Oil entered a bull market — defined as a 20% rally from recent lows — on Friday while stocks bounced back to finish the week higher for the first time this year.
First, the scoreboard:
- Dow: 16,082, +200, (+1.2%)
- S&P 500: 1,905, +37, (+2%)
- Nasdaq: 4,588, +116, (+2.6%)
- WTI crude oil: $32, +8.5%
And now, the top stories on Friday:
- Oil prices rose nearly 10% on Friday with West Texas Intermediate crude oil rallying back above $32 a barrel after having collapsed below $27 earlier this week. Not a ton of news associated with this move but simply a bounce that, in a sense, just had to happen as oil got just destroyed to start the year and, frankly, it wasn’t going to go straight down. Nothing ever does.
- On the oil data front we got the latest rig count from oil driller Baker Hughes on Friday, showing that another 5 US rigs were shut down this week bringing the total rigs in use in the US to 510. This is the lowest since April 2010.
- Two pieces of corporate news were among the most compelling headlines on Friday, with poor earnings out of American Express sending shares of the credit card giant down by as much as 13% on Friday. The company also announced that it will undertake a $1 billion restructuring program in the coming years, though Wall Street analysts were generally sceptical about what is really going on at the company. Josh Beck at Pacific Crest, for example, wrote in a note to clients that while this restructuring is “encouraging,” it fails to, “address the need for significant strategic change.”
- In related American Express news, activist investor Jeff Ubben and his ValueAct hedge fund sold their stake in the company. Last year ValueAct bought about $1 billion worth of American Express. According to a report in ValueWalk, Ubben and Warren Buffett — who owns about 15% of the company — failed to see eye-to-eye on what needed changing at the company. And to this end, I made the argument that ultimately Buffett is going to be the person that sends long-time AmEx CEO Ken Chenault out the door, if it does indeed come to that.
- Boeing also put some less-than-stellar news out to the market late Thursday, disclosing that it would take a $569 million in the fourth quarter and trim production of its 747 cargo jet. But what caught our eye was that the company said air freight volume is down while passenger demand was up 5.9% in November. And this is a clean illustration of the two forces that are really driving the economy right now: industry is struggling while the consumer is booming. Manufacturing data from Markit Economics that came out Friday morning also indicated that while things might be tough right now for goods producers, consumer demand remains robust.
- To this end, looking at how much money US consumers are spending against how much of this money they’re forced to spend on servicing debt, there are few signs the economy is about to roll over. In a note to clients on Friday analysts at Citi said that their clients appear to be positioning for a global recession. “Judging by anecdotal comments from recent client meetings, our sense is that real money investors, rather than panicked speculators, are increasingly participating in this de-risking,” the firm wrote in a note to clients. So there’s that.
- The bond market also remains (as always!) a focus for some of the market’s biggest names, with BlackRock CEO Larry Fink saying at the World Economic Forum in Davos that there is a “need for blood in the street” in markets. “We need to work out all the excess inventories. In energy the only way that’s going to happen is through bankruptcies of some of the oil companies as they stop pumping. So this is all good. This is a good process actually. This market correction weeds out the weak.” I tend to agree!
- And as for how this shakeout is proceeding, Bank of America’s Michael Hartnett said the recent outflows from high-yield bonds indicates “capitulation” among investors who had perhaps been holding out, well, something better. There was the “high-yield ex-energy” meme floating around markets for a while, but as 2016 got underway it became increasingly clear markets were and remain worried about low-quality debt across the investable universe. And so with this kind of sentiment and flow moving around markets, as you’d expect spreads are blowing out.
- It’s been a bad year for the market with the S&P 500’s year-to-date loss hitting 11% at one point on Wednesday, and so Wall Street is out with work showing what happens to the market after terrible months. In short, stocks go up. Currently, the market is on pace to have one of its 20-worst months ever. Following these months, the S&P 500 has gone up 3%, 7%, and 15% during the next 3-, 6-, and 12-month periods, respectively. Or as Business Insider’s Sam Ro likes to say, “Stocks usually go up.”
- Davos is over but before trying to get back into a snowy New York City, Business Insider’s Jay Yarow caught up with Gary Pinkus of McKinsey who pointed out the main conundrum facing the world’s most advanced economies right now: it takes fewer workers to do the same amount of work. Or at least, to create the same amount of value for shareholders. Here’s the data from McKinsey (emphasis ours): “In 1990, the top three automakers in Detroit had among them nominal revenues of $250 billion, a market capitalisation of $36 billion, and 1.2 million employees. The top three companies in Silicon Valley in 2014 had nominal revenues of $247 billion, a market capitalisation of over $1 trillion, and only 137,000 employees.” Happy weekend!