How the Net Dies
….Record highs for Dow, S&P, Nasdaq and Russell 2K. DOJ sues to block AT&T-Time Warner deal. FCC moves to kill net neutrality protections for consumers. Existing home sales climb.
Financial Review by Sinclair Noe for 11-21-2017
DOW + 160 = 23,590
SPX + 16 = 2599
NAS + 71 = 6862
RUT + 15 = 1518
10 Y – .01 = 2.36%
OIL + .70 = 57.12
GOLD + 4.00 = 1281.00
Record high closes for the Dow, S&P, Nasdaq, and Russell 2000. The S&P technology index gained 1.2 percent, helped by a nearly 1.9 percent rise in Apple. The index has risen 38.6 percent this year, by far more than any other sector. The S&P 500 is up 16.1 percent for the year so far. Healthcare stocks also rose after bullish results from medical device maker Medtronic, whose shares rose 4.8 percent after the company reported better-than-expected results and backed its full-year forecast. Shares of Urban Outfitters gained 3.7 percent while Hormel Foods was up 3.4 percent. Both reported quarterly results. Signet Jewelers tanked 30.4 percent after reporting a surprise quarterly loss. Shares of HP fell 4% late Tuesday after the company reported fiscal fourth-quarter earnings and sales above expectations. Hewlett Packard Enterprise managed to close out its year with an earnings beat Tuesday, but the company’s forecast for the first quarter of its new fiscal year and Chief Executive Meg Whitman’s impending departure sent shares down more than 5%. Facebook was up more than 1%, but it managed to drop in ranking. Tencent is now valued at $534.5 billion in market capitalization, making it the fifth most valuable public company globally. Facebook falls to number 6.
Goldman Sachs raised its earnings estimate for S&P 500 companies in 2018 and 2019 based on expectations of U.S. corporate tax reform, above-trend global and U.S. economic growth and slowly rising interest rates from a low base.
The Justice Department sued to block AT&T’s planned $85 billion acquisition of Time Warner. The move is unusual because the government does not typically challenge so-called vertical mergers like this one, which do not involve the combination of direct competitors. The government hasn’t challenged a vertical merger since 1973 in a case involving Fruehauf Corporation, then the nation’s biggest maker of truck trailers. And in that case, an appeals court ruled for Fruehauf. Many mergers that have sparked criticism for hurting consumers — like those of airlines — have involved direct competitors. But, as the Justice Department alleges in its complaint against AT&T and Time Warner, vertical mergers can arguably raise prices for consumers, too. Guidelines for these types of vertical mergers have not been updated since 1984, and they favor companies that want to merge rather than antitrust regulators.
AT&T will now try to get a court to allow the merger, but there are no guarantees they will prevail. Usually, these problems result in some sort of settlement but that might not happen here. The DOJ had reportedly warned AT&T that it would need to sell either Turner Broadcasting—CNN’s parent company—or DirecTV to receive approval for the merger. AT&T said that was a non-starter. DOJ then filed suit. And that raises the question of why the Department of Justice is trying to block this case. Many other larger mergers seem to get rubber stamped for approval. Makan Delrahim, the DOJ’s chief antitrust enforcer, publicly stated in 2016 that an AT&T–Time Warner merger would pose no serious legal problems, declaring: “I don’t see this as a major antitrust problem.” Now he has completely reversed his position. Why the change of heart? Did Delrahim engage in a sincere re-evaluation of the data and doctrines? Or was he acting on pressure from the White House?
The Trump administration’s sudden and selective antitrust enforcement may very well be a front for an unconstitutional effort to punish expression it opposes. AT&T will have ample opportunity to make this objection in court. And if it argues this position persuasively, it may obtain access to government records to prove that Trump’s bias against CNN illegally influenced the DOJ’s antitrust crackdown. Once again, Trump’s own words may wind up undermining his administration’s legal position in court. Bloomberg reports that AT&T will request access to communications between the White House and the Justice Department regarding the merger, apparently to determine whether Trump exerted improper influence. If the president did use antitrust as a pretense for penalizing CNN, he likely ran afoul of the First Amendment’s protection against government retaliation for protected expression. Even if AT&T could not find direct evidence of retaliation, any documentation of political motive would fatally undermine the DOJ’s antitrust arguments. Trump’s own comments about Muslims persuaded courts to block his first and second travel bans, holding that his words undermined the legal justifications for both executive orders. Even more glaringly, Trump’s FCC just eliminated regulations that might have blocked Sinclair Broadcast Group’s proposed merger with Tribune Media. Thanks to the FCC, Sinclair, a vigorously pro-Trump company, will now be able to buy 42 new TV stations, allowing the firm to dominate local media markets in many regions.
In its complaint, the Justice Department argues that AT&T, which already owns DirecTV, would “use its control of Time Warner’s popular programming as a weapon to harm competition.” Specifically, the government argues, AT&T would use the merger to strong-arm its competitors into paying hundreds of millions more per year for Time Warner’s networks. This could ultimately lead to higher bills and fewer options for American families, the Justice Department argues. The government also alleges that a merged AT&T/Time Warner would have the power to stymie the growth of online TV options that it views as a threat to traditional TV.
Under Trump-appointed chairman Ajit Pai, the FCC plans to repeal net neutrality – the principle that all traffic on the internet is treated equally. Repeal of net neutrality rules would allow internet service providers to favor their own content and block or throttle access to their competitors’ material, a move that could allow a company like AT&T to charge websites a fee to reach users at faster speeds, or even block content. In other words, the FCC wants to permit what the DOJ purportedly wants to prohibit by blocking the AT&T-Time Warner merger. The move to kill net neutrality is likely to spark a furious battle before the FCC’s vote on the proposals on 14 December. About 21-million comments were submitted to the regulator as it discussed the proposals, and activists have flooded legislators with more than 250,000 calls condemning Pai’s plans. The FCC’s plans will be challenged in court.
Meanwhile, media merger and acquisition activity is probably on hold until this deal is worked out through the courts or some other resolution. Whatever happens – it has suddenly become one of the most interesting and important mergers in years.
The National Association of Realtors says sales of previously-owned homes jumped 2% to a seasonally adjusted annual pace of 5.48 million in October. The median sales price was $247,000, up 5.5% from 12 months ago, and October marked the 68th-straight month in which prices rose compared to a year ago. First-time buyers made up 32% of the total, up from 29% in September but still well below long-time averages. At the current sales pace, it would take 3.9 months to exhaust the available supply of homes, down from 4.4 months a year ago. October’s inventory, when seasonally adjusted, was the second-lowest on record going back to 1999. Inventory declined 3.2% during the month, to 1.80 existing homes. That’s 10.4% lower than a year ago, the 29th month of lower inventory versus the year-earlier period. NAR expects only a 3.7% increase in existing-home sales in 2018, but continues to warn that the tax reform bills working their way through Congress would “disincentivize” homeownership.
A recent White House report claims that corporate tax cuts would boost the economy and result in GDP growth of as much as five percentage points. The Initiative on Global Markets at the University of Chicago’s Booth School of Business asked 42 economists if they agreed or disagreed that GDP – gross domestic product would be “substantially higher” in 10 years if a tax bill like the one congressional Republicans and the White House are pushing is enacted. Of those 42, only one economist said that cutting corporate tax is likely to grow GDP. Most others — 22 economists — disagreed. Fifteen said they were uncertain and four didn’t answer.