Financial Review

Big Stuff

Sinclair Noe — July 25, 2016

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DOW – 77 = 18,493
SPX – 6 = 2168
NAS – 2 = 5097
10 Y unchanged = 1.57%
OIL – 1.14 = 43.05
GOLD – 6.80 = 1316.30

The Federal Reserve kicks off its monetary policy meeting on Tuesday and will announce its decision on Wednesday. The central bank is widely expected to hold interest rates steady and stop short of signaling a possible rate increase in September because of continued uncertainty about the economic outlook.

In total, 15 central banks are scheduled to meet this week. The Bank of Japan’s rate decision is due on Friday and will be closely watched for any hints of more easing in the face of a stronger yen post Brexit and a slowdown in the economy.

World shares held near nine-month highs after G20 finance chiefs said over the weekend they would use “all policy tools” to lift global growth. A communique issued by the G20 ministers at the end of the two-day meeting said Brexit, which dominated discussions, had added to uncertainty in the global economy where growth was “weaker than desirable”. It added that members, however, were “well positioned to proactively address the potential economic and financial consequences”.

The Brexit led to severe withdrawals at M&G, Schroders, Fidelity and Invesco in June, as equity funds domiciled in Europe suffered their largest monthly redemptions since September 2011. Investors pulled at least €1-billion-euro from each of the four large investment groups, which are either based in the U.K. or have large hubs in the country.

The latest survey by the Association for Financial Professionals shows companies are taking their most cautious approach to cash management since mid-2011, and increasing their holdings of cash in response to a rise in economic and geopolitical uncertainty. The survey shows companies accumulated cash balances at a far quicker pace in the second quarter than in the first, and expect to do so at a still faster pace in the current quarter. Capital investment and hiring by US multinationals has also been held back by swings in currency markets.

Oil prices fell to two and a half month lows this morning on worries that a global glut of crude and refined products would weigh on markets for some time. Barclays bank said global oil demand in the third quarter of 2016 was expanding at less than a third of the year-earlier rate, weighed down by anemic economic growth. Demand support from developed economies had faded, while growth from China and India had slowed.

Meanwhile, Libya’s hopes to boost crude exports have been dealt a blow after the head of the National Oil Corporation objected to a deal between the government and local guards involving payments to reopen key ports. The 2 percent drop in oil prices dragged down major energy companies. Chevron shares were down 2.4 percent and Exxon Mobil stock gave up 1.9 percent, the two biggest drops in the Dow Jones industrial average. Oil prices are down nearly 12 percent this month.

Major oil companies are planning to report their second-quarter earnings this week. BP will lead off on Tuesday, and Royal Dutch Shell and Total, of France, will report on Thursday. Exxon, Chevron and Eni, of Italy, will follow on Friday.

This will be a big week for tech stocks. Apple reports earnings tomorrow; Facebook reports on Wednesday. Alphabet and Amazon report on Thursday. Together, these four stocks make up 30 percent of the Nasdaq 100.

We are right in the middle of earnings reporting season. Second quarter earnings are expected to show S&P 500 companies earnings declined again, for the fifth consecutive quarter. Bloomberg reports second-quarter earnings fell 1 percent among the 130 companies in the S&P 500 Index that have issued thus far; which is not as bad as estimates at the beginning of reporting season.

And there is a bit of positive guidance news; nearly 90 percent of companies in the S&P 500 Index that have changed previously disclosed expectations for future earnings have raised the target. At this rate, if the guidance holds true, we should break out of the earnings recession in the third quarter.

Sprint reported fiscal first-quarter revenue that beat expectations as big discounts attracted more postpaid subscribers, and the No. 4 U.S. wireless carrier said it expected to be cash flow positive next fiscal year after breaking even this year. Sprint up 27% today.

Verizon is set to pay $4.8 billion in cash to acquire Yahoo’s core internet assets as well as real estate. After those sales, Yahoo would still hold stakes in Yahoo Japan and Alibaba – worth about $40 billion. The companies said the deal is subject to customary closing conditions, including approval by Yahoo’s shareholders, and is expected to close in early 2017.

Verizon will combine Yahoo’s search, email and messenger assets as well as advertising technology tools with its AOL unit, which it bought last year for $4.4 billion. Verizon, the No. 1 U.S. wireless operator, has been looking to mobile video and advertising for new sources of revenue outside the over-saturated wireless market. It will be a tough row to hoe because Facebook and Google already have a dominant position in digital ads.

AMC Entertainment has been trying to buy Carmike Cinemas for several months. AMC’s initial offer of $30 a share left some Carmike shareholders feeling short-changed. So, AMC sweetened the deal, to $33.06 per share in cash. That should seal the deal.

LVMH is selling Donna Karan to G-III Apparel. The French luxury goods giant LVMH is selling Donna Karan International to G-III Apparel for $650 million. The deal will be funded through new debt and by issuing $75 million of G-III common stock to be issued to LVMH.

Outerwall, the owner of Redbox video rental kiosks, said it had agreed to be taken private by affiliates of private equity firm Apollo Global Management in a deal valued at about $1.6 billion.

Tesla Motors and SolarCity have made progress in putting together a deal that will merge the electric car maker and the solar panel installer. The two companies are in the final stages of carrying out due diligence on each other, and could agree on the terms of a deal in the coming days, but it’s still unclear if SolarCity will try to press for other bids.

Tesla announced last month that it had made an all-stock offer for SolarCity worth $2.8 billion. It argued that by acquiring SolarCity, the two companies would form a one-stop clean energy shop, offering consumers solar panels, home battery storage and electric cars under a single brand.

Nintendo warns that the impact from Pokémon Go will be “limited.” Shares of Nintendo plunged more than 17% Monday after the company released a statement late Friday suggesting that it would see a “limited” financial impact from Pokémon Go. The plunge has the stock down about 27% from its recent high, but the stock is still up about 67% since the game’s release.

Helping advance research toward integrating drones into the National Airspace System, 7-Eleven and upstart Flirtey have completed the first fully autonomous drone delivery to a customer’s residence. While there’s some speculation on the ways that companies like Amazon, Wal-Mart, Walgreens and Domino’s could use drone delivery, many industry watchers think emergency conditions (flood/earthquake/medical) or niche situations (oil rigs/inaccessible roads) are the most likely scenarios for widespread drone usage.

The Japanese government and the European Commission are working together to connect their global positioning systems in a coordinated effort to clear a path for autonomous vehicles. By linking Japan’s Quasi-Zenith Satellite System and EU’s Galileo satellite network the margin of error of the combined system will be improved dramatically. The development could be positive for Japanese automakers and suppliers.

Two years ago, the Federal Reserve faced a predicament: One of its New York employees had leaked confidential government information to a banker at Goldman Sachs. Both men ultimately pleaded guilty to stealing government property. Goldman, for its part, paid a $50 million penalty to New York State regulators because its “management failed to effectively supervise” the banker.

After a considerable time, the Fed is now preparing an enforcement action against Goldman, and the bank is expected to pay a financial penalty to settle the case. The Fed is also considering an action against a third man, a former Goldman executive who worked alongside the more junior banker who received the leaked material. Unlike Goldman, the former executive plans to fight the Fed if it files a case against him.

Last week we told you the Department of Justice was conducting an investigation into IMDB, the Malaysian sovereign fund. Today, report the department of Justice has seized four multimillion dollar Manhattan condos and a stake in the Park Lane Hotel that are connected with the international money laundering scheme.

Turkey ordered the detention of 42 journalists on Monday and ordered the closure of 2,341 private schools, charities, and other institutions, under a crackdown following a failed coup that has targeted more than 60,000 people. Turkey also imposed a state of emergency which extends detentions without charges to 30 days.

Russia won’t be completely banned from the Rio Olympics. Russian athletes can individually apply and, if they meet strict anti-doping criteria, could be allowed to attend. The ban that applies to Russia’s track and field Olympic team has not been lifted.

Financial Review

Halftime Report

Sinclair Noe — June 30, 2016

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DOW + 235 = 17,929
SPX + 28 = 2098
NAS + 63 = 4842
10 Y + .01 = 1.49%
OIL – 1.48 = 48.40
GOLD + 3.40 = 1322.70

Today is the end of the month, end of the second quarter, and end of the first half of trading, so let’s break down some numbers at halftime.

The Dow and S&P 500 and Nasdaq are now back in the black for 2016 and for the second quarter. The Dow is up 106 points since the start of the year. The S&P is up 40 points year to date. The Nasdaq is up 106 for the year.

For the month of June, the Dow added 64 points, the S&P gained 2 points, and the Nasdaq is down 106. June included some brutal Brexit related losses. The Dow is still down about 80 points from last Thursday (pre-Brexit), the S&P is still down about 15 points, and the Nasdaq is down about 68 points. Still, it was a nice bounce back; the best 3-day rally in 4 months, following the worst 2-day decline for Wall Street in 10 months.

Tomorrow, July 1^st is the most bullish day of the year; according to the Stock Trader’s Almanac, on July 1, over the past 21 years, the S&P 500 has advanced 85.7% of the time on the first trading day of July. The average gain is 0.46%. Of course, not every July 1 is created equal.

European stocks and the pound held on to a third day of gains as the immediate market flurry over Britain’s vote to pull out of the European Union settled. The rebound was not enough, however, to offset the sharp losses suffered in the aftermath of last week’s vote which have put global stocks on track for their worst monthly performance since January. And this does not mean that we have seen the end of Brexit related problems or fallout in financial markets.

Oil closed down almost 3% today but still posted its best quarter in 7 years. Back in January, West Texas Intermediate crude oil touched a 14-year low, falling below $27 a barrel. It gained about 26.1% for the second quarter, and trades roughly 30.5% higher year to date. Still, WTI has had a hard time cracking $50 a barrel, which seems to be the level that sees producers ramping up output.

Initial U.S. jobless claims rose by 10,000 to 268,000 for the week stretching from June 19 to June 25. Still, new claims remained below the key 300,000 mark for the 69th straight week, the longest streak since 1973.

The Senate passed and sent to the White House a relief measure to help Puerto Rico deal with its fiscal crisis, just two days before the territory planned to default on a large debt payment. President Obama said he will sign the measure. The rescue package will not prevent Puerto Rico from missing the $2 billion debt payment due on Friday, but the bill would bar lawsuits by creditors for nonpayment retroactive to December – an important provision in light of the imminent missed debt payment. The legislation would allow the island’s government to restructure its $72 billion total debt so that it can manage payments and create an oversight board to guide the recovery process; at least that is the theory. There will likely be further defaults in the not so distant future.

Nearly all of the largest U.S. banks are on steady enough footing to issue dividends or make share buybacks after passing the final round of the Fed’s annual stress tests. The US units of Deutsche Bank and Santander were the only lenders to fail for a second year in a row, meaning they cannot increase shareholder payouts until they establish a new plan. “Material weaknesses” were also seen at Morgan Stanley, but the Fed allowed the bank to proceed with a dividend hike and $3.5 billion buyback while it rectifies the issues.

After passing the Dodd-Frank stress tests, Wall Street banks announced their stock-buyback plans. Among the notables, JPMorgan will buy back $10.6 billion worth of stock, while Citi and Bank of America will repurchase $8.6 billion and $5 billion worth of shares. Goldman Sachs will also buy back shares, but it did not release an amount. All told, the 31 banks are planning to dish out about $96 billion.

Separately, the International Monetary Fund says Deutsche Bank is the riskiest financial institution in the world as a potential source of external shocks to the financial system: “Among the globally systemically important banks, Deutsche Bank appears to be the most important net contributor to systemic risks, followed by HSBC and Credit Suisse,” according to the IMF Financial Sector Assessment Program. The institution also said the German banking system poses a higher degree of possible outward contagion compared with the risks it poses internally.

What is the cost of being labeled a systemically important financial institution? In the case of General Electric, the magic number looks to be about $50 billion. GE officially shook off the designation on Wednesday that had been applied by the Financial Stability Oversight Council to its GE Capital finance unit.

April last year, GE began selling off almost all of GE Capital’s assets, about $200 billion in sales. Since G.E. announced its plans to offload the financial side of the business, the company’s stock has added about $5.25 a share, or roughly $50 billion in overall market capitalization. G.E.’s stock is up more than 20 percent, even as the S&P 500 has gone nowhere; and while Morgan Stanley, Citigroup and Goldman Sachs have all lost more than 20 percent of their former value.

A federal appeals court threw out a $7.25 billion antitrust settlement among Visa, MasterCard and millions of retailers over credit card fees. The settlement was intended to resolve nearly a decade of litigation concerning whether Visa and MasterCard improperly fixed fees that merchants were charged when customers used credit or debit cards, also known as swipe fees. The settlement would have allowed Visa and MasterCard to impose higher and higher swipe fees.

The 2nd U.S. Circuit Court of Appeals in New York said the accord was unfair to retailers that stood to receive no payments, and in the court’s view, little or no benefit at all. It also decertified the case as a class action. Circuit Judge Pierre Leval, a member of the three-judge panel that unanimously struck down the settlement wrote: “This is not a settlement; it is a confiscation.” The case could now be renegotiated or it could go to trial.

Looking to free up TV spectrum for cellular use, the FCC has acquired $86 billion worth of wireless airwaves from television broadcasters in the first phase of a complex auction. The agency hopes bidders will be willing to spend that much when it resells the airwaves in an auction that will start later this summer, but it may have to sell less spectrum than expected, or use multiple rounds to settle bidding by broadcasters.

The movie studio Lionsgate agreed to buy Starz, the premium cable channel home to hit shows like “Outlander,” for about $4.4 billion.

Theater chain Carmike Cinemas dropped today’s scheduled shareholder vote on its proposed sale to AMC Entertainment Holdings, saying it was adjourning until next month and throwing the $1.1 billion deal into doubt. The deal was opposed by some of Carmike’s biggest shareholders. Carmike said the adjournment was made at the request of AMC and that the special meeting will reconvene on July 15.

The big deal announced today comes from Mondelez International, a $23 billion offer for Hershey, the chocolate company.  Hershey said that Mondelez had offered to pay $107 a share in cash and stock, a premium of about 10 percent to Hershey’s closing stock price. Hershey said that its board had “rejected the indication of interest and determined that it provided no basis for further discussion between Mondelez and the company.”

Winning Hershey could prove tricky for Mondelez, since the smaller chocolate maker is effectively controlled by a charitable trust that owns about 81 percent of the company’s voting power. The Hershey Trust, established by Milton Hershey and his wife, Catherine, in 1905, has opposed takeovers of the company in the past.

In 2002, the trust halted an auction of the company at the 11th hour as it was about to accept a $12 billion deal from Wm. Wrigley Jr. Company. News of the offer approach sent shares in Hershey up 16 percent, to $113.49, which is more than the offered amount. So, if Mendelez is serious, they will clearly have to sweeten the deal. (sorry, I couldn’t resist.)

The Justice Department has told Anthem its planned takeover of Cigna threatens competition and probably can’t be fixed by selling parts of their businesses. A decision on the $48 billion merger is expected by mid-July.

If you decide to just kick back for the Fourth, you might take advantage of the downtime to grab your mobile device and reset your passwords. Oculus VR CEO Brendan Iribe, is the latest, high-profile victim of a Twitter account takeover, and he allegedly used an old password. The hackers took over his Twitter account by posting: “Imagine creating the coolest s**t to ever be introduced to gaming and technology but using the same pass for 4 years lol… silly Mr. CEO.” It got worse from there.

Millions of U.S. travelers flying during the busy Fourth of July holiday weekend will face heightened security and increased delays due to the deadly attacks at Istanbul’s main airport. Following the Istanbul attacks, which took place outside security checkpoints, U.S. airports are likely to focus on surveillance and armed personnel in similar public spaces not subject to screening.

The security measures are not limited to airports; look for more officers at July 4^th celebrations as well. A record number of Americans, 43 million, are expected to travel between June 30 and July 4, according to AAA. The vast majority will go by car, AAA said, but 3.3 million are expected to fly.