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.

Saturday, May 14, 2016

Barrons weekend

Barrons weekend: positive cover story on REGN; positive on ETN and Alleghany (Y) 
Cover story: REGN looks attractively priced, given its growth potential, and as it reaches a few key milestones over the next year, shares could rebound to $500, for a gain of more than 30%, making it one of the best plays in biotech; In addition to its drug pipeline, Regeneron has spent decades developing tools and technologies that remove bottlenecks from the drug discovery process. 

1) Positive on ETN: Chief executive Alexander Cutler will retire this month, but will continue to work with the Campaign to Fix the Debt and the Business Roundtable to advocate for reforming the tax code and balancing the U.S. budget; 
2) Positive on Y: Alleghany doesn't hold earnings calls and receives scant coverage from analysts, but its book value has grown consistently and shares have followed, which should attract investors.

Tech Trader: Tiernan Ray says that for now, the vaunted Internet of Things "is a jumble of electronic devices that don't really connect to anything. They're just dead ends" that are hampering the evolution of personal computing, partly because wearables and other devices don't have the mass appeal of the PC and the smartphone. 

Trader: Rick Seto of Flaherty & Crumrine says big banks could see a boost in June if the Fed blesses share buybacks and dividend increases; Positive on BBT: BB&T "is a boring but beautiful bank, whose shares still could give a double-digit total return, without the blue-sky assumptions about interest-rate hikes"; Positive on BAC, FRC, GS, JPM: With common-stock dividends reaching a seven-year high and interest rates at nearly zero, banks' preferred shares could give investors a boost. 

Profile: Susan Kempler, portfolio manager of the TIAA-CREF Growth & Income fund, takes a cautious approach, hunting for bargains and diligently timing winners, which sometimes results in trailing the market (top 10 holdings: AAPL, GOOG, MSFT, FB, HD, KO, GE, PEP, AMZN, PM). Interview: Ali Dibadj, household products and beverages analyst at Sanford C. Bernstein, says PG should be broken up (picks: PG, KO, PEP, EL; pans: CLX, CL). 

Small Caps: Positive on AXTA: Automotive refinishing company has an attractive business that's less cyclical than selling coatings for new cars, and under chief Charles Shaver it has reinvested for growth and to improve efficiency and productivity. 

1) Positive on JWN: Shares are down, but retailer is positioning itself for the changing industry with investments in e-commerce and off-price retailing, and could be the best long-term holding in the sector; M shares could also see a rebound; 
2) Positive on NXST: Shares of station owner are rising, and could be worth as much as $70 as cash flow grows in the next year; 
3) Positive on ODP: Shares of office-supply retailer now look cheap following the FTC's decision to scuttle its merger with SPLS; it can use a $250M pretax breakup fee to buy back depressed shares. 

European Trader: Positive on Ryanair: Carrier's stock has taken a hit because of concerns about rising fuel prices and a potential U.K. exit from the European Union, but the company is well managed and should be able to move past those issues. 

Asian Trader: Suofeiya Home Collection, Hangzhou Robam Appliances, Midea Group: Shenzhen-listed home appliances and furniture companies are poised for a boost from the growth of home sales in China, and are appealing ways for investors to play the trend. 

Emerging Markets: Low prices may be bad for emerging markets such as Russia and Brazil, but should be good for India and China, though the markets have largely ignored the fact. 

Commodities: Prices for platinum, palladium, and rhodium are up, and though the rally has slowed a bit, it should regain momentum during the second half. 

Streetwise: Among the ideas put forth at the SALT conference, Michael Bloomberg said the Republican Party is no longer the party of business, while Larry Summers said the U.S. is in some ways an emerging market.

Friday, May 13, 2016

Spring Awakening Weekly Market Update: Spring Awakening
Fri, 13 May 2016 16:08 PM EST

Strong jobs and retail sales data out this week appeared to tip the debate about whether the US economy is getting over the big hiccup seen in the first quarter. Also, somewhat hawkish commentary by a few moderate FOMC voters drove a flatter US Treasury yield curve and kept upward pressure on the greenback into the week's end. Weak Chinese trade data drove big declines on the Shanghai Composite, however the story did not seem to impact global markets more broadly. Meanwhile, crude prices steadily advanced back toward $50, where many commentators expect them to be for the balance of 2016. Corporate bond issuance picked up momentum and coincided with a slate of US Treasury issuance. The US 3- and 10-year sales were received well by the markets, but Thursday's 30-year saw demand hampered after a several large corporations sold significant amounts of longer dated debt earlier in the week. Nevertheless the US 10-year yield finished the week at roughly 1-month and 1-week lows of 1.70%. Stocks didn't make much headway as traditional retailers reported a spate of disappointing earnings, and for the week the DJIA fell 1.2%, the S&P500 lost 0.5%, and the Nasdaq slipped 0.4%.

Last Friday, the April jobs report raised real fears about a slowdown in the labor market, however the March JOLTs data out this week lent support to the thesis that things are more or less healthy. The job openings available in March surged to their second highest level ever at 5.8 million, while the key quits rate held steady at 2.1%, just under the decade high of 2.2%. The hiring rate fell slightly from February but remained strong. Meanwhile, the weekly jobless claims rose to a 14-month high, after last week's 12-month high, raising some eyebrows. The April retail sales numbers were much stronger, and most importantly the control group - used for calculating GDP - surged to +0.9% to +0.2% m/m.

The US Dollar accelerated higher heading into the week's end, following hawkish remarks from FOMC voters George and Rosengren, aided and abetted by the better retail sales data. The dollar index pushed out to around one-month highs just shy of 95, while EUR/USD dropped sharply on Friday back below 1.1300. Boston Fed President Rosengren's remarks certainly sounded like an endorsement of more interest rate hikes, sooner. He said markets were too pessimistic about the economic and policy outlook, weak Q1 data appeared to be temporary, and early Q2 data was consistent with inflation closer to 2% target and GDP growth above 1.75%. George, the dissenting voter at the last two FOMC meetings, simply repeated again that she is in favor of raising rates. The 2-year/10-year UST yield curve noticeably flattened at week's end as short-term yields saw their biggest gains in three weeks. Expectations for rate hikes repriced on Friday, with Fed funds futures calling for a 61% chance of a rate hike by December, compared to 43% earlier.

China's exports stabilized in April in yuan terms, but saw declines in dollar terms. The export sector has shown y/y declines in dollar terms for nine of the last 10 months. Imports fell 11% y/y in dollar terms, while imports extended a streak of declines to 18 months, down 2% y/y. In yuan terms, the report was much less bad, with exports up 4% but imports also down sharply. April's exports follow a March surge in both currencies, which may have been exaggerated by seasonal effects after the Lunar New Year holiday. The absence of a sustained trade rebound adds to pressure for more government stimulus to help boost growth

There are growing fears about rising public bond defaults in China, which may be causing the nation's bond market to stagnate. An HSBC note out this week reported that YTD, there have already been 12 public bond defaults involving more than RMB7.8 billion of principal, exceeding the total amount in the previous two years. At the same time, a series of credit events among state-owned enterprises and local government funding vehicles undercut investor confidence in credits assumed to have government backing. HSBC said that in April alone, around 130 primary market bond offerings were either postponed or cancelled, the most on record.

Last weekend, Saudi Arabia's new power player, Deputy Crown Prince Mohammed bin Salman, reshuffled the Kingdom's government in a continuing bid to consolidate his growing influence in Riyadh and also diversify the economy away from reliance on oil alone. Among other moves, he is said to have driven the removal of long-serving oil minister, Ali al-Naimi, and his replacement with chairman of Saudi Aramco, Khalid al-Falih. Analysts believe the reshuffle was the next step in Saudi Arabia's efforts to pressure rival non-OPEC producers (chiefly Iran). Prince bin Salman has hinted in the past that Saudi's oil output could easily be accelerated to help gain market share. Recall that the scuttling of the production freeze deal was widely believed to be bin Salman's decision, over the objection of al-Naimi.

Crude prices returned to the six-month highs seen in late April, with Brent touching $48 and WTI briefly hitting $47. The wildfires in Canada's Alberta province shut in more than 1.0M bpd of crude output, well over a third of the country's typical daily production, almost all of which is exported to the US. Relatively smaller production outages across multiple other geographies received ample press coverage as well. In addition, the weekly DoE inventory report turned in a surprisingly large drawdown in crude stocks.

Over the weekend, Greece's parliament pushed through yet another package of reform legislation to secure yet another bailout loan tranche payment, agreeing to an overhaul of the pension system and higher VAT taxes. Meanwhile, euro zone officials agreed to ease Athens' debt burden by giving Greece longer grace periods and bond maturities from 2018, if the country delivers by then on all reforms agreed under its latest bailout. The Eurogroup will decide on the size of the loan at its next meeting on May 24th, allowing Greece to make key repayments in July.

The Brazil Senate voted to proceed with President Rousseff's impeachment trial, after the Supreme Court rejected challenges to the impeachment process. Vice President Temer assumed the role of interim president, and wasted no time in naming a new cabinet, tapping the market-friendly Meirelles as the new finance minister. Rousseff will be suspended from her position for up to six months as the trial is conducted in the Senate. For her part, Rousseff said she was confident she could defeat the charges, though it could be a long fight.

Earnings out of the US retail sector this week showed that the first three months of the year were very, very tough. The Gap's sales comps sank 7%, versus expectations for a slight gain, while the company also offered first quarter guidance that widely missed the mark. The firm cited weaker traffic and higher inventories for the poor performance. Macy's saw its revenue decline more than 7% y/y, its fifth consecutive quarter of lower revenue, and it also cut its FY view. Sales comps in the quarter fell 5.6%. Macy's CEO warned that the company is seeing continued weakness in consumer spending for apparel and related categories. Kohl's missed top- and bottom-line expectations, on a nearly 4% decline in comp sales. Executives took pains to emphasize that the sales trend would surely improve in the second quarter and get even better in the second half of 2016. JC Penny's quarterly loss was smaller than expected and comps were negative, however the company optimistically sustained its EPS and SSS forecasts for the FY, expressing their confidence in trends for the rest of the year.

In M&A news, Krispy Kreme reached a deal to be taken private by JAB Holding Company for $21 per share in cash, or a total equity value of approximately $1.35 billion. Note that JAB acquired Keurig Green Mountain last year and also has controlling stakes in other coffee companies including Peet's Coffee and Caribou Coffee.

US regulators stopped another megadeal this week, as a Federal district court granted the FTC's request for a preliminary injunction to block the Office Depot/Staples merger. The companies quickly abandoned the deal after the court action, marking the second time that the two companies tried and failed to merge in the last two decades. The federal court judge agreed with the FTC's contention that the merger would reduce competition in the office supply space, in spite of the rise of new sources of competition online. The FTC made a convincing case that Amazon was not offering services that would suit large bulk buyers of office supplies. Shares of the two names had lost 40% a piece over the last ten months as prospects of the deal close looked weaker and weaker. Staples lost another 20% this week, and ODP was down 40%.

Shares of Chinese tech names that are seeking to delist from US markets and relist in China tumbled all week long on reports regulators in Beijing might get in the way of their plans. The China Securities Regulatory Commission (CSRC) was said to be mulling limits on the number of reverse mergers from previously foreign-listed companies, although it was reportedly not considering an outright ban. Separate reports suggested that Qihoo 360's talks with the CSRC on its relisting had bogged down, while the buyout group facilitating YY Inc's delist/relist process was halting its offer due to the uncertainty surrounding the market. Shares of VNET, DANG, MOMO, YY and QIHU saw 10-30% losses on the week.

Sunday, May 8, 2016

Barrons weekend summary

Barrons weekend summary: positive on ICE, VC, EPC, LYG 
Cover story: Because of Australia's proximity to China, the worlds second-largest economy as a supplier of resources, the Aussie dollar has tracked the ups and downs of Chinas growthand is now signaling that the rebound in commodities might have further to run. 

Tech Trader: For consumers, personal technology offers a range of intriguing gadgets, from fitness trackers to virtual reality headsets, but investors are worried about fading product categories such as the personal computer; The most important gadgets of the past, from PCs to smartphones, amplified human productivity but bots such as AMZNs Echo that work in the background are charting a different path by fostering passivity. 

Trader: Citi currency strategist Steven Englander says the market may already be starting to reflect the possibility of a fourth round of government bond buying; Mixed VRX: The companys fundamentals havent changed, and its underlying problems such as low revenue and profit growth remain; Mixed PRGO: Upon closer examination shares arent as cheap as they look, and investors continue to raise questions about the companys fundamentals. 

ETF Special Report: Exchange traded fund picks from a panel that includes David Cleary of Lazard Asset Management (MXI, ILF, PHB, ANGL), Will McGough of Stadion Money Management (IEMG, QEMM, HDV, IEFA), John Forlines III of JAForlines Global (HYXU, PFF, EFAV, USMV, EWC, EWA), and Fritz Folts, 3EDGE Asset Management (IAU, GDX, EWZ, INXX, QQQ, VBR). Profile: James Hung of the Tocqueville International Value fund takes a contrarian approach and doesn't view relative valuations as a harbinger of success or failure (top 10 holdings: Publicis Groupe, Amano, AFL, SNY, ISS, Samsung Electronics, Groupe Bruxelles Lambert, Smiths Group, Aveva Group, Hitachi). 

1) Positive ICE: Shares of financial services company, which surprised Wall Street by not bidding on the London Stock Exchange Group, look appealing at 18 times projected 2016 earnings, and could rise by 15%; 
2) Positive on VC: Company has become leaner since its bankruptcy and is poised for more growth; it has products in some of the fastest-growing electronics categories, and shares could gain 25% or more this year; 
3) Recommendations from the participants of last weeks Sohn conference in New York (short: PXD; long: VRX, MSFT, YUM, ABBV, BKD, QCOM, WBA, Puerto Rico Muni Bonds, 8% of 2035 and 6.2% of 2039). 

Small Caps: Positive EPC: Company has an attractive franchise and could be a likely acquisition target; shares remain appealing despite the fact a buyer may not line up anytime soon. 

European Trader: Positive LYG: Bank has faced a tough road to recovery, but there are many reasons to believe the worst is behind it, and it offers investors a ray of hope in a sector where returns are hobbled by low interest rates and slow growth. 

Asian Trader: The Philippines is in the best shape in decades, and could see GDP growth of 5.9% this year, but whoever wins the country's presidential race will face huge challenges. 

Emerging Markets: Investors who missed the spring rally may be tempted by lower prices, but need to be especially wary of countries such as Brazil and Turkey, where political upheaval is a major risk. 

Commodities: Droughts, floods, and historically low global inventories have rice-market experts worried that the price of the grain could come close to doubling if harvests around the world continue to disappoint. 

Streetwise: Defense stocks such as NOC, LMT, HON, MAS, ROK, HRS, JEC, and TXT are likely to benefit from growth in government spending; Investors have given up on the Feds bond buying as a means of repairing the economy.

Friday, May 6, 2016

Downside Risks Trump Recovery Hopes Weekly Market Update: Downside Risks Trump Recovery Hopes
Fri, 06 May 2016 16:04 PM EST

Over recent weeks there has been a recurring debate in markets about the prospects for the stalled global economic recovery. Many analysts saw the first quarter as a seasonal aberration and predicted the widespread economic softness would soon to be replaced by green shoots as oil prices rose, China stabilized and the US economy improved. The more pessimistic analysis said the problems seen in the first quarter were indicative of deeper problems, and developments this week seemed to favor the latter camp. The April US jobs report was soft, and the decline in the April US ISM factory data suggested manufacturing was not healing quite as quickly as expected. Other global data was similarly weak. The softer dollar trend appears to have plateaued, with EUR/USD unable to sustain gains above 1.1500 while the USD/JPY appears to holding above 105. A resurgent Dollar weighed on commodity prices in general before production hotspots pushed up oil prices late in the week. Treasury yields drifted lower aided by flows out of the equity markets pushing rates to levels not seen since mid-April. For the week the DJIA lost 0.2%, the S&P lost 0.4% and the NASDAQ fell 0.8%.

The April US non-farm payrolls missed expectations, dropping to +160K from the revised +208K figure in March. Unemployment held steady at 5%, while there was a slight uptick in wages. The NFP figure echoed the softness seen in the ADP report out earlier in the week. On Tuesday, Mark Zandi wrote that that "the job market appears to have stumbled in April. Job growth noticeably slowed, with some weakness across most sectors." Analysts suggested the data would greatly lower the chances of a Fed rate hike in June. After the data Fed funds futures repriced for only a 6% chance of a rate increase in June, while odds of a July move were at 24%. Traders now see the first rate increase coming in December.

Fed officials had plenty to say after last week's soft Q1 GDP reading, although these comments arrived before the weaker payrolls data. San Francisco Fed President Williams discounted the data, citing similar seasonal patterns in recent years, and asserted it was the GDP data that was out of sync with the rest of the data. The Atlanta Fed's Lockhart expressed concern that the lackluster GDP data could "turn out, in fact, to be persistent." While there will be relatively little Q2 growth data on hand by the June meeting, Lockhart said the probability of a rate move was higher than markets were pricing in. Fed hawk Bullard said there's a pretty big gap between market expectations of rate path and Fed's prior projections, and reiterated June is a "live" meeting for rates, though he was still undecided on the issue. Dallas Fed President Kaplan wants firmer GDP before advocating for another rate, but anticipates another rate hike this summer if the data keeps steady.

Chinese data out this week was a mixed bag. The official manufacturing and services PMIs fell slightly in April from March levels, but both remained in expansion territory - barely. The small- and medium-sized company focused Caixin manufacturing and services PMIs also declined in April m/m, with the factory index in contraction for the 14th straight month. Interestingly, prices paid saw good upticks across the board, rising at the highest pace in years. With deflationary effects abating, the outlook continues to improve for commodities demand, but on the whole economists with Commerzbank said the data reflects Beijing's campaign of "managed stabilization." Caixin wrote that the reports indicated the economy lacks a solid foundation for recovery and is still in the process of bottoming out. In the wake of the data, former PBoC advisor Yu Yongding called for the government to implement more fiscal stimulus to avoid an economic hard landing.

The Reserve Bank of Australia moved to head off fears of deflation and reduced the official cash rate for the first time since last May, cutting 25 bps to a historic low of 1.75%. Last week, the Q1 report showed q/q CPI dropping into negative territory for the first time in seven years, while the key core CPI measure fell to 1.5%, the lowest level on record and well below the RBA's target band of 2-3%. The RBA warned that labor indicators have turned more mixed (after a run of stronger prints earlier this year) and that economic growth has become more moderate. Later in the week, the RBA's quarterly policy statement deepened inflation worries by cutting the end 2016 CPI target to +1-2% from +2-3% prior and the end-2017 target to +1.5-2.5%. The move strongly suggests the central bank is leaving the window open for more easing. The aussie had been rebounding strongly over the last two months with the general uptick in commodity prices, however the RBA cut decisively reversed the trend. AUD/USD topped out two weeks ago around 0.7835 and has tumbled to 0.7350 as of Friday.

Crude prices pulled back a bit this week under fire from the weaker global economic data. After nearly taking out $47 last Friday, front-month WTI kept testing back down to $44 and did not manage to close out the week above $45. Brent retreated back to around $45 as well. Squabbling between Saudi Arabia and Iran over production quotas boded ill for a revival of the production freeze deal. There were some concerns about supply disruption as wildfires threatened to burn to the ground the Canadian city of Fort McMurray, at the heart of the country's oil sands region. In Libya, a stand-off between eastern and western political factions prevented some oil cargos from being loaded. However, they did not help crude mark fresh recovery highs.

In Europe, there were reports that the ECB would be comfortable to remain in wait-and-see mode for the next several months. Sources said there was little desire at the ECB to take any more action before September as the bank gauged the effects of negative rates. Meanwhile there were political developments in peripheral states. Spain's King Felipe VI dissolved parliament and scheduled new elections on June 26th, ending months of political deadlock caused by inconclusive elections last December. Polls suggest Spaniards might be in for more of the same after the elections. Greece and its creditors continued talks all week about additional contingency measures needed to help hit its budget surplus targets and unlock further bailout payments. Athens agreed to vote on pension reforms this coming Sunday allowing for a Eurogroup meeting to convene on Monday. Greece has several big debt repayments due in the coming months, most critically in July when it faces a €2.3B repayment to the ECB.

The week in politics was highlighted by Donald Trump clinching the Republican nomination with a convincing win in Indiana, which was seen as the last possible firewall for the 'stop-Trump' movement. His has two rivals immediately dropped out, clearing the field for a confrontation with Hillary Clinton. In the UK, voters choose Sadiq Kahn to fill the high profile post of London mayor, which will make him the city's first Muslim mayor. The win for the Labour Party candidate is also a slap in the face of PM Cameron just a year after his Conservative party won the Parliamentary election by a landslide and as the PM has failed to influence the too-close-to-call polling for the Brexit referendum in June.

As the earnings season rolled through its peak week, pharma giant Pfizer saw modest gains after raising its FY view, while Merck was down on another quarter of revenue contraction. AmerisourceBergen sank 11% on the week after it cut its FY guidance and warned that deflation in the generics space was undermining its pricing power. Media names Time Warner and CBS saw good revenue growth, but only CBS sustained durable gains while TWX was in the red on the week. Kellogg dropped on further revenue contraction and stiff FX headwinds. Valero sank as lower gasoline prices squashed margins and profits missed expectations. Tesla moved its target for achieving a 500K unit annual production volume by two years, to 2018, citing the overwhelming demand for is upcoming Model 3, but the stock tumbled as investors worried about the automaker's growing capital needs.

Another megadeal was thrown into the dustbin of history this week as Halliburton's plan to merge with Baker Hughes finally collapsed under the weight of antitrust opposition. The companies cancelled their $28 billion deal on Sunday after more than a year trying to get approval in the US, the EU, Brazil and Australia. Regulators were not convinced the remedies proposed by Halliburton would prevent the reduction of choice in oilfield services, ultimately running a risk of higher energy prices. Shares of HAL have risen 40% and BHI has gained 12% in the three months to the deal cancellation as the prospects of closing the acquisition looked worse and worse. Note that there was plenty of talk that BHI remains a takeover target now that Halliburton is out of the way. In other merger news, Quintiles and IMS Health agreed to a merger of equals. The two health care information and technology providers would combine to create a firm worth $17.6 billion based on market capitalization and with $7.2 billion in pro forma revenue.

Thursday, May 5, 2016

May-June 2016 Market Outlook: The Dismal Science May-June 2016 Outlook: The Dismal Science
Thu, 05 May 2016 7:20 AM EST

Early 2016 has been characterized by recognizable patterns but erratic results. There have been some bizarre gyrations with seemingly incongruous movements across the varied financial markets. This period has been a strong reminder that the art of economic forecasting is easy until the predictions are tested - anyone can make economic predictions, but most of them don't come true.

The markets have been full of contradictions lately. Through much of April, global government bond yields moved higher, a pattern that usually indicates rising expectations of growth and inflation, yet the data remains subdued. The US economy is in better shape relative to the global economy, but the dollar has been weakening, even as the Fed has contemplates further divergence from the global easing regime. Stocks continue to trend higher despite S&P500 corporate earnings sagging for three straight quarters, and yet gold, the ultimate risk hedge, has broken out to new multi-year highs.

As for our last round of predictions, they were a little more hit than miss. As anticipated, energy prices have managed to stabilize, even in the face of Saudi Arabia's last minute veto of the oil production freeze. Better crude prices have in turn eased concerns that the oil patch might implode in a whirlpool of debt defaults. On the political front, Donald Trump and Hillary Clinton took longer than expected to close out the competition. Meanwhile in the UK, polling on the Brexit vote has remained surprisingly tight despite the Prime Minister throwing his weight behind the effort to stay in the European Union. As expected the European Central Bank boosted QE and cut rates again in March, while the Bank of Japan stuck to verbal intervention in April. The Fed stayed predictably patient and cut back its forecast for 2016 rate hikes to something that more closely represent market expectations, citing risks in the global economy.

This jumble of circumstances is a set up for more volatility in months ahead. Though major averages haven't fallen in May since 2012, the "sell in May and go away" mentality may have set in a little early as stocks have sold off in the wake of the Bank of Japan's inaction and another quarter of mediocre corporate profits. The preliminary readings on Q1 GDP for many regions showed poor growth, which could trigger some retrenchment in Q2 until the data proves a better trend. Market jitters may spark another quick contraction in stocks like those seen in January and last August, and risk hedges like gold could keep plowing higher. The political battles expected this summer will add to the risk of fresh volatility.

The Invisible Hand

The politics of the post-crisis era have been shaped by the vox populi as many voters have grown wary of the institutions that contributed to the crisis. Populist movements of many stripes have popped up almost everywhere in the West, sometimes with disastrous consequences in places like Greece, but also recasting old political machines like the two-party system in the US.

As the Presidential election unfolds, frustration with Washington has led to Donald Trump leading the GOP race and to the surprising longevity of Bernie Sanders' campaign. But now the nomination races are all but over. Trump and Clinton are poised to win their party nominations, barring an 'October surprise' (an unlikely event such as a legal escalation of Clinton's classified e-mail scandal crippling her candidacy). The final primaries are on June 7, and by then Trump and Clinton should be the clear winners and will already be ramping up the mud-slinging ahead of the party conventions in late July.

Elsewhere in the Americas, the political crisis in Brazil could deepen this month as the Senate is expected to vote on or around May 11 on whether or not to convene an impeachment trial for President Rousseff. If the Senate agrees to proceed with the impeachment case that was proposed by the lower house, Vice President Temer would become acting President for up to 180 days as the trial is litigated. For her part Rousseff continues to try and win back her erstwhile populist supporters by decrying the impeachment proceedings as a "coup." Reports say she has also floated the idea of moving the next election forward to early October (currently scheduled for 2018), perhaps hoping to ride a post-Olympic euphoria to a new electoral mandate.

In the coming weeks Greece and Spain could return as flashpoints in Europe. Spanish legislators were unable to form a new government over the last month, largely because the upstart left-wing Podemos party refused to support PM Rajoy's centrist party or the opposition Socialist party. Another general election is now tentatively scheduled for June 26, though the polls show the parties tracking at about the same levels of support as in the last vote, which could lead to more months of uncertain government in Spain. Meanwhile, the latest round of Greek talks is making slow progress toward an agreement for additional bailout requirements. Negotiations have been far less acerbic that in the past, but Greece is still capable of authoring a sudden drama.

Perhaps the most riveting political event of the next two months will be the June 23 referendum on the UK's membership in the European Union. After gaining certain special concessions from the EU, Prime Minister Cameron has campaigned against the so called 'Brexit', but he has pledged to abide by the people's decision.

An exit from the European Union would have serious consequences, involving two years of untangling the current political relationship, followed by renegotiation of all existing trade deals with the continent. An affirmative vote for splitting with the EU would also wreak havoc with the currency market - some analysts foresee a 20% drop in the pound sterling. Furthermore, it would set the unsettling example of a G7 nation abandoning a larger political structure, a bad precedent for the euro zone. The UK could also be bitten by its own example of political self-interest as Scotland would surely revive its own separatist movement. On top of that, a vote for a Brexit could also bring an abrupt end to PM Cameron's political career.

For months the polls have shown a close race between the voters who want to stay in the EU and the euro-skeptics. The economic difficulties on the continent and the surge of Syrian refugees spilling into Europe have scored points for Britons who want more self-determination. A year ago a Brexit was seen as a low probability outcome, but as the polls have stayed close the risk has become real. One sign of this: The cost of purchasing protection against a plunge in the value of the pound post-referendum has reached levels higher than during the 2008 financial crisis.

Shifting to the Middle East, the politics of the region as always revolve around oil, which has become central to the global inflation issue. Low energy prices continue to weigh on the prospects of healthier inflation levels, constraining central bankers' policy efforts.

The OPEC cartel is effectively broken, as was clearly demonstrated by the abortive attempt to agree on an oil production level freeze in Doha last month. After voicing support for the freeze plan, Saudi Arabia scotched the deal at the last minute, citing the lack of participation by hated rival Iran.

Since the deal blew up many OPEC nations have been boosting oil output, most notably Iran as it strives to get back to pre-sanction levels. Libya could also soon restore its full quota of high quality oil, as the country's eastern and western governments have agreed upon a tentative Government of National Accord. If the major players in the country can overcome their factionalism and quell an ISIS uprising, it could foster some long absent stability and allow for oil production and exports to ramp up. The head of the national oil company aspires to see production -- which has languished around 400K bpd for years -- double in a matter of weeks after a unity government is formed.

PREDICTIONS: Fortunately for oil producers, the lead up to the Doha meeting was enough to breathe some life back into the energy market and WTI prices have held in the $40's even after the freeze plan melted. Advocates for the plan still hold out hope that the June 2 OPEC meeting, which will invite non-OPEC producers to attend, could be a platform to agree on an oil freeze. That would certainly give the energy market a lift, benefiting producers and heartening economist looking for better inflation. However, the same political animosities that scuttled the Doha deal abide, so the "freeze" will most likely remain just a talking point. That could contribute to a retracement in oil prices this summer. Another concern on that front is the belief among some energy analysts that China has used this period of low commodity prices to top up their reserves, which may mean exports to the Far East could slow in the months ahead - bad news for the fledgling oil recovery.

Hillary and The Donald are about to face off, as somehow the market forces of the political campaign have delivered the two candidates with the highest negative ratings in history. As the election draws nearer, the financial markets may begin to fret over both of the extremely flawed nominees: Trump for his poor temperament and dubious policy ideas, and Clinton for her legacy of scandal and air of being a 20th century, dynastic candidate.

The Brexit polls have been in a relative dead heat for months with the 'stay' and 'leave' camps each getting numbers in the low 40%'s. If this persists, the vote will likely break toward continued EU membership, as late undecided voters tend to go with the certainty of the status quo.

There's No Such Thing as a Free Lunch

All of the monetary policy fuel expended in the last eight years helped to avert a new Great Depression and restored tepid growth, but there has been a cost beyond the billions central bankers have printed. Central bank decisions have come in for increasing criticism as policies have become more expansive.

A case in point is the slow burning conflict between the ECB and conservative critics in Germany which may come to a head in early May as the German Constitutional Court issues a fresh decision on the limits of ECB powers. The central bank's Outright Monetary Transactions (OMT) program is at the center of the case. Though in a preliminary judgment in 2014 the German court found legal problems with OMT, it asked the European Court of Justice (ECJ), for guidance. The international body ruled that OMT was compatible with EU law and that it fell within the ECB's mandate of maintaining price stability, leaving the German court to mull the question again this spring. The constitutional court is expected to render its decision in the next few weeks.

OMT was announced at the height of Europe's financial crisis, meant as a last resort with the power to aim unlimited bond purchases at a country that would agree to a strict reform program under a bailout package. It is separate from the ECB's quantitative easing program, and it has never actually been implemented by the central bank, but when OMT was announced as part of a stabilization package in 2012 it helped to calm markets that were spooked by the euro zone sovereign debt crisis. A big part of Draghi's now famous pledge to "do whatever it takes" to preserve the euro zone was represented by the OMT. If the German high court decides that OMT cannot be countenanced under the nation's constitution it could put a chilling effect on the ECB's accommodation efforts and raise doubts about the central bank's ability to stave off any future financial crisis.

As the court prepares its decision, a number of German officials have expressed concerns about ECB policy extending too far. ECB president Draghi responded to this talk at his April press conference saying that some "polite and lively" debate may be welcome, but criticism of a certain type could endanger ECB independence. Furthermore, he warned that questioning the credibility of the central bank could delay results of policy transmission and thus create the need for even more action, prolonging the very policies that critics have questioned. He also defended negative rates, saying that the euro zone's experience with them has been broadly positive thus far, with no pass through of negative rates to depositors, and noting that other central banks are using the same tools.

Negative interest rate policy (NIRP) is undoubted the biggest development in central bank policy in the last year. The ECB, BOJ and a number of smaller central banks have begun experimenting with negative rates. The ECB has indicated that its current -0.40% rate on excess reserves is about as low as it wants to go, though it won't rule anything out. And in light of the ECB rate, the BOJ has said that in theory it could drop its key rate to as low as -0.50% from the current -0.10%.

Policy makers have expressed optimism about the early results of negative rates but banks in Europe and Japan have been on the losing end of the policy. Press reports suggested that the ECB and BOJ might tack on ancillary measures to alleviate stresses on banks, including one report that said the BOJ was considering lending to banks at negative rates. But no bank boons materialized at their respective policy announcements, probably on concerns it would create the perception of subsidizing banks and engaging in beggar-thy-neighbor devaluation.

The BOJ surprised markets when it took no new action in April. There was much speculation that the BOJ would move rates even further into negative territory, but no rate cut was forthcoming and Governor Kuroda explicitly stated that they did not discuss negative interest rate loans for banks. Instead the committee pushed back its calendar target for achieving its 2% inflation goal by up to 18 months, moving the target to "within FY17/18" from the previous timeframe of the first half of FY17. That longer time horizon implies stimulus measures will be in place for longer, and will give the central bank more time for fine-tuning its accommodation programs.

The BOJ may have been inhibited by the impending G7 leaders' summit on May 26-27, which Japan is hosting. Japan has already faced some scrutiny over the effects of its policies on the foreign exchange market and it may have been uncomfortable about the prospect of explaining even more aggressive negative rate policy action to G7 peers that are also struggling to right their own economies. Ahead of the summit, Prime Minister Abe proclaimed he will propose a G7 version his 'three arrows' program, Japan's three pronged strategy of monetary easing, robust fiscal policy, and growth initiatives to spur private investment.

The BOJ's inaction in April was amplified by the Fed policy statement just hours earlier in which it remained non-committal about tightening rates at the key June FOMC meeting. The Fed delivered a fairly neutral statement, removing concerns about immediate downside risks from the global economy, but also dropping a reference to inflation "picking up."

Fed officials continue to say that the June meeting is "live" for a possible rate hike decision, though they acknowledge there isn't much growth data to scrutinize between now than then. The Fed and the markets appear to have chalked up the weakness in Q1 to seasonal factors, but they are still awaiting evidence of the expected pick up in Q2.

Measures of inflation are still uninspiring despite energy prices edging higher, and now there may be questions about the most consistent part of the US recovery, namely the jobs market. The April ADP employment reading showed the worst monthly job growth in three years. If that is echoed by the official Non-farm Payrolls report (May 6 and then June 3), the Fed may have to roll back its 'dot' forecast again in June.

PREDICTIONS: After the soft patch in Q1, it may be some time before the Fed feels sufficiently confident that growth has rebounded enough to raise rates. The Fed may also be deterred by the uncertainty over the too-close-to-call Brexit vote, which comes just a week after the June FOMC meeting. Many economists don't see a rate hike happening until Q3 and Fed Funds futures are not fully pricing in a move until December.

But the Fed could confound those expectations if better data shows itself in May. The tone of many FOMC moderates has started to lean hawkish this year, and Kansas City Fed chief Ester George has established a beachhead for the hawks with her dissent at the last two meetings. The weakness in Q1 has become a familiar pattern in the last several years, so it may be more easily dismissed if the typical rebound develops early in Q2. Better data would support a rate move and the Fed may feel pressure to move sooner rather than later because of the longstanding tradition of avoiding monetary policy changes too close to the Presidential election in November.

Ultimately, each successive FOMC meeting will be a closer and closer call, but the central bank will probably err on the side of caution. That might translate into additional hawkish rhetoric in the next six weeks, but leaving rates on hold in June with a firmer promise of the next hike coming soon.

In Europe, central bankers trumpet that they are always prepared to do more at an instant, but it seems the ECB is content to let its latest QE boost and rate cut work through the economy this summer. Indeed, recent press reports say that the ECB has no desire to make any new moves before its September meeting. The German contingent that led the dissent against the March stimulus package will continue to debate the extent of monetary policy, but Draghi remains in firm control of the council.

The discord between Germany and the ECB may resolve with the German Constitutional Court ruling. The most likely outcome seems to be that the German tribunal will defer to the European high court again, with assurances that an OMT program would only occur with extremely stringent requirements imposed on the member state being rescued. Even if the decision is tinged with political implications, the German court will probably, if reluctantly, endorse the ECB's ultimate backstop, with the hopes it never gets utilized.

Though Draghi has stated his pleasure with the early results of negative interest rate policy, the full economic effects of NIRP are not yet known. Some market luminaries such as Blackrock CEO Larry Fink suspect that NIRP could unintentionally dampen consumer spending and undermine the economic growth they are supposed to encourage. And the unexpected decision by the BOJ to refrain from taking rates deeper into negative territory might be a sign that at least one central bank is sensing unwelcome side effects.

For its part, Japan has gotten into an uncomfortable spot with its currency again. The failure to go further at the April BOJ meeting sent the USD/JPY to its lowest level in 18 months, with a 5% move alone in the two days after the decision. Monetary and fiscal authorities have been trying to jawbone the yen without much success, so if the central bank is getting cold feet about deeper negative rates, it may be up to the government to do more. That might include the long awaited decision on delaying the next sales tax increase, or it could lend more urgency to PM Abe's 'three arrows' presentation to the G7.

The greatest fear for Japanese officials is a scenario in which they undertake more policy action but see no constructive move in the yen, as occurred after the last round of accommodation. If new policy fails for a second time to weaken the yen, Japanese officials may appear impotent, which could set off a chain reaction that brings the USD/JPY to 100 or even lower. However, the consensus view is still that some better Q2 data will emerge in the US which should help the dollar firm up and limit further stress on the yen.

2: UK Manufacturing PMI; China Caixin Manufacturing PMI
3: UK Construction PMI; Indiana Primary
4: UK Services PMI; US ISM Non-Manufacturing PMI; US Factory Orders; China Caixin Services PMI
6: US Payrolls & Unemployment

8: BOJ Minutes; China Trade Balance (tentative)
9: German Factory Orders; China CPI & PPI
11: UK Manufacturing Production; Japan Current Account; Brazil Senate vote on whether to proceed with Rousseff impeachment trial
12: BOE policy decision; US JOLTS Job Openings
13: Euro Zone Preliminary Q1 GDP (second estimate); US Retail Sales; US PPI; US Preliminary University of Michigan Consumer Sentiment
14: China Industrial Production

17: UK CPI; US Housing Starts & Building Permits; US Industrial Production & Capacity Utilization; Japan Preliminary Q1 GDP (first reading)
18: UK Claimant Count & Unemployment; Euro Zone Final CPI; FOMC Minutes
19: UK Retail Sales; ECB Minutes; US Philadelphia Fed Manufacturing
20: US Existing Home Sales

23: Euro Zone Flash Manufacturing & Services PMIs
24: German ZEW Economic Sentiment; US Durable Goods Orders; US New Home Sales
25: German Ifo Business Climate
26: UK Q1 GDP second estimate; Japan Tokyo CPI; G7 Leaders Summit in Japan (May 26-27)
27: US Preliminary Q1 GDP (second estimate)

29: Japan Retail Sales
30: Japan Household Spending; US MEMORIAL DAY
31: German Retail Sales; Euro Zone Flash CPI; US Personal Income & Spending; US Core PCE; US Chicago PMI; US Consumer Confidence; China Manufacturing & Non-manufacturing PMIs; China Caixin Manufacturing PMI

1: UK Manufacturing PMI; US ISM Manufacturing PMI
2: OPEC semi-annual meeting; German Unemployment Change; UK Construction PMI; ECB Policy Decision & Press Conference; China Caixin Services PMI
3: UK Services PMI; US Payrolls & Unemployment; US Trade Balance; US ISM Non-Manufacturing PMI; US Factory Orders

6: German Factory Orders; Euro Zone Corporate Sector Purchase Program (CSPP) begins
7: Final US Primaries including California; Japan Current Account; Japan Final Q1 GDP
8: UK Manufacturing Production; China CPI & PPI; China Trade Balance (tentative)
9: US JOLTS Job Openings

12: China Industrial Production
14: UK CPI; US Retail Sales; BOJ Policy Statement (tentative)
15: UK Claimant Count & Unemployment; US PPI; US Industrial Production; FOMC Policy Statement & Press Conference
16: UK Retail Sales; Euro Zone Final CPI; BOE Policy Decision; US CPI; US Philadelphia Fed Manufacturing
17: US Housing Starts & Building Permits; US Preliminary University of Michigan Consumer Sentiment

20: BOJ Minutes
21: Euro Zone Flash Manufacturing & Services PMIs; German ZEW Sentiment
22: US Existing Home Sales
23: US Durable Goods Orders; US New Home Sales; UK Referendum on EU Membership (Brexit vote)
24: German Ifo Business Climate

26: Spain general election
28: US Final Q1 GDP; US Consumer Confidence; Japan Retail Sales
29: BOE Financial Stability Report; US Core PCE; US Personal Income & Spending
30: German Retail Sales; Euro Zone Flash CPI; ECB Minutes; US Chicago PMI; Japan Household Spending; ; Japan Tokyo CPI; Japan Tankan Manufacturing & Non-Manufacturing; China Manufacturing & Non-Manufacturing PMIs; Caixan Manufacturing PMI

Sunday, May 1, 2016

Barrons weekend summary

Barrons weekend summary; Positive on FFIV, JCP, HON; Negative on TWTR, SUNE 
Cover story: Barrons expects the Islamic State to see its power and territory greatly diminished by the end of next year following a string of territorial losses, including key cities in Iraq and Syria;

Tech Trader: Traditional tech companies such as WDC and STX are likely to continue to suffer because of the growth of cloud computing, which is displacing sales of traditional equipment and software; 

Trader: The energy sector should be less of a drag on earnings in the future, says John Amato of Neuberger Berman, but investors shouldnt chase the market at current levels until theres greater clarity on earnings; Positive FFIV: Shares of the tech company look cheap, but with favorable long-term prospects, they could rise 30% within 24 months; Positive on JCP: Struggling retailer has made big progress during the past year and remains below the markets radar, though it isnt out of the woods yet; 

Profile: Matt McLennan and Kimball Brooker of First Eagle Global Fund look for companies with hard-to-replicate businesses or assets, trading for less than what a buyer would pay for the business (top 10 holdings: gold bullion, ORCL, Comcast, MSFT, KDDI, OMC, WY, Secom, AXP, HeidelbergCement); 

Interview: Sam Isaly, chief executive of OrbiMed Advisors, talks about last summers biotech bust and M&A in the healthcare sector (picks: BMY, Ono Pharmaceutical, VRTX, LLY, ISRG, HCA); 

1) The Barrons 500 ranking of the largest publicly traded companies measured by reported sales in the latest fiscal year is topped by ABC, GILD, MO, MAR, RAI; 
2) The performance of spinoffs has begun to decline, though MSG, FRGI, and ENR are still attractive and should see gains of at least 15% during the next year; 
3) A list of the cheapest stocks in the Barrons 500, topped by GNW, SC, GM, UAL, and AAL, some of which should have upside in the coming year; 

Small Caps: Positive on HCHC: Company run by hedge-fund mogul Phil Falcone is less known than some of his bigger plays, but with a market value of just $135M it has great potential; 

Follow-Up: Negative on TWTR: Company is the poster child for tech firms that want massive stock compensation to be excluded from profit analysis; Positive on HON: As company improves its operations and profitability, investors will likely reward it with a higher price/earnings ratio; Negative on SUNE: Solar companys shareholders will likely walk away with very little following its bankruptcy reorganization, which gives creditors most of the shares of the restructured business; 

European Trader: Positive Hermes: Shares of the maker of Kelly and Birkin bags is seeing improved earnings and cash-flow growth, which could drive its shares even higher; A

sian Trader: Chinas commodities futures markets are looking like its stock markets a year ago, when hordes of investors bet huge sums, setting the stage for a painful crash; 

Emerging Markets: Russian stocks are in the midst of a rebound, but the case for the country rests on its stoic endurance in the face of the global oil crash and Western sanctions, and investors must be prepared to bail if the rally sags; 

Commodities: The coal market has been strong lately, but investors shouldnt expect the rally to last too long; 

Streetwise: U.S. investors shouldnt put too much faith in Chinas turnaround story, and the nation seems to be drowning in too much debt.