Barron's : Why 2017 Could Be the Year of the Stockpicker

Why 2017 Could Be the Year of the Stockpicker
With stocks and sectors no longer moving in unison, there will be a premium on savvy investment selection.

There’s a hoary Wall Street saying about investing: It’s not a stock market, but a market of stocks. That’s been untrue, however, for the past few years, during which stock sectors have tended to move up and down nearly in unison.

Since the end of the 2008 financial crisis, correlations between sectors have averaged 82%, compared with the 50% norm, notes Nicholas Colas, Convergex’s chief market strategist. This led to the mass “risk on, risk off” trade—which made it hard for active fund managers to beat their benchmarks, often the indexes that many exchange-traded funds mimic. “If all stocks are correlated, then it’s hard to pick, say, a 50-stock portfolio that will outperform,” says Robert Turner, managing principal at Turner Investments.

Yet there are a few inchoate signs that correlations are easing. If so, it’s something that should warm the hearts of suffering active-fund managers. The reality has been grim for them. According to Morningstar, active U.S. funds have seen $478 billion in net asset outflows over the past three years, with total assets now at $5.4 trillion. Over that period, passive funds—including exchange-traded ones—have outperformed their active competitors. During that stretch, they’ve gathered a net $914 billion in assets; they now have $4.2 trillion.

Until Donald J. Trump’s election as president, investors mainly cared about central-bank policy—to the exclusion of nearly everything else. High correlation meant that stock or sector selection mattered less than where rates were going.

The low-interest-rate environment and muted U.S. economic growth tended to decrease stock-return dispersion, says David Kostin, chief U.S. equity strategist at Goldman Sachs. When equities aren’t moving in unison, the opportunities for good stockpickers are better, he observes. Since the election, uncertainty has increased, and there is less slack in the economy, both of which suggest that dispersion will continue to rise in 2017, he adds.

Colas observes that in recent weeks, sector correlations have dropped dramatically, to 56.8%. Sectors have finally broken away from the broad market trend, he says.

Additionally, notes Bespoke Investment Group in a recent report, since the election there have been just two “all or nothing” days during a period in which the market rose 5%, an unusual combination. (Such days occur when the daily advance/decline reading for the Standard & Poor’s 500 index exceeds plus or minus 400, meaning stocks are moving up or down in unison.)

Kostin, Colas, and BIG agree that stock-picking is likely to take on added importance in 2017 and beyond. Interest rates won’t remain an on-off market toggle switch, they say. Instead, other factors will create both uncertainty and opportunity: tax reform, infrastructure spending, deregulation, and better economic growth. “Active managers will have a target-rich environment filled with stocks and sectors that will trade very differently from the market as a whole,” Colas predicts.

Can these managers breathe a sigh of relief? Hardly. The popularity of passive investment funds, which typically offer lower fees and are easier to understand, is here to stay.

“The barn door is open, and the cows are out,” says Turner. To compete, active managers will have to improve portfolio construction, he says. In addition to picking the right stocks, they must harness technology and add more quantitatively-based factors, which tend to be more predictive, to their investing arsenal.

Think of ETFs as the market’s version of a wolf pack picking off and weeding out the slower and weaker active fund managers in the herd, those with consistently poor returns and high fees. Santa might bring a year of opportunity in 2017 for portfolio managers—but only to the good ones.

EXPECT SHARE BUYBACKS to make a big comeback in 2017.

During the third quarter, S&P 500 companies spent $116 billion on stock repurchases, 28% below the total a year earlier, according to FactSet. Blame that partly on management uncertainty ahead of the elections.

However, if the past is any guide, should taxes on repatriated cash be reduced, as markets anticipate, many companies will bump up their buybacks. And if earnings growth perks up, as Wall Street expects, that would be another reason for more repurchases. A recent BIG research note says the average S&P 100 index member—among the very biggest market-cap stocks—has seen its total shares outstanding fall by 7% in the past five years, with 20 having 15% drops.

Companies that have shrunk their share base the most have outpaced the market, BIG says. Atop that list of 20: American International Group (ticker: AIG), Lowe’s (LOW), Allstate (ALL), and Home Depot (HD), whose stocks are all up roughly 200% in the past five years, more than double the market’s rise.

Hard to see why repatriated money would go anywhere else but buybacks.

WSJ : Sovereign-Wealth Funds Threatened by Government Spending

Sovereign-Wealth Funds Threatened by Government Spending
Kazakhstan’s experience shows how fast these funds can dwindle

Kazakh President Nursultan Nazarbayev says the country’s sovereign-wealth fund has the money to help wean the central Asian nation off its dependence on oil revenues and build an economy of entrepreneurs.
The 76-year-old president, who led Kazakhstan to independence from the Soviet Union 25 years ago, earlier this year told visitors to the new capital city he built that “Kazakhs have never lived as well as they live today” and the nation’s savings help maintain living standards.
But since Mr. Nazarbayev created the so-called National Fund in 2000, his government has withdrawn $83 billion from it, according to a Wall Street Journal analysis of data from Kazakhstan’s central bank that was corroborated by the International Monetary Fund. The National Fund has a balance of $61 billion as of Nov. 30, down 21% from its peak in August 2014.

Leaders of petrostates from Kazakhstan to Azerbaijan, Russia and Venezuela have spent billions of dollars from sovereign-wealth funds as the relatively low price of oil has pressured government budgets. Spending the money deposited in these funds—rather than just the investment income they generate—is threatening the funds’ long-term viability.
“It’s really important for Kazakhstan and other oil-producing developing nations to convert these savings into a permanent windfall,” said Angela Cummine, an Oxford University academic and author of “Citizen’s Wealth,” a book examining sovereign-wealth funds. “It is very unwise to draw down the fund until it is depleted because then the major windfall from oil will be gone but economic problems will remain.”
Kazakh Prime Minister Bakytzhan Sagintayev acknowledged the problem in December. “If we continue spending in this way, we won’t have a National Fund soon,” he told business leaders.
The government in November published a draft decree “to prevent further reduction” of the National Fund. The government proposes spending less of it and investing more of the fund’s money in higher-yielding assets such as stocks and private equity rather than bonds, according to the draft. On Dec. 22, an official at the central bank said that the president has signed the new decree.
The scale of spending from the fund has prompted some people to express concern. That can be a risky move in a nation where, according to New York nonprofit Human Rights Watch, criticism of the government is regularly suppressed.
ENLARGE

“It was a wise idea to create the National Fund,” Rakhim Oshakbayev, a former deputy minister for investment and development, said in an interview. “When we started spending the money in the National Fund, it was like opening Pandora’s box.”
Information on how the fund is spent isn’t readily available, Zauresh Battalova, a former Kazakh senator and democracy campaigner, said in an interview. Marek Jochec, an academic at Nazarbayev University, earlier this year published an article in a Kazakh magazine saying that the fund risks losing significant income because of its investment strategy.
Money from the fund has helped finance the construction of Astana, the new capital city, according to the government. At the center of the city’s futuristic layout is Bayterek, a gold-orbed tower that stands as a monument to Mr. Nazarbayev, containing his metallic handprint on a plinth encrusted with silver and gold.
Through a spokesman, Mr. Nazarbayev declined to comment for this article.
Sovereign-wealth funds are state-owned investment funds usually created to save surplus revenues, often collected from natural-resource exports.
Kazakhstan’s National Fund transfers billions of dollars each year to the government budget and projects, according to the central bank.

The governments of Russia, Azerbaijan and Venezuela have also spent billions from their sovereign-wealth funds in this manner.
Venezuela’s Fund for Macroeconomic Stabilization is essentially empty after the government spent almost $7 billion from the fund since its inception in 1998, according to the Venezuelan government.
Russia, the world’s biggest oil producer, has spent about $195 billion from its Reserve Fund since it was created in 2008, leaving $31.3 billion in it as of Dec. 1, according to the government. Russia also has savings in its National Wealth Fund. It has spent about $1 billion of this fund since 2008, leaving it with $71.3 billion as of Dec. 1, according to the government. A Russian government spokesman declined to comment.
Azerbaijan has spent $89.7 billion from a sovereign-wealth fund created in 1999. The fund said it had $35.8 billion left as of Oct. 1. Money was used for “strategically important infrastructure and social projects,” a spokeswoman said. The government plans to draw less money from the fund as it develops new industries, she said.
Middle Eastern nations are also under pressure to tap savings. The Saudi Arabian Monetary Authority, the nation’s central bank, said its reserves fell more than 25% to $543 billion in the two years through the end of October. Spokesmen for the Saudi and Venezuelan governments didn’t respond to requests for comment.
The size of the withdrawals threatens the existence of the funds, potentially leaving oil-producing nations more vulnerable to an extended period of low oil prices. Norway, which owns the world’s largest sovereign-wealth fund, has a rule that the government shouldn’t spend more than the fund earns from investments, to “lessen the risk of overspending.” Norway has so far spent less than 1% of its fund. There is no such rule in Kazakhstan.
Mr. Nazarbayev, Kazakhstan’s president, wrote in his autobiography that the fund he created is a “particular source of pride.” It was inspired by Norway’s fund, he wrote, and “its aim was to safeguard the country’s stable social and economic development by accumulating financial funds for future generations.”

(TechCrunch) Snapchat has quietly acquired an Israeli startup for a reported $30

Snapchat has quietly acquired an Israeli startup for a reported $30 million to $40 million

Snapchat sewed up its first acquisition in Israel this week, according to the outlet Calcalist News. It acquired four-year-old Cimagine, whose augmented reality platform lets consumers instantly visualize products they want to buy in their intended location, paying what Calcalist says was between $30 million and $40 million.

According to its LinkedIn page, Cimagine currently works with brands like Jerome’s, a furniture store franchise in Southern California; the U.K.-based digital retailer Shop Direct; and the global giant Coca Cola — its cloud-based mobile platform aiming to help these companies augment their sites and mobile apps and boost online conversion rates and in-store sales in the process.

Presumably, Snapchat will use the tech to further enhance campaigns like we’ve seen in the past with, say, Starbucks, which launched a Snapchat chilled summer drinks campaign last summer, giving Starbucks drinkers the ability to superimpose a lens over a picture of their icy Frappuccino beverage and send it to their friends.

This also looks like a talent grab, with Cimagine’s four cofounders — Ozi Egri, Amiram Avraham, Nir Daube and CEO Yoni Nevo — each specialists in the fields of computer vision and image processing.

The move would also seem to give Snapchat a way to begin building out a development center in Israel if it wants.

CrunchBase shows that Cimagine had raised an undisclosed amount of seed funding, including from iVentures Asia, OurCrowd, and Plus Ventures.

Snapchat is meanwhile reportedly moving forward with an IPO that could value the company at between $20 billion and $25 billion and is expected to come as early as March.

Snapchat, more recently rebranded as Snap Inc., is known to have made roughly half a dozen smaller acquisitions this year (though others may have flown under the radar of the media). These include an adtech company called Flite (the deal was described as an acquihire); the mobile search app Vurb, for which Snapchat paid a reported $110 million; a computer vision startup called Seene that allowed users to take three-dimensional selfies (terms were not disclosed); and Bitstrips, a maker of personalized emojis known as bitmojis. Snap reportedly paid $100 million for the company.

Recode.net : Apple has pulled all of Nokia’s Withings products from its online s

Apple has pulled all of Nokia’s Withings products from its online store
The move comes after Nokia sued Apple for patent infringement in courts across the globe.

Well, this got ugly fast.
In less than a week, Nokia has sued Apple for patent infringement in courts around the world, saying that Apple has refused to license its patents. Apple, for its part, sued several patent owners it said were conspiring with Nokia and accused the Finnish tech giant of “extortion.”
Taking things a step further, Apple has pulled all Withings products from its stores. (Earlier this year, Nokia bought Withings, which makes Wi-Fi scales and other digital health and fitness gear.)
A Google search finds a listing on Apple’s web store for both a bathroom scale and smart thermometer made by Withings, but clicking on the link leads to an error message on Apple’s site.
Screenshot by Recode
Apple provides the following message:
Screenshot by Recode
This isn’t the first time Apple and Nokia have found themselves in a dispute over patents. The two companies sued each other in 2009 but eventually struck a deal in 2011, with Apple agreeing to license Nokia’s patents.
However, this time Nokia says that Apple has refused to take a new license; Apple says that Nokia is refusing to license its patents on fair terms.
After failing to strike a new deal, Nokia this week sued Apple in 11 countries, accusing Apple of infringing on 40 of its patents.
Apple responded by saying Nokia was acting like a patent troll and said it was “defending inventors everywhere” by standing up to the Finnish tech giant.
“We respect intellectual property and we’ve always been willing to pay a fair price to secure the rights of patents covering technology in our products.” Apple said in a statement to Recode. “Unfortunately, Nokia has refused to license their patents on a fair basis and is now using the tactics of a patent troll to attempt to extort money from Apple by applying a royalty rate to Apple’s own inventions they had nothing to do with.”
Nokia, for its part, said it went to court only “after several years of negotiations trying to reach an agreement to cover Apple's use of these patents.”

>>> Mediaset and Fininvest appoint advisors in Vivendi dispute

Mediaset and Fininvest appoint advisors in Vivendi dispute - report (translated)

Mediaset [BIT:MS] and its controlling shareholder Fininvest have appointed advisors in the their dispute with Vivendi [EPA:VIV], the Italian-language Carlo Festa blog reported. The unsourced report claimed that Mediaset has appointed JPMorgan and Intesa Imi while Fininvest has appointed Unicredit.

As previously reported, Vivendi has built up a stake of just under 30% in Mediaset over the last week, prompting accusations from Fininvest that the French media group is planning a hostile takeover.

Mediaset has a market cap of EUR 4.73bn.

WSJ : Greek Debt-Relief Measures Unblocked by Eurozone

Greek Debt-Relief Measures Unblocked by Eurozone
Move eases tensions between Greece and its creditors over bailout

Greece’s eurozone creditors agreed on Saturday to unblock previously suspended debt-relief measures for the country, after Athens assured them that a Christmas gift it offered pensioners would be a one-off.

The move marks an effort to ease tensions over the country’s bailout, fueled partly by Athens’s decision to pursue fiscal largess without informing its creditors and partly by persisting disagreements between the country’s lenders over the economic overhauls Athens must undertake.

The decision to unfreeze the suspended debt relief will offer a much-needed reprieve to Athens and comes as Greece and its international creditors—which include the eurozone and the International Monetary Fund—are struggling to conclude their latest review of the country’s rescue plan of as much as €86 billion ($89.9 billion) in loans.

“Happy to conclude that we have cleared the way for [the eurozone bailout fund] to go ahead with decision-making procedures for short term debt measures,” said Jeroen Dijsselbloem, the Dutch finance minister, who presides over meetings with his eurozone counterparts, on Twitter.

“I have received a letter in which my Greek colleague has confirmed his commitment to previous agreements,” he added.

A decision by the eurozone bailout fund to proceed with the debt relief is expected as a final formal step.

Greek Prime Minister Alexis Tsipras earlier this month promised 1.6 million pensioners a Christmas bonus of between €300 and €800. He also suspended a planned increase in sales tax on Aegean islands that have received large numbers of refugees from the Middle East and elsewhere.

The decision surprised Greece’s creditors, which as a result suspended proposed debt-relief measures for the country. Eurozone officials expressed frustration that the country’s creditors weren’t told in advance by Greece of its plans—widely seen as a lure to voters ahead of elections—and said the new measures would have to be assessed to determine whether they were in line with the country’s bailout commitments.

The incident was a sign of escalating tensions over the country’s bailout and put further pressure on Greece’s government, which is considering calling snap elections in 2017 as it grapples with slumping popularity and is losing hope of winning concessions on deeper debt relief or austerity from the eurozone and the IMF.

Athens and its creditors remain divided on key overhauls, including a revamp of the labor market, as well as on further austerity aimed at reaching the country’s primary surplus target—its budget balance excluding interest payments—from 2018 onward.

The situation has been further complicated by disagreements among Greece’s creditors over the level of the surplus that Greece must sustain and the economic overhauls it should undertake.


The IMF has pressed Europe to reduce Greece’s budget target to a primary surplus of 1.5% of gross domestic product, instead of the current goal of 3.5%. But European governments, led by Germany, are unwilling to agree, partly because Greece would then need even more debt relief.

The debt relief in question was agreed earlier this month by eurozone finance ministers, who endorsed a package of measures to be implemented in the short term that could ease the country’s debt load by around a fifth by 2060.

>>> Weekly Update

Weekly Market Update: Markets Go Quietly Into Holiday Weekend

US indices largely marked time heading into the final trading sessions of 2016. Volumes were commensurate with the seasonal slowdown associated with holiday trading schedules, running significantly below their 3-month averages. The hope that has manifested itself as the 'Trump bump' appears to be fading as the reality sets in that his administration is only week's away from taking the reins. Concerns about a potential trade war with China and Trump's tweet about expanding the nuclear arsenal raised questions about how aggressive the new government will be in global affairs, nevertheless the VIX volatility index moved below the July low in a continued sign of investor complacency. Stocks remain just below the recent all-time highs while the Dollar index seems to have stalled out around 1.03. In general, currencies, fixed income, and commodities remain confined within their recent ranges with the US 10-year yield consolidating in the mid 2.5% range. Central Banks including the BOJ and Riksbank kept policy on course at their scheduled meetings and it appears the ECB is likely to wait until after Germany's October election before making any significant policy moves. FedEx and Nike headlined the late December earnings reports and neither generated much in the way of excitement, but Micron shares surged and helped put a bid under other names in the semiconductor space after beating Q1 expectations forecasting Q2 results well above the analyst's consensus. For the week the DJIA rose 0.5%, the S&P500 gained 0.2%, and the Nasdaq added 0.5%.

SUN 12/18
*(AU) AUSTRALIA MID-YEAR ECONOMIC AND FISCAL OUTLOOK (MYEFO): Maintains FY20/21 target for return to surplus; Cuts FY16/17 & FY17/18 GDP Outlook
*(CN) CHINA NOV PROPERTY PRICES M/M: RISE IN 55 OUT OF 70 CITIES VS 62 PRIOR; Y/Y: RISE IN 65 OUT OF 70 CITIES V 65 PRIOR

MON 12/19
*(DE) GERMANY DEC IFO BUSINESS CLIMATE: 111.0 V 110.6E (highest since Feb 2014); CURRENT ASSESSMENT: 116.6 V 115.9E
DB: Reportedly nearing DOJ settlement on RMBS case; agreement could come as early as Weds; set to pay less than $14B settlement - press
*(US) DEC PRELIMINARY MARKIT SERVICES PMI: 53.4 V 55.2E (lowest since Sept)
(TR) Russia Ambassador to Turkey Andrey Karlov reportedly has been shot in Ankara, with his condition unknown - press
(DE) Several dead, at least 50 reportedly injured after truck drives into Christmas market in Berlin, Germany; local police spokesman points to terrorism as motive - press
*(JP) BOJ LEAVES INTEREST RATE ON EXCESS RESERVES (IOER) UNCHANGED AT -0.10%; AS EXPECTED; Maintains 10-year JGB yield target around ~0%

TUES 12/20
*(TR) TURKEY CENTRAL BANK (CBRT) LEAVES BENCHMARK REPURCHASE RATE UNCHANGED AT 8.00%; AS EXPECTED
NKE: Reports Q2 $0.50 v $0.43e, R$8.18B v $8.08Be
FDX: Reports Q2 $2.80 v $2.91e, R$14.9B v $14.9Be

WED 12/21
*(SE) SWEDEN CENTRAL BANK (RIKSBANK) LEAVES REPO RATE UNCHANGED AT -0.50%; AS EXPECTED; EXTENDS QE BOND BUYING PROGRAM BY 6 MONTHS IN AMOUNT OF SEK30B
*(US) NOV EXISTING HOME SALES: 5.61M V 5.50ME (highest since Feb 2007)
MU: Reports Q1 $0.32 v $0.28e, R$3.97B v $3.78Be
(US) President-elect Trump and transition team said to be considering a 5% tariff on foreign imports - financial press

THRS 12/22
*(US) Q3 FINAL GDP ANNUALIZED Q/Q: 3.5% V 3.3%E; PERSONAL CONSUMPTION: 3.0% V 2.8%E
*(US) NOV PCE CORE M/M: 0.0% V 0.1%E; Y/Y: 1.6% V 1.7%E
(US) US President Elect Trump tweets U.S. must greatly expand nuclear capabilities until world comes to senses regarding nukes
DBK.DE: Reaches settlement in principal with DoJ on RMBS; $3.1B penalty and $4.1B in consumer relief in US; Sees Q4 pretax charge of ~$1.17B

FRI 12/23
CSGN.CH: Reaches settlement in principle with US DOJ on RMBS; Will pay $5.3B in Mortgage accord
*(DE) GERMANY JAN GFK CONSUMER CONFIDENCE: 9.9 V 9.9E (3rd straight reading below the 10 level)
*(UK) Q3 FINAL GDP (3RD READING) Q/Q: 0.6% V 0.5%E; Y/Y: 2.2% V 2.3%E

>>> Pierre Cardin willing to sell fashion label for EUR 1bn; receives EUR 2.5bn

Pierre Cardin willing to sell fashion label for EUR 1bn; receives EUR 2.5bn offer for Maxim's

Pierre Cardin, the French fashion designer, has stated he will sell his business to a buyer prepared to pay EUR 1bn, no less, a newswire report said. Cardin, 94, said he would rather die without completing a sale than drop the price, Bloomberg reported.
Cardin has indicated several times in the past few decades that he would entertain a sale of his fashion label, the report said. The exact value of the business is unknown but its Societe de Gestion Pierre Cardin arm, which collects license revenues, generated EUR 32.5m revenue and EUR 3.3m net income last year, according to information from the French clearinghouse Societe.com.
Cardin said his Maxim’s restaurant business recently attracted an offer of EUR 2.5bn but he is not rushing to tie up a deal, the item reported

>>> Buccellati 85% stake to be acquired by Gansu Gangtai for estimated CNY 1.464

Buccellati 85% stake to be acquired by Gansu Gangtai for estimated CNY 1.464bn

Gansu Gangtai [Gang Tai Kong Gu; SHA: 600687], a Chinese gold and other jewelry manufacturing company, signed an agreement on 23 December to buy 100% of Yuelong Industry Co., Limited for an estimated CNY 1.464bn (USD 210.76m), so as to hold an 85% stake in Buccellati Holding Italia Spa indirectly.

According to a stock exchange announcement posted by Gansu Gantai, the listed company will issue 94,935,408 new shares at CNY 15.42 per share to Gangtai Group in exchange for the target. Gangtai Group also directly holds a 11.71% stake in the listed Gansu Gangtai.

The remaining 15% stake in Buccellati Holding Italia Spa, the Italian luxury jewellery brand operator, will be held by the Buccellati family.

Meanwhile, Gansu Gangtai will raise CNY 1.36bn via issuing new shares to Gangtai Group. The proceeds will be used on Buccellati's marketing.

Guotai Junan Securities is acting as Gansu Gangtai's independent financial advisor.