Financial Review

A Ploy

…Nasdaq record high. Trade wars on the horizon. G-6-plus-1 later in the week. M&A around the world. Microsoft gets Github. Buybacks, M&A, & dividends push markets. Apple WWDC. Facebook, again.

Financial Review by Sinclair Noe for 06-04-2018

DOW + 178 = 24,813
SPX + 12 = 2746
NAS + 52 = 7606
RUT + 5 = 1653
10 Y + .04 = 2.94%
OIL – 1.19 = 64.62
GOLD – 1.60 = 1292.50

 

Tech stocks led today’s rally and helped push the Nasdaq to a record high close. The Nasdaq Biotechnology Index underperformed the broader market with a 0.7 percent decline Nektar Therapeutics dropped 41% and weighed on the index after mixed results from its experimental cancer drug with Bristol-Myers Squibb’s Opdivo disappointed investors. Bristol-Myers Squibb ended 3.2 percent lower. Merck, however, gained about 2.4 percent after latest data showed its cancer drug Keytruda improved survival as a stand-alone treatment for a type of lung cancer. Falling oil prices weighed on the energy sector.

 

Weekend trade talks between the U.S. and China ended with little sign of progress, setting the two economic superpowers closer to unleashing $100 billion in tariffs on one another. There was no evident progress on a Chinese commitment to buy more American agricultural and energy products, the purported goal of the meeting. In the wake of the Trump team’s renewed threat last week to slap $50 billion in levies on Chinese imports — tariffs that the administration said it will list June 15 — Beijing pledged to respond in kind.

 

In addition, six of the Group of Seven industrialized nations have issued a rare condemnation of the seventh member, the U.S., over its trade policy. Trump’s administration has imposed steel and aluminum import levies on some of the U.S.’s biggest allies, including the European Union, Mexico and Canada. Officials from the G-7 are scheduled to meet in Quebec later this week, although it might seem more like the G-6-plus-1. All six of the countries — Britain, Canada, France, Germany, Italy and Japan — are paying the metals tariffs and are taking different measures to retaliate: Canada and Mexico, which are embroiled in talks with the United States to update the North American Free Trade Agreement, responded to the move by announcing levies of their own on a variety of U.S. exports. The EU is set to retaliate with tariffs on a range of U.S. goods, from Harley-Davidson motorcycles to jeans and bourbon. The White House has said the tariffs are being imposed for reasons of national security. Over the weekend, Canadian Prime Minister Justin Trudeau called the White House’s reasoning “insulting and unacceptable,” in light of the two nations’ long history of military cooperation. If you’re wondering why Wall Street isn’t freaking out over all this talk about tariffs and potential trade wars – best answer is that they consider it as little more than a negotiating ploy. And even if it does end up in a horrific trade war, Trump would just pardon himself.

 

Spain’s Socialist Party leader Pedro Sánchez was sworn in as prime minister on Saturday after Mariano Rajoy was ousted in a parliamentary vote of no confidence on Friday. At the same time, Madrid ended direct rule in Catalonia, letting go of controls put in to resist a push for the region to self-govern. In Italy, a political crisis that rocked global markets was resolved on Friday with the swearing-in of a new government as populist parties the 5 Star Movement and the League formed a coalition administration. The 5 Star Movement and League Party may have agreed to compromise on certain issues, but they remain antiestablishment, and might clash with Brussels down the line.

 

Meanwhile, shares of Italian bank UniCredit and French bank Société Générale were on the move after a Financial Times report that the companies are in early-stage talks about a possible merger. Separately, Société Générale said it’s reached agreements in principle with U.S. and French authorities related to its alleged manipulation of Libor rates and transactions involving Libyan counterparts. Société Générale in March said it made provisions of about $1.2 billion for the litigation.

 

In other M&A news from the Eurozone, Accor Hotels said it’s considering purchasing a minority stake in the French-Dutch air carrier, Air France-KLM.

 

Germany’s Bayer will wrap up the $63 billion takeover of Monsanto on Thursday and also retire the U.S. seeds maker’s 117 year-old name. The deal is the first of a trio of major U.S.-German merger deals to cross the finish line. Deutsche Telekom’s T-Mobile US plans to merge with Sprint for $26 billion, while industrial gases makers Linde and Praxair are also seeking to combine.

 

Microsoft announced plans to acquire open source software platform Github for $7.5 billion. GitHub houses code from about 24 million users, which can be contributed to or integrated into projects of their own. It has amassed the largest developer base in the world thanks to its huge repository of code in various operating systems and languages, flexible platform, and decentralized nature. Microsoft stressed that users will still be able to deploy GitHub projects to any cloud, but it seems fairly obvious they think the acquisition will help fuel the growth of Microsoft’s Azure.

 

The month of May is typically the second weakest month on Wall Street, but not this year. The secret weapon for gains may have been buybacks. May set a record for share repurchases, and the month was the best for stocks since January and the best May since 2009. Companies have nearly $2.5 trillion in cash parked domestically, according to the Federal Reserve, and as much as $3.5 trillion overseas. And according to UBS, companies are expected to push $2.5 trillion of “flow” into the economy this year in the form of share buybacks, dividends and M&A. For 2018, UBS expects dividend issuance to top $500 billion, buybacks to range from $700 billion to $800 billion, and M&A to constitute about $1.3 trillion. If the numbers pan out, they would equate to about 10 percent of the S&P 500’s market cap and 12.5 percent of GDP. Repurchases are up 83 percent year to date, far ahead of the 9 percent gain in dividends, while M&A activity involving U.S. companies has surged 130 percent. It is estimated that the combination of buybacks, dividends and demand flows account for some 40 percent in performance this year.

 

Buybacks have skewed toward tech stocks, which have easily outperformed the rest of the market. And the leader in buybacks is Apple, with a $100 billion buyback program. The stock rose as much as 1.7 percent to $193.42, pushing Apple’s market capitalization past $940 billion. Apple’s stock is now $11 away from making it the first trillion-dollar company. The shares have gained 24 percent over the past year. Amazon and Microsoft also hit new all-time highs today; the three tech companies are now worth a combined $2.5 trillion.

 

Apple’s high coincides with the WWDC, the annual developers’ conference which attracts thousands of third-party programmers from across the world to hear the company discuss new tools and features, as well as introduce its new operating system. WWDC has become increasingly important, as the company works to assert itself as a software and services provider, rather than just a maker of iPhones and Macs. There was no new hardware, but Apple previewed new versions of software, called iOS 12, WatchOS 5, tvOS 12 and MacOS Mojave, which won’t be finished and released widely for several months. Apple said its biggest focus of the new operating system was on reliability and speed, promising apps would load twice as fast in high-performance situations. There was no mention of the impact on battery life. Apple announced several features and upgrades, including a new augmented reality toolkit in partnership with Adobe, and new features for combating tech addiction. Apple is also making it harder for companies to track your activity on your iPhone. Users will have to “opt-in” to allowing websites to track their browsing behavior on Safari, including sites with a “share” button usually provided by companies like Facebook or Google. The move helps Apple respond to increasing user concerns about privacy online, but could make it harder for websites and advertisers to target ads efficiently. Apple is betting on websites reining in tracking rather than users having to give constant permission to track their device. The move would also effectively jam Facebook.

 

Facebook is facing renewed regulatory scrutiny around the world after the New York Times reported late Sunday that the company shared personal data from its users with dozens of device makers, including Apple and Samsung. Perhaps the most concerning claim from the report is that Facebook gave some device makers “access to the data of users’ friends without their explicit consent, even after declaring that it would no longer share such information with outsiders.”

 

Howard Schultz is stepping down from his role as executive chairman of Starbucks, effective June 26. Schultz is seen as the architect of the modern Starbucks. He joined Starbucks in 1982 as director of operations and marketing. Over time he grew it into the iconic brand it is today, with more than 28,000 locations globally.

 

There are 37,241 McDonald’s restaurants in 120 countries, but not a single one in North Korea. In a recent fast-food development, however, Kim Jong Un, according to an intelligence report, may allow a “Western hamburger franchise” into Pyongyang as a gesture of goodwill. It might be more than a gesture. Over the years, McDonald’s has become symbolic of American culture, capitalism, globalism, and the promise of modernization. But could McDonald’s represent even more than that? In 1996, New York Times columnist Thomas Friedman floated for the first time what would become a fairly infamous theory: Two countries with McDonald’s restaurants would never go to war, he said, because they shared globalized, middle-class economies. That theory has seen a few violations over the years. Of course, if we really want lasting peace, we should consider an In ‘n Out or Shake Shack.

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