‘Hope-for-Growth Momentum Investing’

by Wolf Richter

It has now become gospel that stock markets no longer depend on economic or business fundamentals, that they’ve finally been liberated from all those nagging and inconvenient details that in the past had held them down or smashed them into the ground. The gospel can no longer be denied. Andrew Lapthorne, Head of Quantitative Equity Research at Societe Generale, wrote in his Tuesday report: Of course fundamentals have taken a backseat to cheap money and central bank largesse for some time now and the US Fed was once again reminding markets yesterday of its dovish tendencies. Weak fundamentals and cheap money provide the perfect recipe to drive ‘hope for growth’ momentum investing. Why worry if the price can only go up. It shows up in every aspect of the markets. While stocks have soared last year, revenue and earnings growth have been measly. And so far this year, things have gotten tougher. Rather than just soaring, stocks have lumbered and stumbled from one new high to the next. But with earnings season about to kick off, corporate confession time has been in full swing – and there has been a lot of confessing. So far, of the 111 companies in the S&P 500 that have issued earnings guidance, only 18 have guided above Wall Street’s consensus estimate for the first quarter, according to FactSet. That’s 16%; if that’s the final number, it will be the third-lowest for positive guidance in the data set’s history going back to 2006. But 93 companies (84%) have issued earnings warnings – the second-highest in FactSet’s data series, and just one notch below the record 85%, the dubious achievement of the fourth quarter 2013. Companies in the Consumer Discretionary sector got hit the hardest – I’m shocked, shocked, shocked, given America’s effervescent consumers who all have highly paid full-time jobs or something. Industrials were second in line. Both are on track to set a new record in negative EPS guidance. FactSet’s chart shows the ever shrinking positive preannouncements (green bars) and the ballooning negative preannouncements (red bars). But don’t worry: “hope-for-growth momentum investing” takes care of it. As expected, the stock market reacted positively to the positive EPS announcements during Q1, well, those few companies that actually had them: the average stock price of the 18 companies that issued positive EPS guidance, as FactSet pointed out, rose 3.6% (measured 2 days before and after) and handily beat the five-year average of 3.0%. And the losers? Over the last five years on average, stocks of companies with negative earnings preannouncements got whacked nearly 1% over the four-day period. But not during these crazy times of ours. Even when earnings projections were cut, the market reacted positively. The 93 sinners saw their stocks rise 0.2% on average. Nothing rooted in reality can take down this stock market. The game is working. Companies have issued record amounts of debt to buy back their own shares. In Q4 2013, buybacks by S&P 500 companies jumped 30.5% year over year to $129.4 billion. Borrowing money to buy back shares is the simplest way to boost EPS. It’s not an investment in productive capacity, marketing, or expansion projects. It just blows a lot of cash on manipulating the one number that the entire world is focused on. To heck with the rest. And it piles risks and future interest expenses on the balance sheet. Meanwhile, growth in revenues and actual earnings is in the doldrums. What has been soaring, however, is the “hope for growth.” Every quarter, analysts project dizzying revenue and earnings growth, and even more EPS growth, two or three or four quarters into the future, and they use these metrics of fabricated numbers to justify current stock prices, and every quarter, when realty sets in, they roll their hopes further into the future. The game isn’t to produce growth in revenues and actual earnings but to create momentum and manipulate the stock price up. So, companies issue earnings warnings that will, during our crazy times, raise stock prices on average, and then they report EPS numbers that exceed these lowered expectations which will raise stock prices again. In the olden days of stock price manipulation, the first would hammer the stock, and the second would goose it. Now both goose it. A two-step way to ever higher stock prices on uninspiring performance. That liberation of stocks from economic and business realities, and the concurrent official renunciation of gravity and of certain laws of physics, is the Fed’s greatest achievement in its illustrious 100-year history. And they’re right, because everyone believes that everyone believes that they’re right, and so they chase the momentum and it works wonderfully. Until, someday, it suddenly doesn’t. Margin debt is a crummy predictor of a crash. But it has a bone-chilling habit of peaking right around the time stocks do crash. In the last fifteen years, it spiked three times: during the final throes of the bubbles that imploded in 2000 and 2007; and now.

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Bet on China

By Ed Clark and Sara Schafer

Emerging as the third largest U.S. corn customer but a wild card in 2014  No quick solution was expected on the stalemate over China’s ban on GMO corn from the U.S. in mid-March. Despite cancellations of nearly 35.4 million bushels of booked sales, China has quietly emerged as the No. 3 destination for U.S. corn. (China imports more corn from the U.S. than any other competitor.) The long term looks even brighter. From 2013 to 2022, USDA projects China’s corn imports are going to more than triple. "Chinese buying is the demand wild card for 2014," says Sterling Liddell, senior vice president, food and agribusiness research with Rabobank. The current USDA projection of 197 million bushels would likely support prices near $4.20 to $4.30 per bushel, according to a Rabobank analysis. "If imports from the U.S. drop much below that (due to the GMO dispute), prices could drop to $4 per bushel or lower." Reports suggest the GMO dispute might be a smoke screen to protect Chinese corn producers in the wake of growing supplies and a short-term waning of demand because of bird flu and declining hog numbers. "Short-term imports will be constrained, but the long term likely will show significant Chinese import growth in feed grains," says Brian Lohmar, U.S. Grains Council director in China. Imports to Triple. The latest long-term USDA forecast points to Chinese corn imports of 236 million bushels in 2014/15. From there, exports steadily ratchet up to reach 866 million in 2023. The challenge for the Chinese market is the short term, and not just its issues with GMO corn. Perhaps most important is whether China is beginning to transition to more corn imports, paving the way for a trajectory similar to soybeans. While some see nothing but good news on Chinese corn imports, others are more circumspect. In recent decades, China, which has the world’s largest corn acreage and is the No. 2 corn producer—has vacillated from being an importer and exporter, notes Frayne Olson, ag economist at North Dakota State University. As recent as 2003, China was responsible for 9.6% of the world’s corn exports. Although Chinese policy is one of importing the lion’s share of its soybean needs from the U.S. and South America, it remains committed to self-sufficiency in feed grains, Olson says. In addition, once GMO corn seed is approved—most think it’s not a matter of if but when—China could see a yield bump, he adds. For example, when China approved Bt cotton in 1996, yields rose 50% to 60%, although not immediately. No one knows the yield impact of GMO corn, but it could go a long way to supplying China’s corn needs, potentially turning it from a customer to competitor, Olson notes. Economic Growth Engine Slows. It will take more than GMO seed alone to provide a yield bump, says Darrel Good, University of Illinois ag economist. Still, he does not expect China’s corn imports to follow the growth rate of soybeans. Furthermore, China’s economic growth has slowed to 7.5% as it faces a multitude of internal economic challenges. China’s increase in production won’t likely keep pace with demand, says Brian Grete, editor of Pro Farmer. "Even if global exporters must supply just 15% of Chinese corn needs over the next five to 15 years, there will be good demand for corn." China started farming out its soybean needs decades ago and is just now starting to farm out more of its corn needs, Grete notes. Presently, China’s goal calls for 95% corn self-sufficiency, but that could drop to 85% in the future, he adds. The focus on commodity corn exports to China presents a somewhat skewed picture because it doesn’t include dried distillers grains with solubles (DDGS) from the U.S., which are up sharply. China emerged as the world’s top importer of DDGS in 2013 at 177 million bushels, valued at $1.4 billion. Further complicating the Chinese import issue is the conflict in Ukraine. China has ramped up corn imports from Ukraine and invested in its agricultural infrastructure. "We hope for a peaceful and speedy resolution of Ukraine’s crisis, but the instability is creating opportunities for U.S. exports to North Africa, the Middle East and China," says Tom Sleight, CEO of the U.S. Grains Council. Ultimately, when it comes to China, there are more questions than hard answers. "Nobody really knows what is going on in China," says Vince Malanga, LaSalle Economics. "Their purchasing indexes are about as low as they’ve been in the last six to eight months." Officials are trying to negotiate a transition from manufacturing/investment-led growth to a consumer-led growth process, Malanga notes. "When a large economy attempts to make those kinds of transitions, they don’t occur very smoothly. The result is a slowdown in economic growth. From what I can see, the transition is occurring much smoother than a lot of people were thinking." China’s corn imports might rise if strategic reserves that have declined are rebuilt as prices have declined. Source: Rabobank

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Roll Three Years into One

By: By Ed Clark and Sara Schafer

Consider selling not only 2013 and 2014 corn soon, but 2015, too In the brave new world of corn marketing, don’t stop your efforts at fall 2014 but consider 2015, too, analysts suggest. "I have $4.95 per bushel offers for December 2015 corn futures on the board, and I think we’re going to get it done," says Anthony Brooks, an Avon, Ill., corn and soybean farmer. That means he’s selling the rest of his 2013 and unsold 2014 in addition to 40% of his anticipated 2015 corn production—all by the first of April. Brooks’ read of the markets suggests that December 2015 corn futures could drop into the $3.50 to $4 per bushel range if the 2014 corn crop is a good one. With breakeven in the $3.90 range, that locks in a 2015 profit of around $1 per bushel. While Brooks often prices corn three years out, he employs a one-year-out approach for soybeans. For example, he sold 100% of his 2014 anticipated soybean production this past June and July at $14.90 per bushel. "That feels good," he acknowledges. He also sold 45% of his 2014 expected corn crop then at $5.15. Some think Brooks is onto something. "We have to look at 2015," says Randy Martinson with Progressive Ag. With a good crop in 2014 and the potential for bearish feed and ethanol demand, downside risk for the 2014 crop is $3.35 per bushel and potentially $2.45 for 2015, he says. "Carryover this fall could be as much as 2.3 billion to 2.6 billion bushels." "Marketing 2015 corn now is not a ridiculous thing to be thinking about," adds Ed Usset,University of Minnesota ag economist. Given the possibility of sub-$4 corn, he says marketing up to 30% of expected 2015 production is a viable option, but probably no more than that.  Some are more cautious. "A lot has to happen to get to worst case," says Cory Walters, University of Nebraska ag economist. Yet for the risk adverse or those with high debt levels and low working capital, he says selling up to 10% of anticipated 2015 corn production soon could be a smart move. One reason why he’s less concerned about extreme downside risk is that if corn prices slip much below $4 per bushel, farm bill provisions—namely Agriculture Risk Coverage and Profit Loss Coverage—kick in. He acknow­ledges, however, that low corn prices could be the undoing of crop insurance guarantees. "Next year’s crop is too far out to feel real comfortable doing a lot with," says Bill Biedermann with Allendale. "I wouldn’t want to go with more than 40% to 50% of expected production." For producers wanting to get some on the books for 2015 at current prices, he suggests an options parameter, locking in both a floor and ceiling with puts and calls that keeps options affordable. Such a strategy could provide a $4.80 floor and a $5.60 ceiling. Corn prices are heading lower the farther out you go, which leads some to think that booking a portion of your 2015 crop soon isn’t a bad idea. Prices shown are as of March 2014.  Source: Chicago Mercantile Exchange and Iowa State University

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Are the goldbugs finally crying ‘uncle’?

By Mark Hulbert

CHAPEL HILL, N.C. (MarketWatch) — The gold timers are still not running very scared — even after several more days of bullion’s disappointing performance. And that suggests to contrarians that gold’s several-week correction has yet to reach its final bottom. I am revisiting this subject in today’s column even though I wrote about it this past weekend, reaching more or less the same conclusion. But, given a bearish turn earlier this week by several well-known gold timers, some readers have contacted me to ask if enough gold timers have finally thrown in the towel to persuade contrarian analysts that a low is at hand. No. To be sure, the average gold timer is more bearish today than he was this past weekend. But he still is not as pessimistic about gold’s prospects as he was on the occasion of past tradeable bottoms. My preferred gold sentiment indicator is the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the average recommended gold market exposure level among a subset of short-term gold market timers tracked by the Hulbert Financial Digest. This average currently stands at minus 10%, which means that the average gold timer is now recommending that his clients allocate 10% of their gold-oriented portfolios to going short. That is a step in the right direction, from a contrarian point of view. When I wrote my column this past weekend, in contrast, the HGNSI stood at 16.7%. But, as you can see from the chart, the HGNSI is still not as low as it was at the bottom of gold’s other corrections over the last couple of years. At the end of last November, for example, prior to a rally that would add nearly $200 to the price of gold, this sentiment average stood at minus 36.7%. And last June, prior to a gold rally that was even more powerful, the HGNSI got as low as minus 56.7%. To be sure, gold did mount a several-hundred-dollar rally in late 2012 off a sentiment base that wasn’t as bearish as these two instances from last year. Then the HGNSI never got lower than minus 15.7%, only modestly lower than where it stands today. But that appears to be a flimsy foundation on which to base an expectation of a similarly-sized gold rally today. Notice, for example, that the HGNSI spent an extended time below zero during early and mid-2012, during which gold bullion was very volatile but essentially went nowhere. If a similar pattern were to play itself out now, gold wouldn’t mount a significant rally until this fall. The sentiment scenario that results in a more immediate rally would be one in which even more gold timers in coming days throw in the towel and jump on the bearish bandwagon. The most likely cause of that happening would be gold bullion dropping markedly from current levels. Of course, sentiment is not the only thing that makes the gold market run. So gold could very well defy the contrarians by mounting a rally from current levels. But if the contrarians are right, gold is headed lower before it heads much higher.

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Invest like Icahn: The rise of the activist investor

By William L. Watts

Activists from Peltz to Ackman are busy. Are they a boon or bane for shareholders?

NEW YORK (MarketWatch) — Whether they’re castigated as corporate raiders or lauded as activist investors, Carl Icahn, Bill Ackman, Dan Loeb and other troublemaking billionaires aren’t going away any time soon. That means investors need to be prepared for more crusades to replace CEOs, Twitter campaigns lobbying for special dividends, and letters urging management to find white-knight bidders, as well as quieter efforts to convince corporate boards to change strategy or return cash to shareholders. And while mudslinging matches between Wall Street titans and corporate chief executives are fun to watch, the stakes can be high for investors and other stakeholders. To their fans, who now include some of the nation’s biggest institutional investors, activists are largely a force for good, putting money in the pockets of shareholders while holding managers and boards to account. To skeptics, they remain far too focused on the short term, leaving them little different from the corporate raiders often cast as financial villains in the 1980s .

“I think [activist investors] bring an outside perspective to companies…They can say, this is how the Street views you and this is why your stock is undervalued,” said Philip Larrieu, senior investment officer at the $181 billion California State Teachers Retirement System, or Calstrs, the nation’s second-largest pension fund. Calstrs has invested $3.3 billion with activist-oriented fund managers and, in a landmark move, last year co-sponsored a successful shareholder proposal that will split a 115-year old Ohio manufacturer into two separate firms. Critics see more hype than lasting benefit. “In an ideal world, activist investors take a big stake in a company and add value by fixing poor operating performance and improving the balance sheet and jettisoning inept managers and board members,” said Martin LeClerc, chief investment officer at investment advisory firm Barrack Yard Partners in Bryn Mawr, Pa. Unfortunately, “many tend to be very short-term focused and the solutions they come up with are solutions to get the stock moving,” he said.

Most campaigns since 2009 After coming to a standstill in the aftermath of the financial crisis in 2008, the number of campaigns launched each year has accelerated sharply. In the first quarter of 2014, 34 campaigns resulted in board seats being awarded to activist investors, according to data compiled by FactSet SharkWatch. That is up from 19 in the first quarter of 2013 and the most since 2009, when 35 campaigns resulted in board seats over the same period. Corporate raiders or activists investors: a slideshow of Wall Street’s hungriest sharks For the activists themselves and those parking money in their funds or other vehicles, it’s often been a lucrative development. Overall, activist-oriented funds have solidly outperformed the broader hedge-fund universe over the last five years. Like hedge funds in general, they still lag returns in the broader market, though a few superstars have delivered a series of knockouts. There are no guarantees, however, and observers warn that while activists show no sign of going away, outsize returns could eventually become harder to achieve. So what does it mean for everyday investors? Investing in hedge funds typically requires a stake of $1 million or more. For others, blindly jumping into stocks after an activist fund announces a stake probably isn’t an advisable strategy, LeClerc said. On the other hand, if an activist takes on a stock an investor already has a stake in or has been eyeballing, then it offers “another data point” to consider, he said. Tidal wave of money Meanwhile, money is flowing into activist funds. At the end of 2013, an estimated $93.1 billion sat in activist hedge funds, according to Hedge Fund Research, up from $65.5 billion at the end of 2012 and nearly triple the $32.3 billion in assets seen at the end of 2008.

Of course big returns attract big flows, and the returns for activist hedge funds have been impressive. HFR’s index of activist hedge funds delivered a one-year return of 13.4% as of Jan. 1 versus a return of 5.8% for the firm’s weighted composite hedge-fund index. Over five years, the activists saw a return of 13.4% versus 7.7% for hedge funds in general. (The S&P 500, with dividends, delivered a 21.5% one-year annual return and a 19.2% annual return over five years.) There is another ingredient as well: a big, juicy pile of cash. The cash hoard at U.S. nonfinancial companies stands at around $1.5 trillion, according to Moody’s Investors Service. As Apple Inc.’s /quotes/zigman/68270/delayed/quotes/nls/aapl AAPL +0.11%  Tim Cook and countless other executives have learned, there is nothing like a wad of unused money on the balance sheet to attract financiers eager to tell them what to do with it.

Calstrs joins with hedge fund In another crucial twist, institutional investors who were once suspicious of outside agitators are now embracing activist proposals or even helping to trigger shake-ups on their own. This reflects a huge change in the way institutional investors view the world, said Gary Hewitt, head of research at GMI Ratings, a corporate-governance research firm. Institutional investors, including big pension funds and life insurance companies, once seemed inclined to side with a target company over outside agitators, but that’s not necessarily the case any more. Moreover, in the past decade or so, institutions have come around to more of a “universal ownership” view, Hewitt said. In other words, institutions recognize that given their own tremendous size, they can’t easily jump in and out of shares. They effectively own the whole market, and that means “they would rather change the company than change companies,” Hewitt said. Calstrs’s Larrieu said the institution expects the activist funds it invests with to leave companies better off when they go on to their next campaign. Meanwhile, the activists’ efforts when successful also boost the performance of Calstrs’s indexed holdings. Institutional shareholders now often lend a sympathetic ear to activist proposals. While public shoutfests like Icahn’s running battle with eBay are entertaining, corporate boards often move quickly to accommodate activist demands. and avoid a proxy battle. U.S. pipeline operator Williams Cos. /quotes/zigman/246527/delayed/quotes/nls/wmb WMB -0.46%  earlier this year gave board seats to two activist investors to avoid a fight. Microsoft /quotes/zigman/20493/delayed/quotes/nls/msft MSFT +0.04%  last year announced a new $40 billion share repurchase plan after coming under pressure from activists. Microsoft in March appointed Mason Morfit , president of activist investor ValuAct Capital, to its board, under the terms of an agreement reached last year. A board that automatically spurns suggestions from hedge-fund investors is likely to incur the wrath of institutional investors and other big shareholders, said Robert Katz, a partner at law firm Shearman & Sterling. Indeed, in some cases, institutional investors are aiding the activists—or even playing the activist role themselves. Calstrs last year teamed with activist fund Relational Investors, headed by billionaire Ralph Whitworth, co-sponsoring a nonbinding proposal to split up Ohio-based steel and ball-bearing manufacturer Timken Co. /quotes/zigman/243647/delayed/quotes/nls/tkr TKR +0.45%  to eliminate what they termed a “conglomerate discount” impairing the share price. Timken management opposed the proposal, but it won support from a majority of shareholders. Timken subsequently announced in September that it would split . The close relationship between institutional investors and activists is one reason the investing strategy is likely to endure. No need to take control There are other differences with the era of corporate raiding that saw its heyday in the 1980s, when financiers like Icahn, T. Boone Pickens and others would threaten or launch a bid for outright control of a company in transactions often fueled by the issuance of junk bonds. Icahn’s 1985 takeover of TWA was followed by a $650 million stock buyback that allowed him to recoup his initial investment of around $469 million, but also saddled the carrier with around $540 million in debt, according to Investopedia . The airline’s most valuable routes were sold off to competitors and the airline filed for bankruptcy protection in 1992, with Icahn exiting the company the next year. In other instances, raiders would effectively seek to get paid to go away after amassing a threateningly large stake in a company. The current crop of agitators usually don’t gun for outright control of their targets. Activists accumulate stakes that rarely exceed around 10% of stock, noted veteran M&A lawyer Charles Nathan, senior adviser at RLM Finsbury, while financing comes from their own hedge funds or other resources that they control. Activists now are more focused on “value creation for all shareholders instead of creating a new class of stock and a special dividend” to get paid to go away, Hewitt said. Bad for bondholders There is still a dark side. While activists focus on creating shareholder value, corporate bondholders have little reason to cheer when they roll up to a company’s front door, say analysts at Moody’s Investors Service. “Activism is rarely good news for creditors,” said Chris Plath, a senior analyst at the ratings firm, in a report. Some measures favored by activists, such as the sale of cash-generating assets, can lead to a deterioration in a company’s credit picture. Plath said that in 2013, ADT Corp. /quotes/zigman/11802999/delayed/quotes/nls/adt ADT +0.05% , BMC Softwware Inc. and Nuance Communications Inc. /quotes/zigman/98548/delayed/quotes/nls/nuan NUAN -0.12%  were all downgraded after they took actions in response to pressure from activists. Activists don’t always get what they want. Icahn, whose January call for online auction site eBay Inc. /quotes/zigman/76117/delayed/quotes/nls/ebay EBAY -0.33%  to spin off its PayPal unit through an IPO soon turned acrimonious, is now calling for a spinoff of just 20% of the online payments system, in a move viewed as a retreat. eBay shares are up around 3.4% since late January. Icahn didn’t respond to an interview request. LeClerc argued that the push to split up businesses, such as a call by Nelson Peltz of Trian Partners for PepsiCo Inc. /quotes/zigman/238082/delayed/quotes/nls/pep PEP +0.02%  to spin off its drinks business, might not always be the best long-run option for shareholders. Pepsi has resisted the call and reiterated in February that the company’s management and board remain fully aligned. “The problem with Pepsi is the drinks business stinks,” LeClerc said. While splitting the company up could result in a pop higher for the shares, “the other option is to fix the drinks business,” which could allow the stock to move to the high $80s. Pepsi /quotes/zigman/238082/delayed/quotes/nls/pep PEP +0.02%  shares are little changed on the year, ending Wednesday at $82.87. Peltz declined an interview request. Lean isn’t always so mean Some argue that the push to strip down companies to “core competencies” has gone too far. Suzanne Berger, a political-science professor at the Massachusetts Institute of Technology, says that pressure from investors to slim down large, vertically integrated firms into leaner operations have contributed to a hollowing out of the U.S. manufacturing sector. The Timken breakup, which Calstrs supported, threatens synergies that could undercut the firm’s ability to innovate and compete over the long run to the potential harm of workers and other stakeholders, Berger said. “There really is a systematic problem here if we have a system in which we have to ensure the pensions of teachers by breaking up manufacturing companies,” Berger said, in a phone interview. Larry Fink, the chairman and chief executive of BlackRock Inc., the world’s largest asset manager with around $4.3 trillion under management, sent a letter to the chief executive of every S&P 500 company warning that dividends and buybacks often sought by activist investors can come at the expense of long-term investment, The Wall Street Journal reported. But activists can point to research that shows long-term returns haven’t been dented by activist campaigns. In a frequently cited paper , Lucian Bebchuk of Harvard Law School studied around 2,000 interventions by activist hedge funds between 1994 and 2007 and found “no evidence that interventions are followed by declines in operating performance in the long term.” Instead, they found that operating performance improved during the five-year period after the interventions. Getting crowded How long will activists reign? They don’t appear likely to go away soon, but observers expect there will eventually be shifts and shakeouts. When the asset class does get too crowded, activists will be picking on companies not really suited to their strategy or will begin searching for more “quick hits,” said RLM’s Nathan. At some point, if an asset class’s performance starts to suffer, money will leave for greener pastures. “In economic theory that’s bound to occur, but it’s only easy to see in hindsight,” Nathan said.

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Calm before the Storm?

by Marc Chandler

The US dollar is narrowly mixed, largely within its well-worn trading ranges against the major currencies with two exceptions. First, the dollar is trading at its best level against the Japanese since last January. It seems that the combination of Japan’s retail sales tax hike, easing of tensions in both Turkey and Russia, and the firm US data and higher US Treasury yields have lifted the dollar to near JPY104. Second, the New Zealand dollar is off nearly 0.7%, after staging a key reversal yesterday, whereby it made new highs for the year and then sold off to finish below the previous day’s low. There has been follow through selling today. For the first time since late-February, it is testing its 20-day moving average (~$0.8560). A break of the $0.8530 area would suggest a top of some import could be in place after a nearly 6.5 cent rally in Q1. An index of prices of its main exports fell for the first time in five months, and Fonterra’s milk prices posted their biggest decline in 20 months (almost 9%), and it is the fourth consecutive weekly decline. There have been several marginal developments over the 24 hours that are shaping the investment climate. First, there have been two positive developments. Late yesterday, German federal government workers agreed to a 5.4% pay increase over two years, beginning last month. Roughly 2.1 mln workers are directly affected, but the agreement may help set the tone for private sector negotiations. The wage increase important because it is greater than the pace of inflation and will help lean against deflationary (or disinflationary) forces. This is turn is significant as somewhat higher German inflation (without getting carried away), eases the burden of what other countries (periphery) has to do to restore competitiveness. The US reported a sharp jump in auto sales. The annual unit pace jumped to 16.33 mln from 15.27 mln in February. Blaming the weather may or may not have been an overused excuse to explain economic weakness, but it did seem to depress auto sales. This in turn bodes well for retail sales. It also suggests that the rise in auto inventories may not be the problem they appeared. Of note, US producers garnered roughly 80% of the March increase. There have been a couple less constructive developments. Japan’s Tankan survey contained a question about inflation expectations for the first time. Excluding the retail sales tax, the consensus was for a 1.5% increase in CPI this year and 1.7% on a 3- and 5-year basis. The importance of this is below the BOJ 2% target. This suggests another source of pressure for the BOJ to do more. On the other hand, the monetary base for March, released earlier today, suggests that this target is achievable. The monetary base stood at almost JPY220 trillion. The year-end target is JPY270 trillion. There is more head shaking over indications from the French government that it will seek additional leeway on its fiscal goals this year; that the demands of austerity threaten to snip the recovery in the bud. Yes, therein lies the rub. Of course, other countries have made similar arguments, largely in vain. France was given two more years last summer to get its deficit below 3%. It overshot last year’s budget deficit target and unless there is remedial action, it will overshoot this year’s as well. This is likely to force a confrontation with the EC and, perhaps more behind the scenes, with Germany, who did not want to give France (and Spain) the extra grace period to begin with. The ECB meets tomorrow and the vice president (Constancio) made an interesting comment yesterday that reinforces the expectation that the ECB is unlikely to take fresh initiatives at the meeting. Constancio played down the low (0.5%) CPI print, suggesting that April will see a recovery. This plays up the Easter-effect. We suspect there will be a significant euro move tomorrow. The failure of the act could trigger another wave of euro buying; similar to last month. A break of $1.40 would likely trigger stop loss buying. On the other hand, the ECB does not ease, the market could ease for them by taking the euro lower. The resilience of the euro, and the deep held belief that the first Fed hike is still more than a year away (and the world is still awash with liquidity) we are more inclined to the former than the latter. The North American session features the ADP employment estimate. The consensus is for 195k. In six of the past eight months, the ADP estimate has been on the high side of the initial private sector jobs report. The Bloomberg consensus is for a 200k increase in private sector payrolls, which would be the highest since last November. The estimate appears to have crept up in recent days. Separately, two non-voting Fed officials speak today, Lacker and Bullard. Both are among the hawkish wing.

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