Closing Stock Market SummaryThe S&P 500 (+0.2%) and Nasdaq Composite (+0.9%) closed at fresh record highs on Friday in a shortened trading session. The Russell 2000 increased 0.6%, and the Dow Jones Industrial Average increased 0.1%.
A wide range of growth stocks outperformed, including Tesla (TSLA 585.76, +11.76, +2.1%), Moderna (MRNA 127.03, +17.85, +16.4%), Etsy (ETSY 160.55, +15.46, +10.7%), and many within the Philadelphia Semiconductor Index (+1.2%). Value and cyclical stocks, meanwhile, continued to take a breather from their incredible monthly performances.
From a sector perspective, the S&P 500 health care (+1.0%), communication services (+0.6%), and information technology (+0.5%) sectors did the heavy lifting, while the energy (-1.3%) and utilities (-1.0%) sectors declined the most with 1% losses.
The price action in the S&P 500 generally lacked conviction given the reduced market participation, although trading volume at the Nasdaq was three times higher today than the same time last year. In addition, the market never got the risk-on signal from the Treasury market, which traded higher throughout the morning.
Ahead of the bond market close at 2:00 p.m. ET, the 2-yr yield was down two basis points to 0.14%, and the 10-yr yield was down three basis points to 0.85%. The U.S. Dollar Index was down 0.2% to 91.82. WTI crude futures were down 0.7% to $45.39/bbl.
Retail stocks also had a decent outing after Adobe Analytics said Thanksgiving Day spending rose nearly 22% yr/yr to a record $5.1 billion. Adobe expects Black Friday and Cyber Monday sales to be great for retailers, too, as more consumers shop online this year. The SPDR S&P Retail ETF (XRT 61.21, +0.52, +0.9%) increased 1% to extend its weekly gain to 6.3%.
Investors did not receive any economic data on Friday. Looking ahead, investors will receive the Chicago PMI for November and Pending Home Sales for October on Monday.
- Nasdaq Composite +36.0% YTD
- S&P 500 +12.6% YTD
- Russell 2000 +11.2% YTD
- Dow Jones Industrial Average +4.8% YTD
3G: troubleshooting
It will take time for the Brazilian-US investment group to find better hunting grounds
Warren Buffett is not the only one having problems hunting for elephant-sized acquisitions.
His friends at 3G Capital, the Brazilian-US investment group, are asking investors for more time to deploy funds. It blames sky-high valuations and pandemic uncertainty for the lack of suitable candidates.
Holding back is a prudent move. Until recently, 3G looked unstoppable. A stringent approach to dealmaking that focused on slashing costs enabled it to grab consumer brands like Burger King and deliver handsome returns to investors.
But megadeals can result in mega messes, including 3G’s last big bet: the 2015 merger between Kraft and Heinz. The combination created one of the largest food companies anywhere with about $28bn in combined annual revenues. But a slash-and-burn approach could not resuscitate a consumer goods company with a portfolio of ageing brands. Getting health-conscious millennials to try Maxwell House coffee and Oscar Mayer hot dogs requires time and investment.
The pandemic should be a time for the processed food giant to shine. Consumers have stockpiled ready-made meals and foods with long shelf lives. Yet Kraft Heinz’s US sales have only risen 8 per cent year on year in the six months to end of September. Compare this with General Mills. The owner of Cheerios cereal reported a 25 per cent surge in US retail sales in the six months to end of August. Even Campbell Soup, no stranger to struggling brands, managed a bigger increase in a similar timeframe.
Worse, Kraft Heinz lacks a premium enterprise value — at 11 times its ebitda — to its peers to offer a strong acquisition currency. Billions in impairments after an accounting scandal that led to huge losses did not help. Shares worth nearly $100 each in 2017 now trade at about $32.
It will take time for 3G to find better hunting grounds. The fund has said it may deploy more capital away from the consumer industry, a primary focus over the past decade. Good thing as its own special sauce has clearly gone off.
Quintessentially concierge service set up escort agency’s website
Le Besoin offered ‘discreet, superior escort services’ for ‘high-profile gentlemen’
Quintessentially, a concierge company run by the co-chairman of the UK’s Conservative party, created the website of an international escort agency called Le Besoin and registered it to its London headquarters.
Founded by Ben Elliot, co-chairman of the Conservative party and a friend of Prime Minister Boris Johnson, Quintessentially helped set up the website in 2013.
Advertising “discreet, superior escort services” in cities including London, New York and Moscow for “high-profile gentlemen”, Le Besoin — French for “The Need” — offered a “members’ only” group of “high class models”, according to a cached version of the website, which was taken down last year.
The website was registered to Quintessentially’s office in Portland Place, west London, in 2013. Chris Charalambous, then creative director of Quintessentially, used his business email to register the domain.
The escorting website was flagged to a member of Quintessentially’s management in 2018 after a security audit of its databases and websites, according to a person close to the matter.
Quintessentially said it had “created a website for a client launching a dating service”.
“After completion of the website and branding project within two months, we handed over the completed website to the client. Since that time we have had no further interaction with that client,” it said. “To suggest or infer there is any association is categorically untrue, misleading and damaging to our reputation.”
Mr Charalambous, who left Quintessentially in 2015, declined to comment.
Quintessentially has powerful connections across British society — including to Mr Elliot’s aunt, the Duchess of Cornwall — and offers wealthy clients “anything you want, anytime you want it, anywhere you want it” as well as access to exclusive events, including at Downing Street and Windsor Castle.
The company has been scrutinised over a £1.4m contract with the UK government to introduce Whitehall officials to wealthy individuals. The government has said all proper processes were followed when the contract was awarded.
In March, the Financial Times also revealed that Quintessentially’s founders, Mr Elliot, Aaron Simpson and Paul Drummond, had settled a lawsuit brought by two former female employees who accused them of financial mismanagement and creating a hostile working culture. Quintessentially denied all of the allegations, describing its culture as “so far from macho” and said the dispute had been resolved fully.
Global stocks close in on best-ever month
MSCI’s index of developed and emerging equity markets is up almost 13% in November
Global stocks are on track for their best month on record, propelled by a series of Covid-19 vaccine breakthroughs and optimism over Joe Biden’s victory in the US presidential election.
The rally reflects investors’ growing eagerness to buy into risky assets, encouraged by progress in the development of Covid-19 vaccines at pharmaceutical groups Pfizer-BioNTech, Moderna and AstraZeneca.
MSCI’s index of developed and emerging markets has risen 12.78 per cent this month and set another all-time high on Friday, rising 0.1 per cent in US holiday-thinned trading.
The hunger for stocks has been reflected in investment flows, with $89bn flooding into equity funds over three weeks in November, a record haul, according to analysts at Bank of America.
“It’s incredible, absolutely stunning,” said Fahad Kamal, chief market strategist at Kleinwort Hambros. The month’s gains are “all linked back to one crucial factor and that’s the vaccine”.
Wall Street closed a truncated session, in which US markets were open just half a day, with the tech-heavy Nasdaq Composite up 0.9 per cent to a fresh closing high. The S&P 500 rose 0.2 per cent.
“The US election coupled with the vaccine [news] has removed two quite significant tail risks from the market,” said Maya Bhandari, fund manager at Columbia Threadneedle Investments. “There does still appear to be room to add further [to the gains].”
The Stoxx Europe 600 share index closed up 0.4 per cent, keeping the region-wide benchmark on track for a record monthly gain of more than 14 per cent. But despite November’s advances, the Stoxx 600 is still 5 per cent lower than when it started the year, while London’s FTSE 100 is down 15 per cent.
Paul Dales, chief UK economist at Capital Economics, said encouraging vaccine news meant that “by the middle of the decade the economy won’t be much smaller than if the Covid-19 crisis had never happened”.
Doubts have, however, been raised about AstraZeneca’s vaccine candidate, which had been hailed as cheaper and an easier jab to store than the alternatives, following a mix-up in the dosages given and muddled communication about the results.
AstraZeneca inched up 1 per cent in morning US trading while rival Moderna leapt 12 per cent.
Optimism has also been tempered to some extent by the surge in coronavirus cases in the US and tightening restrictions in Europe.
Investors were grappling “with the likely spread in the pandemic over the colder winter months ahead as well as potential disruption with AstraZeneca’s vaccine rollout”, said Jim Reid, a strategist at Deutsche Bank.
The rise in market sentiment led to a modest sell-off in haven assets, taking the price of gold down as much as 2 per cent to $1,787 a troy ounce, its lowest level since July.
Brent crude, the international benchmark, rose 0.7 per cent to just above $48 a barrel. Oil prices have tracked stocks higher this month on hopes of a rebound in fuel demand once a vaccine is rolled out, taking the market back to levels not seen since the early stage of the pandemic.
In Asia-Pacific, China’s CSI 300 index climbed 1.2 per cent, following the release of upbeat economic data. Japan’s Topix closed up 0.5 per cent while Hong Kong’s Hang Seng gained 0.3 per cent.
NHTSA probing Tesla over suspension safety problems in 115,000 vehicles
More than 100,000 Tesla vehicles are being investigated for potential safety problems by the US National Highway Traffic Safety Administration.
At issue is the front suspension system for the 2015-2017 Model S and the 2016-2017 Model X, the NHTSA said Friday, with as many as 115,000 vehicles affected. The agency has received 43 complaints alleging failure in the left or right front suspension force links.
The problem can result in a front fore link that doesn’t meet the automaker’s strength specifications, Tesla said in a 2017 service bulletin, in which case “the driver can still maintain control of the vehicle but the tire may contact the wheel arch liner.”
Three-quarters of the failures the NHTSA received complaints about occurred while parking, while the rest happened while driving.
Tesla did not respond to a request for comment.
On Nov. 20, a class-action lawsuit was filed against Tesla in the U.S. District Court in California over suspension issues in Model S and X vehicles claiming vehicles have defects that can result in the front and rear suspension control arm assembly components prematurely failing.
In a blog post in June 2016 Tesla denied any safety defect in Model X or Model S suspensions, but acknowledged NHTSA had asked the company to informally provide information about suspensions without opening a formal investigation.
The NHTSA investigation arrives the same week that Tesla issued a recall for more than 9,500 vehicles over concerns about parts of their roofs flying off and loose bolts messing with the driver’s ability to steer.
It also arrives about a month after Tesla recalled about 30,000 vehicles in China over potential suspension problems, which the company reportedly claimed were caused by “driver abuse” rather than any defect.
Spate of Chinese defaults tests investor confidence
Tremors shed light on weaknesses of world’s second-biggest bond market
President Xi Jinping is widely regarded as communist China’s most powerful leader since Mao Zedong, its revolutionary founding father. But can he tame the country’s bond market?
Now worth more than $15tn, China’s bond market is the second largest in the world, about one-third the size of its US equivalent. Over recent weeks, it has demonstrated an ability to embarrass its communist masters.
Just weeks after FTSE Russell, one of the world’s most important bond index managers, announced plans to include Chinese debt beginning next year, a spate of defaults shed embarrassing light on the immaturity and weaknesses of China’s bond market.
They prompted a warning this week from vice-premier Liu He that the authorities would “severely” crack down on illegal behaviour on bond financing, ranging from “malicious” transfer of assets to misuse of funds.
Mr Xi’s financial advisers, led by Mr Liu, want the bond market to grow rapidly in order to reduce Chinese companies’ over-reliance on loans from state-owned banks. As Houze Song at Macro Polo observed in a research note earlier this week, local governments and the state-owned enterprises they control are five times more reliant on bank loans than bond issuance for their financing needs.
“Banks have disproportionate influence over local finance because they provide around two-thirds of total credit and are the biggest holder of local government bonds,” Mr Song wrote.
To reduce this imbalance — and more importantly lessen the moral hazards arising from the incestuous links between local governments, state banks and state-owned enterprises — Mr Liu needs Wall Street’s help to increase the size and sophistication of China’s bond market.
The September decision by FTSE Russell, which was catching up with earlier China inclusion announcements by rival bond indices, will initially apply to government bonds. Foreign investors hold 9.2 per cent of total Chinese central government debt and 4.6 per cent of debts of policy banks like the China Development Bank, according to Fitch Ratings. That compares with 8.5 per cent and 3.2 per cent respectively at the end of last year.
But it will be some time before foreign investors dare to dabble in bonds issued by the likes of Yongcheng Coal and Electricity Holding Group, which defaulted on a supposedly triple-A, Rmb1bn ($152m) bond, triggering this month’s market tremors. As of August, foreign investors held only about Rmb100bn worth of onshore non-financial corporate bonds, compared with their central government bond holdings of Rmb1.6tn.
Like so many other Chinese SOEs, Yongcheng Coal’s triple-A bond rating was largely predicated on the assumption that its provincial government owner would step in to prevent a default. But Henan did not ride to the rescue, although provincial officials are now trying to broker a compromise repayment schedule with the company’s shocked creditors. A similar drama is playing out in northeastern Liaoning province, where a state-owned automotive group defaulted on another triple-A, Rmb1bn bond.
The sequence of events at the automotive group, Huachen, is a good illustration of what some Chinese investors call the “landmines” strewn across the country’s bond market.
Less than one month before Huachen’s default, it transferred shares in its best asset — a unit that is BMW’s partner in its highly successful China manufacturing joint venture — to a subsidiary. Two weeks after the default, the subsidiary pledged those same shares to a creditor.
In a market where an implausible 50 per cent of all non-financial corporate bonds enjoy a triple-A imprimatur, defaults are in theory beneficial and long overdue.
“Increasing credit differentiation is positive for the long-term development of the Chinese market,” says Tai Hui, chief Asia strategist at JPMorgan Asset Management. “It will incentivise companies to be more accountable for their cash flows and balance sheets, and onshore credit ratings to more properly reflect credit risks.”
If that happens, foreign investors could well be tempted to divert more of their capital from the relative safety of Chinese central government and policy bank debt into riskier corporate paper.
Mr Xi and Mr Liu are essentially gambling that the recent defaults can be managed on a case-by-case basis without provoking a much larger crisis of confidence that cascades through China’s financial system. It is a very risky bet.
Deutsche Bank’s head of accounting probed over Wirecard
Germany’s audit watchdog investigates Andreas Loetscher for potential misconduct
Germany’s audit watchdog is investigating Deutsche Bank’s head of accounting Andreas Loetscher over potential misconduct in his previous role at EY, where he was one of the partners responsible for the audits of Wirecard.
Wirecard, a once high-flying payments company, received unqualified audits from EY for more than a decade before it collapsed into insolvency this summer.
Mr Loetscher, who joined Germany’s largest lender in May 2018 after a two-decade long career at the Big Four firm, is one of at least two Wirecard auditors who are personally being investigated by Germany’s audit oversight body Apas over potential violations of professional duties.
Apas can impose fines and in extreme cases disbar auditors for misconduct. In late September the watchdog informed criminal prosecutors that EY may have acted criminally. Munich prosecutors are evaluating that assessment but have not launched a criminal investigation into individual auditors’ conduct.
Alexander Geschonneck, a KPMG partner who led a special audit of Wirecard, told MPs on Thursday that EY should have spotted the fraud earlier. “What we did [in the special audit] was not rocket science,” he said. “It wasn’t done [before by EY].”
Mr Loetscher and three of his former colleagues on Thursday declined to give testimony to the parliamentary inquiry commission into the Wirecard scandal.
Mr Loetscher and Martin Dahmen cited the Apas investigation against them. Under German law, witnesses are entitled to remain silent if they are under investigation over the same topic. The committee accepted they had grounds not to testify and discharged them as witnesses.
Jens Zimmermann, an MP for the Social Democrats, told the Financial Times there was particular interest in the position of Deutsche Bank due to its misconduct on various matters in the past, adding that he recommended the bank should “critically reflect on its current set-up” as the lender will be audited by Mr Loetscher’s former employer EY from 2021.
Fabio De Masi, an MP for the left-wing Die Linke party, stressed that the presumption of innocence applied. “However, Mr Loetscher currently poses a very high reputation risk [for Deutsche Bank], in particular as his former employer from 2021 will be Deutsche Bank’s auditor,” Mr De Masi said.
Deutsche Bank told the Financial Times that “we appreciate working with Andreas Loetscher as a colleague and we have full confidence in his expertise and ability for the job”. Mr Loetscher declined to comment.
Apas declined to comment.
Mr Dahmen’s lawyer said: “We are convinced that it will become apparent that Mr Dahmen did meet his professional duties immaculately.”
EY said that “based on our current state of knowledge, our colleagues conducted the audits professionally and in good faith”.
Two other EY partners — Christian Orth and Stefan Heissner — also declined to give testimony to parliament on Thursday. They were fined €1,000 as MPs decided that Wirecard’s administrator and both boards had lifted the confidentiality requirements. Both will appeal against the fine. They pledged to give full testimony once the legal uncertainty had been resolved.
Gapping down
M&A related:
- IQ -3.1% (reports suggest that Alibaba and Tencent put discussions to acquire iQIYI Inc on hold)
- WORK -3.9% (following Monday's M&A related strength)
Momentum EV space names are indicated lower:
- CIIC -3.4%, DPW -3.1%, NKLA -2.8%, FSR -2.5%, LI -2.4%, XPEV -0.7%, KNDI -0.6%, TSLA -0.4%
Blockchain related names are pulling back sharply:
- RIOT -15.1%, BTBT -14.7%, MARA -14.1%
Other news:
- QMCO -15.6% (files for $200 mln mixed securities shelf offering)
- YJ -11.2% (pullback from this week's earnings related move higher)
- GEOS -9.3% (Aaron's post spin-off will replace Geospace in the S&P SmallCap 600)
- RRD -3.5% (to be removed from the the S&P SmallCap 600)
- MSTR -2.3% (after seeing notable strength on blog mention)
- IBIO -2.1% (files for $200 mln mixed securities shelf offering)
- AZN -1.7% (acknowledges mistake in vaccine dosages, according to the NY Times)
- GRBK -0.8% (files for $500 mln mixed shelf offering; also files for offering by selling shareholders)
- DIS -0.2% (discloses in 10K filing it will eliminate 32,000 jobs in H1 of 2021)
Gapping up
M&A related:
- RMG +13.1% (sets December 1 as the record date for stockholder eligibility to receive the proxy and vote to approve the previously announced merger with Romeo)
- QS +10.6% (Kensington Capital Acquisition and QuantumScape Corporation announce closing of business combination)
- BABA +0.6% (reports suggest that Alibaba and Tencent put discussions to acquire iQIYI Inc on hold)
- CLF +1% (received antitrust clearance from US Department of Justice for the acquisition of ArcelorMittal USA)
Several SPAC names are showing strength:
- APXT +26.5%, SFT +15.8% (continued momentum; former INSU SPAC), PIC +15.3%, IPOB +10.4%, SRAC +6.9%, GMHI +2.3%, IPOC +1.1%
Select retail names are trading higher on holiday shopping optimism:
- GME +3.7%, GPS +1.6%, BBY +1%, TGT +0.7%, WMT +0.7%, AMZN +0.6% (added over 400,000 employees over last 10 months, according to NY Times)
Other news:
- YMAB +10.5% (FDA has approved DANYELZA for neuroblastoma in the bone or bone marrow)
- LCA +9.5% (receives New Jersey regulatory approval to acquire Golden Nugget Online Gaming)
- NGVC +6.6% (extend's recent break-out)
- AMCX +5.6% (to be moved to the the S&P SmallCap 600)
- ORAN +3.2% (launches its 5G network by making quality of service its priority)
- SPCE +6.9%, DKNG +1.7% (continued strength)
- AAN +0.9% (post spin-off will be added to the S&P SmallCap 600)
- NOC +0.9% (awarded a $4.8 bln contract for Global Hawk development)
- VRTX +0.9% (announces European Commission approval for SYMKEVI with KALYDECO for eligible children with cystic fibrosis ages 6-11 year)
Early premarket gappers
- Gapping up: APXT +33.3%, SFT +23.6%, TOUR +13.3%, YMAB +10.5%, LCA +8%, CERE +7.2%, SPCE +7%, AMCX +5.6%, QS +3.7%, GPS +2.5%, ORAN +2.2%, FCX +2.2%, BBY +1.8%, DKNG +1.6%, NOC +1%
- Gapping down: RIOT -17.9%, YJ -15.4%, CAN -9.1%, MSTR -8.1%, LI -5.1%, KNDI -4.8%, XPEV -4.5%, WORK -4.2%, NKLA -4.1%, FCEL -2.4%, GRBK -1.8%, BHP -1.8%