Wednesday, February 10, 2016

Markets drift lower after oil inventory report

Dow dropped 99, advancers over decliners 5-4 & NAZ added 14.  The MLP index went up 1+ to the 213s the REIT index gained 1+ to the 292s.  Junk bond funds fell back & Treasuries advanced higher after today's auction (see below).  Oil was lower (see below) as was gold.

AMJ (Alerian MLP Index tracking fund)

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CLH16.NYM....Crude Oil Mar 16....27.33 Down ...0.61  (2.2%)

Live 24 hours gold chart [Kitco Inc.]

Treasuries fluctuated after an auction of 10-year notes drew the lowest yield since 2012 & as Fed Chair Janet Yellen stuck to her call for gradual interest-rate increases.  Shorter-dated notes declined while benchmark 10-year note were little changed with yields near the lowest level in a year.  Yellen said that market turmoil may deter the central bank from the multiple increases that officials have forecast for 2016.  Gov bonds are surging this year as turmoil in equity & commodity markets boosts demand for fixed-income assets amid concern that global growth is slowing.  Declining inflation expectations have supported longer-dated Treasuries, with the gap between yields on 2-year notes & 10-year securities falling to the lowest in more than 8 years.  Traders have pared bets on when the Fed will move again after policy makers in Dec.  The difference between 2 & 10-year note yields fell to the lowest on an intraday basis since Jan 2008.  A shrinking gap is known as a flattening yield curve.  The $23B of notes maturing in Feb 2026 yielded 1.73%, down from 2.09% at the previous 10-year sale last month & the lowest since a Dec 2012 sale that yielded 1.65%.  A gauge of demand known as the bid-to-cover ratio fell to the lowest since Aug.  3-year notes auctioned yesterday drew the least demand since 2009 as the securities were sold with the lowest yield in almost 2 years.  Treasuries have returned 3.4% this year.

U.S. 10-Year Sale's Lowest Yield Since 2012 May Diminish Demand

Russia's largest oil producer Rosneft said it will defend traditional markets & expressed doubts over any coordinated action by crude-exporting nations to curb output.  “Tell me who is supposed to cut?” CEO Igor Sechin said.  “Will Saudi Arabia cut production? Will Iran cut production? Will Mexico cut production? Will Brazil cut production? Who is going to cut?”  Venezuela has lobbied Russia, Iran, Saudi Arabia & other producers over its desire for a meeting between OPEC & non-OPEC countries aimed at a global agreement to restore balance to an oversupplied market.  Oil prices have collapsed to their lowest levels in 12 years after Saudi Arabia led OPEC to defend market share rather than cut production amid a global supply glut.  “We are working on preserving our traditional markets and we will supply those markets with oil in a competitive battle,” said Sechin, adding that his responsibility is to ensure shareholders don’t lose money as part of any talks on managing global oil markets.  Russia, which gets as much as ½ of its budget revenue from oil & gas, has signaled it would attend any meeting between OPEC & non-OPEC producers, should such a gathering occur.  After talks with the Venezuelan Oil Minister earlier this month, both Sechin & Russian Energy Minister Alexander Novak agreed to discuss cooperation on global oil markets.  Rosneft is taking a wait & see approach, but Sechin said the producers' policy has played into the hands of financial players willing to test prices even as low as $10 a barrel.  “What is this other than an invitation to an irresponsible game in which there are no limits to falling prices,” he said.  Middle Eastern producers support an excess of supply to keep prices depressed & hurt the profitability of shale drillers in the US, Sechin said.  The spike in shale output in the 3 years thru 2014 won't happen again, he said.

Russia's Biggest Oil Producer Skeptical on Output Deal With OPEC

Oil prices pulled back even as weekly data from the Energy Dept showed a surprise decrease in crude-oil stockpiles.  It said crude-oil inventories declined 754K barrels in the latest week.  Analysts expected an increase of 3.7M barrels & the American Petroleum Institute had reported a 2.4M-barrel rise in crude supplies.  The report is a widely watched measure of supply & demand, & a drawdown on stocks would signal higher demand or lower supplies than expected.  A 1.1M-barrel drop in imports for the week that likely caused the decline in supply.   Light, sweet crude for Mar delivery settled down 49¢ (1.8%) at $27.45 a barrel after rising as high as $29.22 after the report.   Brent recently traded up 76¢ (2.5%) to $31.08 a barrel.  Despite the drawdown on crude, total oil stockpiles did still grow last week, according to the EIA, because of increases to both gasoline & diesel storage levels.  Both grew 1.3M barrels, compared with expectations of a 900K-barrel decline for distillates & just a 1M-barrel increase for gasoline.  Total stocks of crude & its products have now increased in 11 out of the last 14 weeks.  It is expected that kind of oversupply will persist for months, keeping prices low. 

Oil Retreats Despite Surprise Drop in Inventories

The bulls lost control over the market in the PM.  Janet's words, which added little new to analysis, faded & worries about too much oil supply brought back sellers.  These are tough times in stock & commodity markets with no sign of relief in sight.  NAZ (the tech sector) which is vastly oversold had a minor rally.

Dow Jones Industrials


Higher markets following Janet Yellen testimony

Dow jumped up 180, advancers over decliners 5-1 & NAZ recovered 99 (finally).  The MLP index inched up pennies after its recent plunge & the REIT index rebounded 3+ to the 294s.  Junk bond funds drifted lower & Treasuries were sold after the recent advance.  Oil keeps heading lower & gold ran into profit taking but remains near 1200.

AMJ (Alerian MLP Index tracking fund)

CLH16.NYM....Crude Oil Mar 16...27.80 Down ....0.14  (0.5%)

GCG16.CMX...Gold Feb 16.......1,192.70 Down ...6.00  (0.5%)

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Chair Janet Yellen said the Fed still expects to raise interest rates gradually while making it clear that continued market turmoil could throw the central bank off course from the multiple increases that policy makers have forecast for 2016.  “Financial conditions in the United States have recently become less supportive of growth,” Yellen said before the House Financial Services Committee.  “These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market.”  Yellen also told lawmakers that uncertainty over China's economic prospects & exchange-rate policy had “exacerbated concerns about the outlook for global growth” & contributed to the latest drops in oil & other commodities.  A deeper commodities bust could trigger stresses around the world that threaten demand for US exports.  Yellen kept the door open for a rate increase in Mar, though she didn't explicitly refer to any tightening timeline or the Fed’s next meeting.  Her testimony declared it's too soon to tell whether sharp drops in stocks, oil prices & some bond yields represent passing volatility or reflect worsening global economic fundamentals that will dampen growth & inflation.  Yellen indicated that the FOMC hadn’t changed its view that the US economy will merit continued, though slow, tightening of monetary policy this year.  “The FOMC anticipates that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate,” Yellen said.  She noted that economic growth in 2015 slowed to an estimated 1.75%, restrained especially by the impact of a strengthened $ on exporters.  Still, household spending had gotten a boost from lower fuel prices & steady jobs growth, a trend she expected will continue.

Yellen Signals Rate Path Hinges on Whether Turmoil Persists

The lowest crude-oil prices in a decade are starting to hurt the global economy & aren't increasing consumer demand for gasoline and other petroleum products as much as expected, OPEC said.   The Organization of the Petroleum Exporting Countries cut its forecasts for global oil-demand growth & the world economy, saying lower oil prices were offset by lower consumer appetite while hurting large countries, such as Russia & Brazil.  The announcement comes after oil prices resumed their decline after its members failed to agree on a production cut over the week.  Lower oil prices are generally considered a boon to oil consumers & more broadly for the global economy.  But this time around, "the overall negative effect from the sharp decline in oil prices since mid-2014 has outweighed benefits in the short term," OPEC said.  The organization, which supplies more than one in three barrels of oil consumed globally, lowered its 2016 global growth forecast to 3.2% from 3.4%.  Despite oil prices reaching levels not seen in more than 10 years, OPEC also cut its oil-demand growth forecast by 10K barrels a day for this year.  Oil demand is forecast to rise 1.25M barrels a day to 94.2M barrels a day this year, citing consumers cutting back on car transport & the lingering impact of the recent financial crisis.  "Due to the aftereffects from the 'great recession', the potential that consumer spending ability could rise is limited," it said.   Despite lackluster appetite for its commodity, OPEC has continued to pump at full tilt.  Its production rose 131K barrels a day to 32.3M barrels a day in Jan, driven by higher output from Nigeria, Iraq, Saudi Arabia & Iran.  The group's output level last month implies a global oil surplus of 1.84M barrels a day in Q1.

Low Oil Prices Starting to Hurt Global Economy, OPEC Says

Time Warner, raised its 2016 adjusted profit forecast above expectations & set a $5B share buyback program.  The company expects adjusted EPS of $5.30-$5.40 for 2016.  Analysts were expecting $5.26.  TWX had cut its adjusted EPS forecast to $5.25 from "close to $6" in Nov, citing a strong $.  Time Warner reported a 6% fall in total revenue to $7.08B in Q4, hurt by a lack of hit movie releases from Warner Bros.  Revenue at Warner Bros fell 13% to $3.3B.  In the year-earlier qtr, the studio released hit movies such as "The Hobbit: The Battle of the Five Armies", "Interstellar" & "Annabelle".  The $5B share buyback was effective Jan 1 & includes the amount remaining under a prior authorization.  EPS attributable to shareholders rose to $1.06 from 84¢.  Excluding items, EPS was $1.06.  Analysts had EPS of $1.01 & revenue of $7.53B.  The stock lost 3.25.  If you would like to learn more about TWX, click on this link:

Time Warner Raises Forecast, Sets $5B Buyback Program

Time Warner (TWX)

Janet Yellen spoke & the markets listened.  They liked what they heard.  Nothing like reassuring words to comfort traders.  Of course, stocks are oversold, so it was time for bargain hunters to go shopping.  However fundamentals are not encouraging, starting with oil.  The outlook for oil remains bleak with no comfort coming in months, maybe years.  Dow did not crash thru the 16K, something traders liked to see.

Dow Jones Industrials