Wednesday, July 19, 2017

Wednesday, July 19, Morning Global Market Roundup: Dollar's Decline, China Optimism Cheer Asia Stocks, Commodities

By Wayne Cole
July 19, 2017

The dollar stayed on the defensive on Wednesday as investors wagered any further tightening in the United States would be slow at best, while optimism on China's economy underpinned Asian shares and commodities.

The U.S. currency was near multi-month lows after the collapse of the Republicans' push to overhaul healthcare dealt a blow to President Donald Trump's ability to pass promised tax cuts and infrastructure spending.

The diminished prospect of fiscal spending was a boon to bonds, especially as a run of soft U.S. inflation results had lessened the risk that the Federal Reserve would need to be aggressive in removing its stimulus.

"The question marks over U.S. reform on the one hand, and the underlying economic growth momentum on the other hand are likely to keep the U.S. within its current goldilocks scenario for longer," wrote analysts at Morgan Stanley in a note.

"Globally, financial conditions tend to improve when the dollar is weak and vice versa," they added. "The falling dollar – still the globe's major reserve and funding currency – tends to see risk appetite flourishing."

As a result, yields on 10-year Treasury notes were down at 2.27 percent having fallen 12 basis points in little more than a week.

That in turn undermined the U.S. dollar which hit its lowest since September against a basket of currencies. It was up a whisker on Wednesday at 94.735, but still down over 7 percent on the year so far.

The euro was firm at $1.1543, having made a 14-month top at $1.1583. Investors were wary of pushing the euro too far in case a European Central Bank policy meeting on Thursday proved less hawkish than bulls were betting on.

The dollar also carved out a two-year low on the Australian dollar and a one-year trough on the Swiss franc.

Losses have been more limited against the yen as the Bank of Japan has stuck with its massive stimulus campaign and stopped yields there from rising. The dollar was trading at 112.00 on Wednesday, up from a low of 111.685.

Speculation that the Bank of England might soon tighten was also dealt a blow by surprisingly soft inflation figures at home, giving the dollar a leg up on the pound.

Remember China

In Asia, investor sentiment has also been supported by a raft of upbeat economic news out of China. MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.4 percent at its highest since April 2015.

Shanghai's blue-chip CSI300 index rose 1 percent and back toward an 18-month peak, while Australia's main index added 0.6 percent. The strength of the yen limited Japan's Nikkei to a rise of 0.1 percent.

Wall Street had ended Tuesday mixed after a heavy dose of corporate earnings, with the Dow dragged by Goldman Sachs but the Nasdaq reaching a record high.

The Dow fell 0.25 percent, while the S&P 500 gained 0.06 percent and the Nasdaq 0.47 percent.

The Nasdaq's run of gains was saved by Netflix which jumped 13.5 percent on strong customer numbers. IBM, however, fell 2 percent after the bell when its revenue missed forecasts.

The drop in the dollar and optimism on Chinese demand helped underpin commodities, with everything from copper to iron ore on the rise. Spot gold also added another 0.1 percent to $1.243.36 per ounce.

Oil prices eased after a rise in U.S. crude inventories and ongoing high supplies from producer club OPEC revived concerns of a supply overhang.

U.S. crude was last off 18 cents at $46.22 per barrel, while Brent dipped 17 cents to $48.67.

Article Link To Reuters:

Oil Dips On Rising U.S. Crude Inventories, High OPEC Supplies

By Henning Gloystein
July 19, 2017

Oil prices fell on Wednesday after a rise in U.S. crude inventories and ongoing high output from OPEC producers revived concerns of a fuel supply overhang.

Brent crude futures LCOc1, the international benchmark for oil prices, were at $48.81 per barrel, down 3 cents from their last close.

U.S. West Texas Intermediate (WTI) crude futures CLc1 were at $46.33 per barrel, down 7 cents.

U.S. crude stocks rose last week, adding 1.6 million barrels in the week to July 14 to 497.2 million barrels, industry group the American Petroleum Institute said on Tuesday.

Outside the United States, supplies from the Organization of the Petroleum Exporting Countries (OPEC) remained high, largely because of rising output from member-states Nigeria and Libya, despite the club's pledge to cut production.

"Nigeria and Libya have made significant progress in reinstating their oil supply. Production in Libya is currently reported at or above 1 million barrels per day while August loading schedules for Nigeria have risen to just over 2 million barrels per day," French bank BNP Paribas said.

"The increment of crude oil supply from Nigeria and Libya in June vs. October 2016 reference production levels comes to 450,000 barrels per day on average. This is almost 40 percent of the 1.25 million barrels per day cut by the OPEC 10 members engaged in supply restraint," the bank said.

Nigeria and Libya are exempt from the deal between OPEC and other producers, including Russia, to cut production by around 1.8 million barrels per day between January this year and March 2018 in order to tighten the market and prop up prices.

"Talk of capping Nigerian and Libyan output has been growing fast (within OPEC). But it is very unlikely that both countries will acquiesce to a cap so soon after restoring production," BNP said.

On the demand side, BMI Research warned that China's near record refinery use of crude oil in June would likely fall in the second half of the year.

"The pace of refining throughput growth in China is set to ease in H2, as the Chinese economy loses steam amid intensifying efforts to curb financial risks, and utilization rates at the independent private refineries soften amid lower quotas and a tighter regulatory environment," BMI said.

Article Link To Reuters:

After Privacy Controversy, Trump's Voter Fraud Panel Gets To Work

By Roberta Rampton
July 19, 2017

A White House commission set up to look into U.S. President Donald Trump's allegations of voter fraud, which critics have said could be a vehicle to suppress voting rights, is slated to meet for the first time on Wednesday.

Studies have shown voter fraud is rare in U.S. elections. Trump charged without evidence last year that millions voted unlawfully in the November presidential election. He won the Electoral College, which tallies wins in states and determines the presidential winner. But he lost the popular vote to his Democratic opponent, Hillary Clinton.

Trump assigned Vice President Mike Pence to lead the Presidential Advisory Commission on Election Integrity.

The panel ran headlong into controversy last month when its vice chair Kris Kobach, the secretary of state for Kansas and a high-profile advocate of tougher laws on immigration and voter identification, asked states to turn over voter information.

The data included names, the last four digits of Social Security numbers, addresses, birth dates, political affiliation, felony convictions and voting histories.

Some states refused, and others said they needed to study whether they could provide the data.

The American Civil Liberties Union sued the commission, and a watchdog group, the Electronic Privacy Information Center, sought a temporary restraining order against Kobach's request.

Civil rights groups and Democratic lawmakers have said the commission could lead to new ID requirements and other measures making it harder to vote.

The commission's meeting will be live-streamed on the White House website beginning at 11 a.m.

Article Link To Reuters:

Foreign Buyers Pump Up U.S. Home Prices

Canadian and Chinese buyers help fuel 50% jump to a new record.

By Laura Kusisto
The Wall Street Journal
July 19, 2017

Foreigners are buying U.S. homes at a record rate, helping push up prices in coveted coastal cities already squeezed by supply shortages.

In all, foreign buyers and recent immigrants purchased $153 billion of residential property in the U.S. in the year ended in March, nearly a 50% jump from a year earlier, according to a National Association of Realtors report released Tuesday.

That surpassed the previous record for foreign investment set in 2015, when foreigners purchased nearly $104 billion of U.S. residential property.

The dramatic increase was unexpected given the strong U.S. dollar, turmoil in the political arena and restrictions on Chinese buyers looking to take money out of the country, all of which were predicted to damp demand.

“It was surprising that it increased and the fact that it increased quite substantially is even more surprising,” said Lawrence Yun, chief economist at the Realtors association. “This is not insignificant activity. They are pushing up the prices.”

Supply in the U.S. is already severely constrained. The number of homes on the market has fallen year-over-year for 24 consecutive months, according to the Realtors association, making the most-recent spring selling season one of the most competitive on record.

Builders, squeezed by labor shortages, zoning restrictions and a lack of available lots in prime locations, haven’t been able to construct enough homes to keep up with demand. U.S. starts for new homes and apartment units are still at just 60% of their 50-year averages, according to Ralph McLaughlin, chief economist at Trulia.

Those factors have fueled price increases in coastal markets that could be hard to sustain, especially if foreigners ultimately pull back, economists said.

Average home prices in San Francisco have more than doubled since 2009, according to the S&P CoreLogic Case-Shiller Indices, which track home prices across the U.S., though recently the market has slowed as prices have risen beyond what most buyers can afford.

Economists said other cities that are still experiencing significant home-price appreciation—including New York, Seattle and Miami—could have similar slowdowns.

Across the U.S., home prices rose 5.5% in the 12 months ended in April, according to Case-Shiller. Home prices hit a record in September and price growth has accelerated in almost every month since.

The recent surge in foreign buying was driven largely by Canadians flocking south to escape their own overheated real-estate markets. U.S. home prices are starting to look like a bargain compared with Vancouver and Toronto, where prices rose nearly 30% in the year ended in March. The gains slowed to a 6% year-over-year increase in June.

“There’s the flashing red exit sign going ‘It’s time to get out now,’” said Brent Leathwood, a broker in Florida who said he is seeing an uptick in Canadian buying.

The real-estate boom up north also helps give Canadians the cash to invest in vacation properties to the south. Mr. Leathwood said he recently worked with a couple who flew down from Vancouver.

“They’re shocked at what $300,000 or $400,000 will buy them,” he said. In Florida they can get a detached single-family house in that price range, while in Canada even an 800-square-foot condo is roughly twice that much, he said.

Foreign buyers tend to purchase more expensive homes than their local counterparts. The median price for a home purchased by a foreigner was more than $300,000, compared with roughly $235,000 for all existing homes sold in the U.S., according to the National Association of Realtors.

After dipping in 2016 to nearly $9 billion in sales, transactions involving Canadians this year more than doubled to $19 billion, a new high.

“Given the price appreciation that has occurred in those two cities, they have money to spend,” Mr. Yun said.

Foreign buyers continue to make up a small share of the U.S. market overall, but in some places they are a significant enough force to help explain why prices are rising so rapidly.

Purchases by foreigners accounted for 10% of U.S. existing-home sales by dollar volume in the year ended in March, up from 8% in 2016.

Foreign buyers are disproportionately concentrated in a handful of states, with Florida, Texas and California together making up 46% of foreign buying activity, the report said.

Still, Mr. Yun said, the major factor driving rapid price gains is a lack of new-home construction that is leading to a dearth of supply.

“The way to assure more affordable homes is to build more and not to limit the demand. The better approach would be to increase construction,” he said.

Chinese buyers remained the largest purchasers of U.S. homes by dollar volume, with $31.7 billion worth of purchases in the year, followed by Canadians, Britons, Mexicans and Indians. The bulk of buyers from China, India and Mexico had recently moved to the U.S., while Canadians and Britons were mostly buying second homes.

Kerry Lynn, a broker in New York City, said she is seeing more Canadians buying investment properties because they see Manhattan prices as a relative bargain.

“They’re completely priced out of Vancouver,” she said. “They’re saying Toronto is getting way more expensive, too.”

Article Link To The WSJ:

Americans Want U.S. Goods, But Not Willing To Pay More

By Timothy Aeppel
July 19, 2017

Americans say they love U.S.-made goods. They are less enthusiastic, however, about paying a premium for them.

At the AMES Companies Inc factory here, the wheelbarrows coming off the assembly line once every six seconds cost the company more to make in the United States than abroad, but U.S. retailers generally will not charge more for them because consumers would balk, AMES President Mark Traylor said.

Nearly all U.S. manufacturers face the same squeeze.

A Reuters/Ipsos poll released on Tuesday found 70 percent of Americans think it is “very important” or “somewhat important” to buy U.S.-made products.

Despite that sentiment, 37 percent said they would refuse to pay more for U.S.-made goods versus imports. Twenty six percent said they would only pay up to 5 percent more to buy American, and 21 percent capped the premium at 10 percent.

U.S. President Donald Trump rode into office on promises of bringing back manufacturing jobs and boosting economic growth, and has criticized companies that move production overseas.

Trump has also been quick to promote U.S.-made goods, and on Monday released a state-by-state "Made in America Product Showcase" that included AMES wheelbarrows.

Lower-income Americans were the most enthusiastic about buying U.S. goods, the poll showed, despite being the least able to afford paying extra for them.

Indeed, the biggest U.S. retailer is well aware of the priority buyers place on price above all else. A spokesman for Wal-Mart Stores Inc said customers are telling them “that where products are made is most important second only to price.”

(GRAPHIC - Price of Patriotism, click

Eye On Quality

The good news for U.S. factories is that Americans like the quality of many domestic goods.

Thirty-one percent in the poll said American-made cars are the best in the world. German cars were voted best by 23 percent of respondents. And thirty-eight percent said U.S.-made clothes were best.

Still, domestic manufacturers could be in trouble if they fail to capitalize on perceptions about the quality of their products while also keeping a tight lid on costs.

In order to compete, companies like AMES have to find ways to offset their disadvantage

“We don’t have to be as cheap as imports,” says Traylor, who estimated he sells his wheelbarrows to U.S. retailers for about 10 percent more than importers.

Factors like cheaper domestic freight and a desire among retailers to carry lower inventories can help make up some of the cost differential.

AMES is also better positioned than overseas suppliers to help retailers be agile. When spring comes early, for example, AMES can respond quickly to ship goods to stores, Traylor said, something importers with longer lead times on orders struggle to do.

Traylor said another secret to success for U.S. manufacturers is investing in technology to cut costs.

AMES, a subsidiary of New York-based Griffon Corp, is pouring $50 million into upgrades at several locations. The Harrisburg factory, built in 1921, is dotted with aged machinery that has been fitted with robotic attachments to reduce reliance on human labor.

AMES' annual sales are $514 million.

A production line employee works at the AMES Companies shovel manufacturing factory in Camp Hill, Pennsylvania, U.S. on June 29, 2017. Picture taken on June 29, 2017.Tim Aeppel?

The company said it recently convinced a major retailer, who they did not want to identify, to switch from Mexican-made wheelbarrows to carry their product.

AMES also said business is so strong that it is hiring 100 employees across its five Pennsylvania locations, including the Harrisburg factory.

Traylor says AMES wants to bring more work back from overseas. But that can be difficult.

And the production of certain components may prove impossible to ever bring back to U.S. soil.

In late April, Trump marked his 100th day in office with a visit to the AMES plant. With workers chanting “USA, USA,” Trump asked if every part of the wheelbarrows was made in America.

Everything, he was told, except the Chinese-made tires.

U.S. manufacturers stopped large-scale production of air-filled tires for garden equipment years ago, and the cost of setting up production now would be hard to justify for the low-margin product.

Some rubber makers still manufacture solid rubber tires in the United States, but the last time AMES bought any they cost nearly twice the roughly $7 they pay for a Chinese tire, a big added cost for a wheelbarrow that often retails for less than $100.

“Is it feasible to get U.S.-made tires?” asked Mark D’Agostino, the company’s vice president for supply chain. “We don’t know yet.”

American Premium

To be sure, some manufacturers can command a big premium for American-made products.

Klein Tools Inc, a privately held company based outside Chicago with annual sales of $500 million, makes hand tools that are highly sought after by electricians and other workers.

A pair of 9-inch Klein pliers sells for about 30 percent more than a comparable import.

But betting on the allure of American-made goods can be risky.

In 2012, High Point, North Carolina-based Stanley Furniture Co brought back production of cribs and other baby furniture from China to a U.S. plant, wagering that parents worried about a string of Chinese factory quality scandals would pay $700 for cribs nearly identical to imports selling for $400.

Customers refused to bite, however, and the High Point factory closed in 2014.

Still, Stanley Chief Executive Glenn Prillaman said the Trump administration’s emphasis on American-made goods is a hopeful sign that resonates with “people that work for a living,” because they can see how it impacts their own jobs.

"The lower-end consumers certainly care, and that’s a good thing,” he said. “But they’re also not in a position to pay the premium.”

The Reuters/Ipsos poll was conducted online in English throughout the United States from May 24 to May 31. It gathered responses from 2,857 people, including 593 adults who made less than $25,000 per year, 1,283 who said they earned between $25,000 and $74,999, and 805 people who earned more than $75,000.

The poll has a credibility interval, a measure of accuracy, of 2 percentage points for the entire group, 5 points for the low-income respondents, 3 points for the middle-income respondents and 4 points for the high-income respondents.

Article Link To Reuters:

The U.S. Falls In A Global Retirement Security Ranking

With sharp income inequality and too few workers to support its waves of retirees, America is demoted to No. 17.

By Suzanne Woolley
July 19, 2017

Retirement security in the U.S. took a significant hit in a global ranking, falling three notches to No. 17 among 43 developed countries.

The fifth annual Global Retirement Index ranking from Natixis Global Asset Management has Norway, Switzerland, and Iceland holding on to the top three slots from 2016. The ranking creates an overall retirement security score for each country from 18 performance indicators that address finances, healthcare, material well-being, and quality of life. Countries are also ranked by those four sub-indexes.

Of the 25 countries with the highest overall scores, the U.S. and Austria saw the biggest annual declines this year. The U.S. score is 72 out of 100, which puts it right below Belgium and the Czech Republic and just above the United Kingdom and France. The U.S. had the sixth-lowest score for income equality, which is part of the score for material well-being. That measure, designed to show how well a country's population can provide for its material needs, combines an income per capita index, income inequality index, and unemployment index.

Here are the countries that score the highest for how well their citizens are set up to enjoy a comfortable retirement. The arrows next to the 2017 ranking in the graphic show whether the country stayed the same (orange), moved up (green), or moved down (red) in the rankings, and by how many slots. 

When scores are tallied by region, the U.S. and Canada rank higher than western Europe, with scores of 73 percent and 70 percent, respectively. The U.S. was No. 10 on the finances sub-index, largely thanks to improvements in bank non-performing loans, as well as its level of federal debt relative to other countries. But the regional win is largely due to the financial struggles in Italy, Portugal, and Spain. Canada ranks at No. 11 in the country rankings, down one notch from 2016, with a score of 76 percent.

One measure that hurt the U.S. in this year's index was its rank as No. 30 on life expectancy, even though it spends more per capita on health care than any other country in the index. The mismatch suggests U.S. health expenditures "may not be yielding the same return on investment" achieved by top-ranked countries for longevity, such as Japan, the survey diplomatically noted.

The U.S. was also dinged because income inequality rose from last year. America got the sixth-lowest score in the material well-being category for all 43 countries, even though it was No. 5 in per capita income. The report's analysis: "The results suggest that millions of lower-income Americans are missing out on that economic growth and may struggle to save for a secure retirement as a result."

It shouldn't be too surprising, then, that the quality-of-life measure for retirees fell for the U.S., mainly due to a dip in a happiness indicator. On the bright side, cleaner air improved the American ranking on environmental factors, which are included in the quality-of-life sub-index score.

Challenges to retirement security in a world of aging populations and increasing longevity was a major theme of the report. The ranking looks at "old age dependency," the ratio of the population of younger workers, who will be paying into a retirement system like Social Security, to the retiree population drawing down that money. The bigger the pipeline of younger workers relative to older workers, the better the score.

"If we only had one of these factors—poor dependency ratios but people weren't living longer, or great dependency ratios so it would be OK that people were living longer—it wouldn't represent the type of risk it does to the entire retirement system," said Dave Lafferty, chief market strategist for Natixis. "It's the combination of those two things that presents a real problem."

For most countries, there are not enough younger workers to support an aging population in the next few decades. The chart below shows where countries rank on this metric now, and projections of where they will rank in 2030 and 2050. 

A deficit of younger workers paying into retirement systems for older workers is a dilemma faced across the developed world. Even top-ranked countries for retirement security face this issue. Germany, Sweden and Denmark, all top 10 countries on the overall ranking, are in the bottom 10 for this measure.

This global retirement picture is playing out against a backdrop of slow economic growth worldwide and low momentum in productivity gains. "We see a bit more synchronization in growth rates around the world for the first time in seven or eight years," said Lafferty. "It looks like it is picking up in the near term, but it's limited in the long term unless we can unlock productivity gains, which are hard to come by."

In the U.S., an unpopular solution to improve the finances of Social Security would be to raise the age at which Americans are eligible for benefits, Lafferty noted. "Social Security was designed in a period where the likely age of mortality was right around the early 60s, so right around when Social Security kicked in," he said. "As people live longer, it would make sense to extend that out."

While that may be a great mathematical solution, it's not a big vote-getter for politicians, he added. Also, even if many Americans want to work longer, they aren't always able to, because of ageism, disability, or changes in their industries.

All in all, finding solutions to retirement problems "takes public policy leadership, and there isn't an enormous amount of that out there right now," Lafferty said.

Article Link To Bloomberg:

Discovery Communications And Scripps Networks In Talks To Combine

Media companies previously explored tie-up, but abandoned effort in 2014.

By Dana Mattioli and Amol Sharma
The Wall Street Journal
July 19, 2017

Discovery Communications Inc. DISCB 4.11% is in talks to combine with Scripps Networks Interactive Inc., SNI -1.76% people familiar with the situation said, a deal that would unite two media companies trying to chart a course in a cable-TV industry being upended by digital consumption.

Terms of the deal talks couldn’t be learned. Discovery Communications is worth about $15 billion, including its preferred stocks, according to S&P Global Market Intelligence. Scripps has an $8.8 billion market valuation.

There is no guarantee that the two sides will reach a deal. It is also possible that another bidder for Scripps could emerge.

Scripps shares were up 13% in after-hours trading

Both media companies specialize in nonfiction cable programming. Discovery owns brands such as its namesake Discovery Channel, Animal Planet and TLC, while Scripps has a portfolio including HGTV, Cooking Channel and Food Network.

The companies have discussed tying up before. In 2014, they abandoned talks about a merger and one issue at the time was that the family that controls Scripps wasn’t ready to sell.

Discovery, based in Silver Spring, Md., posted revenue of $6.5 billion last year, while Scripps brought in $3.4 billion in revenue. The two companies, like other midsize cable TV companies that don’t own broadcast or sports networks, are trying to figure out where they fit in a shifting media landscape.

Traditional cable is under pressure from streaming services like Netflix , which are luring away subscribers. Cable channels are vying to be part of “skinny” online TV bundles from Sling TV, Hulu, YouTube and others.

The biggest cable-network owners have an advantage in those negotiations.

Together, Discovery and Scripps could be in position to offer their own subscription web-TV bundle of nonfiction programming. Both companies also are banking on their expertise in food, travel and cooking programs to translate well to young consumers on Facebook and Snapchat.

There is also a simple logic to getting bigger at a time when distributors in pay television have done their own deals and may have more leverage in channel-carriage negotiations. Cable networks get a slice of consumers’ monthly bills based on rates hashed out with the providers. In recent years, AT&T Inc. has purchased DirecTV and Charter Communications Inc. has merged with Time Warner Cable.

It is far from certain that a Discovery-Scripps merger would resolve some of the structural problems they and other media companies face in the TV world, including the gradual movement of eyeballs—and advertisers—to digital platforms that are perceived to allow more sophisticated audience targeting.

Discovery has struggled with soft advertising growth in the U.S., amid ratings pressures on its channels, though it turned in a solid performance at the advance TV ad sales season this spring. Cord-cutting has partially offset gains the company has made in revenue from cable TV subscriptions. Last year overall revenue grew 2%.

Under Chief Executive David Zaslav, Discovery has pursued international expansion as aggressively as any U.S. media company. International revenues now make up about 46% of total revenue. Scripps has less overseas exposure and could benefit from the tie-up in that respect.

Discovery bought the European sport broadcaster Eurosport in 2015, and has bought rights to the Olympics and some soccer games. Those investments and fluctuations in foreign currency have weighed on financial results, at times.

Cable mogul John Malone had a 28.2% voting stake in Discovery, as of the most recent proxy filing.

Scripps has an unusual governance structure that can be a significant factor in completing a deal. When the last of founder Edward W. Scripps’ grandchildren died in 2012, a family trust was ended and shares were distributed to a host of family beneficiaries.

Those people collectively control 91.8% of voting shares. When significant company matters arise, they hold a special meeting beforehand to determine, by majority vote, how the family will vote.

Scripps has been resilient compared with some other media companies in a tough ratings environment. U.S. ad revenues increased 10% last year. Networks like HGTV and DIY, with mostly live viewership, haven’t suffered as much from time-shifting. Scripps is also known for having a female-skewing audience on its networks, something that analysts say appeals to certain segments of marketers.

In 2016, Scripps’ total revenue grew 12.7% to $3.4 billion, while profit increased 11% to $674 million.

A Discovery-Scripps merger would be the biggest media deal since AT&T Inc.’s proposed $85.4 billion acquisition of Time Warner Inc.last October, a deal that is undergoing regulatory review.

Year to date, media M&A only accounts for $32.7 billion in deal volume globally, according to data provider Dealogic. That is the lowest volume of media deal making since 2010.

Article Link To The WSJ:

IBM Continues To Promise A Rosy Future While Reporting A Stagnant Present

Bulk of new mainframe revenues coming in fourth quarter, again disappointing investors.

By Therese Poletti
July 19, 2017

IBM Corp., on the heels of its 21st consecutive quarter of declining revenue, is once again looking to the future for better news.

IBM has been making big investments in cognitive computing, artificial intelligence and cloud computing over the past few years, while talking boldly about how important its Watson AI platform is to its future. Yet a long-awaited revival in revenue from these “strategic imperatives” continues to be just around the corner.

On Tuesday, the tech giant beat earnings expectations, but only because results were buoyed by a tax gain of 18 cents per share. IBM’s IBM, +0.65% overall revenue fell 5% to $19.3 billion, below analysts’ average expectations, though IBM predictably pointed to growth in its “strategic imperatives,” which grew 11%, including growth in cloud computing, and made up 43% of IBM’s total revenue of $19.3 billion in the second quarter.

The next addition to IBM’s list of hopes for the future is a blast from the past, the mainframe. On Monday, IBM launched a next-generation mainframe in its Z Series family, which is capable of encrypting all data associated with all applications and no performance impact. Yet, as should be expected by now, returns from this new gambit will come in later than expected.

Analysts asked if the mainframe would have much of an impact in the third quarter, since it is shipping in September, and learned of a $1 billion revenue shortfall projected for the third quarter. Instead, the bigger bulk of mainframe revenues are expected in the all-important final quarter of the fiscal year, as it begins a new beneficial hardware cycle.

“On the revenue side of that, typically for seasonal reasons, we see about a $1 billion 2Q to 3Q reduction for seasonality,” said IBM Chief Financial Officer Martin Schroeter. “That typical $1 billion impact will be helped a little bit, $200 million to $300 million by mainframe or the services contracts, but that’s about it for the third. And then obviously the rest will be in the fourth.”

Disappointment showed in IBM’s share price, which was down less than 2% heading into the call, then dropped further to a decline of about 3%. Big Blue’s stock is down more than 7% this year already, even as the Dow Jones industrial average, which counts IBM as one of its 30 components, has gained 9.2% and the S&P 500 index is up 9.9%.

The mainframe, once IBM’s biggest-selling product, still has the ability to have a big swing on its results. IBM reiterated its earnings forecast of $13.80 per share for the full year, so it’s clearly counting on a very big fourth quarter.

Investors were obviously hoping for better news for the third quarter. In addition, its earnings were once again boosted by taxes — the company’s approximate 11% tax rate is the lowest effective rate compared with its tech and S&P 500 peers — said Credit Suisse analyst Kulbinder Garcha, in a note Monday. He also said he believes that lever has run its course and that it is likely IBM will miss its 2017 guidance, at least operationally. Garcha estimates $13.03 a share for 2017 and noted that even with an “unusually strong” mainframe cycle, it may miss expectations at some point in 2017.

For IBM, which has been accused by some investors in the past of managing its earnings with share buybacks, tax gains and other items, it seems like it is back to the future. And wondering if the future will ever arrive.

Article Link To MarketWatch:

TV Networks Try New Tricks To Woo Pay TV Partners As Ratings Slide

By Jessica Toonkel
July 19, 2017

Sliding ratings and a continued drop in cable subscribers has led programmers such as Viacom Inc, Univision Communications Inc and AMC Networks Inc to invent new ways to justify their worth to pay TV providers.

In the past, programmers could rely on their hit shows as leverage at the bargaining table with cable and satellite partners who buy their programs. But as online viewing continues to disrupt the traditional media business, programmers are pitching everything from co-producing series with distribution partners to offering data for use in advertising.

The way people watch TV is rapidly changing. Fewer people are watching live television, leading to declines in ratings and ad revenue. And at the same time, more people are cancelling cable subscriptions to watch shows online on their tablets or phones, resulting in record customer losses.

Declining subscriptions have left cable companies hard-pressed to pay higher prices for TV shows.

Cable and satellite companies shed 793,000 subscribers in the first quarter, more than four times the loss during the same quarter last year, according to research firm BTIG. Analysts at UBS estimate another 1 million customers will cut the cord in the second quarter as there are no signs of this trend abating.

"The distribution business has changed more rapidly in the past 12 months than in the prior five years," said Tom Gorke, executive vice president of content distribution at Viacom. "If we just focus on 'here are my channels and here is my price, call me with your response,' that is not going to grow the pie."

While the economics of renewal negotiations is still largely focused on programming, being able to offer other things can help, said Eric Ratchman, executive vice president of content distribution at Univision.

Digital Focus

Viacom CEO Bob Bakish has made it a priority to improve relations with distributors.

Over the past several months, Bakish, Gorke and his team have met with the chief executives for all the largest distributors asking what they can do to help them do their business better, Gorke said.

For Viacom, the company said it is in ongoing discussions to help distributors on everything from identifying password sharing on paid TV apps, to using its viewer data to help target advertising around their broadband and other services.

Offering viewer data helped Viacom clinch a distribution deal with Suddenlink parent Altice USA in May, marking the end of a two-year dispute with the cable company.

Meanwhile, Univision is leveraging the popularity of European soccer to entice a pay-TV partner. Univision owns the Spanish-language rights for more than 600 Union of European Football Associations (UEFA) games and is looking for a distributor to become the exclusive partner on some televised games, said Ratchman.

Univision would also like to co-produce more dramas with distributors like it did with Netflix's "El Chapo," Ratchman said.

AMC, home of the popular "The Walking Dead," zombie series inked a co-production deal with Charter Communications to create programming exclusively for Charter's Spectrum subscribers to watch first before AMC airs it elsewhere..

Last month, AMC launched a monthly subscription option designed for customers of Comcast Corp's Xfinity TV packages. AMC is in talks to do similar deals with other distributors, said Ed Carroll, chief operating officer of AMC.

Such deals demonstrate how conversations between distributors and programmers have evolved away from pricing of content to a more comprehensive digital focus, said Matt Strauss, general manager, video and entertainment services for Comcast Cable.

"The conversation has gotten more sophisticated with respect to digital rights and customer experience," Strauss said. "I think you are seeing a lot of networks leaning into this."

Article Link To Reuters:

Amazon Makes Cloud Contract More Customer-Friendly As Rivals Loom

By Salvador Rodriguez
July 19, 2017 Inc (AMZN.O) has done away with a controversial clause in its cloud computing contracts that prohibited customers from suing the company over patent infringement, according to an updated version of the Amazon Web Services customer agreement released on Thursday.

The so-called “non-assert” clause had been a point of friction for years for numerous companies that were interested in using Amazon Web Services but were reluctant to trust Amazon with their intellectual property.

Amazon Web Services, a cloud computing pioneer, now provides computing and data storage services for a wide variety of customers. It faces growing competition from others including Alphabet Inc's (GOOGL.O) Google and Microsoft Corp (MSFT.O).

The decision to remove the clause makes Amazon “appear more user friendly, and it smoothes over a major objection point corporate counsel have been raising,” said Phil Davis, CEO of, an investment advisory service.

Amazon has also introduced a new policy that will protect customers if they are sued for patent infringement over services that run on Amazon Web Services. Microsoft has offered a policy with similar protections since February.

Calvin French-Owen, co-founder and CTO of Segment, a customer data management startup in San Francisco that has been an Amazon Web Services customer since May 2011, praised the moves.

“It’s cool that they are willing to defend companies on their platform against patent trolls,” he said.

Article Link To Reuters:

Amazon Is Getting Too Big -- And The Government Is Talking About It

Hedge-fund manager Douglas Kass says government talks about antitrust issues have begun.

By Tonya Garcia
July 19, 2017

Fresh off its biggest Prime Day yet, the Whole Foods Market Inc. bid, and a slew of announcements including Amazon Wardrobe, Inc. was the subject of two investor calls last week that raised concerns that it is getting too big.

In one case, hedge-fund manager Douglas Kass said government intervention could be imminent.

“I am shorting Amazon today because I have learned that there are currently early discussions and due diligence being considered in the legislative chambers in Washington DC with regard to possible antitrust opposition to Amazon’s business practices, pricing strategy and expansion announcements already made (as well as being aimed at expansion strategies being considered in the future,” wrote Kass, head of Seabreeze Partners Management.

Kass said he is taking a short position on the stock, or a bet that it will fall. The investor said the stock could fall 10% overnight once the market gets wind of the talks.

As Amazon AMZN, +1.43% has grown, so has speculation about which retail category it will rule next. The company already dominates books, the cloud and electronics. And with moves in fashion and grocery, it appears the company has its eye on those sectors next. Its dominance has created major stress for brick-and-mortar retailers, who are suffering badly as they scramble to catch up.

In January, European Union antitrust regulators cheered the end of audiobook exclusivity between Amazon and Apple Inc. AAPL, +0.35% And last August, Amazon’s offices in Tokyo were searched by the Fair Trade Commission on suspicion that it was breaking antitrust laws.

Amazon said Wednesday that Prime Day was its biggest day ever, with sales up 60% from the same 30-hour period the previous year. The Echo Dot was the best seller, and the company said it gained more new Prime members on July 11 than any other day in its history. As usual, it did not provide any hard numbers.

Kass bolstered his argument in a Thursday comment.

“My understanding is that certain Democrats in the Senate have instituted the very recent and preliminary investigation of Amazon’s possible adverse impact on competition,” he said. “But, in the Trump administration we also have a foe against Jeff Bezos, who not only runs Amazon but happens to own an editorially unfriendly (to President Trump) newspaper, The Washington Post.”

Amazon has been busy this summer, announcing its purchase of Whole Foods WFM, -0.31% last month. Within days, it announced Amazon Wardrobe, a service that lets shoppers try on clothing and receive discounts when they purchase multiple items. Shortly after that, Nike Inc. NKE, -0.24% confirmed that it would begin selling a limited assortment on Amazon.

Kass said he thinks the government “discussions may have just begun and may never result in any serious effort to limit Amazon’s growth plans.” But he has been writing a series of columns about whether we’ve reached “peak Amazon,” and said in an earlier column that the Whole Foods deal puts “Amazon’s vast power… under the microscope.”

“Is Amazon a productive change agent and force for the good of the consumer by virtue of a reduction in product prices? Or is Amazon’s disruption of the general retail business a destroyer of jobs, moving previously productively employed workers into the unemployment line?” he asked.

Kass has previously expressed doubts about Amazon, saying in October 2014 that investors should “avoid Amazon at all costs” and that the company “continues to fail to exhibit a cash flow return on any investment it makes.” The stock has more than tripled in value since then.

Steve Kaplan, a trader and True Contrarian blogger, joined Kass on Wednesday with a short position of his own. Kaplan said Janet Yellen is incorrect and that a recession is looming. He is skeptical about a few other big names too.

“We are likely to experience an especially severe recession since so much money has come out of safe time deposits like bank accounts and money-market funds and has gone into fluctuating assets including real estate, corporate bonds, stocks, and especially the most popular overpriced garbage including Amazon, Tesla TSLA, +2.71% Netflix NFLX, +13.54% Nvidia NVDA, +1.04% etc.,” Kaplan said.

Amazon shares are up 0.7% Monday, and have gained 35% in the year so far. The S&P 500 index SPX, +0.06% is up 10% for 2017 to date.

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Netflix Joins Tesla And Amazon At Nosebleed Heights, And Analysts Are Sounding An Alarm

Netflix has a price-to-earnings ratio, at 197, is higher even than Amazon’s 190.

By Tonya Garcia
July 19, 2017

Netflix Inc. shares soared into record territory on Tuesday after second-quarter results that showed a surprise jump in international subscriber numbers, but analysts cautioned that the streaming company’s stock could be stretching too far.

Netflix shares surged 13.5% to close at $183.60, exceeding the record close of $165.88 and intraday high of $166.87 set on June 8. Analysts and experts are starting to sound the alarm about the company’s price-earnings ratio, which at a staggering 197 times, according to FactSet, exceeds that of another stock with a lofty valuation, Inc. AMZN, +1.43% at 190 times.

“I think chasing Netflix now is an expensive affair,” wrote Seeking Alpha contributor David Butler. “It seems to be following the same mania as Tesla and Amazon where investors will run up the price on speculation alone regardless of actual earnings. To a degree it makes sense, but things are getting out of hand.”

Netflix NFLX, +13.54% reported revenue of $2.79 billion, up from $2.11 billion last year and ahead of the $2.76 billion FactSet consensus. Earnings of 15 cents per share were up from 9 cents per share last year but missed the FactSet consensus of 16 cents. Streaming membership grew to 104 million, with the international segment now accounting for 50.1% of the company’s total membership base.

Citigroup’s Mark May said that while he’s “positive” on the long-term outlook of the business, the bank’s analysis “also suggests that the current price already reflects this view.”

SunTrust Robinson Humphrey analysts homed in on the company’s free-cash-flow losses as a worry, describing it as “again the only blemish” in the earnings and speculating that “another debt raise is possible by year-end.”

Netflix said free-cash-flow losses rose to $608 million in the quarter from $254 million a year ago, and said they are expected to come to between $2 billion and $2.5 billion for the full year.

Chief Executive Reed Hastings put a positive spin on the matter on the earnings call, according to a FactSet transcript: “The irony is the faster we grow and the faster we grow the owned originals, the more a draw on free cash flow that will be,” he said. “So, in some senses, the negative free-cash flow will be an indicator of enormous success.”

J.P. Morgan analysts were more sanguine, saying the cash burn could be an issue for some, but the benefits are worth it.

“Free-cash-flow burn will remain the strongest pushback to the Netflix story, but given the large market opportunity, we continue to like that Netflix is optimizing for revenue growth and subscriber penetration, with reasonable profitability and long-term free-cash flow generation,” analysts led by Doug Anmuth wrote in a Tuesday note. Anmuth rates Netflix shares overweight and raised his price target to $210 from $178.

RBC Capital Markets struck a bullish tone, saying the stock still has room to grow.

“We believe that Netflix has achieved a level of sustainable scale, growth and profitability that isn’t currently reflected in its stock price,” analysts wrote. “This conclusion is based on our assessment of Netflix’s 52 million U.S. subscriber and 52 million international subscriber bases, which makes Netflix one of the largest global entertainment subscription businesses.”

RBC rates Netflix shares outperform and raised its price target to $210 from $175.

Netflix shares are up 48% for the year so far, outpacing the S&P 500 index SPX, +0.06% which is up 10% for the period.

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Snap Founders' Fortunes Fall As Netflix's Hastings Rises

By Justin Villamil
July 19, 2017

Netflix Inc. shares hit an all-time high Tuesday and pushed the net worth of founder Reed Hastings to $2.7 billion, according to the Bloomberg Billionaires Index. The shares were buoyed by strong subscriber numbers helping investors to shrug off the company’s small profits. Snap Inc. shares dropped to an all-time low on the same day as investors reacted to negative projections from analysts. The falling stock has wiped out $4.3 billion from the combined net worth of co-founders Evan Spiegel and Bobby Murphy since the company’s initial offering in early March.

Article Link To Bloomberg:

Chipotle's Tarnished Image Means Every Sneeze Under Scrutiny

Latest suspected norovirus outbreak sends shares tumbling; Food-safety crisis persists for Chipotle after two years.

By Leslie Patton and Craig Giammona
July 19, 2017

The reports were familiar: In the space of 48 hours, a handful of people said they’d gotten sick after eating at a Chipotle Mexican Grill.

Bang: Wall Street’s judgment was swift -- and brutal. Chipotle’s stock plunged nearly 8 percent on Tuesday, erasing its gain for the year. The episode, which involved a single location in Sterling, Virginia, recalled the string of foodborne illnesses that upended the chain two years ago, and underscored the fact that the company remains on probation with both customers and investors.

“Chipotle is under the microscope,” said Stephen Anderson, an analyst at Maxim Group. “Since this is Chipotle and it’s had its troubles in the past, it’s going to be under pressure.”

The burrito chain closed the location on the outskirts of Washington Monday after a “small number” of illnesses were reported, according to Jim Marsden, Chipotle’s executive director of food safety. The company is working with health authorities to determine the cause of the outbreak, he said.

“The reported symptoms are consistent with norovirus,” Marsden said in an emailed statement. “Norovirus does not come from our food supply, and it is safe to eat at Chipotle.”

The move follows a series of foodborne-illness outbreaks in 2015 that sent Chipotle’s sales and stock price plunging. An E. coli scare drew much of the attention, but norovirus also sickened more than 140 students at a location near Boston College in December of that year.

Though norovirus cases aren’t rare -- about 20 million Americans are sickened each year -- the feeling of deja vu on Tuesday was enough to throw the stock into another rout.

The stock fell as low as $362.40, marking the biggest intraday drop since December. It had been up 3.9 percent this year through Monday’s close.

Virginia’s Loudoun County health department, which is investigating the matter, said that reports of illnesses first surfaced Monday morning, with local doctors, Chipotle customers and the company itself contacting the agency. The likely source of the illnesses is norovirus, but it will take a few days to get tests back to confirm the cause, according to David Goodfriend, the department’s director.

“We want to be able to reassure folks that it’s completely safe to eat at this restaurant,” he said. “We suspect it was norovirus, but we don’t assume it.”

Even before news of the latest outbreak, Chipotle’s comeback bid has faced obstacles. This spring, a malware attack struck its point-of-sale technology. The Denver-based company said in May that it had successfully removed the malicious code from its systems.

As it was trying to restore its image in 2016, Chipotle hired Marsden to oversee its food-safety efforts. The former professor in Kansas State University’s Animal Science and Industry Department has worked to revamp procedures at the Mexican-food chain.

Highly Contagious

Norovirus is very contagious and typically spread from one person to another, according to the Centers for Disease Control and Prevention. But it can also be transmitted by eating contaminated food or water.

“We take every report of illness seriously,” Marsden said on Tuesday. “In accordance with our established protocols, our team is working to ensure the safety of our customers and employees, including voluntarily closing the restaurant yesterday to conduct a complete sanitation.”

That latest incident could spur investors to call for a chief operating officer -- someone who could better monitor the company’s more than 2,000 restaurants -- according to Mike Halen, an analyst at Bloomberg Intelligence. Chief Executive Officer Steve Ells previously had help from co-CEO Monty Moran, but he stepped down last year.

“This is not a small chain anymore,” Halen said. It could be “too much for one person to handle.”

Chipotle is adding new menu items, such as melted cheese and dessert, part of its bid to win back customers. But mastering operations should take precedence, Anderson said.

“For now, the focus has to be execution at the restaurant level,” he said.

Article Link To Bloomberg:

Fidelity Shows How Unicorns Hurt Performance At Popular Funds

July 19, 2017

Fidelity's bets on unicorn companies, the rare private firm or startup that grows in value to at least $1 billion, put a dent in the stellar performance of some of the company's most popular mutual funds during the first half of 2017.

Fidelity disclosed this week, for example, how content-sharing company Pinterest Inc had an outsize impact on the portfolio performance of Contrafund, its most popular stock fund. It was one of the first times a company that had not yet done an initial public offering (IPO) made a Fidelity fund's quarterly list of largest contributors and detractors to benchmark performance, Fidelity spokeswoman Nicole Goodnow said.

Pre-IPO investments can amplify a fund's relative performance because they are not included in a comparison benchmark index. And the valuations attached to them by Fidelity and other mutual fund companies have far outpaced the stock market.

Fidelity's $114 billion Contrafund disclosed that its small stake in Pinterest shaved 9 basis points off the fund's relative return versus the S&P 500 Index.

Contrafund's Series E stake in Pinterest was valued at $473.3 million in the first quarter. But at the end of May, that value was marked down by 17 percent, Fidelity disclosures showed.

But Pinterest was tied with TJX Companies Inc as Contrafund's largest detractor in the second quarter, even though the pre-IPO company accounted for only 0.34 percent of the fund's net assets.

Contrafund, which is run by star Fidelity portfolio manager Will Danoff, posted a total second-quarter return of 6.09 percent in the second quarter, easily beating the 3.09 percent total return on the S&P 500 Index.

The fund's year-to-date return of 19.84 percent is better than 75 percent of U.S. large-cap growth mutual funds, according to Morningstar Inc data.

Fidelity's valuation of Contrafund’s Series E stake in Pinterest has more than doubled since an initial investment of $159.4 million in October 2013, compared to Nasdaq's 62 percent rise.

While Pinterest is a relative pipsqueak in the massive Contrafund portfolio, other Fidelity managers have made tech unicorns some of their largest holdings.

At the end of May, ride-hailing company Uber was a top 20 stock in Fidelity's $22 billion Blue Chip Growth Fund. The fund's Series D stake in Uber was valued at $251.5 million, or 1.14 percent of net assets.

Portfolio manager Sonu Kalra's Uber stake is bigger than his bet on Starbucks Corp ($202 million) and Bank of America Corp ($157 million).

In the first quarter, Uber was among the fund's largest detractors, shaving 12 basis points off the fund's relative return. Only Qualcomm Inc and Lululemon Athletica Inc detracted more.

Article Link To Reuters:

The U.S. Stock Market Is The World’s Most Expensive

Wall Street ranks among the priciest markets on a number of metrics.

By Ryan Vlastelica
July 19, 2017

There’s nothing new about U.S. stock market investors fretting about valuations on Wall Street, but they still may not fully realize how pricey things have gotten relative to the rest of the globe.

According to StarCapital Research, the U.S. has the least affordable equity market in the world, coming in last among the 40 countries and regions it analyzed on a variety of metrics. While the U.S. doesn’t place last on any specific measure, it is among the weakest on all of them, resulting in an average that pushes it down to the bottom of the heap.

While elevated valuations don’t necessarily mean that a selloff is imminent, let alone a recession, academic research “has shown that undervalued equity markets have achieved higher future returns in the long run than their overvalued counterparts, which holds for different valuation measures alike,” Norbert Keimling, head of StarCapital Research, wrote in a report.

On the other end of the scale, South Korea was rated as the number one equity market in terms of its valuation, based on its price-to-earnings and price-to-sales ratios.

For the U.S., the most ominous warning signal may be the cyclically-adjusted price-to-earnings ratio, or CAPE, which compares stock prices with corporate earnings over the past 10 years. On this basis, the U.S. comes in at 28, cheaper than only Denmark (36.1) and Ireland (34.5). In the past, a CAPE ratio at current levels has preceded pronounced market declines.

On a price-to-earnings basis, the U.S. comes in at 22.4, the 10th-highest level in the world, excluding the broader category of developed Europe. While this is a lower ratio than such notable economies as the United Kingdom (the second-most expensive on this metric, with a P/E of 31) and India (22.8), it is a far cry from China’s ratio of 7.4, which is second only to Russia (7.1) for being inexpensive.

For developed markets overall, the CAPE is 23.4 and the P/E is 21.

The U.S. is the second-most expensive country in the world when looking at the price-to-book ratio, a measure where it rates a reading of 3.1. Indonesia is the only country to top the U.S., with its 3.3 ratio. Developed markets as an overall category have a price-to-book measure of 2.1.

As with P/E, Russia and China are the two cheapest countries when looked at on this basis. Russia’s ratio comes in at 0.8 while China’s is 0.9. The two are also among the cheapest regions when considered on a price-to-sales metric, with both posting a P/S of 0.7 that is only behind Italy’s 0.6 ratio.

The U.S. has a price-to-sales ratio of 2.0, the seventh-highest among the 40 regions considered by StarCapital.

The valuations in the U.S. come as major stock-market indexes like the Dow DJIA, -0.25% S&P 500 SPX, +0.06% and Russell 2000 RUT, -0.28% have all hit a series of records this year, thanks in large part to technology XLK, +0.46% and internet stocks. Over the past several years, U.S. markets have risen far more than the stocks in such regions as emerging markets VWO, +0.17% Given the U.S. rally that has already occurred, many analysts are urging investors to consider overseas markets for the next leg high.

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Doubts About Trump's Agenda Seen Accelerating U.S. Dollar Decline

By Richard Leong
July 19, 2017

The outlook for the U.S. dollar turned even more bearish on Tuesday after healthcare reform legislation again failed to pass in Congress, casting further doubt on whether the Trump administration will be able to progress to tax reform, infrastructure improvements, and banking deregulation.

The U.S. dollar index .DXY that tracks the greenback's strength against major currencies slid to an 10-month low in the wake of setback to President Trump's agenda.

And with the euro and yen both gaining on the possibility that the European Central Bank and Bank of Japan will raise interest rates later this year as their economies improve, the dollar's decline of the past five months may well continue.

"The prospects for the dollar have turned bearish for the rest of year," said Minh Trang, senior currency trader at Silicon Valley Bank in Santa Clara, California.

A Reuters poll published earlier in July showed a majority of foreign exchange strategists polled by Reuters less bullish on the greenback than at the start of the year.

Trump Trade Tarnished

After the U.S. elections last November, Wall Street stocks and the dollar gained and bond yields rose on hopes that, with the Republican party controlling both the White House and Congress for the first time since 2006, the new administration would quickly enact big tax cuts and spend on bridges and roads, driving faster economic growth and inflation.

The so-called "Trump trade" has steadily eroded though in the first half of the year as infighting in the Republican party stalled the promised reforms, and the collapse of the latest effort to reform healthcare on Tuesday only served to accelerate the dollar's selloff.

“It pushes out the rest of the agenda. It’s hard to do a tax reform in the style that it was campaigned on. The healthcare hurdle pushes everything in Trump’s agenda to 2018,” said Art Hogan, chief market strategist at Wunderlich Securities in New York.

As a result, the U.S. dollar index .DXY, which tracks the greenback against six major currencies, has fallen 7.48 percent so far this year, making the fall for the year-to-date the biggest since 2002 when it shed 10.87 percent in the same period.

Other indicators are also providing evidence of the market's increasing bearishness on the dollar.

Last week, speculators reduced their net long bets on the dollar to their lowest level since last May, according to the Commodity Futures Trading Commission data.

Traders' three-month bearishness on the dollar versus the euro hit its most extreme since at least 2010 in late June before retreating a bit, Reuters data showed. EUR3MRR=

ECB And BOJ Also Pressure Usd

However, prospects for U.S. economic reform are not the only factor seen pressuring the U.S. dollar later this year.

The euro EUR= began its latest leg up against the greenback four weeks ago after comments from European Central Bank President Mario Draghi highlighted the euro zone's economic recovery, stoking speculation the ECB may consider paring bond purchases later this year, pushing up euro bond yields and the single-currency.

The euro has gained 10 percent versus the dollar year-to-date, rebounding from a cumulative 23.5 percent drop in the prior three years due to weak economic growth and the region's sovereign debt crisis, Reuters data showed.

On Tuesday, the euro EUR= climbed to its highest against the greenback since May 2016 after the U.S. Senate failed to bring the healthcare bill to a vote.

The Japanese yen has also advanced against the dollar, gaining over 4.0 percent since January JPY=, after the Bank of Japan upgraded its economic outlook, increasing the prospects for paring monetary stimulus in the latter half of 2018.

The greenback has also weakened against the Canadian dollar CAD=and the British pound GBP=.

The Canadian dollar hit a 15 month high against the U.S. dollar on Tuesday at C$1.2581, bringing its year-to-date gain to 6.0 percent CAD=D4 in the wake of the first interest rate rise in seven years by the Bank of Canada last week.

Years of ultra-low interest rates since the 2008 financial crisis had spurred a borrowing binge and helped drive Canadian household debt to record levels in recent years, fuelling a housing boom that has only recently begun to falter.

And analysts forecast the Canadian central bank will raise rates again in October, according to a Reuters poll.

Last week, sterling GBP= also reached a 10-month high against the greenback as rising U.K inflation prompted comments from Bank of England officials suggesting interest rates may need to rise, despite slowing economic growth as Britain negotiates its exit from the European Union.

"Clearly, anything that comes along at the moment just corroborates the market's negative attitude on the dollar," said Neil Mellor, senior FX strategist with Bank of New York Mellon in London.

"There's just not enough inflation at the moment. And anything like this (defeat for Trump) is liable to push it lower."

Article Link To Reuters:

Wall Street Remains Convinced Tax Cuts Are Coming, Even If Much Smaller Than Promised

-- Even with the failed Senate health-care bill, Wall Street is expecting to see a tax reform package by the end of the year
-- Analysts vary on whether it will be aimed at individuals or corporation, or both
-- Analysts say Congress could take a big swipe at the 35 percent corporate tax rate

By Patti Domm 
July 19, 2017

Wall Street still expects Washington to come up with some type of whittled down tax bill, with simple tax cuts more likely than tax reform.

The Senate's failure to bring a revised health-care bill up for a vote rattled markets and sparked speculation Congress would not be able to do anything else on the Trump agenda, including tax reform.

Analysts say one big catalyst that makes some tax bill more likely is the fact that House members will not want to face midterm elections next year with no major achievements. That would argue the cuts could then target the individual taxpayer, but some strategists say Congress is more likely to go after a significant tax cut for corporations. But size, scope and timing are all big unknowns.

"We usually only see legislation when there's a crisis," said Edward Mills, financial policy analyst at FBR, noting the tax reform plan has no natural deadline. "That's been the problem with a tax bill. It hasn't had a natural catalyst. What I've been waiting for is the political crisis of no real accomplishments by the Trump administration or congressional Republicans, prompting them to do a tax bill."

"We're as close to a political crisis as we get right now," he said, adding work could begin on the bill by the end of the summer. Analysts also expect to see tensions rising in Washington within Republican ranks, as Congress attempts to deal with the budget and debt ceiling this fall. But after that, the focus should turn quickly to tax cuts.

Opinions on what type of tax bill Congress will come up with are varied, with some firms expecting just corporate tax cuts and no reform, to more elaborate plans that would significantly change the tax code.

"I think there's near unanimity that the corporate tax rate is too high. There's an effort to find a way to incorporate a reduced rate for small businesses," said Tom Block, Washington policy analyst at Fundstrat. "There's a strong view that when we change the corporate tax rate, we allow for a special repatriation holiday." Repatriation would be a one-time holiday allowing corporations with cash overseas to bring it home at a one-time low rate.

"I still think the market is expecting very little out of the administration and Congress. A lot of people now expect not even a tax cut could get through," said Wells Fargo's director of rate strategy, Michael Schumacher. He said Treasury yields may have fallen too much, but they are also reflecting the market attitude that the Fed is sounding more dovish and expectations are lower that the Fed will hike interest rates this year.

Based on the variety of views and expectations in the markets, analysts say it's difficult to gauge how much impact a tax bill will have on markets when it's introduced.

With each passing month this year, the air has come out of the Trump trade, and that was also the case Tuesday after the Senate failed to vote on a modified health-care plan to replace Obamacare.

Republicans had scheduled replacing Obamacare ahead of tax reform this year, since they were looking for savings and tax cuts in the plan to help with tax reform. But now Sen. Mitch McConnell has said the Senate will just vote on ending Obamacare, with a two-year delay so it can work on a replacement.

Mills expects Congress to take a big swipe at the corporate tax rate, which is now 35 percent. He said it could be cut to the 15 percent level, proposed by President Donald Trump. Others expect a higher tax rate in the mid- to low-20 percent range. But Mills said an argument could be made that just cutting to a low corporate tax rate would have some of the impact that other tax plans are hoping for. For instance, companies might no longer park money overseas and invest more in the U.S. if the U.S. tax rate was low enough.

"There is a 'go big, or go home' crowd, spearheaded by Gary Cohn," Mills said. Cohn is the White House's chief economic advisor who is one of a handful of individuals working on a bill, together with representatives from the House and Senate.

On Tuesday, market confidence in lawmakers dipped again as the Senate failed on health care, and so did the dollar. The dollar index reached its lowest level since September and was down a half percent in late trading. The 10-year Treasury yield declined to 2.26 percent. But stocks turned earlier losses around, and the S&P 500 and Nasdaq both ended up closing at all-time highs. The Dow was lower on the day, but well above its session lows.

QMA portfolio manager Ed Keon said he still expects a corporate tax plan this year, but nothing like the sweeping reform proposed by the House, with a 20 percent corporate tax rate, a border adjustment tax and a new territorial tax approach on foreign profits.

"It's going to have to be revenue neutral which means it's not going to do much for corporate profits, or a fiscal pulse. There might be some helpful things that make the law fairer, less complicated but they're not going to necessarily give a further push to stocks that are already at high valuations," he said.

The play-by-play from Washington will continue to dominate markets Wednesday, as stocks could also be buffeted by a wave of earnings news.

McConnell said the Senate is expected to bring a vote soon on a bill to repeal Obamacare, but with a two-year delay so Congress can develop a replacement by then. But the prospects for that bill are not high and the next steps are not clear after the Senate could not find enough Republican members to push through a revised health-care plan.

Besides Washington, markets will be watching earnings reports from Morgan Stanley, US Bancorp, M&T Bank and Northern Trust ahead of the open. After the bell, American Express, Alcoa, Qualcomm, T-Mobile, SLM and Kinder Morgan report.

There is also housing starts and building permits data at 8:30 a.m. ET.

Article Link To CNBC:

Is Productivity Growth Becoming Irrelevant?

By Adair Turner
Project Syndicate
July 19, 2017

As the Nobel laureate economist Robert Solow noted in 1987, computers are “everywhere but in the productivity statistics.” Since then, the so-called productivity paradox has become ever more striking. Automation has eliminated many jobs. Robots and artificial intelligence now seem to promise (or threaten) yet more radical change. Yet productivity growth has slowed across the advanced economies; in Britain, labor is no more productive today than it was in 2007.

Some economists see low business investment, poor skills, outdated infrastructure, or excessive regulation holding back potential growth. Others note wide disparities in productivity between leaders and laggards among industrial manufacturers. Still others question whether information technology is really so distinctively powerful.

But the explanation may lie deeper still. As we get richer, measured productivity may inevitably slow, and measured GDP per capita may tell us ever less about trends in human welfare.

Our standard mental model of productivity growth reflects the transition from agriculture to industry. We start with 100 farmers producing 100 units of food: technological progress enables 50 to produce the same amount, and the other 50 to move to factories that produce washing machines or cars or whatever. Overall productivity doubles, and can double again, as both agriculture and manufacturing become still more productive, with some workers then shifting to restaurants or health-care services. We assume an endlessly repeatable process.

But two other developments are possible. Suppose the more productive farmers have no desire for washing machines or cars, but instead employ the 50 surplus workers either as low-paid domestic servants or higher-paid artists, providing face-to-face and difficult-to-automate services. Then, as the late William Baumol, a professor at Princeton University, argued in 1966, overall productivity growth will slowly decline to zero, even if productivity growth within agriculture never slows.

Or suppose that 25 of the surplus farmers become criminals, and the other 25 police. Then the benefit to human welfare is nil, even though measured productivity rises if public services are valued, as per standard convention, at input cost.

The growth of difficult-to-automate service activities may explain some of the productivity slowdown. Britain’s flat productivity reflects a combination of rapid automation in some sectors and rapid growth of low-productivity, low-wage jobs – such as Deliveroo drivers riding around on plain old-fashioned bicycles. In the United States, the Bureau of Labor Statistics reports that eight of the ten fastest-growing job categories are low-wage services such as personal care and home health aides.

The growth of “zero-sum” activities may, however, be even more important. Look around the economy, and it’s striking how much high-talent manpower is devoted to activities that cannot possibly increase human welfare, but entail competition for the available economic pie. Such activities have become ubiquitous: legal services, policing, and prisons; cybercrime and the army of experts defending organizations against it; financial regulators trying to stop mis-selling and the growing ranks of compliance officers employed in response; the huge resources devoted to US election campaigns; real-estate services that facilitate the exchange of already-existing assets; and much financial trading.

Much design, branding, and advertising activity is also essentially zero-sum. It is certainly good that new fashions can continually compete for our attention; choice and human creativity are valuable per se. But we have no reason to believe that 2050’s designs and brands will make us any happier than those of 2017.

Such zero-sum activities have always been significant. But they grow in importance as we approach satiation in many basic goods and services. In the US, “financial and business services” now account for 18% of employment, up from 13.2% in 1992.

The impact on measured GDP and productivity reflects national accounting conventions. If people devote more of their income to competing for scarce housing, driving up property prices and rents, GDP and “productivity” increase, because housing rent is included in GDP, even if the aggregate supply of housing services is unchanged. Since 1985, the share of rents in the UK economy has doubled, from 6% of GDP to 12%.

Likewise, more and better-paid divorce lawyers increase GDP, because end consumers pay them. But more and better-paid commercial lawyers don’t raise output, because companies’ legal expenditures are an intermediate cost. Measured productivity slows as intermediate zero-sum activities proliferate, while other zero-sum activities swell GDP but deliver no welfare benefit.

Potentially offsetting this effect, information technology may improve human welfare in ways not captured in measured output. Billions of hours of consumer time previously spent filling in forms, making telephone calls, and queuing are eliminated by Internet-based shopping and search services. Valuable information and entertainment services are provided for free.

Contrary to what some right-wing economists argue, such free services cannot make increasing income inequality irrelevant. If rents and commuting costs are driven up by intense competition for attractively located property, you can’t pay for them out of freely arising “consumer surplus.” But the essential insight is still important: much that delivers human welfare benefits is not reflected in GDP.

Indeed, measured GDP and gains in human welfare eventually may become entirely divorced. Imagine in 2100 a world in which solar-powered robots, manufactured by robots and controlled by artificial intelligence systems, deliver most of the goods and services that support human welfare. All that activity would account for a trivial proportion of measured GDP, simply because it would be so cheap.

Conversely, almost all measured GDP would reflect zero-sum and/or impossible-to-automate activities – housing rents, sports prizes, artistic performance fees, brand royalties, and administrative, legal, and political system costs. Measured productivity growth would be close to nil, but also irrelevant to improvement in human welfare.

We are far from there yet. But the trend in that direction may well help explain the recent productivity slowdown. The computers are not in the productivity statistics precisely because they are so powerful.

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Despite His Missteps, Don’t Consider Trump A Failure Just Yet

By Michael Goodwin
The New York Post
July 19, 2017

In good, bad and ugly ways, this week has been a revealing metaphor for Donald Trump’s presidency. The ObamaCare- repeal efforts died a sensational death and the number of people known to have attended Donald Trump Jr.’s foolish meeting with a Russian lawyer increased to eight.

Also, special counsel Robert Mueller contacted at least one person at the meeting and requested an interview, according to The Washington Post.

Trump recertified the Iranian nuclear deal he promised to tear up, and his proposed changes to NAFTA, which he once called “the worst trade deal maybe ever signed anywhere,” are so modest that Mexico welcomed them as the basis for negotiations.

On other matters, the economy is still grinding forward, the stock market is near record highs and, despite numerous hysterical predictions, Trump has not started World War III with a tweet.

There is no denying that America elected an exceptional president in Trump, a consummate outsider and the first president ever to have no government or military experience. But as it wraps up its first six months, Trump’s presidency looks more conventional than exceptional.

Separating the substance from the noise shows him in a position familiar to all new presidents: struggling to turn his campaign promises into reality while juggling foreign-policy challenges and mastering the learning curve of the world’s most powerful job.

Trump also faces unique obstacles. Congressional Democrats remain determined to oppose him on virtually every act and appointment, and most of the media, along with much of the permanent government, remain determined to destroy him.

All those things considered, Trump’s rec­ord is not as good as he promised, but far better than his detractors predicted.

Most important, his mistakes and setbacks have not foreclosed the promise of his presidency. He still has an opportunity to reshape the economy so it creates more jobs and better serves working-class Americans. He is nominating federal judges who believe in limited government and don’t want the courts to act as a super legislature.

Trump also has been mostly faithful to his America First agenda on overseas trips. While this has earned him cold shoulders from the likes of Angela Merkel, that’s a badge of honor. Merkel didn’t elect him and most Americans see Europe, including her Germany, as an example of a country not to emulate.

Yet there are worrisome trends, and the death of the ObamaCare repeal merits special attention because of what it says about Trump’s future. While the Rubik’s Cube complexity of health insurance, medical care and cost is daunting, the ultimate problem lies in the gulf between the president and the mainstream Republican Party.

Neither side is fully reconciled to the other and that is making it hard for the White House to get momentum. Its victories on ­executive orders and regulations are like one-game winning streaks, with congres­sional failures interrupting any sense of consistent progress.

Recall that the initial goal was to pass a health bill, tax reform and an infrastructure program — all in the first year. Now it’s not certain if any will get done.

Some of the stumbles are self-inflicted, and I don’t just mean the president’s bad habit of engaging in personal feuds. The larger problem is that the White House is simply not functioning effectively.

Leaks, leaks, leaks are Exhibit A. Why they continue, and why nobody has been fired for bad-mouthing the president to the media, ­remains a mystery. Why does Trump put up with it?

Another kind of amateurism was on display Monday. To set a campaign-consistent theme, the White House began a series of “Made in America” events.

With tractors, beer, tools, soup, golf clubs and leather goods among the products in a state-by-state display, the president put on a Stetson hat, climbed on a firetruck and pledged, “No longer are we going to allow other countries to break the rules, steal our jobs and drain our wealth.”

It made for great imagery, but then reporters asked why Trump family businesses continued to produce products in China. Poof went the air out of the room.

In the president’s defense, press secretary Sean Spicer mumbled something about “supply chains” and “scalability,” which was no defense at all, and Dems pounced.

A spokesman for the DNC called the exhibit “the epitome of President Trump’s ­hypocrisy” and said, “Instead of lecturing us, Trump should try setting an example.”

Of course, the president’s greatest vulner­ability is Mueller’s probe. Even if it finds no crime, its existence in the meantime is a shadow over the presidency.

The probe helps explain Trump’s record-low approval ratings, which tell many fellow Republicans that they have little to fear from him. That, in turn, makes them less willing to go out on a limb to deliver legislative victories for him.

Despite the drip, drip, drip of mistakes and leaks, I remain cautiously optimistic because I believe Trump’s ego will not let him accept being a failed president. To get lasting success, he must match his ambition with a steady effort to fix the White House so he can deliver consistent victories to the American people.

If he can do that, even Mueller won’t be able to stop him.

Article Link To The New York Post: