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

Saturday, July 2, 2016

Barrons weekend summary

Barrons weekend summary: positive on large US financials, select EU names oversold on Brexit, LUV, THS 

Cover story: In the upcoming elections, Democrats seem well-positioned to reclaim the Senate from the GOP, and a net gain of just four seats would give them the 50 necessary to take control, assuming a Democratic vice president is there as a tie-breaker; Regardless of who takes the White House, individual tax rates arent likely to go up, and legislative gridlock should ease. 

Tech Trader: In a tech market dominated by giants such as AMZN and FB, smaller companies that arent likely to grow will increasingly consolidate or sell themselves, as seen by prominent deals such as MSFTs acquisition of LNKD and GCIs bid for RLOC. 

Trader: Near-term, the market will look for any potential Europe-derived fallout in U.S. corporate earnings, according to David Donabedian of Atlantic Trust; Positive on AXLL, CVT, LNKD, QLIK, RDEN, VA: Companies are being acquired in all-cash deals, but their stock prices are significantly below the offer prices, offering investors an attractive annualized yield; Positive on UTHR: Shares of biotech are down 40% over the past year, but the company has a strong balance sheet and is improving of some of its treatments; now could be a good entry point for investors.

 Profile: Scott Davis, manager, Columbia Dividend Income fund, looks for A-rated-or-better balance sheets, consistent cash flow from operations, and yield (top 10 holdings: MSFT, XOM, JNJ, JPM, MRK, HD, PM, CMCSA, VZ, PFE). 

Interview: Harry Nimmo, manager, Standard Life Investments UK Smaller Companies fund, one of Britains top-performing small-cap funds (picks: Fevertree Drinks, First Derivatives, Fuchs Petrolub, Hota Industrial Manufacturing, Jungheinrich, Rational, Rightmove, Ted Baker, Voltronic Power Technology). 

1) Positive on GS, C, JPM, BAC, MS: Despite a rally in the financial services sector, shares of large firms are down an average of 20% so far this year, making banks and asset managers one of the best values in the market; 
2) Positive on Ryanair, GSK, SAP, Abertis Infraestructuras, Rexel, ARMH, Persimmon, Howden Joinery: Companies are among those in Europe that took a hit following the Brexit vote, but investors have overreacted, making these particular shares a bargain; 
3) Positive on LUV: Carrier operates almost exclusively in the U.S., and though it faces challenges because of higher oil prices and slackening demand, it has little exposure to the U.K. and Europe and the share price could rise by 35%; 
4) Positive on Safran: French aerospace and defense contractor is likely to benefit from the airline industrys long-term outlook, which looks bright as a growing middle class embraces air travel. 

Small Caps: A look at the best- and worst-performing stocks from this column during the past 12 months (Best: CFX, PETN, MTW, MPW, TOWN, RAVN, CIR, ENR, DRII, FELE; Worst: PAH, ESL, PICO, DSW, HMHC, JLL, FLWS, PB, CUB, VSI). 

Follow-Up: Positive on Volkswagen: If the troubled automaker shows signs of serious cost-cutting and the global auto market doesnt collapse, shares could rise by about €150 in a year; Positive on THS: Companys $2.7B purchase of CAGs Ralcorp business made it the leader in private-label food, while doubling its sales and boosting earnings powerand shares could rise by 17%. 

European Trader: Rob Bartenstein of Kestra Private Wealth Services says that in the wake of the Brexit vote, internationally diversified British companies are likely to do well in the coming months, and that continued downward pressure on the British pound will be a short-term boon for some U.K. companies. 

Asian Trader: A stronger dollar, propelled by Brexit, is putting downward pressure on the yuan, says John Woods of CS, and the fall will likely become a subject of debate this summer, which wont be good for stocks. 

Emerging Markets: Not even Brexit could keep the emerging markets down this year; the best-performing emerging markets in the first half include Peru, Brazil, and Colombia; the worst-performing include Greece, Poland, China, and Egypt. 

Commodities: Gasoline prices look set to trade in a sideways range over the summer, but there are profits to be made for investors willing to play the options market, which will require them to take significant risk selling rather than buying them. 

Streetwise: Columnist Ben Levisohn says Britain might never invoke Article 50 of the Treaty of Lisbon and leave the European Union, while the EU might undertake structural changes that lead to improvements; As long as policy makers prevent the current political crisis from becoming a financial one, there is no reason for a repeat of previous instances when the U.S. Economic Policy Uncertainty Index surged to peak levels.

Friday, July 1, 2016

Brexit Turmoil Fades, For Now Weekly Market Update: Brexit Turmoil Fades, For Now
Fri, 01 Jul 2016 16:30 PM EST

Global markets began the week under a dark cloud of uncertainty in the wake of the UK voters' decision to leave the EU. On Monday investors continued to flee from risk assets as ratings agencies cut the UK's sovereign ratings, European banking stocks got pummeled, and the British Pound hit new 30 year lows. Uncertainty persisted about the timing and path forward on separation from the European Union, and the leadership transition in the Conservative Party (and perhaps also the Labour Party) dominated the conversation in London along with the markets' reaction. The S&P traded down through the 200 day moving average for the first time since March and money surged into global bonds markets sending US Treasury yields to levels not seen since 2012. The Brexit vote propelled gold to a new 15-month high above $1,300, and pound sterling remained under pressure. Cooler heads prevailed by the end of the week and stocks reversed higher. For the week the DJIA gained 3.1%, the S&P500 rose 3.2%, and the Nasdaq added 3.3%, while the UK's FTSE-100 surged over 7%, notching its best performing week in nearly five years.

At the opening bell on Tuesday, though, confidence was resurfacing as investors took a step back to fully evaluate the landscape. Despite somewhat tougher talk by European officials it was becoming clear that the UK government had no intention of invoking article 50 before a new PM is installed. Hope built that the resulting 2+ years before any agreement needs to be reached should allow cooler heads to prevail and officials to hammer out a mutually beneficial trade pacts. Policymaker responses also went a long way to underpin improving sentiment. Central bankers from around the world chimed in they were prepared to take measures to ensure liquidity and proper functioning of financial markets. South Korea announced a $17B stimulus package and China's president Li pledged he won't allow a rollercoaster ride in Chinese capital markets. Importantly, despite the surge in volatility there were no reports of dislocations in the capital markets or the global banking system. On Thursday the BOE's Carney plainly stated that further easing was likely this summer and that only solidified the growing belief the US Fed was likely on hold through year end. The notion the UK vote would keep central banks rates lower for even longer than previously thought helped fuel a dramatic rebound in equity markets.

By Friday most major stock indices had returned to levels seen heading into the UK vote but the flow of money into government bond markets had yet to really subside. The FTSE was the first to recapture its post Brexit losses while the GBP remained devalued by ~13%. The 10-year GILT went for wild ride and by weeks end the yield touched record lows below 0.9%. German Bund yields fell further into the negative territory while the Euro rebounded from a 1.09 low to stabilize around 1.11. US stocks surged into the end of the quarter aided calming words from central banks and a slew of M&A announcements. The US 10-year yield slipped more than 10 basis points since Friday's close to trade sub 1.5%, and remains down more than 20 basis points from where it stood before the UK vote. The US Dollar index is holding up about 2.5% since the Brexit vote.

Asia's FX flows were just as volatile as the Brexit effects played out. The USD/JPY after briefly trading below 99 on Friday, retraced back above 103 on improving risk sentiment. Verbal intervention remained heavy in Japan, where PM Abe held a meeting with BOJ Deputy Governor Nakaso and Finance Minister Aso. The PBoC's first fixing after the Brexit set the Yuan at 6.65, the lowest setting since Dec 2010. An intraday spike up above 6.70 sparked rumors that PBOC officials were willing to tolerate USD/CNY as high as 6.75.

Data for the week was mixed and ultimately overshadowed by the Brexit news in terms of any market-moving effect, but some key data points were notable. The US Markit services PMI report was a bit more subdued than estimated, noting any rebound in the economy from the weak first quarter was largely confined to April, and that growth has since faded again. The Commerce Department revised first quarter GDP growth upwards from an annual rate of 0.8% to 1.1%, which is still the weakest pace in a year, portending the US economy remains vulnerable to global externalities. On the other hand, the Chicago PMI reading surged in June to its highest reading since January 2015, with managers noting improved production and new orders. US initial jobless claims came in slightly above estimates but remained at a level consistent with a healthy labor market, as the reading remained below 300K for the 69th consecutive week. US consumer confidence rebounded in June according to the Conference Board; however, it's important to note this data was gathered up to a week before the Brexit vote.

In deal news this week, it was disclosed that Hershey was in talks with Mondelez but it rejected a $107/share offer of equally proportioned cash and stock and determined that the offer "provided no basis for further discussion." Nevertheless, shares of Hershey and other US foods producers rose sharply on Thursday on the prospects of more M&A in the sector. After years of winking at each other Lionsgate and Starz finally tied the knot, in a $4.4B merger deal creating a bigger player in the content world. Private equity also got into the act this week as Apollo Global bought Diamond Resorts for $2.2B, paying a 26% premium.

Sunday, June 26, 2016

Barrons weekend summary

Barrons weekend summary: positive on TSCO and GS 

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

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

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

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

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

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

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

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

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

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

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

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

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

Friday, June 24, 2016

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

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

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

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

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

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

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

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