Stocks Trade Mixed on Virus Jitters, Dollar Rises: Markets Wrap By Bloomberg



(Bloomberg) — Stocks came under pressure in Asia and U.S. equity futures retreated after Japan reported two deaths from the coronavirus and cases in South Korea jumped, spurring concerns about the spread of the disease outside China.

Futures on the S&P 500 Index were down along with the after the Japanese report. The dollar rose against most Asian currencies, and held near the strongest against major counterparts since May 2017. Australia’s dollar reached its lowest against the greenback since the global financial crisis after a monthly jobs report underscored slack that may keep monetary policy easy. Treasuries edged up.

Japan’s earlier climbed as much as 1.2% after an overnight tumble in the yen boosted prospects for exporter earnings. The yen slumped past 111 per dollar with little immediate trigger; market participants ascribed a host of reasons, ranging from disappointing economic news to early positioning before the fiscal year-end next month. The currency Thursday took back a sliver of the biggest losses since August.

While the number of new coronavirus cases in China continues to come down — epicenter-province Hubei reported a steep drop Thursday, though that was tied at least in part to another change in methodology — those outside are sparking alarm. Japan, which has come under criticism for insufficient efforts to contain the disease, said two people from a quarantined ship have died.

“Over the next couple of months we are going to see very bad economic data coming out of China and the rest of the Asian markets,” Suresh Tantia, senior investment strategist at Credit Suisse (SIX:), told Bloomberg TV in Singapore. “Analysts are likely to revise down the earnings estimates. So, after this rebound, we don’t see much value in Asian markets.”

Elsewhere, oil gained as U.S. sanctions on Russia’s largest producer and conflict in Libya put the focus on supply threats.

Here are some key events coming up:

  • Earnings season rolls on, with results from Deere & Co. set for Friday.
  • Indonesia is expected to cut interest rates on Thursday, following emerging-market peers that have already moved.
  • Group of 20 finance ministers and central bank chiefs are scheduled to meet Feb. 22-23 in Riyadh, Saudi Arabia, and are expected to discuss efforts to support growth amid the coronavirus threat.

These are the main moves in markets:

Stocks

  • Futures on the S&P 500 Index were down 0.1% as of 1:22 p.m. in Hong Kong. The benchmark reached another record high Wednesday.
  • Japan’s Topix index rose 0.3%.
  • Hong Kong’s declined 0.6%.
  • rose 1%.
  • South Korea’s Kospi index fell 0.5%.
  • Australia’s S&P/ASX 200 Index rose 0.3%.
  • fell 0.3%.

Currencies

  • The yen was flat at 111.36 per dollar after sliding about 1.4% on Wednesday.
  • The offshore yuan fell 0.3% to 7.0321 per dollar.
  • The euro was at $1.0797, little changed.
  • The Dollar Index was at 99.680, after reaching its highest since May 2017 Wednesday.

Bonds

  • The yield on 10-year Treasuries was at 1.56%, down one basis point.
  • Australia’s 10-year yield slid four basis points to 1%.

Commodities

  • West Texas Intermediate crude advanced 0.5% to $53.54 a barrel.
  • Gold dipped 0.2% to $1,609.37 an ounce.
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Asian markets mixed after China cuts loan prime rate


Asian markets were mixed in early trading Thursday after China’s central bank cut its loan prime rate, as expected.

The People’s Bank of China cut its benchmark one-year loan prime rate by 10 basis points, and the five-year loan prime rate by 5 basis points. That came days after central bank officials cut the one-year medium-term lending rate to 3.15% from 3.25% and conducted additional monetary stimulus.

But some found the PBoC’s actions underwhelming. “Not nearly enough,” wrote Stephen Innes, chief market strategist at AxiTrader, in a note. “Although the LPR came in on expectation, the market was hoping for 4 % on the one-year LPR while pining for a nudge lower five years. The PBoC needs to exceed the market expectations, not hit them in this environment.”

Hong Kong’s Hang Seng Index

HSI, -0.71%

  fell 0.8%, while the Shanghai Composite

SHCOMP, +0.90%

  rose 0.5% and the Shenzhen Composite

399106, +1.46%

  gained 1%. Japan’s Nikkei

NIK, +0.32%

  advanced 0.3%, while South Korea’s Kospi

180721, -0.47%

  sank 0.5%. Stocks ticked up in Indonesia

JAKIDX, +0.11%

 , but benchmark indexes in Taiwan

Y9999, -0.29%

  and Singapore

STI, -0.67%

  declined. Australia’s S&P/ASX 200

XJO, +0.25%

  gained 0.2%.

Worries remain about the impact the coronavirus outbreak will have on the global economy, and especially China’s. New cases in China slowed again Thursday, with just 394 new cases from the previous day. Still, China has reported 74,576 total cases, with 2,118 deaths, according to the Associated Press.

On Wall Street on Wednesday, the S&P 500 and Nasdaq finished at all-time highs as investors were encouraged by comments from the Federal Reserve and measures China says it has taken to help coronavirus-stricken businesses.

The Dow Jones Industrial Average

DJIA, +0.40%

  advanced 115.84 points, or 0.4%, to 29,348.03. The S&P 500

SPX, +0.47%

 rose 15.86 points, or 0.5%, to end at 3,386.15, for another record finish. The Nasdaq Composite

COMP, +0.87%

  added 84.44 points, or 0.9%, to end the session at a record at 9,817.18, its second straight all-time closing high.

West Texas Intermediate crude for March delivery

CLH20, +0.47%

  added 18 cents to $53.47 a barrel in electronic trading on the New York Mercantile Exchange. April Brent crude, the global benchmark, gained 7 cents to $59.19 a barrel.

The dollar

USDJPY, +0.03%

  edged up to 111.40 Japanese yen.



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Target: Pre-Earnings Buy Signals – Target Corporation (NYSE:TGT)


I last recommended Target (TGT) when it was trading in the low $50s. It is now more than double that price. I was recently asked whether TGT is still worth a buy.

Worth Buying In General?

Besides having a strong dividend history and high dividend yield relative to its industry, TGT also excels at returning capital to shareholders via buybacks. While the defensive retail sector has an average share buyback ratio of zero over the past three years, TGT’s buyback ratio is nearly five.

The company is quite profitable, in spite of what the bad news in the past couple months regarding falling holiday sales might imply. Several of its important profitability metrics, including return on equity, return on assets, and net margin (income over revenue), are in the top quintile of its industry. Importantly, EPS is on the rise, and analyst estimates expect the uptrend to hold. With earnings coming up in March, this is one value to keep an eye on, as EPS is correlated with TGT stock price:

(Source: Simply Wall St)

Relative to the rest of its industry, TGT offers one of the best EPS growth trends. Other comparisons, too, show the company to be a rare balance of value and the return of shareholder capital:

(Source: Stock Rover)

As for that dividend, it is safe and stable. Currently, the dividend is covered by earnings, with only a 41% payout rate. If earnings and dividends increases continue on their current track, the payout rate will become even lower over the years, helping TGT maintain its status as a safe dividend growth investment.

Still Worth Buying at this Price? Entry Point Talk

The first thing to note is that the stock is still fairly valued by many of my measures, especially when compared to the consumer defensive discount store industry:

TGT

Industry

EBITDA/EV

0.098

0.079

Price/FCF

17.8

27.4

Price/Earnings

19

41

Price/Tangible book

5.2

20.7

(Source: Damon Verial; data from Tiingo)

We should remember that it is not the price of a stock that matters, but whether it will be trading at a higher price in the future. Fair valuations, especially against the industry that contains the stock, support the idea that a stock is not overpriced – i.e., we don’t have the irrational buying to create an unsupported bubble.

Notably, February is one of the best times to buy TGT:

(Source: Damon Verial; data from Tiingo)

From February to March, TGT has yielded an average return of over 5%. You could play this seasonally, exiting for April-May, and re-entering in June if you like to time the market. Even if you don’t, the above chart can be useful for buy-and-holders, giving you two strong dollar cost-averaging entry points (February and June).

Entering now also gives you access to the upcoming dividend (ex-dividend date is Feb18). Based on TGT’s dividend pattern, the company should be raising its dividend soon:

(Source: Stock Rover)

If you want to drill down even further, you can find the best entry time to be on down area gaps. These often occur in the morning, at market open. For TGT, the probability of such a gap filling within the day is roughly two-thirds and gives you an expected return of 56 cents per share. You can think of entering on a down gap as a discount on your holding; with the average down gap being of size $1.33, this is a decent discount.

Ideas for Earnings

So, your eyes should be on earnings. TGT reports next month, and the recent news of lower comps, expectations and sentiment are down. This is good, as an earnings surprise can easily reverse expectations and sentiment, leading to higher price targets.

And the company has a good track record of surprising on earnings:

(Source: Stock Rover)

This makes this year’s February an even better entry point. Of course, when playing earnings, we wish to hedge our downside risk. The best way to do this is via options.

A simple options strategy is to simply buy calls before earnings. I like the Mar13 $118 calls. If you want something more complex, with better downside protection, consider the following strategy:

  1. Buy 1x Mar13 $105 call
  2. Sell 5x Mar13 $122 calls

This strategy reduces risk by giving you an upfront payment for opening the position. You will profit no matter what, provided TGT closes below $123 by Mar13. The maximum profit is achieved when TGT closes at $122 by Mar13.

The main disadvantage here versus the long call is that you have limited upside profit potential. Of course, you can move the strike price of the short calls upward to increase your upward profit potential in exchange for less initial credit. In addition, if you cannot sell calls in your account, this strategy is outside of your toolbox.

Risks

Going long on TGT is not without risks, of course. One general risk is related to the company’s dividend yield, which is lower than its historical average. A low historical dividend yield is an obstruction to buying and position-adding, as dividend investors feel they are buying in at a worse point than before.

Many dividend stocks find strong support levels when dividend yields are lower than their historical averages, as investors want to “lock in” a high yield. This means TGT will have problems finding a floor if it falls. And market risk – perhaps the biggest risk to TGT – makes a fall possible (especially considering the COVID-19 affair), dragging down the stock regardless of the strength of the company itself.

Amazon (AMZN), of course, is always a risk to Target. Amazon’s constant downward pressure on shipping prices and duration continue to make it a strong alternative to the physically oriented Target. Target’s strong point over Amazon has always been convenience and ever presence, but as Amazon enhances the convenience of online buying, the incentive to shop at Target decreases. Still, Target has fared well over the years despite analysts claiming Amazon would be the downfall of Target. We have not yet seen Target enter a phase of redundancy, but the possibility is always there, especially as Amazon ups its game. Be sure to watch Target’s foray into digital, which is currently slow, going forward.

Finally, the falling holiday sales could show a reversal in consumer spending – a large risk to TGT, but a mostly unpredictable one. You can easily hedge this risk via a pair trade. For example, go short on consumer staples, such as via the consumer stables select ETF (XLP), while being long on TGT; this hedges industry risk.

As for the options strategy, above, you have lower downside risk than you would with a pure bull call spread due to opening the position at a net credit, but you “gain” an upside risk if TGT rallies too quickly. Maximum loss here is unlimited but does require a significant surge in the stock before Mar13. As long as you have a clear price target for TGT, you can manage this risk (by placing the strikes of the short calls at that price target).

Give the option strategy a shot, and let me know how it goes.

Happy trading!

Exposing Earnings is an earnings-trading newsletter (with live chat). We base our predictions on statistics, probability, and backtests. Trades are recommended with option strategies for the sake of creating high-reward, low-risk plays. We have 89% accuracy for our predictions in 2019.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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Google plans to move UK users’ accounts outside EU jurisdiction By Reuters


© Reuters. The Google internet homepage is displayed on a product at a store in London

By Joseph Menn

SAN FRANCISCO (Reuters) – Google is planning to move its British users’ accounts out of the control of European Union privacy regulators, placing them under U.S. jurisdiction instead, the company confirmed late on Wednesday.

Reuters had reported the plans earlier on Wednesday, citing people familiar with them.

The shift, prompted by Britain’s exit from the EU, will leave the sensitive personal information of tens of millions with less protection and within easier reach of British law enforcement.

Alphabet Inc’s (O:) Google intends to require its British users to acknowledge new terms of service including the new jurisdiction, according to people familiar with the plans.

“Nothing about our services or our approach to privacy will change, including how we collect or process data, and how we respond to law enforcement demands for users’ information,” Google said in an emailed statement. “The protections of the UK GDPR will still apply to these users.”

A spokesman declined to answer questions.

Ireland, where Google and other U.S. tech companies have their European headquarters, is staying in the EU, which has one of the world’s most aggressive data protection rules, the General Data Protection Regulation.

Google has decided to move its British users out of Irish jurisdiction because it is unclear whether Britain will follow GDPR or adopt other rules that could affect the handling of user data, the people said.

If British Google users have their data kept in Ireland, it would be more difficult for British authorities to recover it in criminal investigations.

The recent Cloud Act in the United States, however, is expected to make it easier for British authorities to obtain data from U.S. companies. Britain and the United States are also on track to negotiate a broader trade agreement.

Beyond that, the United States has among the weakest privacy protections of any major economy, with no broad law despite years of advocacy by consumer protection groups.

Google has amassed one of the largest stores of information about people on the planet, using the data to tailor services and sell advertising.

Google could also have had British accounts answer to a British subsidiary, but has opted not to, the people said.

Lea Kissner, Google’s former lead for global privacy technology, said she would have been surprised if the company had kept British accounts controlled in an EU country with the United Kingdom no longer a member.

“There’s a bunch of noise about the U.K. government possibly trading away enough data protection to lose adequacy under GDPR, at which point having them in Google Ireland’s scope sounds super-messy,” Kissner said.

“Never discount the desire of tech companies not be caught in between two different governments.”

In coming months, other U.S. tech companies will have to make similar choices, according to people involved in internal discussions elsewhere.

Facebook (O:), which has a similar set-up to Google, did not immediately respond to requests for comment.





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The hedge-fund investor who has beaten Warren Buffett by 200x likely made a killing on Tesla


Renaissance Technologies, added more than 3 million shares of Tesla to its holdings in the fourth quarter of last year, as the electric-vehicle maker’s shares catapulted higher, according to public filings.

The hedge fund founded by James Simons, considered the premiere quantitative-driven investor, owned 3.9 million shares of Tesla at the end of Dec. 31, with the company’s stake in Renaissance’s portfolio jumping from 0.1% in the prior quarterly period to 1.3%, according to file-tracking site Whalewisdom.

The purchases would have come as Tesla’s shares

TSLA, +6.88%

were zooming higher, punishing a number of investors with short positions who had bet that the Elon Musk-run Silicon Valley darling would see its price collapse soon. Instead, Tesla’s shares have surged 142% in the past three months and has more than doubled since the beginning of 2020, according to FactSet data.

By comparison, the Dow Jones Industrial Average

DJIA, +0.40%

has gained 4.2% over a three-month period, and 2.4% so far this year, while the S&P 500 index

SPX, +0.47%

has climbed 7.9% in the past three months and 4.2% in the year to date. The technology-laden Nasdaq Composite

COMP, +0.87%

 has advanced nearly 14% in the past three months and boasts a 8.3% gain in 2020 so far.

By some reckonings, Simons is one of the most famous quantitative traders ever. He retired from the firm’s day-to-day operations of Renaissance a decade ago, but is still involved with the firm.

For his efforts, he ranks No. 21 on the Forbes list of the wealthy, with a net worth of $21.6 billion.

Renaissance’s main investment offering is the flagship Medallion Fund, which has generated a 39% average annual return from 1988 to 2018, that is despite rich fees, which currently include a 5% management and 44% performance fees.

Those costs haven’t prevented Medallion from outperforming Warren Buffett’s Berkshire Hathaway

BRK.A, +1.25%

BRK.B, +1.09%

 over the same 30-year period writes Nick Maggiulli of Ritholtz Wealth Management.

The Medallion Fund limits its assets to roughly $10 billion and is only available to Renaissance employees.

For its part, Tesla completed a $2 billion secondary offering on Friday and analysts have continued to hold a bullish view on the company. Bernstein analyst Toni Sacconaghi nearly doubled his price target, describing the vehicle maker as the “ultimate ‘possibility’ stock.” Sacconaghi raised his price target to $730, which was still below current levels at $845, from $325. “Revenue in 2020 is expected to rise by 30.3% to approximately $32 billion, and earnings are forecast to rise to $8.68 per share from $0.20 per share in 2019,” Whalewisdom researchers wrote.

Beyond Renaissance Tech, JPMorgan Chase & Co.

JPM, +1.36%

was seen purchasing roughly 2.2 million shares of Tesla in the most recent period, bringing its position to 2.5 million, according to Whalewisdom data.



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