LIBOR Financial Volume 6, Issue 5

By November 24, 2015Newsletter
Volume 6, Issue 5
November 15, 2015

US ECONOMICS.

The Holidays are upon us gentlemen, and our presents are coming in hot from Uncle Sam. In October, the US had an ambiguously strong report with the strongest rate of job creation thus far, as payrolls expanded 271,000. The unemployment rate dropped to half the level during worst days of the recession at 5%, and wages rose to their strongest since 2009 with average hourly earnings rising 2.5%. Such strong numbers were far above economists’ expectations and easily strong enough to reassure Fed policymakers that the US is approaching full employment. Janet Yellen has hung a central part of her case for higher rates on improvements in the job market, and it seems the giddy nine-year-old inside her might get exactly what she wants. Who needs a hoverboard when you got interest rate hikes? Santa is coming in clutch this year.

The Fed has done what it can to prime the global markets for the possibility of an increase in short-term interest rates next month. With such strong numbers, the conversation has now moved from ‘when’ to ‘how fast’ because at this rate it would take a “catastrophically bad” job report in November to return that nicely wrapped rate hike back to the store.

But this leads to a conversation about whether such numbers show if the US economy is growing fast enough. According to President Barack Obama, the US still lacks that acceleration. In a statement written in regards to G20 summit taking place November 15-16, Obama generally says:

  • Everyone should implement fiscal policies that support short term demand and invests in our future: like America
  • Countries need to take action to boost demand by putting more money in pockets of middle class consumers who drive growth: like America
  • China needs to “unleash” the middle class by transition to a consumption-led economy: like America
  • World needs greater public investment while interest rates are low: like America

Aside from Putin’s pecks, and the effect of the Paris attacks on negotiations, it is important to see how this meeting sets the standard for where Obama (and therefore the US) will go from here in regards to growth.  As stated ever so gracefully by Obama, “If there is anything the past seven years have taught us, it is that we all have a stake in each other’s success… If world relies excessively on the American consumer, it will jeopardize the sustainability of the global recovery.”

Kathy Ye  

GLOBAL ECONOMICS.

Future Global Growth: Voices of Concern

In a global environment of increased financial market volatility, falling oil prices, andconstricting capital flows to emerging markets, growth in emerging economies declined for a fifth year in a row in 2015. According to The Conference Board’s report on theGlobal Economic Outlook 2016 released earlier this week, there will be global GDP growth of 2.8 percent in 2016, a mild improvement from 2.5 percent in 2015. Bart van Ark, Chief Economist at The Conference Board and co-author of the report, explains that, “Technology and innovation continue to feed new, potentially transformative forces, but they’re offset by slow investment growth, lackluster productivity growth, and an array of stubborn policy and business challenges, from Beijing to Brussels to Brasilia, not to mention inside the Beltway.”

This perspective of the future growth of the world economy was reverberated by the Organization for Economic Co-Operation (OECD) as it cut its global growth estimate to 2.9 percent this year, down from a forecast of 3.0 percent made in September and 3.1 percent made in June. The projections included data from 33 mature markets (e.g. US, Europe, Japan and other mature economies) as well as 32 emerging markets (e.g. China, India, Brazil, Mexico, Russia). Moody’s Investors Service also echoed fear towards current economic conditions due to the fact that the risks to the world economy had grown this month as the proportion of countries awarded a “stable” credit outlook had fallen slightly from a year ago, while the share of “negative” outlooks had risen.

Marion Miller  

EQUITY MARKETS.

Stocks Post Worst Week Since August

U.S. stocks broke a six-week winning streak as retail shares tumbled on weak earnings and economic data. Nordstrom, J.C. Penney, and Macy’s shares fell 15%, 15.4%, and 20% respectively for the week after they reported earnings. U.S. sales at retail stores and restaurants rose 0.1% in October from their prior month following two months of flat sales. However, economists had expected a 0.3% rise last month. For the week, the Dow slid 3.7%, with Nike and Home Depot the greatest weights on the index, and the S&P 500 fell 3.6%. That marked their first weekly declines since the week endedSeptember 25 and their largest losses since the week ended August 21. Stocks around the world also fell sharply this past week as investors brace for the Federal Reserve to raise rates as soon as December, their first increase since 2006. About three stocks declined for every two advancers on the New York Stock Exchange. Yet, even with the recent spur of bad news, retailers still remain the best performers of the year.

Kelly Stimmel  

STOCK HIGHLIGHTS.

GAMESTOP (GME): SELL

Video game specialty retailer GME is down 16.5% after Pacific Crest analyst Evan Wilson downgraded the company’s stock, highlighting the growing concern of the evident shift from physical disks to digital downloads; this trend may ultimately affect GME’s business model. The digital download has become more advantageous to the physical disk: there is no additional costs to produce, package, and ship to retailers. For instance, sales of the new Halo 5: Guardians reported to be the best ever in the series, reaching over $400 million. Unfortunately, retailers like GME have only been selling less than half of the predicted sales of physical gaming units. However, if GME is able to revamp its business model and focus on expanding their software by implementing digital downloads on its online store, they may be able to compete with competitors like Microsoft (MSFT).

PLANET FITNESS (PLNT); BUY

On Friday, PLNT’s stock rose 12% after the company reported net sales of $68.8 million and adjusted earnings of 10 cents per share vs. consensus expectations of $66.3 million of net sales and 9 cents per share. Corporate-owned same store sales rose 1.7%, while franchisee-owned same store sales increase 7.3%. 1,000 more stores are planned to be opened by franchisees in the next seven years, and PLNT is even planning on expanding internationally, already opening two stores in Canada last year and planning its first store in the Dominican Republic. However, PLNT reported 7.1 million members for the third quarter, a decrease from 7.2 million in the previous quarter. PLNT states that this trend is because of normal seasonality, and it hopes to see an increase in memberships for the start of next year.

Matthew Lee  
Lawrence Lung  

FIXED INCOME MARKETS.

Raising Morale from Within

Treasury yields finished the week at the largest weekly decline in a month, as a decline in consumer spending increased demand for US government debt. This drop decreased government bond sales, pushing yields to their highest levels in 4 months on Tuesday. All signs pointed green, until oil prices fell mid-week, subduing inflation. After markets reopened Thursday, being closed for Veterans Day, bond gains remained unchanged. Although inflation subdued, a $16 billion sale of 30-year bonds attracted solid demand. Making up for incurred debt, these sales did not compensate for 10-year Treasury note, which lost 5.2 basis points over the week.

The long-awaited Treasury launch of the myRA retirement savings plan made way last week. Available to singles and couples who earn less than $131,000 and $193,000 per year, respectively, this is an easy way to get a start to retirement savings. This fee-and-risk-free fund is targeted to the 50 million Americans without access to 401(k) plans through their employers that haven’t opened their own IRA. Here, instead of a broker, the government makes all investment decisions; all contributions go into the same Government Securities (G) fund, under the Thrift Savings Plan. An added convenience of myRA is that deposits can be made directly from part of a weekly paycheck or tax return refund. My Retirement Accounts are subject to the same contribution limits as an IRA, $5,500 a year, and tax free contribution withdrawals. However, all this security comes with a catch, as myRA plans still won’t yield the same earnings as a mutual fund made up of stocks and bonds. The Government Securities fund has a 10-year average annual return rate of 3.19%, and once the balance matures above $15,000, the holder will need to open a private Roth IRA fund. With returns barely surpassing inflation, this is not the only solution to long term financial security, and a government backed IRA program, similar to that of the UK, would go much further.

Michael Martino  

CURRENCIES.

Dollar’s Overall Poor Performance

Australia has surprisingly gained the most against the dollar this week following a report saying that Australia has created 56,800 new jobs in the last month, leading to a 0.3% decrease in its unemployment rate. Australia has encountered a third month in better than expected unemployment rates, holding steady now at 6.2%. This, combined with the Reserve Bank rate cuts working its way through the economy, means that the bearish AUD/USD exchange rates have bounced back to a 7 day increase streak to 0.7330 AUD/USD.

The dollar, on the other hand, fell against all major currencies in the past few days as last week’s stronger than normal job report pushed the dollar higher, resulting in investors booking profits from this rise and simultaneously sending other currencies higher. This lead to the dollar falling 0.34% against the euro to 1.0778 EUR/USD and falling 0.25% against the Swiss Francs to 1.0018 CHF/USD.

Lance Qian  

COMMODITIES.

The fall within the commodities space has been a partial contributor to the tumble in stocks this week. Oil is currently on track for an 8 percent loss, last trading near $40.40 a barrel.  Oil inventories are at their highest level in at least a decade, because countries that produce crude drilled more out of the ground this year, adding to global production, according to OPEC. There’s even more oil around than there was in 2009, right after the global financial crisis. As we go into the winter season, OPEC says the demand for oil could go up – but the reason there’s so much oil in the markets is because no one anticipated that global demand would slow as much as it has.

Gold prices are at five-year lows, which is unusual – because in a period of slower global growth, gold is one commodity that usually does well, as investors look to keep their money safe.  Prices closed little changed on Friday as lackluster U.S. economic data cast doubt on the timing of a possible interest-rate increase from the Federal Reserve. The most actively traded gold futures contract, for December delivery, fell 10 cents to $1,080.90 a troy ounce on the Comex division of the New York Mercantile Exchange. But current gold prices are reflecting the fears that investors have for the future – the market is expecting rates in the US to rise – which means the US dollar will strengthen as more investors look for higher returns there.

Copper prices are also down by more than a fifth this year.  The metal is used in everything from homes to factories – so it’s a really good gauge of overall global demand.  China is the world’s biggest consumer of copper and other raw materials, because it just needs so much of it to power its massive economy. But China is facing the slowest growth in a quarter of a century – so it’s not surprising we’re seeing copper slump.

Investors are nervous about slowing global growth, but that should come as no surprise. The commodities boom over the last decade has been driven by China’s spectacular once-in-a-lifetime economic rise. Even if other countries in the region (India, Indonesia, Vietnam, Pakistan, Myanmar) see demand pick up for commodities, it is unlikely to be at the scale of China. So as China goes through what’s being called the “new normal”, it’s likely that commodity producers are going to have to accept the same fate for themselves.

Keith Gorda  

DEALBOOK.

Exciting Deals from Britain, France and U.S.

This past week has had a lot of action with mergers, acquisitions and more. Mylan, a pharmaceutical company, had intentions of following through for a bid for an over-the-counter (OTC) and prescription (Rx) specialized pharmaceutical company calledPerrigo. As Mylan was approaching its deal deadline, Mylan reported to have fallen short of its bid offering. The initial deal started at 80 percent, which was negotiated down to 50 percent between the two companies. Mylan unfortunately fell short by roughly ten percent. The chairman of Mylan made a statement saying that although the merger with Perrigo is helpful for the specialization that the company is looking to move towards, it is not a “required for the future success of our company.”

Moving over to updates in Britain, accusations have been made for financial crime against employees of Barclays and Deutsche Bank from the Serious Fraud Office. These employees have been accused of “manipulating a global benchmark interest rate” (Libor). This scandal has led to reputational and financial damages for these leading banks including UBS and the Royal Bank of Scotland. Other trending topics are debates about how much the post financial crisis regulations in Britain have reduced global banking returns. There has been a 12 percent decrease in the past 4 years of total banking assets in Britain. The government and British Banker’s Association are key leaders addressing this issue and acknowledging changes that need to be made.

Finally, Amundi, a five year old company that is a leading asset manager from France, has reported a $1.6 billion IPO. Many leading banks are involved in the offering according to the NY Times, including Crédit Agricole, Goldman Sachs, JPMorgan Chase and Morgan Stanley. Amundi’s 2014 revenues exceed $1.5 billion, and trading in Amundi’s shares will appear in Paris on the Euronext stock exchange.

After an eventful week that has just passed, the week of November 16 is full of expectations as well. Especially since Square is expected to hit the market this upcoming week. Look out for (NYSE:SQ).

Varuni Bewtra  

TECHNOLOGY.

Apple Can’t Feel the Beat While Google Takes it Nice and Slow

Apple announced this week that it will be closing the shutters on its Beats Music service on the 30 of November, a move which frankly makes sense considering the company was trying to run two music streaming services simultaneously.  The acquisition has been under the control of Apple for merely a year.  Many of Beats Music’s features have already been slowly incorporated into Apple Music, and Apple hopes this move will lead the customers of its cancelled service to transition over to Apple Music.

Meanwhile in Mountain View, California, police officers found themselves in the rare situation of having to pull over a car for going too slowly.  Even rarer: the car didn’t have a driver.  Google’s self-driving car was going an entire 11 miles an hour below the 35 mile-per-hour speed limit allowed on local California roads.  The two Google engineers sitting in the back row of the vehicle were scolded for allowing their car to cause a traffic jam, before being let on their way.  Google claims that its vehicles are capped at 25 miles-per-hour, which provides some insight as to why the car was going as slow as it was.  Regardless, this might dissuade some car enthusiasts from purchasing a Google car in the future unless they include a feature that allows them to go over the speed limit.  Or at least at the limit.

Jakub Lipczyk  

LIBOR UPDATES.

Although LIBOR had no formal meeting this week, our members used the time off to continue preparing for the recruiting season through mock interviews and individual meetings with E-Board members.

This week, we have several career opportunities for LIBOR members and newsletter readers. Tech-focused boutique investment bank Union Square Advisors is currently looking for interns to join their 10-week Investment Banking Summer Analyst program this June, and the deadline to apply is November 29. Additionally, tech-oriented equity research boutique Cross Research is seeking a full-time research associate for a position in Millburn, NJ. Please email rulibor@gmail.com with your resume and a writing sample if you are interested in the position.

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