STOCKS FALL, OIL TUMBLES: Here's what you need to know

Stocks fell and oil collapsed to start the week, which is an opening sentence to this post it feels like we’ve written a dozen times in 2016 alone.

First, the scoreboard:

  • Dow: 15,882, -211, (-1.3%)
  • S&P 500: 1,876, -30, (-1.6%)
  • Nasdaq: 4,515, -75, (-1.6%)
  • WTI crude oil: $29.75, -7.6%

And now, the top stories on Monday:

  1. We only had one economic data point cross the wires on Monday but fortunately it was exciting report (though bad for Texas). The latest manufacturing report from the Dallas Federal Reserve was released Monday with the business activity index falling to a remarkable -34.6, the lowest reading in over six years and another sign that the oil rich state is struggling in the wake of the oil price crash. Expectations for the economy in Texas “weakened notably” in January’s survey with one executive saying, “Demand slowed more quickly than is typical in December. Early demand is weaker in January, leading to the belief that growth in 2016 may be elusive.”
  2. A note passed our way from Neil Dutta at Renaissance Macro on Tuesday highlighted that while much has been made about the loss of manufacturing jobs and the general slowdown seen in the sector over the last year, the impact is really all being felt in Texas.

  3. And of course when we talk about Texas, again, we’re really just talking about oil. Over the weekend The Telegraph’s Ambrose Evans-Pritchard was out with a report on why the Saudi’s will not kill the US shale industry. What stood out on our end was a quick two-sentence quote Evans-Pritchard pulled out of a talk at Davos, with energy expert Daniel Yergin explaining why US shale is in control and traditional oil powers are simply outmatched today. “It takes $10 billion and five years to launch a deep-water project,” Yergin said. “It takes $10 million and just 20 days to drill for shale.” This is not dissimilar in spirit from Akin Oyedele’s report out this weekend, citing Citi’s Ed Morse, that argued the fate of the oil market is in the hands of the US (read: shale producers). If these more nimble US shale producers simply decline to cut production then there’s really no reason to think supply will come down, and as a result, prices should remains stubbornly low.
  4. The price of oil fell over 7% on Monday to around $29.75, though as the folks over at Bespoke noted, we’d need to see WTI prices fall back below $25.75 to officially enter a new bear market. Of course, the old bear market is more or less still in place — technical definitions be damned — because prices are still near 12-year lows and off about 70% from their highs reached back in June 2014.
  5. In related commodities news, Goldman Sachs downgraded their outlook on shares of Caterpillar — cutting their rating on the stock to “Sell” from “Neutral” — arguing that there’s about 13% of downside in the current stock price as the “extended commodity deflation cycle” continues to take its toll on Caterpillar’s customers. Shares of Caterpillar fell about 5% on Monday.
  6. Twitter shares also took it on the chin on Monday, falling about 4% after a series of reports out on Sunday detailed that several high-level people would be leaving the company. The company’s head of product, head of engineering, and head of media all departed in a big shakeup that will also see the company appoint two new people to the board of directors in the coming days. The best part: Business Insider has been told at least one of these people will be a “big media name.” So we’ll see how big, I guess.
  7. In tech earnings news, Apple is reporting earnings tomorrow after the closing bell and this is the quarter that we’re all supposed to be scared of. Business Insider executive editor Jay Yarow — fresh off a stint in Davos — has the full preview here, but the thing to know is that iPhone sales look likely to decline when compared to the same quarter last year. That will be the first time this happens (if it happens, of course) in the product’s history. Now, obviously, iPhone sales were not going to increase forever, but if these forecasts come to pass it isn’t much of a leap to assert that this will in fact be the start of a new era for the company.
  8. Speaking of things that seem to go up forever, Amazon Prime memberships now total 54 million according to the latest report from Consumer Intelligence Research Partners. This is a 35% increase from the same time last year, though since Amazon itself doesn’t disclose membership totals for its $99-per-year loyalty program, we’re not 100% sure. Amazon reports earnings on Thursday, and while its Prime service is extremely convenient and the company is often thought of as a retailer, the big story at Amazon now its the growth of its Web Services business.
  9. Seth Klarman had a bad year in 2015. Klarman’s notoriously secretive Baupost Group posted a “mid-single-digit decline,” as Klarman tells it in an investor letter, though a separate update seen by Business Insider’s Julia La Roche puts some numbers on that with the fund’s public investments portfolio falling 6.7% while the private investments gained 2.4%. The average hedge fund fell 3.6% last year.
  10. But of course the real interesting part of these letters is not the performance figures but what these hedge funds types have to say about the world. Klarman, for his part, is worried about unicorns. “A voracious appetite for tech startups has driven prices sky-high, giving rise to the term ‘unicorn,’ meaning privately held firms worth $1 billion or more. In today’s overheated environment, ‘unicorns’ are no longer a rare breed: there were an estimated 143 extant at year-end, up from 45 two years ago.” Klarman added that these unicorns are awful hungry, needing tons of cash just to feed the beast and allow them to grow and the spectacular rate needed to justify the valuation. As a result, Klarman writes, “Recently there have been downward revisions in the valuations of several of the unicorns held by major mutual funds, a sign, perhaps, that excesses in that sector are in the process of being corrected, that the herd is about to be thinned.”
  11. This is what the people in Davos were saying, too.
  12. Another investment that has a less exciting name but is also making people nervous are junk bonds, which junk bond investors are now reportedly set to learn more about. A report from Bloomberg on Monday said that junk investors in Europe are set to attend a series of seminars in February that will give investors more information about the protections they have in the event the company they’re invested in begins to face financial distress. These seminars will specifically deal with covenants, which is basically the agreement made between a borrower and a lender. A lot of the stuff contained in covenants, it seems, isn’t fully understood by investors (or else why would there be seminars about how to understand them!). So I guess going through all the paperwork isn’t, like, absolutely required or encouraged or expected before investing. And so here we are.
  13. Counterintuitively, it seems like BlackRock’s clients are not worried about bond market liquidity even though the only thing people have been worried about has been bond market liquidity. Or just liquidity generally. Either way. A Bloomberg report on Monday said more than half of the 170 respondents to a recent BlackRock survey indicated the firm’s institutional investors were building positions in real estate and private credit in an effort to generate higher returns and combat market volatility. Which, sure, fine. But getting away from market volatility by basically running away from a market — like stocks, for example — and heading into something uncontroversially more illiquid like real estate is a weird way to go about tamping down volatility.
  14. Mario Draghi spoke.

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