TheChek News Flow

In reaction to disappointing earnings/guidance: BSPM -8.1%, CVV -2.1%, ESLT -1.7%, JASO -1.1%

Select notable EU names showing weakness: PHG -2.3%, DEG -2.3%, SAN -2%, DB -1.9%, UN -1.8%, STM -0.6%, HSBC -0.6%

Select oil/gas related names showing early weakness: SHI -2%, TOT -1.4%, RDS.A -1.1%

Other news: EBIO -71.6% (announces top-line results from its Phase 3 study of EBI-005; study did not achieve primary endpoints), BHP -5.1% (announces the commencement of trading of spin-off South 32; IPO launch generally perceived as disapointing valuation), NBG -4.3% (Greek banks trade lower today; IMF concerns Greece wont be able to make June 5 payment), OCN -4.3% (Reduced positions according to 13F filings at Highfield Cap and Alden Global), MT -2.9% (may be in symp with BHP), CLRB -2.6% (discloses a delay in filing form 10-Q), YGE -2.4% (still checking, co did file annual rpt Form 20-F), AZN -1% (reports MOVANTIKTM safety analyses of Opioid; also to invest ~$285 mln in a new high-tech facility for manufacturing of biological medicines in Sweden), BABA -1% (USA Today details news that Kering (PPRUY) has filed lawsuit against Alibaba (BABA) over counterfeit goods)

Analyst comments: YELP -1.9% (downgraded to Neutral from Overweight at Piper Jaffray), LINE -1.7% (downgraded to Sell from Neutral at Goldman), STO -1.7% (downgraded to Sell at Goldman), LYG -1.6% (downgraded to Sell at Investec), LVS -1.2% (downgraded to Neutral from Buy at Goldman), CTXS -1% (downgraded to Neutral from Buy at Goldman), GPOR -1% (downgraded to Sell from Neutral at Goldman), BP -0.9% (downgraded to Sell at Goldman), RRC -0.8% (downgraded to Neutral at Goldman), CVX -0.7% (downgraded to Sell from Neutral at Goldman), NGLS -0.6% (downgraded to Sell from Buy at Goldman), CHK -0.5% (downgraded to Neutral from Buy at Goldman)

Hedge funds loom large in oil price moves

Forget the interplay between supply and demand. When it comes to oil prices, hedge funds and speculators are exerting an uncommonly large influence, say many in one of the world’s most important markets.

Oil traders have watched future prices rally to their highest level this year, within touching distance of $70 a barrel, even as the price of physical cargoes flounders under the weight of a massive oversupply.

In an attempt to explain the conundrum, experienced traders are pointing at the influence of multibillion-dollar macro funds. While much of the increase in speculative demand has been driven by a perceived improvement in oil fundamentals, as US drillers have curtailed activity, other factors have been at work.

Traders say funds have bought oil futures not just as a bet on an eventual oil price recovery, but as a hedge against a weaker US dollar, rising government bond yields and shifting inflation expectations, which have roiled the bigger part of their portfolios.

“Ultimately, the dominant force in the crude market today is macro funds, with talk of diversification and inflation back on the agenda,” says Energy Aspects, a London-based consultant.

“Some of these multibillion-dollar macro funds may only be putting 1 per cent of their portfolio in oil, but that is enough to dwarf far smaller fundamentally focused funds at times.”

After the European Central Bank announced the launch of quantitative easing in January, a popular trade was to sell euros and buy the German Bund and US dollar.

But German 10-year Bund yields have risen towards 0.70 per cent after threatening to turn negative last month. That has led some funds to start unwinding the trade or look at additional hedges for large positions they might struggle to exit quickly.

“If you fear a Bund price fall driven by inflation, then buying Brent provides some protection,” says David Hufton, chief executive of PVM, an oil broker. The correlation between Brent and Bund yields is more than 90 per cent, he adds.

More broadly, buying oil when the dollar weakens also acts as an offsetting position for some investors, given most commodities are priced in the world’s reserve currency.

The dollar was a contributing factor to oil’s crash between June and January as it rose 16 per cent against a basket of other currencies. However, the 60 per cent decline in crude from about $115 to $45 a barrel over the same period illustrates how crude was largely trading on its own fundamentals, as the US shale boom contributed to oversupply.

But the scale of futures based trading in the oil market is immense, and an important driver of prices.

During the past decade there has been a surge in the volume of crude contracts traded on ICE and Nymex, the main commodity exchanges. Daily average turnover has increased from 350,000 futures contracts in 2005, when electronic trading started to dominate, to 1.5m — or 16 times the world’s global daily oil demand — according to calculations by the Financial Times.

Exchange and regulatory data show that funds hold net positions in futures and options markets in London and New York equivalent to about 510m barrels of crude. That is equal to more than five days of global demand, or the combined monthly output of Saudi Arabia, Iraq and Iran, the biggest producers in Opec.

Some investors are warning that fund buying could dry up or reverse, putting pressure on prices. When oil was $10 lower “there was a lot of hedge fund interest in buying oil as it looked oversold”, says one manager of a fund-of-funds in London. “But there’s less interest now after the rally, as it has started to look a little too extended.”

A third of the most active US oil futures contract is controlled by exchange traded funds, popular with retail investors and hedge funds.

Hedge fund short positions, or bets that the price will fall, increased during the oil price rout, though in West Texas Intermediate, the US benchmark, they peaked in March at about 200m barrels, almost two months after the price had troughed.

Some market participants see the closure of more than half of those short positions since then as helping accelerate oil’s recovery. WTI was just below $60 on Friday.

“Futurisation of oil has been as dramatic in its impact as the arrival of horizontal drilling and fracking,” says Mr Hufton. “Fracking transformed oil supply dynamics; futurisation has transformed the factors driving oil prices.”

Goldman Sachs, one of the most influential banks in commodity markets, is warning that the rally may have gone too far. While its analysts see stronger demand from Asia and other fundamental factors as supportive of the price, they wrote in a note this week that the large hedge fund long position in oil could trigger a sell-off if the funds take profits.

“While it is possible that markets have become more forward looking and are already looking beyond the near-term fundamentals, just like they did last fall, we ultimately don’t share this forward view of sharply improving fundamentals, even in 2016,” the bank said.

Ascena retail group have entered into a definitive merger agreement under which ascena will acquire ANN INC. for a combination of cash and stock in an accretive transaction. Upon closing, ANN INC. stockholders will receive $37.34 in cash and 0.68 of a share of ascena common stock in exchange for each share of ANN common stock. Based upon the closing price of ascena stock on May 15, 2015, this implies a price per share of $47.00, a 21.4% premium over the closing price of ANN shares on Friday, May 15, 2015. At closing, ANN stockholders will own approximately 16% of ascena. 

The transaction, which has been unanimously approved by the Boards of Directors of both companies, is expected to close in the second half of 2015, subject to customary closing conditions, including, among other things: the expiration or early termination of the waiting period under the Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976 and approval of the merger by the holders of a majority of the outstanding shares of ANN. The transaction does not require approval by ascena stockholders.

David Jaffe, ascena's President and Chief Executive Officer, commented: "This powerful transaction joins two strong and highly complementary organizations and management teams and dramatically reinforces our leadership position in women's specialty apparel retailing. We are excited to further leverage our uniquely capable operating platform and exceptional combined talent to drive immediate, significant and ongoing value for our stockholders. With the addition of the Ann Taylor and LOFT brands, ascena will become one of North America's largest and most diversified specialty apparel retailers, with a tremendous set of opportunities to continue to expand its leadership position in the women's apparel market."ascena has identified $150 million in annualized run rate synergies in the combination that it expects to generate over a three-year period. The transaction aligns seamlessly with ascena's platform strategy and shared services model, designed to enable an effective, rapid and comprehensive back office integration process. Synergies include sourcing and procurement, distribution, logistics and other efficiencies. Excluding transaction and integration expenses, the acquisition is expected to be significantly accretive to EPS in the first year post closing, accelerating to greater than 20% accretion to EPS thereafter. Additionally, ascena expects the combination to generate significant cash flow while both maintaining appropriate levels of capital expenditures and enabling rapid deleveraging.Ronald Hovsepian, Non-Executive Chairman of ANN INC.'s Board of Directors, said, "Based on our Board's thorough and wide-ranging review process, we are confident that this agreement with ascena is in the best interests of ANN INC.'s stockholders. Our stockholders will receive approximately 80% of the purchase price in cash, providing immediate and certain value, and also have the opportunity to participate in the upside of the combined company as a result of the stock portion of the purchase price. We are delighted with this outcome for ANN INC.'s stockholders."Kay Krill, President and Chief Executive Officer of ANN INC., added, "I am very proud of all we have accomplished and confident that combining with ascena is the right next step for ANN INC. 

The transaction will make us part of a larger organization with a diversified portfolio of brands focused on the women's apparel market, a strong operating platform and a powerful financial base. I have tremendous respect and admiration for ascena's CEO David Jaffe, and our management team and I look forward to working alongside him and other senior members of the ascena team. As a member of the ascena family, ANN will be poised to further enhance and grow our business as we continue to take steps to better strategically and operationally position our brands for the dynamics that are redefining the landscape of the women's specialty retailing industry. At the same time, we look forward to continuing to meet our clients' wardrobing needs by delivering great product and a seamless brand experience across our multiple touchpoints."

Transaction Details

Under the terms of the transaction, upon closing, ANN INC. stockholders will receive $37.34 in cash and 0.68 of a share of ascena common stock for each share of ANN INC. common stock, implying a price per share of $47.00 based on the closing price of ascena stock on May 15, 2015. The transaction gives ANN INC. an enterprise value of approximately $2.0 billion.ascena intends to finance the acquisition through bank debt. Goldman, Sachs & Co. and Guggenheim Securities have arranged committed financing for the transaction. Guggenheim Securities and Goldman, Sachs & Co. acted as financial advisors to ascena. Proskauer Rose LLP acted as legal counsel to ascena in connection with the transaction. J.P. Morgan Securities LLC acted as the exclusive financial advisor to ANN in connection with the strategic review process and the transaction. Wachtell, Lipton, Rosen & Katz acted as legal counsel to ANN INC. in connection with the strategic review process and the transaction

Intel, the much larger company, is looking to diversify as waning demand for personal computers weighs on its mainstay business.

“You should not be surprised if a deal comes together quickly,” said a source with direct knowledge of the talks, adding a resolution one way or the other was expected within a few weeks.

Neither company commented when contacted Sunday.

Both are big players in the semiconductor industry, but they dominate in different areas. Intel mostly supplies chips for personal computers and server systems. Altera is a specialist in programmable chips that can be customized for use in consumer electronics, autos and other applications.

An earlier round of talks between the two ended in April when Altera reportedly rejected an offer of $54 a share. Its shares were trading around $35 in March before talk of a deal leaked.

Even after negotiations stalled, Altera has been trading at an elevated price, suggesting investors are holding out hope that they will eventually reach a deal. The stock closed Friday at $44.42, up 11 cents.

“This is turning into a soap opera,” said Stacy Rasgon, a senior analyst at Bernstein Research.

He said Intel’s announcement this week that it was teaming with startup eASIC was unlikely to weaken its desire for Altera.

“It is a whole other level of programmability,” he said, referring to eASIC’s focus on chips that accelerate computer speeds.

Meanwhile, Reuters reported recently that Avago Technologies was interested in buying Altera competitor Xilinx, although discussions were still at an early stage.