Mergers on a Modest Monday
Another day of modest gains on Wall Street but a busy day for mergers.
Financial Review by Sinclair Noe for 03-21-2016
DOW + 21 = 17,623
SPX + 2 = 2051
NAS + 13 = 4808
10 Y + .05 = 1.92%
OIL + .48 = 41.26
GOLD – 11.90 = 1244.10
Another day of modest gains on Wall Street but those modest gains are adding up. The Dow is up 1.1 percent for the year, while the S&P 500 index is up 0.4 percent. The Nasdaq is down about 4 percent. If the stock market rally is going to continue the next couple of months, it will have to do so against an aggressively worsening profit backdrop.
The corporate earnings picture is ugly and getting uglier in a hurry, with S&P 500 companies expected to post an 8.3 percent decline in first-quarter profits from the same period a year ago. While history suggests that earnings season always ends up looking better at the end than it did at the beginning, if the current trend holds up it will be the worst period since the third quarter of 2009. At the beginning of 2016 analysts had been projecting a modest 0.3 percent earnings increase. Just three of the S&P 500’s 10 sectors are projected to show growth for the quarter, with telecommunications expected to climb 13.5 percent as the biggest gainer and discretionary next at 10.3 percent. However, telecom is the smallest S&P 500 sector by market cap, making up just 2.8 percent of the index. Energy is tracking as the worst sector, with a 97 percent decline expected. The category comprises about 7 percent of the index. In addition to this shaping up as the worst quarter since the financial crisis, it also will mark the fourth consecutive quarter of decline, something that hasn’t happened since the fourth quarter of 2008 through the third quarter of 2009.
The National Association of Realtors said existing home sales dropped 7.1 percent to an annual rate of 5.08 million units, the lowest level since November. The median price for a previously owned home increased 4.4 percent to $210,800 from a year ago. At February’s sales pace, it would take 4.4 months to clear the stock of houses on the market, up from 4.0 months in January. Slow wage growth, low confidence numbers, and an underbuilt low-end housing market have all kept renters renting. This report also showed that sales to individual investors, or buyers who intend to flip the home for a profit, accounted for 18% of existing homes sold in February, the highest share since April 2014. Almost two-thirds of these buyers paid cash.
The Chicago Fed’s national activity index fell to negative 0.29 in February from positive 0.41 in January, on a scale where a zero indicates that the economy is expanding at its historical trend rate of growth. A warm weather drop in utility output is a major factor behind a much lower-than-expected reading for the national activity index.
Two Federal Reserve officials said interest-rate increases may be warranted as soon as the central bank’s meeting next month. Federal Reserve Bank of Atlanta President Dennis Lockhart said, “There is sufficient momentum evidenced by the economic data to justify a further step at one of the coming meetings, possibly as early as the meeting scheduled for end of April.” San Francisco Fed chief John Williams said, “All else equal, assuming everything else is basically the same and the data flow continues the way I hope and expect, then April or June would definitely be potential times to have an increase in interest rates.” Investors have reduced bets that the central bank will lift rates next month to 8 percent, compared to 27 percent a week ago, and see a roughly 43 percent probability of a hike in June, according to pricing in interest rate futures.
Emerging from a historic meeting with his Cuban counterpart, President Obama said today that he remained concerned about the communist island’s record on human rights but said the two countries had enough in common to negotiate a slow normalization of relations. Castro said his country remained committed to normalizing relations but reiterated that it could only happen if Congress ends a decades-old economic blockade.
Starwood Hotels and Resorts Worldwide has agreed to a higher $13.6 billion offer from Marriott International. Marriott’s new stock-and-cash offer is worth $79.53 per share. A group led by Anbang had challenged Marriott with an offer of $13.1 billion, or $78 per share in cash. The Marriott-Starwood combination will create the world’s largest hotel chain with top brands including Sheraton, Ritz Carlton and the Autograph Collection. The combined company will have over 5,500 hotels with 1.1 million rooms worldwide. Separately, Starwood Hotels has signed an agreement to manage three prominent hotels in Havana, marking the first time since the 1959 revolution that a U.S. hospitality company has been allowed to operate in Cuba.
Sherwin-Williams has agreed to acquire rival paint company Valspar in an all-cash deal valued at about $9.3 billion, or $11.3 billion including debt. The merged company would have pro forma 2015 revenues of $15.6 billion. Sherwin-Williams will pay $113 a share, or a premium of about 41% to Valspar’s average price for the past 30 days.
IHS Inc., which provides analysis for finance and other industries, agreed to acquire Markit Ltd. in a deal that values the London-based company at about $5.5 billion. Locating the corporate headquarters in the U.K. rather than the U.S., where IHS is based, could enable the companies to reduce their tax rate through an inversion.
Billionaire investor Wilbur Ross has reached a deal to buy Nexeo Solutions, a distributor of plastic resins and chemicals, for roughly $1.6 billion. Nexeo is currently owned by private-equity firm TPG, which purchased the company for nearly $1 billion from U.S. specialty-chemicals producer Ashland. Nexeo, based in Texas, supplies raw materials used in a number of industries including chemical manufacturing, oil and gas and healthcare. It has more than 2,400 employees in North America, Europe and Asia and generated nearly $4 billion in annual sales.
Goldman Sachs received permission to complete its $17 billion acquisition of GE Capital Bank’s U.S. online deposits. The deal, which was approved by the Federal Reserve, had been pending since August 2015. Goldman will control around $95 billion in deposits through its GS Bank unit following the acquisition. The deal is a result of industrial giant General Electric’s effort announced last year to sell off most of its $200 billion GE Capital finance arm.
Valeant Pharmaceuticals Chief Executive Officer Mike Pearson will step down in a board and management shakeup after a series of problems that culminated in a 61 percent drop in the company’s shares last week. The drugmaker issued a statement that it had started a search to replace Pearson, who will serve as CEO until a successor is found. Bill Ackman, the billionaire investor whose Pershing Square Capital Management LP is one of the drugmaker’s biggest investors, will join the board.
The U.S. Supreme Court heard arguments today in a case that will test the limits of the Racketeer Influenced and Corrupt Organizations Act, a case that has serious implications for American corporate liability. More than two dozen European countries have sued RJR Nabisco, now R.J. Reynolds and Nabisco, over an alleged international money laundering scheme that used drug money to buy tobacco. The question for the justices is whether RICO applies to conduct abroad.
The U.S. Supreme Court stepped into the high-profile patent fight between the world’s two fiercest smartphone rivals, Apple and Samsung, agreeing to hear Samsung’s appeal of what it contends were excessive penalties for copying the patented designs of the iPhone. Apple sued in 2011, claiming the South Korean electronics company stole its technology and ripped off the look of the iPhone. Samsung paid Apple more than $548 million in December related to a jury verdict from 2012. It is seeking to pare back the $399 million of that amount that was awarded for infringing on the designs of the iPhone’s rounded-corner front face, bezel and colorful grid of icons, saying they contributed only marginally to a complex device.
The Supreme Court earlier today threw out a lawsuit filed by the states of Nebraska and Oklahoma against their neighbor Colorado over a law approved as a ballot initiative by Colorado voters in 2012 that allows the recreational use of marijuana. Nebraska and Oklahoma claimed that marijuana is being smuggled across their borders and noted that federal law still prohibits the drug.
You may have noticed a growing trend in smart phones; they have been getting bigger and bigger; until today. Apple unveiled a new version of its smallest current iPhone during an event at its Cupertino headquarters today, and it can actually fit in your pocket. The iPhone SE has a 4-inch-screen with a stainless steel finish, and incorporates the faster A9 processor that also runs the larger iPhone 6S handsets. The phone has full support for the Siri voice-enabled digital assistant, a 12-megapixel camera, and includes features found on the larger phones like Apple Pay and Touch ID. In the fiscal first quarter ended in December, iPhone sales rose 0.4% – its slowest rate of growth since Apple introduced the device in 2007. Analysts also forecast sales to fall for the first time in the current quarter. Apple also announced their Apple Watch is now the #1 best-selling smart watch in the world, and they are cutting the price by 5- bucks to $299, because apparently even the best-selling smart watch isn’t selling enough.
Today marks the 10th anniversary of Twitter, the social networking site that brought about hashtagging, condensing thoughts into 140 characters or less, and countless celebrity spats. Investors still have a hard time valuing the company, due to concerns about user retention, product development, revenue turbulence, and management direction. Twitter shares are down almost 60% since the company’s IPO in November 2013.