LIBOR Financial Volume 6, Issue 4

By November 24, 2015Newsletter
Volume 6, Issue 4
November 8, 2015

US ECONOMICS.

The US economy added 271,000 new jobs in the month of October, and even more startling is the fact that wages grew at a faster pace than ever since 2009.  The average private sector employee saw their wages increase by 2.5 percent. Additionally, the unemployment rate is now at 5 percent, which is near the 4.9 percent rate Fed officials believe is normal for the economy. This means that the economy is at a level of full employment and that the people who are unemployed may be transitioning between jobs or are looking for a better job. Many people feared that a sluggish global market and an appreciating dollar would have resulted in a bleak jobs report, however that was not the case. This is significant because this may be the strongest case for the Federal Reserve to consider hiking up short-term interest rates in next month’s FOMC meeting.

Many people believe that after a strong jobs report, it still may not be a good idea for the Federal Reserve to raise interest rates. Although the economy added a lot of jobs, they were in domestic industries such as restaurants and retail. While industries such as manufacture and mining, which are affected more by the global market, were stagnant for the month of October. Thus, raising rates may only hurt those industries. We are also heading towards holiday season; retail companies add more jobs during this season, and should not be considered part of the jobs number. Thus, there may be some weakness in the US economy and it may be a good idea to not raise rates just yet.

Neil Gandhi  

GLOBAL ECONOMICS.

Asia: China offers a nod of approval for IPOs

On Friday, China announced that it will resume initial public offerings in the country, which were suspended in July when China’s government took sweeping measures to retain money in existing stocks. The China Securities Regulatory Commission said that it has already approved offerings for 10 companies that will be on the market in around 2 weeks, along with another 18 offerings in the pipeline to be launched by year-end. Unlike its major international economic counterparts where firms (like investment banks) sponsor offerings, the CSRC decides what company can go public and when. In the past, Chinese authorities have used this IPO approval process to maneuver the market. With that being said, the ban lift is the CSRC’s vote of confidence that the stock market has largely recovered to its normal state.

Latin America

Brazil’s political dilemma is posing as a significant road black to balancing its books and stimulating the lagging economy amid a deep recession. President Dilma Rousseff, a member of the left-wing Worker’s Party, faces resistance from even her own party for her austerity measures, which favors more stimulatory spending. Opposing parties blocked administration from auctioning contracts for 29 existing power plants for $3 billion in upfront fees, which was meant to funnel money into the National Treasury and shrink the massive budget gap. Earlier in October, Fitch downgraded Brazil’s credit ratings to just one notch above junk status, asserting that the political stalemate makes it difficult to see a “swift and meaningful” turnaround in the country. Though more Brazilian adults have been using banking services (84.5%, up from 60.8% in 2005), only 12% of Brazilians have money dedicated to a savings account. the lowest level in the BRIC countries. Brazil’s $13B primary budget deficit makes the country’s economic prospects weak, underscored by the current political conundrum.

Europe

To see the early ripple effects of China’s stock market correction, one simply has to take a peek at sluggish demand in key European economies. In Germany, orders in the manufacturing industry, which serve as the backbone for German economy, have gone down for the third straight month. Officials cite the reason for this tepid growth to be the decreased demand from outside the Eurozone. Manufacturing orders from outside the Eurozone in the third quarter dipped 8.6% from the second. Meanwhile, the U.K. faces a similar problem. GDP growth has dwindled to 0.5%, which was down from second quarter’s rate of 0.7% and below the Bank of England’s forecast of 0.6%. The slumping manufacturing industry and the strong dip in construction output has been cited as a main cause for the decline. This factor, in conjunction with the strong pound, has caused demand for British-made goods to shrink for three straight quarters.

Akriti Nagpal  
“Making Russia Great”: Reader Response

The conflict in Syria is very complex with a number of groups involved, including the Syrian Government, Syrian rebels, Russia, Iran, Saudi Arabia, Turkey, the Islamic State (IS), and a few Western powers (The United States and, to a lesser extent, France and the United Kingdom). Syria was intended to be the third power more closely aligned with Russia in the Middle East, to be toppled by Western powers under a banner of “democracy” and “freedom.” As one can readily observe, the first two iterations of this strategy in Iraq and Libya were tremendous failures, greatly destabilizing those countries.

The conflict we see to today is in essence a proxy war between the United States (and its allies) and Russia (and Iran). This proxy war was initiated by the United States in the form of funding, arming, and attempting to train rebels. For the moment, let us set aside the common Western concept of Russia and Iran being members of the “Axis of Evil.” Russia is the only country, aside from Iran, that has received permission to operate in Syria’s borders. The United States and its coalition’s airstrikes, and more recently, troop deployments (making this an illegal war) in Syria clearly violated Syria’s sovereignty. So in principle, Russia is an invited power protecting a weakened sovereign nation from internal (IS and Syrian rebels) and external threats (opportunistic neighbors and Western powers), almost the complete opposite of Russia’s position in Ukraine. Yes, the movement of Russian forces was accomplished under false pretenses(the stated purpose of Russian military involvement was attacking the Islamic State), but it is by no means a Russian occupation.

Michael Nehring  

EQUITY MARKETS.

Energy Stocks Outlook

Despite the drop in energy stocks in August, there are potential gains for this sector in the near future. The S&P 500 Index dropped 11.1% from August 17 to August 25, however it has come all the way back, gaining 13.1% from that point through November 2. During the August “semi-crash”, total return for the energy sector was the worst when compared to all sectors. It had dropped 14.5%; however, since then it has had the biggest turnaround with gains of 19.4% through this past Monday. There have always been investors who pick up stocks in energy commodities when the prices are weak to make gains when the market recovers. The current outlook for the energy sector is still positive. Saudi Arabia is currently producing excess amounts of crude oil, which has caused oil prices to halve. Saudi Arabia and its OPEC partners want to corner the U.S. shale-production industry and their efforts are working thus far. Shale-production is more expensive and difficult, and industry experts are projecting consolidations or bankruptcies of small, specialized U.S. shale-oil producers. This means that investors have to remain patient, but investing in large oil companies will have a pay off in the future. Exxon Mobil Corp (XOM), Chevron Corp (CVX), and SchlumbergerNV (SLB) are companies worth considering that can take advantage of the eventual rebound in oil prices. These are long-term investments; however, there may be potential big gains for investors.

Akul Desai  

STOCK HIGHLIGHTS.

TABLEAU SOFTWARE (DATA): BUY

DATA reported its quarter results this past Thursday, revealing that the company beat analysts’ estimates on its top and bottom lines. As a result, thestock price soared 20% before the closing bell. The computer software company saw a 63.5% increase in revenues year over year as well as doubling analysts’ expectations of its earnings per share to $0.14. Over the past few months, DATA announced a partnership with Deloitte Consulting LLP and integration with Amazon Web Services, boosting DATA’s revenue and name recognition in the process. Also, as cloud services begin to grow in demand, DATA’s 9.1 software will surely benefit from the growing market. Analysts view the company’s outlook as promising, especially if it can take advantage of its new partnerships and the growing demand for big data firms.

GROUPON INC. (GRPN): SELL 

GRPN experienced a 65% decline in its share price so far this year, and outlook for the daily-deals site does not seem promising in the near future. Third quarter earnings reports revealed that the company experienced a net loss of $27.6 million along with a disappointing top line. Additionally, shares fell 25% after GRPN announced its new CEO, Rich Williams, reflecting investors’ dwindling confidence in the company’s senior executives. The shortcomings are a result of the company’s inability to attract and retain long-term customers as well as the growing competition within the industry. Mr. Williams aims to take a bold series of measures to steer the company in the right direction including investing more into its marketing plan, cutting 1,100 jobs, and restructuring its global strategies.

Matthew Lee  
Lawrence Lung  

FIXED INCOME MARKETS.

A Friendly Jobs Report: Higher Treasury Yields, A December Hike, and Scandals

Friday morning, all eyes were on the non-farm payroll report. The unemployment rate came in at 5.0 percent, the lowest since 2008, as the U.S. economy created 271,000 jobs in October, a sharp increase from weak numbers in both August and September. After the release of strong employment data, yields on short-term U.S government debt rose to a five-year high and the numbers solidified expectations of a possible interest rate hike by the Fed in December. As yields increase, the price of these bonds decrease, putting more pressure of the sale of these instruments. Likewise, investors eased up on bonds, concerned that the value of their bond holdings would shrink by a shift in the Fed’s loose monetary policy. The yield on the benchmark 10-year Treasury note also rose to the highest level at 2.33 percent since July 21. The timing for this positive report could not have been better for the Fed. Earlier this week, comments from Fed officials strongly hinted a December move and this is exactly the sort of data that bolsters the credibility of the move when, and if, Fed chair Janet Yellen announces the hike.

The effects of U.S. bonds flowed into European government bond markets, sending yields higher in Germany, the U.K., France, and Belgium. Moreover, the dollar index, a measure of the U.S. currency against a basket of currencies, was up 1.2 percent. The majority of this increase was due to a 1.3 percent slide for the euro to $1.0737. A lot of pressure has been surrounding the euro following the expectations that the European Central Bank could expand its asset-buying program as early as December, coinciding with the possible U.S. rate increase.

On a bit more of a scandalous note, two Rabobank traders were convicted of manipulating U.S. Libor, a key benchmark interest rate.  This was the first jury to hear evidence about the case and the New York jurors focused on the simple fact that these Traders skewed the rate to benefit the bank’s trading positions and, essentially, themselves.

Krina Patel  

CURRENCIES.

After the hawkish FOMC statement this past week, there is strong promise of a December rate hike. The Federal Reserve’s outlook, compiled with other banks’ monetary easing policies, has caused the dollar to end as the strongest major currency recording broad based gains. The dollar trade-weighted index, which measures the currency against major trading partners, has appreciated 7.26 for every cent since the August low. The dollar index was also up 1.2 per cent, and just 1.3 per cent short of a 12-year high struck in May. Strong data such as US non-farm payrolls rising by 271,00, compared to estimates of 182,000, and the jobless rate falling to 5.0 percent contributed to this rally.

The BOE’s vote was decided at 8-1 to keep the Bank rate unchanged at 0.5 percent with only one dissenter proposing a rate hike. In Australia the RBA, seemingly unconcerned with recent global developments, noted in an accompanying statement that the global economy will be expanding at a ‘moderate pace’. In line with their thinking they left the cash rate unchanged at 2% in November, despite tighter credit.  Finally in Japan the BOJ’s meeting showed that domestic demand remained unfailing despite stagnant growth in exports and the economy. This motivated them, believing the underlying inflation trend would continue to improve, to continue QQE implementation and the asset purchase program to increase the monetary base at an annual rate of annual pace of about 80 trillion yen. In response to global economic issues and China’s slowdown, there was again an 8-1 vote to continue the asset purchase program.

Sahil Bambulkar  

COMMODITIES.

Oil futures settled at $44.52 at this Friday’s close, suffering a weekly loss of 4.9%, after a blowout US October jobs report made a decision by the Fed to raise interest rates during December much more likely. Traders also shrugged at news that the Obama administration rejected the Keystone XL pipeline construction proposal. There are 64% fewer rigs from a peak of 1609 in October 2014. A barrel of oil fetched more than $100 in June 2014, but a combination of ample supply and weaker demand has driven the international benchmark price to about $50 in the third quarter, the lowest sustained levels since the financial crisis. Although US producers are tightening supply, other major suppliers including OPEC and Russia continue to produce at a high pace to defend their market share. Iran, which holds 13% of the world’s oil reserves, is expected to ramp up oil exports, when economic sanctions against the country are lifted following July’s nuclear agreement.

The prospect of higher interest rates will lead to a stronger dollar, which in turn will push down prices for international commodities. As stronger economic and employment data lifted the dollar, gold and precious metals also fell. Gold settled at $1088.90 a troy ounce, down 4.7% this week.

Madhav Kunal  

DEALBOOK.

Interest Rates and M&A

On the heels of an incredibly strong October employment report, the global market may finally receive a long-delayed present this holiday season: the Federal Reserve may actually raise interest rates this December. The expectation-beating 271,000 increase in payrolls as reported by the Labor Department may finally signal that the economy ishealthy enough for an interest rate hike this year.

Such a change would, among other large effects, almost certainly cause a dramatic slowdown in the frenetic pace at which M&A and IPO deals have been taking place. For example, this week alone, Visa announced a deal to buy its former European unit for $23.3 billion, Activision Blizzard made a strange discount purchase of struggling Candy Crush maker King Digital Entertainment for $5.9 billion, Expedia made a deal for online vacation rental site HomeAway valued at $3.9 billion, and pharma giant AstraZeneca PLC said it had agreed to acquire California-based biopharmaceutical company ZS Pharma for $2.7 billion in cash.

So far this year, according to Dealogic, global M&A volume has surpassed a record $4 trillion in 2015, with 37% of deals being $10+ billion ones (thanks in large part to the health care industry). Moreover, companies like Berkshire Hathaway profittremendously from large deals that occur. And, to top it all off, though IPO deals have been occurring less frequently around the world than in years past, companies likeSquare and Atlassian are announcing large billion dollar valuations through IPOs.

According to investors, these incredible numbers are largely a result of low interest rates and stagnant world growth. Companies had difficulty in finding organic growth, so they borrowed at low rates to buy or merge with competitors and to show better earnings data through the synergies, cost-reductions, and controversial tax-inversionsthat M&A offers. This is evident in the amount of debt that recent deals have been comprised of, and indicates that once the cheap borrowing is unable to occur as much as it currently is, M&A will likely slow down significantly. And, given that large M&A deals are often anticompetitive and conducive to unnecessary increases in prices, a slowdown in mergers might be a good thing for the economy.

That being said, not all is certain with regards to the Fed’s future policies. Though there was a large increase in wage growth in October, overall growth is still not as strong as it could be. This is supported by the Phillips Curve framework, which states that the unemployment rate is below what it naturally should be in the long-term, wage growth will be higher and inflation should rise relative to expectations. As of right now, inflation is still at incredibly small levels and it is difficult for economists to know if the current jobless rate of 5% is near its long-term figure. Thus, it is still unclear whether or not it is truly the right time for the Fed to take action.

All in all, the next few weeks will certainly prove to be interesting in the M&A space.

Saaketh Krosuri  

TECHNOLOGY.

Nasdaq Locks in Sixth Straight Week of Gains

Tech stocks went up again on Friday to lock in their sixth straight week of gains; the Nasdaq Composite rose 0.38%, or 19.38 points, to close on Friday at 5,147.12, nearing its 52-week high of 5,231.94. Notable earnings reports from this past week came from Facebook (FB), Tesla (TSLA), and Nvidia (NVDA). Facebook reported Non-GAAP third-quarter earnings of 57 cents per share compared to a 52 cent Wall Street consensus, citing growing mobile ad revenue and monthly active users (MAU) — now at 1.55 billion compared to 1.49 billion in the previous quarter. Tesla reported Non-GAAP third-quarter earnings of ($0.58) vs. analyst estimates of ($0.56); however, Tesla shares shot up from a market close of $208.35 to a high of $228.70 during after-market hours citing strong Model S sales and talks of production targets for the new Model X. Nvidia reported GAAP earnings of 44 cents per share, blowing analyst estimates of 25 cents per share out of the water, citing growing sales in the company’s GeForce GTX graphics processing units for gaming and automotive systems.

Don’t Count Micron Technologies Out Just Yet

Micron Technology (MU), now down -53.01% YTD, may provide an attractive opportunity to long-term value investors. Despite Intel’s recent announcement to invest up to $5.5 billion over the coming years to expand its NAND manufacturing capacity, resulting in a crashing of Micron’s stock price, Micron is poised to produce long-term growth. Micron Technology reported a positive non-GAAP EPS of $0.37 for its fiscal fourth quarter, topping analyst estimates of non-GAAP EPS of $0.33, despite continuing weak PC sales and DRAM pricing pressures. Additionally, management expects the demand environment for DRAM and NAND to stabilize and improve onwards through calendar 2016, and with rollouts of new smartphones in the fourth quarter of 2015, mobile DRAM memory demand is expected to rise. Furthermore, with technological advancements pursuing greater implementation with cloud computing, Micron’s new developments of 3D NAND and 3D XPoint Technology may provide long-term returns.

Andrew Yang  

LIBOR UPDATES.

This week LIBOR members had the opportunity to network with and learn about several different firms on campus. Tuesday evening, LIBOR members networked over pizza and refreshments with representatives from Nomura after an on-campus presentation about Sales & Trading and Research positions at the firm. Additionally, on Wednesday,LIBOR hosted alumni and other members of the Investment Banking Division of Barclays. This upcoming week, LIBOR will be hosting an information session with members from the Private Equity group of Goldman Sachs Hong Kong.

This past weekend, LIBOR hosted the annual Bender Trust project presentations. The Bender Trust project is a semester-long equity research project during which teams ofLIBOR members attend workshops and work together to give a brief presentation of their stock and a final recommendation. Overall, presentations to LIBOR E-Board and mentor Greg Francfort of Neuberger Berman went extremely well, and LIBOR members had a very positive and constructive learning experience.

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