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

Lonesome Tom and Tom Alone

Sinclair Noe — January 27, 2016

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DOW – 222 = 15,944
SPX – 20 = 1882
NAS – 99 = 4468
10 Y + .01 = 2.00%
OIL + .71 = 32.16
GOLD + 5.00 = 1125.70

Stocks started the session down, a little over 150 points, then rallied and turned positive, then the Fed released its policy statement to wrap up its two-day FOMC meeting, and stocks fell again; 350 points from peak to trough, even though there was no surprise in the statement.

The Federal Reserve statement had a few changes from the last statement. First, there was no change in interest rates – as expected. The Fed says it expects the economy will continue to warrant only gradual rate increases – as expected. They will closely monitor global economic and financial developments – a soft backpedal from December, when they said risks were balanced. Not a big surprise.

Inflation is expected to remain low because oil prices are down, but that won’t last forever – yeah, yeah. The strong dollar is a bit of a drag. Information received since the Federal Open Market Committee met in December suggests that labor market conditions improved further even as economic growth slowed late last year – an acknowledgement that economic growth slowed, well that’s different.

Their confidence in the economy has eroded since December. Not exactly. The Fed also noted the strength of some economic measuring sticks, including continued job growth, more spending by businesses and consumers, and the revival of the housing market.

All in all, the Fed statement was expected. So why did the market selloff? Well, they didn’t rule out another rate hike at the March 16 FOMC meeting; they didn’t commit to a hike either. So, go figure; and while you figure, sell something.

Purchases of new U.S. homes surged in December to the highest level in 10 months, closing out the best year for housing since 2007. Sales jumped 10.8 percent last month, the most since August 2014, to a 544,000 annualized pace. For all of 2015, purchases of new properties climbed 14.6 percent to 501,000. The warmest December on record probably played a big role in the stronger-than-forecast sales gain during the month, but the most basic reason is that demand is outpacing supply.

Puerto Rico plans to meet with creditors on Friday to discuss a possible restructuring of $70 billion of municipal bonds. The talks come as the island struggles to make progress on two tracks – striking deals with bondholders and persuading U.S. legislators that it merits relief from the federal government. Further complicating the process, the territory has more than a dozen types of bonds and is negotiating simultaneously with several creditor groups that have competing claims.

Facebook reported another quarter of soaring revenue. Sales rose 52 percent from a year earlier to $5.84 billion on the strength of its mobile advertising business and an increase in daily users. Profit rose to $1.56 billion, more than doubling from a year earlier. The numbers far surpassed Wall Street’s expectations of $1.2 billion in profit on $5.37 billion in revenue. Facebook reported after the close, and shares jumped in after-hours trade.

Boeing says profit this year will miss analyst estimates by more than a dollar a share as it delivers fewer jetliners. Adjusted profit will probably be $8.15 to $8.35 a share this year. That compared with an average prediction of $9.42.

PayPal’s fourth-quarter sales beat estimates, as it won new vendors and made mobile purchases easier, reassuring investors concerned about the company’s prospects as an independent company. Profit, excluding some items, was 36 cents a share (2 cents better than estimates) on revenue of $2.6 billion. After separating from EBay last year, PayPal increased its total payments volume by bringing on new merchants and enticing shoppers with a Buy button that streamlines transactions on smartphones.

Royal Dutch Shell shareholders approved its $50 billion takeover of BG Group today, clearing the last main hurdle to creating the biggest liquefied natural gas trader in the world. The merger could happen as soon as February 15.

Three major U.S. shale oil firms announced big cuts to their 2016 capital spending plans yesterday in a bid to survive $30 a barrel oil prices, with one of them saying prices would need to rise more than 20% just to turn a profit. The cuts from Hess Corp., Continental Resources and Noble Energy ranged from 40% to 66%, marking the second straight year of pullbacks by a trio of businesses normally seen as among the most resilient shale oil producers. The American Petroleum Institute late Tuesday reported that crude supplies climbed by 11.4 million barrels for the week ended Jan. 22.

Since passage of the last major energy law, in 2007, the United States has gone from fears of oil and gas shortages to becoming the world’s leading producer of both fuels. The use of wind and solar power is rapidly accelerating as those sources become cheaper than fossil fuels in some parts of the country. And President Obama’s clean air regulations are reshaping the nation’s power systems, as electric utilities shutter coal-fired power plants and replace them with alternative sources.

But the nation’s energy infrastructure has not kept pace with those changes. And so Congress today started debating a comprehensive energy bill for the first time in more than 8 years. Right now, Congress is just talking and they might not do anything.

Just hours after senators began debating the bill, it came under attack by both liberal and conservative advocacy groups. In a letter to senators, the Sierra Club complained that the bill’s section on energy efficiency in buildings would actually roll back some existing efficiency standards.

Americans for Limited Government, a conservative group, urged lawmakers to reject the bill. In a letter, the group wrote, “There is no excuse for the Senate to move forward with legislation that continues the practice of picking energy winners and losers, expands federal government authority and fails to turn control of federal lands back to the states.”

California regulators are set to decide how much rooftop solar customers can get for selling their excess clean energy. The California Public Utilities Commission will consider a proposal about continuing a policy called net metering, which requires utilities to pay rooftop solar customers the full retail rate for electricity they put onto the grid.

The solar industry has been largely supportive of the proposed measure while the state’s investor-owned utilities have called it unfair and say it means people who don’t have solar systems are subsidizing those who do, so they want to pay less. Seems the utilities don’t want to pay for electricity. I know the feeling.

Meredith Corp. walked away from its attempt to merge with Media General; that opens the door for Nexstar Broadcasting Group to proceed with its plan to acquire the TV station owner after months of negotiation.  Meredith, the owner of broadcast stations and magazines like Better Homes and Gardens, agreed to a termination package that includes a $60 million breakup fee.

Media General initially agreed to acquire Meredith for $2.4 billion in September. Nexstar later offered to buy Media General, eventually reaching an agreement for about $2.3 billion. But that deal couldn’t move forward until Meredith released Media General from its commitment.

Four years after unveiling its wearable glass headset, Alphabet has shut down several social media accounts linked to its Glass gadget, ending the push to popularize its hi-tech eyeglasses. Google stopped selling Glass to consumers last year, but unveiled a reboot of the device, called GG1, in December.

Meanwhile, Google’s secretive drone delivery project could include a component designed to store packages securely. A patent filed Tuesday in the United States, describes a “delivery receptacle” designed to take packages from an “aerial delivery device” for deposit to a secure location. The receptacle would use infrared beacons to connect with drones in the air and then guide them for delivery.

FedEx announced a new share repurchase program covering up to 25 million shares ($3 billion at current prices). The question is what will they do when the drones take over?

Despite a slight drop in sales, Toyota managed to hang on to the title of world’s best-selling automaker in 2015. The company sold 10.15 million cars last year, while Volkswagen came in second with 9.93 million autos, followed in third place by General Motors with 9.8 million vehicles. Volkswagen had been top in the first half of 2015 before a diesel emissions scandal set back sales.

The Federal Trade Commission has a filed a suit against DeVry, alleging that it deceived students with promises they would find jobs that would pay more than they would earn with degrees from other colleges. The FTC said DeVry claimed that 90% of its graduates' land jobs within six months of completing their studies, and that they earned 15% more on average than others.

A jury in London has acquitted five former brokers of charges that they helped a onetime trader at UBS and Citigroup manipulate an important benchmark interest rate known as Libor. The jury is still considering charges against a sixth broker. Prosecutors had accused the men of helping Tom Hayes, a former trader at UBS and Citigroup, by rigging Libor, which helps determine the borrowing costs for trillions of dollars in loans.

In December, Hayes was sentenced to 11 years. A dozen banks have been fined about $9 billion by global authorities over the last four years in relation to the manipulation of Libor. So, there you have it, Tom Hayes rigged a multi-trillion-dollar marketplace all by his lonesome, resulting in billions of dollars of fines; no executives knew anything or helped this mid-level trader, just Tom. Now move along, move along, nothing more to see.

Financial Review

Understanding Global Banking

Sinclair Noe — June 11, 2015

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DOW + 38 = 18,039
SPX + 3 = 2130
NAS + 5 = 5082
10 YR YLD – .10 = 2.38%
OIL – .87 = 60.56
GOLD – 3.60 = 1183.00
SILV + .02 = 16.13

Retail sales rose 1.2% in May on a seasonally adjusted basis.  Auto dealers and gasoline stations posted the strongest sales, but most major retail segments saw healthy gains. What’s more, sales in April and March were stronger than initially reported. Sales at auto dealers rose 2%; the auto sector generates about one-fifth of all retail spending. Sales were up 3.7% at gasoline stations as the price of fuel crept higher. Even if autos and gasoline are excluded, retail sales rose a healthy 0.7%.

Separately, the Federal Reserve reports household debt grew just 2.2% in the first quarter, as a 0.3% fall in mortgage debt offset a 5.6% rise in auto loans, student loans and credit cards. At the same time, real estate value increased by $411 billion. The net effect is that household net worth jumped $1.6 trillion. Meanwhile, corporate debt grew at a 7.2% seasonally adjusted annual rate in the first quarter as businesses pile on debt before a possible Fed rate increase.

The number of US workers who applied for unemployment benefits in the first week of June edged up by 2,000 to 279,000. Claims have been below 300,000 for 14 weeks in a row, a feat last accomplished 15 years ago.

The prices the US paid for imported goods increased a seasonally adjusted 1.3% in May, entirely because of a sharp increase in fuel costs. It was the first increase in 11 months and the largest in more than three years. Fuel imports jumped 11.8%, the biggest increase since mid-2009, although oil is far less expensive compared to one year ago. Excluding fuel, import prices were unchanged last month.

The World Bank has joined the International Monetary Fund in urging the Federal Reserve to hold off on a rate hike until next year to avoid worsening exchange rate volatility and crimping global growth. The World Bank downgraded its outlook for global economic growth this year, lowering its forecast by 0.2% to 2.8%. The bank expects growth of 3.3% in 2016. The World Bank cut its 2015 forecast for the US economy by 0.5% to 2.7%, saying bad winter weather sapped output in the first quarter despite the economy now gathering steam.

German bunds fell again today, extending a sell-off that has pushed 10-year yields above 1% for the first time since September. The 10-year yield on German bunds edged higher to 1.02%, up sharply from the all-time low of 0.05% hit in April.

The outlook for the Greek economy seems to change day by day, sometimes hour by hour. Today, Greek stocks posted their biggest jump since February, pushing European equities higher for a second day. After a new round of late-night talks with the leaders of Germany and France, Greek PM Alexis Tsipras pledged to work intensively with creditors in coming days to solve all open issues holding up the country’s access to bailout loans. And then today, the IMF said “major differences” remain with Greece over an agreement and there was “no progress in narrowing these differences recently, and thus we are well away from an agreement.” So, the IMF negotiating team has left the talks in Brussels. Meanwhile, S&P lowered Greece’s credit rating to CCC from CCC+ yesterday, stating that Athens will likely default on its debt within twelve months. Athens’ ATG stock index +7.3%.

Greece is not the only one in hot water. Ukraine’s leadership on Wednesday warned that the likelihood of prolonged conflict against Russian-backed separatists and deadlocked creditor negotiations could threaten the West’s $40 billion bailout program. Ukraine is asking for a 40% cut in the face value of the bonds but creditors say no way. Kiev also declared it’s ready to impose a moratorium on foreign debt payments if necessary.

South Korea’s health ministry reported 14 new cases of Middle East Respiratory Syndrome (MERS), taking the total to 122. The rising numbers have sparked concern both within South Korea and across the region. Hong Kong issued a “red alert” advisory against non-essential travel to South Korea, while Singapore Airlines said it would waive fees for customers who want to cancel or re-book flights to South Korea. Today, the Bank of Korea policymakers cut interest rates by a quarter of a percentage point to 1.5 percent, the second rate cut this year, because the MERS virus could hurt businesses and dent consumptions as travelers cancel trips and people stay home out of worries of contagion.

If you’re looking for stock rockets, look no further than Asia. The Shenzen Index is up 146% in the past year. That may be a bit too volatile for most people. Meanwhile, the Nikkei Index in Japan is posting one year gains of 35%; and it has been a wild ride. The past 19 trading sessions included 12 consecutive sessions where the index was up. It was the longest stretch of consecutive days of gains in 27 years in Japan. After a 12-day run, the Nikkei fell six out of the next seven days. You might think a multi-day string of gains would signal a top in the market, but that isn’t necessarily the case. The Nikkei has seen many occasions where it has had 8-day winning runs, and it is more likely to result in a rally than a top. Going back over 35 years, the Nikkei outperforms following multi-day winning streaks, in fact it is more likely to double the performance of time frames without multi-day winning streaks. No guarantees, of course, but it’s the old idea that a trend in place is more likely to continue than reverse…, until it reverses.

New York law enforcement officials have written to eBay and PayPal this week, saying the companies’ revised user policies “raise issues” under consumer protection laws. The updated user agreements would allow the two firms to call or text their combined 322 million users for offers and promotions, to collect a debt or to poll their opinions through questionnaires. eBay’s new user agreement is scheduled to take effect on Monday and PayPal’s will become effective on July 1. The truth is that nobody ever reads those agreements, which means they aren’t really agreements at all.

Rupert Murdoch is preparing to step down as chief executive officer of 21st Century Fox and hand the CEO title to his son James. While it’s unclear whether a reorganization would happen this year or at the start of 2016, Murdoch would stay as chairman.

General Motors will make an announcement next week on a secondary use for electric vehicle batteries. GM’s initiative will involve extended use of EV batteries. Most lithium-ion batteries used in electric vehicles can last about 10 years, which is longer than many of those who lease the vehicles will drive them. Because the batteries still have about 70% of their capacity at the end of their driving cycle, either GM or the owners could sell the batteries to recoup some of their cost. Think something along the lines of the Tesla PowerWall, or some way to use the batteries to store energy in one form or another; anything that would help extend the life of the battery and therefore bring down cost.

California is sinking; it’s because of the drought. Last summer, scientists recorded the worst sinking in at least 50 years. This summer, all-time records are expected across the state as thousands of miles of land in the Central Valley and elsewhere sink. The extent of the problem and how much it will cost to fix are part of the mystery of the state’s unfolding drought. No agency is tracking the sinking statewide, little public money has been put toward studying it and California allows agriculture businesses to keep crucial parts of their operations secret.

The cause is known: People are pulling unsustainable amounts of water out of underground aquifers, primarily for food production, and tens of thousands of square miles are deflating like a leaky air mattress, inch by inch. Groundwater now supplies about 60 percent of the state’s water, with the vast majority of that going to agriculture. Tens of thousands of groundwater pumps run day and night, sucking up about 5 percent of the state’s total electricity; that’s an increase of 40 percent over normal years – or enough electricity to power every home in San Francisco for three years.

The US Court of Appeals in Washington denied a request from broadband providers to delay the implementation of rules adopted by the FCC to ensure an open internet; that means that net neutrality rules go into effect tomorrow. The internet will not slow down or grind to a halt and you won’t have to pay more for what you’ve been getting. Nothing changes, and that is kind of the point.

JPMorgan Chase CEO Jamie Dimon isn’t sure Sen. Elizabeth Warren understands how banking works. Warren is a Senate Banking Committee member, who has challenged the size of large lenders and their political power. She has said it was a mistake for the government to refrain from breaking up big banks after the 2008 financial crisis. Last month, as firms including JPMorgan pleaded guilty to resolve probes into market-rigging, she criticized regulators for granting waivers that let the companies continue operating certain businesses.

At an event in Chicago on Wednesday, Dimon said, “I don’t know if she fully understands the global banking system.” I think I have to agree with Jamie Dimon on this one. If Warren fully understood banking, she would have looted billions of dollars in a bubble inflated through accounting control fraud, crashed the economy, orchestrated the largest upward transfer of wealth in world history in the bailouts, paid herself a big bonus out of the bailout money, and become a billionaire in an industry where net profits equal government subsidies. And then paid millions to buy politicians to push back on regulations, while rigging every market from Libor to Forex to…, well every market. That’s what understanding banking means.