Wal-Mart Stores has always been about low prices, low margins and high volume. This holiday season, though, the retailer is looking to amplify that, with a plan to go head-to-head with Amazon and its other competitors on prices.
Wal-Mart executives are mulling over a plan to install a formalized price-matching program in its stores, Shelly Banjo reported on the MoneyBeat show this morning. That’s great for customers, who will be able to leverage low online prices against Wal-Mart’s in-store prices on the spot. But the plan will almost certainly drive down Wal-Mart’s already razor-thin margins.
The company’s always had this policy informally, allowing local store managers to do price-matching. But the fierce competition among retailers is driving Wal-Mart to take this move, in the hopes of engendering goodwill – and hopefully loyalty – with its customers.
JDS Uniphase Corp. has said it plans to split into two publicly traded companies, separating its optical components business from its networking operations by next year. But one analyst thinks the firm might still consider a sale of the optical business instead.
MKM Partners analyst Michael Genovese thinks JDS’s optical business could merge with rival Finisar Corp.–and said that JDS’s management on a conference call with analysts Thursday suggested that there could be tax benefits of merging with a company before the spin-off takes place rather than after. JDS has said that it expects the spin-off will happen in the third quarter of next year.
Mr. Genovese said that a combination of the two companies would quickly add to both companies profits because it would help give the companies more pricing power. Vendors in the sector, Mr. Genovese said, have struggled to find pricing leverage. A merger of the two could lead to more consolidation in the industry too.
Still, Chief Executive Thomas Waechter did reiterate the company’s commitment to a spin-off of the optical business rather than a sale, explaining that with a spin-off, shareholders will get an incremental benefit from the progress he expects to see in that business over the next two to three years. That company will make commercial lasers and 3D sensors as well as optical components equipment.
The Silicon Valley fiber-optics communications company is among the wave of U.S. corporations that have been announcing breakups recently. Like many of those companies, JDS Uniphase announced plans for a split up after an activist investor, Sandell Asset Management, was in the mix.
Sandell Asset Managment has been pushing the company for a sale of the opticals business rather than spin it off. In a letter to JDS’s board on Oct. 1, Sandell, which owns 2% of the company’s shares, said their fund believes that there are several potential buyers for the business and that JDS should kick off a so-called dual track process, meaning it should prepare for an IPO while conducting an auction process to potentially sell the business.
JDS’s shares are up nearly 4% Thursday but even with that pop are down nearly 5% from the trading day before the spin was announced on Sept. 11.
Shares of Finisar also rose roughly 1.5% Thursday.
After weeks of being beaten relentlessly lower, the Russian ruble suddenly snapped back in early trade Thursday.
Currencies tend to move in hundredths or tenths of a percentage point in a given session. But the ruble’s rally was something straight out of the equities market, at one point gaining more than 5% against the dollar and so recovering most of the past week’s losses in the space of a couple of hours.
The Russian central bank has been managing the ruble’s declines by spending its foreign currency reserves.
There was some speculation it would launch more forceful intervention at Friday’s scheduled meeting, perhaps hike rates, to defend the currency. Others suggested a Russian-Ukraine gas pipeline deal had been hammered out or that a resolution of the Ukraine-Russian conflict was agreed, either of which might pave the way for an end to western sanctions on the country.
Whatever the trigger, the move seemed to have caused a number of market participants to close out their short positions on the currency–in effect having to sell dollars and euros to buy rubles–driving the sharp acceleration.
But the magnitude of the ruble’s short term gains merely puts into focus its long term losses. The ruble traded at 32.9 to the dollar at the start of the year. At its worst this week, it took a shade under 44 rubles to buy a dollar. In other words it had devalued by a third this year. And by nearly half since it was strongest in 2008.
Does this mean the ruble’s suffered its worst?
Probably not, for three reasons.
One, even if a deal is struck with Ukraine, it’s unlikely to be a lasting settlement. President Vladimir Putin’s ambitions to reverse Russia’s loss of territory and prestige in the wake of the Soviet Union’s collapse is bound to keep bringing Russia into conflict with the other sovereign states carved out of the former empire. Not just Ukraine, but perhaps even with the Baltic states, which happen to be part of the Nato military alliance.
Two, there’s little indication that oil prices have bottomed. Fracking in the U.S. and other fresh sources of supply set against a soft global economy suggest there’s scope for further oil price falls. Russia’s government is dependent on oil for revenues. Lower oil revenues will make governing trickier and thus raise the risks of political instability. At the same time, Mr. Putin has expressed reluctance to spend down the country’s currency reserves to keep defending the ruble.
Three, with the end of the U.S. Federal Reserve’s asset purchase program, the U.S. economy continuing to pick up and the likelihood that the Fed will have to tighten policy next year, the dollar is likely to gain further ground. This will put pressure on emerging market currencies generally as capital increasingly flows to the U.S.
For now Russia is likely to remain the province of only the bravest investors, and the ruble will reflect this.
The U.S. economy expanded at a 3.5% annualized rate in the third quarter. What’s that mean? Is that a San Francisco Giants World Series game seven, historic for-the-ages victory? Or is it more like a New York Mets, mid-July win: nice, but you have a distinct fear that it’s not going to amount to much of anything?
Wall Street’s branch of the dismal science has started weighing in, and it seems they’re thinking more July clunker than October classic. While the headline number was good, better than expected even, consumer spending was weak, and there’s nothing in it to suggest the economy is going to break out of the 2-2.5% growth rate it’s been recording the past few years.
Here’s a sampling:
Millan Mulraine, deputy head, U.S. research and strategy, TD Securities: The crux of the GDP report was broadly constructive, with the gains broadly based and pointing to positive underlying momentum in the US economy going into the last stretch of 2014. The upbeat assessment on the recovery should provide some vindication to the Fed’s more constructive view on the economic outlook, and it will be seen as an indication that much of the strong underlying momentum in Q2 carried into Q3. However, with some indications of weakness emerging in housing and consumption spending activity, and the global backdrop becoming unsupportive to the US recovery, we expect the pace of growth to slip further in Q4 with the economy eking out a modest 2.0% to 2.5% GDP advance. We will get a better handle on this tomorrow from the monthly PCE numbers, which would give us some indications on the nature of the hand-off to Q4.\
Dan Greenhaus, chief strategist, BTIG: Our first look at Q3 GDP wasn’t as good as the headline suggests nor as good as we’d like. The composition leaves a bit to be desired. That said, growth is growth and the economy does appear to be on sounder footing today than at any time over the last few years.
Peter Boockvar, chief market analyst, Lindsey Group: While growth was better than expected in Q3, the key components of personal spending and investment was mediocre. We’ll see in Q4 how much spending responds to lower gasoline prices. For those 35% of households that rent their homes, lower gasoline prices are only a modest offset. Exports were certainly a bright spot but in light of the challenges overseas we have to wonder for how long. Government spending on defense is certainly lumpy quarter to quarter. Assuming no change to Q3 GDP in future revisions and another 3% GDP print in Q4, this would bring full year economic growth to 2.3% vs 2.2% in 2013 and 2.3% in 2012.
Jason Schenker, president, Prestige Economics: Today’s report was positive and strong, but also paves the way for gradual 2015 Fed Funds Rate hikes. The implication is clear: the story of modest U.S. growth continues, while inflation remains modest. While today’s session should be positive for equities and commodities, the dollar and yield curve could also rise modestly today.
Wal-Mart is testing a program to match online prices from rivals like Amazon.com Inc. this holiday season, a move that could make the discounter more competitive but cut into profits. The company also plans to close about 30 underperforming stores in Japan. Shares ticked down 0.4% to $76.12 in premarket trading.
Time Warner Cable, still awaiting regulatory approval for its deal to be bought by larger peer Comcast Corp., said its third-quarter profit fell 6%, missing Wall Street expectations, as the company lost subscribers. Shares were inactive premarket.
Avon swung to a profit in the third quarter, with revenue increasing 1% in constant dollars. Shares rose 4.9% to $11.50 premarket.
Altria Group Inc. said its profit rose slightly as higher prices offset yet another decline in cigarette volumes. Shares edged up slightly to $47.58 premarket.
MasterCard Inc. said its profit jumped 15% in the most recent period as the credit-card company posted higher revenue and payment volumes. Shares gained 2.1% to $77.60 premarket.
L-3 Communications Holdings Inc. said third-quarter earnings fell 23% on weakness in its aerospace segment, including order delays and legal costs. Shares dropped 3% to $114 premarket.
Ocwen Financial Corp. swung to a loss in the most recent quarter as it recorded a $100 million charge related to a potential deal with financial regulators in New York. Shares declined 1.3% to $20.55 premarket.
Kellogg Co. said its net sales fell 2.1% in the latest quarter, as the cereal-maker posted weaker sales in its morning foods and snack businesses. Shares were down 2.4% to $61 premarket.
MGM Resorts International posted weaker-than-expected bottom-line results for the third quarter, hurt by lower revenue at its China operations. Shares slid 3.2% to $22.15 premarket.
World Wrestling Entertainment Inc. is dropping its six-month commitment for online video subscriptions, a move it hopes will boost subscriptions to the service. The company also said it swung to a third-quarter loss. Shares were down slightly to $13.25 premarket.
Visa Inc.'s fiscal fourth-quarter earnings topped Wall Street expectations as the giant credit-card company logged growth in payments volumes, while also offering a solid revenue view for 2015. Shares were down 4.2% to $223.61 premarket.
CME Group Inc. said its earnings rose 23% as trading volume picked up in the third quarter. The company’s profit exceeded expectations. Shares were inactive premarket.
New York Times Co. said its third-quarter loss narrowed as the newspaper publisher continued to contend with stagnant print advertising revenue and rising operating costs.
Public Service Enterprise Group Inc. said its operating revenue increased 3.4% in the latest quarter as the power company benefited from the expansion of its regulated utility capital programs.
The auction of PetSmart Inc. has drawn the interest of a number of private-equity heavyweights, in what would be the biggest leveraged buyout of the year, said people familiar with the matter.
Air Products & Chemicals Inc. said its top line grew on the strength of positive pricing and growth in most segments, as the company said it would press forward with restructuring and cost-cutting.
Johnson Controls Inc. said its revenue rose 2.6% in the latest quarter, as its three main segments all reported top-line gains.
AmerisourceBergen Corp. said its revenue increased 29% in the latest quarter, driven by strong top-line gains in its pharmaceutical distribution business.
MetLife Inc. more than doubled its third-quarter net income. Its core operating earnings, which are closely watched by investors, also improved amid strong investment income and the absence of punishing hurricanes.
Cigna Corp. again raised its guidance as fee and premium revenue grew along with its customer base.
Teva Pharmaceutical Industries Ltd. said its third-quarter earnings rose a better-than-expected 23%, driven by a jump in profitability in its generic medicine segment.
ConocoPhillips said its third-quarter earnings grew 9% on increased oil and gas production, despite a drop in realized selling prices.
Fidelity National Information Services Inc. said its third-quarter earnings fell 13%, but met Wall Street expectations, as higher costs offset revenue growth in the company’s finance and international segments.
Thomson Reuters Corp. said its third-quarter profit fell 12% as currency fluctuations and an income-tax expense masked a slight uptick in revenue.
Cardinal Health Inc. said its revenue edged down 1.9% in the latest quarter, as its pharmaceutical segment’s revenue declined.
Elizabeth Arden Inc. swung to a loss in the quarter, with revenue falling 23% amid a large drop in its fragrance segment.
National Oilwell Varco Inc. said its third-quarter profit grew 9.9%, driven by large gains in its rig systems.
Mosaic Co. said earnings in its third-quarter earnings jumped 62% on higher phosphate and potash sales, despite the company’s recent warnings that its phosphate business was being weighed by higher raw material costs.Acadia Healthcare Co. is buying CRC Health Group Inc. in an all-stock deal valued at $1.18 billion.
Akamai Technologies Inc. reported better-than-expected third-quarter earnings growth of 14% on revenue growth throughout the online content-delivery company.
Allstate Corp. said its third-quarter operating earnings fell 16% as the auto and home insurer reported sharply higher pretax catastrophe losses, mostly the result of severe weather in Colorado late last month.
Avis Budget Group Inc. said its third-quarter profit rose 63% as strong volume and pricing continued into the fall.
Baidu Inc. posted a 52% revenue increase for the third quarter, with a smaller increase in profit as its expenses were higher.
DreamWorks Animation SKG Inc. reported strong results in the third quarter, driven by its “How to Train Your Dragon 2″ release, which has made more than $615 million in theaters world-wide.
Firearms maker Sturm Ruger & Co. reported another quarter of lower demand, posting a 76% decrease in its third-quarter profit and a 42% drop in revenue.
Flextronics International Ltd., which provides design, engineering, manufacturing and logistics services, said its profit for the September quarter rose 18%.
F5 Networks Inc. said President and Chief Executive John McAdam plans to retire in about a year and will work closely with the board of directors to ensure a smooth transition as the networking-company searches for a successor.
Grand Canyon Education Inc. said the for-profit education provider will consider converting to a nonprofit entity.
Hanesbrands Inc. said its third-quarter earnings fell on acquisition-related expenses that offset increased sales that were helped by the apparel company’s purchases of Maidenform and DBApparel.
JDS Uniphase Corp. swung to a loss for its September quarter as higher expenses offset a slight increase in revenue.
Kraft Foods Group Inc. said its third-quarter earnings dropped 11% as the U.S. packaged-foods maker raised prices in a bid to offset higher commodity costs.
Lakeland Industries Inc. said Wednesday it has received orders for about one million protective suits because of the Ebola outbreak and plans to double production.
Murphy Oil Corp.'s third-quarter profit fell 14% as lower oil prices offset higher-than-expected production.
Pilgrim's Pride Corp. said its third-quarter earnings rose 59% as revenue grew 6%.
Range Resources Corp.'s third-quarter profit surged as revenue more than doubled driven by production increases primarily at its Marcellus operations.
Take-Two Interactive Software Inc. raised its outlook for the year based on strong early sales figures for several videogame titles released this month.
Weight Watchers International Inc.'s third-quarter profit fell 37% as the company continued to lose members, losing ground to free smartphone apps and other gadgets that track calories.
Deals of the Day is your one-stop-shop for the morning’s biggest news from the finance beat, including M&A, IPOs, banks, hedge funds and private equity. Here’s what’s happening today:Mergers & Acquisitions
PetSmart draws interest. The auction of PetSmart Inc. has drawn the interest of a number of private-equity heavyweights, in what would be the biggest leveraged buyout of the year. [WSJ]
Siemens weighs hearing-aid bidders. Germany’s Siemens AG is likely on Nov. 5 to choose a buyer for its hearing-aid business, which could be valued at more than €2 billion ($2.5 billion). [WSJ]
Lenovo completes Motorola deal. Lenovo Group Ltd. said Thursday it has completed its $2.91 billion acquisition of Motorola Mobility, as the world’s largest personal-computer maker continues its expansion in the global smartphone market. [WSJ]
GE plans stake sale. General Electric Co is reportedly planning to divest stakes in its joint venture auto-financing and credit card businesses in South Korea, as the U.S. conglomerate continues to trim its exposure to the financial services sector. [Reuters]
Deadline extended. Britain’s Spirit Pub Company Plc said it had agreed to extend the deadline for a 109.5 pence-per-share takeover offer from brewer and pub owner Greene King Plc until Nov. 4. [Reuters]
Bayer nabs DuPont assets. German pharmaceutical and chemicals company Bayer AG said Wednesday that its crop-science unit has signed an agreement to buy certain crop-protection and land-management assets from DuPont. [WSJ]
Theater hurdles. A merger of the two largest theater chains in the U.S. and Canada is possible–but it wouldn’t be easy. That’s the word from MKM Partners analyst Eric Handler, who calculated in a research note Wednesday that AMC Entertainment Holdings Inc., the smaller of the two, would face significant hurdles if it wanted to buy Regal Entertainment Group . [WSJ]
Ferrari share sale. Fiat Chrysler Automobiles NV will spin off Ferrari through an initial public offering next year as Chief Executive Sergio Marchionne seeks to unlock the value of the sports-car brand and fund an ambitious five-year plan. [WSJ]
Boost for Shell’s MLP. For some mutual funds dedicated to investing in master limited partnerships, the launch of Shell Midstream Partners LP came at the perfect time—just as Kinder Morgan Inc. is folding up its MLPs into a newly consolidated company. [WSJ]
Fueled by debt. Buyout firms are starting to look a bit more like the companies they own, to the delight of yield-hungry investors. The firms that pioneered the use of debt in corporate buyouts some 30 years ago are now selling bonds as they expand into lending, real estate and distressed-debt investing, among other new fields. [WSJ]
Quicker trigger. Activist investors in the U.S. are cashing out of their holdings faster than in the past, according to a survey from a law firm. That may inflame activists’ biggest naysayers. [WSJ]
Both sides now. Skadden, Arps, Slate, Meagher & Flom LLP has defended scores of companies against sharp-elbowed investors. Now it’s on the other side as an adviser to an investment fund that is urging Epiq Systems Inc., a provider of legal software, to sell itself. [WSJ]
Legal & Regulatory
Repeat offenders? Just two years after avoiding prosecution for a variety of crimes, some of the world’s biggest banks are suspected of having broken their promises to behave. [NYT]
SEC inquires on American Realty . American Realty Capital Properties Inc., the primary holding of property mogul Nicholas Schorsch, was battered Wednesday by its disclosure of an accounting mistake and subsequent coverup that forced the resignations of two top executives, slashed its flagship company’s stock-market value by 19% and sparked a probe by the SEC. [WSJ]
“Totally unauthorized.” Thierry Leyne, the Franco-Israeli financier who died last week in an apparent suicide, was in a dispute with a Swiss asset manager that alleged Mr. Leyne’s firm made “totally unauthorized” trades with its money. [WSJ]
More forex fallout. Barclays PLC on Thursday reported a fresh £500 million ($800 million) legal provision related to investigations into the alleged manipulation of the foreign-exchange market. [WSJ]
Shareholder activism continued to thrive in the 2014 proxy season, spurring corporate action as well as renewed engagement between issuers and investors. While the total number of shareholder proposals declined in 2014, lively activity continued with calls for independent chairs as well as burgeoning growth for social issues. And while few in number, change-in-control payout proposals were notably successful for the first time this year, while equity retention proposals continued to have a weak showing. In addition, support for proxy access proposals also grew at a rate greater than any other type of proposal.
Leo Strine, Chief Justice of the Delaware Supreme Court, and the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance, gave a lecture to a the Delaware Business Law Forum that will be published in The Business Lawyer in May, next year. The essay, titled Documenting The Deal: How Quality Control And Candor Can Improve Boardroom Decision-making And Reduce The Litigation Target Zone, is available here.
A roundup of blog posts and articles from around the web.
The U.S. oil industry can handle the drop in crude prices – WSJ
Tim Cook: I’m proud to be gay – Bloomberg BusinessWeek
QE’s latest critic is the man they used to call the Maestro – WSJ
Jefferies banker Sage Kelly has an extremely messy divorce on his hands – NY Post
The wrath of Draghi: German bank imposes negative interest rate on some savers – naked capitalism
The Fed’s timeline hasn’t changed – Tim Duy’s Fed Watch
Five things to watch for in today’s GDP report – WSJ
Macro Horizons covers the main macroeconomic and policy news events affecting foreign-exchange, fixed income and equity markets around the world, as selected by editors in New York, London and Hong Kong.
WRAP: The Federal Reserve’s policy statement Wednesday was, as is its way, balanced between the observation of disinflationary risks on the one hand and labor market tightening risks on the other. But if anything, the stronger-than-expected assessment of the latter meant that the market read the statement as more hawkish than expected and stocks and bonds both took it negatively. Still, in the grand scheme of things the market reaction in the U.S. – and later in Asian and European trading Thursday – has been pretty muted. That should please the Fed, giving it comfort that it can proceed with plans to tighten rates sometime in the first half of next year. As to how early in the year, that will depend on data – and serving that purpose, we have U.S. third-quarter GDP numbers out this morning. We’ve already had some surprisingly positive data out of Spain and Germany, which will mute any concerns about “headwinds” from the eurozone economy’s problems. (MC)
–Third-quarter gross domestic product grew 1.6% on the year.
–October consumer price index fell 0.2% on the year following a fall of 0.3% in September.
Signs are hopeful for Spain. The economy’s growing and the deflation rate is slowing. With Spanish banks having passed the latest European stress tests, could a more optimistic economic outlook loosen credit flow, creating a virtuous circle? The worm in this particular apple is that Spain’s recovery comes at the cost of massive government deficits. Will they be allowed to persist until Spain hits escape velocity, or will the country’s eurozone partners force a fiscal squeeze? (AM)
GERMANY: October unemployment fell 22,000 against expectations of a 2,000 rise. The unemployment rate stayed unchanged at 6.7%.
Germany’s labor force belies signs of economic weakness and broadly gloomy business surveys. The jobs data will temper hopes for a German fiscal stimulus package that some of Germany’s eurozone partners have been hoping for. (AM)
RUSSIA: The ruble dropped to fresh record lows against the euro and dollar before rebounding sharply in afternoon trading.
Expectations are strong that the Russian central bank will step up its interventions to halt the ruble’s relentless decline and that on Friday it will increase interest rates to achieve the same. Hence the rebound. We can put Thursday down to a small victory to the central bank and its impressive arsenal of reserves and policy tools, then. But the longer term picture is one of constant, waning confidence as the economy drops into a funk and as oil prices, the key determinant of the government’s fiscal health, remain in a slump. This is all exacerbated by European Union sanctions, which creates a dilemma for President Vladimir Putin. He refuses to accede to EU demands that he withdraw Russian support for rebels in Ukraine but won’t be happy to see the central bank’s reserves drain away. (MC, AM)
SOUTH KOREA: Industrial production in September grew a seasonally adjusted 0.1% from a month earlier versus a revised 3.9% fall in August and was up 1.9% from a year earlier versus a 2.8% contraction in August.
The sluggish on-month growth is another reminder of how much China’s slowdown has cut into South Korea’s exporters’ fortunes this year. (MC)
U.S.: 8:30 a.m. EDT.
–Advance third-quarter GDP estimate. [Expected 3.1% annualized vs. +4.6% in second quarter]
Second-quarter growth in the U.S. ended up being significantly stronger than expected. The third quarter had some disappointments, especially in the realm of household spending, but the job market continued to improve and in general there’s a sense that the momentum continued from the prior term. If this number is especially strong it will help to re-emphasize the growing conviction for a spring rate increase, which was brought on by the more hawkish-than-expected statement from the Fed Wednesday. (MC)
–Unemployment insurance weekly claims report. [Expected 285,000 vs. 283,000 in prior week.]
Claims numbers have been so consistently low that some economists are even throwing out the idea that the U.S. labor market is nearing a state of full employment. Some thought we’d never hear such talk for a long, long time. It’s another reason why the Fed felt comfortable saying what it said. (MC)
U.S.: 9 a.m. EDT. Federal Reserve Chairwoman Janet Yellen speaks at National Summit on Diversity in the Economics Profession
Ms. Yellen did not hold a press conference after the Wednesday FOMC announcement. So this event, in theory, gives her a chance to put a spin on things. Bond yields rose on what was perceived to be a slightly more hawkish-than-expected statement. Is the Fed chairwoman comfortable with that? Unfortunately, such questions will likely go unanswered. The name of the event suggests this might not be the kind of setting to delve into the specifics of monetary policy. (MC)
GERMANY: 9 a.m. EDT. (2 p.m., Berlin) October provisional consumer price index. [Preliminary CPI expected -0.1% on month vs. +0% in September; expected +0.9% in October vs. +0.8% in September.]
Germany has been teetering on the edge of deflation for some time. Disinflationary pressures have stabilized in recent months but inflationary forces aren’t taking their place. Outright deflation remains a risk. (MC)
JAPAN: 7:30 p.m. EDT. [8:30 a.m. Friday, Tokyo.]
–September household spending. [Expected -4.2% on year vs. -4.7% on August]
–September consumer price index. [Expected core CPI +3% on-year vs. +3.1% in August]
The household spending numbers tell you all you need to know about what’s eating at Japan, as it continues to grapple with the demographic problems of an aging society and the continued effect of a deflationary spiral, which creates an incentive to postpone expenditure. Although the headline CPI numbers make it look as if inflation is back, these are still showing the effect of the one-off increase in sales tax back in April. Adjusted for that, disinflationary forces are still very much evident in Japanese consumer prices. (MC)
Here’s your morning jolt of news, insight and analysis on the global energy business. Send us tips, suggestions and complaints: firstname.lastname@example.org
NO WORRIES, YET
The oil-price rout has left many wondering about the sustainability of the U.S. energy boom.
The surge in oil output, after all, has been led by small and mid-size companies, not global giants. And some of these drillers have taken on a lot of debt—which was easier to justify when oil was selling for as much as $107 a barrel just four months ago.
The Wall Street Journal’s Russell Gold, Erin Ailworth and Benoît Faucon report that oil prices would need to fall at least another $20 a barrel to choke off the U.S. energy boom, citing industry experts.
Most U.S. forecasters say output can remain steady at current prices because companies have cut their costs by finding ways to produce oil more efficiently.
“I am not sure if $80 is enough,” said Jason Bordoff, director of Columbia University’s Center on Global Energy Policy. “You might need $60 or $65 to really see a stress test.”
And Marianne Kah, chief economist at ConocoPhillips, said oil prices would need to fall to $50 a barrel “to really harm oil production” in U.S. shale basins.
The Organization of the Petroleum Exporting Countries, not surprisingly, disagrees with that assessment.
OPEC Secretary-General Abdalla Salem el-Badri predicted Wednesday that if current prices hold, half of the U.S. oil that is fracked from shale formations would be uneconomic, leading companies to stop producing it.
“At this [current] price, 50% of tight oil will be out of the market,” he said. Tight oil is a term used to describe shale oil.
Some analysts now reckon oil prices will only recover when some of the extra shale oil supply starts to be removed from the market, rather than when or if OPEC decides to start cutting production, according to a report by Benoît Faucon.
For good measure, the OPEC chief also said the current drop in oil prices doesn’t reflect market fundamentals, but added he wasn’t unduly concerned.
OPEC’s output is likely to remain around the same level in 2015 as this year, Mr. el-Badri said, likely tempering expectations that the cartel could seek to cut its production in response to oil-price weakness at its next meeting in Vienna on Nov. 27.
Morning MoneyBeat is the Journal’s pre-market primer packed with market updates, insights and must-read news links. Send us tips, suggestions and complaints: email@example.com
MARKET SNAP: At 6:05 a.m. ET, S&P 500 futures down 0.35%. 10-Year Treasury yield flat at 2.31%. Nymex down 69 cents at $81.51. Gold 1.6% lower at $1205.20. In Europe, FTSE 100 down 0.70%, DAX down 0.78% and CAC 40 down 0.46%. In Asia, Nikkei 225 up 0.7% and Hang Seng down 0.49%.
WATCH FOR: Weekly Jobless Claims (8:30 a.m. Eastern Time): seen 285K; previously 283K. Third-Quarter GDP (8:30): seen +3.1%; previously +4.6%. Altria, Apollo Global, Avon Products, Cardinal Health, Cigna, ConocoPhillips, Eastman Chemical, Expedia, Groupon, Kellogg, LinkedIn, MasterCard, MGM Resorts, Mylan, Public Storage, Starbucks, Thomson Reuters and Western Union are among companies scheduled to report quarterly results.THE BREAKFAST BRIEFING
As the Federal Reserve bids farewell to quantitative easing, it’s time to grade the central bank’s final round of stimulus.
The benefits and drawbacks of QE have been subject of a hot debate on Wall Street for years. Many suggest the Fed’s bond-buying program has been a major pillar of a stock market rally that has reached record levels. Others, however, argue that QE proved inefficient in spurring economic and job growth.
As WSJ’s Jon Hilsenrath reports, the worst fears about the Fed’s actions – rising inflation and a devalued currency – haven’t come to pass. Inflation, as measured by the Commerce Department’s personal-consumption expenditure price index, has been unchanged at 1.5% since September 2012, when the Fed started QE3. Meantime, the dollar, as measured by the Fed’s broad dollar index, is up 6.7% in value compared to the world’s other currencies.
But its benefits are also questionable. While the unemployment rate has fallen sharply – from 8.1% before the latest program was launched to 5.9% in September – the drop is mostly due to people abandoning the work force. As WSJ reports, some 2.2 million jobs were added in the 12 months before the Fed launched QE3 in Sept. 2012. In the past 12 months, that figure has risen to just 2.6 million, not enough to suggest the Fed’s efforts created a material impact on the labor market.
Where the Fed has succeeded is driving investors into risky assets, such as stocks. The S&P 500 has risen 35% since the Fed launched QE3 and has hit a number of record highs along the way.
The question now: what’s next?
As long as the economy keeps improving, Fed officials hope to raise interest rates sometime in the middle of next year. But such a scenario is far from a given: The past two times the Fed stopped buying bonds, the economy struggled, growth sagged and hiring and inflation slumped. Stocks also fell. In 2010, three months after QE1 ended, the S&P 500 fell 12%. And in 2011, three months after QE2 concluded, the S&P 500 dropped 14%.
But if the jobs market continues to show improvement and the economy remains stable, the Fed is likely to move forward with raising rates sometime next year.
Wrapping up QE is a big moment for the Fed. While widely anticipated, it shouldn’t be taken for granted.
“The Fed took a symbolic step towards the normalization of U.S. monetary policy,” said Michael Shaoul, CEO of Marketfield Asset Management.
Morning MoneyBeat Daily Factoid: Today marks this blogger’s final Morning MoneyBeat. After more than seven years at the Journal, it’s time for a new adventure. It has been an absolute pleasure serving MoneyBeat and WSJ readers on a daily basis. Your feedback has been excellent and always fueled me to do better. I look forward to what lies ahead, and I hope Mila Kunis accepts my apology.
-By Steven Russolillo; follow him on Twitter @srussolillo.STOCKS TO WATCH
Groupon is projected to post a penny a share in the third quarter, according to a consensus survey by FactSet.
LinkedIn is forecast to report third-quarter earnings of 48 cents a share, Expedia is likely to report third-quarter earnings of $1.74 a share, while Starbucks is projected to post fiscal fourth-quarter earnings of 74 cents a share.
After Wednesday’s closing bell, Visa said its fiscal fourth-quarter earnings slid to $1.07 billion, or $1.72 a share, from $1.19 billion, or $1.85 a share, a year ago. Revenue increased to $3.23 billion versus $2.97 billion. On an adjusted basis, the credit card company would have earned $2.18 a share, ahead of $2.10 a share forecast by analysts.
Also, Kraft Foods reported its third-quarter profit fell to $446 million, or 74 cents a share, from $500 million, or 83 cents a share, in the year earlier period. The per-share figure included a 3-cent negative market-based impact to post-employment plans and a 1-cent negative impact from hedging activities.MUST READS (LINKS)
Fed Ends Stimulus Program, Sticks to Low-Rate Plan: “The Federal Reserve said it would stop its bond-purchase experiment at the end of October, opening the floor for debate on its efficacy, while it would keep rates near zero for a “considerable time” amid downside risks to inflation.”
NATO Tracks Russian Air Activity: “Russian military aircraft conducted aerial maneuvers around Europe this week on a scale seldom seen since the end of the Cold War, prompting NATO jets to scramble in another sign of how raw East-West relations have grown.”
China Opens Door on Credit Cards: “China is taking a step toward easing its grip on credit cards, potentially resolving a long-running trade dispute with the U.S. and allowing foreign companies such as Visa Inc., MasterCard Inc. and other electronic-payment processors to have a greater presence there.”
SEC to Open Inquiry Into American Realty Capital Properties’ Accounting: “The Securities and Exchange Commission plans to open an inquiry into American Realty Capital Properties Inc.’s accounting, according to a person familiar with the matter.”
Barclays Takes $800 Million Provision Related to Forex Probes: “Barclays PLC on Thursday reported a fresh £500 million ($800 million) legal provision related to investigations into the alleged manipulation of the foreign-exchange market.”
Eurozone Confidence Points to Growth: “Businesses and consumers across the 18 countries that share the euro became slightly more upbeat about their prospects during October, a fresh sign that the currency area’s economy is unlikely to slide back into contraction.”
Shale Boom Shines Light on Natural-Gas Liquids: “An unsung byproduct of oil and natural-gas production is getting more attention from hedge funds and investors.”
SodaStream to Close West Bank Factory: “SodaStream said it would close a factory in the Israeli-occupied West Bank by mid-2015 as part of a major retrenchment in the wake of disappointing third-quarter results.”
How to Keep Running Strong at 70 and Beyond: “The running world has a habit of turning older marathoners into mascots. But within this demographic is a small subset of extreme competitors, who even into their eighth and ninth decades are able to maintain remarkable speed.”
Barclays PLC on Thursday posted better-than-expected third-quarter results despite a poor quarter for its investment bank and a new £500 million charge to cover potential costs from the global probe into foreign exchange markets.
The stock rose 2%, but it’s still down 17% this year and analysts warned that the outcome of a Bank of England review of leverage ratios Friday will be critical for the bank.
Here are the key takeaways from the results:
Foreign Exchange Probe – Barclays joined UBS AG and JP Morgan Chase & Co. in setting aside money for an expected settlement with the U.K. Financial Conduct Authority over their alleged roles in improperly sharing information and attempting to manipulate currency prices. The £500 million charge was roughly in line with expectations, but there could be more pain as other authorities including those in the U.S. continue their investigations.
Investment Bank – It was a terrible three months for the unit, with revenue falling 10% and pretax profit down 39%, the latter mainly because of higher restructuring costs. Equities turned in the worst performance, with revenue down 25%. The unit lost some clients, at least temporarily, after a June lawsuit over the bank’s dark pool electronic trading venue. Finance Director Tushar Morzaria said the lawsuit’s allegations had an impact on its broader business, and that the investment bank’s figures were disappointing.
Leverage Ratio – The outcome of a Bank of England review of the capital banks must hold against their total assets on Friday will be crucial for Barclays. At 3.5%, the bank has the lowest ratio of equity to assets of any major U.K. bank, and will have to work hardest to get to an expected level of at least 4%. On its current plan, Barclays aims to reach that level by 2016. A higher minimum ratio or faster timeline could weigh on future earnings.
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Good Morning Europe
European indexes are forecast to make a rather dazed start Thursday after the Federal Reserve threw markets a curveball the day before.
Admittedly the central bank stuck to the script in two key areas. It ended its program of Quantitative Easing, and reassured markets that interest rates would remain accomodative for some ‘considerable time,’ which is what investors had been hoping to hear.
However, the Fed also painted a rather more optimistic view of U.S. economic prospects than global markets had been looking for, leaving the impression that this was a rather more hawkish day out for the central bank than many had expected. Cue far more modest gains on Wall Street, although Asian stocks have picked up nicely with the strengthening dollar.
Mulling over what the Fed meant will probably take up a lot of market time through the European session. Investors will get a chance to see how justified optimism on economic prospects is when they get a look at U.S. third quarter GDP figures. Will a strong showing here be good news, or will the markets take it as just another sign that easy money’ sell-by date is coming up?
A flattish start is predicted for European mainboards while we wait.
Market Snapshot: U.S. markets (Wednesday close): DJIA down 0.2%, S&P 500 down 0.1%, Nasdaq down 0.3%. Nikkei now up 0.9%. December FTSE up 0.1%, December S&P flat. Brent crude down 17 cents at $86.95. Gold down $16.40 at $1208.50. EUR/USD now at $1.2602. USD/JPY at ¥109.12. Ten-year T-note yields 2.31%, Bund 0.86% and Gilt 2.26%.
Watch For: German CPI data, U.S. jobless claims, GDP.
What you may have missed from MoneyBeat:
MoneyBeat Would Like to Formally Apologize to Mila Kunis: Mila Kunis, we’re sorry. In March 2013, the actor said she would start investing in stocks for the first time. We thought her timing stunk. Boy, were we wrong.
Fiat Banks on Ferrari – The Short Answer: Fiat Chrysler Automobiles announced plans to spin off Ferrari—the maker of sports cars with price tags that can exceed $1 million—and quote 10% of the luxury car brand.
Stock Rally Leaves Technical Analysis in the Dust: There are times when technical analysts can do little but watch the price action. The past two weeks have been one of those times.
Greece’s Real Policy Easing: How far have Europe’s troubled economies come since the crisis? The markets offer a constantly changing picture as equity indexes and bond yields swing. But arguably, for the long run what really matter are conditions on the ground for business. And in that respect, the World Bank’s Doing Business report for 2015, published Wednesday, is encouraging.
Wearable Tech Specialist Puzzled Over 1,400% Share Price Pop: Fitbug Holdings PLC may be a fingerling minnow in the red hot world of wearable technology, but its share price progression is a force to be reckoned with.
Jack Lew: Oil Slump Won’t Hurt the U.S: Persistently low oil prices won’t impact U.S. economic policy in any significant way, but they might force oil-reliant nations to become more cooperative, Treasury Secretary Jack Lew said Wednesday.
Bank of England’s Cunliffe Says Need to Raise Interest Rates Has Receded : A senior Bank of England official said Tuesday the need to raise interest rates in the U.K. has receded, the latest sign that central bank officials are backing away from tightening policy until well into next year.
Facebook: Is the Easy Growth Over?: The social network reported healthy third-quarter results after New York trading closed Tuesday, with revenue for the third quarter up 59%, but that wasn’t enough to prevent the shares falling 7.4% in U.S. pre-market trading and more than 6% in Frankfurt.
U.S. Shale Spans Colorado to the Virgin Islands — Energy Journal: The glut of crude oil in the U.S. could see the reopening of an oil refinery that’s been closed for two years, writes The Wall Street Journal’s Alison Sider.
NATO Tracks Large-Scale Russia Air Activity in Europe: Russian military aircraft conducted aerial maneuvers around Europe this week on a scale seldom seen since the end of the Cold War, prompting NATO jets to scramble in another sign of how raw East-West relations have grown.
Fed Closes Chapter on Easy Money: The Federal Reserve said it would end its long-running bond-purchase program, concluding a historic experiment that stirred disagreement among policy makers, economists and investors about its impact even though the central bank said it helped accomplish its goal of reducing unemployment.
Sanofi Fires CEO as Tensions Boil Over: The French drug maker dismissed Christopher Viehbacher because of his uncommunicative management style, the chairman said.
“What’s happening is quality companies feel like these valuations are fair and the market is liquid enough that they can actually get a transaction complete,” Chief Executive Ken Moelis told MoneyBeat on Wednesday. “You’re seeing more people venture out into selling their quality companies. That’s going to continue if the market stays anywhere near where it is today.”
Revenue at the firm rose to $128.7 million in the third quarter, making it the best third quarter in the firm’s history. Net profits were $32.8 million in the third quarter, more than double the $14.5 million during the same period a year ago.
Mr. Moelis said on an analyst call that M&A completions were growing, but “fairly slowly,” while the number of announced deals had “meaningfully increased.” He highlighted recent moves to split up large firms, adding: “companies are looking to what all of their options are and we’re helping them on those types of issues.”
Brookdale Senior Living Inc.’s merger with Emeritus Corp.; CBS Corp.’s divestment of an 81% stake in its outdoor advertising unit and Laclede Group Inc.’s acquisition of Alabama Gas Corp. are among the large deals on which Moelis advised that closed during the third quarter, according to Dealogic.
Despite recent European market volatility and concerns over growth, Mr. Moelis said there are “still substantial companies that need to make substantial decisions on their future and there’s a lot to be done in Europe.”
Europe emerged as a particular bright spot for a firm, a sign that investments in the region are beginning to bear fruit, he said. Mr. Moelis joked on a call with analysts that the firm’s name used to be pronounced two different ways – both incorrect – in France and the U.K.
“You have to put time in. Our brand image in Europe was not the same as what it was here,” he said on a call with analysts Wednesday. Now, he added: “People know who we are; they know what we can do.”
About 17 of the firm’s 96 managing directors are based in Europe. The total number of managing directors is up from 88 at the end of the second quarter after an active period for hiring.
The firm now has a total of 376 bankers, up from 317 at year end 2013.
This was Moelis’ first full quarter as a public company after its April IPO, which raised $163 million. Its share price is up about 25% since the flotation.
Unsurprisingly, Mr. Moelis was bullish on the ability for boutiques to continue to attract talent from bulge bracket banks. He said the firms are “a friendly environment for creative people to do their work in a less regulated environment, with a smaller, more personal feel to the firms, too.”