Stocks extend sell-off on growth and Brexit worries


By Chuck Mikolajczak

NEW YORK (Reuters) – A gauge of global equities stumbled on Monday, as losses in Europe and Asia extended to Wall Street on new signs the U.S.-China trade spat was impacting world economic growth, but rebounded from an initial drop as Apple Inc (AAPL.O) shares recovered.

Further denting sentiment was confusion stemming from British Prime Minister Theresa May’s decision to abruptly delay a vote on her Brexit deal on Monday, which weighed heavily on European shares.

“The litany of concerns that investors have to price into the market is long and that litany is dense with a great deal of geopolitical concerns. It is not just Brexit – which is huge – it is Europe generally speaking,” said Peter Kenny, founder of Kenny’s Commentary LLC and Strategic Board Solutions LLC in New York.

Sluggish data from the world’s largest economies including the United States, China, Japan and Germany have disappointed investors in recent days, and scepticism has grown that Washington and Beijing will be able to reach a trade deal before a 90-day window expires.

China reported far weaker-than-expected November exports and imports, showing slower global and domestic demand and raising the possibility authorities will take more measures to keep the country’s growth rate from slipping too much.

On Wall Street, the Dow and S&P were well off session lows while the Nasdaq moved into positive territory as Apple recovered from an initial drop. Shares had slumped more than 3 percent as chip supplier Qualcomm Inc (QCOM.O) said it had won a preliminary order from a Chinese court banning the importation and sale of several iPhone models in China due to patent violations.

“Tech has been the leading edge on the trade lower. Any stability there is going to really help the overall market – massively,” said Kenny.

The Dow Jones Industrial Average (.DJI) fell 133.37 points, or 0.55 percent, to 24,255.58, the S&P 500 (.SPX) lost 13.23 points, or 0.50 percent, to 2,619.85 and the Nasdaq Composite (.IXIC) added 8.39 points, or 0.12 percent, to 6,977.64.

Sterling (GBP=) was last trading at $1.2547, down 1.41 percent on the day. The dollar index (.DXY) rose 0.73 percent.

MSCI’s all-country index <.MIWD00000PUS> was on pace for its fifth straight decline and is down nearly 6 percent over that period, its worst five-day stretch since February. The pan-European STOXX 600 index (.STOXX) lost 1.87 percent and MSCI’s gauge shed 1.20 percent.

Last week’s arrest of the chief financial officer of Chinese smartphone maker Huawei Technologies Co Ltd [HWT.UL] for extradition to the United States was seen as putting up another hurdle to the resolution of a trade war between the world’s two biggest economies.

U.S. Trade Representative Robert Lighthizer said Sunday there was a “hard deadline” to the 90-day trade ceasefire and without a successful end to talks by March 1, Washington would impose new tariffs on Chinese goods.

In another sign of a global slowdown, Japan posted the worst contraction in over four years in the third quarter as uncertainty over global demand and trade saw companies slashing capital spending.

The signs of weakening have taken a heavy toll on oil prices, which have slumped around 30 percent since early October. U.S. crude (CLcv1) fell 2.98 percent to $51.04 per barrel and Brent (LCOcv1) was last at $60.01, down 2.69 percent on the day.

(Additional reporting by Richard Leong; Editing by Nick Zieminski and Lisa Shumaker)



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Stock selloff snowballs on fresh fears for world growth


LONDON (Reuters) – Losses on global stocks snowballed on Monday, with European markets following Asian peers lower as fresh signs emerged of slowing growth worldwide and fears grew that simmering U.S.-China tensions would torpedo chances of a trade deal.

FILE PHOTO: Men look at stock quotation boards outside a brokerage in Tokyo, Japan, December 5, 2018. REUTERS/Issei Kato

Wall Street was set to open lower, futures indicated, after New York-listed shares posted their biggest weekly decline since March.

“Another day, another reason to sell risk. Equity markets remain in a world of pain with everyone in search of a very elusive silver lining,” said Stephen Innes at brokerage OANDA

MSCI’s all-country index .MIWD00000PUS has spent four weeks in the red, despite intermittent rallies fueled by hopes of trade war detente. The pessimism has been exacerbated by data showing the world’s largest economies — the United States, China, Japan and Germany — are all headed for slower growth.

That pushed the index 0.5 percent lower, while a pan-European index fell almost one percent by 0930 GMT and U.S. equity futures ESc1 YMc1 were down 0.5 percent, suggesting more pressure on Wall Street later in the session.

Last week’s arrest of the chief financial officer of Chinese smartphone maker Huawei for extradition to the United States was seen putting up another hurdle to the resolution of a trade war between the world’s two biggest economies.

U.S. trade representative Robert Lighthizer said Sunday there was a “hard deadline” to the 90-day trade ceasefire and without a successful end to talks by March 1, Washington would impose new tariffs on Chinese goods.

“The trade theme will preoccupy the markets through the 90-day truce period between the United States and China, waiting for any signs of concession between the parties,” said Soichiro Monji, senior economist at Daiwa SB Investments in Tokyo.

Economic data has disappointed, too, underscoring the impact of the trade wars on the world economy.

Following weak trade and inflation data on the weekend, China posted far weaker-than-expected November exports and imports, reinforcing expectations Beijing will roll out more stimulus to prevent the economy cooling too fast.

However, the yuan sagged to a one-week low after the weak data CNH=D3.

“(The data) would suggest China woes go well beyond U.S. tariffs, given that China trade surplus to the U.S. was at a record level. One can only imagine the impact on China terms of trade if the U.S. follows through with a 25 percent tariff,” Innes of OANDA said.

Japan posted the worst contraction in over four years in the third quarter as uncertainty over global demand and trade saw companies slashing capital spending.

MSCI’s index of Asian equities outside Japan .MIAPJ0000PUS slid 1.5 percent to a near three-week low, Shanghai shares .SSEC retreated 0.6 percent and Japan’s Nikkei .N225 shed 2.1 percent. Emerging-market stocks lost 1.3 percent .MSCIEF.

Asia’s data came after investors were spooked last week by below-forecast industrial output numbers in Germany and U.S. jobs data showing employers hired fewer workers than expected in November.

The slowdown signs also have pummelled oil prices, which have slumped around 30 percent since early October. Brent futures rose 0.2 percent to $61.90 a barrel after producer club OPEC and some non-affiliated producers announced a supply cut.

DATA AND DOLLAR, PARLIAMENT AND PROTESTS

The U.S. jobs data weakened the dollar by convincing many that U.S. growth has peaked and the Federal Reserve will pause its rate tightening sooner than previously thought. Last week, the dollar posted its worst performance since August against a basket of currencies. .DXY

The dollar was a touch firmer on Monday but stayed near two-week lows. The euro rose 0.3 percent at $1.1418 EUR=EBS.

European investors were keeping their eyes on events in Britain and France.

Sterling inched lower, heading back towards 17-month lows hit last week GBP=D3 versus the dollar, as British Prime Minister Theresa May’s European Union divorce deal looks set to be rejected by parliament in a Tuesday vote.

While that raises fears of a chaotic exit in March, those hoping for a no-Brexit outcome were encouraged by a ruling from the EU’s top court that Britain can revoke its decision to leave the bloc without the consent of other EU members.

France, meanwhile, suffered a fourth weekend of anti-government riots, which the finance minister said could curb economic growth by 0.1 percentage point.

French hotel, transport and retail stocks fell. The yield premium investors demand to hold French bonds over German peers rose to the highest since May.

President Emmanuel Macron, already forced to row back on fuel tax increases, will make a televised address at 1900 GMT.

“Concern about a bit of political and fiscal capitulation is rarely good for a bond market,” said Chris Bailey, European strategist at Raymond James.

Additional reporting by Shinichi Saoshiro in Tokyo, editing by Larry King



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Closing Bell: Bloodbath on D-Street as Sensex plunges over 700 pts; Nifty gives up 10,500






Market at Close Bears took complete control on D-Street, as benchmark indices shed nearly 2 percent. Weak global cues, reactions to exit polls as well as weak macro data weighed big on Sensex and the Nifty. 

The 50-share index ended the session below 10,500. 

Selling was visible across all sectors, with maximum pain seen among banks, automobiles, energy, consumption and pharmaceuticals, among others. 

At the close of market hours, the Sensex was down 713.53 points or 2.00% at 34959.72, and the Nifty down 205.20 points or 1.92% at 10488.50. The market breadth was negative as 647 shares advanced, against a decline of 1870 shares, while 134 shares were unchanged.

Coal India, Maruti Suzuki, IOC and BPCL were the top gainers, while Kotak Mahindra Bank, Reliance Industries, and Indiabulls Housing lost the most. 





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Oil slips in line with bearish equities



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By Amanda Cooper

LONDON (Reuters) – Oil fell on Monday, in line with further declines in global stock markets, erasing the gains made last week when producer group OPEC and other key exporters agreed to cut their crude output from January.

Brent crude oil futures fell $1.02 on the day to $60.65 a barrel by 1045 GMT, while U.S. futures lost 98 cents to trade at $51.63 a barrel.

Prices rose 3 percent on Friday after the Organization of the Petroleum Exporting Countries (OPEC) and some non-OPEC producers including heavyweight Russia said they would cut oil supply by 1.2 million barrels per day (bpd).

“They had one thing in common – none of them wanted to see inventories rise further. They could disagree on prices and upon the size of the cuts, but to really see inventories moving higher? No one wanted that,” SEB commodities strategist Bjarne Schieldrop said.

“Firstly, we’ll get some (price) stability, even if oil is weighed down by bearish equities. That really took the glow off oil,” he said.

OPEC has agreed to cut by 800,000 bpd, led mainly by Saudi Arabia, while non-members will cut by 400,000 bpd, with most of that decrease shouldered by Russia.

(For a graphic on ‘Global oil market balance’ click https://tmsnrt.rs/2Prr1Kl)

Global equities have fallen by nearly 8 percent so far this year, battered by concern about slowing corporate earnings and the threat to the broader economy from an escalating trade dispute between the United States and China.

A steep increase in the pace of crude supply growth this year, especially in the world’s three largest producers – the United States, Saudi Arabia and Russia – has made a number of analysts wary about the prospect of demand being sufficient to mop up extra oil.

“The surge in U.S. supply in recent months should be a reason for caution,” Bank of America Merrill Lynch said in a note on Monday.

U.S. bank Morgan Stanley said the cut was “likely sufficient to balance the market in 1H19 and prevent inventories from

building”.

Not all analysts were so confident.

Edward Bell of Emirates NBD bank said “the scale of the cuts … isn’t enough to push the market back into deficit” and that he expected “a market surplus of around 1.2 million bpd in Q1 with the new production levels”.

Oil prices have fallen sharply since October on signs of an economic slowdown, with Brent losing almost 30 percent in value.

(For a graphic on ‘Asia refining profit margins’ click https://tmsnrt.rs/2QKMLpl)

(Reporting by Henning Gloystein; Editing by Christian Schmollinger and Gareth Jones)





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Dow Jones Futures Fall; Apple Stock, Boeing Stock, Visa Stock, Tesla Stock Analysis


Dow Jones futures fell modestly Monday morning, along with S&P 500 futures and Nasdaq futures, but well off Sunday night lows suggesting imminent tests of stock market correction lows. Last week, the Dow Jones, S&P 500 index and Nasdaq composite all lost at least 4.5%, putting the stock market rally under severe pressure. The relative strength line helps identify stock market leaders and laggards. It’s a useful investing tool for watch lists. Tesla stock has an RS line hitting highs as it tries to break out. But don’t buy just on the RS line, as Apple stock, Boeing stock and Visa stock have shown.

Apple (AAPL), Boeing (BA) and Visa (V) are all Dow Jones stocks.

Dow Jones Futures Today

Dow Jones futures fell 0.3% vs. fair value. S&P 500 futures declined 0.3%. Nasdaq 100 futures lost 0.3%. Dow futures, Tesla stock and other overnight action don’t necessarily predict actual trading in the next regular session. Last week, the major averages started off with solid gains Monday. But then the stock market suffered wild, painful losses, with the Dow Jones losing 4.5% for the week and the Nasdaq 4.9%. The S&P 500 index skidded 4.6%, still above Oct. 29 intraday low but ending the week at a 7-month closing low.

U.S.-China trade talks hopes waned on news that Huawei CFO Meng Wanzhou was arrested on Dec. 1 by Canada at America’s request. China summoned the U.S. ambassador to Beijing on Sunday to protest the action and demand the release of the telecom gear giant’s exec. The Trump administration says the Huawei arrest is a criminal issue and separate from U.S.-China trade issues.

Weak economic data from China and Japan as well as Brexit chaos also aren’t helping to calm investors’ nerves.

It’s not a good time to be making new buys. Be quick to take profits and cut losses short. But stay engaged. Read the Stock Market Today columns and The Big Picture to stay in sync with the market. Build your watch list for when stock market conditions improve.

The Relative Strength Line

The relative strength line, the blue line in IBD and Marketsmith charts, tracks a stock’s performance vs. the S&P 500 index. It’s an easy way to spot which stocks are true leaders or laggards, in good markets or bad. An RS line hitting a new high before or with a stock breaking out is especially bullish.

In the current weak stock market, use the RS line as a way to spot which top stocks are holding up reasonably well. But don’t treat stocks with a strong RS line as a buying opportunity by itself. Apple stock, Boeing stock and Visa stock all showed bullish RS lines at various points in the past two months, only for share prices to fall.

Apple Stock

Apple stock was among the best-looking tech stocks in October. While the major averages were selling off sharply in October, Apple stock pulled back modestly from its Oct. 3 peak, holding near its 50-day moving average. The RS line hit several new highs during the month. On Nov. 1, Apple stock reclaimed its 50-day line in strong volume, with its RS line just belo highs, as the stock market was in the middle of a short-lived rally.

Savvy investors likely had Apple on the watch lists, but it wasn’t a buying opportunity. After the Nov. 1 close, Apple gave a weak holiday outlook, with a slew of Apple iPhone suppliers warning of weak demand in the next few weeks. Since Nov. 1, Apple stock has tumbled 24% to a seven-month low. Apple’s RS line also is at a seven-month low.


IBD’S TAKE: Don’t be tempted because Apple looks like a bargain. Several times in recent weeks Apple stock has looked like it might be bottoming out, along to resume selling.


Apple stock, as a member of the Dow Jones, S&P 500 index and Nasdaq composite, has been a big drag on the major averages over the past several weeks.

Apple fell a fraction Monday morning.

Boeing Stock

Like Apple, Boeing stock peaked on Oct. 3, a few days after the broader market. Shares pulled back modestly to the 50-day line and not-too-distant 200-day, but the RS line stayed at or near record levels. But in November, Boeing stock went on an 11-day losing streak. Shares then rebounded, reclaiming their 50-day and 200-day on Monday, Nov. 3. But the RS line rebounded more modestly. Boeing stock closed last week with three straight losses, falling faster than the S&P 500 index once again. Shares edged lower early Friday.

Visa Stock

Visa stock pulled back to its 200-day moving average a few times in the stock market correction, but the RS line didn’t give up much ground and hit new highs a few times. By the end of November, Visa stock moved back above its 50-day average. On Dec. 3, shares popped, briefly peeking past a 145.56 double-bottom base entry but closing just below that point. Visa stock then retreated again. Shares dipped Monday morning.

The RS line remains near highs. The stock is still worth keeping on your radar.

Tesla Stock

Tesla stock rose as high as 379.49 on Friday, above a 366.85 cup-with-handle buy point for much of the session before reversing to close down 1.4% to 357.96. The RS line, which has soared over the past two months, hit a fresh 14-month high because the S&P 500 index fell much more than Tesla stock did. That RS line is bullish for Tesla, but it’s hard for leading stocks to power ahead in a weak market.

CEO Elon Musk expressed his “possible” interest in taking over a General Motors (GM) plant if GM does go ahead with shutting several factories. That’s from a “60 Minutes” interview that aired Sunday night. Tesla’s Fremont, Calif., plant was originally jointly owned by GM and Toyota Motor (TM) until it closed in 2010.

In the wake of Tesla’s SEC settlement that forced Musk to step down as chairman, he told “60 Minutes” that “I want to be clear. I do not respect the SEC.”

Tesla rose 0.8% before Monday’s open.

YOU ALSO MIGHT LIKE:

These 5 Top Stocks Could Lead When Market Improve

Dow Jones Futures: This Often Happens After A Sharp Stock Market Correction

Growth Stock Investing: Use The Relative Strength Line Correctly

Stocks To Watch: 5 Top Software Plays With Bullish Charts

Understand The Market: The Big Picture



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Dow futures down over 200 points following volatile week


U.S. stock futures declined Sunday evening following a volatile week on Wall Street and as Asian equities pointed to a lower open. On Sunday, China summoned the U.S. ambassador to Beijing to protest the detention of Huawei CFO Meng Wanzhou, an arrest that has renewed fears over a prolonged U.S.-China trade war. Dow futures














YMZ8, -0.27%












were down over 200 points, while the S&P 500














ESZ8, -0.27%












and Nasdaq














NQZ8, -0.22%












futures were also lower. Global markets were hit last week with U.S. stocks suffering their biggest weekly loss since March on worries over the economy and global trade.

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Elon Musk Lobs New Criticism at SEC


Tesla
Inc.


TSLA -1.40%

Chief Executive Elon Musk delivered a new barrage of criticism at the Securities and Exchange Commission, saying he doesn’t respect the agency and that his communications on

Twitter

haven’t been censored by the company.

Mr. Musk’s latest volley, in an interview with CBS’s “60 Minutes” that aired Sunday, seemed to poke at his settlement with regulators. The terms of the agreement call for Tesla before the end of the month to have in place new oversight of his communications that might be considered material or cause movement of the company’s stock.

Last month, Mr. Musk stepped down as chairman of Tesla as part of his settlement with the SEC. The agency had claimed Mr. Musk misled investors when he tweeted in August that said he had secured funding to take the auto maker private. Tesla’s shares initially soared, only to plummet in subsequent days after it became clear Mr. Musk didn’t have a deal finalized.

The SEC had sought to have Mr. Musk banned from serving as a director or officer of any publicly traded company. In the end, he got to remain as CEO while stepping down as chairman for at least three years.

Mr. Musk told “60 Minutes” that since the settlement, none of his tweets have been censored—and no one is reading them before they go out.

“The only tweets that would have to be, say, reviewed would be if a tweet had a probability of causing a movement in the stock,” he said. “Otherwise, it’s ‘Hello, First Amendment’—like, freedom of speech is fundamental.”

Asked how Tesla would know if his tweets are going to move the company’s stock price if they aren’t being reviewed in advance, Mr. Musk suggested the company “might make some mistakes.”

“Nobody’s perfect,” the Tesla chief said, while laughing. He added, “I want to be clear, I do not respect the SEC.” Mr. Musk said he is abiding by the terms of the settlement “because I respect the justice system.”

Tesla said it is complying with the settlement, and has until Dec. 28 to put in place its communications policy. The SEC couldn’t immediately be reached for comment.

The billionaire entrepreneur has a long reputation of defying convention. He publicly feuded earlier this year with federal safety investigators over a fatal Tesla crash. In October, just days after reaching a settlement with the SEC, Mr. Musk appeared to mock the agency on Twitter, suggesting it was enriching investors betting against Tesla.

The “Shortseller Enrichment Commission is doing incredible work,” Mr. Musk tweeted at the time. “And the name change is so on point!”



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Huawei CFO seeks bail on health concerns; Canada wants her in jail


By Anna Mehler Paperny and Ben Blanchard

TORONTO/BEIJING (Reuters) – The CFO of China’s Huawei Technologies Co Ltd [HWT.UL] argued that she should be released on bail while awaiting an extradition hearing, citing her longstanding ties to Canada, properties she owns in Vancouver and fears for her health while incarcerated, court documents showed on Sunday.

Huawei Chief Financial Officer Meng Wanzhou is fighting to be released on bail after she was arrested on Dec. 1 in Vancouver at the request of the United States. She is also fighting the extradition request, and China has protested her arrest to U.S. and Canadian officials.

Meng, 46, faces U.S. accusations that she misled multinational banks about Huawei’s control of a company operating in Iran. This deception put the banks at risk of violating U.S. sanctions and incurring severe penalties, according to court documents seen by Reuters. U.S. officials allege that Huawei was trying to use the banks to move money out of Iran.

China has demanded her immediate release. The arrest has roiled global markets as investors worried it could torpedo attempts to thaw trade tensions between Washington and Beijing.

U.S. stock futures fell 0.71 percent in early Asia trading, extending their negative tone from Friday.

In a sworn affidavit, Meng, the daughter of Huawei’s founder, said she is innocent and will contest the allegations at trial in the United States if she is surrendered there.

Meng said she was taken to a hospital for treatment for hypertension after being detained. She cited hypertension in a bail application seeking her release pending an extradition hearing. She also noted that she owns two homes in Vancouver worth millions of dollars each.

BACK IN THE COURT

Her family assured the court she would remain in Vancouver if she was granted bail, according to the court documents. Her husband said he plans to bring the couple’s daughter to Vancouver to attend school during the proceedings. Meng will be back in the court for a bail hearing on Monday.

Huawei, the world’s biggest supplier of telecoms network equipment and second biggest smartphone seller, did not offer an immediate comment on the court documents. The company, a market leader across many countries in Europe, Asia and Africa, previously said it has complied with all applicable rules.

Earlier on Sunday, China’s foreign ministry summoned the U.S. ambassador to lodge a “strong protest” over the arrest, and said the United States should withdraw its arrest warrant.

Chinese Vice Foreign Minister Le Yucheng told U.S. ambassador Terry Branstad the United States had made an “unreasonable demand” on Canada to detain Meng while she was passing through Vancouver, China’s Foreign Ministry said.

“The actions of the U.S. seriously violated the lawful and legitimate rights of the Chinese citizen, and by their nature were extremely nasty,” Le told Branstad.

China urged the United States to withdraw the arrest warrant, Le added. “China will respond further depending on U.S. actions,” he said, without elaborating.

On Saturday, Le warned the Canadian ambassador there would be severe consequences if it did not immediately release Meng. There was no immediate reaction from Canada. On Friday, Foreign Minister Chrystia Freeland told reporters Canada’s relationship with China was important, and the country’s ambassador in Beijing has assured the Chinese consular access will be provided to Meng.

THE CASE

The United States has been looking since at least 2016 into whether Huawei shipped U.S.-origin products to Iran and other countries in violation of U.S. export and sanctions laws, Reuters reported in April.

The U.S. case against Meng involves Skycom Tech Co. Ltd, which Huawei has described as one of its “major local partners” in Iran. Huawei used Skycom’s Tehran office to provide mobile network equipment to several major telecommunications companies in Iran, people familiar with the company’s operations have told Reuters.

In December 2012, Reuters reported that documents showed Skycom had tried to sell embargoed Hewlett-Packard computer equipment in 2010 to Iran’s largest mobile-phone operator. Reuters later reported that Skycom had much closer ties to Huawei and Meng than previously known.

In Canadian court papers made public on Friday, an investigation by U.S. authorities found Huawei operated Skycom as an “unofficial subsidiary” to conduct business in Iran.

Huawei said its Iran operations were “in strict compliance with applicable laws, regulations and sanctions” of the United Nations, United States and European Union, according to Canadian court documents released on Sunday.

U.S. officials allege that Meng and other Huawei representatives misled financial institutions about Huawei’s control of Skycom, so the Chinese company could gain access to the international banking system. As a result, an unidentified financial institution cleared more than $100 million worth of transactions related to Skycom through the U.S. between 2010 and 2014, the court papers said.

On Thursday, Reuters identified HSBC Holdings Plc as one of the banks involved in the Meng case and, citing sources, reported that the probe included possible bank fraud.

Companies are barred from using the U.S. financial system to funnel goods and services to sanctioned entities.

U.S. Senator Marco Rubio said on Sunday he would “100 percent absolutely” introduce a measure in the new Congress that would ban Chinese telecom companies from doing business in the United States.

“We have to understand Chinese companies are not like American companies. OK. We can’t even get Apple to crack an iPhone for us in a terrorist investigation,” he told CBS “Face the Nation.”

“When the Chinese ask a telecom company, we want you to turn over all the data you’ve gathered in the country you’re operating in, they will do it. No court order. Nothing like that. They will just do it. They have to. We need to understand that.”

Rubio was a strong critic of China’s ZTE Corp, which pleaded guilty in 2017 to violating U.S. laws that restrict the sale of American-made technology to Iran.

(Reporting by Ben Blanchard in Beijing and Anna Mehler Paperny; Additional reporting by Julie Gordon in Vancouver, Nick Brown in New York, and Doina Chiacu, Chris Sanders and Karen Freifeld in Washington and Steve Stecklow in London; Writing by Denny Thomas; Editing by Lisa Shumaker and David Gregorio)



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Broadcom: It’s Probably The Best Semi Stock In The World – Broadcom Limited (NASDAQ:AVGO)


Broadcom LogoTaken from the company’s website

I believe that Broadcom (AVGO) currently presents the best setup of growth versus value in the semiconductor sector. Specifically, my high conviction investment thesis in Broadcom is based on three success pillars. The first pillar is revenue growth, accompanied by a significant rise in free cash flow. The second pillar is shareholder friendliness, or how Broadcom treats its shareholders well. The third pillar, as in with every investment, is the current compelling valuation of shares following the takeover announcement of CA Technologies. Recently, Broadcom released an outstanding quarterly earnings report that greatly supports my investment thesis in the stock.

Perfect Metrics

In its most recent quarter, Broadcom generated net revenues in the amount of $5.85 billion, up 18 percent compared to the same quarter last year. The company’s growth is well balanced between its different divisions. Wireless generated $1.69 billion in revenues, down 5.4 percent year over year but up 31 percent quarter over quarter. The strong rise sequentially is attributed to higher volumes from Apple (AAPL).

Wired Infrastructure recorded $2.2 billion in revenues, up 2.9 percent compared to the same quarter last year, supported by a recovery in broadband spend. Enterprise Storage recorded revenues of $1.26 billion, up 1 percent quarter over quarter, mainly attributed to higher level of spend by the IT sector.

Broadcom exhibits exceptional efficiency. In the past quarter, the company recorded an operating margin of 52.5 percent, way above the company’s long term guide of 47.5 percent. By acquiring new technologies and streamlining them into its existing platform, the path to ongoing efficiency is almost guaranteed. And Broadcom will continue to execute in that aspect for years to come.

Shareholder Friendly

But Broadcom doesn’t only grow revenues and margins. It also generates free cash flow at a rapid clip. In the most recent quarter, Broadcom generated free cash flow of $2.5 billion, or 42 percent of net revenue. That’s a highly remarkable revenue conversion rate.

Management isn’t sitting idle on that pile of cash. It is putting it to good use, which basically means – creating shareholder value by accretive M&A activity, high dividends and a commitment to buy back massive amounts of share. In its most recent update, Broadcom disclosed that it had bought 6.4 million shares during the past quarter, with total investment of $1.53 billion – and that’s just in the past quarter alone.

During the most recent fiscal year, Broadcom has invested a total of $7.2 billion in repurchasing its own shares. In addition, management has given its shareholders a nice early Christmas present by raising the dividend by 51 percent to $10.6 per share. Only a cash cow like Broadcom can grow its dividend at a such a rate without stretching its balance sheet.

What The Market Is Missing

Down 11 percent in 2018, Mr. Market is obviously not too thrilled about the company’s prospects. I believe that the most obvious reason for the uninspiring annual share performance versus business performance is attributed to a miscommunicated takeover of CA Technologies. Specifically, investors were not too happy with the idea of a semi company purchasing a software company like CA. They thought that this recent diversification is very bad for business.

The recent earnings announcement should calm investors. Contrary to the original takeover announcement, this time around – management communicated a very clear message regarding the pending acquisition of CA Technologies. Specifically, management has explained the strategic rationale behind the deal and mentioned that it is accretive in its own right. In addition, it is likely to open doors in the future into the broader enterprise space where Broadcom’s data center solutions will play a significant role.

And it shows in the numbers. The most important sought after information during the recent conference call was the impact of CA on Broadcom. Management stated that the annual run- rate of revenues from CA is estimated at $3.5 billion a year. However, the big news was the cost cutting program.

You see, previous operating cost base at CA stood at $2.4 billion, while Broadcom’s management stated that they could bring this cost base down to $900 million only. This translates into operating profits of $2.5 billion from CA, which is roughly 14 percent return on the initial purchase price of CA which stood at $18.4 billion. Now that’s what I call a high quality M&A deal.

Valuation Is A Screaming “BUY”

You see, due to current headwinds from the trade war with China and the miscommunicated takeover of CA, Broadcom is trading at a lowly ten times next year’s earnings. This is a very low valuation compared to the average earnings multiple of the sector as a whole, as expressed in the ISHARES PHLX Semiconductor ETF (SOXX), which currently trades at a forward multiple of 16 times earnings.

ChartAVGO data by YCharts

This represents one of the lowest valuations in the company’s history. Especially notable is the contrast between the gradual rise in revenues and earnings (white and green line, respectively) versus the recent sharp decline in valuation (brown line). This is precisely the setup that I like the most.

AVGO ValuationRisks

There are two main risks in this investment – a business risk and a macro risk. The business risk will materialize if Broadcom is unable to successfully unlock value from its recent purchase of CA Technologies. The second risk will materialize if the trade war continues to escalate, which will cause pressure on the semi sector as a whole and on Broadcom in specific.

My Bottom Line

Broadcom is a leading company in the semiconductor sector. It gushes cash flow, grows revenue and earnings at a rapid pace and treats its shareholders very well. Shares are trading at a great price due to the turmoil surrounding the acquisition of CA Technologies and the ongoing trade war. Considering the growth prospects versus current valuation, Broadcom is probably the best semi stock in the world.

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Disclosure: I am/we are long AVGO.

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Wall St. Faces Stomach-Churning Swings as Economic Uncertainty Grows


When a trade war broke out between the world’s two largest economies in June, investors barely blinked. After the Federal Reserve raised interest rates — often a reason for investors to sell stocks — the markets kept climbing. As some of the world’s largest economies began to slow down, American markets largely shrugged it off.

Not anymore.

Last week, elements of all of those combined to drive the S&P 500-stock index down by 4.6 percent, its worst weekly drop since March and one marked by stomach-churning price swings. Stocks are now down 1.5 percent this year.

More volatility could be in store, as investors assess the allegations by prosecutors that President Trump directed illegal payments to ward off a potential sex scandal, and the possibility that he sought to secretly do business in Russia during his 2016 campaign for the White House.

The arrest of a prominent Chinese technology executive, meanwhile, has added new strains to the relationship between Washington and Beijing, which face a March deadline to reach a trade deal. On Sunday, China summoned the American ambassador in Beijing to protest the arrest, while Robert Lighthizer, who is leading the trade talks with China, said he considered March 1 to be a “a hard deadline” for the negotiations.

“Every eye is going to be focused on every piece of commentary on this trade deal,” said Rick Rieder, chief investment officer of global fixed income at BlackRock, which manages over $6 trillion in assets. “Because the impact on growth is so significant.”

While the large market swings on trade-related news underscore some investors’ view that a resolution to the impasse between the United States and China will be crucial to the survival of the economic expansion, there are other political and economic risks as well. They include the fallout from the special counsel’s investigation of Russian interference in the 2016 presidential election, the relentless staff churn in the Trump administration, the efforts to negotiate Britain’s withdrawal from the European Union, and social unrest in France.

“The fact is that politics is driving the economy to an extent that is very atypical,” said Julian Emanuel, chief equity and derivatives strategist at BTIG, an institutional brokerage firm. “We would say probably to the greatest extent that we’ve seen in our investing lifetime.”

Last week, markets whipsawed on headlines related to the trade war. On Monday, stocks jumped 1.1 percent on word that President Trump and President Xi Jinping of China had agreed to a 90-day halt on any new tariffs to provide space to negotiate key trade issues.

The next day, the S&P dove 3.2 percent, as the president, calling himself “a Tariff Man” in a Twitter message, seemed to reignite the standoff.

Markets were closed on Wednesday for the state funeral for former President George Bush, but as soon as trading resumed on Thursday, stocks dropped as much as 2.9 percent after news that Meng Wanzhou, the chief financial officer of the Chinese electronics giant Huawei and the elder daughter of its founder, had been detained in Canada at the request of the United States. Then, late in the day, the markets recovered most of those losses on hopes that the Federal Reserve could slow its plan to raise interest rates next year. But they still ended the day lower.

The selling continued on Friday, when stocks fell 2.3 percent.

The trade war has already taken a toll on large chunks of the global economy. China, the world’s second-largest economy after the United States, is growing at its slowest rate in nearly a decade. The export-driven economies of Japan and Germany — the third and fourth biggest economies in the world, respectively — both contracted in the third quarter.

The United States has so far been an outlier. Thanks in part to a burst of deficit-fueled stimulus, a large chunk from the tax cut, the American economy this year is on track to grow at its fastest pace since 2005. The national unemployment rate is 3.7 percent, a near 50-year low. Corporate profits and wages are growing at their fastest pace in years.

For much of 2018, results like that helped Wall Street stand out even as major stock benchmarks around the globe tumbled. Chinese stocks are down more than 20 percent this year, and shares in Germany are down 16.5 percent. In Japan, stocks are down about 5 percent, and in Britain they’re down more than 10 percent.

But even in the United States, there are emerging pockets of weakness, particularly in parts of the economy that are sensitive to rising borrowing costs. Pending home sales have declined for eight straight months, as interest rates on 30-year fixed mortgages have climbed. Monthly auto sales have plateaued, prompting job cuts at General Motors and Ford.

The stock market has mirrored those concerns since the summer. Shares of carmakers and auto-parts manufacturers are down more than 25 percent this year. Shares of homebuilders have slumped nearly 30 percent.

And investors are growing more concerned about the outlook for corporate profits next year, despite third-quarter results that showed that profits at S&P 500 companies rose at the fastest pace since 2010. Instead of the strong results, investors zeroed in on commentary from executives about whether next year might signal the beginning of the end for the second-longest business cycle expansion on record.

“We’re very mindful once again where we’re at in the cycle,” Gregory Carmichael, chief executive of the Cincinnati-based lender Fifth Third, said at a conference last week. “We’re well positioned to deal with the downturn in the economy, and we’ll be very cautious.”

That very caution from corporate America could itself sway the economy, should lenders pull back financing, or large businesses slow their growth plans.

There are other risks to the economy, too, and high on many investors’ lists of these is the Federal Reserve. The central bank has been raising interest rates and winding down other financial crisis-era stimulus that helped drive a global investment boom over the past decade. These higher rates pinch stock investors by making government debt a more appealing alternative, particularly in uncertain times, and also mean companies that binged on low-cost loans will have to spend more to cover their obligations.

Many analysts date the start of October’s brutal sell-off for stocks — they dropped 6.9 percent — on comments from the Fed’s chairman, Jerome H. Powell, in early October that seemed to indicate that the Fed planned to raise rates more aggressively than the market had expected. In late November, though, Mr. Powell sent stocks surging when he said the Fed’s benchmark interest rate was “just below” the neutral level. The markets took those remarks as a sign that the central bank might not be as aggressive in raising rates as they initially thought.

The market tumult, coupled with the increasingly uncertain path for the global economy, is part of the reason Mr. Rieder, of BlackRock, said he believed that the Fed might decide not to lift interest rates at its next meeting on Dec. 18-19.

“The Fed should slow down and now take a step back and look at what has happened,” he said.





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