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Market Snapshot*
DJIA
17712.66
+34.43
4891.22
+27.86
S&P 500
2061.02
+4.87
10-Year
1.9511%
16/32
Nasdaq
Friday, March 27, 2015
30-Year
2.5251%
1 16/32
Euro
$1.08995
+0.0014
$48.87
-2.56
Nymex Crude
Source: SIX Telekurs, ICAP plc
Stocks
U.S. stocks ended slightly higher in low
volume trading after four days of losses,
as late-breaking deal news gives semiconductor shares a boost. WSJ reports
late in the session that Intel is in talks to
purchase Altera, giving the major indexes
a boost.
Treasurys
U.S. government bonds strengthened for
the first time in three days Friday after a
report showed growth in the U.S. economy slowed in the final quarter of last
year. A selloff in U.S. crude oil--down
about 5% Friday--reduced worries over
inflation, a main threat to the value of
fixed-income assets over time, contributed to the bond market's strength.
Forex
The dollar eased against the euro and
the British pound on Friday as lukewarm
U.S. data reflected a mildly slowing
economy and diminishing confidence
among Americans to spend money. The
euro inched up 0.1% to $1.0899 and has
increased 0.7% for the week. The pound
rose 0.3% to $1.4879 but has slipped
0.4% lower this week.
Commodities
U.S. oil prices fell Friday, snapping a
five-session winning streak as concerns
about fighting in the Middle East faded,
negotiators appeared optimistic about a
nuclear agreement with Iran, and a
measure of U.S. drilling activity underwhelmed the market. U.S. crude oil for
May delivery fell $2.56, or 5%, to settle
at $48.87 on the New York Mercantile
Exchange, giving back its gains from
Thursday when Saudi Arabian bombing
runs against Shiite rebels in Yemen had
pushed prices higher.
*preliminary values subject to adjustments
Tomorrow’s Headlines
Intel In Talks To Buy Altera
Intel Corp. is in talks to buy Altera Corp. in a deal that would be the chip-making giant's largest takeover ever.
Terms of the potential deal and its timing couldn't be learned, and it is possible there ultimately won't be one.
With a market capitalization of $10.4 billion before The Wall Street Journal's
report Friday, Altera would be a big bite for Intel, which has traditionally stuck
to smaller acquisitions whenever it has done deals.
Intel is a giant in the chip industry, with a market capitalization of about $140
billion, but weakening demand for personal computers has hurt its results.
This month, the Santa Clara, Calif., company cut its revenue outlook for the
first quarter by nearly $1 billion to roughly $12.8 billion.
Altera, based in San Jose, Calif., designs processors used in phone networks, cars and other products.
Intel, which supplies most of the chips that serve as calculating engines in
PCs and server systems, began suffering several years ago as consumer
spending shifted from laptop computers to tablets and smartphones. Rival
chip designs have been used in many of those products.
Economic Growth, Corporate Profits
Slowed as 2014 Ended
Profits at U.S. corporations in late 2014 posted their largest drop in four
years, a reflection of an economy weighed down by a strong dollar and weak
global demand.
The Commerce Department’s third estimate of fourth-quarter gross domestic
product also showed that the economy slowed in the final months of 2014,
putting the growth trajectory on a lower path ahead of an apparent slowdown
early this year.
continued on page 2
Monday’s Calendar
8:30 a.m.
Feb Personal Income & Outlays Personal Income (previous
+0.3%), Personal Spending (previous -0.2%), PCE Price Index
Monthly (previous -0.5%), Yearly (previous +0.2%), PCE Core
Price Index Monthly (previous +0.1%), Yearly (previous +1.3%)
10:00 a.m.
Feb Pending Home Sales Index Current (previous 104.2), MoM
Pct Change (Current Period) (previous +1.7%), YoY Pct Change
(Current Period) (previous +8.4%)
10:30 a.m.
Mar Texas Manufacturing Outlook Survey Business Activity Index
(previous -11.2), Manufacturing Production Index (previous 0.7)
3:00 p.m.
Mar Agricultural Prices Farm Prices, M/M (previous -2%)
N/A
FRB Atlanta Annual Financial Markets Conference reception and
dinner with Stanley Fischer
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page 1
Friday, March 27, 2015 4 p.m. ET
Tomorrow’s Headlines
Mr. Lubitz’s check-up was about “diagnostic clarifications”
and details can’t be revealed due to confidentiality rules,
the hospital said.
continued
GDP, the broadest measure of goods and services produced
across the economy, expanded at a seasonally adjusted
annual rate of 2.2% in the fourth quarter, the Commerce
Department said. That was unchanged from its previous estimate last month. Economists surveyed by The Wall Street
Journal had expected an upward revision to 2.4% growth.
“Reports that Andreas. L. was treated in our house for
depression, are, however, wrong,” it added.
Citadel Securities to Shut Down
Apogee Dark Pool in U.S.
Corporate profits after tax—without accounting for the value
of inventory and depreciation of buildings and equipment—
fell at a 3% pace from the third quarter. That was the largest
quarterly drop in profits since the first quarter of 2011.
Citadel Securities plans to shut down its Apogee “dark pool”
in the U.S., according to people familiar with the matter, as
the U.S. market maker focuses on its faster-growing offexchange trading platform aimed at institutional investors.
On a year-over-year basis, the report pegged corporate
profit growth at 2.9%, slowing from 5.1% annual growth in
the third quarter. As a share of the total economy, corporate
profits were just a hair below the record high of 10.5% set
in 2013.
Details on when the shutdown will occur couldn’t be learned.
The move comes as competition among dark pools and
operators of other private trading venues is set to intensify.
In January, Nasdaq OMX Group Inc. said it had approached
several large banks to take over their dark pools. That same
month, The Wall Street Journal reported that a group of
money managers led by Fidelity Investments was close to
launching a private trading venue.
Dow Chemical to Split Off
Chlorine Business
Dow Chemical Co. on Friday said it would split off a significant portion of its chlorine business and merge it with Olin
Corp. in a deal valued at $5 billion.
Dow’s move away from chlorine, which it has produced since
its founding more than a century ago, is part of a broader
strategic shift by the chemical giant from the increasingly
commoditized business of turning oil and natural gas into
basic chemicals to a focus on higher-margin products.
The company had announced its intention to shed the chlorine business in December 2013, and executives from Dow
and Olin on Friday said the two companies had been discussing an arrangement ever since.
After the merger is completed, Dow shareholders will hold
about 50.5% of Olin, while Olin shareholders will own about
49.5%. The deal’s value of $5 billion includes $2 billion in
cash, which Dow will receive; about $2.2 billion in Olin
stock, which Dow’s shareholders will receive at closing; and
$800 million, which reflects the assumption of pension and
other liabilities. With $2.2 billion in revenue last year, Olin is
a fraction of the size of Dow, which had more than $58 billion in revenue in 2014.
Germanwings Co-Pilot
Had Hospital Check-Up
German co-pilot Andreas Lubitz, who appeared to have
deliberately crashed Germanwings Flight 9525 on Tuesday,
had been for medical check-ups at the University Hospital
in Duesseldorf, but had not been treated for depression at
the clinic.
A check-up took place in February this year and last on
March 10, the hospital said on Friday, two weeks before the
27-year-old appeared to intentionally crash the plane he
was co-piloting with 149 people on board into a French
mountainside on a flight from Barcelona to Duesseldorf.
Dark pools are also attracting increasing regulatory scrutiny. Questions have arisen about whether they have accurately disclosed how they operate, and whether they gave
preferential treatment to some high-speed trading firms. In
January, UBS AG agreed to pay $14.4 million to settle
Securities and Exchange Commission allegations it created
an uneven playing field inside its dark pool. The bank neither admitted or denied the charges, but said it had remedied “the issues that led these charges” in 2012. The fine
was the highest ever paid over a dark pool.
The SEC’s enforcement division director said in January
that there would be “continuing activity in the coming
months” around dark pool operations.
Chicago-based Citadel Securities operates Apogee and
Citadel Connect as two separate platforms that allow
investors to trade stocks away from a traditional
exchange. The alternative trading venues are meant to
help investors achieve better pricing on trades by allowing
them to buy and sell stocks anonymously and to avoid
exchange fees.
BlackBerry Swings to a Profit
BlackBerry Ltd. said a plan to revive its fortunes with
mobile security software and smartphones aimed at corporate and government users remains on track, even though
revenue in its latest quarter fell 32% and was well below
expectations.
Once the dominant smartphone maker, BlackBerry now
commands less than 1% share of the global market following a failed attempt in 2013 to expand beyond its core
enterprise market and compete with the likes of Apple Inc.
in the consumer space. The Canadian company’s twopronged turnaround strategy includes stemming losses by
cutting costs and outsourcing device manufacturing, and
Copyright © Dow Jones & Company, Inc. All Rights Reserved.
www.dowjones.com
continued on page 3
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Friday, March 27, 2015 4 p.m. ET
Tomorrow’s Headlines
Lausanne, Switzerland, with more time, Mr. Hammond said.
continued
spurring software sales by capitalizing on its reputation for
security as well as making devices for business customers.
“I hope that doesn’t mean we have to sit in Lausanne for
another two weeks just because there is another two
weeks,” Mr. Hammond said. “It means we have got a little
bit more negotiating time if we need it, but I think we’re all
hopeful of getting it done as soon as possible.”
Its fiscal fourth-quarter results showed progress on the
first front. BlackBerry swung to a surprise profit in the
period ended Feb. 28 from a year-earlier loss, and said it
expects to achieve sustained operating profits some time
in fiscal 2016.
Ex-Credit Suisse Bankers
Avoid Jail Time
“We are now half way through our two-year turnaround
effort and...our financial house is in order,” Chief Executive
John Chen said on an earnings conference call.
BlackBerry’s cash balance of $3.27 billion at quarter’s end
matched the previous highest cash balance in the company’s history.
“Our financial viability is no longer in question,” Mr. Chen
said.
Iraq Resumes Offensive in
Tikrit After U.S. Airstrikes
After two days of U.S. airstrikes, the stalled Iraqi offensive
to rout Islamic State fighters from Tikrit has resumed, the
Pentagon said Friday.
As Iran-backed Shiite militiamen withdrew from the fight,
thousands of Iraqi government forces sought to capitalize
on the new American airstrikes to dislodge hundreds of
Islamic State fighters hunkered down in the city center.
The push is the first by Iraqi forces into Tirkit since U.S.
planes started hitting Islamic State positions on
Wednesday. The U.S.-led coalition has carried out 20
airstrikes on Islamic State forces in-and-around Tikrit, officials said Friday.
American officials agreed to help Iraq in Tikrit, but only if
the Baghdad government would sideline upward of 20,000
Iran-backed Shiite militiamen that had been at the forefront
of the fight.
The Shiite units, comprising about two-thirds of the 30,000
fighters that sought to retake Tikrit, criticized the American
entry into the battle as they sat on the sidelines—a move
that was hailed by Pentagon officials.
Iran Nuclear Talks Could
Push Past Deadline
International negotiations aimed at reaching a nuclear
agreement with Iran could be extended past a March 31
deadline, U.K. Foreign Secretary Philip Hammond said
Friday.
Mr. Hammond, visiting Washington, said the talks could last
as much as two weeks longer, coinciding with the U.S. congressional recess. Lawmakers have been delaying action
on legislation to ramp up punitive sanctions against Iran in
the absence of a deal by the deadline, but the two-week
congressional break provides negotiators meeting in
Two former Credit Suisse AG bankers who pleaded guilty
to helping wealthy American evade taxes received no jail
time after cooperating in the U.S. case against the Swiss
bank but will have to pay a small fine.
The lenient sentence, handed down Friday, came in
exchange for the men’s cooperation, which helped the
Justice Department secure its first guilty plea against a
financial institution in more than a decade, according to
people familiar with the matter. Last May, Credit Suisse
pleaded guilty to “knowingly and willfully” helping thousands
of U.S. clients open accounts and conceal their “assets and
income from the IRs” and agreed to pay $2.6 billion.
A federal judge in District Court in Alexandria, Va., sentenced Josef Dorig and Andreas Bachmann to five years
unsupervised probation for their roles in helping U.S. customers hide earnings from the Internal Revenue Service in
Switzerland through a web of secret accounts and shell
companies. Mr. Dorig will pay $125,00 and Mr. Bachmann
will have to pay $100,000
Republican-Controlled
Senate Clears Budget Plan
The Senate passed a Republican budget for fiscal year
2016 early Friday morning after a grueling, round-the-clock
marathon of amendment votes.
The conservative spending blueprint for the year that
begins Oct. 1 marked the first GOP budget to clear the
Senate in almost a decade and brought Republicans
another step closer to passing a budget through both
chambers.
The Senate adopted its budget in a 52-46 vote just before
3:30 a.m. Friday, with no Democratic support. GOP Sens.
Ted Cruz of Texas and Rand Paul of Kentucky voted
against it. Mr. Cruz is running for president in 2016 and Mr.
Paul is expected to announce his own White House bid
soon.
The House passed its own GOP budget earlier this week.
Lawmakers are expected to merge the two spending blueprints and both chambers will vote on the unified budget
after the coming two-week spring recess.
“By passing a balanced budget that emphasizes growth,
common sense and the needs of the middle class,
Republicans have shown that the Senate is under new
management and delivering on the change and responsible
government the American people expect,” Senate Majority
Leader Mitch McConnell (R., Ky.) said in a statement after
the vote.
Copyright © Dow Jones & Company, Inc. All Rights Reserved.
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page 3
Friday, March 27, 2015 4 p.m. ET
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Talking Points
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After more than six years of a bull market, investors should stare a cold, hard
truth straight in the face: Future returns on stocks are likely to be far slimmer
than the fat gains of the past few years.
Leading investment analysts think you will be lucky to squeeze out an average
return of 2% annually, after inflation and fees, from a typical portfolio of stocks
and bonds over the coming decade or so.
Investment expenses will loom much larger in a world of smaller expected
returns. So will avoiding big mistakes.
U.S. stocks fell about 3% between Monday and Thursday this past week as economic growth seemed to falter. But that wasn’t nearly enough to make stocks
cheap. One measure of valuation, based on data compiled by Yale University economist Robert Shiller , shows that the market price of the S&P 500 is about 27 times
its average earnings over the past 10 years, adjusted for inflation. The long-term
average, based on data going back to 1871, is about 16 times adjusted earnings.
So how have U.S. stocks performed in the past when valued around 27 times
average earnings? Over the following 10 years, they generated total returns,
counting dividends and adjusting for inflation, averaging about 2.5% annually,
Prof. Shiller told me earlier this month.
Another method of estimating future stock returns yields a higher expectation—
by a hair.
Over time, the return on stocks after inflation has tended to come very close to
the sum of two numbers: dividend yield—total dividends over the past year divided by the current share price—plus the inflation-adjusted growth rate in dividends.
The yield on the S&P 500 is 2%. For more than a century, the growth rate has
averaged about 1.5% after inflation. Add those two numbers and you get 3.5%.
Now consider that the yield—interest income divided by price—on 10-year U.S.
Treasury notes is 2% and that the government’s core measure of inflation is running at about 1.7% annually.
If you have half your portfolio in stocks that return 3.5% and half in bonds that
return 0.3%, you will earn about 1.9% after inflation. If stocks average the 2.5%
return from Prof. Shiller’s data, then a balanced portfolio will return only 1.4%
after inflation. (These numbers assume no fees, taxes or trading costs.)
Either way, “it’s pretty awful by historical standards,” says William Bernstein, an
investment manager at Efficient Frontier Advisors in Eastford, Conn.
Before you despair, bear in mind that the 2.5% expected return that Prof. Shiller
derives from his historical data is an average of many 10-year periods in which
stock returns ranged from losses of nearly 5% to gains of about 7%. All these
results are averaged annually including dividends and after inflation. So 2.5% is
a general expectation, not an exact certainty.
Still, keeping your expectations low is a good idea. “The problem isn’t that you
might be not able to get better than a 2% return,” Mr. Bernstein says, “but that
even getting 2% isn’t going to be psychologically easy.” With stocks and bonds
alike still near record prices, they remain vulnerable to the sort of shocking
decline that can shake many investors out of their conviction.
A few clear guidelines can help you stay the course.
First, you aren’t entitled to higher returns just because you feel you need (or
deserve) them. If traditional investments deliver paltry returns, that doesn’t
ensure that “alternatives” like hedge funds, complex trading techniques or esoteric bond funds will do any better. Take extra risk in a low-return world and you
are likely to reap the risk without earning the reward.
“The things that feel most uncomfortable in the short run are generally the most
rewarding in the long run,” Mr. Bernstein says, “and right now one of the most
continued on page 5
Copyright © Dow Jones & Company, Inc. All Rights Reserved.
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page 4
Friday, March 27, 2015 4 p.m. ET
Talking Points
government would have no choice but to save them in
another crisis.
continued
uncomfortable things is holding cash and fixed income.” By
hanging onto your cash even at today’s invisible yields, you
will be able to buy stock in the next downturn when shares
finally become cheap again.
You can also look overseas now. “The expected returns on
foreign stocks are higher,” Mr. Bernstein says, “plus you’re
buying the currencies cheap relative to the dollar.” Stocks in
Europe and selected other international markets are onehalf to one-third as costly as U.S. shares by Prof. Shiller’s
measure.
Senate Takes Aim At Big Banks
Big banks have something else to worry about when it
comes to writing their “living wills.”
The Senate late Thursday night unanimously passed by
voice vote an amendment to the budget directing
Congress to take punitive measures against big banks
that fail to craft credible plans for how they could collapse
in bankruptcy without damaging the broader economy.
The amendment was sponsored by Sens. Sherrod Brown
(D., Ohio) and David Vitter (R., La.), a bipartisan duo that
has long targeted the largest Wall Street firms for remaining “too big to fail,” or so large and interconnected the
Neither the Senate-passed budget — nor any of the amendments attached to it — are binding policy. But the unanimous vote underscores the political attention the so-called
living wills have in Congress, increasing the pressure on
regulators to dish out harsh medicine to those banks that
can’t produce convincing road maps to their own demise.
Living wills are blueprints that big banks, as part of the
2010 Dodd Frank law, must provide to regulators showing
how they could be dismantled without taxpayer support.
Regulators rebuked 11 of the largest U.S. banks last year
for shortcomings in their plans and demanded significant
progress in the next year. The Federal Reserve stopped
short, however, of declaring the plans “not credible,” a finding that would lead to an escalating series of sanctions.
The Federal Deposit Insurance Corp. did declare the plans
not credible, but both regulators must agree for the consequences to kick in. Some lawmakers have pushed regulators to be more aggressive in using their powers to levy
tougher restrictions and even force the breakup of banks
that don’t produce credible plans.
The Brown-Vitter amendment applied to banks with more
than $500 billion in assets, and directed Congress to “better
protect taxpayers” against those banks without credible living wills by subjecting those banks with higher capital standards, restrictions on growth or activities and even to break
them up.
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page 5