By Jeff Sanford
Toronto, Ontario -- January 30, 2018 -- In this week's Tuesday Ticker, BASF surprises on earnings, stock markets continue to set records, future oil price estimates continue to rise, and much, much more!
The stock market continues to hit new record high levels. The latest round of quarterly earnings season announcements is getting underway. Many corporations are announcing financial results that have surpassed the expectations of analysts. That’s helping drive markets higher. Most fourth-quarter reports have, so far, exceeded estimates. Last week the Dow Jones Industrial Average closed last Thursday at a new record of 26,392.79. As it is, many major economies are enjoying a period of growth. The synchronicity in the national economic cycles is generating optimism. According to analysts, if corporations continue to announce strong earnings over the next couple of weeks, stock markets should do well.
BASF has reported surprisingly strong business. The company announced last week that operating earnings have jumped an amazing 32 percent over the same quarter the year previous. The gain was largely related to the profits generated by an oil and gas producer BASF owns. The price of crude oil is high, driving profits at energy companies. But the price of natural gas has also been rising. A cold winter has people turning up their heaters, driving demand for the resources used to generate electricity. This demand is coming from around the world. Areas of northern China have suffered shortages of natural gas, driving prices for deliveries of liquefied natural gas sharply higher. Those high prices helped BASF achieve its remarkable spike in earnings. According to a press release from the company, "The BASF Group's key earnings figures for the 2017 business year significantly exceed analyst estimates." The company also noted that strong demand for basic chemicals helped offset the higher cost of raw materials. Donald Trump’s recent changes to U.S. tax law also helped, bringing BASF to announce a "non-cash tax income benefit of almost 400 million euros in the fourth quarter of 2017," according to a BASF press release.
Even so, the company has also announced increases in prices for some products. According a BASF announcement, “Effective today, or as contracts allow, BASF will increase prices for pigments, dyes and preparations by up to 15 percent worldwide. The price increase will affect all market segments, predominantly the coatings, plastics and printing industries. Price adjustments are necessary due to higher raw material prices for pre-cursers of pigments and dyes, as well as increased costs for regulatory efforts like registration, environmental, health and safety.”
A brokerage, Seaport Global Securities, issued its most recent estimate for earnings per share for Axalta Coating Systems. In a research note distributed last week, Seaport analysts said they expect Axalta to post earnings of $0.33 per share in the latest quarter. Seaport expects earnings to remain steady, or even rise, in the quarters to follow.
Boyd Group Income Fund announced a cash distribution for the month of January 2018 of $0.044 per trust unit. The company said the distribution will be paid out February 26 to shareholders on record January 31. The company’s policy is to pay monthly distributions on or around the last business day of the month.
Quebec-based bank Desjardins has upgraded its rating on shares of paint distributor Uni-Select. Desjardins analysts now rate the stock a “top pick” in a report issued mid-January. The firm has a target price of $37.00 on the stock, which is up from a previous price target of $34.00. Desjardins analysts also said they expect Uni-Select’s fourth quarter 2017 earnings to come in at $0.35 per share. The bank also expects full year earnings for 2017 to come in at $1.63 per share. Full years earnings for 2018 are estimated to be $1.94 per share. According to the Desjardins’ analysts, Uni-Select’s full year earnings for 2019 are expected to grow to $2.21 per share.
Various banks are reported to have arranged approximately €7 billion in debt financing for companies expected to bid on the coming sale of Akzo Nobel’s chemicals business. The banks lining up to lend money to a potential deal include all the big names, Bank of America, Merrill Lynch, HSBC, JP Morgan and Societe Generale (among others). The sale has attracted large interest from private equity funds. The company agreed to hive off the unit during a takeover battle that erupted last summer. Bids for the unit are expected by March 23. A sale (or a listing as a standalone company) is expected by April.
Auto manufacturer Ford Motor has announced it will distribute profit-sharing checks worth $7,500 to its workforce of more than 54,000 hourly employees. The profit-sharing checks are distributed to members of the United Auto Workers union. Ford pulled in $7.6 billion last year. The profit sharing cheques for this year are smaller than the $9,000 distributed last year. Fiat Chrysler Automobiles also reported its 2017 earnings last Thursday. The company announced it will distribute profit-sharing cheques worth about $2,000 to its employees. General Motors does not report earnings results until the first week of February.
Related Market Notes
Last week, Trump changed the direction of post-war U.S. trade policy when he announced new tariffs on washing machines and solar panels. For decades now the trend has been towards global free trade with tariffs being removed on the trade in goods between countries. This lowered the price for goods, leading to improved living standards around the globe. Some worry this trend may be at an end now that the U.S. seems to be shifting back to a more protectionist stance in terms of trade. During the U.S. election campaign, of course, Trump pledged to reverse the trend toward globalized free trade, and now seems to be making good on that promise.
The next commodity that may be hit with new tariffs could be aluminum. A report from Goldman Sachs suggests the Trump administration may add new taxes to the metal that is increasingly being used in auto bodies.
For the first time in more than a decade analysts are talking about the possibility that the price for a barrel of crude oil could hit $100. It was back in the late 2000s that the price of crude spiked to a price of almost $150 a barrel. In fact, it was late in the day Friday, July 11 that a single futures contract traded for $147 a barrel. At that time the consumer economy in North America and Western Europe fell apart. The price of gasoline hit $3 a litre in some places in Canada, and over $4 a gallon in the United States. In the two weeks before prices spiked that high, American drivers began crowding onto public transportation, which experienced a spike in use. Drivers found they were unable to afford gasoline.
With less money to spend in the consumer economy retailers slashed prices. Malls emptied of shoppers and the market for securitized mortgages imploded as some homeowners began to have trouble keeping up with mortgage payments. At the time the major investment bank Bear Stearns collapsed in the winter of 2008. An event the UK Prime Minister called the world’s Third Great Energy Shock (after the two in the 1970s) settled in. The Great Recession followed. At the time, the system self-corrected. The recession caused by high oil prices killed demand for gasoline. The price of crude fell over the years to follow.
In the years since, global oil markets have been well supplied as new crude came online from American shale fields (and other regions). But now it seems global demand for crude oil is increasing again, and at a rapid rate. Demand in China and India, where millions of former peasants are taking up a more middle-class, car-based lifestyle, sees those countries importing more crude than ever. As global economic activity continues to be strong, world oil demand is expected to increase. The total amount of crude used each day will rise by 1.8 million barrels. That could see world total demand move above 100 million barrels a day for the first time in history.
At the same time, OPEC is controlling its production. Saudi Arabia desperately needs a higher price of oil to fund government programs squeezed by low prices. Venezuela also needs a higher price of oil as the country tumbles toward collapse, partly as a result of recent low oil prices. At the same time, other non-OPEC suppliers outside of North America are struggling to increase production. With prices low over the last few years, companies spent less money on searches for new crude fields. The amount of new discoveries fell to a forty year low as a result. As global demand rises at the same time that global supply growth stalls, many are betting there is another price spike coming similar to the one that occurred by 2008 could be on its way by the early 2020s. The idea of another “super cycle” in the price of crude is something many analysts are beginning to discuss. Sure, there are many who claim that new shale regions in the U.S. and in Canada will provide enough new oil to contain a price spike. But others point out that many of the “sweet spots” in the shale fields tapped over the last decade have been exploited.
Overall, the rate at which wells deplete in some shale players is increasing as drillers move to the less productive regions of those fields. That there could be energy price-related slowing of the consumer economy over the years ahead is something to keep in mind.