Watching and Waiting
DOW – 49 = 17,081
SPX – 13 = 2003
NAS – 42 = 4796
10 YR YLD – .04 = 2.05%
OIL – .53 = 46.57
GOLD + 5.00 = 1169.90
SILV + .09 = 16.01
Anheuser-Busch InBev and SABMiller have agreed on terms for a takeover, with the world’s largest brewer set to pay $106 billion. The deal brings one out of every three beers sold worldwide under a single company. Under terms of the agreement, AB InBev would pay a $3 billion break-up fee to SABMiller should the transaction fail to clear regulatory hurdles or shareholders don’t approve of it.
If the deal goes through, it would be the biggest acquisition of the year, and the largest in British history. SABMiller’s two largest shareholders, Altria Group and Bevco Ltd., can receive cash and stock for their stakes, which account for 41 percent of the company. They won’t be able to sell the shares for five years; a move that might have tax benefits.
Dell’s $67 billion buyout of EMC appears to be a win for nearly everyone involved – except EMC bondholders. Investors in EMC’s $5.5 billion of bonds are down about $338 million since news of the deal first became public last week. Why’s that? Dell’s plan to raise about $50 billion in debt for the acquisition will push existing bondholders down the capital structure (the notes lack protections that would’ve allowed for early repayment in the event of an ownership change). Further, consider that Dell will now have to service that debt, to the tune of about $2.5 billion per year; money that won’t be going into capital expenditures or research and development.
Pepsi is competing against Coca-Cola for an investment in Chobani that could value the Greek yogurt maker at $3 billion including debt. Chobani is looking to sell a minority stake to someone who could help it with distribution and production. The company ran into liquidity issues last year before an investment from private-equity firm TPG.
Wells Fargo agreed to buy $32 billion in assets from General Electric and take on about 3,000 employees as GE retreats from financial services. The sale includes commercial-distribution and vendor-finance units, and a portion of the corporate-finance business from GE Capital. The transaction is expected to be completed in the first quarter of 2016. Wells Fargo previously agreed to buy commercial real estate assets and GE’s railcar-leasing division.
This is part of a major shift for GE; from financial services to its manufacturing and industrial roots; to this end, GE has now divested $126 billion worth of financial operations. GE had previously said it would seek some time in 2016 to apply to remove its designation as a “systemically important” financial institution.
In the past 24 hours or so, we’ve seen more than $210 billion in acquisitions announced. Mergers and acquisitions are on track for a record year. So far in 2015, there have been nearly $3.5 trillion worth of transactions
China’s trade slump has extended into September, adding more evidence that the world’s second largest economy is stalling. Dollar-denominated imports plunged 20.4% Y/Y last month, while exports slipped 3.7%, translating into a trade surplus of $60.34B. In yuan terms, imports fell 17.7%, while exports dropped 1.1%. China’s official GDP data is due on October 19. Separate data shows auto sales expanding at the slowest pace in three years. Much of the import decline reflects this year’s commodity price slump. Miners and metals were coming under pressure again today, with Glencore dropping as much as 5.5 percent in London.
The U.K. inflation rate turned negative again last month, dropping 0.1% year-to-year due to a smaller than usual rise in clothing costs and falling gasoline prices. Although the Consumer Price Index rate has been at or close to zero for most of 2015, the last time it was in negative territory was April. The Bank of England said this past week it did not expect inflation to reach its 1% target until spring 2016.
The International Energy Agency, which represents some of the world’s largest oil consumers, is warning that oil markets would likely remain oversupplied next year, as oil demand growth slows and Iranian oil adds to supplies. The IEA cut its forecast for oil demand growth for next year by about 200,000 barrels a day compared to its previous assessment in September. The IEA said Iran’s production could ramp up towards 3.6 million barrels a day from 2.9 million barrels a day currently once international sanctions are terminated early next year.
Russia’s economy could shrink 3.8% this year on the back of lower oil prices and international sanctions. The country’s finance minister told CNBC that trade restrictions may not be removed any time soon. Despite a GDP contraction this year, the Russians expect their economy to turn to positive growth of 0.7% in 2016.
Investigators in the Netherlands have concluded that Malaysia Airlines Flight 17 was shot down by a Russian-made anti-aircraft missile, causing the jetliner to break apart in midair, killing all 298 people on board. The Boeing 777 was heading from Amsterdam to Malaysia when it was shot down on July 17, 2014, over Ukrainian territory controlled by pro-Russian separatists. The report does not say who fired the missile.
Small business optimism continues to be stagnant. The National Federation of Independent Business said its small business optimism index was little changed in September, edging up 0.2 points to 96.1. That’s still below the 42-year average of 98. Small business owners expect sales to decline and the highest share since 2007 say they cannot find qualified workers.
Switzerland’s finance ministry will require Swiss banks maintain capital reserves of 5% of total assets, in line with the U.S. leverage ratio for its biggest banks and above the 3 percent minimum set in a global agreement by the Basel Committee on Banking Supervision.
Since the summer, trading has been largely driven by negative reaction to growing evidence of a global slowdown. Last week, virtually every economically sensitive asset advanced despite a slew of evidence confirming everyone’s suspicions the global economy is indeed decelerating. Instead, investors looked past the soft data and focused on Fed reaction to that weak data, as expressed in the minutes from the September 17th FOMC meeting. If the Fed obsession seems extreme, consider that fiscal policy is almost non-existent.
In a speech today at the National Association for Business Economics, Federal Reserve Governor Lael Brainard said that the risks to the U.S. economy are now to the downside and that it is important to “nurture” the recovery. Brainard said these risks “argue against prematurely taking away the support that has been so critical to [the U.S. economy’s] success.” Brainard said there was a risk-management argument in favor of a policy of “watching and waiting.”
Also today Federal Reserve Governor Daniel Tarullo said he doesn’t expect conditions to be appropriate to raise interest rates this year. We’ve heard several different Fed policymakers offering differing opinions on the state of the economy and the motivation to raise interest rates; and the only thing we know with any certainty is that Fed policymakers are not unanimous in their positions. And that means it is unlikely that we will see a rate hike at the October meeting.
Michael Novogratz, the CIO of Fortress Investment Group’s macro fund, will step down at the end of this year. His $2.3 billion fund will be closed down, and assets will be returned to investors. Investors redeemed $800 million from the fund at the end of fourth-quarter 2014, a quarter of its total assets. More redemptions followed throughout the year as key bets, like Novogratz’s long call on Brazil, went sour. Fortress’ macro fund was down about 17.5% through the end of September; still, Novogratz will leave with a $255 million golden parachute.
Earnings reporting season kicks into high gear this week, trying to avoid a second consecutive quarter of negatives. Earnings for S&P 500 companies are expected to have dropped nearly 5 percent year over year, which would be the worst quarter for earnings in six years.
Johnson & Johnson reported net income of $3.36 billion, or $1.20 per share, below $4.75 billion, or $1.66 per share, in the year-earlier period. Adjusted earnings per share beat estimates. The company said international sales decreased 13.7% and it had a negative currency impact of 15.8%. J&J also announced it would double its share buyback program to $10 billion. The company will finance the repurchases with debt.
CSX Corp., the third largest railroad in the country, reported third-quarter net income of $507 million or 52 cents per share, down from $509 million or 51 cents per share a year earlier. Results beat estimates, even as revenue declined on lower coal shipments; the company countered by cutting costs.
JPMorgan Chase said third-quarter profit rose 22% as the firm cut expenses and had $2.2 billion in tax benefits. Net income climbed to $6.8 billion, or $1.68 a share, from $5.57 billion, or $1.36, a year earlier. Adjusted earnings came in at $1.32 a share, six cents south of estimates. BofA and Wells Fargo report tomorrow; Citigroup and Goldman Sachs report Thursday.
Intel reported better than expected earnings and revenue, even though both profits and revenue declined. Net income fell to $3.11 billion, or 64 cents per share, from $3.32 billion, or 66 cents per share, a year earlier. Net revenue fell to $14.47 billion from $14.55 billion.