The rally that was sparked by yesterday's late-day FT report had all but fizzled overnight, replaced by more concerns about the state of the global economy when Austrialia's central bank surprised the world (just 9 of 29 analysts had expected this move) by becoming the 15th in a row to ease in 2015 (the list: Singapore, Europe, Switzerland, Denmark, Canada, India, Turkey, Egypt, Romania, Peru, Albania, Uzbekistan and Pakistan, Russia and now Australia), cutting the cash rate to an all-time low of 2.25%, and sparking more concerns about a global currency war or rather USD war against every other currency, when the USDJPY algos woke up again, and did everything they could to re-defend the critical 117.20 level in the USDJPY which has proven critical in supporting the market in recent weeks, once again using the Greek "softening tone" story as the basis for the ramp as Europe woke up, which in turn sent the DAX promptly to new all time highs, while the Athens stock market surged by 9% at last check.
The latest uptick in crude prices - Ostensibly, triggered by a notable drop in the Baker Hughes rig count - will be one more head-fake, a false breakout. Keep in mind, oil drilling rigs and oil wells are not the same thing. Armored Wolf's Jon Brynjolfsson expects global inventories to continue to build until at least June. Drillers seem to be in denial, they fail to acknowledge that as long as inventories are building toward untenable levels, there will be extreme pressure on spot crude prices. What they don’t seem to realize is that absent a universal suppliers’ cartel (which OPEC clearly is not, because its members are autonomous, and many of the largest producers, including Norway, Russia, and US are not even members), high social break even prices incentivize individual producers to pump more, not less, oil at low prices!
Virtually all of AAPL's cash growth in the December 31 quarter took place offshore, where its cash hoard rose from $137 billion to $158 billion (mostly thanks to the previously mentioned surge in Chinese iPhone purchases). How much of Apple's cash is domestic? As the following chart shows, a paltry $20 billion of AAPL's cash, or barely above 10%, is held domestically - one of the lowest levels in the past 4 years - and can be used for such corporate activities as stock buybacks and dividends.
With liquidity increasingly negligible this morning's chaos in crude has now spilled over into stocks. A triple whammy of disappointing data this morning and re-tumbling crude hopes have sent the S&P down 25 points from overnight highs and will below 2000 in cash. The Dow is now down over 1000 points from its record highs. Treasury yields have given up all the AAPL rate-lock surge and are at new cycle lows.
It appears the new narrative for why oil prices surged Friday and this morning is that a record-breaking drop in the US Rig Count means production levels will drop (and thus Saudi Arabia wins). This was enough to spark a melt-up squeeze on Friday which extended this morning running stops above $50.50. However, since that stop-run was exhausted, prices have tumbled back lower - testing a $47 handle - as investors realize the link between production and rig count is spurious at best and anti-correlated at worst.
The world is running out of oil. Peak Oil is a reality, all that is open to debate is how fast production will drop off, and how quickly the world will simply run out of oil. The lack of certainty is due to the fact that (as with everything else) we can’t trust the “official” numbers fed to us, with respect to either global production or global reserves.
In a few minutes, Exxon (first, then all other energy companies) will confirm if the earnings collapse so many had predicted to take place in Q1 as a result of plunging crude prices will materialize. Wait, did we say "so many", make that nobody. Here is what Factset has to say about forecast Q1 energy earnings: "On September 30, the estimated earnings growth rate for the Energy sector for Q1 2015 was 3.3%. By December 31, the estimated growth rate fell to -28.9%. Today, it stands at -53.8%." Just a little off.
It's not exactly the same as if Wall Street were to unionize and demand higher wages, but when US energy workers - supposedly the best paid profession away from those who BTFD or BTFATH for a living - go on strike, it is time to pay attention, which is precisely what happened yesterday afternoon, when US union leaders launched a large-scale strike at nine refineries after failing to agree on a new national contract with major oil companies. It marks the first nationwide walkout since 1980 and impacts plants that together account for more than 10% of US refining capacity. The United Steelworkers Union (USW) began the strike on Sunday, after their current contract expired and no deal was reached despite five proposals.
- Germany Sees No Need to Scrap Troika in Overseeing Greek Turnaround (WSJ)
- European markets subdued as Chinese data weighs (Reuters)
- U.S. Oil Workers Strike Enters Second Day as Crude Prices Slide (BBG)
- Oil prices rally above $55 as investors pile in (Reuters)
- Obama Wants a New Tax on U.S. Companies' Overseas Profits (BBG)
- If Trading Bonds Is Hard, Think About Pain When Rates Rise (BBG)
- Julius Baer Braces for Swiss Franc Impact (WSJ)
- Coke, Budweiser win as Super Bowl ad battle gets serious (Reuters)
The overnight session had been mostly quiet until minutes ago, when unexpectedly WTI, which had traded down as low as the mid $46 range following the weakest Chinese manufacturing data in two years, saw another bout of algo-driven buying momentum which pushed it sharply, if briefly, above $50, and was last trading about 2.6% higher on the day. In today's highly correlated market, this was likely catalyzed by a brief period of dollar weakness as well as the jump of EURCHF above 1.05, within the rumored corridor implemented by the Swiss National Bank, which apparently has not learned its lesson and is a glutton for a second punishment, after its hard Swissy cap was so dramatically breached, it hopes to repeat the experience with a softer one around 1.05. Expect to see even more FX brokers blowing up once the EURCHF 1.05 floor fails to hold next.
"This is going to hurt, no question," fears a landowner in Santa Barbara with a dozen oil wells. Layoffs are "kind of like a death in the family," exclaims a geophysicist in the Permian Basin. Houstonians were hoping for a hiccup, says one restauranteir, but now "they're getting more cautious." As WSJ reports, rumor is becoming reality across America as "unambiguously good" news of low oil prices turns from a trickle to a deluge of job losses and insecurity. Cutbacks aren’t yet reflected in broad data on employment, home sales or tax collections. But fallout is beginning to affect people, starting with the legions working as suppliers to the energy industry.
On September 30, the estimated earnings growth rate for Q1 2015 was 9.9%. By December 31, the estimated growth rate had declined to 4.2%. Today, it stands at -1.6%. Most of the expected decline in the estimated earnings growth rate for the S&P 500 for Q1 2015 is due to reductions in earnings estimates for companies in the Energy sector. On September 30, the estimated earnings growth rate for the Energy sector for Q1 2015 was 3.3%. By December 31, the estimated growth rate fell to -28.9%. Today, it stands at -53.8%.
Chinese Corruption Probe Pivots To Bankers As Manufacturing Contracts At Fastest Pace Since August 2012Submitted by Tyler Durden on 02/01/2015 12:29 -0500
With all eyes on China as the great Eastern hope for putting a floor under crude oil prices, last night's dismally disappointing Manufacturing PMI print looks set to remove that last pillar of 'demand' - artificial or not. Having fallen 6 months in a row and printing 49.8, missing expectations of 50.2 (3rd of last 4 months) and down from the prior 50.1, this is the first official contractionary signal for Chinese manufacturing since September 2012. With Industrial Enterprises in China seeing profits collapse at 8% YoY along with the slowest GDP growth (7.3% of magic unicorns and credit expansion) since Q1 2009, the PMI components' broad-based weakness show significant signs of a cyclical slowdown. What is perhaps most worrisome though is that with cries for more RRR cuts or government-sponsored largesse, the banking system has, it appears, become the new focus of the nation's corruption probes as the President of China Minsheng Bank was taken away by the Communist Party’s Central Commission for Discipline Inspection.
Simple near-term outlook.