Friday, November 30, 2012

Market Week Wrap-Up

Weekly Market Update: Europe Pulls Greece Away from the Edge as US Eyes the Fiscal Cliff

- US and European equity markets accumulated solid gains this week after the Eurozone and the IMF managed to hammer out a compromise with Greece and investors managed to overlook the fiscal cliff antics in Washington, DC. In Asia, Chinese equities sank further in into their post-transition funk as no fresh stimulus measures emerged, while the Japanese government approved $10.7B in stimulus spending ahead of the December 16th parliamentary elections. A couple of positive US data points helped distract people from the fiscal cliff "stalemate": the October durable goods report beat expectations, the second reading of Q3 US GDP saw a firm gain over the advance reading, to +2.7% from 2.0%, and the November Chicago PMI reading moved back above the key 50 level. On the commodities front, traders were unnerved by a mysterious and as-yet unexplained selloff in gold that wiped more than 1% off the spot price in a matter of minutes on Wednesday morning. Spot gold closed out the week down about 2% at $1,708, around three-week lows. For the week, the DJIA rose 0.1%, Nasdaq added 1.5%, and the S%P500 gained 0.5%.

- The White House and the Congressional Republicans offered an operatic level of fiscal cliff rhetoric this week. The White House's opening gambit to Congress went over like a lead balloon, with the President reportedly asking Republicans to give up all of their bargaining chips. The plan included a one year extension of the payroll tax credit and expanded unemployment benefits, and a permanent increase in debt limit. It also asks for $1.6T in tax increases and over $50B in new stimulus spending, offset by only $400B in entitlement cuts and a one year postponement of the defense spending cuts triggered by the 'sequester'. GOP leaders howled that the White House plan was "not serious," with Speaker Boehner calling the current situation a "stalemate" and Senate majority leader McConnell calling it a step closer to the fiscal cliff. In their public statements both parties sought to get the other side to give specifics first: Democrats wanted to see a summary of tax hikes the Republican's would allow, and Republicans demanded to see a list of specific spending cuts from the Dems. Despite the heated rhetoric, however, many reports indicate that in private, the House Republicans are said to understand the weakness of their negotiating position and that they may be readier to compromise than they appear.

- November same store sales reports were not especially positive due to a slow start to the month impacted by Superstorm Sandy in the northeast, but more positive signs were seen during the Black Friday weekend. Sales on Black Friday itself were down year over year, diluted a bit by the decision of many big retailers to start the holiday sales season late on Thanksgiving Day; for the holiday weekend as a whole, US retail sales were up 2.7%. November comps were broadly worse than expected, with very few names able to meet or beat consensus expectations and many others falling well short. The department store names were especially hard hit, with Target, Bon-Ton, Nordstrom's and Kohl's all delivering negative comps. The online retail segment performed very well on Black Friday: comScore reported that online sales rose 26% y/y, hitting a record $1.04B.

- On the M&A front, the week's big story was ConAgra closing its long-running quest to acquire Ralcorp. ConAgra will buy the private-label food firm for $90/share in cash, in a total deal valued around $4.95B ex-debt. McGraw Hill confirmed that it would divest its education business to Apollo Global Management for $2.5B, leaving the firm with its financial services operation. The pursuit of Knight Capital Group heated up, with a $3.50/share bid on the table from Getco and a comparable bid said to be offered by Virtu Financial.

- The EPA temporarily suspended BP from receiving new contracts with the Federal government. The agency cited BPs lack of business integrity surrounding the Deepwater Horizon blowout, explosion, oil spill, and response. Note that BP is one of the largest suppliers of fuel to the US Department of Defense, which announced it would put $2B of contracts that BP currently holds up for an open bidding process when their current term expires in the next two years.

- The torrent of special dividends out of US corporates kept flowing this week. With corporate cash hordes at record high levels and taxes set to rise next year, companies are handing long-term holders a nice payday at today's lower tax rates. Among the most notable was Costco, which declared a $7.00/share that the company said would amount to $3.0B.

- EUR/USD tested and broke out to five-week highs this week, trading as high as 1.3030 after the eurozone managed to hash out the Greece agreement and the German Parliament rubber stamped the deal. Midweek there was a certain amount of skepticism about the deal as German opposition figures tried and failed to delay the Bundestag vote, but it passed through the Bundestag on Friday with the help of votes from the pro-Euro opposition party. In addition, there were still a lot of question about how the Greek debt swap will be handled and whether all eurozone governments are really on board with the deal. Euro-skpetic UK Telegraph writer Ambrose Evans-Pritchard warned that Finland and the Netherlands could withdraw support for the agreement if the IMF does not participate. A late Friday downgrade of the EFSF/ESM European backstop funds by Moody's could also cause ripples next week.

- The yen fell to its lowest level versus the dollar in eight months this week. Traders continued to build up positions on the expectation that more aggressive Bank of Japan policy will unfold following the December 16th elections. LDP party leader Abe and current PM Noda sparred all week long, although both parties have been demanding that an outsider take the reins at the BoJ and pursue more activist policies than current BoJ chief Shirakawa. Late in the week, Nikkei surveys saw the LDP solidly in the lead (23%) while the ruling DPJ (13%) is now running third behind the nationalist Japan Restoration Party (15%).

- China markets extended their dramatic declines this week. The Shanghai Composite cemented its position as the Asia's worst performing index, losing 4.3% for the month of November and 10% YTD. The smooth leadership transition did little to restore faith in the market, given the absence of policy measures from Beijing. On Tuesday the US Treasury released its semiannual currency report and once again refrained from naming China a currency manipulator, but reiterated that the Yuan remains significantly undervalued. Later Friday night, Beijing will publish the key November Chinese manufacturing PMI reading; analysts expect the reading to be around 50.8, up from 50.2 in October. Last week, the HSBC flash PMI climbed to 50.4.