Report From Europe: M&A Chatter Trumps Weakness in Energy Stocks

Includes: DIA, QQQ, SPY
by: The Mole

US stocks rose Wednesday, erasing an early drop, as speculation about corporate takeovers overshadowed a slide in energy producers sparked by a decline in oil. Treasuries pared gains as longer-term yields neared the lowest levels in more than a year.

M&A was the theme again yesterday, as BHP Billiton (NYSE:BHP) (-3.4%) launched a hostile bid on Potash (NYSE:POT). There were rumours about further M&A in the UK Insurance space in the morning, followed by afternoon talk of activity emanating in industrials, mining, tech or financials. The main players involved in varying guises were Mittal, Siemens (SI), Ericsson (NASDAQ:ERIC), etc.

However, if there had been any truth in any of them, I suspect the market would have been a little more buoyant in the afternoon. Stateside, Ryland Group (NYSE:RYL) and Meritage Homes (NYSE:MTH) were both better well bid as Citigroup Inc. predicted more mergers in the home-building industry, while Potash Corp. of Saskatchewan Inc. extended yesterday’s gain on speculation BHP Billiton Ltd. will boost its bid for the company. US Steel Corp. (NYSE:X) jumped 4.8% on a poorly sourced story that ArcelorMittal (NYSE:MT) may be looking to buy the company. But Energy companies fell 1.1% collectively after US government data showed total petroleum stocks surged to the highest level in at least 20 years.

Back To School Click to enlarge

Today’s Market Moving Stories

  • US: President Barack Obama said: “People, consumers, are not going to start spending until they feel a little more confident that the economy’s getting stronger.” He added “How do we, over the long term, get control of our deficit? … The key is to make sure that we do so in a way that doesn’t impede recovery but rather gives people confidence over the medium and the long term.”
  • The Koreas: The North’s official Korean Central News Agency confirms “A South Korean boat which was fishing in our exclusive economic zone in the East Sea (Sea of Japan) was seized by the KPA (North Korean military) navy on Aug. 8th … a preliminary investigation revealed the boat, with four South Koreans and three Chinese on board, intruded into our economic zone…Investigation will continue”.
  • Australia: Prime Minister Julia Gillard said “If I am elected as prime minister on Saturday, the minerals resource rent tax I legislate will be the one that was agreed [with major miners last month]”.
  • Eurozone: Germany’s output prices rose 0.5% m/m in July – above the consensus forecast for a rise of 0.1%. Year-on-year prices roses 3.7% – the highest rate since the autumn of 2008. Excluding volatile energy components, the index rose 0.1% m/m and by 2.4% year-on-year.
    Der Spiegel writes “The austerity measures that were supposed to fix Greece’s problems are dragging down the country’s economy. Stores are closing, tax revenues are falling and unemployment has hit an unbelievable 70% in some places. Frustrated workers are threatening to strike back.” The Times writes that French President Nicholas Sarkozy has ordered three senior Cabinet members to break off their holidays for a crisis meeting to discuss a fresh package of Budget cuts after a warning by Moody’s “the challenges linked to fiscal adjustments imply that the overall ‘distance-to-downgrade’ has been further reduced.”
  • Japan: The Sankei newspaper reports that the BOJ has started considering additional monetary easing steps in line with government efforts to support the economy. The paper did not cite sources and did not specify when the BOJ would actually move. Official (unnamed) sources dismiss rumours of an emergency BoJ meeting.
  • Finance Minister Yoshihiko Noda said: “I want to continue cautiously watching [financial markets]”. Trade minister Naoshima is also reported to have talked with Prime Minister Kan about the JPY.
  • UK manufacturers are planning their biggest hiring drive for more than 10 years, the London- based Times reported, citing Bank of England research. A survey of business sentiment by the central bank’s 12 regional agencies signaled the strongest recruitment intentions by manufacturing and engineering companies since October 1997, the newspaper said

The Economic Scoreboard

On a slow news day I thought I’d have a look at the economic scoreboard

Looking at the Green shoots ? Well….

    1) Asia is booming – China, India, Malaysia, Indonesia and Singapore – also Russia and some part of Middle East are doing great.
    2) Germany – This country has painfully adjusted for 20 years (flat housing market and low growth) – and now looks lean and clean (some banks still a burden though) – and the export led boom might lead to higher German consumer confidence, leading to more retail spending, leading to higher housing prices (they are dirt cheap), any German led domestic spending spree would lift confidence (and GDP) in neighbouring countries like Austria, Holland, Belgium, France and Scandinavia – and could easily offset the sour growth sentiment in PIIGS – that will struggle over the coming years, as they will now be forced to do a painful adjustment a la what Germany did post reunification.
    3) Fixed Income that is normally right in predicting future growth – might this time have gone a bit too far in its pessimism.
    4) Container freight – MAERSK posted strong earnings yesterday – Two of the most important forces in container shipping on Wednesday confirmed the strength and robustness of the recovery. Denmark’s AP Møller-Maersk, Maersk Line’s parent, announced it now expected 2010 to be its best year since 2004, when the container shipping boom was at its height.
    5) Dubai’s DP World, one of the biggest container terminal operators, announced that container volumes grew by 7% in the first half, while net profits, adjusted for the effects of exceptional gains, rose by 10%.

    So what are the imminent threats:
    1) Stock market crash – could be caused by an Israeli strike on Iran.
    2) A further set of very poor US figures – including a housing market dipping again.
    3) European Debt crisis escalating – and a default/restructuring plan from any Euro member – might cause a “Lehman” style systemic risk – that will send Bund yields into free fall towards 1.00% and a price of 142 in the biggest flight to quality that we have ever seen.

 The Iranian Problem Click to enlarge

Company / Equity News

  • The Irish Times reporting this morning that Bank of Ireland (NYSE:IRE) is preparing a bond issue of EUR500m-1bn in early September. It is likely to be government guaranteed. This is what I have been expecting- it is important for the Irish Banks to enter the primary markets again this year, partly to address the chunky funding requirements they have but also to put confidence back into the sector. Bank of Ireland naturally is best positioned to test the waters first and could take advantage of the successful recent Irish auction and expect the others to follow shortly after or in October as long as markets are kind for that long. It is no news to anyone that there is EUR24bn of GGB redemptions at end-Sept, plus short-term debt to be refinanced. The Irish banks should muddle through this period with a combination of GGBs issued early in the yr before primary markets closed for them, and heavy ECB repo-ing reliance. I also believe that it would make sense for the Irish govnt to extend the guarantee on short-term debt (<3mth) beyond the end-Sept deadline to retain stability.
  • The Daily Mail (and the FT) reported speculation that ITV was subject to a bid from a US group (NBC Universal was suggested in the Mail) at a significant premium to yesterday’s closing share price (95p vs. 52.5p). Whilst stories like this are impossible to discount entirely and such a bid would clearly be supportive of spreads, nevertheless the probability of such a move is fairly low at this point. NBC Universal itself is going through a takeover by Comcast (NASDAQ:CMCSA), and anything more than a bolt-on acquisition in these circumstances is unlikely.
  • The 35 biggest US banks will be required to increase their capital half as much as had been expected under Basel III after last month’s rewriting of proposed requirements by the Basel Committee on Banking Supervision, the Financial Times reported, citing analysis by Barclays Capital.
    But Bank of America (NYSE:BAC), JPMorgan (NYSE:JPM), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) might face demands to repurchase as much as $180 billion of troubled mortgages from Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC), Fitch Ratings said. At the end of June, the two government-sponsored loan guarantors held a total of $355 billion of troubled mortgages in their portfolios, of which half were serviced by the four banks, the largest in the U.S., Fitch wrote in a report. While it is “conceivable” that debt eligible for repurchase may surpass $175 billion in “an extremely adverse scenario,” the banks are more likely to face lesser demands, depending on foreclosure rates and loan documentation.
  • Chip manufacturing equipment maker Applied Materials Inc. (NASDAQ:AMAT) said Wednesday it posted a third-quarter profit, reversing a loss and beating analysts’ expectations as revenue more than doubled. Net income in the three months to Aug. 1 hit $123.1 million, or 9 cents per share, reversing a loss of $54.9 million, or 4 cents per share, a year ago. Revenue rose to $2.52 billion from $1.13 billion. Excluding $405 million in charges for restructuring, impairments and inventory adjustments at its energy and environmental solutions segment, adjusted earnings came to 29 cents per share, the company said. On that measure, it beat the forecast of analysts polled by Thomson Reuters of adjusted earnings of 25 cents per share on revenue of $2.38 billion. The company also raised their outlook.
  • In contrast SanDisk Corp. (SNDK) lost 2.1% to $43.90 in after hours trading. The biggest maker of flash-memory cards said it plans to commence an underwritten public offering of $1 billion principal amount of convertible senior notes due in 2017.
  • And for signs of the flagging health of US consumer spending, look no further than Taiwan. At Taipei-based Acer Inc., the world’s second-largest maker of computers, sales plunged 38% in July from a year earlier. Micro-Star International Co., a maker of boards that connect computer components, recorded a 15% drop. Sales at Asian computer makers, which account for more than 80% of computer and parts imports into the U.S. each year, indicate American shoppers aren’t likely to boost the spending that accounts for 70% of the world’s largest economy. Already, consumption is growing at the slowest pace of any recovery since 1945.
  • The WSJ reports that the Obama administration’s conclusion that much of the oil released into the Gulf of Mexico from the Deepwater Horizon spill has disappeared is coming under additional fire from scientists. Earlier this month, a team led by the Interior Department and the National Oceanographic and Atmospheric Administration said that of 4.9 million barrels released from the out-of-control well, roughly 75% had been cleaned up or had broken down. Most of the rest was a light sheen at or near the surface or had washed ashore, the government researchers said. The findings suggested the long-term impact of the spill on the coastline and fisheries might not be as bad as once feared. But Ian MacDonald, an oceanographer at Florida State University, is expected to tell a U.S. House Energy and Commerce subcommittee Thursday that the administration findings were misleading. Only 10% of oil discharged into the ocean was “actually removed from the ocean,” according to his prepared testimony. Mr. MacDonald uses satellite imagery to measure oil slicks. Mr. MacDonald is expected to cite research that indicates oxygen levels in the Gulf aren’t consistent with rapid degradation of oil by petroleum eating microbes. The government report said 17% of the oil released by the well had been collected without ever reaching the ocean and about half had dissolved or been dispersed.
  • Royal Dutch Shell (NYSE:RDS.A) , Europe’s largest oil company, plans to spend as much as $50 billion in Australia over the next 10 years as it continues a shift to gas from oil. “The stars have aligned for Australia” because of improving technologies and rising Asian demand, Ann Pickard, Shell Australia’s chairman and executive vice president for exploration and production, said in an interview in Brisbane today. By 2012, more than 50 percent of Shell’s production will come from gas, Pickard said. Shell may spend between $30 billion and $50 billion in Australia in the next decade, she said.
  • US Steel Corp. (X), the country’s largest producer of the metal, rose the most in four weeks yesterday and bullish option trading jumped to a record on speculation that ArcelorMittal (MT) may be looking to purchase the company Swiss cement producer Holcim Ltd. (OTCPK:HCMLF) Thursday reported a 37% drop in first-half profit as it paid a U.S. tax charge and said the uncertain global economic environment makes it difficult to forecast the business outlook.
  • A proposal by Airbus to put new engines on popular jetliners faces resistance from its top engine supplier, Rolls-Royce PLC (OTCPK:RYCEY), which could cede much of the lucrative market segment to rival US jet producers if it isn’t onboard. Airbus, a unit of European Aeronautic Defence & Space Co., could announce plans as soon as next month to offer new, more efficient engines on its fast-selling A320 range of single-aisle jetliners, company officials said.

This is truly sad.

And Finally..

Vevusuela Joins The English Language

It’s The Little Things That Count…

Lufthansa show us how to have fun in the air……

George Carlin Puts Everything in Perspective

Disclosures: None