Financial Review

M&A Boatload

Sinclair Noe — September 6, 2016

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DOW + 46 = 18,538
SPX + 6 = 2186
NAS + 26 = 5275
10 Y – .05 = 1.54%
OIL – .06 = 44.38
GOLD + 22.70 = 1350.40

Stocks posted modest gains but it was good enough for a record high close for the Nasdaq Composite. Also, the Russell 2000 index briefly touched a 52-week high of 1,254, and closed up fractionally just above 1,253.

We have a boatload of M&A activity:
Bayer has raised its offer for Monsanto to $127.50 a share, bringing the total value of the potential deal to over $65 billion, which would be the largest all cash takeover on record. It’s the second time Bayer has raised its bid, having started at $122 a share back in May before offering $125 in July.

Any merger would still be subject to regulatory approval.  It’s also the latest in a string of deal activity in the chemical sector: ChemChina looks to buy Syngenta for about $43 billion, while Dow Chemical and DuPont are in the process of a $130 billion tie-up.

ChemChina has secured commitments from 17 lenders on a $12.7 billion loan for its purchase of Syngenta. ChemChina agreed to buy Syngenta for $43 billion earlier this year in a deal that would transform it into the world’s largest supplier of pesticides and agrochemicals. It received takeover approval from the U.S. last month, though the deal is still subject to antitrust review by regulators worldwide.

General Electric has agreed to acquire two European 3-D printing companies for a combined $1.4 billion, tapping into manufacturers’ growing demand for digital technologies. Both Arcam and SLM Solutions make machines that can print metal parts used in aircraft components such as turbines. While GE’s Aviation unit has so far been the most active in using the 3D printing technology, parts are also being designed in its Power, Oil & Gas and Healthcare units, as well as across GE’s services businesses.

Volkswagen’s trucks division announced a partnership with Navistar. VW plans to invest $256 million in Navistar at $15.76 a share — a 12% premium to Friday’s closing price — for a 16.6% stake in the company. Navistar said cost savings will come from procurement and technology collaboration, rather than job cuts.

Enbridge, Canada’s largest pipeline company, said it would buy Spectra Energy Corp in an all-stock deal valued at about $28 billion to create the largest North American energy infrastructure company. Enbridge’s biggest-ever deal comes as the company has been steadily expanding its North American pipeline network, which carries the bulk of Canadian crude oil to the United States.

EOG Resources said it would buy privately held Yates Petroleum Corp for $2.5 billion in stock and cash, acquiring acreage in the Permian Basin, one of the country’s most cost-effective oil fields.

Danaher Corp said it would buy molecular diagnostics company Cepheid in a deal valued at $4 billion, including debt, to strengthen its diagnostics business. Danaher will pay $53 per share in cash, a premium of 54 percent to Cepheid’s closing share price on Friday. Danaher develops technology for the dental, life sciences, diagnostics and environmental industries. Sunnyvale, California-based Cepheid develops molecular systems and tests for institutions to perform genetic testing for organisms and genetic diseases.

Navidea Biopharmaceuticals shares jumped as much as 76% this morning after the company said it had agreed to sell its Lymphoseek product to Cardinal Health for all current and future oncology diagnostic applications in North America. Under the deal, Navidea will receive additional payments of up to $310 million, tied to Lymphoseek sales.

Avolon Holdings, part of China’s acquisitive HNA Group is nearing a deal to buy the aircraft leasing assets of U.S. lender CIT Group for between $3 billion and $4 billion. CIT’s commercial air unit is one of the world’s top 10 lessors with about 330 aircraft.

Carl Icahn is buying out Federal-Mogul Holdings, the maker of Champion spark plugs. Icahn Enterprises already owns 82% of the company. The price of $9.25 a share is 86 percent more than Southfield, Michigan-based Federal-Mogul’s closing share price of $4.98 on Feb. 26, the day before Icahn Enterprises’ original proposal of $7. The bid was increased to $8 in June. Icahn also owns service and retail chains Pep Boys and Auto Plus.

MasterCard is expanding its deal with payment processor PayPal Holdings. PayPal’s partnership follows a similar deal with MasterCard’s larger rival Visa in July. PayPal will allow users to select a credit or debit card as the default payment method and share data on transactions made through MasterCard’s tap-and-pay feature, which allows the shopper to wave a card or mobile phone over a reader to pay. As part of the deal, MasterCard will allow PayPal users to withdraw cash from their accounts using a debit card and also waive the digital wallet fee it currently charges PayPal.

Last week, the ISM’s August report on the manufacturing sector came in weak, with the index falling below the 50 mark that delineates expansion from contraction. This morning the ISM’s nonmanufacturing index fell to 51.4 in August from 55.5 in July, and while it remained above the 50 mark, it was a sharp drop and the lowest reading since 2010.

The ISM reports undercut the whole theory of a second half rebound and it’s also undercutting the odds of a Fed rate hike in September. The Atlanta Fed’s GDPNow tracker pegs third quarter GDP at 3%, but the ISM report implies GDP for the quarter at about 0.5%. There is still plenty of talk that the Fed should not keep rates at emergency levels but the data makes that a tough move.

Congress returned from a seven-week recess today with only a few weeks to pass a stopgap spending bill to keep the government running before funding runs out on September 30. So, 3 weeks to come up with a budget – what could go wrong?  Lawmakers will likely clash over money to fight the Zika virus, as well as a bill to restore full lending authority to the U.S. Export-Import Bank.

The Reserve Bank of Australia held rates unchanged overnight in what was Glenn Stevens’ final meeting after 10 years as governor of the central bank. The Aussie dollar rose after the decision. On Thursday the European Central Bank is due to make its latest monetary policy decision, and expectations are low for any meaningful change in policy.

The ECB has passed the €1-trillion-euro mark for its purchases of government bonds, putting pressure on policymakers to address the scarcity of available assets when they meet in Frankfurt this week. Despite being well beyond the halfway point of the €1.7-trillion-euro program, inflation remains virtually non-existent. The latest figure from Eurostat showed euro area prices rising by 0.2% in the year to August – well below the central bank’s inflation target of just under 2%.

South Korea’s Hanjin Shipping plans to file for court protection in about 10 countries, including Canada, Germany and the U.K., this week, and later expand that to 43 jurisdictions to protect its ships from being seized by creditors. The world’s seventh-largest container operator by capacity filed for bankruptcy protection on Friday in the U.S. under Chapter 15, which deals with international insolvency matters. Hanjin’s court hearing is scheduled for today.

ITT Educational Services has shut down its for-profit technical schools, closing more than 130 campuses and leaving as many as 40,000 students stranded in one of the largest college closures in American history. ITT has been under investigation for misleading students. Last month, the feds demanded the company produce an additional $153 million in collateral, nearly double its $78 million in cash on hand, to cover possible losses that the government might incur if the company were to suddenly fail. ITT said it terminated the “overwhelming majority” of its more than 8,000 employees.

Students now enrolled at the company’s technical schools will be able to cancel any federal student debt they incurred for their education if they decide against transferring their credits elsewhere. Other former students are pushing to have their debts canceled by alleging that the company defrauded them into taking out the debt by advertising false job-placement rates.

21st Century Fox said it has settled a lawsuit with former anchor Gretchen Carlson, whose allegations that former Fox News chief Roger Ailes sexually harassed her led to his exit from the company. Terms of the settlement weren’t disclosed, but it is believed the settlement is in the range of $20 million. Also it is reported that a “handful” of settlements with other women who came forward alleging harassment have also been reached.

An Ohio woman has filed a proposed class action lawsuit against Mylan Pharmaceuticals in an Ohio county court, claiming sharp price hikes for the company’s EpiPen device violated the state’s consumer protection law and amount to price gouging. Mylan has raised the US price of EpiPen from less than $100 when it acquired the product in 2007 to more than $600

Apple has a big event scheduled for tomorrow; they are expected to unveil their new iPhone 7; they will do this amid much fanfare and hoopla. The new iPhone 7 will have several new features but still be very similar to the iPhone 6, with the major exception that it will be new and shiny.

A new skyscraper in downtown Los Angeles has become the tallest building west of the Mississippi River. Construction workers on Saturday placed a 10-ton spire atop the Wilshire Grand Tower. The spire looks like scaffolding, or maybe a radio tower, but it adds 160 feet to the 73-story building, making it 1,099 feet high. The tower is 81 feet higher than the nearby US Bank Tower, which had held the tallest building record since 1989.

The Wilshire Grand still has some construction work scheduled. When the $1billion building opens in early 2017, it will include an observation deck, a shopping mall, an Intercontinental Hotel, several luxurious high-altitude restaurants and office space.

Really tall buildings, earthquakes – brilliant.

Financial Review

The I File

Sinclair Noe — February 19, 2016

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DOW – 21 = 16,391
SPX – .05 = 1917
NAS + 16 = 4504
10 Y – .01 = 1.74%
OIL – 1.00 = 29.74
GOLD – 4.70 = 1227.00

So, stocks were basically flat today but it was a good week. Big gains on Tuesday and Wednesday lifted the major indexes to their best weekly performances this year, with the Nasdaq gained 3.9% for the week, its strongest week since July. The S&P 500 gained 2.8% for the week.

Crude gained sharply earlier this week as major oil producers proposed a joint production freeze, but investors remain cautious whether the cap will actually materialize and worry about building U.S. crude inventories. Late yesterday the Energy Information Administration said crude stockpiles rose 2.1 million barrels last week, to a peak of 504.1 million barrels in the third week of hitting record highs in the past month. The EIA also cited record high gasoline inventories. Oil and stocks have been trading in lockstep, sort of. Oil down, stocks down. Oil up, stocks up. Not exactly, not a perfect correlation, but stocks can’t seem to get out of the shadow of oil.

In earnings news: Applied Materials posted a strong profit and revenue forecast for the current quarter. Nordstrom shares dropped 6.7 percent after the department store operator’s quarterly profit and revenue missed expectations and they lowered guidance. Deere & Co shares fell 4.1 percent after the tractor maker cut its fiscal-year sales and profit outlook. Trinity Industries dropped 22 percent after the railcar maker’s forecast missed expectations.

The overall Consumer Price Index, which measures inflation at the retail level, was unchanged in January after slipping 0.1 percent in December. The core rate, excluding food and energy prices, rose 0.3 percent last month, following a 0.2 percent increase in December. The overall price gauge has weakened since the summer of 2014, reflecting a steep drop-off in oil prices. The stronger dollar has also kept inflation in check, in part because it makes foreign goods relatively cheap for U.S. consumers. From a year earlier, overall prices rose 1.4%, the largest annual increase since October 2014. Core prices have risen 2.2% over the past year, the most since June 2012.

A new research paper published by the Federal Reserve concludes the US economy may be saddled with a “deflationary bias” after the last recession that makes it harder for the Federal Reserve to achieve its 2 percent inflation goal. The bias stems from a recognition by companies that the Fed has limited ability to spur the economy when interest rates are low. That in turn prompts firms to reduce expectations of future costs, affecting what they decide to charge for their products and services. Inflation has been below the Fed’s 2 percent target for about 3 1/2 years.

British Prime Minister David Cameron is in Brussels trying to get a deal on the U.K.’s membership of the European Union and late this afternoon came word of an agreement that gives the U.K. a seven-year “emergency-brake” period allowing it to impose welfare curbs on other EU citizens working in Britain. This doesn’t rule out a Brexit, or British exit from the EU, but it provides some sort of rationale for staying.

Apple has been given more time to respond to a government order to assist the FBI in unlocking an iPhone used by the perpetrators of last year’s terror attacks in San Bernardino. Its response in court will now be due February 26 instead of Tuesday. Facebook, Twitter and Google have all voiced support for Apple’s fight against a court order that Apple says would make iPhones less secure.

Later this afternoon, the Department of Justice filed a motion to compel Apple to comply with a judge’s order for the company to unlock the encrypted iPhone, portraying the tech giant’s refusal as a “marketing strategy.” And this is interesting because the government can compel a company or an individual to turn over something they have but it is doubtful the government can compel you to make something you don’t have. Apple says they don’t have the code to unlock the backdoor to encryption.

But information from a 2015 court case in New York, uncovered by the Daily Beast, suggests that Apple may have cooperated with the government and unlocked phones up to 70 times in the past. The report also implies the government might have developed its own ways of getting into at least some iPhones. If so, why push around Apple? And if the government truly is incapable of unlocking a phone, what does it say about our intelligence capabilities? Anyway, battle lines are being drawn. This afternoon Donald Trump tweeted: “Boycott Apple until such time as they give that information.” He tweeted on his iPhone. We’ll file that under “I” for irony.

Meanwhile, if you want to protect your own privacy, the best bet is to use a nice long password. Even if Apple or the government develops a backdoor, it still must use brute force to unlock the password; basically trying multiple passwords until it hits on the exact combo. They can test up to 750 passwords per minute; at that rate, they can guess any 4-digit password in about 13 minutes. Using longer, more complex passwords renders brute force impotent. A combination of 8 lowercase letters and numbers would take up to 7,152 years to crack, unless they get lucky.

General Electric has struck a deal to install new lights at 5,000 JPMorgan Chase U.S. bank branches. “Current”, the new GE unit that sells LED lighting systems, estimates that, once installed, the new lights could reduce the banking giant’s lighting-related energy use in its branches by 50%. The deal is also considered a shot in the arm for Current, which represents a new front in GE’s effort to revive its industrial offerings and shake up the company’s public image.

Of the almost 175 companies that made their U.S. stock-market debuts in 2015, more than 70% are now trading below their IPO prices (on average their shares are down about 20%). There were no U.S. initial public offerings in January, and there have been only four new listings this month.

The FBI raided United Development Funding offices outside of Dallas on Thursday without elaborating on the nature of its move, sending the company’s shares plunging more than 50%. Earlier this month, Texas hedge fund manager J. Kyle Bass launched a website that accused the company of operating a “Ponzi-like real estate scheme.” United Development Funding calls itself a mortgage REIT that lends money to develop properties and charges interest on the loans.

Italian prosecutors are investigating Credit Suisse Group on suspicion of money laundering and tax evasion over billions of euros of insurance policies sold Italian clients and used to shield funds from authorities. Starting in 2005, Credit Suisse allegedly helped about 4,000 clients protect as much as $8.9 billion of funds that were earned illicitly, mainly as income that was undeclared to Italian tax authorities. Clients were sold insurance policies issued by subsidiaries of the bank. The scheme enabled them to skirt a Swiss withholding tax on deposits in foreign-held accounts while retaining access to their cash, which they could still manage from Swiss accounts.

Newly discovered memos and emails suggest that Volkswagen executives pursued a strategy of delay and obfuscation with U.S. regulators after being confronted in early 2014 with evidence that its diesel vehicles were emitting far more pollutants than allowed. The documents could raise the penalties for VW based on laws requiring public disclosure of problems that could potentially affect a company’s stock price. Separately, South Korean prosecutors raided the local office of Volkswagen and sister firm Audi today as part of the widening probe into its emissions scandal.

Ratings agency Standard & Poor’s warned on Friday it may cut the credit rating of billionaire investor Carl Icahn’s Icahn Enterprises to junk status because the portfolio had suffered heavy losses in the last few months. S&P put the company on “CreditWatch with negative implications.” Icahn Enterprises has lost “at least $1.4 billion in value” since the end of September, S&P wrote in a statement, adding it thought Icahn’s hedge fund had lost money this year as markets around the world tumbled. We’ll file that away under “I” for irony.

Three U.S.-based oil and gas companies defaulted this week, lifting the global tally for 2016 to 19. S&P lowered its ratings on Paragon Offshore to D, or default, from CC, after the company said it was filing for Chapter 11 bankruptcy protection. The agency lowered its ratings on Energy XXI Ltd. and its unit EPL Oil & Gas to D from CCC-plus, after that issuer missed an interest payment on senior notes. The agency lowered ratings on Venoco and its parent Denver Parent Corp. to D from CCC-plus, after that company missed an interest payment on senior notes.

Moody’s Investors Service has downgraded a total of 28 energy companies since December, as it continues a global review of the troubled sector. In January, Moody’s placed 120 energy companies and 55 mining companies from around the world on review for a possible downgrade.

Google moved $12 billion through the Netherlands to Bermuda in 2014, as part of a structure which allows it to earn most of its foreign income tax free. Accounts for Google Netherlands Holdings BV published on Thursday show the unit transferred almost all its revenue, mainly royalties from an Irish affiliate through which most non-U.S. revenue is channeled, to a Bermuda-based, Irish-registered affiliate called Google Ireland Holdings.

The tax strategy is known to accountants as the “double Irish, Dutch Sandwich’. It allows Google, now part of holding company Alphabet, to avoid triggering U.S. income taxes or European withholding taxes on the funds, which represent the bulk of the group’s overseas profits. Bermuda charges companies no income tax. The decade-old arrangement allowed Alphabet to enjoy an effective tax rate of just 6 percent on its non-U.S. profits last year, around a quarter the average tax rate in its overseas markets.

Financial Review

Defeat Devices

Sinclair Noe — September 29, 2015

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DOW + 47 = 16,049
SPX + 2 = 1884
NAS – 26 = 4517
10 YR YLD – .04 = 2.09%
OIL + .80 = 45.23
GOLD – 4.40 = 1128.70
SILV + .04 = 14.74

Single-family home prices rose in July, matching the pace of price gains in June but falling just short of expectations. The S&P/Case Shiller composite index of 20 metropolitan areas in July gained 5 percent year over year. San Francisco, Denver and Dallas experienced the highest year-over-year home appreciation among the 20 cities with price increases of 10.4 percent, 10.3 percent and 8.7 percent, respectively.

The worst performing cities on the list include Detroit, and the only surprise is that Chicago was even worse than Detroit. The Sunbelt cities – Miami, Tampa, Phoenix and Las Vegas – which were the poster children of the housing boom have yet to make new all-time highs. Phoenix home prices were up 0.7% in July, and up 4.6% year over year.

The Conference Board said its index of consumer attitudes rose to 103.0, the highest since January, from a downwardly revised 101.3 the month before. The present situation index, a measure of current conditions, also climbed to an eight-year high of 121.1 from 115.8. Yet the expectations index declined to 91.0 from 91.6, suggesting Americans are a bit more cautious about the next six months.

After 2 weeks of solid drawdowns, API reports a huge 4.6 million barrel crude oil inventory build last week – the 2nd biggest weekly build in over 5 months.

The Senate yesterday passed a procedural vote to extend federal agency funding levels until December 11 as Congress moved to avoid a government shutdown on Thursday, when the new fiscal year starts. The Senate overwhelmingly advanced the government funding bill; it still has to go to the House for a vote.

The International Monetary Fund is warning of large positions that mutual funds in the United States have built in high-yielding bonds issued by risky companies here and in emerging markets around the world. The warning comes at a time of increased nervousness about China and other emerging markets like Brazil. And it highlights a growing concern on the part of regulators and economists that mutual funds, in their hunger to load up on high-risk, high-yield securities in a low interest rate environment, will be hard pressed to sell them during a market reversal.

Carl Icahn says the Fed is blowing it. Activist investor Carl Icahn released a new video titled “Danger Ahead,” which warns that trouble is coming to the financial markets. Icahn believes the Fed got the US economy into this mess and that its zero-interest-rate policy has created an “earnings mirage.” In the film, Icahn criticized both political parties for not reaching a tax compromise that would encourage American widget makers to bring more than $2 trillion in foreign profits back to the U.S. He criticized Wall Street sales folk for having a code of ethics he jokingly characterized as less virtuous than the mafia.

He criticized earnings reports wholesale as “suspect” due to financial engineering via share buybacks and M&A. Icahn says companies are simply buying other companies to create the perception of growing earnings and that a lot of companies are buying back stock that shouldn’t be. Icahn says: “A buyback is a short-term fix, but it weakens the balance sheet.” So, activist investor Carl Icahn is now opposed to financial engineering? The only surprise here is that…, actually there is no surprise.

Goldman Sachs lowered its S&P target. Goldman Sachs US equity strategist David Kostin lowered his S&P 500 price target to 2,000, down from his previous target of 2,100. Kostin wrote, “The impetus for these reductions is that our models now incorporate a slower pace of economic activity in the US and China and a lower oil price than we had been previously assuming.” For 2016, Kostin sees S&P 500 earnings per share of $120 and a year-end target of 2,100. At best they are late to the analysis, at worst it’s a contrarian indicator.

The new iPhones had a strong debut, with estimates that Apple sold a record 13 million over the weekend. Apple charges $749 for an iPhone 6S with 64GB of storage. But how much does it actually cost Apple to build the phone? Teardown.com ripped apart a new iPhone to figure out exactly what’s inside, and found that the total cost of components is $245. The most expensive bits are the processors, followed by the touch screen. This does not mean Apple is making $499 in profit on each phone, though, as it doesn’t include costs like manufacturing and shipping.

Yahoo’s board has authorized the company’s plan to spin off of its 384 million-share stake in Alibaba even though the IRS has declined to rule on whether the move will be tax free. Yahoo cautioned that the spinoff is still “subject to certain other conditions, including final approval by Yahoo’s Board of Directors (and) receipt of a legal opinion with respect to the tax-free treatment of the transaction.” The stake is worth $22.75 billion.

Sprint has confirmed  that it won’t take part in the FCC’s broadcast incentive auction for wireless spectrum next March. The auction, for prized low-band airwaves that will help with indoor penetration and in rural areas, won’t be cheap, so skipping it should make a major difference to cash burn, a vital issue for Sprint.

Reynolds American has agreed to sell the international rights to its Natural American Spirit division to Japan Tobacco for about $5 billion. The deal doesn’t include the brand’s U.S. operations, Winston-Salem.

After nearly two years’ worth of delays, Tesla kicks off Model X deliveries today. Prices top out at $132,000. Initial demand looks strong. Tesla has booked roughly 30,000 reservations for the vehicle. The launch isn’t the only big project for Tesla, which aims to open a $5 billion battery factory in Nevada next year.

By now, you’ve heard about the Volkswagen diesel scandal. The company installed software that would cheat emissions tests, and then when the cars went back out on the road, in regular driving situations, the cars would emit 40 times the legal limit for nitrogen oxide, or NOx. The CEO of Volkswagen, Martin Winterkorn was fired. To make matters worse, it appears that Volkswagen was warned about the illegality of the software as far back as 2007 by Robert Bosch. Bosch is the engineering and electronics firm which supplied VW with certain components that are at the center of the scandal, but it did so for testing purposes only.

According to Automotive News Bosch told VW that using the technology in a production vehicle was unlawful. VW’s supervisory board, said the board had received an internal report at its meeting on Friday showing VW technicians had warned about illegal emissions practices in 2011. No explanation was given as to why the matter was not addressed then.

Now, you may wonder how serious this whole mess really is; sure it’s a hit to VW’s reputation; there will likely be recalls of millions of cars; there will be class action lawsuits, and more. But then you recall General Motors had a problem with faulty ignition switches that resulted in 124 deaths and even more injuries. GM was charged criminally with hiding the defect from regulators and in the process defrauding consumers, but the case was put on hold as part of a deal where GM pays a $900 million fine and signed a deferred prosecution agreement – basically saying they won’t do it again.

Volkswagen pollution is harder to link to individual deaths, but it is still a deadly bit of deception. The New York Times reports that the chemicals that spewed illegally from the Volkswagen diesel cars — known as nitrogen oxides or NOx — have been linked to a host of respiratory and cardiovascular illnesses, as well as premature deaths.

Of course all that death an illness can’t be linked back to VW directly, but scientists now calculate that the excess pollution from VW, about 46,000 tons since late 2008, likely resulted in 106 deaths, plus an as-yet uncalculated number of illnesses. Of course, that’s just for the illegal emissions. Most of the air pollution from cars is perfectly legal.

In fact, the average gap between real-world emissions and official test results has been growing. A new report by the International Council on Clean Transportation, the research group that first flagged suspicious emissions patterns at Volkswagen, found that under normal conditions the average carbon-dioxide emissions for passenger cars are some 40% higher than the official amounts certified by European lab tests.

In 2001, the gap was less than 10%. Daimler showed a gap of nearly 50% between what researchers measured on the road and what technicians recorded in official lab tests. The artificial, and predictable, conditions under which cars are tested makes it easy for carmakers to engineer favorable emissions-test results without breaking any rules. Tuning engines to perform most efficiently at the power and load levels commonly used in tests is one way to do it.

And it’s not that VW was the only car company trying to skirt emissions standards. For years, emissions from cars built by almost every major manufacturer have been higher out on the road than when tested in labs. Over the years, several major auto manufacturers — including GM, Ford, Honda and, yes, Volkswagen — have been forced to pay hefty fines and recall vehicles after getting caught using defeat devices. In what was then the largest environmental enforcement case in U.S. history, companies including industry leaders Caterpillar, Cummins Engine, Mack Trucks and Volvo Truck agreed to pay $83 million in fines and reprogram the computers.