More record highs on Wall Street. Earnings season points to earnings recession. Homebuilders are confident. Softbank buys ARM Holdings, and other merger news. VW will pay dealers. Fiat may face fraud charges.
Financial Review by Sinclair Noe for 07-18-2016
DOW + 16 = 18,533
SPX + 5 = 2166
NAS + 26 – 5055
10 Y – .02 = 1.58%
OIL – .73 = 45.22
GOLD- 8.60 = 1329.50
The Dow is on a seven-session winning streak, capped by another record close. The S&P 500 is on a record setting streak as well. This tells us two things: first, the markets are strong, and second, the markets are overbought and due for a breather. Just because a market is overbought, it does not mean it can’t continue to climb higher. The markets can be irrational longer than you can be solvent.
Financial markets have shown resilience after Friday’s failed coup attempt in Turkey, although Turkey’s Borsa Istanbul 100 Index sank 7.1% and Turkish bonds sold off, pushing yields up about 7%. Still, the Turkish lira rallied 3% today. Despite the complacency and thousands of arrests, the turmoil is far from finished.
More than 90 of the biggest U.S. companies will report results this week, giving a clearer picture of an earnings recesssion. Based on analysts’ forecasts for companies in the S&P 500 index, Thomson Reuters predicts adjusted earnings per share for the second quarter will be down 4.7% from a year earlier, following a 5% drop in Q1.
Bank of America said its quarterly profit fell to $4.2 billion, down from $5.1 billion. Revenue also fell, but results beat expectations; which seems to be a recurring trend with the financial stocks’ earnings reports this season.
Hasbro posted second-quarter earnings per share of 41 cents, up from 33 cents in the same period a year earlier. The results beat estimates of 39 cents. But Hasbro shares dropped 7% today. Hasbro sales are closely tied to movies, such as Frozen and Star Wars, and sales results show Star Wars toys may have peaked.
After the close, Netflix reported sales grew to $2.1 billion, up 28 percent more than a year ago. Netflix reported EPS of 9 cents a share, a gain from 6 cents a year ago. But Netflix earnings reports are all about subscriber growth and that proved a disappointment. The company added 1.52 million new customers overseas, compared with an April projection of 2 million. Netflix also added 160,000 in the U.S., bringing the company total to 83.2 million. The company had predicted about 500,000 new domestic customers. Shares dropped 17% in after-hours trade.
Yahoo’s quarterly revenue exceeded analysts’ estimates, even as it declined. Profit missed estimates. The company is expected to stop taking bids and make a decision about a potential sale of the company. Suitors so far have included Verizon, AT&T and private equity firms; and earlier offers have ranged in price from about $3.75 billion to $6 billion, depending on what assets are part of the bid.
The National Association of Home Builders’ index fell to 59. Any reading over 50 signals improvement. All three of the index’s sub-gauges slipped. The index of current conditions eased one point to 63, while the gauge for the upcoming six months fell three points to 66. Buyer traffic was down one point to 45. Builder confidence hit a ten-year high last fall but fell back after that. Builders continue to report trouble finding lots and labor.
Japanese telecommunications company Softbank has agreed to purchase ARM Holdings for $32 billion. The proposed acquisition represents a 43 percent premium over the company’s closing share price last week. If you own a smartphone, you almost certainly own a product designed by ARM Holdings. It has designed the chips for more than 95% of the world’s smartphones. The Cambridge, England-based firm is strictly a designer and not a manufacturer. The 4,000-employee outfit draws up the blueprint for microprocessors for smartphones and other devices and then charges partners such as Qualcomm for using those schematics. ARM was founded in 1990, a spinoff of a collaboration between Apple and Acorn Computer. ARM focused on designing chips that consumed the least energy.
The deal is believed to be the largest acquisition ever of a European tech company. The deal is the first major cross-border transaction in Britain since the Brexit vote. Worries over the British economy have weakened the value of the pound sterling and made it cheaper for foreign companies like SoftBank to hunt for deals there. Compared with this same time in 2015, for example, pound-denominated assets are 30 percent cheaper for buyers holding yen. The deal is seen as a bet on the “internet of things,” a new stage in the evolution of network technology, when cars, buildings and household items may be connected through embedded electronics.
ExxonMobil is getting into a bidding war. ExxonMobil Corp has made a bid worth at least $2.2 billion for InterOil Corp and its stake in a rich Papua New Guinea gasfield, winning the support of its target and topping an offer from Australia’s Oil Search Ltd. Exxon is a partner with Oil Search in the country’s only liquefied natural gas terminal, PNG LNG. Oil Search is also a partner, along with InterOil and Total, in another proposed gas export project, Papua LNG. When Oil Search made its $2.2 billion offer for InterOil in May in conjunction with Total, it did so with the idea that it could save money and increase returns by integrating the two projects. Having Exxon take InterOil’s place in Papua LNG would accomplish the same goal at none of the cost. Exxon’s bid values InterOil at $2.5 billion.
Berkshire Hathaway agreed to buy Medical Liability Mutual Insurance. The target company is the largest underwriter of medical professional liability insurance in New York and will convert from a policyholder-owned to a stock business. Terms were not disclosed.
Due to a Hawaiian regulatory order dismissing the companies’ merger application, NextEra Energy and Hawaiian Electric have announced the termination of their plans to combine. Under the merger agreement’s conditions, NextEra will pay Hawaiian Electric a $90 million break-up fee and up to $5 million for reimbursement of expenses associated with the transaction.
Volkswagen executives in the U.S. have pledged to compensate 650 American franchise dealers who have been dented by the carmaker’s emissions crisis. The decision, which came at a meeting on Friday, marked the first time VW acknowledged that dealers would get compensation for the economic damage they suffered from the scandal.
Fiat Chrysler Automobiles is under investigation by the U.S. Justice Department for fraud, according to Bloomberg news. Prosecutors are scrutinizing whether the carmaker violated U.S. securities laws, although details of the investigation are still sketchy at this time. A civil lawsuit against Fiat Chrysler may provide clues about what prosecutors are looking at. A Chicago-area dealer alleges the company inflated its U.S. car sales by paying dealers to report selling more vehicles than they actually did. Fiat Chrysler is also fighting investor claims that the auto maker played down the economic impact of manufacturing problems that led to expensive recalls. A lawsuit, filed in September in federal court in Manhattan by a group of investors, alleges the company made false and misleading statements about flaws in its manufacturing process and quality control that led to at least 11 million vehicles being recalled.