Friday April 1 Daily Market Primer

The Daily Market Primer will not be published today.  Just kidding, Happy April Fools Day.  March nonfarm payrolls are out, and the economy added 215,000 jobs, as the unemployment rate went up by .1% to 5%.  The widely watched average hourly earnings increased by 7 cents per hour.  This was roughly in line with expectations, but perhaps investors were hoping for an upside surprise since the US index futures are pointing to a down opening of .5%.

Markets were lackluster in the US yesterday to close out the first quarter, with the DOW down just .2%,  the S&P up .2%, and the NASDAQ flat.  In spite of the dull last day, the market made a remarkable recovery in the quarter (first story).  Stocks in Asia did not follow the US's lead and fell 3.5% in Japan and were down in m0st other markets, but flat in China.   My monitor is showing all red for Europe right now, with most stock markets down over 2%, not a good start for Q2.

Tesla took in 135,000 deposits for the Model 3 around the world, and the car won’t even be out until 2017, and according to UBS predictions, can’t seriously ramp up production until 2018 and beyond.  Elon Musk took a page of Steve Jobs playbook, by creating a strong enough buzz to get customers to line up at Tesla dealerships around the world to reserve a car with a $1000 deposit.   While they raised $135 million in deposits, they will need at least a billion to bring the car to market, so the real motivation is to create strong demand to help with company valuation over the next year so until the cars arrive.

The Anbang Insurance investor group unexpectedly withdrew its offer for Starwood, leaving the company in the embrace of Marriott to create the world's largest hotel company by far.   Marriot can say 非常感谢你 to Anbang for driving up the price of Starwood by about $860 million during their brief involvement in the deal.

For a Bloomberg editorial on the layoffs at Blackrock, click here: http://bit.ly/BlkRckJobs

Friday Factoid: Convertible Bonds, Venture Capital, and Down Rounds:

I  mentioned yesterday that Spotify raised $1 billion from venture capital firms with convertible bonds rather than equity.  If you are not familiar with convertible bonds, they are bonds which can be converted into common equity at a specified price and number of shares in the future.  Convertibles are hybrid securities with characteristics of both bonds and stocks.  Convertibles often pay higher yields that traditional corporate bonds, since convertible issuers do not always have full access to the debt markets.   Typically in venture capital funding, each successive fund raising round for a successful company increases the valuation of that company.   Early investors and employees see the value of their stock rise.  Recently however, the opposite has been true, as companies needing capital in a frothy market have been forced to raise capital that lowers the valuation, a so called “down round”.   Down rounds lower the value of company and the existing stock, hurting early investors and demotivating employees who hold stock, and have forced write downs at Fidelity and other private equity investors for a number companies, including LA based Snapchat, and San Fran based Dropbox and Square.  Spotify, along with several other private companies recently, have been turning to converts to avoid the dreaded down round.

You Can’t Make It Up:

Google, famous for its elaborate April fools day jokes, blew it this year when a special email feature got some people in trouble with their bosses.  I will not be sending this to my boss.  http://bit.ly/GoogDrop.

Those of  you familiar with Bitcoin lore will know that the most mysterious thing about it is the identity of the inventor(s).  Bitcoin is credited to Satoshi Nakamoto, widely believed to be a pseudonym who’s real identity has been searched for endlessly by the press over the years.  Now it looks like the real architect of Bitcoin may be ready to come forward. When it happens remember you read it here first (unless you already read it in the Financial Times like I did) . http://bit.ly/BitBrain.

In case you haven’t seen Virgin America’s new logo, click here to see it and the design thinking that went into it. http://bit.ly/VirginNewLogo

Here’s the news for Friday:

Q1 had one of the greatest comebacks in stock market history. Ryan Detrick of LPL Financial noted this was the first time since the fourth quarter of 1933 that the stock market slumped more than 10% in a quarter yet finished in positive territory. The S&P 500 sank to a loss of 11.3% by mid-February but ended the first quarter with a gain of 0.7%.

Markets are lower Stocks in Asia slumped following the disappointing Japanese data, with the MSCI Asia Pacific Index sliding 2.3 percent and Japan’s Topix index losing 3.4 percent. European equities, which have just ended their worst first quarter since 2009, are also trading lower today with the Stoxx Europe 600 Index retreating 1.5 percent by 10:52 a.m. London time. S&P 500 futures are also 0.3 percent lower.

Saudis look to life after oil

In an exclusive five-hour conversation with Bloomberg, Saudi Deputy Crown Prince Mohammed bin Salman outlined his country's plans for the end of the oil age, including the creation of the world's largest sovereign wealth fund for the kingdom's most prized assets. He said that they will sell a stake “of less than 5 percent” in state-owned Saudi Arabian Oil Co. on local markets by 2018, potentially exposing the assets that underpin the country's entire economy to unprecedented scrutiny. The crown prince also said that Saudi Arabia will only freeze its oil output if Iran and other major producers do so. Oil futures in New York declined 0.6 percent after the comments.

Global data

It's not just an important day for U.S. data as across the world as figures are being released to give a snapshot of the wider global economy. Overnight in Japan, the Tankan index of confidence among large manufacturers missed economists' expectations for a reading of 8 after coming in at 6 for the month of March, the lowest level since mid-2013. China's official factory gauge unexpectedly jumped to 50.2 in the same month, its highest level since November 2014, with the non-manufacturing purchasing managers index rising to 53.8. Markit Economics said its Purchasing Managers Index for the euro area increased to 51.6 from February's 51.2 while prices for factory goods dropped the most since 2009. U.K. manufacturing grew less than forecast. There's also more U.S. data on the way as Markit manufacturing PMI will be released at 9:45 a.m. EDT, with ISM manufacturing and University of Michigan Consumer Sentiment due at 10:00.

Chinese manufacturing bounced back.

Data from China's National Bureau of Statistics showed that China's manufacturing sector expanded for the first time in eight months. The 50.2 print for March was an improvement from February's 49.0 and ahead of the 49.3 that economists had forecast. Additionally, the nonmanufacturing reading also saw a gain, ticking up to 53.8 from February's reading of 52.7. The Chinese yuan ended Friday down 0.2% at 6.4639 per dollar.

Japan's Tankan surveys disappointed.

The Tankan survey, which measures sentiment levels for large manufacturers, slumped to +6 for the first quarter from its previous look of +12. The number missed the +8 reading that economists were anticipating and was the lowest print since Q2 2013. The future outlook was even more pessimistic, falling to +3 from +7. The Japanese yen is stronger by 0.3% at 112.22.

Tesla's Model 3 is here. Thursday night at its Southern California headquarters, Tesla revealed its long-awaited Model 3. The $35,000 car will be used as a platform for future vehicles, with Tesla CEO Elon Musk suggesting it's "the next logical step of Tesla's secret master plan." Musk said the Model 3 would have more than 200 miles of range, go from zero to 60 in less than six seconds, and be expected to get a five-star rating in every safety category. It's been reported that more than 130,000 preorders have been made.

US economic data is heavy. After the jobs report, ISM Index, construction spending, and University of Michigan consumer sentiment will all cross the wires at 10 a.m. ET. Auto and truck sales will be released throughout the day. The US 10-year yield is higher by 2 basis points at 1.79%.

Checkout Time
In a surprise move that caps off a three-week bidding war with Marriott International, China’s Anbang Insurance Group walked away from its $14 billion bid to buy Starwood Hotels & Resorts Worldwide. The abrupt withdrawal highlights the newfound muscle of Chinese companies in the high-stakes global business of mergers and acquisitions, and throws into question their ability to close such deals. So far this year, there have been $92 billion of foreign takeovers announced by Chinese companies. However, U.S. regulators are yet to sign off on many of them. That Anbang didn’t ultimately follow through after bidding aggressively for Starwood is bound to reinforce concerns among U.S. companies that Chinese counterparts still aren’t ready for the big leagues in M&A. Starwood will now stick with Marriott’s most recent offer. Shares of both companies fell after the news.

Dollar Dealing
The Obama administration is preparing to give Iran limited access to U.S. dollars as part of looser sanctions on Tehran. The proposed move comes amid rising Iranian criticism that the landmark nuclear agreement reached last year between global powers and Tehran hasn’t provided the country with sufficient economic benefits. Most major international trade—particularly in oil and gas—is conducted in dollars, but American law still prohibits U.S. and foreign banks from dealing in the currency with Iran. The U.S. Treasury is considering how to issue licenses to offshore dollar clearing houses for specific Iranian financial institutions, shielding the U.S. financial system from any direct contact with Iran. Members of Congress from both parties have criticized the idea, but action by the Treasury wouldn’t require congressional approval

Mixed Signals
The U.S. stock market has taken off, but it has left behind an important passenger: the IPO. Major stock indexes have gained about 13% in the past seven weeks and are now in positive territory after a swoon early in the year. The market for initial public offerings, however, is in its slowest period since the first quarter of 2009. If the pace of IPOs doesn’t accelerate, it could be a warning sign for the rally. Meanwhile, gold prices notched their largest quarterly gain in three decades and emerging markets also bounced back in the first quarter after three years of torpor. Bond investors are bracing for a turbulent second quarter as they struggle to reconcile surging U.S. employment with some of the lowest bond yields in years. And as oil prices have tumbled, investors have shifted gears by rewarding the thriftiest oil-and-gas companies.

Hibor hijinx aren't much fun.

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Welcome to jobs day, a day that gives us a glimpse into the state of U.S. employment with the release of nonfarm payrolls. Today’s jobs report may prove more interesting than usual, coming just a few days after Fed Chair Janet Yellen warned that “global developments have increased the risks associated” with the U.S. economic outlook. Her speech sent tongues wagging about the confluence of markets and monetary policy and the central bank’s seemingly diminished ‘data dependency’. A big beat on the headline figure – economists currently forecast a 205,000 increase for March – coupled with signs of wage growth could therefore revive much of that talk both externally and internally at the Fed. Or as Bloomberg’s Matt Boesler put it yesterday: “If you do get down to a lower unemployment rate this year you’re going to have Yellen and some of the other Fed officials … scratching their heads about can we really keep rates lower for longer.” Meanwhile, less-than-impressive employment data will likely see Yellen and her coterie of doves somewhat vindicated. Yellen & Co. may have statistical quirks on their side here; March jobs reports do tend to surprise to the downside, having come in below forecasts for seven of the past eight years, according to Bloomberg data. On the flip side, that would make a big beat for the month of March even more of a big deal for Fed-watchers.

Source: Bloomberg, BI, WSJ, FT, The Guardian