Tuesday, June 6, 2017

Tuesday, June 6, Morning Global Market Roundup: Dollar Hits Seven-Month Low, Stocks, Oil Retreat As Caution Reigns

By Nichola Saminather 
June 6, 2017

Escalating tensions in the Middle East, the impending testimony of the former FBI director, British elections and a European Central Bank meeting this week, all took their toll on Asian stocks, oil and the dollar on Tuesday.

Oil fell back following a brief recovery after Saudi Arabia and several other Arab states severed ties with Qatar, accusing it of supporting extremism and undermining regional stability.

"A potential risk to monitor might be that Qatar will view this as being provided with less encouragement to comply with the agreed production quota," said Jameel Ahmad of futures brokerage FXTM.

Stocks in Qatar plunged more than 8 percent overnight to their lowest since January 2016.

U.S. crude CLc1 was 0.6 percent lower at $47.12 a barrel on Tuesday, after falling 0.55 percent on Monday.

Global benchmark Brent LCOc1 retreated 0.6 percent to $49.17, extending Monday's 1 percent slide.

The dollar index touched a seven-month low ahead of testimony before Congress from former FBI director James Comey on Thursday.

It has been reported that Comey plans to testify to conversations in which U.S. President Donald Trump pressured him to drop his investigation into former National Security Advisor Mike Flynn, who was fired for failing to disclose conversations with Russian officials.

"The dollar is already on the defensive after Friday's jobs data, and now it's facing potential geopolitical risk in the form of Comey's testimony," said Bart Wakabayashi, Tokyo Branch Manager of State Street Bank.

The dollar index .DXY, which tracks the greenback against a basket of trade-weighted peers, fell to its lowest level since the November U.S. election and was last down 0.2 percent at 96.623.

The dollar slid 0.6 percent to 109.85 yen JPY=D4 on Tuesday, close to the six-week low hit earlier in the session.

News on Monday of U.S. services sector activity slowing in May as new orders tumbled also hit the dollar.

The dollar also came under pressure from a stronger euro, on expectations the European Central Bank will take a less dovish tone at its Thursday meeting.

The ECB may even discuss dropping some of its pledges to ramp up stimulus if needed, four sources with direct knowledge of the discussions told Reuters last week.

The common currency EUR=EBS was 0.1 percent higher at $1.127 on Tuesday.

Sterling GBP=D3 advanced 0.1 percent to $1.292 on Tuesday.

The lead of British Prime Minister Theresa May over the opposition Labour Party ahead of Thursday's general election has narrowed to just 1 percentage point, according to a poll conducted before the attacks in London on Saturday.

Other polls in recent days have found bigger leads for the Conservatives of up to 11 and 12 points.

"Even if May does just about enough to increase the majority - that could still potentially be sterling positive," said ING currency strategist Viraj Patel.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS lost 0.2 percent, pulling back from a two-year high hit on Monday.

Japan's Nikkei .N225 dropped 0.5 percent, tripped by a stronger yen.

South Korean markets were closed for a holiday.

Australian shares tumbled 1.1 percent, while the Australian dollar AUD=D3 slipped 0.2 percent to $0.7471 after the current account deficit narrowed to its smallest in more than 15 years last quarter - but still disappointed investors who had hoped for a surplus.

Investors are awaiting the Reserve Bank of Australia policy decision later on Tuesday, when its benchmark rate is expected to be held at a record low 1.5 percent.

Chinese shares .CSI300 and Hong Kong shares .HSI bucked the trend, rising 0.1 percent and 0.3 percent respectively.

Overnight, Wall Street indexes slipped between 0.1 percent and 0.2 percent, with Apple Inc. (AAPL.O) leading losses on the Dow Jones Industrial Average .DJI.

Article Link To Reuters:

Oil Prices Slide Over Worries Middle East Rift Will Undermine Output Cuts

By Henning Gloystein 
June 6, 2017

Oil prices fell for a third day on Tuesday, hit by concerns that a political rift between Qatar and several Arab states would undermine an OPEC-led push to tighten the market.

Persistent gains in U.S. production also dragged on benchmark crude prices, traders said.

Brent crude LCOc1 was trading at $49.27 per barrel, down 20 cents, or 0.4 percent from its last close. That is down 9 percent from the open of futures trading on May 25, when an OPEC-led policy to cut oil output was extended into the first quarter of 2018.

U.S. West Texas Intermediate (WTI) crude CLc1 had dropped 18 cents, or 0.2 percent, to $47.21 per barrel. That is down about 8 percent from the May 25 open.

Leading Arab powers including Saudi Arabia, Egypt, and the United Arab Emirates cut ties with Qatar on Monday, accusing it of support for Islamist militants and Iran.

Steps taken include preventing ships coming from or going to the small peninsular nation to dock at Fujairah, in the UAE, used by Qatari oil and liquefied natural gas (LNG) tankers to take on new shipping fuel.

Analysts said that the current dispute goes much deeper than a similar rift in 2014.

"The measures by the anti-Qatar alliance signal commitment to forcing a complete change in Qatari policy or creating an environment for leadership change in Doha ... Saudi Arabia and its allies will not accept any solution short of (Qatari) capitulation," political risk consultancy Eurasia Group said in a note.

With oil production of about 620,000 barrels per day (bpd), Qatar's crude output ranks as one of the smallest among the Organization of the Petroleum Exporting Countries (OPEC), but tension within the cartel could weaken an agreement to hold back production in order to prop up prices.

Greg McKenna, chief market strategist at futures brokerage AxiTrader, said that the boycott of Qatar meant there was "a real chance" that OPEC solidarity surrounding its production cuts may fracture.

Although Qatar is a small oil producer, other OPEC states could see such an action as a reason to stop restraining their own output, traders said.

Worries over the outlook for OPEC's drive to rein in production come amid bulging supplies from elsewhere, especially the United States.

U.S. crude production has jumped over 10 percent since mid-2016 to 9.34 million bpd C-OUT-T-EIA, levels close to top producers Russia and Saudi Arabia.

"The relentless increase in U.S. oil production appears to have the market worried that the OPEC cuts will be completely nullified by the increased U.S. production," William O'Loughlin, analyst at Australia's Rivkin Securities, wrote in a note to clients on Tuesday.

Article Link To Reuters:

Buyout Firms Eye Gusher Of Cash From Aramco IPO

At least 20% of the Aramco IPO proceeds are expected to be invested in private equity.

By Maureen Farrell
The Wall Street Journal
June 6, 2017

With less than two weeks’ notice last month, more than a dozen of the top global money managers accepted a dinner invitation halfway around the world. The host: Yasir al-Rumayyan, head of Saudi Arabia’s Public Investment Fund, which is set to become the world’s largest sovereign-wealth fund in coming years—and potentially their biggest benefactor, if the kingdom’s state-owned oil company goes public as planned.

The guests, which included Blackstone Group BX -1.10% LP Chief Executive Stephen Schwarzman, Carlyle Group CG -1.40% LP’s David Rubenstein, SoftBank Group Corp.’s 9984 -2.07% Masayoshi Son and Robert Smith of Vista Equity Partners, mingled over nonalcoholic drinks in a large indoor courtyard lined with palm trees at Mr. al-Rumayyan’s Riyadh home. At dinner, the private-equity potentates sat at small round tables with Saudi financiers, executives and government officials.

The meeting, which came a day ahead of President Donald Trump’s visit to Saudi Arabia in late May, shows the potential of the Public Investment Fund, or PIF, to reshape the private-equity industry and create the next round of winners and losers in its continuous quest for assets. PIF could be the single biggest source of cash for buyout firms in the coming years, private-equity officials say.

“This was a coming-out party for the PIF,” said Bill Ford, CEO of private-equity firm General Atlantic, who attended the dinner and a subsequent round table. “Every global investor should have a relationship with Mr. al-Rumayyan.”

The head of PIF was previously best known for being CEO of a Saudi affiliate of French bank Crédit Agricole and a champion of the kingdom’s golf scene.

Saudi Arabia has said it would transfer the assets of state-owned colossus Saudi Aramco into its sovereign-wealth fund when it takes the oil company public, part of a plan to overhaul the Saudi economy and reduce its dependence on oil.

The oil market was jolted Monday, after Saudi Arabia, along with the United Arab Emirates, Bahrain and Egypt, severed relations with Doha and said they would close off routes to the country after accusing Qatar of backing terrorism.

Estimates of Aramco’s value range from $1 trillion to $2 trillion or more, and the kingdom has said it would seek to sell 5% of the company to the public, possibly next year. That could balloon PIF’s assets, which already stand at more than $180 billion, according to the Sovereign Wealth Fund Institute, and put more than $50 billion of additional cash at its disposal.

At least 20% of the IPO proceeds are expected to be invested in private equity, according to a person familiar with the kingdom’s plans.

For those who manage to secure a slice of the bounty, it won’t come for free.

PIF is eager to secure more of a say in how funds it backs operate than a traditional limited partner would have, people familiar with its plans said. It could have input in what types of investments these buyout funds make or have veto power over new investments. The sovereign-wealth fund will also likely pay significantly lower fees than other investors do, according to industry experts, because of its size and because it often makes the first seed investment, giving it more leverage.

There is also no guarantee the expected windfall will materialize, as the Aramco IPO is highly complicated and may not ultimately take place at the expected size or time frame.

Sovereign-wealth funds have become increasingly important for private-equity firms, accounting for 19% of their institutional capital as of January, according to research firm Preqin. That is up from 9% in 2013. At a conference last year, Carlyle’s Mr. Rubenstein predicted that within five years, sovereign-wealth funds could overtake public pension funds as the most significant source of capital for private-equity firms, which according to Preqin had $842 billion available for investment as of March.

“Any time a sovereign-wealth fund decides to increase its allocation by even 1%, it’s significant,” said Andrea Auerbach, head of global private investment research at Cambridge Associates, which advises institutions that invest in private equity.

Blackstone and Japan’s SoftBank are the first big winners in the race to secure the mountain of Saudi assets that is up for grabs. Shortly after the dinner, PIF announced it will commit $20 billion to Blackstone’s new $40 billion infrastructure fund, which is to be the biggest ever raised. It has pledged $45 billion to SoftBank’s Vision Fund, the world’s largest technology-investment pool.

Mr. Schwarzman and other Blackstone executives spent more than a year meeting with Mr. al-Rumayyan and senior Saudi officials courting the commitment, according to people familiar with the discussions.

PIF is in discussions to anchor more funds outside infrastructure and technology, people with knowledge of its plans said.

Private-equity funds could ultimately come back to Saudi Arabia. Carlyle’s Mr. Rubenstein predicted during the round table that private-equity assets would increasingly flow toward the developing world. Numerous attendees expressed interest in investing in Saudi Arabia and offered advice to Mr. al-Rumayyan on what regulatory changes would make it easier for them to be active there.

Article Link To The Wall Street Journal:

When Tech Titans Clash, Consumers Lose

By Jeffrey Dastin 
June 6, 2017

A deal bringing Amazon Prime Video to Apple TV, announced on Monday at Apple Inc's developer conference after years of talk, shows how competitive tensions among Silicon Valley titans can stand in the way of serving customers.

The logic of linking Apple TV, a device for watching television over the internet, with Amazon.com Inc's booming video-streaming service looks obvious.

Apple needs great video to sell its TV player. Amazon needs places to stream its TV shows so that people sign up for its Prime club to watch them - and buy more toilet paper, too. Viewers want to watch their favorite programs on whatever device they choose.

Yet Monday's announcement, rather than being routine, was the result of a negotiation stretching back at least to 2015 when Amazon stopped selling Apple TVs on its retail site.

Amazon had explained that move by saying it wanted to avoid confusing customers who would expect Prime Video to be on devices sold by Amazon. Critics instead saw a negotiating tactic to get Prime Video onto the Apple device, and a prod for people to buy Amazon's competing Fire TV players.

"Whenever these companies try to freeze each other out, the consumer always loses," said Paul Verna, an analyst at research firm eMarketer.

Amazon and Apple declined to comment on how their differences have affected customers. The companies said Amazon shows will be available on Apple TV later this year, but did not specify a date.

Streaming is not the only example where a spat between Apple and Amazon limited customer choice. Amazon's popular voice-controlled speaker, the Echo, can be told to play songs from an Amazon music account or even Spotify, but not from Apple Music.

Amazon's Kindle app for Apple's iPhone lets people read but not buy books, which must be purchased directly from Amazon's website.

According to former Amazon employees, the company at times brings in tangential business concerns as leverage in negotiations.

"The outcomes of these deals may factor into future conversations," said Scott Jacobson, a former Amazon manager and now managing director of Madrona Venture Group.

It was not clear how Amazon and Apple came to terms on the video player.

Analysts estimate that the ascendance of Prime Video gave Amazon a better starting point for negotiations. Its shows and films have started winning awards, including three Oscars in 2017. The internet video player with most market share, Roku, not only offers Prime Video but has a smaller price tag than Apple TV.

"It put Apple TV at a big disadvantage," said Alan Wolk, lead analyst for TV industry publication TV[R]EV.

Amazon declined to comment on whether it will again sell Apple TVs.

Article Link To Reuters:

The Global Recovery’s Downside Risks

By Nouriel Roubini 
Project Syndicate
June 6, 2017

For the past two years, the global economy has been growing, but it has swung between periods of rapid expansion and deceleration. During this period, two episodes, in particular, caused US and global equity prices to fall by about 10%. Is a pattern emerging, or is a fitful global recovery set to stabilize?

The first episode came in August/September 2015, when many observers feared that China’s economy could be headed for a hard landing. The second episode, in January/February 2016, also stemmed from concerns about China. But investors were also increasingly worried about stalling US growth, collapsing oil and commodity prices, rapid interest-rate hikes by the US Federal Reserve, and unconventional negative-rate monetary policies in Europe and Japan.

Each deceleration episode lasted for about two months, at which point the correction in equity prices began to reverse. Investors’ fears were not borne out, and central banks began to ease their monetary policies; or, in the case of the Fed, put rate hikes on hold.

As a third example, one could cite the period following the United Kingdom’s Brexit referendum in June 2016. But that episode was more short-lived, and it did not cause a global slowdown, owing to the small size of the UK economy and monetary easing at the time. In fact, in the months before US President Donald Trump’s election last November, the global economy actually entered a new period of expansion – albeit one in which advanced and emerging-market economies’ potential growth remained low.

We may still be living in what the International Monetary Fund calls the “new mediocre” – or what the Chinese call the “new normal” – of low potential growth. And yet economic activity has started to pick up in the US, Europe and the eurozone, Japan, and key emerging markets.

Owing to new stimulus measures, China’s growth rate has stabilized. And emerging markets such as India, other Asian countries, and even Russia and Brazil – which experienced recessions between 2014 and 2016 – are all doing better. So, even before the US presidential election had inspired “Trump trades,” a “reflation trade” had signaled a new phase of modest global expansion.

Recent economic data from around the world suggest that growth could now accelerate. And yet one cannot rule out the possibility that the current expansion will turn into another global slowdown – if not an outright stall – if some downside risks materialize.

For example, markets have clearly been too bullish on Trump. The US president will not be able to pass any of the radical growth policies he has proposed; and any policy changes that he does make will have a limited impact. Contrary to what the administration’s budget projections claim, annual economic growth in the US has almost no chance of accelerating from 2% to 3%.

At the same time, markets have underestimated the risks of Trump’s policy proposals. For example, the administration could still pursue protectionist measures that would precipitate a trade war, and it has already imposed migration restrictions that will likely reduce growth, by eroding the labor supply.

Moreover, Trump might continue to engage in corporatist micromanagement, which would disrupt the private sector’s investment, employment, production, and pricing decisions. And his fiscal-policy proposals would provide excessive stimulus to an economy that is already close to full employment. This would force the Fed to raise interest rates even faster, which would derail the US’s recovery, by increasing long-term borrowing costs and strengthening the dollar.

Indeed, Trump has introduced such profound fiscal uncertainty that the Fed could make a mistake in its own policy making. If it does not increase rates fast enough, inflation might balloon out of control. The Fed would then have to hike rates rapidly to catch up at the risk of triggering a recession. A related risk is that increasing rates too slowly could lead to an asset-price bubble and all the dangers – frozen credit markets, soaring unemployment, plummeting consumption, and more – implied by its inevitable deflation.

The current Fed chair, Janet Yellen, is unlikely to make a mistake. But over the course of the next year, Trump will have the option of appointing five, and possibly six, new members to the Fed’s seven-member Board of Governors. If he chooses poorly, the risk of serious policy errors will increase substantially.

Markets are also underestimating today’s geopolitical risks, many of which stem from Trump’s confused and risky foreign policies. Indeed, the global economy could be destabilized by any number of scenarios involving the US. A military confrontation between the US and North Korea now seems plausible. So, too, does a diplomatic or military conflict between the US and Iran that results in an oil-supply shock; or a trade war between the US and China that escalates into a larger geopolitical conflict.

But Trump is not the only global risk. China has resorted to a fresh round of credit-fueled fixed investment to stabilize its growth rate. That means that it will have to deal with more toxic assets, debt, leverage, and overcapacity in the medium term. And because growth and economic stability will top the agenda at the Chinese Communist Party’s National Congress later this year, discussions about how to rebalance growth and implement structural reforms will take a back seat. But if China does not jumpstart structural reforms and contain its debt explosion by next year, the risk of a hard landing will return.

Elsewhere, the recent Dutch and French election results (and favorable expectations for the German election this September) have reduced the risk that populists will come to power in Europe. But the EU and eurozone are still in an economic slough. And market fears of a disintegrating eurozone will return if the anti-euro Five Star Movement comes to power in Italy’s next election, which could be held early this fall.

In the next year, a more robust and persistent global recovery will depend largely on whether policymakers avoid mistakes that could derail it. At least we know where those mistakes are most likely to be made.

Article Link To Project Syndicate:

Continental Drift: Investors Embrace Europe, Ex-UK

By Vikram Subhedar and Trevor Hunnicutt 
June 6, 2017

Global investors are distinguishing between the UK and the rest of Europe as part of a fundamental reassessment of what investing in the region means, reflecting growing enthusiasm for Europe's broad economic prospects and nervousness about thorny and possibly protracted Brexit negotiations.

That has meant the forceful emergence this year of "Europe ex-UK" as an investment class, as offshore investors actively seek to avoid lumping British stocks into any Europe-bound investments.

The UK has been an intrinsic part of the European investment process for decades, in no small part because of London's role as the regional financial hub and because of deep links engendered by free trade and free movement of goods and people across the EU.

With Brexit, and the future of many of those links uncertain, there is a growing realization that the UK and EU financial markets will develop their own nuances and drivers which require old assumptions to be challenged.

Data from Lipper - a Thomson Reuters company - on year-to-date flows in and out of exchange traded funds (ETF), a proxy for broader investments, shows that this is well under way.

ETFs that track European stocks excluding the UK are the ones seeing the strongest demand and the largest of these, the iShares MSCI Eurozone ETF (EZU.Z), has seen a net $3.9 billion pumped into it this year.

Meanwhile, regional ETFs which include UK stocks have bled money, suggesting investors looking only for European exposure are actively seeking to avoid British stocks.

"Europe ex-UK" is not a new investment concept, and the size and scope of products available to investors is small compared to those available on a pan-European basis.

According to Lipper, there are more than 1,800 mutual funds globally that invest in pan-European stocks and combined they manage more than $250 billion.

The number of funds that invest in European stocks excluding those listed in the UK, meanwhile, total a little more than 150 and they manage a combined $50 billion.

That said, the decoupling has been noticeable since Britain voted to leave the EU in 2016.

"The two regions have been separate but that has been accentuated by Brexit," said Stephen Mitchell, a portfolio manager who runs a global equities fund at Jupiter Asset Management.

"American investors left the UK in the two weeks after Brexit - by July 2016 they were gone. The uncertainty of Brexit has kept them out," Mitchell said, adding that they have returned to Europe but not the UK.

"That's probably going to continue to be the case for the time being."

Consumer Worries

After a year of second-guessing political outcomes and getting whipsawed by market moves in the aftermath of Brexit, the U.S. presidential election and the Italian constitutional referendum, investors have shied away from trading based on opinion polls and have sharpened focus on fundamentals.

Here, the divergences between the UK and Europe are getting starker.

Political risks facing the euro zone eased following the French election, whereas in the UK an election that was considered a foregone conclusion until last week now looks less certain.

Moreover, the economic outlook in the UK is clouded by concerns around whether consumer spending is sustainable, while in the EU things appear to be more upbeat.

"This is one area where the contrast with continental Europe is very strong," said Isabelle Mateos y Lago, Chief Market Strategist at the world's largest asset manager BlackRock (BLK.N).

"It's hard to quantify how serious, but we've already seen that since the Brexit referendum, UK consumers have been drawing down their savings to an all-time low savings rate," Mateos y Lago said.

UK Like Japan?

The UK does remain a key market for global investors and offers them access to major commodity producers such as Rio Tinto (RIO.L) and Royal Dutch Shell (RDSa.L), food and beverage bellwethers Diageo (DGE.L) and Unilever (ULVR.L) and emerging market-focused banking giants like HSBC (HSBA.L) that are not on the continent.

Also, companies in the euro zone rely heavily on the UK as a market. For example, about 10 percent of the revenue of top euro zone companies comes directly from the UK, according to data from MSCI, meaning investors will still have to closely monitor the health of the UK.

Some say Asia might offer a template for how the investment landscape might evolve.

"With Brexit the UK is going to be a bit differentiated. A bit like Japan. It's part of Asia but the difference is material enough to attract separate research," said Colin McLean, managing director at SVM Asset Management.

A big reason for this is that Japan and the rest of Asia can, and often do move independently of each other.

John Cryan, the British chief executive of Deutsche Bank, alluded to something similar playing out in Europe, as Brexit negotiations loom.

"...for the medium term, I think the Euro 27 does relatively well," Cryan said at a financial conference hosted by his bank in New York last week.

"The U.K. though, I think is only just coming to terms with the complexity of what a Brexit entails."

For investors, also grappling with these complexities, a Europe ex-UK could make life a little easier.

Article Link To Reuters:

How China’s Biggest Bank Became Wall Street’s Go-To Shadow Lender

ICBC emerges as a major U.S. dealer in government debt repos; Loophole in post-crisis rules leads to ‘regulatory arbitrage’

By Miles Weiss
June 6, 2017

High up in a New York City skyscraper, China’s biggest bank is playing in the shadows of American finance.

The prize for Industrial & Commercial Bank of China Ltd. isn’t stocks, bonds or currencies. It’s the grease in the wheels of all those markets: repurchase agreements.

By exploiting a loophole in rules intended to keep U.S. banks from getting “too big to fail,” the state-owned ICBC has become a go-to dealer in repos in just a few short years, alongside longtime powerhouses like Goldman Sachs Group Inc. The short-term loans allow investors to borrow money by lending securities, serving a vital role in day-to-day trading on Wall Street.

ICBC’s rise reflects not only China’s global ambitions in high finance, but also how post-crisis rules have let a whole host of new players profit from the murky world of shadow banking, largely beyond the reach of bank regulators. As big banks face tougher standards, they’re being replaced by brokers, asset managers and foreign firms like ICBC, which can use more leverage and take greater risks. That has some regulators worried non-bank lenders are once again emerging as a threat to financial stability, less than a decade after panic in the repo market wiped out Lehman Brothers.

“The concern is that non-bank dealers are becoming a larger part of the repo market,” said Benjamin Munyan, who specializes in shadow banking and regulation at Vanderbilt University’s Owen Graduate School of Management. “These intermediaries are outside the scope of our traditional Federal Reserve safety net.”

Unintended Consequences

In some ways, the development is emblematic of how steps taken to stamp out financial risk-taking in one area have created unforeseen risks in another. But it also highlights the willingness and ability of firms to jump through whatever holes regulators leave or create.

Alan Levy, who oversees the repo desk as chief commercial officer for ICBC Financial Services, the bank’s New York-based securities unit, declined to comment.

In a repo, firms borrow money by putting up securities like Treasuries as collateral. The cash can then be used to buy higher-yielding assets, something hedge funds often do. When the agreement expires, the borrower “repurchases” the collateral, paying interest to the lender. The process can be repeated over and over, boosting a firm’s leverage, as long as the assets backing the repo maintain their value.

During the credit crisis, reliance on such short-term funding helped bankrupt Lehman and imperiled the financial system. Bailouts put the biggest securities firms under Fed supervision as banks, and Dodd-Frank regulations forced them to shrink their assets. A key provision has been the enhanced capital requirements, which made it prohibitively expensive for large U.S. banks to warehouse low-yielding Treasuries and finance repos.

Unlimited Credit

“You had unlimited balance sheet years ago and almost unlimited credit extension,” said Russ Certo, head of rates at Brean Capital. “These factors are radically reduced.”

That’s opened the door for independent brokers and foreign-backed entities like ICBC’s securities unit, just as another set of regulatory changes turned a low-margin business -- government debt-backed repo financing -- into a more lucrative one.

Beijing-based ICBC itself has more assets than JPMorgan Chase & Co. and Goldman combined, but its U.S. banking operation is tiny -- with only $2 billion of assets. And since the Fed’s costly capital requirements only apply to an overseas lender’s non-bank units when combined U.S. assets reach $50 billion, that’s given ICBC Financial Services an edge.

Using an accounting practice called “master netting,” ICBC has kept its U.S. assets below the threshold where extra costs kick in, even as its repo business expanded well beyond that.

Master Netting

At the end of last year, ICBC’s repo business, which deals almost exclusively in financing backed by Treasuries and agency debt, grew to $95 billion, its latest regulatory filing showed. That’s more than double the level in 2011, ICBC Financial Services’ first full-year of operation and puts the firm among the top 10 repo dealers.

But thanks to master netting -- which lets firms deduct offsetting agreements known as reverse repos with the same client -- the unit reduced its net reported repo to $29 billion. In fact, the amount of netting that ICBC does suggests many clients enter into reverse repo agreements to keep its assets and liabilities in check. The upside is that it gives ICBC the flexibilityto offer more repo at lower prices than its American rivals.

Staying under the $50 billion level also lets ICBC take advantage of a discrepancy in how banks and securities firms are regulated. Unlike the Fed, the Securities and Exchange Commission’s capital requirements vary based on how risky the assets are and therefore impose minimal costs on repos backed by Treasuries. So as long as firms can avoid the Fed’s capital rules, they can boost leverage to generate bigger repo profits.

History Lesson

ICBC has done just that. ICBC Financial Services had roughly $260 in assets for each dollar of capital at the end of 2016 -- over 10 times the leverage used by JPMorgan’s securities unit. (Both figures exclude subordinated debt, which would lower the ratios.) Some experts in the securities industry say firms like ICBC simply bring borrowers and lenders together and can therefore use more leverage without incurring undue risk.

But others such as Daniel Tarullo, who was the Fed’s top bank watchdog until April, say such repo arrangements may still pose a risk to the financial system.

ICBC got into repos in 2010, when it bought part of the Fortis Securities unit of BNP Paribas SA. It was part of a strategy to expand the bank’s global reach, according to David Caruso, a former Fortis executive who helped ICBC get up and running.

Profits from the unit, run by a group of veteran Wall Street traders, would help pay for ICBC’s build-out. In 2013, ICBC Financial Services became the first Chinese-owned member of the New York Stock Exchange. Last July, it registered as a U.S. investment adviser.

‘A Lot of Money’

“These guys at ICBC Financial Services have done this for a very long time,” said Caruso, who briefly led the unit. “They make a lot of money.”

The model has spawned copycats. Last year, two executives from ICBC’s repo desk, Peter Volino and Richard Misiano, left to set up shop at Daewoo Securities America. Volino told the Securities Lending Times at the time that it was “crucial” for the outfit, now called Mirae Asset Securities (USA), to have support of a non-bank parent as constraints increase on bank-owned firms.

Regulators have taken notice. During his time at the Fed, Tarullo repeatedly voiced warnings about shadow banking and the perils of “regulatory arbitrage” in the repo market. Facing pressure from the Fed, the SEC has held also discussions with the industry to cap the amount of leverage dealers employ.

The SEC’s own rule making might be exacerbating the problem. Implemented in October, a requirement to make the money-market industry safer has created trillions of dollars in demand for government bonds. Profits from government repos have soared, and as a result, non-traditional dealers like ICBC’s unit have positioned themselves as the middlemen between money funds that need the securities and hedge funds that need the cash.

“The big hedge funds and money-market funds don’t really have anywhere else to go,” said Scott Skyrm, managing director of fixed-income financing at Wedbush Securities.

Article Link To Bloomberg:

Why Elites Hate

The liberal contempt for middle America is baked into the idea of identity politics.

By William McGurn
The Wall Street Journal
June 6, 2017

Nine years after Barack Obama accused small-towners of clinging to guns or religion, nearly three years after Jonathan Gruber was shown to have attributed ObamaCare’s passage to the stupidity of the American voter, and eight months after Hillary Clinton pronounced half of Donald Trump’s voters “irredeemable,” Democrats are now getting some sophisticated advice: You don’t win votes by showing contempt for voters.

In the last week or so a flurry of articles have appeared arguing for toning down the looking-down. In the New Republic Michael Tomasky writes under the heading “Elitism Is Liberalism’s Biggest Problem.” Over at the New York Times , Joan C. Williams weighs in with “The Dumb Politics of Elite Condescension.” Slate goes with a Q&A on “advice on how to talk to the white working class without insulting them.” Stanley Greenberg at the American Prospect writeson “The Democrats’ ‘Working-Class Problem,’ ” and Kevin Drum at Mother Jones asks for “Less Liberal Contempt, Please.”

None of these pieces are directed at Trump Nation. To the contrary, they are pitched to progressives still having a hard time coming to grips with The Donald’s victory last November. Much of what these authors write is sensible. But it can also be hilarious, particularly when the effort to explain ordinary Americans to progressive elites reads like a Margaret Mead entry on the exotic habits of the Samoans.

Mr. Tomasky, for example, informs progressives that middle Americans—wait for it—“go to church.” They have friends (“and sometimes even spouses”) “who are Republicans.” “They don’t feel self-conscious saluting the flag.” Who knew?

Most of these writers allow that there is at least some fraction of Trump voters who are not deplorable. What they do not appreciate is how condescending they can be while advising their fellow Democrats to be less condescending. Exhibit A: Mr. Drum’s recommendation that Democrats can “broaden [their] appeal” because these are “persuadable, low information folks.”

Still, Mr. Drum comes across as Gandhi when set against the writer at Slate who interviews Ms. Williams. The following question conveys the tone: “What attitude should we be taking toward people who voted for a racist buffoon who is scamming them?”

Ms. Williams, a University of California law professor who has written a new book on the white working class, generously avoids telling her interviewer he is a perfect instance of the problem. But the larger progressive dilemma here is that contempt is baked into the identity politics that defines today’s Democratic Party.

When Mrs. Clinton labeled Trump voters deplorable (“racist, sexist, homophobic, xenophobic, Islamophobic, you name it”) she was simply following identity politics to its logical conclusion. Because identity politics transforms those on the other side of the argument—i.e., Americans who are pro-life, who respect the military, who may work in the coal industry—from political opponents into oppressors.

Which is precisely how they are treated: as bigots whose retrograde views mean they have no rights. So when the Supreme Court unilaterally imposes gay marriage on the entire nation, a baker who doesn’t want to cater a gay reception must be financially ruined. Ditto for two Portland women who ran a burrito stand that they shut down after accusations of cultural appropriation regarding their recipes.

No small part of the attraction of identity politics is its usefulness in silencing those who do not hew to progressive orthodoxy. This dynamic is most visible on campuses, where identity politics is also most virulent. It’s no accident, in other words, that the mob at Middlebury resorted to violence to try to keep Charles Murray ; after all, he’s been called a “white nationalist.” In much the same way identity politics has led Democrats to regard themselves as the “resistance” rather than the loyal opposition.

The great irony here is that this has left Democrats increasingly choosing undemocratic means to get what they want. From President Obama’s boast that he would use his pen and phone to bypass Congress to the progressive use of the Supreme Court as its preferred legislature to the Iran and climate deals that made end runs around the Constitution, it all underscores one thing: The modern American progressive has no faith in the democratic process because he has no trust in the American people.

Here it helps to remember the tail end of Mr. Obama’s snipe about guns and religion: it was a crack about voters clinging to “antipathy toward people who aren’t like them.” Sounds like a pretty accurate indictment of contemporary American liberalism, judging by all these articles begging progressives to be a little more broad-minded.

So good luck with the idea that the Democratic Party can restore its relationship with Middle America without addressing the identity politics that fuels it. Especially when it starts from the premise that the Americans they are condescending to will remain too stupid to figure it out.

Article Link To The Wall Street Journal:

Trump Seeks Legislative Wins As Clock Ticks, Russia Probe Looms

By Ayesha Rascoe 
June 6, 2017

President Donald Trump will huddle with congressional leaders on Tuesday, seeking to rev up a stalled legislative agenda as the summer break draws closer and a probe into Russian meddling in the 2016 election campaign grinds on.

Elected pledging to overhaul the healthcare system and slash taxes, Trump has yet to notch a major legislative win, and time is running out before lawmakers leave Washington for August.

The White House is trying to spur momentum this week by highlighting policy plans - a task made more difficult with the spotlight on testimony by James Comey, the FBI director fired last month by Trump, to the Senate Intelligence Committee on Thursday.

Comey will be grilled by senators on whether Trump tried to get him to back off an investigation into alleged ties between the president's 2016 campaign and Russia. Trump denies any collusion with Russia, and has called the investigation a "witch hunt."

The White House wants to see Senate Republicans vote on healthcare reform legislation before they leave for a break in August, Marc Short, Trump's top aide on Capitol Hill, told reporters on Monday. The House of Representatives passed a bill in May.

Also on tap before the break:

A vote to raise the government's borrowing authority, known as the debt limit, should also take place before the break, Short said.

Republican fiscal conservatives routinely demand budget cuts and other concessions as a price for raising the debt limit, setting up a likely fight.

Congress will then turn its focus to overhauling the tax code in September. While the administration would prefer that the effort not add to the national debt, Short stressed that the top priority would be cutting taxes.

"We want it to be revenue neutral, and we are still supportive of tax reform, but I am also saying to you that what we believe is most important to get the economy going is the tax cuts," he said.

The Trump administration has outlined a broad plan that would cut tax rates for businesses and streamline the tax system for individuals. But, the proposal has been short on details -- including the cost of the tax cuts and what loopholes would be closed.

The healthcare bill passed by the House could result in 23 million people losing insurance, the Congressional Budget Office estimated, though Republicans have challenged that conclusion. The bill would also reduce federal deficits by $119 billion between 2017 and 2026, according to the analysis.

Short said he believed that the Senate healthcare bill would be "similar" to the House package.

Senator John Cornyn, the No.2 Republican in the Senate, said Monday evening he thought there would be a vote on a healthcare bill in the Senate in July.

Article Link To Reuters:

Gulf States’ Feud A Test For Team Trump

By Benny Avni
The New York Post
June 6, 2017

Escalating hostility among Gulf countries can be an opportunity for America — or spell doom for President Trump’s attempt to organize an anti-extremist coalition to pacify the Middle East and check Iran’s malign influence.

A rift between Saudi Arabia, Egypt and their allies on one side, and Qatar on the other, has become a full-blown crisis. The Trump administration is offering to mediate. If successful, it’ll show US leadership is still alive and well — and irreplaceable.

It won’t be easy. Arabs have never been good at unity. For decades, enmities between the region’s potentates and strongmen were hidden behind a veneer of “unity” over opposition to Israel. A side effect of President Barack Obama’s tilt toward Iran, however, was that powerful Arab leaders realized they had bigger problems than the Jewish state.

In a break from his predecessor, Trump saw an opportunity to strengthen the region’s anti-Iran forces.

It was a sound idea: A unified Sunni Arab front would slow Iranian expansion, stem the cash flow to jihadists and possibly even lead to public Arab-Israeli ties. But now that’s on hold.

Saudi kings and Qatari emirs have long competed for Gulf primacy, which leads Qatar to support anti-Western forces as part of the emir’s attempt to chart an independent path.

But the current crisis is more serious than similar past rifts.

On Monday, six countries led by Saudi Arabia severed ties with Qatar. Worse, they closed airspace and borders, threatening Qatar’s imported food supplies.

It isn’t immediately clear what made this simmering pot finally boil over.

Has the location of Trump’s May 21 Riyadh speech, not to mention a $110 billion arms deal, led the Saudis to conclude they’re now kings of all Arabs? If so, why not settle an old score against a hated rival? (Even though Trump’s speech praised Qatar as well.)

Qatar has long been a thorn in the side of the Saudis and other Arabs. It backs the Muslim Brotherhood, Egyptian leader Abdel Fattah el-Sisi’s main opposition. It hosts Hamas leaders and supports Yemen’s Houthis, which fight opposite Saudi-backed forces in Yemen’s civil war. It finances operations of al Qaeda’s Syrian branch, and Bahrain’s (Tehran-backed) opposition.

Then there’s Al Jazeera, the Qatari-financed Arabic-language media outlet that endlessly criticizes Arab leaders (except, of course, for the emir in Doha).

And then there’s Iran.

According to accounts in various Arab press outlets, Qatar secretly funds Iran’s Revolutionary Guard Corps, and Qatar’s foreign minister has reportedly been seen meeting with Gen. Qassem Sulemani, Tehran’s point man on exporting the Islamic revolution to Syria, Yemen, Lebanon and Gaza.

According to the Financial Times, the last straw for the Gulf states might have been when Qatar recently paid Iran and an al Qaeda Syrian offshoot $1 billion ransom to release 21 members of the Qatari royal family captured in Iraq while on a falconry trip, as well as members of a Qatari-affiliated militia captured in Syria.

So that’s how we got in the mess. How do we get out?

“We certainly would encourage the parties to sit down together and address these differences,” Secretary of State Rex Tillerson said Monday in Australia. “If there’s any role” the United States can play in mediating the crisis, he added, it’s certainly interested in doing so.

There isn’t much time to figure it out, says David Weinberg, a Gulf scholar at the Foundation for Defense of Democracies. Qatar could soon run low on food imports — and then perhaps turn to Iran, which has already offered assistance.

With some “deft statecraft,” however, America can help. But “simply resolving this dispute for its own sake won’t be helpful, and in fact could make things worse,” Weinberg says.

If the dispute is “resolved” by allowing Qatar to continue winking and nodding at terror-financiers, or by turning a blind eye to its ties to Iran, then Trump’s anti-Iran coalition may remain intact, but at the risk of forfeiting parts of its own mission.

The Qataris, it turns out, are amenable to pressure. In an apparent response to US pleas, Doha last week expelled some Hamas leaders (though not all).

That, of course, isn’t enough. And pressure must be applied with care: Too much of it could leave Qatar no choice but to leave the US alliance altogether, and defect to the Iran-Syria-Russia axis.

A helping hand, conversely, can help return a wayward sheep to the flock — and make American Mideast diplomacy great again.

Article Link To The New York Post:

Index Funds Still Beat ‘Active’ Portfolio Management

There is no better way for individuals to invest in the stock market and save for retirement.

By Burton G. Malkiel
The Wall Street Journal
June 6, 2017

A recent report from Standard & Poor’s adds impressive support to the large body of evidence suggesting the superiority of simple index investment strategies over traditional stock picking. At the start of every year, “active” portfolio managers declare that the current year will be the “year of the stock picker.” But the results consistently fail to support that view.

For years S&P has served as the de facto scorekeeper demonstrating the dismal record of “active” portfolio managers. During 2016, two-thirds of active managers of large-capitalization U.S. stocks underperformed the S&P 500 large-capital index. Nor were managers any better in the supposedly less efficient small-capitalization universe. Over 85% of small-cap managers underperformed the S&P Small-Cap Index.

When S&P measured performance over a longer period, the results got worse. More than 90% of active managers underperformed their benchmark indexes over a 15-year period. Equity mutual funds do beat the market sometimes, but seldom can they do it consistently, year over year.

The same findings have been documented in international markets. Since 2001, 89% of actively managed international funds had inferior performance. Even in less efficient emerging markets, index funds outperformed 90% of active funds. Indexing has proved its merit in various bond markets as well.

The logic behind the empirical results is irrefutable. In any national market, all the securities are held by someone. Thus if some investors are holding securities that do better than average, it must follow that other investors do worse than average. Investing has to be a zero-sum game. For every winner there will be a loser.

But in the presence of costs, the game becomes negative-sum. The index investor will achieve the market return with close to zero cost. Actively managed funds charge management fees of about 1% a year. Thus, as a group, actively managed funds must underperform index funds by their difference in costs. And empirical evidence suggests that active funds underperform index funds by approximately the difference in their costs. Moreover, actively managed funds tend to realize taxable capital gains each year. Passive index funds are more tax-efficient, making the after-tax gap even larger.

In 2016 investors pulled $340 billion out of actively managed funds and invested more than $500 billion in index funds. The same trends continued in 2017, and index funds now account for about 35% of total equity fund investments. Now a new critique has emerged: Index funds pose a grave danger both to the stock market and to the general economy.

In 2016 an AB Bernstein research team led by analyst Inigo Fraser-Jenkins published a report with the provocative title “The Silent Road to Serfdom: Why Passive Investment Is Worse than Marxism.” The report argued that a market system in which investors invest passively in index funds is even worse than an economy in which government directs all capital investment. The report alleges that indexing causes money to pour into a set of investments without regard to considerations such as profitability and growth opportunities. Detractors also accuse index funds of producing a concentration of ownership not seen since the days of the Rockefeller Trust.

What would happen if everyone began investing in index funds? The possibility exists that they could grow to such a size that they would distort the prices of individual stocks. The paradox of index investing is that the stock market needs some active traders to make markets efficient and liquid.

But the substantial management fees that active managers charge give them an incentive to perform this function. They will continue to market their services with the claim that they have above-average insights that enable them to beat the market, even though they cannot all achieve above-average market returns. And even if the proportion of active managers shrinks to a tiny percentage of the total, there will still be more than enough of them to make prices reflect information.

Americans have far too much active management today, not too little. The S&P report reveals that ever-increasing percentages of active managers have been outperformed by the index. If anything, the stock market is becoming more efficient—not less so—despite the growth of indexing.

It is true that there will be a growing concentration of ownership among the index providers, and they will have increased influence in proxy voting. The possibility of excessive market power needs to be monitored by antitrust authorities, but index funds don’t have an incentive to use their votes to encourage anti-competitive behavior.

Index funds have been of enormous benefit for individual investors. Competition has driven the cost of broad-based index funds nearly to zero. Individuals can now save for retirement far more efficiently than before by assembling a diversified portfolio of index funds. There is no better way to preserve and grow one’s savings.

Article Link To The Wall Street Journal:

WSJ Ends Google Users' Free Ride, Then Fades In Search Results

Publisher says Google visitors dropped after hardening paywall; Google says ‘first click free’ good for users and publishers.

By Gerry Smith
June 7, 2017

After blocking Google users from reading free articles in February, the Wall Street Journal’s subscription business soared, with a fourfold increase in the rate of visitors converting into paying customers. But there was a trade-off: Traffic from Google plummeted 44 percent.

The reason: Google search results are based on an algorithm that scans the internet for free content. After the Journal’s free articles went behind a paywall, Google’s bot only saw the first few paragraphs and started ranking them lower, limiting the Journal’s viewership.

Executives at the Journal, owned by Rupert Murdoch’s News Corp., argue that Google’s policy is unfairly punishing them for trying to attract more digital subscribers. They want Google to treat their articles equally in search rankings, despite being behind a paywall.

“Any site like ours automatically doesn’t get the visibility in search that a free site would,” Suzi Watford, the Journal’s chief marketing officer, said in an interview. “You are definitely being discriminated against as a paid news site.”

The Journal’s experience could have implications across the news industry, where publishers are relying more on convincing readers to pay for their articles because tech giants like Google and Facebook are vacuuming up the lion’s share of online advertising.

The Journal’s owner, News Corp., competes with Bloomberg LP, the parent company of Bloomberg News, in providing financial news and information.

Striking A Balance

With Google, publishers try to strike a balance. While they may want to sign up more subscribers by not giving away free articles, they also don’t want their content to drop in search results, which drives traffic to their sites and can boost advertising sales. For that reason, many outlets with subscription businesses -- like the New York Times and Financial Times -- let Google users read at least one free article so they still rank high in search results.

Google says its “first click free” policy is good for both consumers and publishers. People want to get the news quickly and don’t want to immediately encounter a paywall. Plus, if publishers let Google users sample articles for free, there’s a better chance they’ll end up subscribing, Google says. The tech giant likens its policy to stores allowing people to flip through newspapers and magazines before choosing which one to buy.

“For the many publishers who already take advantage of this approach, it provides the ability to protect their business model and the opportunity to convert people who sample their content into paying customers,” Google said in a statement.

The Journal decided to stop letting people read articles free from Google after discovering nearly 1 million people each month were abusing the three-article limit. They would copy and paste Journal headlines into Google and read the articles for free, then clear their cookies to reset the meter and read more, Watford said.

Free On Facebook

The Journal now only lets Google users see a short snippet at the top of its articles, restricting the rest to its 2.2 million subscribers or people who arrive via social media. In the most recent quarter, the Journal’s digital subscribers grew about 30 percent compared with the prior year, driven partly by barring Google users from reading for free.

Google, meanwhile, displays a “subscription” label next to Journal articles in Google News search results, alerting users that they won’t be getting a full article.

The Journal’s ad revenue wasn’t affected by its recent drop in Google traffic because social media visits grew 34 percent in that time, keeping overall web traffic flat, Watford said. The Journal lets readers get some articles for free via social media like Twitter and Facebook, which the paper views as a marketing tool.

Publishers have long complained about how their articles appear in search results. For years, many newspapers complained that online media companies published posts based on their reporting with a Google-friendly headline and appeared higher in search results.

The Journal’s parent company, News Corp., has a tense history with Google. In 2009, Murdoch accused Google of stealing articles and threatened to pull his company’s stories from its search results.

News Corp. also competes with the tech giant in various ways. It’s an investor in AppNexus, an advertising technology company that rivals Google’s DoubleClick platform. News Corp. also owns Unruly, which competes with Google’s YouTube in social video advertising.

The Journal isn’t the only publisher skeptical of Google’s policy. Jessica Lessin, founder of The Information, a technology publication, said sampling options like Google’s “first click free” program “have not proven to be as beneficial as many publishers thought.”

Her publication, which charges $399 a year for an online subscription, doesn’t let Google users read any articles for free because it’s focused on a Silicon Valley audience that’s more likely to find its journalism through social media than from a Google search, she said.

Google and publishers often have different objectives, said Lessin, a former Wall Street Journal reporter. Google wants to capture attention so it can sell advertising. Many publishers want to convince readers to pay.

“Tech companies are always going to do what’s in the interest of their business,” Lessin said. That’s not always the same as what’s in the interest of publishers, she said.

Article Link To Bloomberg:

Google, Apple, Microsoft, Amazon And Facebook Lead Most Valuable Global Brands List

By Anmar Frangoul
June 6, 2017

U.S. tech giants Google, Apple, Microsoft, Amazon and Facebook are the five most valuable global brands, according to rankings released on Tuesday by WPP and Kantar Millward Brown.

The BrandZ Top 100 Most Valuable Global Brands ranking saw Google retain its top spot with a brand value of more than $245 billion. Amazon rose three places to number four after achieving the highest dollar value growth. The online retailer increased by $40.3 billion to $139.3 billion. Other brands making the top ten included AT&T, Visa, Tencent, IBM and McDonald's.

"Strong brands continue to deliver value for the companies that own them, regardless of economic, political and category disruption," Peter Walshe, global BrandZ director at Kantar Millward Brown, said in a statement.

"The BrandZ Global Top 100 is now dominated by the internet giants — brands that have operated on a global stage since day one, and which are built on powerful, innovative technology platforms," Walshe added. "This has enabled them to transcend regional and sector boundaries and grow their value at an unprecedented rate."

In the U.K., Vodafone headed the top ten, followed by HSBC, Shell, BT and BP. Adidas was found to be the world's fastest growing brand, with its value increasing by 58 percent to $8.3 billion.

The agility and innovative nature of the top tech brands was seen as a core strength.

"The superstar technology brands in the BrandZ Global Top 100 are capable of abundant innovation, using their platforms to create connected ecosystems that meet multiple needs and make our lives easier," Jane Bloomfield, head of U.K. marketing for Kantar Millward Brown, said.

"They also have great elasticity, confidently playing in new territories and categories to expand their customer bases," Bloomfield added.

The list is now in its twelfth year. It combines measures of brand equity based on interviews with more than 3 million consumers about thousands of brands, with analysis of each company's business and financial performance, using data from both Bloomberg and Kantar Worldpanel.

Article Link To CNBC:

Apple Downgraded As Analysts Say Investors Dazzled By iPhone 8 Aren’t Pricing In Enough Risk

Pacific Crest says $145 is fair value for shares.

By Barbara Kollmeyer
June 6, 2017

Stormclouds gathered around Apple Inc. on Monday after a rare analyst downgrade that came with a warning that investors have been pricing in all of the upside from the company’s next iPhone while ignoring the risks.

Pacific Crest analyst cut their long-held overweight rating on AAPL, -0.98% to sector weight, saying they see a 12-month fair value at $145. Shares of Apple were trading down 1% at $153.87 on Monday.

“At current levels, we believe investors are anticipating an extremely strong iPhone 8 cycle, while giving relatively little weight to risks around gross margins, elasticity, supply issues, or the likelihood for declines beyond the iPhone 8 cycle,” said analysts Andy Hargreaves, Evan Wingren and Tyler Parker, at Pacific Crest, in a note to clients dated Sunday.

Apple has been one of the best performers among U.S. equities this year, with shares up about 34%. That run has been credited with helping drive the current stock-market rally, aided by other big tech names — Facebook Inc. FB, +0.01%Amazon.com Inc. AMZN, +0.46% Google-parent Alphabet Inc. GOOGL, +0.78% and Netflix Inc. NFLX, -0.07%

Still, Apple shares have struggled since hitting a mid-May, 52-week high of over $152, and that has some concerned that they may have topped out. Not all however --RBC Capital commented in a note to clients last month that Apple could easily become a $1 trillion company in the next year to 18 months, based on strong iPhone 8 demand expectations and big share repurchases.

But therein lies at least one of the problems, said Pacific Crest’s Hargreaves and the team, who see limited upside to current expectations for the next iPhone to dazzle the faithful and investors. Many investors are already looking forward to fiscal 2018 iPhone unit growth in the mid- to high-teens, with expanded gross margins that could push 2018 earnings per share toward $12.

“This would likely require strong growth in sales to new users and extremely strong replacement volume, a combination that seems unlikely,” said Pacific Crest, effectively tossing cold water on that theory.

Analyst expect the decline in sales to new users to resume and expect lower replacement rates to drive iPhone sales down in 2019, after a stronger-than-normal year in 2018. “This combination is likely to drive iPhone unit sales down in FY19, with the magnitude of decline likely being positively correlated to the magnitude of upside in the iPhone 8 cycle. In other words, the better FY18 is, the worse FY19 is likely to be,” the analysts said.

But investors are likely to have learned some lessons from the past and will be quicker to anticipate stagnation in the coming cycle than they were in the iPhone 6 and 6s cycles, said Pacific Crest. In the 6 cycle, Apple’s price/earnings multiple peaked in the second quarter after that phone launched, then compressed by around 50% over the next 12 months.

Multiple compression refers to when shares fail to rise and sometimes even fall on strong earnings, normally caused by investor skepticism over growth prospects.

“In the current cycle, we believe AAPL’s P/E multiple is already nearing peak levels, which suggests the period of compression could also come earlier,” said the analysts.

Apple shares have gained 34% in 2017, while the Dow Jones Industrial Average DJIA, -0.10% has gained 7% and the S&P 500 SPX, -0.12% has gained 9%.

Article Link To MarketWatch;

The Six Big Announcements Apple Just Made

-- Apple unveiled watchOS 4, macOS Sierra and iOS 11
-- It also launched new Macs, some of which will support VR
-- There's also a new speaker called the HomePod that offers Siri integration and will cost $349

June 6, 2017

When Apple CEO Tim Cook took the stage to kick off WWDC on Monday, he said he was going to make six big announcements. There was a lot discussed on stage, far more than just six items, but they boil down to a few key topics. Here's what you might have missed if you didn't tune in.

1. watchOS 4

Apple unveiled watchOS 4 on Monday, the newest version of the operating system for the Apple Watch. It features a couple of new watch faces, the most important of which puts Siri cards front and center. They can tell you things like when to leave for work, the music you're playing, how your workout is going and more. WatchOS 4 has a new workout UI, support for two-way data exchange with workout machines and more.

2. macOS High Sierra

macOS High Sierra is the successor to Sierra, announced last year. It supports virtual reality headsets, something Apple hasn't ever offered before, security improvements to Safari that help further protect your privacy, new photo search features and a new Apple File System by default, which should mean more secure storage. High Sierra will be available in the coming months.

3. New iMacs and MacBook Air / MacBook Pro refreshes

Apple finally refreshed the iMac after more than 600 days without doing so, adding a sharper and brighter display and new Intel processors. It also brought those seventh-generation Intel processors over to the MacBook Pro, which is otherwise unchanged, and boosted the speed of the chip in the MacBook Air. The biggest announcement was the iMac Pro, however, which will start at $4,999 and includes beefy new processors, a 5K display and a sharp design. Apple said it's "the most powerful Mac we have ever made."

4. iOS 11

Apple's iOS 11 will launch in September and includes new features for the iPhone and iPad.

The big takeaway here is improvements to Siri, which Apple says will make it easier to synchronize your various iOS devices, like iPhones and iPads. It also said it'll keep messages in the cloud, helping to save valuable hard drive storage space.

Another big change is peer-to-peer payments, which will allow Apple to compete with Paypal, Square Cash, Venmo and others by allowing iOS users to easily send money to one another. On the iPad, users will find drag and drop, more room for icons in the bottom dock of the screen and more.

Oh, and we'll bundle this here since it was huge: Apple unveiled ARKit, which will allow developers to easily create augmented reality apps for iOS devices.

5. iPad Pro 10.5

Apple showed a new iPad Pro 10.5 during the event. It features a brighter display with a faster refresh rate, which is important which watching things like movies or playing games. It also sports a new A10X processor that should improve gaming and overall app performance. That chip and the new screen were also added to Apple's iPad Pro 12.9. Apple did not refresh the 9.7-inch iPad Pro.

6. Apple HomePod speaker

The only brand new product announced was the HomePod speaker. It's a Siri-powered smart speaker that allows you to play music, check the traffic, control you smart lights, query sports scores and more. Sound familiar? That's because it's very much like the Amazon Echo and Google Home. Apple says its product is better, though, thanks to advanced speakers that will fill your room with music. It'll cost $349 when it launches in December.

Article Link To CNBC: