Friday, November 9, 2012

Market Week Wrap-Up

Markets Swoon at Edge of Fiscal Cliff

- US voters handed Barak Obama a narrow victory in the presidential race this week. Equity markets sold off hard after the poll, with both the DJIA and the S&P500 dropping on Wednesday to their lowest levels since early August. Stocks sold off even more on Thursday before bottoming out on Friday. While there was turmoil in Greece mid-week surrounding a critical vote on austerity measures and some grim September German industrial production data out on Wednesday, observers agree that the primary driver of the decline was fear that the US President and the House Republicans would not be able to cooperate to resolve the "fiscal cliff." In Asia, the China began its once-a-decade leadership transition on Thursday after disclosing a round of positive October economic data. In Europe, the BoE and ECB both held rates steady and offered no new initiatives, and the EU Commission's autumn economic forecasts cut the 2012 and 2013 GDP outlooks for nearly every European nation. For the week the DJIA fell 2.1%, the S&P500 declined 2.4%, and the Nasdaq took the biggest hit losing 2.6% due in part to the continuing slide in Apple shares which are now more than 2% off their peak in September. 

- The US woke up on Thursday to a virtually unchanged arrangement of political forces in Washington, with Obama in the White House, the GOP running the House and a slightly larger Democratic majority in the Senate. Market commentators offered their read on the situation on Wednesday: Goldman Sachs' Jim O'Neill said he is even more concerned about the fiscal cliff after the election. Citigroup's base-case scenario for the lame-duck session remains a temporary compromise. Fitch warned that a failure to reach an agreement to resolve the fiscal cliff (and the upcoming debt ceiling) would likely trigger a rating downgrade before late 2013. House Speaker Boehner made it clear on Friday that he would leaving it up to President Obama to make the first move, signaling that he is open to new revenue sources, although it is unclear whether that would extend to any sort of tax increases or only rejiggering the tax code. The president essentially restated his prior position (which the GOP rejected last year) of retaining the Bush tax cuts for the middle class and raising taxes on individuals making more than $250K, though he indicated on Friday that he is "not wedded" to every detail of plan and invited Congressional leaders to meet at the White House next week. 

- China's October economic data were better than expected, reinforcing the perception that Beijing has pulled off a controlled landing just in time for the new leadership to hop in the cockpit and take off again. Consumer inflation dropped to a 33-month low of 1.7% from 1.9% in September, giving the PBoC scope to ease up on monetary policy. Industrial production came in 0.2 points above expectations at 9.6% - the biggest increase in five months - while fixed asset investment saw its biggest increase in seven months. Retail sales rose 14.5% and residential housing investment growth saw a 10.8% gain after falling for 17 consecutive months. Electricity production also returned to growth after falling since March. Analysts warn, however, that at least some of the better data has been driven by credit loosening by banks dictated by the government to coincide with the leadership transition. 

- In Beijing, the Great Hall of the People welcomed over 2,000 delegates for the start of the 18th National Party Congress. Up to nine new members of the Politburo Standing Committee will be unveiled sometime next week, along with the widely expected confirmation of Xi Jinping as the next General Secretary of the Communist Party. 

- McDonald's monthly same-store sales fell for the first time in nearly a decade in October. The last time the company reported a negative comp was in March 2003. The US comp of -2.2% was even worse than the headline -1.8%. Smaller fast-food company Wendy's missed both top- and bottom-line expectations in Q3, although its quarterly comps were positive. 

- Heathcare names Humana and CVS both had pretty solid results in Q3, while Express Scripts missed revenue expectations by a hair and narrowed its FY12 outlook. Humana said it would acquire Metropolitan Health Networks to help build out its Medicare and Medicaid business. The purchase price is $11.25/share, for a total deal worth $850M. Executives from Express Scripts were very cautious about the 2013 outlook, warning that the business would be impacted by client membership reductions, the weak business climate and the poor unemployment outlook. 

- Unlike big oil names reporting last week, Marathon Oil saw better profits thanks to higher production in Q3 and revenue blew out expectations. Operating earnings from oil services name Transocean blew out consensus expectations, however it lost money after items related to its exit from the shallow water market. 

- Both Time Warner and News Corp topped earnings expectations but saw modest but disappointing revenue growth in Q3. Time Warner said advertising was down less than expected in the quarter. News Corp was less positive about advertising revenues, calling the market disappointing. CBS's positive ad revenue performance helped it beat expectations and outperform its rivals. Disney met expectations in its Q4, with solid growth seen in earnings and revenue. The only weak spot was the firm's declining studio entertainment revenue, which helps to explain some of the thinking behind Disney's $4B deal to acquire Lucasfilm announced earlier this week. 

- JC Penney continues to see huge losses and dire revenue falloffs as the firm transforms itself from a bargain basement department store to a sleek retail innovator. Comp sales contracted 26%. On the conference call, JCP's CEO said the new JC Penney is like a start-up and that the business being seen by the transformed stores has been excellent, while blaming the old JC Penney operation for the losses and sales declines. Nevertheless, the firm's transformation will not be complete until 2015, so expect more of the same until then. 

- Travel name Kayak announced that it agreed to be acquired by for $40/share in cash and stock, for a total deal valued around $1.8B. Kayak operates like a search engine where consumers compare Kayak's pricing with other competing websites such as Expedia and Orbitz, as well as Priceline. In other deal news, Stifel Financial Corp said it would buy smaller rival KBW for $575 million in cash and stock. 

- FX traders had placed bets on the US election results in the belief that the dollar would weaken after an Obama win and strengthen in the case of a Romney victory. The greenback initially weakened after the President won re-election on expectations for the easy Fed monetary policy continuing, but the risk-off tone in markets through the rest of the week strengthened the dollar in safe-haven trading. EUR/USD moved below its 200-day moving average of 1.2828 and marked several fresh two-month lows throughout midday on Friday. The slide let up around the 1.2740 area for a little while, which was a 38.2% fibonacci retracement of the 1.2040-1.3170 summer price range. The pair also could not withstand the situation in Europe. 

- Despite the passage of the Greek austerity measures late Tuesday, risk appetite found it quite hard to find any footing in Europe. The Greece austerity vote barely squeaked by with 153 MPs voting for the measure in a 300-member parliament. The aftermath saw expulsions of party members who did not toe the austerity line coupled with violent protests and mass strikes that paralyzed Athens. Risk-off sentiment was aided by press reports that ECB was in no rush to launch the OMT bond buying program and that there was little chance that Spain would request ESM aid in 2012. 

- The Reserve Bank of Australia surprised the markets by keeping rates on hold at 3.25%, citing higher than expected CPI data as well as some signs of stability out of China. Late in the week, a dovish RBA quarterly policy statement lowered GDP projections for 2013 by a quarter-point to 2.75%, keeping the door ajar for another interest rate cut before the end of the year. In New Zealand, the kiwi fell almost a full cent after a surprisingly weak employment report, as Q3 jobless rate spiked to a 13-year high of 7.3%.