The Launch Pad: Michael Kors Win, Demandware Bought; Investors Flee China by @connectedWealth
Wednesday, June 1st, 2016
Warren Buffett: If You Own A Good Business, Keep It
Loonies are trading a little stronger this morning despite oil being of a percent or so. The U.S. dollar index is trading lower on the first day of June, after posting its best monthly gain in close to two years. Up 3.02% on the month this hides the fact that it actually rose 4.2% off of the lows on May 3rd. Canadians with heavy U.S. allocations can thank the Fed for their hawkish tone for the currency boost.
Even the decent spending numbers and Case-Shiller home price data released yesterday were not enough to boost the markets as the fell into yesterday’s close. The S&P 500 finished the month up 1.53%, and an impressive 5.91% in Canadian dollar terms. Thanks again to the strong greenback. The S&P/TSX was also positive in May, rising 0.82%. For those interested U.S. home prices rose 5.2% year-over-year.
Japan is trading lower overnight as PM Shinzo Abe has to do another about face and postpone yet another sales tax increase. He’s losing credibility, and traders are pushing equities down and the Yen higher.
Chinese PMI data came in a hair above expectations but did nothing to quell the doubts that further declines are looming. The May Manufacturing PMI was 50.1, still perilously close to negative territory.
Money is leaving China however it can. This is one of the problems with a semi-closed economy that is trying to become more open, it’s never smooth. The current move is money exiting and it would appear it is trying to do this in all sorts of ways. The most obvious is the official reserves. This is government data, so you know grain of salt and all. After peaking at $4 trillion (USD) in June of 2014, this has dropped to $3.2 trillion in early 2016. This decline coincided with global market weakness to a certain degree. It has stabilized the last few months and the global markets have recovered. No news here, but this data is important with the next data point coming out on June 7. Then we turn to less government run data points. The 18% jump in bitcoin prices is apparently coming primarily from demand in China. But then again bitcoins are also the new currency of criminals, supporting this new currency’s existence certainly makes it easier to be a criminal or terrorist. Sorry, off topic now, back to China. The chart of the day is the yuan and the southbound quota. Southbound quota you say? About a year ago they opened a liquidity channel to allow certain participants to buy in Shanghai and sell in Hong Kong. This has the effect of capital leaving the closed economy and becoming global. Initially this channel was set up with a quota of 160 billion yuan but it recently has been declining fast as more shares / capital are moved out of China. This has coincided with a declining yuan (see chart of the day). The markets cared a lot about this a few months back, will this flare up again?
Companies are doing a great job at building that debt pile. Interesting to see corporate debt balloon, yet CAPEX spending still dwindle. Gone are the days of investing for productivity gains. Instead, borrow more and increase share buybacks. Short-termism is rampant.
While on the topic cash piles, Warren Buffett will be handed back $8 billion or so from his investment in Heinz Co. The initial $8 billion in preferred shares paid a handsome 9% annually. Unfortunately for Berkshire shareholders, Kraft Heinz has lowered its financing costs, and issued $7 billion in bonds to buyback the prefs as they wants to optimize cash flows. Witness the 3G cost cutting machine at work, biting the hand that helped lend vote of confidence in the initial deal. (Bloomberg)
How about some ETF education. Today’s lesson is on liquidity. Do you know the difference between primary and secondary liquidity in the ETF market? If you need to trade ETFs without a lot of primary liquidity in size without moving the market, market makers are there to help you out. ETF.com does a decent job at explaining the difference.
US uranium production (U308) peaked at ~44 million pounds in 1980. Production is expected to be ~2.5 million pounds for 2016. According to the EIA, US nuclear power reactors loaded an average of 49 million pounds per year from 2004 to 2015. It follows that the US imports the majority of its supply. US nuclear power reactors bought 57 million pounds of uranium in 2015. Most of this amount was supplied by Canada (17 mps) and Kazakhstan (11 mps).
Employment in US uranium production tends to follow the spot price. As Spot prices rose from an average of $11 in 2003 to ~$100 in 2007, employment rose from 321 to 1,563. Since then, prices have been in decline. They fell to <$30 per pound in 2015. As a result, employment fell to 625 persons. One reason that prices are so low is inventories continue to rise. US reactors purchased more uranium than they required in each year from 2003 to 2015. As such, inventories grew to 121 million pounds at the end of 2015. This is enough to provide for more than 2 years of production. More from the EIA here.
Diversion: Giant gator walks across Florida golf course
Michael Kors – COMPANY NEWS
Michael Kors reported earnings this morning that beat analysts’ expectations. Revenue grew to above $1.2bb as the early release of their summer line up was a hit with shoppers. Shares are up over 11% in premarket trading. Salesforce is buying Demandware for $2.8bb in a deal that will add $120mm in revenue next year. It is expected that the deal will close in the second quarter of this year. Husky is on track to complete 8 projects by the end of this year that should add roughly 90,000 barrels of production once fully ramped up. National Bank saw profit in the quarter decline by nearly 50% because of defaulting energy loans. However, they were still able to raise their dividend to 55 cents a share. Bombardier said their discussions with the Federal Government for aide are going well and that they see it as a win-win for both parties.
Oil prices are lower this morning extending the losses from yesterday afternoon. It is being seen as the rally was over extended as Canadian production begins to come back online. OPEC has a meeting tomorrow in Vienna that will likely which won’t likely lead too much action as the group is expected to maintain production levels in an attempt to push out higher cost producers from across the globe. Steel futures are on the decline as rebar fell 23% last month. Steel production remains at a high level while growth in uses of the product are slowing. Gold is maintaining yesterday’s gains, the first of its kind in 10 trading sessions. Payroll data this week could be the next catalyst for bullion as it will give direction on the FEDs decision to hike rates later this month.
FIXED INCOME AND ECONOMICS
The second of the “big 3” economic data releases this week will be out at 10AM with U.S. ISM Manufacturing PMI and Prices surveys for May hitting the market. Both are expected to remain above the important 50.00 level and stay in the “expansionary” camp and should this occur, will check off box number two on the way to a possible Fed rate hike on June 15. Yesterday’s PCE data came in on the screws to reinforce said tightening move with core inflation remaining at a 1.60% annualized pace. The Chicago PMI (+49.3 and in the “contractionary” zone) and Dallas Fed Manufacturing survey (-20.8 and worst since February) May released both disappointed yesterday so we could see a negative surprise in the broader ISM number. All of the data watching comes to a boil on Friday with a nonfarm payroll update. Treasury markets are higher ahead of the equity open as the long end trades nearly a point stronger to reverse yesterday’s decline.
Say it ain’t so Abe! Prime Minister Shinzo Abe officially announced his decision this morningto postpone a consumption tax hike scheduled for April by at least early 2019, setting the stage for the upcoming House of Councillors election and perhaps implicitly indicating that Abenomics is NOT working. The government had planned to raise the consumption tax rate to 10% next April and Abe’s move is contrary to his remarks in November 2014, when he said he would not implement a second delay in the tax hike. He had repeatedly said he would go ahead with the tax hike as planned unless events occurred with an impact comparable to the collapse of the U.S. bank Lehman Brothers or the Great East Japan Earthquake. While Japan has avoided a recession in the first quarter with a +0.4% expansion in gross domestic product, there are widespread fears that another sales tax hike would take a bite out of consumer spending, and damage the world’s number three economy. The Yen rallied post news by 1.50% against the USD.
Moody’s Investors Service indicated yesterday that they have placed the senior unsecured debt of Telus Corporation under review with potential negative implications. The review of the telco giant centres on how the company uses cash for shareholder returns/dividends amidst intensifying competition and infrastructure investment. Telus’ senior bonds currently carry a Baa1 rating from Moody’s (BBB+ equivalent for S&P and Fitch) so a downgrade from the former could result in similar moves from the latter down road. The review is expected to conclude within 60 days. Yield spreads on Telus credit were unchanged post-news but we think the market will likely play catch-up once the under-the-radar announcement makes the rounds.
CHART OF THE DAY
QUOTE OF THE DAY
Power resides where the men believe it resides. It’s a trick, a shadow on the wall. And a very small man can cast a very large shadow.
– Lord Varys (Game of Thrones)