DOW – 17 = 16,449
SPX – 0.86 = 1939
NAS + 6 = 4620
10 Y + .04 = 1.97%
OIL – 2.23 = 31.39
GOLD + 10.20 = 1129.00
Following the S&P’s worst January since 2009 (down -5.1%), and a volatile month for oil prices, about a fifth of S&P 500 companies will report earnings this week, while lots of economic data (manufacturing figures, auto sales and Friday’s jobs report) could also help determine the future direction of stocks.
The consensus estimate calls for about 185,000 net new jobs in January, down from 292,000 in December. And just a reminder that last Friday brought the first look at fourth quarter GDP, which grew at an anemic 0.7% annual rate in the fourth quarter. That’s a bad quarter to be sure, and real GDP is up only 1.8% from a year ago.
That’s a weak year judged by the US postwar average of 3.1%, but is not far from the 2.1% annual growth we’ve been averaging since 2009. The Atlanta Fed model’s initial estimate for first-quarter growth has been published; the “Nowcast” of first-quarter growth calls for 1.2% annualized growth. Weak, but not recessionary.
Also on Friday, the Bank of Japan moved to negative interest rates; this Wednesday BOJ Governor Haruhiko Kuroda is scheduled to speak. Today, European Central Bank president Mario Draghi addressed the European Parliament and said, “The ECB is willing to contribute its share to ensuring that the recovery remains firmly on track.” Draghi said risks in emerging markets “have increased again amid heightened uncertainty.”
Federal Reserve Vice Chairman Stanley Fischer in a speech in New York today said the Fed is worried the global market selloff could sap the strength of the U.S. economy, suggesting the market’s expectations of barely any interest rate hikes this year could turn out to be right. For now, Fischer said that the jury was still out on the implications of the weak market on the economy and the central bank. Fischer says it is too soon to jump to conclusions about future rate hikes.
Consumer spending was flat in December as Americans mostly pocketed their income gains. Americans bought fewer new cars and trucks. They also spent less on utility bills due to unseasonably warm weather. The numbers for consumer spending in November were revised higher to 0.5%. Consumers didn’t cut back because of tighter finances, however. Incomes rose 0.3% in December.
With Americans spending less than they earned, the savings rate rose to 5.5% from 5.3% to match a three-year high. Meanwhile, inflation remained low. The PCE index, the Federal Reserve’s preferred inflation gauge, fell 0.1% in December.
Construction spending rose 0.1% in December to a seasonally adjusted annual rate of $1.12 trillion. And even though December was a little flat, construction spending for all of 2015 was 10.5% higher than in 2014. Residential construction spending in 2015 totaled $416 billion, 12.6% higher than in 2014.
The Institute for Supply Management said its manufacturing index rose to 48.2% last month from 48% in December. This is the fourth straight month below 50%, a reading that indicates more companies are shrinking instead of expanding.
South Korean exports cratered. South Korean exports tumbled 18.5% year-over-year in January, posting their biggest drop since mid-2009. This is troubling news for the global economy, as economists look at South Korean exports as the world’s imports. Shipments to China, South Korea’s largest trade partner, fell 21.5% year-over-year.
China’s official factory activity skidded to a three-year low in January, adding to further gloom about the state of the world’s second-largest economy. The official Purchasing Managers’ Index stood at 49.4, compared with the previous month’s reading of 49.7, deepening the case for near-term stimulus and marking the sixth consecutive month of factory activity contraction.
The slowdown in China is one of the contributing factors to lower oil prices, but economists have been debating whether lower oil prices are good for the economy. New research from Bank of America Merrill Lynch, however, puts the oil move into a much bigger perspective, arguing that a sustained price plunge “will push back $3 trillion a year from oil producers to global consumers, setting the stage for one of the largest transfers of wealth in human history.”
The research highlights evidence that the fall in the price of crude is having a positive impact on demand. For example, if prices average $40 a barrel over the next 5 years, demand is expected to increase by 1.5 million barrels per day.
You might think lower oil prices would be really bad news for renewable energy, but that isn’t happening, in part because renewable energy prices have been dropping even faster than oil prices. According to a recent report by the investment firm Lazard, the cost of electricity generation using wind power fell 61 percent from 2009 to 2015, while the cost of solar power fell 82 percent. These numbers, which are in line with other estimates, show progress at rates you might only expect to see for information technology. And they put the cost of renewable energy into a range where it’s competitive with fossil fuels.
After the closing bell, Google’s parent, Alphabet, reported profit and sales that topped estimates. Google changed its structure last year to give investors a better understanding of the Web business and the other parts, which include investments in artificial intelligence, health tech, self-driving cars, and other stuff not really related to web search. The bottom line is that Alphabet reported fourth-quarter net income was $4.92 billion, or $7.06 a share, compared with $4.68 billion, or $6.79, a year earlier.
Profit excluding certain items came in at $8.67 a share, beating the prediction for $8.08. The top line was also strong; fourth-quarter revenue, excluding sales passed on to partners, rose 19% to $17.3 billion. That exceeded analysts’ average projection for $16.9 billion.
Google remains the 800-pound gorilla of the internet. Even as ad prices dropped 16%, in part due to more ads on mobile devices, total clicks were up 31% in the latest period. For now, all the other stuff is an investment in the future, but at least they are not squandering the money on buybacks. And it is all working. Alphabet was up over 5% in after-hours trading; meaning that the market capitalization is now up around $545 billion, or about $10 billion more than Apple, formerly the largest company in the world.
Health insurer Aetna reported a better-than-expected profit in the quarter ended Dec. 31 as its Obamacare insurance business improved at the end of last year, providing a stronger starting point for 2016. Aetna still expects to close the company’s $31 billion acquisition of Humana in the second half of 2016.
The World Health Organization declared the Zika virus an international public health emergency. The mosquito-borne Zika virus causes microcephaly, a devastating brain malformation in babies. Increased cases of the disease were reported in May in Brazil. Over the weekend, Colombian authorities found more than 2,100 pregnant women infected with the disease.
The official “emergency” designation can trigger action and funding from governments and non-profits around the world. It elevates the W.H.O. to the position of global coordinator, and gives its decisions the force of international law.
Abbott Laboratories said it has agreed to buy Alere Inc., a diagnostics company, in a deal with an equity value of $5.8 billion. Abbott Labs said it will pay $56 per Alere share, or a 50% premium over Friday’s closing price.
Energy transportation company Dominion Resources has agreed to buy natural-gas company Questar in an all-cash deal valued at $4.4 billion. Dominion will pay Questar shareholders $25 a share in cash, or a 30% premium. Dominion said the combined company will serve about 2.5 million electric utility customers and 2.3 million gas utility customers in seven states.
Stryker Corp. announced a deal to buy privately-held Sage Products LLC from Madison Dearborn Partners for $2.775 billion in cash. Sage develops disposable health and personal care products for hospitals.
Berkshire Hathaway has resumed its purchases of Phillips 66, spending roughly $832 million in January to boost its stake even as the oil refiner’s profit margins narrowed. According to a regulatory filing, Warren Buffet’s Berkshire paid about $198 million last week for 2.5 million shares of Philips, giving it 72 million shares overall, or a roughly 13.7% stake in the company. Phillips 66 is Berkshire’s sixth-largest stock holding.
Credit Suisse and Barclays have agreed to pay $154 million combined to settle investigations by the SEC and New York attorney general into their dark pools. The settlements mark the two largest fines ever paid in connection with cases involving the privately run stock-trading venues.
Toyota is halting production at all car assembly plants in Japan next week due to a steel shortage. The world’s top automaker said an explosion at an Aichi Steel facility on Jan. 8 had curbed production of the metal used in auto parts including engines, transmissions and chassis. Toyota produced 4 million vehicles in Japan in 2015, roughly 46% of which were exported.
General Electric announced today that it will stop producing compact fluorescent lightbulbs by the end of the year. CFLs are the curly, spiral shaped bulbs that replaced the standard incandescent bulb. Now, the light quality of LEDs has improved and the cost has dropped, so goodbye CFL.
Good news: The U.S. presidential elections turns serious today with the caucuses in Iowa, and the spotlight will be on precinct officials who have been trained on a new free Microsoft app that’s meant to cut down on human error and speed up the reporting process. The good news? After tomorrow, we won’t have to hear about the Iowa caucus for another 4 years.
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