Friday, November 21, 2014

Higher markets on more central bank stimulus

Dow climbed 91 to yet another new record, advancers over decliners less than 2-1 (narrowed from the AM reading) & NAZ added 11.  The MLP index lost its early advance & finished down pennies in the 518s & the REIT index rose 2 to the 319s.  Junk bond funds gained & Treasuries also found buyers.  Oil went up on hopes for an improving Chinese economy that will need more oil & gold crawled over 1200.

AMJ (Alerian MLP Index trackig fund)

CLF15.NYM....Crude Oil Jan 15....76.28 Up ...0.43 (0.6%)

Live 24 hours gold chart [Kitco Inc.]

European Central Bank President Mario Draghi
Photo:   Bloomberg

Mario Draghi strengthened his stimulus pledge for the euro area by saying the ECB can’t hold back in its fight to revive the economy.  “We will do what we must to raise inflation and inflation expectations as fast as possible, as our price-stability mandate requires,” the ECB pres said.  Some inflation expectations “have been declining to levels that I would deem excessively low,” he said.  With the next policy meeting less than 2 weeks away & the region remaining close to economic stagnation, Draghi may need to step up efforts to convince investors he’s serious about reigniting growth and inflation.  The € fell & bond yields dropped on speculation the central bank is closer to buying gov debt in a full-scale quantitative-easing program. The ECB is trying to boost the size of its balance sheet to early-2012 levels, signaling an increase of as much as €1T ($1.24T), to help revive the euro-area economy.  GDP expanded just 0.2% in Q3 & inflation is running at 0.4%, well below the ECB’s goal of just under 2%.  Any new action would follow a flurry of activity since Jun that has included interest-rate cuts, long-term bank loans & covered-bond purchases.  The central bank started buying asset-backed securities today as it acquired notes backed by Dutch home loans, according to leakers (a spokesman for the ECB confirmed it started buying ABS).  Draghi has declined to rule out large-scale gov-bond buying & reiterated today that ECB staff are studying further measures to boost the economy if needed.  “There is a combination of policies that will work to bring growth and inflation back on a sound path,” he said.  “If on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialize, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases.”  But expanded measures may not win unanimous approval in the ECB’s Governing Council. Governing Council member Klaas Knot said that he’s “skeptical” about QE.  Bundesbank pres Jens Weidmann has argued that large-scale sovereign-debt purchases muddy the line between fiscal and monetary policy.

Draghi Ramps Up Stimulus Pledge on Weak Inflation Outlook

Russian retail sales growth stagnated after the ruble had its worst month in more than 2 years & joblessness rose to the highest since Apr.  Retail sales in Oct advanced 1.7% from a year earlier, the same rate as in Sep, the Federal Statistics Service in Moscow said.  Unemployment rose to 5.1% from 4.9%, matching the estimate.  The ruble’s plunge to record lows & inflation at the fastest since Jul 2011 are eating into consumers’ finances.  That’s plaguing domestic demand already burdened by higher interest rates, capital flight & tit-for-tat sanctions over the conflict in neighboring Ukraine.  Fixed-capital investment shrank 2.9% after a 2.8% decline in Sep & wages adjusted for inflation increased 0.3%.  The estimate was for investment to contract 3.5% & real wages to drop 0.9%.  The central bank cut its forecast for Russia’s economic growth forecast last week after the price of oil, Russia’s main export earner, dropped to a 4-year low.  The US & EU imposed sanctions against Russia after pres Putin annexed Crimea from Ukraine in Mar & a separatist insurrection flared in 2 regions.  That’s stoked capital outflow & undercut the ruble.  The economy is set to expand just 0.3% this year & stagnate in 2015, according to the central bank’s base-case scenario (which assumes oil prices average $95 next year & sanctions remaining in place until the end of 2017).

Russian Retail Sales Growth Stalls as Ruble Plunge Chokes Consumer Demand

Visa, a Dow stock, said it may have to pay more than $10B to buy Visa Europe if the banks that own it decide to exercise their option to sell.  Visa may seek 3rd-party financing or sell debt to help pay for the purchase, the firm said.  The company said last year that Visa Europe’s perpetual put option could cost several $B or more.  Visa could be exposed to EU regulations & future litigation involving Visa Europe if the option is exercised.  For the purposes of valuing the option, Visa assumes a 40% probability that it will be exercised “at some point in the future,” the company said.  The European firm split from Visa prior to the US company’s 2008 IPO.  While purchasing Visa Europe could introduce new risks, it would add to the company's annual revenue.  The stock rose 2.30.  If you would like to learn more about Visa,click on this link:

Visa Now Anticipates Cost of Visa Europe Put Option May Exceed $10 Billion

Visa (V)

Dow is up a massive 1.2K in about 5 weeks, an amazing run.  The relative strength of the US economy & more stimulus money from central banks overseas are getting the bulls to drool.  For the time being that feels good when looking at portfolios, but plenty of problems remain.  There are numerous military conflicts, economic expansion is not impressive & higher interest rates in the US are approaching, resulting from better GDP growth.  These risks are being ignored.  For what it's worth, there was selling in the PM & Dow closed 84 below its high. 

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