Tuesday, January 12, 2016

Wednesday Watch

Evening Headlines
  • Behind Chinese Yuan's Tiny Drop, Indications of True Crisis Lurk. The Chinese yuan’s 6 percent decline over the past five months is hardly anyone’s idea of a crisis. On average it comes out to a drop of less than 0.04 percent a day. But behind the scenes, Chinese policy makers are unleashing a torrent of measures to stabilize the currency and prevent it from tumbling. Added up, these efforts rival some of the biggest currency defenses seen in emerging markets over the past two decades. Here’s a quick look at the central bank’s most aggressive steps. Hong Kong has become a key focal part for policy makers. Over the last two days, they bought enough yuan there to push overnight borrowing costs for the currency to a record 67 percent on Tuesday from just 4 percent at the end of last week. These rates, designed to discourage speculators, are even higher than those at the peak of Russia’s defense of the ruble in 2014 and Brazil’s intervention in 1999.
  • Pain Points Spread in Korea as Property Joins Whammy From China. South Korea’s property market is heading south, adding a pain point to an economy already weakened by a yearlong export slump amid more modest growth in China, its biggest trading partner. Seoul apartment sales dropped 40 percent in December to 8,614 from an eight-year-plus high reached in April, data from the Ministry of Land, Infrastructure and Transport show. While record-low interest rates support the prices, tightening mortgage rules and expectations for higher rates are cooling demand after months of a property boom last year. “The property market is losing steam,” said Kim Seong Hoon, an economist at Korea Economic Research Institute. “Timing-wise, it’s putting extra pressure on other parts of the economy as it’s hard to expect a major recovery from exports with China’s slowdown.”
  • Global PC Shipments Fall to Lowest Since 2008, Gartner Says. Worldwide personal-computer shipments dropped 8.3 percent in the fourth quarter, ending the year at fewer than 300 million units for the first time since 2008, researcher Gartner Inc. said. PC manufacturers shipped 75.7 million machines in the fourth quarter compared with about 82.6 million a year earlier, Gartner said Tuesday in a statement. Sales sank 3.1 percent in the U.S. to 16.9 million in the quarter. Researcher IDC reported similar declines in the industry.
  • Asia Stocks Join Rebound in Surge From 3-Year Low; Oil Above $30. Asian stocks rallied from a three-year low, tracking a rebound in the U.S. amid speculation a selloff that erased more than $5 trillion from global equity values this year had gone too far. Oil rose for the first time this year and the offshore yuan strengthened for a fifth day. The MSCI Asia-Pacific Index climbed the most in four weeks as benchmark share indexes rallied across the region. U.S. index futures gained after the Standard & Poor’s 500 Index advanced for a second day. Treasuries took back some of the last session’s gains, which were spurred by crude’s decline to below $30 for the first time in 12 years. The more positive sentiment diminished the appeal of haven currencies, with the yen retreating as Australia’s dollar appreciated.
  • The Possibility of $20 Oil Doesn't Sound So Crazy Anymore. The world mostly ignored Ed Morse 11 months ago when the head of commodities research at Citigroup said oil could drop as low as $20. It’s paying attention now that crude has tipped below $30. BP Plc slashed 4,000 jobs, Petroleo Brasileiro SA slashed its spending plan and Petroliam Nasional Bhd. warned that it faces several tough years before crude futures in the U.S. sank into the $20s for the first time in more than 12 years. Morse, who wrote in a Feb. 9 research note that oil could fall "perhaps as low as the $20 range for a while," said Tuesday in Calgary that the world is now “confronting $20 oil."
  • Commodity Rout Spreading Pain Beyond Energy, Citigroup Says. Low commodities prices are hurting the very companies that you’d think would benefit from them. The rise in volatility that has accompanied lower prices of materials from oil to copper to corn is making it harder for management of companies across Standard & Poor’s 500 Index sectors to forecast future cash flows, according to Citigroup Inc. That uncertainty can lead even companies that aren’t commodity producers to decrease investing and expansion, which subsequently crimps sales growth, Citigroup’s Financial Strategy and Solutions Group wrote in a note distributed to clients Tuesday. "Forecasting future cash flows and financial planning becomes a more difficult task for all," the group led by Ajay Khorana wrote. When energy price volatility is 10 percent higher than average, annual revenue growth rates for S&P 500 firms tend to be 3.7 percent below average, according to Citigroup.
  • No Hiding From Debt Slump. Many investors blame the escalating weakness in corporate credit on falling commodity prices. But that’s only one piece of the story, one that ignores a collapsing credit cycle amid a much broader global slowdown. Standard & Poor’s said on Tuesday that the outlook for corporate borrowers worldwide was the worst since the global financial crisis, with potential corporate downgrades outpacing possible upgrades by the most since 2009. This has been attributed largely to slower growth in China and a commodity rout that’s cut prices to the lowest since 1999. In reality, the pain goes well beyond that
  • Gundlach Paints Bearish Outlook for 2016 Investing, Economy. (video) One of the market’s biggest bears says there’s more bad news ahead. Falling commodity prices are signs of China’s weakening economy, which will lead to more destabilizing devaluations of the yuan, Jeffrey Gundlach said Tuesday during a market outlook webcast. Moves by the Federal Reserve to raise interest rates are fighting non-existent inflation and hurting gross domestic product growth, he said, adding that stocks are going to follow high-yield bonds down and low oil prices may lead to political instability. “This is a capital-preservation market, not a money-making environment,” said Gundlach, co-founder of Los Angeles-based DoubleLine Capital. For economic growth, “2016 is not looking all that great, potentially.”
  • CSX(CSX) Says Profit May Drop in 2016 as Cargo Decline Continues. CSX Corp. said earnings per share will probably decline in 2016 as a drop in coal freight continues to drag down the industry’s results. The largest rail carrier in the eastern U.S. expects “negative global and industrial market trends” to weigh on profits this year, it said in a statement Tuesday. Low commodity prices and a strong dollar that makes U.S. exports more expensive in foreign markets are likely to weaken results this year, CSX said. While the railroad’s fourth-quarter profit of 48 cents a share beat analyst estimates of 46 cents as the railroad cut costs, revenue tumbled 13 percent on slumping cargo volumes. Freight fell 6.4 percent for large U.S. rail companies in the quarter, led by a 20 percent coal decline, according to the Association of American Railroads. The forecast of lower 2016 earnings per share may put “modest pressure on the stock,” said Ben Hartford, an analyst with Robert W. Baird & Co. in a note. CSX’s earnings per share will be little changed this year compared with last year’s level, according to analyst estimates compiled by Bloomberg. CSX fell 2.2 percent to $23.17 after markets closed in New York.
  • Ford(F) Shares Slump on Profit Outlook Despite Special Dividend. Ford Motor Co. fell as concerns that its North American profit margins may contract this year outweighed the announcement of a $1 billion dividend and record results in 2015. The automaker’s shares slid 3.3 percent in extended trading to $12.43 at 6:25 p.m. in New York, after closing up 0.6 percent to $12.85.
Wall Street Journal: 
  • Emerging-Market Turmoil Spurs IMF Call for New Crisis Financing. Could this be the year that emerging markets finally get a short-term crisis credit line through the International Monetary Fund? Citing growing financial and growth strains in emerging markets, IMF chief Christine Lagarde resurrected the idea Tuesday in a speech at the Bank of France. Emerging markets have pushed for the IMF to create a new emergency-financing tool similar to the dollar swap lines the U.S. Federal Reserve used during the global financial crisis to stem contagion.
  • The Obama Legacy Project. The U.S. is more divided in more ways than it’s been since the 1960s. As he begins his final year in office, President Obama’s legacy project is already in high gear. This includes Tuesday’s State of the Union, which is best understood as the start of a campaign to persuade Americans that the last seven years have been better than they believe. He needs to start early because this reality makeover won’t be easy.
  • ObamaCare’s $1,200 Pay Cut. The cost of insuring your 26-year-old is more than you thought. Liberals insist the stagnation of real incomes in the Obama era can be solved with more redistribution, while the Donald Trump right focuses on immigrants and trade. Maybe the better explanation is this era’s onslaught of lousy economic policies, starting with ObamaCare.
  • The Global Slowdown Hits the U.S. America dodged the Asian financial crisis of 1997-98, but much has changed. Today’s world economic slide is starting to hurt us. Plunging stock prices and slowing economic growth in China have raised anew the question of how much events abroad really matter to the U.S. Many of the answers are quite placid, drawing on the precedents of the 1997-98 Asian financial crisis, when there was similar concern about impacts at home, which never came. The U.S. grew at a 4.5% annual pace during those two years. For much of 2015, when U.S. growth remained steady despite volatile and weak growth in the rest of the world, the optimists said it was like...
Fox News:
  • US sailors, boats held by Iran in Persian Gulf. (video) Ten U.S. Navy sailors were detained on Tuesday by Iranian Revolutionary Guard forces when one of their boats apparently became disabled in the Persian Gulf. A senior defense official tells Fox News that there is no timeline for the sailors' release but that it would not be before daybreak. The offiicial also said that one of the sailors is female. Pentagon officials said the incident occurred near Farsi Island in the Gulf. They said one of their two small boats had mechanical trouble, causing one or both to run aground. The sailors were then picked up by Iran and taken to the island. But it is unclear where they are now.
  • Officials: ISIS may be testing chemical weapons as terror group rapidly expands. (video) There is growing evidence that ISIS is experimenting with chemical weapons as the number of foreign fighters hits a new high, according to current and former government officials. Photos taken by the Kurds in northern Iraq last summer and fall and reviewed by Fox News show burns and blistering on the skin that a source on the ground there said are consistent with the use of chemical agents. The agents were described as "odorless, colorless and absorbed through the clothing," causing burns or illness hours later. "I think it's, could be a perfect testing ground," former FBI intelligence officer Timothy Gil Sr. said. "They (ISIS) were particularly interested in using these chemicals in confined space environments, soft targets like shopping malls and movie theaters."
  • Don't forget about the Iranian barrels: Croft. (video) Oil could go into the $20 range and possibly stay there for a period, Helima Croft, global head of commodities at RBC Capital Markets, told CNBC's "Closing Bell" on Tuesday.  
Zero Hedge:
  • Icahn says he does not have any position in Time Warner(TWX). Billionaire activist investor Carl Icahn said on Tuesday he did own any stake in media company Time Warner Inc. "I have no position in Time Warner. No options, no forwards, no stock," Icahn said when reached by phone.
Financial Times:
  • Reporting rule adds $3tn of leases to balance sheets globally. Companies around the world will be forced to add close to $3tn of leasing commitments to their balance sheets under new rules from US and international regulators — significantly increasing the net debt that must be reported by airlines and retailers. A new financial reporting standard — the culmination of decades of debate over “off-balance sheet” financing — will affect more than one in two public companies globally.
21st Century Business Herald:
  • Some Beijing, Shanghai Banks Run Short of Dollars. Some banks in China's Beijing, Shanghai and Shenzhen ran short of dollar bills for cash withdrawal amid increasing demand for the currency, citing reporter's investigation.
South China Morning Post:
Night Trading 
  • Asian equity indices are +.50% to +1.75% on average.
  • Asia Ex-Japan Investment Grade CDS Index 147.25 -2.25 basis points.
  • Asia Pacific Sovereign CDS Index 76.5 +.25 basis point.
  • Bloomberg Emerging Markets Currency Index 67.56 +.15%.
  • S&P 500 futures +.79%
  • NASDAQ 100 futures +.78%.

Earnings of Note 
  • (SVU)/.16
  • (FUL)/.69
Economic Releases
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,910,000 barrels versus a -5,085,000 barrel decline the prior week. Gasoline supplies are estimated to rise by +1,861,000 barrels versus a +10,576,000 barrel build prior. Distillate inventories are estimated to rise by +1,030,000 barrels versus a +6,308,000 barrel gain prior. Finally, Refinery Utilization is estimated to fall by -.86% versus a -.1% decline prior.
2:00 pm EST
  • The Monthly Budget Deficit for Dec. is estimated at -$10.0B versus $1.9B in November.
  • US Fed Beige Book release.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Evans speaking, Fed's Rosengren speaking, China trade data, Australia Unemployment report, weekly MBA mortgage applications report and the $21B 10Y T-Note auction could also impact trading today.
BOTTOM LINE: Asian indices are higher, boosted by technology and industrial shares in the region. I expect US stocks to open modestly higher and to maintain gains into the afternoon. The Portfolio is 50% net long heading into the day.

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