Closing Stock Market SummaryThe S&P 500 declined 0.5% on Monday, although it had dropped as much as 1.6% after threats from President Trump to increase China tariffs fueled concerns about a trade deal. Investors, however, regrouped to buy the dip, lifting stocks off their lows on hopes that a trade deal will still be secured.
The Dow Jones Industrial Average lost 0.3%, and the Nasdaq Composite lost 0.5%. The domestically-oriented Russell 2000 managed to finish higher by 0.1%.
President Trump said on Sunday that he will increase tariffs on $200 billion of imported Chinese goods to 25% from 10%, effective Friday. An additional $325 billion of imported goods could also face a 25% tax. The news rattled equity markets around the world and catalyzed a 5.6% drop in China's Shanghai Composite.
The worst levels in the U.S., however, came at the beginning of the day as all 11 S&P 500 sectors traded lower. Buying interest throughout the day contributed to a steady advance off early lows.
Many market participants viewed President Trump's threat more as a negotiation tactic to speed up trade talks than a move prevent the completion of a trade deal. Confidence that President Trump would not try to upend a market coming off session highs by jeopardizing a deal supported a reversal in stocks. China reportedly said it still plans to send a trade delegation to Washington this week.
There is increased uncertainty, though, which contributed to the underperformance of the S&P 500 materials (-1.4%), industrials (-1.0%), and information technology (-0.8%) sectors. These sectors contain many companies with Chinese exposure. The health care sector (+0.6%) was the lone group to finish higher.
The energy sector (-0.1%) showed relative strength following positive reactions to Occidental Petroleum (OXY 58.77, +0.82, +1.4%) revising its offer to acquire Anadarko Petroleum (APC 75.49, +2.77, +3.8%) to include more cash. Shares of Chevron (CVX 118.40, +1.13, +1.0%) also outperformed on the news, as its likely defeats its proposal to acquire Anadarko for a premium.
A turnaround in oil prices ($62.31/bbl, +0.38, +0.6%) amid rising tensions between the U.S. and Iran also provided some support for the energy space.
U.S. Treasuries finished higher but lost steam as equities regained buying interest. The 2-yr yield declined one basis point to 2.31%, and the 10-yr yield declined three basis points to 2.50%. The U.S. Dollar Index finished little changed at 97.53.
Investors did not receive any economic data on Monday.
Looking ahead, investors will receive the JOLTS - Job Openings survey for March and the Consumer Credit report for March on Tuesday.
- Nasdaq Composite +22.4% YTD
- Russell 2000 +19.8% YTD
- S&P 500 +17.0% YTD
- Dow Jones Industrial Average +13.3% YTD
Berkshire Hathaway's Buffett interested in UK, EU deal
Multibillionaire investor and Berkshire Hathaway Chairman and CEO Warren Buffett is interested in making a deal in the UK even though he considers Brexit -- the UK's decision to leave the EU -- a mistake, he told investors at his company's annual shareholders' meeting on Saturday.
Buffett told investors that Berkshire Hathaway hopes for an acquisition "in the UK and/or in Europe" regardless of the Brexit outcome, Yahoo Finance reported on 4 May.
"We'd love to put more money into the UK," Buffett said in meeting remarks captured in video posted on Yahoo Finance on 4 May. "We're hoping for a deal in the UK and/or in Europe no matter how Brexit comes out."
Brexit, he said, "doesn't destroy my appetite in the least for making a very large acquisition in the UK."
Buffett had recently expressed his interest in a UK deal during a Financial Times interview.
Chinese equities/US trade war: Beijing blushes
Too much optimism had been priced in too early
The “Tariff Man” strikes again. Two tweets by Donald Trump over the weekend have put markets into risk-off mode. US-China trade talks had seemed to be going well. A “historic” trade deal this Friday was possible. The US president’s motives might have been tactical, to increase pressure on Beijing. But for weeks, expectations of an imminent deal have been priced into the Chinese markets.
This could well reverse. China mainland’s CSI 300 index slipped 6 per cent on Monday, the biggest fall in more than three years. The renminbi hit its lowest level against the dollar since January. US futures, Treasury bond yields and oil prices also fell.
Even after Monday’s declines, the CSI 300 is up 18 per cent this year. More than a tenth of all companies in the CSI 300 are up more than 50 per cent this year, including the baiju (Chinese liquor) maker Wuliangye Yibin. With a $53bn market value it has become one of the world’s largest drinks companies.
Chinese markets look pricey. The broader MSCI China benchmark trades at 14 times forward earnings, compared with its historic average of 10 times.
Much of this year’s rally was fuelled by government stimulus plans and better than expected economic data. Another factor was expectations of a positive outcome to the US-China trade talks, given weeks of optimistic guidance from both sides. Too much optimism was priced in too early.
Mr Trump has threatened again to increase the current 10 per cent tariffs on $200bn of Chinese goods to 25 per cent. He also suggested 25 per cent levies on another $325bn. The possibility of imposing tariffs on all Chinese exports to the US remains.
An extended US-China trade war would damage China’s exports and employment. A fall in gross domestic product growth would follow.
The US, as well, has much to lose. It imported $540bn worth of goods from China last year. Higher tariffs on imported raw materials and products from China will mean increased production costs.
Bank of America’s portfolio manager surveys regularly cite US-China trade as a main worry. The tariff increases will go into effect this Friday unless both sides reach an agreement by Thursday. Should that happen, the art of the trade deal will have confounded investors yet again.
Liberty Tax receives USD 12/share buyout offer from Vintage Capital
06 MAY 2019
Liberty Tax [OTC PINK: TAXA], the Virginia Beach, Virginia-based provider of tax preparation services and the parent company of Liberty Tax Service, has received an unsolicited proposal from Vintage Capital Management for USD 12 per share in cash
The board of directors has formed an independent special committee to review the buyout firm's non-binding offer and other strategic alternatives.
In November the company announced that it had received an unsolicited and non-binding proposal from an unaffiliated private equity fund worth USD 13 per share.
At the time Vintage Capital owned a 14.8% stake and B. Riley Financial a 22.1% stake in TAXA, whose shares closed at USD 9.15 apiece on Friday 3 May for a market cap of USD 128.6m.
Press release:
Liberty Tax, Inc. (OTC PINK: TAXA) (“Liberty Tax” or the “Company”), the parent company of Liberty Tax Service, today announced that it has received an unsolicited and non-binding proposal from Vintage Capital Management, LLC (“Vintage”) to explore a recapitalization transaction, which would allow Liberty Tax stockholders, at their election, to receive USD 12.00 per share in cash for their shares in the Company.
In light of the receipt of the unsolicited proposal, the Board of Directors of Liberty Tax has formed an independent Special Committee of the Board of Directors to commence a careful and expeditious review of Vintage’s proposal and other strategic alternatives that may be available to the Company in consultation with its advisors.
As previously disclosed, in November 2018, the Company received an unsolicited and non-binding proposal from an unaffiliated private equity fund to acquire all of the outstanding shares of Liberty Tax. Upon receipt of this prior proposal, the Company commenced a review of its strategic alternatives and solicited additional proposals from potentially interested parties. Although the previously disclosed proposal has been withdrawn, throughout this process, the Company held discussions with several other interested parties in consultation with its legal and financial advisors, but none of such discussions resulted in an acceptable proposal. At this time, there are no other proposals being considered by the Company.
The Special Committee intends to undertake a prompt review and evaluation of the recapitalization proposal and other available alternatives with its financial and legal advisors to determine the course of action it believes to be in the best interests of the Company and its shareholders, but there can be no assurance that this process will lead to the approval or completion of any transaction. Liberty Tax does not intend to disclose developments regarding this process unless and until its Board of Directors approves a specific transaction or otherwise concludes its review of strategic alternatives. Liberty Tax will provide updated operating and financial information regarding the 2019 tax season as such information becomes available.
Link to statement
Parques Reunidos consortium could close offer around end August/early September - sources
A consortium bid for Parques Reunidos [BME:PQR] is likely to close around the end of August or beginning of September, said two sources familiar with the situation.
The offer for the Spanish operator of leisure parks, which is being led by EQT, was announced on 26 April. The consortium is likely to take a full month to submit the offer documentation to Spain’s National Securities Market Commission (CNMV), said a third source familiar with the situation.
Under the Spanish takeover code, the CNMV can ask unlimited questions to a bidder while studying a bid prospectus. The authority then has 20 working days to take a decision from its last question. This makes it difficult to predict the timing of approval processes in practice.
However, under new chairman Sebastian Albella, the CNMV is targeting faster and more predictable processes, as reported. While he has been at the helm of the authority, KKR’s [NYSE:KKR] bid for Telepizza [BME:TPZ] was approved on 29 March after being submitted on 8 February (seven weeks).
The approval process for LetterOne’s (L1) offer document for DIA [BME:DIA] went even faster, with the regulator approving the paperwork on 28 March after beginning the process on 21 February (five weeks). However, the regulator was moving particularly fast in this case because of the threat of missed covenants, as reported.
If EQT’s consortium takes a month to file and the regulator then takes seven weeks, as it did with Telepizza, approval would come in mid-July. Offer periods begin shortly after regulatory approval and typically last a month, which would bring it to mid-August in this case.
However, Spaniards typically take their annual vacations in August. Under the Spanish takeover code, offer periods can last from 15 to 70 days. EQT’s consortium will target a close around the end of the month or early September, the first two sources said.
The bid vehicle, Piolin BidCo, will pay up to EUR 631m for close to 56% of the company’s shares in its takeover. Holders of around 44% have agreed not to tender into the offer, but to roll their shares into the vehicle in return for a stake at the end of the takeover, as reported.
A spokesperson for EQT declined to comment. The CNMV never provides a running commentary on its approval processes.
Food delivery: grub’s up
Sales are likely to keep growing regardless of automation
According to a theory called “the lipstick effect”, consumers cheer themselves up with small luxuries during downturns. Add to this the “online pizza paradigm”. Food delivery is proving so addictive in world cities that the companies seem confident of growth even in economic slowdowns.
That should be excellent news for Grubhub, owner of Seamless and one of the first online takeaway delivery companies in the US. It has about a third of the market there. Revenue is forecast to rise by more than a third this year. Yet competition is dragging up costs. In 2018, sales and marketing spend jumped 40 per cent. The shares are down by around a quarter in the past year.
Blame rivals like UberEats, Postmates and DoorDash. PitchBook says more than $3.5bn was invested in food and grocery delivery services in 2018 — three times as much as the previous year. That has inspired still more companies to try their luck.
Delivery services earn revenue by charging restaurants a cut of the orders made online. Competition makes it a low-margin business.
This might change with the rise of so-called cloud kitchens. These are often shipping containers with kitchens inside, which are cheaper to run than restaurants in prime locations with fancy fittings. Food is cheaper to prepare, but customers pay the same fees. Delivery companies take a bigger cut. Automation would lower costs too. Food delivery robots from start-up Kiwi are already rolling around Berkeley — although passers-by are often unable to resist the temptation to push the robots over.
Sales are likely to keep growing regardless of automation. McDonald’s, which has a deal with UberEats, estimates delivery accounts for about 10 per cent of sales in certain markets. Across the US, delivery is used by less than one in 10 households. Yet in China, changing habits mean one quarter of the population now orders food from their phones. The food delivery market is far from satiated.
Why oil could help resolve the US-China trade stand-off
Energy is one area where the two countries have a mutual interest in finding common ground
If US president Donald Trump wants the lower oil prices he has consistently demanded, then escalating a trade war with China is one unconventional method of meeting that short-term goal.
Crude prices tumbled on Monday alongside stock markets, after Mr Trump’s threat to raise tariffs on $200bn of Chinese goods. Brent crude briefly dipped back below $70 a barrel, taking the international benchmark well below the level it traded two weeks ago when the Trump administration announced it was removing all sanction waivers for Iran’s customers.
The decline comes despite bullish traders consistently pointing to the build-up of geopolitical threats in the market, from Iran to Venezuela, which have tightened supplies compared with earlier this year.
These threats appeared to increase over the weekend, with John Bolton, US national security adviser, saying a US aircraft carrier was heading to the Middle East to send a “clear and unmistakable message” to Iran.
But for most oil traders, the threat of an escalating trade war with China is a more immediate risk.
China overtook the US as the world’s largest crude importer earlier this decade, and the two countries account for almost a third of world oil consumption. So the duo plays an outsized role in the oil market, before even starting to account for the spillover effects that a damaging trade war would have on the wider global economy.
Oil, therefore, may not lie at the heart of the dispute, but crude traders cannot easily ignore it, regardless of the threats to supplies elsewhere. But while the risk to the oil market is real, focusing solely on prices may underplay the role that energy could ultimately have in resolving the stand-off.
The US is the fastest-growing source of global energy supplies due to the shale revolution. China, meanwhile, accounts for the fastest-growing portion of global oil consumption, while its demand for seaborne cargoes of liquefied natural gas is also soaring.
So while the dispute around tariffs goes far beyond trade balances, energy is one area where the two countries have a mutual interest in finding common ground.
China has notably slashed its imports of US energy supplies as the trade war has intensified, from more than 430,000 barrels a day of crude in March 2018 to less than 100,000 b/d in March of this year.
Few products have the power to influence the US trade deficit with China quite like oil, with a single supertanker carrying approximately $140m worth of cargo.
Just getting crude oil exports back to where they were a little over a year ago would reinstate approximately $12bn in annual trade, with additional LNG supplies likely to take that figure far higher.
In the short term the US has calculated that it can trust in the flexibility of its oil industry to find overseas markets for its fast-rising exports. But to cut out China entirely would deprive it in the long run of a natural market for its growing shale bounty.
-
Upgrades
- Acacia Communications (ACIA) upgraded to Neutral from Underperform at BofA/Merrill
- DISH Network (DISH) upgraded to Neutral from Underperform at Credit Suisse; tgt raised to $34
- Enable Midstream Partners (ENBL) upgraded to Buy from Neutral at Mizuho; tgt raised to $18
- EOG Resources (EOG) upgraded to Positive from Neutral at Susquehanna; tgt $115
- Fortune Brands Home & Security (FBHS) upgraded to Buy from Neutral at BofA/Merrill
- Group 1 Auto (GPI) upgraded to Overweight from Equal-Weight at Morgan Stanley; tgt raised to $94
- Immunogen (IMGN) upgraded to Outperform from Market Perform at Cowen
- Inphi (IPHI) upgraded to Buy from Underperform at BofA/Merrill
- Owens Corning (OC) upgraded to Neutral from Underperform at BofA/Merrill
- Pacira Pharma (PCRX) upgraded to Neutral from Underperform at Mizuho; tgt raised to $38
- Parsley Energy (PE) upgraded to Outperform from In-line at Evercore ISI
- Insulet (PODD) upgraded to Buy from Neutral at BTIG Research; tgt $115
- Pennsylvania R.E.I.T. (PEI) upgraded to Outperform from Neutral at Boenning & Scattergood
- ResMed (RMD) upgraded to Buy from Neutral at UBS; tgt raised to $119
- Watts Water Technologies (WTS) upgraded to Buy from Neutral at Janney
- Downgrades
-
- AAON (AAON) downgraded to Underperform from Neutral at DA Davidson; tgt $35
Allegheny Tech (ATI) downgraded to Neutral from Buy at Buckingham Research; tgt lowered to $27
- Arrow Elec (ARW) downgraded to Neutral from Buy at BofA/Merrill
- Chemours (CC) downgraded to Neutral from Overweight at JP Morgan; tgt lowered to $34
- Expedia Group (EXPE) downgraded to Neutral from Positive at Susquehanna; tgt lowered to $141
- Five Below (FIVE) downgraded to Equal Weight from Overweight at Barclays; tgt raised to $140
- Hilton (HLT) downgraded to Outperform from Strong Buy at Raymond James; tgt raised to $102
- Hercules Capital (HTGC) downgraded to Market Perform from Outperform at Wells Fargo; tgt raised to $13.25
- Meritor (MTOR) downgraded to Neutral from Buy at Longbow
- Malvern Federal Bancorp (MLVF) downgraded to Hold from Buy at Sandler O'Neill
- Navistar (NAV) downgraded to Neutral from Buy at Longbow
- PACCAR (PCAR) downgraded to Neutral from Buy at Longbow
- Rush Enterprises (RUSHA) downgraded to Neutral from Buy at Longbow
- TPG Specialty Lending (TSLX) downgraded to Market Perform from Outperform at Wells Fargo; tgt lowered to $20.50
- OFS Capital (OFS) downgraded to Neutral from Buy at Ladenburg Thalmann
- Santander Consumer USA (SC) downgraded to Neutral from Buy at Compass Point
- TriplePoint Venture Growth (TPVG) downgraded to Neutral from Buy at Compass Point; tgt $14.50
- Initiations/resumptions
- Aclaris Therapeutics (ACRS) initiated with an Outperform at SVB Leerink; tgt $13
- Biohaven Pharmaceutical (BHVN) initiated with a Buy at Goldman; tgt $92
- Omeros (OMER) initiated with an Overweight at Cantor Fitzgerald; tgt $26
- PagerDuty (PD) initiated with an Overweight at Piper Jaffray; tgt $52
- PagerDuty (PD) initiated with an Overweight at JP Morgan; tgt $55
- PagerDuty (PD) initiated with a Neutral at BTIG Research
- PagerDuty (PD) initiated with an Outperform at William Blair
- PagerDuty (PD) initiated with a Sector Perform at RBC Capital Mkts; tgt $47
- PagerDuty (PD) initiated with an Equal-Weight at Morgan Stanley; tgt $47
- PagerDuty (PD) initiated with a Sector Weight at KeyBanc Capital Markets
- Pebblebrook Hotel Trust (PEB) initiated with a Hold at SunTrust; tgt $43
- Pinterest (PINS) initiated with a Neutral at Susquehanna; tgt $35
- Tufin Software (TUFN) initiated with an Overweight at Piper Jaffray; tgt $25
- Tufin Software (TUFN) initiated with a Buy at Jefferies; tgt $28
- Tufin Software (TUFN) initiated with an Overweight at Barclays; tgt $29
- Tufin Software (TUFN) initiated with an Outperform at Oppenheimer; tgt $35
- Tufin Software (TUFN) initiated with a Hold at Stifel; tgt $24
- Tufin Software (TUFN) initiated with a Mkt Perform at William Blair
- Tufin Software (TUFN) initiated with an Overweight at JP Morgan; tgt $26
- Vivint Solar (VSLR) initiated with a Buy at ROTH Capital; tgt $10