David's Feed
Aug 28, 2014
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MORNING BID – European Deflation

Never say the Europeans aren’t cautious. The dollar has been on a roll of late, in part because of the market’s growing expectation for more stimulus from the European Central Bank before long that would include some kind of larger-scale quantitative easing program after a speech last week from Mario Draghi that European markets seem to still be reacting to several days later. Reuters, however, reported that the ECB isn’t quite likely to do move quite so fast (heard this one before) and that took some of the wind out of the dollar’s sails and boosted the euro a bit.

Some of the move in the euro will depend on the trend in European yields, where everything is going down – German Bunds continue to make their way rapidly toward zero, and Bund futures remain in an overwhelming bullish trend, per data from Bank of America-Merrill Lynch. Analysts there also anticipate the dollar is going to experience some kind of medium-term correction – but remains in rally mode otherwise. There’s a headwind there for equities from that – rising greenback makes U.S. goods more expensive, but the gains are still only in earlier stages, and haven’t pushed into territory that would otherwise indicate surprising strength that we haven’t seen in some time.

Aug 25, 2014
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MORNING BID – I was dreaming when I wrote this…

The move by Roche to buy biotech company Intermune for $8.3 billion at a 38 percent premium isn’t going to make Janet Yellen happy, given her thoughts on the valuation of certain biotechnology and Internet retailing names. Still, with the Fed chair on board for low rates for some time given the slack situation in the labor market that the Fedsters keep talking about (basically, the unemployment rate, like the old grey mare, ain’t what she used to be), the long march to 2,000 on the S&P looks like it’s probably going to be over before long (it’s been done on an intraday basis, and now we’re just waiting on a close above that level), representing a tripling in that average in a bit more than five years and raising again all those questions about whether this all makes sense and if anyone cares anyway.

On the first point, well, nobody knows anything – earnings were generally strong in this most recent quarter, particularly when one expands the universe to the Russell 1000, where Credit Suisse points out more companies that are beating analyst expectations are growing sales, a sign of improved demand.

Aug 15, 2014
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MORNING BID – Down in the Jackson Hole

The markets ease into a traditionally slow period with not much to look forward to other than the Federal Reserve’s Jackson Hole conference due next week, where the highlight, naturally, will be anything Janet Yellen says regarding the state of the labor markets. The chances of the Fed signaling a new shift when it comes to policy are slim – Yellen has proved to be a cautious speaker thus far, interested in furthering Ben Bernanke’s way of telegraphing as much as possible when it comes to policy alterations, and Yellen is more so, her “six months” comment from a few months ago notwithstanding. As Jonathan Spicer and Howard Schneider reported a few days ago, Yellen is much more interested in fighting an inflation war than dealing with a persistent deflationary/lousy economic environment to dominate the headlines, so the expectation should be for lower rates for longer, and not to expect a lot of surprises out of Wyoming next week.

Goldman Sachs economists not that Yellen had sounded a bit more positive on the labor market in July, but even still their belief when it comes to the slack that exists in the jobs market is still too great to bear much more than the end of quantitative easing/bond buying and perhaps a move to a couple of small rate increases around the middle of next year that, well, won’t hurt too much given the Fed’s policy rate still sits between 0 and 25 basis points. The forecasts from Reuters most recently put the first rate hike somewhere in the April to June range, which fluctuates depending on the strength of the economic figures.

Aug 13, 2014
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MORNING BID – Retail therapy

All that’s left for investors now when it comes to earnings season is the shouting, but if the rest of the retailers post results anything like Kate Spade did on Tuesday, the shouts will be screams of terror rather than anything that assuages investors over the state of the overall economy. Kate Spade’s executives went into some detail on its conference call as to the nature of its margins shortfall – which Belus Capital chief equity strategist and longtime retail analyst Brian Sozzi said are not likely to improve until the middle of 2015 – and the company then did itself no favors by declaring that it wouldn’t be discussing the margin issues any further on the call. (Craig Leavitt, the CEO, violated that rule to some degree, but basically, investors don’t like it when you tell them flat-out that you’re not going to talk about your problems, and when you’re a company with a forward price-to-earnings ratio of 77.5 and a price-to-book value of 119, that’s going to be particularly true.)

Other luxury retailers have noted their own problems with attracting customers at this time, including Michael Kors Holdings, which saw its own shares stumble of late after also warning of margin pressures due to expansion in Europe, but at least Kors has a forward P/E ratio around 19, which puts it in line with peers like Coach and Ralph Lauren.

Aug 12, 2014
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MORNING BID – Margins, China and whatever else

We’re deep into a period where the earnings calendar has basically dried up and the news flow overall is pretty slim, so the market will hang whatever gains it can on thin reeds – deals involving master-limited partnerships here, results from the likes of Sysco (the food services company there), and maybe Priceline.com in the mix too. The broader economic signals remain the more important ones for markets right now, and while they’re not uniformly outstanding, there are some hopeful signs for those finally looking for an acceleration in activity.

The earnings situation has been better than anticipated – Goldman Sachs notes that margins broke out of an 8.4-to-8.9 percent rate in the second quarter, ticking up to 9.1 percent, and the firm’s corporate “Beige Book” – a compendium of company comments – shows that the concerns the C suite has looks more like the concerns of those seeing accelerating demand and rising prices, and not slack demand and weak pricing power. They cited a strengthening corporate outlook, margin forecasts coming under pressure as a result of inflation expectations, and a combined focus on spending money on both buybacks and capital investment. Furthermore, companies have been less negative than in the recent past when it comes to revisions, and guidance for the fourth quarter of this year and first quarter 2015 was revised higher.

Aug 8, 2014
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MORNING BID – ‘You don’t wanna go long into the weekend’

Get ready for one of those days where people say a lot about not wanting to be “long going into the weekend.” Except perhaps in bond markets, where the rush to government debt intensified with President Obama’s remarks that the US is ready to provide air support through airstrikes against ISIS, which now controls a big swath of Syria and Northern Iraq. That’s forced a big move into U.S. and German yields, among other things, which is undermining some of the recent strength in the dollar as well. (That’s not to say it’s a strong-euro move, more of a weak-dollar move, given the declines in the dollar against the yen as well.)

What’s striking here about the rallies in U.S. debt and German debt is that even though there’s a substantial safe-haven bid behind both markets, the difference is the German 2/10 spread has narrowed from about 1.73 percentage points to 1.04 percentage points since the beginning of the year thanks to a big move in the 10-year, a bull “flattening” trade that reflects ongoing concerns about economic growth in Germany, and more broadly, in Europe.

Aug 7, 2014

Analysis – It may be too early to give up on the bull market in equities

NEW YORK/LONDON (Reuters) – Investors fretting about the possibility of a big reversal in global stock markets may just want to borrow a slogan from the British – and just keep calm and carry on.

It won’t be easy given the background noise. Fears of a Russian invasion of Ukraine on top of deepening chaos in the Middle East, and the bailout of a Portuguese bank, are all fuelling the pessimism. Add in expectations the U.S. Federal Reserve will raise interest rates next year for the first time since 2006, and concerns that the U.S. stock market has gone too long without a correction, and it isn’t surprising to see the glass half-empty crowd emerging from a long hibernation.

Aug 7, 2014

It may be too early to give up on the bull market in equities

NEW YORK/LONDON (Reuters) – Investors fretting about the possibility of a big reversal in global stock markets may just want to borrow a slogan from the British – and just keep calm and carry on.

It won’t be easy given the background noise. Fears of a Russian invasion of Ukraine on top of deepening chaos in the Middle East, and the bailout of a Portuguese bank, are all fueling the pessimism. Add in expectations the U.S. Federal Reserve will raise interest rates next year for the first time since 2006, and concerns that the U.S. stock market has gone too long without a correction, and it isn’t surprising to see the glass half-empty crowd emerging from a long hibernation.

Aug 6, 2014
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Murders and Acquisitions

People tend to like to see a couple of occurrences and call them “canaries in the coal mine,” a signal of something ominous to come.

Twenty-First Century Fox’s decision to cancel its bid for Time Warner, which was quickly followed by Sprint backing away from buying T-Mobile, certainly could count as one of those things, given the way in which mergers and acquisition signal confidence about an industry, about company earnings, about the economy.

Aug 6, 2014

Investors betting on takeover of Time Warner face ugly reckoning

By David Gaffen

(Reuters) – Many options traders who had taken bets on a successful buyout of Time Warner Inc (TWX.N: Quote, Profile, Research, Stock Buzz) by Rupert Murdoch’s Twenty-First Century Fox Inc (FOXA.O: Quote, Profile, Research, Stock Buzz) are facing a grim lesson in the risks of betting on deals.

Murdoch pulled the $80 billion offer after the close of trading on Tuesday, saying Time Warner management had refused to engage in discussions. He also cited the sharp drop in Fox’s share price since the proposal last month, saying it “makes the transaction unattractive to Fox shareholders.”

    • About David

      "David Gaffen oversees the stocks team, having joined Reuters in May 2009. He spent four years at the Wall Street Journal, where he was the original writer of the web site's MarketBeat blog. He has appeared on Fox Business, CNN International, NPR, and assorted other media and is the author of the forthcoming book "Never Buy Another Stock Again.""
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