TheChek News Flow

The stock market ended the midweek session on an upbeat note after climbing throughout the day. The S&P 500 gained 0.5% while the Russell 2000 (+0.7%) spent the day in the lead.  

Equity indices rallied out of the gate, all but ignoring news that China's GDP growth (+7.0% year-over-year) has slowed to a six-year low. The news was followed by a small uptick in the greenback, but the Dollar Index (98.36, -0.37) surrendered its overnight advance, posting its second consecutive decline.

In turn, the dollar weakness provided a measure of support to crude oil, helping the energy component jump 5.6% to $56.25/bbl. Understandably, the big spike in oil boosted the energy sector (+2.3%), placing the cyclical group in the lead. Thanks to the gain, the energy space is now up 6.8% since the end of March.

Meanwhile, the remaining cyclical groups settled a bit closer to the broader market. Technology (+0.9%) endured a slight struggle early, but the sector ended among the leaders with help from chipmakers after Linear Technology (LLTC 46.17, +0.75) reported better than expected results and Intel (INTC 32.83, +1.34) delivered an in-line report. The two names spiked 1.6% and 4.3%, respectively, while the PHLX Semiconductor Index gained 1.6%.

Staying on the earnings theme, Bank of America (BAC 15.64, -0.18) lost 1.1% after missing bottom-line estimates, but the financial sector (+0.4%) still finished near the broader market.

Also of note, industrials (+0.1%) displayed early strength, but the sector finished among the laggards following an intraday pullback in transport stocks. Delta Air Lines (DAL 44.20, +1.12) surged 2.6% after reporting a one-cent beat while CSX (CSX 32.86, -0.35) lost 1.1% after its own one-cent beat and lowered guidance. For its part, the Dow Jones Transportation Average narrowed its gain to 0.1% by the close.

Moving to the countercyclical side, the consumer staples sector (-0.3%) spent the bulk of the session in negative territory while the remaining

defensively-oriented

groups posted gains. The health care sector (+0.3%) endured an intraday pullback in large insurer names like

Aetna (AET 106.08, -1.80), Cigna (CI 130.22, -2.68), and UnitedHealth (UNH 117.32, -2.60), but biotech names outperformed with the iShares Nasdaq Biotechnology ETF (IBB 360.94, +3.73) climbing 1.0%.

Treasuries ended the day with slim gains, pressuring the 10-yr yield to 1.89% (-1 bp).

Today's participation was ahead of recent averages with more than 850 million shares changing hands at the NYSE floor.

Economic data included Industrial Production, Empire Manufacturing, MBA Mortgage Index, and NAHB Housing Market Index:

• Industrial production declined 0.6% in March after increasing an unrevised 0.1% in February while the consensus expected a decline of 0.3% 
  • Over the entire first quarter, industrial production declined 1.0%, which was the first quarterly decline since the Great Recession ended 
  • Nearly the entire decline resulted from warmer temperatures, which reduced utilities usage by 5.9% after extreme cold boosted production by 5.7% in February. Mining production (-0.7%) also contributed to the pullback as relatively low oil prices continue to constrain the industry 
• The Empire Manufacturing Survey for April registered a reading of -1.2, which was below the prior month's reading of 6.9 
  • The consensus expected an improvement to 7.3 
• The weekly MBA Mortgage Index fell 2.3% to follow last week's 0.4% uptick 
• The NAHB Housing Market Index for April rose to 56 from a revised 52 (from 53) while the consensus expected an increase to 55 

Tomorrow, weekly Initial Claims (consensus 280K) and March Housing Starts (consensus 1.045 million) will be released at 8:30 ET while the Philadelphia Fed Survey for April will be reported at 10:00 ET (expected 7.2).

• Nasdaq Composite +5.8% YTD 
• Russell 2000 +5.8% YTD 
• S&P 500 +2.3% YTD 
• Dow Jones Industrial Average +1.6% YTD

• Reports from the twelve Federal Reserve Districts indicate that the economy continued to expand across most regions from mid-February through the end of March. Activity in the Richmond, Chicago, Minneapolis, Dallas, and San Francisco Districts grew at a moderate pace, while New York, Philadelphia, and St. Louis cited modest growth. Boston reported that business activity continues to expand, while Cleveland cited a slight pace of growth. Atlanta and Kansas City described economic conditions as steady.
• Demand for manufactured products was mixed during the current reporting period. Weakening activity was attributed in part to the strong dollar, falling oil prices, and the harsh winter weather. 
• Business service firms saw rising activity, especially for high-tech services, and they expect positive near-term growth. Cargo diversions resulting from labor disputes on the West Coast boosted activity at several East Coast ports. 
• A majority of Districts reported higher retail sales, and they cited consumer savings from lower energy prices as helping boost transactions. Auto sales rose in most Districts.
• Tourism and business travel is rebounding from the harsh winter, with contacts expecting growth for the remainder of the year in corporate and leisure travel.
• Residential real estate activity was steady to improving across most Districts, although there was some slowing in housing starts due to abnormal seasonal patterns owing to the harsh weather. Multifamily construction remains strong. Activity in nonresidential real estate was stable or improved slightly across many Districts. 
• Agricultural conditions worsened slightly. Factors contributing to these conditions varied by District, but included wet fields, persistent drought, and a harsh winter.
• Investment in oil and gas drilling declined, while mining activity was mixed. Banking conditions were largely stable, with some improvement seen in loan demand.
• Labor markets remained stable or continued to improve modestly. Layoffs related to the decline in oil and gas prices were reported in multiple Districts. Difficulty finding skilled workers was frequently reported.
• Districts noted modest upward pressure on wages and overall prices.

Shell for BG Group (BG/ LN)

Key takeaways from expert meeting. A bump to terms is likely.

PDF attached

 

We held an expert meeting today to discuss the Shell /BG potential merger. My understanding of key takeaways follows:

 

Shell’s Chairman initiated the transaction and it was a chairman to chairman discussion which seems not to have included BG’s CEO until the deal was agreed. Little is known as to the future of Simon Lowth and Helge Lund post-merger. Losing them would be a blow to Shell/BG.

 

BG has been very successful at exploration but it is one thing to find oil (Deep water) it is another to bring it out. BG has world class engineering challenges that would be best met as part of a larger company.

 

However Shell is trying to get BG on the cheap. It would be surprising if the deal closed on the announced terms. The announcement seems to have been rushed and Shell is likely to find more synergies. A bump is likely.

 

A counter bid may have a low probability but in the West Exxon and Chevron could have the most to gain. A joint bid even, while not straight-forward, is possible. Chinese bidders (China is one of the largest producers in the North Sea) may wait for the UK election and test politicians support before any approach.

 

The stock for stock transaction (with little cash) serves to protect against oil price volatility because the cashflow metrics for the companies would move in tandem but an oil price increase would favour BG over Shell. As the oil price environment has declined BG has been writing down assets faster than Shell. In a reversal of fortunes one would expect BG to be writing up assets at a greater rate than Shell suggesting a re-rating.

 

Failing a counter or an improvement to terms, timing to completion seems to be the key risk.

 

There are no fundamental antitrust problems but timing to receive approvals may be an issue. Australia has the largest overlaps but the US is likely to be the most vocal as US competitors will want to ensure as many asset disposals as possible. China is unknown, and they could take their time to review or retaliate if blocked from bidding.

 

Brazil is more a change of operating licence than antitrust. The government is unlikely to oppose, as they want the asset to start producing. Once the assets in Brazil are up and running the government could change the economic agreements and increase the demand for royalty payments.  If due to antitrust reviews, the timetable slips.

 

A delay to completion 3 or even 6 months could ensue because Shell has to issue a prospectus –audited- and the preparation can rapidly fall behind due to accounting checks. The SEC may also need to review documentation adding to pressures on timing.