TheChek News Flow

>>> US Close Dow+0.21% S&P+0.51% Nasdaq+0.55% Russell+0.46%

Closing Market Summary:Oil Bolsters Indices at Mid-Week

The major averages ended their midweek affair on a higher note as a leg higher in oil supported a modest gain in the stock market. Additionally, leadership from the heavyweight technology sector (+1.0%) countered some choppy trade from the likes of the financial (+0.1%), consumer discretionary (+0.1%), and health care (+0.2%) sectors. Today's action preceded tomorrow's policy statement from the European Central Bank, which is widely believed to call for additional stimulus measures. The Nasdaq Composite (+0.6%) settled ahead of the S&P 500 (+0.5%) and the Dow Jones Industrial Average (+0.2%).

Equities displayed modest gains in the early going, reaching their best levels shortly after the release of the Department of Energy's weekly inventory report. The report showed that crude oil inventories rose in-line with analyst estimates, but that gasoline inventories experienced a larger-than-expected draw (4.53 million; consensus 1.39 million). This echoed the results of the API report and led to a bid in crude oil, as investors believed that drawdowns in gasoline inventories would drive increased demand in oil for future refining. As a result, WTI crude ended its day higher by 4.8% at $38.23/bbl.

Commodity-sensitive energy (+1.5%) was able to take advantage of this swing in oil prices, climbing the leaderboard. Meanwhile, the top-weighted technology sector (+1.0%) finished in the second spot.

In the energy sector (+1.5%), oil and gas refining names were able to outperform as Marathon Petroleum (MPC 37.06, +1.89) gained 5.4%. Meanwhile, Dow component Chevron (CVX 92.82, +4.08) managed to top the price-weighted index as it climbed 4.6%. The energy space managed to re-enter positive territory for the year with today's trade, as the group shows a gain of 0.7% over that period.

Heavily-weighted technology (+1.0%) received a boost from large-cap component Microsoft (MSFT 52.84, +1.19), which managed to reclaim its 50-day moving average (52.24). Separately, Cisco Systems (CSCO 27.61, +0.56) benefited from some M&A news as the company announced that it would be acquiring Synata for an undisclosed amount.

On the bottom of the leaderboard, telecom services (-0.3%) led the downside while heavily-weighted financials (+0.1%), consumer discretionary (+0.1%), and health care (+0.2%) underperformed. Biotechnology weighted on the health care space as the iShares Nasdaq Biotechnology ETF (IBB 257.13, 3.00) surrendered 1.2%.

In the economically sensitive financial sector (-0.1%), Morgan Stanley (MS 24.61, -0.40) surrendered 1.6%. The company has plunged 4.8% since Monday whereas the broader sector has lost 1.6% over that period. Meanwhile, Franklin Resources (BEN 37.41, -0.59) tumbled 1.6% after the company reported that preliminary month-end assets under management totaled $714 billion compared to the $728.1 billion under management in January.

Chipotle Mexican Grill (CMG 506.63, -18.06) displayed relative weakness in the consumer discretionary space (+0.1%) after it was confirmed that one of the sick employees at its Billerica, Massachusetts location was infected by norovirus. The location has been cleared to open on Thursday. Separately, large-cap Home Depot (HD 126.03, -0.69) fell 0.5%.

The Dollar Index (97.17, -0.03) ticked up off its session low as the euro/dollar pair backed away from its high of 1.1029 to trade lower by 0.1% at 1.1002. Separately, the dollar/yen pair rose 0.7% to 113.40.

The Treasury complex traded broadly lower throughout the day as the yield on the 10-yr note slipped five basis points to 1.88%.

Today's participation was below the recent average with fewer than 933 million shares changing hands at the NYSE floor.

Today's economic data included the weekly MBA Mortgage Index and the January Wholesale Inventories Report:

The weekly MBA Mortgage Index was showed a seasonally adjusted increase of 0.2% in mortgage applications.

Wholesale inventories increased 0.3% in January from an upwardly revised unchanged reading (from -0.1%) for December. The consensus estimate called for a 0.2% decline in January wholesale inventories, which are up 2.0% year-over-year.

The gain in January was driven by a 1.1% increase in nondurable inventories. Inventories of durable goods actually declined 0.3%.

The uptick in nondurable inventories was driven by drug (+3.3%) and farm products (+2.9%) inventories. The biggest increase was in paper inventories (+4.2%), although they make up just 3.6% of total nondurable inventories.

With respect to durable inventories, the biggest weights were the declines in electrical (-3.6%) and metals (-1.8%) inventories. Machinery inventories, which account for 29% of total durable inventories, rose 0.2% after a 0.4% decline in December.

Wholesale sales dropped 1.3% in January after a 0.6% decline in December. Durable sales were down 1.9% while nondurable sales fell 0.8%.

The wholesale inventories to sales ratio jumped to 1.35 in January from 1.33 in December. This ratio stood at 1.28 in the same period a year ago.

Tomorrow's economic data includes weekly initial claims (consensus 275k) and the Treasury Budget for February, which will cross the wires at 8:30 ET and 14:00 ET, respectively.

Nasdaq Composite -6.7% YTD

Russell 2000 -5.6% YTD

S&P 500 -2.7% YTD

Dow Jones -2.4% YTD

>>> Vivendi unlikely to raise Gameloft offer in the absence of a rival bid

MergerMarket

Vivendi unlikely to raise Gameloft offer in the absence of a rival bid

* 50% acceptance condition cannot be waived

* Activision Blizzard, Viacom and Electronics Arts seen as potential white knights

Vivendi [EPA:VIV] is unlikely to increase its proposed takeover offer for Gameloft [EPA:GFT] in the absence of a rival bid, according to a source close and a banker following the situation.

On 4 March, the French media group increased its offer from EUR 6 per share to EUR 7.20, following a stake increase by the Guillemot family to 21.23%. Gameloft shares are currently trading at EUR 7.41, giving it a market capitalisation of EUR 633.3m.

Vivendi’s offer is conditional on at least 50% acceptance, which cannot be waived, confirmed the source and a spokesperson for Vivendi.

Vivendi can certainly increase its bid should it need to, the source said. But, at this stage, there has not been a counter offer so it does not need to bump its offer.

Vivendi has already set the bar quite high and there is still a long way to go before the closing of the transaction, so they will wait until the last minute to increase the offer if necessary, the banker following said he believed.

Vivendi is currently waiting for French stock market regulator Autorité des marchés financiers (AMF) to approve its tender offer, with a decision expected on 15 March, the source said.

Gameloft’s founding Guillemot family has options to fight back, either by launching its own offer or by seeking a white knight. The family is rumoured to be seeking a white knight to launch a rival bid, as previously reported by this news service.

Support for a rival bid could come from anyone from the industry, and particularly from firms like Activision Blizzard [NASDAQ:ATVI], a lawyer following the situation said. But the banker saw US industry players Electronic Arts [NASDAQ:EA] or Viacom [NASDAQ:VIAB] as better fits to submit a rival bid.

However, finding a white knight might turn out to be challenging for Gameloft shareholders, the source believed.

The Guillemot family has been trying to find a white knight since October when Vivendi started to increase its stake, but to no avail so far, this source pointed out. It seems a lot less appealing for a white knight to come on board now that the company is worth a lot more and Vivendi holds a larger stake. Gameloft shares were trading at as low as EUR 4.20 in October.

But, the market has not ruled out a rival offer, judging by Gameloft’s shares, which are trading above the offer price, the banker said.

Any white knight would usually come in towards the end of an offer, maybe days before it closes, the banker believed.

Vivendi and Gameloft declined to comment.

FT : Draghi sets out to convince sceptics he has the right ammunition

Draghi sets out to convince sceptics he has the right ammunition

Mario Draghi faces a daunting challenge at Thursday’s meeting of the European Central Bank, which is expected to make a fresh bid to bolster the eurozone’s lacklustre recovery. The ECB president has to convince sceptics that central bankers still have the tools to increase inflation and that measures such as increased quantitative easing and negative interest rates can bear fruit.

“QE has been working, but there is only so much central banks can do,” said Guntram Wolff, director of Bruegel, the Brussels-based think-tank, in comments that reflect mounting doubts in the eurozone and beyond about monetary authorities’ ability to grapple with the global threat of deflation. “The benefit of doing more is very low at this stage.”

Whether Mr Draghi convinces such doubters will play a big role in ensuring Thursday’s measures have an impact on the real economy. If individuals do not believe monetary policymakers can raise inflation, then they are less likely to demand higher wages. If growth is expected to remain weak for years to come, then businesses are less likely to invest in innovation or new workers and machinery.

At present, Mr Draghi and other policymakers are facing increasing questions about the limits of what monetary policy can do to fix below-par inflation — currently running at -0.2 per cent in the eurozone — and weak global demand. Although the ECB’s QE programme was launched a little more than a year ago, the bank continues to miss its inflation target of just under 2 per cent, as it has done for the past three years — a failure it shares with other central banks.

That record has created a widening gulf between partisans of more aggressive action — including distribution of central bank cash known as helicopter drops — and those who maintain that central banks are out of ammunition.

Mr Wolff suggests that further ECB efforts at stimulus risk becoming a headache for banks, which are bearing the brunt of the cost of negative interest rates. “Monetary policy is basically undermining their business model,” he said.

QE has clearly had an impact on eurozone governments, businesses and households seeking to borrow. Since central banks started to buy their governments’ debt last March, lending rates in parts of the eurozone’s crisis-hit periphery have fallen closer to levels seen in the stronger core. Bond yields for sovereigns and corporate have fallen to record lows: a German bank earlier this week issued debt at a negative yield, meaning its lenders lose money if they hold the debt to maturity.

Yet the eurozone’s economy remains fragile despite the improvement in credit conditions. With inflation turning negative again, there are big doubts that the central bank can hit its target two years from now. While unemployment has fallen, it remains in double digits and growth is still to weak to create jobs.

“Monetary policy is designed to affect the economy by influencing asset prices. There’s no doubt that what central banks have done has worked on markets,” said Salman Ahmed, strategist at Lombard Odier, an investment manager. “We should not think central banks are out of options — they can print as much money as they like. But their tools are pretty blunt and the way in which they work is pretty opaque.”

Mr Ahmed added: “Ideally, we would see more co-ordination between what they are doing and what governments are doing.”

Mr Draghi himself has always maintained that his central bank would be unable to steer the eurozone back to recovery on its own. He argues that governments should carry out root-and-branch reforms to foster stronger growth and has hinted that those with capacity to do so responsibly should spend more. But political problems in countries such as Spain and Ireland, which have both recently held inconclusive elections, have instead put still more pressure on the ECB.

The ECB president says his central bank will not “surrender” to low inflation and that there was “no reason” to think price pressures would be permanently lower than in the past.

“We now have plenty of evidence that, if we have the will to meet our objective, we have the instruments,” Mr Draghi said last month. He also argues that the ECB’s governing council was “unanimous” in holding that it had the power to hit its inflation target, although hawks on the council such as Jens Weidmann, Bundesbank chief, caution that aggressive monetary easing risks doing more harm than good.

There is as yet no sign that the ECB board members favour still more radical move such as helicopter drops.

The idea — first mooted by one of the fathers of modern central banking, Milton Friedman — is for central banks to bypass the banks and give away their banknotes to everyone. While governments have played with the idea, offering spending vouchers and tax cuts to spur growth, central banks are yet to test it.

“There’s plenty of evidence to suggest that, but no other central bank has tried out helicopter money. There is a reason for that: it’s a fiscal policy tool that needs democratic approval”, said Mr Wolff. “Giving away money is a transfer of wealth because it’s inflationary — it works like a tax on all other holders of money. That makes it highly controversial, especially in the eurozone.”

Reuters - Carson Block says recent rally in U.S. stocks feels like 'dead cat bou

Carson Block says recent rally in U.S. stocks feels like 'dead cat bounce'

Short-seller Carson Block, founder of research firm Muddy Waters LLC who exposed accounting problems and wrongdoing at a slew of Chinese companies, said on Wednesday that the recent rally in the U.S. stock market feels like a "dead cat bounce."

"I would say that this does feel like it is a dead cat bounce because how much more ammunition really do policymakers have?" Block told Reuters at its New York headquarters.

(BFW) Telecom Italia Said to Seek at Least EU5 a Share for Inwit

FT : Senior European bankers voice concerns over ECB cut

Senior European bankers voice concerns over ECB cut

Some of Europe’s most senior bankers have warned the European Central Bank of the dangers of negative interest rates ahead of a widely anticipated cut at the bank’s policy meeting on Thursday.

The ECB is expected to cut its deposit rate by 10 basis points to minus 0.4 per cent as it takes further action in its struggles to lift persistently low inflation and boost economic growth back to normal levels.

Bank leaders are alarmed by the crippling effect on their profits of negative rates which they cannot pass on to ordinary customers, adding to concerns about the fragility of financial stability in some parts of the eurozone.

But any attempt by the ECB to shield lenders from the effects of negative rates could weaken the policy and open the central bank to claims that it is engaged in a beggar-thy-neighbour devaluation.

Andreas Treichl, chief executive of Austria’s Erste Bank, told the Financial Times that another cut could encourage financial bubbles, hurt economic growth and create “social disparity” by penalising savers.

José García Cantera, Santander’s chief financial officer, added that the banks that would take the biggest hit to their profits if rates were cut again were those least able to bear it.

Last week, Sergio Ermotti, UBS chief executive, warned that excessively low rates were prompting banks to extend too many risky loans because they “don’t know what to do” with deposits.

The industry hopes to lay out concrete evidence of the detrimental impact negative rates are already having in mid-April, when the European Banking Federation will present the results of a review into how its members are being affected.

For now, bankers are speaking publicly on the dangers in the hopes that ECB policymakers will heed their warnings as they consider cutting deposit rates at Thursday’s meeting. Deposit rates at minus 0.4 per cent would be higher than Switzerland’s minus 0.75 per cent, but a historic low for the eurozone.

The ECB is considering ways to insulate banks from some of the impact of negative rates. Vitor Constâncio, ECB vice-president, hinted last month that it could follow the Bank of Japan and introduce a tiered rate system to exclude some bank deposits. However, that would blunt the effectiveness of the negative rates policy and other policymakers have said it is not the central bank’s job to protect lenders’ profitability.

Erste’s Mr Treichl, the longest-serving chief executive of a major European bank, said the ECB’s “limits have been reached” after years of ultra-loose monetary policy that has failed to lift inflation to anywhere near the ECB’s target of “close to but below” 2 per cent.

“What is being overlooked is that in a very substantial part of Europe and particularly in our region, savers are risk adverse and capital markets are not very prominent, [which means that] lowering interest rates is not very helpful in stimulating economic growth,” he said.

He believes lower interest income at a time when wage growth is also very modest would hit consumer spending. “It [monetary policy loosening] doesn’t push people into consumption. On the contrary, it pushes people to keep cash at home or at extremely low interest rates.”

UBS’s Mr Ermotti told Bloomberg TV that banks’ own need to generate income in a low rates environment risked creating tensions in mortgage lending and other real estate loans because banks are lending more there as they seek yield.

The hunt for yield is intense in a low rates environment — Morgan Stanley analysts predict that the 10-basis-point cut expected from the ECB on Thursday would knock 5 per cent off eurozone bank earnings next year.

Huw van Steenis, an analyst at Morgan Stanley, said negative rates were a “dangerous experiment” for banks, because they erode the sector’s profits, incentivise lenders to shrink, put a damper on cross-border eurozone lending and could disrupt bank funding.

Santander’s Mr García Cantera added: “The hardest hit banks will be those that earn a high proportion of their revenue from net interest rather than fees, as well as those with a high cost-income ratio and those with poor asset quality.”

Morgan Stanley estimated that banks on the periphery of Europe would be most sensitive, including Italy’s Banca Monte dei Paschi di Siena and Spain’s Banco Popular. It said Germany’s Commerzbank and France’s Crédit Agricole would also be exposed.

Santander, for its part, managed to increase its net income margin last year even as interest rates fell — Mr García Cantera said his bank had “several levers we can pull to offset the impact”, including raising the cost of corporate loans and mortgages.

Helge Pedersen, Nordea’s chief economist who is leading the EBF’s research project on the impact of negative rates, said banks in Denmark coped with negative rates by charging corporate clients, but not households, for deposits.

Danish rates first turned negative in 2012 but the situation is not as severe for the country’s banks compared with those in the eurozone. That is because Denmark’s central bank has a two-tier system that allows them to keep a fixed amount of central bank deposits in a 0 per cent current account and the rest in the negative interest account. The ECB has been considering similar moves.

Even with that concession, Mr Pedersen said there has been a “quite significant cost”, especially as loan creation has been low. Mr Pedersen said negative interest rates could, ironically, hinder credit creation because banks could increase lending rates to compensate for the money they are losing on deposits.

“That’s one of the big risks,” he said. “If the response from banks is to increase the lending rates then you will not see any kind of increase in lending activity. It [cutting central bank rates] might end up having the opposite consequence [to what was intended].”

(BFW) EU Set to Clear Teva’s $40.5b Bid for Allergan Generics: Reuters

(JPM) US Equity Strategy : Momentum Sells Off, Value Makes a Comeback

Equity Strategy and Quantitative Research

US Equity Strategy: Momentum Sells Off, Value Makes a Comeback

In our previous reports (see Rising Momentum Tail Risk, The Case for Rotation in Equity Leadership, Momentum Stocks at Risk) we highlighted the tail risk associated with the equity Momentum trade, while arguing that Value is oversold and ripe for a comeback. Recent data suggests that there has been a significant Momentum/Value rotation, with long/short Momentum (FTUSMTUT) down 24% and Value (JPUSVALU) up16% YTD (vs. S&P 500 -3.2%). Momentum had five days of -3StdDev declines YTD, which is ~30 times more often than normally expected (fat left tail).

Reasons why this rotation may persist beyond the initial change in positioning:

·         Momentum stocks trade at an extreme premium to Value stocks with valuation spread highest since 1980, except for during the tech bubble.

·         Momentum is crowded while Value offers greater opportunity. Dispersion of high Momentum stocks has been decreasing and is at the lowest level since 2009 while dispersion across Value stocks relative to market is rising and at highest level since 2011 suggesting greater opportunity set.

·         Rebalancing of active equity Quant portfolios could further fuel the rotation from Momentum into Value. Most Quant portfolios are rebalanced at lower frequency (e.g., monthly). The most common stock momentum signal skips the last month of price action (e.g., 12M – 1M momentum). Given this lag, this month’s severe Momentum sell-off could be reinforced in subsequent months as Quant portfolios get systematically rebalanced. On the contrary, short Value stock positions (that rallied this month) could get closed only next month and then included in the long portfolio subsequently.

·         In addition, proliferation of passive equity Quant portfolios (e.g., Smart Beta, Low Vol) poses additional risk of Momentum crowding and could exacerbate Momentum sell-off. Momentum is typically one of the core factors within Smart Beta products. Also, currently, Low Vol and high Quality are positively correlated to Momentum and also trade at extreme valuation. These risk premia based products are estimated to have reached ~$900 billion in AUM (3Q15).

·         Macro trends that may further drive the rotation from Momentum into Value: slower US growth and increased volatility resulting in a more dovish Fed; flat-to-weaker USD; stable-to-rising commodity prices including oil (with CTAs still very short and representing 20-40% of WTI open interest); more policy stimulus and improvement in China; commodity induced inflation surprise (even with Fed hiking) would be a positive for Value (including Financials); further stabilization in manufacturing sector (or convergence between goods producing and services industries); further improvement in the 2nd derivative of our business cycle indicator which just turned positive from low levels and moved into Recovery state (QMI, Figure 11); more synchronized business cycles across regions.

·         Risk to Value Rotation: US economy reaccelerates but growth is lopsided driven by domestic services while manufacturing continues to deteriorate; dollar strengthens; oil weakens; China growth scare re-emerges and yuan depreciates.

For a list of Deep Value, JPM Value Composite, Momentum (at Any Price) and MARP (Momentum at Reasonable Price) stocks, see screens on page 4.

Download JPM_US_Equity_Strategy_M_2016-03-09_1966573.pdf

>>> Euroistoxx still up but reveersal in Financials now down on the day

>>> *SAINT-GOBAIN IS COMMITTED TO BUYING STAKE IN SIKA, CFO SAYS

*SAINT-GOBAIN IS COMMITTED TO BUYING STAKE IN SIKA, CFO SAYS