Breakfast on Wall Street – 05 September 2013

Yesterday’s data releases, especially data on US consumers, were nearly all positive and this helped markets advance for a second day. The S&P 500 rose 0.81% to end at 1,653.08, while the NASDAQ was up just above 1% to close at 3,649.04.
It was auto sales and the Fed’s Beige Book that primarily drove market sentiment. The Federal Reserve Bank publishes the Beige Book (officially, Commentary on Current Economic Conditions) eight times a year with countrywide data submitted by the twelve district Feds. It is scrupulously tracked by all market participants for consumer and business data, and more importantly now, to gauge the Fed’s sentiment. The Beige Book reported “modest” to “moderate” growth across the country and an increase in consumer spending—especially in auto and housing sectors—in nearly all twelve Federal Reserve districts.
Seasonally adjusted total vehicle sales data echoed the Beige Book’s positive outlook on the automobile industry. In an earlier article, we had already predicted this trend. We had based our forecast on easing lending standards and higher consumer confidence.

Our bullish call was accurate; the largest auto manufacturers by market share in the US have performed better than we expected. Ford’s sales have risen 12% YoY and GM’s sales have increased 15% YoY. The stock market reacted favorably to the news. Ford Motor Co. (NYSE: F) was up 3.5% yesterday, while General Motors Corp. (NYSE: GM) has risen over 5%. US car sales are now at pre-slump levels. We expect this trend to continue as lending eases, spreads in Asset Backed Securities (ABS) and Mortgage Backed Securities (MBS) tighten and employment numbers become better. The mortgage markets have also improved as MBA Mortgage Applications rose by 1.3%, compared to a drop of 2.5% last month.

Today’s Menu


Two deals in the last few days are making headlines:

  • Verizon Communications Inc.’s (NYSE: VZ) much-awaited $130 billion acquisitions of the 45% stake Vodafone Group PLC (ADR NYSE: VOD) held in it.
  • Microsoft Corp.’s (NASDAQ: MSFT) acquisition of t Nokia Oyj’s (NYSE: NOK) handset business for $5 billion and an additional $2.2 billion for a 10-year license to Nokia’s patents.

With these two crucial deals, the entire landscape of cross-border acquisitions is significantly affected. While global (ex-US) M&A had primarily focused on real estate and telecom this year, the US telecom industry now leads the way with a total deal value of $143 billion (with the recent Verizon acquisition accounting for a whopping $130 billion of that). Real estate in the US ranks third by total deal value, and it now totals $26 billion.

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The M&A landscape had changed completely after the dot com bust and by 2003, total quarterly deals fell below $400 billion. As lending standards eased, deal volumes rose rapidly from 2004 and peaked in Q2 2007. Post 2007, deal volumes fell sharply as the financial crisis caused credit to dry up across the globe. Even at the height of the crisis in 2008, global deal volumes were at pre-2003 levels, signifying a structural change in deal making. M&A has now recovered sharply and the numbers, though far from the $1trillion and above it was at its peak, is back around 2005 levels.

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Surprisingly, the average deal premium has remained fairly constant through the boom and the crisis. A look at the fitted polynomial shows the current rising trend and how premiums are moving beyond peaks – though on lesser volumes.

The Verizon-Vodafone Deal – An Investment Opportunity?

The Verizon-Vodafone deal is the third largest corporate deal announcement – ever. Verizon is buying off Vodafone’s 45% stake in the US firm for $130 billion, of which $58.9 billion will be paid in cash, while $60.2 billion will be in stocks, and the rest is for additional acquisitions. Vodafone’s ADR (NASDAQ: VOD) ended down 32c on the day of announcement, and closed yesterday at $32.41; while Verizon’s (NYSE: VZ) stock ended the day down $1.37 on announcement, but moved up to $46.78yesterday. Verizon has a 3-year growth of 7.94% in its wireless business and estimates the merger to be 10% accretive to earnings from the current year. But we do not see how Verizon will gain from this acquisition except that it may help the company to make better management decisions in future. While we will observe the situation closely over the next few quarters, we believe Vodafone was the gainer in this deal and the focus will be on its European operations where the recession has affected the company’s earnings and growth. Vodafone was trading at its 52-week high on Monday when the deal was announced and it fell marginally after that. It is now trading at a forward P/E multiple of 12.96, compared to 16.43 for Verizon. Vodafone has the highest subscriber base among its peer group and together with its 6.64% dividend yield, the stock definitely looks attractive to us. With the cash hoard from the acquisition, we believe that the firm will be able to further improve upon its market share and video technology (which the company has indicated will be its focus) in the coming months.

The Microsoft-Nokia Deal

This is a comparatively smaller deal at $7.2bn, which received a lot of press due to the players involved and the longer-term implications of the acquisition. Microsoft is finally plunging into the tablet/handset market where it has only been a peripheral player up to now. Nokia’s market share has fallen in the last few years, losing out steadily to Apple (NASDAQ: AAPL) and Android devices like Samsung and HTC. But Nokia is still the second largest phone company in terms of shipment (14% market share) after Samsung (24.8%) and ahead of Apple (7.1%), LG (3.8%) and ZTE (3.4%). However, it is imperative to remember that its market share in dollar value is only 5.9%, compared to Samsung’s 37% and Apple’s 22%. Nokia needs to find an entry into smartphones and higher price points to change these numbers. The market has largely overlooked Microsoft’s Windows mobile operating system and Android and Apple are the clear market leaders. But we are not convinced that Microsoft and Nokia—with both their waning market shares and ‘clunky’ image—can help each other out. We had warned in an earlier publication against the ‘Ballmer rally’ and asked investors to sell the stock (or look for value in put options). The prediction has already come true and the stock is trading at $31.88 – down nearly 10%. What we will closely observe, though, is how Microsoft uses Nokia’s patents, for which it has paid $1.5 billion for a 10-year license.


LinkedIn to Raise $1.2 Billion In Follow-On-Offerings

LinkedIn Corporation (NYSE: LNKD) has priced its class A shares at $233.00 per share for its follow-on-offerings. The company plans to sell 5.4 million shares and this is expected to raise $1.2 billion. It is planning to utilize this money for product development and international expansion. On Wednesday, LinkedIn’s shares slipped 2.6% to finish at $232.60 in after-hours trading.

Reuters – Wed, Sep 4, 2013 8:11 PM EDT

Samsung Launches Smart Watch and New Galaxy Note

On Wednesday, Samsung launched a new smart watch and a new version its flagship mobile phone offering, the Note range. Samsung’s smart watch has exciting features that allow users to make calls, take photos and the watch even runs its own applications. Galaxy Gear will be launched in 140 countries and will be available in six different colors with ten pre-loaded clock options.

US July Import Data Worsens; Leads To Widening Of Trade Deficit

US trade deficit rose more than expected in July 2013 due to a decline in exports and rise in imports. The deficit increased by 13.3% to $39.10 billion. Adjusted for inflation the deficit rose to $47.7 billion. Industrial supplies, automobile and consumer goods were the major drivers of the import demand.

Federal Reserve to Receive One More Report before Tapering QE

The Federal Reserve is expected to receive one more jobs report before it takes the important decision to reduce the market stimulus. The consensus estimate suggest that the non-farm payroll data that will be released on Friday is expected to show an addition of 175,000 jobs in August 2013, which will bring down the unemployment rate from 8.1% to 7.4%. The Federal Reserve will take an important decision about scaling back the $85 billion market stimulus it started in September 2012.

Apple’s Problems Increases in China

Apple Inc. (NASDAQ: AAPL) seems to be having problems in launching its speculated new iPhone in China. It is struggling in its negotiations with its Chinese carrier, China Mobile Ltd. Since the latter holds 63% of the country’s wireless accounts, it is able to dictate terms in this deal. The iPhone is too expensive in comparison to its competitor K900 of Lenovo Group Ltd. but Apple is not willing to provide concessions and neither is China Mobile is ready to subsidize an expensive product.

Resolution for striking Syria cleared by The Senate Committee

On Wednesday, the US Senate Foreign Relations Committee voted 10-7 in favor of authorizing President Obama to conduct military operations against Syria for its alleged use of chemical weapons. This clears the first hindrance in the way of Obama administration as it seeks approval for military action in Syria. The resolution, however, only allows the use of force in a “limited and specified manner against legitimate military targets” for a period of 60 days. It does not allow the US government to use troops in combat.


Important employment data releases are coming out today. Forward-looking employment indicators like Challenger Job Cuts and ADP Employment change will be released pre-market. We also have Initial and Continuing Jobless Claims data releasing today. Additionally, business-related indicators—ISM Non-Manufacturing Index, Factory Orders and Non-Farm Productivity—are being announced later in the day. We expect to see marginal improvement in the employment market as the jobless recovery continues. The employment data, together with the jitters caused by potential military attacks on Syria, may cause markets to fall.

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