*U.S. EQUITY CUT TO UNDERWEIGHT VS OVERWEIGHT AT JPMORGAN
*EUROZONE EQUITY RAISED TO OVERWEIGHT VS UNDERWEIGHT AT JPMORGAN
Asian Market Update: Japan GDP contracts, marks a technical recession, seals the sales tax hike delay; Shanghai-Hong Kong trading link goes live
***Economic Data*** - (JP) JAPAN Q3 PRELIM GDP Q/Q: -0.4% V 0.5%E; ANNUALIZED GDP: -1.6% V 2.2%E; NOMINAL GDP: -0.8% V 0.4%E; 2nd consecutive GDP contraction, marks a TECHNICAL RECESSION in Japan - (NZ) NEW ZEALAND Q3 RETAIL SALES EX-INFLATION Q/Q: 1.5% (5-quarter high) V 0.8%E; Ex-Autos: 1.4% (5-quarter high) v 1.2% prior - (NZ) NEW ZEALAND OCT PERFORMANCE SERVICES INDEX: 57.8 V 58.0 PRIOR; 4-month low - (AU) AUSTRALIA OCT NEW MOTOR VEHICLE SALES M/M: -1.6% V +2.8% PRIOR; Y/Y: -0.5% V +0.6% PRIOR - (TH) THAILAND Q3 GDP Q/Q: 1.1% V 1.5%E; Y/Y: 0.6% V 1.0%E - (UK) UK NOV RIGHTMOVE HOUSE PRICES M/M: -1.7% (3-month low) V 2.6% PRIOR; Y/Y: 8.5% V 7.6% PRIOR
***Index Snapshot (as of 02:30 GMT)*** - Nikkei225 -2.6%, S&P/ASX -0.8%, Kospi -0.2%, Shanghai Composite +0.3%, Hang Seng -0.4%, Dec S&P500 -0.5% at 2,028
***Commodities/Fixed Income*** - Dec gold flat at $1,185, Dec crude oil -0.5% at $75.47/brl, Dec copper flat at $3.05 - (JP) BOJ offers to buy ¥110B in JGB with maturity less than 1-yr and ¥400B in 5-10yr JGB - (KR) South Korea sells 10-yr govt bond at average yield of 2.795%
***Market Focal Points/Key Themes/FX*** - Unexpected contraction in Japan Q3 preliminary GDP has taken markets across the globe on a wild ride, as the world's 3rd largest economy entered another technical recession with a 2nd consecutive quarter of falling growth. A closer look at GDP components revealed private consumption - about 60% of Japan's economy - growing just 0.4% vs 0.8% consensus estimate. Similarly, corporate CAPEX component indicated lingering impact of the April sales tax hike to 8% spilling over into other sectors of the economy, falling 0.2% against expected increase of 0.9%. USD/JPY jumped to 7-year highs of ¥117 on the release, but risk aversion took over and sent the pair back down below 115.50. Nikkei225 is down over 2.5% on the release, S&P500 futures down 10 handles or 0.5% below 2,030, US 10-yr yield is down 4bps below 2.3%, and gold rose above $1,190 - up $10 from the lows.
- The surprise Japan GDP contraction should effectively seal the decision to postpone the 2nd round of consumption tax increase. Indeed, local press has already reported PM Abe will hold a special press conference tomorrow formally announcing that delay. Subsequent comments from LDP finance chief called for the tax hike to be postponed by at least 6 months. Econ Min Amari said the weak GDP was affected by slow inventory adjustment amid stagnating household spending, adding that disinflationary impact from higher sales tax would be particularly detrimental. Amari did contest the implications of a recession from these figures, stating that YTD Japan is still growing.
- Shanghai Composite is a relative outperformer with the formal launch of the trading link with Hong Kong. Separately, a report from National Energy Administration (NEA) saw Oct power consumption - one of Premier Li's preferred gauges of activity - rising 3.1%, up from 2.7% increase last month and the fastest annual rise in 4 months. On the flip side, China Banking Regulatory Commission warned about the rise in non-performing loans, as Q3 NPLs rose by CNY72.5B to CNY766.9B, the highest increase since 2005.
- Final communique from the G20 summit this weekend pledged to boost global GDP by about 2.1% over the next 5 years, making global growth recovery the govts' top priority. G20 leaders pledged to be flexible with fiscal strategies, looking at expanding investment in infrastructure and trade. G20 also announced they would further rein in the banking sector by welcoming proposals requiring more loss-absorbing capacity at too-big-to-fail institutions, strengthen energy markets through natural gas development, and also work together to contain the spread of Ebola. Finally, G20 announced they would look to set up a "global infrastructure hub" that would unlock as much as $2T in global infrastructure capacity by 2013. Separately, the anti-protectionist sentiment of the G20 was reflected further with confirmation of China-Australia and South Korea-New Zealand Free Trade agreements.
***Equities*** US markets: - AGN: Actavis said to be in early agreement to acquire Allergan for $62.5B (vs $59.2B market cap as of Friday close) - financial press - DWA: Hasbro said to have broken off merger talks with DWA - press - BHI: Talks on combination said to be snagged on price issues and possible required assets sales; HAL could go hostile - financial press; BHI: Baker Hughes Announces Receipt of Director Nominations from Halliburton; BHI considers this a pressure tactic - DNR: To cut CAPEX by 50% in 2015; Raises 2015 dividend by 60%; Exercises Capital Restraint in 2015 Planning Amid Declining Oil Prices and Announces Management Changes
Notable movers by sector: - Consumer Discretionary: Toray Industries 3402.JP +3.4% (secures ¥1T from Beoing); Asahi Group Holdings 2502.JP -2.1% (reaches settlement in New Zealand acquisition) - Financials: Dai-Ichi Mutual Life Insurance 8750.JP -4.2% (H1 results) - Materials: Posco 005490.KR +2.2% (to supply steel plate products to Volkswagen) - Industrials: NSK Ltd 6471.JP -3.5%, Jtekt Corp 6473.JP -4.0% (US DOJ files indictments against executives); Elders ELD.AU +3.8% (FY14 results); SAIC Corp 600104.CN +1.9%, Daqin Railway 601006.CN +6.1%, Kweichow Moutai 600519.CN +4.4% (Shanghai-Hong Kong trading link launches)
Sales tax tips Japan back into recession
Japan’s economy tipped into a technical recession following a jump in consumption taxes in April, making it a near-certainty that prime minister Shinzo Abe will delay another increase while appealing for a fresh mandate via a snap election. Monday’s preliminary data for the period between July and September was far worse than markets expected, showing a shrinkage of 1.6 per cent quarter-on-quarter on an annualised basis against analysts’ expectations for growth of 2.2 per cent, as businesses cut back spending. The big swing factor that caught out economists was a big drop in companies’ inventories, which shaved off 0.6 percentage points from the headline gross domestic product number. If inventories had been flat, quarter-on-quarter growth would have been 0.2 per cent. Yet even excluding inventories – which are notoriously hard to predict – the figures on household consumption and capital spending showed that Japan’s recovery after the tax-increase in April, from 5 per cent to 8 per cent, has been "very, very slow", said Kazuhiko Ogata, chief economist at Credit Agricole in Tokyo. The latest contraction, coming after a 7.3 per cent shrinkage in the second quarter, means that Japan is now back in a technical recession – its fourth since the Lehman crisis. "Given this number there is now no doubt that Mr Abe will announce the postponement of the tax increase and call for a snap election," he said. In the minutes after the data were released by the Cabinet Office at 8:50am on Monday, the dollar/yen rate leapt through 117, reaching its weakest level for more than seven years. The Nikkei 225 average fell about 1.5 per cent in the opening hour of trading, with defensive sectors such as utilities and healthcare bearing the brunt of the sell-off. The government had indicated that it would wait for the second estimate of third-quarter GDP, due on December 8, before making a decision on whether to go ahead with the second increase in the consumption tax to 10 per cent, scheduled to take effect next October. But over the past week speculation has been mounting that Mr Abe is preparing for an 18-month deferral, and many expect him to confirm the decision by calling an election for December 14 on Tuesday. Positive growth of an annualised rate of about 3.8 per cent was probably the minimum threshold for going ahead with the tax increase as planned, said Etsuro Honda, an adviser to Mr Abe, basing his estimate on the average growth rate between January and June. More important, he said, are qualitative measures such as real wage growth and inflation expectations, both of which are more sluggish than policy makers would like. Article 18 of the tax-increase law, passed in autumn 2012, gives the government of the time latitude to consider the macroeconomic picture before pushing ahead with the fiscal squeeze. The two-stage tax increase has been endorsed by international bodies such as the IMF and the OECD as the best way of repairing the country’s stretched finances. "The impact of the first round of the consumption tax increase shows how serious we are about rectifying and consolidating our budget situation," said Mr Honda. Keeping the faith of non-Japanese investors is vital in Mr Abe’s campaign to shrug off years of mild but persistent deflation, said Mr Ogata. One way for the prime minister to do this is to demonstrate broad support from the Japanese people as he pursues longer-term reforms. "Approval from the public is crucial for Mr Abe to keep selling ‘Abenomics’ to foreign investors," he said.
Weekly Top Trading Ideas Summary: ALL IN
FULL REPORT ATTACHED
Note that we are exiting part of the Yahoo/Alibaba trade to focus on Softbank
The period from the end of Q4 til the end of the following Q1 is traditionally the best one for relative value trading. As such, we would advise to go "ALL IN" between now and the end of the year in some of the major trades which will think will shape 2015: in particular:
- Short US equities / Long Emerging markets (in particular China), Japan, and Europe equities.
- Long natural resources: oil (IXC US) and miners (BHP, Rio, Anglo, Vale)
- Long banks, in particular in Europe, Japan, and China
- Out of G-7 government bonds; out of high yield
- Long volatility US stocks (ie long puts) / and short volatility Europe (ie short puts); long general market volatility (ie long gold; gold miners)
Last week, TITS was up 50bps, broadly in line with the MSCI World Index. Since June 30, TITS has generated more than 200bps of net trading alpha over the MSCI World Index.
Note: Top Trading Ideas is made up of two model portfolios: 1. ATTIP, AIM&R's Top Trading Ideas Portfolio which is the model portfolio of all of our top trading recommendations. Trades are entered when recommendations are made, and closed when we recommend to exit the trades. All trades/investment positions are justified by a published research report. We track the performance of this portfolio which we benchmark against the MSCI World Index on an unleveraged return on assets basis (return/long+short gross exposures) and against the HFR Global Hedge Fund Index on a leveraged return on capital basis. 2. The weekly TITS, or Top Ideas Trading Selector where we highlight what we consider to be the most timely trades from ATTIP on a weekly basis with the objective of creating trading alpha.
AT&T Seeks Some Southern Exposure
Carrier’s Foray Into Mexico May Be Just the Start
AT&T has placed a call to Mexico. It may be only the start of a longer conversation.
The company’s planned purchase of Iusacell should help it save on charges for calls between Mexico and the U.S. and could be a source of growth as the Mexican wireless carrier’s customers upgrade to smartphones and data-heavy plans. But the $2.5 billion deal, including assumed debt, doesn’t move the needle for the U.S. telecom giant—at least not yet.
Iusacell may just be the first step for AT&T into Mexican wireless, perhaps to be followed by a larger purchase of wireless assets owned by América Móvil. That company is selling assets, which could be worth more than $15 billion, to avoid antitrust penalties being imposed by regulators because of its dominant market position.
For AT&T, which will also own part of a satellite TV business in Mexico once its deal to buy DirecTV closes, further expansion south of the border would be a sign of challenges it faces at home and a bet on growth of the Mexican economy. Along with the broader Latin American exposure from DirecTV, it could also change how investors look at AT&T, largely seen as a play on the U.S. wireless market.
AT&T’s sales are expected to rise 2.9% in 2014, an improvement on the 1% rise seen last year. But those extra sales aren’t expected to be terribly profitable: Analysts forecast AT&T’s earnings before interest, taxes, depreciation and amortization will be roughly flat this year.
That reflects heightened competition in the U.S. wireless market, instigated by T-Mobile US and fueled further by aggressive pricing from Sprint. Meanwhile, U.S. regulators have been firm in their opposition to large-scale consolidation since rejecting AT&T’s 2011 bid for T-Mobile.
Against such a backdrop, Mexico looks more inviting. That market is in an earlier phase of the conversion to smartphones from feature phones and the use of more expensive data plans that comes with this. Smartphone penetration there is 28.4%, versus 51.4% for the U.S., according to eMarketer.
The research firm expects Mexico’s level to reach 50.4% by 2018, while the U.S. is seen climbing to 66.9%. That suggests room for growth. AT&T may also be able to bundle wireless service with TV service through DirecTV’s joint venture with Grupo Televisa.
Granted, AT&T investors would have to get comfortable with exposure to fluctuations of Mexico’s economy, currency and competitive landscape.
They must also hope AT&T is able to expand in that country without overpaying. The company has trimmed projections for capital expenditure in 2015 by $3 billion to $18 billion, alleviating concern its dividend was looking vulnerable. But it will likely need to raise debt to fund the wireless spectrum purchases-worth perhaps $10 billion to $15 billion—it is expected to complete over the next 12 to 18 months as part of government auctions.
Buying América Móvil’s assets on top of that could put a strain on AT&T’s credit rating, depending on the cash flow brought in. Nevertheless, in the company’s quest for growth, Mexico still may be the whole enchilada.
Tough Act for Bonds to Follow
European Corporate Bonds Unlikely to Match Banner 2014 Next Year
Here’s the good news: Europe’s corporate-bond market has produced excellent returns this year. Unfortunately, that’s also the bad news.
Corporate bonds have beaten stocks in Europe hands down this year, with the Markit iBoxx investment-grade corporate index up 7.7% in the year to date, while the Stoxx Europe 600 has gained a meager 2.3%. Moreover, corporate bonds have displayed little of the volatility that has bedeviled stocks. During October’s turbulence, bond prices barely budged as equity markets swung wildly.
At most, corporate-bond yield spreads over haven government-bond yields widened 0.1 percentage point even as stocks fell by 10% before rebounding. The resilience of the corporate-debt market ultimately was a good signal that the panic in stocks was overdone.
But the relentless rally in European corporate bonds comes at a price: The yield on Markit iBoxx’s investment-grade euro-denominated corporate-bond index, which has a maturity of 5.4 years, is at a record low of 1.42%. Many bonds yield much less than that. Of the roughly €760 billion ($952 billion) of nonfinancial corporate bonds that are part of that index, 52% yield less than 1%, UBS credit strategists note. Just 13% yield more than 2%. Issuance of investment-grade bonds with coupons of more than 2% has become a rarity—even at long maturities. Apple was recently able to issue a 12-year euro-denominated bond with a coupon of just 1.625%.
That will create a real headache for investors next year. Mathematically, given the starting point of ultralow yields, the outlook for bond returns is poor. While government bonds have shown yields can turn negative, it seems unlikely corporations can hope for similar generous treatment from investors.
That doesn’t mean the bond market is about to crater. The economic outlook for the eurozone is weak, inflation is low and the European Central Bank is still in easing mode. Moreover, speculation that the ECB could expand its program of asset purchases to include corporate bonds is likely to keep the market buoyant. Corporate balance sheets are still in decent shape. And investors worried about the volatility of stocks could yet prefer the smoother ride that bonds are likely to offer.
Even so, that reassurance will come at the cost of far lower returns than this year. European corporate bonds are now extremely expensive. They may make some small further gains yet. But investors shouldn’t hope for a repeat of 2014’s good news.
Richard Barley CONNECT
BlackBerry’s New Plan Could Bear Fruit
Attempt at Revival Is Showing Signs of Life
Having been thoroughly crushed in smartphones, it is amazing that BlackBerry seems to have any juice left.
At least, investors seem to think so. It has been a year since BlackBerry switched out its senior management—for the second time—and effectively gave up on the consumer smartphone business. In that time, the company has slashed costs to cope with diminished revenue while also working to build up new mobile software offerings aimed at corporations. Despite the new business being in early stages, BlackBerry stock has leapt more than 85% in that time.
That would seem to set it up for another spectacular fall. But the company’s new goals are more grounded.
While it is still building a small number of new devices to serve a niche crowd of loyalists, BlackBerry’s main focus now lies in software. Last week, it launched its new BES 12 platform which is to be the linchpin for a suite of mobile services designed for business users that works across all devices, including those from BlackBerry’s competitors.
This initiative is already showing traction: BlackBerry says it has about 5.1 million licenses signed up for a program that allows corporate users to try the BES platform for free until the end of January. That is up 50% from what the company had just two months prior. BlackBerry still faces the burden of converting these into paying customers when the time comes, though—and the stakes are high.
The company made $2.7 billion in high-margin revenue from service activation fees in the fiscal year ended March 1. Chief Executive John Chen said last week that this number is expected to slide to about $1.6 billion for the current fiscal year, and plunge to the $800 million range in fiscal 2016.
BlackBerry has targeted its mobile software business to grow to about $500 million in annual revenue by fiscal 2016, so it won’t be anywhere close to offsetting the decline in service fees. The company’s niche handset business may help fill that gap: Analysts see revenue for it to still be roughly $2 billion in fiscal 2016, down from $3.8 billion in fiscal 2014. And BlackBerry is adding new services to the BES 12 platform to grow average revenue per user.
BlackBerry’s brand still resonates with corporate-technology executives, so this plan is plausible. But the hard fact remains that the company will be getting a lot smaller before it can get bigger—a risky, even if ultimately necessary, transition. That, along with BlackBerry’s turbulent history, could mean the stock’s sharp run-up of late gives investors pause.
The stock’s saving grace, though, is that it was coming off a low base, trading at less than half book value when Mr. Chen took over. It now trades at about 1.6 times forward sales. Clearly, that implies some sort of turnaround already being priced in. Even so, it is low compared with mobile software rival MobileIron at 4.5 times.
So there may still be further gains for BlackBerry ahead, with the company finally making the right kind of moves.
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Actavis-Allergan Breakup Fee May Be About $2b, Faber Says: CNBC
2014-11-16 20:29:23.292 GMT
By Joe Sabo
Nov. 16 (Bloomberg) -- http://www.cnbc.com/id/102189112
Link to Company News:{AGN US <Equity> CN <GO>}
Link to Company News:{ACT US <Equity> CN <GO>}
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2014-11-16 20:29:23.292 GMT
By Joe Sabo
Nov. 16 (Bloomberg) -- http://www.cnbc.com/id/102189112
Link to Company News:{AGN US <Equity> CN <GO>}
Link to Company News:{ACT US <Equity> CN <GO>}
For Related News and Information:
First Word scrolling panel: {FIRST<GO>}
First Word newswire: {NH BFW<GO>}
To contact the editor responsible for this story:
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jsabo@bloomberg.net
Allergan, Actavis Near Deal
Companies’ Boards to Meet to Bless Cash-Stock Transaction
The boards of the two companies are expected to meet to review a cash-and-stock takeover of Allergan by Actavis , the people said. An agreement could be announced as early as Monday, some of the people said, but timing could slip and one of them said later in the week could be more likely.
The price the companies are contemplating couldn’t be learned, but it would likely be at a premium to Allergan’s market capitalization of $59 billion.
But that is still a big if, in part because Valeant could again raise its offer for Allergan in an effort to wrest the company from its rival.
The deal would be a big bite for Actavis, which, with a market value of $64 billion, is barely bigger than Allergan,whose shares to be sure have received a boost from the possibility it would be bought.
Valeant and activist investor William Ackman have been seeking for months to seal a deal with Allergan. Their most recent bid was $53 billion in cash and stock, though Valeant has entertained boosting it. Valeant’s initial bid valued the company at $46 billion.
A combination of Allergan and Actavis would create a diversified pharmaceutical company selling brand-name and generic drugs for stomach, eye, skin and other conditions. The company would ring up about $23 billion a year in sales, putting it around the top 10 of pharmaceutical companies by revenue.
A deal between Actavis and Allergan also would likely be the year’s largest in a robust year for corporate matchmaking.
Other blockbuster deals in the works earlier this year, such as Pfizer Inc. ’s attempted $120 billion takeover of AstraZeneca PLC and AbbVie Inc. ’s $54 billion proposed acquisition of Shire PLC, have since collapsed.
If an agreement were to materialize, it would also complicate yet again a contentious takeover battle that began in April when Mr. Ackman and Valeant teamed up to try and buy Allergan. Valeant’s attempted takeover of Allergan marks one of the most complex and unusual deal situations of the year, with a company aligning itself with an activist investor. A number of other potential combinations have also sprung up around the two companies and Actavis, creating a complex web that could reshape the health-care industry.
Mr. Ackman’s Pershing Square Capital Management LP built a nearly 10% stake in Allergan before Valeant made its bid.
Allergan declined to enter negotiations, criticizing Valeant as a corporate raider that grew by buying up profitable companies and then heavily cutting costs, especially the research it says is needed for future growth. Valeant has pushed back against that portrayal of the company.
Along the way, other side deals were contemplated that would have made Valeant’s pursuit even more difficult. This summer, for instance, Allergan held talks to buy Salix Pharmaceuticals Ltd. , which would have made Allergan even bigger and more complicated to buy. Those talks ended and Salix recently announced a revision in its accounting that indicated sales of its drugs weren’t as strong as Wall Street had expected, sending the shares down sharply.
While Actavis has been exploring a deal with Allergan, Pfizer was for a time pursuing a takeover of Actavis, a person familiar with the matter has said. But Actavis rejected a deal, the person said.
As of November 10, there had been $367 billion of health-care deals so far this year, the largest number on record for that period since at least 1995, according to Dealogic.
For Halliburton, Replacing Baker Board May Not Be Easy
Baker Hughes’s Board Is Distinguished but Graying Group of Industry Executives
In its effort to force a merger on Baker Hughes Inc. by replacing its board, Halliburton Co. will be confronting a distinguished but graying group composed mostly of energy-industry executives.
Halliburton notified Baker Hughes that it would nominate a slate of directors to run against the existing board after talks between the two companies reached an impasse, Baker Hughes said late Friday. The company says its annual meeting is set for April.
The brewing battle between two of the world’s three largest oil field contractors is rare for the energy sector, and Halliburton’s bid for control isn’t likely to be a cakewalk.
Halliburton declined to comment; Baker Hughes didn't respond to a request for comment, and its directors couldn't immediately be reached or declined to comment.
Houston-based Baker Hughes, which has a stock-market value of about $26 billion, is governed by directors who include the executive chairman of Devon Energy Corp. , and the former heads of Marathon Oil Corp. and Sunoco Inc., among others. Combined, the company’s 11 board members won re-election in April with an average of 94% support of votes cast by shareholders.
In June, Baker Hughes expanded its board to 13 and elected two new members. Excluding the two newest directors, the average board member was 66.1 years old in April, slightly older than the boards of other big companies. The average director of S&P 1500 companies in 2013 was 63.2 years old, according to proxy adviser Institutional Shareholder Services.
The Baker Hughes board may recruit new candidates for its board by April; three current members, including the lead independent director, will have reached the company’s mandatory retirement age of 72 by next year’s election. The board, excluding the affected directors, can waive the retirement clause.
It isn’t clear that turnover on Baker Hughes’ board would give Halliburton an edge in a proxy battle. Baker Hughes isn’t in financial distress. The company posted record revenue of $22.4 billion last year, generating $1.5 billion after capital spending.
But Baker Hughes, by its own assessment, has lagged behind Halliburton and other rivals in several key performance measures. Its total shareholder return, a measure of stock performance and dividends, was zero over the last three years, according to its March proxy statement. It ranked itself 4th among peers in increasing revenue, profit margins and return on capital employed over the last three years.
Baker Hughes’ profits from pumping used in hydraulic fracturing, a mainstay of its business, fell short of its expectations last year. And the company acknowledged earlier this year it has struggled to retain employees.
The issue of retaining talent has surfaced in the fraught negotiations with Halliburton. The company on Friday said Halliburton had refused to agree not to poach its employees before they reached a deal.
Earlier this year, Baker Hughes proposed two measures to issue 30 million shares to compensate executives and other employees, in part to motivate and retain them. A compensation consultant hired by the company estimated it would dilute existing shareholders by 4.7%. Shareholders overwhelmingly approved the measures.