…..Merger Monday: GE Oil-Baker Hughes, CenturyLink – Level 3, Blackstone-TeamHealth. On the hitter’s deck; Draftkings-FanDuel, Brocade, Broadcom. Consumers spend more, save less. Fed FOMC Wednesday; Jobs report Friday. Bond markets are rattled. OPEC and non-OPEC can’t agree on output cuts (shocking!). Moodys includes climate change in bond ratings. Happy Halloween.
Financial Review by Sinclair Noe for 10-31-2016
DOW – 18 = 18,142
SPX – 0.26 = 2126
NAS – 0.97 = 5189
10 Y – .01 = 1.83%
OIL – 1.94 = 46.76
GOLD + 2.30 = 1278.00
Another Merger Monday. For the second consecutive week, we have a batch of big mergers announced. US mergers and acquisitions activity in October was already at a record high before these deals were announced, led by AT&T’s giant deal for Time Warner.
GE is merging its oil and gas business with Baker Hughes. GE will own 62.5% of the new publicly traded company, which will have combined revenue of $32 billion, while Baker Hughes shareholders will own 37.5% and will receive a one-time special dividend of $17.50 a share when the deal closes. The combination of GE Oil & Gas and Baker Hughes will create the second-largest player in the oil-field services industry in terms of revenue after Schlumberger.
Telecommunications company CenturyLink said it would buy Level 3 Communications in a cash-and-stock deal with an equity value of about $24 billion, or about $34 billion, including debt. The deal implies a purchase price of $66.50 per share – a premium of approximately 42% above where Level 3 shares were trading last week, before reports surfaced of a potential acquisition. The combination will increase CenturyLink’s fiber network in the US to 450,000 miles from about 250,000.
Blackstone Group will buy TeamHealth Holdings in a deal valued at about $6.1 billion. TeamHealth is a hospital staffing provider. Blackstone will pay TeamHealth shareholders $43.50 per share held, a premium of about 18 percent to the stock’s Friday close.
Multiple sources say a long-rumored merger between DraftKings and FanDuel is imminent; the pair’s recent settlement with NY Attorney General Eric Schneiderman cleared a key obstacle to the pair-up. Some of the major details discussed last week included executive leadership, the name of the company, whether one site or two will be used, and where the company headquarters will be located. Combined, the two firms cover 90-95% of the daily fantasy market.
Brocade Communications spiked as much as 24% today after a report that the company is finalizing talks to sell itself. Bloomberg reported that a sale of the data-storage and networking provider could be announced as soon as this week, and Broadcom is one of the interested potential buyers. Broadcom makes semiconductors, part of the components that go into Brocade’s networking equipment – so it might make a good fit.
Consumers boosted their spending in September at the fastest pace in three months, while their incomes grew by a modest amount. Consumer spending increased 0.5 percent, a significant rebound from August when spending fell 0.1 percent. The increase was led by a 1.3 percent surge in spending on autos and other durable goods. Incomes increased 0.3 percent in September, slightly faster than the 0.2 percent gain in August. With spending rising faster than incomes, the personal saving rate slipped slightly to 5.7 percent in September, down from 5.8 percent in August.
A key inflation gauge followed by the Federal Reserve was up a slight 0.2 percent in September, while core prices, excluding food and energy, rose only 0.1 percent. Over the past year, core prices are up just 1.7 percent, still below the Fed’s 2 percent inflation target. The Atlanta Federal Reserve’s GDP Now forecast model showed the economy is on track to grow at a 2.7% annualized pace in the fourth quarter. Fed officials meet this week, but they are expected to its key policy rate unchanged at 0.25 percent to 0.5 percent, where it has been since December of last year. The FOMC will wrap up their 2-day meeting on Wednesday. Still, it looks like a rate hike will come in December, and so this week’s FOMC statement will likely include some sort of vaguely blunt Fedspeak sending a clear message to markets that, barring any unforeseen hiccups, the Fed is a go for a December hike.
On Friday, we have the October jobs report. The economy has been averaging 178,000 new jobs per month for 2016, and that is the estimate for the past month; however the September numbers were off a bit – only 156,000. This will be the biggest economic report before next week’s election.
Bond markets around the globe are acting rattled by inflationary pressures and October was a bad month for bonds, down 3%; and even US Treasuries lost 1.2%. People are responding to this idea that central banks will be suddenly shifting away from their excess accommodation. Commercial banks in the US have amassed $90 billion of Treasuries and non-mortgage debt from federal agencies this year alone, bringing the total to $754 billion, according to data compiled by the Fed. The 5 biggest US banks held a combined $206 billion of government debt at the end of the second quarter, according to the latest available filings. That’s a 74 percent increase over the past three years. Including federally guaranteed mortgage-backed securities, banks now own $2.4 trillion of government bonds, which would be the most since the central bank began compiling data in 1973. Why are banks hoarding all that debt? One reason is tighter regulations; the other is banks aren’t lending more because the economy isn’t growing as fast as we’d like it to grow. A big reason banks are funneling so much money into safe assets is that deposit growth is outstripping loan demand.
Eurozone economic growth remained steady at 0.3% in third quarter, indicating 1.6% over the year and suggesting the bloc’s steady recovery has not so far been knocked off course by Britain’s vote to leave the EU. Inflation figures, released at the same time, saw a modest rise in October. The service sector helped boost the Flash Inflation figure to 0.5%, up from 0.4% in September, but the number narrowly missed expectations for a 0.6% rise.
Officials and experts from OPEC countries and non-OPEC nations including Azerbaijan, Brazil, Kazakhstan, Mexico, Oman and Russia met for consultations in Vienna on Saturday and they could not agree to a specific commitment to join OPEC in limiting oil output levels to prop up prices, suggesting they want the oil producing group to solve its differences first. On Friday, OPEC members failed to agree how to put in place a global deal to limit production, following objections from Iran which has been reluctant to freeze its output. The non-OPEC did agree to meet again in November before a scheduled regular OPEC meeting on Nov. 30.
Elon Musk has unveiled a new kind of solar roof that will be offered starting next year through SolarCity, the home solar installation company that he is seeking to merge into Tesla. Whether meant to emulate clay tiles on a Spanish-style house or shingles on a colonial, Musk said they have 98% of the ray-collecting power of a conventional solar panel, are durable and will last longer than the house itself. Tesla gave little detail on cost, except to say that the cost of the roof would be less than a conventional roof plus solar. The plan is to combine the solar roof tiles with a bank of batteries called Powerwall, and provide power to an electric car.
Moody’s Investors Services just issued a bond rating report explaining how and why it considers climate change risk in rating energy companies. Among the G20 economies, electricity production and central heating account for 45 percent of the country’s carbon emissions. This is, of course, the economic sector that can utilize renewables right now. The firms in the electric business are capital intensive and issue bonds often. If the rating agencies become negative on the sector and lower the bond ratings, companies will pay more to raise money and a few will not be able to raise money.
Moody’s argument could be boiled down to this. The cost of renewable energy is falling, and lower renewable prices will put pressure on wholesale energy prices just as carbon pricing adds to the costs of the carbon-fueled generators. Thus, margins will fall the most for the least efficient carbon-fueled facilities. Moody’s entitled its report, “Carbon Transition Brings Risks and Opportunities”. In sum, it appears that big money is beginning to speak, and it says, “Carbon emissions count and if you don’t believe that, you’ll pay dearly if you need money and you might not get our money at all.”
Volkswagen plans to cut more than 10,000 jobs in coming years as the German auto giant switches its focus to making electric cars in the wake of its Dieselgate scandal.
Prime Minister Justin Trudeau has finally signed Canada’s free trade agreement with Europe at a ceremony in Brussels. CETA will remove 98% of tariffs – and officials hope it will generate an increase in trade worth $12 billion a year. For a while it looked like the trade deal might not happen because Wallonia, a province in Belgium objected to certain provisions, which were ultimately changed. But the Walloon intransigence has underlined the extent to which trade has become politically radioactive as citizens increasingly blame globalization for growing disparities in wealth and living standards. What about implications for the much-debated US –EU trade deal? EU Trade Commissioner Cecilia Malmstrom declared, “TTIP is not dead,” adding that negotiations will continue after the November election.
Putting the fizz back into its line-up, Coca-Cola Ginger was launched in Australia today, as the South Hemisphere country ushers in summer. Coca-Cola South Pacific noted that sales of ginger-flavored drinks were up 6% in Australia over the past year, and Bundaberg Ginger Beer has been a favorite since it was launched in 1960.
Sony Corp cut its annual profit outlook due to losses related to the sale of its battery business – disappointing a market that had been hoping for an upward revision on sales momentum for PlayStation 4 and the launch of its virtual reality headset. Sony will announce its first-half results tomorrow.
Happy Halloween to everyone. I hope you enjoyed my costume today –if you haven’t noticed, I’m dressed as a weary broadcaster, sick to death of this seemingly never-ending political campaign where issues have fallen into a bottomless abyss, never to see the light of day. Eight more days until the 2016 campaign is over. Unless … No we won’t even go there. It’s gonna be over. Anyone who mentions the 269-269 electoral vote scenario gets banned.