>>> Barrons weekend summary Cover story: The second installment of Barron’s Roun

Barrons weekend summary 

* Cover story: The second installment of Barron’s Roundtable offers picks from panelists Henry Ellenbogen of New Horizons Fund (EFX, MTN, BFAM, SERV, SHOP, GRUB); Mario Gabelli of Gamco Investors (MSG, Liberty Braves Group, MGM, Davide Campari-Milano, ZBH, CNHI, GCP, PCAR, TXT, ENR); Jeffrey Gundlach of DoubleLine Capital (XLE, NTG, BKLN, EWZ, DXJ); Abby Joseph Cohen of GS (OXY, Samsung Electronics, ABBV, China Railway Signal & Communication, MDLZ); William Priest of Epoch Investment Partners (SBUX, OLED, AMAT, MLM, MET); Scott Black of Delphi Management (LRCX, HCLP, GTN, ARCC, HOFT); and Meryl Witmer of Eagle Capital Partners (KMX, OEC, Dart Group, Howden Joinery Group). 

* Features: 1) Small caps are in a bull market, but there are more risks than many investors realize: many companies are carrying large debt loads, and shares are expensive by historical standards; 2) At CES this year, tech companies heavily pitched their IoT strategies, but “beneath the veneer of convenience, there are considerable obstacles that could sidetrack or delay tech’s utopian vision”; 3) Keith Sanders, the director of operations at a Georgia book distributor, is the winner of the 2017 Barron’s forecasting challenge, topping more than 3,000 other entrants. 

* Tech Trader: Technology has a harder time than other industries putting vast amounts of cash to work, and while the tax overhaul may lead to some investment in U.S. manufacturing, tech outfits will most likely boost dividends, buybacks, and M&A. 

* Trader: The wider the gap grows between the 10-year Treasury yield and the S&P 500’s dividend yield, the more enticing bonds will become for yield-seeking investors; As companies bring money back home under the new tax law, some may try to boost growth through acquisitions; Betting on BA, which is trading at 42.8% above its 200-day moving average, may seem risky, but history shows the stock can remain extended for a long time when it’s in that region. 

* Profile: Mark Baribeau, co-manager of the Prudential Jennison Global Opportunities fund, seeks to build a “unique collection of business models that have a lot of firepower” (top 10 holdings: Tencent Holdings, BABA, Kering, AMZN, MELI, FB, NFLX, UNH, MA, CHTR). 

* Follow-Up: Positive on WMT: The retailer’s acquisition of Jet.com and the talent infusion it brought has put the company back on entrepreneurial footing, as with its move to shutter some Sam’s Club stores and turn others into fulfillment centers for its online business. 

* European Trader: Cautious on H&M: Shares of the Swedish retailer are down since mid-December, and “there is a chance that the pessimists are right, and a big rally isn’t in the cards at this point.” 

* Asian Trader: Positive on AIA Group: The largest pan-Asian life insurer remains one of the most attractive insurance stocks around, partly because it’s in the middle of the world’s fastest-growing life-insurance market. 

* Emerging Markets: The time may have arrived for emerging markets sectors that have lagged—such as banks, utilities, and commodities producers—to gain ground, but betting on them isn’t straightforward. 

* Commodities Corner: Gold prices could hit record highs this year, driven in part by declines in the U.S. dollar and Treasury bonds, excessive optimism in the stock market, and surging inflation. 

* Sreetwise: Columnist Vito Racanelli critiques Larry Fink of BLK’s call for companies to make a positive contribution to society, saying such an approach isn’t a sustainable way spark social change.

>>> US CLose Dow -0.37% S&P -0.16% Nasdaq -0.03% Russell -0.63%

Closing Market Summary: Stocks Back Away From All-Time Highs

Stocks ticked down from record highs on Thursday as traders contemplated their next move following three weeks of nearly nonstop gains.

The Nasdaq Composite finished just slightly below its flat line while the S&P 500 and the Dow Jones Industrial Average lost 0.2% and 0.4%, respectively. Small caps underperformed, sending the Russell 2000 lower by 0.6%. The major averages finished near the middle of their trading ranges.

Financials headlined the earnings front once again on Thursday with Morgan Stanley (MS 55.84, +0.49) and Bank of New York Mellon (BK 55.35, -2.54) reporting their fourth quarter results. Morgan Stanley rose 0.9% after beating earnings and revenue estimates, while BNY Mellon tumbled 4.4% after reporting below-consensus revenues. The S&P 500's financial sector lost 0.1%.

Meanwhile, the top-weighted technology space was among the strongest groups, rising 0.2%, with Facebook (FB 179.80, +2.20) setting the pace; FB shares climbed 1.2%, breaking a three-session losing streak. Chipmakers also outperformed, evidenced by the 0.5% increase in the PHLX Semiconductor Index, which is now up 9.4% year to date.

On the downside, the industrial sector shed 0.6% as two of its largest components by market cap--Boeing (BA 340.16, -10.85) and General Electric (GE 16.77, -0.58)--dropped 3.1% and 3.3%, respectively. Boeing's loss came on the heels of a two-week rally that pushed BA shares higher by 18.3%, while GE's decline extended its four-session loss to 11.7%.

The energy sector was among the weakest groups, losing 0.8%, despite the Department of Energy's weekly crude oil inventory report, which showed that U.S. stockpiles declined for a ninth consecutive week, dropping by 6.9 million barrels. West Texas Intermediate crude futures ticked down 0.1% to $63.93 per barrel.

The rate-sensitive utilities (-0.6%) and real estate (-1.0%) sectors finished with energy at the bottom of the sector standings as selling in the Treasury market increased yields on longer-dated issues. The benchmark 10-yr yield jumped four basis points to 2.61%--its highest level since March 2017. Conversely, the 2-yr yield slipped two basis points to 2.03%.

In Washington, lawmakers still have yet to agree on a short-term funding measure, making a government shutdown a real possibility. The House is expected to vote on a bill late Thursday evening, but, as it currently stands, that bill doesn't appear to have enough votes to pass in the Senate. To avoid a shutdown, an agreement will have to be reached by 11:59 PM on Friday.

Elsewhere, the major European bourses settled Thursday mixed with the UK's FTSE losing 0.3% and Germany's DAX climbing 0.7%. Equity indices in the Asia-Pacific region finished mostly higher, but Japan's Nikkei underperformed, shedding 0.4%.

Reviewing Thursday's economic data, which included Housing Starts and Building Permits for December, weekly Initial Claims, and the Philadelphia Fed Index for January:

  • Housing starts decreased to a seasonally adjusted annualized rate of 1.192 million units in December (consensus 1.280 million), down from a revised 1.299 million units in November (from 1.297 million). Building permits decreased to a seasonally adjusted 1.302 million in December (consensus 1.290 million) from a revised 1.303 million in November (from 1.298 million).
    • The key takeaway from the report is that single-family housing starts were impacted by severe winter weather in the Northeast and the South. Single-family permits increased 1.8%.
  • The latest weekly initial jobless claims count totaled 220,000, while the Briefing.com consensus expected a reading of 251,000. Today's tally was below the unrevised prior week count of 261,000. As for continuing claims, they rose to 1.952 million from a revised count of 1.876 million (from 1.867 million).
    • Initial claims have pulled back after a recent pick-up, leaving the series comfortably below the 300,000 level for the 150th consecutive week, meaning labor market conditions remain favorable.
  • The Philadelphia Fed Survey for January decreased to 22.2 from a revised 27.9 in December (from 26.2) while economists polled by expected a reading of 24.5.
    • The key takeaway from the report is that while the index has slipped into the bottom end of its recent range, it continues pointing to expanding manufacturing activity in the Philadelphia Fed region.

On Friday, investors will receive just one economic report--the preliminary reading of the University of Michigan Consumer Sentiment Index for January (consensus 97.0)--which will be released at 10:00 AM ET.

  • Nasdaq Composite: +5.7% YTD
  • Dow Jones Industrial Average: +5.3% YTD
  • S&P 500: +4.7% YTD
  • Russell 2000: +2.7% YTD

>>> IBM beats by $0.01, beats on revs

IBM beats by $0.01, beats on revs (169.12 +0.47)
Reports Q4 (Dec) earnings of $5.18 per share, excluding non-recurring items, $0.01 better than the Capital IQ Consensus of $5.17; revenues rose 3.6% year/year to $22.54 bln vs the $22.03 bln Capital IQ Consensus.
Excludes the one-time charge of $5.5 billion associated with the enactment of U.S. tax reform.
Fourth-quarter cloud revenues increased 30 percent to $5.5 billion (up 27 percent adjusting for currency). Cloud revenue over the last 12 months was $17.0 billion, including $9.3 billion delivered as-a-service and $7.8 billion for hardware, software and services to enable IBM clients to implement comprehensive cloud solutions.
The company will discuss 2018 expectations during today's quarterly earnings conference call.

FT Lex : Melrose/GKN: come to order

Melrose/GKN: come to order
Buyout specialist should try offering more stock, not cash

Business meetings are overrated. Harvard Business Review points out that the modern executive is forever in meetings, many of which are useless. Well, not the one that occurred between UK buyout specialist Melrose Industries and engineering company GKN earlier this month. That confab has added £2.1bn, over a third, to the market value of GKN.

Melrose made a formal hostile bid this week. On Thursday GKN raised its own points of order to back up its argument that Melrose has offered too little. No matter. GKN shareholders have had their heads turned.

Melrose thinks its price of roughly £4.30 per share, worth £7bn in shares and cash, provides a substantial 32 per cent premium on an undisturbed price. That values GKN’s debt and equity at over seven times expected 2018 earnings before interest, tax, depreciation and amortisation, the high end of its historical range. GKN points out that more than half of the cash portion, 81 pence per share, is effectively the cash on its own balance sheet (though overall, it has net debt). It will still own 57 per cent of the combined group. The market has added to the intrigue by lifting GKN’s shares to £4.46.

Melrose’s plans to lift operating margins by at least 3 percentage points, which equates to about £300m of operating profit annually. Taxed and capitalised, that should cover the premium. GKN has appointed a new chief executive and talked up its own plan, called Boost, to separate its various divisions. But hastily promoting a non-executive to interim chief and promising to lift profitability will not impress GKN investors. They have spent five years listening to promises of 10 per cent margins.

Melrose could likely pay more. Yet GKN cannot argue that Melrose’s buyout strategy differs much from what private equity might do, possibly using even more debt. And Melrose has bought businesses larger than its own market value before, like Nortek in 2016. More cash, if that is what GKN really wants, would not necessarily please GKN’s long-suffering shareholders. They will have more faith in Melrose’s record. A packet of Melrose shares would offer a call option on GKN’s future intrinsic value.

GKN’s objections to the Melrose bid have been minuted. Melrose can win over GKN’s shareholders next month by offering more stock, not more cash.