Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

November 19-20, 2016 Market Update

|Includes: C, FORD, GS, JPM, Wells Fargo & Co. (WFC)

11/20/16

USA

  • In that past week, the euro has fallen 4% against the dollar, rekindling a debate about whether the currency can reach parity with the dollar for the first time since 2002
    • Expectations for economic growth under Mr. Trump has fueled this shift in expectation
    • Citigroup said it shifted its euro-dollar forecast "180 degrees" following the election, predicting the euro will fall to just 98 U.S. cents within the next year
      • Other banks quickly joined Citigroup in this prediction
    • Increasing rates in the U.S. should further appreciate the dollar, although it's unclear how much of that is already priced in
  • Wells Fargo spokeswoman said it has "work underway to fix identified problems and resolve sales practices issues"
    • Includes management changes, eliminating sales targets, and refunding impacted customers
    • The bank paid a $185 million fine in September after opening as many as 2.1 million accounts with fictitious or unauthorized customer information in 2009 and 2010
    • About 5,300 employees were fired between 2011 and 2015 for "sales-integrity violations", about 65% of these were in "personal banker" positions or in similar roles, while 480 were in "supervisory positions, including store managers and persons up to three levels above bankers and tellers"

*Interesting article on how hedge funds are positioning themselves after recent political and economic news

EUROPE

  • The European Central Bank is showing major shifts in monetary policy which have pushed bond rates into negative territory
    • The shift includes a new bond-buying program
  • The euro's decline could be good for the European economy, making Eurozone exports more affordable for U.S. consumers and encouraging inflation
    • On the other hand, European consumers will see a rise in the price of imports like oil
    • The euro is actually up 1.8% this year against a trade-weighted basket of currencies
  • The European economy has grown slowly but steadily for the past nine quarters, expanding by between .3% and .8% of GDP every three months
  • In addition to the Italy referendum which could freeze its small growth, France, Germany, and Netherlands have seen support for populist right-wing parties growing

*Short read on the current state of the Eurozone

*And another on the Italy referendum and possible bets on it

CHINA

  • Federal Probe showed how JP Morgan Asia acted on numerous employment requests from China's Taikang Life insurance, the ninth-largest Chinese life insurer by premium income, in hopes of winning its IPO business
    • Taiking asked JPM to hire, one by one, various family and friends of its executives
    • JPM eventually took on a total of eight interns and full-time employees, twice as many as any other company linked to the so-called "Sons and Daughters" program
    • Taiking is not owned by the Chinese government, so the scandal wouldn't be considered bribery under the Foreign Corrupt Practices Act

FOR MORE INFORMATION

11/19/16

SUMMARY

  • Dollar's steady rise over the past two weeks has pushed down many emerging-market currencies, forcing central bank to intervene
    • Bank Indonesia sold dollars to buy bonds to support rupiah
    • China's state banks support yuan amid 1.5% postelection decline
  • Italian referendum weighing on investor sentiment towards Eurozone
    • A "no" vote might have significant effects on Italy's fiscal policy going forward , especially considering possibility of Renzi stepping down

USA

  • US dollar rallied for 10 days straight, longest streak since 1999
    • May boosted exports from Japan and Europe
    • Rally makes foreign goods and travel cheaper for U.S. consumers, but could slow U.S. corporate profit growth and intensify capital flight in emerging markets
    • Many foreign nations pay their debt in dollars, putting further pressure on countries to take action
      • Japan offered to buy as many bonds as investors were wiling to sell in effort to reduce debt service costs
    • ICE U.S. Dollar Index which measures U.S. currency against six other countries reached highest level in more than 13 years on Friday
    • Dollar gained 2.5% versus euro and 4% against the yen
  • Banking regulators imposed new restrictions on Wells Fargo after scandal involving 2.1 million accounts using fictitious or unauthorized customer information
    • Requires firm's banking unit to get approval before making a wide range of business decisions
      • May need to get regulator approval before paying bonuses, firing executives, and moving branch locations
      • Also banned from offering exiting executives "golden parachute" payments
    • Republican lawmakers urging financial regulators to ease up on imposing new restrictions following Nov. 8 Trump election
    • Wells Fargo checking-account openings fell to about 300,000, down 44% YOY
  • Federal Reserve has expanded policies barring bank supervisors from departing for private sector jobs
    • This move is meant to address the criticism of alleged "revolving doors" between regulators and Wall Street firms, which has raised eyebrows in the past years
    • Fed has already implemented a one-year "cooling-off" period in which senior officials can't accept paid work from financial institutions
    • Goldman Sachs was fined $50M in 2015 for failing to properly supervise the former New York Fed employee, Rohit Bansal, who worked for them and received confidential information from a former colleague at the Federal Reserve
  • New report from Ewing Marion Kauffman Foundation, a Kansas City-based nonprofit, shows that small companies (<50 employees) are surviving past the 5-year mark at a record rate
    • Also indicates that firms are tending to stay smaller rather than growing and employing more people
    • Overall, mixed signals for small business
  • Ford has decided not to move certain parts of construction to Mexico in an effort to improve relationship with Trump
    • Bill Ford called Mr. Trump on Thursday to discuss FordMotor Co.'s willingness to work with Mr. Trump on making U.S. manufacturing more attractive to multinational companies
    • Ford will stick with $1.6 billion construction plan for new small-car plant in Mexico
    • This move falls in line with many CEOs of major multinational companies such as IBM and Dish Network Corp., who have offered to help Mr. Trump find ways to make U.S. manufacturing more attractive without raising tariffs
    • Light vehicle production in Mexico has risen from ~1.5M in 2010 to ~3.4M in 2016
  • Steel sector has joined the infrastructure sector in rally, as potential for infrastructure spending is reviving

*An interesting read on rising bond yields, the slowing inflationary trend and the shifting investing landscape and their effects on markets

OIL

  • U.S. shale producers continue ramping up production to take advantage of potential OPEC output cut
    • 471 oil rigs are currently active in the U.S. - strongest in 5 months
    • Media has overreacted to unsubstantial statements from OPEC members, causing large swings in Crude prices over the past months

*Another interesting article on the growing electric car market and how it might affect the oil industry

EUROPE

  • Italian Referendum on Dec. 4 continues weighing on the minds of investors
    • If the referendum is lost, Italy could plunge into a prolonged period of political and economic uncertainty
      • The reform-minded Italian Prime Minister Renzi would likely resign if the vote is lost
      • A loss could also lead to surge in popularity for the populist Five Star Movement, which has opposed Italy's membership in the EU
    • Without drastic economic reform, there is little hope for Italy to revitalize its stagnating economy, which is 6% below its 2008 pre-crisis peak
  • Italian youth unemployment remains above 35%, showing little signs of recovery
  • Italy has the weakest banking system in the Eurozone, with more than 18% of its banking system's balance sheet being labeled as nonperforming
    • Italian public debt to GDP ratio is sitting above 130%, ranked second in this metric, only below Greece
    • Italy has the third largest sovereign debt market, with debt totaling around $2.5 trillion
    • Unlike Greece, an Italian financial crisis would be too large to save with repeated IMF and EU bailout packages
      • A default would likely push the Eurozone into crisis
    • Recent Brexit referendum and U.S. presidential election may foreshadow a "no" vote on the Italian referendum, casting doubt on stability of the Eurozone

INVESTMENT IDEAS

A short strangle on crude would be a good way to bet on prices remaining in the $40-$50 range - this is the range in which U.S. producers can profit without cutting production. If prices rise beyond the $50 mark, U.S. producers might be inclined to tap their many "drilled but uncompleted" wells which would quickly boost supply.

FUTURE OUTLOOK

The growing European separatist movement will likely take queues from UK's ability to succeed after Brexit. Future referendum decisions will likely be affected by success of countries which have voted in favor of separatist policies. Another factor which may play into the separatist movement's growth is the migration debate which has fueled recent anti-immigration sentiment in citizens across Europe as a result of increased violence and terrorism.

FOR MORE INFORMATION

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.