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Analyst Upgrades/Downgrades

The Latest Bull Call: S&P 1900

“Here’s the latest analyst to double down on bullishness, with stocks remaining near all-time highs.

Paul Murphy at FT Alphaville flags the latest call from Credit Suisse’s Andrew Garthwaite, who predicts the S&P will surge to 1900 in 2014 (it’s currently at 1631)….”

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Wall Street Gets Scary Over Emerging Market Prospects

“Emerging markets (EM) have come up against two earth-shaking developments in 2013: (1) slowing growth in China, coupled with the apparent end of the commodity supercycle; and (2) the rise of the U.S. dollar and Treasury yields, which have been especially spurred along in the past month by fears that the Federal Reserve will begin tapering back monetary stimulus sooner than expected.

The prospect of Fed tapering sparked a sizable rally in the dollar and a sell-off in the U.S. Treasury market over the course of May, sending bond yields to their highest levels in over a year.

The chart below shows a cross-section of some of the worst performers against the U.S. dollar in EM (plus Australia) since May 2, which is when the Treasury sell-off really got started.

Since then, the South African rand has depreciated 12.8% against the U.S. dollar, while the Australian dollar has fallen 7.1%, the Brazilian real is down 6.6%, the Mexican peso has retreated 5.2%, the Turkish lira is 4.6% lower, and the Polish zloty has lost 3.9%.


emerging market currency performance

Business Insider/Matthew Boesler, data from Bloomberg

However, it’s not just EM currencies — which fell 2.0% against the dollar in May — that had a bad month.

EM sovereign debt priced in local currencies declined 3.0%…”

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$BAC: Sell Now or Suffer a Melt Down in the Treasury Market

“Investors should sell U.S Treasurys and buy bank stocks because bonds may be headed for a “crash,” according to Bank of America Corp.

“It’s hard to believe that the greatest bond bull market in history will end without some bloodshed,” Michael Hartnett, the bank’s chief investment strategist, recently wrote in a client note.

“Risks of a bond crash are high.”

Markets are getting nervous about the possibility the Federal Reserve will taper its debt-buying program, according to Hartnett, who is based in New York.

Fed Chairman Ben Bernanke said the central bank could curtail its $85 billion in monthly Treasury and mortgage bond purchases if policy makers are confident that improvements in economic growth are sustainable.

U.S. debt has dropped 1.8 percent in May, the steepest monthly loss since December 2009, according to the bank’s indexes. Benchmark 10-year yields declined from 15.8 percent in September 1981 to a record low of 1.38 percent in July last year. The move resulted in a gain of more than 1,000 percent for the bank’s Treasurys index.

“Major breakouts in equity markets tend to coincide with major inflection points in bond yields,” Hartnett wrote. The Standard & Poor’s 500 Index has climbed 16 percent this year, and it set an all-time high of 1,687.18 on May 22.

Bank of America’s bond strategists predict the 10-year yield will rise to 2.25 percent by year-end, according to the report. The company’s economists forecast the Fed will begin paring its bond purchases in April, it said….”

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Moody’s Cuts $AA To Junk Status as Aluminium Prices Fall

Alcoa Inc. (AA), the largest U.S. aluminum producer, had its credit rating cut to one level below investment grade by Moody’s Investors Service after the metal’s price fell amid a global oversupply.

The long-term rating on Alcoa’s $8.6 billion of debt was lowered by one step to Ba1 from Baa3, Moody’s said in a statement today. The outlook is stable, indicating the rating won’t be reduced again soon.

“The aluminum price has been in a downward decline since reaching post-recession highs in 2011,” Moody’s said in the statement. Strength in the automotive and aerospace industries isn’t sufficient for a “significant” recovery in profitability and Alcoa won’t achieve investment-grade metrics within Moody’s rating horizon, Moody’s said.

While Alcoa has shuttered high-cost smelting capacity, expanded profitable segments and reduced costs, slowing economic growth in China and rising global production have caused aluminum prices to fall.

“We believe Moody’s decision is a greater reflection of macroeconomic conditions and the volatility of metal prices than a true statement of the financial and operating strength of Alcoa,” Alcoa said in a separate statement.

Output Cuts….”

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Italian GDP Gets Cut a Second Time This Month by the OECD

“The Organization for Economic Cooperation and Development cut its economic forecast forItaly for the second time this month as weak household demand extends the longest recession in more than two decades.

Italy’s gross domestic product will contract 1.8 percent this year before rising 0.4 percent in 2014, the Paris-based OECD said today in its Global Economic Outlook. That compares with a 1.5 percent decline for 2013 and growth of 0.5 percent in 2014 forecast in a May 2 survey on Italy, which revised its November predictions.

The country’s recession “will continue throughout 2013 as the effects of fiscal tightening and restrictive conditions bear down on economic activity,” the OECD said in today’s report. “Employment and hours worked will continue to fall, constraining household budget and consumption spending.”

Italy slipped into recession in the final quarter of 2011. The austerity policies of former Prime Minister Mario Monti, which helped bring the budget deficit within the European Union limit, deepened the slump in the EU’s third-biggest economy and pushed the jobless rate to the highest in almost 20 years.

“With employment likely to decline in 2013-14 and with the household saving rate having fallen significantly over the past few years, not much growth in consumer demand can be expected,” the OECD said today.

Household Demand….”

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OECD Expects Global Economy to Improve With Europe Being a Laggard

“The Organization for Economic Cooperation and Development forecasts global economic growth will accelerate in 2014 with both the U.S. and Japan continuing to outpace the euro area.

“The global economy is moving forward and it is doing so at multiple speeds,” OECD Chief Economist Pier Carlo Padoan said today in the Paris-based organization’s semi-annual Economic Outlook. Differing monetary and fiscal choices across the major developed economies are driving regional divergence with “each path carrying its own mix of risks,” he said.

Global central banks are continuing to try to bolster their economies, with the Federal Reserve buying $85 billion of debt a month and the Bank of Japan unveiling unprecedented stimulus last month. In the euro region, where the European Central Bank cut its benchmark rate to a record low this month, the OECD said “more can be done through further non-conventional measures.”

The OECD sees U.S. gross domestic product rising 1.9 percent this year and 2.8 percent in 2014, while Japan’s will increase 1.6 percent and 1.4 percent. The euro-area economy will shrink 0.6 percent this year before expanding 1.1 percent next, according to the report.

In a separate release today, German unemployment rose more than economists forecast in May as the euro-region debt crisis and a long winter took their toll on Europe’s largest economy. The number of people out of work climbed 21,000 to 2.96 million. Economists predicted an increase of 5,000, according to the median of 35 estimates in a Bloomberg News survey.

Some Optimism…”

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The IMF Says China Needs Decisive Action While Lowering Growth Prospects

“The International Monetary Fund lowered its forecasts for China’s growth and said making “decisive” policy changes would put the economy on a more sustainable path.

Expansion will be about 7.75 percent this year and next, David Lipton, first deputy managing director of the IMF, said today at a press briefing in Beijing after concluding an annual review of China. In April, the IMF forecast growth of 8 percent this year and 8.2 percent expansion in 2014.

Lipton warned of risks from a record expansion of credit, with the revised outlook following an unexpected slowdown in the first quarter. Premier Li Keqiang, who took office in March, is planning policy changes that would open up more of the economy to private investment and alter a household-registration system that impedes urbanization.

“While China still has significant policy space and financial capacity to maintain stability even in the face of adverse shocks, the margins of safety are narrowing and a decisive impetus to reforms is needed to contain vulnerabilities and move the economy to a more sustainable growth path,” Lipton said.

At the same time, Lipton said China’s current monetary and fiscal policies are “appropriate” and the IMF isn’t suggesting China restrict credit now.

Lipton spoke after meeting with leaders including vice premiersWang Qishan and Ma Kai, People’s Bank of China GovernorZhou Xiaochuan, Finance Minister Lou Jiwei and Liu He, a vice chairman of the National Development and Reform Commission, according to the IMF.

Analyst Surveys…”

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Moody’s: US Faces Downgrade Without Budget Deal

“U.S. policymakers must address debt loads projected to rise later this decade to avoid a 2013 downgrade, even as the latest budget projections are “credit positive,” according to Moody’s Investors Service.

The U.S. budget deficit will drop to $378 billion in 2015 from a record $1.4 trillion in 2009, according to Congressional Budget Office data. The federal government will post a $642 billion deficit this year, the first time in five years that the shortfall has been less than $1 trillion. Moody’s said Sept. 11 that the U.S.’s top Aaa rating would likely be cut to Aa1 if an agreement on the debt ratio isn’t reached.

“The fact that it showed much lower debt levels going forward, we view as a positive development,” Steven Hess, senior vice-president at Moody’s and based in New York, said in a telephone interview of the CBO forecast. “More needs to be done on the policy front to address this rising debt ratio.”

While projections from the non-partisan budget office forecast the ratio of U.S. debt to gross-domestic-product declining to less than 71 percent by fiscal year 2018, the CBO forecasts the measure will increase “thereafter, pointing to the uncertain long-term outlook if reform of entitlement programs does not take place at some point,” Moody’s said in a report.

Budget Proposals….”

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$GS Raises S&P Year End Target to 1750

” “Our positive 2013 outlook for S&P 500 has played out much faster than we expected.” That is how the latest equity update from Goldman Sachs, which until today had an S&P target of 1625 for the year end S&P, begins. And, logically, the only option for Goldman is to hike its outlook even more, because not even the Squid apparently could anticipate how quickly the policy it forced down the throats of central banks around the world, levitated markets to surpass its old price targets. The result is David Kostin (who until December had foreseen 1250 on the S&P for the end of 2012) and company were forced to goalseek even higher targets based on tried and true excel model fudging exercises, and such “value” creation as multiple expansion and dividend payments.

To wit: “Our earnings estimates remain unchanged but we raise our dividend estimates and index return forecasts for 2013 through 2015. We expect S&P 500 will rise by 5% to 1750 by year-end 2013, advance by 9% to 1900 in 2014, and climb by 10% to 2100 in 2015….”

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Credit Suisse: Au Will Melt Down

“Bearish sentiment toward gold has prices for the yellow metal tumbling again.

On Wednesday, George Soros revealed through a regulatory filing that he cut his gold exposure during the first quarter.

In a new note to clients, Credit Suisse‘s Ric Deverall forecasted that gold would plunge to $1,100 this year and eventually to $1,000 within five years.  This according to Bloomberg’s Maria Kolesnikova.

More from Kolesnikova…”

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$JPM: S&P 1715

“JPMorgan’s bullish analyst Tom Lee just cranked up his S&P forecast:

This has been a better bull market than we expected, particularly in 2013. But this is conforming to history—the average gain in the fifth year of a bull market is 19% (implies 1,719)….”

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The S&P Downgrades Old Man Buffett

“S&P has just downgraded the credit rating of Berkshire Hathaway to AA+ from AA.

“The lower credit rating on BRK better reflects our view of BRK’s dependence on its core insurance operations for most of its dividend income,” said S&P credit analyst John Iten.

S&P is maintaining a negative outlook on the company.

Here’s the press release from S&P…”

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Credit Ratings Agency Get Back to Declining Standards

“NEW YORK — Huxley Sommerville, group managing director at Fitch Ratings, increasingly fears another massive financial crisis. Ask him why and he tells the story of a recent deal his credit rating agency failed to secure.

Last month, a group of Citigroup bankers contacted Fitch’s New York headquarters, hoping to convince its analysts to deliver their seal of approval for a bond issue. In essence, Citi needed Fitch to conclude that the landlord of an iconic Manhattan office tower should be considered as trustworthy as the government of the United States.

Citigroup had recently partnered with Deutsche Bank to lend $783 million to the owner of the Seagram Building, an architectural gem on Park Avenue in midtown Manhattan. Now, its bankers were in the process of turning that huge loan into multiple bonds, hoping to resell the debt to investors in pieces. They would turn one loan into commercial mortgage-backed securities.

But doing the deal required the rating agency’s blessing: Fitch had to assign a slice of those bonds its coveted “AAA” rating, an action that would officially make the debt about as sound as a savings bond from Uncle Sam….”

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Tom Lee of $JPM Puts Out a List of the Best Stocks to Own for the Next Couple of Quarters

JP Morgan‘s Tom Lee is one of the most accurate strategists on Wall Street, having nailed the S&P 500’s path in 2012.

In his brand new note to clients, he offers his list of “23 Ideas For The Next 3-6 Months.”

“Our base case in the short term sees equities higher through the end of 2Q and Cyclicals outperforming (dead cat bounce, 1Q laggards leading in 2Q, etc.),” he wrote. “However, there is a case to be made that Cyclical leadership will likely be a three- to five-year story with Technology, arguably the least consensus, therefore perhaps best positioned”

Lee’s picks run the gamut from biotech to semiconductors to retail.

The group boasts an average 2013 estimated price-to-earnings ratio of 12.3x and an average upside potential to their target prices of 13%.

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The IEA Puts Out a Glowing Report of North America’s Energy Boom

“The boom in North American energy (primarily related to shale in the US and oil sands in Canada) is one of the biggest stories in the global economy.

A new report from The International Energy Agency (IEA) agency discusses the consequences of the boom in dramatic fashion, arguing that it’s as big of a deal for the world oil market as the rise of China was over the last 15 years.

The report describes the US supply “shock” as that is sending “ripples” throughout the world, affecting every aspect of the market.

This chart from the report drives home how significant the expansion of North American supply (dark green bar) will be relative to the growth expected from the rest of the world in the next few years.


Screen Shot 2013 05 14 at 5.56.39 AM



Here’s the key part from the press release announcing the report:

The supply shock created by a surge in North American oil production will be as transformative to the market over the next five years as was the rise of Chinese demand over the last 15, the International Energy Agency (IEA) said in its annual Medium-Term Oil Market Report (MTOMR) released today. The shift will not only cause oil companies to overhaul their global investment strategies, but also reshape the way oil is transported, stored and refined….”

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