the day ahead - april 10th 2013

7/28/2019 The Day Ahead - April 10th 2013

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THE DAY AHEADREUTERS NEWS North American Edition For Wednesday, April 10, 2013

Stocks rose on Tuesday and the Dow reached a recordintraday high as blue-chip technology shares gained, whileTreasuries fell. Oil and gold gained on currency moves asthe dollarfell across the board.

MARKET RECAP COMING UP

Constellation Brands reports quarterly earnings, one of severalconsumer-focused companies posting results. Wall Street is look-ing for its profit to slip and will no doubt want to hear the company'sview on negotiations with U.S. regulators over Anheuser BuschInBev's proposed takeover of Grupo Modelo. As part of that deal,Constellation will take over the Modelo business in the UnitedStates, giving the world's largest wine company a big footprint inthe beer business. For a related Reuters Insider video, click here

Family Dollar's quarterly results will show whether its push to sellmore everyday goods from soda to cigarettes took a big bite out ofits profits. Selling more of those goods is a trendfor the so-called dollar stores including FamilyDollar and larger rival Dollar General. Whilethey boost shoppers' spending and might bringthem into the stores more often, items such ascigarettes carry lower margins than much of theother merchandise such as apparel that the stores sell.

Bed Bath and Beyond and Carmax are expected to post im-proved results, while Ruby Tuesdays earnings are seen slippingfrom the same period one year ago.

The Federal Reserves Federal Open Market Committee issuesminutes from its meeting of March 19-20. Investors will look forclues on whether Fed officials in March were warming to the idea ofscaling back purchases of bonds, although a surprisingly weakreport on U.S. employment since then could muddy any signal theminutes might otherwise send. The minutes have become evenmore important than the Feds rate statement, because policy is ina steady state. Keep in mind the meeting happened before theMarch jobs shocker, so well get a sense of how much appetitethere was for tapering asset buys.

President Barack Obama releases his budget proposal, which isexpected to offer cuts to Social Security and other entitlement pro-grams, as he aims to sway Republicans to compromise on a deficit-reduction deal. Under a proposal that would cut the deficit by $1.8trillion over 10 years, the president will offer to apply a less gener-ous measure of inflation to calculate cost-of-living increases. How-ever, the president will only accept these spending cuts if congres-sional Republicans agree to higher taxes.

Chevron, the second-largest U.S. oil company, updates investorson its push to start growing production this year.

STOCKS Close Change % Chng Yr-high Yr-lowDJ IA 14673.23 59.75 0.41 14716.46 12035.10

Nasdaq 3237.86 15.61 0.48 3270.30 2726.68

S&P 500 1568.58 5.51 0.35 1573.66 1266.74

Toronto 12484.05 139.49 1.13 12904.71 11209.55

Russell 929.46 -2.03 -0.22 954.00 729.75

FTSE 6313.21 36.27 0.58 6533.99 5897.81

Eurofirst 1165.35 0.56 0.05 1209.05 1132.73

Nikkei 13192.35 -0.24 0.00 13225.62 10398.61

Hang Seng 21870.34 152.29 0.70 23944.74 21612.05

TREASURIES Yield10-year 1.7468 -1 /32

2-year 0.2341 0 /32

5-year 0.6972 1 /32

30-year 2.9331 -15 /32

Price FOREX Last % ChngEuro/Dollar 1.3082 0.58

Dollar/Yen 98.99 -0.36

Sterling/Dollar 1.5320 0.45

Dollar/CAD 1.0159 -0.05

COMMODITIES Price $ change % change

May crude $ 94.04 0.68 0.73

Spot gold (NY/oz) $ 1585.06 11.97 0.76

Copper U.S. (front month/lb) $ 3.4380 0.0700 2.08

Reuters/Jefferies CRB Index 291.51 1.81 0.63

BIG MOVERS Price $ change % changeFirst Solar 39.35 12.31 45.53

Suntech Power 0.64 0.16 32.56

J .C. Penney 13.93 -1.94 -12.22

Spherix 6.95 -0.49 -6.59

KEY ECONOMICS EVENTS ET/GMT REUTERS POLL PRIOR SOURCE

Mortgage index for w/e 05/04 0700/1100 -- 790.7 Mortgage Bankers Association (MBA)

Refinancing index for w/e 05/04 0700/1100 -- 4189.0

Federal budget for Mar 1400/1800 -$112.5 bln -$204 bln

FOMC minutes March 19-20 meeting 1400/1800 -- -- Federal Open Market Committee

For The Day Ahead - Canada, click here
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COMING UP (continued)

At the National Space Symposium in Colorado Springs,Colorado, top U.S. and international experts gather to discussmilitary and civilian space and satellite programs, as well ascybersecurity challenges, against the backdrop of significantbudget cuts in the United States and Europe. Top speakersinclude senior officers in charge of U.S. Strategic Command

and Air Force Space Command, and senior executives fromBoeing, Lockheed Martin, Northrop Grumman, Harris, ITT Ex-elis and other companies active in military and commercialspace missions.

Federal Reserve Bank of Atlanta President Dennis Lockhartgives welcome back remarks before the Federal Reserve Bankof Atlanta Financial Markets Conference in Stone Mountain,Ga. Also, Dallas Fed President Richard Fisher speaks at theUniversity of Texas at El Paso.

Bank of Montreal hosts its annual general meeting of share-holders in Saskatoon, Saskatchewan. Canada's No. 4 bankwill discuss its growth strategies, with particular focus on itsU.S. retail bank, which has nearly doubled in size thanks to the2011 acquisition of Wisconsin lender Marshall & Illsley.

A federal judge will consider whether to give final approval to a$115 million settlement with former AIG CEO Hank Green-berg and other related defendants in a lawsuit over alleged bidrigging and accounting fraud at the insurance giant. AIG haspreviously agreed to pay $725 million, and Pricewaterhouse-coopers agreed to pay $97.5 million. The hearing is beforeU.S. District J udge Deborah Batts.

MARKET MONITOR

Click on the chart for full-size imageStocks advanced on Tuesday, with the Dow closing at a recordhigh on a rally in cyclical shares and as the first impressions ofthe earnings season were positive. Microsoft shares ranked asthe Dow's top percentage gainer, up 3.57 percent. Intel sharesshot up 3.13 percent. Analysts said that the market has the mo-mentum to push indexes higher, even with the Dow up about 12percent and the S&P 500 up about 10 percent for the year. J.C.Penney tumbled 12.22 percent and shares of nutritional com-pany Herbalife fell 3.75 percent. The Dow was up 0.41 percent,the S&P 500 Index was up 0.35 percent and Nasdaq was up0.48 percent.

Prices for longer-dated Treasuries dropped as investors ex-

tended a selloff after last week's rally and before debt auctionslater in the week, but an undercurrent of worries about the globaleconomy tempered losses. An auction of $32 billion in 3-yeardebt by the U.S. Treasury proved soft on Tuesday, with a weakbid-to-cover ratio and weak indirect takedown. Benchmark 10-year Treasury notes last traded down 1/32 in price for a yield of1.75 percent. Thirty-year bonds fell 16/32 in price to yield 2.93percent after the auction. Also, the Federal Reserve bought$1.57 billion in government bonds that mature in Feb. 2037 toFeb. 2043.

The dollar edged down from a near four-year high against theyen as traders booked profits on its sharp rally, but the yen'sweakening trend remained intact following the Bank of J apan'saggressive monetary easing plan announced last week. "Giventhe breadth of yen bearishness, any reprieve would likely en-courage investors to re-establish short yen positions at morefavorable exchange rates," said J oe Manimbo, senior marketanalyst at Western Union Business Solutions in Washington,D.C. Dollar fell against the yen 0.34 percent at 99.01 yen. Theeuro extended gains against the dollar. It last traded at$1.3083, up 0.5 percent on the day. Against the yen , the euroreached a high of 129.97. It last traded at 129.53 yen, up 0.21percent on the day.

Crude oil futures rose, boosted by a weak dollar and Chineseinflation data that eased concerns about tightened money sup-ply. "For WTI prices, the dollars under a lot of pressure, andthat's given us a boost throughout the trading day," said GeneMcGillian, an analyst at Tradition Energy in Stamford, Connecti-cut. May crude traded at $94.00, up 0.69 percent, a barrel, hav-ing recovered from a $92.86 session low.

Gold rose as volatility in the currency market triggered by J a-

pan's aggressive monetary easing plan lifted bullion's appeal asa hedge against inflation and currency fluctuations. Gold is nowslowly sinking in to the news that J apan is printing a quick dealof money and liquidity is going to be abundant again, said AxelMerk, chief investment officer of Merk Funds, which oversees$630 million in mutual fund assets. Spot gold was up 0.75 per-cent at $1,584.90 an ounce. June delivery futures were up0.76 percent at $1,584.70.

THE DAY AHEAD For April 10, 2013
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TOP NEWS

Click on the chart for full-size imageU.S. wholesale inventories post largest fall in 1-1/2 yearsU.S. wholesale inventories recorded their biggest decline innearly 1-1/2 years in February, prompting some economists tolower their lofty first-quarter growth estimates. The CommerceDepartment said wholesale inventories fell 0.3 percent, the larg-est drop since September 2011, after a revised 0.8 percent rise

in J anuary. J anuary sales were previously reported to have in-creased 1.2 percent and economists had expected stock to rise0.5 percent in February. Meanwhile, confidence among U.S.small businesses fell in March, the latest indication that eco-nomic activity lost momentum as the first quarter ended. TheNational Federation of Independent Business said its optimismindex fell 1.3 points to 89.5 last month. The overall tone of thesurvey was downbeat, with only two components of the indexincreasing.

J.C. Penney board comes under fire for CEO switchThe board ofJ.C. Penney is facing scathing criticism from in-vestors and corporate governance experts after ousting ChiefExecutive Ron Johnson and replacing him with his own embat-tled predecessor, Myron Ullman. Hours after the switch wasannounced on Monday, there was at least one call for the entireboard to resign, while others suggested shareholders might voteout current directors at the company's next annual meeting. "Itwas the wrong thing for the board to do to get rid of J ohnsonhere. With the board firing J ohnson now, at this stage in thegame, they should tender their own resignation as well," saidBrian McGough, managing director and head of the retail groupat research firm Hedgeye Risk Management.

FBI probes trading as KPMG quits as Herbalife, SkechersauditorIn a case that could shake one of the world's largest accountingfirms, KPMG said it resigned as auditor of two U.S. companiesas the FBI began investigating insider trading allegations involv-

ing a former KPMG senior partner. The companies - nutritionalproducts group Herbalife and footwear maker Skechers - saidseparately that KPMG had quit as their auditor in connectionwith alleged leaks of nonpublic information. The FBI's Los Ange-les office is investigating the matter, according to a source famil-iar with the situation. Herbalife said in a statement that KPMG'sresignation had nothing to do with the company's accountingpractices or the integrity of its management - issues called intoquestion by the high-stakes drama between hedge fund titansBill Ackman and Carl Icahn over the company.

Dell's evaluation of buyout bid fl awed -shareholderSoutheastern Asset Management, the activist investor thatowns 8.4 percent ofDell, said the computer maker's evaluation

of a $24.4 billion leveraged buyout deal with its founder and buy-out firm Silver Lake was flawed. Citing excerpts from Dell'sproxy statement, Southeastern said the company did not prop-erly explain why it did not entertain a buyout offer that wouldallow shareholders to elect whether they wanted to be paid incash or stock. It urged Dell's special committee to negotiate now"in good faith."

Too early to call U.S. in a spring 'swoon' -Fed's Bullard

A top Federal Reserve official downplayed the meager Marchjobs report, arguing he still expects unemployment to tick downto about 7 percent by year's end and suggesting the economy isnot entering another spring "swoon." St. Louis Fed PresidentJames Bullard pointed to a stronger Europe and more positiveU.S. economic data beyond the employment report, which lastweek showed only 88,000 jobs were created last month in theUnited States. Separately, Richmond Federal Reserve PresidentJeffrey Lacker said he was not concerned by a weaker-than-expected March payroll report, which alarmed markets that theU.S. economy might suffer a 'spring swoon' when it was pub-lished last week.

MasterCard under EU fire over payment card feesMasterCard is under investigation by the European Union over

the level of fees tourists to the EU are charged when using cardsto make purchases, which the EU competition regulator saidcould hamper cross-border trade. The EU watchdog saidMasterCard's fees were a concern in view of the growing role ofnon-cash payments. "Fees charged for payments made by card-holders from non-European countries can be quite high. Actu-ally, these types of fees are generally much higher than thosecharged within Europe," Commission spokesman Antoine Co-lombani said.

Microsoft, Nokia demand EU action over Google's AndroidCompanies including Microsoft and Nokia have stepped uppressure on EU antitrust regulators to take action againstGoogle, accusing it of blocking competition in mobile telephony.

In a complaint made public on Tuesday by their lobbying groupFairSearch, Google's rivals accused the company of using An-droid to divert traffic to its search engine.

Judge weighs fairness of Citigroup's $590 mln investor pactA federal judge grilled lawyers for Citigroup and shareholderson Monday over a proposed $590 million settlement of an inves-tor lawsuit over its exposure to toxic mortgage assets, asking ifthe accord was fair given none of the bank executives named asdefendants would contribute money to it. U.S. District JudgeSidney Stein in Manhattan said that Citigroup's current share-holders have been left to pay for the settlement under the cur-rent terms of the agreement.

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TOP NEWS (continued)

Office Depot, OfficeMax get FTC request, pick CEO searchpanelOffice Depot and OfficeMax both received a request for addi-tional information from the Federal Trade Commission regardingtheir proposed merger, they said in a joint statement. The com-panies said they were optimistic about the regulatory process.

Also, they said they formed a board committee to search for achief executive for the combined company. It will consider exter-nal candidates as well as Office Depot CEO Neil Austrian andOfficeMax CEO Ravi Saligram.

Wal-Mart to fund supplier training after deadly BangladeshfireWal-Mart Stores is making its biggest push yet to try to improveconditions at factories that produce its clothing after a fire at aBangladesh factory killed 112 people last year. The companyalso said it would donate $1.6 million to help start a new Bangla-desh training academy, and outlined its efforts to regain controlover the complex and far-flung web of factories that make itsproducts.

PIC OF THE DAY

A demonstrator holds up a picture depicting Russian President VladimirPutin with make-up, during a protest by the gay community in

Amsterdam, Netherlands.

Company Name Action

AMC NetworksStifel raised price target to $70 from $58 to reflect the continued ratings growth and the inclusion of $175mn of cash fromthe VOOM proceeds.

CBRE GroupJ MP Securities raised target to $27 from $25, says the companys brand have become increasingly dominant on a globalbasis, which should continue to lead to a higher level of recurring fees.

J .C. PenneyBaird cut target price to $17 from $20 after the departure of CEO Ron J ohnson who lost key support from activist investors

and board member.

Nasdaq OMX GroupSandler O'Neill cut price target by $2 to $33 to reflect softer-than-expected trading business and temporary suspension ofthe companys buyback program.

Qlik TechnologiesEvercore Partners raised rating to overweight from equal weigh as the tone of business appears to remain solid based onpartner feedback, says expectations are more realistic compared to one year back.

ANALYSTS RECOMMENDATIONS



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THE DAY AHEAD - CANADA For April 10, 2013

COMING UP MARKET MONITOR

No major events are scheduled. Canada's main stock index recorded its biggest one-day per-centage jump in more than four months on Tuesday as positiveeconomic data from China fueled hopes for a global economicrecovery and drove gains in the material and energy sectors.

The Toronto Stock Exchange's S&P/TSX composite indexwas up 1.13 percent at 12,484.05. Barrick Gold climbed 1.49percent and Goldcorp added 3.26 percent, playing the biggestrole of any two stocks in leading the market higher. Suncor En-ergy rose 3.11 percent.

The Canadian dollarwas down 0.04 percent at $1.0160.

BIG MOVERS Price C$ % Change

Niko Resources 7.14 0.88 14.06

Romarco Minerals 0.75 0.09 13.64

Aquila Resources 0.13 -0.01 -7.14

Agrium 96.53 -2.80 -2.82

TOP NEWS

Canada housing data suggests soft landing so far

Canadian housing starts edged higher in March and buildingpermits were weaker than expected in February, reports re-leased showed, offering some reassurance that Canada's hous-ing sector is simply cooling, not crashing. The seasonally ad-

justed annualized rate ofhousing starts was 184,028 units inMarch, up from 183,207 in February and well above the consen-sus forecast of analysts in a Reuters poll for 176,500. Mean-while, data from Statistics Canada showed the value of Cana-dian building permits rose a weaker-than-expected 1.7 percentin February as a sharp decline in plans for multi-family housingpartially offset strength in other projects. Market players hadexpected a February gain of 4.3 percent. For related graphic,click here

Agrium sweeps proxy vote, Jana cr ies foul

Canadian fertilizer companyAgrium said its entire slate of direc-tors had been elected to its board, defeating a rival slate nomi-nated by dissident U.S. shareholder Jana Partners. J ana saidthe vote was tainted and should be investigated. Agrium said theresult was "fair and square". J ana said votes cast for some of itsfive candidates for the 12-member board were revoked afterFriday's deadline. J ana's managing partner, Barry Rosenstein,said the hedge fund had had enough votes as of Friday's dead-line to elect one or more of its candidates, and that the vote was"tainted".

Canada's Porter Airlines to finalize Bombardier plane dealPorter Aviation Holdings is set to announce an order for up to30 C-Series jets made by Bombardier, the Wall Street Journalreported, citing two people familiar with the deal. Bombardiersaid in December an airline based in the Americas had signed aletter of intent to buy 12 C-Series aircraft, with options for an-other 18 narrow-body commercial planes, in a transaction worthup to $2.08 billion. The deal, which is expected to be announcedas early as Wednesday, will finalize the letter of intent Portersigned with Bombardier in December, the J ournal reported.

Click on the chart for full-size image
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ANALYSIS AND INSIGHT

DEALTALKActi vist investors find all ies in mutual, pension fundsBy J essica Toonkel and Soyoung KimU.S. institutional investors, who used to shun activist investorsand side with a company's management on most controversialissues, are starting to change their tune.

Aggressive shareholders such as Carl Icahn and Bill Ackman,who agitate for change at companies they believe to be sub-par,are increasingly getting a hearing with institutions ranging fromthe most staid mutual fund to the state-run pension fund.Philip Larrieu, an investment officer at the California State

Teachers Retirement System (CalSTRS), said activist investorshave won more respect as their research has improved and theircampaigns succeeded."There are some that are very aggressive and people don't likethem because they are so aggressive, but then it turns out theymight have a point," Larrieu said in an interview, declining togive specifics.Last November, CalSTRS teamed up with Ralph Whitworth'sRelational Investors LLC to urge for a breakup of diversifiedmanufacturer Timken Co, the first time the California pensionplan has participated in this kind of activism.In February, T. Rowe Price Group Inc opposed a $24 billionbuyout bid for Dell Inc, one of only a handful of times in the pastdecade that the Baltimore-based money manager has publiclyrejected a financial strategy endorsed by management.Activist investors, proxy advisers and fund managers say institu-tional support has emboldened some corporate gadflies to takeon more and larger companies than they would have in the past- to the extent that even the likes of Apple and Procter & Gamblehave come under attack.

There were 241 activist campaigns in 2012 targeting a change incompany strategy or board, up from 187 in 2009, according toFactSet SharkWatch. More than 20 percent of the campaignslast year targeted companies with at least $1 billion in market

value, up from 7 percent in 2009.Data on institutional support for shareholder activism is hard tocome by, but mutual fund managers say their interest is driven inpart by the performance that activists have demonstrated in re-cent years. Increased focus on corporate governance is anotherdriving factor.Dimensional Fund Advisors, the eighth largest U.S. mutual fundcompany with $262 billion in assets at the end of 2012, said itrarely engaged with activists before 2007 but formed a corporategovernance group that year and started meeting with activistinvestors a few years ago."We felt that we should be more proactive in gathering informa-tion and being informed so we could vote our proxies better,"said J oseph Chi, co-head of portfolio management at the Austin,

Texas-based DFA. "As a very large shareholder in companiesthat are engaged in proxy contests, this is a good opportunity tohave our voice heard."PRESSURE TO PERFORMActivist investors focus on companies they believe can providebetter shareholder returns through a change in strategy or man-agement. With the U.S. economy in recovery mode, sharehold-ers are putting more pressure on underperformers - especiallycompanies with cash on the balance sheet that investors thinkcan be put to better use, such as at Apple."Three or four years ago everyone was in crisis and everyonehad to be conservative and preserve cash but now you can seewhich companies aren't recovering," said Donna Anderson, acorporate governance specialist at T. Rowe Price."I think more investors have been successful with achieving theirobjectives, whether it is to get a board seat or ultimately to layout M&A," Anderson said.

The financial crisis also jolted some passive investors into plac-ing more emphasis on corporate governance."The climate has changed and people are very focused onchanging corporate conduct or more broadly around financialperformance. If you are an activist hedge fund, you have thewind at your back," said Chris Cernich, executive director of

mergers and acquisitions and proxy contest research at influen-tial proxy advisor ISS."I think the financial crisis has contributed to this climate and Ithink it's here to stay," Cernich said.Relational's Whitworth, who pressured industrial conglomerateITT Corp to break up and last week was named interim chair-man of Hewlett Packard, said institutional investors haveevolved from "accepting" to "inviting" shareholder activism."We do get a lot of calls from institutional investors," Whitworthsaid. "Institutional investors see the activity as beneficial andthey're much more likely to be supportive."

To be sure, some fund managers and index funds remain waryof engaging too closely with activist investors."Our question is what is the long-term case. We are going to bepermanent holders of the stock and it is not in our interest tosupport an initiative that will result in a short-term pop in stockprice that isn't sustainable," said Glenn Booraem, controller offunds at the Vanguard Group.CAPITAL INFLOWSU.S. mutual funds and public pension plans together own 42percent of all U.S. stocks, according to Bogle Financial MarketsResearch Center. Their willingness to listen to activist investorshas emboldened some activists to buy stakes as small as 1 per-cent in their targets, and seek support to drive change."More activists are spending more time with shareholders andresearch analysts, and they are spending less time with thecompany," said one industry banker, who wished to remainanonymous because he is not allowed to speak to the media.Over the past three years, activist hedge funds have outper-

formed more traditional hedge funds, according to Chicago-based Hedge Fund Research. Its activist index has returned3.80 percent on an annualized basis, compared to its globalhedge fund index, which has returned only 0.25 percent.

That has drawn the attention of investors. Activist funds' assetsunder management doubled to more than $65 billion in 2012,from $32 billion in 2008, according to HFR."Activism is a new asset class that people track," said Chris

Young, head of contested situations at Credit Suisse Group."Right now the view from pension funds is that we can get out-sized returns."Last year, hedge fund TPG-Axon Capital urged oil and gas com-pany SandRidge Energy to consider selling itself and askedChief Executive Tom Ward to step down, marking only the sec-

ond time the New York-based fund has filed an activist proposal.In March, TPG struck a deal with SandRidge that placed four ofthe hedge fund's nominees on the board."You've got funds that were not activists but that have been in-creasingly willing to use that tool," Young said. "It is like a Pan-dora's box, once you opened it and used that tool, you realizeyou can use the tool again."



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ANALYSIS AND INSIGHT (continued)

COLUMNJapan's big leakBy J ames Saft

The Bank of Japans massive new bid for inflation will creategrowth but to its chagrin much of it may well be concentrated infinancial markets and outside of J apan.

So long as J apanese consumers remained convinced that thenew program will bring more inflation in what they buy ratherthan in what they earn, much of the benefit will be felt in Europe,the U.S. and the other economies into which the newly mintedmoney will actually leak.

The BOJ last week vowed to spend $1.4 trillion in less than twoyears buying up bonds and assets in a bid to hit its avowed 2.0percent inflation goal. The central bank will create money andwade into markets, vacuuming up J apanese government debtand other assets while targeting the amount of money in theeconomy rather than the rate of interest at which it will makeloans.While this is a step change in scale, the logic behind the plan isno different than the monetary policies followed over most of thepast two decades in J apan, policies notable mostly for their lackof success. To break the self-reinforcing spiral of falling prices,wages and output, the BOJ must convince businesses andhouseholds that cash spent or invested today will buy more thanthat tucked away for tomorrow.By any standard this is a big plan, roughly three times the size ofU.S. quantitative easing relative to the size of J apans govern-ment bond issuance.

The question is where the money goes. Clearly the BOJ is al-ready having a big impact on global markets, with the yen con-tinuing to fall in value and J apanese government bond interestrates declining in sometimes frenetic and disorderly trading.

The problem is in the pessimism entrenched in Japanese con-sumers thinking process after a generation of deflation and eco-nomic stagnation.

A survey released by the BOJ last week showed that almostthree-quarters of households expect prices to rise a year fromnow, the most since 2008. On the surface, this looks like a greatvictory for monetary policy. Households, seeing inflation, surelywill part with money?Not necessarily. First off, expectations for rising prices are con-centrated on the kinds of things which households must buy,notably food and energy. When it comes to durable goods, inother words the things one can choose not to buy, the expecta-tion is still for falling prices in real terms.Even worse, only 9.5 percent expect their own wages to keeppace with inflation.

The clear implication is that the money wont move, becausehouseholds will cut back on spending to protect themselves from

the rising cost of essentials.That might possibly change if J apanese businesses start hikingwages, but while newly aggressive monetary policy may drivethe yen down and make exports more competitive, it does noth-ing to improve J apans poor allocation of capital and develop-ment of products.

THE GREAT LEAKAs with QE in the U.S., the real place to look for the impact ofcentral bank action is in financial markets.

The BOJ will succeed in driving down the value of the yen andrate of interest on J apanese bonds. That is good for exporters,but bad for the many investors who depend on income. It willalso drive up the price of stocks, at least in part as savers takeon more risk.If the great printing of money doesnt do much to move moneyaround J apans domestic economy, that money will sit on de-posit at banks, insurance companies and pension funds, all of

which will have to decide what to do with it.Many, inevitably, will become increasingly desperate for extrayield and will choose to take risks by investing in overseas bondmarkets which offer higher returns, though also the additionalrisk of currency moves.

That will help to drive down interest rates in places like France,

the United States and emerging markets like Brazil. This will beespecially welcome in the euro zone, and may go some way toexplaining why there has been so little criticism of J apanesepolicy outside of Asia.A more committed Bank of J apan may have trouble defeatingdeflation, but will support riskier markets. Investors in high-yieldbonds and equities alike will see prices supported by whatshould be a steady flow of money out of J apan and into justabout anything but J apan.In some ways this is all reasonably good news. More moneyprinting will help J apan a bit, and is generally stimulative every-where.

The real issue is the sustained, and widening, disconnectionbetween financial markets and the worlds real economies.

J apan may well be looking at a bull market but searching in vainfor a recovering economy.

(J ames Saft is a Reuters columnist. The opinions expressed arehis own. At the time of publication, J ames Saft did not own anydirect investments in securities mentioned in this article. He maybe an owner indirectly as an investor in a fund.)

BREAKINGVIEWSJ.C. Penney exposes inefficiency valuing CEOsBy Richard Beales

The debacle at J.C. Penney exposes a glaring inefficiency inhow the market values corporate chieftains. When the strugglingU.S. retailer hired Apple whiz Ron Johnson in 2012, the com-pany's equity value spiked by more than $1 billion. On Monday

evening, news of his departure added $350 million. The return ofex-Chief Executive Mike Ullman the man J ohnson replaced swiftly erased some $700 million. Such big swings make nosense.Less than two years ago, J ohnson was given a savior's wel-come. Bill Ackman, a board member and hedge fund managerwhose Pershing Square Capital Management is J .C. Penney'sbiggest shareholder, championed the recruitment and touted

J ohnson's retail success at Apple and Target. Apple, in particu-lar, always looked a shaky comparison. J .C. Penney lacks thedesirable products, focus and brand image of the iPhone andiPad maker.As it turns out, J .C. Penney's shares are trading at less than halfthe price they were when Johnson took over. A year and a half

isn't long enough to forge a major turnaround. Even Ackman,though, realized things weren't going well. He bluntly acknowl-edged the problems at a conference last week.Even if J ohnson's ideas had been the right ones, big organiza-tions with entrenched people and cultures are hard to turnaround. That made the market exuberance for his arrival exces-sive. By the same token, the large discount applied to Ullman'ssecond attempt is probably overdone.Part of the rap against Johnson is he tried to do too much,changing sale policies and alienating traditional customers. Inthat sense, a blast from the past might not be so bad. AlthoughUllman's seven-year tenure cost J .C. Penney 15 percent of itsvalue as Ackman liked to point out the pressure from onlinerivals, the intervening recession and the more dramatic declineunder Johnson make that record look less bad.

J .C. Penney, now a $3.1 billion company, has struggled to keepup in a challenged industry. That may be where Ullman can



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The Day Ahead - North American Edition is compiled by Naveen Mutnal, Benny Thomas and Chandrashekhar Modi in Bangalore; Franklin Paul and Meredith Mazzilli inNew York.

THE DAY AHEAD - North American Edition is produced by Reuters News

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KEY RESULTS vs. THOMSON REUTERS I/B/E/S ESTIMATES

Company Name Quarter EPS Estimates Year Ago Rev Estimates (mln)

Bed Bath & Beyond Q4 $1.68 $1.48 $3,393

Fastenal Q1 $0.37 $0.34 $818

Family Dollar Q2 $1.22 $1.15 $2,888

CarMax Q4 $0.46 $0.41 $2,730

Constellation Brands Q4 $0.45 $0.69 $667

** Includes companies on S&P 500 index. Estimates may be updated or revised.


ANALYSIS AND INSIGHT (continued)

help. If anything, the fickle market has provided him with oneadvantage over Johnson: low expectations.CONTEXT NEWS

J .C. Penney said on April 8 that Chief Executive Ron J ohnsonwas stepping down and leaving the company, and that formerCEO Myron (Mike) Ullman had rejoined the company as chief

executive, effective immediately.J ohnson, a former Target and Apple retail executive, took thehelm at J .C. Penney on Nov. 1, 2011. Ullman ran the companyfor seven years before that.

The company's stock, worth $3.5 billion at the close of the trad-ing day on April 8, rose more than 10 percent in after-hours trad-ing following news of J ohnson's ouster. But after J .C. Penney

said Ullman would return, the shares swung to a loss, and stood10 percent lower in early New York trade on April 9.Hedge fund manager William Ackman of Pershing Square Capi-tal Management, the largest shareholder in J .C. Penney with an18 percent stake, said on April 5 that J ohnson and his team hadmade "big mistakes" with an impact that has been "very close to

a disaster."Ackman, who sits on the J .C. Penney board, championed thehiring of Johnson less than two years ago.

(The author is a Reuters Breakingviews columnist. The opinionsexpressed are his own.)

the day ahead - april 10th 2013

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