Oil prices rallied on Tuesday, rising 3% to near the same level they sat near ahead of this weekend’s big meeting in Doha while stocks did nothing after rallying on Monday.
First, the scoreboard:
- Dow: 18,043, +39, (+0.2%)
- S&P 500: 2,099, +5.5, (+0.3%)
- Nasdaq: 4,936, -23, (-0.5%)
- WTI crude oil: $42.50, +3.1%
Goldman Sachs reported earnings before the market open that unofficially ended major bank earnings season. And while the company’s bottom line results topped expectations while revenue missed analyst estimates, the bank’s results were a huge decline from the same quarter last year.
Earnings totaled $1.14 billion in th first quarter, down almost 60% from last year while revenues totaled $6.34 billion compared to $10.62 billion last year.
“The operating environment this quarter presented a broad range of challenges, resulting in headwinds across virtually every one of our businesses,” Goldman CEO Lloyd Blankfein said in a statement. Which is more or less what every bank CEO said this quarter.
Look: rates are low, people aren’t trading, markets are choppy, companies don’t really want to do deals. It is very hard to be a bank right now.
The biggest news out of Goldman’s report, however, somehow came back to Dick Bove. On the company’s call Bove asked the firm, effectively, if they were willing to do a merger to become a commercial bank.
“When do you start thinking about doing a massive merger of equals?” Bove asked. “When do you start thinking about entering new business lines, which are radically different from the ones you’re in now, understanding that you can’t get anything more from what you’re doing other than waiting for the tide to come in?”
To which Goldman CFO Harvey Schwartz said, in part: “If we felt like there is a client segment or transaction we could do that would benefit our shareholders and we could deliver to those clients, we would do it. We’re open-minded.”
Alternatively, they could become a tech company, which some Goldman execs think they already are.
UnitedHealth reported earnings on Tuesday morning and the big news was an update on the company’s plans to basically remove themselves from Obamacare’s consumer exchanges.
“The smaller overall market size and shorter-term higher risk profile within this market segment continue to suggest we cannot broadly serve it on an effective and sustained basis,” CEO Stephen Hemsley said on the company’s quarterly earnings conference call.
“Next year we will remain in only a handful of states, and we will not carry financial exposure from exchanges into 2017. We continue to remain an advocate for more stable and sustainable approaches to serving this market and those who rely on it for their care.”
Now, the company had earlier said that it was reviewing its participation in these exchanges because selling insurance plans to consumers is lower margin than the bulk insurance offerings you’d sell to a company or school system or something.
So while, in some sense, UnitedHealth’s move away from the exchanges formalises something industry-types knew was coming. But every bit of negative news for Obamacare just lights up because, well, a lot of people really hate it.
In other words, this is not so much a functionality as a credibility issue for Obamacare.
The only piece of economic data out Tuesday morning was the latest data on housing starts and building permits for the month of March, and that data was a flop.
Housing starts fell 8.8% in March to an annualized pace of 1.09 million homes, well below expectations for a more modest decline of 1.1% to 1.166 million new houses.
Building permits fell 7.7% to an annualized pace of 1.086 million against an expected acceleration of permits by 2% to 1.2 million.
“The overall tone of this report was weak, reflecting the continued uneven performance in this segment of the economy,” said TD Securities’ Millan Mulraine, who’s betting on a rebound in building activity in the coming months.
“This is certainly a net negative for GDP and it suggests that this segment will be a drag on economic activity this quarter, which we are currently tracking at 0.6%.”
The Atlanta Fed’s latest GDP tracker — updated Tuesday after the starts data — shows first quarter GDP is tracking at a paltry 0.3%.
The fallout from this weekend’s big oil summit in Doha, Qatar is still rolling in, with analysts writing that the failure to reach a deal shows the “new normal” in oil markets.
In a way, you could argue that this deal’s failure shows the OPEC cartel — a 13-member oil group ostensibly led by Saudi Arabia — is no longer the international force it once was. Or, another way: it is no longer a cartel.
“This new world oil order is one where zero-sum politics have moved from producer vs. consumer relations to producer vs. producer and where the struggle involves who has the cheapest-to-produce oil,” writes Citi’s Ed Morse.
“That’s actually how well-functioning markets should work and the big adjustment by producers nowadays involves finding ways to produce and to balance budgets at the same time. But that’s also an invitation to supply disruptions.”
So, oil markets are now markets? Seems reasonable!
But news that the Saudis are prepping to float a public offering of state-backed oil giant Saudi Aramco show that while the oil market is, again, looking more and more like a market and not something more cartel-controlled, there are some big problems with this. Namely: free markets are less predictable than markets controlled my government interests.
As a result, the Saudis — who had been liquidity providers in terms of dollar-denominated foreign investments via recycled oil revenues — are now liquidity seekers.