a slump in stock prices that have since recovered.  Net worth for households & non-profit groups decreased $1.23T, 1.4%, from the previous qtr to $85.2T, according to the Federal Reserve in its financial accounts report (previously known as the flow of funds report).  Equity values plunged as concerns mounted about the global economy, overshadowing the positive effect from higher home prices on Americans’ net worth.  As the value of their assets declined, households slowed the pace of borrowing.

Household debt rose at a 1.5% annualized rate, the slowest pace in almost 2 years.  Growth in consumer credit, including auto & student loans, climbed at a 7.2% pace from 8.5% in Q2, while mortgage borrowing cooled to a 1.6% rate from 2.4%.  The value of financial assets owned by households, including stocks & pension-fund holdings, decreased $1.7T.  The S&P 500 declined 6.9% in Q3, but has risen 6.6% (all in Oct) since Sep 30 thru yesterday.  Household real-estate assets climbed $443B.  Owner equity as a share of total household real-estate holdings increased to 56.7% from 56.1% in the previous 3 months.  Total non-financial debt advanced at a 2%, the slowest since Q2-2011.  Business borrowing showed a 4.7% gain.  State & local gov debt increased at a 1.7% pace & obligations of federal agencies rose 0.2%.

U.S. Household Wealth Fell $1.23 Trillion in Third Quarter

Yum Brands said it would return up to $6.2B to shareholders before separating its China business & listing it on the NYSE.  The KFC & Pizza Hut owner, which expects to spin off Yum China by the end of 2016, said the capital return could take various forms, including a share repurchase, tender offer or special div.  YUM, which has been hit by food scandals & marketing missteps in China, also said same-restaurant sales in the country fell about 3% in Nov.  The 6.9K-restaurant China division accounted for 54% of YUM overall operating profit in Q3, but sales at established restaurants in the country have fallen in 4 of the last 5 qtrs.  Still, the company said it was targeting EPS growth of about 15% annually for Yum China from 2017.  Yum China will be domiciled in the US, Yum Brands.  Yum China had $1B in earnings before interest, taxes, depreciation & amortization (EBITDA) this year, & the "New Yum," excluding China, had almost $2B in EBITDA this year.  The Yum business, excluding China, will have a sustained leverage ratio of about 5 times EBITDA, the company said, citing the capital return plan.  At present, the company's debt is on par with EBITDA.  YUM said it would receive a license fee of 3% of system sales in China, at the lower end of the 3-3.5% range analysts had expected.  The lower China royalty, compared with the global royalty rate of 4-6%, gives operators in the country some breathing room, according to analysts.  The company expects 96% of its restaurants to be franchised by the end of 2017, up from 79% at the end of 2014.  YUM stock fell 61¢.  If you would like to learn more about YUM, click on this link:

Yum Brands Will Return $6.2 Billion to Shareholders

Yum! Brands (YUM)

OPEC pumped more oil in Nov than in any month since late 2008 & forecast little increase in demand for its crude next year, pointing to a larger supply surplus even as low prices hurt rival producers.  In a report, it also forecast supply from non-member countries will fall more sharply next year, which would suggest its strategy, reaffirmed last week of defending market share, is working.  The report follows an acrimonious OPEC meeting on Fri, where it rolled over a policy of pumping crude to safeguard market share, despite oil prices that have more than halved to $40 in 18 months due to excess supply.  A year ago, Saudi Arabia pushed though an OPEC decision to defend market share instead of cutting output to support prices, hoping to slow growth in rival supplies such as US shale oil.  "U.S. tight oil production, the main driver of non-OPEC supply growth, has been declining since April," OPEC said.  "This downward trend should accelerate in coming months given various factors, mainly low oil prices and lower drilling activities."  Supply outside OPEC is expected to decline 380K barrels per day (bpd) in 2016, as output falls in regions such as the US & former Soviet Union (2 of the 3 top producers in the world).  Last month, OPEC predicted a drop of 130K bpd.  But OPEC also increased its 2015 non-OPEC supply growth forecast by 280K bpd, citing upward revisions to output from the US, Brazil, Russia & the UK, among other countries.  As a result of the report's changes to 2016 & 2015 non-OPEC supply forecasts, demand for OPEC crude next year is expected to average 30.84M bpd, just 20K bpd more than OPEC expected previously.  OPEC production, which has surged since the policy shift of Nov 2014 led by Saudi Arabia (the 3rd leading producer) & Iraq, is far higher than forecast demand.  Supply rose 230K bpd in Nov to 31.70M bpd.  With extra barrels coming from OPEC & no sizeable increase in demand for OPEC crude, the report points to a 860K-bpd supply surplus next year if the group keeps pumping at the Nov rate, up from 560K bpd indicated in last month's report.  OPEC left its 2016 oil demand growth forecast unchanged, predicting global demand would rise by 1.25M bpd, marking a slowdown from 1.53M bpd in 2015.

OPEC Forecasts Larger 2016 Surplus

Today's advance was not impressive.  After dropped 350 in 3 days, this rally looks weak.  Selling in the PM does not help the bullish case.  Congress is struggling to come up with a funding package for the rest of the fiscal year (ending Sep 30).  That should happen & is not holding up the market.  What Janet has to say next week will weigh more heavily on the stock market.  Nervousness about the FOMC meeting next week should limit any advance by stocks & high yield securities will see more selling.

Dow Jones Industrials


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