Oct 5-9: Earnings Season Opens, Debt Dries Up

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Alcoa kicked off the Q3 earnings season with, as many expected, some pretty dismal numbers: for the second quarter in a row, the aluminium manufacturer missed sales and earnings estimates. Contributing factors cited were a slowdown in Chinese demand and a supply and energy glut. Alcoa has recently announced it will be splitting apart its Upstream and Value-Add businesses. (Zacks.com)

36x

The number of times larger that US student lending debt ($1.2 trillion) is than debt (bonds) issued by schools themselves ($32.7 billion) (WSJ)

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EQUITIES:

Demotion on Wall Street: Bond Traders Take a Back Seat, WSJ

"For the first time in at least half a decade, head count of traders and salespeople on equity desks in the first half of the year topped head count on bond-trading desks 17,300 to 17,100, according to research firm Coalition Ltd ... Overall revenue in fixed income remains larger, with $39 billion in fixed income traded by 10 of the biggest global banks over the first six months of the year, compared with $24.6 billion for equities."

CREDIT & GOVERNMENT DEBT

Central Banks Dump US Debt, WSJ

"In a dramatic shift in the $12.8 trillion US Treasury market, foreign official net sales of US Treasury debt maturing in at least a year hit $123 billion in the 12 months ended in July .. It was the biggest decline since data started being collected in 1978. A year earlier, foreign central banks had purchased $27 billion of US notes and bonds."

INDICATORS

Economists See US on Cusp of Full Employment, WSJ

"The US will be in a state of full employment within the first half of 2015, according to 56% of economists surveyed by the Wall Street Journal .. 'Full employment' is a term economists use to signify an economy in balance, where there is no longer cyclical economic weakness, but also no pressure pushing the inflation rate higher. The term doesn't signify an economy in which everyone has a job, let alone a good one ... Even as the unemployment rate has fallen in recent years, other signs of weakness have lingered. In particular, the share of Americans participating in the workforce declined. The rate declined in September to 62.4%, the lowest share since 1977."

M&A

Debt Markets Hold Key to Dell's Bold EMC Bid, WSJ

"Michael Dell is pressing ahead on a $50 billion-plus acquisition of data-storage giant EMC ... Following record or near-record debt issuance in recent years that supported the M&A surge, credit investors have lately become more fickle. In late September, JP Morgan cut a planned high-yield bond sale backing Altice's purchase of Cablevision for $1.5 billion, making up the difference by selling more debt on the loan market. Leveraged loans are viewed as safer than bonds because they are secured by corporate assets."

Vocabulary, People & Companies:

• EMC Corporation
• Going private
• Leveraged loans
• Full employment

Upcoming Calendar:

• Mo Oct 11: Columbus Day - equity market open, bond market closed; INFY 
• Tu Oct 12: NFIB Small Business Optimism index; CSX, JPM, JNJ
• We Oct 13: PPI-FD, Retail sales; BAC, DAL, NFLX
• Th Oct 14: Consumer price index, Jobless claims; UNH, MAT, GS
• Fr Oct 15: Industrial production, Consumer sentiment; GE, HON

Predictions from last time: 1/3 All-Time: 26/51

• $25B merger: CORRECT
• Oil falls: WRONG
• Bitcoin $242-238: WRONG

Weekly Predictions:

1. Honeywell beats
2. CPI falls
3. Another $25B merger

Sept 28-Oct 2: M&A Boom Showing Less Energy

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Northeastern US pipeline owner and manager Williams Companies agreed to be acquired by Energy Transfer Equity for $37.7 billion including debt and other liabilities, creating one of the largest energy companies in the world.

$13,600,000,000

Energy Partners' decline in price offered to William Companies between August and this past week, a 28% discount. Both companies have been affected by squeezed margins as a result of falling oil prices.

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M&A

Energy Transfer and Williams Cos. to Merge, MarketWatch

The deal will exchange ETE stock for shares of WMB at a price of $43.50, valuing WMB at around $32.6 billion not including debt. Williams had rejected a bid of approximately $50 billion early this summer, when oil was $60 a barrel. The deal unites two regional pipeline supervisors--ETE in central US, and WMB out of the northeastern Marcellus deposits.

BANKS & ASIA SLOWDOWN

Standard Chartered, Credit Suisse Face Equity-Raising Dilemma, WSJ

Both banks, heavily invested in Asian growth and the connected commodities boom, have drastically fallen in price as China rebalances its economy away from resource-heavy manufacturing. To meet requirements for minimum capital ratios, they are now faced with the decision to either issue new shares--heavily diluting existing shareholders--or selling off parts of the business.

INDICATORS

US Jobless Claims are Near Record Lows, Bloomberg

Jobless claims climbed 10,000 to 277,000 in the week ended Sept 27. This remains below the 300,000 level taken by some economists to indicate an improving job market. The four-week moving average, which smooths out fluctuations and considered a less volatile measure, decreased to 270,750, its lowest level since early August.

CREDIT

Investors Pul Back from Junk Bonds, WSJ

Expectations of a Fed rate hike in coming months is driving up the returns investors are demanding for corporate credit, threatening to derail the merger boom happening throughout 2015. Recent shortfalls in demand for bonds from Euro cable company Altice and chemical producer Olin will be supplemented by corporate loans, which require less spending and collateral from borrowers.

BEHAVIORAL FINANCE

Paying CEOs Big Bonuses for Stock Performance Doesn't Work: Cornell, Yahoo Finance

Total shareholder return (TSR) connects stock price gains and dividends paid to shareholders to CEO reimbursement. in 2004, 17% of S&P 500 companies had such plans in place; today, 50% have TSR plans. Yet a Cornell study says returns over the past 10 years does not demonstrate strong correlation between companies with TSR plans and outsized shareholder returns they're intended to encourage.

Vocabulary, People & Companies:

• junk bonds
• Marcellus shale
• Altice
• Williams Companies

Upcoming Calendar:

• Mo Oct 5: ISM non-manufacturing index; 3-, 6-month bill auction
• Tu Oct 6: International trade; Gallup US ECI
• We Oct 7: EIA petroleum status report; Consumer credit
• Th Oct 8: Jobless claims: FOMC minutes
• Fr Oct 9: Import/export prices; Baker Hughes rig count

Predictions from last time: 1/3 All-Time: 25/48

• 10-year yield rises: WRONG
• CARZ ETF falls: WRONG
• $25B+ merger announced: CORRECT

Weekly Predictions:

1. Another $25 billion+ merger
2. Oil prices fall
3. Bitcoin price within $2 of $240

Sept 21-25: Ruh-Roh for Das Auto

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Martin Winterkorn resigned as the CEO of Volkswagen after revelations last week by the EPA that the company had installed software in VW and Audi models designed to falsify emissions standards.

$7,270,000,000

Amount set aside by VW for charges connected to emissions scandal, which is said to affect as many as 11 million vehicles.

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VW CEO Resigns As Carmaker Races to Stem Emissions Scandal, WSJ

Volkswagen, which has 300,000 employees and 29 plants in Germany alone, is Europe's biggest automaker and an institution in German society--where every seventh job is connected to the auto industry. Volkswagen has lost almost 30% of its market value in the past week.

Janet Yellen Say Fed Is Likely to Raise Rates This Year, NY Times

Fed chair Janet Yellen's speech this week at the University of Massachusetts-Amherst revealed, through a series of graphs and diagrams, her perspective that various indicators of slack in the economy are tightening and that inflation should gradually return to trend over time at 2%.

Diageo: What Could the SABMiller-InBev Deal Mean?, Forbes

Following news of a $100 billion dollar merger between the world's 2 biggest brewers, some wondered how Diageo, the world's biggest distiller, would jump into the deal flow. With the deal set to take years to clear antitrust hurdles, Diageo is very excited about growth markets in Africa.

Vocabulary & People:

• S&P Case Schiller HPI
• ADP Employment Report
• Factory Orders
• Martin Winterkorn

Calendar:

• Mo Sep 28: Pending home sales index; Dallas Fed survey
• Tu Sep 29: S&P Case Schiller HPI; Consumer confidence
• We Sep 30: Chicago PMI; EIA petroleum status report; ADP employment report
• Th Oct 1: PMI manufacturing index; Construction spending
• Fr Oct 2: Employment situation; Factory orders

Predictions from last time: 1/3 All-Time: 24/45

• Industrial production up: WRONG
• MANU beats: CORRECT
• MTU misses: WRONG

Weekly Predictions:

1. 10-yr yield rises on Yellen's forecast
2. CARZ ETF declines on VW news
3. Another $25 billion+ merger is announced

May 4-8: Activists Abound

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Dan Loeb, founder of Third Point Management, took a swipe a Warren Buffett at the SALT Conference in Las Vegas last week. Activists have been in the news with two big conferences: SALT in Las Vegas last Wednesday and the Sohn Conference last Monday in Lincoln Center, Manhattan.

$112,000,000,000

Total amount of assets under management controlled by activist hedge funds as of 2014, according to JP Morgan

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Hedge fund star Dan Loeb trashes Warren Buffett, CNN Money 

"I love how he criticizes hedge funds, but he really had the first hedge fund. I love how he criticizes activist investors, yet he was the first activist," said Dan Loeb to the sound of applause. "He thinks we should all pay more taxes but he loves avoiding them himself."

Factories sluggish but orders signal stronger outlook, Investor's Business Daily

"2015 had a rocky start: a soaring dollar shrank exports, a West Coast ports work stoppage snarled supply chains, and plunging oil prices dented energy firms' capital budgets. Yet key ISM indicators suggest that some headwinds are receding."

Europe: There's plenty of good news, and then there's Greece, CNN Money

"The quarterly growth rate of the 19 countries in the eurozone was stronger than either the US or UK managed in the first quarter. France outpaced Germany, Spain is on a roll, but Greece saw its economy shrink for the second consecutive quarter."

Vocabulary & People:

• hedge fund
• ISM
• activist
• Dan Loeb

Calendar:

• Mo May 11: Labor market conditions, 3-month bill auction; ACT, DISH, MBLY
• Tu May 12: NFIB Small biz optimism, Treasury budget; Z, GDDY 
• We May 13: Retail sales, Import export prices, Biz inventories; CSCO, M, SHAK
• Th May 14: Jobless claims, PPI; WB, SINA, MANU
• Fr May 15: Industrial production, Consumer sentiment; MTU

Predictions from last week: 3/3 All-Time: 23/42

• High consumer sentiment: CORRECT
• NFLX beats: CORRECT
• GS beats: CORRECT

Weekly Predictions:

1. Industrial production up
2. MANU beats on rising international popularity
3. MTU misses

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

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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!

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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.

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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