FOMC notes showed that they felt the economy has strengthened

BY  | FROM  | 2015-11-26 20:43

Quarter point, quarter point, quarter point onward, into the valley of Bears rode the mighty 500, as a December 0.25% rate hike became the battle cry, even as the youngest of them had traded not for the last (June 2006).  Pessimistic retail predictions to the left, dwindling oil demand and prices to the right, and short-sellers (and their reports) to the front, as they forwarded into the jaws of margin (and IPOs).  Right through the line they broke; fear not a terrorist; fear not budgetary deficit; and fear not a congressional or anti-trust committee.  Back from the mouth of correction; onto the December gains (up 73.6% of the time); when can their short-term glory fade, all the world wondered.

Last Friday’s attacks in Paris left 130 dead and hundreds injured, as it sparked air strike in Syria, police raids in multiple cities, heightened security globally, and set the stage for a potential coalition of nations not seen since the Second World War.  Debate surrounding recent migrant and refugee issues became a major front page issue.  In the U.S., the political pre-presidential debate and discussions moved toward defense and foreign policy issues; most had been centered on domestic economic issues and social inequality. 

While the terrible events speak for themselves, the fact that global markets were able to move beyond them spoke to the general acceptance that this was now a way a life, with the expectation that these events would continue.  In economic news, the IMF staff recommendation that the Chinese yuan should be included in its Special Drawing Rights reserve currency basket was seen as ensuring that it would be approved at the November 30, 2015, meeting. Japan slipped back into a recession, as it posted its second GDP contraction (off 0.8% for Q3 2015 and off 0.7% for Q2 2015). Eurozone October inflation came in positive, up 0.1%, as core inflation was at an annual rate of 1.1%. In the U.S., the October Housing Starts declined 11%, as multi-units declined 25% (after several large increases).  Housing Permits, which are forward looking, increased 4.1% to their highest level since December 2007. The October Leading Indicators Report posted a 0.6% gain, reversing last month’s 0.1% decline. 

The highlight was easily the FOMC notes, which showed that they felt the economy has strengthened and leaned toward December being the month for “lift off” of interest rates.  The Fed noted improvement in markets (less volatility) and stronger business spending.  More relevant to the market was that they outlined that future rate increases, after the initial one, would be slow and gradual—which led to a 1.62% Wednesday gain. M&A continued for the week, as it continued to line the pockets of investment bankers, setting a record year.  Merger Monday lived up to its name via three major deals, as hotel and resort owner Marriott International (MAR; off 0.6% for the week) said it would buy competitor Starwood Hotel & Resorts (HOT; off 2.5% for the week) for USD 12.2 billion in stock.  The deal was announced even though traders were nervous about hotels due to the Paris attacks.  Liberty Global (LBTYA; off 5.6% for the week) said it would buy the Caribbean cable operation from Cable & Wireless for USD 5.3 billion. 

Constellation Brands (STZ; up 4.1% for the week) said it would buy California-based Ballast Point Brewing for USD 1 billion.  Healthcare and specialty chemical maker Pfizer (PFE; off 3.3% for the week) was reported to be close to a deal to buy off-patient medication maker Allergan (AGN; up 4.2% for the week) in a share deal with a potential value of over USD 140 billion, and, if announced, the U.S. government would look closely at it due to its tax and domicile implications (inversions).  In “no deal,” Ericsson (ERIC; up 3.6% for the week) said there had been no talks with Cisco (CSCO; up 5.2% for the week) about a merger, as rumors circulated after the joint venture deal.  Also on the “deal or no deal” basis, electronic payment service issue Square (SQ) did their IPO at an official offering price of USD 9, when its initial offering range was USD 11-13, and its recent private offer was at USD 15.46; the shares closed the week at USD 12.85, up 42.8%, valuing the company at USD 4.2 billion—with the “deal or no deal” classification depending on timing. 

The other IPO that was watched was dating service Match Group (MTCH), which went public with a USD 12 price and closed the week at USD 15.20, up 27%, valuing the issue at USD 3.7 billion.  Together, the two painted a picture of investor appetite for IPO issues, but with investors eyeing the price (and value) with more scrutiny. Of current and future note was UnitedHealth Group (UNH; up 1.4% for the week), the largest U.S.-managed health maintenance service, which cut its forecast, as it cited losses from the Affordable Care Act’s healthcare exchanges (Obamacare) and said it was evaluating its involvement with the program.  Recent 2016 sign-up medical programs and reports have spoken to the lack of profitability of current plans for companies, as well as the higher cost and lower coverage for individuals—not a good combination for a business model. Also of note was the gloomy retail predictions for the holiday season, which, based on ads and special pre-Black-Friday, web-based emails, has already begun.  Next Friday (actually next Thursday night for some) will mark the official start of the holiday season, as “good will to all” appeared to be an ornament for a Christmas tree. 

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