Consumers are feeling practically euphoric. The Conference Board index jumped almost ten points to 102.9, the highest since August 2007, just before the whole construct came apart. Not that reality has suddenly improved that much. But hey, we’re born survivors. Sooner or later, we adjust to lower real incomes and reduced standards of living and start feeling good again.
This exuberance came just as our largest corporate citizens were hit by a tornado of problems that sank the stock market for the day: currency volatility, crashing commodities prices, disappearing XP computers, farmers switching from corn to wheat…. It was all there.
Freeport-McMoRan, one of the largest copper producers in the world, reported an 11% drop in revenues for the fourth quarter and a salty $2.85 billion loss, which included $3.4 billion in losses for its oil and gas business that it got into via two impeccably-timed acquisitions in 2013. The depressed price of copper isn’t helping. It cut its 2015 budget by $2 billion and might cut it some more. Shares dropped 6%.
Long-suffering Peabody Energy, the largest coal producer in the US, reported a net loss for the quarter of $566 million on revenues that declined 3.3%. It projected a much wider loss than expected for the first quarter and cut its dividends to nearly nothing. It’s all about preserving cash and hanging on in a desperately tough pricing environment for coal producers. Shares dropped 6.5% to $6.24, down from $72 during the glory days in early 2011.
The plunge in commodity prices is spreading far and wide. Caterpillar, the world’s largest maker of construction and mining equipment, saw net profits in the fourth quarter plunge nearly 25%, on a slight decline in revenue. It slashed its earnings-per-share outlook for 2015 to $4.60. Wall Street had been set on $6.67. The lower prices for copper, coal, and iron ore have been hitting orders for mining equipment. Now the plunge in oil prices! And to top it off, the strong dollar would eat into its overseas revenues and profits! CAT is “without a doubt, facing a tough year in 2015,” explained CEO Doug Oberhelman.
DuPont, one of the largest chemical companies in the world, saw revenues in Q4 drop 4.8% from a year earlier. For 2015, it projected that revenues would be flat, instead of up. Since it’s doing 60% of its business outside the US, it blamed the strong dollar that would cut its full-year profit by $0.60 a share.
But there was another problem: Growers in North and South America have shifted to soybeans, and away from corn, whose price has collapsed. But corn is DuPont’s most important source of seed profits. So it projected that agriculture income would decline “by a high-single digits percent” in 2015. And despite another $300 million in cost cuts, earnings would drop to $4 to $4.20 a share for 2015, instead of $4.46, as analysts had expected.
To prop up its stock price, DuPont would spin off its performance chemicals unit, which would pay a $4 billion special dividend back to DuPont. For how well this sort of spinoff worked in the energy sector, and just how quickly these new shareholders lost their shirts, read… Money Dries Up for Oil & Gas, Layoffs Spread, Write-Offs Start
DuPont will use that special dividend to buy back its own shares. It already bought back $2 billion worth in 2014, out of a $5 billion repurchase plan. A “source close to DuPont” told Reuters that the company hasn’t decided yet whether the $4 billion will be in addition to or in lieu of the remaining $3 billion in buybacks. Financial engineering, instead of chemical engineering.
Procter & Gamble, the world’s largest household products maker, reported a 4.4% drop in revenues. Particularly hit was its beauty and personal care business. Net profit plunged 31%. It projected that revenues would decline another 3% to 4% this year. About two-thirds of its revenues originate outside the US, and business is crummy overseas. It too blamed the strong dollar, which would eat up 5% of its sales and 12% of its profits this year. Its shares dropped 3.4%
Then there’s Microsoft, the world’s largest software maker. Revenue rose 8% from a year earlier. But stripping out the Nokia purchase, they fell 1%. Net income for the quarter fell 10.7%. To crank up business, it had cut prices in its Xbox and Windows businesses. The temporary boost it had obtained when businesses were dumping their XP-based computers for Windows 7 computers, well, that party was over.
Microsoft offered other plans that didn’t sit well: its new operating system Windows 10 would be a free upgrade from Windows 7 or 8. Windows tablet makers would also get it for free. And it’s trying to switch enterprises to its cloud version of Office which, like everything that happens in the cloud, costs companies less up front but more down the line. So upfront revenues would take a hit. Sales are struggling in China and in Japan. And it too blamed the strong dollar, which would knock 4% out of its revenues.
After so much good news, its shares had their “most active 1st minute since at least 2007,” reported Eric Scott Hunsader (chart) of Nanex. By the end of the day, shares had dropped 9.25%. It’s been a great first year on the job for CEO Satya Nadella. Until today.
These aren’t small companies that are exposed to whims and vagaries of minor events. They’re the largest elephants in their sectors. Suddenly they’re seeing trouble. It was that kind of day. So everyone was praying for a blockbuster report by Apple. A bad surprise would cause such a swoon in the markets on Wednesday that a member of the FOMC would have to be trotted out and evoke QE-4 on TV, to get things to rally again.
But suddenly Yahoo made positive headlines. Not with revenues, which dropped 1%, or profits which plunged by over half, or its guidance that it slashed across the board, which would normally have crushed its shares.
But with its financial engineering. It would spin off its 384 million Alibaba shares, valued at $40 billion, into a separate company to dodge a $16-billion tax liability. These shares will be distributed to Yahoo shareholders. “SpinCo” – and Yahoo’s Alibaba shares – would thus become a separate publicly traded company. Go figure. But its shares jumped 6.7% after hours.
Then Apple rode to the rescue. Revenues in the quarter jumped 30% to $74.6 billion. Sales of iPhones made up 69% of that. They were hot in China too. Gross margins rose to 39.9%. Net income soared 37% to $18 billion. Mac sales rose, iPad sales plunged. But no one cared. The iPhone is all that matters. The results crushed expectations. Shares, which had dropped 3.5% during the day, jumped 5.7% after hours.
But Apple also complained about “growing foreign exchange headwinds from the continued strengthening of the U.S. dollar” and “unprecedented movements in currencies.” The biggest culprits during the quarter were the yen and the ruble, said CFO Luca Maestri, followed by the euro, the Australian dollar, and the Canadian dollar. On a constant currency basis, revenue growth would have been four percentage points higher. She went on:
On a profitability standpoint, our hedging program partially mitigated the impact from the volatility in currencies. As we look forward, and we look into particularly the March quarter, the foreign exchange headwinds will be stronger in Q2 than they were in Q1 for two main reasons. The first one is the fact that the US dollar has continued to appreciate against foreign currencies during the last few weeks. And the other one is the fact that our existing hedges expire.
Apple’s glorious numbers allowed everyone to relax: Wednesday morning would not turn into a predetermined stock-market fiasco. Consumers around the world were buying lots of iPhones, and that’s what mattered. But our corporate heroes, with one eye firmly planted on the Fed, are whining about collapsed commodity prices and/or the suddenly evil dollar. Their message is clear: regardless of what it would do to consumers and how it would clean out their wallets, they want the Fed to jump with both feet back into total currency war.
A sense of unwelcome reality has hit energy junk bonds months ago. But now it’s spreading. Read… Junk-Bond Bubble Implodes Beyond Energy, Deals Scuttled, Yields Soar, Suddenly “Insufficient Demand”
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Stock market crashes tend to happen in the fall, or more rarely in the spring. If the Fed launches QE INFINITY as many expect, they might postpone collapse til fall. Then again, it might not–Draghi’s recent meddling seems to have increased volitility due to the political component. If, as I believe, this is an engineered collapse, I expect the Fed will sit on its hands and do nothing. The best time for a betrayal is when everyone trusts you. While no expert in finance, I did notice the recent head and shoulders formation, which no one has mentioned. Or the announcement by the Fed that it will unleash QE might actually have the opposite effect and trigger the collapse. Here there be dragons…
The ECB QE has been on the backburner, intentionally, pending the first real potential defector from the Euro. Consider for a moment that if you are one of the big, insider banks, you don’t really know which bonds are going to go tits up due to defection. Sucks trading without inside info. They knew where things were going in Greece, so they finally positioned to open up the tap and I have no doubt the ECB will accept Greek bonds, which are guaranteed to see haircuts, at 100 pennies on the dollar.
Smartest guys in the room!
My point? I don’t think the Fed will risk parallel QE. They may just press ahead. After all, all they really care about is are they positioned for the move no one else expects?
The big X factor for me right now is oil, as there are too many players in that market that are not following the insider script and growing contention between major players. Consider how Russia will clear oil sales if they are pushed out of SWIFT? Is Obama this f***ing stupid? Russia, Saudi Arabia, and the US all produce approximately 10 million barrels per day and that is ball parkish 10% of global production (generous rounding to keep it simple).
What is the price of oil, in dollars, when 10% of the market starts to suddenly clear in another currency? Arbitrage much? And then there is the whole Yemen mess, which is is geographically at a pinch point of very heavily traveled oil routes (i.e. new regime there attempts extortion of said trade route for funds putting oil traffic at risk).
Oil, either directly or via currency mechanisms, could see massive swings, but I still suspect if the existing system is held intact prices will stay in the 40s/50s for a couple of years (which sucks because I live in Alaska).
Any attempts at extortion or piracy by the new rulers of Yemen will be the “trigger” or justification of Gulf War 3.0 . Here we go again.
I think that the collapse of commodities is very related to a new pattern of consumer behavior. The one per centers spend a lot but they only impact high end businesses. Apple sells a lot of expensive phones but it is all conspicuous consumption. Everybody else buys a cheap android tablet and smartphone. The high end has the margins but not the volume and the low end has the volume but not the margins.
This theme is repeated with Microsoft which is mass market and thinks they are high end. Microsoft is giving away Windows 10 because no one will buy it. After the role out of Windows 8 which was awful, they are rightly anticipating wide spread consumer apathy. Their subscription model for Office drove me away. I now use a free word processor which is just fine.
Procter and Gamble is also a mass marketer that charges too much and the consumer is substituting without any lose of quality. I frequently buy better products on sale for less money.
Yahoo was smart to cash out of Alibaba while it still can. Alibaba is basically Amazon with smaller margins and more volume.
Alas currency wars often lead to trade wars which is prelude to real wars…
Now we have CBs of the world in frenzy to devalue their FIAT currency to make their products more competitive and boost exports. EU’s QE drove down Euro. Singapore which “lives” on export devalued their currency recently. China is reported to be allowing RMB to hit the lower band. Korean companies have taken huge earnings hits due to weak Yen and pressuring the government to devalue Won. All this “competitive” currency devaluation is not working too well for the Japanese the “sick man” of Asia.
What is interesting is that good ol USD has risen and we’re already hearing about excuse for poor Q4 earnings and of course tone down earnings due to strong USD or uncertain currency meme. Could this be the trigger for the market correction?
In a bit of good news to counter all these gloominess, one needs to point out that Dr Horton is doing pretty well. Apple too is proving that consumers are willing to spend for the right thing.
P.S. I want to reiterate here in a seperate comment my apology to max g as I treated him badly. The error was mine. JULIAN
Apple is great but not immortal. All equipment manufacturers some day go the way of the Dodo. Maybe one day people will realise that the enormous profits of Apple have been sucked out their very own pockets and they will look for a cheaper alternative because cheaper is simply more clever.
Hmmm. The uber wealthy and “donor class”, along with their chamber of commerce ilk, already have most of what they insisted they “needed” to survive and prosper, so why not go all-in and give them the next logical stage of the Beggar-Thy-Neighbor currency devaluation war? Since the majority of pols in congress already consider the donor class and Big Media their real constituency, why wouldn’t they continue to react in a submissively reflexive manner to give that righteous and enlightened “constituency” what they demand?