LIBOR Financial Volume 6, Issue 6

By November 24, 2015Newsletter
Volume 6, Issue 6
November 22, 2015

US ECONOMICS.

On Wednesday the Federal Reserve came out with its strongest indication that they will raise short-term interest rates when the FOMC meets in December. When the news broke, the stock market actually went up – mainly because the rumor of an interest rate hike has been in the news for so long that it was already fixed into the price of the market. Many Fed officials still realize that there is weakness in the economy with inflation still not reaching the Fed’s target of 2 percent. Thus, we will surely see a gradual raise of rates, and it will be some time until rates are at the normal level.

It is also expected that reports on housing, inflation and a revised 3Q GDP growth will soon be released. The real estate market has recently been on the rise, which strongly correlates with the US economy since houses are the most expensive thing people purchase. The rate of foreclosure has been at its lowest rate since 2005. Sales of existing homes rose 4.7 percent in September, however, new homes sales decreased. Inflation is still low and as previously stated has not reached the Fed’s desired 2 percent. However, as unemployment decreases and consumer spending increases, the rate of inflation will rise, which is a good sign since it means people are spending money. Also, most people are hoping a revised 3Q GDP report comes out after the initial report stated the 3Q grew at 1.5 percent.

Neil Gandhi  

GLOBAL ECONOMICS.

Global Domino Effect: Terrorism Rampant

In this past week, Europe as a whole experienced an unfortunate amount of grief and sorrow as it reeled from the back-to-back attacks from the Islamic State of Syria and other terrorist organizations. In the Paris attacks, there is a rising fatality rate around 130 people. Not only do these attacks instill global fear but also significantly impact the global markets.

As a result of the terrorist attacks, global travel companies, such as Expedia, will be trending downwards as less people are inclined to travel to these tourist hotspots. Paris last year was the number one tourist location having 83.7 million visitors, but will likely temporarily decline. In the past, terrorist attacks only had a short-term impact and economies typically rebounded positively by the end of the year. Additionally, consumer spending is expected to go down, as people won’t want to go to big markets due to safety concerns. Inversely, government spending will go up, as counties will be taking measures to prevent future attacks.

Overall psychological effects will deter spending in the short run, however, by the end of the quarter markets should go back to their original position. Due to border security, the Schengen’ border-free zone is at risk of being dismantled. This zone allowed travel between European countries without visas, which promoted trade and overall economic prosperity.

Vishaal Kanitkar  

EQUITY MARKETS.

U.S. Equities Market Continues to Grow

The equities market continues to show growth and a positive outlook for the rest of the year. The S&P 500 had its highest week of gains in about a year with a rise of 3.2 percent for the week, while the Dow Jones Industrial Average increased 3.3 percent, and the Nasdaq Composite is up 3.5 percent. The market seems to be focusing on the growing talk of a rate hike. Investors have gained confidence after the release of last month’s Federal Reserve meeting minutes. It appears that U.S. interest rates will increase soon after clarification from the meeting’s discussion, but that rate rises will come gradually and slowly.

Across the board, many interesting events happened this week. Nike unveiled a stock split, increased its quarterly dividend, and experienced a share increase of 5.5 percent. Although healthcare stocks have been very volatile in the past year, this sector showed an increase of 0.7 percent this week. Energy stocks dropped; however, oil prices rebounded slightly. Oil prices are a topic that is currently somewhat unclear to investors, as it appears they are neither going to drastically increase or decrease in the short term. This is good for the utilities and consumer-discretionary sectors, which posted increases on Friday. Consumers will be inclined to spend in these sectors with energy prices staying low. The European Central Bank also stated that a stimulus plan is continuing to be developed and will soon be ready to be implemented. Investors are closely following this to see the form in which this stimulus might be conducted. Overall, the equities market consistently remained positive for the most part, and will likely show steady growth in the coming weeks.

Akul Desai  

STOCK HIGHLIGHTS.

ALPHABET (GOOG): BUY

GOOG shares rose 0.87 percent to $766.53 after Diane Greene, co-founder and former CEO of VMWare, was announced that she would take charge of the cloud and business application software team. The company also announced that it would be acquiring Bebop Technologies, another software company that Green co-founded. However, GOOG is lagging behind its competitors, with Amazon having a public cloud larger than four of its top competitors combined. Still, the company has implemented features into its other products in order to attract investors: GOOG has released a revamped mobile-friendly Google+ and also plans to launch the China version of Google Play next year. Under the management of Greene and its other newly improved products, GOOG hopes to maintain its market power in the cloud business.

CHIPOTLE (CMG): SELL

CMG plummeted 12.5 percent to close at $536.19, which highlights its worst drop in over three years. The drop in its stock stems from an E. coli outbreak that has infected 45 people and has spread to over six states: CA, MN, NY, OH, OR, and WA. The food-poisoning crisis is suggested to come from a common meal item, specifically a vegetarian product, says the Centers for Disease Control and Prevention. The E. coli situation has tampered with the company’s stock because of its driving focus of high-quality products in comparison to other restaurant chains. However, given the chain’s popularity, the outbreak may not affect its business in other countries of operation. Still, given that this was not confined in a geographical region, the epidemic will tarnish CMG’s reputation from the western coast to the eastern coast.

Matthew Lee  
Lawrence Lung  

FIXED INCOME MARKETS.

Earlier this week, U.S. sovereign bonds were faced with mixed yields in response to the Paris attacks and the possibility of an interest rate hike before the end of the year.Sovereign bonds are national government issued debt securities that are denominated in a foreign country. Investors are concerned with the global economy as the security of Paris is under watch. Moreover, the release of the FOMC meeting minutes revealed strong support for a December rate hike however, some continue to worry that the long term potential has permanently lowered. While the 10-year Treasury closed slightly higher on Wednesday at 2.269 percent from 2.261 percent on Tuesday, the 30-year bond yields were lower at 3.040 percent on Wednesday from 3.047 Tuesday. Globally,German bunds slid over the week from 0.531 percent on Tuesday to 0.485 percent on Friday, hitting a record low on Monday as investors sought to protect their money.

Towards the end of the week, however, U.S Treasury yields stabilized and moved lower as bond prices increased, with the U.S. Treasury closing at 2.25 percent for the week. After several prominent central bank speakers spoke on their opinions towards a December hike, U.S. Treasury yields were higher on Friday. Specifically, St. Louis Fed President James Bullard believes there is a good chance that U.S inflation will hit 2 percent by the end of next year and commenting on the stable state of the job market. Overall, there are mixed opinions about a December hike, but strong economic data and investor confidence that global markets will stabilize increases the likelihood of a rate raise before the end of 2015.

Krina Patel  

COMMODITIES.

US Shale-Oil Producers Face Diminishing Returns

WTI Crude Oil futures settled at $41.90 at this week’s close. US producers continue to struggle and most shale-oil producers are showing negative returns. In fact, US companies are surprising many global rivals by continuing to produce at around $40 a barrel. US producers are slashing jobs and salaries heavily, and if necessary also closing down rigs. The Oil Industry has idled more than $100 billion in spending this year to cope with oil prices that have fallen by more than half since last year. Drillers are using the fewest number of rigs since 2010 (pre-boom levels). US oil production is expected to fall by more than 5 percent to 8.8 million barrels a day in 2016, down from current levels of 9.3 million barrels a day this year. Major exporters Saudi Arabia and Iraq continue to produce at high levels as they pursue market share.

Base Metals Market Sinks to Multi-Year Lows

The base metals market is hitting new lows as demand from China slows, and the dollar strengthens (in anticipation of interest rate hikes from the Fed amid positive economic forecasts). The London Metal Exchange’s three-month nickel contract fell 2.4 percent to $8,735 a metric ton, a 12½-year low. Copper sank to a fresh six-year low, with the most-active New York futures contract declining 1.1 percent Friday to $2.0550 a pound. These commodity declines are putting pressure on some of the world’s largest miners, such as Glencore PLC and Russia’s MMC Norilsk Nickel, and pose concerns to emerging-market nations whose economies rely heavily on commodity mining.

Madhav Kunal  

DEALBOOK.

There were many interesting events that took place in the M&A and IPO space this week. Marriott International announced a surprising $12.2 billion deal to acquire Starwood Hotel & Resorts, notable for the brand Sheraton as well as W and Westin. The acquisition will create the world’s largest hotel company with 1.1 million rooms in more than 5,500 hotels around the world. The merger follows a consolidation trend taking place in the hotel sector due to rising room prices, occupancy levels and competition from rapidly growing startups like Airbnb, as there have now been $50 billion worth of transactions in the sector so far this year according to Dealogic,.

Another interesting deal that occurred this week was online payment company Square’s modest but successful $243 million IPO on the New York Stock Exchange. The company, co-founded and led by Twitter co-founder and CEO Jack Dorsey, preceded its IPO by becoming the first company in 17 years to accept a lower target price below an expected range. Square’s $9 IPO price was far lower than the $11-$13 range that had been expected, resulting in a lower initial valuation of the stock. However, Square seemed to benefit from the move as its shares rose 45 percent in its debut trading session.

Other notable transactions include Tinder and OkCupid-parent Match Group’s roughly$400 millon IPO, French industrial gas company Air Liquide’s $10.3 billion deal for Pennsylvania-based industrial gas supplier Airgas, as well as DZ Bank and WGZ Bank agreeing to merge and create the third largest bank in Germany by total assets.

Yet, behind all the large valuations, synergies and profits that these deals create, lies a quiet and burgeoning feeling of discontent and fear. Starwood customers were very displeased at news of the Marriott merger due to the potential change in the company’s loyalty programs and many investors are increasingly skeptical of the valuations being thrown onto tech companies. Additionally, the rate and scale at which many of the deals are taking place are reminiscent of the 2008 financial crisis and the Dot-com Bubble. Due to the tame financing environment, shareholders and sellers are increasingly supportive of being bought out and going public, as evidenced by the sheer volume of deals occurring around the world ($2 trillion in U.S. targeted M&A Volume alone).

Surprisingly, while the numbers for this year are incredible, investors are still expectingsteady growth in the IPO and M&A markets next year due to huge expected IPOs for companies like Uber and Airbnb, and mammoth rumored deals like Pfizer and Allergan’s $150 billion proposed merger. Moreover, if Pfizer and Allergan’s deal goes through, investors are expecting even more tax inversion mergers to occur in the near future. This could spell bad news for customers, since consolidation by large companies tends to result in higher prices for products and services.

Thus, it is very important to think about how long things can truly continue the way they are. Consumer advocates and antitrust experts are now urging states to review mergers, specifically those of health insurers. Despite this, there has been little action done on the part of the government in response. For example, a much-awaited notice expected to curtail tax-lowering inversion from the U.S. Treasury Department proved to be much less drastic than anticipated, and somewhat relieving for dealmakers!

Saaketh Krosuri  

TECHNOLOGY.

Nasdaq’s Best Rally Since July

The Nasdaq Composite Index posted moderate gains on Friday, garnering 31.28 points, or 0.62 percent, to end the week at 5,106.78 and a weekly percentage gain of3.6 percent — its best rally since mid-July. Stocks climbed higher this past week as investors displayed their resiliency despite geopolitical risks from deadly terror attacks in Paris and Mali. Investor sentiment also improved amid positive signs from monetary policy discussion regarding the Federal Reserve and the European Central Bank. Investors came together this past Wednesday after meeting minutes from the Fed’s October assembly showed most officials were on-board for a potential December rate hike; Federal Reserve Vice Chairman, Stanley Fischer, said on Thursday that the Fed “[has] done everything [it] can to avoid surprising the markets and governments,” however, Fischer also reiterated that the Fed will continue to assess the data. PresidentMario Draghi made a statement on Friday that the European Central Bank would act quickly to boost inflation, possibly modifying its current bond-buying program and deposit rate to prevent inflation from falling below a target 2 percent.

SolarCity’s Glimmer of a Brighter Future

Currently down approximately 23 percent since its 3Q 2015 earnings report and down 45.7 percent YTD, SolarCity has been pummeled by investors as negative sentiment continues to weigh in. For the third quarter of 2015, SolarCity reported an adjusted loss of $2.10 per share, higher than the Zacks Consensus Estimate of a loss of $1.99 per share. Additionally, SolarCity missed its Q3 solar systems installation guidance of 260MW, coming in slightly below at 256MW; Q4 guidance is expected to result in the range of 280MW to 300MW of installations, taking expected total full-year installations to a range of 878MW to 898MW, below prior guidance of 920MW to 1GW. SolarCity shares were sent tumbling 18 percent after-hours trading on October 29. However, in its third quarter report, SolarCity has also announced that it will shift its focus on growth in efforts to cut costs and turn its cash flow positive by the end of 2016. Recent insider trading disclosed on November 16 to the Securities and Exchange Commission that Elon Musk bought 198,615 shares for approximately $5.25 million and that three SolarCity officers sold their combined 9,328 shares for a total of $247,663. On November 18, in a display of confidence, investment firm Silver Lake Kraftwerk made adeal with SolarCity to invest $100 million worth of notes, convertible into shares at $33 each. SolarCity’s expansive 1GW manufacturing facility located in Buffalo, New York is expected to be fully operational by early 2016, touting massive economies of scale that will achieve breakthroughs in the cost of solar power. With a solar investment tax credit of 30 percent set to expire by 2016-end, and SolarCity’s potential mass-scale production of high-efficiency solar panels, made possible through its June 2014 acquisition of solar panel manufacturer Silevo, SolarCity is a company to watch in the coming year.
Andrew Yang  

LIBOR UPDATES.

Last week, LIBOR focused its efforts on helping freshman and sophomore members come up with a “game plan” to land their dream internships. Kevin Cuskley, Director of the Rutgers Road to Wall Street Program, discussed the goal of the Program and shared “best practices” for underclassmen to be prepared come interview season.LIBOR Executive Board members also shared their own experiences with the underclassmen, providing key advice to help with early preparation.

LIBOR has several opportunities that its members and newsletter readers may be interested in. The Rutgers Department of Economics will be hosting its inaugural “Distinguished Alumni” lecture on December 2nd from 4:30 to 6pm. The title of the talk is “Job Opportunities on Wall Street” featuring Barry Nobel (Associate Vice President at NASDAQ, RU ’79). Additionally, ALPFA has provided a list of scholarships offered by various organizations that may be of interest to help pay down those student loans.

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