Monday, July 24, 2017

Monday, July 24, Morning Global Market Roundup: Asian Shares Slip As Risk Appetite Ebbs, Dollar Sulks

By Nichola Saminather
July 24, 2017

Asian stocks slipped on Monday as demand for riskier assets ebbed after their recent strong gains, while the European Central Bank's apparent equanimity at the euro's two-year highs left the dollar languishing.

MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.2 percent.

Japan's Nikkei dropped 0.9 percent, pressured by a stronger yen.

Chinese shares bucked the trend, with bluechips up 0.3 percent and the Shanghai Composite advancing 0.2 percent. Hong Kong's Hang Seng added 0.4 percent.

Australian shares retreated 1 percent and South Korea's KOSPI edged down 0.1 percent.

On Friday, global stocks ended a 10-day winning streak, taking a breather from a rally that had propelled them to a record high in the previous session. The declines continued on Monday, with the index marginally lower.

Wall Street indexes ended Friday flat to about 0.15 percent lower, as disappointing earnings from General Electric and energy shares weighed.

European shares also closed lower, with Germany's DAX slumping 1.7 percent, dragged lower by the euro's strength.

The euro was trading slightly higher at $1.1669 on Monday, just a whisker below a two-year high of $1.1684 hit earlier in the session.

ECB President Mario Draghi's comments on Thursday, which conspicuously avoided citing the euro's recent strength as a problem, emboldened traders convinced the central bank will begin tapering its bond-buying program later this year.

"There has been very little back-pedaling on the long euro storyline as dealers continue to place much emphasis on Draghi declining the opportunity to talk down the currency post-ECB minutes," Stephen Innes, head of Asia-Pacific trading at OANDA, wrote in a note.

"And factoring in the expanding U.S. political sinkhole which is weighing on broader USD sentiment, it's unlikely the market has run out of steam," he wrote, adding he expects the euro to test the August 2015 high of $1.1715 "sooner than later".

The dollar index, which tracks the greenback against a basket of trade-weighted peers, crept higher but remained subdued on Monday.

After touching 93.823, its lowest level since June 2016 early on Monday, it edged up to 93.908, marginally above Friday's close.

The dollar continued to slide against the yen, however, retreating 0.1 percent to 111.01 yen.

Markets are awaiting the Federal Reserve's meeting on Tuesday and Wednesday for an update on its plan to start normalizing its balance sheet.

"All eyes will be on the Fed this week, with market participants eager to see if the Fed formally announces the start of its balance sheet normalization plan or opts to wait until September," Michala Marcussen, global head of economics at Societe Generale, wrote in a note.

"We are in the September camp, but we acknowledge that it is a coin toss between this week's meeting and the next one."

In commodities, oil remained pressured by a consultant's forecast of a rise in OPEC production for July despite the group's pledge to curb output, reviving concerns about oversupply.

But expectations that the joint OPEC and non-OPEC ministerial meeting later in the day would address rising production from Nigeria and Libya, two OPEC members exempted from the cuts, bolstered prices.

Global benchmark Brent crude added 0.3 percent to $48.19 a barrel, after Friday's 2.5 percent tumble, while U.S. crude edged up 0.2 percent to $45.85, after Friday's 2.2 percent slump.

Gold shone on the dollar's weakness and a decline in risk appetite, with spot gold just slightly lower at $1,253.61 an ounce, retaining most of Friday's 0.8 percent jump, and scarcely below a one-month high hit earlier.

Article Link To Reuters:

Oil Gains Ahead Of Producer Meeting; Nigeria, Libya Output In Focus

July 24, 2017

Oil prices gained on Monday after a steep fall the session before, buoyed by expectations that a joint OPEC and non-OPEC meeting later in the day may address rising output in Nigeria and Libya, two OPEC members so far exempt from a push to cut production.

Ministers from the Organization of the Petroleum Exporting Countries (OPEC) and other non-OPEC producers gather in the Russian city of St Petersburg on Monday to discuss the pact to curb output by 1.8 million bpd through the end of March 2018.

The committee may recommend a conditional cap on Nigerian and Libyan oil production, sources familiar with the talks said, although some analysts were deeply skeptical the group would make such a move.

"The committee may issue a statement on cooperation in production cuts, but output cuts by Libya and Nigeria would be next to impossible considering Libya was just re-emerging from the civil war, for example," said Kaname Gokon, strategist for commodities brokerage Okato Shoji in Japan.

Russian Energy Minister Alexander Novak said Libya and Nigeria should cap output when their output stabilizes, the Financial Times reported.

London Brent crude for September delivery was up 24 cents at $48.30 a barrel on Monday. The contract settled down $1.24, or 2.5 percent, on Friday after a consultancy forecast a rise in OPEC production for July despite the pledge to rein in output.

NYMEX crude for September delivery was up 17 cents at $45.94.

Kuwait's oil minister, Essam al-Marzouq, said on Saturday that compliance was good with oil production cuts by OPEC and non-OPEC countries and that deeper curbs were possible.

Meanwhile, OPEC Secretary General Mohammad Barkindo said on Sunday that a rebalancing of the oil market is progressing more slowly than expected, but will speed up in the second half of 2017.

Elsewhere, Turkish President Tayyip Erdogan traveled to Saudi Arabia and Kuwait on Sunday, the Gulf states' official news agencies reported, as part of a diplomatic tour aimed at healing an Arab rift with Ankara's ally Qatar.

U.S. oil drillers cut one rig in the week to July 21, according to data from Baker Hughes.

The United States is considering financial sanctions on Venezuela that would halt dollar payments for the country's oil, sources told Reuters, which could severely restrict the OPEC nation's crude exports.

Article Link To Reuters:

OPEC Grapples With Growing Threats To Oil Deal

Deal intended to withhold about 2% of global oil supplies has failed to raise crude prices.

By Georgi Kantchev and Benoit Faucon 
The Wall Street Journal
July 24, 2017

OPEC is worried that its plan to drain a global oil glut—and thereby raise crude prices—isn’t working.

A long-planned meeting in St. Petersburg, Russia, on Monday to discuss the oil market with big producers outside the cartel has turned into a critical gathering. Over the weekend, the Organization of the Petroleum Exporting Countries said, its ministers have held a series of “intensive consultations” about the challenges for an output-cutting deal the 14-nation cartel struck last year with Russia and other big producers.

The agreement was supposed to take almost 1.8 million barrels of crude oil off the global market and drain an oversupply that has weighed prices down for three years and sent a shock through the economies of oil-producing economies. But prices have remained stubbornly low as the glut persists. Brent, the international benchmark, fell 2.5%, to $48.06 on Friday because of doubts about OPEC’s ability to turn around the market.

Saudi Arabian energy minister Khalid al-Falih cut short his vacation to come to St. Petersburg for a committee meeting he sometimes skips because of the gathering’s sudden “strategic importance” and “the high expectations of the times,” said OPEC Secretary General Mohammad Barkindo.

Mr. Falih has been calling OPEC oil officials all weekend, said a person close to the minister, describing him as “very nervous.” Mr. Falih declined to speak with reporters. A Saudi oil-ministry official didn’t respond to a request for comment.

Mr. Falih met his Russian counterpart, Alexander Novak, on Sunday. Saudi Arabia is the de facto leader of OPEC, while Russia is the world’s top producer and leader of a faction of 10 non-OPEC producers that pledged to cut output.

The two men will preside over a gathering of several OPEC and non-OPEC producers Monday designed to shore up support for their efforts to limit global oil output. Among the topics, Mr. Novak said, will be production from Libya and Nigeria. The two OPEC members, which were exempted from last year’s deal and have recently raised output.

“I think that as soon as these countries reach a stable production level, they must join other responsible producers and make their contribution to the measures aiming to rebalance the market,” Mr. Novak said, according to TASS, the Russian state news agency.

Libyan and Nigerian officials have signaled a willingness to limit their production once it stabilizes, but the details are being negotiated.

An OPEC official said Iraqi production would also be discussed, as the cartel member’s output has remained much higher than its agreed upon levels.

OPEC officials and analysts cautioned against expecting the cartel and its allies to take major action on Monday. It is a routine committee meeting with only handful of the 24 countries involved.

Another reason to expect little action on Monday is that OPEC is still weighing how to deal with U.S. producers, which remain largely outside of the cartel’s control.

Shale drillers—which work on shorter-term projects than traditional oil producers—took advantage quickly when oil prices briefly rose last year after the OPEC deal, sending more crude into global supply. They also have learned to drill at lower prices, and U.S. production has maintained its upward swing even as prices have been depressed this year.

OPEC members have repeatedly ruled out making deeper production cuts. While that action would likely raise prices, it would probably also allow shale drillers to ramp up output even more, reducing OPEC market share and eventually killing any rally.

“Market dynamics have been challenging,” Mr. Barkindo said. “They have been almost challenging established economic theory.”

Saudi Arabia’s goal this week is to “convince the other members that by sticking to the deal all OPEC producers will benefit from higher revenues,” said Giovanni Staunovo, commodity analyst at the Swiss bank UBS.
Iraq and the United Arab Emirates, two of OPEC’s largest producers, haven’t been meeting their output-cut pledges, J.P. Morgan Chase & Co. said in a report last week, making them “material drags on overall compliance.” Saudi Arabia has picked up the slack, cutting more than pledged, but the kingdom in recent months has been pumping more to meet higher summer demand.

Ecuador’s oil minister recently said his country had no plans to stick to its output-cut pledge because the country needed the revenue. Ecuador is a small producer, but its oil minister’s unusual public stance drew a phone call from Mr. Falih, who got the country to issue a statement reiterating its support for the output deal.

Mr. Barkindo said Monday’s meeting could result in recommendations for OPEC and its allies to consider in the future. He said overall compliance with the deal since January had been “excellent.”

“The rebalancing process may be going at a slower pace than we earlier projected but it’s on course. It’s bound to accelerate in the second half,” he said.

Article Link To The WSJ:

Oil Bulls Snap Out Of Funk But OPEC Doubts Still Loom Large

Managed-money WTI long positions rose the most since February; Short positions meanwhile slipped for a third week: CFTC.

By Jessica Summers
July 24, 2017

Oil optimists are back. They’re just not betting the ranch on a rally yet.

Hedge funds added the most weekly wagers on rising West Texas Intermediate crude prices since February, with short-sellers on a steady retreat. Whether the improving mood sticks will depend largely on OPEC, whose members are gathered in St. Petersburg.

“Everybody is still operating off of OPEC’s mantra that it will do whatever it takes to get global inventories down,” Rob Thummel, managing director and portfolio manager at Tortoise Capital Advisors LLC, which manages $16 billion in energy-related assets, said by telephone.

Oil has rebounded from a funk in June one timid, fleeting rally at a time as American stockpiles decline and the summer boosts demand for gasoline. But doubts still abound that the Organization of Petroleum Exporting Countries and its allies have a grip on the global supply and demand balance.

Output has risen from Libya to U.S. shale fields. Ecuador, an OPEC member, stirred up uncertainties last week when its oil minister said the country can no longer comply with production curbs agreed on in November.

OPEC’s supply in July will be the highest this year, according to tanker-tracker Petro-Logistics SA. The group’s compliance with the November deal dropped to 92 percent in June, from 110 percent in May, according to a person familiar with the data.

Several OPEC nations and other leading oil exporting countries gathered in St. Petersburg for a technical meeting on Saturday before a summit of oil ministers on Monday. OPEC Secretary-General Mohammad Barkindo said the technical meeting was "very productive" and the compliance rate on production cuts has been "excellent.”

Limiting oil output from Nigeria and Libya has been ruled out for now, with both African nations saying they’ll need to keep pumping at a higher level before they can join a global effort to stem a supply glut, according to two people familiar with the matter.

Declining Stockpiles

Meantime, the U.S. market appears to be starting to shape up. Nationwide crude inventories are at the lowest level since January, and gasoline supplies have declined for five straight weeks, the latest Energy Information Administration data showed. The agency has lowered its U.S. crude output forecast for next year to 9.9 million barrels a day, from a 10.01 million estimate in June.

Hedge funds increased their WTI net-long position -- the difference between bets on a price increase and wagers on a drop -- by 21 percent to 215,488 futures and options over the week ended July 18, data from the U.S. Commodity Futures Trading Commission show. That was the most bullish stance in six weeks. Shorts slipped by 17 percent, a third week of declines, while longs climbed 4.6 percent to the highest level since April.

The net-bullish position on the benchmark U.S. gasoline contract rose for a fourth week to the most bullish stance since April. The bearish net-position on diesel increased by 13 percent.

WTI tumbled 2.5 percent to $45.77 a barrel in New York on Friday following the Petro-Logistics report, erasing gains from earlier in the week. But it’s still up 7.6 percent from June’s low. The rebound from last month’s doldrums may have encouraged investors to cut back on short positions, according to Tim Evans, an analyst at Citi Futures Perspective in New York.

“We are seeing a little bit of fresh buying, but not really a confident flow that would reflect an expectation that prices will continue to work higher,” he said.

Meanwhile, Saudi Arabia is considering a reduction in its exports of a further 1 million barrels a day to offset rising Libyan and Nigerian production, according to consultant Petroleum Policy Intelligence.

“People are still leaning a little bearish,” Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, said by telephone. “Anything OPEC does to cut production probably gets offset by the shale boys anyway.”

Article Link To Bloomberg:

Britain Is Committed To Brexit And Free Trade

As an independent U.K. embraces the world, the U.S. will remain our foremost partner.

By Liam Fox
The Wall Street Journal
July 24, 2017

The principles of free trade have underpinned the institutions, rules and alliances that rebuilt the postwar world. They facilitated the fall of Soviet communism. They ushered in 70 years of global prosperity, raising the living standards of hundreds of millions of people. As the United Kingdom looks ahead to a new era of trade and a future outside the European Union, we’ll be strengthening ties around the world—especially with our top trading partner and greatest ally, the U.S.

The British government has set up working groups and high-level dialogues in 10 countries that are key trade partners. Our goal is to explore the best ways of improving our trade and investment relationships. On Monday, I will visit my American counterpart, U.S. Trade Representative Robert Lighthizer, for the first meeting of the U.S.-U.K. trade and investment working group. We have two main aims. First, to give businesses on both sides of the Atlantic certainty and confidence. Second, to provide commercial continuity as the U.K. charts a course outside the EU.

The U.K. is prohibited from signing any formal free-trade agreement while we retain EU membership, but we are laying the groundwork for a potential deal with our closest international partners, identifying areas where we could broaden cooperation and remove barriers to trade.

American politicians and business leaders sometimes ask me whether the U.K.’s recent general election has affected our approach to Brexit, or whether there is any chance the U.K. might change its mind and stay in the EU. No. The government’s approach has not changed. The plan to leave the EU that we originally set out is in our national interest. Brexit is going ahead. The democratic choice has been made.

In the June election, more than 80% of voters backed one of the parties that supports Britain’s withdrawal from the EU. The Conservative Party, through our agreement with the Democratic Unionist Party, has secured a legislative majority to provide stable government, uphold the democratic will of the British people, and deliver Brexit.

I believe this offers an unprecedented opportunity for the U.K. If we want to protect jobs and prosperity and watch British businesses expand, we need to engage with the overseas markets that hold the greatest potential. The EU itself estimates that 90% of global growth in the next decade will come from outside Europe. As one of the world’s largest economies, the U.K. has the chance to work with old and new partners to build a truly global Britain at the heart of international trade.

The strength of our trade and investment relationship with the U.S. is clear. Exports to the U.K. last year totaled $555 million from Alabama alone, and $3.5 billion from Washington state. Such exports supported 1,400 jobs in Alaska and 53,000 in Texas, which I will visit at the end of this week. Together the U.S. and U.K. have around $1 trillion invested in each other’s economies, and this strong trading relationship supports more than one million jobs in both countries.

The fundamentals of the U.K. economy are strong, providing a solid platform on which to build new trading links. We have reduced the deficit by nearly 75% and cut taxes for millions of working people, and the unemployment rate remains low. The U.K. was the second-fastest-growing economy in the Group of Seven last year. A PricewaterhouseCoopers report from February projects that Britain will hold the G-7 growth title until 2050, outstripping Germany, France and Italy.

The U.K. has long been one of the best places in the world to invest, with regulatory stability, a strong rule of law, and a low-tax, high-skilled economy. So it’s no surprise that Britain has attracted a range of businesses, from Google and Facebook to Pfizer.

I am committed to securing the best possible global trading framework for the U.K. It is a source of great personal pride to lead the Department for International Trade, tasked with upholding Britain’s centuries-long tradition of advocating free trade and commerce. In that spirit, I look forward to working together with our American allies to deepen a relationship based upon not only our shared values of freedom and democracy, but our shared history, culture and economic success.

At times the U.K. and the U.S. can seem very different, yet we are nations built upon a common foundation. As Britain embraces the world, the U.S. will remain our foremost partner in every endeavor.

Article Link To The WSJ:

Building A Mortgage Meltdown For The Rental Market

By Nicole Gelinas
The New York Post
July 24, 2017

Is the private sector allowed to do anything anymore? For nearly 80 years, Washington has subsidized homeownership — creating massive distortions both in house prices and in what neighborhoods look like. Now the feds will subsidize rental homes as well — expanding government control over even more of the economy.

The American home-buying world doesn’t even resemble a free market. Americans owe $10.3 trillion on mortgages. Fannie Mae and Freddie Mac, the government-guaranteed mortgage giants, hold $5 trillion of that debt. The Federal Reserve holds another $1.8 trillion. Smaller government entities like the Federal Housing Administration and Federal Home Loan Banks round out the government sector.

Government guarantees and direct lending keep mortgage rates low. They also keep home prices high, because the cheaper you can borrow, the more you can pay for a house. They discriminate against cities, where most people rent, not buy.

And they’re not good for the environment. Government subsidies of large single-family homes mean suburban sprawl and long commutes.

We put up with all of this in the spirit of “encouraging” homeownership. The idea — not backed by much evidence worldwide — is that when you own your property, you’ll be a better citizen and help create a more stable community.

This is the American creed, right or wrong, and we’re going to stick to it.

Or not. Freddie Mac wants to provide $1 billion to medium-sized landlords for rental housing, The New York Times reports. This, just a few months after Fannie issued its own $1 billion guarantee for Blackstone, a huge rental-property owner.

Both agencies have long done some rental housing for small-property owners, but this is a big expansion. You can bet Fannie and Freddie will want to expand this new lending, too, well beyond $2 billion.

The idea is that cheaper loans will make rental housing more affordable, just like with the mortgage market.

So, it turns out, never mind about the past 80 years — homeownership wasn’t so important after all. The government is now going to subsidize every kind of housing, and people can make their own choices about where to live.

That’s a radical idea — but if Washington is going to subsidize everything, why not subsidize nothing? The result would be the same: a fairer playing field.

Another claim is that banks aren’t lending enough to rental-property owners, constricting supply. But that’s not true: construction and land-development loans are up nearly 50 percent in the past two years.

And perhaps the banking system isn’t working because of too much government interference, not a lack of it.

If a bank wants to lend to a rental builder, it must set aside 4 percent of the value of the loan in capital reserves to cover losses. If the bank wants to lend to a homeowner via Fannie or Freddie, it must only set aside 1.6 percent. Capital costs money — so banks naturally prefer to make the easier and cheaper loans. The government should change these regulations, and see if private banks will lend more.

Having the government jump directly into this market creates the risk that banks will do even less lending to rental builders. The government can offer cheaper financing, making it harder for private lenders to compete. In the years leading up to 2008, Fannie and Freddie’s dominance of the mortgage market encouraged banks to make ever-riskier mortgages to grow their own businesses.

The big picture, though, is the definition of a reasonably functioning free-market economy: If you want to buy a house, you should be able to find someone willing to lend you the money to do so, provided you have the resources to repay the loan.

If you want to rent an apartment, you should be able to find someone to rent you an apartment, whether you can afford modest rent or high rent. Likewise, the apartment owner should be able to find a lender, based on your rental income.

The government should target subsidies only to people who can’t work because of disability or age, and give temporary help to others — not declare the entire market broken and take over.

Article Link To The NY Post:

KKR Nears Deal To Acquire WebMD

By Lauren Hirsch and Greg Roumeliotis
July 24, 2017

Private equity firm KKR & Co LLP (KKR.N) is nearing an all-cash deal to acquire WebMD Health Corp (WBMD.O), a U.S. online health publisher with a market capitalization of $2.1 billion, people familiar with the matter said on Sunday.

The deal would bring under one roof WebMD's websites, such as, and, with those owned by another KKR company, Internet Brands Inc, including, and

WebMD is close to agreeing to a deal to sell itself to KKR after running a five-month auction and soliciting bids from more than 100 companies and private equity firms, the people said. The deal is expected to be announced by Monday, the people added.

The exact price KKR was offering could not be learned.

WebMD declined to comment, and KKR did not immediately respond to a request for comment.

A deal would make WebMD the latest healthcare media company to be sold. In December, j2 Global Inc's (JCOM.O) digital media arm Ziff Davis LLC acquired Everyday Health Inc, a U.S. operator of health-related websites, for $465 million, including debt.

Founded in 1996, WebMD has grown into one of the most popular health websites for consumers and medical professionals, attracting more than 70 million monthly unique visitors in 2016, according to analytics company comScore Inc (SCOR.PK).

WebMD also owns medical news and education brand Medscape, which accounted for around 60 percent of its advertising revenue in 2016.

The New York-based company said in February it would explore its options, after a slowdown in advertising paid for by pharmaceutical companies. Activist hedge funds Blue Harbor Group and Jana Partners subsequently disclosed stakes in WebMD.

Internet Brands, which launched as in 1998, licenses and delivers its content and internet technology products and services to small and medium-sized businesses. It was acquired by KKR in 2014 for $1.1 billion from two other private equity firms, Hellman & Friedman LLC and JMI Equity.

Under KKR, the company has expanded its portfolio of brands to include Demandforce and Fodor's Travel.

Article Link To Reuters:

Traders Fear Hard Landing In Emerging Markets

Carry-trade exit in EM is ‘quite small’: Schroder’s Olu-Pitan; Benchmark BlackRock bond ETF has doubled in size this year.

By Natasha Doff
July 24, 2017

The rapid growth of a BlackRock Inc. exchange-traded fund that tracks emerging-market debt is causing jitters among investors.

The iShares JP Morgan EM Local Government Bond ETF, ticker IEML, has doubled in size this year, mopping up more than $3 billion of inflows as investors reach for average yields as high as 4.7 percent in developing economies. The risk is that if the carry trade unwinds, as tends to happen eventually, investors could race for the exit all at once and send the fund tumbling.

“That’s something that keeps me awake at night,” said Remi Olu-Pitan, an investor in Schroder Investment Management’s 96.2 billion pound ($125 billion) multi-asset division in London. “If there is any tantrum or any crisis, that money will flow out. The problem is that the door through which everyone tries to get out is quite small.”

ETFs, which passively track indexes for a fraction of the cost of mutual funds allowing investors to gain easy and cheap exposure to a market, have been criticized for creating bubble-like conditions in less liquid markets. Combine that with an asset class that is prone to mass outflows amid sudden sea changes in sentiment and you could get a potentially toxic situation, according to David Hauner, a strategist at Bank of America Merrill Lynch in London.

Unlike emerging-market mutual funds, ETFs don’t have the option of holding cash, so if they get outflows, they have to sell the underlying bonds in the index they track. And when they sell, they don’t pick the riskiest or most liquid markets first, but a slice of the entire underlying index. Since the index has a cap for the biggest markets, smaller, less liquid markets are over-represented, which can exacerbate losses, according to Hauner.

“If and when there will be a major selloff, which I’m not predicting for the time being, then the fact that the share of this ETF is bigger will be an issue,” Hauner said. “It hasn’t been tested. The share that ETFs hold of the total local-currency bond market is significantly higher now than it was during the taper tantrum.”

ETFs are too small to be a driver for the market, a BlackRock spokesperson said in an emailed response to questions. The fund manager estimates that ETFs account for less than 1 percent of the global bond market, and less than 2 percent of debt in emerging markets.

Still, as a proportion of the $400 billion invested in emerging-market bond funds, the share of ETFs is closer to 12 percent, and it’s increasing every year, according to data compiled by Bloomberg.

Both BofA and Deutsche Bank AG have warned in recent research notes that emerging-market carry trades are starting to look overcrowded. An indicator of sentiment created by BofA earlier this year has for been hovering in the past month close to a level that has historically preceded a correction within four weeks.

While a correction probably isn’t imminent, the more investors who gravitate to the trade, the bigger the plunge will eventually be, according to BofA’s Hauner, who recommends buying hedges of emerging-market currencies wherever they are cheap as protection against a broad selloff.

Such a selloff could be triggered by higher developed-world yields as central banks wind down easy monetary policy, like in 2013’s Taper Tantrum. That would dim the appeal for carry traders of borrowing dollars to buy assets in higher-yielding developing world currencies.

“If there’s carry in Treasuries then investors might start to rethink their actions in emerging-market debt,” said Olu-Pitan at Schroder. “If we return to the 2013 level we need to be more cautious because of the ETF. The immense flow into these passive strategies is something we need to be wary of.”

Article Link To Bloomberg:

Direct Lending Funds' Fading All-Weather Appeal

By Lawrence Delevingne
July 24, 2017

Miami-area money manager Bob Press appears to offer the ultimate all-weather investment: a "direct lending" hedge fund that does not require a long-term commitment and has produced nearly 90 straight months of positive returns not correlated to other markets.

Most funds invest in traditional financial assets like stocks or bonds, but direct lenders make high-interest rate loans, usually to fledgling or struggling businesses passed over by banks. Proponents say the strategy can produce smooth returns even in a low-growth economic environment.

But as money pours into offerings like Press's TCA Global Credit Master Fund, there are mounting signs that such steady returns may be at risk.

More than 30 investment professionals canvassed by Reuters list various reasons for concern: the flood of new money pushing down lending standards, an increase in leverage and, sometimes, a mismatch between the duration of investments and lock-up periods.

A November survey by data tracker Preqin showed nearly 40 percent of direct lenders believe loan terms had become easier compared with a year earlier and nearly a third said it was harder to find attractive borrowers.

Returns are also starting to decline into the single digits, according to data trackers. (Graphic:

Some of those investors have just grown more cautions and selective in their fund choices. However a small but growing group of those who embraced direct lending after the 2007-2009 financial crisis said they are now significantly reducing their exposure or avoiding direct lending investments entirely.

The rising risks, they told Reuters, could lead to much lower returns, or even a partial repeat of 2008, when a group of funds lost money and froze investor capital as borrowers failed to repay their loans and collateral seized up.

Those who have pulled back include $1.4 billion Balter Capital Management LLC, which included direct lending as one of its top three strategies a few years ago and now has no money in it, according to founder Brad Balter. Greycourt & Co. has significantly reduced its exposure to direct lending because the money coming in has made it far less attractive, according to Matthew Litwin, head of manager research at the $10 billion firm.

"With a few exceptions, it's more risk for less return," Litwin said.


Direct lending surged after the financial crisis when U.S. authorities tightened credit standards for banks and ultra-low interest rates drove investors to less conventional strategies in the search for higher returns. According to Preqin, U.S. direct lending funds soared from about $33 billion in late 2008 to around $100 billion in June 2016.

The strategy remains popular as high stock valuations and historically low bond yields have boosted demand for private debt strategies. A Preqin survey of 100 institutional investors in January showed that 58 percent expected to increase allocations to U.S. lower-middle-market direct lending in the next 12 to 24 months.

However, several lenders and their investors told Reuters that the strategy's ability to deliver in tougher times has not been tested for years given relatively steady economic growth.

They say the flood of cash itself is driving down the returns and eroding lending standards by giving borrowers more options. The rising demand has spawned a slew of new funds, they add, that may lack experience with loan workouts in recessions and rely on deals sponsored by private equity firms, which tend to come with higher leverage and lower yields than those originated directly.

"There's a lot of Johnny-come-latelies given all the new money. The inexperience hasn’t really shown yet, but it will,” said Mark Berman of MB Family Advisors, LLC, another fund investor who specializes in credit strategies.

Nearly 200 North American direct lending funds have launched since 2009, according to Preqin, compared to just 30 between 2004 and 2008.

Investment professionals interviewed by Reuters say lenders are more likely to do “covenant light” deals with fewer restrictions on the terms of the loan, or deals where they were not necessarily first in line to receive payments in the case of default.

Rising leverage is another red flag, a sign that both investors and target companies are trying to stem a decline in returns by borrowing more.

Thomson Reuters data on unregulated non-bank loan deals show leverage for middle market companies has risen by 16.6 percent over four years to an average debt-to-earnings ratio of 4.9 times.

TCA's Press acknowledges double-digit returns could be a thing of the past. The 53-year-old sees risks to the strategy as more money comes in, but notes TCA does not use leverage and sources all of its own deals.

Press expects his business - situated next to a golf course in Aventura, Florida - will keep growing, given that banks remain reluctant to lend, allowing him to take profits on both loans and advisory fees. TCA started with a few million dollars under management in 2010 has grown to roughly $500 million and aims to raise another $300 million.

Quick Cash

A promise of fast access to cash has helped smaller firms like TCA and Brevet Capital Management grow rapidly.

Larger managers, such as Golub Capital, Czech Asset Management LP and Monroe Capital LLC, require investors to commit their capital for three years or more.

But about two-thirds of funds have lock-up periods of a year or less, including none at all, according to an eVestment review of 71 direct lending and asset-based lending funds for Reuters.

Those who offer generous cash-out provisions say the short duration of the loans and their diversity mitigate risks, and provisions that allow them to freeze funds are disclosed to clients.

"We work very hard to prevent mismatch and make sure that our loans line up with what we’ve promised investors," said Brevet founder Douglas Monticciolo.

TCA's Press said there was an inherent asset and liability mismatch in open-ended funds, even if the loans are short term. “You can’t make it go away. You minimize it the best you can,” he said.

Those who warn of increased risks often recall the 2008 financial crisis, when a combination of loose liquidity, high leverage and quickly-soured loans hurt direct lending firms such as Plainfield Asset Management LLC and Windmill Management LLC's SageCrest.

Plainfield, a $5 billion-plus firm in Greenwich, Connecticut, ended up liquidating its portfolio and shutting down following heavy client redemptions and loan restructurings, even though it reduced leverage before the crisis. Investors ultimately got $0.60 for every dollar invested, according to HFMWeek.

Plainfield founder Max Holmes told Reuters that direct lenders today could be similarly exposed whenever the next downturn comes, especially those with insufficient capital lock-ups. "We have all the same symptoms," he said, citing the loosening of lending standards and high leverage.

A former attorney for SageCrest, which went bankrupt in 2008, did not respond to a request for comment.

The similarities make some experienced investors urge caution even as money keeps flowing in and the economy continues to grow.

"We are ever more cautious about the returns direct lending is going to generate," said Chris Redmond, global head of credit at investment consultant Willis Towers Watson and an early proponent of the strategy. "The risks are starting to add up."

Article Link To Reuters:

Next Leap For Robots: Picking Out And Boxing Your Online Order

Developers close in on systems to move products off shelves and into boxes, as retailers aim to automate labor-intensive process.

By Brian Baskin
The Wall Street Journal
July 24, 2017

Robot developers say they are close to a breakthrough—getting a machine to pick up a toy and put it in a box.

It is a simple task for a child, but for retailers it has been a big hurdle to automating one of the most labor-intensive aspects of e-commerce: grabbing items off shelves and packing them for shipping.

Several companies, including Saks Fifth Avenue owner Hudson’s Bay Co. HBC -1.08% and Chinese online-retail giant Inc.,JD 0.37% have recently begun testing robotic “pickers” in their distribution centers. Some robotics companies say their machines can move gadgets, toys and consumer products 50% faster than human workers.

Retailers and logistics companies are counting on the new advances to help them keep pace with explosive growth in online sales and pressure to ship faster. U.S. e-commerce revenues hit $390 billion last year, nearly twice as much as in 2011, according to the U.S. Census Bureau. Sales are rising even faster in China, India and other developing countries.

That is propelling a global hiring spree to find people to process those orders. U.S. warehouses added 262,000 jobs over the past five years, with nearly 950,000 people working in the sector, according to the Labor Department. Labor shortages are becoming more common, particularly during the holiday rush, and wages are climbing.

Picking is the biggest labor cost in most e-commerce distribution centers, and among the least automated. Swapping in robots could cut the labor cost of fulfilling online orders by a fifth, said Marc Wulfraat, president of consulting firm MWPVL International Inc.

“When you’re talking about hundreds of millions of units, those numbers can be very significant,” he said. “It’s going to be a significant edge for whoever gets there first.”

Until recently, robots had to be trained to identify and grab each item, which is impractical in a distribution center that might stock an ever-changing array of millions of products.

Automation companies such as Kuka AG KU2 -0.04% , Dematic Corp. and Honeywell International Inc. unit Intelligrated, as well as startups like RightHand Robotics Inc. and IAM Robotics LLC are working on automating picking.

In RightHand Robotics’ Somerville, Mass., test facility, mechanical arms hunt around the clock through bins containing packages of baby wipes, jars of peanut butter and other products. Each attempt—successful or not—feeds into a database. The bigger that data set, the faster and more reliably the machines can pick, said Yaro Tenzer, the startup’s co-founder.

Hudson’s Bay is testing RightHand’s robots in a distribution center in Scarborough, Ontario.

“This thing could run 24 hours a day,” said Erik Caldwell, the retailer’s senior vice president of supply chain and digital operations, at a conference in May. “They don’t get sick; they don’t smoke.” is developing its own picking robots, which it started testing in a Shanghai distribution center in April. The company hopes to open a fully automated warehouse there by the end of next year, said Hui Cheng, head of’s robotics-research center in Silicon Valley.

Swisslog, a subsidiary of Kuka, sells picking robots that can be integrated into the company’s other warehouse automation systems or purchased separately. The company sold its first unit in the U.S., to a large retailer, earlier this year, said A.K. Schultz, Swisslog’s vice president for retail and e-commerce. Mr. Schultz declined to name the retailer.

Previous waves of warehouse automation didn’t lead to sudden mass layoffs, partly because order volumes have been growing so fast. And automated picking is still at least a year away from commercial use, robotics experts say. The main challenge lies in creating the enormous databases of 3D-rendered objects that robots need to determine the best way to grip new objects.

Some companies hope to speed development by making some research public. Inc. will hold its third annual automated picking competition at a robotics conference in Japan later this month. For the first time, entrants won’t know in advance all the items the robots will need to pick.

At the University of California, Berkeley, a team is simulating millions of attempts to pick 10,000 objects. Funded by Amazon,Siemens AG and others, the project is meant to build an open-source database for use in any automation system, said Ken Goldberg, the professor leading the project.

“With 10,000 objects, I’m surprised how well it did,” he said. “I would love to show it 100,000 examples and see how well it performs after that.”

Article Link To The WSJ:

Force Congress’s Hand On Health Care

Lawmakers and their staff should have to buy insurance on the exchanges—the way the law requires.

By Heather R. Higgins
The Wall Street Journal
July 24, 2017

If President Trump is serious about repealing ObamaCare—about delivering a better policy with more choice and lower costs—there’s a simple move he could make that wouldn’t require congressional approval. It would align the interests of lawmakers and their staffers with the interests of voters.

Congress is essentially unaffected by the high costs of the ObamaCare exchanges because of a special exemption crafted under the Obama administration. The Affordable Care Act required members of Congress and their employees to participate in the health-insurance exchanges it established. They should have lost the generous coverage they had in the Federal Employees Health Benefit Program and instead bought one of the government-mandated options offered on the ACA exchanges.

In late 2012, staffers and members figured out what was about to happen and begged the Obama administration for relief. Just as Congress was going into its August recess in 2013, the Office of Personnel Management ratified the fiction that the House and Senate each have fewer than 50 employees, and thus qualify as “small businesses.” That enabled OPM to establish a system of special subsidies and exemptions, sparing Congress the embarrassment of a self-serving vote.

Many staffers are exempted and allowed to remain on their old insurance plans. Members of Congress and their designated “official office” staff are insured through the District of Columbia’s small business exchange—but they receive a one-of-a-kind subsidy from their employer (taxpayers) of up to $12,000, or about 70% of their premiums.

All that would be illegal for anyone else. In fact, it’s illegal for Congress too. But since it was established administratively, it can be ended the same way. The president should announce that he is instructing OPM to end the exemption and subsidies for Congress.

This is smart politics. One poll found 94% of voters opposed the special deal for Congress. It would also lead to smart policy: Any continued failure to reform health care means members of Congress and their staff would suffer under the current system. If the president does this, he’d have huge negotiating leverage. He would align the interests of the ruling class with those of his voters, forcing Congress to act. He might even get some Democratic votes.

Article Link To The WSJ:

How Health Care Controls Us

By Robert J. Samuelson 
The Washington Post
July 24, 2017

If we learned anything from the bitter debate over the Affordable Care Act (Obamacare) — which seems doubtful — it is that we cannot discuss health care in a way that is at once compassionate and rational. This is a significant failure, because providing and financing health care have become, over the past half-century, the principal activity of the federal government.

If you go back to 1962, the earliest year with such data, federal health spending totaled $2.3 billion, which was 2.1 percent of the $107 billion budget. In 2016, the comparable figures were $1.2 trillion in health spending, which was 31 percent of the $3.85 trillion budget. To put this in perspective, federal health spending last year was twice defense spending ($593 billion) and exceeded Social Security outlays ($916 billion) by a comfortable margin.

The total will grow, because 76 million baby boomers are retiring, and as everyone knows, older people have much higher medical costs than younger people. In 2014, according to the Kaiser Family Foundation, people 65 and over had average annual health costs of $10,494, about three times the $3,287 of people 35 to 44. Medicare and Medicaid, nonexistent in 1962, will bear the brunt of higher spending.

At a gut level, we know why health care defies logical discussion. We personalize it. We assume that what’s good for us as individuals is also good for society. Unfortunately, this is not always true. What we want as individuals (unlimited care) may not be good for the larger society (overspending on health care).

Our goals are mutually inconsistent. We think that everyone should be covered by insurance for needed care; health care is a right. Doctors and patients should make medical choices, not meddlesome insurance companies or government bureaucrats; they might deny coverage as unneeded or unproven. Finally, soaring health spending should not squeeze wages or divert spending from important government programs.

The trouble is that, in practice, we can’t meet all these worthy goals. If everyone is covered for everything, spending will skyrocket. Controlling costs inevitably requires someone to say no. The inconsistencies are obvious and would exist even if we had a single-payer system.

The ACA debate should have been about reaching a better balance among these competing goals — and explaining the contradictions to the public. It wasn’t.

The ACA’s backers focused on how many Americans would lose coverage under various Republican proposals — more than 20 million, the Congressional Budget Office has estimated. The ACA’s entire gain in coverage would be wiped out, and then some. From 2013 to 2015, the number of insured Americans rose by 13 million, estimates Kaiser. But the ACA’s advocates don’t say much about stopping high insurance costs from eroding wage gains or strangling other government programs.

Meanwhile, congressional Republicans and the Trump White House proposed huge cuts in health spending — $1 trillion over 10 years for the ACA’s repeal alone — while implausibly suggesting that hardly anyone would be hurt or inconvenienced. There was no coherent strategy to reconcile better care with lower costs. Democrats kept arguing that the health cuts were intended to pay for big tax cuts that would go mainly to the rich and upper middle class. Sounds right.

Still, there’s no moral high ground. Some Democrats have wrongly accused Obamacare opponents of murder. This is over-the-top rhetoric that discourages honest debate. It’s also inconsistent with research. Kaiser reviewed 108 studies of the ACA’s impact and found that, though beneficiaries used more health care, the “effects on health outcomes” are unclear.

We are left with a system in which medical costs are highly concentrated with the sickest patients. (The top 5 percent account for half of all medical spending.) This creates a massive resource transfer, through insurance and taxes, from the young and middle-aged to the elderly. (Half of all health spending goes to those 55 and over, who represent just over one-quarter of the population).

And yet, we govern this massive health-care sector — representing roughly a third of federal spending and nearly a fifth of the entire economy — only haphazardly, because it responds to a baffling mixture of moral, economic and political imperatives. It will certainly strike future historians as curious that we tied our national fate to spending that is backward-looking, caring for people in their declining years, instead of spending that prepares us for the future.

We need a better allocation of burdens: higher eligibility ages for Social Security and Medicare; lower subsidies for affluent recipients; tougher restrictions on spending. But this future is impossible without a shift in public opinion that legitimizes imposing limits on health spending.

We didn’t get that with the eight-year Obamacare debate. The compassionate impulse overwhelmed the rational instinct. The result is that health care is controlling us more than we are controlling it.

Article Link To The Washington Post:

Republicans’ Internal Feuds Threaten Legislative Goals Of Trump And The Party

By Sean Sullivan and Robert Costa 
The Washington Post
July 24, 2017

Six months after seizing complete control of the federal government, the Republican Party stands divided as ever — plunged into a messy war among its factions that has escalated in recent weeks to crisis levels.

Frustrated lawmakers are increasingly sounding off at a White House awash in turmoil and struggling to accomplish its legislative goals. President Trump is scolding Republican senators over health care and even threatening electoral retribution. Congressional leaders are losing the confidence of their rank and file. And some major GOP donors are considering using their wealth to try to force out recalcitrant incumbents.

“It’s a lot of tribes within one party, with many agendas, trying to do what they want to do,” Rep. Tom MacArthur (R-N.J.) said in an interview.

The intensifying fights threaten to derail efforts to overhaul the nation’s tax laws and other initiatives that GOP leaders hope will put them back on track. The party remains bogged down by a months-long health-care endeavor that still lacks the support to become law, although Senate GOP leaders plan to vote on it this week.

With his priorities stalled and Trump consumed by staff changes and investigations into Russian interference in last year’s election, Republicans are adding fuel to a political fire that is showing no signs of burning out. The conflict also heralds a potentially messy 2018 midterm campaign with fierce intra-party clashes that could draw resources away from fending off Democrats.

“It’s very sad that Republicans, even some that were carried over the line on my back, do very little to protect their President,” Trump wrote on Twitter Sunday afternoon, marking the latest sign of the president’s uneasy relationship with his own party.

Winning control of both chambers and the White House has done little to fill in the deep and politically damaging ideological fault lines that plagued the GOP during Barack Obama’s presidency and ripped the party apart during the 2016 presidential primary. Now, Republicans have even more to lose.

“In the 50 years I’ve been involved, Republicans have yet to figure out how to support each other,” said R. Emmett Tyrrell Jr., the founder of the American Spectator, a conservative magazine.

On Capitol Hill, Republicans are increasingly concerned that Trump has shown no signs of being able to calm the party. What Rep. Charlie Dent (R-Pa.) called the “daily drama” at the White House flared again last week when Trump shook up his communications staff and told the New York Times that he regretted picking Jeff Sessions to be his attorney general.

“This week was supposed to be ‘Made in America Week’ and we were talking about Attorney General Jeff Sessions,” Dent grumbled in a telephone interview Thursday, citing White House messaging campaigns that were overshadowed by the controversies.

As Trump dealt with continued conflicts among his staff — which culminated Friday in press secretary Sean Spicer resigning in protest after wealthy financier Anthony Scaramucci was named communications director — he set out to try to resolve the Senate Republican impasse over health care.

The president had a small group of Republican senators over for dinner last Monday night to talk about the issue. But the discussion veered to other subjects, including Trump’s trip to Paris and the Senate’s 60-vote threshold for most legislation, which Majority Leader Mitch McConnell (R-Ky.) has said he will not end. That didn’t stop Trump from wondering aloud about its usefulness.

“He asked the question, ‘Why should we keep it’?” recalled Sen. James Lankford (R-Okla.), who attended the dinner.

Two days later, some Republican senators left a White House lunch confused about what Trump was asking them to do on health care. Sen. Susan Collins (R-Maine) said the next day that while the president “made very clear” that “he wants to see a bill pass, I’m unclear, having heard the president and read his tweets, exactly which bill he wants to pass.”

The White House says the president prefers to “repeal and replace” the Affordable Care Act, known as Obamacare. McConnell has also raised the prospect of moving to only repeal the law. Neither option has enough votes. Nevertheless, McConnell plans to hold a vote early this week and bring the push to fulfill a seven-year campaign promise to its conclusion, one way or the other.

“One of the things that united our party has been the pledge to repeal Obamacare since the 2010 election cycle,” said White House legislative affairs director Marc Short. “So when we complete that, I think that will help to unite” the party.

Trump’s allies on Capitol Hill have described the dynamic between the White House and GOP lawmakers as a “disconnect” between Republicans who are still finding it difficult to accept that he is the leader of the party that they have long controlled.

“The disconnect is between a president who was elected from outside the Washington bubble and people in Congress who are of the Washington bubble,” said Sen. David Perdue (R-Ga.), who works closely with the White House. “I don’t think some people in the Senate understand the mandate that Donald Trump’s election represented.”

Trump issued a casual threat at the Wednesday lunch against Sen. Dean Heller (R-Nev.), who has not embraced McConnell’s health-care bill. “Look, he wants to remain a senator, doesn’t he?” Trump said in front of a pack of reporters as Heller, sitting directly to his right, grinned through the uncomfortable moment.

Heller is up for reelection in a state that Trump lost to Hillary Clinton and where Gov. Brian Sandoval (R) was the first Republican to expanded Medicaid under the ACA. Heller later brushed the moment off as “President Trump being President Trump.”

But some donors say they are weighing whether to financially back primary challengers against Republican lawmakers unwilling to support Trump’s aims.

“Absolutely we should be thinking about that,” said Frank VanderSloot, a billionaire chief executive of an Idaho nutritional-supplement company. He bemoaned the “lack of courage” some lawmakers have shown and wished representatives would “have the guts” to vote the way they said they would on the campaign trail.

It’s not just the gulf between Trump and Republican senators that has strained relations during the health-care debate. The way McConnell and his top deputies have handled the legislation has drawn sharp criticism from some GOP senators.

“No,” said Sen. Pat Roberts (R-Kan.), when asked last week whether he was happy with the way leadership has navigated the talks.

As he stepped into a Senate office building elevator the same day, Sen. Ted Cruz (R-Tex.) would not respond to reporter questions about how good a job McConnell has done managing the health-care push. He flashed a smile as the door closed.

McConnell has defended his strategy, saying the process has been open to Republican senators, who have discussed it in many lunches and smaller meetings. Still, when it came time to write the bill, it was only McConnell and a small group of aides who did it. There was no outreach at all to Democrats, who have been united in their opposition.

In the House, the prospect of passing a 2018 budget this summer and a spending bill with funding for the Mexican border wall that Trump has called for remain uncertain, even though Republicans have a sizeable majority in the chamber. GOP disagreements have continued to erupt during Speaker Paul D. Ryan’s (R-Wis.) tenure. There are also obstacles in both chambers to achieving tax reform, which is expected to be among the next significant GOP legislative undertakings.

Trump critics said the ongoing controversies over Russian interference in the 2016 election and probes into potential coordination with the president’s associates would make any improvement in relations all but impossible in the coming months, with many Republicans unsure whether Trump’s presidency will survive.

“The Russia stories never stop coming,” said Rick Wilson, a vocal anti-Trump consultant and GOP operative. “For Republicans, the stories never get better, either. There is no moment of clarity or admission.”

Wilson said Republicans are also starting to doubt whether “the bargain they made — that they can endure Trump in order to pass X or Y” — can hold. “After a while, nothing really works and it becomes a train wreck.”

Roger Stone, a longtime Trump associate, said Trump’s battles with Republicans are unlikely to end and are entirely predictable, based on what Trump’s victory signified.

“His nomination and election were a hostile takeover of the vehicle of the Republican Party,” Stone said. He added, “When you talk to some Republicans who oppose Trump, they say they will keep opposing him but can’t openly say it.”

Some Republican lawmakers have been pained to talk about the president publicly, fearful of aggressively challenging their party leader but also wary of aligning too closely with some of his controversial statements or policy positions. Instead, they often attempt to focus on areas where they agree.

“On foreign policy, I think he very much is involved in a direction that’s far more in alignment since he’s been elected with a bulk of the United States Senate than during the campaign,” said Sen. Bob Corker (R-Tenn.), chairman of the Foreign Relations Committee.

Amid the discord, there are some signs of collaboration. The Republican National Committee has worked to build ties to Trump and his family. In recent weeks, Trump’s son Eric, his wife, Lara, and RNC chairwoman Ronna Romney McDaniel, among other committee officials, met at the Trump International Hotel in Washington to discuss upcoming races and strategy.

That meeting followed a similar gathering weeks earlier at the RNC where Trump family members were welcomed to share their suggestions, according two people familiar with the sessions who were not authorized to speak publicly.

Yet the friction keeps building. Among Trump’s defenders, such as VanderSloot, who said the president is “trying to move the ball forward,” there are concerns he is picking too many fights with too many people. “I think he’s trying to swat too many flies,” VanderSloot said.

The broader burden, some Republicans say, is to overcome a dynamic of disunity in the party that predates Trump and the current Congress. During the Obama years, it took the form of tea party-vs.-establishment struggles, which in some cases cost Republicans seats or led them to wage risky political feuds.

“There was a separation between Republicanism and conservatism long before he won the White House,” said former Republican National Committee chairman Michael Steele. “The glue has been coming apart since Reagan.”

Article Link To The Washington Post:

Two Big Forces Could Thwart This Clockwork Stock Market Rally Come August

-- Quietly and slowly grinding to new highs, the market appears well-supported by benign economic conditions, strong credit markets and rising corporate earnings.
-- Yet stocks' ability to ignore potential threats could be tested come August by two notable forces.
-- Might this bring the first notable pullback in nearly a year?

July 24, 2017

The stock market has been stuck in low gear—in the best possible way.

Think about it: Driving in low gear is no good for going fast, but is great for climbing. And when the declines come, staying in low gear makes the descent more controlled and safer.

This pretty well captures the way the S&P 500 index has moved to a 10 percent gain this year in what's arguably been the calmest market of all time.

We are one year removed from the last five-percent pullback, and it's been nearly nine months since even a three-percent dip. The majority of times in its history the CBOE S&P 500 Volatility index has settled below 10 have come in the past few months.

While the overall breadth of the market has been sturdy, with more stocks rising than falling on a consistent basis, sectors have moved in and out of leadership in a kind of "immaculate rotation" that has refreshed and supported the broad indexes while keeping strong segments from getting over-extended and preventing weak areas from buckling the tape.

This has been the market's character and will remain so until these patterns shift. The market, for many investors, has been too quiet to trust fully, yet too strong to fight with much conviction.

Stocks appear well-supported by benign economic conditions, strong credit markets and rising corporate earnings. Deflationary technological disruption combined with near-full employment, short-term interest rates below the inflation rate with average weekly earnings rising faster than consumer prices—all this seems to form something like today's version of a "Goldilocks" backdrop for financial assets.

Yet with all this, stocks' ability to ignore potential threats could be tested come August by two potential impediments, as seasonal headwinds and elevated investor sentiment come together.

Might these bring the first notable pullback in nearly a year—or just another opportunity for the bull market to earn the benefit of the doubt?


Two things are undeniable: History says that August tends to bring a tougher path for stocks, and the current market has not obeyed seasonal patterns much at all.

The nearby chart from Strategas Research shows the S&P 500 far outperforming the "typical" track, and any closing of the gap would mean a long-delayed setback for the index. Others are pointing to broader patterns involving the four-year election cycle and a high incidence of market accidents or peaks (coincidental or not) in years ending in 7.

Two years ago we entered late July with the same sort of resilient, low-volatility action—that one far more dominated by a handful of tech stocks than today's market is—and hit turbulence in late summer that started a brutal correction. But that required an oil collapse, global industrial downturn and "earnings recession," none of those evident right now.

The bottom line is, seasonal risk is something to bear in mind. Yet February was "supposed" to be weak and this year was strong; May has a tough reputation and this year the market barely hiccuped.


The market's humbling of the bears has pulled many converts into the bullish crowd. Even those strategists who have correctly been positive on the market are flagging some surveys of professional investors that show optimism rising toward levels that can be a restraint on further short-term upside.

Jeff deGraaf of Renaissance Macro says: "The latest Investors' Intelligence and Consensus Inc. [survey] figures show 90-100th percentile readings in bull categories. Simply put, this shows that there are more bulls than bears in the market right now. With the market showing green lights across the board, this represents one of the few headwinds."

Other gauges of mood, such as options activity and low cash levels in retail and institutional brokerage accounts, also support the idea that folks are generally positioned for further record highs.

And, sure, there are elements of the rally that arguably smell of "culmination" rather than a fresh, peppy departure for more distant points higher.

The S&P 500 seems to have a date with the 2500 level, up just another 1 percent, a nice round number that's two-thirds higher than the 1500 mark that capped the market for 13 years. The tech sector just reclaimed its year-2000 high. The Nasdaq just completed a rare 10-day win streak.

S&P 500, 1 Year

But none of this flashes brightly as a sign of rampant speculation or headlong euphoria, and is countered by abiding signs of caution: Wall Street strategists' targets remain muted, retail inflows to stocks are inconsistent, and Friday saw the third-highest volume in five years for options bets that the VIX will rise (implicitly a bet on more market turbulence with a downside tilt).

This is no longer a hated bull market, and it doesn't necessarily owe investors much more, but the sentiment setup right now argues more for a pause or that long-awaited pullback than a serious peak. Markets tend to weaken and get jumpy before they make a top, and this one hasn't yet.

European stocks, consensus darlings right now, have shed more than 4 percent from recent highs as the euro has surged. And stock reactions to U.S. earnings results so far has been skewed toward "sell the news" so far this reporting season.

These are things to monitor for a potential change in market character. It's far too early to say that one is truly at hand. But the approach of August, with investors feeling more comfortable, is the time to start listening for the gears starting to slip on this low-gear market.

Article Link To CNBC:

As GDP Will Show, U.S. Economy On Same Track

Slow growth, inflation means Fed not hitting all its targets, either.

By Jeffry Bartash
July 24, 2017

Despite all the sturm und drang halfway through a wild first year for President Trump, the U.S. economy is no better off now than before he took office.

This the week the government is expected to report a nearly 3% advance in second-quarter gross domestic product, the official scorecard for the economy.

While that would mark a big improvement on 1.4% growth in the first quarter, it would leave the U.S. on the same 2% trajectory it’s been on since the end of the Great Recession. That’s less than two-thirds the nation’s historic rate of growth.

“I think expectations after the election got way ahead of themselves,” said Richard Moody, chief economist at Regions Financial. “Growth is pretty much where it’s been the past eight years.”

The former businessman-turned-president promised to change all that, of course. Trump and his advisers have repeatedly promised they could ramp the economy up to 3% growth, an outcome that could better the lives of millions of Americans now and in the future.

Yet as the White House’s failure to pass a health-care makeover shows, Washington is a hard place to get things done. Most of the president’s agenda such as tax cuts and higher spending on public works is languishing, even in a Congress controlled by the president’s own party.

And pessimism is growing about White House scoring any big wins before the end of 2017.

“At this point, it’s highly unlikely any substantive policy reforms — health care, tax and infrastructure— will be accomplished this year,” predicted Joe Brusuelas, chief economist at the business-consultant firm RSM.

Even if the White House scores some big wins, however, the effects are unlikely to work their way through the economy until 2018 at the earliest.

The gridlock in Washington and unswerving path of the economy are certain to be on the minds of senior Federal Reserve officials when they convene to set the level of a key U.S. interest rate. The Fed is expected to stand pat.

What Wall Street wants to know after the Fed meeting on Wednesday is whether the central bank is turning cautious again.

The Fed still seems unified on its plan to start selling off part of its $4.5 trillion portfolio in Treasurys and mortgage-backed bonds that it acquired over the past decade to keep down U.S. interest rates. Investors are hoping this week to find out just exactly when the drawdown will begin.

Investors are less certain about whether the Fed will proceed with plans to increase the cost of borrowing one more time in 2017.

Some senior Fed officials appear to be having second thoughts, especially after a recent slowdown in inflation. Even with the unemployment rate near a 16-year low of 4.4%, wages are only rising modestly and price pressures more broadly have waned.

Nor are consumers or businesses spending and investing at levels that suggest an overheating economy — far from it.

“Even more hawkish officials seem to have altered their views due to inflation,” said Omair Sharif, senior economist at SG Global Economics.

As a result, investors are unsure the Fed will stick to script. The closely followed FedWatch tool puts the odds of another Fed rate hike in 2017 at 46.9% in December.

Article Link To MarketWatch:

Stocks Brace For Volatility In Earnings Deluge; Fed Meeting Looms

Nearly 200 companies on the S&P 500 to report results.

By Wallace Witkowski
July 24, 2017

With nearly a fifth of quarterly earnings results out, investors are divided on how early corporate reports are serving as an indicator of the overall health of the U.S. economy, and that could contribute to a volatile week as stocks linger near record highs.

On Friday, stocks finished lower with the Dow Jones Industrial Average DJIA, -0.15% declining 0.3% for the week, and the S&P 500 index SPX, -0.04% and the Nasdaq Composite Index COMP, -0.04% posting weekly gains of 0.5% and 1.2%, respectively.

Earnings so far are confirming less-than-stellar economic data recently, said Paul Nolte, portfolio manager at Kingsview Asset Management. While some early reporting banks topped profit expectations, loan activity is still not robust, while revenue weakness from companies like International Business Machines Corp.IBM, -0.39% are cause for concern, he said. Plus, a less-than-rosy profit outlook from General Electric Co. GE, -2.92% on Friday added to concerns.

Some of the economic factors being confirmed by earnings so far are weak inflation, and a softening of industrial production numbers like the Fed’s Philly manufacturing report and Empire State manufacturing index, Nolte said.

In fact, that weakness may find its way into commentary from the Federal Reserve’s two-day Federal Open Market Committee meeting, which finishes up on Wednesday. Nolte said he’s going to be concentrating on comments concerning unraveling the Fed’s $4.5 trillion balance sheet and how the Fed may start to favor that as a tightening measure over rate hikes.

With respect to the overall market, Nolte expects a continuation of the weak dollar DXY, -0.03% and how that will make international stocks more attractive. As investors continue to prop up record prices in U.S. stocks for lack of a better alternative, Nolte sees an inevitable correction in the works, but cautions that there’s no real way to time it.

“The market is like a balloon floating around looking for a pin,” Nolte said.

On the flip side, that may be a glass-half-empty viewpoint. Financial stocks finished lower for the week, with the Financial Select Sector SPDR ETF XLF, +0.00% off 0.5%, following major bank reports but the sector is still poised for double-digit earnings gains this season even in a low-interest rate environment, said Karyn Cavanaugh, senior market strategist at Voya Financial.

“The reaction to banks was that people didn’t like the composition of the earnings,” Cavanaugh said. “The bottom line is that financials have been getting the dirt sandwich lately, and they’re poised for gains once there is a policy change.”

With regards to the Fed’s meeting, Cavanaugh said it would be important to note if the Fed’s tone pivots from its recent dovish bent. Following perceived dovishness from Fed Chairwoman Janet Yellen before Congress last week had a hand in boosting markets, but the Fed is also mindful it needs to build up its toolbox to deal with the next economic downturn.

“If the Fed appears more hawkish, then that could rile markets,” Cavanaugh said. “The Fed’s intent on raising rates because they need the dry powder, that’s probably the most important thing.”

Nearly 200 companies on the S&P 500 are expected to report in the coming week. Among the largest companies reporting are Google parent Alphabet Inc.GOOGL, +0.17% GOOG, +0.49% on Monday; McDonald’s Corp. MCD, -0.19% and AT&T Inc. T, -0.03% on Tuesday; Facebook Inc. FB, -0.06% Coca-Cola Co.KO, +0.47% and Boeing Co. BA, +0.88% on Wednesday; Inc.AMZN, -0.29% Comcast Corp. CMCSA, +0.35% Intel Corp. INTC, -0.06% and Procter & Gamble Co. PG, +0.01% on Thursday; and Exxon Mobil Corp.XOM, -0.92% , Chevron Corp. CVX, -1.32% and Merck & Co. MRK, -0.49% on Friday.

Earnings for the S&P 500 are tracking at an estimated 7.2% growth for the second quarter with about 20% of companies having already reported, according to John Butters, senior earnings analyst at FactSet.

That figure, however, can be a little misleading given that energy earnings are expected to rise more than 300% from the year-ago quarter. Only the tech sector and the financials sector are expected to post double-digit profit growth with gains of 10.4% and 10.1%, respectively. Seven out of 11 sectors are expected to turn in year-over-year growth in the low single digits or worse.

Article Link To MarketWatch:

Singapore Startup Takes Bitcoin Into Real World With Visa

TenX’s Visa prepaid card converts digital currencies to cash; The company has raised $80 million through a token sale.

By Krystal Chia and Sterling Wong
July 24, 2017

A recurring challenge for bitcoin and other cryptocurrencies is how to make them work in the real world. A Singapore-based startup says the answer is its Visa card.

TenX is pitching its debit card as an instant converter of multiple digital currencies into fiat money: the dollars, yen and euros that power most everyday commerce. The company said it takes a 2 percent cut from each transaction and has received orders for more than 10,000 cards. While transactions are capped at $2,000 a year, users can apply to increase the limit if they undergo identify verification procedures.

Tenx’s bid to make digital currencies easier to spend comes amid massive volatility and infighting within the cryptocurrency community. Bitcoin, the most popular, slumped after reaching a record in June amid concerns about a split in two, only to recover as fears faded. The company has built an app that serves as a digital wallet connected to the Visa card so that when it’s swiped at a cafe or restaurant, the merchant is paid in local currency and the users’ crypto account is debited.

“You’re mixing two worlds that are night and day,” co-founder Julian Hosp said in an interview. “When the user spends the cryptocurrency, we have to instantly switch these currencies to fiat and pay to Visa straight away. It’s a lot of pathways."

Hosp said transactions are processed immediately and it doesn’t impose any charges on top of the conversion fee that is set by cryptocurrency exchanges, which typically is 0.15 to 0.2 percent. The card now supports eight digital currencies, including the lesser-known dash and augur, and aims to offer about 11 of them by the end of the year.

TenX currently processes about $100,000 of transactions a month. By the end of 2018, it’s targeting $100 million in monthly transactions and a million users.

TenX has an advantage in moving early, but the startup can expect competition in the future from major financial institutions and venture capitalists with deeper pockets and direct access to clients and databases, said Mati Greenspan, a Tel Aviv, Israel-based analyst at social trading platform eToro.

“It’s an incredible concept,” said Greenspan. “At the end of the day, it’s going to depend a lot on customer relations. Are they meeting the customers’ expectations? Can somebody else do it better?”

TenX’s efforts to make digital currencies spendable come as it joined the many blockchain-based startups taking advantage of initial coin offerings. ICOs are a cross between crowdfunding and an initial public offering that firms use to raise funds by issuing digital tokens rather than stock.

In its token sale last month, TenX raised $80 million with about half to be used to expand operations while the rest will provide liquidity for a cryptocurrency exchange in the works, said Hosp.

The company had previously raised $120,000 from angel investors and $1 million in a seed round led by venture capital firm Fenbushi Capital, which lists Ethereum’s co-founder, Vitalik Buterin, as a general partner. TenX isn’t expecting to become profitable in the next two years as it focuses on expanding services.

“One thing we want to offer in the end, is that you can switch cryptocurrencies within the app,” said Hosp. “If we do this, we can become the market maker, which can bring in a lot of revenue.”

Article Link To Bloomberg:

Southeast Asia's Grab To Get $2.5 Billion Extra FIrepower In Battle With Uber

By Aradhana Aravindan
July 24, 2017

Southeast Asian ride-hailing service Grab expects to raise $2.5 billion in a record round of fundraising to cement its lead over Uber Technologies Inc [UBER.UL] in the region and grow its payments platform.

Southeast Asia has become a key battleground for technology startups vying for a market of over 600 million people, with a burgeoning middle class as well as a youthful, internet-savvy demographic.

Grab's Chinese peer Didi Chuxing and Japan's SoftBank Group Corp, both of which are existing investors, will contribute up to $2 billion to lead the current financing round, it said in its statement on Monday.

The firm expects to raise an additional $500 million, bringing the total to $2.5 billion in this round, which it said would be the largest-ever single financing in Southeast Asia.

Grab will be valued at more than $6 billion at the close of this round, according to a source close to company.

The Singapore-headquartered company said it has a Southeast Asia market share of 95 percent in third-party taxi-hailing and 71 percent in private vehicle hailing. It operates private car, motorcycle, taxi and carpooling services across seven countries in the region, with 1.1 million drivers.

"With their (Didi and SoftBank's) support, Grab will achieve an unassailable market lead in ridesharing, and build on this to make GrabPay the payment solution of choice for Southeast Asia," Anthony Tan, group chief executive officer and co-founder of Grab, said in the statement.

Building on soaring user numbers of its Grab ride-hailing app and GrabPay function, the five-year-old start-up aims to transform into a consumer technology firm that also offers loans, electronic money transfer and money-market funds.

Grab bought Indonesian payment service Kudo earlier this year, and has said it is seeking more acquisitions to support rapid growth.

"The heterogeneity of the banking system, multiple competitors in each country, and multiple regulations to meet are barriers to success," said analyst Rushabh Doshi at researcher Canalys.

"However, given no single payment solution has been able to work across all S.E. Asian markets, Grab stands a good chance of building market share via its ride-sharing business model, and then extend the payments to other adjunct businesses," he said.

Grab competes with the likes of Uber, the world's largest ride-hailing service, and Indonesia's Go-Jek. Tencent Holdings Ltd invested around $100 million to $150 million in Go-Jek, sources told Reuters earlier this month.

Grab's fundraising comes at a time when San Francisco-based Uber has been beset by complaints about its workplace culture, a federal inquiry into software to help drivers avoid police, and an intellectual property lawsuit by Waymo, the self-driving car unit of Google parent Alphabet Inc.

Uber has been expected to increase its focus on India and Southeast Asia after retreating from China last year.

Grab's previous investors include sovereign wealth fund China Investment Corp [CIC.UL], hedge fund Coatue Management LLC, venture capital firm GGV Capital, and Vertex Ventures Holdings - a subsidiary of Singapore state investor Temasek Holdings (Pte) Ltd [TEM.UL].

Article Link To Reuters: