Breakfast on Wall Street – 16 September 2013


Stocks were up again on Friday, September 13, with the Dow Jones Industrial Average posting its best weekly gains (up 3.04% on the week) since January. The Index added 75.42 points on Friday, a gain of 0.49%. On Friday, the S&P 500 gained 0.27% and ended at 1,687.99, while the NASDAQ Composite advanced 0.17% to finish the day at 3,722.18. The outperformance of the Dow this week over the S&P 500, which posted its best weekly gains in the past two months, was primarily due to two large-cap technology stocks.

Intel (NASDAQ: INTC) was up 81c on Friday as Jefferies upgraded the stock with a $30 price target. Intel rose 3.6% to end at $23.44. The other news during the week that helped the Dow to outperform the broader markets was from IBM (NYSE: IBM), which announced the divestment of it customer care outsourcing business to Synnex Corp. (NYSE: SNX) for $505 million on September 11th.

After a dismal August when the S&P was down 3.13% (nearly 53 points), the broader markets advanced last week due to a relief rally. Aided by good macroeconomic news from China, where the economic indicators (including industrial production and retail sales) seem to be stabilizing after a few months of free fall, the markets were relieved that the downward spiral has stopped for now. It is now expecting a new normal for China.

A potentially peaceful resolution to the American military intervention in Syria also helped the markets. The Assad government accepted the Russian suggestion that urged Syria to open up its chemical weapons stockpile to UN and international observers, and thus avoid any immediate retaliation by the US. While the final declaration has not been made, we are hopeful that it will come about soon.

We had predicted on Friday that the inflation rate (PPI and CPI) in the economy would continue to remain low, “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 muted till Thanksgiving. There are no data points in the employment or production side that allows us to be bullish on retail, right now.” Our forecast was accurate on the retail sales, which is also reflected in the Consumer Confidence data released on Friday. Analysts were expecting retail sales to rise 0.5% MoM and the same metric excluding Automobile Sales to rise 0.3%. The actual data came in at 0.2% and 0.1%, respectively. The Michigan Consumer Confidence data also reflected the pessimism in consumer sentiments and came in at 76.8, more than 5 points below the expected 82.0.

Figure 1. Confidence is moving back to pre-slump levels, but still far from highs of usual post-recession growth periods.
Figure 1. Confidence is moving back to pre-slump levels, but still far from highs of usual post-recession growth periods.

While we are hopeful that the US consumer will continue to gain in confidence and start its upward consumption spiral, especially aided by a stronger dollar, we do not see that happening in the current economic scenario. We are less optimistic and more realistic about the consumption sector – the largest share of the US GDP.

Producers Price Index (both MoM and YoY) came in higher than expected—but the more important statistic—the price index excluding Food and Energy, came in worse than analyst consensus estimates. Bloomberg’s survey showed a 0.2% inflation expectation among analysts, using the PPI MoM for August, while the ex-Food and Energy PPI MoM was expected to come in at 0.1%. The released numbers were 0.3% and 0.0%, respectively.

With an annual inflation rate (PPI ex-Food and Energy YoY) of 1.1%, there should not be a reason for the to worry about inflation and cut back on its quantitative easing. The target inflation rate of 2% is far away from the current print and a $10 billion of bond buying by the Fed (which is the market expected reduction) should not move the dial.

As long as there is excess capacity in the US and the global system with no visible signs of inflation, the Fed should do its utmost to spur growth and employment in the US economy – and the quantitative easing process is definitely helping this cause. The Fed should not be concerned with political expediency and wrangling, but follow the course that has helped the economy move out from the edge of the crater.

News of Twitter’s upcoming IPO also helped the markets. Though , this does not reflect any changing fundamentals, it does provide clarity on improving secondary markets. The large deals of the past two weeks has clearly indicated a thawing in the credit markets– this is an additional sign of the equity markets improving.

Thanks to Larry Summers, S&P futures are up over the weekend. Summers, who was expected to succeed Ben Bernanke as Fed chief by many observers, is a known hawk who would have clamped down on QE much earlier. However, with Summers now out of the running, the field seems to be open for Janet Yellen, who is a supporter of QE and considered more market friendly at the moment. Her stand has been to be more concerned with unemployment than with inflation – and we support that stance given our arguments mentioned earlier in the piece. Prof. Yellen’s performance in the Federal Reserve system, with which she has been associated since 1994, has been stellar and she is the current Vice-Chairwoman of the Federal Reserve System.


Starwood acquires seven new malls from Westfield

Westfield Group’s (the world’s biggest shopping-center operator by assets) seven malls in the US has been acquired by Starwood Capital Group LLC for $1.6 billion, although the Sydney-based company will hold on to a 10% interest in the business. Westfield, founded by billionaire Frank Lowy, plans to reinvest in assets with higher returns, especially in strategic development projects. In March and April 2012, the company sold seven of its mall to Starwood for $1 billion and a 50% of its stake in six malls in Florida to O’Connor Capital Partners for about $700 million.

Cooper and Apollo Tyres to negotiate with unions to finalize sale deal

The arbitrator, James Oldham, has blocked the $2.5bn takeover deal between Cooper Tire and India’s Apollo Tyres. Earlier this week, United Steel Workers Union of Cooper Tire had presented the matter before the arbitrator stating that the deal was finalized without the consent of workers at the two US plants. Cooper and Apollo are now set to hold meetings over the weekend with the labor union to resolve the matter. Apollo is set to pay $35 per share all-cash for the transaction, which would be the biggest-ever takeover of a US company by an Indian group will also make Apollo the world’s seventh-biggest tyremaker by revenues.

Twitter’s IPO announcement in line with jobs act

On Thursday, Twitter announced its IPO only after filling confidential draft documents with regulators. Twitter has been able to maintain the secrecy owing to last year’s JOBS Act, which was passed to encourage funding of small businesses (with under $1 billion in revenues) by easing various securities regulations. It allows companies to keep its IPO confidential until 21 days prior to their investor “road shows.” Also, as per SEC guidelines, companies do not have to disclose the details of their IPO.

Lawrence Summers Pulls Out His Name From The Fed Chair Post

Lawrence Summers, Treasury secretary under President Bill Clinton, withdrew his name from the chairmanship of the Federal Reserve, on Sunday. Summers, was considered to be the front-runner to succeed the current chairman Bernanke, whose second term expires on January. Larry Summers’ past decisions to deregulate Wall Street has been widely criticized in the past. Meanwhile, 20 Senate Democrats want to nominate Yellen, who could be the first woman chairman to head the Federal Reserve.

High Prices And Rising Mortgage Rates To Slowdown U.S. Housing Market

The U.S. real estate market is headed for a decline amid high prices and rising mortgage rates, which have climbed more than 1% during the last four months. The Standard & Poor’s Supercomposite Homebuilding Index has declined 17.6% since the end of April, while the S&P 500 has gained 5.7%. The recent jump in mortgage together with a slowdown in investor acquisitions and deficiencies of homes for sale will impact the growth of the U.S. real estate market, considered to be the important mainstay of the U.S. economy.

Fed Meeting To Discuss Three Critical Economic Issues

Federal Reserve officials will discuss three critical economic issues when they on Tuesday and Wednesday: increasing U.S. interest rates, worrying developments about the US government’s increasing intervention in Syria and Washington’s long-running budget stresses. The Fed will take its decision on scaling back of $85 billion-a-month bond-buying program based on the decisions made during this meeting. The second critical agenda will involve discussion on the weekend deal by the U.S. and Russia for a diplomatic solution to Syria. The continuing tensions in the region are likely to keep the oil prices steep. Finally, the issue of budget battles that are threatening the economy for the past three years will be discussed.

Data Releases This Week

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