Apr 6-10: The Mania Continues; Effects of Regulation

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Andrew Gould of BP and Jorma Ollila of Shell shake hands during a news conference announcing their companies' merger. Shell is offering $70 billion for BP in the biggest deal so far in 2015 and would create the world's largest independent producer of liquified natural gas (LNG).

$3,700,000,000,000

Highest annual M&A deal volume on record, which occurred in 2007. So far, this year is on pace to surpass the record

NOTE: If paywalled, search article title and access from Google

M&A:

Rising Optimism Fuels Deal Rebound, WSJ

"The two latest megadeals involving Mylan and Shell underscore the forces behind the M&A surge. Boardroom confidence is a crucial ingredient for deal-making and has bounced back after the economic crisis; rock-bottom interest rates make it cheap for companies to borrow money for takeover; and the dollar's strength is suggesting to some that deals in Europe denominated in a comparatively-cheap currency are increasingly appealing."

HIGH-FREQUENCY TRADING:

Virtu restarts IPO with plan to raise up to $314 million, Bloomberg

Virtu Financial had its IPO shelved earlier in 2014 amid the furor against high-frequency traders triggered by publication of Michael Lewis' Flash Boys. Now, shares are scheduled to price on April 15 at around $17 to $19 apiece on 16.5 million shares. At the high end of the price range, the company may be worth as much as $2.5 billion.

SHADOW BANKING:

Post-crisis risk casts a darkening shadow, WSJ

Shadow banking, an umbrella term for institutions that provide credit without being subject to the same reserve requirements and regulations of other banks, has risen in popularity since the financial crisis. The situation is eerily similar to before the financial crisis, when lightly regulated lenders became a key feature of risky lending practices that led to economic overextension and collapse.

INTERNATIONAL:

Swiss, Mexican bond deals represent milestones for debt, WSJ

Two unprecedented events occurred last week: Switzerland issued bonds that buyers are actually paying to hold, and Mexico issued bonds maturing in 100 years--paying a yield of 4.2%. The two events are being seen as harbingers of an era of extremely easy money that has a lot of assumptions of capital markets being turned on their heads.

MONEY MARKETS:

Repo market sees a lending shift as rules bite, WSJ
Just as is happening in other forms of credit provision, alternative lenders are stepping into the $2.6 trillion repo market, which provides short-term, "overnight" loans and liquidity to companies. Lendees are turning from traditional lenders to alternatives like pension funds and other money managers, who are disintermediating from banks and issuing loans directly to a new stream of clients.

Vocabulary & People:

• repo
• shadow banking
• beige book
• consumer price index

Calendar:

• Mo Apr 13: Treasury budget; PBY, PSG
• Tu Apr 14: PPI, Retail sales; CSX, INTC
• We Apr 15: Industrial production, Beige book; BAC, DAL, NFLX
• Th Apr 16: Housing starts, Jobless claims; AMD, AXP, GS, SLB
• Fr Apr 17: CPI, Consumeer sentiment; GE, HON, SYF

Predictions from last week: 1/3 All-Time: 20/39

• Chinese yuan strengthens: WRONG
• AA misses: WRONG
• Another candidate: CORRECT

Weekly Predictions: gathered at conclusion of weekly meeting

1. Higher consumer sentiment
2. NFLX beats estimates on higher subscriptions
3. GS beats estimates on trading revenue

Mar 30-Apr 3: More Merger Mania

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US courier service FedEx agreed to by Holland-based TNT for $4.8 billion, signaling their interest in competing with UPS in a market that the Brown Uniform Guys previously dominated. A merger between UPS and TNT was actually blocked in 2013 by antitrust regulators. FedEx is a more acceptable partner as it is stronger in air-based business, complimentary to TNT's core business on the ground.

269,000,000

The number of cases of Bud Light sold in the United States in 2012. Revenues totaled $4.45 billion, making it America's most popular beer by volume. The next most popular beer was a tie between Budweiser ("Bud Heavy") and Coors Light,each selling 102 million cases. Happy National Beer Day!

NOTE: If paywalled, search article title and access from Google

FedEx to buy TNT Express for $4.8B, WSJ

"FedEx already has a sizable air-delivery business in Europe, but it lags in ground deliveries. Executives declare that the deal is 'much better and much simpler' than the doomed merger between UPS and TNT in 2013."

Virtu restarts IPO with plan to raise up to $314 million, Bloomberg

Virtu Financial had its IPO shelved earlier in 2014 amid the furor against high-frequency traders triggered by publication of Michael Lewis' Flash Boys. Now, shares are scheduled to price on April 15 at around $17 to $19 apiece on 16.5 million shares. At the high end of the price range, the compay may be worth as much as $2.5 billion.

How the Vise on US Wages Tightened, WSJ op-ed

"US automakers used to manufacture nearly all of the 15,000 parts necessary to make a car. Today, they purchase around 70% of the value-added from independent manufacturers. A battle is being staged in Washington around whether an open US market, or some kind of alternative, is the best way to bring US workers in high-paying manufacturing jobs the wage increases they've been waiting for."

Want to Reduce Inequality? Consult China, India, and Vietnam, WSJ op-ed

"The past three decades have seen a dramatic improvement in the situation for the world's poor, most noticeably in China and India. This change is the result of a move by these countries and others to the markets from a government-managed system."

BlackRock to close or combine some money-market funds, Reuters via Yahoo Finance
"BlackRock, the world's largest money manager, is considering changing its funds lineup to comply with new SEC regulations issued in July. The reforms will require "prime" money funds used by institutional investors to float their values, instead of maintaining a stable value of $1 per share. The goal is prevent investors from getting spooked by the fund breaking the buck, where net asset value falls below $1 per share."

Vocabulary & People:

• breaking the buck
• BlackRock
• money market funds
• liquid alternatives
• Michael Lewis

Calendar:

• Mo Apr 6: Bill Dudley speaks, ISM non-mfg index
• Tu Apr 7: Gallup US ECI, JOLTS
• We Apr 8: Mortgage apps, FOMC minutes; AA, BBBY, FDO, WDFC
• Th Apr 9: Jobless claims, Wholesale trade; WBA
• Fr Apr 10: Import export prices, Treasury budget

Predictions from last week: 1/3 All-Time: 19/36

• Increasing trade imbalance: WRONG
• Rising consumer confidence: CORRECT
• Strong employment numbers: WRONG

Weekly Predictions: gathered at conclusion of weekly meeting

1. Chinese yuan strengthens against dollar
2. AA misses earnings
3. Another presidential candidate declares

Participants: R. Niu, C. Cooper, J. LaSala, S. Ballantyne, K. Meenan

Mar 23-27: Merger mania

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Products from Kraft Foods, above, and Heinz sauces, below. With price being kept down as Kraft executives fight lower margins and flat sales amid changing tastes of consumers, 3G Capital and Berkshire Hathaway saw value to unlock in combining the two historic companies.

$28 billion

Approximate annual sales of a merged Heinz and Kraft foods company. With a market valuation north of $80 billion, the new company will be one of the largest standalone food companies in the world. Eight brands in the combined company have +$1 billion in sales, while 5 others have between $500 million and $1 billion in sales.

NOTE: If paywalled, search article title and access from Google

Kraft and Heinz to merge in deal backed by Buffett and 3G Capital, NYT Dealbook

Jorge Paulo Lemann and Warren Buffett have come together on yet another food & beverage deal, creating one of the world's biggest F&B companies with the merger of Kraft and Heinz--this year's largest merger so far. With complimentary product lines--imagine Heinz mustard and Oscar Meyer hot dogs--analysts expect the company to use Heinz's global footprint to expand Kraft sales beyond North America.

Dow Chemical (DOW) to separate chlor-alkali unit, merge it with Olin (OLN), Street Insider

Divesting itself of a chlor-alkali business that many analysts suggest was making performance track very closely with that of oil's in recent months, Dow is streamlining itself from a strategic and tax standpoint while Olin projects being able to unlock $200 million in synergies from the merger in the next 36 months.

Oil prices rise as dollar weakens, WSJ

An industry newsletter attributed 87% of the move in US oil prices since Thanksgiving to the move in the dollar, noting "the Federal Reserve will have as much of a role as Tehran and Riyadh" in determining oil prices. Oil is traded in dollars, so a drop in the dollar's value makes oil less expensive to buyers using foreign currencies.

Bank of China posts slower profit growth amid rising bad loans, WSJ
Bank of China's net profit rose 8% in 2014, to 169 billion yuan ($27 billion), thanks to higher interest and fee income. As compared to global growth numbers, these relatively-robust metrics represent the slowest annual growth BOC has experienced since going public in 2006. China Agricultural Bank also listed its lowest numbers since going public in 2010. Allowances for nonperforming loans was 187% of total loan losses in 2014, down from 229% a year earlier.

Google hies Morgan Stanley's Ruth Porat as new CFO, TechCrunch
Behind David Viniar at Goldman Sachs, Ruth Porat is one of the longest-standing big bank executives remaining at the same firm, having worked at MS continuously since 1987. The former head of Technology Investment Banking and California native's defection to the tech ranks is yet another suggestion of the rising significance of the technology sector in the modern US economy.

Vocabulary & People:

• NPLs
• CFO
• David Viniar
• Ruth Porat
• Jorge Paolo Lemann

Calendar:

• Mo Mar 30: Pending home sales, Fed mfg survey
• Tu Mar 31: S&P Case-Shiller EPI, Consumer confidence
• We Apr 1: ADP employment, PMI Mfg, Construction spending
• Th Apr 2: International trade, Jobless claims
• Fr Apr 3: Employment situation

Predictions from last week: 1/3 All-Time: 18/33

• Lululemon misses: WRONG
• Another president candidate: WRONG
• Consumer confidence up: CORRECT

Weekly Predictions: gathered at conclusion of weekly meeting

1. Increasing trade imbalance
2. Rising consumer confidence
3. Strong employment numbers Friday

Participants: J. O'Brien, R. Niu, S. Shah, K. Meenan

Mar 16-20: Fedspeak reigns

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Fed chair Janet Yellen spoke last week, removing the "patience" wording from FOMC minutes, but remaining cagey about specifics of when the Fed might raise the target rate. Markets interpreted the report bullishly, sending stocks skyrocketing.

5132.52

Highest-ever level of the Nasdaq, set on March 10, 2000 during the "Tech Bubble." The tech-heavy index has seen a tremendous run-up recently to within several percent of its all-time high, attributed to lower borrowing rates and the renaissance of the technology sector in the US.

Some incredible facts about the Nasdaq's latest run, Yahoo Finance

Despite having a down day on Wednesday, the Nasdaq Composite is still thisclose to breaking 5,000 and ever nearer to breaking its Tech Bubble record

Dollar bulls take it on the chin as Yellen says Fed won't rush to raise rates, Forbes

If there's been one bet on Wall Street that seems common of late, its putting money on continued strength of the US dollar. That presumption got turned upside down last Wednesday, when the Fed issued its latest policy statement and tempered expectations about US growth.

Starbuck's CEO Howard Schultz says Race Together "the right thing to do", CNN Money
Starbuck's CEO is not one to back down about an issue he cares about and last Wednesday he staunchly defended the company's much lampooned effort to improve race relations.

Problem: the bond "conundrum" is back, CNN Money
The 10-year Treasury started last week at 2.11% and tumbled to 1.94% during Janet Yellen's comments, as bond prices (inversely related to yields) we pushed up. But as the Fed move towards raising rates, bond yields should be moving up. What gives?

Vocabulary & People:

• derivatives
• greenback
• Janet Yellen
• Jan Hatzuis
• Jeffrey Gundlach
• CPI

Calendar: 

• M 3/23: Chicago Fed, Existing home sales
• T 3/24: CPI, PMI Manufacturing, New home sales, Richmond Fed
• W 3/25: Durable goods orders, EIA petroleum status
• T 3/26: Jobless claims, PMI services, Kansas City Fed
• F 3/27: GDP, Consumer sentiment

Predictions from last week: 2/3 All-Time: 17/30

• "Patient" removed: CORRECT
• Euro slide against dollar: WRONG
• Oil back above $45: CORRECT

Weekly Predictions:

1. Lululemon misses earnings
2. Another US presidential candidate declares
3. Consumer sentiment positive

Mar 9-13: Happy St. Patrick's Day

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Calendar: 

• Mo Mar 16: Industrial production, Housing market index
• Tu Mar 17: FOMC meeting begins, Housing starts
• We Mar 18: FOMC meeting announcement, forecasts, chair conference
• Th Mar 19: Jobless claims, Leading indicators
• Fr Mar 20: Atlanta Fed business inflation

Predictions from last week: 0/3 All-Time: 15/27

• Stock market drops: WRONG
• AAPL shares up: WRONG
• Dollar General beats: WRONG

Weekly Predictions: gathered at conclusion of weekly meeting

1. Yellen removes "patient" wording from Fed report
2. Euro continues slide against dollar
3. Oil moves back above $45

Mar 2-6: Bulls and bonds

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The Federal Reserve (whose headquarters, called the Eccles Building in Washington DC, is pictured here) just finished its annual stress tests designed to assess the strength of the US banking system. The Fed was founded in 1913 after the Panic of 1907 demonstrated a need for a government financial entity to preserve market liquidity. The Fed has 3 primary goals: maximize employment, stabilize prices, and and moderate long-term interest rates.

676

The value of the S&P 500 index exactly 6 years ago--the lowest level that it hit during the bear market associated with the financial crisis. The index has rebounded by several hundred percent since then, hitting record highs over the past several trading sessions.

The bull market is 6 years old, now what? CNN Money

After hitting a bottom of 676 exactly 6 years ago this Monday, the S&P has returned more than 200% amid the 4th-longest bull market in history. Two market analysts made names for themselves by "calling the bottom," citing that the market losses in 2009 exceeded even the market turmoil from the 1929 market crash. Soon afterwards, the central government and Federal Reserve took emphatic steps to reassure investors, triggering the beginning of the bull market.

Fed stress tests find banks adequately capitalized, WSJ

The Fed's annual stress test of financial health confirmed that all 31 banks tested had resources available to continue lending in the midst of economic shock. This is the first time all 31 banks passed, although it noted Goldman Sachs and Zions Bancorp had certain capital ratios that approached minimum required levels. Banks who pass the test are now permitted to return value to shareholders in the form of dividends and share buybacks.

Faith falters in S&P 500 as $17 billion outflow precedes selloff, Bloomberg
Despite hitting 50 record highs in the past year, investors in 2015 have pulled $17 billion from the S&P index and devoted that money to investments in fixed income and bonds. That change in investment represents the biggest quarterly divergence since 2000. The movement of funds is being attributed to talks that, following continued strong employment numbers, the Federal Reserve will begin raising rates later this summer.



European stimulus sparks bond blitz, WSJ
With rates in Europe being kept low and even negative as the economy continues to recover, some European firms are taking advantage by issuing bonds paying zero interest. The purchase of zero interest bonds indicates that investors believe capital gains--an appreciation in the price of the bond itself--will provide gains. American companies such as Berkshire Hathaway and Coca Cola have issued $26 billion of euro bonds so far this year.

Foreign takeovers see US losing tax revenue, WSJ
Recent government outrage pushed regulators to limit "tax inversions," when US companies purchased companies abroad in order to capture reduced tax in foreign countries. But the law doesn't regulate the opposite: foreign countries purchasing US companies. For example, instead of acting as a predator, Salix Pharmaceuticals has chosen to be the prey in a recent deal to be acquired by Valeant, a competing pharmaceutical firm.

Vocabulary:

• market bottom
• tax inversion
• stress test
• zero coupon bonds
• JOLTS
• bear market

Calendar Mar 9-13

• Mn Mar 9: Labor market conditions; URBN
• Tu Mar 10: NFIB small business index, JOLTS; BKS, HABT
• We Mar 11: EIA petroleum status, Treasury budget; BOX, KKD, SHAK
• Th Mar 12: Retail sales, Import prices, Inventories; DG, TKMR, MTN
• Fr Mar 13: PPI, Consumer sentiment

Predictions from last week: 2/3 All-Time: 15/24

• Costco beats estimates: CORRECT
• Trade gap widens: WRONG
• Caesars Entertainment misses: CORRECT

Weekly Predictions:

1. Stock market drops as Fed signals summertime rate hike
2. Apple shares spike on enthusiasm for Apple Watch
3. Dollar General (DG) beats earnings forecast

Feb 23-27: Riding the bull

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After flip flopping for months on  whether or not additional internet regulation will hamper or speed innovation, regulators last week decided to manage "equal access" to the internet, acknowledging the importance of a platform previously thought of as a frontier territory but which has now become part of the fabric of the modern US economy.

34%

Netflix's share of overall internet downloads during peak evening times in May 2014, up 32% from 2013.

Top News (click on article titles for links; if paywalled, copy article title into Google)

FCC adopts net neutrality rules to ban internet discrimination, Yahoo Finance

After months of debate, on Thursday the FCC moved forward with plans to regulate the internet as a utility much in the same way other telecommunications networks are now controlled. That means Netflix and Google won't have to pay extra fees to assure streaming video quality, but it also means they may be susceptible to connection speed slowdowns as more space is reserved for competitors.

Stock markets all around the world break records, CNN Money
Investors, made giddy by central banks' easing of lending rates, have driven stock market indices worldwide to some of their highest levels since the recession, with some indices hitting all-time highs. The Dow Jones average broke 18,200 for the first time. However, Nobel Prize winner Robert Schiller warns that price/earnings multiples are now around the same level they were before the bubble burst in 2008.

Janet Yellen puts Fed on path to lift rates, WSJ
Citing rates of employment, production, and spending improving at a "solid rate," the Fed plans "at some point" to consider raising the federal funds rate. The cost of credit is considered extremely important to the economy because it determines the cost of home and auto loans for consumers (who constitute around 70% of US GDP) as well as corporate debt for companies, and also plays an important role in valuation.

JP Morgan to start charging big clients fees on some deposits, WSJ
New regulations and low interest rates are pushing bigger banks toward considering charges for larger corporate clients including financial service providers such as hedge funds and PE firms. Retail customers should not be affected by the fees. Traditionally one of banks' most attractive and stable forms of funding, it has become increasingly expensive to maintain profits on deposits amidst newly mandated capital and liquidity requirements.

RadioShack to sell name with $20 million opening bid, CNN Money
Radioshack's largest shareholder agreed to bid $20 million for the consumer electronics brand name in court last Wednesday. After being in business for 94 years, the chain is now liquidating its brand and store leases through bankruptcy proceedings. Despite a financial downtown, RadioShack's name recognition could help save another company a tremendous amount of cost in new branding.

Vocabulary (click to open link)

• FCC
• P/E 10 (Schiller P/E) ratio
• Federal funds rate
• Liquidity
• Private equity

Calendar:

• Mon Mar 2: Personal income and outlays, PMI Mftg, ISM Mftg; CZR, NTRI, PANW, STNG
• Tue Mar 3: Motor vehicle sales, Janet Yellen speaks; AMBA, AZO, BCS, BBY, JD, KATE, TIVO
• Wed Mar 4: ADP employment, ISM Non-mftg, EIA petrol; ANF, AEO, BREW, PETM, TST
• Thu Mar 5: Jobless claims, Productivity, Factory orders; CSIQ, COST, DMND, KR
• Fri Mar 6: Employment situation, International trade; SPLS

Predictions from last week: 1 / 3 All-Time: 13 / 21

• Yellen keeps "patience" wording: CORRECT
• CPI comes in at 0.0%: WRONG
• GDP annualized rate of 3.5%: WRONG

Weekly Predictions:

1. Costco beats estimates after rejecting AmEx's bid
2. Trade gap continues to widen in face of strengthening dollar
3. Caesars misses estimates amidst weakness in China