Closing Market Summary: Indices Flat Ending Range-Bound WeekThe major averages ended a flat week on a similar note as early selling gave way to a partial rebound in afternoon action. The Dow Jones Industrial Average (-0.2%) settled behind the S&P 500 (-0.1%) and slightly behind the Nasdaq Composite (UNCH).
Equity indices began the day under moderate selling pressure as investors adjusted U.S. rate hike expectations and responded to a downturn in European markets. European bourses tilted to the downside as weakness in Italian banking names weighed on regional indices. Additionally, reports indicated that U.K. Prime Minister Theresa May hopes to invoke Article 50 of the Lisbon Treaty by April 2017. The move would begin formal talks for the country's withdrawal from the European Union.
On the central bank front, San Francisco Fed President Williams (not an FOMC voter) surprised market participants last evening by stating that the Fed should get back to hiking rates sooner rather than later. Recall that Mr. Williams published a letter earlier in the week, calling on central banks to reexamine their policy framework. Separately, Dallas Fed President Kaplan (not an FOMC voter) indicated that the Fed has room to manoeuver on rates, but that a lower neutral rate does limit the central bank's policy options.
The prospect of a sooner-than-expected rate hike helped keep a lid on buying interest at the open. The benchmark index violated technical support near the 2178/2180 price level before finding its bearings near its 20-day simple moving average (2175.80).
The broader market marched off that level through the afternoon as heavily-weighted industrials (UNCH), consumer discretionary (UNCH), and technology (+0.2%) helped lead the rebound effort. Seven sectors ended in the red with defensively-oriented telecom services (-0.9%) and utilities (-1.2%) rounding out the leaderboard.
The influential technology space (+0.2%) ended near the front of the pack as top-weighted Apple (AAPL 109.36, +0.28) outperformed. The Dow component erased a 0.7% decline, ending higher by 0.3%. The early selling followed reports of a string of insider sales. Chipmakers led in the sector as Applied Materials (AMAT 29.64, +1.96) jumped 7.1%. The semiconductor name topped bottom-line estimates for the quarter and raised its fourth-quarter outlook above consensus.
In the industrial space (UNCH), Deere (DE 87.32, +10.38) demonstrated relative strength, surging 13.5%. The company beat bottom-line estimates for the quarter and increased its net income guidance for the full-year. Courier names also outperformed in the group as FedEx (FDX 168.63, +1.44) and JB Hunt Transportation (JBHT 83.53, +1.15) moved higher by 0.9% and 1.4%, respectively. Conversely, Emerson (EMR 52.98, -1.69) ended lower by 3.1% after announcing the acquisition of Pentair's (PNR 65.79, -0.74) valve control business.
The consumer discretionary space (UNCH) ended flat while retail names displayed relative strength. The SPDR S&P Retail ETF (XRT 45.94, +0.19) finished higher by 0.4% as above-consensus earnings results from Gap (GPS 26.89, +1.01), Ross Stores (ROST 65.06, +2.18), and Foot Locker (FL 68.49, +6.81) boosted the sub-group. Separately, Dow component Nike (NKE 58.90, +1.69) ended at the top of the price-weighted index.
The U.S. Dollar Index (94.48, +0.32, 0.34%) ended off its session high as the greenback gained against the yen, euro, and pound. The dollar/yen pair ended higher by 0.3% (100.14) while the single currency declined 0.2% against the buck (1.1326). Separately, cable declined 0.7% (1.3085), but rebounded from the 1.3020 price level.
The Treasury complex settled off session lows while yields gained across the curve. The yield on the 2-yr note rose five basis points (0.75%) while the yield on the 10-yr note ended at 1.58% (+4 bps).
Today's participation was above the recent average as more than 824 million shares changed hands at the NYSE floor.
There was no economic data of note released today and investors will not receive any economic data on Monday.
- Russell 2000 +8.8% YTD
- S&P 500 +6.9% YTD
- Dow Jones +6.5% YTD
- Nasdaq Composite +4.6% YTD
Uber’s self-driving cars will hit the road this month, earlier than anticipated. That’s an exciting surprise…unless of course you’re a driver. They won’t be the only ones affected, though. The consequences of robot-induced unemployment could eventually ripple through the rest of the economy.
What will happen to Uber’s 1 million drivers? And the 3.5 million truck drivers in the US? And the countless millions of delivery, bus, taxi, and other drivers around the world?
These jobs won’t disappear overnight. It could take 20 years. But if we don’t plan for this labor shift, it could cause mass hardship for some even while delivering mass convenience to others.
Self-driving cars are undoubtedly the future. They’ll be significantly safer and more relaxing. They’ll reduce traffic and carbon emissions. And they could free up productive time for knowledge workers that used to be spent stuck behind the wheel.
They’ll also be a lot cheaper than paying a person to pilot the vehicle.
Bloomberg writes, “Trips will be free for the time being, rather than the standard local rate of $1.30 per mile. In the long run, [Uber CEO Travis] Kalanick says, prices will fall so low that the per-mile cost of travel, even for long trips in rural areas, will be cheaper in a driverless Uber than in a private car.” Oh, and Uber just announced it has acquired a self-driving truck company.
Dropped Off
The problem is driving constitutes one of the core forms of low-skilled labor alongside cashiers and fast-food prep. The robots are coming for all of them. Some argue that technology will create new jobs for these people. Though while it may create new jobs, they likely won’t be attainable by those losing their low-skilled ones.
Think of it this way. When cars were invented, they threatened the low-skilled laborers that used to bring people and objects around: horses. As laid out by this fantastic Humans Need Not Apply video, the idea that “better technology will create more better jobs for horses” immediately seems ludicrous. Replacing “horses” with “humans” in that sentence shouldn’t inspire much more optimism.
What this shift to autonomy will do to the economy is roll the earnings of the replaced low-skilled laborers up to the owners and designers of the self-driving fleets, cookdroids, and cashierbots. It’s a Marxist nightmare.
Software has already been causing a similar effect, but the proliferation of autonomous robots will allow this revolution to grow beyond bits and invade the realm of atoms.
That’s why the next President needs to start preparing us now, though hopefully without impeding the speed of innovation. Education, job training, and placement services will be essential. Hell, just recognizing and talking about the problem will be a good start.
Long-term, we’ll need to take a long, hard look at how capitalism works in an era where technology replaces jobs faster than it creates them. Must everyone have a full-time role? Can we redistribute wealth from the top so the bottom doesn’t starve without devolving into inefficiency and stagnation? How would that impact the psyches of citizens raised to define their own value by how much bread they earn, not how much they receive?
Those are complicated questions without definitive answers. We’ll need plenty of time to figure them out. But today Uber made it clear the future’s ETA is a lot sooner than we expected.
Commentary: Taiwan makers reluctant to yield to Apple requests to lower quotes
Apple has met resistance from makers in Taiwan's supply chain to lower their quotes for parts and components for iPhone 7 devices, a move which aims to force Apple to discontinue its established policy of constantly squeezing profits from Taiwan suppliers.
Apple is said to have asked downstream part and component suppliers, excluding Taiwan Semiconductor Manufacturing Company (TSMC) and Largan Precision, to reduce their quotes for iPhone 7 devices by as much as 20% even though order volumes for new phones are reportedly 30% lower than those placed a year earlier.
Major downstream suppliers, notably Advanced Semiconductor Engineering (ASE) and associated companies under the Foxconn Group, have replied Apple that they could not be able to accept orders without reasonable profits at this time.
Apple is leveraging the rising handset supply chain in China to force Taiwan-based companies to reduce their quotes comparable to those offered by China-based suppliers. But it makes no sense for such a requirment since the quality of products rolled out by Taiwan- and China-based suppliers is standing at different levels.
Apple appeared to have chosen to by-pass TSMC and Largan and did not require the two companies to reduce their quotes simply because it is difficult for Apple to find alternative sources to replace TSMC or Largan to offer foundry services or high-end camera modules, respectively.
ASE, which has reached a merger agreement with fellow company Siliconware Precision Industries (SPIL), has seen its business growing steadily in recent years optimizing its advanced packaging technology. The planned merger with SPIL will help ASE further expand its client base for sustainable growth.
Foxconn has acquired Japan-based Sharp recently, and orders from Sharp will enable production facilities under the group to hum at high gear for a period of time, and there is no need for the giant EMS to sacrifice its margins to work for Apple.
Apple accounted for a 17.2% share of the global smartphone market in terms of shipment volume, but took as high as 91% of the industry's profits in 2015, according to data compiled by Canaccord Genuity. It is about time for Apple to amend its purchasing policy.
Syngenta/Chemchina equity financing highlights Beijing backing; but deal not seen as ‘critical’ to China
* Deal not make or break to agri modernization policy
* Syngenta spun to lenders as a deal about food security
The level of SOE backed equity supporting the financing of ChemChina’s USD 43bn bid for Swiss crop protection and seed technology company Syngenta [VTX: SYNN] highlights its importance to Beijing. But the deal is not a make or break element of China’s stated strategy to modernize its agricultural production and achieve food security, said academics, advisors and analysts.
When China’s largest ever outbound acquisition was announced in February this year ChemChina Chairman Ren Jianxin said it would be extremely important to China and its farmers and that it would benefit the environment. Reports have repeatedly stressed how the deal fits with Beijing’s plans to modernize agriculture and reduce reliance on food imports over the next five years.
Agricultural productivity was firmly placed high on the policy agenda by President Xi Jinping in a December 2013 speech. Since then, the Number One Central Document, the 13th Five-Year-Plan and ‘Made in China 2025’ program has focused on agriculture modernization.
A source briefed on the deal said the acquisition of Syngenta was pitched to financing banks as a deal about food security. It is a deal that will improve agricultural yield and help feed a billion people, the source said. China has arable land of around 100m hectares which on a per capita basis, sits in the world’s lowest quantile, according to Singapore Management University PhD student Henry Chan.
The fact that equity to fund the deal has only been made available to SOE investors signals Beijing is the main force behind the deal, the source added.
Three-fifths of the 25% equity component backing the deal will come from the Ministry of Finance and the state-owned Assets Supervision and Administration Commission (SASAC), the source said. The balance of the equity component will come from external government-linked investors such as the Silk Road Fund, the source added.
Aside from the amount of equity provided by SOEs, the major criteria to measure the government’s support for the deal include the cost of loans from state banks and how much support the Chinese government provides to drive ChemChina’s operational turnaround, said Jiming Zou, Moody's vice president and senior analyst.
Evidence of the government’s interest in the deal came in April when a spokesperson for the Ministry of Commerce said the proposed acquisition of Syngenta is a normal and straightforward M&A transaction that does not pose a security risk to US food supply. Such comments are relatively rare and it was seen as a direct message to the Committee on Foreign Investment in the United States’ (CFIUS).
In accordance with the tender offer, ChemChina is required to take all action and to supply all information necessary to obtain regulatory approvals for its tender offer unless such actions would result in the reduction of the consolidated sales of one year of USD 2.68bn or more. Or in the case of CFIUS, remove all oversight, management and control of ChemChina to businesses, assets or operations of Syngenta which contributed to consolidated sales of Syngenta of USD 1.54bn or more in the financial year 2015.
Important but not seen as critical
A former China affairs advisor to the US government said the Syngenta deal will facilitate or link China’s broader strategic policy efforts. But while it would be a big win for China if the acquisition closes, it is not a make-or-break deal for the country, the advisor said.
Chan agreed the deal will contribute to China’s efforts to modernize its agriculture activity but said it is not critical for the country in the short term. For instance, China’s approach to improving seed quality is to use hybridization rather than genetically modified organisms, which is a key aspect of what Syngenta brings, he said.
Acquiring Syngenta’s GMO technologies would enhance China’s reserve of technological assets, to help address challenges in the next decade or so, said Professor Yang Jun of the University of International Business and Economics (UIBE). These benefits would not come immediately and would not be obvious but it is a strategic long-term move, he added.
China is experiencing a widening gap between the supply and demand of various crops, such as the oversupply of corn and scarcity of soybean, drawing the need for imports, Rabobank analyst Chenjun Pan said.
Yet the deal will not bring instant relief to China’s concerns about food security, a research fellow at the Chinese Academy of Agricultural Sciences (CAAS) said. The near-term benefits would be owning crop protection technologies that help lift crop yield, while the seed genetics business could improve technological capabilities in seed in the long run, he added.
The government is adjusting its view on its currently limited use of GMO technology, a China-based agriculture analyst and the CAAS research fellow said, adding it is a matter of time before the PRC lifts controls on transgenic technology. Syngenta has the best transgenic and breeding technologies, the analyst added. Yang added that Syngenta will expand China’s portfolio of soybean and corn GMO technologies, enabling the country to grow its own GMO crops in the future.
In the past year China has increasingly signalled it would relax its opposition to GMOs. Earlier this month China released its latest five-year plan for science and technology, saying it would push for the commercialisation of biotech corn and soybeans in the next few years.
China’s about-face on GMOs came in late 2014 when a pro GMO ad campaign from the agriculture ministry reportedly began. Interestingly this came just months before ChemChina made its initial expression of interest to Syngenta on 8 May 2015. That was the same day the Swiss company first acknowledged it had rejected a CHF 449 cash/share offer from Monsanto.
For ChemChina, the Syngenta acquisition came at a cost-effective time as the Swiss target is facing operational pressure, said Yang. Whether or not the deal bears fruit for China depends how well ChemChina integrates Syngenta’s businesses post-deal, Yang added.
When asked if the sale to ChemChina was a policy-driven transaction, a spokesperson for Syngenta said it has no bearing on the deal and that this was simply a change of ownership. Syngenta management will continue to run the company and its headquarters will remain in Switzerland, the spokesperson added.
This deal does benefit all stakeholders, the Syngenta spokesperson added, as ChemChina recognizes the quality and potential of Syngenta's manufacturing and R&D.
Shares in Syngenta are trading at 24.1% spread to CHF 475 offer price (excluding dividend).
Eliott Effect ?
Meggitt (LONDON:MGGT) is exploring a sale of its target systems business alongside Stephens, said two sources familiar with the situation.
The UK-based aerospace components company and Stephens did not return calls for comment.
This news service reported in March that Meggitt’s target systems business, which provides unmanned aerial, marine and ground targets, scoring systems and payloads for weapon performance measurement and personnel training, could be an acquisition target for peers.
Both sources said books have been distributed to prospective buyers, adding that Meggitt’s target systems business has around GBP 30m (USD 39.5m) in annual revenue. Indications of interest are due in early September, one of the sources said. Management presentations are expected to take place later the same month, the two sources added.
Meggitt’s target systems business, which operates from Canada and the UK, is part of Meggitt’s equipment group. Meggitt has four other divisions: Aircraft Braking Systems, Control Systems, Polymers & Composites and Sensing Systems. In 2015, Meggitt Defense Systems in the UK and Meggitt Training Systems in Canada combined to form Meggitt Target Systems.
The March report noted that Meggitt’s target systems unit, whose main focus is on the defense market, could be viewed as non-core based on Meggitt’s recent shift to focusing on the commercial aerospace side of its business.
Meggitt made three acquisitions in commercial aerospace last year. In January 2015, it purchased control systems maker Precision Engine Controls from United Technologies for USD 44m. It subsequently acquired Cobham’s and EDAC Technologies’ composites businesses for USD 200m and USD 340m, respectively.
One of the sources named European defense companies Leonardo Finmeccanica (BIT:LDO), BAE Systems (LON:BA) and Airbus Group (EPA:AIR) as possible acquirers for Meggitt’s target systems business. The March report also pegged Chemring (LON:CHG) as potential suitors as the UK-based company focuses on the defense electronic warfare market.
Last November, Esterline announced it reached an agreement with Chemring to sell certain assets of Wallop Defence Systems, which makes countermeasure products used by military forces in the protection of aircraft from missiles.
Earlier this month, activist investor Elliott Management increased its stake in Meggitt to 5.2%, according to a stock exchange filing.
At around the same time as the filing, a report by The Daily Telegraph said the move is fuelling takeover speculation about the company.
In late February, Meggitt CEO Stephen Young was reported to have said he would be willing to entertain offers for the company.
Starwood Poperty Trust : Reportedly in talks to sell $14.8B loan servicer; has selected Hatfield Phillips as a preferred bidder
During the last six weeks our Hedge Fund VIP basket of popular long positions has led the S&P 500 by 470 bp, ending the basket’s record 1500 bp stretch of underperformance since August 2015.
VIPs benefited from a surge in net leverage as well as a market rotation toward cyclical sectors and factors that hedge funds have continued to prefer despite the early 2016 outperformance of bond-like equities such as Utilities and low volatility stocks. We analyze 826 funds with $1.8 trillion of gross equity positions ($1.1 trillion long and $652 billion short) at start of 3Q.
High hedge fund concentration stocks continue to shine
Although the average equity long/short fund and our VIP basket have eachreturned just 2% YTD, lagging the S&P 500 (+9%), our High Concentrationbasket (ticker: GSTHHFHI) has returned 20% YTD. The basket is on pace topost its fifth straight year of leading the S&P 500 by more than 400 bp.
Funds increase cyclical sector tilt toward Information Technology
Hedge funds continue to hold large overweight positions in cyclical sectorssuch as Information Technology and Consumer Discretionary. Funds cutexposure to the “bond proxy” Utilities and Consumer Staples sectors andshorted Treasury ETFs but maintained a large underweight in Financials.
Hedge fund crowding declines but position turnover remains low
While portfolio position turnover remained low in 2Q, funds shifted assetsaway from the most crowded positions during the quarter. Turnover in ourVIP basket registered its highest level since 2012 and our measure of hedgefund crowding declined sharply in 2Q from a record high in 1Q.