>>> Asian update

Asia Mid-Session Market Update: China inflation rises to new multi-month highs; Risk trade dented by NSA Flynn resignation

***US Session Highlights***
- (US) NY Fed Jan Survey of Consumer Expectations: inflation expectations highest since summer 2015; household spending expectations lowest since Jan 2016 - OPEC Sec Gen Barkindo: prelim numbers show a very high level of compliance with supply cut agreement - press
- (US) Pres Trump: US will be seeking to “tweak” the terms of its trade relationship with Canada.

***US markets on close: Dow +0.7%, S&P500 +0.5%, Nasdaq +0.5%***
- Best Sector in S&P500: Financials
- Worst Sector in S&P500: Telecom
- Biggest gainers: GT +5.9%, REGN +4.4%, NUE +4.3%, CCI +3.0%, STX +2.9%
- Biggest losers: NVDA -4.6%, ATVI -3.2%, GPS -3.0%, EQT -2.8%, EXPE -2.6%
- At the close: VIX 11.1 (+0.2pts); Treasuries: 2-yr 1.21% (flat), 10-yr 2.43% (+3bps), 30-yr 3.03% (+2bps)

***US movers afterhours***
- GUID: Reports Q4 $0.09 v $0.06e, R$29.5M v $28.7Me; Guides initial FY17 $0.28-0.36 to $ v $0.29e, R$112-118M v $115Me; +3.9% afterhours
- CSOD: Reports Q4 $0.00 v -$0.03e, R$109.9M v $109Me; Guides Q1 R$109-111M v $112Me; +3.9% afterhours
- BKD: Reports Q4 -$1.45 (unclear if comp) v $0.47e, R$1.21B v $1.22Be (2 est); -5.3% afterhours
- HIBB: Guides Q4 $0.53-0.55 v $0.68e, R$247M v $255Me; SSS - 2.2%; -5.4% afterhours
- AMKR: Reports Q4 $0.42 v $0.27e, R$1.02B v $1.03Be (1 est)- Guides Q1 -$0.11 to 0.05 v $0.11e, R$860-940M v $970Me, gross margin 13-17%; -10.9% afterhours

***Politics***
- (US) President Trump's National Security Adviser Michael Flynn resigned; Keith Kellogg is now acting National Security Adviser - financial press
- (US) Federal judge in Virginia also rules against upholding President Trump's executive order on immigration - press
- (US) Steven Mnuchin confirmed by US Senate as the next US Treasury Secretary in 53-47 vote

***Asia Key economic data:***
- (CN) CHINA JAN CPI M/M: 1.0% (11-month high) V 0.2% PRIOR; Y/Y: 2.5% (32-month high) V 2.4%E
- (CN) CHINA JAN PPI Y/Y: 6.9% V 6.5%E (5th straight increase and highest since Aug 2011)
- (JP) JAPAN DEC FINAL INDUSTRIAL PRODUCTION M/M: 0.7% V 0.5% PRELIM; Y/Y: 3.2% V 3.0% PRELIM
- (AU) AUSTRALIA JAN NAB BUSINESS CONFIDENCE: 10 (19-month high) V 6 PRIOR; CONDITIONS: 16 (9-year high) V 10 PRIOR
- (NZ) New Zealand Jan Food Prices M/M: +2.8% v -0.8% prior (First rise in 5 months)
- (NZ) New Zealand Jan REINZ median home price y/y: +9.4% v +11% prior; Home sales y/y: -14.7% v -10.7% prior

***Asia Session Notable Observations, Speakers and Press***
- "Re-flation Trump trade" sent US equities to record highs on Monday, but risk is on the back foot in the latter part of the Asia session. After days of DOJ investigations, National Security Advisor Michael Flynn has submitted his resignation after acknowledging he gave "incomplete information regarding phone calls with the Russian ambassador" about US sanctions prior to inauguration, potentially sending the US administration into damage control mode. White House press Sec Spicer will hold a press conference on Tuesday and may be faced with questions about the timing when the cabinet became aware of compromising intel on Flynn, particularly in light of Pres Trump stating Flynn had his confidence as recently as Monday. S&P futures are down slightly, Gold is up $5 from the lows above $1,330, and USD/JPY is off by 40pips below 113.30.
- China released its January CPI and PPI numbers that topped expectations while hitting multi-year highs. PPI remained especially notable as it rose for the 4th month and reached the highs not seen since 2011. CPI increase was more heavily skewed to food inflation (2.7% v 2.4% prior) as non-food component slowed to 0.7% v 2.0% prior. China Stats Bureau noted the CPI was skewed by the Lunar New Year effect, since it came in January this year as opposed to February of last year. Also of note in China, US financial press report indicating US Commerce Sec may not choose to name the country a currency manipulator, but rather designate the practice of currency manipulation as an unfair subsidy when employed by any state.
- AUD benefited from strong NAB Business Conditions reaching multi-year highs. NAB economist noted the employment index improvement was expecially notable since it had previously "stubbornly muted". Comments from UBS economist said the NAB data puts RBA into "rate hike territory".
- Toshiba remains in focus on Japan. After confirming several recent press reports estimating rougly ¥700B charge related to Westinghouse writedown, the company has once again postponed its earnings release as it continues to work with its auditor on the review. A Nikkei report earlier today also noted the company may not be able to continue as a "going concern", potentially requiring bankruptcy proceedings and/or state bailout.

China:
- (CN) US said to consider new currency strategy to pressure China from undervaluing currency to boost exports - financial press
- (CN) China NBS: Jan CPI boosted due to Lunar New Year factors
- (CN) China National Development Reform Commission (NDRC): Expect to invest more than CNY800B in railway improvements in 2017 v CNY801.5B in 2016 - Chinese press

Japan:
- (JP) BOJ Gov Kuroda: Will not alter monetary policy just because global yields are rising
- (JP) Japan Fin Min Aso: PM Abe has proposed an economic dialogue to US president Trump - press

Australia/New Zealand:
- (AU) UBS economist: Latest NAB Business confidence data suggests conditions have moved into "rate hike territory" - AFR
- (NZ) Westpac: New Zealand housing prices showed marked slowdown in Jan - press
- (NZ) New Zealand Jan REINZ median home price y/y: +9.4% v +11% prior; Home sales y/y: -14.7% v -10.7% prior

***Asian Equity Indices/Futures (00:00ET)***
- Nikkei -0.6%, Hang Seng flat, Shanghai Composite -0.2%, ASX200 -0.1%, Kospi -0.3%
- Equity Futures: S&P500 -0.1%; Nasdaq -0.1%; Dax -0.1%; FTSE100 -0.1%

***FX ranges/Commodities/Fixed Income (00:00ET)***
- EUR 1.0590-1.0625; JPY 113.25-113.80; AUD 0.7635-0.7690; NZD 0.7165-0.7195
- Apr Gold +0.3% at $1,230/oz; Mar Crude Oil +0.3% at $53.06/brl; Mar Copper +0.3% at $2.79/lb
- SPDR Gold Trust ETF daily holdings rise 4.2 tonnes to 840.9 tonnes; 8th consecutive increase; Highest since Dec 15th
- (CN) PBOC SETS YUAN MID POINT AT 6.8806 V 6.8898 PRIOR
- (CN) PBOC to inject combined CNY130B v CNY100B on Feb 2nd in 7-day, 14-day and 28-day reverse repos
- (JP) Japan MoF sells ¥2.17T in 0.1% 5-year JGB bonds; avg yield -0.089% v -0.116% prior; bid-to-cover 4.26x v 3.66x prior
- (AU) Australia MoF (AOFM) sells A$150M in 1.25% 2022 Bonds; avg yield: 4785%; bid-to-cover: 4.83x

***Asia equities / Notables / movers by sector***
- Consumer discretionary: 1958.HK BAIC Motor Corp Ltd +2.0% (guidance); 3389.HK Hengdeli Holdings +1.0% (guidance); TWE.AU Treasury Wine -4.7% (H1 result); DMP.AU Domino ’ s Pizza +2.5% ; COH.AU Cochlear -3.7% (H1 result); NCK.AU Nick Scali +10.4% (H1 result); JBH.AU JB Hi-Fi -3.1%
(Credit Suisse cuts rating); 7936.JP Asics Corp -10.3%, 6098.JP Recruit Holdings +1.4% (9-month result); 9041.JP Kintetsu Corp -1.2%, 2501.JP Sapporo Holdings -6.0% (9-month result); 2587.JP Suntory Beverage & Food -2.9%, 2503.JP Kirin Holdings Co -3.5% (FY16/17 result)
- Financials: 1109.HK China Resources Land +1.2% (Jan result); CGF.AU Challenger Financial Services Group -2.4% (H1 result); OCBC.SG Oversea-Chinese Banking Corp -3.4% (Q4 result); NOBL.SG Noble Group +9.1% (potential strategic investment)
- Industrials: RIC.AU Ridley Corp -3.3% (H1 result); AZJ.AU Aurizon Holdings -3.4% (Macquarie cuts rating); 6479.JP Minebea +17.2% (9-month result)
- Technology: 7731.JP Nikon Corp -13.9% (9-month result); 6728.JP Ulvac Inc +17.3% (Nomura raises rating); 6773.JP Pioneer Corp -6.6% (9-month result); 6502.JP Toshiba Corporation -7.8% (May issue first-ever risk warning; May delay earnings, in disagreement with auditors)
- Materials: 1090.HK DaMing International Holdings +3.2% (guidance); 5706.JP Mitsui Mining & Smelting +13.4% (9-month result); 486.HK RUSAL -4.4% (Onexim sold stake)

>>> Valeant Pharma, J. Michael Pearson and Pershing Square Capital Management en

Valeant Pharma, J. Michael Pearson and Pershing Square Capital Management entered into a litigation management agreement 

  • Pursuant to the Litigation Management Agreement, the Valeant Parties and the Pershing Square Parties agreed to certain provisions with respect to the management of the litigation with respect to the putative class action pending in the United States District Court for the Central District of California captioned In re Allergan, Inc. (AGN) Proxy Violation Secs. Litig., Case No. 8:14-cv-2004-DOC (KESx) (C.D. Cal.) including (i) all cases currently consolidated with the California Action and (ii) any opt-out litigation or individual actions brought by members of the putative class in the California Action asserting the same or similar allegations or claims.
  • In addition to the agreements set out above with respect to the Allergan Litigation, the Litigation Management Agreement includes an undertaking by the Pershing Square Parties to forbear from commencing any action or actions that arise out of, or relate to, the claims alleged or facts asserted in the Allergan Litigation or to the purchase or acquisition of, or transactions with respect to, the Company's securities against any of the Valeant Parties from February 3, 2017 until the date that is thirty days after the termination of the Litigation Management Agreement. Any statute of limitations applicable to such actions or tolled claims is suspended during this period. If the Litigation Management Agreement is terminated pursuant to its terms, the parties will meet and discuss whether any tolled claims should be submitted to confidential arbitration or mediation.
  • Mutual Release: In connection with the entrance into the Litigation Management Agreement, on February 10, 2017 the Valeant Parties and the Pershing Square Parties entered into a mutual release of claims (the "Mutual Release"). The Mutual Release will go into effect upon the later of satisfaction of the payment obligations that each party would have in connection with any settlement of the California Action pursuant to the Litigation Management Agreement described above and the date of entry of final judgment, and will not occur if the Litigation Management Agreement is terminated.

>>> Chemicals Initiated at Evercore ISI; Time to ‘Stand And Deliver’

Chemicals Initiated at Evercore ISI; Time to ‘Stand And Deliver’

Chemical sector’s time has come to “stand and deliver” after sector outperformed, re-rated to all-time highs on expectations of sharp earnings recovery, Evercore ISI analyst Laurent Favre writes while initiating coverage of 21 European and 8 U.S. chemical makers.
  • Whole sector can grow EPS by 12% through 2018, which should be enough to generate 7% total shareholder return on average
  • Recommends buying coatings; sell gases, auto catalysts, Christian Hansen (CHR DC)
    • Likes Arkema, LYB, BASF, Solvay among cyclicals
    • Sell Covestro, Lanxess; sees DSM, UNVR as “hidden value” stocks
  • Top picks: Arkema, Akzo, DSM, BASF in Europe; LYB, PPG, AXTA, UNVR in U.S.; bottom picks are PX, Air Liquide, Umicore, Covestro, Christian Hansen
  • U.S. initiations: Buy on AXTA (PT $34), LYB ($109), PPG ($117), RPM ($59), UNVR ($35); hold on IFF ($125); sell on APD ($131), PX ($107)

>>> Impala Asset Management (Robert Bishop-previously was CIO at Soros Fund Mgmt

Impala Asset Management (Robert Bishop-previously was CIO at Soros Fund Mgmt) discloses updated portfolio positions in 13F filing: New FCX position, Closed out CAA DHI CSX
Highlights from 2016 Q4 filing as compared to 2016 Q3 filing:
  • New positions in: FCX (~10.94 mln shares - also has calls), TRN (~1.7 mln), SALT (~1.47 mln), LPI (~1.21 mln), JNUG(~1.06 mln), SUM (~1.05 mln), VALE (~0.82 mln), DOW (~0.79 mln), TXT (~0.78 mln)
  • Increased positions in: RIO (to ~4.42 mln shares from ~3.36 mln shares), HES (to ~1.08 mln from ~0.45 mln), SU (to ~0.71 mln from ~0.23 mln), CAT (to ~0.45 mln from ~0.06 mln), HZO (to ~1.51 mln from ~1.13 mln), TSE (to ~0.83 mln from ~0.46 mln), DAL (to ~0.47 mln from ~0.18 mln) NEM (to ~1.82 mln from ~1.59 mln), CENX (to ~0.7 mln from ~0.57 mln), EOG (to ~0.2 mln from ~0.08 mln)
  • Maintained positions in: TECK (~12.04 mln shares), TTWO (~1.04 mln)
  • Closed positions in: CAA (from ~1.01 mln shares), DHI (from ~0.65 mln), KSU (from ~0.54 mln), BCS (from ~0.53 mln), AMD(from ~0.47 mln), CLD (from ~0.41 mln), BC (from ~0.39 mln), LPX (from ~0.36 mln), TUR (from ~0.28 mln), WAB (from ~0.19 mln), COH (from ~0.16 mln), TJX (from ~0.13 mln), CBS (from ~0.13 mln), SLB (from ~0.12 mln)
  • Decreased positions in: SWFT (to ~2.79 mln shares from ~3.69 mln shares), FLR (to ~0.6 mln from ~1.34 mln), NFX (to ~0.15 mln from ~0.81 mln), X (to ~2.12 mln from ~2.49 mln), CLR (to ~0.19 mln from ~0.51 mln), DVN (to ~0.29 mln from ~0.48 mln), ARLP (to ~0.18 mln from ~0.35 mln), HOG (to ~1.07 mln from ~1.24 mln), FDX (to ~0.16 mln from ~0.29 mln)

>>> Lansdowne Partners discloses updated portfolio positions in 13F filing

Lansdowne Partners (Alex Snow, Sir Paul Ruddock retired) discloses updated portfolio positions in 13F filing: New HAS position, large BAC stake increase, sold most of its V position
Highlights from 2016 Q4 filing as compared to 2016 Q3 filing:
  • New positions in: HAS (~1.4 mln shares), ADNT (~0.24 mln - JCI spinoff), COG (~0.24 mln), FSLR (~0.08 mln), ECA (~0.05 mln), NEE (~0.05 mln)
  • Increased positions in: BAC (to ~30.5 mln shares from ~0.08 mln shares), SPWR (to ~0.29 mln from ~0.05 mln), JCI (to ~0.42 mln from ~0.31 mln), CRM (to ~0.13 mln from ~0.11 mln)
  • Maintained positions in: DAL (~26.19 mln shares), LB (~10.42 mln shares), FB (~5.41 mln shares), GOOGL (~1.28 mln shares)
  • Closed positions in: AES (from ~0.41 mln shares), AMD (from ~0.11 mln), BWA (from ~0.08 mln)
  • Decreased positions in: V (to ~1.42 mln shares from ~7.52 mln shares), NKE (to ~17.05 mln from ~20.71 mln), JPM (to ~21.21 mln from ~23.96 mln), CMCSA (to ~21.37 mln from ~23.89 mln), C (to ~6.05 mln from ~7.89 mln), DIS (to ~8.11 mln from ~9.59 mln), AMZN (to ~1.47 mln from ~1.8 mln), IR (to ~0.07 mln from ~0.2 mln), CNQ (to ~0.17 mln from ~0.25 mln)

NYT : Allergan’s Deal for Fat-Freezing Treatment Shows Spending for Growth

Allergan’s Deal for Fat-Freezing Treatment Shows Spending for Growth

Allergan has added ice and a slice to its M&A cocktail. The drug company is paying just under $2.5 billion for Zeltiq Aesthetics and its diet-avoiding, fat-freezing technology. It sounds like a wackier play than the dozen deals Allergan struck last year. But people pay cash for the treatment, making it less speculative than other acquisitions, such as gene therapy.

Allergan’s deal machine received a $40 billion injection, before tax, from the well-timed sale of the company’s generic drugs unit to Teva Pharmaceutical last year. Brent Saunders, Allergan’s chairman and chief executive, used the pick-me-up to shrink debt and repurchase shares. He is also trying to refill the pipeline by ramping up research and development spending and acquisitions. The company’s biggest drug, Botox, faces tougher competition, while its second-biggest drug, Restasis, may soon lose patent protection.

That may help explain Allergan’s hunger for a deal. In addition to aesthetic drugs, it has, since the start of 2016, bought or licensed gastrointestinal drugs, gene therapy for eye disease, and long-shot treatments for Alzheimer’s and other neurological disease.

Zeltiq may be a safer bet, despite its unusual beginning. It was founded after doctors noticed that children who ate Popsicles tended not to have chubby cheeks. Zeltiq applies this idea to other areas of the body. The treatment fits well with Allergan’s other cosmetic surgery assets, such as Botox and Kybella, which reduces chin fat. Zeltiq customers pay out of their own pockets, rather than go through insurers and governments, which demand big discounts for more essential drugs.

Allergan is not getting the fat-freeze technique for cheap. It is paying well over 100 times Zeltiq’s estimated earnings and six times its estimated 2017 revenue. Zeltiq’s growth should be about 20 percent this year, about half its performance in 2016. A further slowdown, perhaps because customers question whether the service is worth the price, would mean a poor return on the purchase.

Allergan has now churned through a substantial chunk of its Teva windfall. It had about $13 billion of cash at the end of last year. That’s still enough for several more deals, especially as its business should throw off $6.5 billion of free cash flow this year. The frenetic pace of the company’s mergers and acquisitions, and the scattershot targets, raise the risk that the company is misspending its windfall.

>>> US Close Dow +0.70% S&P +0.52% Nasdaq +0.52% Russell +0.25%

Closing Market Summary: Another Day, Another Record Close

Another day, another record close for the major averages. The key indices backed away from their best levels during afternoon action, but still kept the bulk of their gains. The Dow (+0.7%) led the day's advance while the S&P 500 and the Nasdaq both gained 0.5%.

President Trump's upcoming tax-related announcement was yet again the driver of today's bullish sentiment. Investors have pushed the stock market higher since last Thursday when Mr. Trump promised to deliver a "phenomenal" tax reform plan in the coming weeks. Without any specific details of said plan, it's clear that investors are seeing the gesture as symbolic, a sign of the new administration's resolve in keeping the pro-growth promises of Mr. Trump's presidential campaign.

Financials (+1.1%) provided strong sector leadership throughout the morning, but lost some of their momentum in the afternoon. Industrials (+1.0%) also had a solid showing, as Caterpillar (CAT 98.50, +2.19) rallied around a recent report from U.S. Department of Homeland Security which suggested Mr. Trump's proposed barrier along the U.S./Mexico boarder may cost more than it was originally estimated.

The top-weighted technology sector (+0.7%) finished just a step ahead of the benchmark index, thanks in large part to Apple's (AAPL 133.29, +1.17) strong performance. Apple, the largest company by market cap, has added over 10.0% since reporting record revenues, earnings, and iPhone sales on January 31st.

Energy (unch) was the worst performing cyclical space as crude oil broke its three session wining streak. The commodity finished lower by 1.7% at $52.95/bbl as an uptick in U.S. production overshadowed the release of an OPEC report, which showed high compliance with last year's agreed upon production cuts. This report confirms similar findings from the International Energy Agency.

The only group to finish behind energy was the lightly-weighted telecom services sector (-1.3%) thanks to heavy losses from Verizon (VZ 48.55, -0.43) and AT&T (T 40.65, -0.73). Verizon slipped 0.9% after unveiling a new unlimited data plan while AT&T's downtick of 1.8% was partly due to the company's ongoing dispute with the Communications Workers of America. 

U.S. Treasuries also finished the day in the red, leaving the 10-yr note with its fourth consecutive loss. The benchmark 10-yr yield finished two basis points higher at 2.43%.

Investors did not receive economic data on Monday. Tomorrow's lone economic report, January PPI (Briefing.com consensus 0.3%) will cross the wires at 8:30 am ET.

In addition, Fed Chair Janet Yellen will be delivering her semiannual monetary policy report to the Senate Banking Committee on Tuesday. Investors will be tuned in, looking for indications regarding the timing of the next rate hike from the FOMC.

  • Nasdaq Composite +7.1% YTD
  • S&P 500 +4.0% YTD
  • Dow Jones Industrial Average +3.3% YTD
  • Russell 2000 +2.6% YTD

WSJ : Time Is Running Out for Fossil

Time Is Running Out for Fossil
Warnings from other retailers don’t bode well for Fossil ahead of Tuesday’s earnings report

The clock is ticking for Fossil Group Inc.
A turbulent retail environment and the burgeoning wearables market have been a double whammy for the watch and accessories maker. More than three-quarters of its market value has evaporated over the past few years, wiping out a decade’s worth of gains.

And if recent warnings from fellow retailers Macy’s Inc., Kohl’s Corp. and Michael Kors Holdings Ltd. are any indication, Fossil’s challenges will only be further magnified in Tuesdays’ earnings report.


Analysts polled by FactSet estimate fourth-quarter earnings of $1.12 a share, down 23% from a year ago. Revenue is expected at $977 million, essentially unchanged from the prior year. Same-store sales are estimated to have dropped 1.2%, which would be a fourth consecutive quarterly decline.

Hitting those targets won’t be a given. Michael Kors cited weak fashion watch sales at the end of the year, which weighed on overall results. Fossil has licenses to sell watches under a number of labels, including Michael Kors, which accounts for 25% of Fossil’s sales, according to Mizuho Securities analyst Betty Chen. Additionally, both Macy’s and Kohl’s said that watches and accessories were a weakness in the holiday season. Both department stores sell Fossil products.

In the longer term, Fossil faces a structural shift in buying behavior. Consumers are gravitating to wearable devices such as smartwatches and fitness trackers, including Apple Inc.’s Apple Watch. Some 97.4 million wearables shipped in 2016, up 20% from a year ago, according to research firm International Data Corp. That figure is expected to increase to 124.4 million units this year.

Fossil, for its part, said a year ago that it would fast-track more than 100 new products across several brands to try to capture this market. It also acquired a wearables maker, Misfit, in late 2015. But wearables have lower margins than traditional watches. Ms. Chen says smartwatches account for as much as 20% of Fossil’s overall watch sales. As Fossil increases smartwatch sales, she warns the company’s gross margin, which has fallen for the past three years, could drop further.

Even if Fossil exceeds beaten-down estimates and the stock surges, don’t be fooled: The same thing happened a year ago when shares jumped 30% on better-than-expected results, as the high end of Fossil’s earnings outlook exceeded analysts’ estimates. Those gains vanished within three months and the stock has fallen further ever since. Short sellers also continue to bet the stock is headed even lower, as more than 20% of Fossil shares are sold short.

Fetching 13 times projected earnings over the next 12 months, the stock has been far cheaper. Its multiple was single digits as recently as a year ago.

This Fossil is still dead and buried.