The 2 Charts That Have BofA Worried About A "Greater Correction" In Stocks
While the S&P500 rebounded sharply on Friday, BofAML's Macneil Curry warns evidence continues to say that this is a very late stage advance from which a greater correction is forthcoming. The recent deterioration in breadth (52wk highs failing to keep track with price), the negative seasonal period and divergences between the broader indexes say that risk/reward is skewing to the downside. Bottom Line: "The S&P 500 is vulnerable."
Via BofAML's Macneil Curry,The S&P500 is vulnerableWhile the trend in the S&P500 is still higher, with potential for a near term push towards 2000; this is a very late stage advance from which we look for a medium term correction. 1944 (the June-26 low) is key. Below here confirms a top and turn...
The 2 charts he is most concerned about...Breadth...
The bearish divergence for new 52-week highs from last May points to fewer and fewer new 52-week highs as the S&P 500 has continued to rally to new all-time highs. This suggests weaker internals.The divergence in new 52-week highs from last May is a sign of a maturing rally from late 2012.
and Seasonals...With President Obama in his second
term, 2014 is an incumbent mid-term.2014 is following the incumbent midterm year YTD through June. The pattern calls for a June/July peak ahead of a pullback into September. This has the potential to support large and mega caps relative to small caps.
Going back to 1928, July is the strongest month of the year with an average return of 1.52% and is up 57% of the time.However, June was up 1.9% and July returns tend to fizzle, not sizzle, after an up June. When the month of June is up, July is up only 51% of the time and has an average return of 0.48%. This is well below average for July and a below the average monthly return for all months of 0.59%.
Takeover deals highlight bets on equities outperforming bonds
Hedge funds betting on the £32bn AbbVie bid for London-listed pharmaceutical company Shire, which wrapped up on Friday, tracked the US drugmaker’s private jet to and fro across the Atlantic to measure the progress of the talks.
American politicians are now paying close attention to transatlantic takeovers too, although their focus is on the tax revenues the US is losing as AbbVie becomes the largest company to shift its tax base from the US to Britain.
Investors should be focusing on how the deal is financed. AbbVie is borrowing £13.5bn from JPMorgan to help supply the cash it is offering, planning to repay the bridge loan later by issuing bonds.
In doing so, AbbVie is joining what is becoming the biggest corporate bet worldwide: that equities will outperform bonds.
Bond issuance has soared on both sides of the Atlantic as companies race to satisfy investor demand for a return above depressed government bond yields. In the eurozone corporate bonds yield an average of just 1.5 per cent, the lowest to date, according to the Barclays benchmark index, while in the US they are higher but not far above last year’s record lows.
If companies were investing this money in new factories and expanding output, this would be a sign they expect a bright future. Sadly, it is not the case. Compared to profits, investment remains depressed. In aggregate companies are borrowing money in order to buy shares, both their own and those of other companies.
The logic of this change in the capital structure is obvious for AbbVie. Its bridge finance costs it base rate plus zero to 0.5 per cent – a maximum of 1 per cent. If Shire cannot earn 1 per cent of the deal cost, it has no business being in business.
A broader justification applies for other companies: if profit as a percentage of the share price (the earnings yield, a measure of how much accrues to shareholders) is higher than the bond yield – and, crucially, expected to stay higher – it makes financial sense to issue bonds and buy shares. If a company does not do so itself, it can expect an acquirer to make the same calculation and launch a bid.
This equity-for-debt swap has been under way since 2010, with buybacks and debt issuance booming (although the near-perfect match between the two in the US since the late 1990s has broken down, with debt issuance soaring above buybacks in the past 18 months, BlackRock points out).
The economy may be miserable in the US, but takeovers are at boomtime levels. If this year’s trend continues, there will be $1.9tn of deals in the US in 2014, passing the $1.6tn peaks of 1999 and 2007. The world total would reach $3.9tn, trailing only 2006 and 2007, Dealogic data show.
Selling bonds looks like a no-brainer at these yields. Even central bankers, who were trying to encourage markets in the hope some of the gains would trickle into the real economy, have begun warning about froth in junk bonds and leveraged loans. For equity investors it should ring alarm bells too, as it is a modern version of the flawed “Fed model”. This approach, mentioned by the Federal Reserve in 1997, compares bond yields and the earnings yield, the inverse of the PE ratio.
The idea is that investors have a choice between bonds and shares, and the two yields measure what shareholders or bondholders can expect to make.
It is a good predictor of corporate financing. When shares were outrageously expensive in the dotcom bubble, finance directors naturally chose to sell them, racing to float, and financing deals by issuing equity. When the model showed bonds overpriced relative to equity in 2006 and 2007, companies sold debt to fund buybacks and takeovers.
Today it suggests debt is cheaper relative to equity even than during the credit bubble, so it should be no surprise to see buybacks and debt-funded acquisitions taking off.
Yet, the Fed model is deeply flawed. Theoretically, it makes no sense to compare fixed nominal bond yields to variable profits, which are broadly linked to inflation. Practically it has been a poor indicator, too. It worked from 1982 to the early 2000s, shortly after it was identified.
But investors who stuck with the modern version, comparing the forecast earnings yield to corporate bond yields, saw the strongest-ever buy signal in July 2008. After losing horribly in the crash, hardy souls still using the model received the strongest sell signal in five years in May 2009 – just as a raging bull market began.
Yet, if companies keep using the model to arbitrage bonds and equities, it matters. Companies have been the biggest buyers of US shares for years, supporting the market. If they gear up further to buy shares, they can levitate prices for a while, even as the long-term profit outlook is hurt by low investment. As in 2006-7, this is likely to prove temporary.
Smiths’ chief still has ‘unfinished business’
The chief executive of Smiths Group has admitted he is frustrated by the FTSE 100 engineering conglomerate’s inability to sell non-core divisions, as part of his attempt to turnround the 163-year-old company.
Philip Bowman, who took up his role at the end of 2007 with what many analysts and investors believed was a mandate to break up the group, said he still regards Smiths as “unfinished business” and has no imminent plans to leave.
“When I came in it was about improving performance, it was about focusing the portfolio and the portfolio bit has been elusive,” he said in an interview with the Financial Times. “Did I expect to still be here when I came in? I think the answer would have to be no, I didn’t.”
Mr Bowman, who has a record of selling companies including Allied Domecq and Scottish Power, has faced two significant hurdles in his plan to simplify the group: a big UK pension deficit and asbestos liabilities. Estimates suggest Smiths’ pension fund could cost around £1bn on a buyout basis.
“There is certainly a degree of frustration that I haven’t been able to do those things but you have to at the end say there are external factors and you have to watch those and operate within those constraints,” he said.
Smiths, which on Monday celebrates a centenary on the UK stock exchange, started life as a watchmaker in 1851 but now makes industrial seals, medical devices and security detectors. It is one of Britain’s last remaining engineering conglomerates.
Its share price has lagged behind the FTSE 350 Industrial Engineering over the past five years, up about 70 per cent compared to 300 per cent, prompting regular calls for a break-up of what many view as a disparate portfolio of businesses.
But Mr Bowman said this siren call from analysts ignores the problem the group faces. “If you are in a corporate structure where you have those sort of drains on your cash flow and liabilities, you are not going to be able to resolve them by shrinking,” he said. “You need to grow the core before you actually try and sell anything off.”
The group’s struggling medical devices business is viewed as one of the most likely divisions to be offloaded. Flex-Tek, which produces heating elements and ducting for housing, is another likely candidate.
Smiths has already received two approaches in the past three years for the medical unit – the latest was last July by US group CareFusion – but both have come to nothing. However, Mr Bowman insisted the group would have sold if the price had been right.
Smiths in the meantime is focusing on improving performance by growing its share of commercial business – diversifying away from falling western government spending in divisions such as security detection and medical – and increasing its exposure to emerging markets.
“Much of what Smiths are doing already makes sense but there’s a sense of frustration that these actions fail to manifest in the underlying performance and we suspect many observers would hope for more radical action,” said Matthew Spurr, analyst at Espírito Santo.
A frustrated Securities and Exchange Commission revealed that an investigation hindered by stonewalling government employees could balloon into the biggest insider trading case in history, implicating as many as 44 hedge funds and trading firms, new court documents show.
The SEC has unsuccessfully tried to subpoena information from the House Ways and Means Committee and a staffer, Brian Sutter, as part of an investigation into whether the funds traded on a tip about a change in Medicare reimbursements that resulted in a spike in share prices of big insurance companies.
Sutter, 34, set off a chain of events that could end up implicating some of the biggest hedge funds in the world in insider trading, according to the SEC’s memorandum for its inquiry.
At about 3 p.m. on April 1 last year, an hour before the markets closed, Sutter used his cell phone to call a lobbyist from Greenberg Traurig, where he allegedly talked about the upcoming Medicare rate changes, according to court documents.
The lobbyist then told an analyst at Height Analytics, a broker-dealer, who then sent a note to clients about how Medicare would increase payments to some companies ahead of the government announcing the change, according to the memorandum.
The inquiry, which the SEC has called the Humana investigation, concerns trading in four of the largest health-care companies in the US — Humana, WellCare Health Plans, UnitedHealth Group and Aetna.
The funds include “some of the largest hedge funds and asset management advisors in the nation,” according to a July 16 declaration letter from SEC lawyer Sanjay Wadhwa.
Sutter, as well as the Ways and Means committee, has refused to turn over documents or testify before the SEC, calling the subpoena “repugnant to public policy” and claiming they are “absolutely immune” from subpoenas from a federal regulator in an insider trading probe.
However, the SEC argues that Congress passed a law in 2012 that bars lawmakers from disclosing confidential nonpublic information about government matters that could move stock prices.
Should regulators pursue all the 44 funds that traded on the insider knowledge, the scope of the case would dwarf the next-biggest insider trading case against Steve Cohen’s SAC Capital.
A spokeswoman for the Ways and Means committee directed questions to House general counsel Kerry Kircher, who didn’t return multiple messages seeking comment.
As much as $10 million.
That is the valuation investors have assigned to the new smartphone app whose sole purpose is to let people send text messages saying “Yo.” The app, appropriately named Yo, became an instant sensation in the technology world when news broke last month that it had raised $1 million from investors.
On Friday, Yo formally announced that seed investment round, which grew to $1.5 million. The investors included the technology incubator Betaworks and Pete Cashmore, the founder of the news website Mashable.
The company did not disclose its valuation in the round. But a person briefed on the matter, who was not authorized to discuss it publicly, said the investment came in the form of convertible notes, implying a valuation of $6 million to $10 million.
The challenge now for Yo will be to prove it is worth that much. The app, which debuted in April, has been downloaded two million times, according to Or Arbel, the chief executive. Betaworks said that more than 2,000 independent developers were working on projects built on top of the interface.
One such project emerged in Israel, where developers created a service using the Yo app to alert people to rocket strikes.
Mr. Arbel insists the possibilities are numerous.
“It’s not going to stay the same. It has a lot of potential,” he said of the app. The investors, he said, “invested in the potential.”
Betaworks, Mr. Arbel said, had been in discussions with Yo since May, “before anyone heard of the Yo app.”
The investors at Betaworks were early converts. Since the meeting in May, the app has “become part of our communications flow at Betaworks and in my life,” John Borthwick, the Betaworks chief executive, said in a blog post on Friday.
“We Yo with co-workers alerting them that a meeting is starting, I Yo with my wife as a hi during a busy day. I Yo with friends, without any more expectation or need than a Yo back,” Mr. Borthwick wrote.
“We are fascinated by these uses of simple yes/no on/off communications tools,” he added. “There is no payload in Yo — no pictures, no text, just a deceptively simple on/off state that over time has the potential to become a platform.”
BSkyB expected to announce acquisition of controlling shareholding in Love Productions on Monday
BSkyB, a listed UK-based satellite television broadcaster, is likely to announce tomorrow, 21 July its acquisition of a controlling interest in Love Productions, The Sunday Times reported. The newspaper did not cite a source for the claim, which appeared at the end of an article about BSkyB’s bid for the European broadcasters Sky Deutschland and Sky Italia.
As previously reported, News Corporation, a listed New York City-based news media company, owns a 39% stake in BSkyB. News Corporation owns The Sunday Times.
Background:
Love Productions, a UK-based television production company, had turnover of slightly less than GBP 14m (EUR 17.68m) in 2013, according to a Broadcast survey of the sector published on 30 June.
Source Sunday Times
BSkyB poised to agree takeover of Sky Deutschland and Sky Italia within two weeks
BSkyB, a listed UK-based satellite television broadcaster, is poised to agree a takeover of European counterparts Sky Deutschland and Sky Italia within two weeks, The Sunday Times reported. The newspaper cited unspecified sources for the claim.
The Sunday Times is published by News Corporation, a listed New York City-based news company that was split off from Twenty-First Century Fox last year. As previously reported, Rupert Murdoch and his family are controlling shareholders in both companies due to their holdings of voting shares.
Twenty-First Century Fox owns controlling stakes in Sky Deutschland and Sky Italia and stands to receive more than EUR 8bn (USD 10.82bn) from the deal, according to the report.
Fox holds a 57% stake in Sky Deutschland, for which it would be paid about EUR 3.5bn, the item said. Sky Italia has a valuation in the range of EUR 3bn and EUR 5bn, the article said.
Talks with Sky Deutschland’s minority shareholder have been an obstacle to a deal, the report continued.
Twenty-First Century Fox owns 39% of BSkyB, and the deal for Sky Italia and Sky Deutschland poses questions about Fox’s plans for the satellite broadcaster, the item said. Murdoch tried to acquire full ownership of BSkyB in 2011 but decided against making an offer due to a scandal at News Corporation involving phone hacking.
Some sources think Fox will try to acquire BSkyB outright after it has completed its proposed takeover of Time Warner, the article continued.
Source Sunday Times
Alstom plays down added layer of complexity in deal with GE
FILE PHOTO: Patrick Kron, chief executive officer of Alstom SA, pauses during a news conference to announce the company's results in Paris, France, on Wednesday, Nov. 7, 2012. General Electric Co. (GE) is in talks to buy Alstom SA, the French builder of trains and power plants, people with knowledge of the matter said, in what would be GE's biggest acquisition ever. Photographer: Balint Porneczi/Bloomberg *** Local Caption *** Patrick Kron©Bloomberg
It was not the deal Patrick Kron wanted. The chief executive of French industrial champion Alstom had planned a clean €12.35bn sale of its energy business to General Electric before the Socialist government got involved.
The state complicated the issue, forcing the creation of three joint ventures with GE and is also set to take a stake in Alstom, to the disquiet of investors. Shares in Alstom are down 6 per cent since the start of June as the new deal emerged.
“A simple deal has been blurred,” says Jean Medecin at French asset manager Carmignac Gestion. “A ménage à trois between Alstom, GE and the French government may not be the easiest way to manage a company.”
But Mr Kron says that despite the added layers of complexity, investors should not be worried. The fundamentals of last month’s deal are the same as GE’s initial offer in April: selling Alstom’s energy assets for €12.35bn and leaving the maker of the famed TGV trains as a pure play transport business.
The fact that it will also pay €2.5bn to have a 50 per cent equity stake, but no operational control, over three other joint ventures in grid, renewables and French steam and nuclear is by the by as it can sell the stakes with a floor price of €2.5bn.
“The current share price is not fairly reflecting the value of the company from any angle you look at it,” says Mr Kron. “As we move forward the shareholders will see there is no reason to put a discount on a scheme that makes sense.”
He says that in future the joint ventures could be sold in an initial public offering or in the open market, and because of the floor price Alstom could only gain from the success of the joint ventures.
In depth
Analysts at JPMorgan argue that the stake is in fact worth €2.1bn, partly because the government could object to it being sold, a charge that Mr Kron rejects. Mr Kron says he does not need GE or anyone’s permission to sell the shares.
“I get something that has upside potential, and which is protected against loss,” he says. “We will see where we are.”
Mr Kron also refutes the idea, highlighted by GE in a statement about the deal, that Alstom has in effect paid a higher multiple for the joint ventures’ stakes than GE did: “This is not true . . . It [the multiple] is in the same ballpark.”
Complexity of the revised deal aside, the big question is how the new transport-focused business will fare against larger players such as Bombardier, Siemens or the Chinese giants CNR and CSR.
Critics of the GE offer, when it emerged in April, said the deal would leave a transport-focused Alstom too small and weak to compete. But this claim is rejected by Mr Kron.
“When I was trying to organise an initial public offering of Alstom Transport [last year] they accused me of selling the family jewels. Now they are saying it has no long-term viability – why has this changed?” he says.
“I have no doubt about the viability of the transport business,” says Mr Kron, adding the business had more than “€5bn in sales, five years of [order] backlog and the potential to improve margin as well. Why should we have a problem there?”
Analysts tend to agree with Mr Kron on this point. “[The business] harbours the prospect of steady sales and margins growth, underpinning its status as a solid business,” says Alfred Glaser, analyst at Oddo Securities.
The group is also set to be strengthened by the proposed sale of GE’s signalling operations to Alstom, which had sales of about €400m last year, along with the plans for a broader global alliance with GE in the rail business.
The transport-focused group will also be left, assuming the regulatory hurdles can be cleared, with an undisclosed amount of cash which the company says it will use to help pay off debt and fund acquisitions.
“Transportation is strategically more strongly positioned than its energy businesses,” say Moody’s, the rating agency.
A critical JPMorgan note said it “liked” the transport story, if not the joint ventures.
Mr Kron says he is trying not to dwell on the deal that might have been, but looking at making the joint ventures and the transport business work. “There are things I like [about the deal], there are things I don’t like. That’s life,” he says.
Hedge funds split over AIFMD risk management rules
The bronze statue "Europe" stands outside the European Union (EU) parliament building in Brussels, Belgium, on Monday, May 13, 2013. British Prime Minister David Cameron ceded to the rebellion in his own Conservative Party, offering to support a bill authorizing a referendum by 2017 on the U.K.'s continued membership in the European Union. Photographer: Jock Fistick/Bloomberg©Bloomberg
The EU's Alternative Investment Fund Managers directive comes into force this week
Any hedge fund, private equity or real estate fund wishing to market its product in the European Union will, from this week, need authorisation under the Alternative Investment Fund Managers directive.
To the accompaniment of grumbling and complaints about overburdensome regulation, the alternative investment industry has reluctantly lined up and complied. There is even some evidence that it is costing less than previously expected.
Despite all this neat toeing of the line, which would imply business as usual once the forms are all filled out and the reporting software bedded down, some industry commenters predict that what happens next could alter the business structure and practice of hedge funds at a fairly basic level.
“The one thing I think has really changed with this legislation is the way they are forcing risk management on to the board,” says Peter Cripwell, chief executive of RiskSystem.
Among hedge funds, risk management has typically been a relatively low status job, explains Mr Cripwell, who used to be chief investment officer for Pioneer Alternative Investments, a $1.5bn hedge fund manager. “The risk manager is either going to be getting a big pay rise or they’ll have to hire someone new.”
An insider promoted to board level may well be deemed to have insufficient independence, while hiring a new risk manager with sufficient clout and experience could be expensive, as there is suddenly increased demand for such skills.
“The most direct consequence is likely to be people spending more in this area,” says Paul North, head of product for Europe, the Middle East and Asia at BNY Mellon.
“Hedge fund managers are very good at risk management in the investment function, but this is a much broader requirement.”
Managers will need to show that their risk function manages counterparty, liquidity and operational risk, as well as the investment risk traditionally the main focus of such functions. It will also have to be hierarchically and functionally independent of the portfolio management teams.
“We see a lot of clients asking ‘What are other people doing?’,” says Mr North. “What best practice may be is still evolving.”
Managers from outside the EU are also keeping their powder dry as they wait to see how the new regulatory framework develops in practice. “It will be easier when there’s more clarity,” says Stuart Kaswell, general counsel for the US Managed Funds Association, a trade body for hedge funds. “Nobody wants to get on the wrong side of this.”
Not everybody is staying calm and carrying on, however. A lawyer at a large US law firm, who requested anonymity, says: “There have been delays [with authorisations] and the system has gotten clogged up. Trying to get responses from the [UK’s Financial Conduct Authority] is a nightmare. AIFMD is not a very satisfactory piece of legislation. It was an emotional response to the perception that hedge funds caused the financial crisis.”
The lawyer adds that reporting requirements “are a really big deal”, to the extent that a dedicated full-time employee is needed to ensure compliance with them.
“US managers are not used to [fundraising] being more difficult in Europe and some are in denial. [Others] are asking why there is discrimination against them. Some have taken Europe off the agenda as it is too much of an issue [as AIFMD] might be a nightmare,” he says.
Mr Kaswell disagrees, saying the failure of US hedge funds to line up for authorisation under AIFMD (they are treated separately in line with co-operation agreements between national regulators) is about watching and waiting rather than a wholesale decision to step away from the European market.
“We’re not panicking, we’re not holding crisis calls with our members, but there are some issues that need clarifying,” he says. Primary among these is what activities will be permitted by managers that do not apply for authorisation.
They will be allowed to operate on a reverse enquiry or reverse solicitation basis, whereby investors that come to them can have access to their funds. However, the rules about exactly what is permissible under this regime vary from country to country.
Since the main benefit of the AIFMD, the pan-European passport, is not available to third-country managers, they will have to decide for each jurisdiction whether they want to apply for authorisation or just rely on reverse solicitation.
Back in Europe, opinion is equally divided on what is going on.
The chief executive of one UK asset management house, who asked to remain anonymous, says: “AIFMD has been terrible for everyone – the whole thing is a bloody shambles and utterly unnecessary.
“I think we in the UK were asleep at the wheel [when the directive was being drawn up] and fund management companies have had to absorb the costs,” he says.
“The more unnecessary regulatory burdens [there are], the higher the barrier to entry. AIFMD has stifled people from starting up which is a shame. Ironically you create a cartel through regulatory burden, and cartels put prices up,” he says.
“[The directive] has required enormous effort, time and costs.”
Chris Reddy, chief operating officer at Principal Global Investors Europe, is more positive, saying: “The industry has been focused on the detailed and difficult implementation process of AIFMD, without giving much thought to the opportunities the directive can create for both investors and fund managers.
“[These regulated funds] will allow investors to take more risk while providing them with better governance and oversight as well as new safeguards to increase investor confidence.”
A BNY Mellon survey shows asset managers are concerned the new regulations will choke off flows into their funds, but according to reports from Efama, the European industry trade body, and consultant Cerulli, this fear is ill-founded.
“This survey result is partly just expressing frustration with the paperwork they’ve been having to cope with,” says Mr North.
Investors turn sour on US biotech sector
By Michael Mackenzie and Nicole Bullock in New YorkAuthor alerts
Investors have fled US biotechnology shares this month turning fund flows negative for the year to date as the Federal Reserve voiced concerns over high valuations in the sector.
Despite being among the riskiest stocks in the market, biotech has been a boom sector in recent years. Smaller companies on the cutting edge of research and development have attracted significant sponsorship from investors prepared to bet big on a major drug or medical breakthrough. If successful, they hold the potential to generate huge returns, but many fail.
Last week, the US central bank identified biotechs, small-caps and social media shares as a cause for concern, saying valuations “appear to be stretched”.
That triggered a slide of some 6 per cent in the Nasdaq biotechnology index, wiping nearly $40bn from the market’s value, before prices rebounded 3 per cent on Friday.
So far this year, the index is up 10.6 per cent and remains 16 per cent above its low in April, when a valuation scare previously shook the sector.
Investors were pulling money out of the sector before the Fed issued its warning, with the main exchange traded fund tracking the Nasdaq biotechnology index seeing $326m leave over the past week, according to ETF.com.
Since the start of July, outflows from the iShares Nasdaq Biotechnology ETF, known as IBB, have reached $445m, for a net decline of $77m this year. That comes after an inflow of $747m during 2013 when the biotech index surged 65 per cent.