Financial Review

Libor Antitrust Claims Revived

 

Financial Review by Sinclair Noe for 05-23-2016

Markets are waiting on the Fed to act. Bayer goes after Monsanto. Libor antitrust case goes back to a lower court and possible trebled damages.

DOW – 8 = 17,492
SPX – 4 = 2048
NAS – 3 = 4765
10 Y – .01 = 1.84%
OIL – .33 = 48.08
GOLD – 3.70 = 1249.20

 

If you were actively trading the markets today – well, you were probably falling asleep. It was like watching paint dry. The S&P 500 index traded in an 8 point range for the session, drifting from positive to negative without conviction. Including today, we’ve had 98 trading days this year. On 20 of these days, the S&P moved 0.1% or less. That’s just over 20% of the time. In the prior 10 years, there was a total of 2517 trading days. And the S&P had a total of 288 moves of 0.1% or less. That’s just over 11% of the time. There has been plenty of volatility but it has been interspersed with indecision.

 

John Williams, president of the Federal Reserve Bank of San Francisco, said Sunday the presidential election wouldn’t prevent the central bank from raising interest rates later this year. Mr. Williams has said that he favors raising rates two or three times this year. St. Louis Fed President James Bullard said today that the strength of the U.S. labor market, inflation levels that are closer to the Federal Reserve’s target of 2% and easing international pressures are three factors that support the Federal Open Market Committee’s aim for a slow normalization of interest rates. According to FOMC member and Boston Fed President Eric Rosengren the U.S. is on the verge of meeting most of the economic conditions the Fed has set to increase interest rates next month.

 

The market is trying to digest last week’s Fed minutes and the jawboning from policymakers. Everyone will be following the economic data closely over the next 3 weeks. Meanwhile, the bond market has done some of the work for the Fed; since last Wednesday’s release of FOMC minutes yields have jumped, but the Fed can’t just talk about raising rates and then fail to do the deed without a severe loss of credibility.

 

Bayer has confirmed its offer to acquire Monsanto with a $122 per share all-cash bid that values the U.S. agribusiness at $62 billion. The drug and chemicals giant anticipates annual earnings contributions from synergies of around $1.5 billion after three years, and said it would finance the deal through a combination of debt and equity. Bayer said a deal would boost earnings per share by a “mid-single-digit percentage” in the first full year after completion, and by more than 10 percent thereafter. Bayer would likely abandon the Monsanto name following the purchase, which would help distance Bayer from Monsanto’s link to genetically modified foods.

 

The kind of genetically modified seeds that Monsanto started to sell two decades ago now account for the majority of corn and soybeans grown in the US. But that doesn’t mean you want to bet the farm on GMOs. In the United States organic food sales have grown steadily at around 10 percent a year since the Great Recession (and at higher rates before that), which puts the stock market to shame. In 2015 organic product sales revenue grew 11 percent, while the rest of the food market grew at a rate of 3 percent, according to the Organic Trade Association’s annual survey of the industry. Total sales reached $43.3 billion, which makes the organic industry a force to be reckoned with. For comparison, Monsanto brought in just under $15 billion in revenue last year.

 

Anthem and Cigna are quarreling and could delay their merger. The Wall Street Journal reported that disagreements could delay antitrust approvals, which would make the $48 billion deal possible. The report said the two health insurers accused each other of violating the terms of their agreement announced last July. A deal would create America’s largest health insurer by members.

 

Tribune Publishing rejected Gannett’s latest $864 million takeover offer, saying the$15 per share in cash was inadequate, and they have a turnaround plan in place. Tribune Publishing, the owner of the Los Angeles Times and the Chicago Tribune, said billionaire Patrick Soon-Shiong invested $70 million in the company, becoming its second largest shareholder. Still, Tribune said it had invited Gannett to an agreement under which the companies could engage in discussions to see whether a transaction was in the best interests of Tribune and Gannett shareholders.

 

Ares Capital Corp, an investment and finance company focused on mid-sized firms, is buying smaller rival American Capital Ltd in a cash-and-stock deal valued at $3.4 billion to better fill the credit gap created as big banks turn cautious. The deal, which does not include American Capital’s mortgage management unit, comes about five months after American Capital said it would solicit offers. Ares is the biggest BDC, or Business Development Company, in the United States by assets while American Capital, in addition to operating as a BDC, has a large asset management business.

 

Due to the U.S. crackdown on tax inversions, CF Industries is calling off an $8 billion deal to acquire several European and North American operations from OCI of the Netherlands. The two said that they were unable to restructure the acquisition, which would have created the world’s largest publicly traded nitrogen company, in a way that would be attractive to their shareholders.

 

Sixteen of the world’s largest banks must face antitrust lawsuits accusing them of harming investors who bought securities tied to Libor by rigging the interest-rate benchmark, a ruling that an appeals court warned could devastate them.

 

The appellate judges reversed a lower-court ruling on one issue, whether the investors had adequately claimed in their complaints to have been harmed, while sending the cases back for the judge to consider another issue: whether the plaintiffs are the proper parties to sue, in part because their claims, if successful, provide for triple damages that could overwhelm the banks. About a dozen firms have paid almost $9 billion in fines to resolve government investigations around the world into rigging of the key benchmark. The ruling by a three-judge panel opens the possibility the banks may have to pay billions more. Libor, or the London Interbank Offered Rate, underpins hundreds of trillions of dollars of transactions and is used to set rates on credit cards, student loans and mortgages. It is calculated based on submissions by banks.

 

In their lawsuits, the plaintiffs claim that beginning in 2007 the banks colluded to depress the Libor rate to minimize the amount they had to pay out on investments linked to the benchmark. The Libor-tied investments included asset swaps, collateralized debt obligations and forward rate agreements. The appeals court overturned a 2013 ruling which said the investors had failed to show that they were harmed in a way that would permit them to sue under U.S. antitrust law. Last year, the U.S. Supreme Court permitted the bondholders to appeal the dismissal of their antitrust claim.

 

The Second Circuit reinstated the lawsuit today, ruling that the alleged horizontal price-fixing constitutes an antitrust violation, basically the district judge got it wrong by adopting a categorical rule that because the banks were cooperating in setting Libor they could not be violating antitrust rules. That argument is that since banks operate as both borrower and lender in Libor transactions, any conspiracy to gain as a borrower would be offset by losses as a lender. However there might be another argument: that the banks suppressed Libor during the financial crisis to boost earnings or make their finances appear healthier.

 

The New York-based appeals court remanded the case so that the lower court could reach the second component of standing for asserting an antitrust injury – whether the bondholders are efficient enforcers of antitrust law; in other words, the lower court could dismiss the case again, for new reasons.

 

Greece’s parliament has approved a raft of fresh taxes and austerity measures needed to unlock further rescue loans, as the country’s most influential creditors – Germany and the IMF – remain deadlocked over debt relief. “Greeks have already paid a lot, but this is probably the first time that the possibility of these sacrifices being the last is so evident,” Prime Minister Alexis Tsipras told lawmakers. Athens hopes the measures will bolster sentiment ahead of tomorrow’s key Eurozone finance ministers meeting.

 

Holders of bonds from Puerto Rico’s Government Development Bank are suing to challenge aspects of a debt-moratorium law that island officials say is crucial to maintaining essential services. The federal lawsuit names Puerto Rico’s Governor and Treasury Secretary as well as an unidentified bank receiver. It argues that amendments give preferential treatment to local creditors at the expense of others in violation of American and Puerto Rican law.

 

The U.S. will fully lift the decades long ban on sales of lethal arms to Vietnam. Speaking in Hanoi, President Obama said lifting the arms embargo would remove one of the last vestiges of the Cold War, it also opens up non-military markets. Vietnam’s VietJet has agreed to order 100 Boeing 737 MAX 200 airplanes, in a deal worth $11.3 billion based on list prices. Delivery of the planes will run for four years beginning in 2019, and will make the airline one of the fastest growing low-cost carriers in the region.

 

More than 38 million Americans—the most since 2005—are expected to travel during this year’s Memorial Day holiday period, May 26 through Monday, May 30 – and about 90% are expected to drive.  AAA reports gasoline prices are the lowest they’ve been this time of year since 2005. The national average price is $2.26 for a gallon of gasoline; that’s up significantly from the $1.70 a gallon that regular grade gas hit in February but down 40-cents from the average price last Memorial Day. Prices are expected to inch higher over the next few days, heading into the holiday. Meanwhile, truckers will pay about 50-cents per gallon less for diesel versus last year.

 

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