Financial Review

M&A Media Mayhem

…..Dow, S&P down for week. Nas up. Wrapping up a good earnings season. Oct. housing starts jump. FCC rolls back media ownership rules; M&A media mayhem ensues. A knife in net neutrality. Tesla’s Semi. Banks behaving badly.

Financial Review by Sinclair Noe for 11-17-2017

Tax cuts, earnings season, housing starts, FCC, medio ownership, net neutrality, Tesla Semi, JPMorgan money laundering,

DOW – 100 = 23,358
SPX – 6 = 2578
NAS – 10 – 6782
RUT + 5 = 1492
10 Y – .01 = 2.35%
OIL + 1.54 = 56.68
GOLD + 15.10 = 1294.40

 

It has been a wild week on Wall Street, with the biggest gain and the largest drop in two months after touching records a week earlier. Investors are trying to gauge whether benchmarks will continue a march to all-time highs on strong earnings and faster growth spurred by corporate tax cuts or if they will be pulled down amid lofty valuations, the flattest yield curve in a decade and a selloff in junk bonds. For the week, the Dow lost 0.3%. The S&P lost 0.1%. The Nasdaq gained 0.5% for the week. Yesterday, the House passed its version of a tax cut plan. The Senate is still debating its own plan, trying to reduce the 10-year debt impact below $1.5 trillion. A Reuters poll showed that nearly two-thirds of more than 60 economists said they were not confident the Trump administration would get the legislation passed this year. The biggest problem for the tax plan is that it is widely despised.  The latest survey from Quinnipiac out this week found that just 25 percent of voters approve of the GOP tax-cut plan while 52 percent disapprove. A majority of voters, 61 percent, believe the plan will benefit the wealthy, while just 24 percent view it as good for the middle class.

 

With 95 percent of S&P 500 companies having reported third-quarter results, earnings are on pace to grow 6.2% from a year earlier, according to FactSet. That’s up from the 3.1% growth rate expected at the end of period. Technology companies drove much of the growth. The sector reported a 19.7 percent increase in earnings and was the biggest contributor to earnings growth rate. If the tech sector was excluded, the overall growth rate would fall to 2.8% from 6.2%. Profits at companies that generate more that 50% of their sales outside the United States, grew more than 13% in the third quarter. Earnings at firms that get a majority of their revenue from within the U.S., rose only 2.3%.

 

The energy sector reported the largest increase in earnings of the S&P 500’s 11 sectors at 135%. The increase is a reflection of how hard the roughly two year slide in oil prices had hit the industry; 74 percent of companies have reported profits above analysts’ expectations, above the five-year average of 69 percent; Financial firms reported the biggest decline in profits, down 8.3%. That decline can largely be blamed on Hurricanes Harvey and Irma. Insurance companies in the sector reported 63% decrease in profits.

 

The Commerce Department on Friday said October housing starts surged, rising 13.7% to a seasonally adjusted annual rate of 1.29 million. That’s the second-highest level of the economic recovery. Building permits, a less volatile series, rose 5.9% to 1.3 million. Big double-digit gains came from both the South and the Midwest, with at least some of that attributed to the recovery from the hurricanes that ravaged Texas and Florida. On a percentage basis, the Northeast was actually the biggest mover, up a whopping 42%, but that’s the smallest region for activity. It’s possible warm weather proved to be a boost in the Northeast region. Single-family starts rose 5.3%, and starts with five or more units leaped 37.4%.

 

The Federal Communications Commission (FCC) on Thursday rolled back media ownership regulations under the guise of trying “to modernize its broadcast ownership rules and to help promote ownership diversity.” The approved order: Eliminates newspaper/broadcast and radio/television cross-ownership rules, which imposed restrictions on owning multiple media outlets in the same market; Relaxes rules about local television ownership—including joint sales agreements, which allow a company to control news operations at several stations in one market, where stations would typically compete against each other; and formally requests “comment on how to design and implement” an FCC diversity incubator program. In other words, this is the beginning of the end of local media. The new rules are expected to help Sinclair Broadcasting move forward with a proposed a $3.9 billion merger with Tribune Media, which would enable the company to reach 72 percent of the U.S. population. The merger must be approved by the FCC. There are also longer-term forces at work: traditional media companies are struggling with more customers canceling pricy cable contracts while Netflix and Amazon.com are spending billions of dollars on making shows and movies. More viewers now stream programming on smartphones or other devices, diverting the flow of advertising dollars away from traditional media companies.

 

And so now, everybody is trying to buy or sell a media company. It started a year ago when AT&T announced it had reached an agreement to buy Time Warner. Then things really turned upside down when 21st Century Fox — just three years after trying to buy Time Warner — signaled it wanted to sell some assets to Disney.

 

Then on Thursday, it was reported that Comcast might buy some of Fox. Or Verizon might.  It might even be sold off piecemeal. Hulu may be the single most important piece of Fox’s pie as Disney and Comcast look to compete with streaming services from Netflix and Amazon. Comcast currently holds a 30 percent ownership stake in Hulu. Acquiring Fox’s 30 percent stake would give Comcast a majority holding. Disney, which also holds a 30 percent ownership stake in Hulu, is in the same position. Charter Communications director John Malone says 4 firms have talked to the cable company about a potential merger or acquisition. And of course, President Trump might not allow AT&T to buy Time Warner. Meanwhile, Meredith Corp is considering a bid for Time Inc and Discovery Communications is acquiring Scripps Networks Interactive.

 

But wait, there’s more! The Federal Communications Commission will drive a stake through its own net neutrality rules roughly this time next month. Net neutrality is the concept that the internet should be an even playing field. Whether it’s your cousin’s blog or Google, net neutrality proponents argue all data should flow the same, meaning no particular persons or companies can be favored by the networks on which the data flows. That keeps big companies from paying for preferential treatment.

 

This is how the internet has generally operated, but as more services move online, concerns have grown that internet service providers will want to start charging for better access. Net neutrality supporters argue that this would turn the internet into a pay-to-play world, hampering innovations and leaving people to the whims of major companies. The rules could be voted on by mid-December, leaving the door open for internet providers to begin manipulating traffic.

 

FCC Chairman Ajit Pai has made no secret of his wish to undo the benchmark rules. Pai has been working to repeal the FCC’s net neutrality rules since the start of his time as chairman. Pai floated initial rules in May, which led into the usual comment period that FCC rule changes go through. That process was a disaster for the FCC. There appears to be almost unanimous support – with the exception of some telecom companies – for existing net neutrality rules.

 

Elon Musk built a truck, a big-rig. It is all electric. It does not drive itself, but the Tesla Semi is equipped with Enhanced Autopilot. The big reveal was last night in California. The truck has a 500-mile range, roughly twice what Reuters claimed in August. It’s also more than double what Cummins and Daimler have promised so far in their planned electric trucks. That figure, and the promise of solar-powered “Megachargers” to give 400 miles of range in 30 minutes — supplementing the existing Supercharger network — should help put to rest concerns that an electric truck is impractical for hauling outside of cities. For Tesla, this was a fundraising event – looking for pre-orders, and it looks like some of the big trucking firms were ready to buy. Walmart preordered 15.  Here’s the sales pitch: electric trucks can go for a million miles before requiring a major overhaul. The operating cost is $1.26 per mile vs. $1.51 per mile for traditional diesel. And they can be linked in a convoy, dropping the cost down to $0.85 a mile.

 

The big question is whether Tesla can build the trucks before they run out of money. The actual production is proving to be quite a challenge for Tesla. After the big truck display, Tesla unveiled a new version of its Roadster, sports car, which comes with a $200,000 price tag.  Musk boasted of the Roadster’s 0–60 mph time of 1.9 seconds and top speed of at least 250 mph. And it comes with a 650-mile range – that’s Los Angeles to San Francisco and back in one charge, a significant milestone for an electric car.

 

And in today’s edition of “Banks Behaving Badly” – Swiss financial markets authority FINMA has found that the Swiss subsidiary of U.S. investment bank JPMorgan broke anti-money laundering rules. FINMA ruled on June 30 that JPMorgan Switzerland had “seriously infringed” regulatory oversight provisions. The case involved a “violation of obligations of diligence on questions of money-laundering.” Both FINMA and JPMorgan declined to comment on FINMA’s ruling and it was unclear what action, if any, the regulator had taken against JPMorgan. FINMA is not authorized to levy fines, but may confiscate unlawfully realized gains. It is important to remember that JPMorgan is a really big bank, and with hugeness come the inevitable slips and blunders. But it must take some real effort ot get busted for money laundering lapses by the Swiss. That’s just sloppy.

 

 

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