Market and Meaning is my weekly update on market movements and their meaning for you as an investor. Market and Meaning is normally reserved for premium subscribers but is currently being offered for free to all our readers.
Market and Meaning is broken up into three parts:
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WORLD NEWS
UNITED STATES
A bill was introduced to lift the 40-year ban on exports of crude oil, a ban enacted by Congress after the Arab oil embargo in the 1970s. The measure has a slim chance of passing due to lawmaker concerns about fuel prices and costs to refiners. A similar hearing later in the week by the House of Representatives subcommittee on energy and power will discuss whether the export restriction makes sense amid the domestic drilling boom.
A final agreement was reached on a $1.1T U.S. spending bill that would prevent a government shutdown this week and fund every government agency but the Department of Homeland Security through next September. The bill largely keeps fiscal 2015 domestic spending unchanged.
Anyone else tired of band-aids and ready for some real reform? Anyone else wonder how/why a democratic nation of over 300 million people allows a few hundred people in congress lead our nation so ineptly and selfishly? The entire situation saddens me greatly, but that changes nothing. I suppose the issues aren't significant enough for people to take action? People feel like things are a lost cause? Ignorance? I have no intention of stirring the pot, but I fear we live in a nation that has no sense of Edmond Burke's cautionary quote, "The only thing necessary for the triumph of evil is for good men to do nothing."
EUROPE
German imports and exports contracted in October. German October imports slid 3.1% from a month earlier, while exports fell 0.5%.
The Greek government has moved forward a crucial presidential vote by two months, which will now take place on Dec. 17. Greece's Parliament will be dissolved and new elections called if Prime Minister Antonis Samaras fails to secure a majority for his candidate. The surprise decision came after euro zone finance ministers said they were in favor of granting Greece a two-month extension for its bailout program, which is deeply unpopular due to its austerity measures.
Greece is a mess and things aren't getting better. Seems as thought panic is beginning to set in again. Germany can't carry Europe forever.
RUSSIA
After transferring a $378M pre-payment to Russia's Gazprom late on Friday, Ukraine is expecting its gas supply to resume today. Gas deliveries have remained suspended since mid-June after Russia cut supplies over a price and debt dispute and negotiations further deteriorated because of the separatist war in Ukraine's east. The country will receive 1B cubic meters of gas for December as freezing temperatures set in.
An IMF mission will visit Kiev today to begin talks with the country's newly elected government over a $17B loan package that may need to be ramped up due to the separatist crisis in Ukraine's east. The IMF agreed in April to shore up Ukraine's depleted foreign currency reserves and economy, but had waited to disburse the next loan tranche, worth $2.7B, until a new government was formed and a 2015 budget was ratified.
The IMF has identified a $15B shortfall in its bailout for Ukraine, which has opened because of a 7% contraction in country's GDP and a collapse in exports to Russia, Ukraine's biggest trading partner. The additional cash needed would come on top of the $17B loan package announced in April and would have to be filled within weeks to avoid financial collapse. Since the bailout program began in April, Kiev has received $8.2B in funding from the IMF and other international creditors.
Falling oil prices are punishing Russia's economy in serious ways. Mixed with Western sanctions, they are in a really bad spot if prices stay this low for very long. Perhaps that is part of the reasoning in allowing prices to go so low so fast? Something to ponder.
CHINA
China's Shanghai Composite Index surged above 3,000 this week for the first time since April 2011 as the country reported a record trade surplus. Though today's data is seen as a sign of weakness for China's economy, falling imports left the country with a trade surplus of $54.5B. Over the past month, the Shanghai Composite has soared as much as 21% on cheap valuations and expectations of more policy easing.
Increasing its lending target for 2014, China has told banks to issue more loans by the end of the year to lift flagging economic growth. The People's Bank of China will now permit banks to lend more than 75% of their deposits. The move comes just one day after Chinese inflation slipped to a five-year low and follows last month's surprise cut in interest rates.
Hong Kong officials met little resistance as they began clearing the main pro-democracy protest camp near the heart of the financial center today. Hundreds of police stood by as workers used wire cutters to remove protester barricades, following a court injunction two days ago. The protests drew well over 100K people at their peak as students demanded electoral reforms and free elections.
The WTO's IT trade deal is likely to collapse due to a stand-off between South Korea and China, which was refusing all attempts to broker a compromise. Eliminating tariffs on sales of roughly $1T, the deal would liberalize trade in more than 250 categories ranging from semiconductors to medical devices. Countries negotiating the package have set themselves a goal of reaching an accord by this week and further delay raises the risk that it might unravel.
JAPAN
Japan's economy shrank more than initially reported in the third quarter, contracting 1.9% as capital spending declined and private consumption remained weak. Last month, the government estimated that GDP contracted 1.6% during the July-September period. The revised data confirms Japan slipping into recession less than a week prior to general elections that Prime Minister Shinzo Abe has framed as a referendum on his economic policies.
Japanese shares fell to a near-two week low this week as a stronger yen prompted investors to sell exporters' shares. Japanese consumer confidence in November also weighed on stocks, dropping for a fourth straight month, as an April sales tax hike continued to drag down sentiment.
Japan is in recession and has little hope of recovery. I have taken out Yen puts as a portfolio hedge in the expectation of further declines and potential collapse/default.
IRAN
No notable news, but that doesn't mean nothing is happening.
OIL
Brent crude fell to a new five-year low as a number of banks, including Morgan Stanley cut forecasts, saying oversupply would peak next year after OPEC decided not to cut output. Brent for January settlement declined as much as $1.72 to $67.35 a barrel on the ICE Futures Europe exchange, its lowest intraday price since October 2009. WTI for January delivery also slumped, dropping as much as $1.25 to $64.59 a barrel on the New York Mercantile Exchange.
Calling it a "crazy economic policy", Prime Minister Stephen Harper says that Canada will not impose new carbon emission rules on its oil and gas sector in a time of falling oil prices. Canada's critical energy sector has been slammed by the recent collapse of world oil prices, and a number of Canadian producers recently have announced plans to cut spending and dividends.
North Dakota regulators ordered producers pumping oil from the Bakken shale field to strip explosive gases from their product in an effort to make crude-by-rail transport safer. The rule, which will take effect on April 1, 2015, is the first major move by regulators to address the role of gaseous, volatile crude oil in railroad accidents which have been linked to several fiery explosions, including one last year in Quebec that killed 47 people.
"Why should I cut production?" said Saudi Arabia's oil minister Ali Al-Naimi in response to questions over whether he thought it would be necessary to reduce output prior to OPEC's next meeting in June. While oil prices have fallen more than $10 a barrel since OPEC's Vienna meeting, Naimi showed no greater concern, saying that the market would be left to balance itself without the Kingdom's intervention. Crude plunged as OPEC cut its demand forecast for 2015.
Saudi Arabia knows that if they cut production, someone else will make up the difference and steal their market share. They also know that they can outlast everyone else with low oil prices. Their cost per barrel is around $5-6.
EMERGING NATIONS
No notable news, but that doesn't mean nothing is happening.
EBOLA
No notable news, but that doesn't mean nothing is happening.
ISIS
No notable news, but that doesn't mean nothing is happening.
BUSINESS NEWS
SONY
"The bottom line is that this was an unparalleled and well planned crime, carried out by an organized group," wrote a top executive at FireEye's (FEYE) Mandiant forensics unit, in an email to Sony Pictures (SNE) CEO. Restoring Sony's network is taking a considerable amount of time, as each drive needs to be manually replaced or re-imaged. Questions regarding the extent of damage and who was behind the attack still remain, although reports suggest that North Korea is still the prime suspect.
CBS/DISH
CBS and Dish Network reached a new carriage fee deal over the weekend, after CBS (CBS) pulled CBS, CBS Sports and Showtime from top Dish (DISH) markets late on Friday. Terms of the deal weren't disclosed, although CBS reportedly won a concession from Dish which disables its ad-skipping DVR feature for a window of 7 days for CBS-owned stations broadcasted on Dish.
I dream of a day when everyone joins me in the freedom of life without cable. So many better things you can do with $100/month and still see almost all the shows you want.
AMAZON
Amazon plans to shift more of its drone testing and research abroad if it doesn't get permission to test-fly in the U.S. soon. Outdoor testing is crucial to developing the "Prime Air" program, says Amazon (AMZN), which aims to use drones to deliver packages in 30 minutes or less. Meanwhile, Amazon has begun testing 1-hour delivery in Manhattan via bike messenger under a new project called Amazon Prime Now.
What are your thoughts on drones flying around? I think it is ridiculous. Driverless cars make sense, but a bunch of flying drones seems very unlikely except in the hands of well trained pilots. They have great utility, but helping Amazon improve delivery time does not qualify as a reason for large scale adoption.
WALGREENS
A new app from Walgreen gives customers in California and Michigan the option to consult with a board-certified doctor online. Walgreen (WAG), which is partnering with MDLive on the project, plans to roll out the initiative in more states next year. Doctors can write prescriptions based on the online consults which are expected to last 10 to 15 minutes.
I think the moves by Walgreens and CVS to add clinics and medical services to their stores is brilliant. A big fan of what they are doing and think it will bring notable future revenues in our changing healthcare landscape.
WAL-MART
After years of proclaiming China as one of its top markets, Wal-Mart (WMT) lowered its status in August as the worst of its major countries. A management shake-up and job cuts have followed. A Bloomberg report suggests that Wal-Mart's retail business in China has been deteriorating for years, but was hidden by questionable accounting and sales practices, including bulk sales and sales being allegedly booked when no merchandise left the shelves.
Chinese are very nationalistic and there are few companies more American than Wal-Mart. Also, China is the home of cheap, how on earth could Wal-Mart have success competing in China with other low cost Chinese retailers?
Google is shutting down its Google News service in Spain due to new legislation that will require the company to pay publishers for displaying any portion of their work. "As Google News itself makes no money (we do not show any advertising on the site) this new approach is simply not sustainable," announced Richard Gingras, head of Google (GOOG, GOOGL) News. The company will close the service on December 16 and will remove all Spanish publishers from its international versions.
MICROSOFT
Microsoft expects to release Windows 10 "early next fall," says Chief Operating Officer Kevin Turner, outlining a slightly later release than previous comments had suggested. An autumn release would put Microsoft's (MSFT) Windows 10 on track to launch three years after Windows 8, which received mixed reviews due to its tablet and touchscreen-oriented design.
Microsoft is partnering with Bitpay to allow people to use Bitcoin (COIN, BTCS) to purchase apps, games, and videos for Windows, Windows Phone, and Xbox. Using the service like many retailers, Microsoft (MSFT) will not be accepting bitcoin itself, but will rather make use of the Bitpay service which converts the digital currency into dollars that are then placed in its account. BitPay CEO Tony Gallippi called the move "the best endorsement for Bitcoin to date."
On Microsoft and Bitcoin, I had this to say on Scutify, "At first glance, this sounds like a good win for Bitcoin, then I remember that $MSFT hasn't made a good decision in 15 years. Can you picture $AAPL iTunes accepting Bitcoin? Hard for me to see."
EBAY
eBay is weighing a plan to "eliminate thousands of jobs early next year." One source says the company has talked about slashing at least 3,000 jobs, or 10% of its total workforce, with cuts primarily affecting workers in eBay's (EBAY) core marketplace division. The planned layoffs would come ahead of a PayPal split set to occur by the end of next year.
BAIDU
Despite coming under fire across the globe this week, Baidu (BIDU) is buying a minority stake in Uber, giving the ride-sharing giant a boost as it expands in China. The investment may be worth as much as $600M, Bloomberg reports quoting China National Radio. Earlier this month, Uber raised $1.2B in a new round of funding that valued the company at $40B.
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- Brian
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Disclosure: I have no positions.
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