Why earnings could save the market this week

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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After a terrible week for stocks, bulls are looking for earnings to come to the rescue.

The S&P 500 lost 3.1 percent in the prior week, for its worst week since May 2012. Notably, the week wasn’t all red, with stocks interrupting their drumbeat of down days to enjoy the best day of the year on Wednesday. But traders sent the S&P to its close in months on Friday.

More stomach-churning sessions may be ahead as earnings season starts in earnest this week, with giants like JPMorgan Chase, Google, and General Electric (among many, many others) set to unveil their third-quarter results. The big question is whether the spate of earnings will staunch the selling.

“I think the bar is quite high for people to start to get comfortable,” said Thomas Lee, managing partner at Fundstrat Global Advisors. Noting the bevy of issues around the world—which range from hard questions about Europe, to the Ebola virus, to the Federal Reserve ending its quantitative easing program—the generally bullish Lee acknowledged that “there’s a huge list of worries here.”

Read More Texas health care worker tests positive for Ebola

The concern underscoring all of these smaller issues has been valuation. As Nicholas Colas of ConvergEx wrote in a Friday note, “Against measures of long-term earnings power, the S&P 500 is clearly expensive at 25 (times) trailing 10-year earnings. When compared to current earnings power of about $120, the multiple is 16x.

While that might be reasonable in an environment of stronger global growth, “it is, perhaps, not a multiple appropriate for a sloppy expansion in the U.S. and threats of deflation and recession elsewhere,” Colas said.

However, Lee said none of the recent headlines cause him to second-guess his conviction that the US economy will stay strong.

“When people get concerned about valuation, it’s because they’re insecure about the length of this business cycle. The valuation concerns really speak to how many investors believe that this rally is all because of central bank actions. But earning are only going to peak when this business cycle peaks,” Lee said. The investor added that the upcoming corporate earnings should reassure investors that this hasn’t happened just yet.

“Investors are going to look back and realize that this was one of the better chances for them to really step in,” he concluded.

Read More Earnings will be inflection point for stocks: Pros

Initial earnings reports have been impressive, with 70 percent of companies beating earnings estimates, according to FactSet. And while the S&P 500’s price compared to earnings expectations is nearly 50 percent above the low levels exhibited in the summer of 2011, valuations have fallen significantly below the July peak.

Overall expectations for the upcoming earnings season are about in line with those for recent quarters, with analysts expecting 4.5 percent earnings growth, according to FactSet senior earnings analyst John Butters.

“That probably picks up 2 to 3 percent, so we’ll end up in the 7 percent range assuming we see the normal number of surprises,” Butters said.

Read More Why earnings expectations may be too hopeful

And whether earnings impress or disappoint, traders are salivating over the prospect that earnings reports will lead to more outsized moves.

“I think there’s going to be a lot of opportunity as we see a diverse cross-section of earnings next week,” predicted Jeff Kilburg of KKM Financial. “Pick your spots, because it’s going to be volatile all week.”

But ultimately Kilburg, like Lee, is bullish.

“I want to buy some type of panic on Monday,” he said on Friday after the market closed.

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OPEC: Milder winter to pressure oil price further

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Why the strong dollar may sink junk bonds

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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FA simmering mix of a strong US dollar and weak commodity prices may be brewing up trouble for junk bond exchange-traded funds (ETFs) with a hefty weighting in materials companies.

“If the US dollar stays strong, that will exacerbate the impact of the weaker commodity prices” on miners` cash flow and the ability to meet debt payments, said May Zhong, a credit analyst at Standard and Poor`s.

Coal companies, especially US-based ones competing in the export market, are a particular concern, she said. Faced with oversupply, thermal coal prices  have fallen to near five-year lows, while the US dollar index  has risen as much as 8.3 percent so far this year.

But Australian miners may also take a hit, she said. “The Australian dollar hasn`t fallen to the same extent as major commodity prices. It`s still relatively strong compared to the US dollar,” she said.

“You do need a weak local currency to help those [B-rated] miners or shield them from weaker commodity prices,” Zhong said.

That may have a knock-on effect on the high-yield bond ETFs, which in turn may weigh the entire junk-bond segment. Around 14.7 percent of the holdings of the iShares iBoxx high-yield ETF, which tracks the Markit iBoxx index, are in the oil and gas industries, while another 6.5 percent are in basic materials.

The ETF has around USD 13.3 billion in net assets. While that`s a drop in the bucket compared with a total bond market estimated at around USD 38 trillion, some analysts consider bond ETFs a market risk as they are more susceptible to hot money flows, potentially affecting the trading liquidity of underlying bonds. Around 37 percent of US corporate credit is held by households and funds, according to RBS data from August.

To be sure, the default rates on bonds remain low, with SandP noting that in the 12 months through June of this year, 25 speculative grade issuers defaulted. That compares with more than 900 holdings in the iShares iBoxx ETF.

But while the global default rate is 1.65 percent among all speculative-grade bonds, it`s at 3.1 percent for US speculative-grade energy and natural resources players, according to SandP data; among the 47 global corporate defaults this year, 14 were in sectors related to energy, mining or other natural resources.

Some remain relatively unconcerned.

“Commodity prices haven`t been low enough, long enough to drive widespread defaults. We`re some way off from that,” said Will Oswald, global head of fixed income, commodity and currency research at Standard Chartered “The company would need to be close to default [for the stronger dollar] to be a material risk. You would already see signs of stress in those companies.”

Others see the effect of a stronger dollar on commodity companies` debt as more of a longer-term risk.

“It`s pretty far away for most companies, but it is a risk,” said Steve Goldman, managing director at fixed income manager Kapstream Capital.

He thinks the rising cost of capital for high-yield commodity companies may be a bigger concern, noting many of these companies, particularly in Asia, rely on floating rate debt, such as bank loans, rather than fixed-rate debt. This may become an issue as the US Federal Reserve is widely expected to raise interest rates in the next year, he noted.

Some active bond managers are simply avoiding taking a position on commodity issuers.

Raymond Lim, head of Asian bonds at Amundi, which has more than 800 billion euros (USD 1.02 trillion) under management, views the US dollar`s rise as more of an interest coverage and earnings issue for commodity companies, rather than a default risk, but he noted that Amundi is “not too positive” on that sector, preferring other parts of the bond market.

-By CNBC.Com`s Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

Copyright 2011 cnbc.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Health of global economy is worrying: Stiglitz

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Fuel inflation a risky juggle for this Asia heavyweight

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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A government move to reduce crucial fuel price subsidies could hit`s largest economy hard, analysts warn.

Indonesia, which enjoys some of the world`s lowest petrol prices thanks to USD 20 billion in annual fuel subsidies, could see prices rise between 13 US cents and 25 cents -an increase of up to 46 percent-in November, according to analyst estimates.

As a result, annual inflation is expected to spike high above the central bank`s range of 3.5 to 5.5 percent.

United Overseas Banking (UOB) is predicting fuel prices to increase 46 percent by November, which will bring the average inflation rate to 6.5 percent this year. Meanwhile, Barclays is expecting a 23 percent rise in November, followed by another increase in 2015, resulting in a 6.2 percent inflation rate for 2014.

“Higher fuel prices diminish disposable household income and hence discretionary spending. This will subtract from a largely consumption-driven economy,” said Vishnu Varathan, senior economist at Mizuho Bank.

The Indonesian government last increased subsidized fuel prices in June 2013 by 44 percent, the first in five years, sending inflation up to 8-plus percent. The price hike also sparked clashes in the capital city of Jakarta, where protesters fought with police.

Global investors are expected to cheer the decision. The fuel subsidy has contributed to the country`s ballooning current account deficit, expected to exceed 3 percent of gross-domestic product (GDP) this year. Fuel subsidies account for nearly a fifth of the government`s budget.

“This is good news insofar that fuel subsidy burden has been the main fiscal bugbear, extracting a toll on investor confidence,” Varathan added.

Central bank debate

In an attempt to stop prices spiraling out of control once the subsidies have been cut, analysts expect Bank Indonesia (BI) to raise the main interest rate from its current 7.5 percent — the first time in a year.

“Depending on the timing of these fuel price adjustments, we are now penciling in two 25 basis-point hikes in 2015 – first in Q1 after the November 2014 fuel price adjustment, and then once more after the fuel price hike in Q3 of 2015,” said economists at Barclays.

However, Citi believes that a rate hike may not be a first resort for the central bank.

“In light of weakening credit growth and domestic demand, we are more inclined to believe that interest rate hikes will probably not be high up on BI`s priority list of responses,” analysts said in a report.

Timing is key

President-elect Joko Widodo`s need to address fiscal imbalances may be urgent for the economy, but economists say timing could make all the difference.

Euben Paracuelles, Southeast Asia economist at Nomura, told CNBC, that it would be more prudent for Widodo to take action next year.

“This is a political decision; it`s very hard for me to see him have the incentive to do it so early into his term. Besides, as we`ve seen in the latest political developments, things are looking less and less supportive. So, until he gets more parliamentary support, I think fuel price hikes will be delayed,” he added, referring to news of opposition parties winning key posts in parliament last week.

 Copyright 2011 cnbc.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Alibaba sparks hope for Asia e-commerce firms

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Alibaba `s blockbuster trading debut in the US last month generated a sense of optimism among Asia`s e-commerce players, who believe that the Chinese behemoth`s success bodes well for them.

Hong Kong-based online retailer eCargo, for instance, believes the euphoria surrounding Alibaba`s record initial public offering (IPO) is positive for its upcoming listing in Australia.

“We believe that Alibaba and Jack Ma are great ambassadors for the e-commerce market in China. I think they did very well in telling the story of China`s e-commerce and most importantly, draw the picture where we are headed for the coming years,” CEO Christopher Lau told CNBC Asia`s ” Street Signs ” on Tuesday.

eCargo hopes to raise up to USD 35 million (approximately 40 million Australian dollars) through the IPO, which values the firm at USD 198 million. The company has teamed up with international retailers including Australian department store Myer and British fashion label Karen Millen in the past, and believes that it offers an alternative choice for investors keen to buy into the mainland`s booming e-commerce market.

“Alibaba has developed a great market online but what that market supplies is a handful of international brands and quality products. We are looking to bring more international brands into China [and] we feel this is a huge opportunity as Chinese consumers switch towards higher quality products and better brands,” Lau said.

Beyond China

Major e-commerce companies across Asia also read the results of Alibaba`s IPO as an indication of investor confidence in the sector.

“The Alibaba IPO validates [the argument that] there is a large opportunity in Asia`s emerging markets for e-commerce,” said Sachin Bansal, co-founder and CEO of Indian e-retailer Flipkart. “It`s a great example and very motivational for us.”

Malaysia`s e-payment services giant, MOL Global, was also banking on the Alibaba-induced euphoria as it debut on the Nasdaq Composite on Thursday (October 9). It will be the first Malaysia-based firm to list on a US exchange in over 10 years; the float has generated positive response with its book covered after first day of bookbuilding.

The company, which is majority-owned by Malaysian billionaire Vincent Tan, raised USD 263 million by offering 13.5 million shares at USD 12.50 – the low end of price range.

However, shares of the Malaysian online payment provider closed down over 4 percent at USD 8.14.

“US investors are interested in MOL because of its leading position in the under-penetrated Southeast Asian markets, high growth rate and profitability,” Kathleen Smith, IPO ETF manager at Renaissance Capital, told CNBC via email.

“However, they also took issue with the valuation that bakes in higher than average growth forecasts and the poor trading of its peers [like] Qiwi  Xoom  and Qihoo 360 over the past month. Despite the success of Alibaba`s IPO, investors are still very selective about the quality of the company and its valuation,” Smith added.

Cautious view

Some people may be overestimating the extent to which Alibaba`s record IPO will benefit its e-commerce peers, said Jeff Dorr, equity analyst at J Capital Research.

“Alibaba`s stock performance will probably be examined as a point of reference during the IPO for these e-commerce listings, but ultimately, in the long run, the stock performance of each company is going to depend on their individual profits,” Dorr said.

Investors have to question how similar these other businesses are to Alibaba, he added: “Do they hold inventory, do they control their own payment system and what is the market penetration of their e-commerce in these countries.”

Copyright 2011 cnbc.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Buckle-up: Global stocks in for long roller coaster ride

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Whipsawing global markets scream fears about global growth conditions and unless data from the world`s major economies improve, a deeper correction is on the cards, say strategists.

Asian markets tumbled on Friday, extending the sharp selloff in US and European equities overnight as intensifying concerns over the health of the euro zone economy hit risk appetite.

Australia`s benchmark SandP/ASX 200 index led losses, falling 1.8 percent in the morning session, while Japan`s Nikkei 225  and South Korea`s KOSPI were both off 1.2 percent.

“There are a lot of questions at the moment and not a lot of answers in regards to Europe`s economy, the stability of China`s housing market and the timing of the Fed`s first rate hike,” Chris Weston, chief market strategist at IG told CNBC.

“The hallmarks are in place for a stock market correction – Brent crude prices are falling, long-end US bonds are telling the story that markets are starting to look at low growth and low inflation for a long period of time,” he said.

In order to arrest the volatile downtrend in stocks, there needs to be a good run of economic data out the world`s leading economies, Weston said.

Negative macro news flow out of Europe, China and Japan in recent weeks has fueled concerns that the global recovery may be stalling.

On Tuesday, the International Monetary Fund (IMF) cut its global growth forecasts to 3.3 percent for this year and 3.8 percent for next year – from 3.4 percent and 4 percent.

`Correction is underway`

Nicholas Ferres, investment director, global asset allocation, Eastspring Investments say the bearish price action suggests a market correction is already underway.

“Overnight the mindlessly bullish JBTD (Just Buy the Dip) crowd felt the cold steel of Edward Scissor hands. Failure of the market to extend the rebound from the prior day probably suggests that a deeper correction is likely underway,” he said.

“From my perch, this reflects a genuine growth scare, evident in the macro news flow from Europe, China and Japan, rather than a direct fear of US policy normalization,” he said.

It has been a choppy week for global markets, which sold-off on Tuesday after the IMF growth downgrade, recovered on Wednesday as minutes from the Federal Reserve`s policy meeting in September suggested it would move more cautiously raising interest rates only to slump again on Thursday.

Ferres points out that outside the US, the fall in equity markets has already been material. In Asia, South Korea`sKOSPI  and Australia`s SandP/ASX 200  have fallen 3 percent and 4.4 percent, respectively, over the past three months. In Europe, Germany`s DAX  and France`s CAC 40  are off 8.2 percent and 5 percent, respectively, over the same period.

Hang in there

Kenny Polcari, director at O`Neil Securities recommends staying invested in the market, as he believes the current sell-down is more of a “shake out” than the beginning of a correction.

“I think you`ve got to ride this one out. I don`t think it`s the beginning of the end,” Polcari told CNBC.

Looking at technical, the SandP 500 index wouldneed to fall to 1,800 for a “formal” 10 percent correction, and it`s unlikely to get there, he said. The index closed at 1,928 on Thursday.

“If it goes down to test the 200-moving day average at 1,900 or 1,905, which is exactly where I think it`s going to go, that`s where it`s going to find stability,” Polcari said.

Copyright 2011 cnbc.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Bank of England holds fire as wage growth lags

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Bank of England left its benchmark interest rate unchanged as expected on Thursday, as wage growth and productivity remained surprisingly weak, lagging the country’s economic recovery.

The UK central bank’s nine-member Monetary Policy Committee left the bank’s main interest rate at a record low of 0.5 percent and the total size of its bond portfolio at £375 billion ($617 billion) after their October policy meeting.

Read More: First alarm bells for UK economy as rate hike looms

The UK has enjoyed firm economic growth in recent quarters and unemployment has fallen more than expected. The International Monetary Fund (IMF) said the U.K will be the fastest growing major economy in the developed world this year, with growth of 3.2 percent in 2014 – outstripping the rest of the G7 including the United States, Germany and France.

Read More: Wage conundrum weighs as BoE meets

But this economic recovery has not translated into better wages – something the BoE is waiting for before it raises rates. In its August inflation report, the Bank of England warned that pay growth remained weak in early 2014, falling to around 1 percent in the second quarter from 0.5 percent in the first three months of the year.

The bank has insisted that a rate hike is contingent on recovery in wage growth—which it does not expect in real terms until the middle of 2015.

As such, economists and strategists forecast the central bank will not raise the benchmark interest rate until early next year, although Bank of England Governor Mark Carney has hinted that a hike is “nearing”.

Read More: UK economy to grow at fastest rate since 2007

Growth to slow?

Despite expanding by 0.9 percent in the second quarter, there are concerns that Britain’s economic growth could slow in the near future. The IMF expects gross domestic product (GDP) to slip to 2.7 percent next year, while data from the British Chambers of Commerce (BCC) on Thursday indicated that the economy slowed in the third quarter of this year.

“UK growth cannot rely permanently on consumer spending, and on unsustainable current account and budget deficits,” said David Kern, chief economist at the BCC. “Unless exports and investment play a bigger role in growth, the recovery will stall.”

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Is Asia the best place for women in finance?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Asia might be the place to be for females working in finance, an industry infamous for its grueling hours and male-dominated management culture.

Eighty-four percent of finance professionals in Asia Pacific would recommend their company to a female friend, compared with 82 percent in the US, 80 percent in Europe and 66 percent in the Middle East, according to a global survey of 5,000 banking and finance professionals published by recruitment site eFinancial Careers on Tuesday.

“Asia Pacific is a friendly place for female professionals in financial services. We are seeing many of the local and international financial services institutions here developing gender diversity initiatives,” said George McFerran, director at eFinancial Careers.

Read More Gender wage gap in Asia set to get worse

“Flexible working hours, childcare benefits and mentoring programs are among the most popular. They are proven ways to improve the gender balance and they also help attract top female talent,” he said.

Mother-of-two Myra Lim, who is employed at ANZ in Singapore, enjoys flexibility in her work day.

“I get a lot of work-life balance as I’m left to do whatever I need to do without being micro-managed. If I need to rush off to look after my children there are no issues,” Lim told CNBC.

Read More Bet on women with Barclays’ new index

While Lim works five days a week, flexible work arrangements allow mothers at ANZ to have shorter work weeks.

“Frankly, I don’t see much gender discrimination here,” she added.

Her sentiment was shared by Cheong Mei Theng, who has spent over a decade working in Singapore’s private banking industry.

The institutions I’ve worked at have been very supportive of employees with children, she said. “I recall during my time at Citi, there were a few mothers in senior positions that wanted time off and managed to negotiate with the company to get a three-day work week.”

Cheong has also been involved with organizing events featuring powerful female corporate figures to recognize women leaders in business. While such events are positive for celebrating successful women, just 59 percent of financial professionals surveyed in Asia feel that women are fairly represented in management positions.

The global situation is similar; only 53 percent in the U.S., 48 percent in the Middle East and 37 percent in Europe agree that women are represented fairly in senior positions.

Read More One woman on the board makes a difference: Study

“Getting more women into senior positions is a priority for many financial services companies, and while many are spending a great deal of time and effort on this, there is no quick solution. Another crucial step will be addressing the perception of unequal pay, it is damaging both for the industry and the people in it,” McFerran said.

Only 52 percent of women working in the industry in Asia think they are fairly paid, compared with 50 percent in the US and 42 percent in the UK.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow