Stocks finished the day little changed after opening in the red on the first day of a busy week for markets and the economy.
First, the scoreboard:
- Dow: 16,461, -5, (-0.03%)
- S&P 500: 1,940, +0.5 (0%)
- Nasdaq: 4,622, +8, (+0.2%)
- WTI crude oil: $31.44, -6.5%
January was bad
In one chart.
Or as Deutsche Bank’s Jim Reid put it: “Welcome to February and if it’s anything like January, financial markets won’t be best pleased with having an extra leap day to contend with by the time the month ends.”
Manufacturing, still bad
We got two manufacturing reports on Monday indicating that the manufacturing sector is still struggling in the US.
Markit Economics’ manufacturing PMI came in at 52.4, missing expectations but still indicating modest expansion in the sector, while the Institute for Supply Management’s figure hit 48.2 for the first month of the year, indicating contraction. The bright spot was both reports’ internals showing that new orders picked up in the first month of the year, though the pace of hiring slowed in January to a level not seen at any point during 2015.
“Despite picking up slightly, the January PMI reading is one of the worst seen over the past two years, highlighting the ongoing plight of the manufacturing sector,” said Markit’s Chris Williamson.
Ward McCarthy at Jefferies said following the ISM numbers (emphasis mine):
Once again we think it is important to put this data in context. The fact that the manufacturing sector is struggling is not news. Since the beginning of the commodity disinflation cycle that began in late 2014, the sector has been decelerating … The index is now in “contractionary” territory below 50, but this is not a coal mine canary signalling a recession. ISM’s internal studies have shown that readings below 48 are consistent with a recession and, more importantly, those studies are based on data from a time when manufacturing made up a significantly larger percentage of the economy than the current share of about 9-10%.
The folks over at Bespoke also noted that while January’s ISM number was the fourth straight month the index came in below 50 — again, with 50 serving as the breakeven point between expansion and contraction — this is far from the first time we’ve seen this kind of a run outside recession.
And a theme Bespoke has been hammering on, that the current manufacturing slump looks a lot like the oil bust of the mid-80s, was also further confirmed in Monday’s data.
Buy the dip?
Citi thinks there are reasons to look at the dip in stocks and break out the 2013 playbook of simply buying it.
“Maybe the post-2009 global bull market is stalling in line with stalling EPS,” wrote Citi’s Robert Buckland in a note to clients, “but our checklist suggests that it is still too early to call the next major bear market.”
The most common argument that we’re heading for a fresh bear market — that earnings are in decline — is simply not strong enough in Buckland’s view to justify that call. In past true bear markets earnings have fallen by 30% or more, and currently we’re looking at an earnings decline for the S&P 500 of about 12%.
According to history, to make this market a sell, then EPS would have to fall a lot more.”
Over at Oppenheimer, John Stoltzfus — who still has a very bullish 2,300 year-end price target on the S&P 500 — wasn’t exactly sanguine on the current state of global markets, essentially arguing that we’re witnessing the end of a 20-year bubble in commodities unwind.
“We have come to believe that while the stateside sub-prime mortgage and financial sector asset bubbles are now behind us,” Stolztfus wrote, “we are currently experiencing a combination of an unravelling of the over-investment that occurred in the commodity space (oil, mining, agricultural products) based on two decades’ worth of emerging market needs (real, perceived and projected) as well as a need to change economic and investment emphasis within China from investment in production to investment for consumption.”
On Monday the latest report on personal income and outlays showed that the personal savings rate rose to 5.5% in December, a 3-year high.
And while I think the idea that an increased savings rate is bad is counterintuitive — or worse — for many people, this is simply one of the most interesting ways to track in real(ish) time how consumers are feeling about the economy. The simple outline is that if people save instead of spend it is bad for the economy. Of course, people not saving anything will give the economy (and by economy we mean “consumers” because consumer spending is where the bulk of GDP comes from), little cushion in the case of a decline in growth or even outright contraction.
But on the whole it is better for people, when times are improving, to put money to work by investing or spending than it is for them to hoard cash. Because not only does cash experience, over time, the erosion of purchasing power but it also represents money that simply does not make its way into the economy.
And with the Fed tightening financial conditions and stock markets looking particularly unsettled, Deutsche Bank wrote in a note to clients that, “Ultimately our concern is for the household saving rate and hence consumer spending via the transmission mechanism of financial conditions.”
Meaning, in plain English, that an increase in the savings rate can be seen as a proxy for a decline in consumers’ willingness to spend and a potential indication the economy may be stalling. Or that it could.
Adam Jonas slashed his price target on Tesla.
The Morgan Stanley auto analyst wrote in a note to clients on Monday that with increasing production struggles with the company’s new Model X and Model 3 stacking up, the timetable for new Tesla’s coming to market seems to have been delayed. Additionally, the company’s cash burn will also increase.
Of course Jonas, ever bullish on the stock, still has a $333 price target on shares — which were trading near $195 on Monday — but conceded that, “while Tesla may be the best-positioned original-equipment manufacturer under our coverage for auto 2.0, we see its current business model as not yet truly disruptive to the automotive industry.”
Always those pesky business models.
The real fallout from the oil crash is starting.
On Sunday, The Financial Times reported that Nigeria, Africa’s largest economy, asked the World Bank and the African Development Bank for a $3.5 billion emergency loan. This request comes at a time when the country is dealing with a $15 billion budget deficit and an increase in public spending to stimulate its slowing economy, which has been hit hard by the 70% decline in oil prices over the last 18 months.
But in a note to clients on Monday, John Ashbourne at Capital Economics wrote that this loan might not be enough.
“A reported US $3.5 billion loan from the World Bank and the [African Development Bank] would only cover about 15% of Nigeria’s gross external financing requirement,” Ashbourne wrote. “So even were [the] loan agreed, it would hardly be enough to turn things around for Nigeria.”
Elena Holodny has more details here, but its clear that while 2015 and the early part of 2016 were about a fixation on the sheer price of crude oil — as in, “Wow is that low!” — the real impacts are going to be felt as markets and governments and corporations get used to the idea that prices are going to be this low for a while.>
Big money is worried about big activists
Here’s an interesting one.
From The Financial Times:
Jamie Dimon, chief executive of JPMorgan Chase, and Warren Buffett convened the sessions with the bosses of BlackRock, Fidelity, Vanguard and Capital Group to work on a new statement of best practice that would cover the relationship between US companies and their shareholders.
The unusual collaboration comes at a time of rising shareholder activism and a raging debate about whether public markets demand short-term profits at the expense of long-term investment.
So, of course, there was the time in July 2015 when Carl Icahn — famed activist investor — basically scolded BlackRock CEO Larry Fink on stage for being “dangerous.” Icahn’s issue with Fink’s business is, basically, that BlackRock sells and markets exchange-traded funds, which are structured products designed to mimic the performance of some other basket of assets. Icahn thinks these are illiquid and dangerous.
Fink thinks these are fine, of course, and while there is a lot of concern about what will happen to the trillions of dollars parked in these funds when times get really bad, Icahn’s broadside sort of turned the passive vs. active debate up to 11.
And so now with the proliferation of activist investors moving into companies and getting their way — AIG (an Icahn target) is splitting up, for example — firms that invest money on behalf of clients, often in passive vehicles like those offered by BlackRock, Vanguard and others, want to get some of the power back.
Or at least, figure out what is going on and do it together.
More to come on this, certainly.
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