Monday, January 9, 2017

Japan's Takeda Ready For Fresh Acquisitions After $5.2 Billion Ariad Deal

January 10, 2017

Japan's Takeda Pharmaceutical Co (4502.T) said it has the financial capacity for fresh acquisitions to bolster its drug portfolio after agreeing on Monday to acquire cancer drug maker Ariad Pharmaceuticals (ARIA.O) in a $5.20 billion deal.

The Ariad deal, at a 75 percent premium, is the latest example of pharmaceutical companies paying handsomely to snap up promising drugs owned by rivals in a bid to secure revenue growth. Pfizer Inc (PFE.N) agreed in August to pay $14 billion for Medivation Inc, the maker of the $2.2 billion-a-year cancer drug Xtandi.

Takeda's Chief Financial Officer James Kehoe said that the Japanese company's acquisition spree may continue.

"Should the right deal come along we have the capacity," Kehoe said during a conference call after Takeda announced the Ariad purchase. The company was in a position to limit its debt burden and retain a strong credit rating, he said.

At the end of its last business year that ended on March 31, Takeda had 438 billion yen ($3.79 billion) in cash and cash equivalents.

Takeda's Chief Executive Officer Christophe Weber said on the same call that while there were not many opportunities to buy cancer drugs and central nervous system drugs, such as Alzheimer remedies and bipolar treatments, the company, nevertheless, would make acquisitions "that make sense."

Takeda's move comes as it readies to face imminent generic competition for its top-selling blood cancer drug Velcade, with other key products slated to go off patent later from 2020.

Weber said the potential returns from Ariad's lung cancer treatment, Brigatinib, and its leukemia drug, Iclusig, along with other formulas in its pipeline justified the high premium.

Takeda predicts annual sales from Brigatinib, which the U.S. Food and Drug Administration is expected to decide on by April, could exceed $1 billion.

"It has the potential to be the best in class," Weber said.

Article Link To Reuters:

Oil Recovers Some Previous Losses, But Doubts Over Supply Cuts Linger

By Henning Gloystein
January 10, 2017

Oil markets edged higher on Tuesday on expectations that at least some planned production cuts would be implemented, making a slight recovery from big losses the previous day over doubts the agreed reductions would rebalance an oversupplied market.

Brent crude futures LCOc1, the international benchmark for oil prices, were trading at $55.14 per barrel, up 20 cents from their last close.

U.S. West Texas Intermediate (WTI) crude oil futures CLc1 were trading at $52.12 per barrel, up 16 cents.

Both of the contracts on Monday lost nearly 4 percent. Analysts said the small gains on Tuesday came from expectations that some of the cuts planned by the Organization of the Petroleum Exporting Countries (OPEC) and producers such as Russia would materialise despite doubts over full implementation.

"Coordinated output cuts will support the market rebalancing that will draw down global stock levels, leading us to revise up our Brent crude forecast for 2017 to $57 per barrel," BMI Research said.

Most analysts, though, said there was still downside risk for oil due to rising output elsewhere.

Crude plunged in the previous session on concerns that rising output in Iran and also Iraq - which has given full supply allocations of Basra crude to three refiners in Asia and Europe for February - were undermining efforts to curb a global fuel supply glut that has weighed on markets for over two years.

Supplies are also increasing in North America.

"The average Canadian rig count for December 2016 was 209, up 36 from the 173 counted in November 2016, and up 49 from the 160 counted in December 2015," said Matt Stanley, a fuel broker at Freight Services International in Dubai.

"A 30 percent increase in Canadian rigs in a year ... The bear in me is well and truly back," he said.

In the United States, energy companies last week added rigs for a tenth week in a row, extending the drilling recovery into an eighth month as crude prices remained at levels at which many U.S. drillers can operate profitably.

Adding one-off supplies, the U.S. Department of Energy on Monday announced a sale for crude from its Strategic Petroleum Reserve (SPR), with bids for 8 million barrels of light, sweet oil due by Jan. 17.

"U.S. SPR sales add to bearish pressures on U.S. crude," Citi said following the release of the bids.

Article Link To Reuters:

The Trump Oil Trade And Why Oil Might Soon Reach $100 Again

Buy these 2 ETFs to profit from this trend.

By Kirk Spano
January 9, 2017

Five years ago, in the article that landed me a role here at MarketWatch’s Trading Deck, I wrote there was “one general thing that changes everything for America.” That one thing was the rise in production of American oil.

Within a year of that article, once American companies started pumping oil in earnest, we saw a large runup in oil stocks XLE, -1.45% That bull market lasted until the recent oil price crash CLG7, +0.29% The oil crash, as we know, was caused by the Organization of the Petroleum Exporting Countries and Russia flooding the market with oil. Recently, they agreed to slow production to help finish the rebalancing of global oil markets.

Today we are at the beginning of another large rally for oil stocks. There are several catalysts for this move.

The Trump administration is very pro-fossil fuel. The renewed focus on American oil will help drive oil prices higher in coming years and ease regulation on fracking.

The looming decline in global deepwater oil production, about 3 million barrels a day starting this year, will also put pressure on oil prices to rise. This production decline for the most part won’t be replaced with new deepwater megaprojects. Most projects are too expensive and have too long of a payback in an era when we eventually expect to have cheaper, longer-range electric vehicles.

On top of a gradual decline in deepwater oil production, there is a wild card that could drive oil prices toward $100 per barrel again: A very real possibility in the near future that the dollar will no longer be the lone global reserve currency.

As I discussed about a month ago in an article titled "Could Trump, China conflicts take the U.S. to recession?" it is very possible that China and Saudi Arabia make a deal to trade oil in yuan. If they do that, then the “petrodollar,” which is built on global oil being traded in dollars since the early 1970s, will be no more. At that point, the yuan USDCNY, -0.1859% becomes a co-reserve currency, and the dollar DXY, -0.20% depreciates.

If the dollar falls in value due to a such a shock, the price of oil will rally mightily. That of course would be very profitable for most of the surviving oil producers, including American shale.

There is a lot of incentive for China and Saudi Arabia to do such a deal. It would allow both to diversify away from the dollar and support their own long-term interests: a more diverse economy in Saudi Arabia and a bigger role for China in international trade. Most of OPEC could follow suit in such a yuan-for-oil arrangement.

There might even be a security component of a Saudi-China deal on oil and the yuan. Consider, then, what that could look like and what it means to oil prices. What if China deployed troops to Saudi’s border with Yemen, a country embroiled in civil war in which Saudi is supporting one side and Iran the other? Or took part in an Iraqi “peacekeeping” force that fights ISIS? There are quite a few scenarios that could add to the risk premium for oil.

There are many moving parts to the global oil, currency and trade markets. I cover many of those in a report titled “2017 — The Return of Volatility to Markets,” to be published the week of Jan. 16. Sign up at my investment newsletter to receive it.

The bottom line is that over the next few years, the price oil is likely to rise, or to rise a lot. That is a pretty good equation for oil-stock investors. Having extra exposure to the energy patch is again a good idea. Especially good are companies involved with American shale, as they have a lot of supporters in government now.

Two Trades To Consider

The survivors in the shale patch stand to do very well in a higher-priced oil environment. Those with better balance sheets will do better than those with heavier debt. Moreover, companies with significant natural-gas production will probably be safer long-term as oil use shrinks sometime in the next decade and natural gas use keeps on growing.

I recently discussed 4 stocks for oil's final bull market. For those looking to build a better asset allocation, here are two funds that can give you greater exposure to higher-priced oil.

While many will focus on the oil explorers and producers to capture profits, there are many companies in that group that have so much debt that even higher oil prices won't save them. I like the companies with better balance sheets and a mix of oil and gas production. Many such stocks can be found in the First Trust Natural Gas ETF. FCG, -2.39%

FCG focuses on companies with significant natural-gas production. While several components are pure play natural-gas producers, most also have significant oil production, such as Devon Energy Corp DVN, -4.29% a Permian basin leader and the ETF’s second-largest holding. There are also desirable midstream assets in FCG, such as Kinder Morgan KMI, -0.78% and Enbridge Energy Partners EEP, -1.00% that help add a solid dividend to the fund.

In my opinion, FCG is a buy at recent price levels.

Companies that provide equipment and services to the oil-and-gas industry also do very well whe oil prices rise. In fact, the equipment and service companies are usually more levered to rising oil prices than producers. The SPDR Oil & Gas Equipment & Services ETF XES, -1.52% is my selection here. I prefer it to other ETFs because of its non-market-cap weighted portfolio. I believe the midsize companies will do best in an extended bull market, so I don’t want to overweight the large companies. XES is a buy in my opinion at recent price levels.

Article Link To MarketWatch:

The Trump Oil Trade And Why Oil Might Soon Reach $100 Again

When Do Deficits Matter?

When there are Republican presidents, of course.

By Kevin D. Williamson
The National Review
January 9, 2017

It has long been rumored that Paul Krugman does not write the New York Times column that appears under his name. I have no reason to believe that that is true, but I hope it is. There are not many situations in which the reputation of a winner of the Nobel prize and the John Bates Clark medal would be improved by an act of intellectual dishonesty, but this is one of them.

Like homelessness and military casualties, U.S. government deficits are an issue that bleep into visibility on the progressive radar almost exclusively during Republican presidencies. On October 23, 2016, Professor Krugman wrote that the “debt scolds should be ignored,” and that Hillary Rodham Clinton, then presumed to be the next president, should engage in “years of deficit-financed infrastructure spending, if she can.” A grand total of 78 days later, Professor Krugman declared, “Deficits matter again.”

As the kids say, Life comes at you pretty fast.

There is some explanation for this beyond simple hypocrisy.

In her very clear-eyed 2010 profile of Professor Krugman, Larissa MacFarquhar, of The New Yorker, considers the economist’s late-life discovery of politics. “In his columns, Krugman is belligerently, obsessively political, but this aspect of his personality is actually a recent development,” she writes, noting that his work has been strongly influenced by his economist wife, who has focused on making his prose “angrier.” She finds Krugman to be an out-of-touch new-media partisan, dividing his time between Princeton and his beachfront home in St. Croix. Strange that such a life would produce so much bitterness. Is Professor Krugman the world’s angriest economist? It isn’t his anger that is in question: “It’s been a long time — years now — since he did any serious research,” MacFarquhar notes.

Professor Krugman is familiar enough with the workings of social media to anticipate being called out on his remarkably quick — 78 days! — turnaround from scold of deficit scolds to deficit scold. It is unconvincing stuff. He argues that deficit-financed federal activism in the wake of the financial crisis was justified as a form of “depression economics” and that this represents a general consensus in the macroeconomic-policy literature. (It should be noted that this is not his particular area of economic expertise.)

What has changed, he says today, is that the unemployment numbers and wage figures suggest that we have returned to full employment, and hence the emergency measures he advocated earlier are no longer needed. Even if we buy that policy story entirely, the employment and wage figures today are not radically different from what they were 78 days ago, and that demand for deficit-financed spending 78 days ago was, in Professor Krugman’s own prescription, something that should be extended for years into the future.

What has changed since October 23, 2016, is not the labor markets. What has changed is what happened on November 8, 2016. Professor Krugman is simply another cracked Democratic partisan looking for any cudgel with which to beat the incoming Republican government. He was, by all accounts (even those of economists who disagree with him), a very fine economist. He is an incompetent newspaper columnist. The skills are not necessarily transferable.

What’s really a shame about all this is that we could use Krugman the economist just at the moment. In the December 23 issue of National Review, Robert D. Atkinson offered a provocative cover story, “The Case for a National Productivity Strategy,” in which he advocated a vision of “Trumponomics” that would be oriented toward raising overall U.S. labor productivity as an avenue to wider middle-class prosperity. Atkinson, the founder of the Information Technology and Innovation Foundation, has argued for a number of ideas that might strike some more traditional conservatives as an updating of what the Right used to scoff at as “industrial policy,” i.e., putting the White House Office of Science and Technology Policy in charge of a national program for developing automation research, creating a special “innovation box” in the tax code that reduces the tax on profits from “innovation,” doubling the research-and-development tax credit, etc.

The president-elect seems to have similar if less thought-out views, and he is hardly the first. George W. Bush, of the Harvard Business School, was to be the “MBA president,” putting his business expertise into the service of reforming the schools, entitlements, and the tax code, among other things. The events of September 11, 2001, ensured that he never got the chance, but what Bush promised was not so different from what Trump promises and what Ross Perot promised before him: the familiar, ancient formulation of “running the government like a business.”

The limits of that vision were addressed some years ago by an economist not very well-known outside of professional circles, a fellow by the name of Paul Krugman, who authored a persuasive cold-water essay titled “Competitiveness: A Dangerous Obsession.” He began by dismissing (only slightly sneeringly) President Bill Clinton’s insistence that each of the world’s nations is “like a big corporation competing in the global marketplace.” Programs of investment in — see if this sounds familiar — “infrastructure and high technology” were, Professor Krugman argued, political evasions based on economic errors. “Every few months a new best-seller warns the American public of the dire consequences of losing the ‘race’ for the 21st century,” Professor Krugman wrote. “A whole industry of councils on competitiveness, ‘geo-economists,’ and managed-trade theorists has sprung up in Washington.” Many of them, he lamented, occupied high positions in the Clinton administration. What he found was that real changes in standards of living were closely correlated with per-worker productivity — not with changes in productivity in comparison to workers in other countries — and that the most productive workers tended to be found in the most capital-intensive sectors. The vision of countries competing like Pepsi and Coke (his metaphor) is irreparably defective. Neo-mercantilist policies of trade restriction and the like, being based on that error, will not produce the desired results. Krugman:

"If top government officials are strongly committed to a particular economic doctrine, their commitment inevitably sets the tone for policy-making on all issues, even those which may seem to have nothing to do with that doctrine. And if an economic doctrine is flatly, completely and demonstrably wrong, the insistence that discussion adhere to that doctrine inevitably blurs the focus and diminishes the quality of policy discussion across a broad range of issues, including some that are very far from trade policy per se."

If partisanship in the context of economic doctrine is something like a fever, then ordinary political partisanship is more like brain cancer. Which of course helps to explain the difference between Paul Krugman the economist and Paul Krugman the columnist.

Of course deficits matter. They mattered during the George W. Bush administration, they mattered during the Barack Obama administration, and they will matter during the Donald Trump administration, though it is always an open question whether congressional Republicans will act like they matter. A country with a modest amount of public debt can run relatively small deficits more or less indefinitely given sufficiently robust economic growth. (That’s the difference between Rex Tillerson’s having a $15 million mortgage and my having one.) But the United States is not that country, and there is a great deal more to our overall public financial picture than formal debt as such, including unfunded entitlement liabilities and unfunded public-pension liabilities that are not federal obligations today but that could very well end up being federal obligations in the future. (Consider those coal-miner pensions that everybody was making a fuss about two weeks ago.) And the deficit matters even if you believe, as Professor Krugman sometimes does, that deficit-financed federal spending programs are the right medicine in times of economic crisis.

There will be many occasions to consider deficit spending over the next several years, and much of that debate will happen in the context of a national-competitiveness debate of the kind that Professor Krugman criticized so trenchantly during the Clinton years. Paul Krugman might have contributed something useful to that debate, rather than spending the back half of his career as an upmarket Rosie O’Donnell.

Article Link To The National Review:

You Can Blame Obama’s ‘Gig Economy’ For The Election

By John Crudele
The New York Post
January 9, 2017

Do you want to know why Americans really were angry enough to elect Donald Trump as President?

Well, here it is — from an academic report with the dull title “The Rise and Nature of Alternative Work Arrangements in the United States 1995-2015,” which was researched and written by economics professors from Harvard and Princeton.

Their conclusion: 94 percent of the job growth over the last 10 years occurred in “alternative work arrangements.”

What’s an “alternative work arrangement?” Those are people who aren’t really attached to a particular company. They are freelancers, or temporary workers, or on-call workers and contractors.

According to Professors Alan B. Krueger (Princeton) and Lawrence Katz (Harvard) these alternative jobs now make up 15.8 percent of the workforce compared to just 10.7 percent before the Great Recession of 2008.

Only 0.4 percent of the millions of new jobs — or about 500,000 — were traditional employment arrangements.

Both of these professors are also members of the National Bureau of Economic Research, the organization that decides when there is a recession in the US. So Krueger and Katz are both influential.

Here’s the funny part, if you can laugh at numbers like this. Just a few years ago Krueger served as the assistant secretary for economic policy for the Obama Administration and he was also chief economic for the President’s Council of Economic Advisors.

So, the Democrats shouldn’t have been surprised that jobs and the economy were going to be a major issue in the last election.

As I’ve said again and again, the economy is always very important in presidential elections. But the weakness in the job market made it the most important issue last year despite the fact that the candidates, and the media and the pundits were distracted by a lot of other admittedly entertaining stuff that really wasn’t foremost on voters’ minds.

If you’ve been reading my column you already know most of the problems with the job market. Despite the fact that there are 14 million more jobs now than when President Obama took office, that still isn’t enough to absorb all the people who had lost their jobs and all the people who have since gotten old enough to get a job.

Last Friday, the Labor Department announced that another 156,000 jobs were created. But you can never tell from the government releases whether December’s jobs were quality ones or not.

The 146 million jobs that now exist in the US are only 6.5 million more than existed at the peak of employment in late 2007, before the economy soured.

And the jobs that have been created aren’t as good, so many people have had to hold more than one job to make ends meet. All those multiple job holders mean that someone else is unable to find work.

The first draft of the Krueger/Katz report was finished last March but wasn’t highly publicized. The latest draft, which doesn’t look like the final one, came out on Sept. 13 but only recently was made public.

So the two initial drafts of the professors’ conclusions were available to the Democrats’ inner circle early enough for the Party to have adjusted for the election. But the party didn’t. Nor did it apparently listen to the advice of former President Bill Clinton who was urging his wife, Hillary, to make the economy the main campaign issue.

That’s what he did in 1992 when he won. She ignored the advice and she lost.

The report by Krueger and Katz wasn’t the only warning the Democrats were getting. One prominent Democrat who I met a month or so before the election had been telling people very high up in the Democratic Party that the economy wasn’t as healthy was they believe, or pretending to believe.

I tried to contact Krueger with questions but he didn’t get back to me. The big one is: why have these alternative work arrangements taken over for traditional, full-time jobs?

In their paper the professors seem to put the blame for this shift away from traditional jobs — where a worker is attached to a company that pays benefits, unemployment insurance, etc. — on the worker. “Many possible factors could have contributed to the large increase in the incidence of alternative work arrangements,” the profs write.

One is the “possible increase in demand for flexible hours (perhaps supported by the increased availability of health insurance as a result of the Affordable Care Act) may also have contributed,” they write.

Maybe. But how’s this for a more logical explanation. After the Great Recession companies were afraid to take on the cost of full-time employees so they resorted to freelancers, contract workers, part timers and the like.

Krueger and Katz said that higher paid and older workers are more likely to get caught up in these alternative work arrangements.

And now, nearly 10 years after that frightening time for the American economy companies are still in the habit of not hiring traditional workers or are simply too afraid to do so.

As I suggested in last Thursday’s column, one of the first things on President-elect Trump’s agenda should be to have all the economic data subjected to a full-blown government audited. Until he can dig through the muck of economic data and decide what the job market is really doing he can’t solve this country’s economic problems.

Trump has declared that he will get rid of the ObamaCare, which is the nickname for the Affordable Care Act. Whether he follows through on that pledge or not, he first needs to know how that will affect the 95 percent of workers that Krueger and Katz say recently got jobs with no health or other benefits.

Article Link To The New York Post:

America's Builder-In-Chief Should Beware

By Mihir Sharma
The Bloomberg View
January 9, 2017

Can government investment in infrastructure fuel the sort of dynamism that propels an economy forward? Today, that’s virtually an unquestioned truth. Infrastructure spending is constantly cited as the way forward for a stagnating euro zone; in the U.S., both candidates for president promised billions of it. When Donald J. Trump takes office on Jan. 20, that’s the one aspect of his economic agenda that, it appears, Democrats will be able to get behind.

Yet caution is warranted. Some in the West have perhaps forgotten two aspects of public investment in infrastructure. First, it takes ages to have real effects. And second, it creates interest groups that warp public spending for decades thereafter.

For evidence of that first point, look no further than India -- still, according to the most recent growth data, the world’s fastest-growing large economy. Over the past couple of years, the Indian government has sharply increased the money it spends on infrastructure; the last federal budget increased the amount of public investment in roads, rail and so on by 22.5 percent. The argument is simple and familiar: India’s short of infrastructure and increased public spending should energize the private sector -- which should then invest more, too.

But that’s not exactly how it's worked out. In fact, private investment has slowed for several quarters. This year, according to the most recent GDP estimates, the total amount spent on fixed capital in India will actually fall. It turns out that companies care more about a stable investment environment and favorable regulations than government backing for a few new roads and bridges.

That doesn't bode well. Better infrastructure might yet transform the Indian economy. But that’s far in the future and it depends crucially on getting the spending right. And getting spending right is something that’s much easier for companies to do than governments, even those that aren't burdened by conflict-of-interest problems.

Which leads us to that second point, about viewing public infrastructure spending as economic magic. Consider the People’s Republic of China. The country that famously poured more concrete in a few years this century than the U.S. did in the entire century that preceded it is now burdened by excess -- perhaps useless -- capacity and poor returns on its investment. In fact, it’s possible that over half of China’s massive build-out has destroyed rather than created wealth.

If the numbers don’t grab you, the photos will -- stunning shots of silent apartment blocks and vast, empty airports in small towns. The pictures don’t lie: Last year, as I drove through one of the most famous “ghost cities” in Chinese Mongolia, I couldn’t help thinking it looked like some sort of odd post-apocalyptic museum. Beijing’s policy makers know they need to shift the balance of spending. But infrastructure spending, like entitlement spending, is addictive; once an economy gets hooked on the jolt it provides, it’s very hard to go cold turkey. Too many powerful people are upset, and nobody wants the GDP numbers to suddenly take a turn for the worse.

My point is not that publicly-financed infrastructure is bad. It’s just that governments should only invest in infrastructure when and where it's really needed -- where that money will clearly enhance the productive capacity of the economy. And yes, infrastructure in the U.S. is the oldest now that it's been for decades. There are bound to be places where the government can invest and generate good returns for everyone over the long-term. But if you look at public infrastructure spending as a quick and easy way to boost growth and jobs, then you’re asking for trouble. If Trump wants to spend federal money to reward the Rust Belt voters who propelled his victory, there are other and better ways to do so.

Washington will love infrastructure spending, of course; every legislator will hope that his or her district or state will get a serving of pork. But taxpayers should worry. While stories about “bridges to nowhere” have vanished from the papers, the lesson from India and China is that if Trump opens the taps indiscriminately, they’ll soon be back.

Article Link To The Bloomberg View:

Gildan Wins American Apparel Auction With $88 Million Bid

By Jessica DiNapoli
January 9, 2016

Canadian apparel maker Gildan Activewear Inc (GIL.TO) has won a bankruptcy auction for U.S. fashion retailer American Apparel LLC after raising its offer to around $88 million, a person familiar with the matter said Monday.

Gildan will not take any of American Apparel's stores, but will own its brand and assume some of its manufacturing operations, the source said. The deal is subject to a bankruptcy judge approving it on Thursday, the source added.

American Apparel declined to comment, while Gildan did not immediately respond to a request for comment. The source asked not to be identified because details of the bankruptcy auction are confidential.

The auction for the retailer, famous for its sexually-charged advertising, also attracted an offer from California-based apparel maker Next Level Apparel, a source said earlier on Monday. However, Gildan won after raising its original $66 million stalking horse bid, the source added.

The bankruptcy auction also attracted interest from e-commerce giant Inc (AMZN.O), competitor Forever 21 Inc and brand licensor Authentic Brands Group LLC, which led a consortium to acquire Aeropostale Inc (AROPQ.PK) out of its bankruptcy last year, sources said last week.

American Apparel's struggles show the major challenges facing brick-and-mortar retailers as more consumers shop online.

Gildan plans to assume ownership of American Apparel's manufacturing plants in southern California, one of the largest garment-making operations in the United States with about 3,500 employees, sources have previously said.

The bulk of Gildan's manufacturing takes place in the Caribbean and Central America.

American Apparel filed its second Chapter 11 in November with about $177 million in debt after the failure of a turnaround plan implemented by its owners, a group of former bondholders. The company filed its first Chapter 11 in October 2015, and emerged early last year.

Article Link To Reuters:

China Faces A Rock And A Hard Place Amid Yuan Volatility

By Leslie Shaffer
January 9, 2017

Keeping China's yuan from falling much further will likely bedevil the mainland's policymakers, Eric Robertsen, head of global macro strategy and foreign-exchange research at Standard Chartered, said on Monday.

The yuan has certainly been volatile recently.

The People's Bank of China (PBOC) set the yuan midpoint at 6.9262 on Monday, a sharp drop for the renminbi, compared with Friday's fixing at 6.8668. On Tuesday, the fixing was set at 6.9234, indicating a slightly stronger yuan, compared with the pair's onshore trading close at 6.9330 on Monday.

China's central bank does not allow the currency to move more than 2 percent from its daily fixing in onshore trade. While policymakers cannot closely control offshore trade of the currency, it usually remains relatively close to its onshore counterpart.

Onshore, the dollar was fetching as little as 6.8679 yuan late last week, dropping from levels as high as 6.9603 yuan earlier in the week. At 9:35 a.m. HK/SIN on Tuesday, the dollar/yuan was at 6.9285.

In offshore trade late last week, the dollar was fetching as little as 6.7815 yuan amid a spike in overnight borrowing and deposit rates, down from as much as 6.9872 early last week. At 9:20 a.m. HK/SIN on Tuesday, the dollar was fetching 6.8879 yuan offshore.

"We've started the year with some fireworks in the currency," Robertsen said. But while he expected dollar strength would continue to pressure the yuan, he only expected the dollar/yuan pair would rise to around 7.06 this year.

He noted that the PBOC was likely to use three methods to control the pace of the renminbi's depreciation – foreign-exchange intervention, interest rates and capital controls – but added that those would all present "very challenging side-effects."

Intervention was the most straightforward way to control the currency, but the bite out of foreign-exchange reserves could become an issue, Robertsen said.

On Saturday, China reported that its foreign exchange reserves fell for a sixth straight month in December, declining by $41 billion for the month, to $3.011 trillion, the lowest since early 2011.

"We've seen a meaningful decline in reserves over the last two years, largely as a function of FX intervention," he said. "If they continue to intervene in the FX markets, they will categorically take the FX reserve number through $3 trillion."

In pragmatic terms, China's reserves would still be adequate as it likely doesn't need more than $2.25 trillion, he noted.

"But the market doesn't see it that way. A break of $3 trillion will lead to a picked up pace of capital outflows and the PBOC has to manage that situation," he said.

The second way policy makers can support the currency would be through interest rates, but that can only be a short-term measure, Robertsen said.

"The onshore investor community is heavily long fixed income and the interbank community has deployed quite a bit of leverage in expanding their balance sheets," he said. "For them to either tighten monetary policy explicitly or tighten onshore liquidity conditions through either onshore or offshore liquidity measures in the interest rate and foreign exchange markets will have a significant impact on investor liquidity onshore."

Robertsen said policymakers had leaned aggressively on the third strategy, capital controls, over the past three months.

Chinese regulators introduced new rules, which will take effect in July, requiring financial institutions on the mainland to report domestic and overseas cash transactions of more than 50,000 yuan (around $7,217), down from 200,000 yuan previously, Reuters reported.

Starting from January 1, the country's foreign-exchange regulator also planned to step up scrutiny on foreign-currency purchases, Reuters reported.

"Getting capital out of the country has frankly become much more difficult," Robertsen said, noting that the measures come as the annual quota on currency conversion of $50,000 for individuals has "reset" for the new year.

"They're working very hard to make sure that is done in a way that is according to the rules and regulations," he said.

But he noted that the capital controls and the step up in enforcement work counter to policymakers' longer term goals.

"This whole program or agenda of the internationalization of renminbi takes a step backwards and we know that is a major part of their policy agenda and a major part of their reform agenda," he said.

Article Link To CNBC:

Here's Where Goldman Sachs Is Telling Clients To Invest In Equities

Time for some portfolio changes?

By Julie Verhage
January 9, 2017

Goldman Sachs Group Inc. has identified three big items that will shape the equity landscape this year -- and they all hinge on the impact of President-elect Donald Trump's policies.

Tax reform, the strength of the dollar and the pace of wage gains stand to set the tone on the American market this year, Chief U.S. Equity Strategist David Kostin and his team at the investment bank wrote in a note to clients. Here's why: 

Tax Reform

"Corporate tax reform represents key source of hope,'' the strategist wrote. That's especially true for sectors that tend to have higher tax rates, such as brick-and-mortar retailers, energy producers and makers of consumer products.

It's not yet clear how Trump's proposed measures will look when they come out of Congress, so Goldman ginned up a table on how various scenarios would impact earnings for S&P 500 companies. A cut to 25 percent from the current 35 percent statutory rate on domestic income, for instance, would boost profit in the large-cap benchmark by 8 percent.

Currency Markets

The dollar has strengthened dramatically since Trump was elected, as investors speculate his policies will boost domestic growth rates. Even after the greenback reached a 14-year high last week, Goldman thinks there is more room to run if Trump can pass infrastructure spending and roll back some regulations. The obvious play, then, is to buy stocks that have a high percentage of their sales concentrated in the U.S. 

Wage Growth

Lastly, U.S. workers are starting to see faster gains in their paychecks as the labor market tightens. That's great news for the average Joe, but could hurt companies with high marginal labor costs. In fact, wages are now showing their fastest gains since the last recession ended, with average hourly earnings surging 2.9 percent. Fast-food and retail stores could see earnings crimped as costs rise.

Overall, Goldman predicts the coming year won't be that kind to U.S. stock investors. While it sees the S&P 500 Index rising to 2,400 during the first three months of the year -- a 5.4 percent climb from Friday's close -- the investment bank expects the equity benchmark to finish at 2,300, implying a gain of just 2.3 percent in 2017. The basis for their moderate pessimism is that expectations of sweeping tax reform will provide a boost in the first quarter, but some of that exuberance will fade as the year wears on; especially if enacted policies aren't as business friendly as currently expected.

Article Link To Bloomberg:

BofA Team Warns Stock Market Could 'Melt Up' 10 Percent -- Right Before A Meltdown

By Patti Domm
January 9, 2017

Stocks and commodities could see a final 10 percent melt-up in the first half of the year, followed by a "meltdown" closer to 2018, according to Bank of America Merrill Lynch strategists.

"Call it the 'Icarus trade.' The current melt-up, which started back in February 2015, will be followed by a meltdown later in '17," writes the firm's chief investment strategist, Michael Hartnett, and other analysts. The strategists first see a "wobble" in January and February, but they don't expect a major first-quarter correction before the next surge higher.

"This is an eighth- or ninth-inning move. It can often be quite large and produce a big top," Hartnett said in an interview.

While the strategist is not quite calling for the death of the nearly 8-year-old bull market, he said, "It's getting long in the tooth. The thing about a melt-up is you get a lot of people chasing it."

Stocks could continue to rally before fizzling out in the second half of the year, closer to 2018, Hartnett said. He said one sign that "something nasty" is about to happen, would be if both the dollar and gold moved higher at the same time.

That's a rare occurrence, said Hartnett. "You see that there's trouble ahead. The warning signs would be credit, bank stocks [sell off]. Right now, there's nothing more contrarian out there than gold. That's not to say you buy it today. At some point, gold is going to move higher. It's going to start to worry about inflation," he said. When the market sees the withdraw of liquidity by the Fed or other central banks, that's when gold would rise with the dollar.

There could be some choppy periods in the meantime. BofA's year-end target for the S&P 500 is 2,300. It was just 30 points below that Monday.

"Buy the election, sell the inauguration is an easy narrative," Hartnett said. The Dow is up about 9 percent since the election. The inauguration of President-elect Donald Trump is Jan. 20.

Hartnett said in the near term, investors could also get anxious around the Fed's meetings Feb. 1 and March 15, especially since wage growth is beginning to pick up. Friday's December employment report showed the biggest average hourly wage gains since 2009, and continued strong jobs data and wage growth could signal a faster moving Fed.

"That's something that could make the risk assets pause for breath," he said.

Hartnett said the markets have already been factoring in the president-elect's promise of a corporate tax overhaul and infrastructure spending, and it's also showing up in some data and consumer and business activity. Trump's election also coincided with an already improving economy.

"The global economy was on an improving path before Trump was elected. The election of Trump has clearly stimulated animal spirits and expectations," he said.

Hartnett said he favors other markets over the U.S.

"The way we're positioned is for upside in Europe and the U.K. ... and Japan, relative to the United States of America, and emerging markets, and then in commodities a preference for oil, probably over others," he said.

The BofA strategists say the rally is likely to end with bullish positioning, "excessively bullish" profit outlooks and policy hawkishness. They said the markets have not quite gotten to the point where they will melt up. The positioning is not overly euphoric, though it is bullish.

The strategists also say the start of the Trump era has heralded in a change in investment themes from Wall Street to Main Street. They expect that to continue, with the emphasis away from globalization and winners being those that can thrive in a zero interest rate world, to a more isolationist theme and a world where there are winners from fiscal policy.

The themes that are now "in," include cyclical recovery, inflation and fiscal stimulus. "Out" are secular stagnation, deflation and fiscal austerity. Investments that are in include commodities, value, small cap, Japan, banks, real assets and active investing. Those that are out include bonds, growth, large cap, U.S., technology, financial assets and passive investing.

A core trade would be long banks, short bonds.

"The signals that the Big Top in risk assets is approaching in coming quarters will likely be fatigue in high yield & U.S. banks, a contrarian rally in gold, and rates volatility as the era of excess liquidity reverses," the strategists wrote.

Article Link To CNBC:

Why Apple’s Critics Are Right This Time

Apple’s seeming struggle to execute on its vision for artificial intelligence is the most pressing example.

By Christopher Mims
The Wall Street Journal
January 9, 2017

Almost since the birth of Apple Inc., critics have declared it was headed in the wrong direction.

In 1997, when the company was 90 days from bankruptcy and Steve Jobs returned to save it, that criticism was correct. While things aren’t remotely as bad today, Apple’s critics are correct again.

The most pressing example is Apple’s seeming struggle to execute on its vision for artificial intelligence—specifically voice-based interfaces. AI isn’t just a curiosity for the company; it is the technology most likely to disrupt Apple as thoroughly as Apple disrupted the smartphone industry.

AI-powered voice assistants can directly replace interactions with mobile devices. It isn’t that screens will go away completely, but screens unattached to objects that can listen, talk back and operate with autonomy will rapidly become obsolete.

Computers we talk to can be anywhere. To work best, they have to be everywhere—at home and in the office, in our cars, on the go. Inc. had a surprise hit with the voice-based assistant Alexa and its embodiment, the connected speaker Echo. Alphabet Inc.’s Google is close behind. Partners with both companies spent several days at the CES tech show in Las Vegas last week introducing a deluge of devices powered by these competing technologies.

Apple is clearly aware. It is reported to be working on its own Alexa-like smart-home device. The history of Apple is rarely about being first—think of the iPod—but becoming dominant through superior design and execution.

But the conspicuous absence of such a device or comparable functionality makes it hard to believe Apple isn’t falling behind, despite being one of the first to the starting line when it introduced Siri more than five years ago.

Apple didn’t respond to requests for comment for this article.

Apple has a potential solution. Consider which is better: Putting a microphone in every room of your home or office, or putting a single one in your ear. Imagine Joaquin Phoenix spending the entirety of the movie “Her” trapped in his apartment, shouting instructions to the wireless speaker in which the artificial intelligence Samantha was trapped, instead of walking around sharing his life with her as she rode in his smartphone and earpiece.

Apple’s wireless earbuds, called AirPods, are really tiny computers that let you access Siri with just a tap on the side of your head. The problem, though, is Siri is so poorly implemented with the earbuds, it is easier to just use your iPhone. That could be fixed easily enough.

A larger, much more intractable issue is Siri still doesn’t measure up to rival services from Google, Microsoft Corp. and Amazon.

The easy rejoinder is since Apple has the market share and hardware to give us seamless access to AI, it is simply a matter of putting more of its resources into Siri and its always-on access points, the iPhone, AirPods and the Apple Watch.

But that ignores criticism that Apple, despite essentially limitless quantities of money, is failing to live up to its own standards of quality. Apple watchers have kept up a drumbeat of complaints: neglect of the Mac line of computers, unremarkable cloud services, missed ship dates, a creep of product bugs, and so on. Apple’s top brass had their compensation cut after the company missed its revenue and profit goals for 2016.

One explanation is Apple’s “unitary” management structure, where divisions are responsible for tasks such as marketing or engineering rather than individual products. Apple’s head of software engineering is ultimately the head engineer for every single Apple product. This means Apple is great at creating unified experiences, but if the company makes too many products, it is impossible for management to keep up. Contrast that with Amazon, where every business gets its own leadership and profit and loss statement.

Apple Chief Executive Tim Cook repeatedly has said one of his core beliefs is you can only do a few things well. Barring a new management structure, the solution to Apple’s troubles in keeping up with all the things it makes, much less AI, is the same as it was when Mr. Jobs returned in 1997: focus. Mr. Jobs famously reduced the company’s sprawling lineup of devices to just four computers.

Apple’s leaders must devote their attention to disrupting their own company. That doesn’t mean releasing bigger iPads, but exploring how Apple’s core products can be central to the always-on, voice-activated, artificially intelligent computing interfaces here now.

Like all giants at the apex of their power, it isn’t clear Apple is sufficiently paranoid about what might come next.

Article Link To The Wall Street Journal:

Alibaba Promises Trump 1 Million Jobs, But Don’t Believe It

Ma’s ambitious pledge of job creation doesn’t include actual jobs.

By Jennifer Booton
January 9, 2017

Don’t be fooled by the latest billionaire meeting at Trump Tower claiming to have made “great” progress in American job creation: Alibaba won’t create 1 million jobs in the U.S. as promised, at least not directly.

On Monday, Alibaba BABA, +0.88% Chief Executive Jack Ma became the latest CEO to tout job creation after a 40-minute meeting with Trump in the newly-minted politician’s gold-plated tower. There’s no better music to President-elect Donald Trump’s ears than pledges from CEOs to keep jobs in the U.S. or to create new ones. Trump ran much of his campaign on ensuring U.S. jobs are kept away from foreigners and aren’t outsourced to other countries, and he’s gone through great, highly-publicized lengths to prove his election is the reason why jobs are coming to or staying in America.

However, Ma’s assertion that he’s going to create a million new jobs in the U.S. by helping small businesses sell products and services to China is a stretch. The Chinese e-commerce giant is merely upping its own investments to appeal to U.S. small businesses, providing them with incentives, such as user data and logistics capabilities, in hopes that more American brands will sell items on its e-commerce sites. The increased demand on those U.S. goods from the Chinese middle class will prompt, it hopes, increased hiring as U.S. brands expand to meet the heightened demand.

These aren’t promises of traditional labor-force “jobs” that many Americans dream of when they listen to Trump’s rhetoric on job creation. They’re merely part of a publicity stunt that plays on Alibaba’s previous announcements to expand its presence outside of China, particularly in the U.S.

That’s like saying Inc. AMZN, +0.12% , Etsy Inc. ETSY, -5.58% and eBay Inc.EBAY, -0.97% have all created millions, if not billions, of jobs through their respective marketplaces that connect third-party sellers to buyers. Sure, they’re all platforms connecting sellers to buyers, which are necessary tools in this modern-day economy that enable tiny merchants to potentially reach new customers across the globe. But their full-time, with-benefits workforces are much tinier. Alibaba has fewer than 36,500 global employees despite notching in as one of the most valuable Chinese companies with a market capitalization of $230 billion, according to FactSet. Amazon has 230,800 employees, eBay has 11,600 and Etsy has fewer than 1,000.

The U.S. has long been an area of heightened focus for Alibaba, particularly as its stock continues to trade 20% below an all-time high reached more than two years ago. In a Wall Street Journal opinion piece on June 15, 2015, a week before Trump announced his candidacy for the presidency, Ma said Alibaba was focusing on the U.S. market, and said helping U.S. brands connect to Chinese consumers would “create American jobs and increase U.S. exports.” Alibaba also specifically chose the U.S., rather than its home base of China, for its initial public offering.

On Monday, with cameras capturing both Ma and Trump in the lobby of Trump Tower following their meeting, which they both referred to as “great,” Ma said he’s going to work with the incoming administration to support “1 million small businesses to sell” products in Southeast Asia. Despite referring to that 1-million figure as “U.S. jobs” in an Alibaba blog post, neither Ma nor Trump elaborated on whether any of these would be full-time corporate jobs stationed in the U.S., or whether they’d simply be part of the third-party network of sellers on Alibaba’s e-commerce sites, many of whom likely also sell products on other e-commerce sites, such as Amazon and eBay.

An Alibaba spokesperson later confirmed to MarketWatch that these aren’t corporate jobs.

This, of course, isn’t the first time Trump has claimed responsibility for job creation without providing details on what those jobs are or being transparent about where they’re coming from.

In November, Trump took credit for United Technologies Corp.’s UTX, -0.93% decision to keep 1,000 Carrier factory jobs in the U.S. following CEO Greg Hayes’ meeting with Trump in the tower. That included a decade’s worth of corporate tax incentives to be funded by Indiana taxpayers.

In December, he took credit for Sprint Corp’s S, +0.12% decision to return 5,000 jobs back to the U.S. from other countries, even though Sprint said the jobs were part of a previously-announced commitment by Japan’s SoftBank Group 9984, +1.39% to invest $50 billion in the U.S. and create 50,000 new jobs.

SoftBank, which owns a controlling stake in Sprint, announced that multi-billion-dollar investment in the U.S. after a meeting with Trump earlier in December, however even that pledge was tied to an earlier announcement from October, when SoftBank struck a deal with Saudi Arabia to create a $100 billion tech fund with a focus on the U.S., according to the Wall Street Journal.

Article Link To MarketWatch:

Yahoo To Be Named Altaba, Mayer To Leave Board After Verizon Deal

By Aishwarya Venugopal
January 9, 2017

Yahoo Inc (YHOO.O) said Monday that it would rename itself Altaba Inc and Chief Executive Officer Marissa Mayer would step down from the board after the closing of its deal with Verizon Communications Inc (VZ.N).

Yahoo has a deal to sell its core internet business, which includes its digital advertising, email and media assets, to Verizon for $4.83 billion.

The terms of that deal could be amended - or the transaction may even be called off - after Yahoo last year disclosed two separate data breaches; one involving some 500 million customer accounts and the second involving over a billion.

Verizon executives have said that while they see a strong strategic fit with Yahoo, they are still investigating the data breaches.

Five other Yahoo directors would also resign after the deal closes, Yahoo said in a regulatory filing on Monday. (

The remaining directors will govern Altaba, a holding company whose primary assets will be a 15 percent stake in Chinese e-commerce company Alibaba Group Holding Ltd (BABA.N) and 35.5 percent stake in Yahoo Japan.

The new company also named Eric Brandt chairman of the board, effective Jan. 9.

Article Link To Reuters:

Monday, January 9, Night Wall Street Roundup: Oil Drop Stymies Dow's March To 20,000; Health Stocks Boost Nasdaq

By Sinead Carew
January 9, 2016

Declines in energy and financial stocks weighed on the S&P 500 on Monday and helped stall the Dow's pursuit of the 20,000 milestone ahead of earnings season and expected U.S. policy changes under the Donald Trump presidency.

The Nasdaq notched a record high close, extending its bullish run with help from healthcare stocks.

The S&P's energy sector .SPNY dropped 1.5 percent as oil prices slid on concerns that rising Iraqi exports and U.S. output could dampen the impact of a deal among major producers to limit output.

Elsewhere, investors were taking a breather ahead of fourth-quarter earnings and the Jan. 20 presidential inauguration.

The S&P 500 benchmark has risen more than 6 percent since the Nov. 8 election of Donald Trump, who has pledged tax cuts, lighter regulation and fiscal stimulus, but investors are now waiting to see if he can deliver on those promises.

"People are waiting for more information. We're waiting for political news, we're waiting for earnings. There's a lot of uncertainty out there. As the month goes on I expect we'll see some movement," said Peter Jankovskis, co-chief investment officer at OakBrook Investments LLC in Lisle, Illinois.

The financial sector .SPSY fell 0.8 percent on Monday. It had risen almost 18 percent since the election, led by banking stocks.

Big banks will provide the first peek into how U.S. companies fared in the fourth quarter later this week. S&P 500 companies overall are expected to post a 5.8 percent increase in profit in the quarter, according to Thomson Reuters I/B/E/S.

"There is some hope we'll see some movement upward. Investors want to see some of those reports come out first," said Jankovskis.

Two-thirds of the 30 Dow Jones Industrial Average components fell, keeping the psychologically significant 20,000 mark at bay. Goldman Sachs' (GS.N) 0.8 percent fall was its biggest drag followed by International Business Machine's (IBM.N) 0.9 percent drop and Exxon Mobil's (XOM.N) 1.7 percent decline.

The Dow had come tantalizingly close to the milestone on Friday, hitting a peak of 19,999.63, as the S&P 500 and the Nasdaq also touched records after a late pop in tech stocks.

"Our view about the Dow (hitting) 20,000 is not a matter of if, but a matter of when," said Matt Jones, U.S. head of equity strategy at J.P. Morgan Private Bank in New York.

The Dow Jones Industrial Average .DJI was down 76.42 points, or 0.38 percent, to 19,887.38, the S&P 500 .SPX had lost 8.08 points, or 0.354856 percent, to 2,268.9 and the Nasdaq Composite .IXIC had added 10.76 points, or 0.19 percent, to 5,531.82.

Eight of the 11 major S&P 500 sectors were lower.

The S&P's health sector .SPXHC was the biggest gainer with Merck & Co. the leading boost and Vertex Pharmaceuticals (VRTX.O) the biggest percentage gainer with a 4.4 pct jump after it issued guidance.

Nasdaq's biggest drivers in the healthcare sector were Ariad Pharmaceuticals (ARIA.O), which closed up 72.9 percent on a $5.20 billion buyout deal with Japan's Takeda 4502.T Incyte (INCY.O) with a 9.4 percent jump after it announced advancements in its cancer drug program with Merck.

Declining issues outnumbered advancing ones on the NYSE by a 1.77-to-1 ratio; on Nasdaq, a 1.45-to-1 ratio favored decliners.

The S&P 500 posted 6 new 52-week highs and no new lows; the Nasdaq Composite recorded 55 new highs and 16 new lows.

About 6.4 billion shares changed hands on U.S. exchanges on Monday compared with the 6.6 billion average for the last 20 sessions.

Article Link To Reuters: