Closing Market Summary: Stocks Climb Ahead of FOMC
The major averages strung together their second consecutive advance with the S&P 500 climbing 0.9%. The benchmark index extended its weekly gain to 1.7% while the Nasdaq Composite (+0.6%) underperformed, but still brought its week-to-date advance up to 1.4%.
Equities spent the first hour of the day near their flat lines before racing higher alongside the energy sector (+2.8%), which had shown relative strength from the start. That strength was closely linked to the buying surge in crude oil futures that sent the energy component higher by 5.8% to $47.15/bbl. A significant portion of the rally developed after the release of the weekly EIA inventory report, which showed a draw of 2.104 million barrels.
The sharp rally in the energy sector underpinned the overall market, which rallied despite the uncertainty surrounding tomorrow's FOMC policy statement, which could be highlighted by the first rate hike in more than nine years.
To be fair, there were some other areas of relative strength. Notably, the consumer staples sector (+1.1%) saw increased activity thanks to M&A rumblings among brewers and distillers after Anheuser-Busch Inbev (BUD 115.43, +7.39) approached SABMiller (SBMRY 56.45, +9.72) about a potential acquisition. SABMiller expressed willingness to entertain discussions, and the news boosted its peers, none more so than Molson Coors Brewing (TAP 82.98, +10.34), which surged 14.2%.
The news of a merger brewing in the consumer sector invited the heaviest NYSE floor volume of the week (863 million), but tomorrow's session is all but sure eclipse today's tally once the FOMC decision is announced.
Elsewhere, the industrial sector (+0.7%) settled not far behind the broader market, doing so despite relative weakness among transport stocks. Specifically, the Dow Jones Transportation Average was limited to a gain of 0.2% as FedEx (FDX 149.63, -4.37) weighed. Shares of FDX surrendered 2.8% in reaction to below-consensus earnings and guidance, dragging its peer, UPS (UPS 100.08, -0.44), lower by 0.4%.
The industrial sector settled just ahead of financials (+0.6%) while another cyclical group—technology (+0.4%)—underperformed throughout the day with Apple's (AAPL 116.35, +0.07) flat close keeping the sector behind the broader market.
The relative weakness in the technology sector translated into underperformance for the Nasdaq, but it is worth noting the index was also pressured by biotechnology. The iShares Nasdaq Biotechnology ETF (IBB 355.14, -2.32) lost 0.7%, erasing the bulk of yesterday's gain. For its part, the health care sector ended behind the remaining nine groups, but still added 0.3%.
Unlike stocks, Treasuries spent the day inside a narrow range, slipping to lows into the close with the 10-yr yield rising one basis point to 2.30%.
Economic data included CPI and the NAHB Housing Market Index:
- Consumer prices declined an in-line 0.1% in August after increasing 0.1% in July
- A steep 2.0% drop in energy costs was responsible for the downtick, representing the first decline in energy prices since a 1.3% drop in April
- Food prices increased 0.2% for a second consecutive month
- Excluding food and energy, core CPI increased 0.1% for a second consecutive month in August, which is what the consensus expected
- There were no outliers in the core price index and trends remain soft and stable.
- The NAHB Housing Market Index for September rose to 62 from 61 while the consensus expected the reading to hold at 61
Tomorrow, weekly Initial Claims (consensus 275,000), August Housing Starts (consensus 1.158 million), Building Permits (expected 1.158 million), and the Q2 Current Account Balance (expected deficit of $112.20 billion) will be released at 8:30 ET while the Philadelphia Fed Survey for September will cross the wires at 10:00 ET. The day's data will be topped off with the 14:00 ET release of the FOMC policy statement and fed funds rate decision (consensus unchanged at 0.25%).
- Nasdaq Composite +3.2% YTD
- Russell 2000 -2.3% YTD
- S&P 500 -3.1% YTD
- Dow Jones Industrial Average -6.1% YTD
AB InBev and SABMiller: get another round in
Undoubtedly a big deal, but what next for the acquisition machine?
Quirky names. Hand drawn labels. Funny flavours. Craft beer is big news in brewing these days. Customers seem to love the small guy. What better backdrop, then, for the world’s largest brewer by volume to attempt to buy the world’s second largest?
Everything about AB InBev’s approach to SABMiller is big. Take the combined enterprise value of $306bn, or the combined net profit of $13bn that the two made last year.
The benefits of a deal are also big. For AB InBev, the deal would fill in gaps in its portfolio, most notably in Africa where SABMiller generates 29 per cent of its annual revenues, but also in parts of Latin America. And the cost savings would also be hefty. Assume AB InBev can strip out 13 per cent of SABMiller’s costs — the level promised when it bought Mexico’s Grupo Modelo in 2012 — and there could be savings of $2.3bn. AB InBev has a good record of achieving promised savings. There should be few doubts about its ability to deliver.
But the challenges are also big. Start with the price. If AB InBev offers a 30 per cent premium, it would have to bid $98bn for SABMiller’s shares as well as taking on its $10bn of net debt. AB InBev already has net debt of 2.5 times earnings before interest, tax depreciation and amortisation. Assuming the deal is all in cash (as InBev’s takeover of Busch in 2008 was) and ignoring cost savings and disposals, that could rise to over 6 times.
The other challenge is the regulators. AB InBev had a job getting the Modelo deal past US authorities. SABMiller’s 50 per cent stake in MillerCoors would likely have to be sold. Assets in China may also have to go.
But the minutiae of the deal should not distract attention from the really big question. AB InBev is an acquisition machine that has swallowed up Interbrew, Anheuser-Busch and Grupo Modelo. Its shareholders should be thankful — over the past five years its shares have more than doubled against SABMiller’s 50 per cent rise (ignoring Wednesday’s moves).
But after SABMiller, there is nothing in the world of brewing big enough to make a difference for AB InBev. So what does chief executive Carlos Brito do then? Move into spirits? Move into foods? Or perhaps just try to prove that acquisition machines can thrive even without the deals. Either way, by then all the excitement in the industry might well have drifted down to the quirky names and funny flavours.
Buy the Fed Rumor, Sell the Fact
Go with the Fed’s flow Thursday as Janet Yellen and her company do or don’t surprise markets
Don’t fight the Fed.
Although that phrase’s origin dates back to the early 1980s, it has never been truer than in the past eight years. Of course, in the ’80s, the Federal Reserve could just as easily tighten as loosen monetary policy. Today, many people working on Wall Street have known nothing else than monetary easing. If there was a surprise from the Fed, it was almost always a positive one.
That could change Thursday, as a two-day Fed meeting might conclude with the first increase in rates since 2006. Never has more high-priced brainpower been devoted to analyzing a decision by a bunch of economists.
But the funny thing is, all the handicapping may be in vain—at least for people with money riding on the outcome.
Buying the rumor and selling the fact has worked best. Take, for example, the announcement of the first quantitative-easing program, informally dubbed “QE1,” on Nov. 25, 2008. Between then and the time it actually was implemented just three weeks later, the yield on the benchmark 10-year Treasury note fell by a whopping three-quarters of a percentage point, and stocks rose by nearly 2%.
Another example came in August 2010, when then-Fed Chairman Ben Bernanke announced a second round of bond buying known as QE2. In a little over two months, the stock market had rallied by 14%. But from the time the program was implemented until it wound down, benchmark bond yields actually rose by more than half a percentage point, even though they were meant to fall.
The final example is the “taper tantrum” in the spring of 2013 stemming from hints about the end of QE3. Bond yields surged and stocks wobbled, but, between the time actual tapering began in December 2013 and ended in October 2014, stocks rose and bond yields fell by half a point.
So brace for Thursday’s announcement and be inspired by the words of former Fed Chairman Alan Greenspan:
“I know you think you understand what you thought I said, but I’m not sure you realize that what you heard is not what I meant.”
*POTASH CEO SAYS NOT ACTIVELY ENGAGED IN K+S BID
Hearing renewed takeover chatter - MSFT rumored as a potential acquirer with price chatter in the low $30's
Bernstein
SAB/ABI first take...SAB Miller makes a statement ABI intend to make a bid, no terms mentioned and no firm bid but ABI have 28 days to make a bid or withdraw for 6 months. Trevor not surprised at interest but if a deal gets done at ~£40 then it costs 7 years to hit Cost of Capital unless ABI can get huge synergies ~ 7% sales. The mix of cash and shares clearly an issue here and maybe ABI have decided this is the last big beer deal out there and bends their normal parameters. SAB would probably have to make two disposals, Miller Coors (probably to Molson) and Snow in China (probably to CRE). Will be back with more when we have it. One surprise is why ABI has gone up so much...JPM
ABI/SAB: After all the press spec, statement from SAB this morning confirming that ABI intends to make an offer for the co. No details have been disclosed and no formal offer has yet been made. For a first glance scenario analysis, using our note from Feb where we assumed a 30% premium to SAB's closing price of 13th Feb i.e. £44.95, we would expect that at i. 100% debt financed this would be 20% uncreative to ABI (taking N/D EBITDA up to 5x - a level that ABI would be able to handle) & ii. 50% debt financed it would be 5% accretive to ABI:
ENDP - Hearing strength being attributed to takeover chatter - RBC analyst suggests there is talk Perrigo could buy Endo for $100/shr or more