After Hours Summary: JELD -18%, ADBE +5%, JBHT +1% following earnings/guidance, SEND +14% on Twilio (TWLO -2.5%) acquisition newsAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: ADBE +5.1% (reaffirms Q4 guidance; sees FY19 rev up 20%), CRY +3% (light volume; sees Q3 revenue above consensus), JBHT +0.9%
Companies trading higher in after hours in reaction to news: SEND +14.3% (Twilio to acquire SendGrid in an all-stock transaction valued at ~$2 billion), HQCL +9.9% (enters definitive agreement going-private transaction implying equity value of ~$825 million), ULBI +4% (thinly traded; awarded $8.3 million communications radio contract), CGC +2.2% (continued strength; also confirmed earnings release date will be Nov 14)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: JELD -18.3% (lowers Q3 adj EBITDA guidance with downside sales guidance; also announces promotion of John Linker to CFO, effective November 8), PANW -1.5% (names Amit Singh as president effective Nov 1; reaffirms Q1 guidance for EPS of $1.04-1.06 vs. $1.06 S&P Capital IQ Consensus and revs of $625 -635 mln vs. $632.46 mln consensus)
Companies trading lower in after hours in reaction to news: CRMD -16.1% (files for ~15 mln share common stock offering by selling stockholders issuable upon the exercise of warrants), IGC -12.5% (files for $100 mln mixed securities shelf offering), ACRS -3.1% (Aclaris Therapeutics to acquire worldwide rights to RHOFADE from Allergan Sales; purchase price includes upfront cash payment of $65 mln), TWLO -2.5% (Twilio to acquire SendGrid in an all-stock transaction valued at ~$2 billion)
Jony Ive talks smartphone addiction, design, and more in interview, says it’s impossible to ‘predict all the consequences’
As expected, Apple SVP of Design Jony Ive made an appearance at the WIRED25 event today. The company’s head designer was interviewed by Vogue editor Anna Wintour.
The conversation started off with technology addiction. In response to the ongoing concerns regarding the topic, Ive says that it just depends on how you use your devices.
“I think it’s good to be connected. The real issue is what you do with that connection.”
On the same topic of addiction, he notes that in “the nature of innovating” it’s impossible to “predict all the consequences.” With something like the iPhone, the company never envisioned that it would be causing such a large uptick in smartphone addiction.
In line with statements Apple has made in the past, Ive says that his responsibilities as a designer doesn’t end “when a product [has] shipped” noting that, “at the end of every project there are two things: the product you made, and what you have learned.”
Wintour then questioned Apple’s dedication to secrecy. Ive said that the company’s culture with secrecy is simply due to the fact that some products never see the light of day. And with that, the company likes to set expectations when it announces its products, letting the world know what to expect, not what might come.
“I’ve been doing this for long enough where I actually feel a responsibility to not confuse or add more noise about what’s being worked on because I know that sometimes it does not work out.”
Of course, the biggest testament to this statement is Apple’s AirPower Qi charging mat, which the company announced in September of 2017, alongside iPhone 8 and 8 Plus, iPhone X, and Apple Watch Series 3. This product, which was slated for “2018”, still has yet to ship.
Closing out the interview, Wintour asked about what keeps Ive driven at Apple, why he continues doing what he does. His response, “If you lose that childlike excitement, I think it’s time to do something else.” Wintour asked if he’s at that point, to which he responded “Oh goodness no.”
In an age when smartphone design is starting to plateau, it’s interesting to know that Apple’s head of design is still very much excited about innovation.
Ari Emanuel’s Endeavor seeks to end Saudi deal
Journalist’s disappearance roils Hollywood months after warm welcome for crown prince
Endeavor, the media and entertainment group founded by Ari Emanuel, is trying to terminate a $400m investment by Saudi Arabia’s sovereign wealth fund following the disappearance of Saudi journalist Jamal Khashoggi, according to people familiar with the plan.
The deal was struck this year and gave the kingdom’s Public Investment Fund an equity stake of less than 10 per cent in Endeavor, which owns Ultimate Fighting Championship, Miss Universe and IMG, the sports marketing group. It also owns one of Hollywood’s largest talent agencies, which represents stars such as Matt Damon and Serena Williams. Endeavor declined to comment.
The investment in the company formed part of a grand plan by Mohammed bin Salman, the Saudi crown prince, to open up Saudi Arabia’s entertainment sector and create a domestic film and entertainment industry. It is unclear what impact the unwinding of the Endeavor investment will have on this project.
Moves to terminate the deal come months after Hollywood rolled out the red carpet for Prince Mohammed. Mr Emanuel, the brother of Chicago mayor Rahm Emanuel, was among the entertainment executives at a dinner held for the crown prince when he came to Los Angeles in April: Amazon’s Jeff Bezos, Walt Disney’s Bob Iger and Snapchat’s Evan Spiegel also attended.
The Endeavor investment is one of several by the Saudi sovereign wealth fund, which has more than $250bn in assets. It has aggressively invested in western technology companies, buying stakes in companies such as Tesla and Uber. It has also invested $45bn in a new SoftBank technology fund.
It is unclear if Endeavor will return the money paid for the stake or if it has lined up an alternative buyer of the shares. The group has expanded in recent years, partnering with Silver Lake, the technology-focused private equity group, on a string of deals. The two companies are currently among the final bidders for Endemol Shine, the European television production group.
Endeavor’s efforts to withdraw from the Saudi deal come as more western business leaders have pulled out of the Future Investment Initiative conference in Riyadh, which was organised by the PIF.
Executives who have withdrawn from the forum, due to take place at the end of the month, include Sir Richard Branson; Jim Yong Kim, World Bank president; Dara Khosrowshahi, Uber chief; Steve Schwarzman of Blackstone; Larry Fink, chief executive of BlackRock; and Jamie Dimon, JPMorgan Chase chief executive.
Sir Richard has also broken off discussions with the PIF fund about a planned $1bn investment in Virgin’s space companies.
Emerging-Markets Selloffs: This One Is Different
A Journal analysis looks at how 2018’s rout compares with others over the past 10 years
The deepening selloff in emerging markets this year is one of the biggest of the past decade—and differs in ways that highlight how the developing world has changed.
The rout was triggered earlier this year by rising U.S. interest rates and trade tensions, concentrated in a cluster of countries highly dependent on dollar-denominated debt, particularly Argentina and Turkey. Other countries have been pressured but are less vulnerable because they rely less on foreign money.
Other changes to developing economies help explain this year’s extreme volatility. Whereas once banks were the dominant lenders to emerging markets, now asset managers are providing more money by buying up bonds and shares in these countries. That is important because it spreads the risks across lenders and funds. It could also herald wilder market swings, given investors can withdraw their money compared with what banks can do with loans.
Many investors expect further pain for developing economies, pointing to the jump in Treasury yields, a strengthening dollar and trade tensions.
The Wall Street Journal compared this year’s selloff with three others. In 2008, selling was kicked off by the financial crisis, in 2013 by a rise in Treasury yields and in 2015 by concerns over Chinese growth.
Returns dashboard
From a returns perspective, 2018 is among the most-severe episodes of the past 10 years.
But the selloff would have to deepen significantly to surpass the steep falls in equities and currencies during the financial crisis.
Across equity and currency markets, this year’s selling looks sharper than the so-called taper tantrum of 2013, when the belief that the Federal Reserve would trim its bond purchases pushed U.S. rates higher, hurting emerging-market debt. Losses in hard-currency bonds, or those denominated in foreign currencies such as dollars, were heavier compared with today. In 2018, those assets denominated in local currencies are faring worse.
Another crucial difference this time around is that a handful of countries are bearing a large part of the selling. This year, Turkey, Argentina and Venezuela have accounted for around 35% of the widening gap between emerging-market bond yields and Treasurys, according to Bhanu Baweja, deputy head of global macro strategy at UBS.
“In mainstream emerging markets, there are very few countries that are on the precipice of a crisis. That’s down to one very simple thing: You don’t have massive external debt,” said Mr. Baweja.
Capital Flows
Emerging economies’ reliance on foreign money has diminished compared with a decade ago. In 2017, overseas capital flows to emerging markets equaled 4.35% of gross domestic product compared with almost 9% in 2007, according to the Institute of International Finance. That makes these economies less vulnerable to a withdrawal of foreign cash.
Turkey, one of the countries investors are most worried about, has foreign debts that the IMF calculates at around 53% of GDP in 2017.
“Emerging markets are much more robust right now in terms of foreign flows,” said Emre Tiftik, deputy director of global capital markets at the IIF.
The source of the cash flowing into emerging markets has also changed. Asset managers buying up bonds and stocks now provide more cash to emerging economies than bank lending. Before the financial crisis, banks lent far more money.
That means losses from rising defaults in emerging markets will be shared by asset managers and the banking system. That reduces the chances of a systemic crisis, but could hurt pension pots. Also, bank loans tend to be longer term, while funds can usually move in and out of investments quickly, potentially leading to greater volatility.
The drop-off in foreign fund flows to emerging markets has been just as abrupt as during the taper tantrum, according to data from the IIF.
Like in 2013, flows were running at a high level before the start of the latest crisis. The rolling three-month average net flows came to over $40 billion in January, underscoring just how bullish investors had been coming into the year. The question now is whether those flows turn negative in the coming months, as in 2008 and 2015. If they do, that could presage further pain for emerging-market assets.
Saudis Weigh Saying Journalist Was Killed by Mistake
The Saudi government is considering issuing a statement saying that rogue operatives killed Khashoggi by mistake during an interrogation gone wrong
Saudi Arabia is weighing whether to say that rogue operatives killed a Saudi dissident journalist, people familiar with the matter said, a position that would help the royal family exonerate itself from direct responsibility for a matter that has roiled its relations with the U.S.
The kingdom’s tentative explanation echoes comments President Trump made Monday, after speaking to Saudi King Salman, that “rogue killers” may have been behind the disappearance of Jamal Khashoggi, a former royal insider.
It’s unclear if and when the Saudi statement would be released, and its content hasn’t been finalized, the people familiar with the matter said. Saudi government spokespeople didn’t respond to request for comment.
Turkish authorities allege that Mr. Khashoggi was killed by Saudi agents after he entered the consulate in Istanbul on Oct. 2 to handle a paperwork matter. The Turkish government has shared with U.S. officials what it describes as audio and video recordings purporting to show that Mr. Khashoggi was killed in the building, according to people familiar with the matter.
Saudi Arabia has denied the accusation and said Mr. Khashoggi left the consulate alive, soon after arriving.
Mr. Trump said he had a 20-minute phone call early Monday with King Salman, who “firmly denied any knowledge” of what happened to the missing journalist. The president suggested Saudi agents could have been operating without the Saudi government’s knowledge.
“It sounded to me like maybe these could have been rogue killers,” Mr. Trump said.
The president said he had dispatched Secretary of State Mike Pompeo to Saudi Arabia—to meet the king—and “other places if necessary,” including Turkey.
“We are going to leave nothing uncovered,” Mr. Trump said. The State Department said Monday that Mr. Trump had called for a “prompt and open investigation” into Mr. Khashoggi’s disappearance.
Mr. Pompeo left Washington en route to Riyadh at midday Monday.
Mr. Trump also said King Salman had assured him that Saudi Arabia and Turkey were “working hand in hand, very closely on getting to the bottom of what happened.”
The 82-year-old King Salman is the ruler of Saudi Arabia. But his son, Crown Prince Mohammed bin Salman, is effectively the country’s day-to-day leader, and has overseen a succession of recent campaigns targeting perceived dissidents at home and abroad.
Suspicion that Saudi Arabia played a role in the journalist’s disappearance has led a growing list of Western executives and advisers to announce they were pulling out of a premier three-day conference set to start in Riyadh on Oct. 23.
The chief executive of JPMorgan Chase & Co., James Dimon, is one of the prominent executives to back out. Mr. Dimon had been a featured speaker, and his bank has longstanding ties to Saudi Arabia and is advising it on deals.
Mr. Dimon’s decision was joined by two other Wall Street titans: Laurence Fink, chief executive of the world’s largest asset manager, BlackRock Inc.; and Stephen Schwarzman, CEO of private-equity giant Blackstone Group, according to people familiar with the matter.
The disappearance of Mr. Khashoggi has frayed relations between the U.S. and Saudi Arabia and has tested the Trump administration’s efforts to make the kingdom the linchpin of its Middle East policy.
Mr. Trump’s decision to dispatch his secretary of state came as both Saudi Arabia and Turkey sent signals they were seeking to avoid direct confrontation over an incident that has drawn widespread international concern.
Despite their denial, Saudi authorities have begun acting on evidence supplied by Turkey, launching their own probe to determine whether the kingdom played a role in Mr. Khashoggi’s disappearance, people familiar with the matter said Monday.
The probe, which was ordered by King Salman, will be conducted by the Saudi public prosecutor, the people said.
Probe results could be announced within days, and lead to some Saudi individuals being held accountable for Mr. Khashoggi’s death, one of the people said.
Meantime, Turkish authorities said they had reached an agreement with Saudi Arabia to search the kingdom’s consulate in Istanbul for the missing journalist. Turkish television showed a group of investigators entering the building at 7:30 p.m. local time, saying the inspection would drag out late into the night.
Turkish officials, speaking on condition of anonymity, have said police had gathered evidence that Mr. Khashoggi was killed and his body dismembered by a team of 15 operatives dispatched from Riyadh. But Turkish President Recep Tayyip Erdogan has stopped short of accusing the kingdom of his murder.
Turkish authorities suspect Crown Prince Mohammed had a hand in Mr. Khashoggi’s disappearance because the alleged team of operatives they say killed the journalist comprised Saudi government officials and intelligence officers who flew to Istanbul on corporate jets controlled by the crown prince.
Saudi Arabia first pledged it would open the consulate doors to Turkish police several days after Mr. Khashoggi vanished. Since then, however, Saudi and Turkish officials argued over how thoroughly Turkish investigators would be allowed to inspect the diplomatic compound.
“We wanted to come in with all the chemicals and equipment investigators use to inspect crime scenes,” the official said. “The Saudis said we could only get a brief tour.”
The official said he expected Monday’s search would be conducted on Turkey’s terms and amount to a full inspection.
It comes a day after Mr. Erdogan spoke about Mr. Khashoggi’s disappearance with King Salman. The phone call, during which King Salman thanked the Turkish president for agreeing to set up a joint Saudi-Turkish team to investigate what happened, was the firstdirect contact between the two leaders since the journalist went missing.
Saudi Arabia’s ambassador to Washington, Prince Khalid bin Salman bin Abdulaziz, left the U.S. last week to report back to Riyadh, the State Department said, adding the U.S. requested that he return with answers to questions about Mr. Khashoggi’s disappearance.
US budget deficit hits $779bn in Trump’s first full fiscal year
New OMB data show $113bn increase after tax cuts and spending measures
The US budget deficit widened to a six-year high of $779bn during Donald Trump’s first full fiscal year in the White House as borrowing swelled despite surging economic growth.
The deficit grew by $113bn from the previous year, reaching 3.9 per cent of US gross domestic product in the fiscal year ended September 30. That compared with 3.5 per cent the previous year and was above the 40-year average of 3.2 per cent, according to a report from the US Treasury and Office of Management and Budget.
The figures will intensify concerns about the vast deficits the US government is running during an economic boom that has driven unemployment to its lowest levels since the late 1960s. Tax reductions pushed through at the end of 2017, coupled with higher public spending agreed by Congress early this year, are set to push up public debt at a rapid pace, triggering concerns that there will be less room for fiscal stimulus when the US next enters a downturn.
The Congressional Budget Office has predicted that under current laws, public debt is on course to reach its highest levels relative to GDP in US history over the coming 30 years. Yet months before his election, Mr Trump claimed that he would pay off the US national debt in eight years, while his fellow Republicans ran on platforms of fiscal restraint in 2016.
“We have a structural budget deficit that is largely driven by our unwillingness to increase federal revenue to satisfy the public’s appetite for spending programs,” said Michael Strain of the conservative American Enterprise Institute. “Over the next 30 years the debt is supposed to grow and grow and grow, and that is largely driven by predictable increases in social security spending, and major health programmes including Medicare.”
Receipts grew by 0.4 per cent compared with the previous fiscal year, while spending was up 3.2 per cent, the report showed. Mick Mulvaney, the director of the OMB, said the deficit was being exacerbated by a “continual unwillingness” on the part of Congress to restrain spending.
“The president is very much aware of the realities presented by our national debt,” he said in a statement. “America’s booming economy will create increased government revenues — an important step toward long-term fiscal sustainability. But this fiscal picture is a blunt warning to Congress of the dire consequences of irresponsible and unnecessary spending.”
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said that the recent tax cuts and spending increases were “making a bad problem even worse.”
“Deficits are rising — and fast,” she added. “In as soon as a year, they will top $1tn and never come back down unless Congress acts.”
Closing Summary: Stock Market Relents (Again) to Selling InterestU.S. stocks oscillated around the S&P 500's flat line on Monday before whipping noticeably lower in the final hour of trading. Renewed weaknesses in the information technology (-1.6%) and financials (0.5%) sectors coupled with ongoing concerns about the global economic growth outlook kept follow-through buying interest from Friday's rally in check.
The S&P 500 lost 0.6% and closed below its 200-day moving average (2766.54), which is considered to be a key technical level. The tech-heavy Nasdaq Composite lost 0.9% and the Dow Jones Industrial Average lost 0.4%. Meanwhile, the small-cap Russell 2000 outperformed, climbing 0.6%.
The struggling tech sector, which has been a bull market leader, has been a primary laggard during the market's recent setback. Investors who dumped their riskier tech assets last week have yet to come back with conviction. There were a few attempts in today's session, yet the buying interest waned each time as investors continued to trade out of some of the largest and most widely-held stocks. The heavily-weighted S&P 500 sector is down 7.5% for the month.
Notable information technology components that were down on Monday included Apple (APPL 217.36, -4.75, -2.1%), Microsoft (MFST 107.60, -1.97, -1.8%), Visa (V 137.23, -2.83, -2.0%), and MasterCard (MA 200.32, -3.90, -1.9%).
Additionally, the financials sector was unable to impress investors again after an underwhelming response to Bank of America's (BAC 27.92, -0.54, -1.9%) better-than expected earnings report. Charles Schwab (SCHW 47.64, -1.37, -2.8%) also fell after reporting earnings that were in-line with top and bottom estimates.
Bank of America reportedly fell because of some disappointment over the performance of its investment banking business, yet there were general concerns hanging over the sector that banks might be close to, or at, peak earnings growth. The rate-sensitive sector is now down 4.6% this month and 5.8% this year, despite interest rates nearing multi-year highs.
Treasury yields remained near their starting levels. The 2-yr note yield ticked one basis point higher to 2.85%, and the 10-yr note yield rose two basis points to 3.16%.
Separately, United States-Saudi Arabia tensions brewed over the weekend following the disappearance and alleged murder of Washington Post columnist Jamal Khashoggi. In response, President Trump threatened to impose sanctions on the world's largest oil producer if it was found to be guilty; however, President Trump said today that Saudi King Salman strongly denied to him any involvement in Mr. Khashoggi's disappearance.
Despite some underlying angst that the Saudi Arabian situation could boil over and potentially impact oil supplies, WTI crude prices were relatively subdued on Monday, settling 0.6% higher at $71.83/bbl.
In other corporate news, L3 Technologies (LLL 220.91, +25.13) rose 12.8% after announcing an all-stock merger of equals with Harris Corp. (HRS 173.25, +18.38, +11.9%). The combined company, L3 Harris Technologies, will be the 6th largest defense company in the U.S. and a top 10 defense company globally.
That merger news contributed to the relative strength of the industrials sector (+0.2%), which joined with the defensive-oriented consumer staples (+0.6%), real estate (+0.5%), and utilities (+0.4%) sectors to buck Monday's weakness in the broader market.
Separately, retailer Sears Holding (SHLD 0.31, -0.10, -23.8%) filed for Chapter 11 bankruptcy. That was not a surprise to the market, as it had been widely speculated, yet the news itself generated a sentimental story line given the retailer's storied operating history.
Reviewing Monday's flurry of economic data, which included Retail Sales for September, the Empire State Manufacturing Survey for October, total business inventories for August, and the Treasury Budget for September:
- Retail sales were up just 0.1% in September (consensus +0.6%) after increasing 0.1% in August. Excluding autos, sales declined 0.1% (consensus +0.4%).
- The key takeaway from the report is that core retail sales, which factor into GDP growth models, were up a solid 0.5%. Hence, the headline numbers were disappointing, yet this report will still factor favorably for Q3 real GDP growth prospects.
- The Empire State Manufacturing Survey for October checked in at 21.1 (consensus 18.0), up from 19.0 in September.
- The key takeaway from the report is that the strength was led by upticks in the indexes for new orders and shipments, which reflects good demand.
- Total business inventories increased 0.5% in August, in-line with the Briefing.com consensus estimate, after increasing an upwardly revised 0.7% (from 0.6%) in July. Total business sales also increased 0.5% after increasing 0.2% in July.
- The key takeaway from the report is that business sales continued to outpace inventory growth year-over-year, which is a favorable trend that carries the potential to lead to a better pricing environment for businesses.
- The Treasury Budget for September showed a surplus of $119.1 billion versus a surplus of $7.9 billion for the same period a year ago. The Treasury Budget data is not seasonally adjusted, so the September surplus cannot be compared to the $214.1 billion deficit for August.
- The budget deficit for fiscal 2018 totaled $779.0 billion versus $665.8 billion in fiscal 2017.
On Tuesday, investors will receive the Industrial Production report for September, the JOLTS - Job openings survey for August, the NAHB Housing Market Index for October, and Net Long-Term TIC Flows for July.
- Nasdaq Composite +7.6% YTD
- S&P 500 +2.9% YTD
- Dow Jones Industrial Average +2.2% YTD
- Russell 2000 +1.1% YTD
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Market action: the first 20 minutes
Mike Mackenzie’s daily analysis of what’s moving global markets
One of the most important aspects of directing any action or thriller movie is making sure you give the audience a chance to recover from a big shock. An opening scene replete with explosions or drama is followed by a notable moderation in pace, a temporary breather before the next bout of rising action.
After last week’s shock, markets are all over the place on Monday — China sold off, as did Japan, while Europe eked out a modest gain and Wall Street was back under some pressure led by renewed selling of technology shares. The S&P 500 index is having trouble clawing back above its 200-day moving average of 2,766 points. This key level is now acting as a ceiling for the broad market. The usual havens of the Japanese yen and gold have registered modest gains.
In movie terms we have just experienced the first turning point. So enjoy the popcorn and settle back in your seats as we are only 20 minutes into this two-hour feature.
The villain in some eyes is a 10-year Treasury note yield, stuck at 3.16 per cent, and this matters as the US benchmark remains in the breakout zone, above May’s high of 3.12 per cent.
Here’s a blunt appraisal of US stocks from Morgan Stanley’s equity strategy team:
“Despite the slide in multiples we saw last week, growth, discretionary and tech remain among the groups least impacted by the marketwide derating this year. Energy, materials, financials and industrials have seen near 20 per cent corrections in their multiples since the S&P’s valuation peak on December 18, the day before the tax bill was signed. We do not think the pain is over for growth, discretionary and tech and the rolling bear will likely be back for more.”
They add another interesting observation:
“We like to think about valuation in the context of rates and the equity risk premium. Assuming rates stay between 3 per cent and 3.25 per cent, an equity risk premium of 300 to 325 basis points puts us at an S&P multiple of 15-16 times. In short, 16.0x is now the ceiling for market multiples while it was the floor in February’s lower rate environment.”
Earlier on Monday I caught up with Diego Parrilla, from Quadriga Asset Managers, and he thinks we are just seeing the start of volatility and correlations normalising. That means a lot of investors who have sold volatility and chased ever-declining yields face a hefty squeeze on their portfolios. The risk now, argues Diego, is that as implied and realised volatility rise, value at risk models will cut back and thus tighten market liquidity further.
If we look at the most important players in the financial system, dubbed systemically important financial institutions, or SIFIs, a red flag has been fluttering for a while.
This grouping of banks along with a few asset managers and insurers remains firmly out of favour as this chart via Absolute Strategy shows. About three-quarters of the 39 global SIFIs have fallen more than 20 per cent from their 12-month peak. Negative rates in Japan and the eurozone, UK Brexit uncertainty and China’s crackdown on leverage have all taken a toll on the sector.
Among the standouts and worth watching in my view is Standard Chartered, whose share price has fallen 13 per cent since September 21. Just as a weaker Australian dollar reflects the financial markets anticipating a slowing Chinese economy, the markets appear to have adopted StanChart as a barometer of credit worries in China. Likewise the poor performance of French banks tells us that the market is worried about their loan exposures across the eurozone. Not a good look when Italy and the EU are circling each other like a couple of bare knuckle boxers.
Also lagging well below their 12-month highs are US banks, and this may appear surprising to some given a robust economy fuelled by tax cuts in recent months. Not even the recent steepening in the US yield curve has helped the sector. On Monday solid earnings from Bank of America with the sting of weaker loan growth prompted selling in its shares, just as we saw on Friday when JPMorgan Chase delivered a better than forecast third quarter. Of the major US banks only JPM remains up on the year, and that’s a rise of less than 1 per cent.
This tells us a couple of important things. First, if we consider the performance of banks, we are in late-cycle territory for the global economy, including the US. And it also says be very careful about what you buy in the value stocks bucket as growth rivals take a hit from a higher 10-year Treasury yield.
Telefonica could exit Mexico; may face regulatory pushback, sources say
15 OCT 2018
Telefonica [BME:TEF] could struggle to win regulatory approval if it decides to offload its Mexican wireless unit Telefonica Moviles Mexico (Movistar) to a local competitor, according to several sources.
The Spanish telecom giant, whose share price has dropped 25% in the last year, continues to review its portfolio as it focuses on return-on-capital, said a person familiar with the company. It has received many pitches to leave Mexico but there are no concrete plans to do so yet, the person said.
Telefonica, which declined to comment, has 24.6m subscribers in Mexico, which represent about 21% of all the country’s wireless users.
On 25 September, Spanish newspaper El Economista reported (citing sources privy to the process) that Telefonica was considering selling its units in Mexico and Central America to raise between EUR 1.9bn and EUR 2.7bn and cut its debt. At the end of June, the company’s net debt stood at EUR 43.6m.
While it has long been rumored that Telefonica could sell Movistar and its Central American business, the talks seem a little bit more serious than previous times, said a sector banker.
Ignacio Cepeda, a local telecom consultant, said Telefonica’s Mexican unit could be worth about USD 1bn.
AT&T [NYSE:T], which ventured into Mexico four years ago with the acquisition of Iusacell and Nextel Mexico, is seen as the most logical bidder for Movistar, said Victor Pavon, a former telecom regulator. Such a deal, he added, would help the Dallas-based cellular carrier rapidly expand its local subscriber base.
By taking over Movistar, AT&T would expand its subscription base to 40.7m from 16m and reach a 35% market share. Incumbent AmericaMovil [BMV:AMX] controls a 64% market share, according to Mexico’s telecom regulator (IFT)'s data.
According to Cepeda, it is unlikely that IFT would approve a deal that would see the number of wireless carriers operating in the country reduce from three to two.
Legislation introduced in 2014, however, might allow AT&T to takeover Movistar without needing regulatory approval, said Mony de Swaan, Mexico’s former telecom regulator czar.
A transitory article in the law states that as long as there is a so-called “prevailing economic agent” in the country’s telecom sector that controls a market share of more than 50%, competitors could merge together without needing the regulator’s blessing if, among other things, the deal does not hinder competition.
Local media giant Televisa used this provision of the law to take over private cable operator Cablecom in August 2014 without requesting authorization from the IFT. The regulator would have to determine if an AT&T-Movistar deal falls under this category, said de Swaan. The IFT did not respond to requests for comment.
In 2014, the regulator labeled America Movil a prevailing economic agent in Mexico’s telecom sector and imposed asymmetric measures to try and level the playing field.
But even if AT&T were to successfully acquire Movistar, it would surely go beyond the country’s spectrum-holding limit and would be forced to give back some of it to the Mexican state, said Cepeda.
AT&T, which declined to comment, currently controls 201.8MHz, or 33.7% of Mexico’s radio frequency spectrum. Movistar, for its part, controls 103.9MHz, or 17.4%. Mobile phone carriers like AT&T use radio frequency spectrum to transmit wireless data to cell phones.
According to Cepeda, it would not be in the IFT’s best interest to take spectrum back from AT&T. “Who would they sell it to?,” he asked, noting that America Movil (the only other carrier operating in the country) is already near the spectrum-holding limit.
De Swaan disagreed and said the regulator could use that spectrum to entice new cellular carriers to venture into Mexico.
Sprint [NYSE:S], the US’s fourth-largest wireless carrier, could also be interested in Movistar, said Pavon, the former telecom regulator official. Luxembourg-based Millicom International Cellular and WOM, the Chilean telecom business of UK-based private equity firm Novator Partners, could also bid for Telefonica’s Mexican unit, said Cepeda.
Millicom declined to comment. Sprint and Novator did not respond to requests for comment.
Troubled unit
It is no secret that Movistar is struggling, said Pavon. In 2016, the Spanish company wrote down the value of the unit by EUR 91m.
“The results of Telefonica Mexico continue to be affected by regulatory changes and increased commercial aggressiveness on the prepaid market,” the company said in its 2Q18 earnings report.
Movistar was particularly hit by the IFT’s November 2017 decision to allow America Movil to resume charging mobile termination rates (MTRs), said Cepeda.
Mexico’s Supreme Court had ruled a provision in the country’s telecom legislation that prevented America Movil from charging MTRs unconstitutional.
MTRs are fees paid by carriers every time one of its subscribers places a call to a subscriber of another carrier. Local brokerage Intercam estimates America Movil will receive between USD 45m and USD 55m from MTRs in Mexico in 2018.
Movistar is also beset by shrinking wireless traffic and rising operating costs, Cepeda said.
The company’s share of the country’s wireless traffic has dropped to 8.5% in June from 20.8% in September 2008. And its annual operation costs could grow by about USD 100m as it will start paying for the right to use the 40 MHz in the 2.5 GHz band it secured in August and to renew concessions for 140 Mhz in the 1.9 GHz band, said Cepeda.