Sunday, June 26, 2016

Barrons weekend summary

Barrons weekend summary: positive on TSCO and GS 

Cover story: Shock waves from the Brexit are likely to rattle markets and economies around the globe for some time; Felix Zulauf of Zulauf Asset Management says the Brexit isn't an isolated happening, but a swing against the political establishment and probably the beginning of the disintegration of the EU; "Whatever central banks do or don't do, global markets face a prolonged stretch of political and economic uncertainty, which will tend to reinforce each other." 

1) The drop in U.S. stock indexes following the Brexit vote doesn't signal the end of the bull market, since U.S. stocks remain more insulated from global developments than those in any other major equity market; 
2) "For investors bullish on Puerto Rico's prospects, the best bet is its $12.7B of general-obligation bonds, plus some $5.7B of less-liquid commonwealth-guaranteed debt"; 
3) Positive on TSCO: Company is one of this year's most successful retailers because two megatrends-aging baby boomers and the craze for organic food-has led to a boom in hobbyist farming; 
4) Positive on GS: Firm's ability to cut costs, along with a strong balance sheet, should help it in the current downturn, and its reasonably priced shares could gain 30%. 

Tech Trader: Positive on AMZN, GOOGL, MSFT: Cloud computing will continue to make these tech giants increasingly powerful, while FB will benefit from the shift in ad dollars from TV, radio, and print to online; Cautious on FIT: Company's step trackers and smartwatches face fierce competition from AAPL, GRMN, and Samsung. 

Trader: The Brexit will favor North American financial stocks over European ones, says Brian Belski of BMO Capital Markets; Positive on UNF: Along with WFM, company is one of the few sizeable pure plays in organic food; a turnaround focused on faster-growing and higher-margin foods make the stock attractive. 

Retirement Investing: Barron's list of the Top 50 Annuities for 2016 looks at how new rules, lower interest rates, and longer lives are set to affect the sector. 

Profile: Marcus Hughes of the LHC Capital Australia High Conviction fund; the firm owns just 10 stocks and has average annual gains of more than 23%. 

Interview: Bruce Geller of New York money manager Dalton Greiner Hartman Maher looks for stocks that have been forgotten because they're too small or their performance and potential is hidden for some reason. 

Small Caps: Positive on AFI: Company may not be as strong as rival AWI, but with leading market share in most hardwood floors and management working to turn around the business, shares have upside. 

European Trader: The U.K. may end up paying a heavy price for its departure from the EU, as foreign direct investment slows, unemployment rises, and consumer spending falls. 

Asian Trader: With the departure of SoftBank Group president Nikesh Arora and the decision of Masayoshi Son to remain as CEO, the Japanese company "increasingly looks like a debt-fueled venture capital firm that's reluctant to sell its investments." 

Emerging Markets: Among the countries hardest hit by the global selloff following the Brexit were the volatile developing nations of Greece, Poland, South Africa, and Turkey. 

Commodities: A global shortage of zinc has sent prices up, making it one of this year's best performing metals. 

Streetwise: "Bigger dividends and stock buybacks won't solve banks' profitability problem, but at least it eases the pain while investors await a solution."

Friday, June 24, 2016

UK Voters Fancy a Brexit, Global Markets Left in the Lurch Weekly Market Update: UK Voters Fancy a Brexit, Global Markets Left in the Lurch
Fri, 24 Jun 2016 16:08 PM EST

On Friday, the UK voted to quit the European Union after more than four decades of membership, upending global markets and sending the pound to its weakest levels since the mid 1980s. The stunning rejection of Europe's political and economic order prompted Prime Minister Cameron to resign, and global central banks were scrambling to ensure markets continue functioning normally. Asian equity markets cratered, with the Nikkei closing down nearly 8% on Friday and the yen surged, with USD/JPY briefly dipping below 100 for the first time in three years. The CAC fell nearly 8% and the DAX declined nearly 7%, while in the UK the FTSE was only off 2.2% as the surge in gold prices helped hold up the index - where many of the largest global gold miners trade. Gold surged to two-year highs around $1,325. The 10-year Bund yield dipped as low as -0.17%, while the German 30-year yield nearly went negative. The reaction in the States was a bit less harsh, but nonetheless share prices plunged and Treasury prices surged along with the US Dollar. For the week the Dow closed down 1.6%, Nasdaq -1.9%, and the S&P lost 1.6% to finish at a three month low.

The final results of the UK referendum show 51.9% voted to leave the EU versus 48.1% to stay in the union, with London and urban areas strongly favoring 'stay' and northern and more rural areas voting 'leave'. PM Cameron will step down within three months, saying the UK needs fresh leadership. "We should have a new prime minister in place by the Conservative party conference in October," said Cameron. Boris Johnson, former Conservative mayor of London and a leader of the 'leave' camp, appears to be in the front running to lead a new government. The framework of the UK's new relationship with the EU, including trade agreements, will be negotiated over a period of years. Scottish nationalist leader Nicola Sturgeon has said that the Scottish National Party will begin to prepare legislation to allow a new Scotland referendum to take place before the UK leaves the EU. Scotland decisively voted to remain in the EU with 62% voting for 'stay' compared to 38% for 'leave'.

Leading central banks firmly repeated their commitments to strongly support the normal functioning of financial markets. The Fed and other said they would activate existing swap lines to provide adequate liquidity in all cases. Bank of England Governor Carney said the BoE was ready to provide up to £250B of extra funds and foreign currency to stabilize markets and would consider additional policy action in coming weeks. The ECB warned of contagion risks and loss of confidence, with a potential spread to the banking system. The Fed and BoJ both face involuntary policy tightening as funds flee to the greenback and the yen. There is little hope that the Fed will be able to raise rates more than once this year, with a September hike looking less possible and even December a real question. With the yen dropping to parity with the dollar, the Bank of Japan will likely intervene in FX markets ahead of new monetary easing measures, even after Japan Finance Minister Aso said the threshold for an intervention remains very high.

There was little market-moving news beyond the Brexit vote this week. Fed Chair Yellen gave her semi-annual monetary policy testimony before Congress. Yellen offered very cautious remarks, warning that considerable uncertainty about economic outlook remains and that the Fed is concerned that slower productivity growth could continue for some time. Some analysts detect an even softer tone in Yellen's remarks, noting that she seemed to suggest the Fed is looking to see whether there is more improvement in the US economy, not when improvement may arrive. "Proceeding cautiously in raising the federal funds rate will allow us to keep the monetary support to economic growth in place while we assess whether growth is returning to a moderate pace, whether the labor market will strengthen further, and whether inflation will continue to make progress toward our 2 percent objective," Yellen said.

In the US, the June Markit Manufacturing PMI report suggested the healing has begun for the manufacturing industry. The May reading of 50.7 was the lowest in 6.5 years, making June's relatively anemic figure of 51.4 look pretty good. The annualized rate of May existing home sales rose to the highest level in nearly a decade. Strong sales contrasted with lower inventories and higher prices. May new home sales were slightly below the April rate, which was revised lower. Nevertheless, both the April and May reports show rapid growth in sales, with the latest three-month average of 553K up at an annual rate of +19% from the previous three months (Dec through Feb) and up 11% from the same period a year ago.

A spectrum of transport names offered guidance ahead of the June quarter earnings season. Canadian Pacific warned that revenue had declined 12% y/y in its second quarter due to lower-than-anticipated volumes in bulk commodities, such as grain and potash, the unexpected and devastating wildfires in northern Alberta and a strengthening Canadian dollar. United Airlines slightly improved its passenger unit revenue outlook for its second quarter. Executives also hinted that prior capacity reductions had reduced the airline's market share. Southwest reaffirmed its outlook for very modest RASM growth in its second quarter, but warned that RASM would face challenges in the second half of the year. Trucking names Werner Enterprises and Covenant Transportation both offered very soft earnings guidance, citing sluggish demand and higher labor costs.

Elon Musk confounded Wall Street once again and launched a bid for Tesla to acquire SolarCity. Tesla offered to buy SolarCity for 0.122-0.131 shares per share, in a deal valued at $26.50-28.50/shr or $2.5-3.0B in total. The premium was 20-30% over SolarCity's closing price, although it's worth keeping in mind that shares of SCTY have plummeted by 60% over the last year. Musk said he would like to build Tesla into a one-stop shop for electric cars, solar panels and home batteries. The rationale behind the deal would be for SolarCity to save big on sales and marketing costs, and gain access to new customers as part of Tesla, although analysts suggest the plan is nothing more than a bailout of SolarCity's sinking fortunes. Citron Research's Andrew Left warned that if the Tesla deal doesn't go through than shares of SolarCity would go to zero. Investors will scrutinize the deal very closely: Solar City CEO Lyndon Rive and Musk are cousins, and Musk is the biggest shareholder in both SolarCity (22.2% stake) and Tesla (26.5% stake).

Saturday, June 18, 2016

Barrons weekend summary

Barrons weekend summary: positive on CELG, DLPH; Cautious on SQ 
Cover story: A look at the best watches of 2016, which must be new models and house a mechanical movement made either in-house or exclusively for the brand; The list is topped by the Patek Philippe World Time Chronograph, which costs $73,700. 

1) "Based on valuations and dividend yields, foreign stocks look more attractive than their U.S. counterparts," and they could rally if the U.K decides to remain in the European Union; 
2) Positive on CELG: Company may depend on a single drug, Revlimid, but demand is rising and it has about a decade of remaining patent protection, including promise in combination therapies; 
3) Cautious on SQ: Silicon Valley unicorn is at least a year away from making a profit, and the recent expiration of a lockup of more than 250M shares means there's a huge overhang of stock and a sizable short position; 
4) Positive on DLPH: "Investor concerns about peaking vehicle sales in the U.S. and China have created an attractive opportunity to buy Delphi stock at multiples well below the company's expected earnings growth rate."

Tech Trader: Cautious on MSFT: Though the price Microsoft is paying for LNKD isn't expensive, it's still worth asking why the tech giant agreed to add a 50% premium to LinkedIn's share price; There is probably some wishful thinking on chief Satya Nadella's part that should give investors pause in light of past Microsoft deals. 

Trader: Although a potential Brexit appears to be holding U.S. stocks hostage, Aaron Clark of GW&K Investment Management says an EU exit may already be priced in; Positive on BAC: Shares appear cheap, creating a good entry point for investors, who could see a 20% or more gain once the bank gets past current problems; another potential plus is the sale or spinoff of Merrill Lynch; Cautious on WTR: Company's stock now trades near levels that previously preceded steep declines, a sign its recent run may be mostly over. 

Profile: Jamie Wilhelm, manager of Touchstone Focused fund and a follower of Warren Buffet's investment philosophy, seeks to find businesses that have a significant and sustainable competitive advantage, then buy when shares fall below intrinsic value (top 10 holdings: Berkshire Hathaway, BK, MDLZ, AMZN, SYY, NVS, GE, AAPL, ORCL, CSCO). 

Interview: Russell Napier, publisher of the global macroeconomic and strategy report "The Solid Ground," shares his views on the Brexit referendum. 

Follow-Up: Barron's debunks some of writer Michael Lewis' claims in "Flash Boys," finding that he and many proponents of IEX conflated legitimate concerns about computer front-running with a broader fear that small retail traders were getting nicked; Cautious on OPK: Shares are down as investors continue to question the acquisition of Bio-Reference Laboratories; the combined company remains unprofitable and its market valuation too high. 

European Trader: Positive on Adidas, Roche: Companies "are all-weather businesses with strong balance sheets that generate plenty of cash," and should continue to provide solid returns regardless of how the Brexit vote plays out. 

Asian Trader: Story on how a Brexit would affect Asia notes that the region has the advantage of distance, and that not many Asian companies to sell to Britain. 

Emerging Markets: Observers expect Turkey's real GDP to expand by about 3.5% this year, which is partly why foreign investors don't seem overly concerned about the country's geopolitical problems. 

Commodities: Hog prices have soared on demand from China, but experts say the market is getting top-heavy, and that making a case for future gains is difficult. 

CEO Spotlight: Profile of HSIC chief executive Stanley Bergman, who has built a multinational distributor of dental, veterinary, and medical products with investment returns twice those of Berkshire Hathaway. 

Streetwise: Positive on NFLX, NKE, DE, ESRX, QCOM should start to benefit from the reversal of a trend in which the most labor-intensive companies outperformed the lest labor-intensive ones; Cautious on SYF, DFS, AXP, COF: Earnings for the consumer-finance industry have plateaued, and the trend isn't likely to change soon.

Friday, June 17, 2016

Will They Stay or Will They Brexit? Weekly Market Update: Will They Stay or Will They Brexit?
Fri, 17 Jun 2016 16:04 PM EST

Brexit fever gripped global markets this week, as uncertainty about the June 23rd referendum on the UK's continued membership in the European Union inspired a big rotation into safer sovereign paper. Four major central banks - US Federal Reserve, the Bank of Japan, the Bank of England and the Swiss National Bank - left policy unchanged at meetings this week, however their most impactful moves appeared to be jawboning about Brexit, largely via warnings about the chaos that would follow the UK seceding from the EU. Meanwhile, the US presidential campaign and the nation at large was rocked by the worst mass shooting incident in US history at an Orlando, Florida gay nightclub a lone-wolf terrorist, with a death toll of over four dozen people. Brexit fears eased temporarily in the latter half of the week after another shooting death: the murder of a British MP by a nationalistic extremist led to a three-day suspension in campaigning on the referendum and delayed the release of new polls. Sovereign bond yields see-sawed through the week, with European benchmark paper dipping into and then out of negative territory, while the 10-year UST yield tested three-and-a-half year lows below 1.60%. Gold hit its highest mark since August 2014 and then pulled back on Friday. Stocks mostly trended lower, and for the week the DJIA lost 1.1%, the S&P500 dipped 1.2%, and the Nasdaq fell 1.9%.

Citing uneven economic data and the potential uncertainty surrounding next week's UK referendum, the FOMC left rates unchanged and also lowered its median forecast for the Fed funds rate in 2017, 2018 and over the long run. The number of members who saw only one rate hike in 2016 jumped to six from one at the last meeting. At her post-decision press conference, Fed Chair Yellen warned economic headwinds could persist for some time and confirmed the committee was worried about a potential Brexit.

The BoJ largely sustained its policy stance with a bit of tinkering. It upgraded its view of housing investment and public spending, and revised its outlook for inflation to allow for "slightly negative" CPI from the prior view of "about 0%." The strengthening yen is an obvious concern, but Japanese officials were skittish about discussing the potential for FX intervention. Finance Minister Aso refused to say whether another round of intervention was being considered, only reiterating that abrupt, one-sided FX moves were still very undesirable. The Finance Ministry, the BoJ and the FSA met this week to discuss the international situation, although the only details that emerged were that officials agreed volatility was on the rise. Some analysts said that Tokyo would be forced to intervene if USD/JPY broke below 100 in the event of Brexit.

With rates on hold, the BoE took the opportunity to ring emergency bells over the EU referendum. The BoE warned that big economic decisions were already being delayed by uncertainty over the vote, slowing economic growth and sending shockwaves through the global economy, and called the referendum the biggest immediate risk to UK markets. "On the evidence of the recent behaviour of the foreign exchange market, it appears increasingly likely that, were the UK to vote to leave the EU, sterling's exchange rate would fall further, perhaps sharply," read the BoE statement. Cable tested below 1.4050 after the decision, for fresh 10-week lows.

Before the Brexit campaign was violently interrupted by the murder of Labour MP Jo Cox on Thursday, market participants were increasingly unnerved by each subsequent poll on the UK referendum. The 'leave' camp continued to maintain its narrow lead in polls last weekend and in the first days of this week. ORB/Independent and Sky News polls had 'leave' support in the mid 50% range, while others had the two camps a few points apart in the mid 40s - although the undecided respondents continued to be in the double digits in nearly every poll. Fears were amplified as major UK tabloid newspaper The Sun backed the 'leave' camp, becoming the first major UK newspaper with a formal endorsement. By Thursday, cable was plummeting toward 1.4000 and funds were pouring into safer assets. On that day, Jo Cox was shot and stabbed to death in Yorkshire, by a suspect with links to a far-right group that has long advocated for Britain to leave the EU. Both 'stay' and 'leave' camps suspending campaigning, further polling was delayed and market participants shifted their attention to bookmakers, where odds were favoring the UK to vote to remain in the EU. By Friday, GBP/USD was rebounding above the 100-day moving average around 1.4350 in the absence of Brexit campaign rhetoric.

The Swiss National Bank kept its negative interest rate policy unchanged despite safe-haven trading that has further strengthened the franc, raising fears that it was running out of policy options to cope with an overvalued currency. The SNB warned it was keeping a close watch on the UK's EU referendum, and reiterated its familiar mantra that the franc remains "significantly overvalued." Switzerland's 30-year yield dipped into negative territory for the first time after the decision, meaning almost the entire market for Swiss government debt now trades below zero.

Two June regional Fed factory surveys suggested there has been something of a recovery in the US manufacturing. Both the Empire State and Philly Fed manufacturing indexes were much, much better than expected. The new orders and shipments components of the New York Fed's Empire survey rose from negative territory to +10.9 and +9.3, respectively. The weak components of the Philly Fed survey contrasted sharply with the very strong headline. Both orders and shipments were slightly more negative than in May. Advance retail sales were stronger than expected in May, although not nearly as good as the April sales. Retail sales increased 0.5% last month after surging by an unrevised 1.3% in April. Core sales, used for calculating GDP, were up 0.4% after a revised 1.0% gain in April. The good report could see economists raising their Q2 GDP growth estimates, which are currently around a 2.5% annualized rate.

China's May economic data were generally in line or softer than expected. Most notably, fixed urban investment growth slowed to multi-year low as property sales value and construction activity saw the most pronounced declines. China industrial output was more mixed - power generation recovered from last month's decline and crude steel output showed slightly higher growth, even though the headline numbers were as expected. The China Stats Bureau noted overall employment is steady and investment is growing, though the economy is still faced with uncertainties. The IMF warned markets about the deterioration in China's credit markets, stating "mounting corporate debt is a key fault line in the economy" particularly with many SOEs already "on life support."

For the third year in a row, stock index firm MSCI declined to add China mainland A-shares to its emerging market index. Among the reason behind the decision, MSCI cited insufficient reforms of financial markets on the mainland, including continued monthly repatriation limits that impede redemptions as well as pre-approval restrictions on launching financial products. However, MSCI suggested an off-cycle announcement on A-shares could not be ruled out. Currently, shares from China listed in the MSCI emerging market index are all traded in either Hong Kong or the US. Chinese officials were not happy with the decision, and suggested there would not be many more reforms in financial markets given the remaining downside risks in markets over the near term.

Shares of Apple were weighing on broader indices, down more than 3% on the week, after series of iPhone setbacks. First there were press reports that annual sales of iPhones would decline for the first time ever in 2016 due to lukewarm demand, with shipments seen around 210-220M. Over the last six months, Nikkei had reported that Apple could lower its production of iPhone 6 in the first two quarters of the year, based on significantly lower component orders among Taiwan tech suppliers. Then on Friday, a Beijing patent court ruled that Apple violated a competitor's IP and ordered the company to halt sales of the iPhone 6 in China. Apple downplayed the ruling and filed an appeal, saying it continues to sell smartphones in the China market.

In M&A news, Microsoft announced a $26.2 billion cash deal to acquire LinkedIn, priced at $196/share, in one of the most expensive tech acquisitions in history. Jeff Weiner will stay on as CEO of LinkedIn and will report to Microsoft CEO Satya Nadella. Symantec announced a deal to buy Blue Coat Systems for $4.65B amid further consolidation in security space. Ariad Pharmaceuticals announced it had completed a three-month long strategic review for creating shareholder value, opting to undertake more cost cutting with no mention of possible M&A.

Saturday, June 11, 2016

Barron's weekend summary

Barron's weekend summary: positive on WSM, MCK, LYB 

Cover story: Barron's 2016 Midyear Roundtable offers investment advice from Scott Black (DHI, WHR), Abby Joseph Cohen (Toto, SEE, NKE, SYK), Mario Gabelli (SNE, MIICF, SSP, CST, EPC, HRS, TXT), Jeffrey Gundlach (10-Year Treasury, GDX), William Priest (AGN, FIS, GOOGL), Brian Rogers (HRS), Oscar Schafer (COMM, ANIP, NOMD), Meryl Witmer (WYN), and Felix Zulauf (short U.S. dollar, long Argentine peso). 

1) Positive on WSM: Retailer's shares have fallen with the sector, but it has differentiated itself with a strong Internet operation, and can compete with AMZN because it controls its inventory, which is exclusive to its brand; 
2) Positive on MCK: Though bears say the drug wholesale is in secular decline, it has strong cash flow, significant bargaining power, new clients, and a strong position in specialty-drug wholesaling; shares could have 15% upside during the next year; 
3) Positive on LYB: A selloff creates a buying opportunity for bargain hunters, who could see the chemical maker's shares rebound and return more than 20%; 
4) Baruch Lev and Feng Gu say accounting hasn't kept pace with the growth of companies with intangible assets like research, which differ from tangible assets like property, and they call for changes to GAAP.

Tech Trader: The expanding constellation of Internet of Things devices has led to complexity that doesn't benefit consumers; it may be time for AAPL, GOOGL, and other players to cooperate on the creation of a set of industry standards that work for everybody. 

Trader: U.S. stocks' inability to break through previous highs isn't worrisome short-term, says Michael Shaoul of Marketfield Asset Management, but if the market isn't able to get through, it will become an issue; Fed futures continue to forecast the Fed's rate action, or lack thereof, accurately, but they will get it wrong someday; Barron's admits it should have paid closer attention when DWRE chief Thomas Ebling, who had mainly been selling company shares, established a 10b5-1 plan to acquire them on the open market before the CRM deal; Positive on FFIV: Even without an acquisition, shares of the company should continue to be rewarding. 

Profile: Ralph Bassett, co-manager of Aberdeen U.S. Small Cap Equity, says speaking with management is a crucial part of his stock-picking efforts. 

Follow-Up: Dell will likely go public again, at which point it will be clear how lucrative Michael Dell's leveraged buyout of the company was; the company's financial performance since the deal supports the idea that Dell and Silver Lake "stole the company"; Positive on HLF: Despite a few recent hurdles after its move to separate its properties into a REIT and spin off its time-share business, momentum is now in the company's' favor. 

European Trader: Following the European Central Bank's move into Europe's corporate credit markets, pushing returns even lower, there are still strategies investors can use to gain, especially in high-yield debt. 

Asian Trader: Five picks from Hong Kong-based brokerage firm CLSA (Positive on Macquarie Group, AIA Group, Samsung Electronics, Seven & i Holdings, and Tencent Holdings). 

Emerging Markets: Peru's next president, mostly likely former World Bank economist Pedro Pablo Kuczynski, will inherit the emerging world's hottest 2016 stock market. 

Commodities: "La Nina is likely to result in increased production of cocoa-the key ingredient in chocolate, across the globe-putting pressure on prices that have run up on an anticipated deficit this season." 

Streetwise: Positive on POT: Most investors don't consider fertilizer producer a quality company, but large potash producers are more disciplined than the market gives them credit for, and margins could recover.

Friday, June 10, 2016

Caution Abounds Ahead of FOMC, Brexit Vote Weekly Market Update: Caution Abounds Ahead of FOMC, Brexit Vote
Fri, 10 Jun 2016 16:10 PM EST

Global markets were volatile this week as risk assets first recovered from the let-down of last week's May US jobs report and then succumbed to global jitters as funds rotated into fixed income. The ongoing oil market recovery propelled both WTI and Brent firmly back over $50 early in the week, helping boost the broader energy sector. Solidifying belief that the Fed will need to hold off on rate hikes at least little bit longer has helped gold and silver prices reach one month highs as well. In a widely anticipated speech on Monday, Fed Chair Yellen said nothing at to upset the apple cart, and there is a sense that a Fed rate increase in September is emerging as the new favorite view, although July is still touted as a 'live' meeting as well. The dollar arrested its decline without testing the lows seen in early May. Mid-week the DJIA and S&P500 approached but did not hit new all-time highs, as Brexit fears and interest rate jitters took over and pushed risk assets lower. For the week, the DJIA gained 0.3%, the S&P slipped 0.1%, and the Nasdaq fell 1%.

Treasury prices soared globally as panicky investors plowed into fixed income assets this week. The toxic combination of negative interest rates at the Bank of Japan, the ECB, and several other European central banks, fear of Brexit, and deep uncertainty about Fed rate hikes have fostered an extraordinary low yield environment. On Friday, the yield on the German 10-year bund sank to an all-time low of 0.025%, and some analysts suggested it could go to zero soon. Yields have fallen so far that more than $10 trillion of government debt worldwide is now trading with negative yields - Bill Gross took to Twitter to call the huge pile of negative-yielding sovereign a "supernova that will explode one day." The Japanese 10-year benchmark yield touched a record low of -0.15%. The 10-year UST yield fell as low as 1.649%, while the 30-year yield is at its lowest point since February 2015, at 2.45%, further flattening the yield curve to levels not seen since 2007. The 2-year/10-year UST spread has sunk below 90 bps, driving big losses this week in US financial stocks. Bond market analysts commented that the sustained level of demand for US Treasuries at this week's 10- and 30-year reopenings largely appeared to be driven by foreign buyers desperate for yield.

Some better US jobs data helped balance the narrative of a slowing labor market that emerged after last week's dire May payrolls report. The April JOLTS survey - Fed Chair Yellen's preferred gauge of US labor market health - saw an all-time high of 5.8 million job openings, up slightly from 5.76 million openings at the end of March. April hires fell to 5.1 million, slightly lower than the previous month's 5.3 million, while the key quits rate fell to 2.0% from 2.1% prior. Meanwhile, the jobless claims data showed the number of Americans filing for benefits unexpectedly fell in the week ended June 4th. Initial claims fell much more than expected, while continuing claims dropped 77,000 to 2.10 million, the lowest level since October 2000.

The annual US-China bilateral summit in Beijing saw tough rhetoric from both sides, with economic concerns taking a back seat to the tense situation in the South China Sea. Chinese officials blamed tensions in the South China Sea on the provocations of "certain countries for their own selfish interests." Secretary of State Kerry responded that China's plans to set up an air defense identification zone in area would be "a destabilizing act." Relations were smoother on the economic front, but there was still some tension. US Treasury Secretary Lew said good progress was made in currency talks and said China appeared committed to moving in an orderly way to a more market-oriented exchange rate. Lew pressed China to keep reforming bloated industrial sectors, especially steel, and told his Chinese counterpart that offloading excess capacity on the rest of the world was damaging global markets. Chinese officials stressed that Lew's critique only told half the story, as China's steel overcapacity resulted largely from the post-crisis stimulus plans, which themselves contributed to more than half of global growth in the 2009-11 period, helping lessen the impact of the Great Recession.

The China May trade report held good news and bad news for the world's second-largest economy. The bad: exports in dollar-denominated terms tanked 4.1% y/y, more than double April's 1.8% decline and slightly worse than estimates. The good: imports declined a mere 0.4% y/y, much improved from April's 10.9% slide and way ahead of expectations for a 6% decline. Softening global demand was clearly responsible for the worse exports component, while the ongoing recovery in commodities pricing and demand dovetailed nicely with the surprisingly robust imports component. In yuan terms, the trade report looked more positive, with exports up 1.2% y/y and imports 5.1% higher. The divergence with the dollar figures reflected the interruption of CNY's long-term appreciation trend against the dollar. Chinese Premier Li Keqiang once again reiterated this week that Beijing will be able to keep the yuan at a reasonable equilibrium level over the long term.

In Japan, the second and final reading of Q1 GDP confirmed the economy averted a technical recession, though concerns remain that the impact of Kumamoto earthquake could plunge the country back into contraction in the second quarter. Key components were better, with private consumption adjusted slightly higher to +0.6% from the preliminary +0.5%, and capex spending much improved to -0.7% from -1.4% in the preliminary. Skeptical analysts are quick to note that the data included an extra Leap Year day, and growth would have been slower if adjusted for that impact.

The referendum on the UK's further membership in the European Union is only two weeks away and a handful of polls this week have indicated the race is still too close to call. Three polls on Monday showed the 'stay' and 'leave' camps within a few points of each other, and the undecided camp remains in the double digits. Then on Friday an online poll from the Independent showed the 'leave' vote rising to 55%, further weakening the pound sterling. The pound continues to suffer from the heightened level of uncertainty, with GBP/USD dropping back toward 1.4200, for its lowest levels since late April. Last week there were reports that the ECB and the Bank of England were making provisional plans to provide liquidity guarantees for markets in the event of a vote in favor of Brexit, and this week BoE Chief Carney said that the Fed and BoJ are also looking to coordinate responses in case of excessive market volatility. In Parliament, a caucus of MPs in favor of remaining in the EU (totaling 454 MPs versus 147 in the 'leave' camp) is reportedly developing a plan to use their majority in the Commons to delay Brexit and keep UK within the single market because the 'leave' camp has refused to spell out what relationship it wants the UK to have with the EU in the future.

Three central banks around the Pacific Rim tinkered with their policy positions this week. The Bank of Korea surprised markets by cutting its seven-day repurchase rate by 25 basis points to 1.25%. The BOK statement expressed concern with rising household debt, slowing inflation, weakening consumption and declining exports. Analysts expect more BOK cuts are possible. The Reserve Bank of Australia signaled it was in no rush to cut interest rates again (it eased policy at the prior meeting) and kept the cash rate on hold at a record low 1.75%. The RBA acknowledged the recent recovery in trade, stating that exports and "areas of domestic demand" are expanding above trend. In New Zealand, the RBNZ kept on hold at 2.25%, while post-decision comments from Governor Wheeler indicated another rate cut was still built into projections. The statement emphasized inflation would strengthen, reflecting accommodative monetary policy, higher fuel and commodity prices, and a weaker NZD.

In M&A news, Westlake clinched a deal to acquire Axiall Corp, with the latter agreeing to be acquired for $33/share in cash. The deal values Axiall at $3.8 billion. The combined company will be the third-largest chlor-alkali producer and the second-largest PVC producer in North America, with expected combined pro forma revenues of $7.6 billion. Polycom received a competing acquisition offer to its deal with Mitel Networks. According to a Polycom filing, an unidentified private equity firm offered $12.25/share in cash, valuing the company at $1.66 billion. Back in April, Mitel agreed to acquire Polycom for $3.12/share in cash and 1.31 Mitel common shares for each share of Polycom. Weisman Group offered to acquire Ashford Hospitality Group for a $20.25/share, in a deal valued at $1.48 billion.

Saturday, June 4, 2016

Barrons weekend update

Barrons weekend update: Positive on OAK, WFM; cautious on CAB 

Cover story: Private tech companies such as Uber, Dropbox, and Airbnb have legitimate business models that are disrupting mature markets; venture capitalists are funding them, but investors aren't showing much interest, creating a major lull in initial public offerings-but the bad news for IPOs could be a bullish sign for the market. 

1) Female financial advisors face a number of challenges, and "remain a distinct minority in an industry many view as especially well-suited for them"; 
2) Positive on WFM: Shares of market chain have strong potential for upside as it cuts costs, offers more competitive pricing, and launches a value chain that could open up new markets; 
3) Positive on OAK: Shares have gone down since February, but if new initiatives led by chief executive Jay Wintrob bear fruit, they are likely to head back to the $60 range from today's $45; 
4) Cautious on CAB: Shares have climbed to $52 from $33 since October after Elliott Management took a stake, but the retailer still faces many challenges, and investors should consider taking their profits now; 
5) Positive on JNJ: Company tops Barron's annual ranking of the world's most respected companies, displacing AAPL, which dropped to No. 3, while Berkshire Hathaway holds the second spot. 

Tech Trader: Positive on GOOGL, AMZN: Companies are starting to look like INTC and MSFT at the end of the 90s: they're focused less on constant disruption and more on strong products that allow them to thrive and provide investors with healthy returns.

Trader: Jim Bianco of Chicago-based Bianco Research is on high alert for "giant asymmetric risk," and is concerned that after the jobs report, markets put the probability of a rate hike at 4%; +/- KORS: Investors have turned the beaten-down stock into a star performer, but they're clearly looking beyond the gloomy outlook for the current quarter; Positive on ATSG: Company's relationships with AMZN and DHL are giving it a boost, and shares could see 43% gain during the next 12 months. 

Advisor Rankings: Kimberlee Orth of Ameriprise Financial, Shannon Eusey of Beacon Pointe Advisors, and Stephanie Stiefel of Neuberger Berman hold the top three spots on Barron's list of the Top 100 Women Financial Advisors.Interview: Ivy Zelman of Zelman & Associates, one of the few analysts who predicted the housing crash, is bullish on the sector, though she is wary of the real estate markets in New York and Miami. 

Profile: Michael Cornelius, manager of the T. Rowe Price Emerging Markets Bond fund, takes a contrarian approach, aiming to minimize risk despite a preference for second-tier and frontier countries (top 10 country exposure: Mexico, Brazil, Argentina, Indonesia, Russia, Venezuela, Turkey, Ukraine, South Africa, Serbia). 

Small Caps: Positive on HMHC: Textbook and educational-content firm is a market leader in a sector with high barriers to entry; despite a weakening sector, company stands to benefit from the growth of its digital business; Cautious on MPW: REIT invests only in acute-care hospitals, giving it a competitive advantage, but investors may want to pare holdings after a boost following the sale of an equity stake in Capella Healthcare. 

Follow-Up: Cautious on MON: Bayer is unlikely to come up with the capital to entice the company into a deal; shares are up, but its growth prospects have eroded and investors should take their profits. 

International Trader: Should the U.K. vote to leave the European Union, "it could take two years of negotiations to untangle the country from the EU apparatus, but the impact could be more immediate," including a steep drop in sterling. 

Asian Trader: Overview of the Sohn Conference Hong Kon; speaker Yuet Wei Wan of Wei Capital Management said supply and demand for oil is pretty balanced at recent levels, though disruptions in places like Nigeria could tip the markets into deficit. 

Emerging Markets: With the Federal Reserve preparing to raise rates, investors may find opportunities in Pakistan, India, and Romania, as well as central and eastern Europe; caution is warranted in Argentina. 

Commodities: Iron-ore prices are down by almost 30% since late April, but investors hoping to pick a bottom in the volatile commodity should proceed carefully. 

Streetwise: Companies with the highest ratios of free cash flow to debt have outperformed those with the lowest by about five percentage points, which is why investors shouldn't worry about MCD, HD, HSY, and UPS; Companies with low leverage ratios and low interest coverage include MU, MRO, and ODP.

Friday, June 3, 2016

Jobs Data Flop Delays Fed Hike; ECB and OPEC Stand Pat Weekly Market Update: Jobs Data Flop Delays Fed Hike; ECB and OPEC Stand Pat
Fri, 03 Jun 2016 16:06 PM EST

Trading volumes were a bit light this week after the Memorial Day holiday weekend in the US, although markets did not lack for dramatic headlines. The ECB confirmed its corporate bond buying program will start next week. OPEC was unable to agree on any formal production quotas, but members showed they might be more cooperative in the future. In Japan, after months of prevarication, Prime Minister Abe confirmed he would delay a sales tax increase for 30 months. On Friday, the US May jobs report widely missed even the lowest estimates as non-farm payrolls came close to a six-year low and the prior two months were revised lower. After the very poor jobs numbers, Fed fund futures heavily discounted the chances of a rate hike in June and July. The dollar saw its steepest one-day plunge is six months while gold shot up 2.5%. Interest rates fell globally and the US Treasury curve held near some of the flattest levels seen since 2008. Bank stocks finished the week under modest pressure, giving back a portion of the gains seen after the hawkish April FOMC minutes. Nevertheless most major US indices remain within striking distance of all-time highs. For the week the DJIA slipped 0.4%, the S&P500 was flat, and the Nasdaq edged up 0.2%.

The May non-farm payrolls sank to 38K from 123K in April, widely missing expectations for a +160K advance. The unemployment rate dropped to 4.7%, the lowest since November 2007, as Americans left the labor force. The number of jobs added in April was also revised downward to 123K from 160K. The report indicated a broad hiring slowdown, including payroll declines in construction, manufacturing and mining. There was one bright spot in the report: average hourly earnings rose by 0.2% after a 0.4% gain in April. In the wake of the report, Goldman Sachs' Chief Economist Jan Hatzius said there was no chance for a Fed rate hike in June and only a 40% chance for a July hike. Fed fund futures rapidly repriced after the report, with traders seeing only a 4% chance of a June rate increase, down from a 25% probability earlier. The greenback had its biggest one-day decline in six months, as the dollar index dropped back toward 94 from 95.5. The EUR/USD spiked to 1.3500 from 1.1150, and the USD/JPY saw an over 2% move. Many emerging market currencies saw even larger gains against the dollar.

Fed Governor Brainard commented that the jobs report was disappointing and puzzling. She concluded that it would be advantageous to wait for more data before raising rates, saying the risk of waiting is less than the risk of raising rates prematurely. She also worried that an affirmative Brexit vote could cause a significant adverse reaction in the markets. Fed Chair Yellen will likely raise the same concerns in a speech coming up on Monday.

In other key US economic data, the April PCE inflation report was subdued, with no discernable pick-up seen in the Fed's key gauge of US inflation levels. The May Chicago PMI report and the Dallas Fed factory index both came in much more negative than expected, echoing the weak regional May manufacturing data seen over recent weeks. The ISM manufacturing index for May was a bit better than expected at 51.3, and looked much better than the various regional Fed factory production indexes. The new orders component held steady at a solid level of 55.7, while the production index slipped less than two points to 52.6.

On Wednesday, Japanese PM Abe set aside the third arrow of Abenomics and delayed the sales tax increase by 2.5 years, moving fiscal reforms to the back burner due to growing signs of weakness in the economy. The decision may help Abe cope with the expected decline in Q2 GDP and win votes at an upper house election on July 10, however doubts continue growing about Japan's huge public debt and ballooning social welfare costs. Moody's called the move a credit negative, while S&P said it does not believe the delay signals a lessening commitment to fiscal reform and would not have an impact on Japan's sovereign rating. Expectations of more Bank of Japan stimulus are running higher than ever, although some fear the BOJ will refuse to step in and save the government from its own mistakes. The BOJ's Sato, who voted against the January decision to adopt negative rate policy, commented after the tax delay that he was firmly opposed to cutting rates further into negative territory. The yen tightened quickly after Abe's decision, dropping back into the 108 handle, and then broke below 107 in the wake of the US jobs report on Friday.

Ahead of the US jobs report, GBP/USD had seen its biggest weekly decline since March as sentiment shifted against the view the UK would vote to remain in the European Union. Last week, the stay camp was looking much stronger in polling, but on Tuesday an ICM poll shifted in favor of "leave": 45% of telephone respondents and 47% of online respondents were in favor of leave, compared to 42% and 44%, respectively, in favor of stay. The bookmakers are stymied by Brexit: William Hill set odd for a "leave" vote at 11/4 (versus 6/1 a week ago), while Ladbrokes had the odds of "stay" at 11/4 as well (versus 7/2 earlier). Volatility in pound trading rose to its highest level in seven years: GBP/USD moved back toward 1.4400 from the 1.4700 handle through the first four days of the week. After the US jobs report, the pair retraced about half of that, returning to 1.4550.

There were no surprises in Thursday's ECB policy decision as the bank remains in wait-and-see mode. The two salient developments were disclosure of the timing of the corporate bond buying program and the absence of staff revisions to the inflation outlook. Draghi confirmed corporate bond purchases would begin next week under the stimulus program announced in March. Staff inflation projections were not revised higher at the far end of the policy outlook (2017-18), disappointing expectations for a slight upward revision. The euro strengthened modestly through the week heading into the decision, with EUR/USD retesting the mid 1.1220 area seen earlier in May, but gave up gains later on Thursday. Friday's post-US payrolls action saw EUR/USD spike rapidly back to levels last seen in mid-May, with the pair hitting 1.1350.

China May PMIs were mixed: the official non-manufacturing index slid to a three-month low and the manufacturing survey narrowly beat estimates to stay in expansion for the third straight month. In the manufacturing index, new orders hit a three-month low, inventories rose to a seven-month high, and employment rose to a one-year high. The Caixin manufacturing PMI surveying small companies was a less upbeat and fell into contraction. In Hong Kong, the May composite PMI contracted for 15th straight month, although the contraction narrowed somewhat. A Caixin economist warned that China's economy has not been able to sustain the recovery seen in the first quarter and called for Beijing to implement more fiscal policy measures to counter the economic slowdown.

OPEC failed to agree on a new production ceiling at its semi-annual meeting in Vienna. Nigerian candidate Mohammed Barkindo was chosen to be OPEC's new secretary general. Heading into the confab, Persian Gulf member states Saudi Arabia, Kuwait, and Qatar were leaning towards reinstating the OPEC output ceiling, while others such as Iran, Venezuela, and Algeria were insisting an output ceiling must be accompanied by a country-specific quota system. Members could not reach agreement on a renewed ceiling, but they took great efforts to appear more collegial than in the past, and generally expressed satisfaction that oil prices are on the rebound. There were signs that higher oil prices have enticed US frackers to restart some shuttered production: Friday's Baker Hughes data showed the first increase in the oil rig count in eleven weeks, and the largest weekly rise since December. Both Brent and WTI continued to trade this week within the $48-50 range seen since mid-May.

Australia reported first quarter GDP of +3.1%, the biggest rise in nearly four years thanks to particularly strong trade components. The rebound in commodities was a big driver, with exports contributing a full percentage point to the much stronger figure. Other aspects of the Australian economy were looking less good, with fixed capital formation falling 2.2% due to soft construction, and the separate AiG May manufacturing report still in expansion territory but still dropping to a seven-month low. reached a $2.8 billion deal to acquire Demandware, a cloud-based provider of e-commerce services to businesses big and small. Salesforce made its name with cloud-based software to help salespeople manage their leads and close deals, but the company took a big step into the business of sales itself. The $75/share cash offer for Demandware was a big premium on the company's current valuation. In other deal news, Great Plains Energy agreed to acquire utility Westar Energy for $60/share in cash, in a total deal valued around $12 billion. Jazz Pharmaceuticals agreed to buy Celator in a $1.5 billion deal.

Sunday, May 29, 2016

Barrons weekend update

Barrons weekend update: positive on CAG, BF.B, select REITs 
Cover story: The current bull market has lasted seven years and pushed the market to new highs, but after faltering last May some bears wonder if the inevitable crash is just ahead; However, because stock valuations aren't too exuberant, the inflation-adjusted house price isn't above its previous peak, the yield curve isn't flat or inverted, and oil prices aren't surging to triple-digit peaks, investors can assume the bull market hasn't finished its run. 

1) Positive on AVB, EQR, FRT, GGP, PSA: Story says these five REITs are worth a look for investors, noting such investments are less volatile than financials and have a lower correlation to the performance of the broader market; 
2) Cautious on Brown Forman (BF.B): Shares have risen steadily and now sell for 27 times forward earnings estimates, but growth in a crowded market will be difficult, and any problems could lead to a drop in share price; 
3) Positive on CAG: New chief executive Sean Connolly plans to trim down the company, boost margins, and improve quality, and shares could rise 30% if the efforts are successful; 
4) Picks from the speakers at this year's London Value Investor Conference include companies whose attractions aren't apparent in their mostly beaten-down shares (Positive on Ryanair Holdings, easyJet, Elekta, PRGO, RBS, Ocado Group).

Tech Trader: Tiernan Ray says the "unfortunate theme" in the tech world during the past decade has been the massive number of layoffs that resulted from the launch and growth of disruptive industries such as cloud computing. 

Trader: "Investors remain lukewarm on stocks, which still trade at above-average valuations despite weak quarterly earnings"; Positive on AMGN: Biotech's shares have trailed the market, but the company should get a boost if Repatha and AMG 334, now in phase 3 trials, are successful; A vote for the U.K. to remain in the European Union could boost stocks that have strong sales in the bloc, including PAG, PPL, PRAH, IVZ, XRX, F, CPRT, CBG, GWR, EBAY. 

Alternative Investments: Andrew Lo, director of the Laboratory for Financial Engineering at MIT, talks about his work blending economics with behavioral finance and neuroscience and shares insight into the potential pitfalls of liquid alternatives. 

Small Caps: Positive on JLL: The recent share selloff looks like an overreaction and an opportunity for investors, who have given short shrift to the company's less cyclical, annuity-like operations. 

Follow-Up: Cautious on BABA: Barron's "remains wary of the shares of the complicated, opaque company," which could fall further as the SEC's investigation into its operation unfolds; Cautious on CSC: The stock got a boost on news of the HPE deal, but further upside appears unlikely given strong competition in the sector from the likes of AMZN; Cautious on INTC: Chip maker faces a threat from GOOGL's Tensor chip and the company's move into cloud computing, which could put a dent in Intel's lucrative server-chip business. 

European Trader: Positive on BUD, SABMiller: Shares of brewing giants are set to rise now that the European Union has approved their merger, though authorities in the U.S., China, and South Africa remain undecided about the deal. 

Asian Trader: Standard & Poor's is about to launch its index of China's 500 largest stocks; ICBC will partner with CS to offer an S&P China 500 exchange-traded fund, expected to launch in July. 

Emerging Markets: A number of multinationals with operations in Venezuela-including KMB, PEP, MDLZ, Bridgestone Americas, F, PG, HAL, and SLB-are struggling against the country's steep inflation and currency controls. 

Commodities: Cotton, which has been trading in the range of 60-65 cents a pound during most of the past two years, is likely to stay there for the time being. 

Streetwise: The revolving door of chief executives of U.S. companies is more a reflection of market volatility than a struggling economy, and investors shouldn't draw broad conclusions about changes at the top.

Friday, May 27, 2016

Risk Assets Test Key Levels as Global Risks Wane Weekly Market Update: Risk Assets Test Key Levels as Global Risks Wane
Fri, 27 May 2016 16:03 PM EST

The S&P500 notched its second consecutive week of gains neared the key 2100 area, where broader equity rallies have stalled again and again over the last 15 months. Most global equity markets in Europe and Asia also saw modest gains. While equities ground higher, crude prices briefly tested above $50 for the first time since last fall. May corporate bond issuance continued on at a historic pace while US Treasury supply found buyers eager to take advantage the recent declines in prices. The Fed campaign to redirect the markets' interest rate policy expectations was capped by remarks from Chair Yellen on Friday. The G7 produced another tepid statement and plenty of hot rumors of conflict between the US and Japan on clashing visions of how to cope with the global economic slowdown. The Europeans reached yet another deal to keep Greece afloat on borrowed money, while in the UK polling numbers suggested the "remain" camp was gaining ground with only a month to go to the referendum. With some of those global risks starting to fade, equities rebounded and for the week the DJIA gained 2.1%, the S&P500 added 2.3%, and the Nasdaq rose 3.4%.

The barrage of Fed speak that drove last week's repricing of interest rate expectations hardly let up this week. On Sunday, the Boston Fed's Rosengren (a voter) said that most of the conditions for more rate hikes that were laid out in the FOMC minutes seem to be on the verge of broadly being met. On Monday, the San Francisco Fed's Williams said it would be a good idea to raise rates with inflation below target, due to the lag in policy impact, and warned that the Fed sets policy based on the direction inflation is headed, not where it is now. Philly Fed President Harker said rates need to keep rising as inflation picks up. The ever-chatty hawk Bullard said a rate hike in June or July was not set in stone. Powell said the economy is on track to meet the Fed's employment and inflation mandates, with tentative signs that wages are firming. Chair Yellen capped things off on Friday, saying that she expects data to keep improving and if that bears out it will be appropriate to raise rates in coming months.

The second reading of US Q1 GDP was revised a bit higher, to +0.8% from +0.5% in the advance reading. Consumer spending was unchanged at +1.9% in the first quarter. New home construction surged to +17.1% from +14.8% in the advance estimate, the biggest gain in nearly four years. The April new home sales data confirmed that housing market strength has been sustained at the beginning of Q2. The annualized rate of new home sales surged in April, rising to 619K units, up nearly 17% y/y, way ahead of expectations. That's the highest annualized rate of new home sales since January 2008. With supply tight, the median price for a new home increased 9.7% y/y to a record $321,100. US manufacturing data remained poor: the May preliminary Markit factory PMI index sank to its lowest level since late 2009, and the negative reading in the May Richmond Fed manufacturing index echoed a similar result in the May Empire manufacturing survey out last week. Both saw new orders crater, moving from fairly decent growth in April to big declines in May. The April core capital goods orders component of the durable goods report fell 0.8%, the fifth month of declines in the last six months.

For years, the biannual G7 meetings have produced tepid headlines and dull communiques, in which global leaders agree to continue agreeing on broad, vague goals. The most recent edition of the G7 in Tokyo was a different story, as the leaders of the developed world clashed over the right policies to support flagging global growth and forestall all-out FX war. The communique was as anodyne as usual, but in the background US and Japanese officials exchanged sharp rhetoric over FX policies. Japanese officials reportedly made strong appeals for organized exchange rate intervention, but the rest of the group, led by the US, rebuffed the appeals. The Japanese also pushed for their plan to commit G7 members to expanding fiscal spending to blunt the slowdown, warning that the world was potentially at the edge of an economic crisis, but this also appears to have been rejected by the group. With no coordinated G7 plan in place for FX or growth, many analysts now expect another round of Japanese stimulus, and possibly some hint that the BoJ could look at "helicopter money" policies at the June meeting.

For months, Japan PM Abe has been saying that the 2017 sales tax increase would only be delayed (again) under the threat of a Lehman-like crisis. As G7 leaders gathered in Tokyo, Abe gave a speech in which he warned leaders the global economy was possibly heading towards another Lehman-like crisis, citing the 55% decline in commodity prices since mid-2014. This prompted many analysts to conclude the widely-anticipated delay of the tax hike was imminent. Local Japanese press sources suggested the delay could be as long as two years, with a formal announcement as soon as next week. Separately, the Japan April inflation report out this week underlined the failure of Abenomics and the BoJ's negative rates: CPI was in contraction for the second straight month (-0.3%) and the Tokyo CPI figure (-0.5% y/y) saw the fourth month of declines and marked a three-year low. Analysts anticipate the dire inflation data to produce GDP contraction in Q2. This further underlines the possibility of more action from the BoJ in June. The softer yen trend seen in the first three weeks of May hit pause this week, as USD/JPY had trouble maintaining momentum above 110.

There seemed to be a shift in polling on EU Brexit this week, favoring the "remain" camp. On Monday, an ORB/Daily Telegraph survey of "definite voters" showed 55% of respondents in favor of staying in EU and only 42% in favor of leaving. Later in the week, an Ashcroft poll showed 65% of respondents in favor of remaining in the EU and a mere 35% for leaving. Note that "undecided" respondents remain in the double digits in all recent polls. The change in tone comes as the government and the Conservative party ramped up their campaign to emphasize the extreme costs that would accompany Brexit: up to 800K job losses, as much as an 18% decline in property prices and an overall price tag of up to £200 billion. Cable again tested YTD highs this week as the pound softened, although the pair did not maintain a foothold above 1.4700.

Greece and its creditors reached a deal that could be a major step on the road to solving the stricken nation's debt crisis. Representatives from Greece, the IMF and the Eurogroup agreed to preliminary measures to restructure Greek debt when the country's bailout deal concludes in 2018. Most importantly, the proposals include reducing the exposure of the IMF by buying out up to €14.6 billion loans. The deal also includes the possibility of the euro zone handing over €10.3 billion of rescue loans to keep Greece solvent this summer.

Hewlett Packard continues to slim down and adapt to the post-PC world and zero in on its most profitable segments. Hewlett Packard Enterprise will spin off its enterprise-services division to Computer Sciences Corp. in an all-stock deal valued at $8.5 billion. The deal gets HPE out of the market for information technology outsourcing, which helps customers manage and upgrade their systems, leaving it to concentrate on selling hardware that covers servers, storage and networking.

German agricultural and pharma giant Bayer AG offered to acquire Monsanto for $122/share in cash, in a total deal valued around $62 billion. Monsanto called the deal inadequate but left the door open for negotiations with Bayer. The very controversial move comes just three weeks after the board named Werner Baumann Bayer's new CEO, and was condemned by a major shareholder as "arrogant empire-building" when news of the proposal emerged last week.

Shares of Tribune Publishing tanked after the company rejected a revised, $15/share offer from Gannett. Tribune's board rejected the proposal but did invite Gannett to agree to a mutual non-disclosure agreement under which both parties could engage in due diligence and discussions to work out a more acceptable deal, while Gannett said it was thinking hard about dropping its offer.

Saturday, May 21, 2016

Barrons weekend summary

Barrons weekend summary: Positive on RHT, FDC; cautious on BA 

Cover story: Profile of BX strategist Byron Wien, who for the past few months has been bearish on the U.S. stock market, which he thinks may have a down year in 2016, after which investors will be lucky to get a 5-7% annual return; Wien thinks the global economy will grow at just 2% this year, and is cautiously optimistic on China and worried about Japan. 

1) Cautious on BA: Aerospace giant, which turns 100 this year, faces turbulence because of a glut of planes and lower demand for its fuel-efficient models, a sign carriers are using fleets longer before they order new aircraft; 
2) Positive on RHT: Relative to the free cash it generates, company trades in line with the broad stock market, despite much faster growth; shares could see a gain of 30% within a year; 
3) Positive on FDC: Shares are down amid waning investor interest in tech-related stocks, but firm is making progress cleaning up its balance sheet and rebuilding its payment processing system; shares could rise 70% or more in the next year or two.

Tech Trader: Cautious on AAPL: Berkshire Hathaway's $900M stake comes as Apple's business grows increasingly complex, following the paring down that came when Steve Jobs returned in 1997, and it needs to resolve the inherent conflict between iTunes and its streaming music service. 

Trader: That the market was able to recover from the FOMC news indicates investors are "coming to grips with the fact that rates will have to go higher," says Chris Gaffney of EverBank World Markets; Positive on JCI: Company, whose merger with TYC may face extra scrutiny from the Obama administration, has a strong track record of growing profitability, making shares attractive for long-term investors; The difference between two- and 10-year Treasuries can be a useful indicator signaling caution, but only when it hits zero, or when short-term rates rise above long-term. 

Interview: Laszlo Birinyi, founder of Birinyi Associates, says the firm has always made more money in up markets than in down markets (picks: KHC, AZO, NVR; pans: AAPL, MO, NKE). 

Profile: Michael Fredericks, head of income investing for BLK's Multi-Asset Strategies group and portfolio manager of BAICX, will invest in anything that produces income (top 10 assets: high-yield debt, mortgage-backed securities, bank loans, investment grade debt, international equity, preferred stock, emerging market debt, global REITs, U.S. equity). 

Small Caps: Positive on AWI: Company is the largest player in the ceiling market for commercial buildings, a business with a high barrier to entry; lately the construction market has picked up, and shares look attractive. 

Follow-Up: Cautious on R: Near-term risks remain for trucking company, but over the long haul shares look likely to recover, and they offer a 2.4% dividend yield; Cautious on FRAN: Disappointing results and the announcement its chief executive Michael Barnes is leaving amid other executive departures should give investors pause; Positive on PEP: Trian Fund Management has sold its large stake in the food and beverage giant, but the improvements it pushed for should endure, and the company continues to boost shareholder value. 

European Trader: Positive on AXA: Shares of the firm "appear inexpensive and could get a shot of momentum when the French insurer and asset manager unveils a new five-year strategic plan next month." 

Asian Trader: Manufacturers in AAPL's iPhone supply chain-including Samsung, AAC Technology, Japan Display, and Sharp-could take a hit because of slower iPhone sales, though the wider adoption of dual-lens cameras should benefit supplier Largan Precision. 

Emerging Markets: Positive on PBR: Shares of Brazilian state-controlled oil giant have more than doubled from their recent lows; they remain undervalued and are likely to rise. 

Commodities: "Propane prices that have been painfully low for U.S. producers are poised to take off as exports surge." 

Streetwise: Cautious on WMT: The retailer's situation seems to be improving, but with its shares so pricey, investors should proceed cautiously.

Friday, May 20, 2016

Markets Reprice Fed Policy Risks Weekly Market Update: Markets Reprice Fed Policy Risks
Fri, 20 May 2016 16:07 PM EST

The FOMC minutes out on Wednesday drove a major reconsideration of the Fed's policy outlook this week. With the sense that the economic weakness of the first quarter was passing and a bottom had been found in energy markets, Fed officials were out in force telling markets they were wrongly pricing in a more cautious Fed policy view. Risk assets swooned with the repricing action that followed the minutes on Wednesday, but the impact was notably short-lived and equities were already climbing higher on Friday. Separately, China released a raft of weak April economic data last weekend, but even that had no more than a passing impact on global markets and commodity prices, suggesting that a newfound sense of robustness appears to be supporting global markets. Equity markets churned sideways and for the week the DJIA slipped 0.2%, the S&P eked out a 0.3% gain, and the Nasdaq added 1.1%.

The FOMC minutes indicated that most Fed participants feel current and future conditions in economic activity, labor markets and inflation could be supportive of tighter policy by the time the committee meets in June. The language echoed the FOMC position last October that economic trends were already likely to justify a December rate hike, although analysts caution that the corresponding passage in the April minutes was more conditional. Most importantly, the FOMC did not reach a consensus about whether conditions had already been fulfilled, but agreed that a rate hike would become likely if the economy improved further, and remained divided about whether that improvement would actually materialize. Fed fund futures significantly repriced the chances of a June rate hike in the latter half of the week, rising from around 4% on Monday to around 30% at week's end (off the 35% chance seen in the immediate aftermath of the minutes).

A chorus of Fed speak accompanied the report, aiding the overall repricing theme. Ahead of the minutes, Fed moderates Kaplan, Lockhart and Williams emphasized that rates need to start rising and that the June meeting would very much be live. Later in the week, Dudley said that if his personal economic forecast is on track, then June or July tightening is a reasonable expectation, while Lacker said he would like four rate hikes this year and chastised markets for overestimating how likely the Fed was to pause its tightening campaign. The greenback saw its third straight week of gains, with the dollar index rising to near two-month highs in the wake of the minutes. Commodities prices suffered, and crude prices paused on their march back toward $50.

Last weekend saw the release of disappointing China April retail, industrial output, and fixed asset investment reports. Retail sales fell to an 11-month low and industrial output was lower than expected, restrained by the key power generation component, which returned to contraction. The M2 money supply fell to a 10-month low and new loans hit a 6-month low. Property prices were a rare bright spot: home prices posted their fastest growth in two years in April, with gains in regional centers indicating a broader recovery beyond major cities. Earlier this year, a brace of terrible Chinese economic data would have driven big declines across global markets, but today markets have reconciled themselves to the "slowing China" theme and traders have more pressing issues to worry about. Chinese officials kept up a drumbeat of commentary to drive home the "stability" message, and Premier Li Keqiang once again repeated that Beijing would be able to keep economic growth "within a reasonable range."

The preliminary look at Japan's first quarter GDP performance surprised to the upside thanks to better consumption levels. The better result contrasted strongly with the contraction seen in the final quarter of 2015, helping the economy avoid a technical recession. The q/q sequential Q1 preliminary GDP hit a one-year high at +0.4% v -0.3% prior, while the annualized measure was +1.7% v -1.1% prior. Exports returned to growth and consumption hit a three-quarter high of +0.5%, however no recovery was seen in capex spending. Meanwhile, the debate raged on over the planned April 2017 sales tax increase - an important component of the third arrow of Prime Minister Abe's grand economic reform plan. Press sources once again reported the hike would be delayed, but officials quickly denounced the stories. Ruling LDP lawmakers recommended that PM Abe proceed with his plans and add an extra budget to deal with the impact. Abe aide Yamamoto said the extra budget could be as high as ¥10T, plus an additional ¥5-10T for aid to quake-hit Kumamoto prefecture.

There was some tension at the G7 conference in Sendai, Japan as US and Japanese officials sparred over currencies. US Treasury officials said that yen moves continued to be "orderly," signaling that Tokyo has no justification to intervene in the market soften the currency. Japan Finance Minister Aso responded by reiterating his government's standing policy view that excessive and disorderly FX moves were undesirable, hinting that Tokyo won't hesitate to intervene if they think it necessary. US officials fired back by saying currency moves are only "disorderly" enough to warrant intervention when they are triggered by a crisis. While post-FOMC greenback strength appeared to be limited on Friday, the yen continued weakening, with USD/JPY marking fresh three-week highs just shy of 111, before reversing back toward 110 on a Nikkei report that the BOJ had begun building reserves to pay for an eventual exit from monetary easing.

There are five weeks to go until the referendum on the UK's European Union membership on June 23rd and the polls suggest voters are all but deadlocked over the question of whether to stay or go. On Tuesday, an ORB telephone poll showing a 15% point lead for stay, but within hours a second poll, conducted online by TNS, showed the out campaign with a three-point lead - the first time a major poll put the leave camp in the lead since February. In many polls, the undecided camp is taking more than 20%. After falling to 1.4350 last week, cable surged to test above 1.4650, although that had much more to do with the FOMC minutes than Brexit polling. BoE Governor Carney faced plenty of politicized backlash for his remarks at last week's policy meeting regarding the negative economic implications of Brexit (higher unemployment, slower growth, higher inflation), and this week he said that ignoring the risks would not make them go away.

Goldman Sachs reversed its famously bearish view on the oil market - it was calling for $20 crude earlier this year - in a note that argued oversupply might be over and the market may be facing shortfalls. According to Goldman, the physical rebalancing of the oil market has finally begun, and while supply remained higher in the first quarter of the year, the market has likely shifted into deficit in May. Factors adding to the situation include the Canada wildfires and the Nigeria outages. Crude prices hit fresh six-month highs, with WTI and Brent ending the week just shy of $49/bbl.

There was more carnage in the retail sector this week, with Target leading the charge lower. Share of TGT were down as much as 10% at one point following the retailer's terrible comp sales performance and weak guidance. L Brands sagged 9% on the week at its worst. The women's clothier may have maintained positive comps and met expectations in its first quarter, but it also slashed its FY view and warned that May sales comps were in the red. Footlocker and Ross Stores saw losses despite decent earnings reports, as analysts slammed the entire mall chain sector. Meanwhile, Walmart rose nearly 10% after earnings as it beat expectations, while TJX gained around 5% on very strong comps. In the home improvement space, Lowes saw strong gains on a very good first quarter, while Home Depot was down on the week despite turning in a pretty decent result.

Spurious takeover rumors whipped around consumer staples name Church & Dwight and natural gas powerhouse Apache midweek. Relatively obscure sources pushed stories that the firms were looking at potential takeover offers, but the thin reports were dismissed relatively quickly. In more substantial M&A news, Pfizer reached a deal to acquire Anacor Pharmaceuticals for $5.2 billion just a month after it scrapped its $160 billion deal to buy Allergan Plc under pressure from new regulations on tax inversions. Valued at $99.25 per share in cash, the deal adds an eczema gel to Pfizer's portfolio. Papua New Guinea-based firm Oil Search reached a deal to acquire rival InterOil for $2.2 billion. InterOil's best assets include a 36.5% interest in the Papua LNG Project and its Elke-Antelope field, one of Asia's largest untapped gas fields.