US stocks advanced Wednesday, sending benchmark indexes to the highest levels in five weeks, as M&A speculation and the expectation that companies will return cash to shareholders raised investors’ optimism.
Travelers Cos. (TRV) advanced 2.9%, the most in the Dow, after boosting its forecast for stock buybacks. Novell (NOVL) rose 5.9% after the New York Post said the company reached an agreement to sell itself, and McKesson (MCK) helped lead gains among healthcare companies after Lazard Capital Markets said it may rally. But Time Warner Cable (TWC) slumped 5% after saying it may lose customers.
Overnight in China concerns over the impact of tougher new bank capital rules weighed on sentiment. According to media reports, the banking regulator will boost the overall minimum capital adequacy ratio for the largest lenders to as high as 15%. The purpose of this counter cyclical policy is to decrease the likelihood of asset bubbles and reduce the possibility of excessive bad debts by limiting the banks’ ability to lend. Meanwhile the Reserve Bank of India of India lifted the repo rate at which it lends to banks, by 25 basis points to 6% and raised the reverse repo rate by 50 basis points to 5% . This was greater than expectations for an increase of 25 basis points in both rates.
European stocks opened broadly flat this morning but turned lower after data showed an unexpected drop in UK retail sales. Stocks on the move Thursday include:
Marks & Spencer’s (OTCQX:MAKSY), whose shares retreated 1.6% today after news that U.K. retail sales fell 0.5% from July, when they rose 0.8%, the Office for National Statistics said today in London. Economists predicted a 0.3% increase, according to the median of 23 forecasts in a Bloomberg News survey. On the year, sales rose 0.4% , the smallest increase since April.
Siemens (SI), Europe’s largest engineering company, is up 3 percent Thursday on a broker upgrade over at Morgan Stanley who have lifted their recommendation on the German company to “overweight” from “equal-weight.” The stock was also upgraded to “conviction buy” from “buy” at Goldman Sachs.
Staying in Germany, home builder Hochtief (OTC:HOCFF) has surged 6 percent today after ABC newspaper reported that Actividades de Construccion & Servicios plans a share offer for the German builder in which it already owns a 30 percent stake.
In London BT Group (BT) dropped 3.2 percent on a broker downgrade at Morgan Stanley who lowered their recommendation for the phone company to “equal weight” from “overweight.”
United Business Media is ahead by 6 percent on news today that the publisher of InformationWeek agreed to buy Canon Communications from Spectrum Equity Investors and Apprise Media for $287 million. The acquisition is expected to boost earnings per share by 9 percent in the first full year of ownership, London-based UBM company said in a statement today. The purchase will be funded by UBM’s existing bank facilities.
And before the open in New York, bellwether stock FedEx (FDX) is down after issuing lower guidance for Q2 dragging the Dow futures into the red, this despite a drop in weekly jobless claims to 450k.
Today’s Market Moving Stories
- In Japan, Prime Minister Naoto Kan has signalled that his government is ready to keep intervening to curb JPY strength. According to the Jiji News Agency, Kan said he would take decisive steps if needed. The Nikkei reports suggest that the Ministry of Finance sold more than JPY 2 Trillion yesterday. BoJ Governor Masaaki Shirakawa tells conference delegates “We hardly observe the fact that massive expansions in central bank balance sheets result in an increase in inflation in advanced economies.” The Reuters Tankan survey showed manufacturers’ sentiment index fell 5 points from August to +17, down for the first time since October 2009. Service-sector sentiment improved 6 points to -4 but has stayed in negative territory since June 2008. One auto firm surveyed said “Our profits deteriorate as the JPY rises … While the market remains sluggish due to oversupply and price declines, we’re concerned about rises in materials costs.”.
- METI’s ‘tertiary’ index rose 1.6 percent m/m in July compared with an increase of just 0.2 percent previously. The consensus forecast had anticipated a rise of 0.7 percent.
- US/Japan: House Ways and Means Committee chairman, Sander Levin describes yesterday’s JPY intervention as “deeply disturbing.”. He added “China is not the only country with a predatory exchange rate policy … This is a deeply disturbing development, and we will follow it closely”. Japan’s Chief Cabinet Secretary Yoshito Sengoku declines to respond to Levin’s comments.
- China/US: US Treasury Secretary Timothy Geithner said “We are concerned, as are many of China’s trading partners, that the pace of [CNY] appreciation has been too slow and the extent of appreciation too limited … We will take China’s actions into account as we prepare the next Foreign Exchange Report, and we are examining the important question of what mix of tools, those available to the United States and multilateral approaches, might help encourage the Chinese authorities to move more quickly.”
- Eurozone: In an interview with the FT, Greek finance minister George Papaconstantinou has strongly rejected the idea that Athens will be forced to restructure its debts, stating “People fail to see the costs to both Greece and the Euro-zone of a restructuring: the cost to its citizens, the cost to its access to markets. If Greece restructures, why on earth would people invest in other peripheral economies? It would be a fundamental break to the unity of the Euro-zone.”
- ECB council member Erkki Liikanen said “There is the risk that we will shift to a period of slower growth for some time. Unemployment can be stubborn. It does not mean a return to the 1930s but a phase of damp economic growth could very well be ahead”.
- The UK headline CBI Monthly Trends for Sep slowed to -17 from -14, (consensus was -13), though in contrast the Expectations Balance (for Oct) rose to +12 from +10, and the price balance also climbed to +15 from +11. But more worryingly the BoE said UK inflation expectations for the next 12 months rose to their highest level in 2 years with the benchmark CPI rate seen at 3.4 percent compared to the previous reading (in May) of 3.3 percent.
- Royal Bank of Canada (RY) hopes to make acquisitions in Europe and the U.S. if banks there are forced to sell assets to raise capital, the Globe and Mail reported. The Toronto-based bank has held talks with several financial institutions in the past few months to find out what may be coming up for sale, the newspaper said today, citing an interview with George Lewis, the bank’s head of wealth management. Royal Bank wants to add a broader range of clients and expand its investment management capabilities in areas such as global fixed income and equities, Lewis told the Globe.
The Joys of Non Recourse Lending
More than one-third of Americans say it’s acceptable under some circumstances to stop paying a mortgage and walk away from the home, a survey by the Pew Research Center found. While 59 percent of those surveyed said it’s “unacceptable” to abandon a home loan, 19 percent said it was “acceptable” and another 17 percent said it depends on the circumstances, an answer that wasn’t on the survey, said Rich Morin, a Pew Research senior editor in Washington. Of the respondents, 63 percent own homes and 31 percent are renters. “We all know the percentage of people who walked away has been increasing,” Morin said in a telephone interview. “Whether that builds sympathy or resentment, I think, remains to be seen.” Homeowners are struggling with their mortgages amid job losses and the worst housing crash since the Great Depression. About 14.4 percent of home loans were delinquent or in foreclosure at the end of June, the Mortgage Bankers Association reported Aug. 26.
The French Footie Team Remains Friendless
France Telecom (FTE) won’t be a candidate to buy French national soccer rights when its current accord runs out in 2012, Chief Executive Officer Stephane Richard told Le Figaro in an interview. If agreement can’t be reached on an alternative proposal to create a joint television channel with the country’s soccer league then France Telecom will abandon its involvement in soccer, Richard told the newspaper.
Company / Equity News
- Bloomberg reports that “Allied Irish Banks (AIB), which is seeking to raise as much 3 billion euros in a share sale in the fourth quarter, hired UBS to help advise on the process, two people briefed on the situation said. Allied Irish also retained Morgan Stanley (MS), JPMorgan Chase & Co. (JPM) and Goodbody Stockbrokers as advisers, said the people who declined to be identified because details of the capital raising haven’t been completed. Colm Doherty, Allied Irish’s managing director, said on Aug. 4 he expects to raise as much as 3 billion euros of equity from investors and Ireland’s government after selling overseas assets. Ireland’s financial regulator told Allied Irish on March 30 to raise a total of 7.4 billion euros by the end of the year, as the country’s banks grapple with soaring bad loans following the collapse of a decade-long real-estate boom.The advisers may underwrite the sale of shares to investors other than the government, the people said. The state already controls an 18.7 percent stake in the lender through the National Pension Reserve Fund. Allied Irish last week agreed to sell its 70 percent stake in Polish lender Bank Zachodni WBK SA to Banco Santander SA, generating 2.5 billion euros of capital. Doherty is also selling the group’s U.K. division, comprising a business bank in Britain and a branch network in Northern Ireland, as well as its 22.4 percent stake in U.S. regional lender M&T Bank Corp. He said on Sept. 10 the bank will have details on further sales within weeks.”
- And staying with Irish financials a consortium consisting of WL Ross, Carlyle Group and Cardinal Asset Management have bid for the whole of EBS Building society. EBS is for sale and currently under Irish government control. The FT reports that the group has offered EUR550m for a 70% stake and Ireland has not decided on who will win EBS, but according to the CEO of WL Ross, the consortium seems “confident” they will succeed in the bid. The EC would probably like a solution for the EBS by the end of the year. What does this mean for Irish Life & Permanent (OTC:ILPMF), who also bid for EBS? Well if Irish Life fails in this bid, it could turn its full focus onto Irish Nationwide’s deposit base which was noted earlier in the week that it was also keen on. The outcome for Irish Nationwide’s bond holders will depend very much on the decision by the EC on how the bank should be managed, the good/bad bank solution being one of them. Stay tuned.
- Google’s (GOOG) share in the U.S. market for smartphones jumped 42% while BlackBerry maker Research In Motion Ltd. (RIMM) lost ground in the quarter ended in July, according to ComScore Inc. data. The share of phones running on Google’s Android operating system rose to 17 percent from 12 percent in the period through April, research company ComScore said today in a statement. RIM, the market leader, fell to 39.3 percent from 41.1 percent.
- Microsoft (MSFT) and Yahoo! (YHOO), new partners in the Internet-search field, gained less than 1 percentage point of U.S. market share against Google Inc. last month, according to ComScore Inc. Google remains the dominant search provider, with 65.4 percent of the U.S. market in August, compared with 65.8 percent in July, Reston, Virginia-based ComScore said today. Yahoo rose to 17.4 percent from 17.1 percent, while Microsoft’s Bing climbed to 11.1 percent from 11 percent.
- Royal Dutch Shell (RDS.A) and BP (BP) stand to make “serious profit” by pumping carbon dioxide from European power plants into North Sea oil fields, according to Petroleum and Renewable Energy Company Ltd. Putting carbon dioxide into old oil wells may yield profits of as much as $40 a metric ton in the next decade, Stewart Whiteley, managing director at the consultant known as Petrenel, said today at a seminar at London’s Geological Society. “You can start making serious profits out of this,” Whiteley said. ”It’s a matter of whoever gets there first.” Enhanced oil recovery involves pumping carbon dioxide into underground reservoirs to extract more crude than would otherwise be obtained through natural pressure. The process has the advantage of extending the lifespan of an oil field, while permanently burying the pollutant. Carbon capture and storage has been touted as a way of slashing emissions of CO2, a greenhouse gas blamed for climate change. Kinder Morgan Energy Partners Ltd. (KMP) and Denbury Resources Inc. (DNR), two pipeline operators in the U.S., are profiting on transporting and storing CO2, Whiteley said.
- The Australian Greens Party wants Prime Minister Julia Gillard to increase a proposed levy on coal and iron ore profits and expand it to include uranium, underscoring the pressure on her two-day old minority government. “We will be talking with the Treasurer about the setting of that tax,” Bob Brown said in a phone interview from Hobart. “We’ll continue to bring forward legislation that is going to challenge both the big parties.” The Greens Party won a record 12 percent of the national vote at last month’s national elections, giving them nine seats in the upper house Senate and one in the lower house. Gillard’s Labour Party must placate the Greens to pass legislation and do so without alienating three independent lawmakers who also helped her secure a parliamentary majority.
- BMW (OTCPK:BAMXY) plans to start a car leasing business in China in 2012, Friedrich Eichiner, the member of the company’s management board responsible for finance, said in Beijing today. The leasing business has “great potential,” he said.
- Investors in Swedish stocks may pocket the biggest dividend increases in western Europe this year as companies in the Nordic region’s largest economy avoid the austerity measures that are squeezing profits elsewhere. Dividends for Swedish companies will climb 21.5 percent on average this year, according to estimates compiled by Bloomberg. That compares with a 14.3 percent increase in Germany, 16 percent in Switzerland and an average 11.7 percent for the Euro Stoxx 50 Index, a market benchmark for Europe’s biggest companies. Denmark and Norway will beat the Stoxx 50 with dividend growth of 15.8 percent and 15.3 percent, respectively. Sweden’s export-oriented economy boasts the European Union’s smallest budget deficit and a debt level that’s about half the euro-area average, helping the government avoid the cutbacks that are impeding other countries. While the Stoxx 50 fell 6 percent this year, Scandinavian corporate growth, led by Sweden, fueled an 18 percent jump in the Stoxx Nordic 30 Index.
- The UK’s OFT has raided the UK offices of Daimler as part of an investigation into alleged price fixing in the UK truck market that could also involve VW’s Man and Scania, Fiat’s Iveco, and Volvo. The companies can potentially be fined up to 10% of turnover if found guilty and since this is also a criminal investigation, there may be custodial sentences. The investigation is likely to last some time, and is unlikely that the impact will be material from a credit perspective, although this is the type of story that will grab more than its fair share of headlines.
- John Lewis delivered a decent set of H1 results this morning, with operating profits up 15.1% to GBP145.2m on sales up 12.4%. The department store business showed the greatest improvement, with underlying operating profit rising 59.4% to GBP47.5m on like for like sales up 12.3% against admittedly weakfish comps. World Cup related sales e.g. TVs provided an additional boost to the economic rebound. However, Waitrose remains comfortably the largest part of the business – with operating profits rising 3.1% to GBP132.6m on like for like sales up 3.9%, which was well ahead of the UK market. Obviously, the seasonality of the department store business flatters this position in the first half, but it is interesting to see that two thirds of H1 capex is directed towards Waitrose. Net debt rose to GBP663.5m from GBP402.4m at the year end (GBP580.7m at H1 last year), due entirely to a GBP150m one off contribution to the pension fund. There was the usual cautious statement about consumer spending, but this looks set to be a stable performer for some time.
- Speculation has emerged in the last 24 hours that CNOOC (CEO) may bid over $10bn for BP’s 60% stake in Pan America. This Argentinean asset was one of the first flagged by the market as a potential divestment following the Macondo disaster. We would view the sale of BP’s Pan American as a positive for the company as the asset offers little synergies to the overall portfolio and a $10bn cash injection would allay lingering fears that BP’s balance sheet cannot survive the fallout of Macondo. Should a deal be completed, it would bring BP’s total divestments since the disaster to nearly $20bn.
- B&Q owners Kingfisher announced H1 results this morning which were slightly ahead of consensus – with Retail Profit rising 15.7% to GBP402m on sales which were down 1.3% on a like for like basis. Both the UK and France reported decent improvements in profit, partially offset by a fall in Poland. UK profits rose by 15.8% to GBP171m on sales which fell 3% (-3.7% LFL), driven by a 140bp improvement in gross margin as a result of more direct sourcing, less shrinkage (waste) and fewer promotions. Operating costs were also tightly controlled, reducing in line with sales. In essence, cost savings are not being invested in price cuts, which are negatively impacting the top line but helping to bolster profit/margin. It was a similar story in France, where Retail Profit rose 13.7% to GBP160m on sales down 1.4% (up 1.4% LFL). Again the driver was a 100bp increase in gross margin, helped by increased direct sourcing, buying optimisation and fewer promotions. In International, whilst Polish profits fell GBP4m to GBP65m on a 6.0% LFL decline in sales, this was offset by improved profits in Spain and Turkey as well as lower losses in China. Interestingly Kingfisher ended the period with net cash of GBP19m, compared with net debt of GBP250m, reflecting an excellent job done by current management. There is no indication that the Company will look to change this position significantly.
Did you know, on this day…….
Who would live in a house like this?
A little fun from the boys in the Paddy Power marketing department…