Barron's : Top Small-Cap Quant Fund Takes a Scientific Approach

Top Small-Cap Quant Fund Takes a Scientific Approach
The PNC Multi-Factor Small Core is up an average of 16.6% a year over the past five years.

Hitesh Patel had just finished his Ph.D. thesis in medicinal chemistry at the University of Illinois at Chicago when he took his career in a completely different direction: finance. The decision was driven largely by logistics. Staying in his field would have meant leaving the Windy City, where his wife worked as an assistant professor, so he accepted an offer from GE Capital and put his predictive analytics expertise to work forecasting risk. The clincher, he says with a laugh, was getting his own laptop; for a graduate student, in 1995, it seemed like a big deal.
“That led to what my mentor called my random walk,” says Patel, now 53 and the head of PNC Capital Advisors’ structured equity team and co-manager of the $233 million PNC Multi-Factor Small Cap Core fund (ticker: PLOAX). The fund, which Patel helped launch in 2005, won the Lipper award for small-cap core funds for 2015 and 2016, and has handily beaten the Russell 2000 index over the three-, five-, and 10-year trailing periods. It’s up an average of 16.6% a year over the past five years.
Turns out, using computer modeling to predict consumer behavior and investment outcomes isn’t all that different from the molecular modeling that was a staple of Patel’s doctoral research. The main difference, he says, is that the inputs and outcomes are infinite in science. In finance, while it may not always seem the case, there are only so many variables that affect the direction of a stock.
In 1998, Patel put that theory to practice at Harris Investment Management as part of a quantitative team working on the early iterations of multifactor investing, which combines old-school stock-picking techniques with sophisticated computer modeling. It was there he started working with Paul Kleinaitis, a private-equity investor turned small-cap portfolio manager, and Jonathan Toerber Jr., a quantitative systems analyst who “plays bass guitar in the evenings and knows virtually every computer language,” says Patel. In 2005, the trio moved over to PNC Capital Advisors, where they had the opportunity to start their own structured equities team. They recruited Chen Chen, a Ph.D. in business statistics, to join them in developing a multifactor approach for small-cap investing.

Small companies continue to be their focus. “The lack of information and the lack of coverage gives us more room to be active in this space,” says Patel. But while traditional active managers are limited by the number of companies they can analyze, “we can look at the entire universe of small companies,” he adds. “It’s a scientific approach to investing.”
The fund, which typically owns more than 100 stocks, uses the Russell 2000 to develop its market-capitalization target—recently $200 million to $3.8 billion. Industry weightings, however, can deviate by plus or minus three percentage points. From there, they rank companies daily using a model that includes about a dozen factors in three main categories: valuation relative to a stock’s history, peer group, and the market; increases in profitability and positive earnings revisions; and price momentum.
“Our portfolio companies are always at a discount to the market, but they have to have improving fundamentals,” says Patel, whose team runs the model daily but rebalances only monthly. Recent annualized turnover was 77%, which is in line with the fund’s buy-and-hold peers.
The largest holding as of the end of August, Universal Forest Products (UFPI), first came into the fund in April 2015 after a positive earnings-estimate revision, solid cash-flow metrics, and favorable price momentum put it on the board. The Grand Rapids, Mich., company designs, manufactures, and markets wood and wood-alternative products for the retail, construction, and industrial markets. “This is a stock that we might have failed to identify [without the model] because people weren’t looking at the materials sector,” says Patel. The stock has since nearly doubled, to $98.
Similarly, Cantel Medical (CMN) scored high in the spring of 2012 because of fundamentals and valuation, but analysts’ outlooks diverged widely, something the managers consider a positive. In this case, uncertainty was an opportunity for investors in the Little Falls, N.J., company. Founded in the 1960s, it’s a leader in developing and manufacturing infection-prevention equipment and control products used in medical and dental offices. Products include disposable face masks, germicidal wipes, and disinfectants used on endoscopes. The stock has gone from the midteens to $75.
EACH MONTH, THE TEAM analyzes eight stocks—four buys and four sells—to understand if the data are intuitively correct. If they turn up a name they don’t agree on, they typically wait and watch. If they turn up several names that seem off, they rerun the models and look for explanations.

For example, during the financial crises, they made the call to drop their minimum stock-price threshold from $5 to $3.50. Even with the lower threshold, the fund missed out on the rally in low-priced stocks that started in March 2009. The fund’s relative performance suffered that year. While it was up 17%, it ranked at the bottom of its small-growth category. “We like U-shaped spikes, not V-shaped spikes,” Patel says. “Our performance is built over quarters.”
The fund has owned one of its current top holdings, Churchill Downs (CHDN), since 2011. “Its cash-flow metrics were in the top 10% of the entire universe at the time we bought it,” says Patel. The company is best known for its flagship property, the historic Churchill Downs Racetrack in Louisville, Ky., but it owns a wide range of gaming properties, including mobile- and online-gaming giant Big Fish Games.
While the stock has been a holding for more than five years, its weighting fluctuates each month depending on how it scores against its peers. “If the ranking improves, we buy more; if it deteriorates, we sell,” Patel says. “This is very different from the fundamental investor. A fundamental investor will ride the horse until it dies. I will not.” So far, the stock has kept its pace, edging up from $45 a share when the fund first bought it to $142 today.

Barron's : Busted Convertibles’ Allure

Busted Convertibles’ Allure
The Trader puts forth income-yielding security ideas among preferred stocks.

As we’ve noted regularly this year, investors’ search for yield goes on inexorably, given extraordinarily low global interest rates. Even if the Fed hikes rates in December, as expected, it won’t be by very much, and fixed-income yields will remain near all-time lows. It’s likely to stay a low-rate world for some time.
For that reason, the Trader regularly puts forth income-yielding security ideas among preferred stocks. On that score, we checked in with Jeff Bahl, a principal at Bahl & Gaynor Investment Counsel, a Cincinnati money manager whose mantra is income growth and yield. He came up with two bank convertible preferred securities that each yield about 6%, both of which the firm has purchased recently for clients.
He likes the Bank of America Convertible 7.25% Preferred Series L (BAC.L), which finished Friday at about $1,205.00. The other is the Wells Fargo 7.50% Convertible Preferred Series L (WFC.L), which ended the week at $1,282.95. Both are above par of $1,000.

Both are “busted converts,” or issues born of the 2008-09 financial crisis. The securities are tied to equities that have fallen so far below the stated conversion price that a forced conversion into stock is doubtful. Convertible preferred stocks typically are callable, that is, can be called away from the holder in five or 10 years. That’s a risk for an investor seeking a steady yield.
The two identified by Bahl are technically callable, but effectively are not—short of an incredible rise in the underlying stock price. In the case of Bank of America (BAC), its shares would have to soar to about $65 from $16.00 now. At that price, the bank could convert the preferreds into stock. The Wells Fargo (WFC) issue would have to reach about $203 from $44.71 before the bank could force conversion.
Most other preferreds from these two banks yield 5% or less, and are callable. Traditionally, callable preferreds offer a higher yield to reflect the risk that they could be called away from the investor, Bahl notes. With these two, the investor is getting paid around one percentage point or more in higher yield, without the danger of a forced call.
Why? Bahl says that busted converts don’t always show up on trading screens, and, moreover, are less widely followed by Wall Street.
Both issues are trading significantly higher than their par values, but there is price support. The banks must pay out more than 7% in dividends, using after-tax dollars, to preferred holders, so they are relatively expensive issues for both Bank of America and Wells Fargo.
Given that newly minted preferreds from these two banks yield significantly less, it would make sense for the banks to repurchase these old issues at some point, he says. That provides price support.
There are several billion dollars of each issue outstanding, and trading is liquid and done on the New York Stock Exchange.
Our Hain Pain
In a short space of time, our April 2 bullish call in this column on Hain Celestial Group(HAIN) went from heavenly to hellish. At the time of our article, Hain shares were $41.88. They rose to $55 by early August. We should have quit then.
But in mid-August, the provider of natural and organic beverages and foods announced a couple of nasty surprises that have cut its share price by a third. It closed Friday at $35.11.
Hain said it would delay the release of its June-ended fourth-quarter and 2016 fiscal-year financial results as it evaluates its internal control over financial reporting. The company said the total amount of revenue recognized should not be affected, but also warned it didn’t expect to achieve its guidance for fiscal 2016.
This was not comforting. And since then, those results have yet to come out. Our angst has increased.
There’s been some insider buying recently, but we fear things could get worse before they get better. Ultimately, Hain could be bought by a big food company looking to up its organic game, but that could be a long time coming—or fetch an even lower price. We’re not waiting around to find out. We’re closing this trade and stanching the Hain pain.

Barron's : Shares of A.P. Moller-Maersk Look Ready to Sail

Shares of A.P. Moller-Maersk Look Ready to Sail
The Danish shipper could unlock value as it splits itself in two.

Danish conglomerate A.P. Moller-Maersk is splitting itself in two, in a move that could unlock value for shareholders.
Its two classes of shares (tickers: MAERSK.A.Denmark and MAERSK.B.Denmark) have surged about 18% since June 23, when the owner of Maersk Line, the world’s largest container-shipping company, appointed a new chief executive and tasked him with carrying out a strategic review. Class A shares have voting rights; class B shares don’t.
As a result of the review, A.P. Moller-Maersk last month announced it would separate its energy activities, which account for 24% of group revenues; last year those totaled more than $40 billion. It isn’t getting out of the oil business, at least for now.
The share-price gains since the review was announced have gone some way to erasing the company’s conglomerate discount, a situation where a diversified group’s subsidiaries trade at a discount to their intrinsic value.
However, there could be more to come. “I think we have seen some of that [erosion of the discount], but not all of it,” says Katrina Dudley, a portfolio manager at the Franklin Mutual European fund, which owns the stock. She sees potential upside of 20%.
At Friday’s close, the A shares were worth 9,330 Danish krone ($1,377) and the B shares DKK9,800. Its American depositary receipts (AMKBY), which have climbed 16% since the announcement of the review, traded at $7.21; 200 ADRs are equivalent to one ordinary share.
The Copenhagen-listed shares have fallen 17% in the past two years as shipping rates have slumped due to overcapacity, forcing some players out of business, and oil prices have dropped by half, despite a recent resurgence. The shares trade for about 15 times estimated earnings for 2017 and pay dividends at yields above 3%.
Jefferies analyst David Kerstens calculates net asset value at DKK13,350 on a sum-of-the-parts basis for both classes of shares. Allowing for a 10% conglomerate discount, his price target is DKK12,000, or 26% above the latest price.
He estimates the enterprise value of A.P. Moller-Maersk’s energy businesses at $16 billion, but adds: “The amount of cash it realizes will depend on the transaction structure.”
Copenhagen-based A.P. Moller-Maersk, founded in 1904, says it will consider joint ventures, mergers, or listings for its energy businesses. These include Maersk Oil, which produces oil from the North Sea, Qatar, Algeria, and Kazakhstan, and generated revenues of $5.6 billion in 2015, and Maersk Drilling, a provider of drilling services, which produced 2015 revenues of $2.5 billion.
Any transaction may not be straightforward. The family foundation that controls more than 40% of the shares and over 50% of the voting rights seems more enthusiastic about the energy business than A.P. Moller-Maersk, and may prefer to retain an interest in the oil-related assets.
A.P. Moller-Maersk is giving itself up to two years to “find solutions” for its oil businesses, but investors and analysts suggest it may want to take initial steps sooner to demonstrate that it is serious about its new direction. Investors will be hoping for more details when the company hosts a capital markets day on Dec. 13.
ESSENTIALLY, A.P. MOLLER-MAERSK IS STAKING its future on the transport and logistics industry, betting that it can squeeze synergies from its operations, which include APM Terminals, operator of 57 ports and terminals in 36 countries, and Damco, a provider of freight-forwarding and supply-chain-management services.

There’s plenty of scope for cooperation, as the transport and logistics businesses previously operated independently. That meant Maersk Line could use services provided by APM Terminals’ rivals if the price was cheaper. Consequently, only about 50% of APM Terminals’ volume came from Maersk Line.
A.P. Moller-Maersk is looking to improve its offering to customers based on the combined capabilities of Maersk Line, APM Terminals, and Damco. It aims to make better use of its assets, harvest synergies, and optimize its network.
Management—led by Soren Skou, who has run Maersk Line since 2012 and replaced Nils Smedegaard Andersen as CEO four months ago—projects that it can reap savings that will boost the return on invested capital by two percentage points over three years. On an invested capital base of $30 billion, that would represent an increase of $600 million. According to analysts at Credit Suisse, that is equivalent to 43% of estimated 2016 net income of $1.4 billion, although their estimate for net income is above consensus.
A.P. Moller-Maersk is forecast to report 2016 net income of $1.3 billion, or $60.85 a share. In 2017, it could earn $1.9 billion in net income, or $90.98 a share.
The company’s future may not be plain sailing, but it could lead to greater returns.

WSJ : German Government Has Ruled Out Taking Stake in Deutsche Bank

German Government Has Ruled Out Taking Stake in Deutsche Bank
Officials told lawmakers last week state support for lender was ‘inconceivable’

BERLIN—Aides to German Chancellor Angela Merkel have told lawmakers the state wouldn't take a stake in Deutsche Bank AG if it were to issue new stock to shore up its thin capital cushion, one person who attended the briefing said.
The fact that Berlin appears to have ruled out any aid for the embattled lender as both unnecessary and politically unfeasible could put Deutsche Bank under renewed pressure as it works to stabilize its share price and stay out of the news while negotiating an acceptable settlement in a U.S. misconduct investigation.

In a closed-door briefing with a small group of lawmakers last week, Chancellery aides and senior Finance Ministry officials said it was “inconceivable for the state to take a stake in Deutsche Bank,” said one person who declined to be named because the briefing was confidential.
“We have a different bank resolution system than in 2009 and this must apply to us in Germany too,” the government officials said according to this person. This referred to recent legal changes that now force European governments to bail-in creditors—and in some cases depositors—before they shore up a struggling bank with taxpayer money.

Deutsche Bank is currently negotiating with the U.S. Justice Department to bring down a settlement in several investigations over the mis-selling of mortgage-backed securities. Last month, The Wall Street Journal reported that U.S. authorities had floated a $14 billion amount as an opening bid, sparking a rout in the bank’s share price. The bank has said it would not pay anywhere near this amount, which would wipe out nearly all of its existing capital.
It is still unclear whether Deutsche Bank will need to increase capital and, if it does, whether it would need the government to pitch in. But the fact that Ms. Merkel’s government has ruled out any aid for the bank will come as a negative surprise to investors, given widespread expectations in the market that the state would offer some form of last-resort assistance given the scale of Deutsche Bank and the shock its failure could inflict on Europe’s financial system.
“It would be amazing of the German government to let the (world’s) fourth most systemic bank collapse,” said one London-based analyst, who declined to be named because of compliance reasons. “All investors I talked to are of the view that one minute to midnight the German government would step in and support Deutsche Bank in some way.”
But others expect the private-sector solution is the more realistic outcome.
“It is inconceivable that Germany’s largest bank will be allowed to fail, but, even with the U.S. fine at the high end of expectations, we think a private sector solution combining disposals and a deeply discounted capital raise is more likely than state aid,” said Jonathan Peace, analyst with Credit Suisse.
Government officials told lawmakers the political fallout of any state involvement in a capital increase would outweigh the benefits and said they would favor Deutsche Bank raising whatever capital it may need from private investors.
It would be legally possible for Berlin to participate in a capital increase at the bank without bailing in creditors as long as it did so under market conditions—for instance by participating alongside private-sector investors. But such a move could be unpopular at home less than a year before a general election and expose Berlin to accusations of double standards after it campaigned for years to end state-financed bank bailouts in Europe.
The Chancellery and Finance Ministry declined to comment. The government has said in the past it wasn’t working on a state rescue for Deutsche Bank. A Deutsche Bank spokeswoman declined to comment. The bank said last month it hadn’t asked for help and didn’t need a capital increase.

Concerns that Deutsche Bank might need fresh capital pushed the shares to a low of €9.90 ($10.94) on Sept. 30, down 56% this year. Prices have recovered somewhat since and closed at €12.24 on Friday.
Late last month, Deutsche Bank sought to silence speculation about its future by appealing to lawmakers to tone down their public comments on the lender.
“Deutsche Bank lobbyists visited me…and stated clearly that Deutsche Bank can handle on its own what needs to be done,” Lothar Binding, a lawmaker with the Social Democrats and the party’s financial expert, told The Wall Street Journal.
The government has also sought to keep a low profile and deflect attention from the bank.
“There is far too much talk,” Finance Minister Wolfgang Schäuble told a press conference in Washington last weekend. When asked about Deutsche Bank by German lawmakers during the trip, Mr. Schäuble also refused to comment, a person familiar with the talks said.

WSJ : Yellen Cites Benefits to Running Economy Hot for Some Time

Yellen Cites Benefits to Running Economy Hot for Some Time
Fed leader also warns that holding an accommodative stance for too long could have costs

Federal Reserve Chairwoman Janet Yellen offered an argument for running the U.S. economy hot for a period to ensure moribund growth doesn’t become an entrenched feature of the business landscape.
That would mean letting unemployment fall lower and spurring faster growth to boost consumer spending and business investment.
This could encourage businesses to spend more on new equipment that would have lasting benefits for the economy and encourage future growth, she said. A fast-growing economy and low unemployment also could encourage individuals who have stopped looking for work to start looking again, expanding the labor force and national income.

Moreover, running the economy hot could encourage higher levels of research and development and increase incentives for new business formation.

Ms. Yellen didn’t directly address looming policy decisions, such as whether the Fed should raise short-term interest rates before year’s end. She also avoided a short-term diagnosis of the economy’s performance, something of great interest in financial markets.
Still, her speech at a conference held by the Federal Reserve Bank of Boston offered a window into her mind-set and how policy might evolve in the months ahead. She effectively expressed sympathy for the idea of keeping short-term interest rates low to let the economy gather steam and reverse some of the long-run debilitating effects of the slow recovery, such as low labor-force participation and business investment. That implied very gradual rate increases in the months ahead.
Economic theory holds that weak demand can become a self-perpetuating problem for an economy. When businesses don’t invest and consumers don’t spend, it drives down the productive capacity of the economy and the pool of available labor, begetting still-slower growth. The idea is called hysteresis in economic circles. Weak demand begets weak supply, something Ms. Yellen said—with some careful hedges—might be reversed if demand is boosted.
“If we assume that hysteresis is in fact present to some degree after deep recessions, the natural next question is to ask whether it might be possible to reverse these adverse supply-side effects by temporarily running a ‘high-pressure economy,’ with robust aggregate demand and a tight labor market,” Ms. Yellen. “One can certainly identify plausible ways in which this might occur.”
A hot economy would boost sales, which in turn would prompt managers to invest more in their businesses, she said. “In addition, a tight labor market might draw in potential workers who would otherwise sit on the sidelines.”
One sign that the economy is beginning to run hot is that the U.S. jobless rate has fallen to 5%, signaling diminished slack in the labor market. Despite its descent in recent years, Fed officials have been prepared to keep interest rates low and encourage the jobless rate to fall further still.
The Fed leader didn’t come right out and endorse running the economy too hot. As a qualifier she said that “we of course need to bear in mind that an accommodative monetary stance, if maintained too long, could have costs that exceed the benefits by increasing the risk of financial instability or undermining price stability.”

In all, market analysts are likely to interpret her comments as “dovish,” meaning supportive of low rate policies.
The Fed has held its benchmark short-term interest rate in a range between 0.25% and 0.5% since December, after keeping it near zero for seven years. Most central bank officials at their September meeting expected to nudge it another quarter percentage point this year and proceed slowly toward further interest-rate increases after that.
“She seems to want to keep policy very accommodative for as long as she can while inflation is low,” said Charles Lieberman, chief investment officer at Advisors Capital Management in Ridgewood, N.J. “It is consistent with her previous public statements.”

Her comments serve in part as an antidote to a downbeat Boston Fed conference where many analysts argued that the U.S. economy is stuck in a period of slow growth, thanks to weak productivity gains and an aging workforce.
Ms. Yellen noted that the link between a tighter labor market and inflation seems to have weakened in recent years. Economists have found in the past that a falling unemployment rate tended to raise inflation, a connection known as the Phillips curve. But that hasn’t happened since the recession.
“The influence of labor-market conditions on inflation in recent years seems to be weaker than had been commonly thought prior to the financial crisis,” she said.
If true, that would suggest the Fed has more room to let the labor market tighten without pushing up inflation.

>>> Weekly Update

Weekly Market Update: Market Tensions High As Earnings Season Starts

US indices finished lower for the second straight week as investors' risk appetite faded heading into earnings season. Preannouncements from the likes of Honeywell, Dover, Ericsson, and Fortinet continued to spook market participants, along with a disappointing Q3 report from Alcoa, tempering expectations ahead of the quarterly deluge that begins in earnest next week. Friday's strong banking results took some of the sting away but traders nevertheless remain anxious to hear what managements have to say.

A stronger US Dollar, and in particular, continued selling in the British Pound served as a further headwind to overall sentiment. After last week's 'flash crash' in GBP/USD, cable moved back towards 1.20 early in the week before recovering. Separately, Thursday saw the PBOC set the yuan at the lowest levels since 2010, which also happened to coincide with a particularly soft September trade report from China, which sent many commodities tumbling. Some of the growing rumbling surrounding China dissipated on Friday though, after September inflation numbers moved notably higher.

Interest rates continued to back up. Markets seem to be getting more and more comfortable with a December FOMC rate hike, especially in light of the declining poll numbers for Donald Trump. US data reports were largely in line with the recent trends headlined by September retail sales and final PPI figures that generally topped estimates. By Friday various segments of both the US Treasury and UK GILTS yield curves were reaching the highest levels since before the Brexit vote. An October preliminary University of Michigan sentiment miss, that included the lowest 5-year inflation expectation since 1979, and a somewhat dovish speech from Fed Chair Yellen resulted in steeper US curve into the close. For the week, the S&P500 fell 1%, the DJIA lost 0.6%, and the Nasdaq dropped 1.5%.

MONDAY 10/10
(CN) China State Council releases guidelines on lowering companies' leverage and debt ratios; to allow companies to give equity in themselves to banks in exchange of lower debt - financial press
(EU) EURO ZONE OCT SENTIX INVESTOR CONFIDENCE: 8.5 V 6.0E
2202.HK: Reports Sept contracted sales CNY25.4B v CNY20.0B m/m

TUESDAY 10/11
IEA Sept Monthly Oil Market Report: Forecast both 2016 and 2017 Global oil demand growth at 1.2M bpd
(DE) GERMANY OCT ZEW CURRENT SITUATION SURVEY: 59.5 V 55.5E; EXPECTATIONS SURVEY: 6.2 V 4.0E
AA: Reports Q3 $0.32 v $0.35e, R$5.21B v $5.35Be
(US) Sept Labor Market Conditions Index Change: -2.2 v +1.5e

WEDNESDAY 10/12
005930.KR: Revises Q3 Op KRW5.2T v KRW7.8T prelim, Rev KRW47.0T v KRW49.0T prelim; Q3 guidance revision reflects effects of Galaxy Note 7 crisis
HUM: Raises FY16 EPS ~$9.50 v $9.28e (prior "at least $9.25"); Raises Q3 EPS ~$3.15 v $2.88e (prior "at least $2.85"); Reports plan year membership in 4-Star plans or higher at 37% v 78% y/y
(US) FOMC MINUTES FROM SEPT 20-21ST MEETING: REASONABLE CASE COULD BE MADE FOR BOTH HIKING AND WAITING
WFC: Chairman/CEO Stumpf to retire; President and COO Sloan to take over as CEO; effective immediately
(KR) BANK OF KOREA (BOK) LEAVES 7-DAY REPO RATE UNCHANGED AT 1.25%; AS EXPECTED; (4th straight pause in current easing cycle)
(CN) CHINA SEPT TRADE BALANCE (USD): $42.0B (6-month low) V $53.0BE; Trade Balance (CNY): 278.4B (6-month low) v 364.5Be

THURSDAY 10/13
UNA.NL: Reports Q3 Rev €13.4B v €13.2Be
*(US) SEPT IMPORT PRICE INDEX M/M: 0.1% V 0.2%E; Y/Y: -1.1% V -1.0%E
*(US) INITIAL JOBLESS CLAIMS: 246K (matches lowest since 1973) V 253KE; CONTINUING CLAIMS: 2.05M V 2.050ME
CVTI: Guides Q3 $0.12-0.17 v $0.27e (2 est)
(PE) PERU CENTRAL BANK (BCRP) LEAVES REFERENCE RATE UNCHANGED AT 4.25%; AS EXPECTED
(CN) CHINA SEPT CPI M/M: 0.7% (7-month high) V 0.1% PRIOR; Y/Y: 1.9% (3-month high) V 1.6%E
(CN) CHINA SEPT PPI Y/Y: +0.1% V -0.3%E (1st increase in 55 months)

FRIDAY 10/14
JPM: Reports Q3 $1.58 v $1.40e, R$25.5B v $24.0Be
C: Reports Q3 $1.24 v $1.15e, R$17.8B v $17.4Be
(US) OCT PRELIMINARY MICHIGAN CONFIDENCE: 87.9 V 91.8E (lowest since Sept 2015); 5 year inflation expectations 2.4% v 2.6% Sept final reading (lowest since 1979)
(US) SEPT PPI FINAL DEMAND M/M: 0.3% V 0.2%E; Y/Y: 0.7% V 0.6%E
(US) Weekly Baker Hughes US Rig Count: 539 v 524 w/w (+2.9%) (fourth straight week of increases)
TWTR: Salesforce CEO: have walked away from Twitter bid; Twitter was not the right fit - FT
(US) Fed Chair Yellen: 'high pressure' policy may be needed for full recovery from crisis - comments in Boston

>>> US Close Dow +0.22% S&P +0.02% Nasdaq +0.02% Russel -0.27%

Closing Market Summary: Indices Walk Back Gains Despite Upbeat Bank Earnings

The stock market ended a downbeat week on a tepid note as an opening rally on Friday ultimately fizzled out. The Dow Jones Industrial Average (+0.2%) finished ahead of the S&P 500 (+0.02) and the Nasdaq Composite (+0.02). The three indices finished the week lower between 0.6% and 1.5%.

Equity indices rallied at the start of the session as positive inflation data out of China, a string of better-than-expected expected quarterly reports, and upbeat domestic data boosted investor sentiment. 

The three catalysts also helped solidify the rate hike picture as above-consensus inflation data stood in contrast to persistently low inflation readings. The Producer Price Index (PPI) came in slightly ahead of estimates as PPI rose 0.3% in September (consensus +0.2%). Meanwhile, core PPI ticked higher by 0.2% (consensus +0.1%). The two readings are up a respective 0.7% and 1.2% on a year-over-year basis. 

According to the CME's Fed Watch Tool, the probability of a rate hike at the December meeting has increased to 69.2% from 61.7% at the end of September. The firming rate hike picture also helped move the dollar and long-term rates higher. 

The U.S. Dollar Index (98.11, +0.59, +0.60%) strengthened throughout today's session, which in turn weighed on dollar-denominated oil prices ($50.32/bbl, -$0.08, -0.2%).

The early rally reversed stating around 10:20 a.m. ET and coincided with some strengthening in the dollar, a reversal in oil, and fading gains in the financial sector (+0.5%), which had been up as much as 1.5% following some better than expected earnings results from JPMorgan Chase (JPM 67.52, -0.22), Citigroup (C 48.61, +0.14), and Wells Fargo (WFC 44.71, -0.04). 

Rising treasury yields also worked to thwart the early rally. Higher-yielding sectors -- utilities (-0.6%), real estate (-0.3%), and telecom services (-0.2%) -- found it difficult to make any headway and general valuation concerns percolated with the jump in rates. 

The yield on the benchmark 10-yr note rose six basis points to 1.80% as the boost in producer price inflation, the stronger than expected inflation report out of China, and waning price momentum unsettled investors. 

The S&P 500 (+0.02%) finished basically flat, surrendering just about all of an initial 0.8% gain. 

Five sectors finished in the green with financials (+0.5%), technology (+0.5%), and materials (+0.4%) staging the largest moves on a percentage basis. 

The financial sector (+0.5%) outperformed in the wake of positive economic data, a steepening in the yield curve, and a string of above consensus quarterly reports.

Citigroup (C 48.61, +0.14, +0.3%), Well Fargo (WFC 44.71, -0.04), and JPMorgan Chase (JPM 67.52, -0.22, -0.3%) each beat analysts' estimates for the quarter. The three were up between 1.7% and 3.1% at the onset, but were unable to hold onto the bulk of those early gains as concerns about a potential slowdown in commercial lending reportedly tempered investors' enthusiasm. 

In the technology sector (+0.5%),  Salesforce.com (CRM 74.27, +3.64) finished higher by 5.2% after the Financial Times reported that the company is no longer interested in acquiring Twitter (TWTR 16.88, -0.91). Chipmakers also outperformed in the group as the PHLX Semiconductor Index (+0.8%) narrowed its weekly loss to 3.3%. 

Department store names underperformed in the discretionary sector (UNCH) after JPMorgan cut quarterly estimates for Macy's (M 35.57, -1.27, 3.3%) and Kohl's (KSS 43.64, -1.44, -3.2%). The broader SPDR S&P Retail ETF (XRT 43.12, -0.09) also finished on a negative note. 

Today's trading volume fell came in below the recent average of 862 million as 785 million shares changed hands at the NYSE floor.

Today's economic data included the PPI Report for September, the Retail Sales Report for September, Business Inventories for August, and the initial reading of the University of Michigan Consumer Sentiment Index for October: 

  • The Producer Price Index (PPI) for September showed a 0.3% increase in final demand prices (consensus +0.2%), led by a 0.7% jump in the index for final demand goods.
    • Excluding food and energy, the index for final demand was up 0.2% (consensus +0.1%).
  • Total retail sales increased 0.6% in September while sales, excluding autos, rose 0.5%. Both results were in-line with the consensus estimates.
  • Total business inventories increased 0.2% in August (consensus +0.1%) after being unchanged in July.
    • Sales were also up 0.2% after declining a downwardly revised 0.3% (from -0.2%) in July.
  • The University of Michigan's Index of Consumer Sentiment dropped to 87.9 in the preliminary reading for October (consensus 92.4) from the final reading of 91.2 for September.
    • The October reading is the second lowest level in the past two years.

Monday's economic data will include the 8:30 a.m. ET release of October Empire Manufacturing consensus 2.0). The Industrial Production (consensus 0.2%) and Capacity Utilization (Consensus 75.6%) report for September will be released at 9:15 a.m. ET. 

(MAKOR) MERGER ARBITRAGE RESEARCH - SYNN VX - THE HOUSE OF THE FLYING CHATTER





SYNGENTA / CHEMCHINA

THE HOUSE OF THE FLYING CHATTER…

 

PIVOTAL QUESTIONS:

We think the pivotal questions in the context of the recent news flow that investors should ask are:

Why now?

Who has a vested interest to create turmoil and uncertainty for the deal and who is likely to benefit from this? 

 

MAKOR VIEW:

We wanted to clarify our view on the transaction following a spate of contradictory news-flow around the transaction over the past week.

We remain convinced that the transaction remains on track, and today’s news-flow in particular has created significant confusion among investors and had an adverse effect on Syngenta’s share price. 

Ultimately, the current uncertainty around the transaction conclusively benefits and strengthens the negotiating position of the potential investors in CITIC’s $25bn syndication as the reported difficulties around securing the financing only entrenches their position.

We continue to believe that the Chinese Government remains fully committed to the transaction. 

 

>>> Twitter suitors vanish as Salesforce rules out bid

Twitter suitors vanish as Salesforce rules out bid
The boss of Salesforce has ruled out his company as a bidder for Twitter, all but bringing an end to attempts to find a buyer for the struggling internet company.

The US cloud software company had been left as the most likely bidder last week, after other potential acquirers, including Google and Walt Disney, decided not to pursue a deal.

“In this case we’ve walked away. It wasn’t the right fit for us,” Marc Benioff, chief executive of Salesforce, said in an interview with the FT.