Financial Review

The Question

Financial Review by Sinclair Noe for 01-05-2016

 

DOW + 9 = 17,158
SPX + 4 = 2016
NAS – 11 = 4891
10 Y un= 2.25%
OIL – .87 = 35.89
GOLD + 3.10 = 1078.50
The Dow Jones Industrial Average had its greatest opening-day loss since 2008 yesterday. Today might be considered a tepid recovery, or maybe just a reminder that the world did not end with the change of the calendar.

 

China moved to shore up shaky investor sentiment today following an equities selloff that rocked global financial markets on revived concerns about the country’s economic slowdown. China’s CSI 300 Index initially dropped 2%, but a late session rally erased losses and the index closed 0.3 percent. State-controlled funds bought equities and the securities regulator signaled that a selling ban for major investors which was due to expire this week may be extended. The People’s Bank of China pumped nearly $20 billion into the economy, the largest amount since September. The yuan rebounded from a five-year low.  The Nikkei 225-share index in Japan finished the day 0.4 percent lower. The Hang Seng Index in Hong Kong closed 0.7 percent down. European stocks rose, with the FTSE 100 in London up 0.7 percent for the day. The Euro Stoxx 50 index rose 0.4 percent.

 

Kuwait recalled its ambassador from Iran. The announcement is the latest in an unfolding regional row that escalated with Saudi Arabia’s execution of a Shiite cleric over the weekend. Saudi Arabia’s embassy in Tehran was ransacked and set on fire Saturday. Saudi Arabia broke off diplomatic ties with Iran in response, followed on Monday by its allies Bahrain and Sudan, and a diplomatic downgrade by the United Arab Emirates. The Strait of Hormuz, which connects the Persian Gulf with the Arabian Sea, carries about 20% of the world’s petroleum, and about 35% of the petroleum traded by sea, making it a highly important strategic location. At almost any other time, an escalating diplomatic conflict between OPEC members Iran and Saudi Arabia would mean a spike in oil prices, even if temporary, but this latest problem saw prices dip slightly yesterday, and today, prices dropped to a 2-week low. That should give us some indication about the strength of the downtrend in oil.

 

President Obama announced executive actions on gun control today, in the wake of mass shootings across the country. The executive action will require all gun dealers to be licensed, including those who sell online and at gun shows, clamping down on dealers who pass themselves off as “hobbyists” or “collectors.” It closes a loophole that allows people to acquire guns through “gun trusts” without background checks, and increases the responsibility of gun dealers for reporting missing guns. It includes a plan to hire more staff to process background checks and enforce gun laws, and allocates $500 million to mental-health care.

 

Puerto Rico is bracing for lawsuits following the island’s second default in the past five months. Governor Alejandro Garcia Padilla said, “Every dollar used to pay lawyers will be a dollar not available to pay creditors.” The U.S. territory was able to pay the majority of the nearly $1 billion due to bondholders on Monday, but a series of transfers from revenue bonds to general obligation bonds was not enough; Puerto Rico defaulted on two of the 13 bonds that had scheduled payments. Because of the New Year’s Day holiday, all of the due dates were extended until the close of business on Monday.

 

CoreLogic reports US home prices rose 0.5% in November, representing a 6.3% year-over-year gain. Arizona posted a 5.9% price gain in the last 12 months.

 

Automakers are reporting a record year for sales. New vehicle sales in 2015 totaled 17.47 million, topping the record setting sales of 2000.  Fiat Chrysler reported its 69th straight monthly gain in sales; that was a record for Fiat Chrysler, but it missed analysts’ estimates. Nissan achieved its best-ever December in the US with strong sales of trucks, minivans and sports utility vehicles, including its premium Infiniti brand. For the full year, Fiat-Chrysler reported 2.2 million vehicles sold, up 7% from 2014. Nissan, with 1.35 million, was also up 7%. General Motors sold 3.1 million vehicles, up 5%. Ford, with 2.6 million, was also up 5%; sales of Ford’s F-Series pickups jumped 15 percent as the trucks remained the top-selling vehicle line in America for the 34th consecutive year. Toyota, with 2.5 million vehicles sold, was up 5% as well. And Honda posted 1.58 million vehicles sold, an increase of 3%.

 

Early news from the Consumer Electronic Show: Nvidia has revealed a new lunchbox-size super-computer for self-driving cars, saying Volvo will be the device’s first customer. The Drive PX 2 has computing power equivalent to 150 MacBook Pro computers, and can deliver up to 24 trillion “deep learning” operations per second – allowing the computer to use artificial intelligence to program itself to recognize driving situations. Partnerships between automakers and Silicon Valley on self-driving technologies appear to be taking center stage at the annual tech conference.

 

The coolest news out of the CES might be the debut of a new prototype electric car from Faraday; it features 1,000 horsepower and goes from zero to 60 in 3 seconds. The vehicle looks like a cross between a Formula One race car and the Batmobile. Faraday officials said they’ll sell a vehicle in a “couple of years’ time,” and are a few weeks from breaking ground on a 3 million-square-foot factory in Nevada. The Batmobile prototype is not what they will eventually sell; they will probably come out with a more practical sedan as its first offering.

 

Facebook’s Oculus will release its virtual reality Rift headset to consumers for pre-order on Wednesday but one big question remains: how much will it cost? In a blog post on Monday, Oculus revealed very little except that pre-orders will open from 8 a.m. Pacific time and that each headset will come with two free games. Last year, Oculus executives hinted that the Rift headset and a computer needed to run it would cost no more than $1,500 together.

 

New York City will begin replacing thousands of pay phones this month with free Wi-Fi hot spots that will sit atop a 9-foot tall box featuring electronic advertising screens and an Android tablet that can be used to place free phone calls. The $200 million project, called LinkNYC, is being run by CityBridge, a joint venture between three tech companies: Qualcomm, CIVIQ Smartscapes, and Intersection – which has backing from Alphabet.

 

2015 was a record setting year for mergers and acquisitions. Buyers spent $3.8 trillion, the highest amount ever, surpassing the previous record set in 2007, before the financial crisis. The fourth quarter was the busiest of last year, with $1.3 trillion in transactions announced, passing the trillion-dollar mark for the first time since the second quarter of 2007. And the calendar for 2016 looks busy, as companies will try to wrap up previously announced deals; including ABInBev and SAB Miller, Anthem and Cigna, Aetna and Humana, Shire and Baxalta, plus Halliburton and Baker Hughes; to name just a few of the bigger deals.

 

The FCC is delaying its informal deadline by 15 days to review the proposed $56 billion merger of rivals Charter Communications and Time Warner Cable. The break will give the agency more time to assess the impact of the proposed deal on TWC’s regional sports networks and Charter’s residential pricing/packaging.

 

Fairchild Semiconductor has received a revised takeover proposal from a group led by China Resources Holdings and Hua Capital Management. The improved bid would value the company’s equity at $2.46 billion. Phoenix-based ON Semiconductor in November agreed to buy Fairchild Semiconductor for $2.4 billion to bolster its business of making power-management chips. Fairchild said this morning that its board still supports the deal with ON Semiconductor and is not making any recommendation related to the revised proposal, but they did acknowledge the offer from the Chinese investor group would constitute a “superior proposal”.

 

Meanwhile, Chandler-based Microchip Technology is planning to submit a binding offer for Atmel by early next week, challenging the latter’s planned merger with Dialog Semiconductor. Reuters reported last month that Microchip was the undisclosed bidder that made a $3.8 billion unsolicited offer for Atmel. Atmel said on Dec. 11 it had started negotiations with an unidentified party that made a $9 per share cash offer that could potentially be deemed more valuable than a cash-and-stock acquisition proposal by Dialog it accepted in September.

 

More tech/media deals: Dell is close to selling its Perot Systems unit to French IT consulting firm Atos for $4 billion. Activision Blizzard confirmed its acquisition of Major League Gaming, but did not disclose financial details. China’s Dalian Wanda Group has sealed a deal to take a majority stake in U.S. movie studio Legendary Entertainment that values the company at $3-$4 billion. Harman Industries, best known for JBL and Harman Kardon audio gear said it agreed to buy automotive cybersecurity company TowerSec. Terms of the deal were not disclosed.

 

If all this M&A activity has you thinking that stocks are a little overvalued, you might be right. Citigroup today downgraded US stocks to underweight. They didn’t call for a definitive end to the US bull market, but they think there might be better opportunities elsewhere. Citi assigned an underweight ranking to the US, the UK, and Australia; specifically the sectors of consumer staples, utilities, and industrials. Citi assigned an overweight ranking to Europe (excluding the UK) and Japan; specifically to the sectors of IT, financials, and health care.

 

And finally, we answer the most pressing question of the day: the Powerball drawing is at 10:59 PM tomorrow (that’s 8:59 PM Arizona time). Ticket sales usually close down about an hour before the drawing. The jackpot is expected to top $450 million. The odds of winning are 1 in about 292-million. If you buy 2 tickets, your odds are still about 1 in 292-million.

 

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