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Trees and the Forest

The Pando (pictured here) appears to be 107 acres of forest, but scientists have concluded that the nearly 47,000 genetically identical quaking aspen trees share a common root system.  It is a single organism.  It is estimated to be around 80,000 years…

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The Pando (pictured here) appears to be 107 acres of forest, but scientists have concluded that the nearly 47,000 genetically identical quaking aspen trees share a common root system.  It is a single organism.  It is estimated to be around 80,000 years old and weighs something of the magnitude of 13 million pounds. It may be dying. 

Many market participants also struggle to distinguish the forest from the trees.  It is not a personal failing; it is systemic. The immediacy of the market for many participants demands full attention.  Correlations are unstable, and although most of our analytic tools require normal distribution, the returns in the market are anything but. The old model of the market as a place where profit-seeking economic agents clash has to be re-imagined.  Many participants are not trying to maximize profits but to lock in certainty.  Some hedgers pay to fix prices, and others are willing to assume the risk with compensation. 

While focusing on the immediate trees, the market seems to bounce around from one view of the forest to another.  The secular stagnation hypothesis was arguably dying a death by 1000 blows before the pandemic struck.  And when it did strike, it seemed like the end of days, and disruptions cascaded to even unhinge the US Treasuries, the critical ganglia of the capital markets.  The announcement that a vaccine was discovered fanned the reflation trades, but something strange took place.  After more than doubling to almost 1.80% at the end of Q1, the US 10-year yield trended sharply lower and put in a double bottom below 1.15% in July and August.  Over the last couple of months, the yield has trended higher.  It approached 1.60% before the September jobs report.   

The forest du jour is "stagflation," which connotes a weak economy and strong price pressures.  It harkens back to the mid-1970s-early 1980s. Unemployment reached 9% in May 1975.  It fell back briefly below 5.5% as the US emerged from recession, but then rose to nearly 11% as Reagan and Volcker tried to wring out inflation in a one-two punch of breaking organized labor and sado-monetarist policies.  

Consumer prices rose around 1% in the first half of the 1960s and trended above 5% by the end of the decade. Then, pressures eased, and CPI slowed 3% in the summer of 1972, before surging to nearly 12.5% by the end of 1974. Two years later it was below 5% and then trended higher to climax in March 1980 a little shy of 15%.  

This was particularly vexing because it was thought to be impossible to have both high unemployment and high inflation at the same time.  A soft labor market should contain prices through the demand and income channels.  Arguably, the Phillips Curve, first articulated in the late 1950s, suffered a mortal blow then, though it is still being debated more than 60 years later.  Any fuzzy shorthand phrase to encapsulate the conflicting forces and unprecedented pandemic experience will falter upon anything more than a superficial examination.   It is mainly the case with stagflation.

The most important point is that it is hard to consider, say around 6% growth in the US this year as stagnant no matter how much one stretches the meaning.  The median Fed forecast for 2022 growth is a little more than 3.5%, which would put it at the second strongest year (after 2021) since 2004.   Unemployment is not a good fit either for the stagflation forest.  Since peaking at the start of the pandemic (14.8% in April 2020), it has fallen faster than officials and private-sector economists expected. In September, it stood at 5.1%, but standing is the wrong image.  It is falling.  With a more forceful use of the stick to provide more incentives to be vaccinated, and the recent increase in cases subsiding, further improvement in the labor market should be expected.  The issue seems more about the pace than the direction.  

Some pundits see stagflation in the UK. Yet here, too, the label is more concealing than revealing. The UK economy is on pace for something around 6% this year and is projected to grow above 5% next year.  Both projections may err on the side of optimism, but even so, growth is unlikely to stagnate.  The Bank of England forecasts inflation to reach 4% this year and decelerate to 2.5% next year and 2.0% in 2023.  The market seems to be less confident.  The 10-year breakeven (the difference between the convention and inflation-linked yields) has risen by about 50 bp since the end of June to approach 4%.  In contrast, the US 10-year breakeven stands near 2.48%, up around 15 basis points so far in H2.  

Next week, the world's two largest economies report September consumer and producer prices.  China will report its figures several hours after the US report is released on October 13.  After surging earlier this year, US consumer prices have stabilized in recent months.  Recall that after beginning the year at a 1.4% year-over-year pace, the headline inflation pace tripled to 4.2%  by early Q2 and then quickened to 5.4% in June.  It likely remained in the 5.3-5.4% Q3 three-month range in September.  

Prices are expected to have risen by 0.3% in September.  If true, then the annualized pace so far this year will slow to about 6.2% from 6.6% in August and 7.2% at the end of H1.  The annualized pace in Q3 would be 4.4%.  The core rate, which excludes food and energy, is important, but not because the Fed targets it, which it does not do.  The target applies to the headline deflator of personal consumption expenditures. It makes little sense to call the core rate the Fed's preferred rate when it does not target it. 

Still, the core rate is important because historically, the headline rate has converged to it rather than the other way around.  Through August, the core rate has risen at an annualized pace of almost 5% this year.  It is forecast to have increased by 0.2% in September, which would leave the year-over-year unchanged at 4.0%.  Recall that the core rate peaked in June at 4.5% before easing.  If last month's core prices rose as expected, the annualized rate would moderate to below 4.7%.  Another way to capture the underlying pace, consider that the annualized core pace was over 10% in Q2.  A 0.2% increase in September would put annualized rate near 2.5% in Q3.   

While recognizing that price pressures remain elevated by more than anticipated, most Fed officials continue to argue that they are transitory in nature.  The increases are a function of the base effect (e.g., around 18 months ago, the price of crude oil was negative), the uneven recovery, and supply chain disruptions.  Whether the inflation overshoot is transitory or not requires perspective, like seeing the forest, not just trees.  It has not been proven wrong.  

The pressures are understood to be coming primarily from supply constraints.  Although faith in self-regulation has waned (see Global Financial Crisis), confidence remains that businesses, seeing opportunity, will quickly respond to incentives to overcome supply constraints.  The stronger-than-expected magnitude that prices have risen says little about duration.  Moreover, the steep rise in energy prices is not understood by policymakers as inflationary but, on the contrary, almost like a consumption tax.  It is ultimately deflationary.  

In contrast to most countries, China is not experiencing strong upward pressure on consumer prices.  In August, consumer prices were 0.8% higher than a year ago. Consider that just in the month of June, US consumer prices rose by 0.9%.   There are two critical forces at work.  First, food prices in general, particularly pork prices, have fallen (4.1% year-over-year).  Second, non-food prices have risen modestly.  Recall that in January and February, they were still lower than in at the start of 2020. In August, non-food prices rose 1.9% year-over-year.  Also, it appears that weak demand may be contributing to subdued consumer inflation. 

Without an inflation constraint, and given the knock-on effect of the disruption caused by Beijing's actions and the collapse of Evergrande, the PBOC is widely expected to reduce reserve requirements.  The energy shortage and purposeful cuts in output to meet emission targets also point to slower growth.  While sustaining high levels of growth will not solve Beijing's challenges, it will make them easier to address.  


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DAX index forecast ahead of the ECB meeting

European stocks rose on Friday on a surge in technology stocks; still, rising inflation became a concern for investors. European inflation was confirmed at 3.4% YoY in September, and concerns grew that the European Central Bank could change its monetary..

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European stocks rose on Friday on a surge in technology stocks; still, rising inflation became a concern for investors. European inflation was confirmed at 3.4% YoY in September, and concerns grew that the European Central Bank could change its monetary policy.

European Central Bank President Christine Lagarde said that ECB would maintain its accommodative policy for as long as necessary, but this could change soon. Germany’s DAX index has advanced again above 15,500 points, but it is still trading below its recent highs.

Germany’s recovery from the pandemic has been strong so far, and the country will release the preliminary estimates of its October Inflation data and its Q3 GDP next week.

Results from many big companies provided a strong start to third-quarter earnings, and investors’ focus will remain on the third-quarter earnings season because many companies have yet to publish their reports.

Next week, Deutsche Bank, Volkswagen,  Linde, MTU Aero Engines, and Daimler are among the companies scheduled to report quarterly results.

According to the German Economic Ministry, the outlook for the industry remains positive, but the world’s supply chains crisis represents a serious problem for Germany because of its dependence on exports.

The German economy is particularly vulnerable to shortages of key parts and raw materials, and more than 40% of companies reported they had lost sales because of supply problems.

Many big companies scaled back production of some of their most profitable models, while Opel announced last month that it would shut down a factory in Eisenach until the beginning of 2022.

It is important to say that nearly half of Germany’s economic output depends on exports of cars, machine tools, and other goods, while the semiconductor shortage throttling global car production suggests more pain for the automotive industry.

Despite this, the German Economic Ministry reported that it expected this effect to be temporary while the German central bank expects that the German economy could grow 3.7% this year. The German Economic Ministry added:

Healthy order books give us reason to expect strong recovery impulses from industry, and thanks to that strong overall economic growth

The European Central Bank recently reported that exports from Eurozone would have been at least 7% higher in the first half of the year if not for supply bottlenecks. The European Central Bank will announce its decision on monetary policy next Thursday, which could significantly influence on DAX index in the near term.

15,000 points represent support

Data source: tradingview.com

DAX index has advanced again above 15,500 points, and if the price jumps above 15,800 points, the next target could be at 16,000 points.

On the other side, if the price falls below strong support that stands at 15,000 points, it would be a strong “sell” signal, and the next target could be around 14,500 points.

Summary

The European Central Bank will announce its decision on monetary policy next Thursday, which could significantly influence on DAX index in the near term. DAX index has advanced again above 15,500 points, and if the price jumps above 15,800 points, the next target could be at 16,000 points.

The post DAX index forecast ahead of the ECB meeting appeared first on Invezz.

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Poland Will Not Be “Blackmailed” Into Accepting European Union Laws, PM Morawiecki Says

Poland Will Not Be "Blackmailed" Into Accepting European Union Laws, PM Morawiecki Says

Authored by Naveen Athrappully via The Epoch Times,

Polish Prime Minister Mateusz Morawiecki said on Thursday that his country will not bow to the Europe

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Poland Will Not Be "Blackmailed" Into Accepting European Union Laws, PM Morawiecki Says

Authored by Naveen Athrappully via The Epoch Times,

Polish Prime Minister Mateusz Morawiecki said on Thursday that his country will not bow to the European Union’s “blackmail” on deciding legal frameworks of member states, but is open to constructive dialogue.

Arriving at a summit of the 27-member bloc, Morawiecki said that Poland “was as faithful to the rule of law as others and as the EU institutions are.” He added,

“Some EU institutions assume the right to decide on issues to which they have not been entitled to decide. They assume competencies which have not been handed over to them in the treaties.”

Morawiecki said that EU laws maintain supremacy over national laws on matters transferred to the EU. “We don’t agree to the constantly broadening range of competencies but we will, of course, talk about it.”

On Oct. 7, Poland’s Constitutional Tribunal ruled that some elements of EU law were incompatible with the country’s constitution. This ruling, criticized by Brussels, essentially gave national law primacy over that of the EU.

“It has to be clear: You are a member of a club, you have to abide by the rules of the club. And the most important rule of the club is that the European law is over national law,” the EU’s top diplomat, Josep Borrell, told Reuters.

Since the nationalist Law and Justice (PiS) party took over power in 2015, the ideological conflicts have incrementally increased.

European Parliament President David Sassoli said the Polish tribunal’s ruling challenged “the legal bedrock of our Union,” and that, “never before has the Union been called into question so radically.”

European Commission President Ursula von der Leyen laid out three options as a response.

The first option, “infringement,” is where the commission legally challenges the verdict of the Polish court.

The second option, which is active currently, involves the withholding of funds. Warsaw will not be able to access the 36 billion euros ($42 billion) of COVID-19 pandemic recovery grants. This could lead to a further blockage of around 70 billion euros ($81 billion) set aside for development projects in the 2021-2027 budget.

The third option would be the implementation of Article 7 of the EU treaty which suspends member states of certain rights, including the right to vote on EU decisions.

Morawiecki, however, maintained his country’s stance under repeated criticism in the tense debate on Tuesday. This led to the idea of Poland exiting the bloc which the prime minister dismissed. He said that there were no plans for a “Polexit” as there is considerable support among the Polish for remaining within the EU.

A majority of European countries, including Ireland, France, Sweden, Finland, Luxembourg, and the Netherlands were critical of Poland, barring staunch ally Hungary. Hungarian Prime Minister Viktor Orban has not been a supporter of excessive European Union interference in the laws and decisions of member states.

“Poland is one of the best European countries. There is no need for any sanctions, it’s ridiculous,” Orban said.

Dutch Foreign Minister Ben Knapen implied the issue will soon need to be addressed.

“The time for talking is never over, but it doesn’t mean that you cannot take action in the meantime,”  Knapen said. “It’s going to come soon.”

Outgoing German Chancellor Angela Merkel called for finding “ways of coming back together,” and warned against isolating Poland, the largest ex-communist EU country of 38 million people.

Tyler Durden Sat, 10/23/2021 - 09:20

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Should I invest in Coca-Cola shares after a positive view from Morgan Stanley?

The Coca-Cola Company (NYSE: KO) shares have weakened from their recent highs above $57, registered in August 2021, and the current price stands at $54.45. Coca-Cola declared a $0.42 per share quarterly dividend last week, and Morgan Stanley continues…

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The Coca-Cola Company (NYSE: KO) shares have weakened from their recent highs above $57, registered in August 2021, and the current price stands at $54.45. Coca-Cola declared a $0.42 per share quarterly dividend last week, and Morgan Stanley continues to have a positive view on KO shares.

Morgan Stanley has a positive view

Coca-Cola continues to improve its position in the market, and the board of directors declared a $0.42/quarterly share dividend last week, which will be payable on December 15.

Coca-Cola reported better than expected second-quarter results in July; total revenue has increased by 42% Y/Y to $10.1 billion, which was more than expected, while the GAAP EPS was $0.61 (beats by $0.05).

Through the second quarter, volume trends steadily improved each month, driven by the recovery in markets from the pandemic, and the company’s management expects another EPS beat in Q3.

Coca-Cola expects to deliver organic revenue growth for the 2021 fiscal year of 12% to 14% and comparable EPS growth of 13% to 15% compared with the previous year.

According to the latest news, Molson Coors has signed an exclusive agreement with Coca-Cola to manufacture, market, and distribute Topo Chico Hard Seltzer in Canada. The product is scheduled to launch in the summer of 2022, less than two years after the successful launch in the United States.

Topo Chico Hard Seltzer has garnered a 2.4% share of the U.S. market, and this deal will certainly help Coca-Cola to expand its revenue base further.

Last month, Coca-Cola introduced a new global brand platform called Real Magic with a new campaign, “One Coke Away From Each Other.” This is the first new global platform since 2016, and the company’s stability in a variety of market conditions has revealed its true staying power.

Morgan Stanley has a positive view on KO shares with a price target of $65, representing 20% upside potential. Dara Mohsenian, an analyst from Morgan Stanley, added:

The outlook for Coca-Cola remains positive; we see some headwinds from the recent increase in global COVID cases and slightly lower our FY21 topline forecasts, but remain above consensus in 22/23. We expect a return to outsized sales growth vs. peers post COVID, with improved execution and higher margins.

Technically looking, Coca-Cola shares could advance above the current price levels, but this company is not undervalued with a market capitalization of $234 billion. The book value per share is around $5, and Coca-Cola trades at more than seventeen times TTM EBITDA.

$60 represents strong resistance

Data source: tradingview.com

Coca-Cola shares have weakened from their recent highs above $57, and if the price falls below $50 support, the next target could be at $45. On the other side, if the price jumps above the strong resistance that stands at $60, the next target could be at $65 or even above.

Summary

Coca-Cola shares have weakened from their recent highs above $57, but Morgan Stanley continues to have a positive view on KO shares with a price target of $65. Coca-Cola continues to improve its position in the market, but this company is not undervalued with a market capitalization of $234 billion.

The post Should I invest in Coca-Cola shares after a positive view from Morgan Stanley? appeared first on Invezz.

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