Saturday, August 20, 2016

Barron's weekend

Barron's weekend: positive on FB 
Cover story: Donald Trump and Hillary Clinton's views on free trade are wrong, since they don't take into account the benefits cheap imports bring, including jobs that more costly imports can destroy; nor do they see that a widening trade deficit correlates with prosperity while a shrinking one is tied to slumps and recessions. 

1) Profile of Paul Britton, founder of the Capstone Volatility Master fund, uses an unusual alternative strategy that seeks to profit from volatility spikes and which involves owning only a few underlying securities; 
2) Positive on FB: Wall Street analysts predict the social site's shares could hit $153 in a year, for a further gain of 20%, with profits growing steadily and stronger advertising sales; 
3) Positive on Liberty Braves Group: Shares of the stock that tracks the Atlanta Braves could benefit from increased ticket sales and concessions when the team moves into a new stadium, and deliver 20% returns; 
4) A look at what top investors, including George Soros, Warren Buffett, David Einhorn, Jeffrey Ubben, and Carl Icahn, are betting on, with AIG, C, GS and MS being favorites and all but Buffett dumping AAPL; 
5) Review of a new book, "Winning at Active Management," explains why it's hard for investors to beat the index, and how they can go about doing so.

Tech Trader: Cautious on CSCO: Recently announced layoffs at the networking major are sign that its market opportunity is being eroded by the shift of computing activity to cloud services run by AMZN, MSFT, and others. 

Trader: In the markets, "plenty of cash remains on the sidelines, but a 2% to 3% pullback could draw in folks who have been either short or have missed this latest rally over the past six weeks," says Andrew Ahrens of Ahrens Investment; Positive on C: Shares of bank look cheap for investors with long-term horizons, and they could provide a double-digit percentage annual return during the next two years; The rising popularity of various derivatives, such as options, among others, has stolen volume from equities. 

Interview: Stephanie Pomboy, founder of MacroMavens, continue to like government bonds because economic growth won't be a catalyst to push rates higher, and she says investors should look for a repricing of credit risk. 

Follow-Up: Positive on MAT: Barron's foresees a strong holiday season for the toymaker, and a further 20% return during the next year, including dividends; Cautious on HAIN: Company "may eventually find an acquirer, but until the cloud dispels from its books, the stock is going nowhere"; + LafargeHolcim: Cement giant has delivered synergies following the merger of Lafarge and Holcim last year and has cut staff and trimmed fat, all of which should help the shares rise. 

European Trader: Positive on SpareBank 1 SR Bank and SpareBank 1 SMN: Norwegian regional savings banks are among the firms doing well in the troubled European banking sector, partly because Norway's economy, though tied to oil, is thriving. 

Asian Trader: China may not be as scary as some investors have made it out to be, but its stocks can't have a reasonable rally less bank shares participate. 

Emerging Markets: The MSCI Emerging Markets index is up about 35% from its January low and should continue to rally, according to Calamos Investments. 

Commodities: Gold has made an impressive comeback, and investors hope the rally will continue as many of the factors that have driven it remain in force. 

Streetwise: Positive on CRL, APC, WLL: Guggenheim's Subash Chandra says these energy companies may be on the verge of seeing gains because of higher production targets.

Friday, August 19, 2016

Markets Drift Sideways, Looking Ahead to Jackson Hole Weekly Market Update: Markets Drift Sideways, Looking Ahead to Jackson Hole
Fri, 19 Aug 2016 16:07 PM EST

Major equity indices retreated slightly from record highs in light summer trading, while the 10-year Treasury yield crept up toward 1.6% this week. Crude futures continued to march higher with Brent breaking above $50/bbl for the first time since early July and WTI topping $48/bbl, even as the Baker Hughes rig count rose for the eighth straight week. The greenback hit seven-week lows against the Yen and Euro before mounting a small recovery on Friday. For the week, the DJIA lost 0.1%, the S&P500 slipped less than 0.1%, and the Nasdaq edge up 0.1%.

The economic data this week was mostly unremarkable, though US July core CPI came in one-tenth weaker than expected. Meanwhile UK inflation data saw some fallout from the Brexit vote and post-referendum sterling fall: July CPI hit a 20-month high at 0.6% y/y and manufacturers saw the biggest jump in PPI in 3 years. On Friday, a report said that Prime Minister May would invoke EU Article 50 and start the 2-year Brexit process by next April.

In corporate news, Cisco beat earnings expectations but was weighed on by a 7% workforce reduction announcement. Private prison operators Corrections Corp and Geo Group were subject to hard time this week after the DOJ said it would phase out their contracts, hitting their shares by as much as 50% on Thursday.

A raft of Fed speakers set a somewhat more hawkish tone as markets look ahead for signals about rate tightening at the Jackson Hole symposium next week. Most notably, the normally dovish NY Fed President Dudley said the time for a rate hike is getting closer and would not rule out a September move. The minutes of the July FOMC meeting released this week indicated that Fed members are still divided on the future course of action and wanted more data before making a decision.


BLT.UK: Reports FY16 Net loss $6.39B v profit $1.91B y/y, Underlying profit $1.22B v $1.04Be; Rev $30.9B v $52.3B y/y
(UK) JULY CPI M/M: -0.1% V -0.1%E; Y/Y: 0.6% (20-month high) V 0.5%E; CPI CORE Y/Y: 1.3% V 1.4%E
(UK) JULY RPI M/M: +0.1% V -0.1%E; Y/Y: 1.9% V 1.7%E
(UK) JULY PPI INPUT M/M: 3.3% V 1.0%E; Y/Y: 4.3% V 2.0%E (largest annual rise since July 2013)
HD: Reports Q2 $1.97 v $1.96e, R$26.5B v $26.4Be
(US) JULY CPI M/M: 0.0% V 0.0%E; CPI EX FOOD AND ENERGY M/M: 0.1% V 0.2%E; CPI NSA: 240.647 V 240.805E
TJX: Reports Q2 $0.84 v $0.80e, R$7.88B v $7.87Be
(US) Fed's Dudley (dove, FOMC voter): Getting closer to the time for a rate hike, Sept rate hike is possible; Bond market is looking a bit stretched, 10-year yield is looking a bit low, given the circumstances - TV interview
(US) Fed's Lockhart (moderate, non-voter): would not rule out at least one rate hike this year; not committed to any particular timing on rate hike
(US) Atlanta Fed GDPnow: raises Q3 GDP forecast to 3.6% from 3.5% on Aug 12th
(US) EPA finalizes greenhouse gas requirements for medium and heavy duty trucks; 2027 model year trucks to be 25% more efficient
F: Targets fully autonomous vehicle for ride sharing in 2021

CARLB.DK: Reports H1 adj Net DKK1.41B v DKK1.80B, EBIT DKK3.45B v DKK3.54Be, Rev DKK31.2B v DKK31.5Be
700.HK: Reports Q2 Net CNY10.7B v CNY9.52Be, Rev CNY35.7B v CNY23.4B y/y
MON: Reportedly allows Bayer limited access to confidential company information; Bayer has not yet signed confidentiality agreement with Monsanto and ongoing talks described as "difficult" - press
(PT) Canadian ratings agency DBRS analyst: agency is 'comfortable' with current Portugal BBB rating - press
CSCO: Reports Q4 $0.63 v $0.60e, R$12.6B v $12.5Be; to eliminate up to 5.5K positions (7% of global workforce)
992.HK: Reports Q1 $0.02 v $0.01e; Net $173M v $111Me, Rev $10.1B v $9.9Be

(UK) JULY RETAIL SALES (EX AUTO FUEL) M/M: 1.5% V 0.3%E; Y/Y: 5.4% V 3.9%E
(EU) EURO ZONE JULY CPI M/M: -0.6% V -0.5%E; Y/Y: 0.2% V 0.2%E V 0.2% ADVANCE; CPI CORE: 0.9% V 0.9%E
HOG: US regulators file suit over emission control defeat devices, claims Harley Davidson violated Clean Air Act - press
(US) Dept of Justice to end its use of private prisons due to safety and security issues - Washington Post
(US) Fed's Williams (moderate, non-voter): calls for rate hike sooner rather than later; raising interest rates makes sense
AMAT: Reports Q3 $0.50 v $0.47e, R$2.82B v $2.83Be
GPS: Reports Q2 $0.60 v $0.58e, R$3.85B v $3.81Be

(ID) INDONESIA CENTRAL BANK (BI) LEAVES 7-DAY REVERSE REPO RATE (new benchmark rate) UNCHANGED AT 5.25% (not expected)
(UK) UK govt reportedly likely to trigger Brexit by April 2017 - press
(US) Weekly Baker Hughes Rig Count: 491 v 481 w/w (+2%) (8th straight week of increase)

Saturday, August 13, 2016

Barron's weekend update

Barron's weekend update: positive on BKD 

Cover story: A Hillary Clinton win in the presidential race "would be easily digested by markets because of her mostly moderate instincts and predictable policy prescriptions"; U.S. multinationals such as GE, MON, and DE would likely benefit because Clinton has shown no signs of being a protectionist. 

1) Sectors including biotech, energy, and even defense stocks could benefit from a Donald Trump presidency, because he is calling for less regulation on a variety of industries; 
2) Positive on VOD, Deutsche Telekom, NVS, Nestle, NGG: Five European stocks have yields ranging from 2-5%, and could get a boost as European investors seek alternatives to ultralow, or negative, government bond yields; 
3) Positive on BKD: Company faces a number of issues, including a slowdown in new construction in senior housing, but shares already appear to reflect these concerns, and they could rise 30% or more. 

Tech Trader: Cautious on IBM: Tech company has contributed to the impression that it's failing in the cloud sector because it doesn't indicate what cloud revenue is new business; A lack of information from players such as MSFT and GOOGL about their cloud businesses has forced analysts to compile their own estimates. 

Trader: "The more stocks go up, the more those sitting on the sidelines will be forced to capitulate and join in," says Douglas Cote of Voya Investment Management; A rise in three names-MMM, IBM, and UNH-accounted for almost 50% of the Dow's 7% gain as of Thursday; Cautious on PAY: Company's valuation is near an all-time low, with the stock trading at big discounts to its own history, rivals, and the market; Positive on AMZN: Retailer is likely to benefit from back-to-school shopping-22% of respondents to a Civic Science poll say they'll do a quarter or more of their shopping online. 

Small Cap: Positive on SSP: Broadcaster faces slower-than-expected political spending this year, but a recent selloff looks like an opportunity, and long-term prospects are good. 

Follow-Up: Positive on CAT: An earnings recovery could take two more years to begin, but when it happens it should be strong, and patient investors should stick with the shares; Positive on BDX: Shares of medical-equipment maker could rise by 10% during the next 12 months following a string of strong revenue and earnings gains; Cautious on ECL: Shares are up 48% during the past three years, but with sluggish growth and some industry headwinds, it could be time for investors to take their profits. 

European Trader: Positive on FirstGroup: Shares of transport group have rebounded following a drop in the wake of the Brexit vote, and its profit picture shows signs of brightening. 

Asian Trader: Cautious on Idea Cellular: Indian consumers have embraced smartphones, but they shy away from high-priced data plans, a problem for the country's No. 3 carrier. 

Emerging Markets: With state-run deficits amounting to 10% of GDP for three years straight and failures by the central bank to prop up its currency, Egypt badly needs a bailout from the IMF. 

Commodities: Easing concerns about the global economy this year have halted the long slide in copper prices-though the support isn't likely to last. 

Streetwise: Profits in technology and healthcare continue to grow at double-digit rates, and it wouldn't take much outperformance for them to attract momentum investors, which would give them a boost.

Friday, August 12, 2016

Risk-On Rules Despite Doubtful Data Weekly Market Update: Risk-On Rules Despite Doubtful Data
Fri, 12 Aug 2016 16:03 PM EST

The DJIA and the S&P500 both notched fresh all-time highs this week and the Nasdaq came very close to record levels as markets kept melting up in the August heat. Crude prices saw their second week of gains off the late July low, providing an assist to higher US equity valuations, while the dollar is gradually softening. Trading volumes were about 20% below average. In the US, decent retail sector earnings were seen, with the quarterly earnings season coming to a close. Economic data was less than stellar, with the July retail sales report flat after three months of solid gains. Both the July PPI report and the import prices data showed inflation losing steam again. The focus in both Japan and China was on the possibility of fresh central bank action to help prop up growth, while in the UK, the Bank of England had trouble finding enough bonds to purchase under its restarted QE program. For the week, the DJIA gained 0.2%, the S&P500 edged up less than 0.1% and the Nasdaq added 0.2%.

The bounce back in crude prices continued this week, with WTI reaching its 200-day moving average at around $44 and Brent back to $47/bbl. Further inventory builds in weekly crude stocks reports undercut prices midweek, but that impact was more than offset after OPEC confirmed that its member would hold an informal meeting in Algiers on the sidelines of an energy forum on Sept 26-28, consolidating talk that Russia, Saudi Arabia and Iran might be able to set aside their differences and put in place some sort of production ceiling.

Economic data out of China further called into question the ability of Beijing to meet even the +6.5% low end of its 2016 growth target. July industrial production and retail sales growth decelerated, while new bank loans fell significantly in July from the prior month and widely missed expectations. Pressure is building on the PBoC to further ease policy, but the central bank has stalled and simply repeated its standing promise to keep policy slightly loose to meet growth targets. Once again, repeated reports made it clear that very high debt levels across the economy and murky bank balance sheets are making policy-makers very nervous about asset bubbles. With that in mind, regulators this week ordered a large-scale review of the nation's banking system, including inspections of deposits, outstanding loans, interbank business and bonds.

Last month, the Bank of Japan launched a comprehensive review of its policies in the era of Abenomics. Reports circulating this week suggest a preliminary outline of the review has identified sharp declines in oil prices, a prolonged hit to growth from the 2014 sales tax hike and the nation's inability to shake off its deflationary mindset as the main obstacles to achieving its 2% inflation target. Analysts were quick to point out the BoJ is only blaming external factors for disappointing inflation gains, and appears to have avoided a frank reckoning with the implications of its own policy decisions. In any case, the BoJ is expected to announce a big new easing plan next month to complement the government's latest stimulus package. Markets expect the bank to change the parameters of the inflation target, cut rates further and possibly expand asset purchases.

In an ominous sign for ambitious quantitative easing programs across the globe, the Bank of England's restart of QE bond purchases ran into trouble on its second day, as it failed to find enough sellers of bonds. The first auction on Monday went off without a hitch, but on Tuesday the bank fell £52 million short of its target to buy £1.17 billion in long-dated government debt. The BoE issued a statement asserting that would be able to make up the shortfall later this year, but with lower and lower yields forcing funds and other investors to hold more and more bonds to maintain returns, it appears that the bank has a real problem on its hands. In the wake of the failed BOE operation, the 10-year gilt yield touched a record low of 0.55%, while the bund yield dove to -0.16%, within range of the all-time low of -0.20% seen in early July. Separately, BoE hawk McCafferty acknowledged that further easing will likely be necessary to further cushion the shock of the Brexit vote on the UK economy.

On Thursday, the Reserve Bank of New Zealand (RBNZ) met expectations and cut rates to new record low of 2.00%. This is the bank's sixth policy easing since 2015, and analysts expect the RBNZ to cut at least one or two more times, bringing the rate to 1.50%. The policy statement added a focus on house price inflation becoming "more broad-based across the regions, adding to concerns about financial stability." As for headline inflation, the statement foresees growth resuming in Q4. The RBNZ specifically stated that "further policy easing will be required" to get inflation to the middle of its target range.

Bank of Korea remained at 1.25% for the second straight month after a surprise rate cut earlier this summer, though expectations of more easing down the line have been sustained after BoK Governor Lee acknowledged the continuing strength of the currency. Also note that South Korea's credit rating was increased to AA from AA- by Standard & Poor's, which cited the nation's steady economic performance, sound fiscal position and flexible fiscal and monetary policies.

Shares of Delta Airlines fell as much as 4% from last Friday's close after a major system-wide network outage massively impacted its flights worldwide. The computer problem was caused by a power outage at its headquarters in Atlanta. The airline cancelled nearly 2,000 flights Monday to Wednesday, and there were further technical issues even after the systems were brought back online, which slowed down the recovery process.

The judge overseeing the review of the Aetna/Humana merger said the trial would begin on November 7th, favoring requests from the Aetna/Humana team. The DOJ had moved for the trial to be held in 2017. This comes just a week after the court agreed to separate consideration of the Aetna/Humana and Anthem/Cigna mergers into two separate trials. The judge in the Anthem/Cigna case said that trial would start by late November, but that she would not likely rule until early next year.

After a week of rumors, Walmart confirmed it reached a deal to acquire online retailer Walmart will pay $3 billion in cash plus about $300 million of Walmart shares for the site. The two operations will maintain separate branding for now, and the deal is expected to greatly boost Walmart's attempts to compete with Amazon. Walmart has generated about $14 billion in annual e-commerce sales, compared with Amazon's annual run rate at over $100 billion.

Friday, July 29, 2016

Barrage of Data Gives Mixed Signals for Second Half Market Update: Barrage of Data Gives Mixed Signals for Second Half
Fri, 29 Jul 2016 16:27 PM EST

This week investors digested a deluge of corporate earnings reports and key economic data while oil prices continued retreat. The S&P500 finished out near another all-time high, while the DJIA was weighed down by weak earnings commentary from several component names. The advance Q2 US GDP estimate showed the US economy has grown at less than a 2% pace for three straight quarters. Expectations for Japanese stimulus ratcheted up and the same went for the BOE. The US Federal Reserve hinted towards an increasing willingness to raise rates later this year, but market reaction/expectations suggest the consensus view is the Fed remains firmly in a wait and see mode. For the week, the DJIA fell 0.8%, the S&P500 slipped 0.1%, while the Nasdaq rose 1.2%.

The first estimate of the second quarter US GDP did not see the bump higher that was widely expected. Analysts were calling a healthy rise in Q2 GDP to +2.5% after the anemic +1.1% in Q1. There was no bounce, however, and the advance reading came in at +1.2%, while final Q1 GDP was revised down to +0.8%. Inventory declines continued to drag on GDP, while nonresidential fixed investment declined at a 2.2% y/y pace, the third straight quarterly drop. There were strong components in the report: personal consumption expanded at a 4.2% rate, while outlays on goods advanced 6.8%. And the decline in inventories is apt to deliver a big boost later in the year.

The suspense continues in Tokyo, where neither Abe's government nor the Bank of Japan provided concrete details on their plans for big new stimulus packages. The government has confirmed its stimulus will total ¥28 trillion, however the policy mix making up this humongous plan remains unclear. There was press speculation - later denied - that the government would sell 50-year JGBs, the longest maturity of postwar era, although they did suggest that around 25% of the plan would be new spending. The government did confirm that the new plan would be disclosed in full next Tuesday. Expectations were running high ahead of Friday's BoJ meeting, with analysts debating whether the bank would pursue expanded asset purchases, deeper interest rates cuts, or both. In the event, the bank merely boosted its ETF buying program to ¥6 trillion from ¥3.3 trillion and doubled the size of its dollar lending program to $24 billion. The weaker yen trend seen since the election reversed this week, with USD/JPY dipping back below the 102 handle by Friday.

The Fed held pat on Wednesday, as expected, and tweaked the statement just enough to suggest a slightly more hawkish outlook. The dollar modestly sold off, with EUR/USD trading back up to the high end of its most recent four-week range, closing out the week around 1.1150, suggesting the market now sees the prospect of another rate hike this year as good for risk appetite. The capsule summary of economic conditions was sweetened to reflect improved economic data, while the second paragraph gained a line saying "near-term risks to the economic outlook have diminished." Similar changes in April were thought to herald a June hike (before the Brexit disaster), and analysts suggest the new additions this time indicate a September hike is on the table. Before the statement, fed funds futures showed roughly 30% odds of a rate hike in September and a 48% chance by December. The futures were more or less unchanged after the statement.

UK economic data is starting to expose the negative impact of Brexit on the UK economy, and the Bank of England is gearing up to cut rates and expand its QE program next week. Second quarter UK GDP was ok, however July reports on consumer confidence, retailing and industrial trends all sank deep into the red. The GFK consumer confidence index sank to a two-year low, while the business optimism component of the CBI industrial trends report was stunningly pessimistic. The BoE's Weale told the FT that the Brexit vote had rattled the economy more than he expected. The consensus is that the BoE will cut rates by at least 25 bps and increase QE by £50-75 billion. Other European data was more upbeat, with the German July IFO business confidence survey holding up very nicely, and other measures of Continental consumer confidence not flagging nearly as much as feared. With the euro zone looking solid, many commentators expect the ECB to continue with its wait-and-see policy for a while yet.

Crude prices saw another week of sustained losses, as both WTI and Brent sank toward the $40 level amid persistent reports of oversupplied markets. The Baker Hughes rig count has marched higher for five weeks in a row, with total rigs working on North American drilling up about 10% in a month. US crude inventory reports showed more gains in oil stores, and supply disruptions are being resolved in Libya, Nigeria and Canada. Cheap crude has led refiners to produce lots of refined products, which has pushed down margins worldwide, while anemic global growth is not delivering robust demand. There was a slight bounce higher at week's end as short-covering kept WTI and Brent from dipping into the 30s. In second-quarter earnings out this week, Exxon and Chevron both took a severe beating, with Exxon's profits down 60% y/y, while revenue at both firms fell more than 20% as refining margins were pressured.

Earnings from global manufacturers Ford and Caterpillar carried pronounced warnings about the global economy. Ford warned there were risks that could keep it from achieving its FY guidance, and the CEO cautioned that the US economy remains under pressure. Cat said "world economic growth remains subdued and is not sufficient to drive improvement in most of the industries and markets we serve." Consumer names continued to indicate some problems: McDonald's headline results were good, but the firm's sales comps were way below expectations, as analysts had predicted a much bigger bump from the firm's big all-day breakfast push. Google, Amazon and Facebook all widely beat expectations and saw continued huge rates of growth in their core internet services. Apple saw its second consecutive quarter of lower revenue and lower iPhone sales, however shares of the tech giant saw solid gains on optimism about the next smartphone cycle.

Yahoo reached a deal to sell off its core operations, with Verizon agreeing to pay $4.83 billion in cash to acquire its internet assets. The sale did not include Yahoo's cash, its shares in Alibaba Group, its ownership stake in Yahoo Japan, and the non-core patent portfolio. These will continue to be held by Yahoo, which will change its name at closing and become a publicly traded investment company. Verizon plans to combine Yahoo with its AOL unit. Oracle reached a deal to acquire NetSuite for about $9.3 billion, or $109 per share in an all-cash deal. While their service offerings are similar, NetSuite offers Oracle access to companies sized smaller than its traditional client base, and could also give it some additional competitive edge in taking on primary rival Salesforce.

Saturday, July 23, 2016

Barrons weekend summary

Barrons weekend summary: cautious on pharmacy benefits managers; positive on mortgage insurers 
Cover story: There are a number of reasons for investors to be concerned about the prospects of pharmacy-benefit managers, which haven't been effective in keeping rising drug costs contained, a task some top corporations are taking on themselves (Cautious on ESRX, CVS, UNH). 

1) Positive on ATVI, AHS, ANET, FB, SWHC, SPLK: Estimize, a crowdsourcing platform for earnings and revenue estimates, says Wall Street has underestimated the earnings potential of these six companies; 
2) Positive on MTG, RDN, NMIH, ESNT: Shares of mortgage insurers are down from a year ago, but some analysts expect them to rebound when the housing market gains steam; 
3) For the second year in a row, a survey from the National Association of Realtors shows Chinese nationals dominating the ranks of international home buyers in the U.S.

Tech Trader: The financial technology sector, or FinTech, is moving beyond a focus on payments driven by early players such as PYPL and SQ and into robo-advisors, exchanges, trading platforms, and financial-data companies. 

Trader: Issues such as the Brexit and the U.S. elections should be capping market enthusiasm, says Mark Luschini of Janney Montgomery Scott, but the market doesn't seem to care; Positive on CSCO, IBM, APD, PX, OXY, VZ: These six laggard stocks should begin to outperform once the economy picks up, according to research from Fundstrat; Positive on AIG: "If rates don't go up, AIG's warrants could take a while to be in the money, but as the insurer executes on its plans, there's plenty of time for the warrants to grow." 

Interview: John Wilson, managing director and senior equity portfolio manager, Columbia Threadneedle focuses on new-product pipelines where the Street's estimates might not be properly modeled (picks: BMY, CMCSA, FB, MDT, SWK, TJX). 

Small Caps: Positive on CSW: Company recently spun off from Capital Southwest "has an opportunity to improve profit margins by better integrating its manufacturing platform, and it could drive growth by cross selling." 

Alternative Investments: Charles Royce, manager of the Royce Pennsylvania Mutual Fund, is looking at alternative investment management companies such as ARES, KKR, and APO. 

European Trader: Portfolio managers who run U.S. mutual funds that invest in British stocks have been fairly upbeat despite the Brexit vote, and there is an overall sense that U.K. shares are stabilizing. 

Asian Trader; Defensive stocks in Asia have become expensive, and even income investors should look elsewhere, especially toward the financial industry. 

Emerging Markets: "Recently considered a good idea, investing in Turkey has quickly turned into a nightmare as the government uses increasingly autocratic methods to purge its society following a failed coup." 

Commodities: Natural gas prices in the U.S. have risen since winter, and they may still have room for gains. 

Streetwise: "Investors looking for safety and income have driven utility stocks to pricey levels and low yields," and though the rally has yet to wind down, investors should take profits.

Friday, July 22, 2016

Markets continue rally on solid data and corporate earnings Weekly Market Update: Markets continue rally on solid data and corporate earnings
Fri, 22 Jul 2016 16:04 PM EST

Political developments and quarterly earnings were the main focus this week, although incessant speculation surrounding foreign, Central Bank intervention swung investor risk sentiment. Thursday broke a string of record closing highs on the DJIA and S&P500, but by Friday the S&P was back at all-time highs. The Republican Party gathered in Cleveland to officially nominate Donald Trump as their presidential candidate, while in Turkey an attempted coup by the military was put down, adding to the endless turmoil in the Middle East. Crude prices retreated back below $45, marking six weeks of contraction after key benchmarks topped out above $50 in early June. About a fifth of the S&P500 have reported quarterly earnings, with average profits a bit lower y/y and revenue a shade higher. While tech and financials have been generally impressive, consumer discretionary stalwarts have hit a wall, and Starbucks CEO went as far as to cite deteriorating global conditions - terrorism, and Brexit included - as driving a cooling in consumer confidence. After another solid swath of US economic data, US Treasury prices moved marginally higher, but yields largely consolidated just below the recent one-month highs. For the week, the DJIA gained 0.3%, the S&P500 rose 0.6% and the Nasdaq added 1.4%.

Fresh off its big election win last week, the government of Japan PM Abe has been crafting yet another huge stimulus program to revive the domestic economy and slay deflation. Three years of Abenomics, promises of sweeping legislative reform and negative rates have failed to do the job, and this week press reports suggested Abe's people are designing a fiscal package valued up to ¥20-30 trillion ($186-280 billion) - well ahead of the ¥10T discussed in the immediate aftermath of the election, given that some of the government guarantees and other off-budget measures will run into 2017 and beyond. There has been plenty of talk that the Bank of Japan will also pursue additional measures, and Kuroda has repeatedly said the BoJ is prepared to push rates lower, although the most recent speculation has fixated on the possibility the bank might pursue direct financing of government fiscal measures, widely referred to under Bernanke's formulation as "helicopter money." Kuroda strongly pushed back against that idea again this week, reiterating that there is neither the need for or the possibility of helicopter money, having already emphasized several times that the approach would be illegal under Japanese law. The yen pushed out to six-week lows around 107.60 on speculative press reports about helicopter money, but Kuroda's denials pushed USD/JPY back toward the 105 handle on Friday.

Top Chinese planning agency NDRC forecasted China 2016 CPI to be around 2% - well below the 3% official target - and GDP in a range of 6.5-6.8%, compared to the official 6.5-7.0% forecast. The agency warned that China was still facing increasing difficulties in stabilizing growth with investment and the possibility of overheating home prices. Fitch released a report that cautioned measures by policymakers in Beijing to reduce debt-servicing costs were fueling the ongoing credit boom, warning that "risks of asset quality and liquidity shocks to the banking system will continue to grow the longer that total leverage grows." Fitch estimates that total loans to the private sector have almost doubled since the 2008 crisis, reaching 243% of GDP in 2015, likely to rise to 253% by the end of 2016.

An attempt by a faction of the Turkish armed forces to overthrow the government of President Erdogan late last Friday rattled investor sentiment coming into the week. The coup attempt saw violent confrontations in the Turkish capital of Ankara and in Istanbul and produced a sharp reversal in risk assets, but the uprising was contained and the market impact was fairly limited. Erdogan's government has detained thousands of military officers suspected of treason and dismissed tens of thousands of teachers and civil servants in a wide-ranging purge of those believed to be sympathetic to Fethullah Gulen, a US-based cleric and political oppositionist being blamed for the coup. Turkey declared a state of emergency for three months and tensions with the US are rising as the government demands the extradition of Gulen.

The first big batch of post-Brexit European economic data showed minimal impact on the Continent from the UK vote. France and Germany preliminary July Markit composite PMIs beat expectations. Meanwhile, the UK July Markit composite PMI sank into contraction and saw its lowest reading in seven years. The new UK government has gotten to work with minimal snafus, although given his gaffe-filled record the appointment of Boris Johnson as foreign secretary has raised some eyebrows. Prime Minister Teresa May reiterated her government would not invoke Article 50 to leave EU before the end of 2016. Cable remained in a fairly tight range after the volatility of the prior two weeks, with GBP/USD bouncing around between 1.3315 and 1.3065.

The overall tone of the June quarter earnings reports has been lukewarm, with banks and tech showing real pockets of strength and revenue levels seeing very modest growth. Bank of America, Goldman Sachs and Morgan Stanley managed to beat expectations, but all three had some problems in the quarter, with lower ROE levels on falling interest rates. Both GS and MS saw lower y/y revenues. In tech, Microsoft is seeing very strong growth in its cloud business, offsetting the declines in the Windows unit. IBM's revenue and earnings declined less than expected (although IBM's revenue has now fallen for 17 straight quarters). Qualcomm saw very good gains on strong outperformance.

Airlines got hit by problems in Southwest's earnings. Higher fuel prices are looming on the horizon for the industry, and while Southwest's quarterly numbers were good, the firm's outlook for Q3 anticipates fuel costs rising back above $2/gallon for the first time in a while and RASM in contraction. Results from American and United Continental beat expectations, although both firms said RASM levels would be lower in the second half of the year. Germany's Lufthansa also had a mixed earnings report, and predicted weakness in Q3 unit revenues.

Industrial firms Honeywell and General Electric had mixed results. GE reported lower quarterly profits and revenue in its core industrial business, weighed down by its underperforming oil equipment division. Honeywell cut its 2016 sales forecast amid sluggish global growth and lower demand for energy-related products. Meanwhile, General Motors raised its FY outlook and posted record second-quarter earnings, beating analysts' estimates by a wide margin as truck sales increased in North America and its European business managed a small profit.

The Department of Justice sued to block the Anthem-Cigna and Aetna-Humana mega mergers. US Attorney General Lynch warned that US consumers would suffer if the Big Five health insurance names became the Big Three and said her department would vigorously enforce anti-trust laws. Press reports early in the week hinted about the development, forcing shares of all four firms lower, although the confirmation of the DoJ's suit and statements issued by the firms promising to vigorously defend the deals helped the stocks regain all their losses. In other M&A news, after years of takeover speculation and a 70% decline in its stock price over the last half a decade, Joy Global agreed to be acquired by Japan's Komatsu for $28.30/share in cash, in a total deal valued at $3.70 billion. Japan's Softbank reached a deal to acquire UK technology company ARM Holdings for £17/share in a £24B deal, as the Japanese telco conglomerate aims to capture opportunities in the IoT market.

Sunday, July 17, 2016

Barrons weekend summary

Barrons weekend summary: Positive on GILD, MSG, KW, CI 
Cover story: Positive on Royal Dutch Shell: After its acquisition of BG Group, oil major slashed spending on projects and sold low-return businesses, and announced a capital plan that calls for more asset sales and a limit on capital spendinga makeover that could raise shares by 20% in a year. 

Tech Trader: Virtual reality devices such as FBs Oculus Rift may offer powerful hardware, but the software still feels rudimentary; Theme parks such as SIX are ramping up efforts to integrate VR into their rides; Cycling game Zwift may have a transformative impact on the VR industry. 

Trader: Tradition Capital Management chief investment officer Benjamin Halliburton says that its hard to see significant upside in the stock market going forward; Positive on GILD: The pharma company faces a number of concerns, but if just one or two fall away the stock could rise about 25% during the next two years; Positive on TSN, MDLZ, MSFT, ACN, INTU, XL, HIG: U.S. blue-chip dividends are expected to rise 7% in the third quarter, down from the 11.6% third-quarter growth seen over the past three years. 

Profile: Jim Cullen and Jennifer Chang, co-managers, Cullen High Dividend Equity fund, take a value investing approach that focuses on low P/E stocks with the potential to raise their dividends (top 10 holdings: NEE, T, JNJ, RTN, HCN, CSCO, MO, KMB, GE, MRK). 

Interview: Charles de Vaulx and Chuck de Lardemelle of International Value Advisors take a value-oriented approach with a focus on absolute, not relative, value (picks: BAC, Astellas Pharma, Samsung Electronics). 

1) Positive on MSG: Companys assets include two prime sports teams, a refurbished sports arena, and substantial air rights, but despite these trophy properties, shares are sharply undervalued; 
2) Barrons first-half stock picks beat the S&P 500 but trailed, as a group, the benchmarks against which they were tracked; 
3) Positive on CI: Managed-care provider could have plenty of upside, even if its merger with ANTM doesnt go through, with the potential for a 27% gain during the next 12 months. 

Small Caps: Positive on KW: Company has a $2B real estate portfolio, including multifamily buildings in the U.S., Japan, and Europe, and an impressive track record of creating value from of out-of-favor properties. 

Follow-Up: Positive on Nintendo: The impact of the companys Pokemon Go game could go far beyond mobile, giving bricks-and-mortar stores a boost through sponsorships and paving the way for similar games on wearables. 

European Trader: European banks are too risky for many investors, and Italys hold more danger than most, even after a sharp drop in their share prices in 2016. 

Asian Trader: Positive on Charoen Pokphand Foods: Agribusiness and food company has a vertically integrated operation, and should benefit from surging pork prices and a better shrimp business. 

Emerging Markets: The military coup attempt in Turkey will take a toll on stocks and put the countrys bankswhich already faced concerns about bad debt at further risk. 

Commodities: Gas prices have started to drag down oil prices, and that could continue through the third quarter. 

Streetwise: The lunge at defensive stocks might seem like a contrarian signal that buying power isnt yet exhausted, though Doug Ramsey of Leuthold Group isnt so sure.

Friday, July 15, 2016

Risk on Flows Push US Indices to New Highs com Weekly Market Update: Risk on Flows Push US Indices to New Highs
Fri, 15 Jul 2016 16:17 PM EST

For much of the week equity prices moved up aggressively as investors pointed to a variety of reasons to add risk to their portfolios. A faster than expected, relatively smooth transition of Theresa May to UK prime minister allayed some lingering Brexit fears. Speculation on the growing likelihood of aggressive BOJ and BOE stimulus later this summer coincided with a deluge of US Federal Reserve speak that indicated the Fed is still likely to keep rates at very low levels for quite some time. Finally, solid early Q2 earnings reports/commentary provided hope that US earnings growth has troughed and business on both sides of the Atlantic can withstand any negative impacts related to the UK's decision to leave the EU. The Dow and S&P each registered multiple new all-time highs as investors that have kept cash on the sidelines felt compelled to jump in, forcing valuations higher. For the week the Dow rose 2%, S&P gained 1.5% and the NASDAQ added 1.5%.

Risk-on flows also pulled money away from sovereign bond markets, sending rates higher. US Treasury supply was met with notably tepid demand early in the week spooking some bond investors. Improving US data, including some hotter than expected inflation readings, helped the US 10-year yield back up ~25 basis points to finish the week at 1.59%. The German 10-year Bund future traded without a negative yield for the first time since the UK vote.

In key data this week, analysts' eyes were on the JOLTS survey - Fed Chair Yellen's preferred gauge of US labor market health - which pulled back from the all-time high of 5.85 million job openings seen at the end of April, to 5.50 million in June. Analysts characterized the slight deceleration in openings a correction from the elevated levels of the last two months, rather than a deceleration. On Thursday, jobless claims added to the healthy labor market view, with the numbers holding steady at a three-month low of 254K, well below expectations. University of Michigan consumer sentiment came in lower so far in July's preliminary reading, as high-income consumers expressed nervousness about global events. Firming producer and consumer price figures, along with retail sales and industrial production data that topped expectations on Friday added to the view that the Fed may be able to raise rates later this year.

The Bank of England left interest rates unchanged for an 88th consecutive month, surprising markets, which had been pricing in a 75% probability of a rate cut of 25 bps to 0.25%. The British Pound surged on the news before giving back some of that ground late in the week. The policy minutes showed that most MPC member expect a rate cut at the August meeting, which will coincide with the BoE's quarterly inflation report and a press conference from Gov Carney. Also in the UK, Theresa May was named the new prime minister, after her only remaining challenger, Andrea Leadsom, pulled out of the running. PM May wasted no time in shaking up the cabinet: notably, naming Pro-Brexit MP Boris Johnson as Foreign Secretary and appointing Phillip Hammond as Chancellor of the Exchequer. The Dollar rose against the Yen late in the week on expectations for the launch of Japan PM Abe's promised big stimulus package after his party was victorious in Sunday's parliamentary election.

JPMorgan, the first big US bank to report second quarter results, did quite well in the three months to June. Net income declined very slightly, although EPS and revenue beat expectations. FICC trading revenues were up 35% y/y, widely beating consensus expectations. Shares of Alcoa saw gains after reporting a beat on top and bottom lines. The materials conglomerate affirmed global aluminum demand growth expectations and forecast improvement in H2 and 2017 on ramp-up of capacity. Data storage firm Seagate raised its guidance on Monday, citing demand for its HDD product portfolio, and Western Digital lifted in sympathy. Nintendo was up nearly 70% on the week on the surprising popularity of its new mobile game, Pokemon Go.

Sunday, July 10, 2016

Barrons weekend summary

Barrons weekend summary: positive on GS, STT, ANET, GHC, NTRS, BSX; Cautious on NFLX, SJM 
Cover story: The mutual fund industry faces increasing pressure to outperform, but as that grows more difficult investors are withdrawing moneya trend the industry calls flowmageddon; Traditional mutual funds still dominate the industry despite the growth of ETFs, but Vanguard is winning with both. 

Tech Trader: Cautious on NFLX: Now that streaming has gone mainstream, founder and CEO Reed Hastings needs a new strategy to maintain the companys momentum and must continue to produce better content than rivals; otherwise, shares could drop by 40% or more.

 Trader: Dennis DeBusschere of Evercore ISI says low yields on the 10-year U.S. Treasury are a money-flow, central-banking issue and not a sign the American economy is in trouble; A number of credit-card stocks fell on earnings news at SYF, but even after last weeks rally their multiples remain low historically and relative to the S&P 500, offering downside protection; A decline in the number of pubs in the U.K. may partly lie with smoking bans and tougher drunk-driving laws. 

Mutual Fund Quarterly: 
1) Jeffrey Gundlach of DoubleLine Capital discusses the effect of the Brexit vote on the stock and bond markets; 
2) Mutual funds posted gains during the second quarter and ended the period in the black, boosted by gains in categories such as value and precious metals; 
3) Positive on GS, STT, BLK, JPM, Franklin Templeton: Among firms that are making a push into the multifactor or smart beta ETF market, which though young is growing increasingly popular with investors; 
4) Because of todays extreme currency volatility, funds that hedge back into dollars are the best bet. 

1) Positive on ANET: Company is gaining market share in high-end network switches at the expense of CSCO, and has entered the router market; shares could climb 20% and Arista has an attractive valuation; 
2) Positive on GHC: Television and education company has undergone major changes in the past few years, and under new chief executive Tim OShaughnessy it should start to close the gap between its share price and its estimated asset value; 
3) Positive on NTRS: A recent string of deals have given the trust company more market share in a competitive sector, and fees in its wealth-management business are growing. 

Small Caps: Positive on FLWS: Companys acquisition of Harry & David extended its ability to cross-sell gifts of food and bouquets, which should boost revenue and growth. 

1) Positive on BSX: After seeing a 41% gain, shares of the medical device maker still seem reasonably priced, and the company could grow profits at a low double-digit rate for years to come; 
2) Cautious on SJM: Any benefits from lower coffee costs arent likely to continue, and with shares stretched valuation investors may want to take money off the table. 

European Trader: A sudden and violent sellof in U.K. property assets following the Brexit vote has created value for long-term investors. 

Asian Trader: An ongoing activist investor battle at China Vanke could ultimately be bad for the companys share price. 

Emerging Markets: Entrepreneurial healthcare, tech, and consumer-discretionary companies have grown in number since 2005, but are not proportionately reflected in the MSCI Emerging Market Index. 

Commodities: Gold is strong of late, but silver is outshining itand the Brexit vote makes both more appealing to investors. 

Streetwise: As with junk, the margin of safety for stocks might not be as big as it appears, and the Brexit will call any surge in corporate profits into question

Friday, July 8, 2016

Investors Find Brexit Solace in US Equities & Government Bonds Weekly Market Update: Investors Find Brexit Solace in US Equities & Government Bonds
Fri, 08 Jul 2016 16:15 PM EST

Global financial markets remained volatile under the continuing influence of the UK Brexit vote two weeks ago. The 10-year UST yield sank to fresh record lows below 1.35%, and buyers of 50-year Swiss government bonds got ready to accept a negative yield this week as malaise settled over the entire global economy. The pound, which hit a 31-year low against the dollar of 1.2800 on July 6th, gave up recent gains and sank back below 1.3000, while the dollar and yen remained strong. Crude prices sank lower, with WTI back in the $45 handle and Brent back around $46. In the UK, various investment firms suspended redemptions in open-ended property funds as investors rushed to take out their cash, while investors eyed the Italian banking system with deepening concern. On Friday, the very strong June US jobs report lifted stocks broadly to flirt with all-time highs in the S&P. US Treasury yields stayed stubbornly low, as global demand for assets that offer any kind of relative yield remains unwavering. For the week, the DJIA +1.1%, the S&P500 +1.3% and the Nasdaq +1.9%.

The June US jobs report was very strong and may have been good enough to bring forward Fed rate hike expectations after the setback of Brexit. The 287K non-farm gain was way ahead of even the most optimistic estimates, although the result only brings the Q2 average up to +147K, versus +196K in Q1. Unemployment ticked up to 4.9% from 4.7%, however the household survey showed an incremental decline in labor market slack as the participation rate ticked slightly higher.

Global currency markets remained under pressure from the Brexit vote. Sterling slid lower on Monday and Tuesday, then appeared to stabilize around 30-year lows in the second half of the week, but remained firmly below 1.3000. The yen remained a safe haven, with funds flowing into the Japanese currency despite some weak economic data reports. USD/JPY had traded back up to 103.25 last week, but as of Friday the pair was back to the critical 100 level, which was briefly breached during the Brexit vote panic and subsequently held unchallenged. The volatility prompted Vice Finance Minister & FX Chief Asakawa to warn the government was "closely watching" FX markets with urgency and would act promptly if there were "speculative moves." EUR/USD was steadier and held above the 1.100 level.

The second-order effects of the Brexit vote further dampened confidence. Seven UK investment firms suspended trading in property funds this week, freezing £15 billion of assets since Monday, out of a total of £24 billion invested in UK open-end real estate funds. Many comparisons were made to the failure of Bear Stearns' hedge funds in the summer of 2007, although the total amount held in such property funds is extremely modest. Press reports asserted that funds Henderson, Columbia Threadneedle and Aberdeen were maintaining positive cash balances but chose to halt withdrawals to "protect" investors.

The ongoing selloff in the Italian bank stocks continued apace, leading the nation's market regulators to ban short selling of shares of Banca Monte Paschi for three months. Italy's banks are burdened by €360 billion of non-performing loans, the equivalent of a fifth of the country's GDP. Collectively they have provisioned for only 45% of that amount. With shares sinking faster post-Brexit vote, there is building pressure for more bail-in funding for the system, and there were reports the government would set up a second fund - dubbed Atlante 2, with €3-5 billion in capital, after the Atlante fund set up earlier this year - to help clean up the mess.

The yuan weakened for the fifth week in a row, marking the longest losing streak for the Chinese currency this year. USD/CNY has risen to 6.6873, the yuan's weakest setting against the greenback since the first quarter of 2010. The June China FX report disclosed the biggest one-month gain in reserves in over 12 months, leading many participants to speculate that the PBoC has halted its regular FX market interventions and allowed the yuan to weaken in its quest to revive economic growth. The currency also saw its biggest weekly drop against a trade-weighted basket of 13 currencies in four weeks, another sign that Beijing has become tolerant of further declines. There was little hard data out this week - the Hong Kong PMI contracted for the 16th straight month in June as conditions deteriorated to their worst level since last summer - but speculation about PBoC rate cuts heated up and many analysts are saying another cycle of RRR cuts is in the offing in the second half of 2016.

The contagion of political uncertainty has infected another major economy, this time Australia. Last Sunday, Australians went to the polls to elect a new federal parliament, and almost a week later, Liberal/National Coalition and Labor remain basically deadlocked. The Australian Electoral Commission is recounting all ballots before announcing the official result, and as of Friday the conservative National Coalition is leading with 74 seats, followed by the Labor Party with 71, with the former ceding at least 16 seats to the latter. It appears that National Coalition will most likely be forming a government, but S&P lowered their outlook on Australia's AAA rating to negative from stable on Thursday as the lack of a strong mandate potentially dinged the future government's prospects for reining in the budget deficit.

Retailers reported much improved sales comps for the month of June. The Father's Day holiday on June 19, a calendar shift reporting the sales of Memorial Day weekend in June and good weather all contributed to boosting the month's business. Gap disclosed its first positive monthly comps report of 2016, with Old Navy posting a +5% comp. After flattish April and May SSS, L Brands posted an increase of 6%. The numbers may herald a third month of good total US retail sales (the June US retail sales report drops next Friday), after much better than expected April and May retail sales. However, many other retail comp sales reports remained deep in the red, with Zumiez, Buckle and Cosi reporting terrible numbers.

Tuesday, July 5, 2016

July-August 2016 Outlook: Summer Break July-August 2016 Outlook: Summer Break
Tue, 05 Jul 2016 18:17 PM EST

A traditionally quiet summer for the markets was about to begin. Then Britain surprised the world with its decision to leave the EU, turning the summer doldrums into a summer break.

Before the fateful vote, our forecasts were lining up nicely: the Fed held off on a rate hike one more time; the ECB remained in wait-and-see mode and the German Constitutional Court affirmed its OMT powers; the Japanese PM delayed a sales tax increase; and crude had eased off of recent highs. Then the Brexit vote came in, shocking most financial experts and even Britains vaunted bookies. The high-quality bond trade got even more crowded and gold hit a 15-month high as the sterling got pounded down by a double digit percentage overnight. Stocks tumbled for two days and European banks were especially hard hit on concerns about interest rates remaining near zero for even longer and about the chilling of financial relations between the UK and the continent.

In the aftermath of the Brexit vote, the trajectory of everything in the financial world has been altered. The Fed, once poised to raise rates imminently, is now likely to sit on its hands for the rest of the year. European and Asian economies struggling to regain momentum may have to resort to even bigger and more exotic stimulus schemes. And the UK has the greatest uncertainty ahead as it reshapes its position in the European political and economic structure.

Bon Voyage Britain

What did Britons get for their Brexit vote? An economic slowdown, a weaker currency, and some multinational businesses threatening to pull out. The UK, which had been on a good path toward recovery, could now quite possibly suffer a recession and a severe case of Bremorse.

The BOE is already giving serious consideration as to how it can ease the blow. A few days after the referendum, BOE Governor Carney laid out a measured reaction. He said that the central bank will give an assessment of options at its upcoming July 14 meeting, with the intention to take action at the following meeting (on August 4). Carney signaled that a rate cut is likely this summer, which would take the key rate below 0.50%, where it has sat for the last seven years. The post-Brexit stimulus package may also involve boosting the BOEs Asset Purchase Target from the current £375B. In his speech, Carney attempted to look at the bright side, saying the UKs highly flexible economy can handle change and will adjust: The question is not whether the U.K. will adjust, but how quickly and how well." He also warned that the monetary policy could not carry the entire burden of easing the adjustment, urging political leaders toward forceful policy actions.

Unfortunately the government will be in limbo for the next two months as the ruling party decides on a new leader. Prime Minister Cameron will step down after a large majority of Conservative Party voters flouted his advice to vote Remain. Tory MPs are now mulling over five candidates, and will whittle them down to two before a wider party vote selects the new PM.

In a surprising turn, Brexit poster-boy Boris Johnson was outmaneuvered by an ambitious ally and is already out of the race for PM. The man who turned the tables on Johnson, Michael Gove, is now the leading candidate from the euro-skeptic wing of the party. In early polling, Gove is trailing Home Secretary Teresa May who was a lukewarm supporter of Remain during the referendum.

There was some early speculation that, if selected, May might look for a backdoor to reverse the Brexit vote, but as she formally announced her candidacy, she made it clear that she would abide by the peoples mandate. Meanwhile, Gove is making the case that the next PM should be from the winning side of the referendum. The eventual winner will be announced on September 9, but both May and Gove have said they would not trigger Article 50, the event that starts a two year clock on leaving the EU, until next year at the earliest.

The rest of Europe is already growing impatient with the secession process Britains ship of state is waving goodbye but its still tied up at the dock. Though top European leaders have discouraged taking retribution against the UK for leaving, much of the continent is seething over the troubling fallout from the Brexit vote. How the UK handles its invocation of Article 50 will greatly influence the tone of treaty re-negotiations with its former EU partners. If the new PM in London pushes for preconditions before starting the clock, the political tensions and uncertainties created by the Brexit could be extended by several additional months.

EU leaders worry that prolonged uncertainty about the Brexit process could poison the economy. International trade could slow and business planning could be chilled. It could also bolster populist movements ahead of general elections in France and Germany next year in which voters may express similar frustration with the current political path in Europe. Euro-skeptics playing a longer game are looking ahead to 2019 when, Mario Draghis term as ECB president ends. The thinking is that Germany will almost certainly get the nod for the Presidency after the Bundesbank candidate opted out in 2011, leading to Italys Draghi taking the post. A German at the helm of the ECB will be less prone to central bank largesse.

Eventually the Brexit could spell the end of the United Kingdom itself. Scotland has made noises about reviving its own referendum for independence so that it can rejoin the EU. In their own bid to regain European status, Northern Ireland politicians are openly discussing the reunification of Ireland. Such moves would certainly diminish the UKs economic clout and may make it harder to get good terms in renegotiated trade agreements.

As the BOE goes to battle stations, other central banks may bide their time for now. Markets have been volatile since the Brexit vote, but they have remained orderly, with no real signs of panic. If conditions stay relatively calm, global central bankers may breathe a sigh of relief.

Initial surveys of economists show most believe the ECB won't cut its already negative deposit rate any further over the coming months. President Draghis team is still crunching the numbers on impacts of new stimulus added earlier this year, and wont overreact to the unknown extent of the Brexit fallout. If markets do take a turn for the worse, the ECB could muster another token 10 basis point cut to bring its deposit rate down to -0.50 percent.

The BOJ appears patient as well, even in the face of the Brexit strengthening the yen back toward uncomfortable levels. Many currency analysts see a USD/JPY level of 100 as an obvious point for the central bank to try and hold the line with interventions. But the BOJ is still assessing the effects of the negative interest rate policy (NIRP) it instituted in February and has stuck with verbal interventions. Before the Brexit turmoil a key economic advisor to PM Abe said that Japan would have to intervene in FX market if yen strengthened to 90-95 area even if the US objected, so that level may be the actual line in the sand.

NIRP has had a modest stimulative effect, but its skeptics are legion. The unprecedented combination of negative interest rates at the BOJ, ECB and other central banks, fear of Brexit, and deep uncertainty about Fed rate hikes have fostered an extraordinary low yield environment. The Japanese 10-year benchmark yield has slid to -0.25% and the German 10-year bund has now joined the sub-zero club. With the Brexit adding to the compression, yields have fallen so far that approximately $11.7 trillion of government debt worldwide is now trading with negative yields. Thats up more than 15% from a month ago when Bill Gross declared that the huge pile of negative-yielding sovereign debt a "supernova that will explode one day."

Most banks have suffered silently after the Brexit blew away any sign of higher interest rates over the horizon, but some are starting to show signs of disgust with NIRP. In a clear demonstration of its frustration with negative rates, the Bank of Tokyo-Mitsubishi UFJ announced it might stop acting as a primary dealer of Japanese government bonds. In the same vein, Germanys Commerzbank is said to have considered pulling its cash from the ECB and physically storing it in vaults. These warnings should cause the ECB and BOJ to think twice before submerging rates further.

PREDICTIONS: The BOE is poised for a rate cut in August, but its unclear if Governor Carney is prepared to delve into negative rates. If the economic assessment in July finds the adverse scenario isnt materializing, then a more modest 25-50 basis point cut may serve for the time being. That may be followed up in the autumn with a quantitative easing package on the order of £75B or more.

In the short-term, Europe and the rest of the global economy will have to deal with waiting for Britain to choose its leader, and for that leader to decide when the Brexit will actually begin. This waiting game opens the door for more nervous volatility in markets for the next two months.

Markets should not count on splashy new stimulus plans in the near term. Central bankers are still assessing the results of NIRP, and there is little room left to cut rates.

The reaction in the markets will ultimately depend on how much separation anxiety develops in the wake of the Brexit. The precedent set by the UK referendum could inspire other EU countries to reconsider issues of sovereignty, and if that movement snowballs it might eventually threaten to unravel the EU or EMU.

The Boys (and Girls) of Summer

Across the pond, the surge of populism that ushered in the affirmative Brexit vote is a ray of hope for the Donald Trump campaign. Trump has had a series of stumbles lately, and is trailing Clinton in the national polls and in money-raising headed into the party conventions in July. The Republican National Convention will be held July 1821, followed by the Democrats convention a week later, giving both candidates a chance to reset the tone of their campaigns.

While there are similarities between the Brexit vote and the Trump campaign, its not clear if that will be enough to propel Trump to a Brexit-like upset. Much like the Leave voters, many Trump supporters are focused on issues of immigration and globalization, and demographically they tend to be older and white. But the Presidential election also involves a choice of leadership style, and polls show the majority of Americans have a poor view of Trumps temperament and competence. Another hurdle for the GOP nominee is that the US electorate is about 30% non-white, about twice the percentage of the UK minority population. The identity politics built in to the prospect of electing the nations first female President is yet one more notch in Mrs. Clintons favor.

Janet Yellen, perhaps the second most prominent female official in the US, has many challenges ahead. In June, she gave the impression that although interest rates stayed on hold, there were still probably a couple of hikes coming soon. In the aftermath of the Brexit, the Fed will have to reassess. The market has already voted, pushing the Fed Funds futures forecast for the next rate hike out into early 2017.

Recent Fed commentary has been mostly non-committal. Fed Vice Chair Fischer forecast very little impact on US trade from the UK referendum, but noted that predicting the full impact of Brexit is difficult because it will unwind over a long period of time. That means the Fed will probably be waiting at least until Britain actually invokes Article 50 no sooner than September before it even begins considerations on the next rate move.

The Fed will also have new data to look at over the next few months. Economic growth and consumer confidence data have been solid. Employment figures have been mostly good too, though the unexpectedly sharp drop in the May payrolls report was a concern. If the payrolls continue to peter out over the next two months, it could further dampen the outlook for Fed policy normalization. However, other labor indicators do remain strong, including the sub-five percent unemployment and recent record levels in the JOLTS Job Openings, a favorite indicator of Chair Yellen.

Corporate earnings will also begin rolling in over the next two months. Second quarter earnings are expected to be solid but guidance may be clouded by ripples from the Brexit, including recent big shifts in the currency market.

PREDICTIONS: Eight days of wall-to-wall coverage of the party conventions will make it impossible to avoid thinking about the outcome in November. The mud-slinging generated by Trump, Clinton, and their supporting super PACs will keep both candidates favorable ratings low, giving them both a shot at victory.

As the conventions get underway in late July the race will draw more attention that it has so far, which could stir some market jitters, especially from forecasters who believe Trumps proclamations on trade could be a disaster for the economy. Clinton remains the likely winner in November, which could hold negative implications for certain businesses. She already made a dent in the pharmaceutical sector earlier this year as she pressed hard on the issue of excessive price hikes by drug makers. Weakness in the stock market usually undermines the incumbent party, something Clinton will have to be aware of as she squeezes her Wall Street donors for funds.

Electioneering aside, the US markets will soon switch their focus to the Q2 earnings season starting in mid-July. Even if the Brexit turmoil fully subsides by then, US corporate earnings reports could be challenged as the second half outlook will be weighed upon by renewed dollar strength that resulted from sterling losing its shine.

The Fed is on hold indefinitely, and what was once expected to be a close call at the July 27 FOMC meeting is now a definite no. Meanwhile the minutes of the last monetary policy meeting, to be released on July 6, might suddenly sound quite hawkish after the Brexit surprise. Global central bankers gathering at the Jackson Hole symposium in late August may use it as a moment to provide a reassessment of global monetary policy in the post-Brexit world.

As a side note, the Rio Olympic Games (August 5-21) may prove a distraction for already light markets during the peak vacation period. However, the triumphs of human athletic achievement could be marred if it turns out Brazils troubled government falls down in its hosting duties. The Zika virus could also get renewed attention, possibly stoking pandemic fears, though not on the scale of the 2014 Ebola scare.

Happy Summer!


4: UK Construction PMI; China Caixin Services PMI; US 4th of July holiday
5: UK Services PMI; BOE Financial Stability Report; US Factory Orders
6: German Factory Orders, US Trade Balance; US ISM Non-Manufacturing Index; FOMC minutes
7: UK Manufacturing Production; Japan Current Account
8: UK Goods Trade Balance; US Payrolls & Unemployment
9: China CPI & PPI

12: UK Inflation Report Hearings; US JOLTS Job Openings; China Trade Balance (tentative)
13: BOE Credit Conditions
14: BOE Policy Decision; US PPI; China Q2 GDP; China Industrial Production
15: Euro Zone Final CPI; US CPI; US Retail Sales; US Industrial Production; Prelim University of Michigan Sentiment

1821: Republican National Convention

19: UK CPI; German ZEW Sentiment; US Housing Starts & Building Permits
20: UK Claimant Count & Unemployment
21: Various Euro Zone Flash Manufacturing & Services PMIs; ECB Policy Statement & Press Conf; US Philly Fed Manufacturing Index; US Existing Home Sales

25: German Ifo Business Climate
26: US Durable Goods Orders; US Consumer Confidence; US New Home Sales
27: UK Prelim Q2 GDP; FOMC Policy Statement; Japan Retail Sales; BOJ Policy Statement (tentative)
28: German CPI; German Unemployment; Japan Household Spending; Tokyo CPI
29: BOJ Outlook Report; German Retail Sales; Euro Zone Flash CPI estimate; Euro Zone prelim Q2 GDP; US Advance Q2 GDP; Chicago PMI
31: China Manufacturing & Non-manufacturing PMIs; China Caixin Manufacturing PMI


1: UK Manufacturing PMI; US ISM Manufacturing PMI
2: UK Construction PMI; US Core PCE Price Index; US Personal Spending; China Caixin Services PMI
3: UK Services PMI; US ISM Non-Manufacturing PMI
4: BOE Inflation Report; BOE Policy Statement & Press Conf; US Factory Orders
5: US Payrolls & Unemployment; US Trade Balance
5-21: Rio Olympics

7: Japan Current Account; China Trade Balance (tentative)
8: China CPI & PPI
9: UK Manufacturing Production; UK Goods Trade Balance
11: China Industrial Production
12: Euro Zone Flash Q2 GDP; US Retail Sales; US PPI; US JOLTS Job Openings; US Prelim University of Michigan Sentiment

14: Japan Prelim Q2 GDP
16: UK CPI & PPI; German ZEW Sentiment; US Housing Starts & Building Permits; US CPI; US Industrial Production
17: UK Claimant Count & Unemployment; FOMC Minutes
18: UK Retail Sales; ECB Minutes; US Philly Fed Manufacturing Index

22: Various Euro Zone Flash Manufacturing & Services PMIs
23: US Durable Goods Orders; US New Home Sales
24: US Existing Home Sales
25: German Ifo Business Climate; Japan Household Spending; Tokyo CPI; Jackson Hole Symposium begins (tentative)
2528: Democratic National Convention
26: UK Q2 GDP Second Estimate; US Prelim Q2 GDP (second estimate)

28: Japan Retail Sales
29: US Core PCE Price Index; US Personal Spending
30: US Consumer Confidence
31: Euro Zone Flash CPI Estimate; Chicago PMI; China Manufacturing & Non-manufacturing PMIs; China Caixin Manufacturing PMI

1: UK Manufacturing PMI; US ISM Manufacturing PMI
2: UK Construction PMI; US Payrolls & Unemployment; US Trade Balance; US Factory Orders

9: UK Conservative Party selects new PM