Closing Market Summary: Stock Market Closes Thursday FlatInvestors were very selective of their pitches when they stepped up to the plate on Thursday, ultimately choosing to take ball four rather than risking a swing and miss. Despite news, earnings, and economic data, the major averages finished in the neighborhood of where they began, with the S&P 500 (-0.1%) closing just a tick lower.
Conversely, Donald Trump did take a swing today tweeting that Mexican President Enrique Pena Nieto should cancel his upcoming meeting with the U.S. President "if Mexico is unwilling to pay for the badly needed wall." The Mexican President responded by doing just that.
The market ticked down ever so slightly on Mr. Pena Nieto's response, but regardless, the incident does highlight some concerns about Mr. Trump's ability to play nice with foreign leaders. Only time will tell if President Trump's international agenda will be as friendly to the stock market as his domestically focused, pro-growth one has been so far.
Sector standings looked just as unenthusiastic as the market itself with some sectors green, some red, but no one space swinging too far from its flat line. Cyclical sectors had a slight edge over the defensive groups, with four of the six finishing higher. Technology (-0.2%) and energy (unch) bucked the trend, however, with the latter sector ignoring crude oil's 1.9% climb. The energy component closed its trading day at $53.75/bbl.
The downtick in technology stemmed from a downbeat response to Qualcomm's (QCOM 54.05, -2.85) quarterly report. The company finished 5.0% lower after missing on revenues, signaling a possible slowdown in demand for semiconductors, which are a component of nearly every modern technological device.
Industrials (+0.3%) finished near the top of the leaderboard, beside financials (+0.3%), as airlines willed the industrial sector to a modest gain. Southwest Airlines (LUV 53.92, +4.46) added 9.0% after reporting favorable earnings per share, however, the industrial sector's gains were capped by a lackluster earnings report from Caterpillar (CAT 97.22, -0.93) and continued weakness from United Technologies (UTX 110.36, -0.60), who reported quarterly results before yesterday's session. The two names finished down 1.0% and 0.5%, respectively.
On the countercyclical side, health care (-0.7%) finished in last place after Bristol-Myers Squibb (BMY 46.82, -2.73) missed earnings per share estimates and issued downbeat guidance. The company slipped 5.5%, putting pressure on its fellow health care components. Consumer staples (-0.4%) finished just a hair better than the health care sector, while the lightly-weighted telecom services, utilities, and real estate sectors finished near their flat lines.
U.S. Treasuries closed modestly higher, bouncing back in the afternoon after succumbing to morning selling pressure. The benchmark 10-yr yield finished one basis point lower at 2.50%.
Today's economic data included Initial Claims, International Trade in Goods, New Home Sales, and Leading Indicators:
- The latest weekly initial jobless claims count totaled 259,000 while the consensus expected a reading of 246,000. Today's tally was above the revised prior week count of 237,000 (from 234,000). As for continuing claims, they rose to 2.100 million from the revised count of 2.059 million (from 2.046 million).
- The headline for initial claims was a bit disappointing, yet the key takeaway is that there wasn't really any major deviation from the underlying trend considering how low the initial claims reading has been in recent weeks.
- December International Trade in Goods decreased by $65.00 billion on the back of a unrevised $65.30 billion decline in November.
- New Home Sales in December hit an annualized rate of 536,000, which was below the revised November rate of 598,000 (from 592k), and less than the 589,000 that was expected by the consensus.
- The key takeaway from the report is that the combination of higher prices and higher mortgage rates appears to have squeezed the home-buying capability of lower-income consumers, evidenced by the drop in sales of new homes priced under $299,999.
- The Conference Board's Leading Indicators report for December ticked up 0.5% (consensus +0.5%) after a 0.1% increase (from 0.0%) in November.
- The key takeaway from the December report is that the component indexes suggest the economic expansion should continue and possibly increase in the near term.
Tomorrow's economic data will include advance fourth quarter GDP (consensus 2.2%) and December Durable Orders (consensus 3.0%) at 8:30 am ET, with the final reading of the Michigan Sentiment Index for January following at 10:00 am ET.
- Russell 2000 +1.4% YTD
- Dow Jones Industrial Average +1.7% YTD
- S&P 500 +2.6% YTD
- Nasdaq Composite +5.1% YTD
BT Group faces U.S. lawsuits as Italian accounting scandal deepens
BT Group Plc has been hit by at least two shareholder lawsuits in the United States, after one-fifth of the telecommunications company's market value was wiped out on Tuesday, due in part to an accounting scandal in Italy.
The lawsuits accusing the British company and three top executives of securities fraud were filed on Wednesday in the U.S. District Courts in Manhattan and in nearby Newark, New Jersey, on behalf of BT investors over the last few years.
Both lawsuits were brought by individuals seeking class-action status, and also name Chief Executive Gavin Patterson, his predecessor Ian Livingston, and Finance Director Tony Chanmugam as defendants.
A spokesman for BT said: "These cases are standard procedure in the US. Our position will, of course, be defended robustly."
BT had launched an internal probe into its Italian business after a whistleblower flagged concerns.
The price of BT's shares in London and American depositary receipts in New York fell nearly 21 percent on Tuesday.
This came after BT boosted an expected writedown tied to its Italian division to 530 million pounds from 145 million pounds, with Patterson expressing disappointment with the "inappropriate behavior" uncovered.
BT on Tuesday also reported slowing demand from government and corporate customers following last June's vote by Britons to leave the European Union. It said that slowdown, together with the accounting problems, would weigh on results for two years.
The lawsuits accuse BT of having concealed or made misleading statements about the accounting practices in Italy, causing it to inflate earnings and its stock price.
Both lawsuits seek unspecified damages.
The New York case was brought on behalf of investors in ADRs, while the New Jersey case also covers other securities.
It has become harder to pursue U.S. securities fraud lawsuits targeting non-U.S. companies over securities issued outside the country, since the U.S. Supreme Court in 2010 narrowed the reach of U.S. securities laws.
Companies are frequently sued in the United States after releasing negative news that investors say they did not expect.
The cases are Sarraf v BT Group Plc et al, U.S. District Court, Southern District of New York, No. 17-00558; and Christian v. BT Group Plc et al, U.S. District Court, District of New Jersey, No. 17-00497.
The US hedge fund Och-Ziff has emerged as one of the biggest winners in Johnson & Johnson’s planned takeover of Swiss biotechnology company Actelion, thanks to a 3.2 per cent stake it built up in the target shortly before the end of 2016.
That stake is now valued close to $1bn after Actelion shares spiked about 20 per cent today following the merger’s announcement.
The gain is a much-needed bright spot for Daniel Och’s publicly traded hedge fund after it was fined $413m by the US authorities and saw one subsidiary pleaded guilty as part of a sprawling investigation into overseas bribery in Libya, Chad, Niger, Guinea and the Democratic Republic of Congo.
In November, Fitch Ratings downgraded Och-Ziff to junk status with a negative watch after the fund cut the management fees for its main funds by 25 basis points.
Och-Ziff’s master fund finished 2016 up 3.8 per cent. Assets under management were $33.5bn at the start of the year, down from a peak of $47.5bn in 2014. Investors pulled $3.6bn in December alone. On the bright side, Och-Ziff’s credit fund was up 18 per cent last year.
Under its debt covenants, Och-Ziff is under pressure to retain the money investors have put into its funds. According to its financial statements, the hedge fund’s total fee-paying assets under management must not fall below $22bn for two successive quarters, or it will be judged to be in default against its five-year unsecured revolving credit facility.
Corporate America split over radical Republican import tax plan
Exporters including GE and Boeing square off against Walmart and other retailers
Dozens of US exporters including GE and Boeing are squaring off against Walmart and other retailers as a radical Republican plan to tax imports divides the giants of corporate America.
The rift in the business community threatens President Donald Trump’s pledge to overhaul the tax code for the first time in 30 years by undermining a blueprint that House Republicans are drafting for the White House.
The Financial Times has learnt that GE, Boeing and several dozen manufacturers are in advanced talks over forming a coalition to lobby in favour of the import tax, just as Walmart and other big importers, including the billionaire Koch brothers, mobilise against it.
Walmart sent its top tax executives to meetings on Capitol Hill this week to warn officials that the proposal would have a dramatic impact on its business, potentially forcing the retailer to raise prices for shoppers, according to two congressional aides.
The “border adjustment” tax regime, which would penalise imports and encourage exports, is central to the plans of House Republicans initiating tax legislation. But visceral divisions over the idea do not bode well for its prospects.
Doug Holtz-Eakin, a former director of the Congressional Budget Office, said: “In the US, tax reform is always killed by the business community. They divide, go at it ferociously, the tax people on the Hill can’t take the heat, and they quit.”
US companies have spent years urging policymakers to fix a “broken” tax code only to see previous efforts fail on Capitol Hill. A post-election rally in the US stock market has been driven partly by hopes of a cut in the tax rate, but the outlook has been clouded by the import tax furore.
The stakes for both sides in the battle are high.
Under the proposal, profitable net exporters “may pay little to no federal taxes — and may even accrue tax benefits in the form of net operating losses”, wrote Morgan Stanley analysts in December, because they would effectively be selling to foreign customers tax-free.
GE is known as one of the sharpest tax planners in US industry and Jeff Immelt, its chief executive, said of border tax adjustments in December that “things that help exporters are a good thing for GE”.
Boeing said: “The current US tax system is not globally competitive. Without change, the ability of US-based companies to grow will probably weaken. The US needs a modern system that creates a level playing field with the rest of the world.”
GE and Boeing are among the companies negotiating the formation of a coalition to lobby for the proposal by Kevin Brady, the chief tax policymaker on Capitol Hill, according to three people familiar with the talks.
The coalition is likely to be launched in a matter of weeks and one person said 27 businesses had already agreed to join it while dozens more had expressed an interest.
The companies are in talks over hiring a political consulting firm called Cavalry to manage the campaign. The firm was founded by two former aides to Mitch McConnell, the Republican Senate majority leader, who will help decide whether the import tax survives in the Senate.
More crucial to the idea’s fate will be the stance taken by Mr Trump, who has equivocated on it. Lobbyists predict that it will only prevail if he embraces border adjustments as part of his “America first” agenda — and comes up with a better slogan for the tax policy.
Border adjustments would work by not letting US companies deduct the cost of foreign inputs from their revenues for tax purposes, while giving a rebate to exporters by allowing them to exclude revenue from foreign sales from their taxable income.
Mr Brady, who is writing the tax plan as an ally of House speaker Paul Ryan, says the import tax would make US exporters more competitive overseas.
He argued this week that more than 100 countries already tax US-made products when they are imported. However, they do so via VAT — a consumption tax — whereas his proposal for a border-adjusted corporate tax is more radical and untested in the real world.
Retailers that sell a high proportion of foreign-made goods say the import tax threatens to wipe out a large chunk of their profits.
The Walmart officials visiting Capitol Hill said the company estimated conservatively that it would have to raise the prices consumers pay for clothing and electronics by 20 per cent, said one congressional aide.
“Walmart is technically trying to find a way to meet [House speaker] Paul Ryan halfway because this is his baby. But the dollars don’t line up. From a business perspective they can’t organise a way to handle this without significant cost,” said the aide. Walmart declined to comment.
Scot Ciccarelli, analyst at RBC Capital Markets, divided retailers into four groups according to the impact of border adjustment and placed Walmart among those likely to suffer the most, alongside Best Buy and Williams Sonoma.
They would experience “sizeable drops in net income and more limited ability to pass through price increases, materially raising future earnings risk”, he wrote this month, citing the price sensitivity of Walmart shoppers as a barrier to asking them to pick up the cost.
With 98 per cent of clothes sold in the US made overseas, the National Retail Federation, a trade group, says the import tax could inflate the tax bills of some fashion chains to three to five times their pre-tax profits, jeopardising their solvency.
Bayer’s $66 billion acquisition of Monsanto will likely not get past European regulators if they stop Dow Chemical and DuPont from merging, a dealmaker close to the situation said.
Dow and DuPont said this week it would take three months longer than their previous guidance to complete their tie-up, as they work through regulatory issues. They expect the deal to close by the end of June.
The Post reported exclusively on Jan. 15 that the merger of equals was experiencing serious European regulator pushback.
A giant wave of consolidation is engulfing five of the six largest players in the seed and agrochemical business, with Dow and DuPont’s regulatory review the furthest along.
The European Union’s biggest concern is that a merger will lead to reducing spending on insecticide research and thus smaller global yields, sources said. The EU also wants the combined company to divest some assets, they added.
On the plus side, Dow and DuPont stand to increase market share as more weeds become resistant to rival Monsanto’s category-leading Roundup products, a chemicals analyst said.
Bayer and Monsanto’s chief executives met with President Trump earlier this month and committed to increasing their combined US operations, which could decrease their employment in Europe, a source said.
Monsanto, run by CEO Hugh Grant, declined to comment.
Verizon Exploring Combination With Cable Firm Charter Communications
Verizon CEO has approached officials close to Charter, sources say
Verizon Communications Inc. is exploring a combination with Charter Communications Inc. that would unite two giants in search of growth in a rapidly consolidating media and telecom landscape, according to people familiar with the matter.
Verizon CEO Lowell McAdam has made a preliminary approach to officials close to Charter and Verizon is working with advisers to study a potential transaction, the people said, though there’s no guarantee a deal will materialize.
It is unclear whether Charter executives, including Chief Executive Tom Rutledge, would be open to a transaction. The effort could be complicated by Charter’s ownership structure, which includes cable tycoon John Malone and the Newhouse family.
A combination would bring together Verizon’s more than 114 million wireless subscribers and what remains of its landline business with Charter’s cable network, which provides television to 17 million customers and broadband connections to 21 million.
Verizon has a market capitalization of $194 billion and more than $100 billion in debt, while Charter ended Wednesday’s session valued at about $85 billion.
Both Verizon and Charter face challenges to their core businesses. Growth in the U.S. wireless market has slowed and pricing pressure has chipped away at profits. Furthermore, the cable-TV business is threatened by cord-cutters and over-the-top video services.
Any transaction would face a close regulatory review, given the sheer size of the businesses and some overlapping services. Both companies provide home broadband and television services in certain markets, including the greater New York area. On its fiber-optics network, known as Fios, Verizon has about 5.7 million high-speed internet customers and 4.7 million TV subscribers, primarily in the Northeast.
It would pose a big test for new antitrust enforcers under the administration of President Donald Trump, who during the campaign expressed concerns about media consolidation. In October, he vowed to block AT&T Inc.’s $85.4 billion purchase of Time Warner Inc., saying it put too much power in the hands of too few, but he hasn’t spoken publicly on the transaction since the election.
Many deal makers are hopeful a more traditional Republican administration will be merger friendly. Mr. Trump recently appointed Ajit Pai, a Republican, as chairman of the Federal Communications Commission, which oversees telecom mergers in addition to the Justice Department.
In his testimony before the Senate, Mr. Trump’s selection for Attorney General, Sen. Jeff Sessions, said he wouldn’t have a problem blocking mergers deemed anticompetitive. “I have no hesitation to enforce antitrust law,” Sen. Sessions said on Jan. 10. “There will not be political influence in that process.”