Month: February 2017

Interview: This Male Student Was Expelled for Raping His Girlfriend Even Though She Said He Did Nothing Wrong

NealThere was one moment during Colorado State University-Pueblo’s investigation into sophomore Grant Neal—an athlete accused, and eventually expelled, for sexually assaulting his girlfriend—that made Neal realized he was about to be railroaded.

Neal’s girlfriend, Jane Doe, never accused him of wrongdoing, and famously stated, “I’m fine and I wasn’t raped.” But CSU-Pueblo initiated an inquiry into their forbidden relationship, which violated an informal rule about physical trainers dating athletes. The university prohibited them from contacting one another during the course of the investigation, but Doe paid little heed to the no-contact order and sent Neal several supportive messages.

Neal, though, was worried her messages could get him in even more trouble, so he promptly informed Roosevelt Wilson, the university official charged with investigating the matter under Title IX—the federal state prohibiting sex-based inequality at institutions of higher education.

“it really hit me after the second meeting I had with the Title IX officer, Roosevelt Wilson,” Neal recalled during an interview with Reason.

Neal asked Wilson what he should do about the fact that Doe was still texting him.

“I said, well, she’s snapchatted me, what do you want me to do? He told me to open [the snapchat messages] and take a screenshot and send them to him, so I did that.”

This turned out to be bad advice.

“[Roosevelt’s] email response back to me was, you could be potentially be in complication with your no contact order for opening the snapchats that she sent you.“

In other words, the man in charge of investigating whether Neal had raped a woman—a woman who emphatically stated that Neal had not done so—first told Neal to open emails from his girlfriend, and later told him he could be disciplined for opening them.

“That’s when I immediately knew,” said Neal. “That’s when I really knew that the situation was above my control.”

This was just one of many injustices perpetrated against Neal by his university. After denying Neal any meaningful way to demonstrate his innocence, CSU-Pueblo effectively ended his career, cancelling out his scholarships and opportunities to play football and pursue a wrestling career.

“One day I woke up and I had all my dreams in front of me and I was doing very well academically and on the football field, and then I just got a wrestling scholarship, and for that to be yanked away from me for no justifiable reason… that’s hard to cope with,” said Neal.

More than a year after being expelled, Neal has finally achieved a victory of sorts: a magistrate ruled just last week that his pending lawsuit against CSU-Pueblo should not be dismissed. Neal has filed suit against the university and its board of regents, as well as the federal Education Department. His lawsuit argues that CSU-Pueblo violated his due process rights, in part because of Title IX guidance from the Education Department’s Office for Civil Rights.

The magistrate was not persuaded that OCR was to blame for Neal’s situation and recommended dismissing his complaint against the feds. But the magistrate left room for him to amend this aspect of his lawsuit, and left intact his due process case against CSU-Pueblo.

When it comes to sexual assault allegations on college campuses, there are two sides to every story. Usually.

Neal’s case is unique in that Doe, the alleged, victim never made a complaint, and denied that Neal had done anything deserving of punishment.

Instead, a third party—who was an acquaintance of Doe’s—made the complaint. This person, a female student and trainer, spotted a hickey on Doe’s neck and surmised that she had been assaulted by Neal. Doe texted Neal to let him know he was likely to be questioned by university officials.

At the time, Neal had no idea his life was about to be made a living hell. In fact, he was worried Doe would be in trouble—for dating an athlete. When he went to meet up with Doe, he assumed he was going to “console” her.

“What happened then was she just seemed very visible upset so my immediate reaction was that she probably got kicked out of the athletic training program,” Neal says.

Instead, Doe began to explain to Neal that the other trainer had suggested to Dr. Richard Clark—director of the athletic training program—that Doe might have been assaulted by Clark. Clark immediately informed his wife, who was a CSU-Pueblo faculty member, and Wilson.

Doe attempted to put an end to the matter at once: Neal recorded her making the definitive statement, “I’m fine and I wasn’t raped” to university officials. But no one cared. In the eyes of the university, it was not Doe’s place to determine whether she was a victim of sexual assault—that was Wilson’s job.

“I was just under the impression that there was a big mix-up and I didn’t understand the magnitude of the situation that I was really in at that time,” says Neal.

What followed was a mockery of due process. Roosevelt met with Neal and thrice accused him of raping Doe. At this point in time, no one had suggested to Doe that he should consult a lawyer, let alone inform him of the seriousness of his situation.

The investigation continued, even though Doe did not consider herself a victim of assault and was in fact interested in continuing her relationship with Neal. She even engaged in consensual sex with him the night after the Title IX investigation began.

Incidentally, this act was accidentally witnessed by one of Neal’s roommates, and he thought it should count as evidence in his favor. But Wilson declined to interview the roommate. Wilson went so far as to lecture Neal that it was his job—not Neal’s—to decide which witnesses were worth interviewing.

“[Wilson] would deem things evidence if he wanted to,” says Neal. “He didn’t allow me to call any witnesses in my favor.”

Since Wilson wasn’t interested in any opinion that contradicted his theory of what happened, his investigative report could reach only one conclusion, even if that report contradicted the opinions of both Neal and Doe. In early December of 2015, Wilson submitted his report to Jennifer DeLuna, CSU-Pueblo’s director of diversity and inclusion. Neal was given just 24 hours to make himself available to appear before DeLuna. This meeting was, in Neal’s view, a “sham.”

“It wasn’t actually a hearing at all,” says Neal. “I was allowed to have legal counsel there if I wanted to, but the legal counsel wasn’t allowed to counsel.”

This meeting represented Neal’s first opportunity to read the report and take stock of the charges against him, and the university’s evidence. He was not allowed to make a copy of the report—all he could do was try his best to commit it to memory.

Note that the report was not an exact transcript of Wilson’s conversations with relevant witnesses: it was merely Wilson’s recollection and summarization of those conversations. According to Neal, it contained numerous factual errors. For instance, the report cited the Clarks as claiming that Doe did not consent to sex with Neal. Neal says that’s a clear mistake: Doe did not consent to unprotected sex, but enthusiastically agreed to have sex with Neal after he put on a condom.

On December 18, DeLuna informed Neal that he would be suspended for sexual misconduct until Doe finished school. Neal’s lawsuit alleges that DeLuna’s decision contained further errors: it referred to Doe as the complainant, even though Doe never made any complaint against Neal.

Neal appealed the decision. His appeal was denied.

In the months that followed, it was difficult for Neal not to succumb to depression. He made several attempts to transfer schools, but was denied admission every time. His status as a sexual misconduct violator killed his chances.

“It’s one thing for someone to tell you that your dreams aren’t attainable but to have that written to you on multiple occasions and still have to apply and try, and still to keep going forward… I can’t even begin to describe the pain,” says Neal, beginning to choke up.

He became a nutrition specialist at GNC, and draws strength from his grandmother, who reminds him to “control the controllables.” He’s currently watching his friends prepare to graduate and pursue opportunities that are no longer available to him.

It’s an experience that would make anyone bitter, though Neal says he doesn’t hold Doe responsible. How could he, when she never complained?

“I blame Roosevelt Wilson for conducting a non-impartial investigation,” he says. “I blame the university for standing by and watch a miscarriage of justice happen. I blame Title IX and the Department of Education for profiling males in a certain manner, scaring universities into making decisions that aren’t necessarily just.”

Then there are the unsettling details. Neal, like so many male students disciplined as a result of Title IX investigations, is an athlete of color. And Doe, like so many alleged victims, is a white woman. Could racism have been a factor here? Neal doesn’t want to believe so—he hates to “assume the race card”—but finds it hard to ignore.

“I want to think that that’s not true but I wouldn’t put it past them,” he says. “It’s terrible, and black, white, Latino, I would not want this to happen to anybody. I wouldn’t wish this upon my worst enemy.”

Neal pauses.

“I wouldn’t wish this upon Roosevelt Wilson, who put me through this,” he says.”

Dozens of wrongfully punished students have brought lawsuits against universities. Neal’s is novel in that it seeks to hold the federal government responsible for eroding due process rights on campuses. At Reason and elsewhere, I have made the case that the Education Department’s Title IX guidance does not comport with basic principles of justice, and should be revised.

Unfortunately, it was this aspect of Neal’s lawsuit that the magistrate contested. The magistrate’s recommendation suggests that CSU-Pueblo’s treatment of Neal was so glaringly unfair, it might be a stretch to blame the government.

And yet OCR’s Title IX guidance is at the center of so much of the college war on due process. Universities are worried that they will lose federal funding if they do not obey the dictates of OCR, which requires the use of the preponderance of the evidence standard while discouraging cross-examination. This puts many accused students in a position where they are unable to prove their innocence, because they have been deprived of the means to do so.

“One rape on the campus is horrible and I will not stand for it whatsoever,” says Neal. “But then again, one false accusation does not solve the problem. I really feel like the Title IX proceedings and things like that are a band-aid solution to a bigger problem, and I feel like it’s not going to help anything.”

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Deep State War? Russian Officials Keep Dying Unexpectedly

Six Russian diplomats have died in the last 60 days. As Axios notes, all but one died on foreign soil. Some were shot, while other causes of death are unknown. Note that a few deaths have been labeled "heart attacks" or "brief illnesses."

1. You probably remember Russia's Ambassador to Turkey, Andrei Karlov — he was assassinated by a police officer at a photo exhibit in Ankara on December 19.

 

2. On the same day, another diplomat, Peter Polshikov, was shot dead in his Moscow apartment. The gun was found under the bathroom sink but the circumstances of the death were under investigation. Polshikov served as a senior figure in the Latin American department of the Foreign Ministry.

 

3. Russia's Ambassador to the United Nations, Vitaly Churkin, died in New York this past week. Churkin was rushed to the hospital from his office at Russia's UN mission. Initial reports said he suffered a heart attack, and the medical examiner is investigating the death, according to CBS.

 

4. Russia's Ambassador to India, Alexander Kadakin, died after a "brief illness January 27, which The Hindu said he had been suffering from for a few weeks.

 

5. Russian Consul in Athens, Greece, Andrei Malanin, was found dead in his apartment January 9. A Greek police official said there was "no evidence of a break-in." But Malanin lived on a heavily guarded street. The cause of death needed further investigation, per an AFP report. Malanin served during a time of easing relations between Greece and Russia when Greece was increasingly critiqued by the EU and NATO.

 

6. Ex-KGB chief Oleg Erovinkin, who was suspected of helping draft the Trump dossier, was found dead in the back of his car December 26, according to The Telegraph. Erovinkin also was an aide to former deputy prime minister Igor Sechin, who now heads up state-owned Rosneft.

If we go back further than 60 days…

7. On the morning of U.S. Election Day, Russian diplomat Sergei Krivov was found unconscious at the Russian Consulate in New York and died on the scene. Initial reports said Krivov fell from the roof and had blunt force injuries, but Russian officials said he died from a heart attack. BuzzFeed reports Krivov may have been a Consular Duty Commander, which would have put him in charge of preventing sabotage or espionage.

 

8. In November 2015, a senior adviser to Putin, Mikhail Lesin, who was also the founder of the media company RT, was found dead in a Washington hotel room according to the NYT. The Russian media said it was a "heart attack," but the medical examiner said it was "blunt force injuries."

 

9. If you go back a few months prior in September 2016, Russian President Vladimir Putin’s driver was killed too in a freak car accident while driving the Russian President’s official black BMW  to add to the insanity.

If you include these three additional deaths that’s a total of nine Russian officials that have died over the past 2 years that WeAreChange.com's Aaron Kesel knows of – he notes there could be more.

As Kesel explains, it’s worth noting that governments, specifically the CIA, have for long periods of time had chemical concoctions that can induce a full systematic shutdown of a person’s nervous system and in some cases cause someone’s’ heart to explode.

Former CIA employee Mary Embree discusses the infamous heart attack gun and how she was tasked with finding a chemical concoction that would cause a heart attack. The weapon was first made public during the Church Committee hearings in 1975 by former CIA director William Colby. It was said to be very lethal and untraceable, by using this weapon a murder is made to look natural while the poison dissolves in hours.

It seems highly unlikely and improbable to write off that six Russian officials would die in under 60 days in such an influx in various different mysterious ways without a catalyst. And let’s not forget RT founder and former Putin aide Mikhail Lesin was found dead in 2015 from a blunt weapon that was originally blamed on a heart attack so assassination can’t be taken off the table and ruled out in any of these cases. Turkey and Russia already accused NATO of a false flag attack killing Karlov the Russian-Turkish Ambassador. NATO also had a dead diplomat Yves Chandelon mysteriously die of a gunshot wound to the head in his car a week before the death of Karlov. Chandelon was the Chief Auditor in charge Of Counterterrorism funding.

“Turkey and Russia have the will not to be deceived by this false flag attack,” they said.

Don’t forget that on Christmas day, a Russian military jet went down over the Black Sea, killing 60 members of the Red Army choir and 33 others that just adds to the massive coincidence list.

On a final note, former acting director of the U.S. Central Intelligence Agency (CIA), Michael Morell openly conspired to “covertly” kill Russians and Iranians in Syria in an August 2016 interview with Charlie Rose. While Morell was talking about killing Russian and Iranian soldiers it is definitely a strange piece to add to this puzzle.

Are we witnessing a battle between the deep state and Russia in a spy versus spy plotline or is this all just a freak coincidence?

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PwC Apologizes For “Historic, Colossal, Ludicrous” Oscar Screw-up

For those who missed last night’s ritual of Hollywood self-congratulation, it ended in perhaps the greatest humiliation in Oscars’ history, when the spectacle that relentlessly mocked and ridiculed Donald Trump, both directly and indirectly, concluded by handing the Best Picture award to the wrong movie.

The award was given to Moonlight after presenters Warren Beatty and Faye Dunaway initially announced that La La Land had won best picture. As the film’s producers were making their acceptance speeches, producer Jordan Horowitz informed viewers that the category’s winner was actually Moonlight, and showed the card announcing the winner to the camera. Beatty then informed the stunned audience of the mix-up, as he and Dunaway had mistakenly been given, and read, the card for best actress, which was presented to La La Land’s Emma Stone just minutes before.

As the WSJ’s Jason Gay summarized hours after the show, “Well, that was nuts, even for Hollywood.”

Let’s be clear: the Oscars were already a fairly ridiculous exercise. A cathedral of glamour and ego, the movie industry’s annual awards conclave is a bloated exercise of hype and self-satisfaction that takes as long to complete as the second year of medical school. This is, of course, why we watch it. An Oscars ceremony that isn’t too long, inane and occasionally infuriating—that’s not a proper Oscars, buddy!

 

And yet, what happened late Sunday in Los Angeles redefined the already high standard for absurdity at the Academy Awards. An event that once gave us a Rob Lowe duet with Snow White, as well as Telly Savalas,Pat Morita and Dom DeLuise singing “Fugue For Tinhorns” from “Guys & Dolls,” now has its signature moment of insanity: “Bonnie & Clyde” compatriots Warren Beatty and Faye Dunaway erroneously awarding Best Picture to “La La Land”— rather than the actual winner, “Moonlight.”

 

I’ve watched the sequence on replay several times now and, to be honest, it’s way too bizarre to be infuriating. It appeared that Mr. Beatty and Ms. Dunaway were somehow in possession of an incorrect envelope, containing not the Best Picture winner, but the Best Actress, which had just been awarded to Emma Stone of “La La Land.” Opening the crimson envelope, 79-year-old Mr. Beatty seemed baffled, pausing briefly before handing it off to Ms. Dunaway, who announced “La La Land” as the winner.

 

The most painful thing, really, is that mistake wasn’t recognized immediately. Where was the production team? Already tucking into steaks at Musso & Frank? Even Steve Harvey botching the prize for Miss Universe 2015—the previous gold standard for bungled awards show finales—was faster to repair the damage of a winner incorrectly named.

 

* * *

Between the election, the Super Bowl, and now this, it has been some stretch for late-breaking upsets. It will be tempting for some to seize upon the Oscar flub as an example of Hollywood hubris, or karmic retribution for the political leanings of the filmmaking tribe. I guess you could do that, though that sort of takes the fun out of it. Conspiracy theories will pop up, too, but it really seems like what happened Sunday was a screw-up.

As Gay summarizes it, “a historic, colossal, ludicrous screw-up, which undoubtedly has some very talented people feeling very terrible. But let’s keep some perspective. It’s just the Oscars, man. It’s a TV show that’s always been too long and too weird. If they promise to always be this crazy, I’ll stay up late to watch every time.”

And with the damage done, the fingerpointing begins, and as expected, the first on the firing line is none other than the firm tasked with making sure epic fiascos like this never happen.

Accounting firm PricewaterhouseCoopers LLP took responsibility and apologized early Monday for the error that led to the mistaken announcement of “La La Land” as Best Picture at the Academy Awards instead of the actual winner, “Moonlight.” PwC, the longtime overseer of the Oscar voting process, said Best Picture presenters Warren Beatty and Faye Dunaway had mistakenly been given the envelope for the wrong category. PwC has two sets of envelopes at the ceremony with the winners’ names, and the presenters were apparently given the duplicate envelope for the Best Actress award, which had already been announced as Emma Stone of “La La Land,” instead of a Best Picture envelope.

Beatty and Dunaway proceeded to announce “La La Land” as the Best Picture winner, and that film’s creators were giving their acceptance speeches when the error was discovered and the award given to “Moonlight.” 

“We are currently investigating how this could have happened, and deeply regret that this occurred,” PwC said. The firm said “(w)e appreciate the grace” with which the situation was handled by the nominees and the Academy of Motion Picture Arts and Sciences, which awards the Oscars.

PwC and its predecessor firms have been in charge of the Oscar ballot process for 83 years on the Academy’s behalf. PwC keeps sole custody of the votes and tabulations of Oscar ballots and is in charge of maintaining the integrity and confidentiality of the process.

As the WSJ reports, the PwC partners in charge of the effort, Brian Cullinan and Martha Ruiz, are the only people who know who the Oscar winners are before the envelopes are opened on the live Oscar telecast. They are the ones who maintain the briefcases that hold the sealed envelopes with the winners’ names, and they are stationed backstage during the Oscar ceremony, handing each envelope to the presenters before they go on stage.

According to PwC, Cullinan and Ruiz memorize all the winners, and if a mistake is made in an announcement, PwC has said it has protocols in place for correcting the error immediately. Both Mr. Cullinan and Ms. Ruiz were visible on stage as the confusion unfolded and the error was corrected.  Cullinan, who resembles the actor Matt Damon, is PwC’s U.S. board chairman and managing partner of the firm’s Southern California practice. Ms. Ruiz is a tax partner who specializes in providing tax compliance and advisory services to the firm’s entertainment-industry clients in Southern California. In retrospect, the IRS may want to double check the tax returns of Cullinan’s clients.


PricewaterhouseCoopers partners Martha Ruiz and Brian Cullinan are the only
people who know who the Oscar winners before the envelopes are opened“

“As long as our relationship is good and strong and we do a good job, which we always do, the Academy has been pleased, I think, with how we’ve been involved,” Mr. Cullinan told Financial News in a recent interview. “It’s such a long-term relationship that we know intricately how everything works, the timing of it, the process that we use, and they have absolute trust in us and what we do.”

That may no longer be the case, although the auditor’s logical replacement to take over the Oscar award distribution, Arhtur Anderson, failed to return phone calls as of this writing.

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Frontrunning: February 27

  • Epic Oscars Mistake: Faye Dunaway, Warren Beatty Announce Wrong Best Picture Winner (Variety)
  • ‘Moonlight’ upsets ‘La La Land’ for top Oscar after major gaffe (Reuters)
  • Oscar host Jimmy Kimmel turns Trump into recurrent punch line (Reuters)
  • After Mix-Up, Hollywood Searches for an Explanation (WSJ)
  • Trillions at Risk When Trump Speaks to Congress (BBG)
  • Bond Market Is Flashing Warning Signal on Trump Reflation Trade (WSJ)
  • Mexico Warns U.S. It’ll Cut Off Nafta Talks If Tariffs Proposed (BBG)
  • Trump to Ask for Sharp Increases in Military Spending, Officials Say (NYT)
  • GOP Leaders Bet on Cooperation in Push Against Obamacare (WSJ)
  • Euro-Area Economic Confidence Climbs to Highest Since 2011 (BBG)
  • Billionaire Warren Buffett more than doubled his holdings in Apple in 2017 (CNBC)
  • Mystery deepens over Chinese forces in Afghanistan (FT)
  • Will Beijing blink again on Pyongyang? (Nikkei)
  • VX Nerve Agent Killed Kim Jong Nam in 20 Minutes (WSJ)
  • Wal-Mart launches new front in U.S. price war, targets Aldi in grocery aisle (Reuters)
  • A Radical Experiment in Monetary Policy Isn’t Working (WSJ)
  • GM Dials Up Discounts on Pickups as Rivals Tread on Truck Turf (BBG)
  • Job Hoppers Are Redefining Wage Inflation for the Fed (BBG)
  • Funds prepare $2 billion oil market play as supply tightens (Reuters)
  • Supersmart Robots Will Outnumber Humans Within 30 Years, Says SoftBank CEO (WSJ)
  • The Man Who Moved Oil With His Words Won’t Talk About It Anymore (BBG)
  • North Korea spy agency runs arms operation out of Malaysia, U.N. says (Reuters)
  • US prime property is magnet for illicit wealth, warns Treasury (FT)
  • Russian frigate heads to Mediterranean on Syria mission (Reuters)
  • Trump’s trade czar expected to get easy U.S. Senate confirmation (Reuters)
  • Philippines says hostage may have been beheaded because he was sick (Reuters)
  • Philadelphia Jewish cemetery desecrated by vandals (Reuters)

Overnight Media Digest

WSJ

– Facing mounting criticism about prices, drug companies put some limits on their increases this year. Prescription-drug makers traditionally raise list prices in January but this year they didn’t raise prices for as many drugs as the year before. According to an analysis by investment firm Raymond James & Associates, about 5.5 percent of the increases reached the 10 percent level. A year ago, 15 percent did, and two years ago, 20 percent did. http://on.wsj.com/2lWcbRd

– Malaysia said Sunday that a high dose of a lethal nerve agent killed Kim Jong Nam within 20 minutes of being assaulted on Feb. 13, while authorities checked for traces of the substance at the main international airport and at a condominium here. Medical specialists are now turning over a full autopsy report to the police. http://on.wsj.com/2lW02vo

– The planned megamerger between Deutsche Börse AG and London Stock Exchange Group PLC to create Europe’s largest exchange is at risk after the LSE said late Sunday it wouldn’t sell its majority-owned fixed-income trading platform in Italy to appease antitrust concerns over the deal. http://on.wsj.com/2lW667d

– ‘Moonlight’ shocked audiences around the world by winning best picture at the 89th Academy Awards on Sunday. It was a Hollywood twist at the last minute of the ceremony, after presenter Faye Dunaway announced that frontrunner ‘La La Land’ was the winner. While that movie’s producers were making their acceptance speeches, they were interrupted and told that ‘Moonlight’ was the actual winner. http://on.wsj.com/2lW4j1V

– President Donald Trump’s first budget will seek a sizable increase in military funding but won’t make changes to the largest future drivers of government spending: Social Security and Medicare. Work to prepare the president’s first budget proposal, expected to be released in mid-March, ramped up last week following the Feb. 16 confirmation of Mick Mulvaney as director of

 

FT

London Stock Exchange Group Plc said on Sunday it believes the European Commission is unlikely to approve its proposed merger with Deutsche Boerse AG after LSE’s board concluded it would not be able to meet a new condition proposed by antitrust regulators in Brussels.

Prudential Regulation Authority Chief Executive and Bank of England Deputy Governor Sam Woods warned against rolling back reforms made in the wake of the financial crisis, arguing against any “retreat” to light-touch regulation after Brexit and the election of President Donald Trump.

The European Commission plans to take a tough stance on rules that could provide a post-Brexit lifeline for the UK financial sector, according to a document obtained by the Financial Times, dealing a blow to the City of London’s hopes of maximising access to the EU.

The Father of the House of Commons, Gerald Kaufman, died on Sunday evening having been ill for several months, his family said. He was 86.

 

NYT

– The London Stock Exchange Group said late on Sunday that European regulators were unlikely to approve its merger with Deutsche Boerse, which would have created a European heavyweight in a rapidly consolidating industry. http://nyti.ms/2lprOxv

– President Donald Trump will instruct federal agencies on Monday to assemble a budget for the coming fiscal year that includes sharp increases in Defense Department spending and drastic enough cuts to domestic agencies that he can keep his promise to leave Social Security and Medicare alone. http://nyti.ms/2lphBRG

– The father of the commando killed in a Special Operations raid in Yemen last month said in an interview published this weekend that he had refused to meet with President Trump on the day his son’s body was returned home, and criticized the White House over the mission, saying, “Don’t hide behind my son’s death to prevent an investigation.” http://nyti.ms/2lpCuvX

– As Defense Secretary Jim Mattis prepares to submit his first big pitch to his new boss — options for accelerating the fight against the Islamic State — he is balancing the need to rein in President Trump’s more extreme impulses without distancing himself too much and losing White House favor. http://nyti.ms/2lpF4C5

 

Britain

The Times

Frontier Economics, the consultancy helping to make the competition case for Tesco Plc’s merger with Booker Group Plc, has provoked concerns over a potential conflict of interest after winning a contract with the Competition and Markets Authority. http://bit.ly/2mtsbrK

A government green paper suggests that struggling companies could soon be allowed to dodge their liabilities to former employees by separating out their pensions funds and setting them up as standalone entities. http://bit.ly/2mtqMkE

The Guardian

Workers in UK saw their wages fall by 1 percent a year in the period following the financial crisis, putting the country in 103rd place in a global ranking of pay growth compiled by the TUC. http://bit.ly/2mtsHpG

Transport Secretary Chris Grayling is lobbying Japan, the country that pioneered modern high-speed trains, to buy rolling stock from Derby as part of the government’s post-Brexit trade push. http://bit.ly/2mtvL4R

The Telegraph

The London Stock Exchange Group Plc’s merger with Deutsche Boerse AG was thrown into doubt last night after the LSE’s board said addressing EU competition concerns would be “detrimental” to the business. http://bit.ly/2mtse6I

UK has risen a place in investors’ eyes to equal Germany as the third most-important country for company growth prospects in a sign that Brexit has not weighed on the country’s international business standing, according to analysis from PwC. http://bit.ly/2mttSWa

Sky News

Barclays Plc will this week announce the appointment of Ian Cheshire as chairman of its UK-based operations, a key milestone in its planning for new rules aimed at protecting taxpayers in a future banking crisis. http://bit.ly/2msBlEB

The Independent

Gerald Kaufman, the father of the House of Commons as the oldest serving MP, has died at the age of 86. http://ind.pn/2mtoNwY

 

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Trump Seeks Sharp Increases In Military Spending, “Drastic Cuts” To State Department, EPA

As part of his proposed budget, President Trump will instruct federal agencies on Monday to assemble a spending plan for the coming fiscal year that includes sharp increases in Defense Department spending and “drastic cuts” to domestic agencies such as the State Department, the EPA and other non-defense programs, so that he can keep his promise to leave Social Security and Medicare alone, according to four senior administration officials cited by the NYT. The budget outline will be the first move in a campaign this week to reset the narrative of Mr. Trump’s turmoil-tossed White House.

Coming one day before delivering his high-stakes “State of the Union” address on Tuesday to a joint session of Congress, Trump will demand a budget with tens of billions of dollars in reductions to the Environmental Protection Agency and State Department, administration officials reported. The NYT adds that social safety net programs, aside from the big entitlement programs for retirees, would also be hit hard. Treasury Secretary Steven Mnuchin, speaking on Fox News earlier on Sunday, said Trump’s budget would not seek cuts in federal social programs such as Social Security and Medicare.

While preliminary budget outlines tend to be little-noticed administrative exercises, the first step in negotiations between the White House and federal agencies that usually shave the sharpest edges off the initial request, this plan, a product of a collaboration between the Office of Management and Budget director, Mick Mulvaney; the National Economic Council director, Gary Cohn; and the White House chief strategist, Stephen Bannon, is intended to make a big splash for a president eager to show that he is a man of action.

Resistance from federal agencies could ease some of the deepest cuts in the initial plan before a final budget request is even sent to Congress. And Capitol Hill will have the last word. To meet Mr. Trump’s defense request, lawmakers in both parties would have to agree to raise or end statutory spending caps on defense and domestic programs that were imposed by the 2011 Budget Control Act.

As Reuters adds, one of the officials said Trump’s request for the Pentagon included more money for shipbuilding, military aircraft and establishing “a more robust presence in key international waterways and chokepoints” such as the Strait of Hormuz and South China Sea. Meanwhile, the State Department’s budget could be cut by as much as 30%, which would force a major restructuring of the department and elimination of programs. 

Last Friday, speaking to conservative activists, Trump promised “one of the greatest military buildups in American history.”

Some defense experts have questioned the need for a large increase in U.S. military spending, which already stands at roughly $600 billion annually. By contrast, the United States spends about $50 billion annually on the State Department and foreign assistance. The amounts that Trump is proposing to add to the Pentagon budget and trim elsewhere are not yet publicly known.

Quoted by Reuters, John Czwartacki, a spokesman for the White House’s Office of Management and Budget, said the budget blueprint would be released in mid-March.

“It would be premature for us to comment – or anyone to report – on the specifics of this internal discussion before its publication,” he said in a statement. The budget plans that the White House is expected to send to departments and agencies on Monday are just one stage in a lengthy process.

The agencies can argue for more funding, and final spending plans must be approved by the U.S. Congress.

Pouring cold water on previous reports of optimistic economic projections, Trump’s budget assumes annual economic growth of “only” 2.4%, an official told Reuters. While campaigning for the presidency last year, Trump called for a “national goal” of 4 percent economic growth. For next year, the operating assumption is only slightly higher, “a sign that the budget process will not be too out of step with economic reality.”

Meanwhile, the NYT notes that Trump’s top advisers huddled in the White House this weekend to work on his Tuesday night prime-time address.

They focused on a single, often overlooked message amid the chaos of his first weeks in the White House: the assertion that the reality-show candidate is now a president determined to keep audacious campaign promises on immigration, the economy and the budget, no matter how sloppy or disruptive it looks from the outside.

 

“They might not agree with everything you do, but people will respect you for doing what you said you were going to do,” said Jason Miller, a top communications strategist on the Trump campaign who remains close to the White House. “He’s doing something first, and there’s time for talk later,” Mr. Miller added. “This is ultimately how he’s going to get people who didn’t vote, or people who didn’t vote for him, into the fold. Inside the Beltway and with the media, there’s this focus on the palace intrigue. Out in the rest of the country, they are seeing a guy who is focused on jobs and the economy.”

The budget plan, which will probably be substantially altered by House and Senate Republicans, and vociferously opposed by congressional Democrats, will be Mr. Trump’s first big step into a legislative fray he has largely avoided during the first 40 days of his administration.

Mayor Rahm Emanuel of Chicago, who was Mr. Obama’s first chief of staff, told the NYT in an interview Sunday night that Mr. Trump was trying to create a “sense of urgency, which most people aren’t feeling right now, which was a reality to us” in order to generate support for his unspecified economic agenda, including an infrastructure bill and a tax overhaul.

One West Wing official, who requested anonymity to speak candidly about strategy, said the administration craved the split-screen television images of Mr. Trump at round-table discussions with business executives every few days on one side, and the vehement protesters of his administration on the other. But his critics say such photo opportunities are all an act, a not-very-entertaining real-life rendition of “The Apprentice” by an ineffective rookie president.

“This man is not a doer,” said Representative Nancy Pelosi, the House minority leader, who will host a Monday “pre-buttal” of Mr. Trump’s Tuesday speech. “Oh, please. He has nothing to show for what he’s been doing in office for 40 days. It’s all been squandered.”

Other disagreed: “During his first month in office, President Trump has done exactly what he said he was going to do,” said Thomas Barrack Jr., a longtime friend of Mr. Trump’s who ran his inaugural committee. “No president has worked harder or accomplished as much, even with tremendous political resistance forcing him to operate with a small team of outsiders possessing little government experience.”

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Colorado’s Governor, Who Opposed Pot Legalization in 2012, Is Ready to Defend It

Two years ago today, during his appearance at the 2015 Conservative Political Action Conference, Donald Trump said states should be free to legalize marijuana, but he also said, “I think it’s bad, and I feel strongly about it.” He added, “They’ve got a lot of problems going on right now in Colorado, some big problems.” Colorado Gov. John Hickenlooper, who opposed legalization in 2012, disagrees with Trump’s impression of the consequences. The president, whose press secretary last week predicted “greater enforcement” of the federal ban on marijuana in the eight states that have legalized the drug for recreational use, may be interested in what Hickenlooper had to say in an interview with Chuck Todd on Meet the Press yesterday:

Todd: If this were put on a ballot today, I know you opposed it before, but if it were put on a ballot today, would you now support it?

Hickenlooper: Well, I’m getting close. I mean, I don’t think I’m quite there yet, but we have made a lot of progress. We didn’t see a spike in teenage use. If anything, it’s come down in the last year. And we’re getting anecdotal reports of less drug dealers. I mean, if you get rid of that black market, you’ve got tax revenues to deal with, the addictions, and some of the unintended consequences of legalized marijuana, maybe this system is better than what was admittedly a pretty bad system to begin with.

Hickenlooper’s views on legalization have been evolving since 2014 based on what has actually happened in Colorado, which suggests the “big problems” that Trump perceived in 2015 may have been exaggerated by the prohibitionists who were feeding him information. Even if legalization were a disaster in Colorado, of course, that would not mean the federal government should try to stop it. The federalist approach Trump has said he favors allows a process of trial and error from which other states can learn.

According to Hickenlooper, Attorney General Jeff Sessions, prior to his confirmation, told Sen. Cory Gardner (R-Colo.) that marijuana enforcement “wasn’t worth rising to the top and becoming a priority.” That assurance is consistent with Sessions’ vague comments on the subject during a confirmation hearing last month but seems to be at odds with White House Press Secretary Sean Spicer’s statement last week.

If Sessions does try to shut down state-licensed marijuana businesses in Colorado, it sounds like Hickenlooper is ready for a fight. “Our voters passed [legalization] 55-45,” he told Todd. “It’s in our constitution. I took a solemn oath to support our constitution….The states have a sovereignty just like the Indian tribes have a sovereignty, and just like the federal government does.” Asked if he questions whether “it’s clear that the federal government could stop you,” Hickenlooper replied, “Exactly. I don’t think it is.”

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Buffett Boosts Apple Holdings To 133 Million Shares In 2017, Becomes Top 5 Holder

Traders, analysts and Buffett-watchers were amazed two weeks ago when in its 13F filing, Berkshire Hathaway reported that it had nearly quadrupled its Apple stake from 15.2 million shares as of Sept 30 to 57.4 million shares on December, making it a Top 10 holder in the tech company. Then, moments ago, the surprises continued when speaking to CNBC’s Becky Quick, the Berkshire Hathaway Chairman said that he more than doubled his holdings in Apple yet again between the start of 2017 and the tech company’s most recent earnings report.

At this point, Buffett owns $17 billion worth of the tech giant’s stock he told CNBC making him a Top 5 holders of the stock, sandwiched between CapRe in 6th spot and Fidelity in 4th.

The purchases that Buffett revealed on Monday give Berkshire Hathaway about 2.5% of the outstanding Apple shares. It also made Apple one of Buffett’s company’s largest holdings, second only to Coca-Cola.

The investor said that he upped his stake because of the consumer-retaining power of Apple. “Apple strikes me as having quite a sticky product, and an enormously useful product to people that use it,” Buffett told CNBC.

The Berkshire Hathaway CEO said that a book by famed investor Philip Fisher called “Common Stocks and Uncommon Profits” inspired him to research how consumers feel about Apple products. “He talks about something called the ‘scuttlebutt method,’ which made a big impression on me at the time, and I used it a lot,” Buffett said. “[It’s] essentially going out and finding out as much as you can about how people feel about the products that they [use.]”

Yet while the results were favorable enough for Buffett to greatly up his stake in Apple, he said that he does not personally own an iPhone.

Apple stock was creeping higher in early hours trading on Monday, up 0.4 percent at $137.20 a share.

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Goldman Downgrades Tesla To “Sell” On Cash And Execution Risk

The recent avalanche of bad news for Tesla has refused to stop this morning, when former Tesla cheerleader, Goldman Sachs analyst David Tamberrino, announced he was cutting the company’s stock rating to “Sell”, slashing his price target to $185, and predicting 28% downside from current prices. TSLA stock was down -2.3% in premarket trading on the Goldman report.

As Tamberrino explains, “we downgrade shares of Tesla to Sell from Neutral with 28% downside to our 6-month price target of $185 (lowered from $190), vs. 8% downside for our coverage. While we believe Tesla currently has a lead relative to OEM peers with respect to vehicle technology adoption, electric vehicle architecture, and (potentially) battery scale, our concerns are more near-term oriented with respect to operational execution on the Model 3 launch, an unproven solar business, and cash needs. Ultimately we see a delayed launch (pushing volume growth out and to the right) and FCF burn rate (necessitating a capital raise before 4Q17) to weigh on TSLA’s shares.”

Some additional details why Tamberrino changed his opinion (aside, perhaps, from the immediate lack of more secondary offerings on which Goldman can be lead underwriter):

We downgrade shares of Tesla from Neutral to Sell with 28% downside to our 6-month price target of $185. We expect to see pressure on shares as we progress through the year, as cash burn intensifies and the ramp of Model 3 volumes proves to be slower and flatter than assumed in guidance/consensus. Further, the acquisition of SolarCity – which is undergoing its own business model transition – comes at a time when we believe Tesla should be singularly focused on becoming a mass automobile manufacturer. Lastly, while we see Tesla as a net beneficiary of potential tax reform, we believe the net present value of those benefits would remain effectively unchanged from the current tax system given the increased time it would require to utilize increased NOLs. Our key concerns are as follows:

  • Model 3: Launch curve a concern, operating margin dilutive at current cost, and reservation conversion may be hindered by higher selling prices. We believe the Model 3 will have a more subdued launch curve than the company is targeting as some suppliers have expressed concern around final designs not being locked down. As a result, we expect the company to achieve mass market volumes (i.e., above 100k annualized run-rate) in 4Q18 vs. Tesla’s target of 4Q17.
  • SolarCity business model unproven and acquisition comes at a pivotal point in Automotive product cycle. We believe the recent acquisition of SolarCity increased the risk profile of Tesla amidst a business model transition – from company-owned equipment installation and lease/PPA contracts to customer purchased equipment on cash/loan sales – and provides limited synergies. Ultimately, the acquisition raised the net leverage of Tesla while creating EBITDA and FCF drag that requires incremental non-recourse debt to be raised.
  • Capex ramping significantly, driving incremental capital raise: We forecast a significant increase in near-term capex levels required to bring both the Fremont, CA factory and TSLA’s gigafactory to scale. Overall this drives our forecast for $3bn of automotive capex in 2017 and FCF burn of $2.8bn in 2017. Ultimately we see another equity raise needed before 4Q17. This is further exacerbated by the addition of SolarCity, whose business would continue to be a FCF drag and requires an equal amount of sale of project level debt and tax equity financing to maintain cash balances.
  • Potential tax benefits significant, but would be recognized over a longer period of time – driving net present value lower. While we would expect TSLA to be a net beneficiary of potential US tax changes (i.e., scenario including destination-based tax with border adjustment as well as full capex expensing and elimination of net interest expense) and forecast its NOLs to grow under a potential tax change scenario, based on our model we find that the net present value of these higher NOLs is slightly worse than the status quo given a longer time period to achieve (the company is not currently a cash tax payer and a lower corporate tax rate would push out recognition of NOL benefits).
  • Estimates now include SolarCity; we are well below the Street: We update our 2017 through 2020 estimates following 4Q16 results and further layer on our SolarCity forecast. Overall, our EBITDA estimates fall by an average 12% (SolarCity inclusion, lower Automotive gross margin, pushed out Tesla Energy volume ramp) and are on average approx. 30% below the Street.

Goldman then explains “what would make us more positive?” andnoes the following:

We would become more positive on the stock if the company were able to demonstrate improved manufacturing execution by driving more rapid quarterly production growth in its current vehicle offerings than we model, demonstrate key milestones implying its Model 3 launch remains on track for mass volume in 2H17, drive down the cost of its battery packs faster than expected, demonstrate considerable market demand for the cross-selling between Tesla products and SolarCity products, and deploy capital more efficiently – driving reduced incremental capital requirements.

Unwilling to disappoint the Tesla fanatics, of which Goldman itself was a member until recently, the bank offers the following “quick word to the Tesla bulls”

We continue to view Tesla as a disruptor in the electric vehicle and alternative energy segments – with a clear lead relative to its peers with respect to vehicle technology adoption (increasing advanced driver assist features, revolutionary over-the-air update capabilities, infotainment capabilities, and general consumer-desired features), electric vehicle architecture, and (potentially) battery scale with the build-out  of its gigafactory. However, over time we do not see competitive barriers to entry (other than ease of raising capital and achievement of scale) that traditional OEMs, new entrants into the space, and other battery manufacturers could not duplicate. As a result while we do believe the company has at least one product cycle lead on its competitors, there ultimately could be a Samsung to this Apple (think smartphones), with incremental competition on the horizon as we have detailed in past reports. That being said, this is still an unprofitable Apple at present and pushing growth out and to the right would drive present value down. With that as a backdrop, we see valuation as appropriate at $185, and anticipate downside to shares as we progress through what we believe will be a choppy Model 3 launch that is slower than anticipated.

Some more valuation observations:

  • Share move opens entry point: Since 12/2/16, TSLA shares have risen 42% (vs. S&P500 +8% and Auto coverage average +9%) driven by a mixture of positive news flow (potential beneficiary from tax proposals, gigafactory investor tour, Model 3 pre-production). However, fundamental operations have not exhibited a material improvement and we estimate potential tax benefits are a wash looking at the net present value of NOLs generated.
  • Operational execution still unproven: We see room for shares to de-rate as the Model 3 production launch likely disappoints and as an unproven SolarCity business model likely weighs on the company’s focus/results.
  • Capex ramping, see capital raise in 3Q17: We forecast $3bn of automotive capex in 2017 and FCF burn of $2.8bn, necessitating a $1.7bn equity raise.
  • Valuation: Our 6-month price target becomes $185 (from $190), now adding SolarCity ($9) to Tesla Energy ($31 from $34 on slower ramp) and probability-weighted automotive segment ($145 from $156 on lower margins) valuations.
  • Key risks: Stronger Model S/Model X demand and/or production, positive free cash flow generation, and incremental new product announcements

Finally, and perhaps most amusing, is Goldman’s rendition of what the bank calls Tesla’s “hype cycle”

Trading the TSLA hype cycle: TSLA shares have mostly traded in a $180 to $280 range over the past couple years (Exhibit 1), and we again see room for downside toward the bottom of this band. Historically, (1) the stock takes an average 3 months to move significantly higher driven by “hype” around incremental product launches, new business lines, and delivery growth is priced in; (2) post these runs, TSLA takes approx. 7 months to de-rate as launches are pushed out, deliveries miss expectations, and gross margin percentage disappoints. This has occurred three times over the past three years. And as laid out above, we believe the drivers behind the most recent stock surge (beneficiary of potential tax changes, Model 3 launch/delivery timing, and gigafactory investor tour) are baking in benefits that will take longer to materialize and we expect the stock to de-rate as a result.

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Global Stocks Drop, Futures Flat; French Yields Slide As Political Jitters Subside

In a quiet night for markets, in which the top highlight was the Oscar’s historic peddling of best picture “fake news” and where “millions” of Academy members seemingly voted illegally, European stocks were little changed after a selloff that pushed them to a two-week low, while the MSCI Asia index fells as Japan’s Topix dropped for third day. S&P futures were unchanged after hitting a a fresh all time high on Friday. Oil futures gained, with the dollar little changed against a basket of major currencies. Priceline, Albemarle and AES are among companies reporting earnings. Dallas Fed manufacturing activity, durable goods sales data due.

European politics once again drove sentiment, this time higher after French electoral polls boosted the country’s bonds and reports of a potential Scottish independence referendum sank the British pound. The dollar was little changed before a key speech from U.S. President Donald Trump.

French bonds gained for a fourth day, with the 10-year OAT yields hitting a one-month low on Monday, pushing other euro zone sovereign yields lower, while a more cautious mood hung over world stock markets and the dollar, both of which struggled for clear direction.

The fall in French bond yields came as polls (everyone knows how accurate those can be) showed centrist Emmanuel Macron would easily beat far-right candidate Marine Le Pen in May’s presidential election runoff, relieving some fears that have built up in recent weeks among investors. “Macron gained further support in the polls,” said DZ Bank rates strategist Rene Albrecht. “Another important point is that it looks like Hamon and Melenchon won’t merge, so there is less of a chance that we will have a left-wing candidate that could outpace Macron or Fillon.”

Over the weekend, French press reported that Socialist lawmaker Christophe Caresche has announced that he will now back Macron, calling him the “only solution to counter effectively Marine Le Pen in the second round of the presidential election”. That follows the news of Francois Bayrou publicly announcing his backing of Macron last week and the latest polls from the weekend suggest a boost to Macron following that. An Odoxa Dentsu poll published yesterday showed Macron as gaining 25% in the first round compared to 19% for Fillon and 27% for Le Pen. The pollster highlighted that this is the first time Macron has taken a 6% lead over Fillon in the first round. In a second round runoff the poll showed Macron as defeating Le Pen by 61% to 39%. The other weekend poll is the Kantar Sofres poll for Le Figaro. It showed a similar trend with Le Pen at 27% in the first round ahead of Macron with 25% and Fillon with 20%. A second round between Le Pen and Macron has the latter coming out on top at 58% to 42%.

Following the latest polls, Oddschecker saw Macron gaining, with his victory odds rising above 42%, while Le Pen remained flat at just over a third.

As a result, France’s 10-year bond yield fell 2.5 basis points to a one-month low of 0.90%, outperforming euro zone peers. Safe-haven German bond yields DE10YT=TWEB edged higher, narrowing the gap between French peers to around 70 basis points, its tightest level in just over a week.

Furthermore, as discussed last night, sterling weakened against all its major peers after The Times reported Prime Minister Theresa May’s team is preparing for Scotland to potentially call for an independence referendum in March. European stocks fell, tracking a negative day across Asian equities.

It will be another week in which Trump can make or break the recent market euphoria. With elections taking place this year in France, the Netherlands and Germany against a backdrop of rising populism, and uncertainties around Trump’s policies, investors have been hanging on every word from central bank officials and politicians. The next focus is set to be the U.S. president’s speech to Congress on Tuesday, which will be parsed for details on spending and tax plans.

“We are concerned that the markets could be heading for a harsh reality check if the Trump administration fails to meet high expectations as reflected in strong equity gains, including risky assets,” Piotr Matys, currency strategist at Rabobank in London, wrote in a note to clients. “It seems to us that the markets are too optimistic, looking from the glass half full perspective and not pricing enough of the negatives.”

In Europe, the French-led fall in bond yields and tightening of spreads over Germany were the most notable moves at the start of a week in which U.S. President Donald Trump’s State of the Union address on Tuesday will loom large. Trump is expected to unveil some elements of his plans to cut taxes in his joint address to Congress.

It was also a mixed bag in stocks. Benchmark European markets were flat, Asian bourses fell and U.S. futures pointed to a slightly higher open on Wall Street. “This morning’s moves follow what was a fairly cautious end to the week on Friday for markets,” said Jim Reid, markets strategist at Deutsche Bank (see full note below). MSCI’s benchmark world stock index slipped 0.1 percent to 444.53 points on course for its first consecutive daily fall for three weeks. On Thursday, it hit a record high of 447.67 points.

The index of the leading 300 European stocks was flat on the day at 1,457 points. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.3 percent, near the day’s lows and following Friday’s 0.7 percent fall. The Euro zone’s STOXX 600 index was down -0.3% at last check, at 369. Japan’s Nikkei closed 0.9 percent lower, hitting a 2-1/2 week low on concerns that a stronger yen would crimp corporate earnings.

Though U.S. stocks clawed their way to a higher close on Friday, major indices spent much of that day’s session in negative territory, suggesting increased caution. Yet it was the Dow’s 11th consecutive record high on Friday, which is the longest such run since 1987.

In currencies, the dollar was flat on an index basis. The euro was up 0.2 percent at $1.0580 EUR=, but the dollar was 0.1 percent higher against the yen at 112.30 yen and sterling was down 0.3 percent at $1.2430. In addition to Trump’s address to Congress, rates and the dollar will take their cue this week from Federal Reserve Chair Janet Yellen’s speech on Friday. “In order for the Fed to really have the option of hiking next month, Yellen will have to make a much stronger case relative to what’s been said recently,” Deutsche’s Reid said.

The 10-year U.S. Treasury yield rose 2 basis points to 2.335 percent. On Friday it hit a five-week low of 2.31 percent, and last week’s fall of nearly 11 basis points was the steepest weekly decline since July last year.

In commodities, Brent crude rose 1.15% to $56.62 per barrel while WTI was up 0.8% at $54.42 per barrel as a global supply glut appeared to ease.

Market Snapshot

  • S&P 500 futures down less than 0.1% to 2,364.5
  • STOXX Europe 600 down 0.28% to 368.96
  • MXAP down 0.6% to 144.98
  • MXAPJ down 0.3% to 466.49
  • Nikkei down 0.9% to 19,107.47
  • Topix down 1% to 1,534.00
  • Hang Seng Index down 0.2% to 23,925.05
  • Shanghai Composite down 0.8% to 3,228.66
  • Sensex down 0.2% to 28,824.19
  • Australia S&P/ASX 200 down 0.3% to 5,724.18
  • Kospi down 0.4% to 2,085.52
  • German 10Y yield rose 1.5 bps to 0.201%
  • Euro up 0.2% to 1.0587 per US$
  • Brent Futures up 1.2% to $56.65/bbl
  • Italian 10Y yield fell 3.0 bps to 2.195%
  • Spanish 10Y yield fell 2.2 bps to 1.676%
  • Brent Futures up 1.2% to $56.65/bbl
  • Gold spot down 0.13% to $1,256
  • U.S. Dollar Index down 0.07% to 101.02

Top Overnight News from Bloomberg

  • Last-Minute ‘Moonlight’ Oscar Win Marks Black Film Milestone
  • Buffett Stings Hedge Funds Anew Over Their ‘Misbegotten’ Rewards
  • AbbVie Gets EMA Panel Nod for Shorter Chronic Hep C Combo Course
  • Chevron Says Gorgon Train 2 Resumed LNG Production on Sunday
  • Berkshire Hathaway 4Q Oper EPS $2,665, Est. $2,717
  • Blackstone, Prudential Said to Win in $16 Billion Loan Sale
  • Sasol First-Half Net Income Up 19% to 8.7 Billion Rand Y/Y
  • IMI’s Selway Tells FT U.K. Co. Seeking Acquisition Opportunities
  • Samsung SDI Supplies Batteries for Energy Storage System in U.S.
  • Fortescue, Apollo Said to Bid for $1.5 Billion Wesfarmers Mines
  • Proposed Trump Budget Said to Hike Defense Spending, Cut EPA

Asia equities shrugged off last week’s positive sentiment and traded with a negative tone despite Friday’s last minute record rally on Wall Street as most major bourses in the region traded lower. ASX 200 (-0.3%) was down following weakness in the commodity sector after energy shares were dampened by an initial decline in oil and declines from Friday in which WTI crude futures briefly dropped below USD 54/bbl, while Nikkei 225 (-0.9%) underperformed alongside a firmer JPY. Shanghai Comp. (-0.4%) and Hang Seng (-0.4%) were subdued with participants cautious following another weak PBoC liquidity injection and amid regulatory concerns after the CIRC banned Evergrande Life from stock trading for 1 year, while CSRC Chairman Liu also stated that China is ready for a greater number of IPOs and vowed stricter regulations. 10yr JGBs were higher as the risk averse tone and BoJ presence in the market supported demand for Japanese paper. Furthermore, 5yr yields fell to a 3-month low and the curve flattened amid outperformance in the super long-end.

Top Asian News

  • Hedge Fund Joins Tactical Crowd as Trump Clouds Dollar View
  • China Will Allow More IPOs to Lure Capital, Regulator Says
  • Japan Stocks to Watch: Toshiba, Panasonic, Sumitomo, Mitsubishi
  • GLP Committee in Talks With Shortlisted Parties on Proposals
  • Noble Group FY Net $8.7m Vs $1.7b Loss Y/y

The European Indices trade in the green this morning with the FTSE outperforming currently up 0.4%, being lent a helping hand by the softer GBP. The main headline grabber has been reports that the potential tie up between LSE and Deutsche Boerse could be off the cards. Insurance names have taken a hit in the UK after the UK chancellor changed the discount rate. Elsewhere in Europe, Intesa (+5%) and Generali (-4%) cancelled a possible merger between the two Co.’s which benefitted Intesa shares. Finally, Unilever trade higher amid shareholder pressure to break the company up. The German French spread has traded below 69bps for the first time in ten days after Macron increases his lead in the first round polls for the French election. Italian paper saw underperformance against that of Spain ahead of this morning’s auction and failed to regain any ground in the wake of the results.

Top European News

  • Euro-Area Economic Confidence Climbs to Highest Level Since 2011
  • LSE Says Deutsche Boerse Deal Unlikely After Year-Long Try
  • Deutsche Bank Cuts 2016 Bonus Pool by Almost 80%, FAS Reports
  • Macron Extends Lead Over Fillon, Nears Le Pen in French Race
  • VimpelCom Boosts Dividend After Italy Deal; to Become Veon
  • Agrokor’s Senior Notes Fall to Record Low After Serbian Dispute
  • GAM Shares Gain as Investor RBR Seeks Seats on Company’s Board
  • UniCredit Unexercised Rights Sold for About EU15.1m
  • Anglo Profit Surge Has Little to Do With Commodities Rally
  • BTPs Rally, Following OATs, as Italian Bank Stocks Gain Off Open
  • U.K. Insurers Fall After Government Cuts Ogden Discount Rate

In currencies, the British pound lost 0.3 percent to $1.2422 as of 10:58 a.m. in London after an overnight report from the Times of London that Theresa May was considering a second Scottish referendum. The euro gained 0.2 percent to $1.0582. The Bloomberg Dollar Spot Index was little changed. The gauge fell 0.4 percent last week, its first drop in three weeks. Thin market conditions as FX trading confined to relatively tight ranges. The early focus has been on GBP where talk of another Scottish referendum on independence — perhaps announced in tandem with the triggering of Article 50 – has once again reminded the market of the destabilising effect of Brexit. Cable has tested down through 1.2400 — both in London and Tokyo — but the selling has been well absorbed as yet. Month end flow pushing EUR/GBP higher has also played its part as the cross rate has pierced through 0.8500, but highs set around 0.8534/5 contain for now. In Europe, French election candidate Macron has made some modest gains in the polls (for the first round), and along with the EUR/GBP flow mentioned above has given EUR/USD as modest bid this morning (edging towards 1.0600). USD/JPY continues to hover above the 112.00 level, with the initial test below the figure finding some support. President Trump’s address to Congress tomorrow will put the USD trade ‘on hold’ for now, with UST yields also basing out for now at some key levels to further prop.

In commodities, WTI crude futures rose 0.7 percent to $54.37 a barrel, near the Feb. 23 closing price, which was the highest since July 2015. Gold was little changed at 1,256.21 an ounce. The metal jumped 1.8 percent last week for its fourth straight weekly advance. Gold continues to hold better levels as the USD remains pressured on the dip in yields. However, the flight to safety has also played its part, with the French (and Dutch) elections having also provide a catalyst for demand for the yellow metal. Elsewhere, hedge funds are said to be positioning for a break higher in Crude prices closer in on the curve. This has helped maintain WTI towards the upper end of the recent USD50-55 range, but the recent test through here was met with strong supply. In base metals, Copper prices stay comfortably below the USD2.70 mark, but finding some support on the session, but Nickel and Tin are showing the stronger gains on the day.

Looking at today’s key events, in the US we’ll get a first look at the January durable and capital goods orders data as well as pending home sales and the Dallas Fed manufacturing survey index.

US Event Calendar

  • 8:30am: U.S. durable goods orders, est. 1.7% (pr. -0.5%)
  • 10am: U.S. pending home sales m/m, est. 1%, (pr. 1.6%)
  • 10:30am: Dallas Fed manf. activity, est. 19.4 (pr. 22.1)

* * *

DB’s Jim Reid concludes the overnight wrap

Before we kick off properly this morning, tomorrow marks the 10 year anniversary of the EMR. To mark the occasion we’ll be doing a performance review of the whole period which hopefully will be interesting as the start of the publication coincided with what we think was the start of the global financial crisis given this was when the US subprime bond market was just starting to disintegrate. We’ll also republish the first ever edition from February 28th 2007 if for no other reason than to prevent the touts from trying to sell the first edition on eBay at an exorbitant price.

So 10 years from the origins of the crisis and the truth is that the ramifications are still front and centre in financial markets. Bunds capped a remarkable week by rallying -4.6bps to 0.181bps on Friday (10 years) and -11.7bps on the week. At the short end 2y Bund yields also rallied another -3.3bps to -0.965% on Friday (and a new record low) and so taking the weekly move to -13.4bps and the biggest rally since 2012. A combination of pricing in of political and redenomination risk and a collateral shortage seem to be growing themes. Our European FI strategists think the market is pricing in around a 5% risk of Bunds being redenominated back into DEM. It’s a strange market though as French OATs also rallied on Friday and more or less matched Bunds on the week (10yr -11.1bps) and European equities were fairly flat last week (notwithstanding a weak Friday session which we’ll touch on below) with inflows the highest in over a year in the week to Wednesday. So Bunds seem to be the magnet to any systemic fears at the moment with other markets barely recognising much additional risk.

The main news concerning the French election from the weekend is of another endorsement for Emmanuel Macron. French press are reporting that Socialist lawmaker Christophe Caresche has announced that he will now back Macron, calling him the “only solution to counter effectively Marine Le Pen in the second round of the presidential election”. That follows the news of Francois Bayrou publicly announcing his backing of Macron last week and the latest polls from the weekend suggest a boost to Macron following that. An Odoxa Dentsu poll published yesterday showed Macron as gaining 25% in the first round compared to 19% for Fillon and 27% for Le Pen. The pollster highlighted that this is the first time Macron has taken a 6% lead over Fillon in the first round. In a second round runoff the poll showed Macron as defeating Le Pen by 61% to 39%. The other weekend poll is the Kantar Sofres poll for Le Figaro. It showed a similar trend with Le Pen at 27% in the first round ahead of Macron with 25% and Fillon with 20%. A second round between Le Pen and Macron has the latter coming out on top at 58% to 42%.

The other notable weekend news concerns comments from Treasury Secretary Steven Mnuchin. Speaking on Fox News TV, Mnuchin said that at the much anticipated Trump speech this week to a joint session of Congress on Tuesday night the President will be using it to preview some of his sweeping plans to cut taxes and also simplify the tax system. Mnuchin hinted that the President’s budget will not touch social welfare programs such as Social Security and Medicare or cuts to any other big entitlement programs. The Treasury Secretary didn’t give much away on the proposed border tax, saying that he was “still studying very carefully” the proposal. Mnuchin added that “there are certain aspects that the president likes about the concept of a border adjusted tax” and that “there are certain aspects that he’s very concerned about”.

Trump’s speech is almost certainly the main event for markets this week although there’s still a relatively packed data docket to get through with the final PMI’s in Europe to be confirmed on Friday, a second reading of Q4 GDP in the US tomorrow and also an economic outlook speech by Fed Chair Yellen on Friday in Chicago. On that it’s worth noting that the March hike probability did steadily climb last week to 40% on Friday from 34% the week prior based on Bloomberg’s calculator but you’d imagine that in order for the Fed to really have the option of hiking next month, Yellen will have to make a much stronger case relative to what’s been said recently.

Ahead of that, this morning in Asia it’s been a relatively soft start to the week for markets. The Nikkei (-0.94%), Kospi (-0.36%) and ASX (-0.31%) in particular are all in the red while the Hang Seng and Shanghai Comp have also just turned negative after a more resilient start perhaps reflecting the news from China’s securities regulator that it is looking to allow for more IPO’s in China, suggesting increased confidence in the market’s recovery from the 2015 rout. Meanwhile the focus in FX this morning has been on Sterling which has fallen -0.32% after the UK Times reported that PM May is preparing for the Scottish government to call another independence referendum to coincide with the triggering of Article 50 next month. Elsewhere it’s been a fairly quiet start for commodities while Asia bond markets have generally echoed the strength from Friday.

This morning’s moves in Asia follow what was a fairly cautious end to the week on Friday for markets. With an uncertain political environment bubbling away the European session in particular was weak and that was evident through a -0.76% decline for the Stoxx 600 which was the sharpest fall since the end of January. The DAX also tumbled -1.20% while France’s CAC retreated -0.94%. Perhaps also reflecting some disappointment at the lack of details from Mnuchin’s interview on Thursday it had looked like US equity markets might follow a similar route before a late surge into the close helped both the S&P 500 (+0.15%) and Dow (+0.05%)  just about hold onto gains. Notably that is now the 11th consecutive record high for the Dow which is the longest such run since 1987. The fairly cautious mood though was still reflected in the strong rally for Gold (+0.61%) while base metals also generally rebounded from losses on Thursday. Like their European counterparts, US Treasuries also had a strong day with 10y yields finishing the day -6.0bps lower at 2.313% and the lowest closing yield since November.

Friday’s economic data didn’t really add much to proceedings. In the US we learned that new home sales in January rebounded a slightly less than expected +3.7% mom (vs. +6.4% expected). The University of Michigan’s consumer sentiment reading was meanwhile revised up 0.6pts to 96.3 in February albeit still a couple of points below its January reading. In France we learned that consumer confidence was stable in February while in the UK the BBA recorded a modest rise in home loans in January.

Before we wrap up, in a report published this morning Wolf von Rotberg on our European equity strategy team highlights the likely winners and losers among European corporates from a US tax reform that would see the introduction of a border tax adjustment in exchange for a lower corporate statutory rate. He finds that such a reform would reduce net profits for the 70 European companies most exposed to the US by an average of 5%, implying a net negative impact of around 1% on Stoxx 600 earnings overall. At the European sector level, he identifies that autos are the biggest losers, while earnings for health care equipment, construction materials and food retail could see a minor uplift.

On to this week’s calendar now. It’s a quiet start to the week in Europe this morning with just February confidence indicators for the Euro area due out. In the US this afternoon we’ll get a first look at the January durable and capital goods orders data as well as pending home sales and the Dallas Fed manufacturing survey index. Tuesday kicks off in Japan where the latest retail sales, housing starts and industrial production data are due. In the European session we’ll get France CPI, PPI and Q4 GDP and the February CPI estimate for the Euro area. Over in the US it’s all eyes on the second reading of Q4 GDP, while core PCE, wholesale inventories, advance goods trade balance, S&P/Case Shiller house price index, Chicago PMI and Richmond Fed manufacturing survey round out a busy day of releases. In Asia on Wednesday the early focus is on the official manufacturing and services PMI’s in China. Over in Europe we’ll then get the final February manufacturing PMI’s followed by CPI in Germany and UK credit and money aggregates data. In the US there is more important data in the form of the January core and deflator PCE readings, ISM manufacturing, construction spending, vehicles sales and the final manufacturing PMI. Thursday looks set to be quieter with just Euro area PPI due in the morning and initial jobless claims in the US. We end the week on Friday in Japan with CPI and the latest employment numbers. China will also release the Caixin services and composite prints. In Europe we get the remaining services and composite PMI revisions for February as well as Euro area retail sales. The final services and composites are  then due in the US alongside the ISM non-manufacturing print.

Away from the data the Fedspeak during the week consists of Kaplan today, Williams and Bullard on Tuesday, Kaplan and Brainard on Wednesday and then a bumper day on Friday headlined by Fed Chair Yellen when she gives an economic outlook speech in Chicago. Fischer, Powell, Evans, Lacker and Mester will also speak. Away from that, arguably the biggest event of the week is President Trump’s address to a joint session of Congress at 9pm ET in the US on Tuesday (early Wednesday morning in the UK). Also worth noting is the House of Lords debate on Brexit where talks are due to start about a more detail examination of the proposed bill.

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Brickbat: Ending the Dispute

assaultA federal jury has awarded Jillian and Andrew Beck $1.6 million after the Becks sued the Las Cruces, New Mexico, police department. The jury found that an officer had used excessive force against Jillian Beck when he threw her down and slammed her face into rocks, breaking her nose and wrist, and unlawfully arrested Andrew when he tried to help his wife. The officers had responded to a dispute between the Becks and a neighbor.

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