Friday, November 14, 2014

Market Week Wrap-up Weekly Market Update: US Stocks at New Highs In Spite of Europe and China Stall
Fri, 14 Nov 2014 16:41 PM EST

The S&P500 and the DJIA both pushed out to fresh record highs again this week though trading volumes remained light. The fall earnings season is all but over and this week featured major US retailers turning in decent but not exceptional quarterly results. CPI and GDP data out of Europe confirmed that the continent's sick economy is not seeing any marked improvements, although the prelim German Q3 GDP q/q reading rose to +0.1% from -0.2% in the advance reading, keeping Europe's largest economy out of official recession territory. Crude prices sank to the lowest level in over four years as OPEC continued to pretend that everything was fine in markets heading into a November 27th meeting. World leaders attended the APEC summit in Beijing, where President Obama and China President Xi reached a bilateral agreement to reduce carbon emissions and member nations endorsed a roadmap for China's Free Trade Area of the Asia-Pacific (FTAAP), Beijing's rival to the Trans-Pacific Partnership (TPP) trade agreement. For the week, the DJIA gained %, the S&P500 rose % and the Nasdaq added %.

President Obama called on the FCC to classify the internet as a utility under Title II regulation (the same treatment given to phone companies), in an attempt to shape the debate over net neutrality. The president's statement came as FCC Chairman Wheeler was briefing members of Congress on his own concept for net neutrality, based on a hybrid model involving elements of both utility-like and free market regulations. House Republican leaders commented that placing internet under title II regulation was beyond the power of the FCC. Time Warner Cable lost as much as 10% and Comcast lost up to 6% in the two sessions following the president's statement, before recovering.

Crude saw more dramatic moves to the downside this week, with crude futures falling to 4-year lows with WTI around $73.25 and Brent below $78 by week's end. The next OPEC meeting is coming up fast on November 27th and there is still no clear indication that the organization will move to lower output. Saudi Oil Minister Al Naimi called talk about an oil price war a misunderstanding while Kuwaiti Oil Minister Ali Al-Omair said OPEC would not change its production quotas. In its monthly report, the IEA said there was more downside yet to come in oil prices, given market dynamics.

Ukraine was back in headlines this week as Russia and its anti-government proxies in Eastern Ukraine were observed concentrating forces for what appears to be a major offensive. NATO said it had seen multiple columns of tanks and materiel arriving in the rebel provinces and Kiev has begun shifting more forces to the east, even as artillery exchanges heated up. The September 5th ceasefire agreement is looking increasingly hollow.

McDonalds October SSS were much better than expected, however comps in all three of the company's regional divisions were still in contraction territory. Recall that with third-quarter earnings, McDonalds CEO warned that October comps would remain negative. On Friday, Jana Partners disclosed a new stake in McDonald's giving investors hope that the activist may propose changes. This comes after tons of speculation that the struggling Micky D's could be a big target for activists.

Retailers Walmart and Macys had decent results for the third quarter which encompassed the back to school season. Walmart's earnings topped expectations and comps stayed in positive territory, although it narrowed its FY forecast. On its conference call, Walmart said it would start matching prices with major online retailers. Macys widely topped the consensus on earnings, although its comps were negative and the firm trimmed its FY view. Both Walmart and Macys made constructive comments about Q4 holiday business. Both stocks sustained more than 4% gains through week's end. JC Penny and Kohls had problems in their Q3 reports. Headline results from both names were below expectations, JCP's SSS were flat, and KSS's comps were negative. JC Penny asserted that it was in the "final stage" of its turnaround plan.

Alibaba did $9.3 billion dollars in orders on Single's Day (11/11), China's big fall retail sales day, topping all estimates. Chairman Jack Ma said he was happy with the results and even went as far as to say he hoped this new holiday would become a global commerce event in the years ahead. The company also announced it was looking to raise $8 billion in USD bonds, adding fuel to rumors the e-commerce giant might do some shopping of its own. Shares of BABA were volatile, seesawing through week's end after a solid month of gains in the wake of the company's October IPO.

On the M&A front, BB&T Corp agreed to buy Susquehanna Bancshares for about $2.5 billion in cash and stock. The deal gives BB&T a bigger foothold on the East Coast. Berkshire Hathaway said it would acquire the Duracell battery unit of P&G in a cash-and-stock arrangement valued at $6.4B. In other deal talk, there were reports that Actavis was in talks to acquire Allergan for around $210/share, as Vertex's flagging offer looks less and less likely to succeed. Share of Baker Hughes gained sharply towards the end of the week after the company disclosed it was engaged in preliminary discussions with Halliburton about a possible combination.

EUR/USD bounced back and forth in the 1.2400 handle for most of the week in the absence of any major Eurozone news. Final October CPI data and the second reading of Q3 GDP data confirmed the wretched condition of the European economy but held no big surprises. EUR/CHF fell to around 1.2010 on Friday from the 1.2030 level coming into the week. The Swiss National Bank's Jordan said the bank would not abandon the 1.2000 floor for the foreseeable future and called the peg the bank's most important tool for price stability. The SNB's resolve may soon be tested as the Swiss referendum on central bank gold reserves takes place on November 30th, and one poll out this week showed the vote was too close to call, with 44% of respondents in favor of the initiative, 39% against and 17% undecided.

USD/JPY declined to seven-year lows by Friday, topping out around 116.80 before retracing a bit on Friday afternoon. Comments by government officials drove speculation that the final decision on the next planned sales tax increase could be delayed until after early elections, which PM Abe may call in December in order to bolster his mandate. The Bank of Japan warned that any plan that would delay the tax increase could make BOJ's decision harder by hurting fiscal trust and diminishing the attractiveness of Japan's government bonds. The rumors went back and forth all week making it hard to say whether PM Abe would go ahead and actually launch early elections, although it appears that a final decision would wait at least until after Monday's Q3 GDP results.

China published a raft of October economic figures last weekend. October CPI at 1.6% matched the lowest level since Jan 2010, with the food component at 2.5% and non-food at 1.2%. Year-to-date CPI was unchanged from September, just above the 2% level. October exports were still in surplus but imports were slightly lower than expected. Subsequent reports suggested that the trade surplus was driven by the contraction in import growth, domestic demand remains weak, and destocking has led to decline in consumption of cement, coal, iron ore and other raw materials. Thursday saw another round of October economic data drop: industrial production was weaker than expected and power generation contracted on a sequential basis for the third month in a row. China retail sales were pretty soft, and slowed for the fifth moth in a row.