Wall Street Breakfast: Global Bond Selloff Continues

by: Wall Street Breakfast
Wall Street Breakfast
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Long-dated government bond yields are up nicely again today nearly across the board. Leading the way are Spanish 10-years, up 11 basis points to 1.156%. The U.K. 10-year Gilt yield is higher by another 9 basis points to 1.09%. Janet Yellen's Friday afternoon speech - in which she suggested the Fed might have to tolerate higher-than-otherwise inflation - makes for a good excuse to sell today. U.S. yields rose sharply in the aftermath of her musings, and the 10-year is higher by another basis point this morning to 1.81%. The German 10-year Bund yield is up 3.4 basis points to 0.093%. The Italian 10-year is up 5.8 basis points to 1.439%. The 10-year JGB yield is flat at -0.055%


"We believe globalization has probably reached its peak," says a fund manager at Barings. "The market won't like it." The team at Barings gets together once a year to discuss its 10-year investment forecast. At the next one, they expect to mull reducing or even eliminating their "globalization premium" from stock price estimates. In more concrete terms, it means directing assets at the margin towards fixed income at the expense of equities. Globalization premium? Barings figures U.S. stocks trade at a P/E ratio one full number higher than they otherwise would have, thanks to this generation's boom in global trade. At issue now is a slowing in global trade this year - the weakest since 2007 - just as protectionist policies are on the rise and efforts for further open trade treaties have stalled. A continuation of the trend, says MSCI, could lead to near-20% declines in U.S. and European stocks. “Globalization is increasingly coming under siege,” says a senior strategist with Allianz Global.


In just one recent week alone, three restaurant companies filed for Chapter 11 bankruptcy protection - Cosi (OTCPK:COSIQ), Rita Restaurant (Don Pablo) and Garden Fresh Corp. (Souplantation, Sweet Tomatoes). At least five other operators have done the same this year. Rattled by so many filings in such a short time frame, industry experts now say to expect more bankruptcies, closings, consolidations and management shake-ups. Famous Dave's of America (NASDAQ:DAVE) is in the midst of closing many of its barbecue restaurants, and last week named its fourth new CEO in four years. Late this summer, Ruby Tuesday (NYSE:RT) announced plans to close almost 100 locations, and Bob Evans (NASDAQ:BOBE) in April shuttered 27 restaurants on top of 20 closed last year. Behind the problems: Restaurant supply for years up until 2014 had been growing even as foot traffic hadn't. While restaurants have seen net closings since, other options have been drawing away even more customers - think meal-kit delivery services like Blue Apron, better prepared meal choices at supermarkets and improved offerings at convenience stores. "Restaurants are competing against a lot of those other choices, not just restaurants," Darden (NYSE:DRI) CEO Eugene Lee told investors earlier this month.

The possibility of a commodity collapse apparently wasn't on Doug Oberhelman's mind when he took over as CEO at Caterpillar (NYSE:CAT) in 2010. Between then and 2013, he plowed nearly $10B into plants and equipment, just as miners began shelving buying plans amid retreating commodity prices. Adding to that, Chinese growth began slowing, and then oil prices collapsed. Oberhelman's company is now facing an unprecedented fourth straight year of declining sales, and while the stock has bounced nicely this year, it's still 25% below its 2012 peak. Glass half full: CAT continues to be the world's largest construction and mining equipment seller, and is gaining market share. The workforce has been trimmed 20% over the past four years, creating a more nimble company ready to handle to next upturn.

Constellation Brands is near a sale of its Canadian wine unit to the Ontario Teachers’ Pension Plan, reports the WSJ. An official announcement could come as soon as Monday morning. Constellation (NYSE:STZ) earlier this year said it planned to pursue an IPO of the division, but instead put it on the block after receiving interest from a number of parties. The sale highlights the Constellation's heightened focus on premium spirits, beer, and wine. Among the company's purchases of higher-priced alcohol purveyors over the past few years are craft brewer Ballast Point, winemaker Prisoner Wine Co. and whiskey-maker High West Distillery.

Karen King - in charge of overseeing more than 14.2K U.S. restaurants - plans to retire from McDonald's (NYSE:MCD) as chief field officer at year-end, as does Erik Hess, SVP of customer experience. Their exits come alongside a trio of other recently announced executive departures, and as McDonald's tries to turn around its U.S. business. The introduction of all-day breakfast about a year ago fueled some optimism, but same-store sales rose just 1.8% in Q2 vs. expectations for 3.2%. "Their retirements provide an opportunity to change our organizational structure to further enhance our connectivity with our owner-operators and our customers,” says a McDonald's spokesman.

A new product/service announcement from Tesla (NASDAQ:TSLA) has been pushed back to Wednesday after a Monday reveal was initially teased. Elon Musk says a few more days of refinement are needed. While there are plenty of guesses on what the latest development will be from Tesla, the most popular theory seems to be that Autopilot 2.0 will be unveiled.

Due after the bell today are Netflix's (NASDAQ:NFLX) Q3 results, and post-earnings swings up or down of 10% or more have been relatively common for the streamer after subscriber growth numbers have either impressed or raised concerns. What to watch: Netflix guided for 300K net subscriber adds in the U.S. and 2.3M globally for Q3. What sets up the stock for some frenzied trading late on Monday is the wildly varied estimates from investment firms on sub growth and average pricing after factoring in churn, price hikes, ungrandfathering, etc. On the financial side, analysts expect Netflix to post revenue of $2.28B and EPS of $0.06 for the quarter. On the conference call, don't expect Netflix management to directly answer any questions about acquisition talks (AAPL, DIS, TWX), rather the nuanced answers to progress in key international markets and margin expectations will be in the spotlight.

Today's Markets

In Asia, Japan +0.3% to 16900. Hong Kong -0.8% to 23037. China -0.7% to 3041. India -0.6% to 27498.
In Europe, at midday, London -0.9%. Paris -0.6%. Frankfurt -0.7%.
Futures at 6:20, Dow -0.3%. S&P -0.4%. Nasdaq -0.4%. Crude -0.3% to $50.19. Gold -0.1% to $1253.80.
Ten-year Treasury Yield Flat at 1.80%

Today's Economic Calendar

8:30 Empire State Mfg Survey
9:15 Industrial Production

Companies reporting earnings today »