Stocks bounced on Thursday as Facebook was the big winner, oil surged again, and econ watchers turned their attention towards Friday’s big fourth quarter GDP report.
First, the scoreboard:
- Dow: 16,074, +130, (+0.8%)
- S&P 500: 1,894, +11, (+0.6%)
- Nasdaq: 4,507, +39, (+0.9%)
- WTI crude oil: $33.70, +4.7%
Recession watch, 2016
Stop me if you’ve heard this before: we might be heading for a recession in 2016. Bloomberg TV’s afternoon program “What’d You Miss?” — co-anchored by Business Insider alum Joe Weisenthal — was set to host a special 90-minute edition on Thursday specifically addressing this concern current running through the investment community.
Readers of this space will know that we’re generally bullish on the consumer- and services-based US economy to continue expanding, albeit at a moderate pace. The problems have been and remain in the manufacturing sector of the economy which is getting hit by the strong US dollar, soft growth out of China, and a crash in commodity prices. To that end, durable goods orders reported early Thursday disappointed, declining 5.1% in December, far more than the 0.7% decline that was forecast. Ian Shepherdson at Pantheon Macroeconomics said simply that the numbers were, “horrible,” but that January will be less bad. Something to look forward to, at least.
Research out of Morgan Stanley this week looked at future of recessions, which is interesting since we haven’t had one in over six years, but also notable because as the firm writes, “Negative growth and recessions are simply more likely when trend growth is lower.” And while the specific manifestation of how the US experiences Larry Summers’ secular stagnation are hotly contested, that we’re entering a period of potentially slower growth seems more and more widely accepted.
For Morgan Stanley, this means acknowledging that we’re likely to see periods of negative growth more often because falling to flat or negative growth from a growth trajectory of, say, 1.5% per year shocks the economy less than were it to fall from a pace of 3% growth. The firm also pointed it out that many people in the markets talk about “recession” and mean “two consecutive quarters of contracting GDP,” which are not exactly the same thing.
On Friday, the BEA will release its first estimate of fourth quarter GDP, which economists expect to show the economy grew at a pace of 0.8% to end the year.
Meanwhile, the CEO of Altria — which sells Marlboro and Parliament cigarettes, among other things — doesn’t think there’s a recession coming because people are still smoking enthusiastically.
Caterpillar, a global manufacturing bellwether that has really had nothing to say but bad things about the economy for some time now, was out with more downbeat commentary as part of its fourth quarter earnings report on Thursday.
“The outlook for 2016 sales and revenues does not anticipate improvement in world economic growth or commodity prices,” the company wrote in its report, adding, “The decrease from last October’s preliminary outlook is largely a result of continued declines in commodity prices and economic weakness in developing countries.”
Shares of the company, however, rallied about 4% on Thursday after profits beat expectations.
Sales, however, missed expectations, as they almost always do.
Short selling is working
People are short stocks.
Data from Bespoke Investment Group released Thursday indicated that the S&P 500’s short interest is currently at the highest level since 2010. According to Bespoke’s data 4.4% of the S&P 500’s outstanding float is being sold short while the S&P 1,500 is being sold short at levels not seen since 2012.
The notable thing, to our minds, is that this is working! Bespoke notes that the most shorted stocks have declined about 38% since the start of 2014 while the least shorted stocks are up about 4% over that period.
And so while earlier in the post-recession bull market the main axiom that drove markets was, “Buy the dip,” which made for a perilous short-selling environment, times have changed.
There were oil rumours on Thursday.
Reports Thursday morning said that according to Russian energy minister Alexander Novak, Saudi Arabia proposed a 5% production cut from each of OPEC’s 13 members. Novak added that there was talk of a meeting between OPEC and non-OPEC members with an eye towards balancing the oil markets.
OPEC officials, of course, denied this.
Oil prices rallied hard on Thursday following initial reports that there could be an oil summit and then declined some but still gained for the day.
Elsewhere in the oil markets, the political situation in Nigeria looks increasingly unstable and uncertain and potentially looms as a source of decreased production as tensions rise in the West African nation. This would be a relief for the market, somewhat, as less supply is certainly what is needed right now.
In a note to clients on Thursday RBC Capital Markets’ Helima Croft wrote that, “we believe that a return to significant supply disruptions is a clear and present danger” in Nigeria. Elena Holodny has the full breakdown here.
Stephen Curry plays basketball for a living.
While doing so, he wears Under Armour shoes, and this has been good for sales.
And while Under Armour had a lacklustre year through Wednesday’s close, shares of the retailer rose more than 20% on Thursday following an earnings report that beat expectations.
In its release Under Armour said its footwear sales rose 95% over last year, “primarily reflecting the success of the Curry signature basketball line.” Under Armour, of course, has a very long way to go to be Nike or adidas, but the way you get there — or so the thinking goes — is by getting people to wear shoes that cool and famous and successful and dazzling athletes wear. Curry, the NBA’s reigning MVP, is definitely those things. So is Cam Newton, quarterback of the Carolina Panthers who will make his Super Bowl debut next weekend. Jordan Spieth, the golf world’s next big thing, also meets this criteria. More or less.
On Wednesday, Harley Bassman at PIMCO asked whether we ought to consider something other than the US Treasury yield as the benchmark lending rate for loans with same duration.
Here’s Bassman (emphasis ours) :
Nearly every vector of description has an agreed-upon foundation. For instance, most of the world measures time versus a clock in England and elevation relative to the surface of the ocean. Closer to home, the investment process relies upon the concept of the benchmark interest rate (often thought to be a “risk-free” rate, though this isn’t necessarily the case). But allow me to pose a question many readers may find radical: What if our desire for stability blinds us to events that suggest our “North Star” has shifted, that maybe our long-standing agreed definition of that benchmark rate is no longer the yield of a U.S. Treasury (UST), but rather the more liquid and fungible Libor-based interest rate swap (IRS) market? (Recall that Libor, or the London Interbank Offered Rate, is a primary benchmark for short-term rates globally.)
The current set of market circumstances that seems to have struck Bassman — as well as others — is the inversion in swap spreads. This effectively shows investors willing to pay a premium for a synthetic interest rate instrument as opposed to the corresponding Treasury bond of the same duration, which you can think of as the “real thing.” Bassman notes that swaps are easier to sell, are more liquid, require less balance sheet, and are basically just as good as the “real thing.”
There’s the small problem of these swaps being benchmarked off Libor, which was manipulated some years back, but as Bassman makes fairly clear, his post is about challenging the received wisdom that the benchmark interest rate for global finance is and will remain Treasuries.
Initial jobless claims fell by 16,000 last week to 278,000, somewhat allaying fears that the most real-time economic data point we get was making a turn for the worst.
US automakers are bullish on SUVs, which Matt DeBord thinks might be a problem considering it was the focus on these vehicles that, in part, sent the carmakers into bankruptcy around the financial crisis.
There are going to be two new versions of Tesla’s Model 3, its mass-market car.
A former NFL player allegedly ran a Ponzi scheme.
Chick-fil-A’s commitment to its religious roots means it probably won’t be going public. Ever.
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