Financial Review by Sinclair Noe for 11-19-2015
DOW – 4 = 17,732
SPX – 2 = 2081
NAS – 1 = 5073
10 YR YLD – .02 = 2.25%
OIL – .24 = 40.51
GOLD + 11.30 = 1082.30
SILV + .04 = 14.32
The biggest rally in stocks in 4 weeks fizzled today. The S&P is up 2.9% so far this week. The S&P 500 has surged almost 12% from its August lows, including an 8.3% gain in October. Treasuries rose and the dollar fell. The MSCI Emerging Markets Index rallied 1.9%, heading toward the biggest weekly gain since the period ended Oct. 9. Equity gauges in South Korea, India and South Africa jumped more than 1%. Oil touched the lowest level in almost three months.
The number of Americans filing for unemployment benefits fell last week. Initial claims for state unemployment benefits slipped 5,000 to a seasonally adjusted 271,000 for the week ended Nov. 14. Claims have now held below the 300,000 threshold for 37consecutive weeks, the longest stretch in years, and are not too far from levels last seen in the early 1970s. Claims below this level are usually associated with a healthy jobs market.
Other data showed a slight pick-up in factory activity in the mid-Atlantic region in November after two straight months of declines. In a separate report, the Philadelphia Federal Reserve said its general activity index rose to 1.9 this month from -4.5 in October. It was the first positive reading in three months.
Arizona gained a net 33,800 jobs in October, dropping Arizona’s unemployment rate to 6.1% from 6.3%. Even so, the state remains well behind the nation’s 5% unemployment rate. In October, Phoenix had 1.9 million workers, about 3,000 fewer than it had in the same month eight years earlier.
Rebuilding the US energy industry to substantially reduce reliance on carbon-based fuels may result in a net gain of 2 million jobs by 2050 while increasing disposable household income, according to a new study sponsored by a nonprofit that advocates clean energy. The report found that a large-scale shift to renewable sources for generating electricity could increase U.S. employment by 1 million jobs by 2030 and 2 million by 2050, even after accounting for job losses related to fossil fuels. The transition would also provide between $300 and $650 in additional disposable income per household annually in 2050. A majority of the 2 million new jobs would be in the construction, utility and manufacturing industries.
Two IPOs came to market today: Square and Match. Both IPOs were underpriced, although the market will probably adjust in time. Square raised less than it had sought in its initial public offering, selling 27 million shares for $9 each, totaling $243 million. The price realized is well below the offer price of $11 to $13 a share and puts the company’s market value at about $2.9 billion, less than half the $6 billion valuation it had in its latest financing. In trading, the price popped to a high of $14.78. Match Group, the owner of online-dating services Tinder, Match and OkCupid, priced its shares in its IPO at the bottom end of a $12 to $14 per share offering. The sale gives the company a market value of $2.9 billion. The price jumped as much as 24% in the first day of trading, valuing the company at $3.57 billion.
The U.S.’s biggest health insurer is considering pulling out of Obamacare, a month after saying it would expand its presence in the program. UnitedHealth Group is scaling back marketing efforts for plans it’s selling this year under the Affordable Care Act, and may quit the market entirely in 2017, because the business has proven to be more costly than expected. It’s an abrupt shift from October, when the health insurer said it was planning to sell coverage in 11 new markets next year, bringing its total to 34. The company also cut its 2015 earnings forecast.
MetLife, the largest U.S. life insurer, said the Financial Industry Regulatory Authority’s staff has indicated the agency will seek a “significant fine” from the company’s broker-dealer unit as part of a probe into possible violations tied to variable annuities. MetLife said in its quarterly regulatory filing that the company is cooperating in this investigation. MetLife said in the filing that the probe focuses on potential violations “regarding alleged misrepresentations, suitability, and supervision in connection with sales and replacements of variable annuities and certain riders on such annuities.”
Wall Street’s private stock markets would have to reveal whether they favor any particular users including high-frequency traders under a proposal approved Wednesday by the Securities and Exchange Commission. Many of the new disclosure requirements sought by the SEC mirror those currently reserved for public markets such as The New York Stock Exchange. The regulatory effort follows a series of enforcement actions in which Investment Technology Group and UBS Group paid tens of millions of dollars to settle allegations they misled investors about how their dark pools worked. The proposal would require dark pool operators to make a new public filing that spells out their conflicts of interest, including whether an affiliate trades in the dark pool. If the dark pool creates advantages for any particular users, it would have to reveal that in the filing.
Japanese exports fell for the first time in more than a year in October. Exports slumped 2.1% last month, while imports fell 13.4%, hit by soft demand in China and other Asian economies. Despite the weakness, the Bank of Japan held its current pace of monetary stimulus steady at its policy meeting today.
Volkswagen is expected to announce substantial spending cuts on Friday, the day the carmaker must inform U.S. regulators of how it plans to bring its diesel cars into compliance with air-quality standards. VW is facing class action lawsuits around the globe. Volkswagen has also disclosed that 120,000 U.S. owners have signed up for its $1,000 goodwill package – or about one quarter of the 482,000 vehicle owners covered by the emissions scandal.
Meanwhile, Reuters is reporting that federal prosecutors with the Department of Justice are examining whether Bosch, the world’s largest auto supplier, knew or participated in Volkswagen’s years-long efforts to rig diesel emissions tests. Bosch built key components in the diesel engine used in six Volkswagen models and one Audi model. Federal authorities are also investigating how deeply the scheme permeated VW’s hierarchy. The probe is at an early stage and there is no indication that prosecutors have found evidence of wrongdoing at Bosch.
A proposed four-year labor contract between Ford and the United Auto Workers appears to be in trouble after more than half of those voting so far have rejected the pact and only two days remain for workers to cast ballots. Newer UAW members are providing the most resistance over the length of time it takes for younger workers to reach the top wage level. Older workers feel they gave up too much in earlier contracts. Results of voting are due on Saturday.
Pfizer is in advanced talks to buy Allergan for as much as $380 per share in a deal that would value the Botox maker as high as $150 billion. The companies might announce an agreement as soon as Monday. Shares in Ireland-based Allergan had dropped due to plans by the U.S. Treasury Department to deter tax inversions, a major motivation behind Pfizer’s pursuit of the company.
The US Treasury Department will release new “targeted guidance” this week designed to reduce the tax benefits available to US companies that move their tax addresses overseas. Treasury Secretary Jack Lew informed lawmakers of the coming announcement in a letter on Wednesday. The administration previously has said it was examining “earnings stripping,” a practice by which companies load up their US operations with deductions and effectively push profits to low-tax countries. In September 2014, the Treasury Department announced rules against inversions, including limiting companies’ ability to use their offshore profits to finance a deal. That change caused AbbVie to abandon a planned inversion, but other companies moved ahead. The Treasury hasn’t yet issued the formal regulations it promised last year, and congressional efforts to revamp the international tax system have stalled.
The September 2014 announcement included a warning that rules against earnings stripping might be retroactive to inverted companies. That means the Treasury announcement coming later this week could affect companies such as Medtronic and Mylan that finished their inversions in the past 14 months, plus a half dozen more deals that haven’t closed yet.
Cutting Pfizer’s tax rate to 15% would save $2.1 billion in 2017 based on analysts’ estimates. At a multiple of 10, that’s worth just over $20 billion. At the reported deal price, Pfizer would be paying a premium of more than $35 billion for Allergan based on its undisturbed price. If Pfizer can’t get the deal done, it might face a breakup fee of 2 to 3%. And the more companies try to weasel out of taxes through inversions, the greater the likelihood there will be legislative change, which could make any savings short-term or even non-existent.
The attacks in Paris may have finally spurred a brand change for Isis Pharmaceuticals, a drug maker that until now has held on to its name despite the terrorist group’s rise in the Middle East. Named after Isis, the Egyptian goddess associated with good health, the company has had the moniker since its founding 26 years ago. Its ticker symbol is also under review.
The House of Representatives has easily passed a bill to restrict the admission of Iraqi and Syrian refugees to America by requiring extra security procedures. The American Security Against Foreign Enemies Act of 2015, or the American SAFE Act of 2015, would require the secretary of Homeland Security, the head of the FBI and the director of national intelligence to sign off on every individual refugee from Iraq and Syria, affirming he or she is not a threat. It’s unclear whether the Senate will take up the legislation. President Obama has already said he would threaten such a bill, and the perfect venue for a veto would be directly in front of the Statue of Liberty.