Friday, March 27, 2015

Market Week Wrap-up

For those who doesn't receive our newsletter: Vad's A Taoist Trader is available as a book starting today. You can find it on Amazon at

Give it an unhurried read, you won't be sorry! Weekly Market Update: Mixed Data Blunts Risk On Appetite
Fri, 27 Mar 2015 16:45 PM EST

Global equity indices retreated from at or near record high levels this week. Traders noted technical trading around some key sector reversals, historically weak seasonal patterns observed post March options expiration and pre-Q1 earnings releases, and geopolitical worries emanating from the Middle East as all playing a role in reversing equity sentiment. US economic data was mixed but definitively continues to point to a slowdown in Q1 economic activity. The momentum technology and biotech stocks saw a few bouts of selling which garnered attention as they did on a couple of occasions in 2014. There were glimmers of hope in Europe. Measures of confidence among German businesses and consumers saw surprising improvements, while other European nations also saw an uptick in confidence surveys. German and euro zone March preliminary services and manufacturing PMIs surveys beat expectations and rose further into expansion territory. In Asia, China's March HSBC PMI manufacturing survey slipped to an 11-month low amid wider unease about the nation's economy. Chinese officials continue to talk down growth expectations, with Vice Premier Zhang saying China has "paid a price" for very high growth and that high growth levels are "not sustainable." For the week, the DJIA fell 2.3%, the S&P500 lost 2.2% and the Nasdaq dropped 2.7%.

Just before markets closed on Friday, Fed Chair Yellen reiterated that rates are likely to rise this year, but that the path of rates is more important than the timing of rate lift off. She again mentioned that the dollar strength will impact US exports, but said that the currency market has to be put in context, and that other factors like robust consumer spending and foreign central bank stimulus will help the US economy.

Other Fed speakers this week also reiterated that the June, July and September Fed meetings would be live for possible rate hikes. Fed Vice Chair Stanley Fischer said the FOMC would "eventually raise rates by 25 basis points," jesting that this would take Fed policy from "ultra-accommodative" to "extremely accommodative".

US CPI returned to growth in February, delivering the first positive headline CPI reading since October and the first rise in energy prices since June. Domestic gasoline prices rose 2.4%, the largest increase since late 2013. The Fed has asserted that the declines in energy prices are transitory, and this is some of the first hard economic data to support its contention.

Analysts saw the sizable unexpected decline in the February durable goods orders as evidence the global slowdown is starting to show up in US data. Durables and capital goods orders were all down more than 1% in Feb, while the surprising gains in the January report were revised lower. Orders for non-military capital goods (ex-aircraft), a proxy for future business investment, saw their sixth consecutive decline, the longest stretch of decreases since mid-2012.

The February new and existing home sales reports diverged noticeably. The Feb existing home sales echoed the contours of the tepid February permits and starts data out last week, with a reading slightly below expectations and more or less flat with the January figure. The new home sales were unexpectedly strong, widely topping consensus estimates, up nearly 25% y/y and up 87% y/y in the Northeast. The annualized sales rate was the highest in seven years. Weather had been blamed for the sluggish starts, permits and existing home sales, but analysts seemed stumped by the good new home sales, offering explanations based on the limited supply of new homes. Shares of homebuilders got a bump from the data but ended the week more or less flat.

Crude prices retracted most of the losses seen in the first half of March through Thursday. A rebellion by Yemen's Shiite Houthis intensified as the group forced the sitting president to flee the country and took control of the capital. Egypt, Saudi Arabia and other Persian Gulf nations agreed to intervene in the conflict, and the Saudi air force began bombing strategic targets in the country. A ground force is being assembled and may intervene soon. While Yemen has scant oil resources of its own, the conflict is seen as a proxy war between Saudi Arabia and Iran. After dipping below $45 last week, WTI topped out around $52.50 as the Saudis started bombing. Brent rose from lows around $52.80 last week to above $58. Both contracts dipped lower on Friday. US weekly inventory reports didn't help: the DoE report saw the eleventh straight build in oil inventories, with the amount once again widely exceeding expectations.

The beaten-down share of thinly traded rare earth name Molycorp gained nearly 30% on Monday after CBS's '60 Minutes' reported that China has cornered the market on rare earth minerals and highlighted Molycorp's ownership of the only domestic rare earth mine in the US. Analysts cautioned that rare earth metals are neither rare nor expensive, and asserted China's monopoly could easily be broken. Shares of Lumber Liquidators, which have dropped about 60% since a '60 Minutes' exposlast month, got a 10% bump midweek after the Consumer Product Safety Commission made dovish comments on its investigation into CBS's allegations regarding the high toxicity of the company's flooring products.

Kraft Foods and H.J. Heinz are merging in a giant deal that will create the world's fifth largest food and beverage company. Under the terms of the deal, Heinz will return to the public market with a 51% ownership of a new company with $28 billion a year in revenue. Current Kraft holders will own 49%. Kraft's shareholders will receive stock and a special cash dividend of $16.50 per share, financed by a $10 billion investment from Brazil private equity firm 3G Capital and Warren Buffet's Berkshire Hathaway, the two firms that own Heinz. Recall that in 2013, 3G and Berkshire bought Heinz for $23 billion and took the company private. In other news, Lexmark reached a deal to acquire Kofax for $11/share in cash or about $1B, giving the printer firm a stronger position in enterprise software. Friday afternoon, semiconductor names traded higher after a report that Intel is in talks to buy Altera, in what would be Intel's largest ever acquisition.

China HSBC flash manufacturing PMI missed expectations of a 2nd consecutive month of expansion, not only returning into sub-50 contraction but also falling to an 11-month low. HSBC economists cited a renewed fall in total new business and workforce reduction, along with falling import prices as a result of oil-driven disinflation. On Friday, China YTD industrial profits also showed continued decline, falling by -4.2% during the holiday adjusted Jan-Feb period. Given the dearth of evidence for recovery, the Asian Development Bank's 2015 Outlook merely affirmed China GDP forecast of 7.2%, which is still higher than the official target of around 7%. The domestic China Academy of Social Sciences think tank pegged growth for Q1 to slide to 6.85%.

With the one-year roll-off for Japan consumption tax increase fast approaching, both PM Abe and BOJ Governor Kuroda would have preferred to see more concrete signs that their battle to turn back disinflation was yielding results. Instead, Japan's latest nationwide core CPI fell to an 11-month low of 2.0%, while ex-sales tax inflation has actually stalled for the first time in nearly two years. The latest addition to the BOJ board offered a more practical assessment that while remaining committed to the 2% target is important, achieving that goal within the confines of a rigid 2-year timeframe is challenging. Kuroda and Abe also reportedly held meetings early this week amid press speculation of a growing rift between the two men at the helm of Abenomics, with the prime minister supposedly being less inclined to cater to the more fiscally conservative agenda of his advisors.