Meandering Markets Await Clearer Signals

TradeTheNews.com Weekly Market Update: Meandering Markets Await Clearer Signals
Fri, 08 Apr 2016 16:11 PM EST

US equity markets drifted lower this week in low-volume trading. With little weighty US or global economic data on the calendar, trading sentiment was knocked around by the vagaries of the oil market and the continuing weaker dollar trend. Traders scanned the ECB and Fed minutes in vain for more direction on the institutions' monetary policy views. Interest rates declined globally with US Treasury yields falling to one month lows. Banking stocks continued to face strong headwinds with several managements outlining the difficult environment financial institutions still face. Meanwhile, the US government worked hard to crush several high-profile merger deals. Next week looks pretty light of data as well, although the slow-moving spring quarter earnings season is rapidly approaching. For the week, the S&P500 slipped 1.2%, the DJIA lost 1.2%, and Nasdaq fell 1.3%.

The yen's big move higher - the Japanese currency edged up to 18-month highs against the dollar, with USD/JPY dropping as low as 107.75 - was a big theme this week. The end of the Japanese fiscal year in March brings plenty of yen inflows, as Japan's corporations are required by law to repatriate their overseas profits. However, the Bank of Japan continues to stay away from any big new stimulus programs, the government has refused to consider a 2016/17 extra budget frontloaded with additional stimulus spending, and PM Abe's has made it clear the sales tax will rise to 10% in April 2017 as scheduled, giving traders plenty of reasons to go long yen. Technical considerations played a role, too: the 110 level was a big magnet, as that was the key level breached when the BoJ launched its surprise QE enlargement at the end of October 2014 expanding its asset base to ¥80T. As the USD/JPY breached the 110 level, reports emerged that the BoJ might further expand the asset base at its upcoming April meeting. Government officials repeated all week that they were watching yen strength with concern, but there was no evidence of intervention, especially given Japan is hosting the G7 in May, and Japan has no desire to be seen as an FX manipulator ahead of the meeting given its

The minutes from the March 16th FOMC meeting did little to change the messaged crafted by Chair Yellen in her post-decision press conference or her speech last week: to assure the expansion stays on track, policy will respond to growth threats as much as it does to actual data. The minutes showed several members agreed that hiking rates in April would signal an unjustified sense of urgency, although a couple of hawks had advocated a March hike - in remarks later in the week, Fed Governor George said she voted for a 25 bps hike in March on concerns about creating financial imbalances. Separately, hawk Mester refrained from saying when the Fed should hike next, and also emphasized that the Fed was not behind the curve. Fed fund futures were pricing in less than a 20% chance of a June rate hike as of Friday.

Minutes from the last ECB meeting complicated the policy picture somewhat. The minutes showed the committee did not rule out more rate cuts at the March meeting and judged there was little evidence of unwelcome side effects from negative rates. Recall that during the post-meeting press conference back in March, Mario Draghi stated that he did not anticipate any more rate cuts as the ECB turned to other instruments, which helped fuel the current streak of euro strength. The minutes this week indicated that several council members were willing to consider deeper rate cuts and that future cuts remain on the table. EUR/USD spiked to fresh six-month highs ahead of the release of the minutes, trading up to around 1.4550, but the pair remained rangebound in the 1.1340-1.1420 area this week.

The two-week long slide lower in crude prices bottomed on Monday, with WTI dropping to around $35.50 and Brent to around $37.40. After some uncertainty in recent comments, the Iranians and the Russians both confirmed that Iran would attend the OPEC/non-OPEC production freeze negotiations in Doha on April 17th, although Tehran continues to insist it would only participate in the freeze after its domestic production level rises back to the pre-sanction level of 4.0M bpd. Last week, the Saudis were threatening not to participate in the freeze unless all other producers agreed to the deal. On Friday, the Russians said the deal would likely freeze production at January levels. Separately, weekly inventory reports showed that US crude stocks have started to be drawn down again after nearly two months of big builds. Those drawdowns along with the weaker greenback ushered WTI oil prices back up to just under $40/bbl by Friday afternoon.

Tesla disclosed that it had received 325K Model 3 orders in the first week after the vehicle's debut, indicating to about $14B in future sales. This is nine months ' worth of production under CEO Musk's goal of 500K unit per annum by 2020, and earlier in the week Musk had taken to Twitter to ponder whether he may have been too conservative in his outlook. Some analyst said their estimates were as high as 350K units, and on April 4th Tesla said its first quarter deliveries would only be 14,820 units, versus the 16K guidance it offered back in February. Shares of TSLA gained 10% on the week.

The US Treasury published tough new regulations aimed at tax inversions. The new rules would prevent foreign companies from acquiring multiple US firms over a short period of time, with a new three-year limit on foreign companies bulking up on US assets to avoid ownership requirements for a later inversion deal. Last fall, the Treasury made its first attempt to stop inversions, forbidding them in transactions where continuing ownership of the US parent in the deal is 60-80%. The rules were at least in part implemented to stop the Allergan/Pfizer deal. Just after the first regulations were announced last fall, Pfizer agreed to acquire 59% of Irish firm Allergan in an inversion deal. But Allergan itself was built by serial acquisitions: US firm Actavis bought Irish firm Warner Chilcott in an inversion, then it acquired Forest Labs and finally Allergan, taking the latter's name but remaining in Ireland. Pfizer abandoned the Allergan buy the day after the new rules were announced. There were concerns about Shire's acquisition of Baxalta, and shares of both firms sank on the rule change, although the companies claim the deal is not an inversion.

Separately, the Justice Department sued to stop Halliburton from acquiring rival Baker Hughes, in a deal currently valued around $34 billion that was announced in November 2014 (just as oil prices started to fall). The DoJ said it would not allow deals that enhance shareholder value at expense of competition. The BHI-HAL tie-up would combine two of the world's three leading providers of services to oil and gas companies. The companies were said to have made last-ditch efforts to save the combination, but that the DoJ was uninterested in the various remedies offered.

Barrons weekend update

Barrons weekend update: positive on TWX, UTX; cautious on BAM 
Cover story: Though Republican leaders are pressing Ohio governor John Kasich to drop out of the race, it's unlikely he will do so-and for investors that's a good thing; "Kasich's policy prescriptions, experience, and temperament make him the GOP's best bet to reassure a nervous marketplace," and he would be better for investors than Hillary Clinton in the White House. 

Feature: 
1) Picks from participants in Barron's energy roundtable, featuring Barry Kupferberg of Trilogy Capital Management (Rockies Express Pipeline, Permian Resources), Robert Thummel of Tortoise Capital Advisors (EPD, SXL, LNG, PXD), Harlan Cherniak of KKR (SLCA, DYN bonds, CPN bonds) and Richard Daskin of RSD Advisors (SEP, MMP, PSXP); 
2) Positive on TWX: Shares are up following the success of Batman v Superman, which bodes well for nine more DC Entertainment movies to be released during the next five years, while the company's TV and game production is thriving; 
3) Positive on UTX: Shares have fallen 15% over the past two years, but increased cost-cutting, stronger results in its U.S. air-conditioning business, and a new commercial jet engine could send earnings up; shares could return 20% during the next year; 
4) Cautious on BAM: Company specializes in illiquid properties whose values it calculates from "unobservable inputs," such as the discount rate applied to a property's projected cash flow, a process that raises some questions for investors. 

Tech Trader: The cloud-computing sector continues to undergo a transformation, with shares of pure-play stocks such as CRM and WDAY down, while traditional software makers like ORCL and IBM have risen because of efforts to highlight the parts of their businesses that contain cloud-computing elements. 

Trader: Investors "want to see interest-rate hikes that indicate the U.S. economic engine is revving strongly to withstand higher rates," says John DeClue of the Private Client Reserve of U.S. Bank; Positive on CELG: Shares of the managed-care health provider are down as investors lose interest in the sector, but the company stands to benefit from expansion and the ACA's push to insure more people; Positive on HAIN: Slower revenue growth is partly the result of the company growing larger and struggling to maintain momentum, but it stands to benefit from growing sales in organics and efforts to reduce expenses-and insiders have increased their holdings. 

Profile: Justin Thomson, portfolio manager of the T. Rowe Price International Discovery fund, has taken advantage of weakness in foreign markets to buy (top 10 holdings: Victrex, Eurofins Scientific, Axiare Patrimonio Socimi, Playtech, Norma Group, Partners Group Holding, Nippon Seiki, Ambu, Fisher & Paykel Healthcare, MercadoLibre). 

Small Caps: Positive on MTW: Industrial crane maker, formed only a month ago as a spinoff of parent company MFS, will undergo a restructuring that will improve margins and could lead to higher profitability. 

Follow-Up: Barron's says robo advisors are legitimate competitor-at the mass-affluent level-to traditional financial-services firms, which are weighed down by legacy software code and human advisors.

European Trader: Positive on ENDP: Specialty pharma company's shares are down, but it should undergo a recovery over the next 12 to 24 months, and shares could rebound by more than 50%. 

Asian Trader: Sinagpore's recently announced budget will boost spending by 7% this year, which could bolster stocks in banking, consumer staples, healthcare, and transport. 

Emerging Markets: Some investors in Brazil are looking to put profits elsewhere, given the country's mounting problems, and are looking to China, which has projected GDP growth of 6-7% (Positive on Kweichow Moutai, JD). 

Commodities: A seasonal shortage boosted lumber prices, but slowing U.S. housing construction and a weak Canadian dollar should bring them back down again. 

Streetwise: With the markets rallying, companies may see a window of opportunity for IPOs, but it remains unclear how eagerly investors will embrace them.

March Came in Like a Bear and Went Out Like a Bull

TradeTheNews.com Weekly Market Update: March Came in Like a Bear and Went Out Like a Bull
Fri, 01 Apr 2016 16:07 PM EST

March arrived with panicky market participants griping about imminent recession and ended this week with those fears essentially in the rear-view mirror. The S&P500 delivered a 1.8% gain this week and a 6.8% gain in March, its best monthly advance since the current bull market began seven years ago - leaving it up a mere 1% for all of the first quarter of 2016. US and China manufacturing data has started perking up, the jobs and housing markets remain strong and there are signs that both China and Europe are starting to get a handle on their respective economic problems. Meanwhile, the recovery in crude prices appears to be over for the moment, as WTI and Brent keep failing to gain any purchase above the $40 mark and the global production freeze deal bogs down from the larger Saudi-Iran rivalry. Fed Chair Yellen negated all of last week's hawkish Fed-speak, apparently taking an April rate hike off the table, citing weak inflation even as the US economy delivered its 73rd month of strong job growth. Treasury yields declined to one month lows and Fed fund futures closed out the week projecting just a 30% chance of a rate hike occurring in June. The US Dollar suffered one its worst weeks in months stirring hopes that the weaker currency will lead to an improving Q2 corporate earnings outlook.

In her remarks, Yellen stressed the pace of rate rises would remain very gradual, largely because global developments still pose ongoing risks. She pointed to some signs inflation expectations may be drifting lower and noted that remains a concern for her. The February PCE report arrived the day before her speech, and the core PCE- the Fed's key inflation metric - sank to +0.1% from +0.3% in January, although the y/y metric remained unchanged at 1.7%. The speech took an April rate hike definitively off the table, and other Fed speak this week echoed Yellen's major themes. Fed moderate Lockhart said that even with good data, it's not mandatory that the Fed moves in April, and added that he sees scope for three rate hikes this year. The New York Fed's Dudley said he was hopeful two rate hikes would be possible in 2016. The very chatty Evans said he would like two hikes, but warned that inflation could stall out around 1.8% later this year. All Fed speakers agreed that current risks to the US outlook come from overseas, and reiterated that soft inflation was the fault of lower commodity prices, chiefly oil.

The March US jobs report was a bit stronger than expected, with the 215K gain in payrolls following a revised 245K gain in February. Average hourly earnings increased 0.3% m/m, while the jobless rate crept up to 5% as more people entered the labor force. The labor force participation rate grew for a fourth straight month, rising to 63% from 62.9% in February. Participation had fallen to a 38-year low of 62.4% last September, but has recovered gradually over the last six months. Analysts noted that in the employment sector breakdown, among the best gains were in construction (+37K jobs) while the worst losses were in manufacturing (-29K jobs).

Factory data from the US and China confirmed a marked uptrend for manufacturing in the month of March. The US ISM manufacturing report returned to expansion territory for the first time in five months, while China's official manufacturing PMI reading topped 50 for the first time in eight months. Key new orders components in both reports were even stronger, boding well for next month - the new orders reading in the ISM data rose to its highest level since 2014. Adding to the constructive production outlook, the Chicago March PMI rose a very strong six points to 53.6, with big gains in new orders, employment and production. Elsewhere in Asia, the Japan and South Korea March PMI reports clouded this rosy outlook, with both figures in contraction. The Japan report warned that total incoming work declined at the sharpest rate in nearly two years. In addition, Japan's Tankan large manufacturing index for Q1 hit its lowest level since mid-2013, with the forward-looking index coming in very weak. Major European manufacturing PMIs remained right around 50, where they've been for months.

Recent home sales data has shown that while the recovery in the US market continues apace, affordability and supply continue to give homebuyers headaches. The January S&P/Case-Shiller home price index recapped this point, showing elevated price gains in major US cities. Meanwhile, inventories are still constrained. The 20-city composite Index rose 5.7% in January, roughly twice the rate of inflation, with four to five months of supply in the market. Pending home sales were well ahead of expectations in February, with the index seeing its biggest m/m increase in a year, however it only just more than cancelled out the January drop, which was revised from -2.5% to -3.0%. Separately, homebuilder Lennar reported another strong quarter, beating top- and bottom-line expectations in its first quarter, with double-digit gains in backlog and new orders.

Crude is seeing a second week of losses as hopes slip away for a grand bargain to freeze crude output levels. There were reports earlier this week that Iran would attend the OPEC/non-OPEC production freeze meeting on April 17th, but would not participate in any deal, as Tehran continues to insist it needs to let its production levels return to the pre-sanction level of approx. 4.0 million bpd. On Friday, Iran's arch rival Saudi Arabia said the kingdom would only freeze output if all other major producers do so - including Iran. The warning came during an interview with Crown Prince Mohammed bin Salman, who is emerging as a major Saudi political force. Meanwhile, Iraq's crude production level was at its highest level in four years. After both Brent and WTI peaked around $42 last week, Brent dropped below $39 and WTI sank below $37.

Shares of former hedge fund hotel SunEdison lost more than half their value this week as it emerged the SEC and Department of Justice launched parallel investigations of recent moves by the company. The SEC is looking into whether the company overstated its liquidity position last fall, when the stock was collapsing and management told investors it had over $1.0B in cash. The DoJ is seeking information related to acquisition of Vivint Solar and intercompany transactions with its yieldcos, TerraForm Power and Terraform Global. It's widely known that SUNE was using the two yieldcos as piggy banks to drive its rapid growth, although investors are betting that they may survive the demise of their parent, and shares of TERP are actually up more than 12% on the week.

Apple won its standoff with the US government after the DoJ said it had managed to access the information locked on the San Bernardino terrorists' iPhone. A Federal judge vacated the earlier order demanding that Apple open up the iPhone for FBI investigators, removing for now the implicit threat it would be forced to build "backdoors" into its products. It remains unclear how the phone was accessed, but speculation centers on a third-party use of an experimental technique called NAND flash mirroring.

Tesla unveiled its much-anticipated Model 3 electric car, its least-expensive vehicle to date. The Model 3's $35,000 base sticker price and decent range should expand the reach of Tesla considerably, and play a central role in helping the company meet CEO Musk's long-term objective of producing 500,000 vehicles a year. Within a day of the launch, Musk tweeted that nearly 200,000 vehicles had been pre-ordered. The first deliveries of the new mass market vehicle are scheduled to start in late 2017.

In M&A news, Foxconn finally reached a deal to discount its original acquisition offer for fallen Japanese electronics giant Sharp. Foxconn (formally named Hon Hai Precision Industry) will pay about $3.5 billion for a two-thirds stake, cutting its initial offer by nearly $900 million following the emergence of previously undisclosed liabilities at Sharp. The deal marks the largest acquisition ever by a foreign company in Japan's insular tech industry. Anbang's dramatic challenge to Marriott's standing deal to acquire Starwood fell apart in spectacular fashion. Two weeks ago, Anbang topped Marriott's cash-and-stock bid with an all-cash offer of $76, then was bid up to $82.75. However, Anbang never made its original unsolicited proposal binding and failed to adequately demonstrate there was sufficient financing in place to back up the deal. Anbang did not give Starwood the reason for dropping its offer, but Chinese financial magazine Caixin reported earlier this month that China's insurance regulator would likely reject the bid since it would put Anbang's offshore assets above a 15% threshold.

Barrons weekend update

Barrons weekend update: positive on IPG, ZBH
Cover story: The luxury second-home market is thriving; Topping the ranking for livability and value are Austin, Texas, where there are good buying opportunities in a softening market; Lake Geneva, Wisconsin, where a long-moribund market is on the upswing; and Park City, Utah, where MTN is giving the ski business a boost; Overheated cities include Palm Beach, Florida, and Hanalei, Hawaii.

Features:
1) Positive on IPG: Advertising giant's blend of traditional and digital advertising gives it an edge over competitors, and its shares could see a 20% boost in a strong ad market;
2) Positive on ZBH: Manufacturer of hip, knee, and shoulder replacements is thriving; shares are trading at a deep discount and could see a gain of 25%.

Tech Trader: Cautious on YHOO: Time may be running out for chief Marissa Mayer's turnaround even as she embarks on a new three-year plan that includes considering bids for its core business while transforming it for a possible a spin-off; The current battle between activists and Yahoo has been a waste of time for investors, who should take their money and seek other tech opportunities.

Trader: First-quarter earnings, which are just over the horizon, will need to be better if the rally is to continue, though much of the recent earnings shortfall can be blamed on energy; Positive on CERN: Shares of healthcare infotech provider have fallen, making it appear "invitingly cheap" because of its growing bookings and robust earnings; Positive on EDGE: With its shares now at about half the IPO price, company that develops and delivers drugs for hospitals that treat life-threatening conditions offers an opportunity for investors.

Alternative Investments: Positive on Pershing Square Holdings: Fund "offers the best way for retail investors to play a possible rebound in William Ackman's fortunes, via a concentrated portfolio of stocks that includes APD, ZTS, CP, QSR, and VRX."

Interview; Ross Margolies, founder of Stelliam Investment Management, is focused on the energy and airline industries and is bullish on APC, DAL, and SPLS. Profile: Hedi Ben Miouka, manager of Duet EM Frontier fund, focuses on nascent markets such as Egypt and Nigeria that are less developed, regulated, and researched than emerging economies like Mexico and Turkey.

Small Caps: Positive on RELY, IGT: Shares of both companies continue to look like bargains; Real Alloy should benefit from increased aluminum use in cars and trucks, while International Game Technology "is a free-cash-flow-generating monster."

Follow-Up: Cautious on DECK: Investors who have ridden the rise in share price should take profits now, given potential risks facing the maker of UGG footwear.

 European Trader: Positive on Marine Harvest, Pandora: Scandinavian salmon farmer and jewelry company should both outperform this year, and each could see a 20% rise in share price during the next 12 months.

Asian Trader: India and Indonesia elected reform-minded leaders, but this year Indonesia is outpacing India for several reasons, including the fact that it has an easier time whipping up private-sector spending.

Emerging Markets: As of March 24, the best performing emerging markets were Peru, Brazil, and Colombia, while the bottom three were Greece, China, and Egypt; In Indonesia and the Philippines, low inflation is giving central banks more room to be accommodative.

Commodities: "Unfavorable weather conditions and increased global grain consumption are expected to lift prices for wheat and corn out of a slump that has lasted for years."

Streetwise: Positive on AAL: Stock is in an Evercore ISI basket that combines companies with cheap valuations, little or no gap between operating and GAAP earnings, and which have outperformed the S&P 500 during the past 10 years.

Green Shoots or Gangrene?

TradeTheNews.com Weekly Market Update: Green Shoots or Gangrene?
Thu, 24 Mar 2016 17:05 PM EST

Global equity markets broke a month-long advance this week, as another leg down in energy prices and further gyrations in emerging markets impeded risk appetite. Risk was further constrained by the twin Brussels bombings, which killed scores, wounded hundreds and showed a Europe gravely exposed to Daesh terrorism. The continuing recovery in crude prices peaked again midweek as both Brent and WTI bumped up againt $43 or so and then headed lower, dragging down the energy sector and rekindling fears about bank exposure to bad energy debt. There were faint green shoots in a few March manufacturing reports, but the preponderance of economic data showed a global economy mired in slowdown. At the same time, Fed speakers continued to talk about two or three Fed rate hikes this year, causing markets to reconsider risk tolerance in the face of global monetary policy divergence. For the week, the DJIA lost 0.7%, the S&P500 dropped 0.7%, and the Nasdaq slipped 0.5%.

The flash Markit March factory PMI report showed the US manufacturing sector remains in go-slow mode. The index slightly missed expectations and remained pretty close to flat, however the new orders component was slightly elevated. Nevertheless, the Markit manufacturing PMI remained in expansion territory and greener shoots kept emerging from the regional Fed surveys: the March Richmond Fed manufacturing survey was very strong, with a big bounce back seen in the headline figure and the new orders component. This comes after last week's March Philadelphia Fed outlook index rose to its highest level since last February on a big surge in new orders and the New York Fed's Empire survey rose back into positive territory for the first time since last July.

Several Fed officials offered commentary on policy this week, and the hawks and doves appeared to be in greater agreement about the direction of policy than one might expect. Bullard dismissed the Fed's dot plot and claimed the composition of the plot contributed to the sell-off earlier this year, adding that he had considered dropping out of the exercise. He said the issue with forward guidance is that markets may take the Fed's projections as a promise. Harker said he was not a "two-dot member," and claimed there was a very good case for raising rates more quickly. Harker said he expects at least three rate hikes this year. The dovish Evans said rates need to start going up because the economy is getting stronger, and said two rate hikes this year is not at all unreasonable. Moderate member Lockhart warned there could be another hike as soon as next month.

Last Friday, the PBoC had tightened the yuan reference rate to its strongest level since mid-December, at 6.4628, in response to continued dollar selling the wake of the Fed decision. Over the next four days, it dialed back the yuan rate to the softer rate seen before the FOMC meeting. The streak of post-Fed and post-ECB forex gyrations likely dictated the moves. Beijing has pledged to make monetary policy more flexible this year even as it leans more on increased fiscal spending and tax cuts to support economic growth and cushion the pain from structural reforms.

Japan's preliminary March factory PMI fell to its lowest level since early 2013, returning to contraction for the first time in a year. Markit economists warned there had been more deterioration in manufacturing conditions, citing the contraction in output and new orders. The disappointing PMI data comes amid the ongoing dispute about fiscal policy and the question of whether to postpone a second round of sales tax increases as part of the government's ongoing economic reform plan. Finance Minister Aso still wants to implement the hike next spring, and said this week he does not believe the economy needs more stimulus (in the form of withdrawing the tax hike). Meanwhile, Cabinet Secretary Suga was less resolute than last week when he ruled out a delay, stating that the government may in fact postpone the tax hike if overall tax revenues were to fall further. On Friday, Japanese long rates backed up modestly after the BOJ changed the composition of upcoming asset purchases to favor securities with shorter maturities.

Home sales in the US were mixed in February. The annualized rate of new home sales accelerated from the January reading, while the rate of existing home sales slowed somewhat m/m. Both figures were up slightly from last year. The National Association of Realtors (NAR) blamed the lull in existing home sales on delays in contract signings in January from the East Coast blizzard and the slump in the stock market. Meanwhile, new home sales were buoyed by big gains in the West, however the other three regions of the country saw flat to much lower sales. Affordability and supply continues to be a huge problem. "Finding the right property at an affordable price is burdening many potential buyers," said the NAR. Separately, KB Homes disclosed solid first quarter results, including good gains in net orders and backlogs.

Apple has launched a smaller, cheaper iPhone - called the iPhone SE - ultimately aimed at emerging markets and China. The iPhone SE - featuring a smaller 4" screen - is Apple's second attempt to offer an entry-level or mid-tier device, following the poorly received iPhone 5c, launched in 2013. Shares of Apple have rallied 10.3% over the last month as investors anticipate Cupertino has finally found a way to juice its flat lining iPhone sales trends, although AAPL was flat on the week.

Activist fund Starboard Value has committed itself to replacing the entire Yahoo board in a fight to control the company. Starboard - with a 1.7% stake in Yahoo - proposed a slate of candidates includes Jeffrey Smith, its own CEO. Starboard had previously called into question the leadership of CEO Marissa Mayer, and analysts believe that by increasing the pressure on Yahoo's board, Starboard thinks it can finally push the company to sell its core businesses.

In deal news, Marriott raised its offer to acquire Starwood Hotels to $79.53/share in stock and cash, topping Chinese insurance firm Anbang's offer of $78/share. The new total for Marriott's offer is valued around $13.6B, however Marriott's cash component is a mere $21/share, while Anbang's offer is all cash. UK financial data giant Markit has agreed to combine with its US rival IHS in a $13 billion all-stock deal, valued around $31.13/share. The combined company will be headquartered in London and would have had annual revenue of about $3.3 billion in 2015. Sherwin-Williams reached an agreement to acquire Valspar for $113/share in cash - a big 41% premium to the prior 30-day weighted average price - for a total deal value of $11.3B. Shares of Richard Branson's Virgin America shot up more than 15% on Wednesday after the airline was said to be reaching out to potential buyers about a sale of part or all of the company.

Barrons weekend summary

Barrons weekend summary: Positive on FDX, ILMN 

Cover story: Barron's list of the 30 best chief executives includes the leaders of the tech sector's FANG group-FB, AMZN, NFLX, and GOOGL-but not AAPL chief Tim Cook, who is struggling to create the next big hit at the company; New to the list this year are Mark Parker of NKE and Brian Roberts of Comcast, while financial titans Jamie Dimon of JPM, Warren Buffett of Berkshire Hathaway, and Laurence Fink of BLK are among those returning. 

Features: 
1) Fidelity tops Barron's 2016 survey of best online brokers, followed by Interactive Brokers, OptionsHouse, AMTD, and TradeStation; 
2) Positive on FDX: Fears about growing competition from AMZN are likely misplaced, as are key-customer concerns, and the share price could rise 15-20% during the next year; 
3) Positive on ILMN: Company's share took a hit amid the overall collapse of biotech and healthcare stocks, but the gene-sequencing company-which dominates its market-should rebound with solid revenue and earnings growth; 
4) Positive on Smurfit Kappa Group: Irish packaging company's shares could see a 40% boost in the next 12 months if performance continues to improve following its debut on the London Stock Exchange; 
5) Profiles of the 30 global leaders who made Barron's list of the World's Best CEOs.

Tech Trader: Cautious on TWTR: Shares are down 27% this year and 64% during the past 12 months, a sign founder Jack Dorsey's return as CEO hasn't helped; Though Twitter has a massive audience, Wall Street thinks it isn't "mainstream," but may eventually have to accept that it's best seen as a strong niche player. 

Trader: "The market's valuation, at 17 times consensus analyst earnings-per-share estimates for 2016, looks stretched again, given that easy monetary policy and rising oil prices-not earnings growth-are responsible"; Determining whether there's any value left in VRX's assets will take time, but for now "it remains an uninvestible trap with too many unknowns"; David Zion of CS says companies in the S&P 500, excluding financials, hold at least $750B in cash overseas, up from $690B a year ago-and for some firms, the money is a significant part of their market cap. Interview: Joel Tillinghast, portfolio manager, Fidelity Low-Priced Stock fund, buys only stocks priced less than $35 and looks for a highly visible discount to fair value (picks: ANTM, KEYS, BBBY). 

Profile: Anne Walsh, chief investment officer at Guggenheim and co-manager of the Guggenheim Total Return Bond fund, seeks to minimize the effects of behavioral biases (top ten holdings: asset-backed securities, non-agency MBS, U.S. Treasuries & Agencies, high-yield corporate bonds, investment grade corporate bonds, bank loans, commercial MBS, preferred securities, municipal bonds, military housing bonds). 

Follow-Up: Cautious on TSN: Company's move into prepared foods lifted shares by 66%, and there is more growth in store, but the stock's valuation is high, and investors may want to take their profits. 

European Trader: Positive on NN Group: Insurer and asset manager "could offer investors a degree of protection in today's challenging markets. Its shares look cheap despite solid fundamentals, and they could climb 20% or more in the next 12 months." 

Asian Trader: Despite criticism from abroad, the Bank of Japan's negative rates haven't stalled the yen, which has gained on the dollar, but that strength undercuts consumer confidence. 

Emerging Markets: A weak dollar might help Brazil, but it needs domestic infrastructure projects, which are unlikely to come because of the country's debt burden and political morass. 

Commodities: "Copper prices are heating up after a long downturn," but investors should be wary because the rally is being driven more by market momentum than fundamentals. 

Streetwise: GS strategist David Kostin added BMY, NKE, and SHW to his basked of strong-balance-sheet stocks; REGN, which is also on the list, has taken a hit this year, but investors should focus on its pipeline.

Dovish Fed Ends Dollar Rally, Sends Stocks Higher

TradeTheNews.com Weekly Market Update: Dovish Fed Ends Dollar Rally, Sends Stocks Higher
Fri, 18 Mar 2016 16:09 PM EST

This mid-March week was dominated by a string of monetary policy decisions, with the key focus falling squarely on the Federal Reserve. Risk on sentiment was rewarded when the Fed apparently blinked, delivering an even more dovish statement that expected. The Fed decision got some cover from poor retail sales revisions that erased what had been strong sales data in January. US Treasury rates were touching monthly highs heading into FOMC statement after February core inflation ran hotter than expected. The 2-year yield touched 1% for the first time since early Jan before a dovish FOMC statement and press conference sent short rates forcefully lower. The curve steepened pushing the 10-2 Treasury yield spread wider by roughly 5 basis points. For the week, the DJIA gained 1.8%, the S&P500 advanced 1.3%, and the Nasdaq added 1%.

The week started off with a BOJ policy decision. The Japan central bank maintained its rate and quantitative easing targets unchanged, but it downgraded its economic assessment to reflect a slowdown in exports. Elsewhere, the Norway central bank cut its key rate by 25 basis points to 0.50%, as expected, and said it could cut further this year, but is approaching the lower bound. South Africa's SARB raised its rate 25 basis points to 7.00% citing inflation concerns. The BOE, SNB, Banixco (Mexico), and Russia central bank also had meetings this week, leaving their policies unchanged.

The FOMC decision was the most impactful monetary policy announcement of the week, and it also delivered the biggest surprise. As expected, interest rates were left unchanged, but the policy statement was more dovish that expected as the Fed refrained from restoring language about a balanced risk outlook. In addition, the Fed's rate path projections moved much closer to the market outlook, with the Fed's median projections for rate hikes cut in half from 4 to 2 for this year. The US dollar sold off and equities rejoiced with both the Dow and S&P 500 continuing their winning ways with a fifth positive week and erasing all the losses of January and February.

The USD Index hit a 5-month low. The Yen benefited from repatriation flows ahead of Japanese fiscal year-end at the end of March and saw gains throughout the week. As USD/JPY tested below 111.00, speculation reemerged that the BOJ might intervene in FX markets to combat recent yen strength. Meanwhile, several ECB members (Draghi, Praet) noted that the ECB had not run out of ammunition and rates could go lower. The verbal intervention tempered some of the post-FOMC strength seen in the Euro.

Another key story was the rebound in oil. With emerging market central banks broadly remaining accommodative, flows to riskier assets, alongside the dollar decline, benefited the oil rally. Crude gained another dollar this week, and WTI managed to peek above the $40/bbl mark for the first trading day of January. The main driver outside of the weaker Greenback this week was the potential OPEC/non-OPEC production freeze summit. It appears that producers have settled on a meeting on April 17th in Doha. About 20 nations have been invited, and officials said the summit will now take place with or without Iran attending.

Despite the strength in equity markets, the biotech sector was under pressure again this week as Valeant's woes continued. The biotech roll-up reported disappointing Q4 results on Tuesday and cut guidance, admitting that it continues to face challenges. In addition, management said that it would not be able to file its annual report in a timely manner, creating a technical breach of its debt covenants. Creditors were quick to pounce, reportedly demanding higher interest payments to grant Valeant a waiver on debt covenants. By the end of Tuesday, VRX shares had plunged 50% and other firms with a similar model were also under pressure.

In M&A news, Starwood has inspired a bidding war. A consortium led by China's Anbang raised its preliminary offer by another two dollars to $78/share in cash, putting pressure on Marriott to improve its standing offer. Another Chinese firm, Zoomlion, raised its bid for Terex by a dollar to $31/share, tempting Terex to call off its pending merger with Finland's Konecranes. Meanwhile, TransCanada reached an agreement to acquire Columbia Pipeline Group for $13B in cash.

Barron's weekend: positive on ASH, IR, KORS 

Cover story: Growth stocks, especially the so-called FANG group (FB, AMZN, NFLX, GOOGL) have led the broad market, but in recent months they've grown too rich for many investors, while value stocks are becoming too cheap to ignore; Story looks at 16 ways to play value's resurgence (C, GS, TWX, DISCA, MU, INTC, BA, CMI, AMGN, PFE, F, GM, IWD, IWN, AWSHX, TRVLX). 

Features: 
1) Positive on IR: Company "remains undervalued relative to the broad stock market and other industrials, especially considering how well its profits have held up amid a recent weak patch for the group"; 
2) Positive on KORS: Company is expanding its product lines and closely monitoring inventory; it also plans to expand in footwear and menswear and boost its presence in Asia and Europe; shares could rally 30% in the next year; 
3) Positive on ASH: Shares of motor oil and specialty chemical maker have fallen from last May's 52-week high and now look cheap, especially because of the upcoming Valvoline spinoff, which should benefit investors. 

Tech Trader: Many people on Wall Street have realized that it will be increasingly difficult for the PC sector to grow, while others remain in denial that it's a dying category; Only challengers such as AAPL and other companies that bring novel approaches to the business are likely to thrive. 

Trader: Some investors wonder if the ECB's stimulus will work amid fears that chief Mario Draghi has "thrown in the kitchen sink" and that there are few options left for boosting Europe's economy; Cautious on Z: The market is ignoring a number of factors that could send shares down, such as growing losses and the fact that the company can't make a net profit with 70% market share; Positive on ADT, ALR, ARG, CVC, RAD, TUMI: The shares prices of these acquisition targets are significantly lower their deal prices, offering investors an attractive annualized yield. 

ETF Special Report: Experts discuss the latest trends in exchange-traded funds and explain what investors need to know about "smart beta"; Picks: Larry Whistler of Nottingham Advisors (USMV, EEMV, PXF), Michael Yoshikami of Destination Wealth Management (SDY, VUG, VTV). 

Profile: Phil Davidson, portfolio manager, American Century Equity Income (top 10 holdings: Bank of American conv, Wells Fargo conv, XOM, PG, SYY, SLB, JNJ, PFE, WMT, Microchip Technology conv). 

Small Caps: Positive on HYH: Shares of surgical and infection products appear poised to double in three years as the company expands its product line through acquisitions. 

Follow-Up: Cautious on BABA: Chief Jack Ma's transfer of Alipay ownership to Ant under flimsy pretexts continues to raise issues for investors, and the company's shares could eventually become toxic; Positive on Samsonite: Luggage giant's acquisition of TUMI "offers a lot of opportunities to boost margins, revenue, and profit in the next few years." 

European Trader: The stimulus efforts announced by European Central Bank head Mario Draghi could be good news for bank stocks, and the decision to purchase corporate bonds could lead to a rally; Companies such as ISS, SAP, and Linde are potential beneficiaries. 

Asian Trader: Iron-ore prices, now nearly $58 per dry ton, could fall to the low $30s or high $20s by the end of the year and remain there until 2017 (Cautious on RIO, BHP, Vale, Fortescue). 

Emerging Markets: "Colombia is suffering from stagflation, but you wouldn't know it from the performance of the local stock market." 

Commodities; Gold isn't likely to keep going up at its current pace, says Julian Jessop of Capital Economics, and those who believe industrial metals will improve should buy silver. 

Streetwise: Mutual funds aren't happy with the SEC's proposal to force them to keep more cash on hand to meet redemptions, which is difficult because many funds are having a tough enough time beating their benchmarks.

From Beijing to Frankfurt

TradeTheNews.com Weekly Market Update: From Beijing to Frankfurt
Fri, 11 Mar 2016 16:37 PM EST

China and the ECB set the tone for global markets this week. Last weekend, the Chinese leadership disclosed their economic projections for 2016 at the National People's Congress (NPC), unveiling a GDP target range of 6.5-7.0%, as well as a higher fiscal deficit level. China left its CPI target at +3%, and cut its fixed asset investment growth to 10.5% from 15% prior. The changes were largely in line with expectations, although enthusiasm was tempered by the very weak February China trade report out later in the week. On Thursday, the ECB launched another round of monetary policy stimulus, cutting all three of its key policy rates and adding to its monthly QE bond buying scheme. Mario Draghi warned markets that there would not be much more easing on tap from the ECB, while simultaneously claiming that the ECB was not out of ammo. Thursday was the seventh anniversary of the current bull market, as measured from the Monday following the S&P500's ominous bottom at 666 on Friday, March 6th 2009. US markets were flattish and devoid of much major news (beyond the continuing political circus of the presidential nominating contest) until Friday, when stocks surged higher. For the week, the DJIA added 1.2%, the S&P500 gained 1.1%, and the Nasdaq rose 0.7%.

Markets eyed the February China trade report with concern. China's trade balance sank to a 10-month low in yuan terms and an 11-month low in dollar terms, while yuan exports fell 20.6% y/y, their biggest annualized decline since May 2009. Chinese exports have now fallen for eight months in a row, while imports have contracted for 16 straight months. Shipments to the US, Europe and Japan were all down about 20% y/y, racking up bigger declines than high-single/low-double digit slippage seen last month. The data also explain why last weekend Premier Li decided to skip 2016 projections for the trade component of the economy. After the trade numbers, HSBC suggested that recent hopes for a global rebound need to be tempered, as the figures clearly show the downturn in global demand is not getting any better.

In its decision on Thursday, the ECB cut all three of its key rates, and expanded the QE bond buying program by €20B to €80B a month. In something of a surprise move the central bank also said that non-bank investment-grade corporate bonds will now qualify for the buying program, vastly expanding the universe of debt the ECB can choose from. Fears about the perilous state of some banks remain a big problem for the euro zone recovery. While bonds issued by banks still don't qualify for ECB buying, falling yields on other corporate debt due to ECB buying will likely inspire investors to turn to bank debt for yield. The ECB also eased bank funding costs by unveiling a new four-year TLTRO loan program, which could carry interest rates as low as the deposit rate (now cut to -0.4%). In the press conference, President Draghi suggested that there would be no further easing (unless things got much worse), which somewhat dampened the immediate response to the decisions. Draghi also took pains to reiterate that the ECB is by no means out of tools or out of ammo. Buyers snapped up Greek and Portuguese government bonds after the announcement, while most other sovereigns sold off, sending yields higher.

The final reading of the fourth quarter GDP report confirmed Japan's economy has dipped into contraction for the second time in three quarters. The final reading was a bit less bad than the preliminary data, thanks to slightly better corporate capex spending. There was more talk that the government would again push back the second round of sales tax increase from the current April 2017 target date, with a key cabinet meeting scheduled for March 16th.

Commodity prices see-sawed through the week, following the ups and downs of the Chinese economy. Chinese iron ore futures gained 19% on Monday, to multi-month highs, topping an eight week rally, after Beijing set its 2016 GDP target range, then reversed around half this rally on Wednesday after the brutal February trade report - but then reversed higher through week's end. Other major industrial commodities followed a similar trajectory. After following the run-up in commodity prices over recent weeks, mining stocks saw steep losses mid-week, although many of the global mining majors closed out the week flat, with the exception of Vale, which is down 13% thanks in part to the chaos devouring the Brazilian political leadership. Goldman Sachs published a note on Wednesday arguing that deflation, divergence and de-leveraging would reapply downward pressure on commodity prices in the near term.

The rally in crude oil prices slowed but did not stop, as WTI tested YTD highs just shy of $39 and Brent equaled November highs above $40. Maneuvering ahead of a potential oil production freeze summit continued. There had been talk that OPEC and some non-OPEC nations would meet on March 20th in Moscow to seal the deal, but officials said the inability to get Iran on board meant the meeting would most likely take place in April. Sources say Iran is demanding to be allowed to freeze production at its pre-sanctions production level of 4.0M bpd, rather than current levels, which were just over 2.9M bpd in January. The Kuwait Oil Minister said they would only join the freeze if "all major producers" signed on, and threatened to sell "every barrel Kuwait produces" if there is no deal.

Global banking giants Deutsche Bank and Citigroup both made cautious comments at industry conferences about the business environment for banks in the first quarter. Citigroup's CFO warned that revenue from equity and fixed-income trading would fall 15% y/y in the first quarter, while investment banking revenue would fall 25% y/y. Deutsche Bank's CEO said the seasonally strong first quarter might turn out to be challenging for the sector overall, given the heightened volatility in global markets.

United Continental CEO Oscar Munoz said he would return to work just two months after heart transplant, and was welcomed back by a big push by two funds to take control of the board. Holders PAR Capital (3.8% stake) and Altimeter (3.1% stake) said they would launch their own slate of six board members and nominate former Continental CEO Gordon Bethune as chairman, claiming the current board is not holding management accountable. United said they had been engaged in talks with the two firms, and also said they were disappointed the firms could not reach a deal with management.

There was talk that BASF was mulling a rival bid for DuPont, which is in a pending deal with Dow Chemical. According to reports, BASF had contacted DuPont last year, before announcing a $130 billion merger agreement with Dow. Deutsche Boerse is expected to formally announce a merger agreement with London Stock Exchange next week. TransCanda disclosed that it was discussing a "potential transaction" with an unnamed third party, following press reports that a $10B merger with Columbia Pipeline Group was under consideration.

Barron's weekend

Barron's weekend: cover story picks Clinton over Trump as better for the economy; positive on MLM, STCK, MYL; cautious on DB 

Cover story: After looking at the positions of Hillary Clinton and Donald Trump on taxes, spending, trade, and other issues, Barron's concludes that Clinton, "the strong favorite to win the Democratic nomination, seems better suited to help the markets than the Republican front-runner, Donald Trump."

Features: 
1) Positive on MLM: Earnings at the miner of rock, sand, and gravel could double this year as government infrastructure budgets grow and residential and commercial building increases; shares have a possible 35% upside; 
2) Cautious on DB: Bank has faced global sanctions for various misdeeds over the past years, and could soon lose the right to run U.S. retirement funds if a Labor Department ruling goes against it; 
3) Positive on MYL: Shares of drugmaker are down after it rejected a bid from from TEVA and embarked on a deal for Meda, but the current valuation seems to price in more problems than the company has, and the stock could rise by 30%; 
4) Positive on STCK: Shares of nation's second-largest lumber and building-materials distributor have taken a hit because of investor sentiment about the housing recovery, but they appear undervalued and could gain 20%.

Tech Trader: Cautious on GOOGL: The transition to having more self-driving cars on the road will be messy, and for a long period of time they may be segregated in separate lanes; Insurers and regulators must deal with liability issues, and there will be a debate about who owns the data the cars generate. 

Trader: For a sustained rebound, says Michael Mullaney of Fiduciary Trust, investors need to see positive earnings estimate revisions; Cautious on DNKN: With same-store sales comparisons worsening and traffic down, shares could fall 20% to around $37 from about $48; The SEC should approve IEX Group's application to be an exchange, and not try to predict the outcome of its experiment to force market makers to honor their quotes. 

Advisor Rankings: Barron's annual list of the top financial advisors by state, with profiles of the top advisors in each state. Profile: Andrew Foster, manager of the Seafarer Overseas Growth & Income fund (top 10 holdings: Bank Pekao, INFY, Hang Lung Properties, Sanlam, BBD, Samsung Electronics, Singapore Telecom, Astra International, Texwinca Holdings, Grupo Financiero Banorte). 

Interview: Amid Wadhwaney of Moerus Capital, a hedge fund that will open this summer, talks about undervalued stocks (picks: Sino Land, GTE, Global Logistics Properties, Major Drilling). 

Follow-Up: Positive on BRKA: Berkshire Hathaway "remains a solid choice for conservative investors because of the company's ample earnings power, steadily rising book value, and reasonable valuation." 

European Trader: "European stocks-bank shares in particular-could continue to rebound as long as central bankers don't pull any surprises this week"; Positive on Capita: Shares of London-based advisory, administration, and transaction services could gain 20% in the next 12 months. 

Asian Trader: Western consumer brands seeking to expand in India could take a hit from the growing trend of Indian consumers buying natural products using ingredients from the ayurveda tradition (+/- CL, Nestle). 

Emerging Markets: "For emerging market equities, the worst may be over as central banks go all-out to boost global growth"; BAC's Ajay Singh Kapur and Ritesh Samadhiya favor cyclical stocks, and suggest selling defensive staples such as healthcare, utilities, and telecoms. 

Commodities: Erratic weather patterns around the world are affecting coffee production, which is concentrated in a small number of countries, including Colombia, Vietnam, and parts of Brazil. 

Streetwise: Cautious on WLL: C analyst Jeanine Wai says company would need to sell $3.5B in new shares, more than twice its current market value, to bring its debt "below the dividing line separating good balance sheets from the bad."

Recession? What Recession?

TradeTheNews.com Weekly Market Update: Recession? What Recession?
Fri, 04 Mar 2016 16:04 PM EST

US and European equity markets saw their third straight week of gains as stronger crude prices and the prospect of more easing kept the rebound on track. The ECB has all but guaranteed more easing at its policy meeting on March 10th, and President Draghi reiterated that the ECB has no limits on policy tools that are within its mandate, highlighting the growing downside risks to the euro zone outlook. Russia, Saudi Arabia and an ad-hoc group of other OPEC producers continue to discuss a meeting later this month to finalize plans on freezing crude production at current levels, helping push crude futures close to YTD highs. In China, the PBoC kept the yuan strong and cut the RRR ratio for the first time since 2009. There was a raft of dodgy US economic data, but the very good February jobs report provided a strong counterweight, and by Friday markets were pricing in at least one Fed rate cut this year, as well as a small chance of second rate hike by the fourth quarter. For the week, the DJIA rose 2.2%, the S&P500 gained 2.7%, and the Nasdaq added 2.8%.

US economic data out this week included more subpar manufacturing sector reports (the Feb Chicago PMI), weak January home sales numbers and even a Feb ISM services report that raised questions about the consumer-driven side of the economy, but the strong February US jobs report trumped them all. February non-farm payrolls rose by 242K, the 72nd straight month of uninterrupted job gains, by far the longest streak on record. December and January payrolls were revised higher, putting monthly job gains over the past three months at a very healthy average of 228K. Unemployment remained at 4.9%, equal to the eight-year low seen in January. Somewhat offsetting these very positive components, wages fell by 0.1% versus the 0.5% increase in January, for a 2.2% bump in the annual gain. The Fed's beige book was split, with half the Fed districts reporting economic growth and the other half showing flat to slightly down conditions.

China's PBoC resumed its easing cycle on Monday, cutting the reserve requirement ratio (RRR) by 50 bps, taking the ratio to 17% for the nation's biggest lenders. It was the first cut in the key policy rate since last October, and comes as somewhat of a surprise given that the PBoC had previously said it would rely more on short-term cash injections to maintain liquidity. The PBoC did conduct open-market operations on Monday, however the RRR cut suggests that the short-term liquidity operations have not been as successful as hoped. Note that the announcement came just after the government said 1.8 million workers would be laid off from the steel and coal sectors, in an effort to curb overcapacity, and just ahead of the annual meeting of the National People's Congress, which will discuss the continuing implementation of President Xi's plan for deep structural reforms.

The G20 last weekend met the very low expectations, as leaders agreed yet again that monetary policy was no longer sufficient to address the ills of the world economy and promised to refrain from competitive FX devaluation. China specifically used its role as host of the event to reassure its global partners that it did not intend to further devalue the yuan. The PBoC raised the yuan reference rate to a three-week high by Friday even as they pumped more cash into the domestic economy. After the G20, Chinese officials kept up a steady drumbeat of commentary to the effect that the yuan would remain steady and that another big devaluation was "impossible."

Polling ahead of Britain's June referendum on continued European Union membership appears more or less deadlocked. An ICM poll saw support for and against the EU tied at around 41%, while an ORB poll saw 52% in favor of leaving and 48% saying they would vote to remain in the EU. Prime Minister Cameron began amping up his rhetoric in favor of the "stay" option, highlighting the unknown and possibly very high costs that would come with the choice to leave the EU, just a week after his conservative rival Boris Johnson threw his weight behind the "go" camp. After peaking above 1.4650 at the beginning of February, cable bottomed around 1.3850 on Monday then firmed somewhat, closing out Friday around 1.4250.

The ongoing political and economic crisis in Brazil reached a head on Friday, as police raided the home of Luiz Incio Lula da Silva, the former president who is under investigation in the colossal "Car Wash" graft scheme involving national oil company, Petrobras. Lula was taken into custody for questioning, just a day after reports claimed that Delcdio do Amaral, a senior senator in Lula's Workers' Party, was negotiating a plea deal to testify that Lula was deeply implicated in the scandal. Current President Dilma Rousseff is already facing impeachment proceedings, and it appears that Amaral has the goods on her as well, greatly increasing the risks to her office. Nationwide anti-government protests are scheduled for mid-March, and many analysts suggest the government may not survive for much longer. As the socialist government unravels, markets like what they're seeing: the Bovespa has rallied more than 40% since its January low, adding nearly 18% this week alone. The real has strengthened around 7% on the week, with USD/BRL dropping to around 3.72, its strongest level since last August. Shares of Petrobras rallied ~50% this week.

Crude prices probed YTD highs as futures racked up their third straight weekly gain, with Brent topping $38 and WTI approaching $36. Russia confirmed that the oil production freeze summit will take place later this month, featuring the participation of 15 major OPEC and non-OPEC producers, although parties to the deal were taking pains to reiterate that no production cuts are under discussion - only the production freeze. Markets remained optimistic despite another stunning set of gains in US weekly inventories, with the DoE build about four times the expected amount. Meanwhile, US natural gas futures settled at a 17-year low on Thursday around $1.68 thanks to oversupply and the warm winter in North America.

February auto sales data was relatively strong, providing a counterpoint to the weak US manufacturing theme that continues to obsess US participants. Fiat Chrysler and Ford sales were very strong, although General Motor's headline figure widely missed the mark due to some specific company factors. Ford led the way with a 20.4% gain thanks to an uptick in its fleet business, while sales at Fiat rose 11.8%. GM's sales fell 1.5% due to a decrease in rental sales, although this was largely the result of a planned reduction in rental deliveries.

In M&A news, Intercontinental Exchange said it would compete with Deutsche Boerse to acquire the London Stock Exchange. ICE hasn't given a formal offer to LSE, and no decision has yet been made as to whether to pursue such an offer. Last week, shares of LSE soared 17% after Deutsche Boerse proposed an all-stock deal. Theater chain AMC Entertainment reached a deal to acquire Carmike Cinemas for $30/share in cash, in a total deal valued at $1.1 billion. Honeywell formally abandoned its pursuit of United Technologies, citing the latter's unwillingness to engage in negotiations.

March-April 2016 Outlook

TradeTheNews.com March-April 2016 Outlook: March Madness
Thu, 03 Mar 2016 23:05 PM EST

Leonardo DiCaprio's now infamous run-in with a bear may have been a harbinger for the markets early this year. Just a couple of days into the New Year, it was apparent that global markets were going to test the resolve of central bank policy makers. Stocks and oil prices were mauled, currencies saw outsized daily movements, and bond yields experienced renewed downward pressure - all signaling discontent in the markets.

Looking back, the last two months of retrenchment were not entirely unexpected after the rough start seen in the opening days of 2016. As predicted, the markets didn't have much appetite for the Fed's tightening message, and expectations are growing that the Fed will take an even slower rate tightening path. The fourth quarter earnings season was subpar, as retailers continued to struggle against ecommerce at Christmas, a number of tech firms failed to justify their large multiples, and Apple appeared to turn the corner from a growth stock to a value stock. The US Presidential race has been pared down, with only three viable GOP candidates left, and a likely Clinton versus Trump general election moving toward a reality. Meanwhile, the PBoC refrained from any new big currency moves, as expected, and even pushed the value of the yuan up over most of February to discourage speculative trading.

For the time being, the optimism about the US recovery that led the Fed to raise rates in December has been dampened by a fresh round of global uncertainties ranging from persistent low inflation to an unprecedented political environment. These problems are being magnified as Europe and Asia are still struggling to right themselves.

The question for this spring is how bad the current economic environment will become. It may just be another short lived "tantrum" caused by the Fed starting a tightening cycle years before other central banks can follow suit. Or it could be the prelude to a recession, which is a growing minority opinion. In the worst case scenario, it could be a global deflationary wave eroding confidence in central banks set to trigger a fresh financial crisis at a time when central banks are low on ammunition.

Marching to a Different Drummer

Stubbornly low inflation remains at the heart of the current economic malaise. Central bankers in the US, Europe, and Japan would roll out the red carpet for any sign that consumer and industrial demand was starting to edge inflation up toward target levels. But inflation has so far defied numerous predictions that an upturn is just around the corner, leaving economists and central bankers to repeatedly push out their forecasts for rising prices.

While other factors are certainly at play, oil prices have been emblematic of the low inflation problem. Crude futures have surrendered all of their speculative froth, while the Fed has been describing the effects of low oil prices as "transitory" since December 2014. The two-year long collapse in energy prices has still not seeded any of the consumer spending that economists were counting on, and razor thin margins are pummeling the energy extraction industry, resulting in dramatic capex cuts and the loss of many high paying jobs.

Despite some high cost wells being shuttered, all indications are that crude still has lots of excess inventory to work off. Cushing crude stocks continue to hit fresh record highs almost every week and the big refinery turnaround season underway in the next two months will exacerbate the glut. In another anecdotal indication of oversupply, a recent report said that port of Rotterdam has 50 tankers awaiting unloading, the highest number since 2009 and double the normal amount. To top that off Middle Eastern oil supplies will expand as Iran ramps up its production as sanctions are lifted.

Russia and Saudi Arabia have raised hopes for an end to the misery in the oil market by striking a tentative deal to freeze output levels. Under the agreement brokered by Qatar and Venezuela, participants would freeze production at January levels. This would not eliminate the supply and demand imbalance any time soon, but could create the prospect for a more wide reaching production accord when participating nations meet to discuss the freeze sometime during March (the meeting date has not been specified yet).

Mounting global uncertainties are also contributing to the low inflation environment, as consumers fear overspending when they can't predict if the economic recovery will continue or if recession is around the corner. One inescapable source of uncertainty is the strange dynamic of the US Presidential race. A year of populist revolt has seen the rise of Donald Trump as the now likely GOP nominee and a strong challenge from Bernie Sanders against Hillary Clinton. The untimely death of Justice Scalia may become the deciding factor as President Obama's Supreme Court nomination in the next few weeks will draw out partisans on both sides (assuming Obama can find a sacrificial lamb willing to expose her life to the political circus with little chance of ever being rewarded with a confirmation hearing).

The other major ongoing political story is the UK referendum on remaining in the European Union, with a vote now scheduled for June. PM Cameron came back from Brussels with a reform deal to keep the UK in the union, but some high profile members of his own party, including a number of cabinet members and the flamboyant London mayor, have come out in support of a Brexit. The uncommitted vote is still large enough to swing the referendum in either direction, so Cameron will have to campaign hard, and the polling will be watched very closely between now and June.

The other prickly topic in Europe these days is the continuing flood of migrants fleeing the Syrian conflict. The EU and Turkey will hold a summit on March 7th to discuss the flow of refugees through Turkey and into Europe. There has already been a backlash in many EU states and the burden for Greece -- being on the front line of the migrant influx -- is causing complications in Athens' ongoing debt discussions with European creditors. The issue has even given some Euro-skeptics ammunition to suggest that the Schengen agreement, a cornerstone of the Union which allows unhindered travel between states, should be suspended.

PREDICTIONS: Crude prices have been behaving better in the last couple weeks, showing tentative signs of stabilization. Russia and Saudi Arabia have made a good show of their oil freeze accord, but it won't make much difference if the agreement doesn't bring in other large oil producers. So far, Iraq has expressed support for the idea but has not agreed to sign on to it, and Iran's oil minister declared the production freeze to be "a joke."

Saudi drew its line in the sand on production two years ago and it will take some time for shrinking capex budgets to trickle down into a tighter oil supply. The good news is that the gyrations in oil prices may be more about the oil market itself than about a prospective global downturn. Economists note that recessions tend to be proceeded by rising energy prices, not falling prices. They also still hold out the hope that consumers will start spending their energy savings more readily when some of the uncertainties that have led them to save the money start to dissipate.

For the markets, the ultimate question will be how far ahead we can anticipate the eventual rebound in oil prices. Some optimistic OPEC ministers are hoping for better prices in the second half of this year, but more conservative estimates see prices finding somewhat higher levels in 12 to 18 months. Oil market speculators could push up that timetable in anticipation a more balanced market, so late 2016 might indeed be a better time for oil prices and energy companies.

The major political campaigns of this spring will continue to create uncertainties for the voters and the markets. The Presidential race looks poised to enter the general election campaign with two highly flawed candidates, marked by some of the highest negative polling ratings in history. Dreams of a white knight at a contested Republican convention (Mitt Romney) or a miraculous third party entrant (Mike Bloomberg) could keep stirring the political pot for months to come. Meanwhile in the UK, an affirmative Brexit vote is still seen as the outlying case. However, if the polling should drift toward that result in the weeks ahead, it should be noted that an HSBC analyst has predicted that a Brexit would wipe 20% off the pound sterling.

Beware the Ides of March

A lot of central bank activity will converge around mid-March. For more than a month, the ECB has been teasing new measures at its March 10th meeting. The BOJ will hold its monthly conclave a few days later, and then on the 16th the Fed will take its turn in the spotlight.

The ECB has all but guaranteed more stimulus at its upcoming policy meeting. At the last meeting, President Draghi promised to fully review and "reconsider" policy in March alongside the release of updated economic projections. He said the council would weigh a full range of policy options and gave assurances that there are still many monetary policy tools at their disposal as well as the required "power, willingness and determination to act."

There must be some concern, however, that the ECB is no longer getting the bang for its buck (or rather, the 'effect for its euro'). The new measures announced just last December disappointed markets to some extent. Though the key rate was cut another 10 basis points to negative 0.30% and the scope of QE was expanded in both duration and composition, the monthly size of QE purchases was not increased. Reports at the time indicated that a northern European block objected to going further and indeed there were five dissenting votes on the council (led by the Bundesbank's Lautenschlaeger and Weidmann).

The German contingent has led the hawks throughout Europe's navigation of the financial crisis, but this time they may sit on their hands when Draghi calls for new stimulus because Germany's largest bank is at the center of the latest financial storm. Negative rates and a still slow loan environment have been especially tough on Deutsche Bank, which has prided itself on providing the entire menu of banking services, even at the expense of the bottom line. The ECB's Coeure recently indicated that the council is sensitive to the burden that negative rates are putting on European banks and hinted that the next stimulus package could include provisions to help banks deal with adverse consequences of prolonged negative rates. If true, that could convert prior dissenters into affirmative votes.

Even as the ECB has been telegraphing its next policy moves, Asian central banks have tried a different tactic. The BOJ shocked almost everyone with its decision to match Europe's negative rate posture. And in China, the PBoC continues to utilize the element of surprise in its efforts to thwart the speculators that the government vilifies.

With only a month gone by since its surprise rate move, the BOJ is not expected to do more than jawbone at its March meeting. The government, however, may be on the move again. Reports say that Prime Minister Abe's cabinet has begun to consider new emergency economic measures to provide additional support. This comes as corporate profits deteriorated last quarter, leaving many Japanese firms bracing for further weakness as a stronger yen has undermined the PM's growth initiatives.

China got a lot of the blame for the market retrenchment in the New Year on escalating fears that policy makers were losing control of the currency. The Chinese central bank has refrained from any more jarring currency moves like the sudden devaluation that caught markets off guard last summer, but further yuan weakness in early January raised some questions about whether monetary officials were still in control. The PBoC has since firmed up the yuan to thwart currency speculators, and to assuage concerns of foreign partners that China might export deflation to the world. Furthermore, at the G20 meeting of financial ministers that was just hosted by China, Beijing gave assurances that it would not initiate more sudden movements in its currency.

Over the first half of March, China's National People's Congress will hold its annual meeting to introduce major policy initiatives and set new targets for growth and inflation (announcements expected March 5). Going into the congress, reports say that the CPI target is likely to be maintained at 3% and the M2 money supply target could be raised one percentage point to 13%. The GDP target could step down another notch as PBoC officials are forecasting growth between 6.0-7.0% this year after 2015 came in just under the target of "around 7.0%." Additionally, the PBoC statistics department has called for the fiscal deficit to be increased by one percentage point more than previously planned to 4% of GDP. Presumably that would promote greater government spending on stimulative public works projects.

Back in the US, the Fed has to consider scaling back its plans for higher rates. At the March FOMC meeting, the policy statement probably will not change drastically after the economic outlook was downgraded earlier this year. In the January statement, the Fed said it now expects inflation to remain low in the near term and it deleted a reference to being "reasonably confident" about inflation being on track. Commentary about global concerns was also intensified, as the Fed struck language about the outlook for economic activity being balanced. Altogether these changes signaled the Fed would probably be on hold for a while.

In their individual speeches, Fed officials have tried to create the impression that they have an open mind about the March meeting, with many of them saying every meeting is still "live" for potential rate hikes. However, the Fed's data dependent stance won't leave much room for policy action in March, because the data has not been particularly good.

Though payrolls have been solid, a lot of the job creation has been in low paying entry level jobs. It's true that unemployment has edged below five percent, but the economy has been near full employment for the better part of a year, so the low jobless rate has lost some of its positive psychological impact. Wage inflation is still elusive, and that, coupled with continued weak industrial production data, should give the Fed enough cover to keep rates on hold in March.

The Fed's updated Summary of Economic Projections (SEP) will be the most closely scrutinized part of the FOMC release. In December, the SEP predicted a central forecast of four rate hikes in 2016, which would be a pace of every other meeting. Global economic conditions clearly no longer warrant such an aggressive tightening schedule, and the dot chart is expected to reflect this in March.

PREDICTIONS: The periodic application of fresh stimulus has kept markets in a risk on mode for most of the last several years, but there is growing evidence of diminishing returns. Markets retrenched throughout the first two months of the year despite the ECB's expansion of QE in December (and the promise of more in March) and the BOJ's surprise rate move. The experimental use of negative rates pioneered by the ECB, shows central banks can continue to innovate, though it has also created some misgivings.

The ECB President may hear fewer dissenting voices if he brings out the bazooka again, possibly completing the QE trifecta announced in December by increasing the pace of monthly bond purchases from the current €60B/month. For good measure, the ECB may also cut rates another 10 to 15 basis points into negative territory, as long as they find a way to shield commercial banks from the blow. After pledging new action for the last six weeks, anything less would surely disappoint markets.

For the time being, Japanese officials will probably choose rhetoric over additional action, taking time to assess if negative rates are having the desired effect. Yet, now that the BOJ has crossed the threshold to experiment with negative rates, it seems likely that further cuts will be forthcoming eventually. In the meantime, the government may provide a supplementary budget with targeted stimulus, or give more consideration to postponing the next phase of a planned consumption tax hike.

Growing pessimism about the prospects of the world's second largest economy demand that China keeps up its ad hoc stimulus initiatives. The People's Congress will set achievable targets as it continues to ease the economy into a consumer driven model. Further monetary easing is likely to be proposed and executed periodically to help cushion the pain of reform efforts.

In the US, the Fed can afford to be patient on any further tightening. Uncertainty abounds, and another rate hike at this fragile moment could tip things in the wrong direction. Also, other central banks are cutting rates, which is the equivalent of the Fed tightening - so, relatively speaking, the Fed can essentially tighten just by standing still.

Fed Funds Futures aren't fully pricing in the next Fed rate hike until early 2017, way out of line with the December dot charts that predicted FOUR more hikes this year. Clearly something has got to give and that will probably be the Fed forecast, which could be trimmed to three hikes or even two, but certainly won't give up on the notion that the tightening cycle should continue. In giving this ground Chair Yellen will reprise her warning that a slower start to the cycle is apt to lead to steeper hikes later on.


CALENDAR
MARCH
1: UK Manufacturing PMI; Euro Zone Unemployment; US ISM Manufacturing PMI; Super Tuesday Primaries & Caucuses in 12 states
2: UK Construction PMI; China Caixin Services PMI
3: US ISM Non-Manufacturing PMI; US Factory Orders
4: US Unemployment & Payrolls; US Trade Balance
5: China National People's Congress annual meeting

7: German Factory Orders; EU Summit on Refugees; Japan Final Q4 GDP; China Trade Balance (tentative)
8:
9: UK Manufacturing Production; China CPI & PPI
10: ECB policy statement and press conference; US JOLTS Job Openings
11: US Preliminary University of Michigan Confidence
12: China Industrial Production

13: BOJ policy statement
14:
15: US PPI; US Retail Sales
16: UK Claimant Count & Unemployment; US Housing Starts & Building Permits; US CPI; US Industrial Production; FOMC policy statement & press conference
17: Euro Zone Final CPI; BOE policy statement; BOJ Minutes
18: Philadelphia Fed Manufacturing

21: Various Euro Zone Flash Manufacturing readings; US Existing Home Sales
22: UK CPI & PPI; German ZEW Economic Sentiment
23: German Ifo Business Climate; US New Home Sales
24: UK Retail Sales; US Durable Goods Orders; Tokyo CPI
25: US Final Q4 GDP

28: US Personal Income & Spending; Japan Retail Sales & Household Spending
29: German Retail Sales; German Unemployment; US Conf Board Consumer Confidence
30: German CPI; US ADP Employment
31: UK Final Q4 GDP; Euro Zone Flash CPI; ECB Minutes; US Chicago PMI; Japan Tankan Manufacturing & Non-Manufacturing; China Manufacturing & Non-Manufacturing PMI; Caixin Manufacturing PMI

APRIL
1: UK Manufacturing PMI; Euro Zone Unemployment; US Unemployment & Payrolls; US ISM Manufacturing PMI

4: UK Construction PMI; US Factory Orders
5: German Factory Orders; US Trade Balance; US ISM Non-Manufacturing PMI; China Caixin Services PMI
6: FOMC Minutes
7: US JOLTS Job Openings
8: UK Manufacturing Production

10: China CPI & PPI
11:
12: UK CPI & PPI; China Trade Balance (tentative)
13: US PPI; US Retail Sales
14: Euro Zone Final CPI; BOE policy statement; US CPI; China Q1 GDP; China Industrial Production
15: US Industrial Production; US Prelim University of Michigan Consumer Sentiment

18:
19: German ZEW Economic Sentiment; US Housing Starts & Building Permits
20: UK Claimant Count & Unemployment; US Existing Home Sales
21: Various Euro Zone Flash PMI readings; ECB policy statement & press conference; US Philadelphia Fed Manufacturing
22: German Ifo Business Climate

25: US Durable Goods Orders; US New Home Sales
26: US Conf Board Consumer Confidence; BOJ policy statement
27: UK Prelim Q1 GDP; FOMC policy statement; Japan Household Spending; Tokyo CPI; Japan Retail Sales
28: German CPI; US Advance Q1 GDP
29: BOJ Outlook Report; German Retail Sales; Euro Zone Flash CPI; Euro Zone Unemployment; US Personal Income & Spending; Chicago PMI
30: China Manufacturing & Non-Manufacturing PMIs