Feb 19, 2019

Axios Markets

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Situational awareness:

  • Walmart's fourth quarter profit and revenue came in above Wall Street expectations, while U.S. same-store sales rose 4.2% — more than the 3.2% analysts expected. (CNBC)
  • A coalition of 16 attorneys general, led by Xavier Becerra in California, filed a lawsuit Monday challenging President Trump's move to invoke emergency powers to build a wall on the U.S.-Mexico border. (Axios)
  • Honda said it will hold a news conference today, after a British lawmaker said the Japanese car maker will close its only British factory, in another blow to UK’s auto industry before Brexit. (Reuters)
  • U.S. deputy attorney general Rod Rosenstein is expected to step down by mid-March. (Reuters)
1 big thing: Everybody's dovish

Education Images/UIG via Getty Images

The reversal of quantitative tightening has now gone global.

Emerging market central banks are now the most dovish they have been since 2009, Bank of America Merrill Lynch strategists said. Their findings were based on language in various central bank statements.

Since the Federal Reserve's dovish turn in January, other central banks have followed suit, including the European Central Bank, Bank of England and Bank of Japan, with emerging markets now joining the action.

  • "EM central banks have turned the most dovish since 2009 because of the mounting fears of a sharp slowdown evident across Asia and Europe in particular," David Hauner, head of emerging EMEA economics at BAML, tells Axios. "The source of the slowdown is weakness in China."

The latest:

The move away from tightening policy comes as global debt levels have reached more than 300% of the world's GDP and emerging markets have taken on an increasingly unsustainable debt load.

  • The world is now "pushing at the boundaries of comfortably sustainable debt," IIF's managing director of policy initiatives Sonja Gibbs told Axios last month.

Why it matters: Loosening monetary policy tends to boost economic growth but also weaken local currencies and create asset bubbles. That puts added stress on countries' debts, which for many emerging markets are issued in dollars, euros or renminbi rather than their own currencies.

  • That means that if things don't go well, they increase the likelihood of defaulting on their sovereign debts, endangering bondholders around the globe.
2. Payless' second bankruptcy follows a pattern
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Data: BankruptcyData; Chart: Axios Visuals

Payless ShoeSource has filed for bankruptcy protection — and intends to close all of its stores in the U.S. and Puerto Rico — just 2 years after it emerged from its last bankruptcy proceeding, Axios' Courtenay Brown writes.

Why it matters: Payless' second bankruptcy follows a clear trend in the retail sector.

By the numbers: According to an Axios analysis of BankruptcyData research, 8 out of the 10 biggest bankruptcy declarations (by assets) in which the company remained intact were followed by another bankruptcy protection filing.

  • The largest was Kmart, which emerged from its 2002 bankruptcy and later merged with Sears. The merged company filed for bankruptcy last year.
  • Payless Cashway — not to be confused with the discount shoe retailer — filed for bankruptcy in 1997, then went out of business following a subsequent bankruptcy in 2005.
  • Hills Department Stores, No. 4 on the list, was acquired by Ames 7 years after it emerged from bankruptcy protection. Ames itself went bankrupt in 1990, then went bankrupt again in 2001.

The big picture: Payless' dance with bankruptcy protection is common for companies in the business of sales. Retailers will often use "bankruptcy to reorganize by shedding debt and closing stores, but often these companies end up with a second bankruptcy soon after," as CNN Business points out.

The exceptions:

  • Zale Corp. avoided a second bankruptcy protection filing when it was bought by Signet Jewelers in 2014.
  • Claire's emerged from bankruptcy late last year and eliminated $1.9 billion of debt.
3. Janet Yellen on the Fed's reversal and the carbon tax

In a podcast released today by the Brookings Institute where she's currently a Distinguished Fellow in Residence, former Fed Chair Janet Yellen talked about the Fed's recent turn away from tightening monetary policy.

"You know I think even if you look at what's happening now, global economic developments have played a role in encouraging the Federal Reserve to moderate its interest rate stance and take a wait-and-see-approach. And part of that set of developments, global developments, is impacts of monetary tightening that's occurring in the United States.
"I still remember back in 1998, during the Asian financial crisis, Alan Greenspan argued for an interest rate cut in spite of the fact that the U.S. economy was doing very well. And, in justifying it, he said 'it's just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress.'
"And I think that remains as true today as it was then."

Yellen also defended and elaborated on the carbon tax proposal that's been endorsed by all four of the still-living former Fed chairs, nearly 30 Nobel economists and all but one former chair of the White House's Council of Economic Advisers.

"We would impose a tax on goods entering the country from localities with less ambitious climate change policies or lower carbon taxes. So, this would offset the environmental loss that would come from shifting production to places that generate more greenhouse gas emissions.
"It would also level the playing field competitively, and we think that a set of border tax adjustments would also encourage other countries to come into compliance and join the club of countries imposing carbon taxes."
4. Apple's new revenue expectations
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Data: Company earnings reports; Chart: Axios Visuals

As iPhone sales have tapered off, Apple has been putting increasing focus on growing its services business, Axios' Sara Fischer writes.

Why it matters: Having started as just cloud storage and extended support contracts, Apple's "services" revenue sector has expanded to include Apple Music and will soon likely expand further to news, video and gaming.

The details: Apple has made an aggressive push into media and entertainment over the past year, which has sparked rumors that it could one day sell a bundled subscription. With that, consumers could potentially pay one fee for an array of entertainment and media services.

What's coming:

  • News: Apple is set to debut a news subscription business at a March 25 media event, even though publishers are balking at the terms. Publishers largely object to Apple's reported take of almost half the revenue and limits on their access to customer data.
  • Video: The company is also looking to debut a new video streaming product in April, CNBC reports. The service will include free original content for Apple device owners and the ability subscribe to other video services.
  • Gaming: Apple is planning a subscription service for games, Cheddar reported last month. The service would resemble a Netflix for gaming, giving users access to many different games under one subscription payment.
  • Music: In a push to gain more subscribers, Apple Music sent notices to subscribers last week that they can now give a month's worth of free access to a friend with their referral. The week before it offered lapsed users 3 months of free access for resubscribing.

The big picture: Apple has pledged that by 2020 its services business will be double that of 2017. However, as this chart shows, hardware in general, and the iPhone in particular, still dominate company-wide revenue.

5. Bitcoin may be bouncing back

Bitcoin, left for dead by many investors, has been on a tear of late and is attracting significant interest from speculators.

Why it matters: Traders raised their bullish bets on bitcoin to the highest level in 11 months on Monday, data from cryptocurrency exchange Bitfinex shows, and traders are continuing to pile into the cryptocurrency.

  • Long positions have risen by 35% in the last three weeks, while short positions have remained largely unchanged. Long positions are near historic highs, but remain at least 8% below the record high registered on March 26, 2018, Coindesk reports.

What's next? Yves Lamoureux, president and chief behavioral strategist of research firm Lamoureux & Co., tells Axios his models show the rally in Bitcoin is going to grow tenfold. He points to the Fed's dovish turn late last year that will eventually lead the U.S. central bank to more quantitative easing and an overheated U.S. economy, prompting major flows into Bitcoin.

Further, Lamoureux says, "the Fed is slowly eroding its credibility," leading to more upside for assets like cryptocurrencies.

  • "Our money flow pressure indicates upside for Bitcoin until mid-2020."

Lamoureux called for a rally in Bitcoin to $25,000 per coin in February 2017 when it was trading at around $950.

  • "Whether tulips, housing or tech stocks, bubbles require public participation," he wrote at the time. "And as blockchain becomes more ubiquitous, it lends credibility to the technology behind bitcoin. We feel that digital currencies, such as bitcoin, have now entered a similar cycle."

Yes, but: The cryptocurrency peaked in December 2017 at just under $20,000, short of Lamoureux's prediction. Bitcoin bulls (many of whom held large amounts of the cryptocurrency) also have made a number of outlandish predictions in the past, from Tyler Winklevoss' $100,000 a coin prediction to John McAfee's $1 million.

Still: Bitcoin is trading at its highest in more than 5 weeks at $3,911.

History: Robert Smith is a former chemical engineer and investment banker who has an estimated net worth of $5 billion. In 2000, Smith founded Vista Equity Partners, a private equity and venture capital firm that now boasts more than $43 billion in total capital commitments.

Vista owns more than 50 software companies and has 65,000 employees worldwide, making it the fourth largest enterprise software company after Microsoft, Oracle and SAP. It has posted annualized returns of 22% since inception.

In January 2015, Vista Equity Partners was named the best performing private equity firm for the previous ten years, by HEC-Dow Jones. Smith was named Private Equity International's 2016 Game Changer of the Year.

Preqin, a consulting firm that tracks private equity, reports that Vista's third fund returned $2.46 for every dollar invested, better than every other big fund raised between 2006 and 2010, some of the most profitable years for private equity.

Smith is the first African-American to sign the Giving Pledge, a commitment to contribute the majority of his wealth to philanthropic causes.

He is a fourth generation Coloradan, who hails from the greatest city on earth, Denver.