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Monday, February 27th, 2017

Contributors: J.Price, C.Basinger, D.Benedet, C.Kerlow, D.Mak, S. Obata



We start a full week on a softer note after markets weakened overnight, particularly in Japan where the Nikkei dipped into negative territory on a year-to-date basis.  Results are mixed in Europe through the morning, while futures point to a flat start here.

Loonies are relatively calm, seeming to stay stable amid the equal forces of oil prices grinding higher and relative yields pulling it lower.  They have spent all of February in this very tight range just above 1.30 and are not breaking to new ground this morning.
As if the pound hasn’t gone through enough. First Brexit last year and now rumours circulating that the Scottish government wants to call a second independence referendum which will coincide with the triggering of Article 50. The pound is off against all major currencies this morning.

With plenty of data and more importantly President Trump addressing congress tomorrow, there will be plenty of news to influence the markets, and with markets at all-time highs it is all the more interesting to watch.  The Atlantic does ask a good question as to why the market is so calm in the face of the political chaos.  Given the massive uncertainty around Trump’s protectionist trade policies, in particular, it seems silly to look back and think as is so often written that “the market hates uncertainty”.

Jim Rogers, speaking on the Macro Voices podcast, does highlight the dichotomy of Trump.  Low tax, low regulation policy being great for companies, but the saber-rattling trade war policies potentially devastating.
Warren Buffett released the Berkshire Hathaway Annual Letter this weekend. In it he lauded the miraculous qualities of the U.S. economy.
On the race to autonomous cars, it looks like those in Silicon Valley, the early pioneers for the dream are now starting to fade. (Auto Blog)

Up until very recently the talk in Silicon Valley was about how the tech industry was going to broom Detroit into the dustbin of history. Companies such as Apple, Google, and Uber - so the thinking went -were going to out run, out gun, and out innovate the automakers. Today that talk is starting to fade. There's a dawning realization that maybe there's a good reason why the traditional car companies have been around for more than a century.

Diversion:  Netflix is winning.  Picking up the latest Martin Scorsese sure thing, The Irishman.  The Atlantic discusses the streaming startup’s win, but also asks why this seeming box-office lock would choose to skip the box office altogether.
Here is the clip of the Oscars announcement for La La Land Moonlight for for Best Picture from last night. It’s certainly cringe worthy. Apparently PWC put the wrong card in the envelope, they have since apologized.  


Berkshire Hathaway, the company run by billionaire investor Warner Buffet, has increased its stake in Apple. They now own 133mm shares or about $18bb worth. Blackstone and Prudential won an auction for $12.5bb in failed U.K. mortgages from the financial crisis. This is probably the last major sale of U.K. mortgages from great crisis and should free up hundreds of millions in capital for financial institutions in Europe. Saudi Aramco, which is soon to be the world’s largest publically traded company, is investing $7bb in a refining hub which is being developed by Maylasia’s Petrliam Nasional. Royal Bank of Canada is undergoing a strategic review of their Asian wealth division. They did not say if they are actively seeking a buyer but will be implementing new ideas, at the very least.


Oil is up 0.98% to $54.42. Prices are moving higher as money managers add to their already extended net long positions. Even so, oil remains within a range due to conflicting dynamics in the market. While the implementation of production cuts has been a positive, rising production elsewhere has been a negative…

Gold is down 0.16% to $1256.25. Prices are still near “the 3-1/2 month highs hit last week” as investors wait for direction from Donald Trump. The President will outline his plans for tax cuts, etc in an address to Congress on Tuesday.

In other commodities news…

Saudi Arabia's Oil Wealth Is About to Get a Reality Check” – BBG

With Shale Oil Production Like This, Who Needs Trump?” – BBG

Coal Industry Casts Itself as a Clean Energy Player” – NYT

China Said to Probe Speculation in Commodity Futures Rally” – BBG


Treasury bond yields are modestly higher to start the week with the 10 year at 2.35% and the long end just shy of the 3.00% threshold. Part of this is due to a slightly weaker than forecast U.S. durables number just released (more below), but also due somewhat to the expectation that we will see an interest rate hike from the FOMC on March 15. The latter currently has futures pricing in a 40.0% likelihood officials tighten policy in two weeks time during the live meeting. Fed minutes of their latest meeting noted that they can raise rates “fairly soon” if labor market and inflation data meet or exceed current expectations. But time and again (and as mentioned countless times in this section of the LaunchPad), officials have shown that they want to be sure investors are ready for an increase before it actually happens. Unexpected surprises can happen (just ask the Academy Awards) but should Chair Yellen telegraph we are go during her presser this Friday, expect yields to ramp up even further.
Orders for goods in the U.S. meant to last at least three years rose +1.8% during January, snapping back to back months of declining demand for capital goods. Despite the headline print besting expectations for a +1.6% increase, markets are viewing the details a tad more somberly. Core durables actually slipped by -0.2% last month to break six months of rising and/or flat demand. Transportation orders, which are far-flung and can be skewed monthly by a single large aircraft or train contract, rose 6.0% and accounted for majority of the headline gain. Bloomberg’s summary is showing that bookings for commercial aircraft rose by +69.9% in January, which overshadowed declines for electronics/computers (-1.6%), electrical equipment (-2.2%) and primary metals (-1.6%).
Crew Energy Inc. became the first Alberta-based E&P to issue a CAD denominated high yield bond in 2017. The $300 million raise of 2024 senior notes priced at +520.10 bps over Canada benchmarks for a 6.50% coupon. Proceeds of the deal are being used to redeem early all $150 million of the existing 8.375% 2020 senior notes and for general corporate purposes. The new bonds are rated “B” by S&P and marked the company’s second foray ever into the debt market. Secondary trading saw the issue trade a half point higher on the break. This deal breaks a recent trend of CAD energy issuers (Athabasca, Precision Drilling, Baytex) refinancing their debt and/or seeking new funding via USD issues, where the market for high yield investors is far greater than north of the border.



Recognizing risk often starts with understanding when investors are paying it too little heed. 

- Howard Marks

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Charts are sourced to Bloomberg unless otherwise noted.

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