TheChek News Flow

FRANKFURT—The European Central Bank’s decision to offer eurozone financial institutions cheap four-year loans offers fresh hope to struggling banks in Southern Europe—and has drawn immediate ire from their Northern European rivals.

The loans allow eurozone banks to borrow at no cost for up to four years. Many banks in Italy, Spain and the region have struggled to clean up bad loans and maintain investor confidence.

But in Germany, where banks sit on more cash than they can productively deploy, the industry lashed out at the loan program and other aspects of the ECB’s monetary-policy decision. German financiers said the moves were unnecessary and could undermine German investments, insurance and retirement plans.

ECB President Mario Draghi addressed such concerns by saying Thursday that it was unlikely interest rates would fall further.

Investors, foreseeing immediate help for all eurozone banks, bid up lenders’ shares Friday. Spain’s Banco Popular Español SA surged almost 13%, Italy’s UniCredit SpA leapt 9.5% and Germany’s Deutsche Bank AG, which faces internal restructuring problems, jumped 7.4%.

For bankers, though, the dispute highlights afresh the lingering gap between lenders in the continent’s generally healthy north and a south that struggles with debt and high unemployment. This represents one of many conundrums in creating a one-size-fits-all monetary policy for the 19-country eurozone.

The ECB on Thursday rolled out a six-pronged plan to boost weak inflation to its target of just below 2% and increase bank lending in the eurozone. The ECB also said it would cut all of its key interest rates, pushing its core deposit rate further into negative territory. The move means commercial banks with excess funds—which are mainly those in the north—must pay even more to park cash at the central bank.

The ECB also announced a fresh program of targeted, longer-term loans to banks, which can now even be paid to lend to the eurozone’s private sector. The ECB added corporate bonds to the mix of assets it can buy as part of its large-scale asset-purchase program, a policy known as quantitative easing. The ECB also increased its monthly bond purchases by €20 billion ($22.30 billion), to €80 billion.

A German trade group representing commercial banks including Deutsche Bank and Commerzbank AG criticized the ECB’s moves to pump more money into the economy. The association, BdB, accused the central bank of overstating “deflationary risks.”

Germany’s association of savings banks also opened fire, saying the ECB measures hurt not only savers and banks but endowments, pensions, social-security schemes and insurers.

“These measures are above all aimed at financial institutions in crisis in Southern Europe, which could use favorable refinancing,” said Michael Wolgast, the chief economist at the savings-bank association, DSGV. The longer-term loans “aren’t necessary for monetary policy and they will not have an effect on the real economy,” he said.

Bankers aren’t the only Germans upset. The front page of business daily Handelsblatt’s Friday edition depicted Mr. Draghi lighting a cigar with a burning €100 bill. “Mario Draghi’s dangerous game with the money of German savers,” read the caption, and “Whatever it takes” beneath, a sarcastic allusion to Mr. Draghi’s statement in London nearly four years ago promising to do “whatever it takes” to save the euro.

Experts say the ECB’s package of measures was a victory for banks in the eurozone’s embattled south, which can access cheap funding for loans.

“Italian banks are much more old-fashioned commercial banks that make money from loans,” said Luca Paolini, chief strategist at Pictet Asset Management. “The ECB decision…is a positive because [the targeted loans] are on very generous terms and will go a long way to offset any negative impact of falling deposit rates.”

Southern European banks are more dependent on central-bank funding and are less rich in deposits than their German peers. Data compiled by Dutch lender Rabobank Group show that as of January the top borrowers from regular ECB loans were banks from Italy and Spain. German banks, in contrast, had the highest level of central-bank deposits.

The ECB itself doesn’t disclose this information. Ample deposits mean that German banks are well-insulated from any capital flight.

Data provided by the ECB show that the cost of borrowing for German firms stood at 1.98% in January, down 22% from their level in June 2014, when the ECB first pushed borrowing rates into negative territory. Comparable rates in Italy in January stood at 2.47%, down 32% from June 2014

The ECB’s decision Thursday is “going to hurt banks that have a lot of excess liquidity” said ING economist Carsten Brzeski, citing German savings banks. “These are the ones being hurt by the negative deposit rate.” He said these banks need to park excess funds somewhere, “so they park it at the ECB.”

These lenders also aren’t helped by the ECB’s targeted four-year loans, he said. “Why would you now pick up more excess liquidity if you already are having trouble getting rid of your excess liquidity?”

The hedge fund titan Larry Robbins did something out of character last year. He apologized to investors for losing their money and pledged to “right the ship as quickly as possible.” Then he solicited more money from them, raising $1 billion for a new fund and promised to waive the fees.

But he keeps on losing money.

Over the first two months of this year, his $9.2 billion Glenview Capital Management’s flagship portfolio lost 15 percent. The new fund — called GCM Equity Partners — is down 5.2 percent. Even worse, the Glenview Capital Opportunity fund, a $1.7 billion portfolio that uses leverage or borrowed money to enhance its bets, has lost 22.4 percent through the end of February.

Mr. Robbins is not the only one. William A. Ackman, another big-name investor, is also nursing double-digit losses this year.

If last year was a tough one for the swing-for-the-fences hedge fund managers who became synonymous with moneymaking in years past, the first few months of 2016 are looking just as bad.

These losses have become harder for impatient investors to stomach following big losses last year.

The University of California’s endowment fund, for example, said on Thursday that it would cut the number of hedge funds it invests in to about 10 from 32, as part of an effort to simplify its hedge fund investments.

Now some brand-name managers who have recorded big losses for many months are facing pressure from investors to redeem their money — something that could lead them to sell their holdings in stocks in order to come up with the necessary cash.

But the continued underperformance from the industry has also raised a broader question from investors like pension funds: What are they getting in return for the hefty fees they pay?

In the first three months of this year, investors are expected to withdraw $25 billion from hedge funds, according to a Goldman Sachs Prime Brokerage Services survey of hedge fund investors representing about $425 billion in investments. Of those investors who planned to redeem money, however, more than three-quarters said they would reinvest the money in other hedge funds.

“I think they are getting the benefit of the doubt,” Dean Backer, global head of sales and capital introduction at Goldman Sachs, said of many of the biggest hedge fund managers, owing to their historical performance. “I’m not sure people know — if they took money out of hedge funds— where they would put it,” he added.

Some well-known firms that bucked the negative trend in 2015 are getting punished this year. The Marcato International Fund, run by Mick McGuire, a former protégé of Mr. Ackman, was down 12.8 percent as of the end of February. Citadel’s Kensington fund, run by the billionaire Kenneth C. Griffin, had lost 6.2 percent as of the end of February. SkyBridge Capital, a fund of hedge funds run by Anthony Scaramucci, pulled $1 billion in the fourth quarter from hedge funds that focus on event-driven strategies led by John A. Paulson, Daniel Loeb and Barry Rosenstein, taking action ahead of turbulent performance from all three firms this year.

Solomon Kumin’s Folger Hill Asset Management is still struggling to gain traction some two years after it opened for business. The firm is down about 10 percent for the year. Mr. Kumin, who was the chief operating officer for Steven A. Cohen’s former multibillion-dollar hedge fund, SAC Capital Advisors, lost 3 percent last year.

Maybe one of the biggest surprise losers is Blackstone’s Senfina Advisors, a $2 billion fund the private equity firm started in 2014 that allocates money to several equity trading teams. The fund is down about 15 percent for the year after posting a 20 percent gain in 2015.

Some of the declines can be attributed to the underwhelming performance of a basket of 50 stocks that Goldman Sachs says hedge funds like most. The basket — which includes Allergan, Amazon, Apple, Citigroup, Valeant and Teva — was down 5.6 percent for the year as of March 4.

Meanwhile, the broadest measure of hedge fund performance, the HFRI Fund Weighted Composite Index, was down about 2.6 percent for the year at the end of February, matching the 2.6 percent decline in the S.&P. 500-stock index as of the close of trading on Thursday.

Both Mr. Robbins and Mr. Ackman then are consistently faring worse than their peers when it comes to placing bets on stocks.

For Mr. Robbins, positions in Monsanto, Cigna, the Laboratory Corporation of America and Teva Pharmaceutical Industries have caused investors a headache. For Mr. Ackman, big bets on Valeant, Platform Specialty Products and the Howard Hughes Corporation have driven losses.

And Mr. Ackman’s firm continues to be bedeviled by its longstanding bearish bet against the shares of Herbalife, which have risen a little more than 3 percent this year.

It’s not all red ink in the nearly $3 trillion hedge fund universe.

David Einhorn’s Greenlight Capital is up 3.3 percent after losing 20.4 percent last year. Horseman Capital Management, a firm based in London and run by John Horseman, is up 9.7 percent this year, after posting gains of 20.4 percent in 2015.

One of this year’s early big winners is Boaz Weinstein and his Saba Capital Management. Mr. Weinstein, a one-time star credit trader at Deutsche Bank, has seen his share of ups and downs — assets at his fund fell to $1.9 billion from a peak of nearly $6 billion in 2012. But the firm now appears to be on the upswing.

Saba Capital, which focuses mostly on investments in credit, reported a 3.4 percent gain in its main fund last year. As of the beginning of March, the fund was up a little more than 14 percent — making it one of the top-performing hedge funds tracked by HSBC. A major driver of the firm’s returns this year is a bet on volatility in Asian markets in both Japan and China, where the swings in stock prices have been far greater than in the United States.

Despite the poor returns and hand-wringing from investors in certain funds, many of this year’s worst-performing managers will be fine, as evidenced by their hobbies — from real estate to art, and even horses.

Mr. Robbins recently bought a Manhattan penthouse on the Upper East Side for $37.9 million. Mr. Griffin paid $500 million for two pieces of iconic modern art.

As for Mr. Kumin, while things may have gotten off to a slow start on Wall Street, he has enjoyed some good fortune on the racetrack. A horse racing organization recently named Mr. Kumin “new owner of the year” because of the success of two horses he owns.

Wall Street’s high rollers think new ways to bring bigger profits

As their Midtown captains slash costs and crack the whip for higher profits, many of Wall Street’s top go-getting brokers are near physical and mental collapse, multiple sources told The Post.

The big “wirehouses,” led by Merrill Lynch and Morgan Stanley, are also fending off challenges on several fronts, including:

 Declines in customer asset values over the past 12 months because of market conditions;

New “fiduciary” rules that could sharply raise the cost of handling customers’ retirement accounts.

To combat dwindling assets under management from cratering portfolios, the wirehouses have moved fast, launching aggressive attempts to grow bigger margins and more profit from their financial advisers and wealth management businesses, sources say, by wringing out “excesses” on the expense side.

A source notes that brokers will see cutbacks in areas that advisers at Morgan Stanley once took for granted — administrative support, office space, expenses, marketing and entertainment.

The wirehouses’ game plan, say analysts, is a massive asset gathering, with a focus on America’s wealthiest investors and relentless cost-efficiency.

Bank of America’s Merrill Lynch and Morgan Stanley each have about $2 trillion or so in assets under management in “wealth management” area. Wells Fargo has about $1.4 trillion, and UBS Wealth has just over $1 trillion in invested assets. All are eyeing different strategies, from tweaking broker compensation to adjusting minimum customer account sizes.

Morgan Stanley Chief Executive James Gorman, in the wake of a profit-challenged quarter, recently told analysts the firm’s wealth management machine will drive profit margin from 20 percent to 25 percent over the next two years.

In December, Merrill, with some 14,500 advisers, set higher production goals, bumping them up by $50,000 for advisers who bring in less than $1.5 million in fees and commissions.

One person familiar with Merrill and Morgan Stanley says that both are willing to take the necessary steps. No cuts are off-limits, from eliminating office administration support to restricting the use of the photocopying machine.

“It’s all about gathering and preserving assets in this tough climate and saving money elsewhere to sustain profitability,” said this person.

Meanwhile, wirehouse brokers fear a new Labor Department regulation aimed at reducing conflict of interest in how advisers handle their clients’ retirement accounts will hit the books soon.

The banks expect the new rule to tie up brokers in expensive red tape. “This could be the straw that breaks the camel’s back for many advisers,” said Alois Pirker, a brokerage industry analyst at Aite Group.

None of the wirehouses in this story had a comment.

Brazil and Turkey are rushing to tap international debt markets for the first time this year as rising oil prices and radical central bank stimulus plans create an opening for bonds from emerging markets.

The two countries have issued debt in the past fortnight after a prolonged market absence, helping to increase this year’s emerging market debt issuance from $15bn in late February to $25bn, according to Dealogic.

At the start of the year, emerging markets were gripped by a negative feedback loop as concerns about slowing growth left investors unwilling to lend and lack of lending reinforced concerns about growth.

By the end of January, bond issuance by low-income governments in “hard” currencies such as the dollar, euro or yen was half the level it had reached at the same point in 2015.

The slowdown in growth led the World Bank to warn that emerging economy weakness could weigh on global growth as lower demand from emerging markets made 2015 the worst year for world trade since 2009.

However, the recent rebound in oil prices and action by central banks in Japan and Europe to further ease monetary policy has led to a resurgence in borrowing by emerging markets.

“This year is only 10 weeks old and we’ve been on a real rollercoaster already in emerging markets,” said Bhanu Baweja, credit strategist at UBS.

“Countries are taking this new opportunity to borrow because they have debts to be refinanced and investors are suddenly positive about credit.”

Saudi Arabia, Russia and Argentina are also planning a return to international capital markets this year and are in talks with banks to arrange meetings with bondholders. If Argentina goes ahead with plans to raise more than $15bn in new debt, credit analysts say 2016 could be a record year for emerging market sovereign debt issuance.

“Issuance was at multiyear lows for good reasons,” said Shahzad Hassan at Allianz Global Investors, which has €289bn of third-party assets under management. “Credit quality was deteriorating. But as oil prices rise it doesn’t take long for investors to go from bearish to bullish.”

Prices for oil have rallied by almost 50 per cent after falling to a low of $30 a barrel in January, supporting a rally in emerging markets stocks that has nearly wiped out losses so far this year.

Last week, the European Central Bank announced that it would cut a key interest rate and increase asset purchases, following Japan’s cut in a key interest rate below zero earlier this year, boosting demand for credit markets. Average emerging market borrowing costs in international currencies have fallen from a five-year high of 6.78 per cent in mid-January to 6.11 per cent.

Lending to emerging market economies via bonds has surged since 2009. But sovereign borrowers were forced to wean themselves off cheap global credit at the start of the year as demand for emerging market bonds evaporated in the face of a strengthening US dollar, market volatility and falling oil prices.

Potential borrowers including Bahrain were forced to rethink plans to issue dollar-denominated bonds as investors in hard currency emerging market bonds made net withdrawals every week in January and February, according to data from EPFR, the Boston-based fund monitor.

Economists expect the US Federal Reserve to leave benchmark interest rates unchanged when policymakers meet this month and next, but believe the uncertain outlook for global growth will not stand in the way of the central bank resuming its path towards normalisation in June.

Ahead of the Fed meeting this week, a large majority of the 53 top economists surveyed by the Financial Times said the US central bank would remain on hold until June, as sharp market gyrations and concerns over economic activity at the year’s start stay its hand.

But they saw slight flickers of inflation and a labour market that had created more than 12m jobs over the past five years ultimately coaxing the Fed back into action — albeit gradually — intensifying the divergence between monetary policy in Europe and Asia.

“The economy is looking better, inflation will pick up and that’s good on the dual mandate side,” said Ward McCarthy, an economist with Jefferies. “Consider the reaction to the European Central Bank. [The Fed] wants a little more time to let the dust settle, but all the necessary pieces are falling into place for a June hike.”

The rebound in US equity markets has soothed investor nerves, with the benchmark S&P 500 stock index now about 1 per cent below where it started the year. Equities had tumbled as much as 11 per cent at their nadir as crude prices slid, fanning fears that the US was on the verge of a recession.

The market rally has for the time alleviated a key hurdle for policymakers as they ready their message for Wednesday: companies have regained access to capital markets and financial conditions have eased.

A stabilisation in the price of oil and other commodities is expected to diminish a drag on inflation, a factor policymakers at the Fed have considered transitory. Less than half of the economists surveyed said that prices would run above the Fed’s 2 per cent target at some point over the next year.

Several more said inflation in the US would move above that level later in 2017.

However, the pace of tightening will be even more gradual than policymakers indicated in December, when they last released economic growth and interest rate projections. More than four-fifths of economists polled by the Financial Times said the Fed would lift rates two times or fewer this year. One believed the Fed would be forced to cut rates by December.

Policymakers have struck an increasingly cautious tone amid the market turbulence and lacklustre economic reports in the first two months of 2016. Bill Dudley, president of the New York Federal Reserve, warned earlier this month that the risks to his outlook had started to “tilt slightly to the downside”.

Lael Brainard, a member of the Fed’s board of governors, has been even more explicit. Last week, Ms Brainard told a conference that policymakers should be patient.

“Given weak and decelerating foreign demand, it is critical to carefully protect and preserve the progress we have made here at home through prudent adjustments to the policy path,” she said. “Tighter financial conditions and softer inflation expectations may pose risks to the downside for inflation and domestic activity.”

Economists expected the Fed to lower its projections for how fast it will raise rates over the next several years, although the survey found that the cohort continued to place greater faith in the central bank’s previous guidance than the market. Fed funds futures imply that the Fed will increase rates only once in 2016.

Market measures of inflation remain muted while incoming data have painted a picture that is at times contradictory.

The Fed’s preferred measure of inflation, the core personal consumption expenditures index, ticked up to 1.7 per cent in January. Separate data showed wages slipped in February, a closely scrutinised figure that underlies inflation.

Easing monetary policy in Europe and Asia may also slow the Fed, although ECB president Mario Draghi’s comment that he does “not anticipate” lowering interest rates deeper into negative territory provided a brief fillip for the euro.

That divergence, which fuelled fund flows until recently, has buoyed the US dollar and made exports from the country more expensive, in effect damping economic growth.

“It should mean less pressure to tighten,” Thomas Julien, an economist with Natixis, said. “It’s putting more pressure on the dollar and doing part of the Fed’s job.”

Michael Kors is back in style on Main Street and Wall.

Michael Kors Holdings (ticker: KORS), the handbag and apparel company founded by designer Michael Kors, has beaten earnings estimates for the past three quarters after struggling for much of the prior year. Kors is hoping to keep the momentum going by introducing new designs, expanding its product lines, and keeping a close eye on inventories. The company, based in London, launched its largest assortment of handbags ever for its spring 2016 collection, focusing on new sizes, shapes, colors, and textures. It is also expanding in footwear, making a big push into menswear, and boosting its presence in Europe and Asia, which together contribute about 25% of sales.

The good news—and ambitious plans—haven’t been lost on investors. After falling 50% last year, Michael Kors shares have rallied more than 40% in 2016 to a recent $57, compared with a year-to-date loss of 3% in the Standard & Poor’s 500 index. Yet the stock, which trades in New York, still looks cheap to Dorothy Lakner, a specialty-apparel retail analyst at Topeka Capital Markets. She expects the company’s new initiatives and a pickup in consumer spending to lift the shares another 30% or so, to $75, in the next 12 months. Kors’ stock, a onetime market darling, topped $99 at its February 2014 peak.

Lakner thinks Kors could command a price/earnings ratio of 15 times her fiscal-2017 earnings estimate of $5 a share, up from a current P/E of 13. (Its fiscal year ends in March.) Coach (COH), one of Kors’ chief competitors, trades for 18 times forward estimates. Lakner’s earnings forecast is well above the consensus estimate of $4.56 because she expects sales and earnings to increase sharply. The consensus view assumes little growth.

Michael Kors operates in three divisions: retail, wholesale, and licensing. The retail division, with 857 Michael Kors boutiques worldwide, contributed 52% of revenue in the nine months ended on Dec. 26 and 47% of income from operations. The wholesale business, selling through department stores such as Nordstrom (JWN) and Macy’s (M), accounted for 44% of revenue, with the remainder from licensing. The company posted revenue of $1.4 billion in the December quarter, up 6.3% year over year, and earnings of $295 million, or $1.59 a share, well ahead of Street forecasts of $1.46 a share. Management spent $200 million to buy back 4.7 million shares during the quarter.

Kors expects revenue to total $4.65 billion for the full fiscal year, up 6.5% from fiscal 2015. The company sees earnings per share of between $4.38 and $4.42, versus $4.28 in the prior fiscal year. Growth has been driven by a strong holiday season, new product offerings, and an increase in online sales.

Kors is expected to generate $600 million in free cash flow in fiscal 2016, for a yield of almost 7%. Free cash could rise as capital spending peaks in the current fiscal year at $400 million. Longer term, Chairman and CEO John Idol expects to produce top-line growth of 5% to 6% and earnings gains of between 3% and 4%, with operating profit eventually reaching $1 billion. Idol didn’t respond to a request for an interview.

KORS’ RECENT SUCCESS marks a nice turnabout for the company. The designer, who serves as honorary chairman and chief creative officer and is famous for his withering one-liners on the fashion reality show Project Runway, might have labeled the company’s prior setbacks “crazy disco turkey,” a term he has used to ridicule other designers’ work. The company’s comparable-store sales fell sharply in the quarter ended in March 2015 and didn’t turn positive again until the December quarter, although they improved sequentially in the interim.

Kors was hurt by weak department-store and mall traffic, leading to markdowns. Moreover, investors worried that management would cheapen the brand by sticking with a plan to open 400 stores in North America. The regional store count is now at about 430, including Latin America; the company says it won’t expand further.

Kors was also caught off guard in the handbag market, as women began to favor smaller, fresher, and more affordable bags from competitors, turning away from Kors’ larger, more expensive tote bag, which had been widely copied.

Watch sales, sold under a licensing arrangement with Fossil Group (FOSL), have been in a downward spiral, as consumers increasingly rely on smartphones and wearable smart technology for timekeeping. Kors has countered by introducing new styles and launching a “connected fashion” line that will include smart technology. “We believe that connected accessories will reshape the fashion watch business globally,” Idol told investors in early February, following the release of earnings.

Still, the big excitement centers on Kors’ move to reassert leadership in handbags and expand in Europe, which the company sees as a $1.5 billion opportunity, and Asia, an $800 million market. Then there’s the new focus on men’s fashions, a potentially $1 billion business that will be driven by sportswear, leather goods, and watches.

Kevin Smith, founder and CEO of Denver-based Crescat Capital, sees good long-term opportunity in the shares. Kors is a “large-cap retailer that has been beat up and should benefit from low energy prices, as consumers begin to spend the savings,” he says. The company’s free-cash-flow yield also gives him confidence in the stock.

If Michael Kors’ new initiatives evolve as expected, the shares will dress up many a portfolio.