Daily Agenda: Abenomics Still Struggling

Oil prices slip even as conflict in Yemen escalates; RBS announces the sale of private banking subsidiary; Chevron to sell holding in Caltex Australia.


Yuriko Nakao

Japanese consumer inflation data, released today, is proving to be a major setback for Bank of Japan governor Haruhiko Kuroda and his colleagues as they continue to pursue an unprecedented campaign of quantitative easing. February consumer inflation index levels released by the Statistics Bureau registered at a seemingly healthy 2.2 percent year-over-year but, when stripped of the impact of the increased sales tax and volatile components, the indicator came in at 0 percent, the lowest reading since May 2013. Overall household spending, while slightly better than forecast, contracted by 2.9 percent year-over-year in February. A weakened yen has been enough to help some export centers but to date, Japanese internal consumption remains too weak to achieve the ambitious targets set by the Bank of Japan and Prime Minister Shinzo Abe’s administration. The long-term question may be what Plan B will look like if easing fails to get results in the coming quarters.

Conflict in Yemen continues. Egyptian President Abdel Fattah el-Sisi announced today that Egyptian military units may join coalition forces from Saudi Arabia and other nations in ground operations in Yemen. Overnight, West Texas Intermediate crude oil futures for May delivery gave back 2 percent of Thursday’s gain despite the escalating tension between the coalition and Iranian-backed forces.

RBS sells Coutts. Royal Bank of Scotland Group, the U.K.’s biggest state-owned bank, unveiled an agreement to sell private bank Coutts International to Geneva–based Union Bancaire Privée in a move that will mark a withdrawal from the Swiss market for the U.K. lender. Proceeds from the sale will reportedly top $360 million and includes international branch offices.

Chevron divests major holding. Chevron Corp. announced today that it intends to sell its holding in Caltex Australia, the country’s biggest refinery operator, for $3.6 billion through a public offering to be managed by Goldman Sachs Group. The floor prices for the sale has been set at approximately a 10 percent discount from Caltex’s closing price during the most recent equity trading session in Sydney.

U.S. GDP and PCE on deck. In the U.S., revised fourth-quarter GDP and personal consumption expenditure data will be a focus for market sentiment while final University of Michigan consumer sentiment data for March will also be released. Consensus estimates call for overall growth in the final three months of 2014 to improve over the initial revision on recalculated inventory investment.

Portfolio Perspective: More Financial Engineering on The Way to Boost Stock ValuationsBrian Reynolds, Rosenblatt Securities


After Tuesday’s close, Merck announced a massive $10 billion buyback. And before Wednesday’s open it was announced that Kraft, with a market cap of $36 billion at the time, was being taken out. That’s $46 billion of stocks taken out between Tuesday’s close and Wednesday’s open. A look at Kraft’s stock price chart shows that stock investors continue to underprice equities compared to where credit investors will finance them. That’s more evidence that the credit boom should continue to take stock prices higher once this correction concludes. The funny thing, though, is that despite the massive gain they just received, current Kraft shareholders are leaving a lot of money on the table. You can see this in the action of Heinz and Kraft’s bonds.

Kraft is going to be combined with Heinz. Heinz was acquired in a leveraged buyout and taken private, so it is now junk-rated. The new combination is likely to be investment-grade rated, however, because of Kraft’s quality and asset size. So, Heinz’s bonds surged in price this week, as they are likely to be refinanced at lower rates. In prior cycles, the bonds of the company being acquired suffered because the added leverage lowered their rating enough to knock their price down. But in this cycle, because stock valuations are so low relative to credit valuations, the bonds of the company being acquired have often rallied. That was the case again on Wednesday with Kraft.

So, the bondholders of both companies had a windfall on Wednesday! That means that despite the intensity of the credit boom, credit investors still haven’t been aggressive enough. And, it means that the acquirers could have paid a lot more for Kraft and still be able to comfortably finance it. Because of investors’ dislike of equities, however, they don’t have to.

Brian Reynolds is the chief market strategist for Rosenblatt Securities in New York.