Financial Review

Merger Monday

…..AT&T-Time Warner; TD Ameritrade-Scottrade; Rockwell Collins-BE Aerospace; HNA Group-Hilton Worldwide/Blackstone; Genworth-China Oceanwide Holdings; American Midstream-JP Energy. Whew! Visa beats. T-Mobile beats. Busy week for earnings, including the A+ list (Apple, Alphabet, Amazon) plus car companies (new and old). Goldman cuts outlook for S&P earnings. Support holds for now.

Financial Review by Sinclair Noe for 10-24-2016

DOW + 77 = 18,223
SPX + 10 =  2151
NAS + 52 = 5309
10 Y + .02 = 1.76%
OIL – .36 = 50.49
GOLD – 1.30 = 1265.40
Merger Monday is alive and well. AT&T announced it will acquire Time Warner for $85 billion; or at least it will try. The biggest deal in the world this year will give AT&T control of cable TV channels HBO and CNN, film studio Warner Bros and other media assets. The deal is subject to regulatory approval, and right now it looks like it will face opposition. The Justice Department has the power to reject such a deal if it violates antitrust laws. AT&T said it is unclear if the Federal Communications Commission will also have jurisdiction to review the deal. Remember that regulators blocked Comcast’s planned acquisition of Time Warner.


AT&T has described the deal as a “vertical merger” because there is no overlap between the two companies and hopes that such a tie-up will get the regulatory green light by the end of 2017. The reason we are seeing this deal now is because in the next couple of years, wireless will be changing over to 5G, the next generation technology which will provide high-speed broadband and television service and allow wireless companies to compete with cable companies.


Toronto-Dominion Bank and TD Ameritrade are buying Scottrade Financial Services for $4 billion in a deal that would combine two of the biggest U.S. discount brokerages. TD Ameritrade, the largest U.S. discount brokerage by trade executions, said it would pay $2.7 billion for Scottrade’s brokerage business. Toronto-Dominion Bank, TD’s largest shareholder, is acquiring Scottrade Bank for $1.3 billion.


Rockwell Collins has struck a deal to buy aircraft interior maker B/E Aerospace for $62 a share in cash and stock. The acquisition, valued at $6.4 billion plus the assumption of $1.9 billion in debt, expands the range of products Rockwell Collins supplies to major commercial and business aircraft and broadens its customer base internationally. The acquisition, which is expected to be completed next spring, allows both companies to sell to each other’s customers and to deploy Rockwell’s capability with onboard connectivity to make internet-enabled seats, galleys, lavatories and other cabin systems that B/E Aerospace provides.


Chinese aviation and shipping conglomerate HNA Group said it would buy a stake of about 25 percent in hotel operator and manager Hilton Worldwide Holdings from biggest shareholder Blackstone Group for $6.5 billion. HNA will buy the stake for $26.25 per share, representing a premium of 14.6 percent to Hilton’s closing price on Friday and valuing the hotel company at about $26 billion.


Genworth Financial, a dominant carrier in U.S. long-term-care insurance, agreed to sell itself for $2.7 billion, to a Chinese investment firm, China Oceanwide Holdings Group. The deal comes as China Oceanwide has been pouring hundreds of millions of dollars into U.S. commercial and residential properties in the past two years. Genworth has struggled since the financial crisis, one of the insurers hardest hit by the bursting of the real-estate bubble and later by ultralow interest rates.


American Midstream Partners LP said it would buy JP Energy Partners LP in an all-stock deal, creating a $2 billion midstream master limited partnership. The combined company will own and operate more than 3,100 miles of gathering and transportation pipelines.


According to S&P Global Market Intelligence, October 2016 currently stands as the third-strongest month ever for US M&A announced deal value. To date, October has seen $279 billion in announced M&A involving US companies, the highest since July 2015. It’s good news for Wall Street banks, which could bring in up to $200 million in fees from advising on the mergers. You add in financing costs and just the AT&T- Time Warner deal could top $400 million.


Iraq doesn’t want to participate in the OPEC freezeIraq, OPEC’s second largest oil producer, says it wants to be exempt from the OPEC production freeze, which is expected to be decided at the November 30 meeting in Vienna, Austria. Comments from Iran’s deputy oil minister, however, helped to push prices higher earlier in the session. He said Tehran would encourage other OPEC members to join an output freeze, adding that $55-$60 a barrel is a fair price to bring stability to the market. All the talk of capping production has managed to push oil above $50 a barrel, but in the past, OPEC has not been able to deliver on holding firm to output cuts.


Credit card giant Visa said its fiscal fourth-quarter results rose 28 percent from a year earlier, as the company processed more payments. The company’s results were also lifted by the recent purchase of Visa Europe. Visa reported net income of $1.9 billion for the period ended Sept. 30, compared with $1.5 billion in the same period a year earlier.


T-Mobile reported a better-than-expected quarterly profit and raised its forecast for customer additions for the year as heavy discounting helped attract subscribers. T-Mobile said it benefited from the launch of the iPhone 7 in the quarter and an increase in branded prepaid customer migrations to postpaid plans.


Earnings season is in full swing with Apple, Alphabet,, Exxon Mobil and Caterpillar among big names scheduled to announce third quarter results this week.


Apple reports earnings on Tuesday and we’ll see if the new iPhone 7 sales live up to expectations; on Thursday, Apple will unveil a new line of Mac computers, which are long overdue for an update and have seen only sluggish sales in recent quarters. And just to drive home the importance of constant updating and reinvention – yesterday the iPod turned 15 years old.


Google has been given an extra week to respond to European antitrust charges that some of the company’s advertising products hampered consumer choice. Google denies any wrongdoing. But it represents the first of three separate responses that Google must give to European competition authorities by early November to allegations that some of its services and products, including the popular Android smartphone operating system, hindered rivals and limited competition in Europe. Alphabet reports quarterly earnings on Thursday.


Tesla reports third quarter earnings on Wednesday – more accurately, Tesla will report a loss. Tesla previously disclosed that deliveries rose 70 percent to 24,500 cars in the July-to-September period. But a loss is likely because the company is spending heavily to introduce a new car, the Model 3, and to start up its gigantic Gigafactory in Nevada, where it will produce batteries. We’ll also hear from the major carmakers; GM, Ford, and Fiat Chrysler report this week. Today, Consumer Reports said General Motors’ Buick has become the first domestic car brand in more than 30 years to be among the top three most reliable brands; trailing Toyota and Lexus.


Goldman Sachs analysts have cut their outlook for S&P 500 earnings through 2018. They now see earnings per share climbing 5% to $105 (from $110) in 2016, 10% to $116 in 2017 (from $123), and 5% to $122 (from $130) in 2018. The analysts blame disappointing earnings growth from the financials and information technology sectors. Furthermore, they blame the impact of low interest rates on telecom sector pension liabilities.


This week we will also see third quarter reports from most of the major Euro-banks, including BNP Paribas, Santander, UBS, Barclays, Lloyd’s, the Royal Bank of Scotland, and Deutsche Bank. We’ll keep an eye on Deutsche Bank for any update on its negotiations with the Justice Department, which has proposed a $14 billion fine for the bank’s underwriting of mortgage backed securities during the financial crisis.


And as we work our way through earnings the market is holding up relatively well. We’ve talked about a strong level of support for the S&P 500 at the 2120 level, which represents both the highs from June and the lows from September. So far, 2120 is holding up quite well, and we are consolidating in October, a month that can be quite scary. Although right now, the scariest event on the horizon is the election in November.


This Friday we get the first estimate of third quarter GDP growth; look for 2.5% growth. Last month, the Commerce Department reported that GDP grew 1.4 percent in the second quarter of 2016, up from 0.8 percent in the first quarter of 2016.


James Bullard, president of the Federal Reserve Bank of St. Louis and a voting member of the Federal Open Market Committee says low interest rates will likely be the norm during the next two to three years. Bullard’s comments come one month after he voted against hiking the federal funds rate. The Fed continues to grapple with deciding when it will increase rates from the current target range of 0.25 to 0.50 percent. The last time the Fed raised rates was in December 2015, when it did so for the first time in nine years. Fed watchers expect the next increase to come by year end. Fed fund futures show implied odds of nearly 70 percent for a December rate hike.


And while Bullard seems to indicate rates can be nudged slowly higher, Chicago Fed President Charles Evans said today that the Fed needs to “demonstrate commitment to achieving the inflation target sustainably, symmetrically, and sooner rather than later.” This might require undershooting the unemployment rate and overshooting the 2% inflation target. Even so, Evans expects 3 rate hikes by the end of 2017.


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