Market Snap: At the New York close on Friday, for the week: S&P 500 up 1.16% to 2063.50. DJIA up 0.99% to 17810.06. Nasdaq Comp up 0.52% to 4712.97. Treasury yields declined; 10-year at 2.317%. Nymex crude oil up 0.91% to $76.51. Gold up 1.05% to $1197.50/ounce.
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How We Got Here: The Dow Jones Industrial Average and the S&P 500 rose to record highs Friday after China’s central bank cut interest rates and the European Central Bank’s president reiterated that the institution was ready to expand its stimulus program.
Even as the moves underscore the willingness of central banks to fight slowing global growth with easy monetary policy, investors remain wary. U.S. stocks pared their earlier gains as investors digested what these central bank actions mean about the health of the global economy, traders said.
“It’s short-term good news, but the really good news is going to take longer to play out,” said Tom Kolefas, a portfolio manager with TIAA-CREF, which manages $840 billion. “What we really need is real economic growth (outside the U.S.).”
The Dow rose 91.06 points, or 0.5%, to 17801.06 and the S&P 500 index advanced 10.75 points, or 0.5%, to 2063.50, on Friday. The Nasdaq Composite gained 11.10 points, or 0.2%, to 4712.97.
“If Europe and China grow a little bit faster because they’re stimulating their economies, that growth should drive industrial demand for materials,” said John Jares, an equity portfolio manager at USAA Investments, which manages about $66 billion in mutual fund assets. “The belief is demand for materials such as iron ore will come back with global growth.”
Coming Up: Oil-market watchers will have a keen eye on the Organization of the Petroleum Exporting Countries’ meeting in Vienna on Thursday to see whether its members decide to rein in production. Global prices have plunged for months due to ample global supplies and weaker-than-expected demand, but traders are becoming more convinced that OPEC won’t act. Failure to broker a deal would further weaken the cartel’s ability to influence prices.From The Wall Street Journal
In China Coal Hub, City Struggles to Survive: Despite billions of dollars in investment, Jixi ranks among China’s slowest-growing cities. Its struggle illustrates the challenge Beijing faces in trying to squeeze growth from resource-dependent areas that were hit hard by the slowdown.
Energy IPO Boom Leaves Some Wary: A gusher of U.S. IPOs of energy-focused master limited partnerships has some money managers urging caution.
New EU Stimulus Fund Hopes to Spark Investment: The EU is poised this week to announce a new fund that will use financial engineering in an effort to spark at least €300 billion euros of additional investment in the continent’s moribund economy.
Loan ‘Guarantee Chains’ in China Prove Flimsy: As China’s economy slows, guarantee chains—in which companies pledge to back loans to other companies—are wreaking havoc.
BHP Outlines Plan to Cut Costs, Reshuffles Management: BHP Billiton Ltd. outlined plans to cut costs further and curb investment spending as the world’s biggest miner by market value looks to simplify and strengthen its business amid falling commodity prices.
Medibank in $4.92 Billion IPO: Australia raised $4.92 billion from the sale of the country’s top public health insurer, beating expectations for the largest IPO of a government-owned asset here in nearly two decades.
CGN Power in $3.16 Billion IPO: China’s largest nuclear power plant operator is raising up to US$3.16 billion in an initial public offering in Hong Kong, setting to become the first listed pure nuclear play in the city.From MoneyBeat
A Sign of Health for Stocks: Cautious 2015 Forecasts: Investment strategists are beginning to issue forecasts for 2015, and the numbers are puny. Paradoxically, their skepticism also could be good news.
When It Comes to Stocks, No Investor Is an Island: Foreign stocks are in the red this year, even after a rally on Friday, while U.S. indexes set record after record. Japan is in recession, Europe is stagnating and the dollar is booming.
Foreign-Exchange Scandal Raises Odds of Restructuring: If we can draw any hope from the recent revelations of price rigging by banks’ foreign-exchange trading desks, it is that they open the door to a long overdue restructuring of the world’s biggest, most important market.
The Two Speeds of the Biotech IPO Market: It’s hits-and-misses in the health-care tech IPO market these days. This week’s hottest IPO in the sector was Second Sight Medical Products Inc., maker of a technology to help the blind see (ticker “EYES”). It zoomed 122% in first-day trading Wednesday on the Nasdaq. That first-day pop was the third best of any U.S. listing this year, according to Dealogic.
Motions to dismiss have been called “the main event” in securities class actions. They are filed in over 90% of securities class actions and they result in dismissal close to 50% of the time they are filed. In contrast, out of 4,226 class actions filed between 1995 and 2013, only 14 were resolved through a trial, and of those, only five resulted in verdicts for the defendant. In between a denial of a motion to dismiss and a trial are i) discovery, ii) opposition to class certification, iii) motion for summary judgment, iv) mediation, and v) settlement. Unfortunately for defendants in securities class actions, class certification is granted in whole or in part 84% of the time, and there is no summary judgment decision at all over 90% of the time. Thus, for most defendants in securities class actions, a denial of a motion to dismiss usually results in writing a settlement check, often after years of costly discovery. Defendants that fail to give adequate attention to motions to dismiss are shortchanging the very best opportunity they have to avoid what may otherwise become multi-year, expensive litigation.
The Basel Committee on Banking Supervision (BCBS) last month proposed revisions to its operational risk capital framework. The proposal sets out a new standardized approach (SA) to replace both the basic indicator approach (BIA) and the standardized approach (TSA) for calculating operational risk capital. In our view, four key points are worth highlighting with respect to the proposal and its possible implications:
Investors in Ann Inc. seem to be betting that the private-equity firm Golden Gate Capital can fix Ann Taylor’s parent.
Ann Inc. reported third-quarter earnings Friday and in the words of Stifel analyst Richard Jaffe ”the wheels came off the wagon.” The company missed projections, said its inventory was way up at Ann Taylor because of product-shipment delays, and admitted its mix of merchandise wasn’t resonating with consumers.
Yet Ann’s stock barely budged, trading down less than 1% Friday. Golden Gate, a firm known for taking retailers private, has clearly put a floor on the stock since it revealed a stake of nearly 10% stake in March.
Mr. Jaffe wrote in a report Friday morning that Golden Gate premium makes the company’s stock hard to value. “We believe the stock is no longer trading on fundamentals.”
It’s unclear what Golden Gate’s plans for the retailer are. The fund appeared to up the ante last month when it signed a nondisclosure agreement with Ann, which gave it the opportunity to peer deeper into the company’s financials and precluded the fund from selling its stake.
At the time, the retailer said “given Golden Gate’s expertise in specialty retail and the positive interactions between the companies to date, it would be beneficial to continue discussions on a more detailed basis.”
Golden Gate wouldn’t comment on its plans Friday but investors and analysts are betting that the PE firm would either take Ann Taylor private or might simply take a more active role in its retail operations. In addition to Golden Gate, activist investor Engine Capital LP called in August for Ann to consider a sale.
Mr. Jaffe said a take-private deal could be difficult now with Ann’s stock trading at its current price of $38.23. It would be difficult for a PE firm to both give Ann Inc. enough of a take out premium and enough wiggle room on its interest payments on any debt it takes on based on the company’s current free cash flow, which is projected to come in at $86 million in 2014, according to FactSet estimates.
Still Golden Gate has proven its retail prowess on several occasions and any operational assistance it provides to Ann Taylor could be helpful, analysts say. Golden Gate won big in its investment in Zale Corp. which was acquired by Signet Jewelers Ltd. in May for $1.46 billion. In May, it purchased the Red Lobster chain from Darden Restaurants Inc. despite opposition from activists investors.
Yet not all its takeover attempts have been successful. In an unusual deal, it tried to provide backing for Jos. A. Bank Clothiers Inc.’s $2.3 billion hostile bid for rival Men’s Wearhouse Inc. Instead, the target, Men’s Wearhouse, ultimately prevailed and bought Jos. A. Bank.
Without a deal? Analysts at Stifel and Janney pointed to the external headwinds facing Ann’s, including weak mall traffic and a highly promotional retail environment, as well as some poor choices in merchandise that just hasn’t resonated with consumers.
Still analysts at Janney also think that the hope of a buyout will keep investors in the stock at these levels at least.
Actavis PLC’s $66 billion deal to buy Allergan Inc., announced Monday, is the biggest merger in a very busy year for mergers. The agreement appears likely to mark the end of a months-long tug-of-war between Allergan, the maker of Botox, and a team that included activist investor Bill Ackman.
In this week’s edition of the MoneyBeat Week podcast, the team looks at the deal from a few different angles. How did it come together? Why didn’t Mr. Ackman’s team raise its bid? And what does the recent flurry of merger agreements say about the state of the stock market?
On that last question, the concern is this: The last two peaks in deal activity coincided with the last two stock-market tops. Is this year’s record merger pace a warning sign for what’s ahead for investors in 2015?
It’s ups-and-downs in the health-care tech IPO market these days.
This week’s hottest IPO in the sector was Second Sight Medical Products Inc., maker of a technology to help the blind see (ticker “EYES”). It zoomed 122% in first-day trading Wednesday on the Nasdaq . That first-day pop was the third best of any U.S. listing this year, according to Dealogic.
Meanwhile, Neothetics Inc., which develops fat reduction drugs, was down 14% in first-day trading on Thursday.
Last week saw fibrosis treatment maker FibroGen Inc. jump 22% in first day trading, after debuting as the most highly valued clinical stage drugmaker in at least 10 years, with a market cap of just over $1 billion, according to research service IPO Boutique. That week also saw NeuroDerm Ltd., which makes treatments for nervous system disorders, drop 8.5% in first-day trading.
With the number of biotech IPOs surging more than 70% this year from last year—comprising about a third of the market, according to figures from BMO Capital Markets—one thing issuers have to consider is just the plethora of options available to investors, both in the form of new issues and recently public companies that are still new to them (and might be available for less than their IPO price).
“As supply has increased, buyers have become more discerning,” said Michael Cippoletti, head of U.S. equity capital markets at BMO Capital Markets. Investors are “currently favoring later stage issuers as well as orphan drug and oncology companies,” he said.
The result is what looks like a two-speed market. Since Labor Day about half the deals in the sector priced in or above their range, and half below. Among healthcare IPOs in the last 30 days, three heaare trading up more than 40% from their issue price, and three have broken below issue price, according to Syndicate Pro LLC, an IPO tracking service.
So while the Nasdaq Biotechnology index trading just 2% shy of its all-time high, set at the end of October, the IPO market is revealing that underneath that, conditions are not as rosy for the hot sector. Contrast this month’s IPO debuts to March, at the tech-and-biotech market peak, when not one of the 11 healthcare IPOs dropped in first-day trading.
What it suggests is that momentum money is coming out of the market, leaving it to the fundamental folks to price deals. Not as good a sign for people looking to make quick bucks.
The pay that CEOs and other executives receive is not aligned well with company performance, primarily because companies and boards lack the tools to accurately measure how much success executives are actually having in their jobs, a new study concludes.
The new report, from the nonprofit Investor Responsibility Research Center Institute and consultancy Organizational Capital Partners, set out to determine how well executive compensation among S&P 1500 companies was aligned with company performance and shareholder returns. “The expectation was that the analysis could usefully serve as a marker in the ground,” the firms wrote in its report, “and yet what it uncovered was unexpected.”
IRRCi is a research firm that was formed after its parent was sold to Institutional Shareholder Services. OCP is a corporate consultancy operating in the U.S. and Europe. You can read the full report here.
“The most common measurement tools and metrics used in enterprise performance measurement and the design of long-term incentives,” the authors write, “do not necessarily directly align with underlying sustainable value creation for shareholders.” That’s a turgid way of saying companies can’t really tell whether or not executives are doing anything to make the business better in the long run.
The report is aimed at institutional investors, corporate directors, and executive management. But inasmuch as it adds to the national discourse on executive pay, it seems the report should also have some appeal beyond those narrow groups. With so many focused on “say on pay” measures, it would help if there were better ways to actually gauge the value shareholders are getting for the pay they are doling out. The goal of the report is to make it easier to actually say what the pay should be.
The most common metric used to gauge an executive’s success: total shareholder return, which is the stock price’s appreciation plus any dividends. “Total shareholder return is, by far, the most dominant performance metric in long-term incentive plans,” they say.
The problem is that the stock price can be influenced by factors that have nothing to do with the executive, like central bank policies, regulatory changes, and geopolitical risks. Worse, executives can take actions that maximize short-term performance. That’s been the critique of International Business Machines Corp. and its $12 billion in buybacks in just the first six months of 2014. On top of that, the study found that most compensation plans have a long-term outlook that isn’t actually long-term, “three years or less,” the firm noted.
IBM isn’t the only company to be accused of financial engineering, and in fact buybacks tend to drive up stock prices, which drives up the value of executive stock options. But a larger problem the study uncovers is that boards don’t even have the proper tools to gauge just how well their executives are performing.
A company’s actual economic performance, the authors say, constitutes only about 12% of variance in CEO pay. “The remainder is based on other factors largely beyond management control,” they said, with 44% coming just from the size of the company and the its industry, and another 19% based on how much the company paid in the past.
“Earnings and EPS do not take into account the level of invested capital, cost of capital or future value built into enterprise valuation. So, for example, a company could boost higher earnings and higher earnings per share following a value-destroying acquisition, if that acquisition were paid for with debt that did not come due during the measurement period.”
There are, IRRC says, firms that are doing it right, building the business for the future, looking out at least five or ten years down the road. That kind of long-term focus, in fact, emerges as a key factor in determining an executive’s true value to a company. The report comes back to it several times, and conversely faults companies time and again for a short-term focus.
One key metric the report focused upon is “economic profit,” which is the net operating profit after taxes minus invested capital. In other words, profits, after accounting for what’s been reinvested in the business.
“A sustainable and viable business model must eventually provide consistent positive economic profit and a return on invested capital greater than its cost of capital. Without a reasonable expectation of positive economic profit then no amount of sales or earnings growth will create sustainable shareholder value,” they write.
Billionaire technology investor Peter Thiel thinks Bitcoin has a problem: the government won’t shoot you for it.
In a recent interview Web site Vox, Mr. Thiel linked the value of money to the requirement that taxes be paid in the government’s currency. “You will not be able to pay your taxes in Bitcoin. You have to pay them in dollars. If you don’t pay them with dollars, there will be people who will show up with guns to make you pay them,” Mr. Thiel said.
The idea that taxes drive the value of money—known as chartalism—goes back at least as far as German economist Georg Friedrich Knapp’s 1905 book “The State Theory of Money.” Its proponents contrast it with the view that money gets its value from either its link to a commodity or from its acceptance as a medium of exchange.
Of course, not being money doesn’t mean something isn’t worth a lot money. PayPal, the company Mr. Thiel founded, may have never evolved into a non-governmental, private currency. But it certainly garnered a lot of the ordinary government money known as dollars.
For activist investors, the hottest trend in retail ahead of the holiday season: REITs.
The activist hedge fund Marcato Capital Management LP wants Dillard’s Inc. to join the REIT party and said the retailer’s stock could jump by 75% if put its real estate into this structure.
Dillard’s stock, of which Marcato owns just under 5%, rose 9% Thursday after Marcato made its announcement. The stock is down roughly 2% Friday after Dillard’s reported third-quarter earnings and announced plans to buy back nearly 10% of its stock.
The list of companies seeking to split off their real-estate assets into a REIT this year is crowded with retailers like Sears Holdings Corp. as well as non traditional REIT candidates including a telecom company.
Dillard’s wouldn’t comment on the possibility and doesn’t host analyst calls, so management didn’t field any questions publicly on the topic Friday.
Investors, though, should keep an eye out for who it picks as its next CFO. “If it reaches outside the company for a real estate specialist, it might foreshadow a future REIT move,” the research firm Gordon Haskett Research Advisors wrote in a report Friday.
A REIT wouldn’t be new territory for Dillard’s, which used a REIT in 2011 for some of its real estate to take more tax deductions, Gordon Haskett noted.
Still investors question whether the Dillard family, which effectively controls the board through its Class B shares, would consider this move now, during a year when its stock is up nearly 20%, more than many of its peers.
Some investors say that the founding family would prefer to use REIT as a backstop should the company ever run into trouble.