The Launch Pad: Stocks are higher with oil making a 10 month high, the classic Fed rate hike pass, rig counts tick higher, Valeant Crushed
Futures are pointed higher, although they have been softening a bit as the morning winds on. Talk is following Yellen’s comments the Fed is on hold for now and that has global markets dancing a bit of a jig. Europe is up the most, +1.4% led by France and Germany. The UK is closer to flat as currency gyrations and the referendum vote nears.
Brexit is all the talk and more recent polls show the tide is turning towards a potential exit vote. Of course who knows as there is mounting evidence polls are not as reliable as they used to be. Maybe because millennials don’t have or answer the phone. Maybe the people who do answer the phones are really bored or angry at the man. The pound is actually rising in value at the moment, more than a penny against the US dollar. So if we ignore the polls, what the bookies saying? According to a recent bet placed in Leeds that the vote would be to remain in the EU, the odds were 2/5. Meaning if correct the wage will return 140,000 pounds on a 100,000 bet. Interestingly, according to a Bloomberg story 70% of bets have been for an exit but based on the money waged 73% is bet on England staying. Will be an interesting one.
Last Friday the number of rigs actively drilling in the US rose from 404 to 408. This was the first increase in the rig count since August of 2015. $50 oil is starting to alter behavior. Not sure one week changes things but there is also talk of DUCs coming on line. DUCs are drilled uncompleted wells and there are about 650 of them in North Dakota alone. A report by Genscape expects DUCs to be brought down gradually as many producers will spread out the timing. Given how long it took for US production to start declining as the price of oil fell, will it take equally as long for production to turn higher?
Valeant International (VRX) has cut their guidance this morning and shares of the largest health care company in Canada (wait, let me check that), are down 15% this morning. That is U$25 per share for a company that traded over U$250 less than a year ago. Of course one of the hardest hit is Pershing Square which had Valeant as comprise 33% of its hedge fund (using the word hedge very loosely). Valeant is down to about 6% of the fund (based on long positions only) so the portfolio has de-risked the hard way. $31.3 billion in long term debt and $8.3 billion in equity certainly makes for a high debt to equity ratio.
Well yesterday Fed Chair Janet Yellen talked down the likelihood of a June interest rate hike. Obviously the jobs number from last Friday played in an important part the newfound cautiousness. Here’s a transcript of the speech from The Big Picture. While she remains “cautiously optimistic”, she notes her concern over lower productivity growth. There is also still some concern for global uncertainty, though that fear is easing.
Economic developments abroad have significantly restrained growth in the United States over the past year, although I am cautiously optimistic that these headwinds are now fading. Concerns about slowing growth in China and falling commodity prices, which afflicted global financial markets early this year and thus likely weighed on demand, appear to have eased somewhat.
It’s now been over a year since stock buybacks, the secret sauce of financial engineering for corporate America have failed to provide a meaningful boost to stock prices. Dividend growth, is back in vogue with investors seeing growing income streams. In the Chart of the Day below we plot the relative strength of the S&P 500 Dividend Aristocrats vs. the S&P 500 Buyback Index. After years of declining relative strength, the aristocrats (increasing dividends for 25 years) have been on an upswing since early 2015. It’s come in recently, but the uptrend remains in place.
Rise of the Robots
There has been a lot of talk about the risk of automation for jobs. But maybe the risk is not as great as it seems. According to the OECD, across its 21 countries, 9% of jobs are automatable. That said, there are differences between countries. The share is 6% in Korea vs. 12% in Austria. These differences stem from previous investments into technology and to the education of workers.
Other discourse is more concerning. One study found that, in the US, 47% of jobs are at risk of automation over the next 10-20 years. Even so, there are reasons to believe these claims overstate the risks. What is more likely is that men and machines work side by side, with some degree of automation taking place. Either way, the rise of the robots is something to behold. Robots such as Pepper are already quite impressive. Hopefully, Elon Musk’s “Terminator” fears are unfounded. More from the FT here.
Diversion: The robots are even making our food now. Sushi Robots and Vending-Machine Pizza Will Reinvent the Automated food market.
Samsung is said to be launching two bendable smartphones next year. One would fold in half, much like a cosmetic compact. The other would expand from a five inch device out to an eight inch tablet like device. This is the newest innovation that will follow up the water resistant product they are marketing now with Lil Wayne.
Valeant – COMPANY NEWS
Valeant has cut their full year profit expectations as the new CEO Joe Papa tries to steer the wayward ship back on course. Papa joins Valeant from Perrigo Co. Which they a generic drug manufacturer. Suncor has reduced their 2016 production guidance by 6.2% as a result of the wildfires in Alberta. They were the Canadian oil sands producer most impacted by the fires. Lundin is seeking nearly $1bb for their gold mine in Ecuador as the price of gold has increased this year.
Copper prices are down this morning after the largest two day gain in inventories in over 10 years. Inventories in London warehouse rose 30% in just the past two days, leaving stockpiles at the highest level since February. However, this comes as stockpiles in China are declining as demand typically increases around this time of year from the red dragon. Gold prices are down again this morning after Janet Yellen stated she still sees reasons for taking down monetary easing by slowly increasing interest rates. Oil prices are above $50 this morning and rising as inventories are expected to have fallen for the third straight week.
Valeant – FIXED INCOME AND ECONOMICS
MRB Partners (The Macro Research Board), an independent investment research firm, published an eye-opening piece last Friday that theorized the Bank of Canada would be unable to raise interest rates in the foreseeable future due to the sharp rise in domestic household debt. MRB notes that “expectations of eventual rate increases ignore the extremely large structural issues facing the Canadian economy” and that “household debt levels are so excessive that we doubt the Bank of Canada will be able to raise rates materially without risking a serious recession”. Essentially, raising rates would cripple debtors so badly that the BoC would not be able to tighten money for fear of a broader shock to the domestic market. Citing comparisons to the U.S. real estate market and the current mortgage rules in place locally, the report further noted that current low costs to borrowing possess a “potential financial stability risk” whereby homeowners take on a debt load under the assumption that rates do not rise. The piece also pointed out that Canadian household debt-to-disposable income is now 35% higher than the U.S. during the housing bubble, and 70% more than our southern neighbors today. Even more concerning, real estate assets as a percentage of total assets exceed 40% for Canadians (versus 20% in the U.S.) and underscoring how damaging a large-scale housing collapse would be for domestic households.
There is nothing on the economic docket to really excite us today so markets are likely to trade in reaction to FOMC Chair Janet Yellen’s testimony yesterday that was rather upbeat considering the context, although it gave the impression of something written before the Friday numbers, and incorporating a number of edits thereafter. The central argument was that positives outweigh the negatives, the job market has come a long way, global uncertainties have receded and gradual hikes will thus become warranted. Treasury markets are stronger across the curve for now with no scheduled speakers or auctions to influence direction. The powerful rally of the loonie since last week continues in earnest again this morning with the USD/CAD cross trading as low as 1.2760 for a near four penny advance in the CAD in just two full trading sessions. The combination of a weak USD (the DXY is actually marginally higher today but down -1.90% since last week) and surging crude prices (WTI through $50.00, Brent above $51.00 time of writing) is driving the loonie strength as we await this Friday’s labor update. Canadian Ivey PMI is out at 10AM which could add to the buying should a blowout number print (+51.0 expected for May) and fuel the CAD further. Note that there are no option expiries for the currency pair in the near term so watch for technical players to tread the 1.2732 May 3 high and 1.2705 trend-line support for the trading extent of the CAD.
CHART OF THE DAY
QUOTE OF THE DAY
Opportunity is missed by most people because it is dressed in overalls and looks like work.
– Thomas Edison