Friday May 13 Daily Market Primer

The US market took a round trip since I last wrote this letter Tuesday morning, moving up about 2% on Tuesday, then reversing and giving up most of those gains on Wednesday, and with flat returns on Thursday.   Stocks are down modestly around the world Friday, and US S&P futures are looking to another down opening.  Oil has been marching higher, and Bloomberg reports on the paradox of high bond returns in a negative interest rate world (first story).

LAST CHANGE % CHG DJIA 17720.5 9.38 0.05% Nasdaq 4737.33 -23.35 -0.49% S&P 500 2064.11 -0.35 -0.02% Russell 2000 1108.6 -6.14 -0.55% Global Dow 2303.46 -11.67 -0.50% Japan: Nikkei 225 16412.21 -234.13 -1.41% Stoxx Europe 600 332.01 -1.1 -0.33% UK: FTSE 100 6081.12 -23.07 -0.38% China: Shanghai Composite 2827.11 -8.75 -0.31% Hong Kong: Hang Seng 19719.29 -196.17 -0.99% UK: FTSE 100 6080.75 -23.44 -0.38% France: CAC 40 4280.59 -12.68 -0.30% Germany: DAX 9874 11.88 0.12% U.S. 10 Year 1.73 6/32 U.S. 30 Year 2.577 13/32 Crude Oil 46.1 -0.6 -1.28% Brent Crude 47.63 -0.45 -0.94% E-mini S&P 500 2054 -4.75 -0.23%

Brazil’s President Dilma Rousseff was suspended from office yesterday as the Senate voted to hold an impeachment trial http://bit.ly/RousseffOut  She is calling it a “coup”.  The interim President is named Michel Temer.  The annual SALT hedge fund is underway in Las Vegas, and participants do not have as much swagger as in past years http://bit.ly/HedgeFundAngst.  SWIFT is reporting a cyberattack similar to the one that stole $81 million from the central bank of Bangladesh this year, so please be careful with email attachments, which is the most common way to plant malware in networks.  Perennial baby boomer upscale retailer Nordstrom’s had a big earnings miss and is paying the price in the stock market, down 14%.  This is symptomatic of increasingly dismal conditions in retail that have surfacing this year (last story).

Here’s the news:

Bond market

In a global bond market where negative yields are becoming the norm, things are starting to look very odd. Returns on Treasury 30-year bonds have topped 10 percent for 2016 already, with the U.S. preparing to sell $14 billion of the securities later today. In Japan, where investors have to go beyond 15-year maturity for a positive yield, demand for the world's most expensive bonds continues unabated. Even in the U.K., where the uncertainty surrounding the Brexit referendum continues, the 10-year government bond has just set its longest winning run on record. With $9 trillion of debt globally now with a negative yield, it is hard to think of there ever been a better time to be selling bonds.

Automaker woes

Honda Motor Co. reported net income of 344.5 billion yen ($3.2 billion) for the year ended March 2016, missing its forecast by 34 percent. The company also said that it will recall 21 million more vehicles to replace Takata Corp. air bags and gave guidance far below analysts estimates for this fiscal period as the strong yen takes its toll on profits. Meanwhile, more details have emerged on the tie-up between Mitsubishi Motors Corp. and Nissan Motor Co. in which the latter is taking a 34 percent stake in Mitsubishi and has promised to back the under-pressure automaker "as much as possible" following the revelation of it overstating the fuel economy of its cars. In Europe, another scandal-hit automaker continues to feel the pressure with Volkswagen AG's market share slumping to a five-year low. The company has now lost market share in every month since the emissions scandal came to light in September of last year.

Apple v Uber... and Apple v Alphabet

Apple Inc. is investing $1 billion in Didi, a ride-hailing startup in China, in a move that will be a blow to Uber Technologies Inc. which is trying to build its presence in the country. Didi said in a statement that Apple's investment takes its funding round to $3 billion, leaving the company now valued at $26 billion. Apple's position as the world's most valuable company is coming under pressure from Alphabet Inc., with the iPhone maker's market cap falling behind that of the owner of the Google search service in trading yesterday. Both, however, will be reduced to fighting over second place, once Saudi Aramco floats.

So much data

Today is a good day to gauge the health of the global economy as data releases across the world should provide some insight. So far today it has been a mixed bag. Hong Kong's economy unexpectedly contracted in the first quarter with GDP dropping 0.4 percent and only growing 0.8 percent from a year earlier, far below economist expectations of 1.5 percent. In the euro-area first quarter GDP was revised 0.1 percent lower to 0.5 percent in the second reading released this morning. The stand out economy in the region was, once again, Germany which grew 0.7 percent in the quarter, with that growth driven by stronger domestic consumption. In the U.K., construction output fell 4.5 percent from a year earlier, far more than expected. Investors will be closely watching U.S. retail sales data, due at 8:30 a.m. ET, with analysts surveyed by Bloomberg expecting a rise of 0.8 percent in April. Any sign of consumer weakness from retail data, or the University of Michigan sentiment survey, due at 10:00 a.m. will feed into Fed policy

Markets lower

Equity makers are lower across the board this morning. Overnight in Asia, the MSCI Asia Pacific Index dropped 1.3 percent as uncertainty over global growth prospects amid a disappointing earnings season weighed on sentiment. In Europe the Stoxx 600 Index is down for a third day, trading 0.6 percent lower at 5:58 a.m. ET, as the commodity bounce earlier in the week fades. S&P 500 futures were 0.5 percent lower.

Brazil's new cabinet

Brazil’s new leader, Michel Temer is already facing criticism for selecting a cabinet that is completely male and pale. One of the hardest jobs in the administration has gone to Henrique Meirelles who was President of the Central Bank while Luiz Inacio Lula da Silva was in power. Investors who had piled in the country's stock market in the lead up the suspension of Dilma Rousseff, may now be better off looking to the Brazilian bond market as Temer seeks to restore government finances and quell inflation.

Shake Shack had a great quarter. The fast-food chain announced adjusted earnings of $0.08 per share on revenue of $54.2 million. Those numbers were ahead of the adjusted $0.05 per share and $52.2 million that were anticipated by the Bloomberg consensus. Same-Shack sales surged 9.9%, propelled by the introduction of the Chick'n Shack sandwich. Shake Shack raised its full year 2016 revenue outlook to $245 million to $249 million, versus its previous projection of $237 million to $242 million. Shares were higher by more than 8% in after-hours action.

Nordstrom is getting crushed after its earnings miss. The high-end retailer was the latest sign there's trouble in the sector. Nordstrom announced earnings of $0.26 per share, missing the $0.46 Bloomberg consensus by a wide margin. Revenue edged up 2.5% to $3.25 billion, just missing the Wall Street estimate. Meanwhile, comparable-store sales fell 1.7% versus expectations of a flat reading. Nordstrom's outlook also disappointed as it now sees full year 2016 earnings of $2.50 to $2.70 per share versus analyst estimates of $3.20 a share. Shares were down more than 14% in after-hours trade.

Acacia Communications is IPOing. The optical-networking products maker priced its initial public offering at $23 per share, the upper end of its $21 to $23 range. The 4.5 million share offering will raise about $103.5 million. Acacia will trade on the Nasdaq under the ticker 'ACIA.'

Global investors are fleeing stock market funds. In a note to clients, analysts at Jeffries said global equity funds "recorded their fifth consecutive weekly outflow, at a net $7.3 billion." The biggest outflow came from Japanese stock market funds where investors pulled $4.9 billion. $3.1 billion left European funds, leading to an 11th straight week of outflows. US funds fared slightly better as only $1.8 billion fled.

South Korea kept policy on hold. The Bank of Korea held its key interest rate at 1.50%, as expected. The BOK said exports continue to slow and that employment growth also appears to be slowing. Looking ahead, the central bank forecasts "consumer price inflation will continue at a low level, under the influence of the low oil prices for example." The South Korean won ended Friday's session weaker by 0.8% at 1171.47 per dollar.
Eurozone GDP missed. The eurozone's economy grew 0.5% in the first quarter, missing the 0.6% that economists had forecast. Spain's economy was the standout, growing at a 0.8% clip. On a year-over-year basis, growth came in at 1.5%, which was just shy of the 1.6% that was anticipated. The euro is weaker by 0.3% at 1.1345 per dollar.

Stock markets around the world are in the red. Japan's Nikkei (-1.4%) led the losses in Asia and the UK's FTSE (-0.5%) trails in Europe. S&P 500 futures are down 6.50 points at 2052.25.

Earnings reports trickle out. J.C. Penney is the only notable reporting ahead of the opening bell.

US economic data picks up. PPI and retail sales will be announced at 8:30 a.m. before data concludes for the week with the 10 a.m. ET release of business inventories and University of Michigan consumer sentiment. The US 10-year yield is down two basis points at 1.73%.

Friends of Bill
We report that a $2 million commitment arranged by the nonprofit Clinton Global Initiative in 2010 went to a for-profit company part-owned by people with ties to the Clintons, including a current and a former Democratic official and a close friend of former President Bill Clinton. The commitment was placed on the agenda for a September 2010 CGI conference at Mr. Clinton’s urging, and the former president also personally endorsed the company, Energy Pioneer Solutions, to then-Energy Secretary Steven Chu for a federal grant. Meanwhile, Energy Pioneer Solutions, whose business plan was to insulate people’s homes and let them pay via their utility bills, has struggled to operate profitably. In other political news, Congressional Republicans and Donald Trump began the process of narrowing their differences as the presumptive nominee met with party leaders yesterday, including House Speaker Paul Ryan, who stopped short of endorsing Mr. Trump but delivered his most positive assessment to date.

Health Scare
The battle over Obamacare shows no sign of abating. A federal judge dealt a blow to the Obama administration’s health law yesterday, ruling the government improperly reimburses insurers to cover discounts to low-income consumers. The decision by U.S. District Judge Rosemary Collyer came in a lawsuit filed by House Republicans challenging the law’s implementation, and introduces significant new legal uncertainty for President Barack Obama’s signature legislative achievement. The ruling blocked certain government payments to insurance companies, a key part of the law’s attempts to reduce out-of-pocket insurance costs for very low-income individuals. The judge, who was appointed by President George W. Bush, stayed her ruling to allow the administration an opportunity to appeal. If the White House ultimately loses the case, it would be a major financial challenge to insurers, who are required to offer the cost reductions even if they don’t get funding from the federal government.

Life Over the Hedge

Under the weight of years of underperformance and an uptick in client defections, the mood was anything but festive in Las Vegas this week at the annual celebration of the hedge-fund industry. The slump—highlighted by the largest exodus of investors since the financial crisis—damped interest in the SkyBridge Alternatives Conference, commonly known as SALT. At the conference, longtime hedge-fund manager Leon Cooperman openly questioned whether it made sense to continue on after redemptions from his firm, Omega Advisors. Major hedge-fund clients, including China’s sovereign-wealth fund, also aired doubts, positing that 90% of hedge-fund managers probably weren’t skilled enough to navigate the markets. The annual desert confab is famous for attracting heavyweight investors, celebrities and politicians, but the relative strain on the industry this year was evident: tips at the shoe-shining station a few feet from the main ballroom were down more than 50%.

Cybercriminals attack second bank, SWIFT says

A commercial bank has been hit by a cyberattack similar to one that stole $81 million from the central bank of Bangladesh this year. The Society for Worldwide Interbank Financial Telecommunication said the cybercriminals who attacked the undisclosed bank had a "deep and sophisticated knowledge of specific operational controls." The attackers used a form of malware known as the "Trojan PDF reader" to alter PDF reports to conceal what they were doing, SWIFT said.

Reuters (12 May.), 

Banks face record year for busted M&A

Nearly $400 billion in US mergers and acquisitions have fallen through this year, according to Dealogic. Regulatory scrutiny, issues with the deal and volatile markets have been blamed for the record amount of broken deals, which have cost banks millions of dollars in lost fees.

The Wall Street Journal (tiered subscription model)

Yellen doesn't rule out negative rates in letter to congressman.

Jeffrey Gundlach said there’s a 50 percent chance the Fed will hike rates this year.

Brazilian beef producer ends real short that earned it $3 billion.

Treasurers worried Draghi's bazooka might chase away their investors.

Newly elected Duterte has investors spellbound with Philippine metamorphosis.

Handle comes off Putin's military upgrade.

China decides debt can be dangerous.

Economists Disagree With Voters Who See U.S. Worse Off Today Than in 1960s

Brazil Faces Hard Road Ahead as Dilma Rousseff Yields Presidency to Michel Temer

Facebook’s Curators Shape ‘Trending’ News Feature

Wal-Mart Takes Aim at Amazon

Swift Finds Evidence of Second Malware Attack

Community Bank Group Suspends LendingClub Purchases

The story in the markets this week has been the retail implosion. One after another we saw chain or department store stocks plunge after horrible earnings. In pre-market activity, Nordstrom Inc. is down around 15 percent. Shares of Macy's Inc. plunged after earnings and are now down over 20 percent since the beginning of May. It's a similar story at Kohl's Corp. These companies appear to be getting slammed with a series of macro and secular headwinds, including the rise of e-commerce. The whole thing feels similar to last august, when the old line media companies got clobbered. The Walt Disney Co. fell nearly 11 percent between August 4 last year and August 6. Viacom Inc. was even worse, plunging nearly 20 percent on those same dates. Then as now, the big question was whether this was "it" the moment these old lines business models finally buckled under the weight of digital disruptions. There hasn't been a satisfactory answer yet. Disney staged a recovery later in the year before slumping back. Viacom's been uglier. Comcast Corp, which fell over 7 percent during the early August media selloff has held up better, with the stock now not too far from all-time highs. So that's some recent historical context for understanding this wave of anxiety. Meanwhile! In a fitting end to the week, the Commerce Department will report retail sales for April at 8:30 a.m. ET. Economists are looking for 0.8 percent month-on-month growth for the headline, a sharp acceleration from the 0.4 percent fall in March. For the "control group" which tries to get at some core measure of retail sales excluding volatile components, the expectation is for 0.4 percent growth.