>>> US Close Dow-0.31% S&P-0.14% Nasdaq+0.18% Russell+0.78%


Closing Market Summary: Stocks End Flat Following Strong Jobs Data

The stock market ended the week on a flat note, locking in its second consecutive weekly decline. The S&P 500 shed 0.1%, losing 0.7% for the week while the Nasdaq Composite (+0.2%) outperformed, ending essentially unchanged (-0.03%) in the first week of June.

Friday morning featured a whirlwind of global and economic developments, but they barely registered with the market when the dust settled.

Starting in Europe, Greece did not make today's debt payment to the International Monetary Fund, opting instead to bundle all June payments into a single installment of EUR1.60 billion, to be paid on June 19. This will allow discussions to continue, but the developments weighed on investor sentiment in Europe. After European markets closed, Greek Prime Minister Alexis Tsipras addressed the Greek parliament, saying the proposals received from the lenders are unrealistic and that debt restructuring must be included in any potential agreement.

Staying in Europe, the Organization of the Petroleum Exporting Countries met in Vienna, electing to maintain its current production target at 30 million barrels per day. Crude oil struggled in the early going, revisiting last week's lows, but ended higher by 1.9% at $59.13/bbl. Meanwhile, the energy sector (+0.7%) ended in the lead while only two other groups—financials (+0.6%) and industrials (+0.1%)—registered gains. Going back to oil, the energy component overcame greenback strength that sent the Dollar Index higher by 0.9%, which resulted from a better than expected Nonfarm Payrolls Report for May.

Specifically, the strong report revealed the addition of 280,000 jobs while the Briefing.com consensus expected a reading of 225,000. More notably, average hourly earnings increased 0.3% (consensus 0.2%), which boosted aggregate earnings by 0.5% in May.

The Fed has stated multiple times that the first fed funds rate hike will be contingent on data trends that show the inflation rate gradually moving toward its 2.0% target. The 0.3% increase in hourly wages and the 0.5% increase in aggregate earnings place the economy on that path.

Treasuries plunged in immediate reaction to the report with the 10-yr yield spiking as many as 13 basis points to 2.44% before ending at 2.40% (+9 bps). Also of note, selling in the 2-yr note pushed its yield up to 0.71% (+5 bps), its highest level since 2010. For the week, the benchmark 10-yr yield jumped 28 basis points.

Eight sectors registered losses with defensively-oriented utilities (-1.3%) and consumer staples (-1.4%) ending behind other groups. Both sectors were pressured by high-yielding members as they lost some attractiveness relative to Treasuries. For the week, the utilities sector lost 4.2%.

Elsewhere among countercyclical groups, the health care sector (unch) settled just below its flat line, but that masked afternoon strength in biotechnology. The iShares Nasdaq Biotechnology ETF (IBB 367.04, +4.25) gained 1.2% and helped the Nasdaq Composite end ahead of the broader market while the S&P 500 hit resistance at its 50-day moving average (2,100) early on, and retreated into the afternoon amid weakness in most sectors.

Also contributing to the Nasdaq's strength was the high-beta chipmaker group. The PHLX Semiconductor Index added 0.1%, but losses among large cap members like Intel (INTC 31.84, -0.47) and ASML (AMSL 109.10, -1.49) offset gains in 21 of 30 index components. Smaller index components displayed continued strength amid speculation more mergers and acquisitions could be in the works; however, the broader technology sector (-0.3%) ended among the laggards.

Unlike technology, the second largest sector by weight—financials (+0.6%)—spent the day in positive territory with banks expected to benefit from rising rates at the longer end of the curve. For the week, the financial sector gained 0.8%.

Also of note, the industrial sector (+0.1%) eked out a slim gain thanks to newfound strength among transportation names. The Dow Jones Transportation Average climbed 0.9%, extending its weekly advance to 2.5%.

Today's participation was ahead of recent averages with more than 766 million shares changing hands at the NYSE floor.

Economic data released included Nonfarm Payrolls and Consumer Credit:
  • Nonfarm payrolls added 280,000 jobs in May after adding a downwardly revised 221,000 (from 223,000) in April while the Briefing.com consensus expected an increase of 225,000 
    • Nonfarm private payrolls increased by 262,000 jobs (Briefing.com consensus 225,000), up from a 206,000 increase in April 
    • Average hourly earnings increased 0.3% in May (Briefing.com consensus 0.2%) after increasing only 0.1% in April. The May increase, combined with increase in payrolls, pushed aggregate earnings up 0.5% 
    • The average workweek was flat at 34.5 hours 
    • The unemployment rate increased to 5.5% in May from 5.4% in April while the consensus expected no change at 5.4% 
      • The entire increase in the unemployment rate was due to discouraged workers returning to the labor force. If the labor force remained at its April level, the unemployment rate would have declined to 5.3% 
  • The Consumer Credit report for April showed an increase of $20.50 billion, which was higher than the Briefing.com consensus estimate of $16.80 billion 
    • The prior month's credit growth was revised to $21.40 billion from $20.50 billion 
There is no economic data on Monday's schedule.
  • Nasdaq Composite +6.6% YTD 
  • Russell 2000 +4.6% YTD 
  • S&P 500 +1.6% YTD 
  • Dow Jones Industrial Average +0.2% YTD

>>> BASF bid for Syngenta could require leverage jump to avoid dilution

Deal Reporter

BASF bid for Syngenta could require leverage jump to avoid dilution
* BAFIN would wait for 'sufficiently concrete' plans before forcing disclosure
* German break fees typically more conservative than for US, lawyer says

BASF [ETR:BAS] may prefer to increase leverage with a significant cash portion in any potential bid for Syngenta [VTX:SYNN], two sector bankers said. This would avoid it being “hugely dilutive” to its own earnings to the detriment of existing shareholders, one of the bankers said.

The German chemicals giant has reportedly been considering a potential bid for Syngenta. This follows a private proposal from Monsanto [NYSE:MON] at CHF 449.15 per share that was rejected by the Swiss group.

An uninvolved lawyer pointed out that the German securities regulator, BAFIN, requires a disclosure for inside information only when plans are “sufficiently concrete”. This leaves BASF some headroom to analyse the situation before being forced to make an announcement.

The lawyer pointed out that BASF may be keen to avoid a disclosure as this in turn could risk triggering the Swiss “put up or shut up” mechanism.

BASF would have significant work to do in analysing a bid that would sit well with shareholders.

BASF trades at 15x LTM earnings and has a leverage ratio of 1.25x, while Syngenta trades at 25x and 0.89x. An all-share offer, based on an offer at Syngenta’s pre-rumour 7 May share price, would see BASF’s leverage (net debt/EBITDA) decrease from 1.25x based on LTM 1Q15 figures to 1.19x according to Dealreporter analytics.

BASF shareholders would be unlikely to vote for such a deal, the first banker said.

Monsanto’s offer was at a 35% premium to Syngenta’s pre-rumour CHF 332.7 trading price. Assuming a counter offer from BASF would be at a similar level, a 20% cash deal would result in a leverage level of around 2x. BASF has not made any public comments in its equity or debt reports on a desired level of leverage. A 40% cash component for an offer could push the ratio up to 2.5x.

The leverage levels of BASF peers include Linde (2.2x), Lanxess (1.7x), Akzo Nobel (1.3x), Arkema (2.4x), Solvay (.9x).

Ignoring synergies, a 100% cash deal is the only scenario in which such a deal would be accretive to BASF’s 2014 EPS, but it would push the net debt to EBITDA to over 4x.

At EUR 500m of synergies, the deal could be accretive at a cash 50% payout ratio. This would leave the combined entity with 2.6x-2.7x leverage, according to a calculation by Dealreporter.

Some reports have suggested BASF would be a white knight for Syngenta. Shareholders may also be keen to see the common strategic goals, rather than creating a larger conglomerate.

The first banker pointed out that buying Syngenta would be contrary to BASF’s stated strategy of servicing the seed industry players, rather than being one. This was behind the company's Becker Underwood acquisition. This banker pointed out that becoming a player in that sector would undermine that. “It would be a bolt from the blue, strategically.”

The tie-up may suit Syngenta’s management better, in terms of their own employment prospects, given the reduced overlap in Syngenta’s seeds business. That said, it would still need to closely analyse antitrust risk due to overlaps in crop protection, the bankers and a third banker said.

BASF would be at a disadvantage to Monsanto in its break fee discussions. The lawyer pointed out that German companies would typically be more conservative in break fee payments, typically only agreeing a fee in line with market practice. It would be hard to see a break fee agreed from BASF of more than 5%, the lawyer said. This compares to reports of a 10% break fee being negotiated on the Monsanto side. But, a BASF deal would also not be at risk of failing on tax inversion issues. It is not clear whether Monsanto’s proposal for Syngenta was conditional on a successful tax inversion.

The prospect of the Swiss Takeover Board imposing a “put up or shut up” (PUSU) deadline on a renewed bid from Monsanto is increasingly likely in the event of interest from a rival bidder, namely BASF, the first banker and a Swiss M&A lawyer said.

A second Swiss lawyer said the situation may not qualify for a PUSU given Monsanto’s first offer might be considered a merger proposal as opposed to a public offer.

The second Swiss lawyer said Monsanto’s announcement may not have been made formally and “publicly” enough to trigger a potential PUSU situation.

(Makor) Tech View Dax30 Index (11,228 last) - taking 5% profit on short position at mkt price


Summary

 

·         The Index has tested the 11,167 level today and so far this level is holding nicely

·         A move below 11,167 would be negative but till this happens will take profit and look to sell bounce or a breakdown

·         The Weak Euro is also a warning sign that we might bounce from here

 

Strategy; Short from 11,841 taking profit at 11,228 for 5% gain, step aside for now

 

Daily chart

 

 

(Makor) Special Situations: PSA PEUGEOT CITROËN (UG: FP) - Is The Race Over?



Special Situations: PSA PEUGEOT CITROËN (UG: FP) - Is the Race Over?

 

For full report and additional data please refer to our new format https://relayto.com/makor-capital/DhUmV21v

 

PSA stock rallied 80% since the beginning of the year. The company, which suffered in the last few years from shrinking market share and declining profits is now going through a reconstruction plan, and has managed to show operating profitability in 2014 for the first time since 2010. We believe that further improvement in the operational performance together with a continued recovery of the European Auto sector (which was seen year to date), can lead to further share gains. However, at the current stock level we prefer to wait for a better entry point that will reflect a more attractive risk-reward ratio.

 

Valuation & Investments strategy

 

We identify two potential catalysts which we recommend investors to follow: 1) PSA reconstruction plan -   in April 2014 Carlos Tavares, Chairman of the PSA and former Renault executive, announced the 2014-2018 “back in the race” business plan, with a clear focus on returning the group to profitability. The plan includes three main financial metrics - recurring positive group operating free cash flow by 2016 at the latest, €2 billion in total Group operating free cash flow over the 2015-2017 period (this was lately updated by management from 2016-2018); and a 2% operating margin in the Automotive Division by 2018 with a long term target of 5%. The company aims to achieve these goals by reducing overall models numbers, improving capacity utilization through restructuring, and SG&A cost reduction. We believe that strong execution can continue to drive the stock up especially if the recovery in the Auto sector continues through 2015. 2) Potential M&A candidate - we see PSA as a natural candidate for M&A deals given the fact that it is one of the smallest OEM’S in Europe and could be acquired by a bigger OEM which could drive scale out of it. We point out that this could be a major catalyst.

 

We value PSA at €19 per share using a sum of the parts analysis based on the following assumptions and adjustments: 1) The automotive segment was valued at 0.2x EV/SALES on FY16 estimated revenues in order to reflect a certain level of improvement in the operational performance. 2) Faurecia stake (51.1%) was taken at market value based on a share price of €40.7 (the closing price as of June 4, 2015). 3) BANQUE PSA finance was taken at 20% discount to book value. 4) PSA China was taken at 0.55x EV/SALES on the FY14 revenue which we believe is quite conservative given the good performance of PSA in China together with its local partner DPCA (this valuation is also supported by the DDM method based on 2014 dividend). 5) PSA net debt and pension liabilities were taken excluding Faurecia. 6) We accounted the dilutive effect from the equity warrants issued in April 2014 by adding 120 million shares and €770 million to assets.

 

We note that PSA management stated in 1Q15 revenue release that the Group is ahead of schedule with its "Back in the Race" recovery plan and is benefiting from a favorable economic environment. We ran a sensitivity analysis for PSA share value in order to reflect a number of potential scenarios for the automotive segment and for PCA China. We took a 0.10-0.35x EV/SALES multiple range for the automotive segment and 0.55-0.70x range for China PSA. We believe the appropriate range of the share value is @ a €16-€21 range (an average of €18.5). Therefore, at current market price of €18 we see PSA as Natural but we recommend to follow the stock and the company’s operational progress and take advantage of a potential pull back.

 

Key risks

 

Main risks include: (1) unexpected drop in European and global vehicle demand; (2) poor execution of PSA restructuring plan and lack of management’s ability to improve profitability and become cash flow positive in the short term; (3) market share declines in Europe and globally which will lead to declining revenues. (4) Strengthening of the euro particularly relative to sterling or emerging market currencies.

 

>>> Fitch: Greece IMF bundling highlights extreme liquidity pressure; No direct

Fitch: Greece IMF bundling highlights extreme liquidity pressure; No direct implications for Greece's 'CCC' sovereign rating 

Greece's decision to bundle four payments due to the IMF this month highlights the extreme pressure on government funding, Fitch Ratings says. It does not have direct implications for Greece's 'CCC' sovereign rating.

The risk that Greece misses its larger IMF payment at end-June cannot be discounted. The prospect of fiscal disbursements from Greece's official creditors is highly uncertain. The Greek government has not accepted the proposals presented by the institutions (the European Commission, European Central Bank, and IMF) this week. If the two sides do agree a deal, it will meet political opposition from elements of Syriza most hostile to the institutions' proposals for pensions and public sector wages. Time constraints mean we expect that an agreement would take the form of a further extension of Greece's existing programme beyond end-June and partial disbursements, conditional on Greece demonstrating its commitment to its terms. These funds would primarily be used to meet redemptions, which will rise sharply in July and August as bonds held by the Eurosystem fall due, as well as enabling Greece to fund a small ongoing deficit. Missing the larger end-June payment to the IMF would be credit negative. If no outline agreement between Greece and the institutions were in place, it would increase the risk that the ECB restricts Emergency Liquidity Assistance (ELA) to Greek banks. This may ultimately lead to restrictions on the banking sector to reduce liquidity strains, including capital controls. The risk of capital controls is reflected in our 'B-' Country Ceiling for Greece, which is just one notch above the sovereign IDR.