>>> US Close Dow+0.51% S&P+0.34% Nasdaq+0.62% Russell+0.72%

Closing Market Summary: Strong Week Ends on Higher Note

The stock market ended an upbeat week on a higher note with the bulk of today's action taking place during the opening hour. The S&P 500 gained 0.4%, ending the week higher by 3.3% while the Nasdaq Composite (+0.6%) outperformed, boosting its weekly gain to 3.6%.

Equity indices rocketed out of the gate, marking their best levels of the day about 45 minutes after the opening bell. The S&P 500 set a session high just above the 2,097 level and spent the remainder of the trading day in a slow retreat from that perch.

The consumer discretionary sector (+1.2%) displayed strength from the start while five other sectors also finished in the green. As for the discretionary space, the group extended its weekly gain to 4.5%, ending atop this week's leaderboard. Apparel names were largely responsible for the strength with Dow component Nike (NKE 132.65, +6.87) soaring 5.5% after announcing a new $12 billion share repurchase program and boosting its quarterly dividend by four cents to $0.32/share. In addition, the industry giant announced its stock will undergo a two-for-one split.

Staying in the discretionary sector, another apparel stock—Abercrombie & Fitch (ANF 24.37, +4.88)—soared 25.0% after beating earnings and revenue estimates while the broader SPDR S&P Retail ETF (XRT 44.16, +0.88) spiked 2.0%.

The strong showing from retailers overshadowed a 12.3% plunge in the shares of Chipotle Mexican Grill (CMG 536.19, -75.32), which unfolded after the Center for Disease Control published a report detailing new E. coli cases at CMG restaurants in six states.

Elsewhere among cyclical sectors, industrials (+0.6%) and technology (+0.9%) also settled ahead of the broader market while energy (-1.0%) and materials (-0.3%) could not stay out of the red. Interestingly, the energy sector finished at the bottom of the leaderboard even though crude oil overcame intraday weakness to end the pit session higher by 0.3% at $41.90/bbl.

Moving to the countercyclical side, consumer staples (-0.7%) and telecom services (-0.5%) retreated during the afternoon while utilities (+0.5%) and health care (+0.7%) settled in the green. The health care sector fared better than the biotech group as the iShares Nasdaq Biotechnology ETF (IBB 333.49, +0.07) settled flat.

Treasuries held modest gains through the bulk of the session but they dipped in the afternoon with the 10-yr yield ending higher by a basis point at 2.26%.

Today's participation was ahead of average with the final tally receiving a healthy boost thanks to options expiration. As a result, more than 950 million shares changed hands at the NYSE floor.

Investors did not receive any economic data today and Monday's economic news will be limited to the October Existing Home Sales report (consensus 5.50 million), which will be released at 10:00 ET.

  • Nasdaq Composite +7.8% YTD
  • S&P 500 +1.5% YTD
  • Dow Jones Industrial Average 0.0% YTD
  • Russell 2000 -2.4% YTD

>>> EMC/Dell tax worry overstated, attorneys say

EMC/Dell tax worry overstated, attorneys say
Dell's use of VMware (NYSE:VMW) tracking shares to help fund its purchase of EMC (NYSE:EMC) is not expected to trigger a tax liability, tax attorneys said.

As long as typical tax-sensitive features are used in the tracking stock, the tax liability is unlikely to be a real concern for the transaction, three tax attorneys told this news service.

Earlier this month online technology publication Re/code reported that Dell’s USD 67bn proposed acquisition of storage giant EMC could trigger a tax bill of USD 9bn. The Texas-based technology company has proposed to use cash and a VMware tracking stock to acquire the company.

The report, citing sources familiar with the matter, said the creation of the tracking stock in virtualization technology company VMware, of which EMC owns an 81% stake, could attract scrutiny by the Internal Revenue Service (IRS). The potential concern is the agency may deem the transaction taxable if the tracking stock disguises interest in the assets it will track.

Robert Willens, an independent tax expert, said that during the 35-year history of tracking stocks, the IRS has never attempted to argue that tracking stock is anything other than what it purports to be, stock of the issuing corporation.

A source familiar to the situation agreed, adding that it would be odd for the IRS to come up with new directives now.

“The correlation between tracking stock and the tracked asset in this case is quite tenuous,” Willens said.

Holders of VMware tracking stock, which is called Class V Common Stock, are subordinated to all creditors of Dell parent Denali Holding in claims, yet, no actual shareholders of VMware could be subordinated to the claims of Denali’s creditors, Willens explained, an argument that the tracking shares in VMware are more closely tied to Dell rather than VMware.

The first attorney and Willens said that the IRS is unlikely to rule on the tracking stock in this transaction, but there will be an opinion of the companies’ counsel, which will be forthcoming.

The Re/code story also said that Dell’s plan to create tracking shares in VMware, which it does not yet own, would be an effort to carefully manage tax laws since the transaction would not require a distribution of shares or a spin-off, two types of deals that are sometimes taxable.

Willens and two of the attorneys said they disagreed, noting that EMC and Dell structured the deal in a way where the link between the tracking stock and the tracked asset is more attenuated than normal, and the transaction is not “threading the needle,” as Re/code described it.

An example would be that Denali, the parent company of Dell, is not obligated to distribute to the Class V common stock holders any dividends it receives on the VMware stock, Willens said.

Class V common stock will be issued by Denali to track the performance of a portion of the group’s post-closing economic interest in the VMware business. Denali will issue approximately 223 million shares of the Class V stock at the closing of the transaction, according to SEC filings.

The first and second attorneys said that the companies were trying to structure the deal as a tax-free rollover transaction, which help align the interests with different parties and also bridge valuation and financing gaps.

The Re/code story also mentioned US Internal Revenue Code Section 355, and said that if Section 355 applies, the deal will not happen.

Section 355 regulates the distribution of stock and securities of a controlled corporation and has served as an essential tool for restructurings since it allows the movement of corporate entities to be tax-free.

Willens said Section 355 tolling can be easily dispensed if EMC is merged with and into Denali before spinning off VMware. This eliminates the “purchased” basis in the VMware stock and, in the process, eliminates the Section 355 issue.

The fact that Liberty Media (NASDAQ:LMCA) has been using tracking stock for decades in the face of the supposed risks involved shows the efficacy of tracking stock, added Willens and two attorneys.

Dell and EMC declined to comment. VMware was not immediately available for comment.