Weekly Market Update: Green Shoots or Gangrene?

Weekly Market Update: Green Shoots or Gangrene?


Global equity markets broke a month-long advance this week, as another leg down in energy prices and further gyrations in emerging markets impeded risk appetite. Risk was further constrained by the twin Brussels bombings, which killed scores, wounded hundreds and showed a Europe gravely exposed to Daesh terrorism. The continuing recovery in crude prices peaked again midweek as both Brent and WTI bumped up againt $43 or so and then headed lower, dragging down the energy sector and rekindling fears about bank exposure to bad energy debt. There were faint green shoots in a few March manufacturing reports, but the preponderance of economic data showed a global economy mired in slowdown. At the same time, Fed speakers continued to talk about two or three Fed rate hikes this year, causing markets to reconsider risk tolerance in the face of global monetary policy divergence. For the week, the DJIA lost 0.7%, the S&P500 dropped 0.7%, and the Nasdaq slipped 0.5%.

The flash Markit March factory PMI report showed the US manufacturing sector remains in go-slow mode. The index slightly missed expectations and remained pretty close to flat, however the new orders component was slightly elevated. Nevertheless, the Markit manufacturing PMI remained in expansion territory and greener shoots kept emerging from the regional Fed surveys: the March Richmond Fed manufacturing survey was very strong, with a big bounce back seen in the headline figure and the new orders component. This comes after last week's March Philadelphia Fed outlook index rose to its highest level since last February on a big surge in new orders and the New York Fed's Empire survey rose back into positive territory for the first time since last July.

Several Fed officials offered commentary on policy this week, and the hawks and doves appeared to be in greater agreement about the direction of policy than one might expect. Bullard dismissed the Fed's dot plot and claimed the composition of the plot contributed to the sell-off earlier this year, adding that he had considered dropping out of the exercise. He said the issue with forward guidance is that markets may take the Fed's projections as a promise. Harker said he was not a "two-dot member," and claimed there was a very good case for raising rates more quickly. Harker said he expects at least three rate hikes this year. The dovish Evans said rates need to start going up because the economy is getting stronger, and said two rate hikes this year is not at all unreasonable. Moderate member Lockhart warned there could be another hike as soon as next month.

Last Friday, the PBoC had tightened the yuan reference rate to its strongest level since mid-December, at 6.4628, in response to continued dollar selling the wake of the Fed decision. Over the next four days, it dialed back the yuan rate to the softer rate seen before the FOMC meeting. The streak of post-Fed and post-ECB forex gyrations likely dictated the moves. Beijing has pledged to make monetary policy more flexible this year even as it leans more on increased fiscal spending and tax cuts to support economic growth and cushion the pain from structural reforms.

Japan's preliminary March factory PMI fell to its lowest level since early 2013, returning to contraction for the first time in a year. Markit economists warned there had been more deterioration in manufacturing conditions, citing the contraction in output and new orders. The disappointing PMI data comes amid the ongoing dispute about fiscal policy and the question of whether to postpone a second round of sales tax increases as part of the government's ongoing economic reform plan. Finance Minister Aso still wants to implement the hike next spring, and said this week he does not believe the economy needs more stimulus (in the form of withdrawing the tax hike). Meanwhile, Cabinet Secretary Suga was less resolute than last week when he ruled out a delay, stating that the government may in fact postpone the tax hike if overall tax revenues were to fall further. On Friday, Japanese long rates backed up modestly after the BOJ changed the composition of upcoming asset purchases to favor securities with shorter maturities.

Home sales in the US were mixed in February. The annualized rate of new home sales accelerated from the January reading, while the rate of existing home sales slowed somewhat m/m. Both figures were up slightly from last year. The National Association of Realtors (NAR) blamed the lull in existing home sales on delays in contract signings in January from the East Coast blizzard and the slump in the stock market. Meanwhile, new home sales were buoyed by big gains in the West, however the other three regions of the country saw flat to much lower sales. Affordability and supply continues to be a huge problem. "Finding the right property at an affordable price is burdening many potential buyers," said the NAR. Separately, KB Homes disclosed solid first quarter results, including good gains in net orders and backlogs.

Apple has launched a smaller, cheaper iPhone - called the iPhone SE - ultimately aimed at emerging markets and China. The iPhone SE - featuring a smaller 4" screen - is Apple's second attempt to offer an entry-level or mid-tier device, following the poorly received iPhone 5c, launched in 2013. Shares of Apple have rallied 10.3% over the last month as investors anticipate Cupertino has finally found a way to juice its flat lining iPhone sales trends, although AAPL was flat on the week.

Activist fund Starboard Value has committed itself to replacing the entire Yahoo board in a fight to control the company. Starboard - with a 1.7% stake in Yahoo - proposed a slate of candidates includes Jeffrey Smith, its own CEO. Starboard had previously called into question the leadership of CEO Marissa Mayer, and analysts believe that by increasing the pressure on Yahoo's board, Starboard thinks it can finally push the company to sell its core businesses.

In deal news, Marriott raised its offer to acquire Starwood Hotels to $79.53/share in stock and cash, topping Chinese insurance firm Anbang's offer of $78/share. The new total for Marriott's offer is valued around $13.6B, however Marriott's cash component is a mere $21/share, while Anbang's offer is all cash. UK financial data giant Markit has agreed to combine with its US rival IHS in a $13 billion all-stock deal, valued around $31.13/share. The combined company will be headquartered in London and would have had annual revenue of about $3.3 billion in 2015. Sherwin-Williams reached an agreement to acquire Valspar for $113/share in cash - a big 41% premium to the prior 30-day weighted average price - for a total deal value of $11.3B. Shares of Richard Branson's Virgin America shot up more than 15% on Wednesday after the airline was said to be reaching out to potential buyers about a sale of part or all of the company.

FT : John Paulson urges Premier Foods to engage

Wall Street hedge fund manager John Paulson has attacked the management of Premier Foods for refusing to engage in discussions over a takeover from US spice company McCormick as the battle over the future of the Kipling Cakes maker intensifies.

The FTSE 250 company has rejected two bids from McCormick, the latter pitched at 60 pence a share, and has said it’s prepared to engage in discussions should there be a higher offer.

Paulson & Co, which says it owns more than 7 per cent of Premier’s shares, said in a statement on Thursday afternoon that “we communicated to the Chairman yesterday our belief that after receiving the approach from McCormick & Co., the company should fully engage with McCormick.”

The criticism of Premier Foods echoes that made earlier on Thursday by Standard Life, which owns a similar amount of the shares. Premier Food’s future is complicated by the board’s decision to instead pursue a “co-operation agreement” with Nissin Foods, the Japanese maker of instant noodles.

Nissin strengthened its hand this week by acquiring a 17 per cent stake in Premier Foods from Warburg Pincus for 63p a share. Mr Paulson, who is best known for making billions betting against the US sub-prime mortgage market, said “the fact that the company’s longstanding and largest shareholder sold all their shares at 63p, shows that the 60p offer from McCormick should be worthy of engagement.”

Premier Foods has described McCormick’s bid as a “highly conditional” one that “significantly undervalued” the company. Premier Foods closed down 3.3 per cent at 52p.

>>> Constellation Hotels considers selling Berkeley and Connaught hotels

Constellation Hotels considers selling Berkeley and Connaught hotels 

Constellation Hotel Holdings Limited, a Qatar-based hotel company, is thinking about selling The Berkeley hotel and The Connaught hotel in London, UK, the Irish Independent reported. The article cited a report in the Estates Gazette trade journal for the information.

Constellation is sounding out potential buyers for an off-market sale with a GBP 750m (EUR 948m) asking price, the newspaper said.

Estates Gazette also reported that Constellation is also thinking about selling The Connaught, also based in London, according to the Irish Independent item. The article mentioned an asking price of about GBP 350m for The Connaught.

The hotels are managed by the Northern Ireland-based entrepreneur Paddy McKillen, the report noted.

Irish Independent, Estates Gazette

WSJ : Exxon Mobil in Talks to Buy Stake in Big Mozambique Gas Project From Eni S

Exxon Mobil in Talks to Buy Stake in Big Mozambique Gas Project From Eni SpA

Shows major oil companies are again hunting for deals after energy prices crashed in 2014

Exxon Mobil Corp. is in advanced talks to acquire a stake in a giant Mozambique natural gas development project from Italy’s Eni SpA, a sign that major oil companies are again hunting for deals after energy prices crashed in 2014.

The acquisition could be announced in coming weeks, according to people familiar with the matter. Terms of the deal aren’t clear, but one person indicated Exxon is in talks to buy a stake of around 20% from Eni, which owns 50% of the development.

As with all discussions over deals, timing could slip, talks could fall apart at the last minute or the size of the stake could change.

Any such purchase likely would be a drop in the bucket for Exxon, which has a market value of around $350 billion. A 20% stake in the concession sold for more than $4 billion in 2013, before energy prices tumbled.

The Mozambique Area 4 offshore development is expected to become a major global supplier of liquefied natural gas. Eni has said Area 4 may hold 85 trillion cubic feet of gas. The Italian company estimates it may hold enough gas to meet U.S. residential consumption for nearly two decades.

For Exxon, the assets would represent an important move toward adding to oil and gas reserves with acquisitions during the downturn in oil prices, a step many analysts have estimated it would take as prices fell. Last year, the Irving, Texas-based company was only able to replace about two-thirds of the oil and natural gas it produced, the first time that has happened in 22 years.

The Mozambique project involves separate giant natural gas discoveries in the Indian Ocean that a host of companies want to exploit. Eni and Anadarko Petroleum Corp. made the original discoveries in the area and agreed last year to coordinate development that is likely to cost in the tens of billions of dollars.

Anadarko owns a 26.5% working interest in Area 1, which is a separate tract not included in the Eni deal under discussion with Exxon Mobil. Area 1 could hold as much as 75 trillion cubic feet of gas. Partners there include Japan’s Mitsui & Co. Anadarko isn’t a partner in Area 4.

The projects come at a difficult time for Anadarko and Eni. As oil and gas prices have plunged, Anadarko has said it would cut spending by almost half, complicating its ability to advance the Mozambique development. Both companies have yet to make a final investment decision on the project. It is unclear how a potential Eni stake sale would impact the funding picture for Anadarko.

The backing of Exxon, which has a AAA credit rating and recently sold $12 billion in bonds to build its acquisition war chest, could be a lifeline for Eni as it seeks to make the discovery viable. Exxon is said to have an interest in becoming an operator in the development, people familiar with the matter said.

Energy deal making has been relatively muted because of the downturn in oil and gas prices. The largest energy deal so far this year is TransCanada Corp.’s agreement to buy Columbia Pipeline Group Inc. for $10.2 billion.

Re/code.net : Microsoft Tells Possible Yahoo Buyers It Would Consider Backing Bi

Microsoft Tells Possible Yahoo Buyers It Would Consider Backing Bids With Big Bucks

According to numerous sources, Microsoft execs have been meeting with private equity firms mulling over bids to buy Yahoo and telling investors the company might be willing to lend significant financing to their efforts.

As most know, Yahoo has said it is for sale. Some question the company’s commitment to the process, given how glacial it has been, which many attribute to CEO Marissa Mayer’s antipathy toward it, favoring her own turnaround efforts instead.

Today, activist shareholder Starboard Value said as much, mounting a long-expected proxy challenge to Yahoo and naming its own slate of directors to replace current ones.

Starboard’s Jeff Smith noted that the new board was needed to bring “credibility to a process that has been publicly criticized repeatedly for being too slow, fraught with conflicts of interest and very difficult for highly qualified and motivated strategic and financial buyers to access much-needed diligence information.”

Every single possible buyer I have spoken to this week agreed in spades, with many calling the Yahoo sale effort a farce. The current Yahoo board has said it is not, but the credibility of the current Yahoo board is — let’s be honest — under some much-deserved scrutiny.

In any case, adding Microsoft into the mix does give this process some seriousness. Microsoft’s partnerships and acquisition strategy head Peggy Johnson is part of the effort, as well as others at Microsoft, sources said (you can hear my Re/code Decode podcast interview with her from last fall below).

To be clear, the software giant has made no commitments so far to any investors, and any discussions now are exploratory. But sources said that the reason for providing financing would be because Microsoft wants to ensure that if Yahoo is sold, whoever buys it will be a good partner going forward. That makes sense, since Microsoft has close search and advertising ties with Yahoo, part of a longtime partnership.

That deal was struck after Microsoft made a hostile bid to buy Yahoo in 2008. At the time, former CEO Steve Ballmer offered $31 a share; at that time it was worth about $45 billion.

Ultimately, the effort was unsuccessful, but it was ugly by more friendly tech standards.

Since then, the companies have had a more cooperative relationship, although there was some recent tension when Mayer tried to get out of parts of the current search deal via a lawsuit that failed. She ended up renegotiating the deal a year ago on more favorable terms for Yahoo and later signed another search deal with Google, too.

Preserving its current status is important to Microsoft, said sources, which is why it has been mulling the financing of possible Yahoo buyers, who will have to come up with billions of dollars in cash to be competitive. “If Microsoft put in a billion, it would cost them almost nothing,” said one investor who had spoken to the company. “It’s a minor thing and it buys them a lot.”

Yahoo’s market cap is currently $32.5 billion, but that includes its stakes in its Asian assets. After the spin-off of its Alibaba Group assets and minus-ing out its shares of Yahoo Japan, most peg the price of its core business at $6 billion to $8 billion.

But sources close to Yahoo’s board said it wants $10 billion in a sale. (By way of comparison, I want a pretty pony from Microsoft comms head Frank Shaw and have a better chance of getting it.)

Sources within Microsoft said the company had no interest in making a more significant bid, but others do. This week, sources said, Yahoo began engaging with “strategic” bidders that include AT&T, Verizon and Comcast. PE and other investment firms will come next, the sources said, and those interested include Advent International, Vista Equity Partners (this one interests me the most), TPG, KKR and others.

A Microsoft spokesman who will not buy me a pony anytime soon declined to comment.