>>> US Close Dow-0.47% S&P-0.50% Nasdaq-0.21% Russell-0.48%

Closing Market Summary: Dollar and Rates Pressure Stocks

The stock market ended the Tuesday affair on a lower note as rising interest rates and a stronger dollar pressured the major averages. The S&P 500 (-0.5%) finished in-line with the Dow Jones Industrial Average (-0.5%) and behind the Nasdaq Composite (-0.2%).

Equity indices began the day on a choppy note as renewed Brexit concerns continued to plague the foreign exchange market. Sterling fell 0.9% against the greenback (1.2726) after UK Prime Minister Theresa May reminded investors that the UK remains on course to invoke Article 50 of the Lisbon Treaty by the end of March 2017. The pound notched a new 31-year low (1.2720) against the dollar, which in turn helped support the UK's FTSE (+1.2%). Weakness in cable also led to an early downturn in the euro, which contributed to gains in European bourses.

The single currency reversed course near midday when reports indicated that the European Central Bank is nearing a consensus on tapering its quantitative easing program ahead of its planned conclusion. Recall that the ECB contributed to rate jitters in September when President Mario Draghi indicated that an extension of the asset purchase program past March 2017 was not discussed at the most recent policy meeting. The euro/dollar pair rallied to the 1.1240 price level before erasing its gain. The single currency ended lower by 0.1% against the dollar (1.1202).

The news of potential tapering on the horizon led to a downturn in sovereign bonds, which boosted rates globally. Defensively-oriented sectors extended early losses as participants unwound some crowded trades in real estate (-1.6%), telecom services (-1.7%), and utilities (-2.2%). The benchmark index rallied in the final hour of trade, narrowing its loss to 0.5%. Heavily-weighted financials (+0.3%) finished with the only gain.

The financial sector (+0.3%) led the advance as steepening in the yield curve boosted earnings prospects for the group. Richmond Fed President Jeffrey Lacker, who is not an FOMC voter, kept the rate hike conversation alive, saying that the fed funds rate should be higher given current inflation and unemployment rates. Mr. Lacker also advocated pre-emptive rate hikes in order to sustain economic stability. The SPDR S&P Bank ETF (KBE 33.54, +0.31) finished higher by 0.9%. Conversely, Wells Fargo (WFC 43.75, -0.08) ended behind the group after reports indicated that fraudulent account activity may have impacted small business owners in addition to consumer banking customers. 

In the technology sector (-0.2%), Dow component Apple (AAPL 113.00, +0.48) displayed relative strength, advancing 0.4%. Fellow heavyweight Alphabet (GOOG 776.43, +3.87) also outperformed after its recent hardware launch event. The tech giant unveiled a number of devices including new smartphones and a smart home hub. The high-beta chipmakers finished slightly behind the broader sector, evidenced by the 0.3% loss in the PHLX Semiconductor Index. Micron (MU 17.80, +0.07) finished ahead of the price-weighted index as participants looked forward to the company's earnings release this evening. 

The consumer staples sector (-0.9%) underperformed as defensively-oriented groups remained pressured by rising rates. Dollar Tree (DLTR 76.43, -3.10) declined 3.9% after being downgraded to "Neutral" from "Buy" at Cleveland Research. Meanwhile, Dr Pepper Snapple (DPS 86.86, -3.90) fell 4.3% after being downgraded to "Hold" from "Buy" at Evercore ISI. The broader sector extended its weekly loss to 1.5%. 

Treasuries finished near their worst levels as yields rose through the curve. The yield on the 2-yr note increased two basis points (0.82%) while the yield on the benchmark 10-yr note rose six basis points (1.69%).

Today's participation was above the recent average as more than 876 million shares changed hands on the NYSE floor.

There was no economic data of note released today.

Tomorrow's economic data will include the 7:00 ET release of the weekly MBA Mortgage Index. Meanwhile, the ADP Employment Change Report for September (consensus 171k) and the August Trade Balance (consensus -39.1 billion) will be released at 8:15 ET and 8:30 ET, respectively. The day's data will be capped off with Factory Orders for August (consensus 0.1%) and ISM Services for September (consensus 52.8), which will cross the wires at 10:00 ET. 

  • Russell 2000: +9.1% YTD
  • Nasdaq: +5.6% YTD
  • S&P 500: +5.2% YTD
  • Dow Jones: +4.3% YTD

(ZH) US Considering Air Strikes On Assad Regime After Top General Warns It Could

US Considering Air Strikes On Assad Regime After Top General Warns It Could Lead To War With Russia

Now that the gloves have come off in the faux diplomacy between Russia and the US, which yesterday culminated with Putin halting a Plutonium cleanup effort with the US, shortly before the US State Department announced it would end negotiations with Russia over Syria, the next step may be one which John Kerry warned last week is "back on the table", namely the launch of military strikes on the Assad regime.
As WaPo reports, meetings have been going on within US national security agencies for weeks to consider new options to recommend to the president to address the ongoing crisis in Aleppo. A meeting of the Principals Committee, which includes Cabinet-level officials, is scheduled for Wednesday while a meeting of the National Security Council, which could include the president, could come as early as this weekend.
As Reuters hinted last week, at a Deputies Committee meeting at the White House, officials from the State Department, the CIA and the Joint Chiefs of Staff discussed limited military strikes against the regime as a "means of forcing Syrian dictator Bashar al-Assad to pay a cost for his violations of the cease-fire, disrupt his ability to continue committing war crimes against civilians in Aleppo, and raise the pressure on the regime to come back to the negotiating table in a serious way." Or, in other words, to cut to the chase and go right back to what the US was hoping to achieve in Syria in the first place: another regime change.
Among the options considered include bombing Syrian air force runways using cruise missiles and other long-range weapons fired from coalition planes and ships. One proposed way to get around the White House’s long-standing objection to striking the Assad regime without a U.N. Security Council resolution would be to carry out the strikes covertly and without public acknowledgment, the official said. In other words, the warhawks in the administration are actively contemplating not only bypassing the White House, but flaunting the UN and launching a sovereign incursions, also known as a war, against Syria.


The CIA and the Joint Chiefs of Staff, represented in the Deputies Committee meeting by Vice Chairman Gen. Paul Selva, expressed support for such “kinetic” options, the official said. That marked an increase of support for striking Assad compared with the last time such options were considered.

“There’s an increased mood in support of kinetic actions against the regime,” one senior administration official said. “The CIA and the Joint Staff have said that the fall of Aleppo would undermine America’s counterterrorism goals in Syria.”
The good news is that, at least for now, not everyone involved in the discussion is a hawkish neocon. According to WaPo there’s still skepticism that the White House will approve military action. Other administration officials told The Post this week that Obama is no more willing to commit U.S. military force inside Syria than he was previously and that each of the military options being discussed have negative risks or consequences.

There is another problem: launching bombing raides over Syria would necessarily require the creation of a "no fly zone" for Syrian and, more importantly, Russian warplanes. However, as we noted yesterday, during testimony before the Senate Committee on Armed Services last week General Joseph Dunford rang the alarm over a policy shift that is gaining more traction within the halls of Washington following the collapse of the ceasefire brokered by the United States and Russia in Syria saying that it could result in a major international war which he was not prepared to advocate on behalf of.
The notable exchange took place after Senator Roger Wicker of Mississippi asked about Hillary Clinton’s proposal for a no fly zone in Syria in response to allegations that Russia and Syria have intensified their aerial bombardment of rebel-held East Aleppo since the collapse of the ceasefire.
"What about the option of controlling the airspace so that barrel bombs cannot be dropped? What do you think of that option?" asked Wicker. "Right now, Senator, for us to control all of the airspace in Syria would require us to go to war against Syriaand Russia. That is a pretty fundamental decision that certainly I’m not going to make," said the Chairman of the Joint Chiefs of Staff suggesting the policy was too hawkish even for military leaders.

As we further added last night, despite Dunford's warning, the military angle has gained traction in recent weeks among top US diplomats, as today's WaPo report confirms.
And since the report is, at least for now, just a trial balloon to gauge the Russian reaction to a potential US military incursion, we now wait to see what Putin's reaction to the possibility of a US military campaign in Syria will be.

(ZH) For Crispin Odey This Is The Engame: Hedge Fund Billionaire Goes All In Bet

For Crispin Odey This Is The Engame: Hedge Fund Billionaire Goes All In Betting On "Violent Unwind" Of QE Bubble

In mid-August, when the market was enjoying its low-volatility grind higher, we observed that one of the biggest bears in the hedge fund industry, Crispin Odey, was having a bad year, with his hedge fund sinking some 30% through the end of July. Since then, conditions have only gotten more precarious for the billionaire hedge fund manager, and as the FT writes, for Odey, who is betting it all "on a violent unwind of a QE bubble", the endgame may have arrived.
As Miles Johnson writes, "many financial commentators have warned that current monetary policy has inflated a bubble that will one day violently pop. Few of them have risked money betting on the precise manner in which a chaotic unwinding of quantitative easing will play out through financial markets. This makes the portfolio of Crispin Odey, a London-based hedge fund manager, an interesting outlier. Mr Odey is one of only a handful of investors who has backed up his dire prognosis for the global economy with a series of large, leveraged trades designed to pay off in the event of a crash."
To be sure, as we noted two months ago, Odey's bets are predicated on a collapse of Japanese bond prices, a surge in the price of gold and immolation of equities. Or as the FT puts, it, "If it works he may make hundreds of millions of dollars for his clients. If wrong his fund may not survive."
However, while for Odey the endgame of fighting the Fed (and other central banks) may have arrived, he may have a problem cashing out, even if correct. As FT observes, a closer examination of Mr Odey’s individual positions reveal the ways in which he has translated his views into a set of assumptions about how markets will move in the event of a crisis. The biggest risk he now faces is even if the denouement he predicts finally arrives, his trades may well not react in the way he intended.
Some thoughts:



Odey’s first big assumption appears to be that market turmoil will cause the value of the US dollar to rise against other major currencies. His flagship hedge fund holds 104 per cent of its active currency exposure in the dollar, according to his most recent letter to investors. This presumably is based on the idea that severe market stress will see investors rush into the safety of the largest global reserve currency.
However, "this assumption needs to be questioned. In the event of a market catastrophe the only major central bank that has the ability to cut interest rates is the US Federal Reserve. If the Fed is forced to take action this could see the euro and the yen rise against the dollar, rather than fall. Added to this both the eurozone and Japan have comparatively strong current account positions. The dollar may indeed surge in a crisis, but it would be unwise to bet your house on it."


Mr Odey’s second big trade is that Japanese government bond yields will explode higher as financial markets realise that the “all in” Bank of Japan has run out of ammunition. Some macro hedge funds have over the years attempted to short JGBs based on the idea that the country’s indebtedness and poor growth was incompatible with its low yields. JGB yields have continued to drop, leading to the trade being nicknamed the “widow maker”.
Here too, there is a gamble even assuming central banks lose control: "the premise that JGB yields will rise during market turmoil is no certainty. The Japanese are the world’s largest single owners of financial assets, which in the event of a crash would presumably be sold and funds repatriated into yen. Over the last two decades a strong yen has tended to coincide with a fall in Japanese government bond yields. Betting against JGBs in anticipation of a crisis may have painfully opposite consequences when a crisis arrives."
But all of the above pales in comparison to Odey's gold bet:


Mr Odey’s single biggest bet is that the value of gold will surge. This gold position represents an eye-watering 100 per cent of his fund’s net asset value, meaning a large rally or fall in its value may dictate the fate of his entire portfolio. His intellectual justification for the position is well rehearsed. He recently observed how “central banks have printed $80tn of money, backed by only $1.27tn of gold”. The real value of this “printed” money has therefore been debased and logically should fall when priced in gold.
Even here a "cashing out" problem emerges, because shoudl China implode, gold may end up being sold not bought: "Odey’s long gold position interacts with his overarching premise — that a crisis starting in China explodes through global markets. Large amounts of global gold demand come from Asia."
In other words, while massively levered to an unprecedented, global failure of QE, Odey may not be able to profit even in that case, or as Johnson concludes "for those of us watching from the sidelines the lesson should be clear: predicting a crash is far easier than ensuring you profit from it." What he ignores, also, is that in a worst case scenario where faith in not only central banking is lost, but fiat currencies lose value as a result while banks keel over left and right, just who will honor their contractual agreements to cash your shorts, or novate your CDS?
For Odey, the answers better come soon, because the only thing worse for his hedge fund and LPs than the end of the world coming in short notice, would be if central banks once again manage to keep the artificial market calm, cool and collected and levitating ever higher.

>>> Nokia offer date for Alcatel-Lucent shares extended due to AMF legal action

Nokia offer date for Alcatel-Lucent shares extended due to AMF legal action

The French stock market authority (Autorité des marchés financiers, "AMF") announced today that a legal action was filed before the Paris Court of Appeal on September 30, 2016 for annulment of the AMF's clearance decision regarding Nokia's public buy-out offer (the "Public Buy-Out Offer"), which would be followed by a squeeze-out (the "Squeeze-Out", together with the Public Buy-Out offer, the "Offer"), for all remaining securities of Alcatel-Lucent. Consequently, the Public Buy-Out Offer period is extended until further notice and the Squeeze-Out, which had been scheduled for October 6, 2016, will take place once the public buy-out offer is completed.
Nokia is now awaiting details of the legal action, and the AMF will publish a further notice with a new timetable in due course. Nokia believes that the Offer complies with all applicable laws and regulations and expects that, unfortunate delay aside, the legal action will not have a material impact on its acquisition of the remaining outstanding securities of Alcatel-Lucent.
Documentation relating to the Offer, which includes Nokia and Alcatel-Lucent's joint offer document (note d'information conjointe) and Nokia's and Alcatel-Lucent's respective "other information" documents, is available on the AMF website (www.amf-france.org), on Nokia's website (http://company.nokia.com/en/investors/financial-reports/filings-related-to-the-alcatel-lucent-transaction), and on Alcatel-Lucent's website (www5.alcatel-lucent.com).Nokia offer date for Alcatel-Lucent shares extended due to AMF legal action
04 OCT 2016
The French stock market authority (Autorité des marchés financiers, "AMF") announced today that a legal action was filed before the Paris Court of Appeal on September 30, 2016 for annulment of the AMF's clearance decision regarding Nokia's public buy-out offer (the "Public Buy-Out Offer"), which would be followed by a squeeze-out (the "Squeeze-Out", together with the Public Buy-Out offer, the "Offer"), for all remaining securities of Alcatel-Lucent. Consequently, the Public Buy-Out Offer period is extended until further notice and the Squeeze-Out, which had been scheduled for October 6, 2016, will take place once the public buy-out offer is completed.
Nokia is now awaiting details of the legal action, and the AMF will publish a further notice with a new timetable in due course. Nokia believes that the Offer complies with all applicable laws and regulations and expects that, unfortunate delay aside, the legal action will not have a material impact on its acquisition of the remaining outstanding securities of Alcatel-Lucent.
Documentation relating to the Offer, which includes Nokia and Alcatel-Lucent's joint offer document (note d'information conjointe) and Nokia's and Alcatel-Lucent's respective "other information" documents, is available on the AMF website (www.amf-france.org), on Nokia's website (http://company.nokia.com/en/investors/financial-reports/filings-related-to-the-alcatel-lucent-transaction), and on Alcatel-Lucent's website (www5.alcatel-lucent.com).

WSJ : Good Case for LVMH’s Groovy German Acquisition

Good Case for LVMH’s Groovy German Acquisition
Rimowa, inventor of the ribbed aluminium suitcase, is a fast-growing bolt-on for French luxury group LVMH

LVMH Moët Hennessy Louis Vuitton has bagged a good maiden deal in Germany. Just don’t expect the usual cost-cutting or cross-selling to boost profits.
The French luxury group announced Tuesday it had agreed to buy80% of Rimowa, a Cologne-based luggage firm famous for its ribbed polycarbonate suitcases, for €640 million ($716 million). The remaining 20% will remain with the founding family. Current patriarch Dieter Morszeck, grandson of the founder, will stay on as co-chief executive, working alongside Alexandre Arnault, still in his early 20s but qualified by his status as son of LVMH chairman (and France’s richest man) Bernard Arnault.
The fit is clear enough. Mr. Morszeck is 63 and needs a succession plan. He is also an engineer who could benefit from support in distribution and marketing after a period of rapid growth. Last year Rimowa’s sales rose 28% to €350 million, and this year they’re expected to reach €400 million. The company has a high profile in east Asia and Germany, but only a handful of boutiques elsewhere.

For its part, LVMH is using the proceeds of its €650m Donna Karansale to buy a fast-growing complement to its stagnating fashion and leather goods division—and at a very reasonable price. The deal values the company at €800m, twice expected sales. LVMH paid almost four times sales for a similar 80% share in cashmere specialist Loro Piana in 2013. In March, Samsonite’s acquisition of Tumi, a similarly priced brand but one growing far more slowly, worked out at 3.3 times 2015 sales.
Tumi made an operating margin of 23% in the fourth quarter. Rimowa keeps its numbers secret but could be less profitable than its U.S. peer. The German firm has been investing heavily in its factories in Cologne, the Czech Republic and Canada to keep up with demand.
But a better explanation for the frugal deal price is the nature of Mr. Morszeck’s priorities. He stresses close ties with the Arnault family and “guaranteeing a promising future to all Rimowa employees” in public comments. Common values, not crystallizing value, seem to have driven his thinking.

To keep its side of the bargain—and the potentially awkward co-CEO structure alive—LVMH will need to invest rather than seek synergies. A costly store rollout looks likely, particularly in the U.S., still the key market for luxury groups and a weak spot for the German company.Like Loro Piana, Rimowa will remain largely independent of its new parent. Their only link will be Alexandre Arnault, a longtime Rimowa customer and now its new boss for marketing and distribution.
This is a deal between families, not financiers. Even so, LVMH has probably got the better of the domestic negotiations.

WSJ : Apple’s Price Is Right for iPhone 7

Apple’s Price Is Right for iPhone 7
A higher average selling price for new iPhones could pay off well

It would really be nice if Apple sold more iPhones in the year ahead, but the company has other ways to give its flagship business a boost.
The iPhone 7 went on sale a little more than two weeks ago. Apple is no longer giving out early sales figures. Still, some signs are pointing to decent demand. Those same signs also suggest Apple may see an uptick in the average selling price of the iPhone, which benefits both the company’s top and bottom lines.
Apple needs both. The company wrapped its latest fiscal year on Sept. 24. While final results won’t be reported for a few more weeks, it will be the first time Apple has seen fiscal year drops in both revenue and net income since 2001. That is mostly because last year’s iPhone 6Hopes are currently modest. Wall Street expects iPhone unit sales to grow 5% for the current fiscal year. But Apple made some changes that also could lift the smartphone’s average selling price. The company raised prices on all versions of the larger iPhone 7 Plus by $20. And a glossy new color called Jet Black is available only in higher memory configurations.
Those models all seem to be in demand. In a survey of Apple Stores on Friday, Gene Munster of Piper Jaffray noted that only about 8% had availability of the larger iPhone 7 Plus models compared with 61% for the smaller-screen versions. Supply is likely still very limited, though analysts at both Pacific Crest and Cowen & Co. noted Monday of a “slight uptick” in production activity for the iPhone—which doesn’t suggest weak demand.
In any case, higher average selling prices tend to pay off for Apple. The iPhone 6 boosted Apple’s average iPhone selling price by 11% in fiscal 2015. Revenue and net income jumped 28% and 35% for the year, respectively.
There is room for another surprise here. Analysts are currently projecting the iPhone’s average selling price to decline by 1% for the current fiscal year. Toni Sacconaghi of Bernstein estimates that if iPhone’s average selling price came in 3% higher than Wall Street’s current target, that would make up for a six million unit shortfall in iPhone sales.
Enough, in other words, to help Apple dial up a better year.S generated weaker demand. So the company needs this year’s offering to do better.