After Hours Summary: LNDC -7.4%, FLXN -2.8% following earnings/guidanceAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: RECN +11.4% (ticking higher)
Companies trading higher in after hours in reaction to news: AMID +30.2% (receives revised buyout offer from ArcLight), NVAX +10.3% (announces positive Phase 2 NanoFlu results in older adults; sets the stage for Phase 3 clinical trial in 2019), ZAGG +4.4% (light volume; acquires HALO for total purchase price of $43 mln in cash and stock), SQ +1.1% (announced that Amrita Ahuja will join the company as CFO), GDOT +0.9% (upgraded to Buy at BTIG), CELG +0.6% (upgraded to Neutral at Goldman)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: LNDC -7.4%, FLXN -2.8%
Companies trading lower in after hours in reaction to news: RCII -3.5% (attributed to unfavorable ruling in Vintage Capital litigation), NBEV -2.2% (continued weakness)
This Selloff Could Be ‘The Big One’ That Ends Economic expansions
Buckle your seat belts. This might be “the big one,” write analysts at Bank of America Merrill Lynch.
In other words: The recent market volatility could signal the end of the decadelong improvement in credit conditions, and the accompanying economic expansion.
This view, described in a Wednesday note, is far bleaker than the one BAML held just a month ago. Back on Dec. 7, the bank’s strategists assured investors that the selloff in high-yield bonds looked like “a passing episode.”
But since then, the S&P 500 has slid nearly 7%, the Dow Jones Industrial Average has fallen more than 6%, oil has dropped more than 10%, and long-term Treasuries have rallied.
“We think this [volatility] can no longer be dismissed as noise on the grounds of illiquidity or machine trading alone,” write BAML’s Oleg Melentyev and Eric Yu.
Relatively risky high-yield bonds—the CCC-rated tier—are trading as if they were distressed, or expected to default. Within the high-yield index, 12% of issuers with bonds making up 9.5% of the index’s face value are seeing their securities trade as if they were distressed. And BBB-rated bonds are trading at levels that would be fitting for high-yield bonds in normal markets, the strategists write.
The bank is forecasting a 5.5% default rate for high-yield debt, an increase of 225 basis points (2.25 percentage points) from last year. That does not count as “a full-blown [default] cycle,” the BAML analysts write, so a downturn is “not inevitable yet.”
Default-rate forecasts aren’t the bank’s only reasons for pessimism, though. There’s also the looming threat of trade wars; the concerns about BBB-rated debt and weak loan covenants; and the ongoing monetary tightening and rising political tensions in Europe and the U.S.
The most reasonable view is probably this: Global markets are at a fragile point, and future events could either extend the credit cycle or bring it to an end.
Unfortunately, the strategists’ list of things required to extend the credit cycle is not encouraging. They say investors should brace for volatility and own securities they’re willing to hold through a recession. And policy makers should “come back to prudent governing and orthodox central banking,” which is “obviously easier said than done.”
Beyond that, debt issuers “must find religion in deleveraging,” Melentyev and Yu write. Of course, this comes just as Bristol Myers-Squibb (BMY) announces a $74 billion deal for Celgene (CELG), part of which will be in cash (which often means debt).
The list of events that could end the credit expansion seems more realistic. For example, “the cycle would not survive a full-scale trade war,” they write. They predict that public opinion and market volatility will discourage the Trump administration from taking a tough stance against China—but neither of those pressures has made the White House stand down yet.
Chaotic downgrades of BBB-rated bonds into the high-yield market could also set off a downturn, the bank writes.
Beyond that, simple “generic volatility” in markets could pressure investors and companies to the point that the cycle turns, they say.
That hints at an important point: Some of the bank’s warnings are supported by a self-reinforcing feedback loop. When investors get spooked about the end of credit cycle, they sell risky assets such as high-yield debt. That drives yields higher, which raises borrowing costs for risky companies and the probability that those companies will fail to make payments on their debt.
Indeed, the strategists cite tightening financial conditions, defensive-sector outperformance and cyclical-sector underperformance as reasons the cycle could turn. But all of these could change if investor confidence improves.
So January’s market moves will be important for determining the outlook for markets this year, Melentyev and Yu write:
“If...the market fails to stage a tactical rebound in the next few weeks and proceeds to go wider, we think the evidence would become exceedingly convincing that the cycle has in fact turned.”
Here’s How Oil Pipeline Stocks Could Gain 33% in 2019, According to Goldman Sachs
Midstream energy stocks have been battered by declining oil prices and waning patience with an industry still trying to get its financial act together. But the sector now yields an average 8%, while fundamentals are picking up, and the stocks look inexpensive. Put the three together and they could return 33% in 2019, including dividends.
That’s the view of Goldman Sachs analyst Michael Lapidis, who upgraded a slew of stocks in a report issued Wednesday.
But he isn’t the only analyst beating a drum for the sector. UBS analyst Shneur Gershuni argues that while the macro climate remains challenging, financial conditions should improve at the industry level, resulting in dividend growth and buybacks, according to a report out Thursday.
Kinder Morgan (KMI), one of the largest, integrated midstream companies, is Lapidis’s top pick. He also favors Cheniere Energy (LNG), a leader in liquefied natural gas export terminals, and Plains All American Pipeline LP (PAA), a master limited partnership that he upgraded to Buy from Neutral. His other favorite large-cap ideas are Energy Transfer LP (ET) and Targa Resources (TRGP).
Gerhsuni’s top picks include Cheniere Energy, Kinder Morgan, Williams Companies (WMB), and Targa. Among MLPs, he likes Enterprise Products Partners LP (EPD), Western Gas Partners LP (WES), Energy Transfer, and DCP Midstream LP (DCP).
Investors should note some key differences between MLPs and traditional C-Corps. MLPs have complex tax treatment, issuing K-1 forms rather than standard 1099s. The firms primarily distribute return of capital rather than dividends. MLPs often yield more than C-Corps, and most of their distributions aren’t taxable (treated as return of capital). But their distributions lower the cost basis of the stocks, and investors may face heavy taxation on the sale of units (the MLP version of shares).
Investors interested in income distributions should consider stocks like DCP Midstream, yielding 11.7%, Energy Transfer at 9.2%, and Western Gas at 9.6%. Among C-corps, Targa offers one of the highest yields at 9.7%. Kinder and Williams yield 5.1% and 6%, respectively. Cheniere doesn’t currently pay a dividend (making it more of a growth stock play).
If there’s a theme for the industry in 2019 it’s that fundamentals have reached an inflection point. Capital spending on pipelines and other infrastructure projects is tapering off from highs in 2018. Gershuni expects capex to decline 11% in 2019 from 2018 levels. More pipelines and other cash-generating projects are coming online, meanwhile, improving free cash flow and Ebitda (earnings before interest, taxes, depreciation, and amortization).
“We see this as somewhat of a Goldilocks environment where there is enough growth for above average earnings for the next several years,” Gershuni writes. Companies and MLPs should also generate enough cash to accelerate distributions and buybacks, in his view.
Goldman’s Lapidis also sees positive trends supporting a pickup in free cash flow. A build out of export terminals and processing plants along the Gulf Coast should benefit pipeline operators, he writes. The discount in price between West Texas Intermediate crude, produced in the U.S., and Brent crude oil, pumped abroad, implies that “opportunities will exist to export oil to capture the wide spread.”
Several companies are also benefiting from rising exports of natural gas liquids and related products. Exports should ramp up as major projects come online over the next few years, supporting growth for firms involved in transporting, processing and exporting the commodity.
The industry could still be caught in a classic vise of excess supply without enough demand to soak it up. The build out of pipelines and other infrastructure projects in recent years won’t look so smart if the economy weakens and demand tapers off domestically and internationally. Unless oil prices rally, the stocks will probably stay depressed. WTI crude oil futures have gained 3% so far this year, after dropping 25% in 2018.
“We can scream into the wind how this time is different,” UBS’s Gershuni writes. “However, in the short term macro headlines will dominate.” OPEC has announced production cuts and U.S. drilling activity appears to be slowing. But investors will “need to see an improvement in inventories resulting from the cuts before calming down,” he adds, “and the seasonal calendar is not in our favor.”
The Alerian MLP Infrastructure ETF (AMLP) is off to a decent start this year—it gained 1.2% yesterday versus a flat return for the S&P 500. But it’s got a lot of catching up to do: The index was down 12.6% in 2018, including dividends, versus a loss of 4.4% for the S&P 500.
Activist U.S. hedge funds hurt by late-year stock tumble
BOSTON (Reuters) - Widely followed activist investors Daniel Loeb, Barry Rosenstein and William Ackman suffered heavy losses in December, when fears about trade battles and slower growth sent stocks spiraling lower.
Many fund managers are still compiling annual returns, but early data from some of the industry's most prominent firms shows how December's stock market tumble erased gains at many funds. At others, the fall expanded small losses into bigger ones.
Early data from Hedge Fund Research shows that the average hedge fund lost 6.7 percent last year, slightly more the S&P 500's 6.2 percent loss. Data for activists' funds full-year returns have not been finalized.
Loeb's Third Point, fresh from settling for board seats at Campbell Soup Co, told investors its Third Point Partners fund closed 2018 with a 10.7 percent loss after sinking 6.2 percent in December. The Third Point Ultra fund lost 7.8 percent in December to end 2018 down 14.7 percent.
Rosenstein's Jana Partners Fund ended 2018 with an 8.1 percent loss after falling 10 percent in December, according to an investor update. Another portfolio, which tracks only the firm's activist positions, was up roughly 20 percent in 2016 and 2017, an investor said, but its 2018 return could not be obtained.
David Einhorn, an occasional activist, put up some of the industry's worst numbers, nursing a 9 percent loss in December and a 34.1 percent drop for the year. Several investors said they have now pulled their money out, prompting some speculation about his future.
Several prominent hedge funds closed down last year and investors said more closures are expected.
December's stock market rout also hurt William Ackman's Pershing Square (NYSE:SQ) Capital Management. But the manager, who vowed to make 2018 his comeback year, finished with a small gain in one fund and roughly flat in another.
Pershing Square Holdings fund lost 10.8 percent in December and ended 2018 off 0.7 percent. Pershing Square International ended the year up 1.8 percent, an investor said. The firm's capital, however, shrank to $6.8 billion at the end of December from $8 billion at mid-year.
Early in 2018, Ackman cut his staff and promised to shun the limelight as he sought to reverse his returns after three years of losses. For much of the year, Pershing Square was up double digits thanks to gains at investments ranging from Chipotle Mexican Grill (NYSE:CMG) to Automatic Data Processing. Ackman announced new bets on Starbucks (NASDAQ:SBUX) and Hilton Worldwide Holdings late in the year.
To be sure, there were some activist funds, mostly smaller ones, that performed well. Sahm Adrangi's Kerrisdale Capital ended the year up more than 37 percent, an investor said, and J. Daniel Plants' Voce Capital gained 6 percent.
There were wins among other hedge funds, too. Renaissance Technologies LLC's Renaissance Institutional Equities Fund gained 8.5 percent in 2018 while Brahman Capital Corp. posted a 2.4 percent gain, investors said.
What anthropologists can teach tech titans
‘These leaders have been operating with dangerous blind spots’
This year, the tech giant Amazon will be engaged in a delicate political dance in New York. The reason? In late 2018, the company announced plans to base one of its two new “headquarters” in Long Island City, Queens.
Amazon’s leaders probably assumed that the decision would delight locals. After all, New York mayor Bill de Blasio was so keen to lure the company that he joined forces with his arch-rival Andrew Cuomo, New York governor, to offer incentives.
But local residents have not reacted as the city elites — or Amazon officials — might have expected. Instead of welcoming the new high-paying jobs, some locals organised community meetings to try to keep Amazon out.
As Tania Mattos, a leader at Queens Neighborhoods United, a group that promotes affordable housing in the area, told the FT: “This deal was not for our communities and, if it’s not for our communities, we’re not going to allow them into our neighbourhood.”
How should companies respond? The normal answer would be to throw money at local “charity” projects and hire a few political lobbyists. But here is another idea that Jeff Bezos, Amazon’s chief executive, might consider, along with other tech leaders: hire some anthropologists.
This doesn’t seem a very Silicon Valley thing to do. Men such as Bezos, Facebook’s Mark Zuckerberg and former Google chief executive Eric Schmidt have amassed vast wealth by handling computer programs and algorithms. By contrast, anthropologists study the human condition by watching people on the ground rather than using spreadsheets.
When anthropology emerged as a discipline in the 19th century, it tended to study so-called “primitive” cultures — tribes in the Amazon jungle, for example. That all seems a very long way from a 21st-century Amazon warehouse.
But anthropology’s focus has shifted over time. These days its adherents are more likely to study modern western societies than remote jungles. And what makes the discipline so relevant for thinking about today’s technology is its methodology.
Most notably, anthropologists try to use patient observation, without preconception, to see how all aspects of “culture” fit together, including those parts that nobody usually talks about. The core aim is to see the world through somebody else’s eyes and to understand cultural patterns.
Doing this enables them to comprehend other ways of life. But it also delivers a second — crucial — benefit: when you think yourself into the mind of someone who initially seems different, or “alien”, you don’t just give yourself a chance to understand them, you also obtain a fresh perspective on your own culture.
Outsiders see things that insiders cannot — and vice versa. Being an “insider-outsider” (someone who can both deeply empathise with a tribe’s culture and view it in a wider, detached way) can bring powerful new awareness.
This is what tech titans desperately need to take on board. In 2018, it became painfully clear that they have been operating with some dangerous blind spots: they seemingly failed to appreciate the consequences of their innovations on society as a whole — in relation to privacy, political manipulation and so on.
Critics claim this is because some techies are greedy, arrogant or evil. But I suspect that the problem is more to do with tunnel vision: they have been so obsessed by innovating, operating within an introverted world where everyone speaks the same technical language, that they have lost common sense — and the broader vision of how their actions affect the wider world or are perceived by it.
The problem is not dissimilar to the one that plagued Wall Street before the 2008 financial crash: an elite so drunk on its own power that it becomes stuck in a rarefied ghetto.
Some officials at tech giants are aware of this, and are attempting to make changes. For several years, groups such as Intel and Xerox, for example, have been quietly consulting anthropologists to help them with their product design.
But recently, companies including Facebook, Uber, Spotify and Google have started to do this too. When the business anthropology group EPIC held its annual Ethnographic Praxis In Industry Conference in October, tickets sold out within 24 hours, as technology companies, among others, scrambled to attend.
However, while techies may be ready to hire anthropologists to study consumers, it remains to be seen whether they are also prepared to use their newly gained perspective to understand the prejudices and peculiarities of their own “tribe”.
Hence my advice to Bezos and others: try to act more like an anthropologist this year — whether in Queens or elsewhere. It will not be easy; nor will it magically remove your regulatory woes. But it might help you understand the societal backlash. Or consider this: anthropologists are far cheaper to employ than the (ever-swelling) army of political lobbyists you have been hiring; and probably less controversial.
Datacenter server demand to see sharp growth after sluggish 1H19
Orders for datacenter servers are expected to slow down in the first half of 2019, but will resume sharp growth in the second half and grow even stronger in 2020, as many first-tier cloud computing service providers are turning to focus on raising the utilization of their new storage capacity established during the past year.
Wiwynn, a subsidiary of Wistron, currently sees over 90% of its revenues contributed by orders from US-based cloud computing datacenter players. The company generated a total of NT$134.4 billion for the first three quarters of 2018, up 146.7% on year. For 2019, Wiwynn expects its on-year shipment growth to weaken and will only reach below 30%.
Wiwynn president Emily Hong pointed out that the company's two major US-based Internet service provider clients have been investing in datacenter establishment since 2017, allowing the company to enjoy robust shipment growths during the period from the second half of 2017 to 2018. However, since the second half of 2018, the clients have started making adjustments to the utilization of its storage capacity and the process is expected to continue in 2019.
The industry will still be in good shape in 2019, but Wiwynn is unlikely to more than double its revenues in the year as it did in 2018.
Digitimes Research's latest special report on the global server industry also estimates that Wiwynn's shipments will rise over 25% on year in 2019, allowing the company to get a hold of around 7% share in Taiwan's overall volumes.
Fellow competitor Quanta Computer expects its server operation to continue enjoying a double-digit percentage on-year growth in 2019.
As for Inventec, the largest server motherboard supplier worldwide, some market watchers have pointed out that the ODM had 6-9% on-year growths in server shipments and revenues in 2018, while shipments to datacenter players went up 20% on year. Inventec's shipments to datacenter players in China were up 30% on year. However, shipments to datacenter players are expected to see slower on-year growth at 10-15% in 2019.
For 2020, global demand for servers will see sharp growth as new applications including AI and Internet of vehicles (IoV) are expected to strongly stimulate the requirement of datacenter capacity.