Energy sector drags market lower

BY  | FROM  | 2015-12-17 15:05

You would think the market being up nine of the past eleven weeks, with a net gain of 4.20%, would make investors happy—but you would think wrong.  Oil’s continuing decline this week, which was started by the lack of consensus last Friday at the OPEC meeting, appeared to unnerve traders, as they moved their money around, looking for a hiding space.  It wasn’t a flight to safety; bonds declined (as the 10-year U.S. Treasury closed at 2.14%, which is less than the 2.17% it was at year-end 2014, and down from last week’s 2.27%) and gold fell (closing at USD 1,073.70, down from the prior week’s USD 1,085.60).  Nor was it a reallocation, as all 10 sectors fell for the week.  It wasn’t a turn to potential M&A issues, as M&A remained active (and many of the issues declined: DuPont, Dow Chemical, Electrolux, Staples).  So what was it?  We’re not sure, but here are few items it appears to be: a soft sell-off of window-dressing issues (profit taking), which could add to some buying later; an acceptance—finally—that oil is down and staying low even if it rebounds (S&P 500 energy stocks are off 24.46% year-to-date, and small-cap energy is off 45.98%, so there was a potential catch-up; from June 2014 it is -39.10% and -70.63%); and the catch-all item that is the crystal ball of investors is not clear at the moment, as the Fed’s schedule for post next Wednesday combines with OPEC’s continued “we will produce more and protect our market share” stance (which is not good for stocks—basically sovereigns versus companies). 
Too many issues, not to worry, next week will focus the market on the Fed and their expected 2016 path, with everything being interpreted from that point of view.  If you don’t want to focus on the Fed, take the week off, because the following two weeks will focus on the market’s expected path in 2016—as commentary, positioning, and window dressing take over the trades.
In economic news, Chinese exports declined 6% year-over-year in November, as imports declined 8.7%.  Japan revised its GDP to a rate of 1.0% from the initially released 0.8% decline.  This restatement means that Japan was not in a recession.  The 19 EU nations grew 0.3% for the third quarter, down from the second quarter’s 0.4% gain.  In the U.S., the weekly new unemployment claims report came in higher than expected (282,000 when 270,000 were expected).  November exports declined more than expected, as imports came in better, with the takeaway being that exports were off 6.3% year-over-year and imports were off 9.4%.  The November Retail Sales report came in slightly lower than expected, though the ex-auto component came in slightly stronger than expected.  The November PPI posted a 0.3% gain (when it was expected to be flat) but remained at -1.1% year-over-year; the ex-food and energy component came in up 0.5% year-over-year.  A report said that the Chinese government was considering devaluing the yuan (which was reduced in August 2015), as the yuan traded at a four-year low to the U.S. dollar (at 6.4528). The economic bottom line was that there was nothing standing in the way of the Fed increasing interest rates next Wednesday. In M&A, JAB Holdings (which holds other coffee producers) said it would buy Keurig Green Mountain (GMCR) for USD 13.9 billion, a 78% premium.  The amazing premium, however, is relative, as the offer price was 30.5% lower than Keurig’s year-end price.  The shares are up 72.1% for the week but off 32.8% year-to-date. General Electric (GE; off 0.8% for the week) said it had abandoned its plans to sell its portion of its household appliance business to Electrolux (ELUXY; off 19.6% for the week) for a planned USD 3.3 billion.   U.S. regulators sued on anti-trust grounds to stop the planned merger of office product superstore Staples (SPLS; off 23.1% for the week) and Office Depot (ODP; off 14.0% for the week).  Railroad issue Norfolk Southern (NSC; off 2.8% for the week) said it received and rejected a revised offer from Canadian Pacific (CP; off 8.2% for the week).  Chemical issues Dow Chemical (DOW; up 0.1% for the week) and DuPont (E.I.) de Nemours (DD; up 4.0% for the week) said they would merge via a share swap deal, resulting in almost equal ownership. Also of note, in Venezuela’s midterm elections, the opposition party won major positions, as socialist President Maduro was seen as weakened.  OPEC announced that its November production had set a three-year high (average of 31.70 million barrels a day, as Saudi Arabia averaged 10.13 million—32% of the production).  Oil fell solidly under USD 40, becoming comfortable at the mid-high USD 30s, as last week’s lack of consensus combined with excess supply and weak demand to close the commodity at USD 35.36—its lowest price since December 2008. On an issue level, which for this week seemed more like a dividend column than an equity one, U.K.-based mining issue Anglo American Plc (NGLOY; off 16.1% for the week) said it would restructure its business, sell 60% of its assets, cut 85,000 workers (of 135,000), and suspend its dividend (through 2016).  Commodity issue Glencore Plc (GLNCY; up 1.2% for the week) said it would cut debt, reduce operations, sell assets, and suspend its dividend.  Natural gas transportation and storage issue Kinder Morgan (KMI; up 1.0% for the week) cut its dividend 84%, as mining issue Freeport-McMoRan Copper & Gold (FCX; off 12.1% for the week) suspended its dividend after the company had cut it in March by 84%.  The cuts yielded higher concern. Not making earnings (or expected forecasts) cost equipment and services for transportation issues Ciena (CIEN) 20.9% for the week, and cost clothing retailer Men’s Warehouse (MW) 29.3%. Top-level market volatility declined, as the up and down 1% per day moves stopped—unfortunately, they were replaced with four of the five days being down, as Thursday’s reprieve only added 0.23% and Friday’s 1% move being off 1.94%. 
The net result was a 3.79% weekly decline, to close at 2,012.37, as all 10 sectors fell.  It was only the second decline in 11 weeks (leaving it with a 4.60% gain over the period), but the decline was now, and that was the takeaway.  The decline left the market in the red year-to-date, off 2.26% (and off 0.27% with dividends).  The variance in sectors and issues this week was smaller, as the negative breadth took 92% of the issues down for the week. 
Year-to-date, however, the variance continues, as 64% of the indices have moved at least 10%, with 124 issues up at least 10%, and 199 down at least 10%. Breadth, which was negative last week, became solidly negative, as the market posted its worst week since early November and only its second decline over the past level weeks (cumulative change of 5.69%).  Only 36 issues were up for the week, down from the prior week’s 238 and a turnaround from the 270 gainers the week before.   For the week, 423 issues declined, up from last week’s 268 and the prior week’s 234 decliners.  Three issues gained at least 10% (three did last week) and another two issues were up at least 5% (14 last week and 105 the week before), as27 issues declined at least 10% (10 did so last week) and another 150 issues (30% of the index) lost at least 5% (25 last week).  All 10 sectors declined for the week, compared with seven decliners last week and five the week before that (with all 10 up the week before that).  There was few places to hide (unless you were a short seller), as the broad decline affected issues across business lines.  Energy did the worst, off 6.50% for the week, as it fell 3.36% on Friday, as financials were next, off 5.37%. Utilities did the best, off “only” 1.83%. Year-to-date, energy remains the sector with the most damage; the group is down 24.46%, with no issue in the black (the best was off 0.32%). The week pushed the market into the red year-to-date, off 2.26%, with six of the ten sectors in the red.  Energy led the way down, off 22.10% year-to-date, as oil continued to ask the question “how low can you go?”  Utilities were next, also posting a double-digit decline, off 12.39%.  On top was consumer discretionary (which was off 4.04% for the week), posting a 7.81% year-to-date gain.  Health care is up 2.30% year-to-date, as its past outperformance left it up 26.14% from the close of 2013 (which seems so long ago).  Trading levels remained high and on par with last week’s levels, with the week 13% higher than the average week over the past year.  Measurable volatility (the high-over-low price variance) increased, with the high-to-low for the week at 4.06%, up from last week’s 3.03%, and slightly above the one-year average of 2.76%.  The week posted one 1% movement, compared with last week’s four such changes, but the trend was down.   The VIX initially increased for the week, briefly trading over 20, as it closed at 24.39, up from last week’s 14.81 (which had decreased last Friday from Thursday’s 18.11 close).  Interest rates were lower, closing the week at 2.13%, up from last week’s 2.27%; the 30-year U.S. Treasury, however, closed at 2.88%, down from last week’s 3.01%. Oil traded solidly under USD 40, as it closed the week at USD 35.36, down from the prior week’s USD 40.14.  Gold moved down for the week, closing at USD 1,073.70, down from last week’s USD 1,085.60.  The U.S. dollar was weaker, closing at 1.0983, up from last week’s 1.0885 and the prior week’s 1.0591 (which was before the ECB action).  The pound closed at 1.5223, up from last week’s 1.5111, and the yen (quoted in yen-to-U.S. dollar, so higher is weaker) was at 120.90, slightly changed from last week’s 123.12.  The yuan closed at 6.4382, up from last week’s 6.4598, as reports that the Chinese government may devalue it again circulated. 
Next week will be dominated by the two-day FOMC meeting, with the highlights coming in at 2 p.m. on Wednesday, when the Fed is expected to increase interest rates 0.25%—the first increase since 2006—and then at 2:30 p.m., with the Chair’s conformance.  Other background economic data will include the CPI report on Tuesday and Housing Starts/Permits/Completions on Wednesday.  Friday will bring the quarterly quadruple witching hour, as stock index futures, stock index options, stock options, and stock futures expire, with S&P adding to the fun via its quarterly rebalancing.  Earnings will remain slow, as nine issues are scheduled, with the highlight being Wednesday’s package delivery issue FedEx (FDX) reporting after the close, as investors and traders pay careful attention to its guidance on holiday deliveries. 

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