After Hours Summary: SBUX / COST -3%, ADBE -1.4% following earnings/guidanceAfter Hours Gainers:
Companies trading higher in after hours in reaction to news: SGMS +5% (reaches settlement in litigation with Shuffle Tech International), MDRX +1.7% (CEO disclosed the purchase of ~25K shares and Director bought 12K shares), REGN +1.2% (upgraded to Buy and added to Conviction Buy list at Goldman), ESRX +1% (continued strength after California approved CI / ESRX merger; also the cos disclosed that NY determined that a previously noticed hearing in that State was not required and issued its approval of the transaction), RH +0.9% (elected to no longer explore the previously announced $300 million convertible notes offering), PG +0.7% (upgraded to Overweight from Equal-Weight at Morgan Stanley), WM +0.4% (ticking higher - to increase quarterly dividend rate for 2019 to $0.5125 per share from $0.465 per share; authorizes new repurchase plan of $1.5 billion)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: SBUX -3.1% (outlines growth agenda and reiterated its FY19 targets -- Investor Day is today), COST -3.2%, ADBE -1.4%
Companies trading lower in after hours in reaction to news: YECO -24.2% (Nasdaq will be suspend ord shares trading tomorrow - co expects to be quoted on OTC market under YECO), AXON -5.3% (licenses exclusive worldwide rights for GMA gangliosidosis and GM2 gangliosidosis from the University of Massachusetts Medical School; commences underwritten public offering of common shares), SHOP -3.6% (files preliminary prospectus supplement to its short form base shelf prospectus dated August 3, 2018), LNT -1.7% (appoints John Larsen as the new COO; announces public offering of $326 mln of shares of common stock)
Closing Market Summary: Stocks Mixed in Lackluster SessionThe U.S. major indices finished mixed on Thursday, as ongoing uncertainty surrounding global issues kept many buyers on the sidelines. The S&P 500 finished flat, the Nasdaq Composite lost 0.4%, and the Dow Jones Industrial Average gained 0.3%.
In particular, the continued weakness from the Dow Jones Transportation Average (-1.7%), S&P 500 financial sector (-0.6%), and small-cap Russell 2000 (-1.6%), all of which play a key role in driving sentiment on the domestic economic outlook, and some cautious-sounding commentary on the economic outlook from European Central Bank President Draghi following today's ECB policy meeting, subdued investor confidence.
Concerns over slowing economic growth, and its adverse effect on corporate earnings, helped contribute to investors assuming some defensive positioning within the stock market.
The S&P 500 utilities (+0.9%), consumer staples (+0.7%), and real estate (+0.6%) groups finished atop the sector standings on Thursday.
Procter & Gamble (PG 96.49, +2.46, +2.6%) was a standout in the consumer staples sector, and Dow, after being upgraded to 'Buy' from 'Neutral' at Bank of America/Merrill Lynch.
The information technology (+0.2%) and energy (+0.4%) sectors also showed relative strength. Renewed leadership from Apple (AAPL 170.95, +1.85, +1.1%) helped lift the tech sector, while the energy space benefited from rising oil prices. WTI crude rose 2.8% to 52.58/bbl.
In addition, some key standouts from the industrial sector (-0.3%) included Delta Air Lines (DAL 53.55, -2.72, -4.8%) and General Electric (GE 7.20, +0.49, +7.3%).
Delta fell after it reaffirmed a FY19 EPS target range that had a midpoint below Wall Street's average expectation. GE, meanwhile, led the S&P 500 in gains after a surprise upgrade to 'Neutral' from 'Underweight' at JP Morgan, though maintained its $6.00 price target.
Separately, retail stocks were one of the hardest hit groups on Thursday, which helped drive the weakness in the consumer discretionary (-0.4%) sector. The SPDR S&P Retail ETF (XRT 42.52, -1.17) lost 2.7%. On a related note, Tailored Brands (TLRD 14.13, -6.01) and Oxford Industries (OXM 67.24, -7.57) dropped 29.8% and 10.1%, respectively, after some disappointing guidance/outlook.
Reviewing Thursday's economic data, which included Export and Import Prices for November, weekly Initial and Continuing Claims, and the Treasury Budget for November:
- Import prices declined 1.6% in November after increasing 0.5% in October. Export prices declined 0.9% in November after increasing an upwardly revised 0.5% (from 0.4%) in October. Excluding fuel, import prices were down 0.3%. Excluding agricultural products, export prices were down 1.0%.
- The key takeaway from the report is that it stirred some thinking that inflation trends could be in a topping phase, which is constructive in terms of the market's belief that the Federal Reserve is apt to take a more conservative path with future rate hikes.
- Initial jobless claims for the week ending December 8 dropped by 27,000 to 206,000 (consensus 228,000). Continuing claims for the week ending December 1 increased by 25,000 to 1.661 million.
- The key takeaway from the report is that it helped quell for the time being burgeoning concerns about the rising trend in initial jobless claims.
- The Treasury Budget for November showed a deficit of $204.9 billion versus a deficit of $138.5 billion for the same period a year ago. The Treasury Budget data is not seasonally adjusted, so the November deficit cannot be compared to the $100.9 billion deficit for October.
- The fiscal year-to-date deficit is $305.4 billion versus a deficit of $201.8 billion for the same period a year ago. The budget deficit over the last 12 months is $882.6 billion.
Looking ahead, investors will receive Retail Sales for November, Industrial Production and Capacity Utilization for November, and Business Inventories for October on Friday.
- Nasdaq Composite +2.4% YTD
- Dow Jones Industrial Average -0.5% YTD
- S&P 500 -0.9% YTD
- Russell 2000 -6.7% YTD
US resists efforts to boost IMF’s permanent reserves
Move deals a blow to Christine Lagarde’s efforts to shore up fund’s financial footing
The US has come out against an increase to the International Monetary Fund’s permanent reserves, dealing a blow to efforts by Christine Lagarde, its managing director, to put the institution on a more stable financial footing.
David Malpass, the US Treasury’s undersecretary for international affairs, told a congressional committee on Wednesday that the US is “opposed to changes in quotas”. He argued that the IMF has ample firepower and countries have developed alternative resources to draw on in a crisis.
Ms Lagarde had embarked on a drive to persuade the IMF’s largest shareholders to back an increase in the organisation’s permanent firepower around the time of its annual meetings in Bali, Indonesia, in October. Had the US supported the idea of an increase in IMF quotas, it would have probably triggered a positive response from other leading countries as well.
While the US appears to have shut the door on an increase in the IMF’s permanent reserves, it appears to have left it open when it comes to US backing for alternative funding mechanisms, for example a renewal of the NAB — the borrowing facility that pools temporary contributions to the IMF from its members.
While the IMF has plenty of available cash, the expiration of borrowing arrangements in the coming years is expected to sharply shrink its resources, potentially constraining its capacity to rescue financially troubled economies.
The Trump administration’s decision to shy away from a permanent boost to IMF resources reflects its aversion to multilateral institutions. While an increase for the IMF would have strengthened an institution that has for decades been synonymous with the US-led international economic order, it would have inevitably allowed emerging markets, including China, to wield greater influence within the organisation, at a time of high tension between Washington and Beijing.
The US enthusiastically backed this year’s IMF bailout of Argentina, the largest in its history, but has been more sceptical of IMF interventions in countries that are big recipients of Chinese investment, such as Pakistan.
Speaking to the House Financial Services Committee, Mr Malpass said: “We will be seeking a constructive size for IMF resources that contributes fully to the stability of the international financial system, but recognises that the IMF is just one part of the global financial system and its various support mechanisms.
“We are opposed to changes in quotas given that the IMF has ample resources to achieve its mission, countries have considerable alternative resources to draw upon in the event of a crisis, and the post-crisis financial reforms have helped strengthen the overall resiliency of the international monetary system.”
Mr Malpass said in his testimony that he met Ms Lagarde last week to discuss funding needs, and that the administration would notify Congress within a few weeks of the formal start of negotiations with the IMF. Gerry Rice, the IMF’s chief spokesperson, said it had taken note of Mr Malpass’s comments.
“The fund currently has the financial means to fulfil its role in the global financial system, and we will continue to provide advice and program support to our membership in line with our policies,” said Mr Rice.
“We are actively engaged in discussions with our membership to complete the 15th review of quotas by the time of the annual meetings [in] 2019 at the latest. These discussions will continue, guided by our members’ common interest in ensuring that the IMF remains strong and well-resourced into the future.”
Mark Sobel, US chairman of think-tank Omfif, who represented the US on the IMF's board until April, said: “Even if fund resources are ample at this moment, that is no guarantee of the future. Turning our backs on a fund quota increase will be seen across the globe as another US snub of multilateralism, global institutions, and a rules-based order.”
The global rulemaker for banks is trying to crack down on lenders’ practice of gaming of regulations by flattering their accounts just before quarterly reporting periods.
So-called window-dressing by banks should be curbed by forcing them to publish measures that are harder to game alongside quarterly averages, the Basel Committee said in a consultation paper published on Thursday.
Supervisors have been concerned for some time that banks can make their balance sheets look better by reporting an overly optimistic leverage ratio. This ratio measures equity against total assets and essentially acts as a measure of how well a bank can pay its debts.
Banks can make their leverage ratios look better by reducing their exposure to repo markets — where banks lend out assets in return for short-term financing — just before quarterly reporting dates. It means they may be carrying more risk than their customers and investors can easily see. US banks have to report daily averages and there is not the same adjustment made.
“A particular concern is ‘window-dressing’, in the form of temporary reductions of transaction volumes in key financial markets around reference dates resulting in the reporting and public disclosure of elevated leverage ratios,” the Basel Committee said, adding that window-dressing “is unacceptable, as it undermines the intended policy objectives of the leverage ratio requirement and risks disrupting the operations of financial markets.”
The committee suggested in its consultation, which is open until March, that banks should publish not only quarterly leverage ratio figures but also three other figures based on an average of daily values across the quarter, including of central-bank reserves counted in banks’ on-balance sheet exposures.
German bank consolidation: Deutschmerz
A mash-up of Deutsche Bank and Commerzbank makes a lot of sense on paper
Freddie Mercury’s vocals helped make “We are the Champions” one of the catchiest songs of all time, according to an academic study. German politicians echo his theme when describing their country’s industries — except for banking. German lenders are dispiritingly weak. Hence the recurrent idea of merging the two largest, Deutsche Bank and Commerzbank.
The main aim is to put the fallen titan that is Deutsche back on its feet. Overheads are stubbornly high, with a cost-to-income ratio of 93 per cent. A dire return on equity, under 1 per cent, means the bank cannot plough enough profit back into its balance sheet each year to bolster the capital base. Chief executive Christian Sewing’s target of a 10 per cent return on equity over the medium term looks challenging. Cost cutting helps. But hefty restructuring would bring big cash charges, eroding thin capital.
A mash-up — with the penitential code name Deutschmerz — makes a lot of sense on paper. Deutsche probably could not pay cash for Commerzbank, which has a market value of €8.7bn, roughly half its own worth. The weird physics of accounting means an all-share deal would lift capital. Commerz trades below book value. If Deutsche acquired it, any goodwill — the difference between the price paid and net asset value — would be negative. Even on a bid premium of 30 per cent, Citi thinks the boost could be €11bn, a fifth of Deutsche’s top tier capital, assuming no big writedowns.
That backdoor capital raising would not be enough to reassure shareholders. Management would still need to raise profitability. Assume Deutschmerz cut total overheads by 10 per cent. That would produce €3bn in savings. Taxed and capitalised, those are worth about €22bn, nearly equal to the banks’ combined market values. Hallelujah!
So much for fantasy M&A. Doing the deal would be tough politically, given the job cuts. Profits in German lending would remain miserably thin without structural reform. Yet the banks of the EU’s largest economy are slowly imploding. Freddie had no time for losers. In banking, Germany should follow his example.
UK scientists find link between Alzheimer’s and surgery
Brain abnormalities associated with the disease could be transmitted, research shows
Brain abnormalities associated with Alzheimer’s disease could be transmitted by surgical procedures in exceptional circumstances, UK scientists have found.
The team at University College London said their experiments demonstrated the need for extreme vigilance in sterilising medical instruments, but they emphasised that there was no evidence of potential transmission of Alzheimer’s through blood transfusions or social contact.
The UCL study, published in Nature, examined batches of human growth hormone extracted from the pituitary glands of deceased donors, dating back to the early 1980s, when children of short stature were treated with HGH from cadavers.
Some HGH samples contained substantial amounts of amyloid-beta, the abnormally folded protein that builds up in the brains of Alzheimer’s patients and is believed to contribute to dementia symptoms.
Then the researchers injected the contaminated HGH samples into the brains of mice genetically susceptible to Alzheimer’s disease. Over a period of months this “seeded the development of amyloid-beta pathology” in the animals’ brains, similar to the changes seen in humans in the early stages of Alzheimer’s before symptoms appear.
Although HGH from cadavers has not been used since 1985, the UCL team said the findings “should prompt a review of the risk of transmission of amyloid-beta seeds by medical and surgical procedures” — for example on the instruments used in brain operations. But the scientists added: “There is no suggestion that Alzheimer’s disease is contagious and no supportive evidence from epidemiological studies that it is transmissible . . . by blood transfusion.”
Other Alzheimer’s experts expressed confidence in procedures put in place in the 1980s and 1990s to prevent the transmission of pathogens, particularly the prion proteins that cause Creutzfeldt-Jakob disease (CJD), through potentially infected human tissues or surgical instruments.
“These procedures are still in place and while this publication emphasises their importance, there is little reason to assume more stringent procedures are needed,” said David Brown, professor of biochemistry at the University of Bath.
John Collinge, the project leader, said it followed up a 2015 study that found traces of amyloid-beta in the brains of patients who had died from CJD as a result of treatment with contaminated HGH. “These were young people in their 30s and 40s who would not normally show signs of amyloid pathology,” he said.
The latest study adds evidence that preserved HGH contained amyloid-beta, and that the samples could transmit the protein to susceptible mice.
“I was rather amazed that we could seed the pathology so easily from material that had sat around for 30 or 40 years as a powder at room temperature,” said Professor Collinge. “But it is very important that we don’t scare people into thinking they might ‘catch’ Alzheimer’s disease.”
Renault Sticks With Carlos Ghosn as Internal Probe Finds No Illegality
Auto executive is under arrest in Japan for allegedly understating his compensation
Renault SA RNO +1.63% said Carlos Ghosn, under arrest in Japan for allegedly understating his compensation, will remain chairman and CEO of the auto maker after it found no financial wrongdoing in France.
The French car maker launched an internal probe on Nov. 23, days after Japanese prosecutors arrested Mr. Ghosn in response to Renault’s partner, Nissan Motor Co. NSANY 0.73% , alerting authorities with details of its own probe alleging financial wrongdoing by Mr. Ghosn.
The Renault investigation has so far looked at the period 2015-2018, and its preliminary conclusion is that Mr. Ghosn’s compensation and its approval were “in compliance” with the law as well as France’s corporate governance code for listed companies.
Mr. Ghosn receives two separate salaries from Renault and Nissan. The Renault probe is only looking at his remuneration from the French car maker.
Renault’s probe could help determine not only Mr. Ghosn’s fate, but also set the tone for the future relationship between Renault and Nissan, whose two-decade alliance entails pooling technology, basic components, and research and development. If Renault investigators turn up parallel evidence of any wrongdoing by Mr. Ghosn, it could clear the way to his removal from the French company. If not, Renault may find itself at odds with its partner about who should lead their alliance—a role that is currently reserved for the Renault CEO.
The Renault investigation is being led by Eric Le Grand, chief ethics and compliance officer at Renault, and Claude Baland, the company’s senior ethics adviser. The two men briefed the board on Thursday.
Japanese prosecutors indicted Mr. Ghosn this week on charges of understating his compensation in five years of Nissan’s financial reports, and they have also laid out new suspicions that he did the same in an additional three years of Nissan financial reports through the year ended March 2018.
Mr. Ghosn, who was arrested in Tokyo Nov. 19 and remains in jail, has denied wrongdoing, according to Japanese public broadcaster NHK. The office of his lead Japanese lawyer, Motonari Otsuru, has declined a request for comment.
Why Farfetch Acquired Stadium Goods
The fashion platform is seeking to gain an edge in the increasingly competitive online luxury space by picking up the growing streetwear consignment marketplace, which was valued at $250 million.
LONDON, United Kingdom — In its first major move since going public in September, Farfetch announced Wednesday that it is acquiring sneaker and streetwear marketplace Stadium Goods in a deal that values the business at $250 million. The London-based fashion e-commerce platform is aiming to extend its reach in the growing luxury sneakers and streetwear market, as millennials account for a growing percentage of luxury sales and competitors are engaged in a digital land grab.
Farfetch first partnered with Stadium Goods, a consignment reseller of rare and limited edition products, on a distribution deal in April of 2018, bringing a small selection of products sold on Stadium Goods to the Farfetch platform. After the deal closes, Stadium Goods’s full inventory will be available to Farfetch users. Stadium Goods will continue to operate independently while tapping into Farfetch’s logistics and delivery capabilities.
The world's largest fashion e-commerce players, including Farfetch, MatchesFashion and Richemont’s Yoox Net-a-Porter, are locked in a race to add new services and technologies through investments, acquisitions and internal research and development in order to stay ahead of the pack, generate higher margins and become the go-to platform for consumers and brands, according to BoF and McKinsey's The State of Fashion 2019 report.
They’re all chasing a rapidly expanding online luxury market, which Bain & Co. sees growing from an estimated €26 billion ($30 billion) in 2018 to between €80 billion and €91 billion ($90.9 billion to $103 billion) in 2025. Sneakers are a key driver of the boom, outpacing overall luxury sales growth to reach $4 billion last year.
Farfetch founder chief executive Jose Neves said that while his marketplace has built a following around high-end streetwear, “we did not have access to the rare sneakers, to the premium limited editions in the secondary market” that Stadium Goods Offers. The partnership has so far generated “phenomenal, immediate traction” from all of Farfetch’s markets, especially China, Japan, Russia and the Middle East.
“[Sneakers] are growing faster than other categories and we see the same on Farfetch,” added Neves. “We now have the strongest secondary market brand, in our view.” Stadium Goods competes directly with other streetwear-focused platforms StockX, Grailed and GOAT.
Stadium Goods co-founder and chief executive John McPheters said Farfetch’s international reach would be a major boost to the business. “They’ve figured out a lot of things that we are still learning,” he said. McPheters and co-founder Jed Stiller first met Neves a year ago and began the conversation that led to the deal.
Most of Stadium Goods’ sales happen online, and the marketplace has partnered with larger digital retailers including Amazon, eBay, Zalando and Alibaba to scale its access to sneakerheads. Last year, it turned over $100 million in gross merchandise volume.
McPheters said the relationship between Stadium Goods and Farfetch is unlike its other partnerships to date. “We can do so much more in terms of driving that engagement, that resonance, that cross pollination of product,” he said. “Our models are very well aligned. A lot of the guess work in terms of selling on channels is really taken out.”
Both Farfetch and Stadium Goods are focused on capitalising on China’s growing luxury market, but they have taken different approaches. JD.com, China’s second-largest e-commerce company, has a stake in Farfetch. Meanwhile, Stadium Goods started selling products on JD.com rival Alibaba's Tmall in 2016, and the company has said the channel now accounts for 15 percent to 20 percent of total sales.
But McPheters said Stadium Goods’s relationships with its existing e-commerce partners will remain “business as usual,” batting away the suggestion of a potential conflict between the two company’s respective alliances with JD.com and Tmall. Neves said any re-evaluation of the partnership between Stadium Goods and Tmall would be up to Stadium Goods management: “We need to do what’s best for Stadium Goods… We should be open minded if channels are bringing great customers."
Farfetch, which went public on the New York Stock Exchange in September 2018, has aspirations to be the “Amazon for luxury,” adopting the e-commerce giant’s marketplace model. Third-party sellers, from tiny boutiques to global brands and retailers, list products on the site, with Farfetch processing sales and sometimes handling the logistics, but not taking inventory.
Since going public, Farfetch has made clear its aggressive focus on new markets, pursuing more business in emerging economies such as China and the Middle East, as well as signing on additional retailers and brands. Neves told analysts in November that he wants Farfetch to take the “lion’s share” of new luxury spending online over the next decade.
The company reported $310 million in sales on its platform in the third quarter, a 53 percent jump from the same time last year, and putting Farfetch on track to handle transactions worth well over $1 billion for the full year. Farfetch’s cut of each sale is around 30 percent. Losses are also growing, as it invests heavily in technology, hitting $77 million in the third quarter of 2018, up from $28 million during the same period the previous year.
On Wednesday, Farfetch shares were up 5.9 percent at $23.90.
Stadium Goods is Farfetch’s first acquisition since picking up Chinese digital marketing agency CuriosityChina in July. In 2015, it also acquired London boutique Browns.
“We will continue to look only at world-class absolute leaders in specific markets or technologies or categories, and nothing else,” said Neves, describing his strategy around potential future acquisitions as case-by-case. “I believe first in deals that are win-wins.”
Stadium Goods opened in New York’s Soho in 2015, reselling limited edition sneakers to a growing market of fans ready and eager to pay thousands of dollars for rare pairs. Founded by McPheters and Stiller, the business raised $4.6 million in January 2017 in a Series A funding round led by Forerunner Ventures. In February 2018, LVMH bought an undisclosed minority stake in the business.
“They have huge knowledge and great passion for this space,” said Neves.