STOCKS FALL: Here's what you need to know

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February 29, 2016

Happy Leap Day!

Stocks fell on the final day of February, the 29th day of the month which only comes around once every four years. For the month, the major US averages finished just about flat but slightly in the red.

First, the scoreboard:

Dow: 16,516.5, -123.5, (-0.7%)
S&P 500: 1,932.2, -15.8, (-0.8%)
Nasdaq: 4,557.9, -32.5, (-0.7%)
WTI crude oil: $33.90, +3.4%

Economy

We got three pieces of economic data out Monday morning and they were all disappointing. (Well, there were four, with the ISM Milwaukee reading hitting 55.22 against expectations for 50.00. As niche regional economic indicators go, however, this is very niche and very regional.)

The latest Chicago PMI report indicated contraction in manufacturing activity in the Midwest during February, with the reading hitting 47.6, down from 55.6 the prior month and below expectations for a reading of 52.5.

"If one looks beyond the gyrations seen over the past three months then trend activity has been running a little below the 50 neutral mark, highlighting continued sluggish activity levels, with manufacturers under particular pressure," said Phillip Uglow, chief economist of MNI indicators, in the release.

Also out Monday was Dallas Fed's manufacturing activity index, which hit -31.8, better than the -34.6 report in January but still worse than expected. This report has been among the worst pieces of economic data out over the last year or so as Texas and the greater south central US has been the epicenter of the fracking boom and subsequent crash (only North Dakota, really, has been hit harder).

Among the disappointing comments out of the Dallas Fed's survey were comments from a chemical manufacturing executive who said they didn't know, "if it is the weather, uncertainty created by the presidential election, or just a slowdown in the world economy, but things are definitely slowing down."

Another executive in the fabricated metal manufacturing industry said, "Our backlog has declined (50 percent less than the same time last year). We are receiving a very high volume of requests for proposals, but either are not winning them or the projects are on hold. Pricing to obtain any work has decreased for the benefit of the owner/contractor."

Finally, a disappointing report on the housing market crossed as the January report on pending home sales showed a 2.5% decline in January compared to the prior month, the biggest monthly decline in two years.

Lawrence Yun, chief economist at the National Association of Realtors, said, "While January's blizzard possibly caused some of the pullback in the Northeast, the recent acceleration in home prices and minimal inventory throughout the country appears to be the primary obstacle holding back would-be buyers."

Recession Watch, 2016

Commentary out of US Treasury specialists at Kessler Investment Advisors over the weekend offered the argument that the recent uptick in inflation we've seen over the last couple months is a sign that the economic cycle has already turned and that perhaps we are in recession now.

It's worth keeping in mind that recessions aren't declared by the NBER until after the fact — so, for example the Great Recession was called in December 2008 when the economy had obviously been in the tank for months before that — and so we won't really know we're in recession until, I guess, it's too late or whatever.

But here's Kessler on the thinking:

Counter-intuitively, the recent increases in core inflation are normal in the sequence of how a recession evolves. The typical business-cycle sequence is that the manufacturing sector weakens first, then employment and consumer spending, and lastly, inflation. In fact, it is often not until the recession is over that inflation begins to come down. Inflation is the longest lagging indicator.

infl Now, some folks on Twitter noted that with this call we've got US Treasury specialists basically recommending investors go long Treasurys. This is a fair point. But it's a view and one we hadn't seen advanced in many other places. (And, for whatever this is worth, I don't see a recession. But, you know, also just a view.)

Elsewhere, Bob Bryan breaks down the two visions financial markets and economic data are outlining for investors to digest about just what is going on in the US right now.

And basically you've got markets saying that things are bad while data says that while things might not be great they are not that bad, either.

Barclays' Michael Gapen wrote in a note to clients that, "In particular, US data will need to firm enough to substantially reduce fears that the economy is on the brink of recession ... We stand by our original thesis: something's got to give. The longer financial market uncertainty persists, the more likely it is that the give will come from activity."

And so this is basically the idea that perceived weakness in the economy displayed in financial markets but not explicitly clear in the data will create the data that makes this perceived weakness real. Reflexivity, or something.

Saudi Arabia

Saudi Arabia was the largest exporter of oil to China in January, leapfrogging Russia after falling behind them in the prior month.

But, there's a catch.

Here's Barclays:

Russia ESPO blend has been popular among Chinese teapot refineries, which received crude import quotas and started importing crude oil last year. However, according to [research firm] Argus, teapot refineries are facing credit constraints from banks. At least two ESPO cargos were defaulted by Chinese teapot refineries due to credit issues.

So! It's a China credit story as much as anything else. Which is interesting and also slightly concerning. Of course, the important thing to Saudi Arabia is that they continue exporting oil and maintaining its dominant position as an exporter in the global oil markets.

The concern for markets worried about things like China is, well, credit conditions in China.

Russia, like Saudi Arabia, wants to export lots of stuff, too.

Elsewhere in the House of Saud, Will Martin notes that foreign exchange reserve in Saudi Arabia dropped to their lowest level in three years in January, indicating another area of financial stress in the kingdom.

Here's HSBC on the problem (emphasis ours):

The government has continued to drawdown on its savings to cover budget shortfalls, with oil prices averaging USD/bbl 35 in January. Lower oil receipts have also been reflected in tighter domestic liquidity. Commercial bank deposits have contracted m-o-m in four of the last six months, helping — along with a recent pick-up in credit — to push the loan-to-deposit ratio to its highest reading since 2009.

Twitter

Fred Wilson likes Twitter and Saturday's NBA game of the year between the Golden State Warriors and Oklahoma City Thunder is a prime example of why.

(The short of it is that Stephen Curry, the best player in the NBA right now, had a historic night that was capped off with one of the most outrageous shots you'll see. Even if you don't like basketball, watch this video.)

Wilson writes (emphasis ours):

Steph's opponents expressed their appreciation for what he is doing on Twitter in the moment. Not on Facebook. Not on Instagram. Not on Snapchat. Not anywhere else. And you don't have to be on Twitter to see that. You can see that here and many other places.

Here's the thing about Twitter. You don't need to be logged into Twitter to see these tweets. You can see them on Twitter logged out. Or you can see them embedded in other places on web and mobile or on TV and elsewhere. You only need to be logged into Twitter to tweet.

So anyone who is focusing on the logged in monthly active user number is missing something bigger.

Wilson also notes that Donald Trump is using Twitter as his primary — and really, only — media tool to communicate with voters and storm through the Republican primaries.

And look, we're journalists here at Business Insider and as members of the media really, really like Twitter. But the reality is that investors simply don't like to see companies that aren't growing. And while revenue growth at Twitter is still strong its user growth has been flat.

But this metric is what Wilson is taking issue with. And it's a good argument.

Twitter is the kind of thing that people who don't use it all the time don't understand, or are intimidated by. But when you use Twitter a lot you realize it is the most powerful and amazing network of just raw information you could ever have hoped to stumble upon.

(Also, you need to tweet to be an active user. And, as the rule for keeping yourself out of trouble on the internet goes, "Never tweet.")

So growth is important, but Twitter's coming of age might be about growing the value of its users rather than the number of its users. This is both scary and uncertain because really, no company that is, at heart, a software company has made a successful shift at this scale in the Tech Bubble 2.0 era.

So we'll see.