Inversion Dysfunction
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DOW – 31 = 17,792
SPX – 2 = 2086
NAS – 2 = 5102
10 YR YLD – .01 = 2.25%
OIL + .09 = 41.99
GOLD – 8.50 = 1069.70
SILV – .04 = 14.25
Belgian authorities have extended a lockdown of Brussels for a fourth straight day after police raids searching for those behind last week’s Paris attacks failed to find a prime suspect. The Belgians say they have credible threats of imminent attacks against public gathering places like shopping malls and public transportation. The lockdown will see Brussels’ subway and many shops closed, as well as schools, offices, and mosques; although it is doubtful the terrorists are in mosques.
France’s economy slowed following the Nov. 13 terror attacks in Paris. However, that slowdown in the eurozone’s second-largest member wasn’t sharp enough to slow the Eurozone as a whole.
Economic activity in the eurozone grew at the fastest pace since May 2011 in November, giving some optimism over the health of the region’s economy. Markit’s flash composite Purchasing Managers’ Index climbed to 54.4 from 53.9 last month, as a recovery continued to be led by the service sector. Growth meanwhile accelerated to a three-month high in Germany, where Markit’s flash composite PMI rose to 54.9 from 54.2, fueled by a big improvement in new business.
A reading of manufacturing sentiment in the US fell in November to its lowest level in 25 months. The flash manufacturing purchasing managers index from Markit fell to a reading of 52.6 from 54.1 in October, with all five of the PMI components deteriorating. Any reading above 50 indicates the manufacturing sector is still expanding.
Sales of previously owned homes in the U.S. fell 3.4% in October to an annual rate of 5.36 million. Despite the decline last month, existing home sales are still 3.9% higher compared to the same period a year ago. The National Association of Realtors reports the median price of homes sold in October, meanwhile, was 5.8% higher vs. a year ago at $219,600.
Foreclosures and short sales dropped to 6% in October, down from 9% a year ago, and the lowest level since the National Association of Realtors stared tracking distressed sales in October 2008. By region, existing home sales in the West fell 8.7% in October, but are still 2.7% above a year ago.
The economic data continues to show steady, although sluggish growth; in other words, good enough for a rate hike in about 3 weeks when the FOMC meets. And we have been hearing from the Fed policymakers that they generally think it is time for a rate hike, with the caveat that they are data dependent.
Their intentions have been well telegraphed, and the data would have to be pretty nasty to avoid a rate hike. The Fed has pretty much run out of reasons to keep rates at zero, and leaving rates unchanged would raise a red flag that something evil is lurking. So we can figure that a rate hike has now been priced into the market, and then the question is how much more they will tighten and over what period of time. And the most likely answer is small and slow; again, this has been priced into the markets.
By about the middle of next year we should learn more about how the Fed will handle its balance sheet. And the big question is whether the Fed can pull it off. Other central banks have been less-than-successful in their efforts to pull off of the zero bound, not exactly a hopeful precedent.
Profits from S&P 500 companies have fallen by about $25 billion in the first three quarters of this year, and a further drop is expected before the end of 2015 as energy companies battle with lower oil prices and a sharp rally in the dollar hits exporters. About 96% of S&P 500 companies have reported third quarter results so far, and their aggregate net income from continuing operations for the first three quarters is $804 billion, compared with $828 billion for the first three quarters last year.
The aggregate revenue for S&P 500 companies has fallen by $287 billion over the same period last year. On a share-weighted basis, S&P 500 profits were down 3.3 percent on year in the third quarter, making this earnings season the worst since 2009, and marking a second consecutive quarter of negative earnings growth.
Oil futures were volatile in early trade today, failing to hold on to a sharp but brief bounce higher after Saudi Arabia said it would work with global oil producers toward stable prices. Oil futures spiked higher after the announcement from the Saudi Press Agency. The rebound soon lost steam, because the remarks were in line with previous Saudi statements. So far, there’s little indication Saudi Arabia is prepared to begin cutting production.
Copper lost 2% to the lowest level since 2009. Nickel touched the lowest in more than a decade; there is a supply glut right now. The London Metal Exchange’s index of six industrial metals is having its worst year since the global financial crisis in 2008.
Charts of the commodity indices are the definition of a downtrend since 2011. Two factors in the energy and materials sectors: a supply glut and a stronger dollar. That means some downward pressure on stocks, but generally good news for consumers. The average nationwide price of unleaded gasoline is expected to hit $1.99 on Thanksgiving; that’s down about 82 cents from Thanksgiving last year. I’ve seen prices around $1.85 a gallon here in Phoenix.
Pfizer and Allergan will merge in a tax inversion deal worth about $160 billion that would create the world’s biggest drug maker by sales. The takeover would be the largest inversion ever, moving one of the top names in corporate America to a foreign country. Such deals enable a U.S. company to move abroad and take advantage of a lower corporate tax rate; in this case, the new Pfizer will have corporate headquarters in Dublin Ireland, even though their administrative headquarters will be in New York.
A Pfizer-Allergan combo would still face anti-trust scrutiny, but the US Treasury, concerned about losing tax revenue, has been taking steps to clamp down on tax inversion deals, but it doesn’t look like the existing rules are enough to stop this deal. Pfizer is confident the deal will pay off in lower taxes and cost cutting, unless…, unless Medicaid and Medicare changed their rules and started negotiating drug prices; in which case they could require that administrative headquarters match corporate headquarters, or else.
Looking to create the world’s largest ATM maker, Diebold has launched a $1.8 billion bid in stock and cash for German rival Wincor Nixdorf. A deal would see the two companies land about 35% of the ATM market, leaving NCR, the global number two, with an estimated share of 25%. Wincor expects the transaction to yield at least $160M in annual cost savings.
Petco agreed to be acquired by CVC Capital and the Canadian Pension Plan Investment Board for $4.6 billion. Petco, the No.2 U.S. pet supplies retailer, had been put up for sale by a group of investors led by private equity firms TPG Capital LP and Leonard Green & Partners. It’s not the first time. The two buyout firms took the company private in 2000 for $600 million, and then took it public again in 2002. Then they bought it back again in 2006 in a $1.7 billion deal, taking it private again.
AstraZeneca has finalized plans to divest its Crohn’s disease drug Entocort by selling U.S. rights to the medicine to Perrigo for $380 million. The move is part of AstraZeneca’s “externalization” drive, which aims to sell non-core products to help it fill a short-term revenue gap caused by older drugs, while investing in a pipeline of new medicines.
Walmart can’t wait for Cyber Monday. So, they are starting a day early, launching all its Cyber Monday deals on the Sunday after Thanksgiving rather than the early hours of Monday morning as in previous years. Actually, the starting line is already blurred. A number of retailers are promoting deals for ‘Black Friday’ – the day after Thanksgiving and traditionally one of the busiest shopping days – weeks in advance.
A jury in West Virginia has been struggling with the idea of sending a CEO to jail. The CEO is Don Blankenship; the company is Massey Energy. The trial was to determine whether Blankenship is guilty of conspiring to break safety laws, defrauding mine regulators and lying to both investors and regulators about mine safety. Massey’s Big Branch mine in West Virginia turned out to be anything but safe; an explosion in 2010 killed 29 people. In the year leading up to that catastrophe, mine inspectors had cited it nearly 500 times, often for “significant and substantial” violations. Blankenship faces 30 years in jail if convicted.
The prosecutors seem to have laid out a damning pattern of facts. Blankenship clearly raked in millions in compensation. He was a micromanager, with a staff of individuals whom prosecutors derided as “yes men”, who seems – based on some documents and tape recordings he himself made of his own phone calls – to have been concerned about the costs of safety regulations and their impact on production levels. Orders reached the miners to cover up safety violations, and it seemed clear to many from who they had originated, according to testimony. But for now, the jury is deadlocked.
Facebook’s Mark Zuckerberg has announced he will take two months of paternity leave after his daughter’s birth, though he did not say when she is due, or who would be his interim successor. Facebook allows its U.S. employees to take up to four months of paid maternity or paternity leave, which they can use all at once or throughout the year.
