04May2015 Market Update: Opening Markets Rise Half Percentage Point, Trade Sideways And Then Roll Over

Here is the current market situation from CNN Money

North and South American markets are broadly higher today with shares in Mexico leading the region. The IPC is up 1.11% while Brazil’s Bovespa is up 1.01% and U.S.’s S&P 500 is up 0.42%.

U.S. Stocks Trade Higher

U.S. stocks rose, boosted by a handful of solid earnings reports and gains in European and Chinese shares.

Prudential’s Asia Margins Don’t Stand Too Tall

Worries that regulators may take aim at U.K. insurer Prudential’s seemingly wildly profitable Asian business are overdone.

Junk Bonds “Even More Dangerous” Than Stocks, Icahn Says

Early last month we asked: “Is The Stage Set For A High Yield Meltdown?” As a reminder, here is how we summarized prevailing HY market conditions:

Periods of QE in the US saw US HY supply surge 50% above normal levels as issuers sought to take advantage of lower borrowing costs and investors clamored for the relatively higher yields they could get by taking on more credit risk. More recently, struggling oil producers have tapped the market in an effort to stave off insolvency as crude prices plummet, leading directly to a situation where outstanding HY energy bonds account for a disproportionate share of all outstanding debt in the space. With rates set to rise later this year, with crude prices likely to stay depressed for the foreseeable future, and with suppressed liquidity in the secondary market for corporate credit poised to bring heightened volatility, the stage may be set for a high yield meltdown.

Now, Carl Icahn is out warning that junk bonds are in fact the biggest threat facing investors today.

“What’s even more dangerous than the actual stock market is the high yield market.”

“It’s ridiculous…I think default rates are going to go up in this market… and the people buy it! The public… I’m going to try to put stuff out and let the public know what they should be aware of because I feel bad for them.”

“They’re buying the yield and they think ‘Oh, bonds are going to go up,’ but when they start coming down, there’s going to be a great run to the exits and at least in 2008 you had a bit of a safety net with th …

McDonald’s to reorganize units, boost franchises in turnaround

(Reuters) – McDonald’s Corp’s new chief executive officer said on Monday he would reorganize operating units, sell more restaurants to franchisees and cut costs in a bid to turn the fast-food chain into a “modern, progressive burger company.”

BofA to Let Investors Vote on Moynihan’s Expanded Role

Bank of America said it will give shareholders the chance to vote on the board’s decision in October to give the chairmanship to CEO Brian Moynihan.

US Factory Orders Drop YoY For 5th Consecutive Month

After 6 months of MoM drops (something not seen outside of a recession), February saw a modest 0.2% rise in Factory orders which has spurred economists to extrapolate a 2.0% expectation for March. However, while Factory Orders rose 2.1% in March, Feb was revised lower (to a -0.1% drop) leaving US Manufacturing Orders down 4.0% YoY. The series of YoY drops continues (now at 5 consecutive months) to indicate a recessionary environment. The ratio of inventories-to-shipments remains stuck at extremely elevated levels.

For those curious how Factory Orders “beat” rising by 2.1% compared to the 2.0% expected, and yet the final dollar number was still below the expected one, the answer is simple: when you revise the base number lower, a 2.1% increase is not nearly enough.

Leading to a “beat” MoM, even if in dollar terms it was a miss, and will lead to a downward GDP revision.

Year over Year, this is the 5th consecutive monthly drop… hint: recession.

& …

Oil Prices Reach Five-Month Highs

Oil prices moved higher in European trade and reached five-month highs amid stronger signs of economic growth in the eurozone.

U.S. factory orders post largest gain in eight months

WASHINGTON, (Reuters) – New orders for U.S. factory goods recorded their biggest increase in eight months in March, boosted by demand for transportation equipment, but the underlying trend remained weak against the backdrop of a strong dollar.

U.S. Firms Shoulder Rising Debt

U.S. companies and consumers are on a borrowing binge, but stock and bond bulls point to data, such as strong profit margins, that suggest the corporate debt pile is manageable.

U.S. Supreme Court hands win to Barclays over $4 billion in Lehman assets

WASHINGTON (Reuters) – The U.S. Supreme Court on Monday allowed Barclays Plc to claim about $4 billion of disputed assets as part of its hurried purchase of much of Lehman Brothers Holdings Inc’s[LEHRG.UL] brokerage unit at the height of the 2008 financial crisis.

Dennis Gartman’s Latest Trade Recommendation

We wonder if Gartman’s newsletter recently added a “purely for comic purposes” disclaimer because this is (and continues to be) nothing short of humor gold.

NEW RECOMMENDATION: We are sellers this morning of the Russell and we are buyers of the S&P, for the chart of the former is ominously bearish while the chart of the latter is interestingly bullish. We’ll do equal dollar sums on both sides of the trade and we’ll have a stop in tomorrow’s TGL, but for now we’ll not wish to see the trade more 2% against us and as we write the June Russell 2000 is trading 1222 and the June S&P is trading 2099.50.

And sure enough from the open: the “ominously bearish” RUT is up 0.7%, the “interestingly bullish” SP: +0.2%.

Oil slips after hitting 2015 high above $67

LONDON (Reuters) – Oil eased toward $66 a barrel on Monday after reaching a 2015 high, as ample current supplies and weak Chinese factory activity countered expectations of a tighter supply and demand balance later this year.

Dow Fires 1,750 After Boosting Share Buyback Program To $10 Billion

Several months ago we showed that in the aftermath of its brush with vocal activists such as Dan Loeb and Nelson Peltz, Dow Chemical did everything it could to push its stock price as high as it possibly could go. It did this in the simplest of ways: by buying back its own stock. In fact, over the past year, DOW bought back over $4 billion in DOW shares after barely doing any stock repurchases in prior years.

But that’s just the beginning.

As a reminder, six months ago, Dow increased its share buyback plan by $5 billion which boosted the total share repurchase program to just shy of $10 billion. It did this so CEO Andrew Liveris would keep his job, and keep shareholders happy as it scrambled to prevent Daniel Loeb’s push to split the company.

Of course, it also didn’t hurt that as a result of the buybacks, shareholders were ok with a 30% jump in the CEO’s compensation despite a consistent decline in DOW’s net income.

Still, without an organic growth in the company, and with increasing compensation for C-suite execs, and with just financial engineering to make the company appear prettier than it is, someone had to foot the bill.

Sure enough,

PartnerRe Rejects $6.4 Billion Offer from Agnellis’ Exor

The reinsurance company said that it was committed to its merger with Axis Capital Holdings.

Buyback Bonanza, Margin Madness Behind US Equity Rally

One of the themes we’ve been keen to advance this year is the idea that the rally in US equities is in large part attributable to corporate buybacks. In essence, companies tap yield-starved investors in the debt market and use the proceeds to repurchase shares, thus ensuring a constant bid for their stock while artificially inflating earnings and propping up the value of equity-linked compensation at the same time. All of this comes at the expense of capex (i.e. investing in future productivity and growth) and as we’ve noted on several occasions, is easy to spot if one looks at the divergence in the percentage of companies beating earnings estimates versus the percentage of companies beating revenue estimates.

Over the weekend, we pointed to data from JPM which shows that equity withdrawal in the US (IPOs minus buybacks/LBOs) is the most negative it’s been since early 2008 and has trended lower in lockstep with the long-running rally in US stocks, suggesting yet again that in this case, correlation may indeed imply causation.

Here’s more from Morgan Stanley on the buyback binge, its relationship to the equity rally, and what it all means for corporate health:

Why Are Companies Buying Back Shares? Lack of confidence in organic growth alternatives, very low cost of debt relative to equity, a struggle to improve ROEs, and relatively flat WACC curves have driven the pace of share buybacks. Wh …