BEARNOBULL’S WEEKENDER

THE WEEK THAT WAS (FACTSET)

Overview:

• US equities finished higher this week, snapping a three-week losing streak. The big tailwind came on Thursday from the ECB’s more aggressive than expected sovereign QE announcement. However, there were still some concerns about the spillover effects, particularly in combination with the recent batch of easing announcements from other central banks. Much of the focus revolved around the strength in the dollar. While not a big directional driver for stocks, this dynamic ratcheted up some of the concerns about the complications for a Fed liftoff that press reports say remains on track for 2015. It also fed into the fairly lackluster sentiment surrounding Q4 earnings season. In terms of the other developments this week, better Q4 GDP and December activity data out of China provided a small semblance of reprieve for the recent pickup in global growth fears, but did not drive any shift in recovery sentiment. In addition, the fallout from last week’s shock move by the SNB to scrap its minimum exchange rate seemed more subdued than had been expected. Oil was back on the defensive and there continued to be more attention on the earnings, labor market and capex headwinds from the plunge in energy prices than the support for the consumer. Once again, there were relatively few notable read-throughs for the macro narrative from sector performance. Tech and industrials were among the standouts, while telecom was the only sector to finish in negative territory.

ECB delivers:

• As expected, the ECB announced a sovereign QE program on Thursday. However, the widely anticipated details were more dovish. Starting in March, the central bank will purchase €60B of bonds a month. The program will include sovereign and agency debt, along with the already announced ABS and covered bond schemes. It is intended to run through the end of September 2016. The ~€1.1T headline purchase figure implied that the central bank could ultimately buy ~€800B of sovereign debt, which was well ahead of consensus expectations in the €500-600B range. In addition, the statement suggested that the program could be extended in the absence of a meaningful improvement in the inflation outlook. The open-endedness of the program, something that was later confirmed by a couple of ECB officials, seemed to represent the most positive development, fitting with Draghi’s “whatever it takes” pledge from the summer of 2012. In terms of some of the other highlights, purchases will take place across the curve (2 to 30 years) and the ECB will retain 20% of the risk. The former contrasted with some expectations for a program focused on shorter-term debt. In addition, there were concerns going into the meeting that in an effort to placate the German camp, all of the risk would be retained by national central banks.

Dollar strength another Fed liftoff complication:

• There were a number of different takeaways from the ECB’s QE announcement. One theme revolved around the strength in the dollar, which rallied 3% on the euro cross. In addition, the dollar index finished up over 2.5% with additional support from a batch of recent easing announcements by other central banks. The highlight outside of the ECB this week was the BoC, which unexpectedly cut its key rate to 0.75% from the 1.0% level it had held at since 2010. It attributed the move to the sharp drop in oil prices, which it expects will be a negative for growth and underlying inflation. It also said the rate cut will provide insurance against financial stability risks. In addition, Denmark twice cut the rate on its seven-day deposit facility by 15 bp this week, pushing it to (0.35%). These moves followed last week’s unexpected easing announcements out of Switzerland and India. They also came at a time when the Fed seems to be pushing back against a pickup in expectations that worries about a slower global growth backdrop, sluggish inflation trends and depressed long-term bond yields may force it to delay the start of the policy normalization process until 2016. This seemed to be the message in the latest article from the WSJ’s Fed-watcher, Jon Hilsenrath.

Lackluster earnings sentiment:

• Following last week’s scrutiny surrounding sluggish top-line trends at the money center banks and disappointing gross margin guidance from the homebuilders, sentiment surrounding Q4 earnings season remained fairly lackluster. This fit with the latest key metrics from FactSet, which put the blended Q4 S&P 500 EPS and revenue growth rates at just ~0.3% and ~0.6%, respectively. Takeaways and post-earnings price action still seemed largely company specific, though there were a themes that stood out. There continued to be more focus on the adverse spillover effects from the plunge in energy prices. With some of the major oil services firms reporting, headlines in the press revolved around layoffs and capex cuts. In addition, most of the major semiconductor companies that reported this week guided below the Street for the March quarter. The theme that stood out the most this week revolved around the impact of more onerous FX headwinds on both Q4 results and 2015 guidance. In addition, this was something that impacted companies touching a broad range of sectors including pharma, household and consumer products, payments, eCommerce and enterprise services.

Oil back on the defensive:

• After snapping a seven-week losing streak last week, oil was back on the defensive. WTI was the big decliner, settling 6.4% lower at $45.59 a barrel, while Brent was down 2.8% at $48.79 a barrel. Bearish US inventory data received some of the blame for the outsized decline in WTI. Another round of headline-grabbing sell-side price forecast cuts seemed to be an overhang as well. Iraq was another area of concern as the country’s oil minister said that daily production reached a record 4M bpd in December, while adding that it is planning to increase global market share to help compensate for the plunge in prices. Demand concerns, which have been one of the factors behind the weaker tone in equities thus far in 2015, continued to get attention. An FT article noted the IEA recently pointed out how a combination of sluggish global growth, subsidy removals and dollar strength are among the factors constraining the demand response to lower prices. While China Q4 GDP and December activity data were slightly better, there was no change in recovery sentiment. In addition, there was more discussion about how lower oil prices (and a stronger dollar) are driving cost deflation in other parts of the commodity complex, exacerbating the negative feedback loop.

Tech, industrials lead market higher:

• Tech was the best performing sector this week with help from a bounce in AAPL +6.6%. The semis even beat the tape with the SOX +2.5% despite the trend of softer guidance. While guidance from EBAY +5.8% disappointed, it was overshadowed by the restructuring and corporate actions updates. The industrials sector was boosted by an earnings/guidance driven rally in the airline space with LUV +16%, UAL +11.2% and DAL +10.3%. Some positive sell-side commentary also helped HVAC plays like WSO +10.3%, IR +4.9% and LII +4.2%.Consumer growth fared a bit better than the broader market. Retail was the big gainer with the S&P Retail Index +3.7%, though there did not seem to be anything specific at work. AMZN +7.5% was a big gainer despite denials regarding speculation that Icahn had built a stake. Energy was in line despite the oil weakness. Refiners led the move higher with MPC +12.4%, TSO +12.1% and VLO +10.5%. A wider Brent-WTI spread was cited as a tailwind. Financials lagged, though banks found some reprieve with the BKX +2%. Some better results out of the regionals helped (as did the lower bar). Upside in the materials sector was capped by pockets of weakness in the industrial metals. Cautious comments out of Goldman Sachs weighed. Telecom was the only sector to finish in negative territory. One of the bigger drags came from the disappointing wireless margin performance at VZ (1.8%).

Sector Performance (vs S&P 500):

• Outperformers: Tech +3.11%, Industrials +2.35%, Consumer Disc. +1.71%
• Underperformers: Telecom (1.13%), Consumer Spls. +0.66%, Materials +0.77%, Healthcare +0.83%, Utilities +1.11%, Financials +1.22%, Energy +1.59%

In case you missed this last week:

A Evans-Pritchard: Mario Draghi’s QE blitz may save southern Europe, but at the risk of losing Germany

(…) Adam Posen, a former UK rate-setter and now head of Washington’s Peterson Institute, said the QE blitz is large, but not as overwhelming as some think. “It will make some difference. It’s not going to be enough to fully offset deflationary forces, let alone restore growth, but to the degree that Draghi was able to make it sound open ended is a good thing,” he said.

“Ultimately, €1.1 trillion over 18 months versus euro area GDP is roughly a third of what the Bank of England or Federal Reserve did under similar circumstances, and it’s likely to take more money to get the same effect in Europe right now,” he said. (…)

The decision amounts to an act of political defiance by a majority bloc in the Governing Council – unmistakably a debtors’ cartel of Latin states and like-minded states – and therefore opens an entirely new chapter of the EMU story.

This Latin revolt is to violate the sacred contract of EMU: that Germany gave up the D-Mark and bequeathed the Bundesbank’s legacy to the ECB on the one condition that Germany would never be out-voted on monetary issues of critical importance.

Nor is the irritation confined to Germany. The Tweede Kamer of the Dutch parliament was up in arms today, the scene of fulminating protests from across the party spectrum. “Dutch taxpayers should not be made liable for the debts of the Italian state,” said the liberal VVD party. (…)

Let me be clear: I have argued for at least three years that the Latin bloc should seize control of the ECB’s machinery and call the German bluff, and this is exactly what has just happened.

They have perfect right to do so. The ECB’s policy has been far too tight even for Euroland as a whole. For them it has been disastrous. The slide towards deflation – and contracting nominal GDP – has caused their debt trajectories to spiral upwards even faster.

Yet nobody should have any illusions about the implications of such defiance. What is at stake is German political consent for the euro project. Bernd Lucke, the leader of the AfD anti-euro party, called today’s decision an “act of desperation and the introduction of eurobonds by the back door” by the ECB.

The Bavarian Social Christians (CSU) are also furious. “With this decision, the ECB has crossed the Rubicon,” said Angelika Niebler, the party’s parliamentary leader. The Bavarian finance minister, Markus Soder, said: “unlimited purchases of sovereign bonds threaten to bring down the whole system.”

On the Left, Die Linke lashed out at the decision, calling it a gift for insiders. It plunders the savings of the poor to make the “super-rich even richer” by driving up asset prices.

Mr Draghi may have saved Italy from a debt-deflation trap in the nick of time. He may have gained another year or two for Southern Europe to recover before radical populist parties sweep the stale elites from the political scene. But in doing so he risks losing Germany.

Now, listen to Larry Fink through the end:

LARRY FINK ON EU, US, ECB, FED, SNB, ETC

Good stuff from Bloomberg Television: http://bloom.bg/1E6EQWr

GLOBAL EQUITY VALUATIONS

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Chart for Paul Krugman: