5/26/2016

How Investors React to a Rate Hike

Markets tend to react to news of interest rate increases in two phases. The first reaction is often negative as the fast money that has capitalized on easy lending pulls back as the liquidity party winds down.

The second phase is what the market is witnessing now as investors focus on the benefits of a strengthening economy rather than the drawbacks of higher interest rates.

Some market strategists remain skeptical of an imminent hike, arguing that the Fed will instead wait for several upcoming events—most notably the U.K. referendum on European Union membership in June, and possibly the U.S. election this fall—to pass. The U.K. vote takes place about a week after the June Fed meeting.

All of these risks also pose a problem for markets. If any one of those becomes a problem, you have an asymmetric risk to the downside.

Tesla Raises $2B in Secondary Offering

Tesla raised $2 billion in a second offering of common stock in order to fund the Model 3 production. Goldman Sachs upgraded Tesla to a “buy” after having them as a “hold.” The timing of this upgrade is suspicious because Goldman Sachs is the bank responsible for selling the newly issued Tesla shares. Goldman’s price target for Tesla is $215. The high valuation is necessary because the new shares dilutes the share price and automatically brings it down. But if they had a solid price target, share prices will remain stable.

However, hares have lost a third of their value since a 2014 peak in September, in part over concerns about lower gasoline price, new electric cars entering the market, and capital spending.

Verizon Low Balls Yahoo

Yahoo feels it’s worth between $4 billion and $8 billion, but front-runner Verizon reportedly only wants to bid around $2 to $3 billion. This offer is likely just a negotiation tactic of anchoring, but is a bit of a slap in the face for Yahoo and its ore businesses.

America’s Credit Card Debt Reaches $1 Trillion

Credit-card debt balances are poised to hit $1 trillion this year, coming close to pre-recession levels.

Thanks to aggressive credit card pushing by banks and growing consumer confidence, this year’s sum falls just shy of the all-time peak of $1.02 trillion in July 2008, the Wall Street Journal reports.

The increase largely sum comes from creditworthy consumers feeling less hesitant to take on debt as economic conditions have steadied and the job market improved. Lenders have also been issuing credit to subprime consumers who were previously unable to qualify for credit, according to the Journal.

Banks and credit card companies have been making the most of this upswing by increasing credit card limits, doling out more cards, and offering sweeter perks or rewards — all in an effort to raise profit margins in one of their more profitable sectors after low-interest rates hurt returns on lending and stock trading profits were dampened by stricter regulation and volatile markets

Cash is King

Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Cisco Systems (CSCO) and Oracle (ORCL) are sitting on $504 billion, or 30%, of the $1.7 trillion in cash and cash equivalents held by U.S. non-financial companies in 2015. Apple alone is holding more cash and investments than eight of the 10 entire industry sectors.

Unfortunately for U.S. investors, 72% of total cash held by all non-financial U.S. companies is stockpiled outside the U.S., up from 64% in 2014 and 58% in 2013, as companies try to avoid paying U.S. tax rates.

Investors are eyeing companies' growing cash piles as potential sources of dividend increases to maintain fat returns even if stock prices continue to go nowhere.

Dividends rose 4% last year to a record high of $404 billion, while companies cut back on capital spending by 3% to $885 billion.

Companies have also been pulling back from using cash to buy back their own stock. That is a maneuver that can reduce a company's number of shares outstanding and in theory should make each share more valuable.

Apple is hold $215.7 Billion in cash reserves with 93% of it stockpiled overseas in order to evade U.S taxes.

NVIDIA Dominates the VR Sector

The trends are in NVIDIA's favor, with VR expecting to generate global hardware revenue of up to $2.3 billion this year, according to a recent report from information technology research firm International Data Corp.

IDC expects the total number of shipped VR units to reach 9.6 million this year and 110 million units by 2020.

There are several plays on the explosion of VR, but NVIDIA produces high-quality gaming graphics processing units and graphic cards that are crucial for the operation of VR headsets.

Alibaba’s Accounting Principles Investigated

The SEC has ordered Alibaba to give over all the data related to its largest shopping day of the year (the Chinese Black Friday, 11/11.) Regulators believe Alibaba hasn’t been reporting its earnings using the standardized GAAP guidelines that all U.S.-listed companies must adhere to—a big no-no, since if every company used its own interpretation of measurements like “net income,” it would be impossible to compare them. Alibaba shares fell 7% on the news.

Microsoft Lays Off 1,850 Employees

The company says it will record an impairment and restructuring charge of about $950 million because of the cuts tied to its failed acquisition of Nokia's handset business in 2014.

"We are focusing our phone efforts where we have differentiation — with enterprises that value security, manageability and our Continuum capability, and consumers who value the same,” Microsoft CEO Satya Nadella said in a statement.

The latest downsizing marks an ongoing makeover in Microsoft's mobile strategy.

Two years ago, when then-Microsoft CEO Steve Ballmer oversaw a $7 billion acquisition of Nokia's handset business, the smartphone market was vastly different, Milanesi says. Back then, Nokia was a force in the enterprise market for mobile phones and Microsoft had ambitions to rival the Android and iOS operating system platforms.

But Samsung became the dominant Android vendor in a market that has saturated.

Clean Energy vs. Exxon/Chevron

Around 40% of shareholders from Exxon and Chevron voted in favor of implementing stress tests to measure the risk that anti-climate change efforts pose to their businesses. In other words, investors are growing worried that efforts to curb climate change are seriously hurting business at Exxon and Chevron, and they want to know just how much.

Despite the defeat, the proposals drew more support than any contested climate-related votes in the history of the two biggest U.S. oil and gas companies. Preliminary results showed 41% support from Chevron CHV, +0.82%  investors that cast ballots and 38% support at Exxon XOM, -0.44%  , an indication that more mainstream investors are starting to take more seriously the threat of a global weaning from fossil fuels.

The number of shareholders supporting the climate-risk measures is significant, and it will continue to grow.

Apple Looking into Building Electric Car Charging Stations

Apple has publicly hired EV charging experts from BMW, Georgia Tech and Google. Apple is asking charging station manufacturers about their technology for the sake of its oft-rumored electric car project. It's not certain how deep the talks go or who's involved (the companies certainly aren't talking). However, NRG Energy issued a vague response noting that it's talking to "every potential manufacturer of tomorrow."

 Apple's strategy revolves around controlling as much of the experience as possible. It only makes sense that the company would want optimized charging stations instead of leaving drivers to use generic stations that might not work as effectively.

Google to Build an R&D Center Near Detroit for Self-Driving Cars

Google's Self-Driving Car Project just announced on Google+ that it's building what it calls a "self-driving technology development center" in Novi, Michigan, about 30 miles northwest of Detroit. The 53,000-square-foot facility will be used for research and development in concert with the company's Michigan-based partners — this is still the home of the American auto industry, after all — and will be where Google works alongside Fiat Chrysler (based another 30 miles north in Auburn Hills) to build its self-driving minivans starting later this year. "Many of our current partners are based here, so having a local facility will help us collaborate more easily and access Michigan's top talent in vehicle development and engineering," the post reads.

The Novi facility is expected to open later this year

Millennials Likely to Retire Late

12% of American Millennials do not see retirement in their future. And in Japan, 37% expect to work all the way to their graves. Are millennials crazy for having this mindset? Considering that nearly 19% of Americans over the age of 65 are still working—the highest rate since Medicare was introduced—millennials might just be being realistic.

ECB to Buy Corporate Debt

Investment-grade corporate bonds issued in euros are the latest addition to a growing list of assets the ECB is buying as part of its 1.74 trillion euro effort to boost economic growth in the euro zone via lower borrowing costs.

The difficulty is that the 600 billion euro market for such notes is largely limited to big corporations in France and the Netherlands that already enjoy easy access to credit. Issuers in Germany, Britain and France accounted for 70 percent of new bonds sold this year and there was little evidence of growing supply from peripheral countries.

The ECB, however, is hoping its money will eventually trickle down to smaller borrowers across the euro zone for whom funding is still a problem. Since this is likely to take time, the ECB will increase the pace of its purchases only gradually and refrain from setting a monthly target.

One of the aims of the program, indeed, is to encourage medium-sized companies, which have traditionally relied on bank loans, to issue bonds.

This would free up bank cash and indirectly force lenders to look for clients among enterprises that are too small to tap financial markets directly.

Creating this trickle-down effect will be crucial if the program is to succeed and would address the criticism that it may simply supply more money to already well-funded companies that can borrow cheaply.

Fitch says, for example, that European issuers sold bonds with the lowest coupons on record in the first quarter of the year, with high-rated companies paying less than 2 percent on bonds with a maturity of 10 years or more.

Saudi Arabia is Determined to Stop Iran’s Economic Rise

The Saudis and Iranians, leaders of the Sunni and Shiite Muslim camps in the Middle East, are already clashing via proxies on the battlefields of Syria and Yemen. Their long-troubled relationship got worse when Saudi Arabia executed a top Saudi Shiite cleric in January, and an Iranian mob responded by attacking the kingdom’s embassy in Tehran, leading the Saudis to cut all diplomatic ties.

Since the easing of sanctions early this year, a key Saudi concern has been that Iran will use the proceeds of a potential wave of investment to step up engagement in regional conflicts. That’s one reason the Saudis are doing their bit to ensure the investment never arrives.

Saudi Arabia tried to get Iran to freeze its oil production in March due to a global supply glut. But Iran did not comply because they want to compensate for al the lost revenue they faced during sanctions.

Also last month, Saudi Arabia banned Iran’s Mahan Airline from flying through Saudi airspace. Shipping insurers and brokers have been advising clients since February that ships carrying Iranian crude will not be permitted to enter Saudi or Bahraini waters, according to an April report by Control Risks. It said ships that have been to Iran as one of their last three points of entry must also receive special approval.

The Saudis can’t do much to block Iran at the global level, he said, but they’re “applying pressure on Iran wherever they are able to do so, to limit its political and economic influence.

                                                                                                                                                                       

The ECB may help Bayer Finance it’s Monsanto Acquisition

Bayer could receive financing from the European Central Bank that would help to fund a takeover of Monsanto (MON.N), according to the terms of the ECB's bond-buying program.

U.S.-based Monsanto, the world's largest seed company, turned down Bayer's $62 billion bid on Tuesday, but said it was open to further negotiations.

The ECB can buy bonds issued by companies that are based in the euro area, have an investment-grade rating and are not banks, provided that they are denominated in euros and meet certain technical requirements.

The purpose for which the bonds are issued is not among the criteria set by the ECB, which will start buying corporate bonds on the market and directly from issuers next month.

This means that, in theory, the ECB could buy debt issued by Bayer, which said on Monday it would finance its cash bid for Monsanto with a combination of debt and equity.

UK Banks to Deny Lending to Risky Clients

A “perfect storm” of regulatory reform, higher compliance costs and less profitable relationships have hit the UK’s banking sector over the past decade and shut customers out of lending. Banks have severed ties with clients they deem risky at an accelerated rate over the past three years — two large UK banks are dropping as many as 1,000 personal accounts and 600 corporate accounts a month — in response to stretched compliance teams and a reduced appetite for risk in the wake of fines for poor anti-money-laundering controls.

Clamping down on money-laundering and financial crime has been an FCA priority for the year. This follows a record £72m fine on Barclays in November for poor money-laundering controls on wealthy Qatari clients.

High-profile clients affected recently include Wafic Said, the Syrian-born billionaire, who said in March he would sue Barclays after the bank cut its ties with him after 40 years.

It is important that banks retain flexibility in setting up appropriate systems and controls to ensure they comply with legislation … However, banks should not use [anti-money-laundering rules] as an excuse for closing accounts when they are closing them for other reasons.

Shadow Banking Supervision is Unsustainable

Shadow banking usually refers to nonbanking firms carrying out services similar to those typically offered by banks. Or in other words, the shadow banking system refers to unregulated activities by regulated institutions.

Banks face tougher rules since the 2007-09 financial crisis, prompting a shift in risks to shadow banking like repurchase agreements, securitization or pooling of debt, money market funds and securities lending by asset managers.

Policymakers now call the sector market-based financing that can offer alternative funding for the economy, but are still mindful of risks after securitization helped sow the seeds of the financial crisis.

The FSB's "narrow" measure of shadow banking published last November, which excludes pension funds and insurers, rose by $1.1 trillion to $35 trillion in 2014, or 12 percent of global financial system assets.

A broader measure estimated shadow banking to be worth $137 trillion in 2014, or 40 percent of assets.

Shadow banking in China has seen sharp growth, rising from 2 percent to 8 percent of the global total between 2013 and 2014, but the FSB said on Wednesday the country did not agree with the classification of some entities as shadow banks.