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The holiday shortened trading week was largely uneventful in terms of major market moving headlines.Investors did return to find volatility holding near the higher levels seen over the last month. Intraday swings of 100 points or more in the Dow continued, though volumes retreated back to more normal levels and indices largely moved sideways. Earnings season wound down with retailers taking center stage, and overall the positive tone from executives extended despite a few key misses. The US 10-year yield hit a 4-year high above 2.94% after the release of Wednesday’s FOMC minutes led to speculation about the tone Fed Chair Powell may take when he testifies on Capitol Hill early next week. The Greenback bounced, garnering modest momentum when stocks sold off midweek, and then ebbed when equity buyers reemerged on Friday.

Macro :

- Goldman Says Stocks May Plunge 25% If 10-Year Yield Hits 4.5%

- U.K. Needs New Customs Treaty With European Union, Labour Says

- Nouy Says Greek Banks’ Top Priority is to Reduce New NPLs: Vima

Keep an eye on :

- AIRBNB IPO : Airbnb Founder Chesky Considers Starting an Airline: S. Times

- APC US : Anadarko Is Said to Be in Mozambique LNG Talks w/ Indian Buyers

- BRK/A US : Berkshire Fourth Quarter Operating EPS Beats Highest Estimate

- BA US : Boeing, Embraer Deal Negotiations Said to Advance: O Globo

- DAI GY : Daimler in $2 billion China investment with BAIC as Geely swoops https://t.co/YAPzcDF5cS

- DAI GY : Daimler Could Face Early Payback of EIB Loans: Welt am Sonntag

- DIS US : ‘Black Panther’ Grosses $108M in Second Weekend: Variety

- FCA IM : Fiat Chrysler Is Said to Phase Out Diesel Cars by 2022: FT

- GATE SW : HNA Plans Gategroup IPO End of March, Swissport in 2Q: NZZamS

- PFG LN : Provident Financial Mulling GBP500m Rights Issue: S. Telegraph

- SIKA SW : Sika Offer for Burkard Higher Than Saint-Gobain: Tages-Anzeiger

- HO FP : Thales Wins Contracts for Australia’s OneSky Project: Herald Sun

- TOYS US : Toys R US Is Said to Seek Bids for European Arm: Sky

- NOKIA FH : Nokia CEO Says 5G Network Technology Coming Faster Than Expected

- VVT LN : Vivat CEO Is Reviewing Options Including Buyers, IPO: FD

- VIV FP : Sony Music’s Doug Morris is Said to Leave End-March: Variety

- VOW3 GY : Germany Prepares for Partial Diesel Driving Ban: Rheinische Post

- VOW3 GY : German Police Raid VW Site in Audi Emissions Scandal: Bild

* Cover story: Barron’s 2018 Energy Roundtable featured fourexperts discussing oil, natural gas, and other energy stocks, as well as MLPs,with three of the four offering picks: Helima Croft of RBC Capital Markets,Charles Robertson of Cowen (APC, NBL), John Dowd of Fidelity Select EnergyPortfolio (EOG, HAL, PXD) and Gregory Reid of Salient MLP Complex (GEL, TRGP,SHLX). 

KGI’s Ming-Chi Kuo today reports that Apple will release ‘high-end over-ear’ headphones in late fall ‘at the earliest’. Apparently featuring an all new design, it sounds like this is not a successor to the Beats Studio 3, but it will be Apple’s AirPods equivalent for premium over-ear headphones.

The analyst also corroborates the release of upgraded AirPods with a new case to support wireless charging and an improved W1 chip.

Last week, Bloomberg reported that new AirPods were in development. The ‘AirPods 2’ were reported to feature integrated ‘Hey Siri’ support, enabling faster activation of voice controls when using the AirPods earbuds.

Apple has already announced plans to release a new wireless charging AirPods Case as a standalone separately, which will support the upcoming AirPower mat. KGI confirms speculation that the new AirPods would be bundled with the wireless charging case as standard.

Ming-Chi Kuo says the new case will have a redesigned hinge that is more expensive to manufacture, apparently to accommodate wireless charging.

The addition of over-ear headphones to Apple’s lineup would flesh out Apple’s range of audio options, with AirPods optimized for size convenience, HomePod for high-quality home audio and the new over-ear headphones for high-quality sound on the go.

Due to the differences in form factor, the Beats Studio 3 boast better sound, longer battery life, and noise-cancelling features that the AirPods earbuds simply cannot provide.

Exact features of the Apple headphones are not detailed in today’s KGI report but it would be sensible to expect the best bits of the Beats line to transfer over.

In an announcement that was already expected by the general public and largely a forgone conclusion, China's Communist Party has officially cleared the way for President Xi Jinping to rule as emperor for life by announcing on Sunday that it intends to abolish a two-term constitutional limit on the presidency.

The change to the country's constitution follows the decision during last October's National People's Congress to enshrine Xi's name in the country's constitution (see "Xi Could Rule For "Decades" As China's New Leadership Team Unveiled"), making him the first living leader to be granted such an honor.In addition, the Party's appointments to the Politburo lacked a clear successor to Xi, another sign that he intends to seek a third term after the conclusion of his second term, which has only just begun.

As the NYT reports, citing local media, the Central Committee approved the amendments to the Constitution at a meeting last month. But the vague official announcement released at that time did not hint at the momentous expansion of Mr. Xi’s presidential power, which was kept secret until Sunday.

In another victory for Mr. Xi, the draft amendments to the Constitution would also add his trademark expression for his main ideas - "Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era" - into the preamble of the Constitution, as well as adding a nod to the ideological contributions of his predecessor, Mr. Hu.

The amendments are almost certain to be passed into law by the party-controlled legislature, the National People’s Congress, which holds its annual full session from March 5. The congress has never voted down a proposal from party leaders.

"Sunday’s move will make Mr. Xi much more powerful than he already was, and will dampen any remnants of resistance to his rule", said Zhang Baohui, professor of international affairs at Lingnan University in Hong Kong.

"Once people know he will serve for who knows how long, it will strengthen his power and motivate everybody to bandwagon with him," said Mr. Zhang. "Any rival will think he will be almighty."

In other words, "Dear Leader" has returned.

* * *

This historic shift was predicted by many since last fall, when Xi refused to appoint a successor as his power would begin to wane in a year or two as he entered what would've been a lame duck period for his presidency - the second half of his second term.

At the same party congress, Mr. Xi conspicuously broke with precedent by choosing not to name a pair of much younger officials to the Politburo’s ruling inner circle, the seven-member standing committee, to serve as his heirs-in-waiting. Instead, Mr. Xi chose men — no women — who were closer to his own age or older.

Mr. Xi’s strongman style has been compared to that of the Russian president, Vladimir V. Putin. But even Mr. Putin, who has amassed considerable personal power, did not try to erase his country’s constitutional limit on serving more than two consecutive terms as president as he approached that limit in 2008.

Instead, he arranged for a close adviser with limited personal influence, Dmitri A. Medvedev, to serve as president for a single term while Mr. Putin held the post of prime minister. Mr. Putin then returned to the presidency in 2012, and is running this year for re-election to another term.

Mr. Xi may now have even greater power, and the question will be how he chooses to use it.

"Xi Jinping is susceptible to making big mistakes because there are now almost no checks or balances," said Willy Lam, an adjunct professor at the Chinese University of Hong Kong who is the author of a biography of Mr. Xi in 2015. "Essentially, he has become emperor for life."

In a brief discussion wondering what municipalities and states will do when local tax revenues decline and unemployment worsens, Hunt said "we're worried about those pension obligations.”

He is hardly alone: having reported over and over and over (and over, and over) again that public pensions are in deep trouble, two days ago none other than Steve Westly, former California controller and Calpers board member - manager of the largest public pension fund in the US, made a stunning admission, confirming everything:

"The pension crisis is inching closer by the day. CalPERS just voted to increase the amount cities must pay to the agency. Cities point to possible insolvency if payments keep rising but CalPERS is near insolvency itself. It may be reform or bailout soon."

Westly was referring to an editorial laying out "the essence" of California’s pension crisis, exposed last week when the $350 billion California Public Employees Retirement System (CalPERS) made a "relatively small change" in its amortization policy.

Specifically, the CalPERS board voted to change the period for recouping future investment losses from 30 years to 20 years. While this may not sound like much, the bottom line is that it would require the California state government and thousands of local government agencies and school districts "to ramp up their mandatory contributions to the huge trust fund."

As author Dan Walters observes, with client agencies – cities, particularly – already complaining that double-digit annual increases in CalPERS payments are driving some of them towards insolvency, the new policy - which kicks in next year - will raise those payments even more.

“What we are trying to avoid is a situation where we have a city that is already on the brink, and applying a 20-year amortization schedule would put them over the edge,” a representative of the League of California Cities, Dane Hutchings, told the CalPERS board before its vote.

CalPERS, however, has no choice because as both Walters and Westly claim, America's largest public pension fund itself is on the brink, "and the policy change is one of several steps it has taken to avoid a complete meltdown."

As we have reported previously, the Calpers system, once more than 100 percent funded, now has scarcely two-thirds of what it would need to fully cover all of the pension promises to current and future retirees. And that assumes it will hit an investment earnings target of 7%per year, that many authorities criticize as being too optimistic. 

Last In December we also reported that the increasingly panicked fund, decided to boost its stock allocation to 50% in order to raise its future liability discount rate to 7%, as any reduction in stock allocations would also lead to a lower discount rate which in turn which would require more contributions from cities, towns, school districts, etc. and could bring the whole ponzi crashing down. Amusingly, one Calpers board member argued to raise the equity allocation even higher, to 60%, so that the discount rate was greater than the current 7% in order to make the books appears "better."

Ironically, it was just a decade ago that Calpers' lofty equity allocation resulted in a staggering losses, and the current dead end. The trust fund lost about $100 billion in the Great Recession and never has fully recovered. In December 2016, Calpers voted to lower its earnings projection to 7.0% – it had been 7.5% – hoping to avoid another disaster were the economy to turn sour; since then it has been taking quiet steps to lever up its equity exposure once again.

On the other hand, "protecting" CalPERS means getting more money from its client agencies, which could drive some of them into insolvency, as Hutchings said. This is not a hollow threat: three California cities have already gone bankrupt in recent years, in part because of their ever-increasing pension burdens, and payments have escalated sharply since then.

So on one hand, CalPERS is doing what it has to do to remain financially solvent, but on the other hand its self-protective steps threaten local government solvency.

That’s the crisis in a nutshell.

As Walters suggests, one way out would be to modify benefits in some way.

City officials, for instance, have suggested reducing automatic cost-of-living escalators in pensions over a certain mark, such as $100,000 a year.

However, the CalPERS board, dominated by public employee organizations and sympathetic politicians, has spurned such pleas: it is almost as if, once promised generous retirement benefits, public workers would rather take the entire system down, than see their own pensions reduced, even modestly.

“Our members have expressed frustration that you keep coming to them asking for more while at the same time not providing a lot of other options and assistance for them,” Dillon Gibbons of the California Special Districts Association told the board.

Alas, the options boild down to either taxpayers get the shaft, or public employees see their pensions reduced.

In the end, it will likely be the worst of both worlds, as taxpayers are dragged in to bailout CalPERS and other retirement funds, while retirees see huge cuts to their benefits.

And the next market crash will likely catalyze it.

Meanwhile, everyone involved is waiting for the California state Supreme Court to rule on pending pension rights cases, and were it to overturn the so-called “California rule” that bars changes in benefits, it would open the door to pension modification.

CalPERS officials are also concerned that should it become insolvent, or pension payments force some cities into bankruptcy court, it would revive long-dormant plans for a statewide pension reform ballot measure.

* * *

As Walters concludes, "This crisis will haunt California for many years to come and will be a big headache for the next governor."

Unfortunately, that is an optimistic outlook, because when the crisis really hits, it will be all American taxpayers who are on the hook to bail out the country's insolvent pension funds. It is also then that some of the deepest fissures in US society: between public and private workers, between taxpayers and benefits recipients, between the young and old, all bubble to the surface at the same time, with very violent consequences.

Sequoia bought into the company when it was cheap. Here’s what that means today.

Dropbox’s CEO and its first big institutional investor have amassed an unusually large percentage of the company.

Dropbox, which unveiled its IPO documents on Friday, raised money relatively slowly on its way to its last valuation of $10 billion. What that means is that Drew Houston, one of the company’s founders, and Sequoia Capital, which cut Houston his first venture capital check, now stand to make a disproportionately largely amount of money off their file-sharing and cloud-storage project.

Houston owns 25 percent of the outstanding shares of the company, and his co-founder, Arash Ferdowsi, owns about another 10 percent.

And unlike at companies that raise more than a half-dozen rounds of outside financing before going public, Dropbox only partook in four major venture capital rounds. Fewer total rounds meant fewer new investors to dilute Houston’s and Ferdowsi’s shares.

Sequoia, which led the seed and Series A rounds for the company, currently controls 23 percent of the stock. Sequoia is represented on Dropbox’s board by Bryan Schreier.

Those were the two rounds when an investor could buy shares on cheap — after that, Dropbox’s valuation jumped from $25 million in 2008 to $4 billion just three years later in 2011, according to PitchBook.

To keep that high ownership rate in the company, Sequoia likely aggressively doubled down on its big success during those later financing rounds led by investors like Index and BlackRock.

Yet it was much more expensive to buy into an established success. Neither of those funds own more than five percent of the company today.

Jack Dorsey invested in the music streaming service in 2016; last year he wrote off the deal.

One more reminder that digital music remains a very, very difficult place to make money: Twitter has written off a $70 million investment it made in SoundCloud, the music streaming service.

Twitter put the money into SoundCloud in in 2016, via its Twitter Ventures unit, in a deal that valued the company at $700 million. Now Twitter, via its 2017 annual report, says it has written off $66.4 million it invested in SoundCloud because that money is “not expected to be recoverable within a reasonable period of time.”

Variety first reported the news. For context: Twitter generated revenue of $2.4 billion in 2017, and ended the year with $4.4 billion in cash and short-term investments.

Twitter’s SoundCloud writedown isn’t a surprise, since almost all of SoundCloud’s existing investors were crammed down in a last-ditch funding deal last summer, which also brought in a new management team.

But it should be a formal coda to Twitter’s on-off infatuation with SoundCloud. Two years before the investment, Twitter had looked at buying SoundCloud for more than $1 billion, but didn’t.

And it’s a reminder that even though consumers have embraced free and paid music streaming services, the companies that run those services generally aren’t making a profit.

For giant tech guys like Apple and Google who run streaming music as a side business, that’s probably OK. For standalone companies like Pandora and Spotify, that’s not (reminder: Spotify is planning on going public in the next couple months).

Meanwhile SoundCloud, which had been pushing a $10-a-month subscription service like the one Apple and Spotify offer, is changing its strategy.

The new plan, as outlined by CEO Kerry Trainor at our Code Media conference this month: Focus on a more limited $5-a-month plan, as well as a renewed emphasis on a subscription service SoundCloud has always sold to music creators, producers and other prosumers.