Financial Review

Veterans Day 2015

Sinclair Noe — November 11, 2015

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DOW – 55 = 17,702
SPX – 6 = 2075
NAS – 16 = 5067
10 YR YLD closed 2.34%
OIL – 1.14 = 43.07
GOLD – 3.00 = 1087.20
SILV – .09 = 14.45

“To us in America, the reflections of Armistice Day will be filled with solemn pride in the heroism of those who died in the country’s service and with gratitude for the victory, both because of the thing from which it has freed us and because of the opportunity it has given America to show her sympathy with peace and justice in the councils of the nations…” Those were the words of President Wilson in 1919, one year after hostilities ended in World War I on this date in 1918, in the 11^th hour, of the 11^th day, of the 11^th month. Back then it was called Armistice Day. Today we call it Veterans Day. And for all the veterans – Thank you.

The 11^th day of November is celebrated in China as Singles Day, symbolized by the four lonely 1s of 11/11. Apparently, this is kind of the anti-Valentine’s Day. Alibaba broke its own record for sales on China’s Singles Day, the world’s largest Internet shopping event, generating more than $9.3 billion in gross merchandise volume by midday Wednesday. Sales now look on track to hit $13 billion. More records: In the first eight minutes of this year’s sale, the company posted more than $1 billion in sales, topping last year’s 17 minutes to hit the billion-dollar mark.

AB InBev has completed an agreement to buy SABMiller for $105 billion, one of the largest mergers in corporate history. Under terms of the deal, SABMiller will sell a 58% stake in its MillerCoors joint venture to partner Molson Coors for $12 billion. A combined AB Inbev-SABMiller would have controlled close to 70% of the U.S. beer market, so the sale of the U.S. division was seen as a concession to competition authorities. In other brewing news, shares in Carlsberg A/S rose as much as 8.7 percent after the beer-maker announced a cost-cutting plan which will see it shed about 2,000 employees.

Iraqi oil puts pressure on shale; 19 million barrels of oil are due to arrive by ship from Iraq in American ports this month, the biggest influx from that country since June 2012, as OPEC members continue to defend market share in the face of low oil prices. The tactic seems to be working as yesterday the Energy Information Administration cut its U.S. crude oil production forecast for 2016 by 1 percent to 8.77 million barrels a day. The American Petroleum Institute said Tuesday that inventories rose by 6.3 million barrels last week. This all adds to concerns about oversupply. Crude oil fell to the lowest level in nearly three months.

Britain’s relationship with the EU is working but the Bank of England Governor Mark Carney says they will do whatever is needed to adapt should Britons vote to leave the bloc in a referendum. Britain is due to vote to stay in the EU before the end of 2017. The announcement came as U.K. unemployment fell to the lowest level in more than seven years, dropping to 5.3% in the third quarter. Also on tap: ECB chief Mario Draghi will deliver a speech today at the Bank of England’s Open Forum.

Online orders for Apple’s iPad Pro started today. The 12.9 inch-screen tablet, aimed in large part at business users and creative pros, will start at $799 but costs more than $1,000 if buyers want a keyboard and stylus included. Yesterday, Apple shares fell 3.1% after a Credit Suisse report said Apple had cut its orders for iPhone 6 components by as much as 10%.

Meanwhile, Apple is in talks with banks in the US about creating its own mobile-to-mobile payments service that sounds a lot like PayPal’s Venmo app. The app would reportedly let people send payments to each other directly from their phones, and automatically take it out of their checking accounts on the back end. While Apple already has its own payments system thanks to Apple Pay, the service so far has been mobile-to-merchant, and the mobile-to-mobile space has largely been dominated by PayPal’s Venmo app, but there is competition from Facebook’s Messenger app, Snapchat, and Square.

Macy’s shares plunged by as much as 14% after the department-store chain said its sales growth was weak because of muted consumer demand. Macy’s also lowered its guidance for 2015 earnings per share. Sales fell 5% to $5.87 billion, below the expectation for $6.1 billion. Bad news for Macy’s could be great news for customers, the company’s revenues have plunged, which means year-end sales are likely to be fantastic.

The New York state attorney general has ordered the fantasy sports sites DraftKings and FanDuel to stop accepting bets in New York, saying that the operations were essentially illegal gambling. The AG said the fantasy sites were considered gambling because customers “are clearly placing bets on events outside of their control or influence, specifically on the real-game performance of professional athletes.” The state of Nevada took a similar action in mid-October, with the Nevada Gaming Control Board saying the companies had to cease operations in the state.

DraftKings and FanDuel have indicated they would continue to let customers play while they contest the order in New York. Four smaller daily fantasy sports sites: DailyMVP, DraftDay, DraftOps, and MondoGoal Trading say they will stop letting users from New York enter their paid contests.

Nomura lowered its price target on Valeant Pharmaceuticals to $175 from $220. Nomura had been one of the most bullish on the company. The analyst for Nomura wrote: “Valeant’s business update call did not address all our outstanding questions; however, management’s willingness to be as open as possible in its responses was a positive first step towards rebuilding credibility with investors.” Here’s the big problem though, share price has dropped from $263 to $78.90. Every now and then it is a good idea for Wall Street analysts to open their eyes before issuing a forecast.

Valeant’s biggest investor is Bill Ackman of Pershing Square; he doubled down when the bad news on Valeant first hit; after Citron Research, a short-selling firm led by Andrew Left, issued a report two weeks ago asking if the company was running an Enron-like fraud. The stock had already been under pressure after the company was scrutinized for raising the prices for two acquired drugs. The Citron report, though, focused on Valeant’s relationship with Philidor, a specialty pharmacy. Citron has accused Valeant of using Philidor to book “phantom sales.” Valeant is the largest holding in Pershing Sqaure, and that hedge fund is now down about 19% for the year.

And the hits keep coming. A U.S. judge said Valeant Pharmaceuticals and hedge fund manager William Ackman must face a lawsuit accusing them of insider trading in Allergan before making an unsuccessful takeover bid for the maker of Botox. The lawsuit was filed on behalf of investors who sold Allergan shares in the two months before the defendants on April 22, 2014 announced an unsolicited $51 billion bid for Allergan. Pershing had by then quietly amassed a 9.7 percent stake in Allergan, which soared in value after the bid was announced. Investors said Pershing bought those shares knowing that Valeant was preparing a bid that could, and later did, become hostile.

Who knows? Maybe Valeant is an extraordinary bargain at current prices, but I’m guessing it will take years therapy before anybody is able to laugh at this.

The U.S. Department of Transportation has denied an appeal by railroads challenging new “crude-by-rail” regulations on trains hauling hazardous flammable materials. The rules issued in May include the phasing in of tougher tank car standards over several years and require new expensive braking systems on trains hauling more than 70 cars of crude oil by 2021.

General Electric’s stock did something yesterday that it hasn’t done in seven years: it closed above $30/share. In the years since June 10, 2008, GE’s stock has struggled despite CEO Jeff Immelt’s efforts to reassure investors that the company was changing. The mood seems to have shifted over the past year as the company offloaded its finance business and completed its biggest acquisition of all-time with the purchase of Alstom’s energy assets.

On Nov. 11, 1915, exactly three years before the end of World War I, IBM listed for the first time on the New York Stock Exchange — its name then Computing-Tabulating-Recording Co. IBM isn’t making a big deal of Wednesday’s 100th anniversary, which comes at an inauspicious time. Its stock has been the second biggest drag on the Dow Jones Industrial Average this year. For really, really long-term investors, consider this: If you had bought one share of IBM when it first listed on the NYSE at $47, you would now own 11,879 shares with a value of $1.6 million, according to the company. That’s a 3.4 million percent return.

Financial Review

Watching and Waiting

Sinclair Noe — October 13, 2015

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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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 17^th 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.

FINANCIAL REVIEW

More Worthwhile Pursuits

Sinclair Noe — October 12, 2015
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DOW + 47 = 17,131
SPX + 2 = 2017
NAS + 8 = 4838
10 YR YLD closed
OIL – 2.10 = 47.53
GOLD + 7.50 = 1164.90
SILV – .01 = 15.92

The Dow Industrials posted a gain for the seventh consecutive session, and ninth gain in the past 10 sessions. During the rally, the Dow has gained 1,130 points. Crude oil futures settled 5.1 percent lower after gaining almost 9 percent last week. The dollar was down slightly.

Dell and private-equity firm Silver Lake will buy EMC Corp. for roughly $67 billion in cash and stock, marking one of the largest technology-industry takeovers ever. The $33.15 a share price tag represents a 19% premium over Friday’s closing price. EMC also owns about an 80% stake in VMware, which will remain a publicly traded company. EMC holders will receive $24.05 a share in cash and in addition to tracking stock linked to a portion of EMC’s economic interest in the VMware business. VMware has a market value of about $33 billion.

The Dell deal is the largest in tech history, and it may be the biggest tech deal in terms of debt. Dell will add about $50 billion in debt to complete its proposed acquisition, bringing the closely held company’s total debt to about $60 billion.

Budweiser must really like Miller. Anheuser Busch InBev upped the ante again, making its fourth bid in the past few weeks for SABMiller, saying it’s willing to pay $103 billion in cash and stock. Under British takeover rules Anhesuer Busch InBev must make a formal offer by Wednesday or sit on the sidelines for at least 6 months. SABMiller, the world’s second largest brewer, has rejected three prior proposals since news first emerged in September that Anheuser-Busch InBev was interested in a merger.

The deal, if it were to be completed, would create a combined company with $64 billion in annual revenue that commands 30 percent of global beer sales. Any deal between the brewing giants would most likely face significant regulatory scrutiny.

Separately, the Justice Department is investigating allegations that Anheuser-Busch InBev is trying to cut competition by buying distributors, making it harder for fast-growing craft brewers to get their products on store shelves. In the past few months, A-B InBev has made deals for five distributors in three states. Many states require brewers to use distributors to sell their product, and once AB InBev buys a distributor, craft companies say they find that they can’t distribute their beer as easily and sales growth stalls.

A demonstration in Berlin on Saturday involved hundreds of thousands of protesters against the Transatlantic Trade and Investment Partnership being negotiated between the U.S and EU. The broad trade accord is seen as picking up momentum following last week’s Trans-Pacific Partnership deal, along with some gentle nudging from large multinationals. Groups in Europe are taking issue with TTIP’s lack of transparency and the potential impact on labor and safety.

Standard & Poor’s has cut its ratings on Catalonia by one notch to BB-, saying it expects increasing political tension following last month’s regional elections.

Greece’s new government faces a major test this week when several new economic reforms and austerity measures demanded by international creditors need to be voted on to become law. The Greek parliament will vote this week on an omnibus bill cutting pensions, raising the retirement age and increasing punishments for tax evasion ahead of the country’s first bailout review later this month. The reforms will need to be approved to unlock a fresh -euro loan installment from the country’s €86-billion-euro bailout.

Several dozen Republican congressmen have signed a petition that will force the House to vote on whether to revive the Export-Import Bank that helps American companies sell goods overseas. After the House votes on the Ex-Im Bank bill later this month, the Senate would still have to approve the measure.

The interest rate watch goes on. Here’s the latest twist. U.S. Federal Reserve policymakers are still likely to raise interest rates this year but that is “an expectation, not a commitment,” – so says Fed Vice Chairman Stanley Fischer at a weekend International Monetary Fund (IMF) meeting in Peru. Fischer also said “Considerable uncertainties” still surround the U.S. economic outlook, including the drag on exports from slowing global growth, low investment caused by the decline in oil prices and the recent “disappointing” drop in U.S. jobs.

This morning, Atlanta Federal Reserve Bank President Dennis Lockhart says the Fed will have plenty of new economic data to make a decision in December. And San Francisco Federal Reserve Bank President John Williams said that even “a little bit” more economic data could convince him to support a rate hike at the Fed’s next meeting, in October. Over the weekend Chicago Federal Reserve Bank President Charles Evans said the Fed that globally low inflation makes it “challenging” for the U.S. central bank to lift domestic inflation to its 2 percent goal.

Social Security recipients shouldn’t expect an increase in benefits next year. Adjustments are based on increases in inflation, however falling gasoline prices over much of the last year mean the cost-of-living adjustment, set to be announced Thursday, will likely be zero. The COLA adjustment affects payments to around 70 million Americans. This is just the third time in the past 40 years that Social Security would get no increase in next year’s benefits.

Much of the stock market is sensitive to the economic ramifications of Fed decisions, of course. But perhaps the sector with the most near-term sensitivity is the financial sector. The big banks are scheduled to report earnings this week, including: GS, BAC, WFC, C, JPM, and MS. While the broader market has recovered from losses sustained in the latter half of August, banks are still struggling. Other major earnings reports on the calendar this week include, Intel, GE, and Alphabet (formerly known as Google).

General Electric is in advanced talks to sell a specialty finance portfolio, worth more than $30 billion, to Wells Fargo. Reuters reports Wells Fargo has so far outbid other parties for General Electric’s vendor financing, commercial distribution finance and direct lending assets. A deal could be announced by the time Wells Fargo publishes its third-quarter earnings on Wednesday.

Glencore halted trading of its Hong Kong-listed shares overnight pending the announcement of an asset sale. The embattled mining giant then confirmed the sales process for its wholly-owned Cobar copper mine in Australia and Lomas Bayas copper mine in Chile. The deals are part of a broader plan Glencore has outlined to cut $30 billion in net debt, weather a slump in commodity prices and revive its shares (which have dropped 57% this year).

Copper rose 0.4 percent following a near 4 percent gain last week after production cuts by Glencore boosted base metals. Glencore plans to cut zinc production by a third. Zinc capped the biggest one-day gain in at least 26 years on Friday and copper jumped 3.1 percent.  The shift in output may not be enough to offset weak demand growth in China. Demand has been disappointing, but supply has also been worse than expected.

Fiat Chrysler  has disclosed the price range of Ferrari’s initial public offering that could value the luxury unit at close to $10 billion. The company will sell up to 10% of Ferrari in the IPO at a price of between $48-$52 per share and use the proceeds of the offering to help pay for its own turnaround plan.

Looking to secure a larger slice of the world’s biggest auto market, Ford is investing $1.8 billion over the next five years to expand research and development in China. The company also expects to introduce the C-MAX Energi, a plug-in hybrid, to the Chinese market next year. Beijing has been trying to encourage more electric vehicles to combat pollution, but progress has been slow due to the lack of infrastructure.

Angus Deaton, a Princeton economist, was awarded the Nobel Memorial Prize in Economic Science. The award committee said Deaton’s research has “shown other researchers and international organizations like the World Bank how to go about understanding poverty at the very basic level.” Deaton has criticized the widening income gap between rich and poor in the U.S.

In his 2013 book, “The Great Escape,” Deaton wrote that “inequality can sometimes be helpful” in promoting prosperity by giving people incentives to work harder and more efficiently. But last year Deaton wrote that he worried that high-paying jobs in finance and other fields were diverting talented young people from “more worthwhile pursuits.” He also warned that the very rich might be using their disproportionate influence to “write the rules in their favor, and they may work against the public provision of health care or education, for which they pay a large share but have little personal need.”

In a 2003 essay, Deaton wrote about the difficulty in determining how we define poverty. He wrote: Even if you have enough goods, they are worth little if you are not healthy enough to enjoy them. Children who live in an unsanitary environment will obtain little nutritional benefit from the food that they eat if they continually suffer from diarrhea. More broadly, girls who are denied the opportunity to go to school experience yet another type of poverty, the poverty of not being able to read and to participate in activities that are only open to the literate. People are also poor in another sense if they lack the resources to participate fully in the society in which they live, who in Adam Smith’s term “are afraid to appear in public,” even if their incomes would be sufficient in some other society.