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Daily Intelligence Briefing – January 30, 2017

Featured Topic: Coffee

  • Coffee – Brazil Drought Deja Vu Makes Coffee 2017’s Commodity Winner
  • Coffee – Coffee Prices Supported by Reduced Production Expectations
  • Coffee – The Looming Coffee Shortage
  • Coffee – Hefty price rises will leave bitter taste for coffee fans
  • Coffee – The Price of Bad Coffee Is Going Up

THEME RELEVANCE: Unusual climate and weather disruptions in coffee-producing regions coupled with strong demand coming from India and China support higher coffee prices. Furthermore, coffee has a biennial bearing cycle where it alternates between lower and higher crop yields. Starting in May of this year the coffee production cycle will shift from the higher yielding year to the lower. This supports MRP’s recommendation to be Long Coffee.

Other Highlights:

  • Markets:
    • Bonds – China’s Bond Market Has a Forgery Problem
    • Bonds – A Default in China Spreads Anxiety Among Investors
    • Brazil Stocks – Brazilian markets flying high over economic reality
    • U.S. Stocks – Trump trade picks up speed in president’s first week
    • U.S. Stocks – Trump Tax Fears: Wal-Mart, Target, Macy’s Hit New Lows
    • U.S. Stocks – Planes – Airline Stocks Tumble On Fears Capacity May Creep Back Up
    • U.S. Stocks – How Smart Money Can Survive Trump Era, as Seen From Sweden
    • IPOs – Snap Seen Publicly Filing IPO Late Next Week
    • Volatility – Markets’ Postelection Calm Is Eerie and Historic
  • Politics and Policy:
    • U.S. Immigration – CEOs Face Uneasy Test of Doing Business Under Trump
    • U.S. Immigration – U.S. judges limit Trump immigration order; some officials ignore rulings
    • U.S Trade – Koch network launches effort to kill Republican border tax plan
  • Monetary Policy:
    • BoJ – Japan Central Bank to Weigh Unpredictable Factor at Meeting: Trump
  • Finance:
    • M&A – Big Chinese Deals Stall on Capital-Outflows Clampdown
    • Corporate Finance – Back to zero: Companies use 1970s budget tool to cut costs as they hunt for growth
  • Real Estate:
    • HK – Mainland firms expand property footprint in Hong Kong, set to fuel price rises
  • Labor & Demographics:
    • U.S. Education – The Future of College Enrollment Runs Through … Kentucky?
  • Services:
    • Fireworks – Beijing makes ‘no fireworks’ plea amid smog concerns
    • Gaming – Bigger Than Vegas: Japan’s Pachinko Market Dwarfs the Strip
  • Technology:
    • Internet – What Happens If Net Neutrality Goes Away?
    • Mobiles – Apple iPhone Loses No. 1 Position In China Smartphone Market
  • Transportation: 
    • Planes – Trump bump fuels private jet business
    • EVs – Black cab maker targets capitals of Europe for fresh sales of new hybrid-electric taxi
    • Logistics – ‘Delivery bots’ ready to deploy across US capital
  • Commodities:
    • Oil – Oil extends decline as rising U.S. output weighs
    • Coca – Colombian government and rebels announce cocaine crop plan
  • Energy & Environment:
    • Energy Storage – India’s First Grid-Scale Battery Project Signals a Coming Boom for Energy Storage
  • Biotech:
    • Antibiotic Resistance – Superbug infections found in Chinese hospitals, medical journal study finds  SCMP
  • Endnote:
    • Sugar Futures – This Is How Much Americans Pay for Sugar Protectionism: Chart

About the DIBs: MRP focuses on identifying transformational change in the global economy and offering an investment thesis whenever an opportunity arises that has not yet been recognized by the market. The DIBs are MRP’s compilation of articles and data from multiple sources on subjects reflecting disruptive change that have potential investment implications for an industry or group of securities. We share these with our clients who may already have or may be considering exposure in the industries affected. The subjects change daily and constitute an excellent update on featured topics. Every day, the DIBs also include links to MRP’s MARKET VIEWPOINT, THEME TRACKER and MACRO MONITOR. On many days, the DIBS will also include NEW DATA & THEME DEVELOPMENTS for active themes.

   MAJOR DATA POINTS Top   

United States: Pending Home Sales MoM: 1.6% from prior -2.5%
Unites States: Pending Home Sales YoY: 0.3% from prior -0.4%
United States: Core PCE Price Index MoM: 0.1% from prior 0.0%
United States: Core PCE Price Index YoY: 1.7% from prior 1.7%
United States: PCE Price Index MoM: 0.2% from prior 0.1%
Unites States: PCE Price Index YoY: 1.6% from prior 1.4%

   MARKETS Top   

Bonds – China’s Bond Market Has a Forgery Problem

Forged seals, fake letters, and counterfeit documents. They’re all part of a recent spate of fraud in China that’s added to worries about the country’s $3 trillion corporate bond market, where defaults have been rising and companies are finding it increasingly difficult to sell debt issues…

To legally skirt rules limiting bond holdings or leverage, brokerages and institutional investors can entrust their bonds to a third party and agree to buy them back later. That frees up funds they can use to purchase even more bonds…

The bond market is under pressure in other ways. At least 29 bonds defaulted in 2016, up from seven in 2015. At least 117.5 billion yuan of sales were canceled or postponed in December, almost quadruple the amount in November, according to data compiled by Bloomberg. Meanwhile, an index of government bonds plunged 1.7 percent in December, the biggest monthly decline since October 2013. Investors were selling in response to signs of tighter monetary policy and in many cases trying to unwind leveraged positions. B

Bonds – A Default in China Spreads Anxiety Among Investors

A Chinese phone maker’s failure to repay around $166 million in bonds has rippled through the world’s largest internet investment marketplace, hitting investors who hadn’t even bought the securities.  The default, by phone maker Cosun Group, is one of the most high-profile failures to hit China’s sprawling network of Internet-based financial firms. It is an embarrassment to Alibaba Group Holding Ltd. because its affiliate Ant Financial Services Group owns the investment marketplace where the bonds were sold, and illustrates a rising risk in China, where hundreds of millions of people seeking higher returns on their savings have used their mobile phones to buy risky, unregulated investments…

Such cases, which some government officials warn will become more common in the internet financial industry because regulation hasn’t kept up with practice. WSJhttps://si.wsj.net/public/resources/images/OJ-AU789_CANT1_9U_20170126235408.jpg *

Brazil Stocks – Brazilian markets flying high over economic reality

The rebound in Brazil’s economy that many expected following last year’s change of government has failed to materialise. GDP will grow just 0.5 per cent this year according to a central bank survey. In per capita terms, that means another 12 months of contraction after headline negative growth of about 8 per cent over the past two years…

Not that investors are deterred. The Bovespa equities index is up more than 9 per cent this year, while the currency has gained about 3.5 per cent against the dollar… Companies had no reason to invest, he said, household income had fallen and for the millions who had lost their jobs, collapsed and the government had embarked on a long-term path of reform and fiscal contraction…

Much of the rally, too, has been driven by the recent recovery in commodities prices. Some 20 per cent of the Bovespa equities index is made up of shares in Petrobras, the state-owned oil company, and Vale, the miner. FT

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U.S. Stocks – Trump trade picks up speed in president’s first week

Donald Trump’s first week as US president has re-energised Wall Street bulls while sharpening concern about the risk of higher inflation and trade protectionism.  The sense of fatigue that hung over much of January has been replaced by renewed enthusiasm for equities, as investors sent the S&P 500 to fresh highs and the Dow Jones Industrial Average finally broke above the 20,000 threshold…

As the billionaire took office this week, there was strong appetite for details on whether and how the administration would make good on pledges made during the campaign. Markets did not need to wait long. On Tuesday, Mr Trump backed two contentious oil pipeline projects, which was enough to bolster confidence that the newly installed government would move quickly…

However, the Trump trade reflecting hopes of tax cuts, higher infrastructure spending and an easing in business regulation that had dominated financial markets since November also underwent a subtle shift this week. While financial shares still shone, it was sectors that will benefit from infrastructure spending and cope with higher inflation that led the way. Up 3.4 per cent, the materials sector was the best performer on the S&P 500 with miners also seeing gains…

The S&P 500, for example, is trading at 17 times forward earnings. Some investors say a judgment on whether US equities are too expensive depends on how strong the current recovery in corporate earnings proves, and the degree to which it is eventually underpinned by any stimulus and tax cuts. FT

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U.S. Stocks – Trump Tax Fears: Wal-Mart, Target, Macy’s Hit New Lows

The retail stock swoon picked up on Friday after getting started late in the session on Thursday, when the White House appeared to offer the clearest sign yet that President Trump may embrace the House GOP border-tax plan that could sock retailers’ earnings…

According to the initial news reports on Thursday afternoon, White House press secretary Sean Spicer seemed to offer confirmation that Trump would adopt the House proposal for a 20% tax on imports. Spicer said that the wall Trump wants to build on the border with Mexico could be paid for with a 20% tax on imports from Mexico as part of the broad corporate tax reform package being developed…

Economists generally suggest that such fears are way overblown because appreciation of the dollar vs. other currencies should offset the 20% tax. Nevertheless, retailers that were hoping for a big boost to after-tax profits from tax reform are now giving off a sense of panic about how they may fare under the GOP plan. IBD

U.S. Stocks – Planes – Airline Stocks Tumble On Fears Capacity May Creep Back Up

American Airlines’ (AAL) hint that it may increase domestic capacity sent stocks in the industry tumbling Friday, just as signs began appearing that airlines have finally ended a two-year glut in flights and seats that have weighed on earnings.  In a research note, Stifel analyst Joseph DeNardi attributed the stock sell-off to “commentary from management that it ‘wouldn’t be shocked if we slightly toned down international and add a little bit to domestic (capacity).'”…

He added: “Following similar creep from Southwest yesterday, the messaging to investors is pretty poor (i.e. domestic RASM has finally turned positive – now let’s start adding capacity). While we appreciate that perspective and understand it’s based on reality given how 2015 played out, we’d be surprised if airlines make the same mistake again.”…

IBD’S TAKE: Higher fuel prices can help airlines operate more conservatively and pass costs onto consumers, annoying passengers but helping financials. But rising fuel costs, along with pay-raises or other deals struck with staff, are also likely to keep margins thinner this year. Margins could become more of a focus as the year progresses. IBD

U.S. Stocks – How Smart Money Can Survive Trump Era, as Seen From Sweden

Recent history suggests it doesn’t pay to expect the worst every time a political shock hits markets.  Michael Livijn, who as Nordea Bank AB’s chief investment strategist makes recommendations that guide about $100 billion, says don’t expect a bloodbath if elections in Europe this year unleash a populist wave like the one that propelled Donald Trump into the White House. That’s because crisis fatigue has led to increasingly rapid market reversals.  “It took the market three days to shake off Brexit, with Trump it took three hours, and the election in Italy three minutes,” Livijn said in an interview in Stockholm on Wednesday…

The next big date on Europe’s political calendar is March 15, when the Dutch vote in general elections. After that, it’s the turn of the euro zone’s second-biggest economy, as France holds the first round in presidential elections a month later…

In the U.S., Livijn says Trump’s infrastructure plans face several bureaucratic and practical hurdles.  “So don’t expect anything to happen this year, or next, or even the year after that,” he said. “There are no earmarked funds for infrastructure at this stage.”… Instead, he sees Trump’s agenda to reform taxes as something investors should take more seriously. That will be the “major thing,” he said. B

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IPOs – Snap Seen Publicly Filing IPO Late Next Week

Snap Inc., parent of messaging app Snapchat, will publicly release financial information and other data related to its upcoming initial public offering late next week, according to multiple media reports… Snap confidentially filed its IPO with the SEC last year. So this will be the first time that the company will have to give hard data about its size and growth…

Snap reportedly will look to raise up to $4 billion in its IPO. Snaps is eyeing a market valuation of $25 billion, though that could rise, Recode reported, which broke the news of Snap’s imminent public filing Friday evening. IBD

Volatility – Markets’ Postelection Calm Is Eerie and Historic

Stop me if you’ve heard this before: We may be experiencing the calm before the storm for markets.  By one measure, investors are remarkably complacent. Despite political upheaval in Washington, the CBOE Volatility Index, or VIX, is at its lowest level since 2014 and below all but 1% of readings in its history. From the Friday before the presidential election through Friday’s close, the so-called fear gauge has had its sharpest 12-week drop ever…

The problem with the VIX, which is derived from the prices paid for options expiring in a month, is that it is backward-looking and tends to fall during periods of rising stock prices such as the recent Trump rally. But this belies heightened regulatory, geopolitical and economic uncertainty one week into a new administration. Common sense dictates that insurance for a stock portfolio should at the very least be a bit pricier right now…

A low VIX isn’t in and of itself worrisome, but the “calm before the storm” idea has some basis in history. Some of the lowest historical VIX readings preceded sharp, unexpected stock selloffs such as the 2008 financial crisis and the 1994 interest rate scare. WSJ

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