Stocks Rally Ahead of the Fed
Posted by Eddy Elfenbein on December 17th, 2014 at 10:15 am

The stock market did a big about-face yesterday. Stocks opened lower, then rallied, then gave it all back. On Tuesday, the S&P 500 closed at its lowest level since October 27. The yield on the 10-year bond got as low as 2.05%. There seems to be a good chance it could fall below 2%. In the summer of 2012, the 10-year got to 1.43% which I believe is an all-time low. I didn’t think we could ever get that low again. Now I’m not so sure. Yesterday, oil dropped down $53.60 per barrel before closing at $55.51.

Stocks are up again this morning but it seems much more cautious out there. Energy is leading the way while most of the broader market is up on small gains.

The Fed meets later today. I don’t expect much but they will update their projections. Last time, only two of the 17 members said they expect interest rates to rise in 2016, meaning the central bank will hold its powder dry all year. I’ll be curious if more members feel that way now.

Deflation in November
Posted by Eddy Elfenbein on December 17th, 2014 at 9:08 am

This morning, the government reported that consumer prices fell 0.3% last month. The reason, of course, is the big plunge in energy prices.

The core rate, which excludes food and energy prices, comes in for a lot of ribbing but this is one of those times when it’s important. Food and energy prices can be very volatile and they may not reflect what’s really going on with most consumer prices. The core rate of inflation rose by just 0.1% in November.

Morning News: December 17, 2014
Posted by Eddy Elfenbein on December 17th, 2014 at 6:54 am

Irish Lawmakers Open Probe Into Banking Crisis

Slowdown in China Bruises Economy in Latin America

Why Russia Is Destroying Its Own Economy

Gold Trades Above One-Week Low as Investors Weigh Fed to Russia

Bond Investors Are Skittish Over Emerging Markets

Diesel Deregulation, Gas Price to Have Positive Impact on Oil Companies

Fed Likely to Signal Rate Hike on Track Despite Global Woes

Gross Backs Krugman View of Fed on Hold in World of Lowflation

Uber CEO Says Company Wants to Make Rides Safer

Uber Says Only Some Employees Have Access to `God View’

Coolpad Announces Strategic Partnership with Qihoo 360

Oil Firms Supply Fuel to SpiceJet on Cash Payment

Joshua Brown: RIAs Will Take a Third of the Wealth Management Biz by 2018

Joshua Brown: Another Lying Paper Trader

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Express Scripts Reaffirms 2014 Guidance
Posted by Eddy Elfenbein on December 16th, 2014 at 9:30 am

Express Scripts ($ESRX) just released a statement saying their CFO Cathy R. Smith will be leaving soon. The company also reaffirmed their guidance for 2014. ESRX expects full-year EPS of $4.86 to $4.90. This is the same guidance they offered in October. At the time, ESRX narrowed it from the previous guidance of $4.84 to $4.92 per share. That translates to Q4 earnings of $1.36 to $1.40 per share.

The Ruble Crashes
Posted by Eddy Elfenbein on December 16th, 2014 at 8:51 am

Despite the Russian Fed’s dramatic rate increase, the ruble’s fall continues. The Russian currency dropped another 20% today. That’s on top of the huge fall this year. This is getting out of hand. At one point, the ruble was going for 80 on the dollar.

The currency market seems especially concerned about a mysterious bond offering from Rosneft, a major Russian oil company. The company is run by one of Mr. Putin’s old buddies from the KGB.

It’s still not exactly clear what happened, but this is my best estimate. In effect, Rosneft is using the Russian Fed as their personal piggy bank.

What happened is that Rosneft went on a buying binge, snapping up smaller rivals. Now they’re in debt which they can’t rollover due to sanctions. So Rosneft floated a 625 billion ruble bond which was bought by…someone, we’re not sure who. It was most likely some of the major state banks. The banks then deposited the bonds at the CBR in exchange for loans. That’s one large indirect way of the CBR printing rubles and giving them to Rosneft. This news did not go down well.

This is what’s referred to as monetizing debt (printing currency to pay for debts). The hitch is that you’re not really paying anything off; you’re just displacing it. You’re going to pay one way or the other, and this time it was in the form of a much lower currency.

Morning News: December 16, 2014
Posted by Eddy Elfenbein on December 16th, 2014 at 7:36 am

Weak Private Sector Growth Data Pushes Euro Zone Yields to New Lows

3 Banks Fall Short in Bank of England Stress Test

Ruble Continues Its Decline in Russia, Despite Interest Rate Increase

Dubai Stocks Lead Gulf Markets Lower as Oil’s Plunge Deepens

Shale Veteran Takes On Argentina’s $6 Billion Shortfall

When Will Short-Term Interest Rates Rise?

Will Low Oil Prices Affect The U.S. Fed’s Decisions?

U.S. Industrial Output Surpasses Prerecession Peak

Halal Beef Supplier Vows to Contest Fraud Charges

Repsol Agrees to Buy Canada’s Talisman for $8.3 Billion

Riverbed Technology Accepts $3.6 Billion Takeover Bid

Fallout for the S.E.C. and the Justice Dept. From the Insider Trading Ruling

Korean Air Facing Sanctions For Urging Employees to Lie About Nut-Rage Case

Cullen Roche: Can A Central Bank Always Create Inflation?

Jeff Carter: What’s A Position Limit?

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Russia Raises Rates 6.5%
Posted by Eddy Elfenbein on December 15th, 2014 at 10:39 pm

In last Friday’s CWS Market Review, I wrote:

The ruble is looking more like rubble. Russia estimates that inflation will hit 10% next year. The Russian Fed raised interest rates again this week, but the forex market just laughed at them. I don’t blame them. Despite a lot of talk, the Bank of Russia simply isn’t serious about defending the ruble. The BOR raised rates by 1% to 10.5%. Please. If they’re serious, they would have raised rates by 2% or 3%. That’s what needs to be done.

Someone must be listening to me. The Bank of Russia just announced that it’s raising interest rates to 17%. That’s a stunning increase of 6.5%. The increase was announced at 1 a.m. As a rule of thumb, anything done by a central bank in the middle of the night is probably bad news. It’s also probably very important.

Russia is in a classic situation that many countries have faced before. The international currency and bond markets have lost faith in the ruble. Every day it’s been attacked. Until now, Russia has attempted, rather weakly, to defend the indefensible ruble. The defense hasn’t been nearly adequate but they’ve finally taken a tough stand.

These currency wars are characterized by an odd feedback relationship. If the markets have faith in the government, then the crisis ends. If they don’t, the situation worsens and it thereby becomes more difficult for the government to do what needs to be done. It’s not so easy to turn a vicious cycle into a virtuous one. Nearly every government leader since the dawn of time has blamed a currency attack on “speculators,” though I’ll note that these evil speculators have an odd habit on ganging up on currencies that can’t withstand attacks. Funny, that.

Russia is in much better shape than they were in 1998. During the crisis 16 years ago, Russia raised rates to 150%. Make no mistake: The big rate hike is a war on the shorts. Check out the amazing decline in the Russian ETF ($RSX). It’s lost 35% in the last three weeks.

The Pain in Junk Bonds
Posted by Eddy Elfenbein on December 15th, 2014 at 11:02 am

The junk bond market has been getting clobbered recently. The chart below shows the recent plunge in the Junk Bond ETF ($HYG) The sell-off is partly a spillover from lower oil prices since many energy companies have floated low-rated bonds. Last week was the worst week for junk bonds in three years.

The weakness in junk isn’t necessarily a harbinger of bad times, but it’s an important development. It’s basically a broad reassessment of risk. Investors are now demanding a greater premium to own riskier bonds.

For an economy to show a broad recovery, I would expect to see marginal borrowers do well, but that’s not a given. The WSJ notes that, “Junk bonds now trade at a yield of 5.28 percentage points above yields of comparable U.S. Treasurys, up from 3.23 points at their June low for the year.”

Strongest Industrial Production since May 2010
Posted by Eddy Elfenbein on December 15th, 2014 at 10:01 am

Last week was the worst for the S&P 500 in two-and-a-half years. For the Dow, it was its worst week in more than three years. The market may also be getting more volatile. The high for the VIX on Friday was more than twice its low from the previous Friday. Fortunately, stocks are holding on to modest gains this morning.

One hopeful sign is that Prime Minister Shinzo Abe of Japan won a big reelection victory yesterday. That ought to give him a mandate to continue with his economic reforms which have included a dramatically lower yen. The yen has dropped from 101 to the dollar in July to 121 per dollar last week. Japan hasn’t had much good economic news in a long time.

On a related note, the amazing drop in oil continues. On Friday, West Texas Intermediate got as low as $57.34 per barrel. That’s the lowest price since May 2009. For some context, in the summer of 2008, oil was going for more than $140 per barrel.

The big econ report this morning showed that Industrial Production rose by 1.3% last month. That’s the biggest jump since May 2010 (see below). The report also showed the biggest gain in consumer production in 16 years. The theme is the same—the U.S. economy is improving, but very slowly.

The Federal Reserve meets on Tuesday and Wednesday of this week. This meeting will be followed by a Yellen presser plus updates on the Fed’s projections (better known as the blue dots). I actually think this meeting won’t be so important. We know rates are going higher, but we don’t know when.

There might be some nervousness this morning as the terrible hostage drama plays out in Australia. I also noticed that PetSmart ($PETM) is up this morning on the news that it’s being bought out for $83 per share. That’s 16.7 times estimated earnings for next fiscal year (ending in January 2016). I’ve often kept an eye on PETM and considered it for previous Buy Lists. I am a little surprised by how low the premium is. It’s less than 7% above Friday’s close.

Oracle ($ORCL) is up strongly this morning thanks to an upgrade at Morgan Stanley. Although it’s odd to upgrade a stock that’s going to report earnings on Wednesday.

Morning News: December 15, 2014
Posted by Eddy Elfenbein on December 15th, 2014 at 7:00 am

The Rouble Is Tumbling Again

BOJ Survey Shows Japan Business Mood Fragile, Highlights Abe’s Challenges

Bundesbank Backs ECB Line on Possible Further Measures

India’s Wholesale Inflation at Lowest in Over Five Years

Oil Jumps Most in Two Weeks as Fighting, Strike Curb OPEC Output

U.A.E. Sees OPEC Output Unchanged Even If Oil Drops to $40

Airlines Charging Sky-High Prices as Oil Costs Plummet

Paris Taxis Block Highway to Urge Ban on Uber Cabs

Uber Briefly Quadruples Prices For Rides Out of Hostage-Crisis Sydney

PetSmart to Sell Itself to Investor Group for $8.7 Billion

Emerson to Sell Power Transmission Unit for $1.4 Billion

Shunning Apple Tops Long List of Bad Market Calls in 2014

Sony Pictures Demands That News Agencies Delete ‘Stolen’ Data

Roger Nusbaum: Grandma Got Run Over By A Dividend Portfolio

Jeff Miller: Weighing the Week Ahead: Will Crashing Oil Prices Change the Fed’s Course?

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