Many of us within the investment and trading community have scratched our collective heads when considering just how gravity defying the equities market has been over the past two years. Due to the paradigm shift and mixed phenomena of bailouts, rescues and quantitative easing (underscored by a unified zirp policy adopted by most leading economies) cash had very little places to find a resting place, ergo share prices were bid up on increasingly shallow trading volume. Notwithstanding this fact we now learn that a relentless programme of share buy backs has been actively promoted.
This revelation, underpinned by falling income, profits and revenue from banks, makes it an extremely dangerous and combustible time for investors in the equities market. I’m not about to insult our readers’ and clients’ intelligence to suggest where, in my opinion, is the safest haven for cash right now..
Apparently equities are getting scarcer in the U.S.A. for the first time since the secular bull market began in 2009, companies are cutting share sales to the lowest level since 2006 whilst engaging in share buy back schemes at the fastest pace in four years. Over 1,970 U.S. companies repurchased $397 billion of stock last year, whilst issuing only $169 billion of new equity.
Shrinking supply supports prices and company executives would rather buy back shares than spend the cash to expand. Vanishing growth prospects will limit gains and deter investors who pulled money from stock funds for eight straight months through to December, the longest stretch in at least two decades.
The S&P 500 trades for 13.6 times earnings, down from 15.2 a year ago and 19 percent less than the average level since 1960. The gauge declined 0.04 point in 2011, the smallest annual change since 1947, after surging 11 percent in the fourth quarter. The S&P 500 has gained 2.9 percent so far this year.
U.S. share sales fell 8 percent in 2011 as interest rates near record lows spurred companies to issue bonds instead. Corporate debt sales rose 3.2 percent to $800 billion, exceeding stock offerings by the widest margin since 2008, according to data compiled by Bloomberg.
Bank Revenues Collapsing
Citigroup joined JPMorgan Chase in posting their lowest revenues since the height of 2008’s financial crisis as trading slumped. Citigroup said fourth-quarter revenue fell 7 percent from a year earlier to $17.2 billion. Net income declined 11 percent to $1.17 billion as trading revenue dropped 37 percent and investment banking tumbled 45 percent.
Citigroup fell 6.8 percent to $28.66 as of 12:37 p.m. in New York, the worst performance in the 24-company Bank Index. Wells Fargo advanced 1.3 percent to $29.98. New York-based JPMorgan declined 2.2 percent to $35.12.
U.S. banks’ revenue growth in 2011 was probably the slowest since the Great Depression and is unlikely to improve in 2012, Mike Mayo, an analyst at CLSA Ltd., said on Bloomberg Television last month. JPMorgan, the nation’s largest bank by assets, said last week that revenue fell 18 percent to $21.5 billion. Citigroup’s revenue was the lowest since the fourth quarter of 2008. The New York based bank said it would lose 5,000 employees, 25 percent coming from securities and banking. Citigroup’s earnings slump capped a year in which the shares slid 44 percent amid concern troubled European countries would default.
Market Overview
Stocks advanced on Tuesday, pushing the S&P 500 to its highest since early August, but USA markets then retraced sharply later in the session due to Citigroup’s steep drop in profit. The financial sector had previously outperformed the wider market in the first few days of 2012.
Citigroup’s stock slid 8.1 percent to $28.25 after it reported weak earnings.The KBW Banks Index lost 1.4 percent. Through Friday, the Index was up approx. 10 percent for the year, while the S&P 500 was circa 2 percent higher.
The banks’ sell-off killed off a rally that had pushed the S&P 500 through 1,300 for the first time since August. The Dow added 60.01 points, or 0.5 percent, to close at 12,482.07 at 4 p.m. in New York and the Standard & Poor’s 500 Index increased 0.4 percent to 1,293.67. The MSCI All-Country World Index gained 0.9 percent after the Shanghai Composite Index rose 4.2 percent, its biggest gain since 2009, as China’s economic growth topped estimates.
The euro rose 0.6 percent to 97.87 yen, arresting its two day decline, it strengthened versus nine of 16 major peers. The dollar depreciated against 14 of its 16 major counterparts. The Dollar Index declined 0.5 percent, retreating from a four-month high. Oil rose 2 percent to $100.71 a barrel, snapping a three-day slump, as France pushed for faster enforcement of Europe’s proposed ban on Iranian oil.
Economic calendar releases that could affect sentiment in the morning session
09:30 UK – Claimant Count Rate December
09:30 UK – Jobless Claims Change December
09:30 UK – Average Earnings Increase November
09:30 UK – ILO Unemployment Rate November
10:00 Eurozone – Construction Output November
12:00 US – MBA Mortgage Applications W/e 13 Jan
The UK jobs figures could affect the sentiment of sterling. A Bloomberg survey predicts a rate of 8.30% for the ILO rate, the same as the previous month. A survey shows a median forecast of +7000 for extra claimants compared to last month’s change of +3000.
