Will the Fed stick to its rate-hike strategy?

The chase by Frances Horodelski:

What were you doing June 29, 2006, the last time the Fed hiked rates (to 5.2%)? That was the last hike after a series of 17 hikes over two years that moved the rate from 1% to 5.25%. That stair step of increases was followed by a water fall of cuts beginning in September 2007 and ending with ZIRP on December 16, 2008. With great symmetry, seven years to the day, Janet Yellen and the Fed is widely expected to put ZIRP to bed this Wednesday , Dec. 16, 2015.
Last week ended badly, so is it time for some good market news? We’re starting the week with bad news if you’re an oil trader. The price of oil dropped below $35 as the U.S. dollar is strong, the momentum from last week continues and all the concerns with supply continue (Iraq, Libyan peace agreement, etc). According to CFTC data, the commercial shorts are at the lowest level since the Spring while speculative longs are at the lowest levels since January 2013. But the catalyst for a reversal is hard to see (there is no risk premium and remains driven by supply). Natural gas is trading at the lowest level since 2001 (when the low was $1.83, right now the commodity is $1.88) – a reversal here is also hard to see.
Weather remains unusually warm and even when it does get cold later in the week in the North East and in Canada, it couldn’t be called frigid. These are tough times. And another sign of these times is Encana which has “reset” its annual dividend from seven cents/share to six cents/year. Reset is euphemism for slash I guess.
Meanwhile, the world continues to reel from high yield collapse including last week’s closure of Third Avenue’s fund (which was very high yield) and another this morning (Lucidus) which was triggered by a significant investor wanting out in October forcing the fund to wind down. One measure of credit risk (junk yields versus the 10-year) is stressed having risen 437 basis points since June (from 2.21% to 6.585 spread) but still well below five year highs at 8.33% and crisis high of 20.55%.
Last week’s CNN fear/greed index has moved to the highest fear level in a month at 24 – but the index can go to zero. But fear is [palpable. According to one pundit, when the market falls by more than 1.5% on a Friday, 86 out of 90 times, the market is down on the following Monday. Right now, markets are showing green but weakening as I type.
Meanwhile, news continues – especially in the record setting M&A space. Another big deal on the table as Newell Rubbermaid and Jarden merger in a cash and stock deal. Each JAH shareholder will receive $21 cash plus 0.862 NWL. The combination will be a bit of a branded powerhouse with Jarden bringing things like Sunbeam, Coleman, Rawlings, Yankee Candle, Bicycle playing cards and the list goes on. M&A activity so far this year is running at a record $5.5 trillion globally (announced deals). Interesting item on the DowDuPont merger from last week. According to Barron’s, DuPont paid US$500 million to investment bankers on its spin-out of Chemours. Some more suspicious than me suggested that the big chemical merger was more to line the coffers of the bankers than for strategic or shareholders reasons!
Speaking of Barron’s, the 2016 outlook from strategists look for an average year from stocks in 2016 (2200 on the S&P 500). Stocks that were profiled positively include Macy’s, XL Group, Disney. Also a note that the correlation between stocks has risen to 71%-- the highest since 2012. What does that mean? The macro backdrop is more important than the micro and stocks are moving together. So your stock-picking prowess is less important. There is an old adage on Wall Street that suggests just when you need it most, that is when markets fall, diversification helps you the least. We’re in one of the moments. They do end – but I have found that this “tough” time happens when a transition of some magnitude is unfolding just beneath the surface.
We’ll talk transitions with Scotia’s chief strategists this morning and what his 10 themes are for 2016. MKM Partners chief derivatives strategist also uses the term transition in his daily missive. Pivot and transition – watch for these words in the strategy pieces for 2016.
From street research this morning – RBC getting more conservative on Valeant (by reducing the target to $194 from $206 U.S.); Scotia says now is the time to buy Paramount Resources (with a $15 target), BMO upgrades Mattel to outperform from hold ($33 target); Barclays introduced its global stock picks last week that included four names that are Canadian – Suncor, CNQ, Vermillion and Goldcorp (these have been the same Canadian names for some time) and Scotia introduces its 2016 featured stocks list that run from Aecon through to WPT Industrials with 41 names between. Barclays also initiates on two recent IPOs Square and Match Group with outperform.
Stick with BNN as we stick-handle these markets with guests. The futures are now in negative territory and European markets are also lower across the way. From Art Cashin at UBS: “Crude is bothering markets but it's the high yield thing that has the most market risk. Friday's Option Expiration is rumored to be enormous, which could make this a very volatile week. Stay wary, alert and very, very nimble.”
So there you have it.

Survival of the fittest

The chase by Frances Horodelski:

From the reading pile:

-Goldman Sachs is making a head and shoulders pattern and is vulnerable to $120 (!) (Bottarelli Research)

-FANG stocks are ridiculously overpriced (Facebook, Amazon, Netflix, Google) and require increases in net income of 473%, 5017%, 1752% and 81%, respectively to get p/e levels to market multiple (720 Global)

-Global exposure to USD appreciation is highest ever (at 18% of world GDP, ex-U.S.) and $9.8 trillion (National Bank Financial)

-Beware of Sovereign Wealth Funds (from China to Saudi Arabia) where selling could exacerbate global debt market valuations. Oil country SWF’s total $4.2 trillion. China’s reserves have dropped from $4 trillion to $3.43 trillion (an old number, but still falling) (Financial Times)

-Resistance on the S&P 500 is around 2072 and then about 2100 – will we take another run today (traders)

-Suncor made the front page of options newsletters yesterday as the shares have seen two days of heaving call buying (50:1 over puts) – 9 of 10 most active contracts are all calls especially the January 2016 $25 (U.S.) calls

-Not surprisingly, Caterpillar and Exxon are these most oversold Dow stocks (deeply oversold), the most overbought Dupont and Procter & Gamble (Bespoke)

-CNN’s fear/greed index is in the fearful territory (35)

-But maybe fear is justified – from Walter Murphy, CMT looking at chart patterns notes “the long-standing internal deterioration suggests that in early 2016 the market could be in its most fragile condition since 2007”

In the news cycle we have Cenovus lowering its 2016 capex budget by 19% to $1.6 billion (there will be a call at 11 am); we have a report from CIBC that 80% of millennials have no idea how to invest; there are earnings to asses including Hudson’s Bay Company after the close (watch in particular the impact of the U.S. dollar’s strength on the flagship 5^th Avenue store of Saks and commentary about the Christmas selling season), DavidsTea (third earnings release post IPO, first earnings saw the stock collapse and has never recovered trading 41.6% below $19 offering price), and Transat (reported already and outlook shows 15% improvement in first half 2016 bookings).

Sandvine and Lumenpulse have also reported results. Economically, housing starts for Canada (which traders say is unlikely to move the dial on the Canadian dollar which is oil focused) as well as initial claims (the last jobs related number before next week’s Fed meeting). BNN will have more 2016 outlooks, some small cap high tech ideas in the “disruptor” space, we’ll talk about the dollar and the results of an IIROC study into High Frequency Trading. CVE’s CEO will also join BNN.

From the analysts on the street – interesting discussion on Dollarama which had a good quarter and opened higher yesterday got pummeled on what CIBC calls “detailed” guidance that was below their forecasts and admittedly “conservative” according to the company. DOL has a history of beating its own outlook but street worried about stocks trading at about 30x earnings. RBC has a detailed report out on the short interest in specialty pharma companies. The companies with the largest % of float short positions include Insys (82%) and Lannett (36%). Biggest changes higher include Teva (+49%), Perrigo (+24.5%) while Valeant has seen its short position drop modestly.

On the U.S. active list, Men’s Wearhouse missed its Q3 numbers and looks like it will miss the next quarter as well (stock down 21%), Canadian Solar also down 14% while Adobe, Box and GoPro are modestly higher on discussions that they could be targets for Apple.

U.S. futures are higher, European markets are lower, the smart money index is high but rolling over, bonds are getting a little bit of love, gold is up, oil is flat, the Canadian dollar is a little higher.

There isn’t much to read into the action so far. Glencore is a topic of conversation as it looks potentially to IPO is agriculture assets as it pledges to cut debt further (stock up 11% in London), Uni-Select and Cott remain at the top of the performance list in Canada (+109% and 82%, respectively YTD) while the biggest bounces today may come in the mining space.

Remember that there have been three bull market bounces (+20% or more) in oil since the collapse from last June. These quick bounces are very tough to play – we’re probably due for another bounce for the very nimble only. When the turn comes, there will be plenty of time to get one board.

Enjoy the day.

What to do as the oil trade crumbles

The chase by Frances Horodelski:

It’s tough out there. The oil trade is falling apart (and taking the Canadian banks and the Canadian dollar with it) as the amount of oil sloshing around is at record levels (see below for more oil details). All 59 components of the TSX energy sub-sector were lower (led by Paramount down 23%, with Enbridge taking the most points off the index) and all 40 components of the S&P 500 energy sub-sector were also lower (led by Consol Energy down 15%). This morning we have a modest respite as oil prices are bouncing very modestly but global equity markets are lower everywhere. Some will cite weak Chinese export (-3.7%) and import (-5.6%) data although the latter was better than expected. But these are momentum trades now combined with end of year tax loss selling and positioning (don’t under estimate the impact ETFs are having on this).

Japan reported better than expected Q3 GDP numbers (revised to positive from negative) although as always with these things details and math are important to know as capital spending, for example, has been rising at the fastest pace in eight years (according to Scotia Capital) and that number was known before today’s revision. All of these tick-by-tick numbers are likely noise. Global growth is soft but generally positive. The U.S. growth trajectory is soft compared to previous cycles, but trending okay. The Fed, unless something really crazy happens, will be raising rates next week. The unknowable knock-on-effects from the end to ZIRP against a back ground of central bank divergence will make for tricky trading – and investing too.

Some energy details from Yardeni Research this morning include this nugget “a cartel that can’t control the production of its members isn’t a cartel.” True enough. According to Oil Market Intelligence OPEC production in October was a near record pace of 38.8mbpd with Non-OPEC at 57.2mbpd. The former figure is a bit of an aberration and the estimated average for the year is closer to 32-33mbd. Although consumption is rising (+2.2% to a record high in October), it isn’t enough to cause a supply constraint. And of course, Iran is coming. Oil producers have seen a huge decline in revenues – about 56% from last year’s peak or $2.1 trillion from last year’s annualized rate of $3.8 trillion. Yikes. We’ll be talking energy ratings with S&P’s analyst on the liquidity constraints for many Canadian companies – who is in good shape and who isn’t.

Today, the stories will focus on takeovers. For example, CP Rail will be holding a conference call for investors to highlight their arguments for its multi-billion dollar offer for Norfolk Southern and to refute NSC’s charges of the offer being grossly inadequate and substantially undervaluing the company. The WSJ is reporting that CP will be revising its bid offering less cash and more stock – but the cash will come sooner (May 2016) and with a temporary trust structure until the regulatory bodies approve a merger (which would take upwards of two years). Note that NSC has hired two former Surface Transportation Board officials who advise that approval is “highly unlikely to be approved.” The new offer (based on unnamed sources) is worth $91.71 U.S. (based on last night’s closes) versus $92.13 for the previous offer. Conference call begins at 9 am.

In other takeover activity (which is running at record levels), note that Staples is going to fight with the FTC over its denial of approval for its takeover of Office Depot. Nasdaq to buy Canada’s Chi-X for an undisclosed amount.

In corporate news, Home Capital Group announced a reduction in its long term ROE target to 16%+ versus 20%+ previously although its earnings growth range 8-13%) is unchanged. The company argues that its substantial equity cushion is the reason for the ROE target reduction. The Street has been modelling something close to 17% for next year and the consensus earnings growth for 2015-2017 is 2%, 5% and 8%, respectively. In Canadian economics, housing starts came in better than expected at 211,900 annualized. Housing remains a strong point.

The problem with market routs is that we all tend to get paralyzed. The babies get thrown out with the bathwater (join us for that discussion at 9 am ET this morning). I think 2016 will be a challenging year but it doesn’t mean that there aren’t some good companies that should be bought at good prices. Have a shopping list, check your numbers and make sure that you step up when the gift is given. But a plan helps.

If you’ve been using the TFSA to save, please visit http://bnn.ca for a review of the proposed changes by the new Liberal government on this savings plan which include a roll-back to $5500 for an annual contribution (from $10,000) effective January 1 2016. Contributions will be indexed to inflation. We also have an interview with Finance Minister Bill Morneau for a full discussion.

Finally, the governor of the Bank of Canada will be giving a speech today. Might be useful to get a sense of his thoughts for 2016 although the topic is on the evolution of unconventional monetary policy.

Right now the Dow futures are now some 186 points. The opening might be miserable – 2064 could be one place to watch for the S&P 500. For the S&P/TSX the 13000 level isn’t far away but may be important.

Head’s up trading.

Scammers : Missing mutual funds seller is focus of 3 investigations

VANCOUVER— At least three investigations are underway in the case of an investment dealer and former Canadian Olympic rower who has gone missing from Victoria.

Investia Financial Services Inc. has launched a probe into the activities of Harold Backer, who is also the subject of two missing-persons investigations — in his hometown and in Washington state.

The Victoria Police Department has said Backer, 52, told his wife on Nov. 3 that he was going for a bike ride but failed to return home.

“Harold’s family needs to know that he is safe,” the department said in a statement asking for the public’s help in finding Backer.

Police in Port Angeles, Wash., said last week that an officer who viewed video from a street security camera on Nov. 3 noted a man fitting Backer’s description was aboard a ferry from Victoria, a 90minute trip away.

Pierre Picard, a spokesman for Investia in Quebec City, issued a statement saying Backer has been a representative for the company since June 2005 and it has never received complaints from clients.

“Although Investia has no reason to believe that there has been any wrongdoing on the part of the representative, the company takes this situation very seriously and is conducting a full investigation into Mr. Backer’s professional activities with Investia.”

The Canadian Securities Administrators lists Backer as a seller of mutual funds in B.C. and Ontario, and its website says he agreed to be supervised. Investia said that is “in no way related to his mutual fund dealings with clients.”

“Investia’s thoughts are with the family of Mr. Backer during this difficult time,” the company said.

Backer competed in rowing in the 1984, 1988 and 1992 Olympic Games.

A report in the Victoria Times Colonist said Backer wrote a letter to his clients before he disappeared and apologized for mismanaging their money.