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Analyst Upgrades/Downgrades

DOW 16k in the Cards? Very Bullish Investment Managers Say it is Quite Possible

“…..This week we saw our first real market rattling in awhile.

Commodities got absolutely hammered, and the renewed deflationary chill law to a series of violent up and down swings, resulting in the worst week in some time.

Also, US data is softening (and things aren’t hot in Europe or China either).

And yet. At least as of very recently, big money managers are bullish on historical levels.

From Barron’s cover story:

The stock market isn’t the only thing that has set records this spring. Barron’s semiannual Big Money poll of professional investors also is setting a record — for bullishness, that is. In our latest survey, 74% of money managers identify themselves as bullish or very bullish about the prospects for U.S. stocks — an all-time high for Big Money, going back more than 20 years. What’s more, about a third of managers expect the Dow Jones industrials to scale the 16,000 level by the middle of next year, notwithstanding a dismal week of selling that left the blue-chip index at 14,547.51 on Friday…..”

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$IBM Receives Multiple Downgrades as Earnings Miss Across the Board, All Business Sectors Experience Weakness

“(Reuters) – Three brokerages cut their price targets on IBM Corp shares and warned its weak earnings suggested results would also be disappointing at other hardware technology companies such as EMC Corp, Dell Inc and HP Co.

IBM’s shares were set to open 1.5 percent lower on Friday than their Thursday closing price of $207.15 on the New York Stock Exchange.

IBM posted on Thursday a rare quarterly earnings miss as a sliding yen hurt earnings from Japan and it failed to close a number of major deals, especially in Europe and the United States.

“The IBM miss is a decidedly negative read through for the entire IT hardware segment and we are incrementally more cautious on the sector; particularly those with a March quarter end,” Deutsche Bank analyst Chris Whitmore wrote in a note….”

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Moody’s: ‘Evidence Is Mounting That the Economy Lost Momentum’

“The number of Americans filing new claims for unemployment benefits rose last week and factory activity in the nation’s Mid-Atlantic region cooled in April, further signs of a moderation in economic growth.

Underscoring the softening growth outlook, another report on Thursday showed a gauge of future economic activity fell in March for the first time in seven months. They were the latest data to indicate a step-back in the economy after a brisk start to the year as tighter fiscal policy began to weigh.

“The evidence is mounting that the economy lost momentum in March and that has carried to April,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

Economic data for January and February have suggested growth accelerated in the first quarter after activity almost stalled in the final three months of 2012.

But in a replay of the prior two years, the economy appears to have hit a speed bump at the end of the quarter, with data ranging from employment to retail sales and manufacturing weakening significantly in March.

Initial claims for state unemployment benefits rose 4,000 to a seasonally adjusted 352,000 the Labor Department said. The four-week moving average for new claims, a better measure of labor market trends, rose 2,750 to 361,250.

While claims rose last week, they were still at levels economists normally associate with average monthly job gains of more than 150,000. That helped ease concerns of a deterioration in labor market conditions after nonfarm payrolls posted their smallest increase in nine months in March.

“Labor market conditions still appear to be grinding forward, but pushing against the weight of a slowing economy and subdued confidence,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan.


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$MS Reverses Bullish Position, Calls for Japan’s Topix to Fall 10%

“Morgan Stanley, previously the most bullish brokerage on Japanese stocks, says the Topix Index (TPX) will fall about 10 percent as investors await corporate earnings and progress on promised economic reforms.

Japan’s broadest equity measure may fall to 1,020 “in the near term,” according to Morgan Stanley which in March had a year-end estimate for the Topix of 1,270, the highest among brokerages and asset managers surveyed by Bloomberg News. The company isn’t changing its outlook even as others including Nomura Holdings Inc. (8604) and Goldman Sachs Group Inc. (GS) raise their forecasts, Jonathan Garner, Hong Kong-based chief strategist for Asia andemerging markets, said by phone….”

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$GS and $BAC Discard Calls for a 2013 Recovery

“Back in 2010, Goldman’s Jan Hatzius, fresh on the heels of QE2, committed rookie Economist mistake 101, and mistook a centrally-planned market response to what then was a record liquidity infusion, for an improvement in the economy (a move we appropriately mocked at the time, as it was quite clear that the Fed’s intervention meant the economy was getting worse not better). It took him about 4 months to realize the folly of his ways and realize no recovery for the US or anyone else was on the horizon. He then wised up for a couple of years until some time in December he did the very same mistake again, and once again jumped the shark, forecasting an improvement to the US economy in 2013, albeit in the second half (after all nobody want to predict an improvement in the immediate future: they will be proven wrong very soon) based on consumer strength when in reality the only “reaction function” was that of the market to the Fed’s QE4 (or is it 5, and does it even matter any more?). Four months later we get this…

A Consumption Setback


Coming into this year, we expected a notable slowdown in real personal consumption expenditures (PCE) from around 2% in 2012 to a 1% (annualized) pace in the first quarter of 2013. The main reason was the hit to disposable income resulting from the 2-point increase in payroll taxes that took effect in January. Based on our statistical analysis of the effects of past shocks to disposable income, we thought that the tax increase would deliver a sizable, front-loaded hit to spending. Such a front-loaded hit also seemed plausible intuitively. After all, lower- and middle-income consumers–many of whom seem to spend their income on a pay-as-you-go basis and should therefore respond quickly to a shock–saw a reduction in their disposable income of up to 2%.


This forecast was too pessimistic. Our current estimate is that real PCE grew 2-1/2% (annualized) in the first quarter, which would be the strongest quarter in two years. While this estimate is based on incomplete data for March and the January/February data are subject to revision, the basic thrust is unlikely to change at this point in the quarter. We have therefore been wondering whether we have already moved “over the hump” of fiscal contraction, at least as far as the consumer is concerned.


But the recent data suggest that the answer is no:


1. Weaker tracking. The March retail sales report showed a drop in “core” sales (excluding autos, building materials, and gasoline) to a level below the first-quarter average. If core retail spending through the quarter (that is, June vs. March) grows at the 2% pace seen over the prior year, quarterly average growth in core spending as well as real PCE (that is, the Q2 average vs. the Q1 average) could be as low as 1%. Admittedly, the retail sales data can be noisy and the weak March reading might have been influenced by seasonal adjustment distortions related to the timing of Easter and/or the relatively poor weather. But we do need a significant rebound in the pace of growth over the next few months to avoid a meaningful deceleration in Q2.


2. Weaker confidence. The weaker data are not confined to the retail sales release. Consumer sentiment according to the University of Michigan also took a dive in early April. To be sure, the preliminary Michigan reading is based on a small sample of households and other surveys such as the daily Rasmussen Reports series do not show a meaningful decline. But we would put a bit of weight on the Michigan reading given its relatively good historical performance as a coincident indicator of spending.


3. Lower saving rate. According to the February personal income and spending release, the personal saving rate currently stands at 2.6%. Except for the January 2013 reading, which was artificially depressed by tax-related income shifting between 2012 and 2013, this is the lowest number since late 2007. As shown in Exhibit 1, it is nearly 1 percentage point below our estimated equilibrium, which is based on a model using household wealth, bank lending standards, and labor market conditions. If this model is correct, we might see upward pressure on saving and correspondingly weaker growth in spending over the next couple of quarters.


Exhibit 1: Savings Rate Below Equilibrium

In our view, the most plausible interpretation of the weaker data is a delayed negative impact from the tax hike. Although we find a front-loaded impact more intuitive given the concentration of the hit among pay-as-you-go consumers, some of the models we estimated–specifically those using the Romer-Romer measure of tax shocks–do show a significant amount of back-loading. The low saving rate also points in that direction…..”

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$GS Sees Another 9% of Upside for the S&P 500

“With all the uncertainty out there about theFederal Reserve, fiscal policy, Europeand North Korea, one would think it’s hard enough to give an equity forecast for the end of this year. But the gang at Goldman is taking a stab at predicting market returnsuntil 2016.

The global equity team at the elite Wall Street firm sees 9 percent annual total returns for the S&P 500 ahead, pushing the index up 20 percent to 1900 by the end of 2015. They see even bigger returns for Japan, Europe and the rest of Asia.

Gains will be “driven by strong earnings growth supplemented by a good dividend yield and some expansion in multiples,” states the strategy paper. The forecasts rely “upon our economists’ scenario for future economic activity and the tools for modeling earnings and discount rates that have so far been important inputs for setting our 12-month index targets.” (Read More: You Must Understand This About Yield)

The firm sees 21 percent annual returns in the Asia ex-Japan region over the next three years, followed by 19 percent a year in Europe and 15 percent annual gains in Japan….”

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Bearish Views on the Economy are Slowly Turning Bullish

“Bearish forecasts for the U.S. economy are giving way to more upbeat views of the nation’s ability to weather federal spending cuts and tax increases.

At Morgan Stanley in New York, Chief U.S. Economist Vincent Reinhart now sees a 3 percent pace of growth in the first quarter, up from 0.8 percent in December. JPMorgan Chase & Co.’s Bruce Kasman raised his forecast to 3.3 percent from 1 percent.

“What happened at the beginning of the year was a genuine surprise in terms of how well the economy held up,” Kasman, the firm’s New York-based chief economist, said in an April 5 conference call.

Gross domestic product probably climbed at a 3 percent annualized rate from January through March, according to the median forecast in a Bloomberg survey of 69 economists from April 5 to April 9. That’s up from the 2 percent gain projected last month and 1.6 percent in December.

Consumers overcame a 2 percentage-point increase in the payroll tax and higher gasoline prices to spend at the fastest pace in two years, the survey shows. The pickup, combined with sustained gains in housing and business investment, will help propel the expansion through the worst of the automatic government cuts that are projected to take effect this quarter.

“We are surprised that there wasn’t a bigger and more immediate hit to spending” by consumers, said Reinhart. “There is an underlying momentum in spending, which means that sequestration and the tax increase will only lead to a momentary pause.” …”

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IMF Lowers U.S. Growth Outlook

“The International Monetary Fund lowered its forecast for U.S. growth as automatic budget cuts take hold, according to a draft of the Washington-based lender’s World Economic Outlook.

U.S. gross domestic product will expand 1.7 percent this year compared with a previously forecast 2 percent advance, according to the draft report obtained by Bloomberg News. The draft, which was presented to the IMF board last week, may be subject to revisions before its scheduled April 16 release.

The U.S.’s fiscal tightening that took effect last month will restrain consumption temporarily, the report said. The global economy will expand 3.4 percent this year, compared with 3.5 percent forecast in January, according to projections in the report….”

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$GS Expects Japan’s Market to Rally Another 20%


“In further evidence of growing exuberance over prospects for Japanese stocks, U.S. investment bank Goldman Sachs late Thursday upgraded its 12-month target for both Japanese benchmarks – the Nikkei and Topix – on expectations of bumper earnings growth.

It increased its target for Nikkei to 16,000 from 15,000 and for the Topix to 1,350 from 1,250 earlier, which marks a near 20 percent upside from current levels.

“Last week’s announcement by [Bank of Japan] Governor Haruhiko Kuroda was the most credible attack on deflation that Japan has seen in a very long time, there’s prospect for Japan to exit this liquidity trap and get its domestic economy back on its feet,” Kathy Mitsui, chief Japan strategist at Goldman Sachs told CNBC on Friday.

For the Topix, Mitsui forecasts earnings per share growth of 54 percent in the fiscal year ending March 31, 2014 and 23 percent in following year, driven by expectations of stronger gross domestic product (GDP) growth in the world’s third largest economy and continued weakness in the yen. The bank expects the yen to weaken to 105 against the U.S. dollar by the end of the year, and to 110 in 2014.

Gains in the Topix – which has risen almost 60 percent since mid-November when Prime Minister Shinzo Abe unveiled in his bold election campaign to boost the economy with expansionary fiscal and monetary policies – have largely be driven by foreign investor inflows. Japan’s equity markets have seen $60 billion in foreign inflows over this period, which has also pushed the Nikkei up over 55 percent.

And, while this will continue to be a major force for the country’s stocks, Mitsui said, there is also potential for domestic retail investors to increase their participation in the market.

(Read MoreUniqlo Shrugs Off Row, Picks China for Biggest Store)

“Retail investors are gradually beginning to sniff around looking at higher yielding names. There is going to be a time when some domestic money, particularly retail and mutual fund money begins to trickle in again,” she said.

Betting on Consumption…”


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Pimco’s Australian Division Sees Longer Term Upside in Bonds and the Aussie Dollar

“Australian government bonds are poised to extend the best rally among top-rated nations as local policy makers cut interest rates in response to global monetary easing, according to Pacific Investment Management Co.

“Hyperactive monetary policies underway across the vast majority of the developed world” will keep the Australian dollar strong, Robert Mead, head of portfolio management at Pimco’s Sydney office, said at the Bloomberg Australia Economic Summit this week. “The escape valve becomes monetary policy once again and that probably starts to show up sooner rather than later.”

The country’s 10-year yields fell 31 basis points over the past month to 3.31 percent, the biggest drop among 10 sovereign markets with AAA scores from all three major ratings companies. The notes offer more than twice the average for top-rated peers even after the yield plunged 2.3 percentage points in two years.

The Aussie dollar reached a 28-year trade-weighted high this week after the Bank of Japan (8301) surprised forecasters on April 4 by doubling monthly bond purchases to almost match the Federal Reserve’s extraordinary monetary easing. The erosion in export earnings, along with a slowdown in China, will damp Australia’s economy and pressure the Reserve Bank to cut rates to a record, according to Pimco, which runs the world’s biggest bond fund.

28-Year High….”

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