Friday, November 15, 2013

Market Week Wrap-up  Weekly Market UpdateDovish Yellen Pledges to Keep the Good Times Rolling

- The DJIA and the S&P500 pushed out to fresh all-time highs this week as Janet Yellen affirmed her dovish proclivities during an initial round of Senate confirmation testimony. In China, the Third Plenum of the Communist Party unveiled a raft of reforms which are still being digested. Third quarter Europe GDP data indicated that economic stagnation remains a big problem for the euro zone. US industrial production dipped slightly in October, although the declines in output at power plants and mines were nearly offset by gains in manufacturing output. WTI crude prices sank further, dipping briefly below $93 to the lowest price since June. The front-month contract closed out the week lower, for the sixth weekly decline, its longest losing streak in a decade and a half. Despite lackluster earnings reports from some marquee names like Cisco and Walmart, stocks continued to melt up, and for the week the DJIA gained 1.3%, the S&P500 added 1.6% and the Nasdaq rose 1.7%.

- In her first public appearance as nominee to succeed Bernanke, Yellen testified before the Senate Banking Committee on Thursday and confirmed her intention to keep the monetary policy easy while also actively denying that QE was blowing asset bubbles. Yellen reiterated familiar positions: unemployment remains too high, inflation is well below the 2% target and QE is effective but cannot go on forever. Note that the WSJ's Hilsenrath published a piece asserting that the FOMC has moved closer to lowering its unemployment threshold to 5.5% or 6.0% from 6.5% presently, in its quest to keep interest rates low even as it rolls back QE. Among other Fed speakers this week, the usually moderate Atlanta Fed President Lockhart suggested that the FOMC could still begin tapering QE in December, though the decision remains data dependent.

- In China, the newly-installed leadership wrapped up a landmark four-day Central Committee meeting on Tuesday. The meeting had been watched closely after President Xi indicated the politburo would endorse a range of economic and social reforms. Beijing issued a rather vague communique on Tuesday, but more extensive coverage of the reforms emerged in the Chinese press on Friday. Reforms include a partial roll-back of the one child policy, allowing more privatization of the state-controlled banking system, greater CNY convertibility, and extensive land ownership reforms, among other issues.

- Shares of Cisco lost about 8% on the week after the company reported lower-than-expected Q1 revenue and offered very weak Q2 revenue guidance. Executives warned that this revenue downturn is different from the slide seen in early 2009, citing softness in emerging market demand, especially in China. Additionally, Cisco said this demand slowdown will be felt across the industry. Shares of Hewlett-Packard and other Cisco competitors and suppliers saw pressure after the report as well.

- Mega retailer Walmart's Q3 earnings report failed to impress the street. Walmart more or less met expectations in the quarter, but also trimmed the top end of its FY14 guidance range. Comps were down y/y, with the exception of Sam's Club. Macys reported excellent gains in its Q3 report, with earnings up more than 30% y/y, although revenue growth was much more modest. Top- and bottom-line results beat expectations. Executives made upbeat comments about the firm's Q4 outlook, including its view of the upcoming holiday season. Meanwhile shares of department store name Kohls slid sharply after it missed top- and bottom-line expectations and cut its full-year forecast.

- Bill Ackman's Pershing Square Capital acquired stakes in both Fannie Mae (9.98% stake) and Freddie Mac (9.77% stake). According to filings, Ackman wants to talk with the GSEs' executives about how the firms are run in light of the proposal from Bruce Berkowitz's Fairholme Capital Management. Fairholme said Wednesday it would like to buy choice parts of the bailed-out mortgage-finance giants Fannie Mae and Freddie Mac from the government in a recapitalization valued at $52 billion. In 13F quarterly holdings filings Berkshire disclosed a new stake in Exxon, Third Point (Dan Loeb) confirmed a stake in Fedex, and Carl Icahn confirmed a nearly 3.9M share stake in Apple.

- In deal news, Shire struck a deal to acquire ViroPharma for $50/share in cash, valuing the company around $4.2B. ViroPharma makes Cinryze, a treatment of the rare immune disorder hereditary angioedema. Analysts say we should expect more deals for companies making treatments for rare conditions as big pharma looks to replace revenues lost over the patent cliff. Jos. A. Bank terminated its $48/share offer to acquire Men's Wearhouse after MW refused to engage in negotiations. Jos. A. Bank offered to continue negotiations in the future. Eminence Capital LLC, MW's largest shareholder, expressed disappointment that the board had failed to engage in discussions, accused directors of ignoring their fiduciary duties and requested a special shareholder meeting.

- EUR/USD began the week around the pivotal 1.3400 level and moved higher with little conviction to just shy of the 1.3500 level on Friday. Weak preliminary GDP figures out of Europe only temporarily hindered the euro: French GDP growth turned negative, Germany eked out +0.3% growth while overall Eurozone growth was +0.1%, its second month of tepid expansion. GBP/USD fell to two-month lows below 1.5870 after the October UK inflation data came in below expectations, but bounced back after the better October UK employment data. The BoE's Quarterly Inflation Report moved up the BoE's forward guidance unemployment threshold by one year -- the BoE now sees unemployment hitting 7% in Q3 of 2015, from the prior Q3 of 2016 forecast. USD/JPY weakened to two-month lows above 100. Dealers were focused on the spread between US and Japanese 30-year bond, which spread out to the widest level since 2011.