Market Snap: At the New York close: S&P 500 down 0.7% at 1927.11. DJIA down 0.9% at 16461.32. Nasdaq Comp down 0.8% at 4382.85. Treasury yields rose; 10-year at 2.234%. Nymex crude oil down 2.4% at $80.52. Gold down 0.5% at $1,244.80/ounce.
How We Got Here: U.S. stocks snapped a winning streak that saw them reclaim about half the ground they had lost since the September highs.
The proximate cause was a shooting in Canada’s capital. “Stocks ease back a bit as a second Canadian incident in days reintroduces risk to markets on fears that these could be the beginning of a series of lone wolf events,” UBS’s Art Cashin wrote.
However, several market technicians we follow pointed to the fact that Tuesday’s close for the S&P 500, at 1941, brought that index almost exactly to what’s called a “Fibonnaci retracement” (Investopedia has a good explanation here). If that not only drove the three-session rally, but also stopped it in its tracks, then the market may discover that this “all’s clear!” rally was in fact no such thing.
To that point, look at what happened on Wednesday in the oil patch, where WTI slid sharply, rounding back toward the $80/barrel level that caused so much consternation last week. We’ll see if familiarity breeds acquiescence, or contempt.
Coming Up: China on Thursday will unveil its Markit Economics HSBC preliminary October “flash” manufacturing purchasing managers’ index data, a closely watched indicator. Its end-September reading of 50.2 was worrying, because it brought the number exactly back to the level of stagnation that it held in August, correcting a mid-September result that had shown a rise to 50.5. The index, whose virtues include that it focuses on a lot of small- and medium-sized businesses not captured by official statistics, is now only just above the 50 level that signifies expansion or contraction.What You Missed Overnight
Two Dead in Canada Shootings A soldier was shot dead at Canada’s National War Memorial and shots were fired inside the country’s Parliament building nearby before a suspected assailant was killed.
U.S. Stocks Drop After Recent Rally U.S. stocks fell on Wednesday, snapping the Dow Jones Industrial Average’s three-day rally that lifted the benchmark from six-month lows.
J.P. Morgan Knew of China Hiring Concerns Before Probe Several executives at J.P. Morgan Chase & Co. in New York were warned of potential problems related to the bank’s hiring practices in China more than a year before the program came under scrutiny by the U.S. government, according to people familiar with the matter and documents reviewed by The Wall Street Journal.
Takata Targets by Federal Prosecutors Federal prosecutors are investigating Japanese air bag supplier Takata Corp. in connection with defective air bags made by the company that have been linked to two deaths and prompted an unusual government warning to owners of more than seven million vehicles in the U.S., according to people familiar with the matter.From The Wall Street Journal Asia
Ex-Security Chief Zhou Faces Expulsion From Communist Party The highlight of Xi Jinping’s anticorruption drive may well be the widely expected party expulsion of former political strongman Zhou Yongkang.
Widodo Inherits Legacy of Foreign-Investment Hurdles Joko Widodo is the first entrepreneur to become president of Indonesia, and his supporters hope his history of pragmatism and disdain for red tape will help him modernize the country’s economy.
Google Japan Case Raises Issue of ‘Right to Be Forgotten’ Could the “right to be forgotten” be coming to Asia? In the latest development that highlights how countries around the region are starting to grapple with the issue, a Japanese man asked a Tokyo court Tuesday to fine Google, saying it failed to remove certain Internet search results referencing him, even after it was ordered to do so.
Investors in Emerging Markets Cool on Consumer Stocks Investors in emerging markets are cooling on stocks of companies that sell essential goods like food and drinks after a dizzying rally that has left those shares looking expensive.From MoneyBeat
Apple’s Back at Record Highs; Now What? The shine from Apple’s upbeat quarterly results earlier this week continues to give the iPhone maker’s stock price a boost.
CNET Founder Readies New Bitcoin Venture Halsey Minor made a name for himself during the dot-com boom with CNET. Now he’s climbing onto another new-technology wave with Bitreserve, a bitcoin-wallet serviceunveiled in May that will become publicly available later this month.
China Economy on Track For Sweeping Reforms, Asia Society Report Finds China’s leadership is making real headway in an ambitious program to liberalize its economy and if all goes to plan it will maintain a respectable 6% growth rate in 2020, according to a new detailed analysis of the reform agenda laid out at last year’s third plenum of the Chinese Communist Party.
How an ECB Corporate Bond Program Could Work Reports Tuesday suggesting that the European Central Bank might be preparing to buy corporate bonds sent stocks soaring and the euro diving, even without any clarity on how likely it is to happen, what it would buy, or what the impact might be.
Welcome to BitBeat, your daily dose of crypto-current events, written by Paul Vigna and Michael J. Casey.
Bitcoin Latest Price: $380.36, up 0.53% (via CoinDesk)Crossing Our Desk:
–Some of the biggest names in bitcoin’s coding community have unveiled a new cryptocurrency software project that’s likely to cause a stir.
The so-called sidechains project was officially launched Wednesday with a whitepaper that proposes the creation of new sideline versions of bitcoin’s “blockchain” transaction ledger. People can import bitcoins into these sidechains from the core bitcoin blockchain and transfer them back without a trusted third-party’s intermediation. The idea is that they create an independent environment for innovators to freely work with and enhance copies of the core software without inadvertently harming bitcoin’s basic software program, its so-called protocol.
The proposal, which could pose a major challenge to various “altcoin” competitors to bitcoin, aims to ramp up the development of “Bitcoin 2.0” technologies to decentralize commercial and financial activity.
The proposal also carries weight because of the names behind it. The paper’s lead author is Adam Back. In 1990s, he developed a program known as “hashcash” whose core features were incorporate into the basic design of bitcoin’s core “mining” system for processing transactions. Among the whitepaper’s eight other authors are two of the five-person core development team charged with managing bitcoin’s underlying software — Gregory Maxwell and Pieter Wuille. Gavin Andresen, leader of that core team, is listed in the acknowledgements as having offered reviewer comments.
The sidechains project is backed by Blockstream, a new company focused on cryptocurrency innovation that includes Messrs. Back, Wuille and Maxwell among its 11 co-founders, along with Austin Hill, who created Zero-Knowledge Systems, which develops cryptographic privacy and anonymity solutions, and who was a very early developer of e-cash products.
Sidechains “allows you to have innovation without speculation,” said Mr. Back in an interview. He noted that hundreds of altcoin competitors to bitcoin, created as a vehicles for innovation, suffer from market challenges and can sometimes breed suspicions about the proprietary interests of their founders.
“In the past when people have started alternative currencies it tends to create problems when the currency grows a little bit and then somebody copies it, which is why you get dozens and dozens of altcoins,” he said. None of these altcoins’ protocols are “interoperable” with each other, Mr. Back said. That means if a person wants to transfer value from one blockchain to another, they have to work through a third-party provider such as a digital-currency exchange, which reintroduces the core problem that bitcoin seeks to solve: dependence on trusted counterparty.
In an alternative strategy, developers looking to innovate have built new software programs that work directly on top of the existing bitcoin blockchain. Startups in this field have created mechanisms to imbed extra information into bitcoin transactions so that parties can do things like exchange digitized assets or enter into “smart contracts” that are executed without the intermediation of lawyers or courts. But these programs, Mr. Back said, are hindered by bitcoin’s “one-size-fits-all network,” which isn’t designed to handle multiple, complex tasks beyond the exchange of bitcoin currency. And while smart minds are seeking to alter bitcoin’s software to scale it up and allow these new uses, it’s difficult to speedily enact change – both because it can introduce dangerous software bugs and because the political structure of the bitcoin network requires the majority support of bitcoin miners if major changes are to be adopted.
The sidechains project seeks to address all of that through a “pegging” system so that transactions transferring bitcoins out of the “parent” bitcoin blockchain and into a sidechain ledger are confirmed and authenticated by the same computer network of miners that runs bitcoin. The sidechain is entirely independent of the bitcoin blockchain but both ledgers remain interoperable.
Mr. Back and Mr. Maxwell will hold an AMA (“ask me anything”) session on the popular social network site Reddit Thursday. (Michael Casey)
Today [October 22, 2014], the Commission will consider the recommendation of the staff to adopt, jointly with five other federal agencies, final rules for the asset-backed securities market that will require securitizers to keep “skin in the game.” Specifically, we will consider rules to require certain securitizers to retain no less than five percent of the credit risk of the assets they securitize. These rules, which are mandated by Section 941 of the Dodd-Frank Act, are part of a strong and comprehensive package of reforms that will address some of the most serious issues exposed in the asset-backed securities market that contributed to the financial crisis.
News, analysis and some curiosities to ease your commute home.
Two dead in Canada shootings at heart of capital – WSJ
Four Blackwater guards found guilty of murder in Iraq shooting – WSJ
A classic illustration of Ben Bradlee, the legendary Post editor who died yesterday, is this letter in which he positively shreds a flak – Washington Post
Amazon is doing the world a favor by crushing book publishers – Matthew Yglesias, via Vox
A musical interlude: Ruth Brown; Fine and Mellow – YouTube
Pity the poor banks, hounded by regulators – Jesse Eisenger, via DealBook
The four principles of quantum advertising (part two of his “theory of everything”) - The Ad Contrarian
Those crazy Kansas City Kats – WSJ
Shares of several big train companies dropped Wednesday after railroad executives threw cold water on the idea that the railroad industry is ripe for consolidation.
Investors had been betting on railroad mergers and acquisitions recently after deal talks between Canadian Pacific Railway Ltd. and CSX Corp. became public. Those discussions have now ended, Canadian Pacific confirmed this week. Investors are now left to sort through the comments from the industry’s leading lights for hints of what will happen next.
Norfolk Southern CEO Wick Moorman was the latest executive to explain why investors are unlikely to see big deals anytime soon. On an earnings call Wednesday, he said a major merger would be “highly problematic.”
“I think a major railroad merger is not a good idea,” Mr. Moorman said, citing three reasons. First, historically big mergers have lead to “significant service problems for some period of time.” Secondly, he said, railroad M&A has been driven in the past by cost savings, like overlapping routes, which don’t exist as much anymore. “You can save some money, yes, but it’s not necessarily the order of magnitude that it used to be.”
Third, he said, the current regulatory environment is “not receptive in any way to major combinations.” The Surface Transportation Board, which oversees railroads, has blocked or otherwise interfered with deals in the past.
His remarks follow comments from Canadian Pacific Chief Executive Hunter Harrison, who said Tuesday he saw merit in consolidation, but that his company was unlikely to go hostile after failing to engage CSX in merger talks.
Some analysts had speculated Canadian Pacific might turn its sights to Northern Southern or Kansas City Southern , both of whose eastern U.S. networks could complement Canadian Pacific’s oil-bearing rails in the West. Canadian Pacific has staked much of its future growth on hauling oil, so-called crude-by-rail freight, and needs connections to eastern U.S. refineries.
Last week, CSX Chief Executive Michael Ward didn’t address Canadian Pacific’s approach specifically. But he also said he thought rail mergers were a bad idea.
Shares of Canadian Pacific dropped nearly 2% Wednesday, while Norfolk Southern Corp.’s and Kansas City Southern’s shares dropped about 3%. CSX dropped 0.6%. Warren Buffett‘s Berkshire Hathaway Inc., which owns Burlington Northern Santa Fe, was down 0.9%. The S&P 500 meanwhile closed down 0.7%.
– Tess Stynes and Betsy Morris contributed to this post.
One of Herbalife Ltd.'s most bullish analysts is back. He’s with a new firm, but he has the same optimistic views on the controversial maker of nutritional supplements.
Tim Ramey, a former analyst at D.A. Davidson who took a consulting gig earlier this year, is back on the sell-side, this time with a firm called Pivotal Research Group. In his first research note on Herbalife since January, Mr. Ramey unveiled a buy rating and a 12-18 month price target of $110 on the stock. That’s more than double the current price.
Herbalife shares are down 36% this year after surging 139% in 2013. In March, the Federal Trade Commission opened an investigation into Herbalife amid allegations by hedge-fund manager Bill Ackman–who has placed a $1 billion short bet against the company–that the company is a pyramid scheme.
Mr. Ackman has alleged the company should be shuttered and its stock price should go to zero. Herbalife has said it complies with all laws and regulations and welcomed the inquiry as a chance to clear its name.
For his part, Mr. Ramey now predicts the investigation will ultimately lead to a settlement between Herbalife and the FTC in which the company gets a fine or sanctions, but won’t get shut down.
“We anxiously look forward to the deal with the FTC — it will likely bless the current structure while extracting some pound of flesh for sins of the past,” Mr. Ramey wrote to clients this week. “We can envision an ‘FTC day’ being a day when Herbalife shares rise 50% or more.”
Herbalife shares dropped 6.2% to $49.54 on Wednesday.
Mr. Ramey’s views need to be put in context. In January, he left his job as an analyst at D.A. Davidson to join Post Holdings Inc. as a consultant with the title of director of strategic ventures. Post Chairman and Chief Executive William Stiritz is one of Herbalife’s largest investors.
Mr. Ramey said he will continue to work for Post as a consultant on a part-time basis as he takes on the full-time job at Pivotal Research. In an interview with MoneyBeat, Mr. Ramey acknowledged that it’s a “slightly weird situation” that raises the question of potential conflicts of interest when covering Herbalife.
“I guess you could point to it as an issue, but Bill [Stiritz] has no control over what I do as an analyst at Pivotal,” Mr. Ramey said. “I’m still the same person. I’m not inconsistent with my views.”
In that vein, Mr. Ramey is very optimistic about Herbalife.
“If our job as analysts is to assess risk, quantify upside, and understand the downside, there is perhaps no better example of ‘alpha’ in the stock market today than Herbalife,” Mr. Ramey wrote in his note.More In Herbalife
He acknowledged Herbalife shares are “certainly in a funk” due to the company’s latest lackluster quarterly results and the “death blow” that Mr. Ackman tried to deliver to Herbalife. In July, Mr. Ackman gave an emotional speech for more than three hours unveiling new evidence that he said supported his case that Herbalife is a “criminal enterprise.” Instead, shares rose 25% that day in Herbalife’s biggest one-day rally ever. But the rally fizzled within a week and the stock continued lower over the past few months.
“We do believe that a combination of the negative spin from Ackman and the tighter controls on the business that the company has initiated in response to his criticism has very likely slowed growth,” Mr. Ramey wrote, while later adding: “But what do we get for all of this travail? We get a company that is clearly not operating an illegal pyramid scheme; a company with much greater compliance and better supervision of its members and a company that will likely continue to grow, meaningfully, despite these challenges. It remains an impressive growth engine.”
Even in a worst-case scenario, Mr. Ramey is still optimistic. The prospect of the FTC shutting down Herbalife in the U.S. and Canada would wipe out about 1/5 of the company’s overall sales, he projected. Such an event would also have ripple effects in other locations of the business, he said.
But even if Herbalife’s earnings were cut in half, “we could justify a buy rating at current prices,” Mr. Ramey said.
On the chances of such a shutdown taking place, he told MoneyBeat: “It’s in the realm of possibility, but the odds are very low.”
New York State’s “Green Bank” is luring local and national banks to fund their first such projects in the state.
The Green Bank, a $1 billion initiative from Governor Andrew Cuomo’s office, is lending $200 million towards seven new clean energy projects across the state. Local and national banks including Bank of America Merrill Lynch, Deutsche Bank , Citigroup , First Niagara Bank, and M&T Bank will provide another $600 million to fund financing for projects across the state.
Buffalo-based First Niagara, for example, is in discussions to partner with its local rival M&T Bank to fund a solar energy project in Lackawanna, NY. The Green Bank will provide guarantees to the bank lenders for construction and some of the financing for the project.
The project, assuming it closes, will be First Niagara’s first such project in the state. It has financed other solar projects in Connecticut, according to a spokeswoman. Connecticut started the first green bank in the U.S. in 2011.
Citi is working with a Oakland, Calif.-based partner Renewable Funding to lend money to homeowners who want to improve their energy efficiency. The Green Bank will be providing a credit facility to the program.
New York State’s Green Bank functions like any other bank, in the sense that it doesn’t provide subsidized capital, and lends at market rates. The bank is funded by fees collected through utility bills, and is the largest such bank in the U.S. It provides financing for clean energy projects that can’t be completed with private investment alone.
The announced deals will close near the end of the year, said Alfred Griffin, NY Green Bank president.
He said the government has been soliciting financing proposals since February, and chose the first seven based on their feasibility and risk. But the government wants to avoid any whiff of poor financial judgment, and doesn’t want to lose money on the loans. That’s why the Green Bank is structured to fund projects that already have financial backing by large institutions. It provides the financing needed to fill gaps that other lenders or markets can’t fill.
“We’re not the lender of last resort here,” he said.
Halsey Minor made a name for himself during the dot-com boom with CNET. Now he’s climbing onto another new-technology wave with BitReserve, a bitcoin-wallet service unveiled in May that will become publicly available later this month.
BitReserve has a few features differentiating it from other digital-currency wallet services. It taps the efficiency and low-transaction costs of bitcoin, but also promises to lock in users’ bitcoin deposits at fixed exchange rates. The service does not allow actual exchanges of bitcoin against fiat currencies but rather promises to absorb and manage the risk of bitcoin losing value against them by maintaining and publicly displaying an asset reserve covering 100% of its clients’ dollar- and other currency-denominated deposits. The goal is to overcome the extreme price volatility that has been the digital currency’s primary deterrent for mainstream users and thus provide them with a service for cheap, reliable money transfers.
“We want bitcoin to go from being this weirdo currency to being ‘my currency,’ ” says Mr. Minor.
A key target market for the service is that of remittances, by which immigrants in the U.S. send money back to their home countries. Remittances from the U.S. to Mexico alone ran to an estimated $22 billion last year, according to the World Bank. By locking in rates in dollars and/or Mexican pesos and by keeping transaction fees as low as 0.45%, BitReserve aims to take a portion of that market away from dominant providers such as Western Union , which use the more costly banking system to send money.
Bitcoin is built on a decentralized network of computers that confirms peer-to-peer transactions without requiring fee-charging intermediaries such as banks and credit-card companies. That structure helps keep the underlying costs of payments and money transfers down. But the digital currency is notoriously volatile, having lost about 50% of its value versus the dollar this year, after gaining 5,500% in 2013.
Much like bitcoin-based digital wallet services, BitReserve allows people to easily and cheaply transfer funds to other users in digital form. Unlike pure bitcoin services it allows them to fix their assets in a “home” currency, taking on the exchange-rate risk itself. BitReserve then manages that risk by immediately buying the underlying currencies and investing them in reserve assets.
For the whole thing to work, users must trust that BitReserve stands behind the fixed exchange rates, key to which is their perception of its reserve management. The service seeks to win them over by publishing and constantly updating in a real time the breakdown of the reserve’s assets. The portfolio is expected to include short-term bonds and other highly liquid, low-risk securities, all denominated in the various underlying currencies.
BitReserve will profit by the degree to which the return on those reserves outpaces its customers’ assets. “Holding money its own business model,” Mr. Minor said.
This policy of full reserve disclosure is helped by the transparent features of bitcoin’s universal ledger, the so-called blockchain, which displays every underlying transaction publicly. With these real-time disclosures, and backed by quarterly audits, BitReserve is betting that customers will reach a sufficiently high level of confidence in the currency values quoted on its site.
“We are going to be the first fully transparent financial institution ever,” Mr. Halsey said. “I want to form a new level of compliance based on stewardship of capital. I think it’s the only way forward.”
Like other early Internet entrepreneurs, including Netscape founder and now venture capitalist Marc Andreessen, Mr. Minor’s enthusiasm for bitcoin is shaped by a belief that it offers similar opportunities to build value on top of a new software platform.
Bitten by the Internet bug in the early 1990s, Mr. Minor quit a job in corporate finance at Merrill Lynch to launch the tech-news website CNET with a $50,000 investment in 1993, eventually turning into one of the first online news services to turn a profit (CBS acquired it in 2008 for $1.8 billion). He stepped down as CEO in 2000 to focus on investing.
A series of successes added to Mr. Halsey’s personal fortune — cloud-based enterprise software company salesforce.com was one; Grand Central, which became Google Voice, was another – which he then parlayed into real estate and artwork purchases. But the financial crisis threw those investments into the red and in 2013, he was forced to declare chapter 7 bankruptcy.
Still, even at that point, Mr. Halsey had discovered bitcoin and was dreaming of its possibilities.
“I totally got the idea of being able to send value through the Internet just like information,” he said. “What I did not get was that anybody would hold something so volatile.”
Not market cap-wise, but actual growth.
In the fiscal year ended September 2010, Apple generated $65.2 billion of revenue. The company said as part of Monday’s fiscal fourth-quarter report that for just this quarter, the topline is seen ranging from $63.5 billion to $66.5 billion.
So in four years, what took 12 months for Apple’s businesses to generate is now occurring in a single holiday quarter. The stock has tripled since the summer of 2010, putting its market cap close to $650 billion.
Wall Street has learned to be a little skeptical on 3D Systems . Perhaps it deserves more than a little.
The maker of 3D printing products surprised investors Wednesday morning with preliminary third-quarter results below expectations. The shortfall was blamed on problems with manufacturing direct metal printers and “delayed availability” of some consumer products. Earnings are expected to be 16 to 19 cents a share for the quarter, compared to analysts’ consensus forecast of 21 cents. Shares of 3D Systems slumped nearly 14%.
But investors shouldn’t have been that surprised: The company has actually missed Wall Street’s earnings targets for the last six consecutive quarters, according to FactSet.
3D Systems is investing heavily in an attempt to capitalize on rising demand for 3D printing technology, so pressure on profits is a given. But the company has been having trouble reaching its sales goals as well: It lowered its 2014 revenue forecast by about 7% on Wednesday. The stock is now off about 60% for the year to date, so in that respect, at least, hopes look a little more grounded now.
China’s leadership is making real headway in an ambitious program to liberalize its economy and if all goes to plan it will maintain a respectable 6% growth rate in 2020, according to a new detailed analysis of the reform agenda laid out at last year’s third plenum of the Chinese Communist Party.
The study by the Asia Society Policy Institute in collaboration with the Rhodium Group stands in contrast to a pessimistic take by U.S. think tank the Conference Board, which on Monday predicted China’s government would fail to push through a difficult economic overhaul and cause growth rates to slow to 3.9% over the coming decade. Such a sharp decline from a current annual rate of 7.3% — according to a third-quarter GDP report released Tuesday — would likely have dire consequences.
As the Asia Society report notes, there is much at stake in these competing projections. With its share of global growth having gone from 4% in 1997 to 28% now, “China is more interdependent with world markets than [other] nations going through a middle-income policy shock have been,” the report’s author, Asia Society Policy Institute fellow Daniel Rosen, wrote. “China’s current reforms will shock the world.”
In coming up with a 6% forecast for what Mr. Rosen describes as “potential growth” — that is, if all reforms are fully implemented — his report focuses on nine “clusters” of economic and political reform aimed broadly at reducing centralized control over the Chinese economy and opening it up to more market influence.
In all, Mr. Rosen’s analysis finds that quiet progress is being made in some politically sensitive areas of reform, a view that contrasts with critics who say that a lack of key developments such as the creation of a deposit insurance scheme are stymying vital liberalization of the financial system.
Mr. Rosen said the starting point for the reform agenda is not the interest-rate liberalization proposals or plan to open up cross-border capital flows that many economists focus on, but a more fundamental overhaul of the fiscal relationship between the central government and the provinces. This is “the true bellwether of China’s direction,” he wrote in the report.
The current arrangement has allowed “an imbalanced division of power and responsibility between central and local authorities [which] has given rise to pressing misallocations of resources and provincial resistance to central reforms,” Mr. Rosen wrote.
But on a positive note, he added, “In a pattern we identify in most other regulatory areas as well, evidence of follow-through was apparent in 2014.”
In an interview, Mr. Rosen said he viewed the anti-corruption campaign orchestrated by President Xi Jinping as a sign of a serious commitment to shake up an inefficient and privileged bureaucracy rather than as a political score-settling exercise as some have described it. That and the other political reforms set the stage for a more comprehensive overhaul that’s needed to shift the economy from its current, unsustainable dependence on investment-led growth to a more consumer-focused model.
Mr. Xi has been a key driver of this process, Mr. Rosen said.
“Xi is the first leader since 1998 who didn’t come in with [economic] tailwinds behind him,” Mr. Rosen said. “Xi Jinping really did understand that it wasn’t going to be business as usual anymore. China was going to need a radically different set of policy reforms and regulatory tools if it was to meet its potential.”
But Mr. Rosen warns that if Mr. Xi fails to properly shift the Communist Party and government away from a role as central planner to one of regulating a market economy and providing services such as health and welfare, it will pay a heavy price from the waning productivity gains to be had from continuing its investment-led economic growth model.
“Growth driven only by investment would mean a hard landing in 2020: no better than 3% annual GDP growth,” he wrote. “Falling productivity could easily pull private investment down with it, leaving GDP growth even lower at 1%, surely a crisis.”
A memo to Allergan Inc.: When it comes to hostile M&A, the “just-say-no” defense tends to come with a cost, new research finds.
Companies that fend off takeover bids culminating in shareholder votes tend to underperform over the following year, according to a report Wednesday from proxy advisory firm Institutional Shareholder Services Inc.
Since 2009, seven hostile battles went all the way to a shareholder vote. In only one, CF Industries Holdings Inc.’s 2010 pursuit of rival fertilizer maker Terra Industries Inc., did the bidder get its prize. In the other six, the companies remained independent.
Over the next year, those six companies lagged the S&P 500 index by an average of 10.6 percentage points and trailed their industry peers by 13.6 percentage points, ISS finds. Only one–Illumina Inc., whose shareholders rejected a hostile bid from Roche Holding Ltd. in 2012–was a “clear home run,” ISS writes, returning 304% to date and significantly beating the benchmarks. Airgas Inc., which fended off a hostile takeover attempt by rival Air Products and Chemicals Inc. in 2011, did about as well as the broader market and outperformed its peers. Others–notably Pulse Electronics Corp., which fended off Bel Fuse Inc. in 2011–were money-losers for shareholders.
While a stiff-arm defense won some companies sweetened bids that increased the stock price leading up to the contested vote, the median bump was just 9.2%, ISS found. “It does not often, apparently, win the target shareholders a much richer bid to consider when the matter finally comes to a shareholder vote,” the report says.
The findings call into question to a long-held belief that giving boards more time and more leverage to negotiate leads to better outcomes for shareholders. It also may also provide some guidance to Allergan’s investors, who will decide Dec. 18 whether to replace the board of the Botox maker with directors warmer to the idea of a sale to Valeant Pharmaceuticals International Inc.
Of particular interest to Allergan’s situation: ISS finds that “self-help” initiatives, reluctant targets embarking on deals, restructurings or cost-cutting of their own, do little for shareholders. NRG Energy beat back a takeover attempt by Exelon Corp. in 2009, partly aided by such moves. It made an acquisition, invested in clean energy alternatives and cut costs, promising the moves would boost profits.
The initiatives convinced shareholders, who voted down Exelon’s slate. But since then, NRG shares have returned just 19%, underperforming its peers by 99 percentage points and the S&P 500 by 107 points, ISS finds.
Allergan has made a similar pivot since Valeant and activist investor Bill Ackman made their bid in April. The company in July said it would lay off workers and cut some drug research, moves it says will boost profits over the next few years.
“A board’s own self-help plan, particularly if launched in response to or amid a hostile bid, is unlikely to return strong value over a sustained period,” ISS writes.
ISS has been skeptical of Allergan’s board throughout the six-month fight. In August, it backed Mr. Ackman’s and Valeant’s call for a special board election. Earlier this month, it urged Allergan’s board to put any acquisition it might strike in the coming weeks to a shareholder vote.
Gold and platinum are prized for their rarity. What is happening with their prices right now is also pretty unusual.
At about $1,245 an ounce, gold isn’t far off parity with platinum at about $1,270. This doesn’t happen often. In the past 20 years, gold has matched or exceeded the platinum price only about 7% of the time. And much of that occurred between the summer of 2011 and early 2013, when quantitative easing was in full swing and hyperbole about the dollar’s demise was at its height.
Similarly, the current price action reflects an anxious world. Gold hasn’t really gained much this year; rather, platinum has collapsed since July. This makes sense: More than half of platinum demand relates to industrial, primarily, automotive uses. Deflation fears have whacked industrial commodities.
Gold usually benefits when such extreme scenarios seem plausible. There is one twist: negative inflation would imply rising real interest rates. The latter erode the case for holding non-yielding assets such as precious metals. Even so, the rare melding of gold and platinum prices is an unwelcome sign that optimism about growth is fast becoming the rarest commodity of all.
The shine from Apple Inc.'s upbeat quarterly results earlier this week continues to give the iPhone maker’s stock price a boost.
Shares rose more than 1% on Wednesday, hitting an all-time intraday high of $104.11. Analysts have praised Apple’s resurgent growth, particularly in its iPhone segment, and remain optimistic about the company’s long-term prospects.
The question now: Just how high will the stock go?
Apple said late Monday that it sold 39.3 million iPhones in the period ended Sept. 27, a 16% increase from a year ago and well above the 37.8 million that analysts had predicted. But the iPhone’s strength contrasts sluggish iPad sales. While some of that weakness was due to consumers potentially waiting for the new iPads to be released, the bottom line is Apple’s sales are increasingly focused on one product.More In Apple
“IPhone has stunningly contributed about 90% of revenue growth over the last 12 months,” Toni Sacconaghi, a tech analyst at Bernstein Research, wrote to clients following Apple’s quarterly results. “While we expect a very robust iPhone 6 product cycle, buoyed by share gains and an accelerated replacement cycle, we worry that the flip side of an accelerated iPhone replacement cycle in fiscal 2015 is that the cycle may revert ‘back to normal,’ potentially pressuring unit sales in fiscal 2016.”
Mr. Sacconaghi has a buy-equivalent rating and a 12-month price target of $110 on Apple. He notes that iPad, iPod and iTunes revenue are declining and the Mac, App Store and software services remain a relatively small slice of Apple’s overall results. “With the narrowness of Apple’s growth drivers and the risk of longer replacement cycles in mature markets over time, we worry that Apple could see increasing revenue pressure in mature markets that will be hard for other markets to overcome,” he said.
Apple shares are up about 30% this year, far outpacing the S&P 500′s 5% gain and the tech-heavy Nasdaq Composite’s 5.8% rally. Apple first crossed above $100 in August and on Sept. 2 set its previous all-time intraday and closing highs above $103.
Apple would only need to rally about 6% over the next 12 months to hit Mr. Sacconaghi’s target.
As the chart below shows, Apple rallied about 6% in the month that followed the iPhone 6 product announcement. That’s a far larger gain than what typically has taken place following other iPhone announcements, according to Mr. Sacconaghi.
“Unlike other iPhone cycles, Apple’s stock has modestly outperformed in the few weeks following the iPhone 6 product announcement, after largely performing in line in the two months prior,” Mr. Sacconaghi said. “We do worry about expectations for the stock – which are likely to further increase following the company’s strong results and bullish conference call.
“We encourage investors to carefully monitor estimates, but for now, believe that rising EPS forecasts and an attractive valuation are likely to continue to propel the stock near-term,” he added.
Citigroup Inc. has hired Scott Schlossel as a managing director within its leveraged finance team, covering the energy and chemicals sectors, according to people familiar with the matter.
Mr. Schlossel, based in New York, will join Citi in November from RBC Capital Markets.
He replaces Chris Abbate, who left Citi earlier this year to join energy and power-focused private-equity firm Riverstone Holdings LLC.
Citi’s recent energy deals include leading a $400 million 8.5-year senior notes offering for oil-and-gas company BreitBurn Energy Partners LP and jointly arranging a $275 million term loan for Callon Petroleum Co., according to S&P Capital IQ LCD.
The deal in the spotlight now: Mylan Inc.’s $5.3 billion acquisition of part of Abbott Laboratories’ generic-drugs business.
Mylan announced changes to the terms of its deal with Abbott in a regulatory filing Wednesday. But analysts and investors seem to believe that tweaking the deal is a sign that it will still happen.
To be sure, the changes are another in a string of repercussions stemming from the Treasury Department’s new guidance designed to curb the appeal of tax inversion deals. AbbVie cited those new guidelines as a key reason its board recommended against buying Shire.
Barclays analyst Douglas Tsao said in a note that the new terms show that both Mylan and Abbott are committed to making sure the deal moves forward.
Miles White, the chairman and chief executive of Abbott, didn’t comment directly on the deal beyond the new terms but he tried to assure investors on the company’s quarterly investor call with analysts Wednesday. Mr. White said he expected that the new terms plus the fact that Abbott is reporting the generics part of its business as “discontinued operations” should take away some uncertainty about whether or not the deal will close.
Under the updated deal terms, Abbott Labs will receive a slightly larger stake in the new entity, roughly 22% instead of 21%. In exchange, Abbott said it would manufacture and supply products to the new company with better pricing terms.More In Inversions
The move to give Abbott a larger stake in the new company appears to be an attempt to make the so-called inversion more bullet-proof in the eyes of the U.S. Treasury. The hurdle for a U.S. company to invert into a new tax jurisdiction is buying a company roughly 20% of its size.
Investors, particularly Mylan investors, did not appear to like these new terms. Abbott Labs’ stock moved down less than 1%, while Mylan’s fell 3%.
While both management of Abbott and Mylan reiterated their commitment to closing the deal, one parallel to the AbbVie-Shire deal may still be giving shareholders headaches: AbbVie’s management had been assuring Shire’s employees that the deal would certainly close as of late September, after the Treasury released new guidelines. Yet two weeks later, AbbVie’s board said otherwise–and the deal was off.
– Jonathan Rockoff contributed to this post.