ECB To Propose $58B in Monthly Bond Buys

Market Snapshot*
Friday, January 23, 2015
DJIA
17672.6
-141.37
Nasdaq
4757.88
+7.48
S&P 500
2051.82
-11.32
10-Year
1.8193%
22/32
30-Year
2.3981%
1 21/32
Euro
$1.12095
-0.0149
$45.59
-0.71
Nymex Crude
Source: SIX Telekurs, ICAP plc
Stocks
U.S. stocks finished mixed, with the
Nasdaq Composite rising and the Dow
Jones Industrial Average and the S&P
500 giving up some ground after four
sessions of gains that lifted the S&P 500
to its highest close of the year. The
retreat came a day after U.S. stocks
surged following the European Central
Bank's announcement it would buy 60
billion euro ($68 billion) of bonds a
month in an effort to revive the region's
stagnant growth and low inflation.
Treasurys
Government bond yields on both sides of
the Atlantic tumbled to historic lows on
Friday, the latest ripple from Thursday's
decision by the European Central Bank
to support economic growth with a monetary stimulus plan. The 10-year yields in
Germany, France, Belgium, Finland,
Austria, the Netherlands, Spain, Italy,
Ireland and Portugal all fell to record
lows, extending the declines of the past
months.
Forex
The European Central Bank has ignited
every corner of the region's markets. The
euro, having on Thursday notched its
biggest one-day loss against the dollar
since November 2011, sank further to
$1.115--its lowest level since August
2003. That should be welcome news to
the ECB; a weaker currency pumps up
the price of imports, which supports inflation, and makes exports more attractive
abroad.
*preliminary values subject to adjustments
Tomorrow’s Headlines
Existing-Home Sales Rebound In December
Sales of previously owned homes rebounded somewhat in December, a solid
end to a largely lackluster year for the U.S. housing market.
Existing-home sales rose 2.4% last month from November to a seasonally adjusted annual rate of 5.04 million, the National Association of Realtors said Friday.
Sales for November were revised slightly lower, to a 4.92 million pace from an
earlier estimate of 4.93 million, down from a 5.25 million sales rate in October.
Economists surveyed by The Wall Street Journal had expected December
sales would rise to a level of 5.08 million.
“Homes are still selling a bit more quickly than a year ago—but overall, the
market is moving sideways,” Pantheon Macroeconomics chief economist Ian
Shepherdson said in a note to clients.
Sales in December were up 3.5% from the same month a year earlier. For all of
2014, though, existing-home sales totaled 4.93 million, down 3.1% from 2013.
McDonald’s Reports Disappointing Results
McDonald’s Corp. warned that sales and profits will remain under pressure for
the next several months as it reported a 21% drop in earnings for the latest
quarter, rounding out a dismal year for the fast-food chain that prompted core
changes to its business.
The world’s largest restaurant chain by revenue has struggled with weak sales
in all major markets, most notably the U.S., amid changing consumer tastes
and other hurdles. In the fourth quarter, customer traffic fell in Asia, Europe
and the U.S.
“2014 was a challenging year for McDonald’s around the world,” Chief
Executive Don Thompson said in a news release. “As we begin 2015, we are
taking decisive action to regain momentum in sales, guest counts and market
share.” But, he added, “our business continues to face meaningful headwinds.”
The results also offered a smidgen of positive news, as McDonald’s logged its
first monthly increase in same-store sales in the U.S. in more than a year. A
key metric for the industry, sales at McDonald’s locations that have been open
at least 13 months rose 0.4% in the U.S. in December.
Commodities
Oil prices slipped Friday as investors bet
that a change in Saudi Arabia's leadership was unlikely to alter the kingdom's
oil-market policy. The U.S. oil benchmark, which had risen as much as 3.1%
in overnight trading, turned negative during the morning session, down 21 cents,
or 0.4%, at $46.10 a barrel on the New
York Mercantile Exchange.
Seasonal Expenses Dent UPS Results
United Parcel Service Inc. said higher-than-expected seasonal expenses
dragged down its earnings in the fourth quarter as the shipping giant took
steps to avoid a repeat of the holiday shipping snafus that plagued its network
in 2013.
continued on page 2
Monday’s Calendar
10:30 a.m.
Jan Texas Manufacturing Outlook Survey Business Activity Index
(previous 4.1), Manufacturing Production Index (previous 15.8)
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page 1
Friday, January 23, 2015 4 p.m. ET
Tomorrow’s Headlines
The Sunni monarchies of the Persian Gulf commended
Abdullah in defending the cause of the “Muslim nation” and
said the Arab world had lost an “outstanding” statesman,
according to statements on national news agencies.
continued
Chief Financial Officer Kurt Huehn said the extra capacity
UPS added was necessary to handle the high volume on
the days just before Christmas. But demand was less than
expected on other days. That resulted in a decline in productivity, increased contract carrier rates and costs tied to
overtime and training hours.
Shares dropped 10% in early trading on his comments,
also weighing on rival FedEx Corp., which declined more
than 2%. FedEx sought to reassure its investors in the
wake of UPS’ warning by affirming its outlook for the year
ending in May.
After millions of packages were delivered late during the
Christmas season in 2013 thanks to bad weather and lastminute surges in online shopping, both UPS and FedEx
sought to upgrade their networks to handle higher volumes.
In addition to hiring more people, UPS spent about $500
million on projects including automated sorting systems to
rapidly identify ZIP Codes and swiftly reroute packages in
the event of bad weather. And FedEx accelerated delivery
by at least one day in more than two-thirds of the U.S. and
introduced a new reporting system to help with delivery
planning.
GE To Feel Oil Drop’s Ripple Effect
Flags were ordered to be flown at half mast across Gulf
government ministries and days of mourning were called
across the Middle East.
“The world has lost one of its great men,” Kuwait’s emir,
Sheikh Sabah Al-Ahmad Al-Jaber al-Sabah, said in a statement on the country’s national news agency.
Abdullah died early Friday at about age 90. Abdullah’s halfbrother, Crown Prince Salman, who is 79 years old, was
declared king and Prince Muqrin, 69, became crown prince,
according to a statement read on Saudi state television.
In-Flight Catalog SkyMall
Files for Bankruptcy
The company behind the in-flight catalog SkyMall filed for
bankruptcy protection, a victim of evolving rules and technology that now lets airline passengers keep their smartphones and tablets powered up during flight.
After 25 years selling quirky products like a Dark Vader
toaster or a paper towel holder with USB ports, SkyMall
LLC is seeking a court supervised sale of its assets,
according to papers filed Thursday with the U.S.
Bankruptcy Court in Phoenix.
General Electric Co.’s oil and gas business managed to
blunt the hit from plunging prices of crude but the company
is braced for deepening trouble in the year ahead.
“We are extremely disappointed in this result and are hopeful that SkyMall and the iconic “SkyMall” brand find a home
to continue to operate,” acting Chief Executive Scott Wiley
said in a statement Friday.
In the final three months of 2014, orders fell 10% in GE’s oil
and gas business, including a 72% decline in requests for
such drilling equipment as blowout preventers. The company said it hasn’t yet had to negotiate lower prices for its
backlog of orders. But customers are starting to call, as
they look to curtail projects, lay off workers and trim costs.
The company, which started in 1989, fully suspended its
retail catalog operation Jan. 16, and also laid off 47
employees, according to court papers. SkyMall’s parent
company Xhibit Corp., which acquired the business in
2013, is also seeking Chapter 11 protection.
“That’s to come in 2015,” Chief Financial Officer Jeff
Bornstein said.
For the past decade, GE Chief Executive Jeff Immelt has
built up a sizable oil and gas operation, which accounted for
about 17% of its industrial revenue last year. Plunging oil
prices have led GE executives to warn of a drop in both revenues and profits this year at the formerly fast-growing unit.
Mr. Immelt said he had received some initial letters about the
pricing of previously booked orders for GE’s roster of equipment for land-based and offshore oil exploration and production, though so far the company hasn’t faced an onslaught of
demands for a drop in prices. “This is early days,” he said.
Middle East Leaders Mourn
Death of Saudi King
Middle East leaders offered their condolences on Friday to
Saudi Arabia’s ruling family on the death of Abdullah bin
Abdulaziz al Saud, praising the late king as a “wise leader”
who dedicated his life to his country.
Mr. Wiley cited a “crowded, rapidly evolving and intensely
competitive” retail environment as the reason for the quarterly publication’s recent struggles. “With the increased use
of electronic devices on planes, fewer people browsed the
SkyMall in-flight catalog,” he said.
Box Shares Surge in Market Debut
Shares of Box Inc. rose as much as 77% in their market
debut Friday on the belief that the company can grow
beyond the commodity business of online storage and into
a more lucrative suite of tools tailored for industries such as
health care and retail.
The stock—which trades under the symbol BOX—opened
at $20.20 on the New York Stock Exchange, rose as high
as $24.73 and recently traded at $23.40, up 67% from its
initial public offering price of $14. Box sold 12.5 million
shares at the $14 IPO price, which was above the expected
price range of $11 to $13.
The pricing pegged Box’s market capitalization at roughly
$1.6 billion and raised $175 million in proceeds that will
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continued on page 3
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Friday, January 23, 2015 4 p.m. ET
Tomorrow’s Headlines
continued
help the company support a high-cost business model
dependent on sales and marketing.
Friday’s stock-market debut comes roughly 10 months after
the company publicly filed for an IPO. Those plans were
postponed amid tepid demand for cloud-computing stocks,
and in the ensuing months it turned to the private market to
raise additional funding.
Box’s success as a public company will hinge on its ability to
differentiate its offering amid increasing competition from tech
giants like Microsoft Corp. and Amazon.com Inc., who have
used their heft to offer online storage at ever-lower prices.
Honeywell Results Narrowly
Top Expectations
Honeywell International Inc. said its earnings edged up in
the fourth quarter on a lower tax expense, though the
industrial manufacturer again said it is taking a cautious
outlook on the global economy.
Results narrowly topped expectations, sending shares up
2% in premarket trading.
Despite tepid recovery in the global economy, Honeywell
has seen growth in recent quarters. Honeywell’s businesses include aviation components, chemicals, and automation
and control systems.
Last month, however, Honeywell provided a muted revenue
outlook for 2015, saying it expects only modest economic
growth. Meanwhile, the industrial conglomerate has been
on the lookout for acquisitions.
Honeywell said last year that it plans to spend $10 billion
on strategic acquisitions that would contribute about $5 billion to $8 billion in sales over the next five years.
Kimberly-Clark Posts Loss,
Warns On Currency Hit
Kimberly-Clark Corp. swung to a loss in its fourth quarter
and gave a disappointing outlook for 2015 as the consumer
goods company struggles with currency volatility and
increased competition in its diapers segment.
Kimberly-Clark said it expects to post per-share earnings of
$5.60 a share to $5.80 a share for the year, below Wall
Street expectations for $6 a share. The company forecast a
negative impact from foreign currency of 8% to 9%.
The maker of Huggies diapers has struggled in recent
quarters as parents have skewed to the high and low ends
of the price spectrum. The trend has played into the hands
of rival Procter & Gamble Co., whose premium Pampers
and low-end Luvs are gaining share.
Kimberly-Clark is also facing new competition from P&G’s
adult incontinence products and Japan’s Unicharm Corp.,
which is starting to sell pull-up diapers in Brazil. Both threaten Kimberly-Clark’s leading positions in the segments.
Overall, Kimberly-Clark posted a loss of $83 million, or 22
cents a share, compared with a profit of $539 million, or
$1.40 a share, a year earlier. The quarter included a $462
million charge related to the remeasurement of Venezeula’s
currency. Excluding the charge and other items, per-share
earnings from continuing operations were $1.35.
Anheuser-Busch Buys
Seattle-Based Elysian Brewing
Anheuser-Busch InBev NV said Friday it is acquiring
Seattle-based Elysian Brewing Co. It is the fourth craft
brewery acquisition by the world’s largest beer company in
the last five years.
Terms weren’t disclosed.
Elysian is one of the Pacific Northwest region’s fastestgrowing brewers. It went from selling about 5,000 barrels to
50,000 barrels in five years, according to the Brewers
Association, which represents craft brewers. AB InBev said
Elysian’s flagship Immortal IPA accounted for more than a
quarter of that volume.
Recent brewery acquisitions have priced craft brewers at
more than $1,000 a barrel. The majority of the more than
3,000 craft brewers in the U.S. remain privately owned.
AB InBev said it expects to close on the deal by the end of
the first quarter. In addition to the brewery, AB InBev also is
acquiring the company’s four Seattle brewpubs.
Moody’s Cuts Atlantic City
Ratings Deeper Into Junk
Moody’s Investors Service has downgraded Atlantic City’s
credit ratings deeper into junk territory, citing the gambling
mecca’s millions in debt and high likelihood of default within
the next five years.
The firm cut the city’s rating several notches to Caa1 with a
negative outlook from Ba1, after it had started reviewing the
New Jersey city in anticipation of a downgrade in
December.
The downgrade comes as casino closures hurt revenue in
the city. Last year, four out of 12 casinos closed, as customers opted for destinations such as nearby New York.
Together, the establishments—Atlantic Club Casino Hotel,
Trump Plaza, Revel Casino Hotel and Showboat Casino—
generated $75 million in property tax yearly. A fifth casino,
Taj Mahal, is now in bankruptcy.
In August, Mayor Don Guardian said Atlantic City would
have to cut hundreds of employees and slash the city
budget to make up for the losses. The city also is proposing
a 29% property-tax increase for homeowners. The jobless
rate, at 13% and likely to rise, already is more than twice
the U.S. rate of 6.2%.
Just this week, New Jersey Governor Chris Christie
appointed a team, including Detroit emergency manager
Kevyn Orr, to help turn around the struggling city. They will
consider debt restructuring, which could involve a loss to
bondholders.
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page 3
Friday, January 23, 2015 4 p.m. ET
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Equities Week Ahead
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No Change Seen In Fed Policy Statement
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The Fed meets on Tuesday and Wednesday, with a policy statement scheduled
for release Wednesday afternoon.
Economists generally do not expect any change in monetary policy. What will
interest Fed-watchers will be any change in wording, especially to the phrases
“considerable time” and the Fed “can be patient.”
Durable Goods Orders Seen Weak
Before Fed officials meet on Tuesday, the Commerce Department will report on
the durable goods sector. Economists surveyed by the Wall Street Journal
expect new orders for durables edged up just 0.3% in December, after falling
0.9% in November.
4Q GDP Growth Seen Slowing
The first look at fourth-quarter gross domestic product arrives on Friday. The
median forecast expects real GDP grew at an annual rate of a sturdy 3.3%.
Falling gasoline prices probably freed up money that consumers spent elsewhere. The global slowdown, however, probably dented growth in exports.
Money Week Ahead: Where Will Euro Slide End?
Rip up your euro forecasts.
A day after the European Central Bank unveiled its bond-buying program, the
single currency was still in free fall, blowing past analysts’ expectations for how
low the euro can go.
Some investors now say the euro could fall to the point where it is on equal
footing with the U.S. dollar for the first time since it climbed above the buck in
late 2002.
“If you would have asked me a few months ago, I would’ve said that parity could
be in the cards in the years ahead. Now, we can’t rule it out anymore even by
the end of this year,” said Thomas Kressin, head of European foreign exchange
at Pacific Investment Management Co., or Pimco, which has $1.68 trillion under
management.
On Friday, the euro fell 0.8% against the dollar, to $1.1260, on top of a 2.1%
slide the day before. It is now down about 7% against the dollar since the turn of
the year and is at its lowest point in 11 years.
Morgan Stanley cut its estimate of where the euro will end 2015 to $1.05 from
$1.12 previously. Bank of America Merrill Lynch sees the euro now falling to
$1.10 by the end of the year, from $1.20 in an earlier forecast, while HSBC
Holdings PLC analysts cut their year-end expectation to $1.09 from $1.15.
The downgrades have echoed Wall Street’s failure to predict outsize pullbacks
over the past year in global government-bond yields and oil prices. Those
declines have increased investor unease over the risks facing the global
economy.
Under the bond-buying program, known as quantitative easing, central banks
create new bank reserves to buy assets from financial institutions. Central
banks get bonds, and banks get money that they can in turn use to extend new
credit to households and businesses. Such expansionary monetary policies
usually weaken an economy’s currency in part because lower interest rates
make a currency less attractive to hold. In turn, a weaker currency makes
exported goods more competitive overseas, which could benefit Germany’s
export-driven economy.
continued on page 5
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page 4
Friday, January 23, 2015 4 p.m. ET
Equities Week Ahead
continued
The euro has held to a relatively lofty level in recent years,
peaking at $1.60 in 2008 and trading close to $1.40 as
recently as last May, in part because the ECB arrived late
to the world of quantitative easing. The Federal Reserve,
Bank of Japan and the Bank of England, meanwhile, have
implemented stimulus efforts. The ECB’s bond-buying
plan—to the tune of 60 billion euro ($68 billion) a month
until at least September 2016—combined with record-low
interest rates is meant to spur growth and stoke inflation.
“The ECB has effectively said this will go on until we see a
significant adjustment in the path of inflation. That tells us
[quantitative easing] is going to be with us for quite some
time,” said Nick Gartside, chief investment officer for fixed
income at J.P. Morgan Asset Management, which oversees
$1.7 trillion of assets.
The flood of easy money and the fact that some central
banks are charging banks to hold overnight deposits “will
make sure capital continues to be pushed out of the euro
area,” said Pimco’s Mr. Kressin, who is betting the euro will
continue to weaken against the dollar. This combination
means the euro “is a hot potato that everyone tries to get
rid of,” he said.
The ECB’s asset-purchase program aligns the eurozone’s
monetary policy more closely with Japan’s against that of
the U.S. In October, the Fed closed down its large-scale
asset-purchase program and is moving closer toward raising interest rates. Many Fed officials have signaled they
expect to stick broadly to their plan to start lifting their
benchmark short-term rate from near zero around the middle of the year.
Investors predict the euro will fall faster against the greenback than the yen in the near term because it has more
pressing factors driving it lower.
“The euro area stands to be a winner of the currency wars
in 2015,” said Jonathan Baltora, inflation-linked bonds fund
manager at AXA Investment Management, which oversees
607 billion euro of assets, referring to the possibility that a
weaker currency would make European goods cheaper
than those produced in Japan and elsewhere.
U.S. Bank Wealth Management, which manages $126 billion, said the falling euro is causing eurozone sovereign
bonds to lose their allure. U.S. Bank has positions in almost
all eurozone sovereign bonds. But the low yields and dim
prospects for the euro have the asset manager considering
reducing them, particularly in German bunds, said Jennifer
Vail, its head of fixed-income research.
“We have projections for the currency and balance them
with projections for the debt,” Ms. Vail said. “Add a weak
euro, and it’s not attractive a bet at all...the market needs to
get its head around the implications [of the ECB’s move].
The euro definitely has more room to fall.”
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page 5