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Good Morning Europe
Stocks are tipped for a perky start Friday as cues from both the U.S. and Asia look extremely positive.
The Fed’s surprising optimism over the U.S. economy seems to have been fully justified by third quarter GDP figures. An annualized rise of 3.5% slightly exceeded market expectations and sent Wall Street into the close with plenty of green on the screens.
Asian action was focused on Japan, where it was reported that the vast Government pension fund -the world’s biggest- will be authorized to invest more aggressively in local stocks. There was also some surprise monetary policy easing from the Bank of Japan, which said it would increase the expansion of the monetary base. The upshot so far has been a gain of over 5% for the Nikkei and a slide in the yen.
European indexes are expected to join in the euphoria, although, as ever, investors would like few more local factors they could cheer. We will get inflation and employment numbers from around the eurozone this morning, and they’re not expected to be pretty.
Market Snapshot: U.S. markets (Thursday close): DJIA up 1.3%, S&P 500 up 0.6%, Nasdaq up 0.4%. Nikkei now up 5.2%. December FTSE and S&P both up 1%. Brent crude down 19 cents at $86.05. Gold down $11.70 at $1186.90. EUR/USD now at $1.2573. USD/JPY at ¥110.83. Ten-year T-note yields 2.34%, Bund 0.80% and Gilt 2.23%.
Watch For: French producer price data, Italian unemployment numbers, EU consumer prices and jobless rate. From the U.S. there is personal income and spending data, the Chicago business survey and the University of Michigan’s monthly look at consumer confidence.
What you may have missed from MoneyBeat:
Ruble Rallies, But Its Prospects Remain Grim: After weeks of being beaten relentlessly lower, the Russian ruble suddenly snapped back in early trade Thursday.
Barclays Earnings: The Key Takeaways: Barclays PLC on Thursday posted better-than-expected third-quarter results despite a poor quarter for its investment bank and a new £500 million charge to cover potential costs from the global probe into foreign exchange markets.
Fed’s Yellen Says Economics Can Benefit From More Diversity: Janet Yellen, the first woman to lead the Federal Reserve in its 100-year history, said Thursday the economics profession, which is dominated by white males, could benefit from a more diverse range of views,
Big Banks Brace for Penalties in Probes : Big banks in the U.S. and Europe are stockpiling billions to pay for a potential trans-Atlantic settlement of allegations that they manipulated foreign-exchange rates as talks heat up with regulators on both continents.
Turkey’s Influence in Middle East Ebbs: Analysis: Ankara’s regional influence has sunk to a low point. Ambitious policies have alienated Turkey from much of the region.
U.S. Extends Solid Growth, Sidestepping Global Tumult:The U.S. economy expanded at a healthy 3.5% annual pace during the third quarter, a sign of sustained growth fueled by government spending and a narrower trade deficit despite mounting concerns about the health of overseas economies.
For Samsung Electronics Co., the financials have been bad but the stock performance has been anything but.
On Thursday, after the company said its quarterly earnings almost halved from a year earlier, shares jumped 4.5% for the biggest one-day gain in more than a year.
The stock is up another 5% in midday trading Friday, part of a 14% ascent in the stock price since Wednesday that has added about 22 trillion Korean won ($20.8 billion) to Samsung’s market capitalization.
Not bad for a company that one analyst, Neil Shah of data tracker Counterpoint Technology Market Research, says is “doing a Nokia.”
Why the disconnect between company and stock performance?
For one thing, investors have already had ample opportunity to punish Samsung this year for its missteps, which have both been well-publicized and acknowledged by company executives.
As a result, the stock has traded in negative territory for most of the year, and during its worst stretch, dropped 26% between early June and last week. In that context, a 14% rebound can be seen as a corrective to an overzealous sell-off, says Mark Newman, a Hong Kong-based analyst with Bernstein Research.
“All the bad news is well known and what they say can only be better than expectations,” says Mr. Newman, who adds that executives on the Thursday conference call sounded “more confident than expected that things will improve.”
In other words, it’s mostly about expectations, which weeks ago had already hit “rock bottom.”
Few investors now expect a rapid turnaround, particularly in the company’s ailing mobile division. But hopes are high that the recently-ended quarter will mark the lowest of the low. And the company’s semiconductor and components businesses are strong and getting stronger. Investors, it seems, have reset their expectations and are willing to be patient.
Or, it could be something else entirely.
Daniel Kim, an analyst at Macquarie Research who has been glum on Samsung’s prospects since the summer, points to recent maneuvers at the Samsung Group level that suggest the conglomerate’s ruling family may be accelerating its attempts to transfer ownership to Jay Y. Lee, the grandson of Samsung’s founder.
Analysts see such a family transfer as a part of a long-awaited restructuring of Samsung’s tangled web of myriad affiliates.
In September, Samsung Group’s information-technology unit, Samsung SDS Co., whose largest shareholder is Samsung Electronics, said it would seek a $1.1 billion initial public offering by the end of the year.
And earlier this week, Mr. Lee sought regulatory approval to buy stakes in two Samsung affiliate companies.
In response, Mr. Kim points out that Samsung affiliate stocks as a class have been perking up in recent days. Samsung Life Insurance Co. Ltd. is up 5.4% today, capping a 13% surge over the past six trading sessions to hit an all-time high. Samsung Fire & Marine Insurance Co. Ltd. has gained a more modest 3.7% over that period, but also is set to close at an all-time high.
If the asset transfer is really taking place, that could in turn free the company up to return more of its $64 billion cash pile to shareholders in the form of dividends and buybacks, as many investors have been clamoring for.
Some of the more optimistic analysts, in fact, are already predicting an impending change in dividend policy, despite a string of disappointments over the past year.
During Thursday’s conference call, Samsung’s investor relations head Robert Yi said that management would make an announcement on shareholder returns when the company details fourth quarter earnings early next year.
That’s good enough for C.W. Chung, a Nomura analyst, who predicts in a note to clients today that “management will view the improvement in shareholders’ return policy as inevitable” and announce a dividend policy “at an appropriate level.”
After five consecutive cuts in his target price on the stock, Mr. Chung raised his target price to 1,400,000 won ($1,329) today. Of course, the optimism is relatively tempered: the new target price is just 2% higher than his previous target.
Market Snap: At the New York close: S&P 500 up 0.6% at 1994.65. DJIA up 1.3% at 17195.42. Nasdaq Comp up 0.4% at 4566.14. Treasury yields declined; 10-year at 2.305%. Nymex crude oil down 1.3% at $81.12. Gold down 2.1% at $1,198.10/ounce.
How We Got Here: U.S. stocks, broadly speaking, rose modestly on Wednesday, with two caveats: Visa and the glitch.
Visa shares were up 10% on Thursday, closing at $236.65, and that bulbous gain helped drive the Dow up more than 200 points, putting the index within sight of its all-time high (from September) of 17280. The index is actually up about 0.9% on the month, fairly extraordinary consider the state of affairs just 10 trading days ago.
Then there was the glitch. Another computer problem hit U.S. exchanges, although it seemed to have a beneficial effect: The midafternoon problem drove the indexes higher. The S&P 500 came within a point of the 2000 level before easing back.
With only one more trading session left in October, and with both the QE3 decision out of the way and with a fairly strong GDP report, U.S. stocks look like they’re past the agita that gripped them earlier this month.
Coming Up: The Asian data calendar picks up Friday with Japan’s release of household spending and consumer price data, both for September. The household spending numbers tell you all you need to know about what’s eating at Japan, as it continues to grapple with the demographic problems of an aging society and the continued effect of a deflationary spiral, which creates an incentive to postpone expenditure.
Although the headline CPI numbers make it look as if inflation is back, these are still showing the effect of the one-off increase in sales tax back in April. Adjusted for that, disinflationary forces are still very much evident in Japanese consumer prices.What You Missed Overnight
U.S. Stocks Rise; NYSE Experiences Technical Glitch U.S. stocks rallied Thursday with help from strong corporate earnings, even as traders were forced to wrestle with a significant technical glitch for New York Stock Exchange stocks.
U.S. Third-Quarter GDP Rises at 3.5% Rate The U.S. economy expanded at a healthy pace during the third quarter, a sign of sustained growth fueled by government spending and a narrower trade deficit despite mounting concerns about the health of overseas economies.
Citigroup Cuts Third-Quarter Earnings Citigroup on Thursday cut its already-reported third-quarter earnings by $600 million, citing “rapidly evolving regulatory inquiries and investigations.”
Apple CEO Tim Cook: ‘I’m Proud to Be Gay’ Apple Chief Executive Tim Cook said he is “proud to be gay,” publicly commenting on his sexual orientation for the first time and becoming the most prominent openly gay executive in the business world.From The Wall Street Journal Asia
Bad Loans Rise at China’s Biggest Banks Sour loans on the books of China’s biggest banks have risen 22% since the start of the year, as slowing economic growth and overcapacity in a number of industries take an increasing toll on the financial sector.
Hong Kong Students Consider Taking Protest to Beijing Student leaders here said they are considering taking their demands for democracy to Chinese leaders in Beijing next month when China plays host to a high-profile global summit, a move that would represent a significant escalation of protests.
Sony Replaces Mobile Division Head Sony Corp. on Thursday named Senior Vice President Hiroki Totoki as the new head of its mobile division, the electronics giant’s latest move to prop up its struggling smartphone business.
Wal-Mart to Close 30 Stores in Japan Wal-Mart Stores Inc. plans to close about 30 underperforming stores and accelerate its remodeling efforts in Japan, a highly fragmented retail market.
Army Seizes Power in Burkina Faso Burkina Faso’s army seized power on Thursday after protesters burned government buildings in anger over President Blaise Compaore ’s plan to extend his 27-year rule.From MoneyBeat
Goldman: Global Slowdown to Take Bite Out of S&P 500 Earnings The investment bank’s team of equity strategists cut their outlook for S&P 500 corporate earnings in a client note late Wednesday, citing the troubles in economies overseas. They also grappled with the impact on earnings of a stronger dollar and falling oil prices.
GDP Reaction: ‘Broadly Constructive’ But Not a Game Changer While the headline number was good, better than expected even, consumer spending was weak, and there’s nothing in it to suggest the economy is going to break out of the 2-2.5% growth rate it’s been recording the past few years.
GoPro Options Suggest a Wild Ride After Earnings GoPro shares tend to leap around, much like the adventure seekers who use the company’s video cameras. Options traders are betting that Thursday afternoon’s earnings will be no exception.
Ruble Rallies, But Its Prospects Remain Grim After weeks of being beaten relentlessly lower, the Russian ruble suddenly snapped back in early trade Thursday.
The outage of a critical piece of stock-market infrastructure Thursday afternoon prompted a scramble among brokerage firms to assess the impact.
Many traders said a rash of oddly priced trades flooded the market in a number of stocks, exchange-traded funds and futures contracts during the technical outage, which began at 1:07 p.m. EDT.
The outage prompted many market participants to pull back from the market. Jamie Selway, head of electronic brokerage at ITG, said the glitch led the brokerage firm to shut down trading in its dark pool, called POSIT, for about 15 minutes during the outage.
“If the market data isn’t available, things get to be a mess from an electronic trading perspective,” he said.
The outage led to a number of erroneous trades, and Mr. Selway said the firm spent the afternoon scrambling to fix such trades that involved firm clients.
“We’re having to adjust trades that were executed at prices that were far off where the market actually was,” he said. The process typically involves getting clients on each side of the trades to agree on a new, more accurate price.
“The price of having a SIP failure is that everybody trading electronically has to scramble a bit and fix the damage that bad prices have done,” he said.
Rick Fier, director of execution services at Conifer Securities LLC, said the firm put limits on all their outstanding stock orders once he got word of the glitch.
“You don’t want to leave yourself completely exposed in the marketplace,” he said. “You let the marketplace figure it out and you get back involved when the markets are back to normal.”
Many traders and investors say such glitches have come to feel almost routine in the stock market since the 2010 Flash Crash.
“Was it fun? No,” Mr. Fier said. “Was it the biggest deal in the world? No. Is it part of the job? Yes.”
Western Union could be the latest target for the very busy group of activist investors.
The event-driven analysts at Susquehanna Financial Group say that Western Union looks particularly vulnerable to an activist investor looking to shake things up at the money-transfer company that has been facing competitive pressures from the likes of Wal-Mart Stores Inc., Apple and PayPal.
An activist investor would have a relatively clear path to pushing for change at the company, Susquehanna’s analysts point out. All 11 of Western Union’s directors are up for a vote in May, and the company has no poison pill to deter an investor from buying up a large portion of the company’s stock.
Susquehanna’s analysts estimate that Western Union shares, which closed at $16.70 Thursday, could have up to $9 of additional value, if the company put more of its capital toward a dividend and used less of it for stock buybacks. The company’s stock is roughly flat in 2014.
Western Union’s management could also consider a spin-off of the company’s business-to-business money transfer unit, which is a minority of the company’s business. Roughly 80% of the company’s revenue comes from its consumer-to-consumer money transfers. Susquehanna estimates that a spin-off of the business-to-business unit could add $2.20 to the company’s share price.
Western Union did not return requests for comment.
Shares of the company rose in after hours trading after Western Union reported better-than-expected third-quarter results and a rise in both profit and revenue.
News, analysis and some curiosities to ease your commute home.
U.S. stocks surge, glitch and all – WSJ
The Fed has not stopped trying to juice the economy – Justin Wolfers, via NY Times
Private papers emerge in AIG trial that show a very different Tim Geithner – ProPublica
Forty years ago today, Muhammad Ali pulled off one of the greatest upsets of all time, the Rumble in the Jungle – Telegraph
The guy who invented the kid’s game Operation can’t afford an operation of his own – NPR
A musical interlude: Jimmy Cliff; I Can See Clearly Now – YouTube
Ignore the market, Jack Bogle says – Chuck Jaffe’s Your Money podcast
WASHINGTON — Most banks taking the Federal Reserve’s annual stress tests don’t use the results to influence the way they manage their loan portfolios, according to a new survey by Moody’s Analytics.
The results shared with The Wall Street Journal suggest banks may not be taking the tests to heart in the way regulators hope. Federal Reserve Gov. Daniel Tarullo, the Fed’s regulatory point-man and an advocate for the use of stress tests to monitor the banking sector, earlier this month lamented what he called a “check-the-box” approach to the tests.
The annual “stress test” exercise examines banks’ ability to withstand a severe recession and measure risks across their operations. Passing them is a prerequisite for getting the Fed’s approval to return capital to shareholders. Mr. Tarullo said that in addition to fixing flaws pointed out by regulators, he would prefer to see banks thinking about how “identified shortcomings fit into their overall risk decision-making and management processes.”
The Moody’s survey of more than 100 representatives of U.S. and foreign banks found that while the group expected to use the test results for “regulatory compliance,” less than half said they would use the results for structuring loan portfolios or setting limits on their exposure to certain classes of assets.
(Full disclosure: Moody’s has an interest in the results because it sells banks’ advice on improving their stress testing.)
That could limit the impact the tests have on individual loans, said David Little, managing director for enterprise risk solutions at Moody’s Analytics. Regulators have been testing banks’ exposure to risky corporate borrowers, for instance, “but if banks aren’t using the results of the stress tests for portfolio structuring or limit setting, is it going to have any effect?”
This morning’s U.S. GDP report appears stronger than most people expected, but it still reflects a “mediocre” economy, Erik Davidson, the deputy chief investment officer at Wells Fargo Private Bank, said this morning on the MoneyBeat show.
“The unfortunate thing is, we are the cleanest shirt in the closet right now as you look around the world,” he said. “It creates some good tailwinds.”
He noted the irony of officials trying to stoke inflation, something that would’ve been anathema a generation ago. “It’s so odd and counter-intuitive that we would be begging to get inflation.” But with deflation stalking Europe and Japan, the risks there are clear, as nobody wants a “a deflation pandemic.”
If a computer glitch sends stocks up rather than down, was it really a glitch at all?
U.S. stocks – which started the day off weakly apart from Visa – are surging, with the Dow Jones Industrial Average up more than 200 points and within shouting range of its all-time high of 17280 set in September.
But the trading is coming amid another “glitch” on the exchanges. The NYSE said that a key piece of insfrastructure, the Securities Information Processor, or SIP, had “market-wide issues” between 1:40-1:50 p.m. New York time. The exchange said everything is working fine now. The SIP is an automated system that consolidates quote and trade data. It was at the heart of the problems that led to a three-hour shutdown of the Nasdaq platform last August.
The midafternoon spike drove all the indexes higher. The Dow is up about 230 points – importantly, Visa is adding about half of that – the S&P 500 is up 13 at 1995, and the Nasdaq is up 17 at 4566. Meanwhile in the commodities markets, crude is down 1% at $81.36, and copper was down 1.4%; gold is down 2% (sitting right at $1,200).
Additionally, there are reports as well of problems in the trading of eMini S&P 500 contracts that seem to precede the problems at the NYSE. Shortly after 1 p.m. New York time, eMini S&P 500 prices and volume spiked sharply. Charts on FactSet show volume of 34,679 contracts right at 1:19.59, when the price suddenly shot straight up. Trades before then were all in 7,000-8,000 range.
Eric Scott Hunsader, who runs the research and trading firm Nanex, noticed the spike, and the subsequent problems, and wrote this on Twitter:
I am pretty sure that monster EMini trade was caused from the outage/screw-up
— Eric Scott Hunsader (@nanexllc) October 30, 2014
It isn’t clear yet what exactly happened, and it probably won’t be for some time. But we’ll make one prediction: if it’s a problem that pushes stocks prices higher, traders won’t be all that vexed by it.
Oil prices might be falling, but Apollo Global Management LLC’s thirst for petroleum hasn’t diminished.
The New York private-equity firm sees an “opportune time to buy physical assets at a significant discount to energy prices implied by the financial markets,” Apollo co-founder Josh Harris told investors Thursday during a call to discuss third-quarter results.
The main U.S. crude benchmark, West Texas Intermediate, is down about 23% since the start of the third quarter, with international prices following a similar trajectory.
Apollo has about $5 billion of exposure to energy in its private-equity and credit businesses–about 7% of its invested cash–but that figure could rise: The firm is planning a new multibillion-dollar natural-resources fund. Apollo’s first natural resources fund, a $1.3 billion pool that has made bets on U.S. energy production, is about 70% invested, and significant sums have been planted in the oil patch from Apollo’s main $17.5 billion private-equity fund.
Stock prices of Apollo-owned energy producers, including U.S. explorer EP Energy Corp., declined during the third quarter on slumping oil prices, nicking the firm’s overall results as it wrote down the value of its holdings. But the sting doesn’t bother Apollo.
“Energy is one of the few arbitrage opportunities in overvalued markets,” Mr. Harris said.
Who needs hard targets when you can just confusingly reinterpret them? Chinese oil major Cnooc appears to have taken this approach when it revised production targets this week.
Cnooc has for a while been holding on to its ambitious goal of raising output by 6% to 10% every year on average between 2011 and 2015. The state-controlled firm, which bought Canadian producer Nexen for $15 billion last year, meant to achieve this even before the impact of that deal.
So when Cnooc said on Wednesday that the target included Nexen, analysts were confused–and divided.
Jefferies considered this an about-turn and downgraded the stock to “hold.” Macquarie, maintaining its “outperform” rating, said the market always suspected Nexen was included, meaning the news didn’t really change much. Barclays, meanwhile, invoked its meetings with the company and split the difference: It argued that Cnooc was still aiming for the lower end of the 6-10% range by itself, and just the upper end with Nexen.
As for investors, they weren’t confused. They pushed Cnooc’s Hong Kong shares down 4.7% Thursday when the Hang Seng index dipped merely 0.5%.
Janet Yellen, the first woman to lead the Federal Reserve in its 100-year history, said Thursday the economics profession, which is dominated by white males, could benefit from a more diverse range of views.
“Did the economics profession recruit and promote the individuals best able to bring the energy, the fresh insights, and the renewal that every field and every body of knowledge needs to remain healthy?” asked Ms. Yellen, who was delivering introductory remarks at a conference on diversity in the economics profession.
“These are not idle questions,” she said. “There has been a fair amount of public debate in recent years about the health of the economics profession, prompted in part by the failure of many economists to comprehend the dire threats and foresee the damage of the financial crisis.”
Ms. Yellen did not comment on the outlook for the economy or monetary policy, just a day after the Fed decided to conclude its bond-purchase program and leave interest rates at zero for the foreseeable future as expected.
She said the Fed is committed to enhancing diversity in the economics profession both as employer and institution, adding that the benefits of diversity are frequently evident in various lines of economic and financial research.
“Often, in the things economists study and the methods we use, diversity is a good thing,” she said. “I believe decisions by the Federal Reserve Board and the Federal Open Market Committee are better because of the range of views and perspectives brought to the table by my fellow policy makers, and I have encouraged this approach to decision making at all levels and throughout the Fed system.”
Ms. Yellen has already seen a number of dissents in her short tenure, which began in February. This week, Minneapolis Fed President Narayana Kocherlakota voted against the Fed’s decision, calling for additional bond-buying and a firmer commitment to meeting the Fed’s 2% inflation goal, which has proven elusive in recent years.
The economy has been on a roller coaster ride in 2014.
The year started with largest contraction since World War II that wasn’t part of a recession, followed by a roaring rebound, now only to end 2014 with mounting fears of a global slowdown.
The result? Growth in gross domestic product this year looks pretty much the same as the last five.
Several economists are projecting economic growth to slip from the 3.5% pace recorded in the third quarter to a rate between 2% and 3% in the fourth quarter. Forecasting firm Macroeconomic Advisers pegs the current quarter’s advance at 2.4%.
The projection would put the GDP advance from the prior year’s fourth quarter at 2.1%, economist Ben Herzon said. That modest gain nearly matches the 2.25% annual pace recorded since the economic recovery began in the second half of 2009.
Thursday’s report showed that inflation-adjusted GDP rose 2.3% in the third quarter from one year earlier.
The economy has grown at better than a 3% pace in four of the past five quarters (the first-quarter contraction being the exception). But a “very strong” third quarter for both defense spending and export growth is not likely to be repeated in the fourth quarter, Mr. Herzon said.
Weaker growth in those categories will help offset expected increases in consumer spending and inventory building.
Morgan Stanley forecasts GDP to increase at a 2.6% pace in the fourth quarter and Credit Suisse projects a 2.5% advance.
“A possible reversal in defense imparts some downside risk to that estimate, although we expect there is room for faster growth” in consumer spending “given the plunge in energy prices,” said Credit Suisse economist Jay Feldman.Related Content:
LinkedIn and Groupon are due to report results after the bell Thursday during what has been a brutal week for social media stocks.
Twitter reported earnings Monday after the close and showed a slowdown in user growth. That was enough to make the stock reel. Twitter’s stock is down more than 15% since it reported third-quarter results.
Meanwhile, Facebook managed to spook investors when it reported earnings Tuesday for another reason: spending. The social networking site said it plans to ramp up spending in 2015. Mark Zuckerberg on a conference call said the company plans to invest “aggressively.”
Shares of Facebook are down 9% since the company reported earnings Tuesday.
Investors in LinkedIn appear to be pessimistic Thursday ahead of earnings as the stock is down more than 1%. Groupon’s stock is up slightly.
But what are analysts expecting for LinkedIn and Groupon?
For LinkedIn expectations are mixed for how the stock will trade in the short-term but bullish over the long-term. BCG Partners analyst Colin Gillis notes that LinkedIn’s stock has traded down on four out of the last six earnings reports. Mr. Gillis, who has a buy rating on the stock, says that LinkedIn could exhibit some of the same characteristics that have spooked investors in Facebook and Twitter, i.e. slowing revenue growth and increased spending. Still he attributes his buy rating to LinkedIn’s market position and relatively diverse revenue streams.
Wunderlich Securities analyst Blake Harper says that Twitter and Facebook may have spooked investors enough to cause LinkedIn’s stock to trade down in the near-term if investors don’t like the guidance the company gives for the fourth quarter. Still he too has a buy rating on LinkedIn, saying that longer-term the stock has room to run.
Cantor Fitzgerald’s Youssef Squali is more robustly bullish on LinkedIn’s short and near-term outlook.
On Groupon, analysts aren’t necessarily all that optimistic on the company’s story but see some potential in the stock simply because it’s fallen so far. Groupon’s shares are down than 50% in 2014, compared to LinkedIn’s shares, which are down 8% this year.
Analysts are looking to see what Groupon will say about whether it’s been able to make any progress in signing new, local business customers.
Sterne Agee analyst Arvind Bhatia said that Groupon has fallen so out of favor among investors that signs of a turnaround could be a catalyst for the stock.
Bill Gross’ abrupt departure from Pacific Investment Management Co. turned into a bonanza for U.S. bond exchange-traded funds, which are poised to net their biggest-ever monthly cash hoard.
U.S. listed fixed-income ETFs ended Wednesday with a monthly inflow of $17.4 billion for October, on course to top February’s previous record of $17 billion, according to data from BlackRock (BLK).
Investors, traders and industry insiders have said that a large chunk of the bond ETF inflows are a result of money migrating away from Pimco’s Total Return fund (PTTRX) following the departure of Bill Gross for Janus Capital Group (JNS) on Sept. 26.
After Mr. Gross’ exit, trading volumes surged in short-term government bond ETFs and broad-market trackers that can act like cash substitutes.
For some managers, these ETFs can serve as placeholders until a decision is made about where to park money for the long haul.
Matt Tucker, head of fixed-income strategy at BlackRock’s iShares unit, said the firm has been talking with investors about using the Core U.S. Aggregate Bond ETF as a bridge position.
“They may stay there long term, or identify a manager down the road and then switch,” Mr. Tucker told this blogger earlier this month.
Institutional investors such as pensions have flooded into ETFs as an easy-to-trade alternative in a bond market that has grown increasingly illiquid.
Total assets of U.S.-listed bond ETFs have nearly tripled over to the past five years, to $294.8 billion, according to BlackRock. October’s flows put bond ETFs close to topping $300 billion in assets for the first time. For the year, bond ETFs have taken in $47 billion.
The global growth slowdown is bringing out the bearish side at Goldman Sachs .
The investment bank’s team of equity strategists cut their outlook for S&P 500 corporate earnings in a client note late Wednesday, citing the troubles in economies overseas. They also grappled with the impact on earnings of a stronger dollar and falling oil prices.
The bank’s team of equity strategists say they now expect earnings of $122 per share for the S&P 500 next year, down from $125 previously. For 2016, they cut their outlook to $131 per share from $132.
The forecast is below consensus estimates. Wall Street broadly expects S&P earnings of $130.05 per share next year, according to estimates by company-level analysts compiled by FactSet. The figure comes in at $145.53 per share for 2016.
Even with strong growth at home, “investors are concerned about a slowing world economy and the impact on S&P 500 EPS growth,” the Goldman team writes. Foreign sales accounted for 33% of S&P 500 revenue last year, they say. They expect global GDP to grow 3.3% in 2015 and 3.8% in 2016.
The bank says it expects the S&P 500 to finish the year at 2050. Recently, the broad-market index gained 0.4% to 1989.
The Goldman team says its new forecasts incorporate the stronger dollar and falling oil prices. While a stronger dollar tends to curb corporate revenues of multinational companies that do business in countries with weaker currencies, the impact is dampened by the recent slide in crude, which tends to boost consumer spending and confidence, they write.
“A stronger dollar combined with falling oil prices have less impact on earnings than many investors expect, as they offset each other in their effect on GDP growth,” they write.
The bank expects oil prices to decline through 2015 but to stabilize in 2016. Brent crude should average $84 a barrel next year and $90 the following. The oil benchmark has shed 25% from its June 19 peak of $115.06 a barrel, recently trading at $86.20.