Thursday, March 9, 2017

Wall Street Expected To Open Little Changed

By Anmar Frangoul
March 9, 2017

U.S. stock index futures pointed to a relatively flat open on Thursday morning as traders eyed data, earnings and any news out of Europe, where the Governing Council of the European Central Bank (ECB) is meeting.

On the data front, initial jobless claims are set to be released at 8:30 a.m. ET, with import and export prices also set to come out at the same time.

In Europe, the pan European Stoxx 600 Index was around 0.20 percent lower on Thursday morning.

The ECB is set to announce its monetary policy decision at 7:45 a.m. ET, with ECB President Mario Draghi due to give a press conference soon after.

On the earnings front, Staples is set to report before the bell, while El Pollo Loco is among companies set to report after the bell.

Article Link To CNBC:

Oil Drops Below $50 For First Time Since December On Supply Glut

Crude inventories rose by 8.2 million barrels last week: EIA; Saudi minister says inventories draining slower than expected.

By Ben Sharples and Grant Smith
March 9, 2017

Oil dropped below $50 for the first time since December after concerns that OPEC’s output cuts aren’t tempering a surplus in the U.S. triggered the biggest slump in more than a year.

Futures dropped as much as 2.2 percent in New York to $49.20 after losing 5.7 percent the previous three sessions. Stockpiles rose 8.2 million to the highest level in weekly government data since 1982. Harold Hamm, the U.S. shale oil billionaire, warned on Wednesday that the industry could “kill” the crude market if it embarks on another spending binge.

Oil had fluctuated above $50 a barrel since the Organization of Petroleum Exporting Countries and other nations started trimming supply for six months starting Jan. 1 to reduce a global glut. While U.S. shale production has rebounded, larger-than-expected cuts elsewhere and signs of growing demand suggest stockpiles will decline, according to Goldman Sachs Group Inc.

“The bottom line here is you have wide compliance within OPEC with the production cuts and on the other hand you have increased production out of the U.S.,” Hans Goetti, chief strategist for the Middle East and Asia at Banque Internationale a Luxembourg, said in a Bloomberg television interview. “The shale oil industry in the U.S. has made great strides to cut costs.”

West Texas Intermediate for April delivery dropped 74 cents, or 1.5 percent, to $49.54 a barrel on the New York Mercantile Exchange at 10:17 a.m. in London. Total volume traded was about 60 percent above the 100-day average. The contract lost $2.86, or 5.4 percent, to $50.28 on Wednesday, the biggest decline in percentage terms since February 2016.

U.S. Output

Brent for May settlement fell as much as $1.09 a barrel, or 2.1 percent, to $52.02 a barrel on the London-based ICE Futures Europe exchange. Prices dropped $2.81, or 5 percent, to $53.11 on Wednesday. The global benchmark crude traded at a premium of $2.32 to May WTI.

Saudi Arabia’s Oil Minister Khalid Al-Falih said this week global inventories are falling slower than expected, opening the door to extend the output-cut deal beyond its initial six months.

U.S. crude production increased for a third week to 9.09 million barrels a day, the Energy Information Administration said Wednesday. The nation’s output is projected to surge to a record 9.73 million barrels a day next year, according to the EIA’s monthly Short-Term Energy Outlook on Tuesday.

Oil-market news:

-- Stockpiles at Cushing, Oklahoma, the delivery point for WTI and the biggest U.S. oil-storage hub, rose a second week to 64.4 million barrels, the EIA reported.
-- Production from Libya’s Waha Oil Co., a venture between the nation’s state oil company and foreign partners, may be suspended as clashes in the country’s east keep the main export terminals out of service.
-- Royal Dutch Shell Plc will sell almost all its production assets in Canada’s oil sands in a $7.25 billion deal that cuts debt and reduces involvement in one of the most environmentally damaging forms of fossil-fuel extraction.

Article Link Bloomberg:

China Gives Greenlight To Dozens Of Trump Trademarks

By Adam Jourdan and Eric Walsh
March 9, 2017

China has granted preliminary approval for 38 trademarks linked to Donald Trump, documents on China's state trademark office show, giving the U.S. President and his family protection were they to develop the "Trump" brand in the market.

The trademarks - which in theory cover a wide sweep of businesses from hotels to mobile libraries and escorts - underline the complexities and potential concerns over conflicts of interest facing President Trump, who has a sprawling business empire using the Trump name around the world.

Trump, a wealthy real estate developer, has previously said he has handed over his business interests to a trust overseen by one of his sons and a Trump Organization executive. He can, however, revoke the trust at will and, as its sole beneficiary, remains linked to it financially.

The trademarks - mostly variations in English and Chinese on the name "Donald Trump" - were given preliminary approval in two lists published on the Trademark Office of the State Administration for Industry and Commerce on Feb. 27 and Monday.

Trump's lawyers applied for the trademarks in April last year, mostly registered to "Donald J. Trump" and listing to the address of Trump Tower on Fifth Avenue in New York.

Some U.S. law makers have raised questions about whether Trump's position as President could prompt preferential treatment of his businesses. Trademark lawyers, however, said that the approval process did not seem that unusual.

"If they were filed in April last year and just now approved, it's fairly normal," said Yong Heng Wu, Shanghai-based counsel for MWE China focused on intellectual property, adding the general timeframe for preliminary approvals was 6-9 months.

"I think the reason why people are paying so much attention to Donald Trump trademarks now is because he became the President of the most powerful country in the world."

The trademarks cover business areas including branded spas, massage parlors, golf clubs, hotels, insurance, finance and real estate companies, retail shops, restaurants, bars, bodyguards and escort services.

Intellectual property lawyers said trademark applications were often very broad to give the applicant the most comprehensive protection for their brand.

Three of them, related to hotel brand Scion that Trump's sons want to expand in the United States, are not directly registered in the President's name but via DTTM Operations LLC. The three are also listed to the Trump Tower address.

Asked about the approvals, Chinese Foreign Ministry spokesman Geng Shuang said China had always "equally" protected trademarks for Chinese and foreign companies, adding that the approvals process had been carried out in line with the law.

Politics And Business

The preliminary approvals are open to be challenged for around a 90-day period. Barring objections they will be formally registered in late May and early June respectively.

Trump and his family, like many business owners, hold trademarks around the world, from business sectors such as apparel in the Philippines to golf clubs in Australia and property in Japan and South Korea.

These ties between politics and business have, however, prompted concern from politicians and rights groups who say the President could face potential conflicts of interest related to the extensive business affairs of his family.

Alan Garten, general counsel for the Trump Organization, said in a statement the group had been actively enforcing its intellectual property rights in China for over a decade.

"The latest registrations are a natural result of those long-standing, diligent efforts, and any suggestion to the contrary demonstrates a complete disregard of the facts as well as a lack of understanding of international trademark law."

Democratic Senator Ben Cardin, the ranking member on the U.S. Senate Foreign Relations Committee, called for formal briefings about the Chinese trademark approvals and on "the potential constitutional dangers that they present."

Cardin has previously introduced a resolution demanding Trump cut his ties with the Trump Organization or risk violating the Emoluments Clause of the Constitution, which bars public servants from accepting anything of value from foreign governments unless approved by Congress.

Chang Tsi & Partners, listed as acting on behalf of Trump's team for the China trademark applications, did not immediately respond to Reuters' request for comment on the approvals.

Trump received a single trademark approval last month in China for Trump-branded construction services, following a 10-year legal battle.

The Associated Press earlier reported the approvals.

Article Link To Reuters:

Oil Majors Still Years From Repairing Balance Sheets After Price War

By Ernest Scheyder and Gary McWilliams 
March 9, 2017

Financially strapped oil producers are spending billions to boost production before it's clear that recent crude price gains brought on by OPEC output cuts can be sustained.

Five of the largest publicly traded oil companies - BP, Chevron, Exxon Mobil, Royal Dutch Shell, and Total - are trying to work down debts that totaled $297 billion at the end of December. That nearly doubled the companies' 2012 debt levels.

But even with oil prices about 70 percent higher than a year ago, most companies have yet to reach the point where their cash flow covers annual shareholder payouts and expansion projects vital to the industry's long-term survival.

Add other expenses, such as the interest on debt, and the break-even point is pushed out until at least 2020, industry analysts from Citigroup estimated.

"For the entire oil and gas industry, balance sheets have never been worse," said Fadel Gheit, an Oppenheimer & Co oil industry analyst. Producers, he said, "were in critical condition and have been upgraded to guarded."

For a graphic on oil majors' debt, cash flow and capital spending, see:

For now, U.S. producers are taking advantage of the price increase spurred by OPEC's production cuts to boost their output. Some of the oil they are pumping would not have been profitable at $40 a barrel, but is with prices holding steady above $50.

The industry is betting that prices will maintain a delicate balance - high enough to repair balance sheets and finance new projects, but not so high that it creates a new glut.

If crude maintains a price in the mid-$50s per barrel, the biggest oil producers could see their cash flows increase by 71 percent on average over 2016, according to Citigroup.

The danger is that too many wells could come back online too soon, undercutting OPEC's effort to reduce global inventories. That could send prices back to the 12-year lows of early 2016.

U.S. shale producers in March are forecast to pump 79,000 barrels a day (bpd) more than in February, when shale contributed about 4.75 million bpd to U.S. output, according to the U.S. Energy Information Agency, reversing production declines last year.

Shale output could rise more than 500,000 bpd by the end of the year, said Daniel Yergin, vice chairman of analysis firm IHS Markit and an oil historian.

"U.S. shale has demonstrated that it's still a player," Yergin said in an interview. "It's going to continue to be a major factor in the global market."

Spending Again

Most majors are planning strong production growth until at least 2021, a Reuters analysis of the latest investor presentation and corporate plans showed.

The firms - Royal Dutch Shell, Exxon Mobil, Chevron, BP, Total, Statoil and Eni - plan to grow output by a combined 15 percent in the next five years.

It could take another year before the biggest companies' cash from operations exceeds their combined capital spending and dividends, Citigroup estimated. It projects the major oil producers will need to sell their oil for between $55 and $60 per barrel this year just to cover those two big costs.

Chevron Corp, which expects positive cash flow this year, says it could generate an additional $3.5 billion selling its oil at $55 a barrel, a figure predicted to be 2017's average price in a Reuters poll of analysts and economists. [O/POLL]

Exxon Mobil Corp and BP have signaled they will spend more on expansion projects this year than in 2016, a sign of optimism about stronger pricing.

Higher production could deliver fresh money that can be used to hire workers, reduce debt or boost shareholder payouts.

It would also be a welcome turn for an industry that has been spending more cash than it generates and borrowing to pay dividends that shareholders expect, regardless of the state of the industry.

John Watson, Chevron's chief executive, said in late January he wants to "maintain and grow" the oil giant's dividend, calling it his top priority.

Chevron is winding down construction of several big projects, helping to stem its past spending rate and generate more revenue as new operations come online.

France's Total SA is raising its dividend by 1.6 percent this year, the first time in three years, and says it expects to cover its capital spending and cash dividend with oil above $50 a barrel.

The gains are driven largely by the OPEC output cut in November - the first in eight years. The agreement to reduce supply by about 1.8 million barrels a day runs through June, and OPEC and Russia are expected to review the cut in May.

Some analysts expect the agreement to be extended, but the cartel could just as easily resume higher production, squelching the industry's nascent financial recovery.

Torgrim Reitan, head of U.S. operations for Statoil - Norway's state-owned firm - said he has "stopped guessing" what OPEC might do in crafting the company's plans.

“We need to be prepared for volatility," he said in an interview at the CERAWeek energy conference in Houston. "This is the time for leadership in the oil industry, the time for making the right decisions that will fuel growth."

The Shale Advantage

Unlike the major producers, U.S. shale companies are better equipped to live with volatility. When prices rise, they ramp up drilling and lock in returns with price hedges, which Chevron, Exxon and other large producers typically don't do.

When prices fall, shale producers can more easily cut spending than the majors because of their small size.

Shale producers' ability to pour more of their new cash into production is feeding technology developments that allow them to squeeze more oil out of existing wells and at a faster pace than a few years ago.

"Those who withstood the storm and survived have learned just how nimble they can be," said Avi Mirman, chief executive of Lilis Energy Inc, a shale oil producer in west Texas.

Similar approaches are belatedly being adopted by the biggest producers. Chevron is embracing a short-cycle approach to investing in projects that can go into production in months, not years.

However, Alastair Syme, who tracks global oil and gas companies for Citigroup, cautions the continued cost reductions by shale producers could thwart OPEC's ability to prop oil prices through production cuts, undercutting the cash flows needed to rebuild.

"If shale producers can grow U.S. supply at between 1 million and 1.5 million barrels a day, it'll be a challenge for everyone to respond to that," he said in an interview.

Article Link To Reuters:

Assessing The Markets’ Shift To A 'Presidential Put'

By Mohamed A. El-Erian
The Bloomberg View
March 9, 2017

Stock-market investors, especially the very bullish ones who have been proven right and have been richly rewarded in recent years, are in the midst of a gradual transition in their operating regime.

Their environment is moving away from comfortable reliance on central banks that are able and willing to support asset prices and toward a White House that appears less constrained by Congress in pursuing pro-growth policies, given the Republican majorities in both houses of Congress. Two events this week will attest to the speed of this transition, though without shedding much light on its potential effectiveness.

For much of the period since the 2008 global financial crisis, markets have been able to rely on central banks to repress financial volatility and boost asset prices -- not as an end in itself for policy makers, but as a conduit to higher growth and faster balance-sheet repair. Over the last few weeks, however, the Federal Reserve -- using the public reasoning of higher global growth and inflation -- seems set to resume gradually lifting its foot off the accelerator. This includes a skillful and carefully orchestrated management of market expectations that, with the assist of solid data, has tripled the implied probability of a March Fed hike to almost 100 percent in just a few days; and without causing major disruptions to markets.

The Fed is not the only systemically important central bank that may be in transition mode, particularly given the growing awareness of the potential costs and risks of remaining too loose for too long. For its part, the European Central Bank has come under increasing pressure to consider reducing its balance-sheet support for markets as a prelude to abandoning negative policy rates. Meanwhile, the governor of the Bank of Japan has publicly questioned the continued effectiveness of a pedal-to-the-metal approach to unconventional monetary policy.

This change has not been of major concern to markets because of what Jonathan Ferro, the co-anchor of Bloomberg Television’s U.S. morning show, has referred to as the “presidential put” -- that is, the markets’ willingness to embrace prospects for pro-growth policies under the new Trump administration. This is due to two factors: repeated comments by President Donald Trump signaling his intention to pursue the trifecta of pro-growth measures involving deregulation, infrastructure and tax reform; and the reduced threat of paralyzing political gridlock on Capitol Hill.

In sum, the major question facing stock markets is less about the nature of the regime shift and more about its timing and effectiveness.

The ECB policy meeting on Thursday and Friday’s job report will have some influence on the speed of this transition.

Consensus expectations suggest that the ECB’s Governing Council will acknowledge the improved economic situation but refrain from any policy changes, especially given the proximity of the French election and the upcoming scheduled trigger of Brexit’s Article 50 by Prime Minister Theresa May's government in the United Kingdom. The market regime transition would be accelerated, however, if the central bank also took this opportunity to change its forward guidance -- away from signaling continued loose and, effectively, open-ended balance-sheet support to suggestions of a gradual taper over time.

On Friday, the U.S. jobs report for February is likely to provide the final data point that the Fed needs to hike interest rates in its policy meeting next week. Indeed, only truly horrific job creation and wage data would dissuade the central bank at this point. And, alternatively, were the data to be extra strong -- involving, for example, job creation of more than 200,000, a significant boost in wage growth and a stagnant labor participation rate that suggests limited slack remaining in the labor market -- the Fed could even signal next week that the balance of risk to its baseline of three rate hikes this year has shifted to the upside. And this would be part of a change from data dependency to a more strategic approach to monetary policy.

When it comes to effectiveness, markets have yet to internalize the multiple dimensions associated with the simple fact that this is a different type of “put.”

On the positive side of the ledger, for example, transitioning from overreliance on central banks to a broader policy response has the potential to generate higher and more inclusive growth, as well as strengthen the underpinnings of genuine financial stability. Both of these would help validate existing asset prices and even push them higher over time in a sustainable fashion.

On the negative side, however, the new policy construct is less autonomous when it comes to implementation. Unlike the Fed, which can pursue measures without congressional approval (though that offers a significantly narrower policy set), the president needs congressional approval for a lot of what he has suggested for promoting growth. And such approval is subject to influences that go beyond the merit of the measures themselves. As an illustration, there is some concern that the administration's taking on health care ahead of tax reform means the implementation of an important item of the pro-growth agenda could be delayed by political divisions over the effort to repeal and replace Obamacare.

The “central bank put" was extremely supportive of asset prices for several years. For the “presidential put” to be similarly beneficial, good policy making by the Trump administration would not prove sufficient unless it is accompanied by sound economic governance by Congress.

Article Link To The Bloomberg View:

Why $50 Is More Likely To Be A Ceiling Than A Floor For The Oil Price

By Gemma Acton
March 9, 2017

OPEC's production cut agreement is not yet succeeding in driving down supply, suggesting that $50 per barrel oil may turn out to be a market top, industry experts told CNBC on Thursday.

The predictions follow Wednesday's slump in oil prices when the benchmark WTI and Brent indices both tumbled over 5 percent to close the session at $50.28 and $53.11, respectively. For WTI, the level represented its biggest one-day fall since February 2016 and the lowest closing price since early December.

Neither benchmark had managed to sustain a substantive recovery in early European trade on Thursday, with WTI up 0.04 percent and Brent up 0.73 percent as of 9am London time.

The price plunge has been primarily attributed to U.S. data showing domestic stockpiles had recorded a ninth consecutive month of supply rises in February to reach 8.2 million barrels. Adding to the negative sentiment, non-committal comments from OPEC and non-OPEC members on Wednesday indicated that while producers intend to continue pursuing production cuts, they will not pledge at this point to renew their existing six-month agreement once it expires in May.

Indeed, despite claims from participants that the existing agreement is functioning well, it actually has fundamental flaws if you peek behind the headlines, according to Eugen Weinberg, head of commodities research at Commerzbank.

"Compliance within OPEC is less than 50 percent if you exclude Kuwait and Saudi Arabia who cannot shoulder the whole burden over the long-term," Weinberg told CNBC by phone on Thursday.

Furthermore, while production cuts might be underway on the part of some participants, export numbers have not softened, hence why market supply is still elevated.

"The export numbers are at the same level as last December which demonstrates that the oil production cut is having little effect on market levels," he added.

"The market is looking for a price recovery from here but as there is still not enough of a cut to send supply into deficit, I think $50 per barrel is more likely to be a ceiling than a floor with prices potentially slipping down to $40 this year," opined the Commerzbank analyst.

His pricing outlook was supported by Kevin Boscher, chief investment officer, Brooks Macdonald Asset Management, speaking on CNBC's Squawk Box on Thursday.

"Our view is the oil price is in a trading range. $50 – 55 is more likely to be the ceiling for now than the floor, particularly as part of Trump's policies is likely to be making the U.S. more self-sufficient from an oil perspective," he posited.

"We're likely to see an increase in supply of oil at a time where supply and demand are roughly a little bit more balanced," Boscher added.

The psychologically critical $50 mark was also within the sights of Sam Wahab, director of oil and gas research at Cantor Fitzgerald Europe, who described continued U.S. upgrades in both inventory and production as the greatest downside risk for now.

"There are also certain doubts as to whether all OPEC members will stick to their quotas (notably Iraq), which combined, could very well see the Brent oil price slip towards $50 over the coming fortnight," added Wahab.

Yet not everyone shares the bearish view, with analysts at Goldman Sachs publishing a more optimistic note on Monday claiming that oil demand is now poised to overtake supply.

"Our conviction that OECD inventories will steadily decline through 2Q17 remains high…with stocks showing declines over the past two weeks and crude forward curves flattening significantly recently," reads the research.

"While the shale production rebound has surprised to the upside, the slightly larger production cuts than we had expected and most importantly, the higher 2016 realized demand level, lead us to expect a slightly faster normalization in OECD inventories through 2017 than previously," the analysts concluded.

Article Link To CNBC:

Trump To Meet With U.S. Community Bankers On Regulatory Costs

By David Lawder
March 9, 2017

President Donald Trump will meet with Main Street community bankers on Thursday to learn more about their difficulties in complying with the tougher Dodd-Frank financial regulations enacted after the 2007-2009 financial crisis.

The listening session is aimed at helping the Trump administration craft a legislative plan to ease the regulatory burdens on small banks to try to unlock more small business lending and fuel economic growth, a senior White House official told Reuters.

The meeting will include chief executives of nine community banks with assets of around $1 billion or less, along with the heads of the American Bankers Association and the Independent Community Bankers of America.

ICBA has advocated for a tiered system of regulations that treat smaller banks differently than global financial behemoths, tailoring regulations to a bank's size, business model, complexity and risk.

The Trump White House largely shares that view.

"The type of regulation that you need for a $700 million bank and the risks they present are very different than those for a $200 billion bank or a $1 trillion bank," the White House official said.

"Right now we have a lot of these rules that apply one-size-fits-all. And if you're the small community bank trying to comply with rules that are also applied to much larger institutions, it's very hard to remain competitive."

Larger banks are able to spread their higher compliance costs over much bigger asset and employee bases, while smaller banks struggle with high costs and workloads.

One of the institutions represented in the meeting, Standard Financial Corp of Monroeville, Pennsylvania, has just nine branches with $488 million in assets and earnings of $559,000 in the quarter ended December 31, 2016. It plans to merge with a rival in southwestern Pennsylvania in a deal that will roughly double its size.

Trump officials cited a dearth of applications to form new community banks and around a 30 percent drop in the number of small U.S. banks since 2008.

U.S. Treasury Secretary Steven Mnuchin, who is expected to attend the meeting with Trump, along with National Economic Council Director Gary Cohn, said at his confirmation hearing in January that onerous regulations are "killing community banks."

Mnuchin, the former CEO of OneWest bank, a regional lender in Southern California, pledged to ease those burdens while maintaining "proper" regulation, "so that we don't end up with a world where we only have four big banks in this country."

The bankers are expected to highlight compliance costs associated with the Consumer Financial Protection Bureau (CFPB), a new regulator created under the Dodd-Frank law.

The CFPB is a perennial target for Republicans, who want to shift its funding from the Federal Reserve to annual appropriations by Congress and shift its management, now concentrated in a powerful chairman, to a multi-person commission structure.

Another problem to be aired by the bankers, the White House official said, will be post-crisis mortgage regulations that hamper home loans to small business owners who may have irregular income streams.

Article Link To Reuters:

No Matador In Sight As Bull Market In U.S. Stocks Turns Eight

By Chuck Mikolajczak and Rodrigo Campos
March 9, 2017

The run of gains on Wall Street turns 8 years old on Thursday and, despite its advanced age, is expected to rage on, with perhaps a few hiccups, based on a combination of stronger company earnings, lower taxes and a corporate-friendly administration in Washington.

Strategists, however, warn that a correction of as much as 10 percent should be expected as the market is richly valued. The bull case for equities relies on analysts seeing little chance of recession in the short term.

"Just because the (bull) market has hit a birthday, or is among the longest ever, doesn’t mean that it will 'die' of old age," said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago.

"Markets don’t really pay attention to the calendar or the candles on the cake."

The S&P 500 index has rallied 250 percent since hitting a closing low of 676.53 on March 9, 2009. The gains since, uninterrupted by a decline of 20 percent or more, rank this bull market as the second longest ever.

The current run is nearly three years older than the average bull and more than a year shorter than the longest one: the rally from Oct. 11, 1990 to March 24, 2000.

The S&P continued to rise through a year-long decline in corporate earnings through most of 2016, supported in part by historically low interest rates which made stocks comparatively cheaper and more rewarding than U.S. Treasuries.

The index has risen nearly 6 percent in 2017, closing on Wednesday at 2,362.98. Analysts remain undeterred in their belief that more gains are coming as the economy and corporate earnings growth improve.

"With earnings growth expected to continue the rest of the year, it might be a rocky road but it could still be that the bull market makes it to nine," said Ryan Detrick, senior market strategist at LPL Financial in Charlotte, North Carolina.

A Reuters poll in December showed analysts expected the S&P 500 to finish 2017 at 2,350, buoyed by the belief that President Donald Trump's plans to stimulate the economy with infrastructure spending, lower taxes and financial deregulation would come to pass.

Strategists, including some with a lower target than that, see the bull market continuing, even if a correction is in the cards.

Julian Emanuel, executive director of U.S. equity and derivatives strategy at UBS Securities, said he expects a pullback of 5 to 10 percent to "refresh" the bull market and that such a correction would be a buying opportunity.

"The bull market is going to finish, in our view, when conditions begin to accumulate that tend to lead to a recession. We just don't see that as a 2017 or 2018 event," Emanuel said.

He warned, however, that "valuations have outrun earnings potential and the state of fundamentals generally."

With the S&P 500 currently trading at a forward price-to-earnings ratio of about 18, well above its average of 15, corporate profits will need to improve in order to bring down valuations.

Earnings are seen growing 10.7 percent this year compared to last, according to Thomson Reuters I/B/E/S data. Even though that is a lower expectation than the 12.5 percent estimate at the start of January, it still allows for a healthy gain in 2017.

U.S. economic data, including a private sector jobs report on Wednesday that showed growth recorded its biggest increase in more than a year in February, continues to improve and is far from indicating a downturn, further supporting stock prices.

"We do not yet see any of the warning signs that point to a larger decline," said Kingsview's Nolte, who sees a pullback of up to 5 percent. "A recession does not seem to be in the cards just yet."

Article Link To Reuters:

Will Trump Top Obama As Investor-In-Chief?

The new administration has ambitious economic plans that might keep the bull market going.

By Michael Brush
March 9, 2017

Think what you will of former President Barack Obama, he was a great investor-in-chief.

On March 3, 2009, days before the start of the amazing bull market rally that turns eight this week, he told us that stocks had gotten so cheap they looked like a “good deal.”

Eight years on, the S&P 500 Index SPX, -0.23% is up 240%. It’s posted a compound annual growth rate that would make Warren Buffett smile: 13%.

Now that the market has risen so much, apparently on expectations of business-friendly reforms from President Donald Trump, I’d love to know what Obama thinks about whether to buy or sell, given his record.

Alas, we don’t know his market view. The truth is, whatever he thinks might be tainted by partisanship. There’s a lot of that going around now. As an investor, you should try to avoid this pitfall, especially if you are on the left. Buffett, who backed Hillary Clinton, recently quipped that for half of his adult life this country had a president he didn’t vote for, but that never kept him out of stocks.

But it feels like it’s time to sell. After all, Trump appears unpredictable, to put it mildly. And at least two signals are telling us to be cautious about this rally.

1. Insiders are bleak

We may no longer have Obama to help us with market guidance, but we can turn to other higher-ups: corporate insiders. The news is bleak for bulls. Insiders are selling this rally hard — so hard they’re driving insider sentiment into extremely bearish territory.

The selling has pummeled an eight-week sell-buy ratio tracked by Vickers Weekly Insider, which analyzes insider activity. It is up to 6.3 from around 3 at the start of November. Insiders have continually stepped up selling, relative to buying, in the post-election rally. “The current sentiment reading is solidly bearish,” says David Coleman, of Vickers Weekly Insider.

2. Investors may be too bullish

I like to watch investor sentiment for contrarian signals. After all, the best time to buy is when investors are frightened. And a good time to sell is when investors are exuberant. This means there are fewer people left to come in to buy your shares and drive them higher. Besides, in the market, the crowd is often wrong.

Here too, though, we see bad news for bulls. Various sentiment measures I track show lots of optimism.

The Investors Intelligence bull-bear ratio, a measure of stock-newsletter-writer sentiment, rose to 3.82 last week. Generally, anything above 4 is a big red flag. The National Association of Active Investment Managers survey shows an allocation to stocks of 102%, the second-highest level on record. Put buying, a signal of bearishness, is low relative to call buying, which signals optimism.

Still Too Early To Dump The Trump Bump

Even though insiders are negative and investors are extremely optimistic — often a bad combination for bulls — it’s still too early to sell the Trump bump in the market. Here’s why.

First, the insiders. Like many investment analysts, Coleman at Vickers Weekly Insider cautions investors against making decisions on the basis of insider sentiment alone. Insiders can be early. Markets can rally for a while even though they are negative.

Next, while sentiment seems very high, it’s not high across the board. There are several exceptions that suggest we aren’t at extremes, maintains Bruce Bittles, the chief investment strategist at Baird. “I don’t think there’s enough optimism to overwhelm the trend in the market, which is decidedly bullish. You need more optimism than this to stop a market that has broken out of a trading range.” That’s because, for him, the optimism is not “deep-seated.”

Retail investors, for example, are still relatively cautious, he points out. The number of bulls in the American Association of Individual Investors (AAII) survey recently stood at 37.9%, which is below average.

The yield on 10-year Treasury bonds is still around where it was in the fourth quarter of 2016, suggesting bond vigilantes are cautious on economic growth.

And the financial media remain cautious. Journalists are worth watching for a sentiment read, because they are often very good contrarian indicators. They’re not necessarily dumb. They’re just good at knowing what people want to read about. That makes them a good reflection of investor mood.

And, tellingly, the mood in the press remains skeptical of this rally. “Nobody wants to talk about the market going higher,” says Bittles. “Every reporter I talk with is trying to get me to say the market is going to go down because of the uncertainty. But the uncertainty is what drives a market higher.”

Here, Bittles is referring to the adage: The markets like to climb a wall of worry. That’s another way of saying you need cautious investors on the sidelines to come in and drive your stocks higher. The cautious media mood is telling us that’s still the case.

Market Internals

When sentiment is high, as it is now, it becomes even more important to watch for a deterioration in market “internals” to indicate that a pullback is at hand. “Market internals” refers to the extent to which stocks are broadly participating in the advances tallied by narrow indices like the Dow Jones Industrial Average DJIA, -0.33% or the S&P 500.

A deadly combination of extreme bullishness among investors and narrowing participation among stocks in market strength (weak internals) preceded and signaled the bout of market weakness that started in August 2015.

But we don’t see this combination now, because market internals are not deteriorating as indices advance. Stocks are still broadly participating in the current rally. That’s a bullish signal worth following.

Here are some details. In the current market strength, the percentage of stocks making new highs in the S&P 500 — around 30% — is higher than it’s been since the first half of 2013. Another measure of the strength of market internals, the share of stocks in the S&P 500 above their 200-day averages recently surged to almost 85%, the highest level since 2014.

“The path of least resistance for now still seems to be higher,” says Bittles. Any near-term correction, he predicts, will be shallow.

The Push From Here

Given that Trump sometimes acts like a bull in a china shop — he might do something that spooks investors or, at best, fail to get reform quickly — what’s going to give the bull market further strength, from here? Two things.

1. For the first time in this recovery, there’s a “broad, global, synchronized bounce in economic momentum,” says James Paulsen, a chief investment strategist and economist with Wells Capital Management. Global growth is supported by uniformly expansionary policies in most of the main economic regions of the globe, something that’s been lacking much of the time since the financial meltdown.

“No longer do we have U.S. economic stimulus in direct conflict with eurozone fiscal austerity, Japanese policy indifference or China’s earlier quest to moderate their recovery,” says Paulsen. “Today, policy officials nearly everywhere are pushing up in concert on the recovery, and it is working.” As evidence, he cites a global economic surprise index tracked by Citigroup. It is at a seven-year high.

All of this makes the stock market far less susceptible to “Trump antics,” or delays in the implementation of his plans, than most people think, he says. “This has not been a stock market rally based on some flimsy ‘Trump hope,’ ” says Paulsen.

2. Business leaders, the people whose hiring and capital-spending decisions drive the economy, are so enthralled with Trump’s pro-business mindset, it’s going to take more than a few delays in implementing his regulatory and tax reforms to cool them off, which is a fear of investors.

“Some of us have said that this is probably the most pro-business administration since the founding fathers,” Dow Chemical DOW, +0.21% CEO Andrew Liveris said after a February meeting with the executive branch. “There is no question that the language of business is occurring here at the White House.”

The National Federation of Independent Business’ (NFIB) Index of Small Business Optimism shot above 105 after the election from the mid-90 range, hitting levels not seen since 2004. “The recent growth in optimism looks similar to the surge in the Index in 1983, which was followed by years of economic prosperity,” says NFIB chief economist Bill Dunkelberg.

Business leaders are so bullish on Trump, it will take more than delays in the approval of promised reform to throw them off track, predicts Ed Yardeni, president and chief investment strategist of Yardeni Research. “Timing isn’t everything, as long as investors are convinced that Trump will deliver on his bullish goodies in the foreseeable future, meaning within the next two years,” says Yardeni.

Article Link To MarketWatch:

ECB To Sit Tight Ahead Of High-Risk Elections

By Balazs Koranyi and Francesco Canepa
March 9, 2017

The European Central Bank is set to keep monetary policy on hold on Thursday as it casts a nervous eye ahead to high-risk elections in France and the Netherlands during an upsurge in populist sentiment that threatens to derail the recovery.

Although economic growth and inflation are both picking up, the ECB is expected to resist calls to tighten policy, pointing to political risks, weak underlying price growth and a still fragile recovery nearly a decade after the bloc's economic woes began.

For once, the outlook is improving. Economic sentiment is at a six-year high, trade is rebounding, services and manufacturing output are rising, and unemployment is at its lowest since 2009, suggesting the economy is in its best shape in all that time.

Even inflation, the ECB's key objective, has rebounded, essentially hitting the bank's target last month.

"The fast improvement in economic data and an energy-driven jump in inflation to 2 percent are probably enough for ECB President (Mario) Draghi to consider throwing a bone to the hawks of the Governing Council and start sounding less dovish," UniCredit economist Marco Valli said.

Indeed, German banking association BdB and the Ifo economic institute both called on the ECB on Thursday to start preparing the ground for the end of ultra-easy monetary policy, adding to a long list of powerful names demanding an ECB retreat.

For Draghi, it will be walking a tightrope. While acknowledging the positive economic developments, he is likely to keep arguing that the inflation surge is temporary, growth is fragile, and the outlook is clouded with risks.

These include -- within weeks -- the Dutch and French elections and the first meeting of G20 finance leaders since U.S. President Donald Trump took office.

Economists in a Reuters poll said the ECB's next move will be either a tweak of its guidance in the second half of this year or a gradual reduction in its asset-buying next year.

"An important reason for not taking any hasty action is the ECB's own track record of jumping the gun," ING economist Carsten Brzeski said. "In 2007/8 and 2011, the ECB hiked rates, the first based on German wage increases and the second when the worst of the euro zone debt crisis seemed to be over.

"Both times, the ECB was taught a lesson. It seems unlikely that the ECB would want to jump the gun for a third time, particularly not on the eve of two important elections in the euro zone."

The central bank will announce its policy decisions at 1245 GMT, and Draghi holds a news conference at 1330 GMT.

The bank's deliberations may be heated. The rebound in inflation particularly has fuelled calls in Germany, the 19-member currency bloc's biggest economy, to scale back its 2.3 trillion euro bond-buying programme or at least start drawing up plans to wind it down.

But at best the central bank may bump up some economic forecasts, particularly for inflation. It may also drop its reference to downside economic risks and let an ultra-cheap borrowing facility for banks expire as scheduled.

It may also debate but likely reject calls to give up a reference to lower rates or higher bond buying if necessary.

Markets were relaxed ahead of the meeting with 10-year German yields inching up just 3 basis points and the euro broadly steady.


The French election is likely to be particularly concerning, even if Draghi may be reluctant to admit it. With far-right candidate Marine Le Pen wanting to take France out of the euro zone, markets are already bracing for a shock.

Indeed, the cost of insuring French government debt against default is up sharply, with five-year credit default swaps FRGV5YUSAC=MG on French debt doubling since the start of the year. And the spread between five-year French and Germany bonds rose to its highest since 2013 last month.

Any turmoil would likely hit the periphery just as hard, and spreads in places like Italy and Portugal are also on the rise, even as the ECB's main indicator of stress in the financial system is trending downwards.

Next weekend's G20 meeting in the German town of Baden-Baden may complicate policy further. The world's top finance ministers and central bankers may no longer explicitly reject protectionism or competitive currency devaluations, according to an early draft of the communique, after the U.S. has accused some trade partners, particularly Germany, of exploiting a weak currency.

Nevertheless, policymakers have so far suggested that the ECB is only likely to begin discussing its next policy move in June, with the first actual move perhaps not coming until after German elections in September.

"From the current levels, financial markets are more vulnerable to a hawkish than a dovish tilt," Tuuli Koivu at Nordea said. "However, the recently seen favourable economic development probably starts shifting the discussion towards slightly more hawkish comments in the coming meetings."

Article Link To Reuters: