After Hours Summary: BBBY -15%, CMTL -13% following earnings/guidanceAfter Hours Gainers:
Companies trading higher in after hours in reaction to news: HAIR +7.4% (initiated with Outperform at William Blair), AZO +1.1% (authorized the repurchase of an additional $1.250 bln of common stock), PYPL +0.6%/ MA +0.3% / V +0.2% (initiated with Outperform at BMO Capital Mkts), EXP +0.4% (initiated with Outperform at Macquarie)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: BBBY -14.6%, CMTL -12.9% (also promotes Michael Porcelain to Chief Operating Officer and Michael Bondi to Chief Financial Officer)
Companies trading lower in after hours in reaction to news: CCXI -10.9% (ticking lower; announces proposed offering of $75 million in common stock), ROYT -5.7% (light volume after declaring lower monthly distribution), KRP -1.9% (thinly traded; commenced 3 mln common unit underwritten public offering ), TLRY -1.7% (ongoing volatility), ALDX -0.4% (to offer 5.25 mln shares of common stock in underwritten public offering)
Closing Market Summary: Fed Votes to Raise Rates; Stocks Slide in the Final MinutesThe Federal Reserve increased short-term interest rates on Wednesday, as expected, raising the fed funds target range by 25 basis points to 2.00-2.25%.
Stocks were up modestly ahead of the release of the Fed's decision, which crossed the wires at 2:00 PM ET, and extended gains after the central bank removed the word 'accomodative' from its policy statement. However, that initial move was reversed, and then some, following a post-decision press conference from Fed Chairman Jerome Powell, during which he said the language change didn't signal a change in the Fed's path for rate hikes.
The S&P 500 was up as much as 0.5% on Wednesday, but fell sharply in the final minutes of the session to finish with a loss of 0.3%. The tech-heavy Nasdaq Composite ended lower by 0.2%, the blue-chip Dow Jones Industrial Average finished lower by 0.4%, and the small-cap Russell 2000 lost 1.0%.
As for rate-hike projections, the Fed still appears to be on track to raise rates another 25 basis points in December, with the CME FedWatch Tool putting the chances at 79.2%. Beyond 2018, the Fed's dot plot showed expectations for three rate hikes in 2019 (unchanged from June) and one in 2020 (also unchanged from June).
U.S. Treasury yields fell following the Fed's policy announcement, although the 2-yr yield managed to close unchanged at 2.83%. The yield on the benchmark 10-yr Treasury note dropped four basis points to 3.06%. In currencies, the U.S. Dollar Index finished +0.2% at 93.90, but was volatile after the release.
The drop in Treasury yields weighed on the rate-sensitive financial sector, which finished at the bottom of the sector standings with a loss of 1.3%. The energy sector (-1.0%) was another notable laggard, dropping in tandem with the price of crude oil; WTI crude futures finished -1.0% at $71.58/bbl.
On the upside, the communication services, consumer discretionary, and health care sectors had relatively strong outings, adding between 0.2% and 0.4%.
On the corporate front, Nike (NKE 83.70, -1.09) lost 1.3% despite reporting above-consensus earnings; IBM (IBM 151.61, +2.70) climbed 1.8% after getting upgraded to 'Buy' from 'Neutral' at UBS; Papa John's (PZZA 50.14, +3.93) spiked 8.5% after reports that its recently ousted founder and CEO is reaching out to private equity firms to buy the company; and SurveyMonkey (SVMK 17.24, +5.24) closed its first day of trading 43.7% above its IPO price of $12.00/share.
In politics, the details of a U.S.-Mexico trade deal will reportedly be released on Friday. That deal is expected to allow Canada to join at a later date.
Reviewing Wednesday's economic data, which included August New Home Sales and the weekly MBA Mortgage Applications Index:
- New Home Sales in August hit an annualized rate of 629,000, which is below the consensus of 630,000. The July reading was revised to 608,000 (from 627,000).
- The key takeaway from the report is that it reflects the affordability constraints that are increasing on the back of high prices and rising mortgage rates. To wit, the median sales price was up 1.9% year-over-year to $320,200 and the supply of new homes for sale stood at a 6.1-months' supply at the August sales pace versus 6.0 months a year ago.
- The weekly MBA Mortgage Applications Index rose 2.9% to follow last week's increase of 1.6%.
Looking ahead, investors will receive a big batch of economic data on Thursday, including the advanced readings for August International Trade in Goods, Retail Inventories, and Wholesale Inventories, Durable Goods Orders for August, the third estimate for Q2 GDP, weekly Initial Claims, and August Pending Home Sales.
- Nasdaq Composite +15.8% YTD
- Russell 2000 +10.2% YTD
- S&P 500 +8.7% YTD
- Dow Jones Industrial Average +6.7% YTD
Italy plays for high stakes in its fiscal poker game
The country’s debt sustainability remains on a knife edge
The past few weeks have provided global investors with a riveting game of what I like to call “Italian hold ’em”. Italy’s coalition government has been playing poker with the public, the EU and the markets as it cobbles together its fiscal and economic projections ahead of Thursday’s budget announcement.
The public started the game of poker by drawing a new hand in March, rejecting traditional centrist parties and voting for the populist League and Five Star Movement. The coalition government formed by the two parties has largely bluffed its way through the game so far. It has pledged both that its fiscal plans for 2019 will not make the structural budget deficit worse than in 2018, and that it does not feel constrained by Europe’s fiscal rules.
Yet the League and Five Star came to power promising to implement a universal basic income and flat tax, roll back previous pension reforms and scrap a planned value added tax rise. Following the fatal collapse of a bridge in Genoa, the government has also championed infrastructure spending.
This all costs money, which is problematic for the eurozone’s second-most indebted country (behind Greece). While finance minister Giovanni Tria has suggested some savings could be generated by reducing tax breaks and deductions, that is unlikely to fully offset the government’s expansionary priorities.
The markets and the EU are both calling the government’s bluff. Yields on Italian government bonds have risen on the back of government promises to spend and fallen following reassurances from Mr Tria that the 2019 deficit would be lower than feared.
By the end of the year, Italy will have missed its fiscal targets in 2017 and 2018, which raises the possibility that it will be placed in the EU’s “excessive deficit procedure”, a sort of budgetary timeout that could result in sanctions. This would not be a disaster — sanctions have never been applied — but it would leave the European Commission with limited appetite for allowing Italy more fiscal room for manoeuvre.
The Italian government cannot fold to pressure from the markets and the EU for fear of losing the pot to the public, and with it its popularity. And it cannot raise (the deficit) or it loses the pot to the markets and the EU.
Game theory suggests a fudge. To avoid losing the poker game, the Italian government must offer at least some plan to meet its electoral pledges while reducing the deficit moderately, even if less than the EU would like.
But even if Italy wins this hand, it may not win the game. Whatever its fiscal and growth projections, there is no guarantee they can be achieved. Italy’s debt burden is sufficiently high, and investor confidence sufficiently skittish, to put its debt sustainability on a knife edge.
Second, even if Italy’s medium-term fiscal plans are reasonable, they could be knocked off kilter by global developments. Most economists agree that as fiscal stimulus measures peter out in the US, the risk of an American recession will rise significantly from 2020. That could damp growth in the eurozone, just as Italy’s debt obligations are at their highest.
Third, Italian banks remain fragile and continue to be the country’s Achilles heel. And finally, there is no credible plan for what to do if Italy were to get into trouble.
European Central Bank officials have waved off such concerns, claiming Italy will just ask for an Outright Monetary Transactions programme if necessary — a bailout that comes with strict conditions.
My fear is that no Italian government would be willing to accept the strict conditions attached to an OMT, least of all a populist one.
All of which makes the stakes in this poker game rather high as Italy prepares to up the fiscal ante this week.
DBAG in advanced talks to acquire Kraft & Bauer
26 SEP 2018
DBAG [ETR:DBAN] is in advanced talks with Swiss sponsor Invision to acquire Kraft & Bauer, a German fire-protection systems supplier, two sources briefed on the situation said.
The deal is expected to have a three-digit price tag, the first and a third source briefed said. Kraft & Bauer generates around EUR 11m EBITDA, the first source said. IMAP is running the process on the sell-side, as reported.
At least two other private equity firms made it to the final round of the auction and are on hold while DBAG and Invision negotiate a deal, the first source said.
The process initially generated interest from strategics, which however failed to meet the vendor’s price expectation. The sale then restarted this summer with a focus on private equity bidders, the third source said.
Kraft & Bauer supplies automatic, microprocessor-controlled fire protection systems to machine manufacturers and industrial businesses. Its product offering includes modularly structured object-protection systems, with pressure-relief and air-butterfly valves for machine tools that have individual or central extraction systems, as well as object-protection systems for computer facilities and explosion protection areas.
Invision acquired a majority stake in the business as part of a succession agreement in 2013.
Kraft & Bauer generates EUR 25m revenues and has 80 employees, according to the sponsor’s website.
Invision, DBAG and IMAP declined to comment.
Disney-Fox to sell Sky stake to Comcast
Move gives US media group £11.6bn and smooths sale of broadcaster
Walt Disney and 21st Century Fox are selling their shares in Sky to Comcast, putting the US cable operator on course to take full control of the European media group.
Fox holds a 39 per cent stake in Sky, which would go to Disney as part of Disney’s $71bn purchase of Rupert Murdoch’s entertainment assets.
However, after Comcast beat Disney in the £37bn auction for Sky on Saturday evening, Disney has decided to sell up rather than remain as a minority shareholder.
Fox confirmed on Wednesday that it would tender the shares in the Comcast offer. The proceeds will flow to Disney as part of its purchase of the Fox assets.
Disney plans to use the proceeds from the sale — about £11.6bn ($15.3bn) — to strengthen its balance sheet, reduce the debt associated with its purchase of the Fox assets and invest in content creation.
The company is developing new, global direct-to-consumer streaming services and is planning to produce exclusive content for them. Disney will take control of Hulu, the US streaming service, as part of its acquisition of the Fox assets, and will develop new content for it to attract new subscribers. It has launched ESPN Plus, a sports streaming service, and plans to launch a service aimed at families which will include content produced by its Marvel, Pixar and Lucasfilm divisions.
The sale of the Fox-Disney stake in Sky will push Comcast over the acceptance threshold for its offer, meaning that the company can begin working with Sky. If they had held on to the stake, they could have prevented Comcast from consolidating Sky’s cash flow, although the US cable company would still have controlled the broadcaster.
At the weekend, Comcast agreed to pay £17.28 a share for Sky, £30.6bn in equity and $37bn including net debt, trumping Fox and Disney’s rival bid.
Brian Roberts, Comcast’s chief executive, told the FT this week that Sky would operate independently once it completed the acquisition, with Jeremy Darroch, its chief executive, given autonomy to run the business.
“The consistent theme at Comcast has been letting leaders of our businesses make their own decisions, being decentralised and keeping an entrepreneurial spirit,” Mr Roberts said. “We’ve said this to Jeremy and the rest of the Sky team . . . They will be able to act as an independent company but with the resources of a $150bn company behind them.”
Sky ushered in the pay-TV era in the UK when it was launched almost 30 years ago by Rupert Murdoch on “a wing and a prayer” from a draughty industrial park on the outskirts of west London.
Its early financial troubles almost bankrupted the media mogul. But eventually, its mix of exclusive sports rights and movies, and later additions such as broadband and mobile services, turned it into one of Britain’s most valuable companies.
*UBER VALUATION UPDATED TO $100B, LYFT TO $25B AT AEGIS CAPITAL