Oil Prices and Policy Stimulus Hopes Elevate Markets

TradeTheNews.com Weekly Market Update: Oil Prices and Policy Stimulus Hopes Elevate Markets
Fri, 26 Feb 2016 16:13 PM EST

Higher oil prices, soothing central bank/G20 commentary and better US economic data all helped European and US equities climb higher this week. On Friday, the S&P500 tested above the key 1950 level that has repeatedly provided strong resistance over the last several weeks as global markets looked to put the rough start to 2016 in the rear view mirror. Treasury demand remained noticeably firm into month end, especially in light of the improving risk appetite by investors and a string of stronger than expected US data later in the week. Sovereign bond prices did slip on Friday, but have still largely consolidated the safe haven bids seen here in early 2016, keeping the US 10-year around 1.75%. All three of the major indexes closed about 1.5% higher for the week.

Data out this week painted a somewhat confusing picture of the real condition of the US economy. The February preliminary Markit factory PMI reading told us what we already knew: US manufacturing faces very tough sledding. The survey sank to 51.0, its lowest reading since late 2012. But it was Markit's February preliminary services PMI that really freaked people out: the index sank into contraction at 49.8, and Markit Chief Economist Chris Williamson warned the survey data show a significant risk of the US economy falling into contraction in the first quarter. February consumer confidence fell to the lowest level in seven months, with notable declines in the present situation and future expectations components.

On the more positive side, the preliminary January durable goods orders came in at +4.9%, the strongest gain in nearly a year, more than reversing the -4.6% plunge seen in December. The revisions to fourth quarter GDP were a mixed bag, with the headline figure better but spending a bit lower. The second reading of Q4 US GDP defied expectations to the upside, rising to +1.0% from the +0.7% advance figure. Most of the revision higher was attributed to the volatile inventories and trade components. The January personal consumption measure remained very healthy at +2.0%, and personal income accelerated +0.5% from the flat December reading. Core PCE - the Fed's preferred ruler for measuring inflation - was surprisingly strong in January, rising to +1.7% from +1.5% in December, the fastest m/m acceleration seen since late 2012.

January inflation data out of the euro zone suggested the disinflation predicted by ECB Vice President Constancio last week was at hand. The total euro zone measure was a mere +0.3% y/y, while preliminary February readings from Spain, France and four major German states saw negative y/y readings. The readings further strengthened the case for more easing from the ECB next month, even as markets express more and more uneasiness with negative rate policies. The strengthening dollar seen over the prior two weeks continued this week, with the relatively strong US GDP and PCE data on Friday pushing EUR/USD back below 1.0950 and back into the range seen in December and January.

Expectations have been building for weeks if not months that Beijing would be forced to add additional stimulus of some kind in order to deal with the continuing Chinese slowdown. Guessing has focused on RRR cuts, more medium-term liquidity injections and possible fiscal policy moves. There were reports that PBoC staff were recommending the government increase the fiscal deficit to 4%/GDP from the 3%/GDP currently targeted in 2016, although finance ministry officials tempered these hopes. Until Thursday, the Shanghai Composite had remained more or less calm since late January. Tightening liquidity conditions, driven by a spike in short-term money market rates - the overnight repurchase rate spiked by 16 basis points to 2.12% - sparked a 6.4% decline in Shanghai. Interestingly, the sell-off did not travel to Europe and the US, with equities in both regions up sharply on Thursday.

Saudi Arabia, Russia and other major OPEC producers worked hard to consolidate support for the proposed oil production freeze agreement announced last week. Iraq remains non-committal, while Iran ramped up its negative rhetoric. Iran Oil Min Zanganeh called the plan "a joke," while various OPEC officials conceded that Iran might need individual attention in negotiations for a freeze. Parties to the agreement will meet in mid-March to negotiate a formal deal. On Friday, Brent tested as high as $37 and WTI briefly ticked above $34.50 for three-week highs, but by and large prices were well contained within the ranges seen through the month of February.

Cable made fresh seven-year lows every day this week, closing out Friday around 1.3850, forced lower by nervousness about the upcoming referendum on the UK's continued membership in the EU. Political jawboning and constant polling kept the subject of Brexit in headlines, but the biggest development was London Mayor and Conservative Party stalwart Boris Johnson backing the anti-EU camp. Citigroup suggested that Brexit risk rises to 30-40% from 20-30% prior with Johnson's endorsement. Polls were very tight: a BMD/Standard poll on the EU Referendum showed 44% of respondents opting to stay in the EU, while 41% wanted to leave, while a YouGov poll saw 37% in favor of staying versus 38% for Brexit.

Earnings season is winding down with reports from the largest US retailers. Decent results from Macys, Kohls, Best Buy and JC Penny helped boost the shares of a broad spectrum of retail names. Macy's topped its recent guidance for the quarter and offered FY guidance that was slightly ahead of expectations. Comps were down more than 4%, but again this slightly beat consensus views. Kohls raised its dividend and managed to deliver (barely) positive sales comps. Best Buy's comps were negative, although it also launched a big new buyback and raised its dividend. Lowe's and Home Depot both had positive quarters, aided by continuing strength in the housing market. Shares of Hewlett-Packard sold off hard after the firm disclosed ugly revenue declines with its first-quarter results.

After years of negotiations, fallen Japanese titan Sharp reached a deal to sell itself to Chinese firm Foxconn (formally known as Hon Hai Precision Industry) for around $6 billion. But then in a very rapid reversal, shares of Sharp gave up the 15% or so they had gained over the last month on talk the deal was finally closing when Foxconn said it would postpone the arrangement until it had clarified some "new material information" from Sharp, reportedly sizable undisclosed liabilities. Honeywell and United Technologies confirmed press reports that the two companies had discussed a potential merger deal but talks stalled given very significant regulatory hurdles and considerable customer concerns. UTX's CEO went as far as to appear on CNBC to say that a merger with Honeywell just "ain't going to happen." Honeywell confirmed that it had offered $108/shr in cash and stock, and would continue to pursue a combination. London Stock and Deutsche Boerse said they were holding talks about a potential merger of equals, which would create a combined group worth nearly $28 billion.

Barron's Saturday summary: Positive on LGF, SYF, PDCO 

Cover story: The economy is in a growth pause, not the pause before the onset of recession; Favorable fundamentals at this stage in the expansion should dominate, with economic growth running at an annual rate of 2.8% through the first half and 3.2% by the second half. 

Tech Trader: Cable companies are worried about a potential FCC plan to unlock cable boxes, allowing viewers to use devices from other companies to watch TV; Comcast has worked hard to improve its set-top box, and it thinks few of its customers would use third-party devices. 

Trader: Bernie McGinn of McGinn Investment Management says that for the stock market to regain its equipoise, energy and financial stocks need to show strength; Positive on LGF: Many of the studios problems appear to be discounted in the stock price, and shares could rise 50% during the next 24 months just by returning to form; Ned Davis Research says investors should seek out GARP, or stocks offering growth at a reasonable price; among companies meeting the criteria are MOH, WEX, SOHU, AMG, OMF, AAPL, GILD, ESRX, HCA, VMW. 

Interview: Donn Vickrey and Herb Greenberg of Pacific Square Research make a bearish case for BABA, Home Capital Group, and SIG. 

Profile: Neil Hennessy and Brian Peery, portfolio managers, Hennessy Cornerstone Mid Cap 30, discuss their focus on mid-caps that are large enough to weather economic downturns and small enough to be strategically nimble; firm has outpaced 86% of its peers during the past decade (top 10 holdings: CASY, W, SBGI, SNX, HA, INGR, ATO, NVR, OMI, IPG). 

Features: 
1) Positive on SYF: Company has gained 12 points of market share since 2004; shares are down 17% in the past year, but that appears overdone, and they could rise 40% as steady loan growth boosts the P/E multiple; 
2) Austin, Texas-based Hoisington Investment Management has ridden the secular decline in government bond rates and the handsome concomitant rise in bond prices to annual compounded returns of 7.9%; 
3) Positive on LafargeHolcim: Stock price is down amid disappointing earnings and worries about the global economy, but the selloff seems overdone, and shares are likely to rise this year as new opportunities extend the brand. 

Small Caps: Positive on PDCO: Global distributor of dental and veterinary products has simplified operations, and shares are inexpensive for a market leader. 

Follow Up: The year is only two months old, and high volatility and a punishing stock market correction have already taken a painful toll on the most recent predictions made by strategists in Barrons annual market outlook; Positive on AMD: Chip designer should have better days ahead as it launches new high-end desktop chips and moves into the server sector. 

European Trader: Positive on Exor: Italian financial holding company whose assets including FCAU, RACE, and CNHIis a good way to by those companies at a discount. 

Asian Trader: As Chinas bad debt reaches levels not seen in a decade, investors are pondering a crucial question: Do Chinas commercial banks have enough of a capital cushion to absorb all those delinquent loans? 

Emerging Markets: Katie Koch of Goldman Sachs Asset Management says Indias real GDP growth could move from about 7.5% today to 10% within the next several years, but the benefit of the uptick wont be reflected in funds that buy GEMAX. 

Commodities: Gold has defied naysayers with a sharp rally, but the jury is still out on whether the gains will last.

Inflation, Crude Surprises Herald an Early Spring for Markets

TradeTheNews.com Weekly Market Update: Inflation, Crude Surprises Herald an Early Spring for Markets
Fri, 19 Feb 2016 16:10 PM EST

The heightened volatility of early February gave way to slightly calmer global markets this week. The biggest story was the joint effort between Venezuela, Saudi Arabia and Russia to freeze crude production levels and put a floor under the market. A provisional agreement was reached on Tuesday, although without much buy-in from Iran. China returned from the week-long Lunar New Year holiday without any major market upsets and guided the Yuan notably higher, and a handful of more positive inflation and loan data helped calm nerves. More monetary easing looks to be on tap in both Japan and the euro zone next month. Meanwhile in the US, January PPI and CPI inflation readings came in hotter, further complicating the outlook for the FOMC on rates. The week saw the first 3 day rally for US indices this year while Treasury markets largely consolidated last week's move higher keeping the benchmark 10-year yield pegged near 1.75%. WTI can't get much if any traction above $30 and natural gas is fallen back towards the Dec low to trade at $1.80. For the week, the DJIA gained 2.6%, the S&P rose 2.8%, and the Nasdaq added 3.8%.

There were no big surprises in the minutes from the January FOMC meeting. As expected, the committee expressed deepening concerns that the ongoing decline in commodity prices and the rout in financial markets posed more risks to the US economic outlook. However, the members "judged that the overall implications of these developments for the outlook for domestic economic activity were unclear." Markets took the minutes overall to indicate officials are increasingly reluctant to raise rates in March and possibly the first half of 2016. This week Fed fund futures were pricing less than a 50% chance of any further rate hikes this year.

In a bid to stabilize an oversupplied market, Russia and OPEC members Saudi Arabia, Venezuela and Qatar reached a preliminary deal on Tuesday to freeze production at January levels, provided that other major producers followed suit. Iran reacted tepidly to the deal, issuing non-committal statements of support for the agreement while still insisting they would continue to target returning to the pre-sanction level of oil production. Iraq also said it "supported" the effort, but said it would not formally commit to the production freeze until other major producers did. As reports on the negotiations emerged, crude prices had momentary gains - Brent lunged for $36 a few times and WTI almost broke above $32 - however prices closed out Friday flat on the week, without sustaining any of these short-lived gains.

In Japan, the week kicked off with a very weak GDP figure and a huge gain for equities. Fourth-quarter GDP saw its biggest drop in 12 months, as the headline q/q figure hit -0.4% and the y/y measure was -1.4%. The bad news further strengthened expectations that the Bank of Japan would be forced to offer more stimulus, driving the Nikkei up 7.2% on Monday, its biggest one-day gain in three years. PM Abe's advisor Honda addressed the terrible GDP print later in the week, noting that in addition to possibility of more BoJ policy easing, he would also recommend a fiscal stimulus package of around ¥5T and also the postponement of the second round of sales tax increase until April 2019. Subsequent press reports indicated that Abe was not keen on more government stimulus or delaying the tax increase. USD/JPY had lifted off the 15-month lows around 111 last week, weakening to 114.8 early this week, then strengthened back to around 112.50 by Friday.

The Shanghai Composite played catch-up with last week's global volatility as it reopened for trading after a week-long break for the Lunar New Year holiday, falling more than 2% on Monday. However, some less bad economic data through the week helped lift the index and dispel some anxiety about China's economic prospects. January new loans hit a record high level and the January M2 money supply hit a 19-month high, although analysts rightly point out that this came as the PBoC pumped record amounts of liquidity into the system ahead of the holidays, fearing an epic cash crunch. Moreover, many expect these positive reports will not likely diminish the chance of another RRR cut sometime in the first quarter. January CPI rose at a healthy +1.8% y/y rate, a five-month high, driven mainly by higher food prices. The data hinted that persistent disinflationary forces may be waning, but many analysts said much of the better data could be ascribed to seasonal holiday factors.

It is looking more and more likely that the ECB will ease monetary policy again at its March meeting. Multiple ECB speakers addressed the issue in speeches this week. Draghi reiterated that the subject would be under consideration at the meeting, and added that Europe is facing significant challenges and increasing concerns about the global economy. ECB Vice President Constancio said action would be taken if it was determined that conditions have delayed the expected rise in inflation later this year, warning there could be another bout of disinflation in the first half of 2016. The Bank of Italy's Visco had the strongest take, calling on the ECB to act pre-emptively before a dramatic fall in inflation expectations took hold.

The European Union's negotiations with the UK crept closer to a deal to keep Britain in the union. UK PM Cameron held all-night negotiations on Thursday with top EU officials and a handful of leaders with specific objections to the draft text, mostly concerning welfare payments to immigrants. By late Friday, reports indicated a tentative deal had been reached. The UK referendum on EU membership will likely take place in mid-June, and a TNS poll out on Friday showed 36% of respondents said they would vote to leave the EU while only 34% said they would vote to remain in the union. Separately, Greece and its European creditors continued negotiations over bailout compliance, and managed not to produce any more of the market-moving headlines seen last week.

Mexico's central bank took action to shore up the peso, delivering a surprise rate hike on Wednesday. Banxico raised its overnight rate by 50 bps to 3.75% at an intra-meeting decision and said that peso weakness was threatening inflation expectations, forcing action. Recall that Banxico raised rates at a scheduled meeting back in December for the same reason. USD/MXN has plunged about 9% this year and more than 30% over the past year and a half to record lows, the biggest losses against the dollar among leading emerging market currencies in the current cycle. As a major oil producer, Mexico has been battered by falling oil prices, which Banxico Governor Carstens also discussed in justifying the move. USD/MXN gained 4% in the wake of the decision. Separately, the Bank of Korea held rates steady at its scheduled meeting, but the bank issued a statement warning that recent won currency weakness was "excessive" and warned against intensifying "herd behavior."

Earnings season is slowly drawing to a close, with the major retailers among the last to discloses quarterly results. Shares of Walmart closed out the week down 2.5% after it disclosed y/y declines in earnings and revenue, and a FY outlook that was weaker than the qualitative view offered at the annual investor day last fall. Sales comps were lower than expected.

In a long-expected development, Yahoo's board has formed a committee to explore strategic alternatives. The company has hired advisors, and said one focus will be the Alibaba sale via a reverse spinoff. Recall that earlier this month, the company launched a fresh round of restructuring, including a plan to lay off 15% of the workforce. Reports have indicated that close to two dozen public and private firms have expressed interest in various Yahoo assets and on Friday the board is said to have started returning some of their calls.

In M&A news, home security firm ADT agreed to be acquired by Apollo Global Management for nearly $7 billion, or $42/share in cash, a 56% premium the prior closing price. Apollo intends to merge ADT with another home security firm it owns, Protection 1. Chinese aviation and shipping conglomerate HNA Group reached a deal to buy electronics distributor Ingram Micro for about $6 billion, or $38.90/share in cash. This is the latest in a string of overseas buys by Chinese companies, which have been aggressively splurging on foreign acquisitions to sidestep slowing domestic growth.

Barron's Saturday summary: Positive on DWN.DE, CUB, ESL, KEY, BMY; Cautious on VIA, LNKD, JPM, RACE, CS 

Cover story: The rise of Donald Trump and Bernie Sanders in the presidential race "could be one more reason why stock markets are under pressure and could remain so for awhile"; Investors, who are generally more comfortable with establishment candidates, have reason to be nervous about the campaign's direction. 

Tech Trader: Amid the recent rout in the tech sector, mega-cap companies such as AAPL, CSCO, GOOGL, and FB remain powerful in their markets, while smaller players such as QLIK, DATA, and LNKD are feeling the pain, partly because of high valuations and expectations. 

Trader: When the Chinese market gets back in the swing of things next week after the Asian New Year break, there could be volatility if growth slowdown fears return; Cautious on VIA: Nothing much is likely to change at the company as long as Sumner Redstone remains a presence, and long-term oriented investors who find the shares attractive because they're undervalued may have to wait some time for a payoff; Cautious on LNKD: Amid skepticism and worry in the tech market, company's growth is likely to keep decelerating, shares remain overvalued, and margins are declining. 

Profile: Mammen Chally, lead manager, Hartford Core Equity fund, looks for three traits in a company: improving quality via capital structure or competitive situation; business momentum; and lower-than-average valuation (top 10 holdings: GOOGL, MSFT, CVS, JPM, COST, MDLZ, AAPL, AGN, MO, PNC). 

Interview: Don Morgan, chief investment officer at Brigade Capital, says the risk/return ratio in the bond market is favorable relative to other asset classes, and that high-yield bond prices could rise sharply (picks: Albertson's 7.45% due 2029, AMD 7.75% due 2020, Consol Energy 5.875% due 2022, Savine Pass (Cheniere) 5.75% due 2024, Puerto Rico 5% GO due 2041). 

Features: 
1) Positive on BMY: Company's cancer-fighting medicine Opdivo has earned FDA approval and has the potential for $8-9B in annual sales, making the pharma giant's shares a good bet for long-term investors; 
2) Positive on KEY: Shares of bank look cheap by historical standards, and its acquisition of FNFG could prove more lucrative than investors expect; firm's 2.9% dividend payout could go up this year, and shares could return 30% or more; 
3) Positive on CORE: Wholesale distributor is benefiting as the stores it serves see more foot traffic, but its customers remain vulnerable to growing competition from WMT and DG, and to the severity of tobacco-sale restrictions. 

Small Caps: Positive on CUB: Shares of the maker of fare-collections systems for transit services have fallen, but the resultant selloff looks like an overreaction, and a buying opportunity for investors; Positive on ESL: Selloff following a poor earnings report in February offers an opening for investors; company has an attractive franchise, and an activist investor could take interest. 

Follow-Up: Cautious on JPM: Chief Jamie Dimon's decision to buy shares gave them a boost, but investors in the banking sector still worry about potential problems in the global economy and trouble with European firms; Cautious on CS: Despite a plunge in shares, bargain hunters should take a pass and seek safer firms that trade cheaply; the bank continues to face heat from regulators related to tax evaders; Cautious on RACE: Shares are selling far below their IPO price, and are likely to stay there until the bull market returns. 

European Trader: "Bloodletting in the European banking sector may not be over despite last week's brutal selloff," and uncertainty remains amid negative interest rates and other issues in the eurozone; Positive on Deutsche Wohnen: German property stock is worth a look for investors. 

Asian Trader: Some investors wonder if all the bad news in Thailand is already reflected in the market, paving the way for bargain hunting, but that view is premature. 

Emerging Markets: Venezuela's "political disarray and shortage of dollars have put its bonds in a tinderbox," and though default may not be imminent, many observers see it as an eventuality. 

Commodities: Orange juice is no longer the consumer staple it once was, and a case can be made that its futures market "will go the way of the dodo." 

CEO Spotlight: UA founder and chief executive Kevin Plank says the "athleisure" trend is here to stay, and that the company plans to expand internationally to ease its dependence on North America and gain ground on rival NKE

Everybody's Going Negative

TradeTheNews.com Weekly Market Update: Everybody's Going Negative
Fri, 12 Feb 2016 16:16 PM EST

Volatility shook global markets this week as participants grappled with a non-stop series of confidence-shaking developments. In Europe, jitters about the solidity of bank capital levels drove shares of Deutsche Bank down as much as 10% at one point and undercut broader equity indices. Meanwhile, Greece appeared to backtrack on pension reform commitments, compounding the worries about Europe. In the US, Fed Chair Yellen's Congressional testimony revealed little about the chances of more rate hikes this year, however her words of caution about the US economy added weight, strongly inferring the Fed will keep rates on hold in March. The dollar weakened further as markets all but priced out the chances of Fed hikes this year, driving the biggest monthly decline in USD/JPY since Oct 2008 and further strength in the euro. Mainland Chinese markets were closed all week for the Lunar New Year, but on Thursday, Hong Kong's Hang Seng opened for trade and plunged 3.9%, catching up with the western selloff. Crude prices hit 15-year lows on talk that an OPEC/non-OPEC production deal was dead, then saw 10% gains Friday on talk the deal was back on, whipping around energy stocks along the way. Concerns about the banking sector drove gold prices to a one year high, briefly rising above $1260 while Treasury yields tumbled. The US curve reached its flattest levels since 2008 when the spread between the US 2 and 10-year yields fell below 1.00%. For the week, the DJIA slumped 1.4%, the S&P dropped 0.8%, and the Nasdaq lost 0.6%.

During her two days of Congressional testimony, Fed Chair Yellen repeated her firm stance that it would be premature to draw any conclusions about deteriorating market conditions or make judgements about what the Fed might do in March. However, she affirmed that market conditions would play a big role in the March decision. Regarding the strength in employment, Yellen cautioned that job creation has been skewed toward lower paid sectors, with the data giving only tentative signs of wages rising.

In light of moves by the BOJ and ECB, Yellen was asked repeatedly whether negative rates were in the realm of the possible for the Fed. She would not rule out the use of negative rates as part of the Fed toolkit if conditions worsen, but said the issue required more study. Interestingly, Yellen disclosed that the Fed had considered going negative in 2010 but decided it wouldn't be the best course at that time. As of Friday, Fed fund futures were pricing only about a 25% chance of one rate hike in December.

The greenback continued to weaken against its major pairs as markets pushed forecasts for Fed hikes out further and further. Meanwhile, flight-to-safety and the unwind of the short yen/long Japan stocks trade continued to drive the yen higher; the currency has gained nearly 9% against the dollar since the BoJ adopted negative rates in late January. USD/JPY dropped to 15-month lows early on Thursday, drawing strong verbal intervention from Japanese officials. As the pair dropped below 112, there were rumors the BoJ was checking rates - marking the first intervention by the bank since summer 2014 - then on Friday BoJ Chief Kuroda and various cabinet officials met to discuss the situation. USD/JPY rose off the ~111.00 lows on the verbal intervention, but not by much. The euro also kept gaining against the dollar, with EUR/USD nearly reaching 1.1400 on Thursday, for fresh four-month highs.

China's foreign reserves decline was nearly as bad as expected in January, confirming fears that Beijing is rapidly burning through cash in its attempts to prop up the yuan and the Chinese economy. Total reserves fell for the third straight month to a three-year low in January, although the decline of $99.5B was less than the record high $107.9B in December. The total reserves stand at $3.23 trillion, however analysts estimate that liquid, accessible reserves could be as low as $2 trillion. Noted China skeptic Kyle Bass said that the nation's liquid foreign reserves were already below a critical level and China's back was already up against the wall. With Chinese markets closed all week for the Lunar New Year, there were no yuan fixings, although the offshore yuan rose to a two-month high of 6.5272.

Sweden's Riksbank unsettled markets at its scheduled policy meeting on Thursday by cutting rates even further than expected into negative territory. The central bank cut its main repo rate by 15 bps to -0.50% (expectations were for a 10 bps cut) and commented it felt forced to act because of "weakening confidence" in achieving its inflation target of 2%. There was a familiar split in European sovereign rates after the move, with core UK, German and French 10-year yields dropping to fresh record lows, while peripheral yields moved higher.

The Greece crisis has returned to headlines, providing a familiar source of deep uncertainty for European markets. On Friday, February 5th, talks on the ongoing Greek pension reform process between Athens and its European creditors ended on a very bad note. On Monday, the Athens stock exchange fell nearly 9%, dropping to its lowest level since 1990, its fifth consecutive day of losses. The creditors said the budget gap for 2016 was too big and the government had no credible strategy for fixing the deficit. Greek officials were still stonewalling their European partners as of Friday. Yields on the sovereign debt of Spain, Portugal and Italy follow a predictable pattern, as peripheral debt sold off.

Peripheral jitters were not the only problem for Europe this week, as contingent convertible bonds (CoCos) emerged as a big worry for the banking sector. On Monday, Cantor Fitzgerald published a note overflowing with concerns about Deutsche Bank's CoCos, which carry relatively high yields and allow the bank to skip payments and in certain cases convert the notes to equity in times of stress without causing a default. Cantor and others are worried that market shocks might force European banks to stop paying coupons, and investors have been dumping the instruments over recent weeks, undermining confidence in bank capital levels and sending certain bank CDS much higher. Frankfurt-traded shares of Deutsche Bank tanked 12% in the two days after the Cantor note, then gyrated up and down in double digit percentage moves through the week as rumors circulated that the bank would buy back billions in senior debt. The $5.4 billion tender was officially announced on Friday, and shares of DB firmed up. Shares of other major banks followed DB higher, and they were also helped by a report that JP Morgan CEO Jamie Dimon recently bought 500K shares of his own bank's stock.

Shares of the second largest natural gas producer in the United States, Chesapeake Energy, collapsed on Monday after reports made the rounds that the firm had hired Kirkland & Ellis, a law firm that specializes in restructuring. The company issued a statement asserting that Kirkland & Ellis LLP has served as one of the firm's outside counsels since 2010 and claimed the company has no plans to pursue bankruptcy. But the damage was done: shares of CHK fell 50% on Monday and only recovered a fraction of the loss through Friday as commentator suggested some form of bankruptcy or restructuring is the most likely outcome given the firm's huge debt load. Meanwhile, Anadarko cut its dividend 82% to conserve cash.

Earnings season is about 2/3 over at this point, with the bulk of the DJIA and S&P500 components out of the way. Disney fell 4% to 12-month lows despite widely topping earnings and revenue expectations, as investors zoomed in on shrinking ESPN profit levels. Coca-Cola's organic revenue declined y/y while its total concentrate sales fell 3%, however profits held up thanks to higher pricing. Cisco saw 10% gains on the week after its net income rose more than 25% y/y and earnings topped expectations. Tesla disclosed a big loss in its fourth quarter, however the firm's ambitious 2016 deliveries forecast and solid Model S deliveries more than made up for it. Twitter hit new all-time lows after disclosing very poor fourth-quarter user growth metrics. Mylan tanked 20% after its earnings miss and announcing it agreed to pay nearly $10B for Sweden's Meda.

Barron's Saturday summary: Cover predicts oil could drop to $20/bbl and then rebound sharply; positive on CELG, GILD

Cover story: "Oil could fall as low as $20 a barrel in the first half of this year, recovering to $55 by year end. That could help drive stocks, which have closely followed oil prices, much higher"; Stock traders "may be subscribing to the misguided belief that low oil prices are signaling imminent global recession."

Features:
1) The Barron's/Lipper Fund Family ranking for 2015 is topped by Sit Investment Associates, Eaton Vance, and Thrivent Financial;
2) Positive on CELG, GILD: Companies rely on a few closely related medicines for the bulk of their income, but they are profitable and the recent drop in the sector creates a buying opportunity; shares of each could trade 30% higher during the next year;
3) Kevin Kaiser of Hedgeeye, whose short bets on KMI, LINE, and CHK have paid off, says the worst may not be over for master limited partnerships, which continue to face a number of challenges.

Technology Trader: The plunge in tech shares such as CRM, WDAY, and NOW shows that cloud-computing companies aren't immune to macroeconomic conditions, which are weighing on corporate budgets, though even after Friday's drubbing their shares remain high; Cautious on INFN, ANET, FNSR, CIEN, AVGO: It's unclear whether companies that supply the infrastructure for cloud computing will suffer as the market loses faith in that sector's growth.

Tech Trader: Non-cyclical companies, including staples and utilities, are on track to show 4.3% earnings growth this year, and domestic companies are vastly outperforming international ones; Cautious on CHD: Maker of Arm & Hammer and other consumer brands is vulnerable to competitive pressure in its core markets from rivals such as PG, and share remain pricey; Positive on TMO: Shares of world's largest scientific equipment maker are down, but a boom in research funding and smart acquisitions could lift them 25% in the next year.

Interview: Ed Yardeni of Yardeni Research says the Fed "is focused on just two mandates-the unemployment and inflation rates-but is averse to thinking about foreign exchange and global credit markets."

Profile: Raman Srivastava, portfolio manager, Dreyfus/Standish Global Fixed Income fund, which has benefited from a hefty weighting of developed-country government bonds and a low quotient of riskier high-yield and emerging-market bonds (top 10 government bond holdings: Australia 2018, Italy 2024, Australia 2025, Japan 2044, Canada 2024, Australia 2019, Italy 2019, Korea 2025, Australia 2024, Germany 2046).

Small Caps: Positive on TOWN, SBCF: Though shares are down, small banks are benefiting from industry consolidation, and with a rebound their stock should generate healthy returns.

Follow-Up: Positive on AMZN: Share price "looks reasonable relative to the profits analysts expect Amazon to make by the end of the decade"; Cautious on GPRO: Barron's continues its contrarian stance on the camera maker; an acquisition by AAPL is unlikely, but SNE or UA could bite, though there's a good change once acquired the brand would cease to exist; Positive on VNTV: Payment processor should continue to benefit as more merchants embrace the EMV standard, and shares could have 15% upside.

European Trader: Positive on ITV: London-based broadcaster should see increased ad revenue, and it has several potential avenues for growth; EPS could climb this year at a double-digit rate.

Asian Trader: Hong Kong continues to face problems, and as a global financial center, it imports volatility from the U.S. and China, two largely uncorrelated stock markets.

Emerging Markets: Argentina's problems are far from over, but reform-minded president Mauricio Macri has devalued the peso, cut energy subsidies, and secured financing to reduce the deficit.

Commodities: Cocoa has fallen this year amid the general drop in commodities, though it managed to buck the trend until last year's third quarter, and any rebound is likely to be small.

Streetwise: Chinese companies can't make acquisitions in "strategic" U.S. industries, but there are still a wide range of options; potential targets include JOY, TRN, GBX, EMR.

Markets Reprice Fed Policy Forecasts

TradeTheNews.com Weekly Market Update: Markets Reprice Fed Policy Forecasts
Fri, 05 Feb 2016 16:09 PM EST

After two weeks of moves sideways or higher, most global equity markets resumed the downtrend seen in early January. The big exception was the suspiciously calm Shanghai Composite, which eked out a modest gain ahead of China's Lunar New Year holiday week and was much less volatile than in recent weeks. With central bank largess pacifying most of Europe and Asia, concern about the US played a central role. The dollar saw its biggest weekly decline against the index since 2009, while US treasuries rallied and the 10-year UST yield sank as low as 1.790% on Wednesday, its lowest level since last February and within half a percentage point of the record low of 1.380% seen in 2012. Analysts reoriented their forecasts on Fed policy moves, with many suggesting only one or two rate hikes may be possible this year. Lower interest rates slammed US banks, as shares of a raft of major US financials hit 52-week lows. Commodity prices broadly lifted outside of energy, on the outlook for lower rates allowing the beaten down global materials stocks to enjoy a modest rebound. Gold moved back above the 200-day moving average for the first time since November while the mining stocks saw big outperformance. Weak earnings results from many oil and tech names provided no relief and for the week the DJIA lost 1.6%, the S&P fell 1.3%, and the Nasdaq plunged 5.4%.

Markets recalibrated their outlook for Fed monetary policy this week, helping to weaken the greenback. In a note published on Tuesday, Goldman Sachs pushed its forecast for the next Fed interest rate hike out to June from March, and lowered its view for the number of increases this year to three from four. On Wednesday, New York Fed Governor Dudley acknowledged that conditions were worse now than they were in December when the FOMC delivered its first rate hike, but also stated the FOMC was not ready to draw very many conclusions about policy right now. Dudley's cautious comments about the strong dollar also helped momentum. The closely-watched dollar index fell more than 3% on the week and gave up all its gains since late October. EUR/USD climbed more than three big figures on the week - rising from 1.0850 to around 1.1200 - putting the dollar at its weakest level against the euro since last fall, when the ECB began hinting about additional QE measures and tanked the single currency.

Key US January data raised tough questions about the state of the domestic economy. The ISM manufacturing PMI remained in contraction territory for the third month in row, while the employment component dropped to its lowest level since June 2009 (45.9 vs 48.0). Services PMIs deteriorated, with the Markit reading dropping to its lowest point in the series in 27 months and the ISM data at its weakest since March 2014. The January US jobs report was a mixed bag: the nonfarm figure was +151K, well below expectations and the weakest total since the +149K gain in September, while the December nonfarm figure was revised down by 10% to 262K. On the other hand, unemployment declined to 4.9%, pushing the economy even closer to full employment. Hourly earnings were materially higher, giving the Fed some of the wage inflation it has been looking for.

Global interest rates descended after the Bank of Japan's move to negative interest rates late last week. Two-year yields fell to -0.5% in Germany and -0.2% in Japan, where the 10-year yield touched 0.025%. The sugar high felt by the yen wore off quickly, as USD/JPY dropped back to the 116-118 area it had been occupying in the weeks leading up to the BoJ decision, off the 121.50 area. BoJ Governor Kuroda spoke extensively about last week's decision, stating that just because negative rates were adopted it does not mean the bank is out of ammunition to expand asset buying. Kuroda said he is still concerned that inflation expectations will weaken in medium term, but for now saw the economy recovering moderately. He reiterated the BoJ is prepared to push further into negative rates, if necessary.

Crude prices were volatile this week, and despite the snapback on dollar weakness remained below last week's highs. Coming into the week, prices dipped on the weak China manufacturing numbers and a round of denials that an emergency OPEC meeting would be taking place. WTI sank around 11% to below $29.50 and Brent dropped 10% to $32.30 on Monday and Tuesday as hopes for coordinated production cuts were crushed. OPEC and Russia January production reports showed modest growth in output, further pressuring prices. Russia pumped the equivalent of 18.9M bpd, +1.5% y/y, a post-Soviet record. The plummeting dollar revived prices briefly, but both contracts were well off their highs as the week drew to a close, with Brent around $34/bbland WTI below $31/bbl.

After the market volatility last August and this January, China's FX reserve levels have become a point of concern for broader markets. The December data showed the biggest monthly decline on record in Chinese reserves. For 2015 overall, reserved declined $513B, the biggest annual drop ever. The January report drops over the weekend, and expectations are for another record drop by more than $100 billion, to a total of $3.2 trillion. While this number is almost unimaginably huge, some analysts suggested that markets would start to worry if the total dropped to $2.8 billion or less, as the PBoC could be forced to let the yuan slide lower with dramatic consequences. Needless to say, the softer dollar gave the Chinese breathing room in their struggle to manage the yuan this week.

The BoE's Monetary Policy Committee returned to unanimity for the first time since last July, voting 9-0 to keep interest rates on hold at record lows. McCafferty, the MPC's only real hawk, switched his vote to the majority and conceded to the data, noting that the pick-up in wage growth has been more muted than expected. And while the committee also cut its economic growth outlook over global growth concerns, it also stated that a rate hike would be more likely than not over the forecast period. At his press conference, Governor Carney said the committee did not discuss negative interest rates and reiterated that the whole MPC believes the next rate move likely higher, not lower. Cable leaped to one-month highs after the decision, testing briefly above 1.4650 before dropping to 1.4470 on Friday.

The Q4 earnings season is in full bloom but results have not been a boon for the equity markets. Results in the tech sector included some notable disappointments. GoPro sales bombed during the holiday quarter and guidance was even worse as management said they would need the next quarter to clear out excess inventory. Executives promised a simplified product line and a focus on developing better software would improve the user experience and future results. Renewing a commitment to long term thinking, they also said they would no longer give quarterly guidance. Yahoo reported another lackluster quarter, and CEO Meyer announced her latest underwhelming turnaround plan. She confirmed reports that the board would review alternatives for the core internet business, but gave every indication that she is not in favor of the idea. On Friday, shares of LinkedIn traded down 40% after earnings and very weak guidance caused analysts reconsider their valuation of the stock.

Among the most notable earnings out this week were results from the global oil majors. BP's fourth-quarter earnings plunged 91% y/y, with its key "underlying replacement cost profit" metric falling to $196 million from $2.2 billion. For 2015, BP saw an annual loss of $5.2 billion compared with a profit of $8.1 billion a year earlier, worse than the $4.9 billion loss in 2010, when BP was battered with write-downs and charges related to the Gulf oil spill. Exxon's quarterly results were better than expected, although profits fell more than 50% y/y and revenue was down sharply. ConocoPhillips bent under balance sheet pressure, slashing its dividend by 66% after its net losses steepened dramatically on a y/y basis. Royal Dutch Shell saw its profits cut in half y/y, while revenue fell slightly less than 50%, although its preliminary report two weeks ago prepared markets for the slump. Norway's Statoil saw profits shrink 44% y/y.

In deal news, Abbott agreed to pay $56/share in cash to acquire over-the-counter testing kit firm, Alere. The offer represented a huge premium of more than 50% over Alere's prior closing stock price. The total deal is valued around $5.8 billion. Just two weeks after News Corp quashed rumors it was pursuing Twitter, new reports circulated that private equity firms were working on a deal to take Twitter private. Six months after Syngenta said no to a $47 billion takeover attempt from Monsanto, the Swiss ag firm has said yes to a $43 billion offer from state-owned China National Chemical Corporation. The transaction would be the largest acquisition of a foreign company by a Chinese business and the latest in a string of deals by the company, known as ChemChina.

Barron's Saturday summary

Barron's Saturday summary: positive on CTRP and on the banking sector 

Cover story: With the recent selloff, the banking sector looks like one of the best bargains in the market, and with strong balance sheets and low share prices, bank stocks probably have 20% upside (Positive on BAC, C, JPM, WFC, GS, MS, BBT, PNC, STI, USB). 

Features: 

1) Positive on ADSK, AKAM, WDC, SNADK, LRCX: The tech sector has taken a hit during the recent market turmoil, creating a number of bargains, of which these five stocks present good opportunities; 

2) Positive on CTRP: Chinese online travel company is more dominant in the country-where travel spending is up despite trouble in some parts of the economy-than PCLN and EXPE; Ctrip's acquisition of rival QUNR should give it a major boost; 

3) Brian Davis of Davis Capital Management, who won Barron's 2015 forecasting challenge, thinks we're in transition from a bull market to a bear market.

Tech Trader: Cautious on AAPL: Company "is up against the law of large numbers," such that even a strong business like the iPhone "is challenged to add to the top line year after year"; Despite clamor from pundits, Apple should resist "engaging in dubious M&A" to appease impatient investors; Apple lags peers in cloud computing, and needs to make more meaningful progress in that area. 

Trader: "Some investors might see two up weeks in a row as a turning point, but if that were true, then why did defensive sectors-such as telecom, utilities, and consumer staples-make up three of the top four sectors last week?"; Cautious on VIA: Media company faces problems, including stagnant revenue growth and high debt, but some of its unique assets are undervalued, and it has plenty of content to counter cord-cutting; Positive on VRTU: Electronic market-maker "benefits in the short term from big market gyrations," but its long-term potential is strong as more international asset classes move towards electronic trading.

 Barron's Roundtable, Part 3: Picks from Scott Black of Delphi Management (TSQ, FL, LRCX, MYL, USB); William Priest of Epoch Investment Partners (CVS, SYF, NRE, VOD); and Meryl Witmer of Eagle Capital Partners (AXTA, Tessenderlo Chemie, NVGS). Profile: Sharat Shroff, portfolio manager, Matthews Pacific Tiger fund, looks for opportunities tied to consumer strength in healthcare, insurance, and the Internet, while steering clear of exporters and commodities (top 10 holdings: Naver, BIDU, Orion, Dongbu Insurance, Kotak Mahindra Bank, DKSH Holding, Central Pattana Public, Ping An Insurance Group, Tata Power, Amorepacific). 

Small Caps: Cautious on FELE: Manufacturer of water-pump systems has seen a drop in demand and taken a hit in international markets because of the strong dollar, but things aren't likely to get worse, and a rebound could be in the works. 

Follow-Up: AIG chief Peter Hancock says he wants to create a sustainable business model, but he needs to deliver returns to shareholders sooner rather than later; YHOO is under growing pressure to solicit bids for its Internet business, and investors who hold on have "a nice margin of safety" as they wait for a breakup or sale. 

European Trader: "January's market downturn offers an opportunity to shop for European bargains in February"; Good values include Ryanair Holdings, easyJet, Barratt Development, Persimmon, Berkeley Group Holdings, NN Group, Direct Line Insurance Group, VOD, Royal KPN, and Deutsche Telekom. 

Asian Trader: Cautious on Softbank: Company is worth less than its 32% stake in Chinese online retailer BABA, with its holdings in S causing much of the trouble.

 Emerging Markets: "As the Fed raises rates, boosting the dollar, currencies in many commodity-driven economies will remain vulnerable," though the Mexican peso and the Russian ruble could be exceptions. 

Commodities: Platinum continues to lose its luster after peaking in 2008, and doesn't appear poised for a good year because production hasn't slowed down. 

Streetwise: Retailers like CONN that do business in energy-dependent states such as Wyoming, North Dakota, and Texas face growing concerns; Conn's also depends heavily on providing financing to customers, making its situation more precarious. 

Fed Cautious, Japan Less Than Zero

TradeTheNews.com Weekly Market Update: Fed Cautious, Japan Less Than Zero
Fri, 29 Jan 2016 16:19 PM EST

Steadying crude prices and another bout of central bank cajoling helped global equity markets stabilize this week. The Bank of Japan surprised markets by putting interest rates into negative territory for the first time ever, joining the ECB and various other European central banks. Voting 5-4 in favor of the measure, the BOJ announced that it will charge a rate of -0.1% for excess reserves parked at the bank by financial institutions, and implied that lower oil prices made its decision necessary. At the scheduled meeting on Wednesday, the US Federal Reserve left the door open to a March rate increase despite acknowledging that "economic growth slowed" since its last meeting in December. Meanwhile, the PBoC pumped cash into the Chinese economy and continued its streak of very gradually strengthening the yuan exchange rate. Stocks continued to be to be very volatile, and by Friday the DJIA posted its eighth straight day with a triple digit move. For the week, the DJIA gained 2.3%, the S&P rose 1.7%, and the Nasdaq added 0.5%.

Global interest rates dipped on the news the BOJ was going negative. The 2-year US Treasury yield dropped to a 3-month low while German short rates forged further into negative territory. Fed fund futures found buyers after the FOMC statement on Wednesday and remained bid through Friday, with many acknowledging it will be even harder for the Fed to gradually take rates higher if major Central Banks around the world keep their foot on the stimulus pedal. The Dollar rallied 2% against the Yen and 1% against both the Euro and Pound on Friday further complicating factors.

The FOMC offered more cautious language in its statement, warning that economic growth slowed late last year, after previously describing the expansion of economic activity as moderate. Further, the statement abandoned its balanced outlook language ("the committee sees the risks to the outlook for both economic activity and the labor market as balanced") and said inflation would "remain low in the near term." On the positive side, the Fed noted further improvement in labor market conditions. Analysts said the changes reflected a more cautious outlook, but hardly ruled out more rate hikes. Friday afternoon Dallas Fed President Kaplan clarified that the message from FOMC statement was that more time is needed to assess global situation. He said the committee has good reason to be patient on rate decisions, and that the number of rate hikes this year is not locked in.

Heading into Friday's BoJ decision, expectations had been piling up for Kuroda and company to respond to softer economic data. The final straw were the lower inflation rates seen in the Japan and Tokyo January CPI prints - particularly in the forward-looking capital region - along with bigger than expected declines in household spending and industrial output. Echoing Mario Draghi's famous phrase, BoJ Chief Kuroda said the bank was prepared to do "whatever it takes" to achieve its 2% inflation target, and that the bank would go even deeper into negative territory if needed. In addition, the BoJ cut its FY16/17 CPI projection to 0.8% from 1.4% prior but maintained its FY17/18 forecast at 1.8%, noting that the assumptions were based on oil prices rising to over $40/bbl by 2018.

The PBoC used liquidity injections ahead of the lunar New Year holiday to add the most funds to the Chinese financial system in three years to help stem the seasonal cash crunch. The bank auctioned a total of 590 yuan or nearly $90 billion in reverse repos in two auctions. The PBoC has signaled its preferences for such lending and liquidity operations in place of RRR cuts, although officials also said this week that RRR cuts can still be used, if needed. Meanwhile, as of Friday the PBoC has strengthened the yuan midpoint for 15 consecutive sessions. Analysts suggested that the BoJ move would put heavy pressure on the Chinese to resume devaluation of the yuan.

Russia and OPEC began the painful process of admitting that oil prices have sank too far and that something must be done to put a floor under the market. There were reports from mid-week that OPEC was considering a meeting with major non-OPEC producers to discuss the market and possibly attempt to get all parties to agree to equal, coordinated production cuts. One report suggested the Saudis wanted everybody to cut 5% of production. OPEC officials downplayed the reports, but did say the door was open to cooperation. Iran could dampen the chances of a broad producer agreement, as Tehran appears focused on restoring its oil industry to pre-sanction production levels. The reports helped WTI test above $34 on Thursday and Friday, while Brent managed to test above $35/bbl.

Another January regional manufacturing report surprised to the upside, offering a glimmer of hope for the battered US manufacturing sector. Earlier in month, the New York Fed's January Empire survey hit its lowest level since the depths of the recession in early 2009, while the Philly Fed manufacturing index improved significantly on a m/m basis, but remained in negative territory. On Friday, the Chicago PMI saw its biggest m/m rebound in decades, rising back into expansion territory at 55.6 from a six-year low of 42.9 in December. The new orders component of the barometer jumped to the highest level in a year, while production also surged. The December durables report was much less positive, with the headline figure down 5.1% - the biggest monthly drop since mid-2014 - following a 0.5% decline in November. Orders for nondefense capital goods (ex-aircraft) - a key proxy for business investment - plummeted 4.3%. Analysts suggest that the headline loss was mostly due to big declines in the very volatile aircraft orders category, while the nondefense capital goods slip was largely concentrated in the oil and gas sector.

Among the most notable stories out of earnings season was the extreme volatility hitting elite tech stocks. Shares of Amazon rose 9% ahead of its report on Thursday afternoon, then plunged 13% after market as profits widely missed expectations (nearly every other metric telegraphed excellent and sustained growth in Amazon's various businesses). There was no run up ahead of Apple's results, as most observers expected the company to offer disappointing iPhone sales, although the reaction to modest miss (74.8M v 76Me) was compounded by the firm's typically conservative forward revenue guidance. Shares of Apple were down around 8.3% on the week by Thursday afternoon. On the positive side, Facebook gained 15% to a new all-time high on big double-digit gains in daily and monthly active users, and a 57% y/y gain in ad revenue. Microsoft was up 5% on modest outperformance in its second quarter, even as net income and revenue slipped lower y/y.

Johnson Controls agreed to combine with Tyco, in a deal that appears to be chiefly engineered as a tax inversion to move JCI to Ireland and lower its corporate tax rate. Shareholders of Johnson Controls will own about 56% of the combined company and Tyco holders will own 44%. After a tangled, months-long, three-way merger drama, Nexstar has secured a deal to acquire Media General for more than $2.1 billion. Meredith Corporation bowed out from its own attempt to combine with Media General, in exchange for a $60 million breakup fee and a first look at some of the divestitures that may be required to get Nexstar's Media General deal done. Media General agreed to be acquired for $10.55 a share in cash and 0.1249 of a share of Nexstar common stock.

Barrons Saturday summary: Positive on IP and NWL
Cover story: Barron's Roundtable Part 2 has picks from Abby Joseph Cohen (PHG, ABBV, MYL, SIG, LOW, Bharti Airtel, Ocado Group), Felix Zulauf (Buy: CME 90 Day Eurodollar Future, U.S. dollar/short offshore Chinese yuan, U.S. dollar/short Korean won, U.S. dollar/short Taiwan dollar; Short: EEM, CME S&P 500 Index Future, IBEX 35 Index Future, EWS, German Stock Future Index, Euro STOXX 50 Future), Mario Gabelli (MSG, GFF, GPC, MIICF, CBS, DISCA), and Jeffrey Gundlach (Buy: HTR, NLY, Puerto Rico GO Bonds, BWX, INP; Short: EEM).

Features:
1) Positive on IP: Company, which counts AMZN among its customers, is seeing its business grow; the shares discount a lot of bad news, its free cash flow leads that of rivals, and it recently raised its dividend;
2) Positive on NWL: Shares are down on news of the Jarden acquisition, but look like a good deal at their current price because the company is shedding underperforming divisions, streamlining the back office, and investing in key brands;
3) An overview of the World Economic Forum, where climate change, sustainable development goals, and the collapsing Chinese stock market were key topics of discussion;
4) Interview with MacroMavens founder Stephanie Pomboy, who has been bearish on stocks since 2010 because she thinks the market is ahead of fundamentals amid weak consumer spending.

Tech Trader: "The tech world appears to be going through the bursting of another bubble, but the outcome should be positive for investors in publicly traded companies overall, unlike the implosion of the dot-coms in 2001"; The collapse of some young venture-backed companies could affect the demand for networking gear (Cautious on EMC, HPE, CSCO).

Trader: Last week's recovery was a relief rally from much oversold levels, says Adam Sarhan of Sarhan Capital; For energy sector investors, bonds may be a better bet than stocks, because if oil stays where it is or drops further, bonds bring fewer risks; "As fourth-quarter earnings reports come out, investors should look for pension accounting changes that will artificially flatter earnings by tens of millions of dollars or more in 2016 at some firms."

Small Caps: Positive on HMHC: Leading provider of textbooks and digital education tools in the U.S. is poised to benefit from the trend toward increased digital learning aids, and with shares down, the share price is attractive and likely to see a rebound.

Follow-Up: Cautious on KMI: The sharp decline in the energy-pipeline operator's shares could be over, and at the current price Barron's is no longer bearish; Negative on CMG: More bad news at restaurant chain seems likely, "and any more hiccups could drive the shares, still pricey at 36 times projected 2016 earnings, down another 20%."

European Investor: Positive on SNY: French pharma giant is set to deliver 18 new products by 2020, and could be a good investment at a time when European equities are suffering badly from various global problems.

Asian Investor: Cautious on CNOOC, Sinopec, PetroChina: If oil stays under $30, investors will likely see large asset write-downs and dividend cuts at China's Big Three energy companies, for which the worst is not over.

Emerging Markets: Positive on Embraer, Tencent: Amid ongoing trouble in emerging markets, the long-term prospects for the Brazilian plane maker and the Chinese mobile giant look strong.

Commodities: Despite a two-year drop in value, iron ore's rough patch will likely extend into 2016 as big miners churn out record volumes despite lower demand in China.

Streetwise: Dividend-paying stocks may not be as safe as they look, because the earnings necessary to pay for them may be harder to come by this year; Iman Brinvanou of TCW likes dividend payers KO, MO, and PEP because their risk/reward ratio is still favorable.

Central Bankers and Higher Crude Stem the January Sell-Off

TradeTheNews.com Weekly Market Update: Central Bankers and Higher Crude Stem the January Sell-Off
Fri, 22 Jan 2016 16:14 PM EST

After three weeks of punishing declines, global markets may have found a bottom. Traders keyed on what appears to have been Wednesday's important intraday technical reversal for both stocks and oil prices. On that day trading volumes surged, negative market internals spiked, the VIX reached levels not seen since last summer ahead of a 400+ point reversal in the Dow. By Thursday many suggested sentiment was also improving upon markets hearing the distant sound of the central bank cavalry riding to the rescue. Mario Draghi promised the ECB would look at more easing at the next policy meeting, while there were rumors that the Bank of Japan could launch another helping of QE at the policy meeting next week. The PBoC was less sanguine, however they promised to expand use of a new medium-term instrument to provide markets with liquidity, and separately fixed the yuan reference rate higher for the tenth consecutive session on Friday, putting the yuan at its strongest rate to the basket since January 6th. The other big positive catalyst was crude, which found a short-term bottom below $28. Both WTI and Brent dipped into the $27 handle on Wednesday upon Feb options expiration, then rallied hard through the close on Friday. Prices gained more than 20% in 48 hours, with both WTI and Brent closing out the week above $32. Global elites gathered in Davos, where nearly every interviewee was asked at least once whether they saw recession in the offing (most hedged or said not really). In the background, Q4 earnings season slogged on with managements offering up cautiously optimistic outlooks based on more of same in terms of tempered economic growth. US stock indices posted their first weekly gains in a month: after losing over 500 points through Wednesday morning, the DJIA rallied to end up 0.7% on the week, the Nasdaq rebounded to post a 2.3% gain, and the S&P added 1.4%.

China's economy slowed in the final quarter of 2015 to +6.8%, the weakest quarter of growth since the crisis in 2009, as Beijing continues to push its economic transition to a consumer economy. The full-year 2015 China GDP figure was +6.9%, the weakest growth rate since 1990. December industrial production saw its weakest y/y growth in 25 years, while December fixed-asset investment expanded at the slowest pace since 2000. The anemic slate of economic data prompted hopes for yet another round of stimulus from the authorities, in the form of RRR cuts or spending programs. The PBoC said it would begin expanding use of mid-term lending facilities (MLFs) to add liquidity, and a PBoC economist commented that the MLF facility could be a substitute for RRR cuts, which somewhat confused markets.

The ECB took no action at its policy meeting this week, but ECB President Draghi said the committee would review and possibly reconsider monetary policy at the next meeting in March, when the latest round of ECB staff forecasts will be published. He repeated several times that the ECB has not only been highly successful with its prior unconventional monetary policy actions, but that it still has plenty of tools left to help it achieve its mandate. Draghi justified his more dovish stance by warning that conditions have changed since December, specifically citing the 40% decline in oil prices since that time, an increasing possible correlation between inflation expectations and lower oil prices, and the chance that 2016 inflation levels will drop even lower due to the commodity price implosion. EUR/USD saw lower lows this week, testing below 1.0800, but was still constrained at the upper bound by the 1.0990 level.

The Bank of Japan's upcoming policy meeting is scheduled for next week and expectations were building for the bank to introduce more QE in light of market conditions. The yen has strengthened notably since the start of the year, with USD/JPY dropping from the 120.50 area in late December to as low as 116.00 this week. Preliminary January manufacturing PMI data dropped to a three-month low, as the new orders component slowed to a six-month low and inflation-gauging input prices fell for the first time in over three years. At Davos, BoJ Governor Kuroda said that deflationary pressures were a real risk, but also cautioned that he did not believe the global economy was on the brink of a deflationary wave and highlighted that underlying Japan inflation was still above 1.0% and that inflation expectations were still well anchored. Kuroda hinted that the BoJ has room for more QE, if needed, but the bulk of his comments were dismissive of any need for more stimulus.

In the eye of the storm on Wednesday, Fed fund futures had significantly repriced the probability of more FOMC rate increases this year. Futures pointed to less than 1% probability of four Fed rate hikes in 2016, with just a 30% chance of a March rate hike, compared to 53% a month ago. Recall that the dot chart released at the December Fed meeting predicted four interest rate hikes in 2016. Fed fund futures priced a 40% chance of no further rate hikes this year. By Friday, the futures contracts had eased off those levels. The benchmark 10-year yield after touching 1.93% recovered back above 2.05% by weeks end.

While the jobs picture certainly argues in favor of more Fed policy tightening, the inflation front is much less rosy. After trending downward for more than a year, two key inflation gauges - the five-year, five-year forward inflation break-even rate and the yield premiums on regular USTs over TIPS - both tumbled to their lowest levels since April 2009. In a report out on Wednesday, US CPI inflation unexpectedly slipped lower m/m in December, after November's flat reading. Analysts said the softness in the sequential data was mostly due to lower energy costs. Meanwhile the y/y readings were stable. In the 12 months through December, core CPI rose 2.1%, the largest gain since 2012, after climbing 2.0% in November.

At Davos, Saudi Aramco's chairman made extensive comments about the oil market and Saudi Arabia's role in it. He said the Saudis would be able to withstand low oil prices for a long time, given they have the lowest cost of production and the ability to increase production at will. He also said oil prices have overshot to the downside and will likely rise by the end of the year. Also at Davos, the head of Russia's Direct Investment Fund said Russia may be ready to cooperate with OPEC, given how low prices have fallen.

The IMF cut its global growth forecast for the third time this year. Citing weakness in the developing world, the IMF said the world economy would grow 3.4% in 2016, down from an October forecast of +3.6%. It downgraded the 2016 outlook for developing economies to 4.3% growth from a forecast of 4.5% in October. The IMF trimmed its forecast for US economic growth to 2.6% this year from 2.8%, noting the prospect of higher interest rates. It kept its 2016 forecast for China's economy unchanged at 6.3%.

Wall Street earnings reports continued roll in this week. Morgan Stanley greatly improved its performance in the bank's fourth quarter, roundly beating both earnings and revenue expectations. Morgan grew both earnings and revenue on a y/y basis. Bank of America's fourth-quarter results were mixed, with earnings up nearly 10% y/y, beating expectations, even as revenue slightly undershot. On the conference call, executives disclosed that 2% of the bank's overall loans were to the energy industry. Goldman Sachs had a mixed report, with provisions for its RMBS legal settlement eating approximately 75% of its quarterly profit, while revenue fell slightly on a y/y basis. Goldman's key book value per share metric rose 5% y/y.

Three big Dow components held back the index late in the week. IBM reported its 15th straight quarter of contracting revenue, with sales at all three of the firm's major business lines lower y/y. The firm's FY16 forecast was weaker than expected. GE's revenue total in its fourth quarter missed analysts' expectations, although total profit beat and both profit and revenue were up modestly on a y/y basis. The firm's oil & gas revenue fell 16% y/y, but most of the other industrial businesses saw good growth. American Express tanked as investors tore into the firm's FY16 forecast. The new guidance range beat expectations, but only because it includes an expected $1 billion gain on the sale of its Costco credit card portfolio, which implies that underlying growth will be weaker than expected.

Barron's Saturday summary: positive on YHOO, BEAV
Cover story: Participants at the Barron's 2016 Roundtable "see more stock market turmoil, junk-bond mayhem, and global strife in the year ahead"; Oscar Schafer of Rivulet Capital likes EVTC, CPN, COMM, NICE; Brian Rogers of T. Rowe Price likes AXP, CMCSA, ETN, M, OXY, QCOM.

Feature:
1) Positive on YHOO: Company faces increasing pressure to unload its core Internet business, which would likely also lead to a sale of its stakes in BABA and Yahoo! Japan, netting shareholders a potential 35% gain, or about $40 a share;
2) Positive on BEAV: If aerospace company's growth picks up steam, shares-which have dropped from a high in 2014-could see 30% upside, and even more if it becomes a takeover target;
3) Barron's looks back on its bullish stock recommendations for 2015, noting shares of the 146 companies it wrote about fell 2.4% against a 1.8% drop for the benchmarks, while bearish picks fell 18% on average;
4) As world leaders gather for the World Economic Forum in Davos this week, "a new industrial revolution is the theme for debate...but there will be plenty of talk about turmoil in emerging markets and geopolitical issues too."

Tech Trader: Cautious on AAPL, Samsung: The smartphone sector is doing worse than the PC sector, with shares of both big players down, but suppliers such as SWKS, QRVO, and ADI are feeling even more pain; Cautious on GPRO: Camera maker relies on a single product and has yet to prove that it will have staying power; Brian Schwartz of Oppenheimer & Co. thinks CRM, ELLI, INST, and WDAY are likely to survive what could be major turmoil in the cloud-computing sector.

Trader: David Kelly of JPM Asset Management thinks that the current market turmoil will last another two weeks, and says investors shouldn't succumb to emotional reactions during the swings; Wall Street strategists Stephen Auth of Federated Investors and David Kostin of GS have shifted to a significantly less bullish viewpoint of the market following two bad trading weeks; Cautious on QLIK: Software developer has a solid niche in a growing business, but sales have slowed significantly and its valuation is still extremely high.

Profile: Clare Hart, portfolio manager, JPMorgan Equity Income fund looks for sustainable growth and strategy, and will exit a holding if gains were achieved by diverting from management's outlined game plan (top 10 holdings: WFC, XOM, JNJ, AAPL, PNC, OXY, CME, PFE, TRV, MO).

Small Caps: Cautious on CFX: Shares of pump and welding-products maker have tanked, but assuming oil prices don't stay at $30 forever, the stock looks like a bargain. Penta: A survey by Fidelity Investments of its high-net-worth clients found that impact investing, which attempts to generate market-rate returns while advancing social or environmental goals, is "a surprisingly big deal."

European Trader: Positive on SHPG: Most of the concerns about pharma company's acquisition of BXLT seem to have been dispelled, and investors seem confident it can complete the transaction and boost value.

Asian Trader: If China's reform efforts were effective, the country could get back on track, but local politicians are likely to drag their feet when it comes to change. Emerging Markets: Saudi Arabia doesn't offer much potential for investors, and though the government loosened foreign-ownership restrictions for institutional investors last year, retail choices remain limited.

Commodities: "Investors in agricultural commodities will continue to feel the pain of weak prices this year" amid strong global supplies, a strong dollar, and weakness in the currencies of producing and exporting countries.

Streetwise: The market is a lot cheaper than it was a few months ago, and that means value can be found, especially at cash-rich companies.

Historically Poor Start to 2016 Extends on Global Market Turmoil

TradeTheNews.com Weekly Market Update: Historically Poor Start to 2016 Extends on Global Market Turmoil
Fri, 15 Jan 2016 16:19 PM EST

The New Year's market mayhem went from bad to worse this week. Beijing took its campaign to create volatility in the yuan FX rate to Hong Kong, creating elevated levels of paranoia regarding the economic strategy behind its big interventions. On Wednesday, the Shanghai Composite slipped below 3,000 for the first time since last August, putting the index in a technical bear market, down 20% from its December highs. The index closed the week below its August lows at 2,900, down about 6.5%. US and European equities were whipped around by the continuing chaos, with highly volatile trading seen all week, however Friday's session was the real moment of truth, as options expiration, the coming three-day weekend and a real sense of panic in markets combined to drive a massive selloff, with the DJIA and S&P500 down more than 3% a piece and the Nasdaq down more than 4% at their worst levels. On Friday, the S&P500 plunged through its August low of 1867 in mid-day trading before recovering to close above it. The 10-year UST yield tumbled nearly 18 basis points from its high of 2.175% on Monday below 2.00% before the open on Friday. Short rates fell too, when futures traders used Friday's disappointing US data to push Fed rate hike expectations out further into 2016. And behind it all, WTI and Brent crude marched in lockstep to 12-year lows below $30.

For the five sessions through Thursday, the PBoC set the yuan fixing higher, then set it slightly lower on Friday. So after pushing down the yuan last week, the PBoC has worked hard to build it right back up again this week, driving confusion and chaos in domestic and overseas markets along the way. Many analysts say that is exactly the point, with the bank creating volatility to make betting against the yuan more expensive and tamp down the flow of money heading out of the country. Beijing's efforts to monkey with the yuan over recent months have paid off, as seen in the December Chinese trade data. China's December trade surplus in both CNY and USD terms was much higher than expected. Outbound shipments priced in CNY rose +2.3% v -4.1%e, and in USD terms the decline was just -1.4% v -8.0%e. The decline in imports in both CNY and USD terms were much less than expected.

Another theater of conflict in the Chinese crisis opened up in Hong Kong this week. On Monday, short-term rates in Hong Kong (HIBOR) to borrow offshore yuan (CNH) jumped to a record 13.4% from 4% on Friday. On Tuesday, HIBOR spiked to an astonishing 66.8%, and then settled back around 8% in the latter half of the week. Traders said the PBoC - via large Chinese banks - intervened in the offshore market by selling USD/CNH, to reduce the pool of offshore yuan liquidity, in an effort to crush the yuan carry trade, punish the short CNY trade and narrow the spread between onshore and offshore yuan. The CNY/CNH spread had spiked rapidly through the first week of the New Year to a five-year high, topping out around 1.02 before PBoC action crushed the spread back below 1.00. Meanwhile, the Hong Kong Dollar sank to its lowest level against the greenback in five years.

Brent and WTI crude prices cratered in lockstep, with both contracts closing out the week below $30, for 12-year lows. With Iran weeks or even days from achieving final compliance with the International Atomic Energy Agency (IAEA) on mothballing its nuclear program, there was little prospect of support for prices any time soon. Morgan Stanley, Goldman Sachs and Citigroup all published research pieces this week asserting that the price of oil would remain in the $20 handle over the near term as a result of China's slowdown, the appreciation of the USD and the fact that drillers are not curbing production despite the oil glut. USD/CAD touched a 13-year high of 1.4550 on the continued softness in crude, with traders waiting anxiously for a possible rate cut at next week's Bank of Canada policy meeting.

Two Fed presidents - dove Evans and hawk Bullard - aired their fears about the impact of plunging oil prices on inflation. Evans said he was nervous that inflation expectations might not be well anchored, citing downward pressure from the endless decline in oil prices. Bullard echoed his comments, warning that inflation expectations were becoming worrisome. Bullard took an even stronger stance than Evans and said the Fed may no longer be able to keep looking past crude prices when assessing inflation trends. Bullard said that low crude prices are now correlated with falling inflation expectations, could hold down actual inflation levels. Friday the Fed's Dudley offered little solace to plunging markets. Dudley opined he does not see much change in the economic situation and believes core inflation remains relatively stable.

It's no secret that US manufacturing has been seeing sequential declines over recent months, and data out on Friday confirmed that the trend is not improving. The January Empire manufacturing survey from the New York Fed (the first of the regional Fed factory surveys for January) was a total disaster, which declined to its lowest level since the depths of the recession in early 2009. The new orders and production indexes each deteriorated by nearly 20 points. US industrial production dropped for the third straight month in December. Analysts note that a major part of the month's decline was due to utilities cutting output amid unusually warm weather and energy companies reducing activity in the face of falling oil prices. The November figure was revised much lower, to -0.9% from -0.6% prior.

The Bank of England kept its key interest rate at a record low of 0.5% and made no changes to its asset purchase program. Both decisions were widely expected, as the outlook for UK growth and inflation has been crushed by negative developments in the energy markets and the world economy. The MPC voted 8-1 to keep rates at 0.5% where they have stood since March 2009, but voted unanimously to keep it's QE program unchanged. "Recent volatility in financial markets has underlined the downside risks to global growth, primarily emanating from emerging markets," the central bank said in minutes from its meeting. GBP/USD saw its highs of the week around 1.4600, then skidded lower to under 1.4300 in the chaotic trading on Thursday and Friday, to a fresh six-year low.

Alcoa marked the unofficial beginning of the fourth quarter earnings season on Monday. Alcoa's earnings topped analysts' expectations, but revenue fell just short of what was expected, as some high-growth segments helped to slightly negate headwinds in its legacy business. The firm's outlook for aluminum demand growth in 2016 was +6% y/y, down slightly from its last 2015 forecast of +6.5% y/y.

JPMorgan widely exceeded expectations in its fourth-quarter earnings report. Profits rose more than 5% y/y, while revenue was only up incrementally. The corporate and investment bank saw huge profit growth, however, the commercial bank and asset management unit both saw lower profits. Executives warned of rough waters ahead for the US economy. "We're not forecasting a recession - I think the US economy looks pretty good at this point," said CEO Dimon. Citigroup turned in good quarterly results, with profits up sharply y/y as the bank shakes off its legal woes, and revenue up 3% y/y, both beating expectations. Wells Fargo only just met top- and bottom-line expectations.

Shire has finally bagged Baxalta, with the latter agreeing to be acquired in a $32 billion deal valued at $45.47 in cash and stock. The deal includes an $18/shr cash component, not too far from the 40% cash portion rumored last week. Baxalta, which was spun out of Baxter International, generates a large portion of its sales from Advate, a drug for hemophilia. This is Shire's third major buy in just over a year, coming after last November's $5.9 billion Dyax buy and the acquisition of NPS Pharmaceuticals for about $5.2 billion a year ago.

Barrons Saturday summary: positive on HBI, DECK

Cover story: Despite turmoil in the market at the beginning of the year, "it's probably too early to call an end to the bull run"; the U.S. economy remains healthy and global stocks still look like the best major asset class.

Features:
1) Positive on HBI: Despite a drop in the share price, apparel maker has been able to withstand difficulties in its sector, and its Champion brand is thriving; company compares well to peers such as COLM, NKE, UA, and VFC on valuation and profit margins should rise;
2) Asia faces a number of potential problems in the coming year, including instability in Beijing, terrorist mayhem, a Japanese debt crash, and territorial disputes in the South China Sea;
3) Positive on DECK: Shares have fallen because of slower-than-usual winter sales, but company is moving goods faster than rivals and launching new products; shares could trade up to $65 in the next year from a current $45.

Tech Trader: Positive on AMZN, GOOGL, FB, MSFT, BIDU: Though a host of new companies are sprouting up to leverage the Internet of Things, the companies that have the most to gain are cloud providers, which will serve as hubs and data collectors; Cautious on AAPL: The recent "quixotic trading pattern" affecting the company's stock is likely to persist indefinitely because of concerns about the iPhone, but it's not cause for worry.

Trader: In China, the correction and continuing improvement in employment suggest consumer stocks could be an opportunity, says Michael Yoshikami of Destination Wealth Management; +/- UPS: Though the delivery giant faces several challenges, the company is a good play "for a long-term-oriented investor wanting a robust, income-generating company"; Cautious on CMG: News at the food chain keeps getting worse, but the company has other issues beyond the recent foodborne illness outbreaks, including a problematic supply chain.

Interview: John Dowd, manager of the $2B Fidelity Select Energy Portfolio, sees strength in the energy sector ahead, though timing remains an open question (top 10 holdings: XOM, SLB, EOG, VLD, CVX, XEC, NFX, PXD, BHI, FANG).

Small Caps: Barron's looks back at its small-cap picks last year, noting that REMY, TOWN, POST, ELY, and BNCL were the best performers, while LXU, FOR, ESL, FLWS, and OI were the worst.

Mutual Fund Quarterly: Profile of fund managers who have beaten the S&P 500 in multiple time periods; A look at how mutual funds should handle illiquid investments; Value-oriented stock funds took a hit from falling oil prices in the fourth quarter; "Guggenheim and iShares offer ETFs that can be used to create a bond ladder-a benefit for many investors, but higher costs and structural issues can be a drag on performance."

European Trader: Positive on Dassault Aviation: French aircraft company should do well in 2016-it has a healthy backlog of orders and production of its Rafale fighter aircraft should increase.

Asian Trader: The worst may be yet to come for the Chinese stock market as company insiders begin to sell shares; investors should also be wary of buying the rest of emerging markets.

Emerging Markets: India remains strong, with a solid backbone, and investors are likely to benefit if prime minister Narendra Modi's reforms materialize; IBN and HDB look attractive, as does SMIN.

Commodities: "Analysts are now divided on whether the demand gains for gasoline will be repeated this year."

CEO Spotlight: Martin Gilbert, co-founder and chief executive of Aberdeen Asset Management, has rebuilt the firm's platform, boosted assets under management, and used acquisitions to add new products and markets.

Streetwise: With earnings season about to start, investors are worried that corporate profits will disappoint, but Thomas Lee of Fundstrat says that may not be the case.