Breakfast on Wall Street – 13 September 2013

MARKET COMMENTARY

Ending a seven-day upswing, the S&P 500 rally did not last another week, as many had hoped. The S&P 500 moved down 0.34% to end the day at 1,683.42, while the Dow Jones Industrial Average, which had significantly outperformed the S&P yesterday due to IBM, reversed trend; the index was down 0.17%, and ended the day at 15,000.64.

The jobless data was the first culprit contributing to the downward move, although information sent out by the Bureau of Labor Statistics (BLS) provided the markets with some relief. The jobless claims data that came out yesterday was too good to be true – and it was. Consensus had expected initial claims to increase to 330,000 from last week’s 323,000. Continuing Claims were also expected to move up – from 2,951K last week to 2,960K this week. Instead, both numbers fell: Initial Claims had a 292K print, while Continuing Claims came in at 2,871K. However, these numbers do not include information from two states—which had computer-related issues that had not allowed them to record the claims applications — and thus will be revised up next week.

While we are not in a position to predict absolute numbers, we still believe that the job market is recovering, albeit very slowly. Last week’s employment data came in worse than expected, and we forecast that this is an aberration. Despite our call of a jobless recovery, the claims number will keep going down – as it has for the past few months.

We had said yesterday that if the jobless data does turn out to be better than expected, the markets might reverse its upward trend. Investors realize that a positive labor market will increase the chance of a larger Fed bond purchase tapering. Though primarily an accounting error, the jobless claims data still did worry the markets. We reassert that this concern is excessive as there is a definite improvement in the fundamentals. The unexpectedly optimistic data may cause markets to fall in the short run but the discerning investor should try to ignore these swings and hold on to a long-term optimized portfolio.

Import Index data, released yesterday by the BLS, showed lower than expected import (thus, global) inflation. We had predicted this and the lack of inflation do not surprise us. While analysts expected imports prices to rise by 0.5% MoM, the actual numbers from the commerce department came in at 0% – or no inflation at all. Analysts were expecting import inflation of 0.4% YoY, while actual data came in at -0.4% – thus, showing some deflationary pressure.

China, the global manufacturing powerhouse, has to keep increasing its industrial production if it tries to keep its pace of growth in line with its optimistic plans. With low labor costs and almost none of the environment norms of the developed world, China has flooded global markets with low cost alternatives – and it will continue to do so in the years ahead. Additionally, overcapacity in the US will deter any inflation in the near future. We hope that the Fed will look at inflation data when deciding upon its monetary policy. The key reason for tapering is a fear of inflation. The import price data, the strengthening dollar and the overcapacity in the US and in global economies should make it obvious that these fears are exaggerated and are not based on economic fundamentals.

THE LAST 24 HOURS

Twitter To Go Public: Files IPO Registration

Twitter Inc., the micro blogging social media-company with more than 200 million members and valued at about $10.5 billion, has finally decided to go public. After the success of Facebook Inc. (NASDAQ: FB), which raised $16 billion in May 2012 in the biggest IPO for a technology company, Twitter’s offer is highly anticipated. Begun in 2006, Twitter is becoming increasingly popular in the rapidly growing mobile market as customers easily access the service via their smartphones and tablets. Details about the IPO have still not been disclosed.

Pimco and Blackrock Purchase More Than A Quarter Of $49 Billion Verizon Bond Deal

Pacific Investment Management Co. and BlackRock (NYSE: BLK) jointly bought about $13 billion of Verizon Communication Inc.’s (NYSE: VZ) $49 billion corporate-bond deal, which is the largest corporate bond deal ever. Pimco, a unit of Allianz SE of Germany, bought about $8 billion of the bonds, while BlackRock bought about $5 billion. This multi-billion dollar bond purchase by the two investment giants will help Verizon to finance its $130 billion purchase of its wireless joint venture from Vodafone Group PLC (NASDAQ: VOD).

Blackstone’s Hilton to Raise $ 1.25 Billion in U.S. IPO

Hilton Worldwide Holdings Inc., the world’s largest hotel chain, which is owned by Blackstone Group LP (NYSE: BX), filed for an initial public offering and is looking to raise $1.25 billion. At $1.25 billion, the IPO will be the largest for a lodging company and the proceeds will be used to pay Blackstone’s down debt. When it begins to trade, Hilton is likely to be valued at around $30 billion. In six years, Blackstone has made Hilton a superior force in the international hotel market with 2012 earnings at $9.3 billion, which 15% higher than 2010.

US – Russia Talks on Syrian Crisis Begins in Geneva

The US Secretary of State met the Russian Foreign Minister on Thursday to discuss the future of military action against Syrian President Bashar al-Assad for use of chemical weapons on the rebels. The diplomatic talks will focus on the Russian plan that urges Syria to surrender control of its stockpiles of chemical arms to international control. Meanwhile, the United Nations received a formal application from Damascus seeking to join the global poison gas ban. However, the US has asserted it will use military intervention in Syria if diplomacy fails.

J.P. Morgan to Spend More to Sort-out Legal and Compliance Issues

J.P. Morgan Chase is preparing to spend an extra $4 billion and hire 5,000 additional employees this year to clear legal and regulatory issues. The bank is dealing inquiry from U.S. regulators on topics extending from trading inaccuracies to mortgage-bond deals to trading oversight, overseas- hiring and especially with matters relating to the housing bubble and economic crisis. The bank is expecting to add $2.5 billion to its ligations fund by the second half of the year. Since 2008, J.P. Morgan had paid in excess of $18 billion as legal expenses – more than any other U. S. Bank.

THE NEXT 24 HOURS

We have three important data releases tomorrow. If the Producers Price Index—another gauge of inflation—is muted, then the Fed should not worry about inflation and should instead concentrate on kick-starting the job market.Retail Sales data is also coming in tomorrow. As the back-to-school extended season showed the same muted data that we have seen in the past few years, we expect retail sales to remain subdued till Thanksgiving. As of now, there are no data points in the employment or production side that allows us to be bullish on retail. We continue to believe that the American consumer will still lead the worldwide economic recovery in the foreseeable future. Tomorrow’s Consumer Confidence data from the University of Michigan will allow us to gauge the American consumer’s behavior in the days ahead.

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