MORNING BID – Emerging Markets, Apple, Ma Bell, and whatever else one can think of

Jan 28, 2014 13:56 UTC

In the words of Inigo Montoya, let me explain. No, there is too much. Let me sum up.

The market’s most immediate issues remain tied specifically to what’s going on overseas, particularly in Turkey. There, monetary authorities are meeting on a potential interest rate hike as a way of getting on top of the inflation problem (inflation’s at 7.5 percent, and the central bank’s lending rate is, uh, 7.75 percent).

So that’s a problem: Inflation is running real hot, the lira is in free-fall, and as Reuters’ Mike Peacock in London points out, the consensus view for a rate hike puts it at about 10 percent for when the bank announces its decision at midnight Istanbul time, 5:00 p.m. Eastern time (1000 GMT). Will that be enough to put a floor under the lira? Perhaps.

Now, U.S. companies don’t exactly have a lot of exposure to Turkey, and in this emerging markets rout we’re in the midst of right now, there’s a real question as to whether we’ve reached that “contagion” level. Sure, everything is selling off, but that’s not quite the definition, and it will take a little bit more time and effort – that is, more wholesale selling, liquidation of positions across various countries – to really call this a contagious effort. There are worrisome signs on that front, though. An analysis by Reuters’ Sujata Rao-Coverley, Dan Bases and Vidya Ranganathan points out that the increased funding through publicly traded fixed-income markets rather than bank lending means these markets are more intertwined, leading to the possibility of more selloffs that feed on each other.

Emerging markets with big current account deficits.

Back in 1998, bank loans were the funding mechanism for lots of emerging countries. Furthermore, the sheer dollar volume now dwarfs what was out there in the 1998 Asian contagion that later saw the collapse of the ruble. EM bonds are now in the range of $10 trillion, versus $422 billion in 1993, per JP Morgan; funds benchmarked to EM have assets of $603 billion, more than double what existed in 1997. EM ETFs? About $300 billion now – compared with nothing in 2004. And let’s remember the main ETF for emerging markets – EEM is the symbol – which is routinely the second-most active ETF in the United States. Long-term investing this ain’t, and the flight exacerbates the worries.

After three days of selling, emerging markets have stabilized a bit on Tuesday, so that’s something. Again, these selloffs often combine magnitude and time, with the swiftness only one part of it – the sheer ongoing nature of it is the other part. But that doesn’t mean preparations aren’t in order: David Kotok of Cumberland Advisors said his firm is raising cash levels, noting volatility tends to spike in forex markets when central banks have held interest rates near zero for a long time (which they have).

The real watcher is likely China’s shadow banking system and the possibility of problems there. Banks have been selling massive amounts of exposure to investment trusts to individuals for some time with promises of big returns and using that money invested for lots of lending; one of those trusts distributed by ICBC had to be bailed out this week. If there’s more of that to come, it’s a real question of what’s going on with the banking system’s health there – and that again leads to some uncomfortable conclusions about growth in China, which is far worse a problem than any crisis in Turkey, given its sheer size and influence.

Meanwhile, on a domestic front, Apple’s earnings weren’t what was expected. Sure, the company exceeded revenue forecasts and earnings forecasts, but it fell short of expectations on iPhone sales by a lot, and nobody’s happy about this. The stock was hit hard in after-hours action, and was, of late, down about 6 percent. Of course, selling 51 million phones over a three-month period isn’t exactly shabby, and the company is still making money hand-over-fist.

The disappointment comes, in part, from the realization that Apple’s growth rates just aren’t what they used to be, and that Samsung is widening its global lead in the smartphone market, with one report putting its sales at 86 million phones in the quarter. Samsung, of course, is selling more low-end phones, so it’s not like Apple is getting its head handed to it here, but its market share is down to about 17.6 percent from 22 percent, according to Strategy Analytics.

Carl Icahn’s recent calls for the company to get more aggressive in giving money back to shareholders through a big buyback are going to probably only get louder. This raises the chances that the company doubles down on the financial engineering strategy of growing earnings that admittedly has helped the shareholders of names like IBM, AT&T and Exxon Mobil, but doesn’t speak well from the innovation front for a lot of these names.

The company – the most valuable in the United States – had been banking on a big deal in China to sell even more phones, but the market is starting to look saturated on that front, Pacific Crest analyst Andy Hargreaves told Reuters’ Bill Rigby. And Apple doesn’t have a game-changing product on the horizon either right now, so that means the investment thesis comes down to volume. It’ll keep making scores of money, but reduced market share and pretty new colors and bells and whistles won’t be enough when “hardware can only go in one direction, and that’s flat or down,” said Alex Gauna of JMP.

If Apple is headed in the direction of AT&T, it’s going to eventually turn into one of those companies where investors get excited about special factors pumping up earnings results, and AT&T’s going to have that today when it reports results. What’s going on here? Pension related stuff – the market’s gains mean companies with lots of pension assets can mark those positions to market (read: make them bigger). And where previous years of losses can hurt those positions for the likes of Verizon, Ma Bell and UPS, this year it’s a help.

Verizon’s adjustment boosted S&P 500 earnings per share by 42 cents this quarter, and AT&T could make just as big a splash this time around. So AT&T is expected to record a gain of about $7.6 billion in the fourth quarter as a result of this, which is massive. Now, David Randall wrote a story a few days ago noting that few fund managers buy a stock based on this sort of thing – AT&T’s primary business is, uh, selling telephones, no, wait, ah yes, telecommunications – so if the business stinks, never mind the pension stuff.

But it’s nice that the pension funds are fully funded or better now, just in time for a big market correction.

MORNING BID – Only a dream in Rio

Jan 15, 2014 17:35 UTC

Among the BRIC nations, Brazil’s the one that’s been repeatedly whacked with a brick in the last couple of years, seeing its currency depreciate and its stock market trashed as it steadily ratchets up interest rates to an expected 10.25 percent this evening (or perhaps even 10.50 percent).

Most emerging nations were hit hard in the last year as the Federal Reserve announced it would start changing its strategy toward reduced bond buying, which will reduce some liquidity among dealers and result in less cash sloshing around in the vast ocean of world markets.

The last year was a rough one for Latin America overall, with most major averages sinking anywhere from 25 to 35 percent, but Brazil was in the unlucky position of already being kicked when it was down.

The MSCI Brazil Index now posts just a 4.1 percent return (annualized) over the past five years, which compares unfavorably with the other BRIC giants of China, India or Russia, to say nothing of Indonesia, Korea, Mexico or Peru.

So like Joe Btfsplk of the Li’l Abner comic, always walking with a dark cloud following him around (nobody got that reference to a Depression-era comic strip? Ok, never mind), Brazil has been faced with the poor choices of letting inflation get out of hand or continuing to try to pull a Volcker-style situation out of one’s hat, breaking inflation’s back in a way that somehow still results in things getting better later.

The IPCA consumer price index rose nearly 6 percent in 2013, as price increases have outpaced expectations for four years running (economic predictions in Brazil being about as accurate as they are in the United States).

Optimism in Brazil has dimmed of late, falling for the first time since the 2009 global financial crisis, according to public polling firms there.

The inflation problem is likely to get worse, according to Brown Brothers Harriman researchers, who said controlled prices were up just 1.5 percent in 2013 – meaning all other prices rose at more than a 7 percent clip in that year – adding “it’s likely that the pass-through impact from the weaker currency has not yet shown up fully in the numbers.” So, they’re forecasting a bump in the Selic rate to 10.5 percent from 10 percent, rather than the half-measure implied by a quarter-point hike.

Whether that brings back investors is another story: Latin American flows have been weak all year, according to Lipper data. The region hasn’t seen steady inflows since 2009, and that didn’t change in 2013, with more outflows.

The weakening real and slipping equity market would seem to provide an opportunity – this is, after all, the world’s seventh largest economy, as the World Bank says.

Years of rapid growth, though, have given way to the more recent 2 to 2.5 percent rate of growth, fine for a fully developed economy like the US (ok, it’s not, but work with me), but not so much for a faster-growing nation, and 2013 saw more than $12 billion in net forex outflows, the worst in a decade.

With Brazil’s current account deficit large and growing ($54 billion at the end of 2012, ranking it seventh worldwide), if sentiment turns even further from emerging markets, it’s Brazil, already getting hit this year, that could get it worse.

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