Closing Market Summary: Averages Start the Week with Modest LossesA morning sell-off was met with a slight uptick in buying interest on Monday afternoon, leaving the major averages with modest losses to start the new week on lower-than-average trading volume. The Dow finished lower by 0.2% while the S&P 500 (-0.3%) and Nasdaq (-0.4%) performed slightly worse. Small-caps were hit the heaviest with the Russell 2000 closing lower by 0.7%.
Given the pace and scope of gains this year, and really since President Trump's election on November 8 -- a period in which the S&P 500 has gained over 11.0% -- it should come as little surprise to see the stock market succumb to some profit-taking interest.
There were some news headlines over the weekend that may have contributed to the profit taking from what many pundits are describing as a market that is overextended on a short-term basis.
The most notable of these headlines was North Korea's most recent act of defiance in which Pyongyang launched four ballistic missiles into the Sea of Japan, marking the third time since August that North Korean missiles have fallen in Japan's exclusive economic zone.
Other notable news included allegations from President Trump that former President Obama ordered a wiretap of his Trump Tower offices prior to the presidential election and an announcement from Deutsche Bank (DB) that the company will raise $8.5 billion of capital through the issuance of stock.
These headlines, though, appeared to serve more as convenient excuses to do some selling than anything else considering the stock market did make a rebound effort intraday and the CBOE Volatility Index increased less than 1.0%, hinting at some limited hedging activity among today's participants.
Ten of eleven sectors finished Monday's session in the red. The energy sector (+0.3%) was the lone winner. The top spot on the leaderboard has been an elusive one for the energy sector, which remains in last place in the 2017 sector standings with a year-to-date loss of 5.2%.
Crude oil didn't aid the energy sector's uptick, finishing Monday's session with a loss of 0.2% at $53.22/bbl. The commodity was pressured somewhat by a strengthening U.S. dollar, which was reflected in the 0.3% uptick for the U.S. Dollar Index (101.69, +0.34).
The top-weighted technology sector (-0.2%) saw some slight outperformance versus the broader market, but still ended the day lower. The semiconductor stocks helped keep the sector's losses in check, as they rebounded from early losses to help the PHLX Semiconductor Index eke out a small gain for the session.
The financial sector (-0.6%) led the stock market's retreat in the morning session, but received a jumpstart in the afternoon to climb past the materials sector (-0.7%) at the bottom of the leaderboard.
News on the corporate front was limited, but it is worth noting that airlines suffered after Delta Air Lines (DAL 48.85, -1.28) cut its first quarter guidance in light of more moderate than expected unit revenues in February. Despite the airlines' losses, the industrial sector (-0.3%) finished in line with the benchmark index.
Losses in the remaining sectors -- consumer discretionary, health care, consumer staples, utilities, telecom services, and real estate-- were modest, between 0.2% and 0.4%.
U.S. Treasuries finished slightly lower as fixed-income markets were still digesting last week's aggressive campaign by Fed officials to prepare markets for the possibility of a March 15 rate hike. The benchmark 10-yr yield closed Monday one basis point higher at 2.49%.
Monday's lone economic report was January Factory Orders:
- The Factory Orders Report for January showed an increase of 1.2% while the consensus expected a increase of 1.0%. The December reading was left unrevised at 1.3%.
- The key takeaway from the report is that it should contribute to some slight upward revisions to economists' first quarter GDP estimates since shipments of nondefense capital goods excluding aircraft were not down as much as the advanced report for durable goods indicated.
Tomorrow's data will include January Trade Balance (consensus -$48.5 billion) at 8:30 ET and January Consumer Credit (consensus $17.0 billion) at 15:00 ET.
- Nasdaq Composite +8.7% YTD
- S&P 500 +6.1% YTD
- Dow Jones Industrial Average +6.0% YTD
- Russell 2000 +2.0% YTD
Trump adviser Navarro: U.S, Germany should discuss trade outside EU
Trump administration trade adviser Peter Navarro said on Monday the $65 billion U.S. trade deficit with Germany was "one of the most difficult" trade issues, and bilateral discussions were needed to reduce it outside of European Union restrictions.
Navarro, the director of the new White House National Trade Council, also in an address to economists in Washington depicted chronic trade deficits as a threat to national security and said the Trump administration would seek to "reclaim" parts supply chains that had moved overseas.
Navarro said that Germany has too long used the argument that the EU dictates its trade policy and that it does not control the value of the euro.
"I think that it would be useful to have candid discussions with Germany about ways that we could possibly get that deficit reduced outside the boundaries and restrictions that they claim that they are under," Navarro told a National Association for Business Economics conference.
"But it's a serious issue. Germany is one of the most difficult trade deficits that we're going to have to deal with but we're thinking long and hard about that."
He said an visit by German Chancellor Angela Merkel to Washington next week could include discussions on how to improve the U.S.-German economic relationship as part of the administration's agenda to make trade "free, fair and reciprocal."
Navarro's comments follow his complaints last month that Germany was exploiting a weak euro to gain a trade advantage.
But the Trump adviser, who shares the trade policy spotlight with new U.S. Commerce Secretary Wilbur Ross and Treasury Secretary Steven Mnuchin, said he would wait until a Treasury currency report due in mid-April to learn whether China is manipulating its currency and the yuan is undervalued.
Trump had said during his election campaign that he would declare China a currency manipulator on his first day in office, a move that would require demands from the administration for negotiations with Beijing. He has not made such a declaration, despite telling Reuters in an interview last month that China was the "grand champion" of currency manipulation.
Navarro said that according to classic trade theory, in his view, the yuan's value should rise and the dollar should fall so that trade equalizes. He said the current capital outflow pressure in China was largely due to China's drive to acquire companies abroad.
"If you look at it through that lens, it's clear that the Chinese currency is undervalued. Navarro said, adding that he would wait for the Treasury report for a final verdict.
Navarro also called out India for its high tariffs and Japan for its non-tariff trade barriers, and said negotiations to use U.S. leverage as the world's largest market were needed to bring these down and boost U.S. exports.
"If we are able to reduce our trade deficits through tough, smart negotiations, we should be able to increase our growth," Navarro said.
If current trade trends continue, foreign interests will eventually acquire wide swaths of the U.S. economy, he said, ultimately driving down wages and living standards for Americans in a grim "conquest by purchase" scenario.
Saudi Aramco to list locally and abroad in second half of 2018: CEO
Oil giant Saudi Aramco will be listed locally and abroad in the second half of 2018, and the process is going according to plans, Chief Executive Amin Nasser said on Monday.
The IPO is the centerpiece of the Saudi government's ambitious plan, known as Vision 2030, to diversify the economy away from oil. Up to 5 percent of the world's largest oil producer is likely to be listed on both the Saudi stock exchange in Riyadh and on one or more international markets.
"We have always said the listing will happen in the second half of 2018, everything is going very smoothly, we are evaluating different stock exchanges," Nasser, speaking at an industry conference in Bahrain, said.
"There is a lot of work which is ongoing but everything is going as planned," he added.
He said the listing would be "locally on Tadawul and internationally on one or perhaps two" bourses. The Tadawul is Saudi Arabia's stock exchange.
"We are evaluating different stock exchanges globally and we will present this to our board and shareholder on where Aramco will be listed," he added.
Nasser also said an overhang in world oil supplies was expected to ease in the first half of 2017 and that the industry needed to maintain investments for the long term despite lower prices.
Funds expect Saudi Aramco to be valued around $1-1.5 trillion - survey
Fund managers and institutional investors expect oil giant Saudi Aramco to have a market capitalisation of $1 trillion (816 billion pounds) to $1.5 trillion (1.22 trillion pounds) when it sells shares to the public next year, a survey by regional investment bank EFG Hermes showed on Monday.
The valuation of Aramco IPO-ARMO.SE, the world's biggest oil firm, has been the focus of intense speculation since the Saudi government last year announced plans to sell up to 5 percent of it and list the shares in Riyadh and at least one foreign stock exchange.
Deputy Crown Prince Mohammed bin Salman, who oversees the kingdom's economic policy, has said the sale is expected to value Aramco at $2 trillion or more, making it by the far the world's largest initial public offer.
The EFG Hermes survey, conducted at an investment conference organised by the bank in Dubai, found 39 percent of respondents predicted the market would value Aramco at between $1 trillion and $1.5 trillion.
Thirty-six percent expect a valuation below $1 trillion, and 24 percent a figure above $1.5 trillion, the bank said.
EFG Hermes said it polled 510 international fund managers and investors from 260 institutions at the conference, as well as 147 other companies. It did not say how many of them had replied to the question on Aramco.
The company's ultimate valuation will depend on decisions that are expected to be made by Saudi authorities in coming months, including the tax rate that Aramco will pay as a public company, and the portion of Aramco's huge and diverse array of assets that is included in the listed entity.
Saudi officials have given no concrete indication of how they will decide these questions, so any estimate of Aramco's value remains tentative.
The EFG Hermes survey suggests a higher valuation than some estimates by private analysts. Last year Foreign Reports, a Washington-based oil industry consultancy, calculated Aramco could have a market value of $250-460 billion, excluding the value of refining assets and guaranteed access to oil and gas.
Aramco's valuation is important for Saudi Arabia because it will determine how much money the government makes from the IPO and the size of foreign fund flows that are expected to enter the country to buy the shares.
The huge IPO looks likely to strengthen the case for Saudi Arabia to join the emerging markets indexes of international index compilers such as MSCI, a step which could attract tens of billions of dollars of fresh foreign money to the kingdom.
The EFG Hermes survey found 16 percent of respondents expected Saudi Arabia to join MSCI's emerging markets index next year, 34 percent in 2019, 22 percent in 2020 and 27 percent at a later date.
BT pays £1.2bn to retain European football broadcasting rights
Group sees off rival Sky for Champions League games after ‘knockout bid’
BT has paid a hefty premium to stay in the Champions League after spending £1.2bn to retain the exclusive rights to show European football in the UK.
BT paid £394m per season for the three-year deal that runs between 2018 and 2021 — a third higher than it paid in 2013 when it surprised the market by knocking Sky and ITV out of the running for live Champions League football.
The deal is the latest sign of hyperinflation in the value of football rights as media and telecoms companies battle for the most lucrative games. But it also shows that BT is not finished in its audacious attempt to turn itself into a heavyweight competitor in pay-TV.
BT was in a “no win situation”, according to one person with knowledge of the auction, given the need to maintain investment in a still fledgling TV operation in a market long dominated by arch rival Sky.
Yet BT will also need to justify the additional £100m annual outlay to shareholders already reeling from cuts to its free cash flow guidance following the accounting scandal in its Italian unit. The additional expenditure takes its annual sports spend to near £1bn, according to analysts at Raymond James.
John Petter, head of BT’s consumer operations, denied the company had overpaid for the rights, however. “You have to make a good business case,” he says, adding: “You have to be mindful of losing them but there are no blank cheques.”
Tenders for the rights were only lodged at the start of March and a vicious battle between Sky, BT and potentially other bidders was expected to ensue. Yet there was a distinct lack of fireworks in what was described as a “clean” auction. People involved said that only two rounds of bidding took place, with Sky stepping back from the fight after BT lodged a “knockout bid” that matched the expectations of Uefa, the European football body.
Jerry Dellis, an analyst with Jefferies, noted that BT faced limited opposition from Sky but still shouldered a hefty rise in the cost of the rights. “BT shareholders might, therefore, question how necessary it was for their company to meet Uefa’s price expectations in full. Moreover, we wonder what this implies for BT’s negotiating leverage in future Uefa rights auctions,” he said in a note.
Other analysts questioned whether the payout for Champions League might hinder its ability in any future auction of Premier League football rights, in which its British customers base may have greater interest.
However, BT executives make it clear that they see the price as justified. BT Sports has become a growth driver for the company, with its TV customer base rising to 1.7m from 1m in the 10 quarters since it started showing Champions League games, initially as a free service for its broadband customers.
Sport also acts as a counterweight for broadband customers defecting to Sky for cheaper broadband deals — protecting BT’s core market. The 2013 auction win triggered a turnround in its consumer arm, which returned to revenue growth in 2014 for the first time in almost five years partly as a result of its push into premium sports.
BT argues that it has got more bang for its buck with the new deal. The new European football rights package contains 35 per cent more broadcasting slots, including a 6pm and 8pm “double header” that analysts said would be good for pubs and clubs revenue when games are shown back to back.
There were concerns that Uefa has been unhappy with ratings on BT’s pay-TV sports channels given the limited reach of the BT Sports product compared to free-to-air television.
BT has dismissed that notion in the past, and Uefa’s decision to sell the entire rights package — including highlights and clips packages previously owned by ITV and News UK, the publisher of The Sun and The Times newspapers — undermines that argument. There is no requirement for BT to show any games on free-to-air channels for the new rights although it could choose to wholesale games to ITV.
BT is also able to show the games to a wider base having acquired EE, the UK’s largest mobile network, in 2015.
The exclusive rights for football clips could work well on Twitter and was highlighted by BT’s Mr Petter, who says that social media “is where the audience is”. He points to deals signed by the National Football League to live stream games over Twitter and Snapchat as a sign of the way broadcasting sport has evolved.
“You can reach a younger, broader audience through social media,” he says. Chasing viewers on those platforms could help to offset the decline in traditional TV ratings for football matches.
Mr Petter would not rule out raising prices to offset the higher cost of the Champions League rights but says that consumers are “very conscious of value for money” in the broadband market. He says BT has an opportunity to increase its take on pubs and clubs revenue and wholesale deals with more games. “There are a lot of sources of value,” he says.
Investor group seeks to bar Snap from indexes over voting rights
A group representing large institutional investors has approached stock index providers S&P Dow Jones Indices and MSCI Inc, looking to bar Snap Inc and any other company that sells investors non-voting shares from their stock benchmarks.
Both index providers have said they are reviewing Snap's inclusion. Were Snap to be added to indexes such as the S&P 500 Index or the MSCI USA Index, then managers of stock index portfolios will have to buy its shares and other investors, whose performance is tracked against such indexes, would likely follow suit.
Some big money managers worry about buying Snap’s Class A shares because they have no voting rights, meaning shareholders will have no voice on matters like the company’s future strategy or the pay of its executives.
"They're tapping public markets but giving shareholders no say," said Amy Borrus, deputy director of the Council of Institutional Investors, which represents big pension funds and other large asset owners, in an interview.
In reaching out to both index providers, she said, "What we would like to see at the least is for the indexes to exclude new no-vote companies." Meetings with both index providers are scheduled this week, she said.
David Blitzer, managing director of S&P Dow Jones Indices and chair of a committee overseeing its indexes, said they would not add a new stock like Snap for 6 to 12 months after its IPO in any case, and will use the time to study Snap's structure.
While the index provider does not have a hard requirement about a company's voting structure, the committee needs to think through how much influence investors should have, Blitzer said in an interview on Monday.
" 'Who Votes?' is the issue right now," he said.
MSCI said on March 2 that Snap would qualify for indexes including the MSCI USA Index but then said on March 3 that after additional analysis Snap did not meet all requirements. Snap's inclusion into the MSCI USA Index will be re-assessed in May, MSCI said in a statement on its website.
MSCI is seeking feedback from investors about whether companies without voting rights should be included in indexes, according to the March 3 statement. A spokesman did not immediately provide further details.
A spokesman for Snap declined to comment.
Snap's $3.4 billion initial public offering of stock last week marked the hottest technology IPO in three years as investors snapped up shares of the Venice, California company, even though its two co-founders retained near total control. The situation alarms some big investors who fear other companies might copy Snap's structure.
Other big S&P 500 companies like Facebook and Google parent Alphabet also have non-voting shares but still grant voting rights with other widely-traded shares.
After the council raised concerns about Snap's lack of voting rights last month, Snap's chairman Michael Lynton wrote back on Feb. 21 to point out a section of its prospectus stating the voting structure "prolongs our ability to remain a founder-led company" and that Snap will have a majority-independent board, including himself.
Index inclusion requirements vary. For the S&P 500 a stock typically needs a market capitalization of around $5.5 billion and to have been profitable over the past four quarters, for instance, Blitzer said.
Exxon Mobil - Plans $20B of investments to expand manufacturing in U.S. Gulf Region
Expanding its manufacturing capacity along the U.S. Gulf Coast through planned investments of $20 billion over a 10-year period to take advantage of the American energy revolution, Darren Woods, chairman and chief executive officer, said Monday.
The projects, at 11 proposed and existing sites, are expected to generate thousands of new high-paying jobs and $20 billion in increased economic activity in Texas and Louisiana, Woods said, highlighting the company’s Growing the Gulf initiative in a keynote speech today at the CERAWeek 2017 conference.
ExxonMobil is strategically investing in new refining and chemical-manufacturing projects in the U.S. Gulf Coast region to expand its manufacturing and export capacity. The company’s Growing the Gulf expansion program, consists of 11 major chemical, refining, lubricant and liquefied natural gas projects at proposed new and existing facilities along the Texas and Louisiana coasts. Investments began in 2013 and are expected to continue through at least 2022.
Uber Chief Travis Kalanick Rides Out Recent Storms
Some investors say negative headlines reveal leadership woes at ride-sharing company
Tearing up at times, Uber Technologies Inc. Chief Executive Travis Kalanick reflected on the previous five years after a stretch of negative headlines.
“I realize that I can come off as a passionate advocate for Uber,” Mr. Kalanick said, reading from a teleprompter. “I also realize that some have used a different ‘a’ word to describe me. I’ll be the first to admit I’m not perfect, and neither is this company.”
The humbling moment in a June 2015 anniversary speech at Uber headquarters in San Francisco suggested Mr. Kalanick was maturing as a CEO. Nearly two years later, the 40-year-old is again pledging to reform following a spate of setbacks that some investors say has exposed leadership shortcomings at the ride-sharing company, the world’s most valuable startup.
In recent days, people familiar with the matter said, Uber executives have discussed hiring a new senior deputy for Mr. Kalanick, possibly in the mode of Sheryl Sandberg, who as Facebook Inc.’s chief operating officer has served as a public face of the company. The challenge for Uber’s board, composed mainly of its executives and investors, is to make any changes while preserving the formula that built its $68 billion valuation.
Uber declined to comment and said Mr. Kalanick wasn’t available for an interview.
A self-described “hustler,” Mr. Kalanick has a pugnacious leadership style that helped Uber bulldoze into new markets while battling local regulators and competitors around the world. Investors have pumped some $13 billion into the business, which matches some 1.5 million drivers with millions of riders globally, who can hail a car via a smartphone app, often at a lower cost than taxi fares.
Uber’s work culture reflects Mr. Kalanick’s confrontational approach, say employees and investors. The company lists “toe-stepping” and “hustlin’” as corporate values. It has acknowledged aggressive tactics including Operation Slog to divert rival Lyft Inc.’s drivers from picking up legitimate fares, and a program called Greyball to identify and block authorities from using Uber’s app so they can’t interfere with its operations.
The approach has left a swath of detractors, including regulators, rivals, employees and drivers.
Still, Mr. Kalanick, another Uber co-founder and its head of global operations together retain a majority voting stake in the company, and therefore effectively control his fate as CEO, the people familiar with the matter said. Even with a steady drumbeat of negative stories over time, Mr. Kalanick hasn’t faced much internal pressure, being rewarded instead with a skyrocketing valuation particularly as regulatory victories have mounted.
A customer backlash erupted in January when it appeared Uber tried to undermine a brief work stoppage from New York City taxi drivers who were protesting President Donald Trump’s travel ban. Uber said a tweet stating it wasn’t raising fares during the protest was misunderstood. Days later, Mr. Kalanick stepped down from a presidential advisory board.
Last month, a former engineer accused the company of permitting sexism and sexual harassment, prompting others to come forward with similar accusations. Mr. Kalanick condemned the behavior described by the woman and ordered an investigation led by former U.S. Attorney General Eric Holder. In a teary presentation at a town-hall meeting, Mr. Kalanick faced pointed questions from employees upset about what they described as a challenging workplace and tarnished brand.
In late February, Google parent Alphabet Inc. sued Uber, alleging it conspired to steal design plans for self-driving vehicle technology, claims Uber said it was reviewing. Then a dashboard camera video of Mr. Kalanick yelling expletives at an Uber driver emerged, prompting the executive to apologize and pledge to “grow up” and get “leadership help.”
“The question for many entrepreneurs is whether they can shift to a more conventional leadership style, while still maintaining their willingness to defy conventions,” said David Bach, associate dean at Yale University’s School of Management. “The last four weeks or so have unraveled a lot of the work Uber has done.”
At Uber, Mr. Kalanick’s relentless drive is often on display. Tables in some conference rooms are pushed closer to one wall to give him room to pace during meetings. He often spontaneously approaches employees at their desks to ask what they are working on. A little over a year ago, after Mr. Kalanick was seen in the same clothing for several days straight, a few employees surmised he was sleeping at the office and persuaded him to go home and clean up, according to a person familiar with the matter.
Mr. Kalanick has caused, and weathered, previous controversies. He once joked in an interview that the company should be called “Boob-er” because of his ability to attract female companions, and he mocked customers online for complaining about pricing.
Several months before the five-year anniversary speech, a senior company executive was quoted describing plans to investigate journalists who wrote critically about it. The comments, and news that Uber used an internal tool called “God View” that let employees track movements of specific riders, triggered an inquiry from Sen. Al Franken (D., Minn.). Uber scaled back the use of “God View.”
Mr. Kalanick has sought to clamp down on leaks. The release of documents related to internal programs such as Operation Slog prompted Uber to begin to erase all emails after six months. “The answer was not about changing the behavior, it was about changing the disclosure,” a former employee said.
Throughout, investors have largely remained loyal, saying his directness and boldness are rare virtues. And Uber’s rise has created what could be a once-in-a-lifetime payout if the company goes public.
“He definitely has my confidence, he has the board’s confidence,” Arianna Huffington, one of Uber’s only independent directors, told CNBC on Friday. She is assisting the internal investigation into the sexual-harassment claims.
Early investors Freada Kapor Klein and Mitch Kapor have called out in an open letter what they saw as a “toxic” culture at Uber and insufficient responses to prior scandals. But they didn’t suggest change in the c-suite.
“Until there’s a real impact to the fundamentals of the business, say ride requests falling or fewer drivers signing up, investors are likely to view this as just another blip,” said Yale’s Mr. Bach. “Otherwise, Kalanick is going to be their guy.”