Bank of Japan Adopts Negative Rates: Headwind or Catalyst&#63

02/01/2016 9:10 am EST


Michael Berger

President & Founder,

The unexpected move by the BOJ sent stocks and bonds higher, and since Michael Berger, of thinks the length of this rebound will be impacted by the strength of company earnings, he outlines the reasons why he sees upside in the shares of these two stocks.

In an unexpected move, the Bank of Japan adopted a negative interest rate and stepped up its monetary stimulus. This move sent stocks and bonds around the world higher as yields on Japanese government bonds fell to record lows and the yen weakened against its peers. Although it is too early to say if this is the catalyst needed for a longer-lasting rebound, many analysts consider this move to be a nice surprise. Japan's decision comes days after the Fed decided to keep interest rates unchanged and now, both the Bank of Japan and the European Central Bank have negative interest rates. This subsequently creates a stronger dollar without the Fed having to do anything. The strong dollar will continue to serve as headwind for companies who generate a significant portion of revenue outside of the United States.

Earnings Season to Impact Length of Rebound

We believe that the length of this rebound will be impacted by the strength of company earnings. Over the course of this week, several bellwether stocks will announce earnings. These companies include Alphabet, Inc. (GOOG), Tesoro Logistics LP (TLLP), Lazard Ltd. (LAZ), Chipotle Mexican Grill, Inc. (CMG), and Exxon Mobil Corporation (XOM).

The upcoming earnings season comes at a pivotal time as the Fed prepares to meet in March. One of the main topics of the meeting (and pretty much the only topic the market cares about) will be interest rates. While we do not expect to see the Fed increase rates during the quarter, strong earnings-coupled with favorable economic data-could be a catalyst behind another interest rate hike.

Earnings Season Creates Opportunity

Recent market weakness-coupled with weak earnings-have caused a number of stocks to sell-off and this has created several opportunities for investors. Of the stocks that have reported earnings, we see upside in shares of, Inc. (AMZN) and Flextronics International Ltd. (FLEX).

On Friday, AMZN fell more than 7.5% after the company reported lower than expected revenue, margins, and income. Despite the negative reaction from the market, we are favorable on AMZN because: 1) we expect to see continued retail revenue growth driven by e-commerce market share gains, 2) meaningful long-term margin expansion given AMZN's focus on operational efficiency, 3) conservative Amazon Web Services estimates, and 4) attractive valuation following the recent dip.

FLEX saw shares rally almost 10% on Friday after the supply chain and manufacturing logistics company reported better than expected fiscal 2016 third quarter financial results. Our positive thesis reflects our expectation of continued margin expansion, improving organic growth trends, responsible capital allocation, and attractive valuation.

Michael Berger, Founder and President,

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