Dell Details

May 17th, 2016 12:56 pm

These are the details for the massive Dell deal. The various tranches add up to $20 billion and the total book was $85 billion. The Bloomberg note clearly manifests the demand for the various issues. So as an example the launch level on the 3 year was + 250 and the guidance level was 262.5 area. The initial price talk was a whopping + 325.

Via Blooomberg:

* Launch/Guid/IPT:
* $3.75b 3Y Fxd: +250; +262.5A; +325A
* $4.5b 5Y Fxd: +312.5; +325A; +375A
* $3.75b 7Y: +387.5; +400A; +437.5A
* $4.5b 10Y: +425; +437.5A; +475A
* $1.5b 20Y: +550; +562.5A; +600A
* $2b 30Y: +575; +587.5A; +625A
* Guidance area is 12.5bps

 

Inflation Data

May 17th, 2016 12:34 pm

Via TDSecurities:

TD SECURITIES DATAFLASH                   

US: Inflation Momentum Picks up Some Steam

·         Higher energy prices pushed the headline CPI index up a firm 0.4% m/m, marking the biggest monthly gain in this indicator since February 2013.

·         Core inflation was also firmer on the month, gaining 0.2% m/m, though the annual pace of core inflation decelerated to 2.1% y/y from 2.2% y/y.

·         The overall tone of this report was encouraging, suggesting some improvement in the US inflationary backdrop.

Higher energy prices, which rose 3.5% m/m on account of higher gasoline prices, pushed the headline consumer price index up a relatively firm 0.4% m/m in April, marking the biggest monthly advance in this indicator since February 2013. This was ahead of the market consensus for a slightly more modest 0.3% m/m advance. Excluding energy, prices rose at a slightly more modest 0.2% m/m pace. Core inflation was also relatively firm, gaining 0.2% m/m (up 0.195% m/m at 3 decimal places), on account of gains across a broad swathe of components in the consumer basket. On a year ago basis, however, the pace of core inflation decelerated to 2.1% y/y from 2.2% y/y, reflecting the unfavorable base effects that have come into play.

Beyond the gains in energy and food prices, there were decent gains in a number of  key components in the consumer basket, with the costs of OER (up 0.3% m/m), medical care (up 0.3% m/m) and recreation (up 0.3% m/m) rising firmly. However, this was partially offset by the downdrift in the cost of apparel (down 0.3% m/m) and the price of motor vehicles (down 0.3% m/m), which resulted in the cost of core commodities declining a further 0.1% m/m. Core services, however, were quite strong at +0.3% m/m, underscoring the recent trend of firming underlying domestic inflation.

The tone of this inflation report was encouraging. Outside of the gains in energy prices, the continued firming in underlying core domestic prices suggests that the Fed’s confidence in the inflation outlook over the medium term might be well placed. Nevertheless, with underlying growth momentum appearing to be weakening and the disinflationary impulse from the rest of the world continuing to linger, the underlying inflation backdrop could remain subdued for some time, arguing for continued caution at the Fed.

Soros Cuts Holdings of US Equities

May 17th, 2016 6:31 am

It looks as though George and I are on the same wave length as I have been seeking safe sanctuary in cash.

Via Bloomberg:

  • Soros’s U.S. listed stock holdings drop to $3.5 billion
  • Firm adds $264 million stake in bullion producer Barrick Gold

Billionaire George Soros cut his firm’s investments in U.S. stocks by more than a third in the first quarter and bought a $264 million stake in the world’s biggest bullion producer Barrick Gold Corp.

The value of Soros Fund Management’s publicly disclosed holdings dropped by 37 percent to $3.5 billion as of the end of the last quarter, according to a government filing Monday. Soros acquired 1.7 percent of Barrick, making it the firm’s biggest U.S.-listed holding. Soros also disclosed owning call options on 1.05 million shares in the SPDR Gold Trust, an exchange-traded fund that tracks the price of gold.

Soros, who built a $24 billion fortune through savvy wagers on markets, has warned of risks stemming from China’s economy, arguing its debt-fueled economy resembles the U.S. in 2007-08, before credit markets seized up and spurred a global recession. In January, the former hedge fund manager turned philanthropist said a hard landing in China was “practically unavoidable,” adding that such a slump would worsen global deflationary pressures, drag down stocks and boost U.S. government bonds.

Soros sold a stake in Level 3 Communications Inc. which was worth $173 million as of Dec. 31 and a holding in Dow Chemical Co. that was worth $161 million. The family office also divested its stakes in Endo International Plc and Delta Air Lines Inc.

Druckenmiller’s Take

Soros’s former chief strategist, billionaire investor Stan Druckenmiller, is also bullish on gold. Earlier this month he called gold his largest currency allocation as central bankers experiment with the “absurd notion of negative interest rates.”

Gold for immediate delivery jumped 16 percent in the first three months of the year, the biggest quarterly surge since 1986, according to Bloomberg generic pricing. Shares of Toronto-based Barrick have more than doubled this year as the miner accelerates cost-cutting efforts and reduces debt. Barrick is up 39 percent since March 31.

Soros returned money to outside investors five years ago and his New York-based firm now manages his own wealth. Michael Vachon, a spokesman for Soros, declined to comment on the firm’s holdings.

Glenview Capital Management, the hedge fund run by Larry Robbins, also cut its investments of U.S.-listed stocks last quarter. The value of his firm’s equity holdings fell by 22 percent to $13.6 billion, a filing shows.

Money managers who oversee more than $100 million in equities in the U.S. must file a Form 13F within 45 days of each quarter’s end to list those stocks as well as options and convertible bonds. The filing

Some Corporate Stuff

May 17th, 2016 6:27 am

Via Bloomberg:

IG CREDIT: Volume Lower; All Eyes Turn to Dell Deal
2016-05-17 10:13:55.593 GMT

By Robert Elson
(Bloomberg) — Secondary IG trading ended with a Trace
count of $11.7b vs $12.4b Friday, $14.2b last Monday.

* 10-DMA $15.1b; 10-Monday moving avg $13.8b
* 144a trading added $1.5b of IG volume vs $1.5b Friday, $1.6b
last Monday

* The most active issues:
* C 2.50% 2018; just 3 large tickets accounted for all the
volume, a client buy, a client sale, a trade between
dealers
* SNI 3.50% 2022; client flows took 87% of volume
* BBT 2.05% 2021; affiliate buying was twice client
selling
* CBAAU 5.00% 2019 was most active 144a issue; client flows
took 100% of volume

* Bloomberg US IG Corporate Bond Index OAS at 156.1 vs 157.1
* 2016 high/low: 220.8, a new wide since Jan. 2012/150.8
* 2015 high/low: 182.1/129.6
* 2014 high/low: 144.7/102.3

* BofAML IG Master Index at +156 vs +157
* 2016 high/low: +221, the widest level since June
2012/+152
* 2015 high/low: +180/+129
* 2014 high/low: +151/+106, tightest spread since July
2007

* Standard & Poor’s Global Fixed Income Research IG Index at
+203, unchanged
* +262, the new wide going back to 2013, was seen
2/11/2016
* The widest spread recorded was +578 in Dec. 2008

* S&P HY spread at +675 vs +688; +947 seen Feb. 11 was the
widest spread since Oct. 2011
* All time wide was +1,754 in Dec. 2008

* Markit CDX.IG.26 5Y Index at 81.6 vs 83.3
* 73.0, its lowest level since August was seen April 20
* 124.7, a new wide since June 2012 was seen Feb. 11
* 2014 high/low was 76.1/55.0, the low for 2014 and the
lowest level since Oct 2007

* IG issuance totaled $7.275b Monday
* Note: subscribe bar in upper left corner
* May now stands at $92.06b
* YTD IG issuance now $685.5; YTD sans SSA $565b

* Pipeline – Dell Leads Parade, Others May Join
* Note: subscribe bar in upper left corner

FX

May 17th, 2016 6:24 am

Via Marc Chandler at Brown Brothers Harriman:

Dollar Consolidates as Sterling Shines

  • AUD higher as minutes from the recent RBA meeting indicate it was a close decision
  • Brexit polls swing toward “Remain” but soft UK CPI reading took some wind from sterling’s sails
  • The US reports April consumer prices, housing starts, and industrial output
  • The Chilean central bank meets and is expected to keep rates steady at 3.5%

The dollar is mixed against the majors as it consolidates recent gains.  Sterling and the Aussie are outperforming, while the yen and the Swiss franc are underperforming.  EM currencies are narrowly mixed too.  KRW, MYR, and RUB are outperforming while THB, CNY, and ZAR are underperforming.  MSCI Asia Pacific was up 0.7%, with the Nikkei rising 1.1%.  MSCI EM is up 0.5%, despite Chinese markets down marginally on the day.  Euro Stoxx 600 is up 0.7% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is up 1 bp at 1.76%.  Commodity prices are mixed, with oil narrowly mixed and copper up 0.5%.  

The US dollar is weaker today.  It appears to be consolidating the gains scored since the reversal on May 3.  Sterling and the Australian dollar are leading the way early in Europe.  

The Australian dollar’s gains appear more intuitively clear.  The minutes from the recent RBA meeting indicated that it was a close decision.  This means that a follow-up rate cut next month is unlikely, which is what we have argued.  While short-term participants may be surprised today, the medium-term outlook has not changed.  It seems likely that the RBA may still need to ease monetary policy.  
The resilience of the Australian dollar yesterday despite the disappointing data from China, and the follow through gains today, is notable.  If it is sustained, it is likely signaling the end of this leg up in the US dollar, which began in late April against the Aussie and May 3 for most of the others.  The Australian dollar’s upside momentum eased in the European morning, so the key to the outlook may be the shape and magnitude of the pullback.  Ideally, the Aussie holds above the $0.7280-0.7320 band.    

We have argued that the place to look for investor anxiety about the UK referendum is not the spot market but the options market.  At the start of next week, it is a month away.  The one-month volatility and risk-reversal will replace the two-month tenor as the indication of the cost of insurance.  More polls have come out, and the one that has captured the market’s attention (sponsored by the Telegraph) found a seven-point swing toward the “Remain” camp over the past month.  That puts the status quo in a 55-40 lead.    

Some press accounts attributes sterling gains to this poll, but this seems a bit selective use of evidence.  The ICM conducted two surveys one by telephone and one online.  This produced conflicting results.  By telephone, “Remain” was ahead 47-39.  Online participants gave Brexit the lead 47-43.    

Also, a seven point swing is large in a month and may be a statistical quirk.  Other surveys need to confirm that the undecideds are breaking toward the status quo, as is typically the case, to validate the Telegraph’s results.  We note that there has not been comparable shift in the event markets.  

An alternative hypothesis is that sterling is responding to the same set of fundamentals as the Australian dollar.  There is no greater crisis that the RBA needs cut interest rates at back-to-back meetings.  Part of the reason is the rebound in commodity prices.  The UK is not a large commodity producer of course.  However, there are several large companies that report their earnings in the UK, which are tied to the price of commodities.  In fact, there have been some reports linking the deterioration of the UK current account to the drop in profits and repatriated earnings from a couple of dozen companies.  

Behind that explanation lies the statistical fact that sterling and the Australian dollar are at their highest correlation in nearly four years.  On a percent change basis, the correlation of the two over the past 60 days is 0.65.  

The soft UK CPI data (0.3% year-over-year, vs. expectations of an unchanged reading of 0.5%) took some wind from sterling’s sails.  The weakness was in the core rate, which unexpectedly fell to 1.2% from 1.5%.  Sterling was already stalling ahead of the report, so the key to the near-term outlook may be how far sterling retreats.  

After all, the April CPI report has little bearing on the outlook for rates, and whatever impact it may have under normal circumstances, the referendum will alter the outlook one way or another.  The $1.4440-1.4450 area may be key.  A break of it could warn of another 1.0-1.5 cent decline.  On the upside, the $1.4530-1.4545 area has capped upticks since the May 3 reversal.  

The euro is little changed in the well-worn range.  On the other hand, the dollar is pushing above resistance around JPY109.50, helped by rising equity markets and the rise in US yields.  Ideas that Q1 GDP contracting will boost the chances for fiscal stimulus in Japan miss the point.  The fiscal support plans on in the works.  Investors cannot say GDP is not a good metric of the state of the economy and then expect policy makers to put so much emphasis on a report whose components are already known.  

Moreover thinking that a small decline is materially different from a small gain for policymakers is to be fooled by the precision that measuring something to a tenth of a decimal point pretends.  The BOJ estimates that trend growth is about 0.2%.  

Speculators in the futures markets are holding a gross and net long yen position that is near record levels.  Given the interest rate differentials, it is expensive to be short dollars and long yen without momentum.  Some of the long yen positions may feel trapped, and may now be looking for an exit.  The greenback is unlikely to go through JPY110 (of psychological importance) straight away.  Positioning warns that the pullback will likely be shallow.  

The US reports April consumer prices, housing starts, and industrial output.  The data will impact expectations for the pace Q2 growth, but the broad direction seems clear.  After the soft patch the economy hit in Q4 15-Q1 16, the economy appears to be rebounding.  The Empire State survey yesterday was for May and the fall in orders was disappointing, but we need confirmation before investors should be concerned give the momentum of the other data.

Also during the North American session, the Fed’s Williams, Lockhart, and Kaplan will speak.  Canada reports March manufacturing sales.  

The Chilean central bank meets and is expected to keep rates steady at 3.5%.  It has been on hold since the last 25 bp hike back in December.  The real sector is weak, while inflation has fallen.  This will allow the bank to remain on hold for now.  Chile reports Q1 GDP Wednesday, which is expected to grow 1.8% y/y vs. 1.3% in Q4.  The recent slide in copper has taken a toll on the peso.  USD/CLP has retraced half of this year’s drop.  A break above the 703 area would set up a test of the January multi-year high near 733.

Copper is leading the move, and a clean break of the 208 area would set up a test of the January low near 193.55.  Supply remains an issued, with both Chile and Peru slated to bring several mines on line over the next few years.  Copper’s plunge has had a wide-reaching impact.  For instance, the Congo (Africa’s largest copper exporter) recently asked the World Bank for budgetary support to make up for the drop in copper revenues.

IS Market Underpricing a June Rate Hike?

May 17th, 2016 6:22 am

Stephen Stanley of Amherst Pierpont Securities penned this excellent piece yesterday. He discusses recent rhetoric from FOMC participants and the possibility of a June rate hike. Ms Yellen is scheduled to speak on June 6 and he considers that speech a pivotal event.

Via Stephen Stanley at Amherst Pierpont Securities:

The hawks and the doves at the Federal Reserve often fail to see eye-to-eye, but either the consensus is shifting at the Fed or the hawks are gearing up to challenge the ruler of the roost, Chair Yellen.  Feathers are definitely ruffled, as the hawkish rhetoric over the last week or so has been extraordinary in my view and seems to be ratcheting up in intensity with each successive wave of speakers.  Meanwhile, the financial markets are very confident that the FOMC is not going to move in June and pricing in only slightly better than even odds of a single rate hike over the balance of the year, and policymakers’ rhetoric seems aimed, so far unsuccessfully, at altering that view.  Unlike most market participants and Street economists, I am not quite ready to write off a June move as out of the question.  With roughly a month to go before the June FOMC meeting and two days before the release of the April FOMC minutes, this is how I see the current state of affairs.

In my view, the Fed wanted the April FOMC statement to send the signal that a rate hike in June was possible but not guaranteed.  Officials were clearly not ready to commit at that time, but they did not like the fact that leading up to the late April meeting, the financial markets were only pricing in about a 20% chance of a June move.  Rather, in my opinion, the Fed was hoping to move the needle closer to 50-50 and then let the data be the determinant of whether the Committee pulls the trigger in June.  The sentence from the March statement about global economic and financial developments posing risks was deleted.  In addition, the Committee seemed to judge the strength in labor markets more important than the softness in Q1 GDP and accentuated the positives with respect to the consumer spending outlook.  Nonetheless, financial markets took the statement as no more than a baby step toward the next rate hike and proceeded to actually downgrade the perceived likelihood of a June move.

The first salvo of comments after the FOMC blackout lifted were fairly tame.  No one wanted to commit to anything with so much critical data still to be revealed (and with Q1 GDP just posting a paltry 0.5% advance).  Dallas Fed President Kaplan noted a point that Boston Fed President Rosengren had made before the April FOMC meeting, agreeing that the Fed would probably end up going faster than the markets currently expect.  He noted that if the consumer data were satisfactory, he would probably advocate for a move in June or July.  Atlanta Fed President Lockhart declared that June was a live meeting, but he also acknowledged that the looming Brexit vote would be a risk at that time.  San Francisco Fed President Williams said that June could be appropriate if the data came in as expected, and St. Louis Fed President Bullard concluded that it was too early to judge the merits of a June rate increase with so much data still to be released, though he too suggested that the markets were likely pricing in too shallow a path for the policy rate.  Finally, New York President Dudley in an interview with the New York Times repeated that he is still fine with an expectation of two rate hikes this year.

Clearly, none of this impressed market participants.  The July 2016 fed funds futures contract continued to rally, as market participants lowered their odds of a June move basically to zero.  This apparently did not sit well with a significant contingent of the FOMC.

The most recent and most interesting round of Fed commentary began last Thursday.  Rosengren, a consistent dove since the crisis, gave a speech in which he repeated – and more forcefully – that he felt the markets were off-base: “In my view, the market remains too pessimistic about the fundamental strength of the U.S. economy, and the likelihood of removing monetary accommodation is higher than is currently priced into financial markets based on current data.”  He proceeded to describe why he believed that Q1 GDP was an anomaly, that labor markets are tightening, and wages and prices are beginning to accelerate.  He then dedicated three pages of his speech to fleshing out several of the risks of

leaving rates “too low for too long.”  All of this would have been easily dismissed if it had come from a known hawk, but Rosengren has been near the dovish extreme of the Committee’s range of views for years.  On the same day (last Thursday), Kansas City Fed President George argued not just that a rate hike in the near future may be warranted (which would not be a surprise since she dissented in favor of an immediate move in March and April) but that “I view the current level (of rates) as too low for today’s financial conditions.”  So, now a representative from the dovish contingent is worried that the Fed is staying too low for too long, and a hawk believes that the Fed is already behind the curve.  This was a definite ratcheting up of intensity from the Fed’s normal language.

The drumbeat continued to get louder over the weekend.  Williams on Friday night noted that “it definitely still makes sense, given the data we’ve seen, to have two to three rate increases this year.”  While he said that he had not made up his mind about whether to support a June hike, he acknowledged that “the longer we put this off, the more back fill we are going to have to do later on.”  He also introduced a brand new concept that most market participants are going to consider radical: “I definitely don’t think we need to go into the meetings with markets convinced that we’re going to raise rates in order for us to raise rates.”  Williams’ views were echoed and extended by noted hawk Richmond Fed President Lacker in an interview with the Washington Post.  He sounded much like George in noting that “at this point it looks to me as if the case for raising rates looks to be pretty strong in June,” which is the Fedspeak equivalent of pounding his shoe on the lectern.  He argued that the repeated delays in the wake of episodes of financial uncertainty without follow through once the turmoil subsided has left the Fed decidedly behind the curve (again, a significant step beyond simply saying that a rate hike is justified soon).  He then seconded Williams’ point: “The prospect of surprising markets shouldn’t stay our hand if we think an increase in rates is warranted.”

So, the Bank Presidents (or at least a handful of them) are clearly getting restless.  You may have noticed that we have not heard anything from the only voice that markets think matters: Chair Yellen.  Her last public utterance remains the radically dovish speech from late March.  In fact, the entire Fed Board has been almost entirely silent since the April meeting.  So, while it is tempting for a hawk like me to surmise that the thinking of the entire Committee is evolving in a significant way, it may just be that there is a silent dovish majority and the policymakers who we are hearing from are speaking out because their views are not being validated at the FOMC table.

In this context, the April FOMC minutes represent the last chance that the Committee as a whole will have to influence market thinking before the June FOMC meeting.  If my hypothesis is correct that the Committee wanted to nudge the market expectations closer to even in April, then it would be reasonable to assume that the minutes will have some hawkish tidbits in them that could finally shake market participants’ complacency toward the Fed (or at least try to).  However, in my view, if the Fed wants the markets to price in a reasonable chance of a June move before next month’s vote, then Chair Yellen is going to have to schedule a public appearance and change her tone noticeably from her March 29 missive.  Unless or until she does that, market participants are likely to stubbornly view a rate hike in the near term as unlikely, regardless of how the data come in.  And notwithstanding the comments from Williams and Lacker, the Fed leadership has proven itself to be extraordinarily timid over the past year or two so that the notion that it would hike rates when the markets are not expecting it just after postponing moves twice within the last year by 3 months or more specifically because of market volatility strikes me as very unrealistic.  By late this week, we will have the April FOMC minutes as well as the last CPI release before the June meeting.  Pretty soon, patiently watching the data is going to segue to crunch time.

In what can only be described as a bolt of lightning from Heaven, as I was proofreading this note, headlines hit the newswires that Chair Yellen will be delivering a speech on June 6 (one day before the blackout for the June FOMC meeting begins) to the World Affairs Council in Philadelphia.  That’s positively eerie, but it also significantly raises the odds in my view that the Fed is in fact seriously considering a June rate hike, and Yellen can deliver the decisive blow in support of one in this June 6 speech if the data support such a course of action.

Credit Pipeline

May 17th, 2016 6:13 am

Via Bloomberg:

IG CREDIT PIPELINE: Dell Leads Parade, Others May Join
2016-05-17 09:53:11.646 GMT

By Robert Elson
(Bloomberg) — Set to price today:

* Dell/EMC (DELL) Baa3/BBB-, to price 8-part 144a/Reg-S deal,
via managers Barc/BAML/C/CS/GS/JPM; book said to be over
$60b
* 3Y FRN, IPT equiv
* 3Y, IPT +325 area
* 5Y, IPY equiv
* 5Y, IPT +375 area
* 7Y, IPT +437.5 area
* 10Y, IPT +475 area
* 20Y, IPT +600 area
* 30Y, IPT +625 area
* World Bank (IBRD) Aaa/AAA, to price $bench Global 5Y, via
Barc/BAML/JPM/Nom; guidance MS +23 area

LATEST UPDATES

* State of Qatar (QATAR Govt) Aa2/AA, mandates Al
Khaliji/Barc/BAML/DB/HSBC/JPM/Miz/MUFG/QNB/SMBC to arrange
investor meetings to begin May 19; USD 144a/Reg-S deal may
follow; last issued in 2011
* Bank Nederlandse Gemeenten (BNG) Aaa/AAA, mandates
GS/HSBC/Nom/RBS for 144a/Reg-S 2Y to be launched in the near
future
* Three Gorges Finance I (YANTZE) Aa3//na/A+, to hold investor
meetings May 18-23, via BoC/DB/GS/ICBC/JPM/UBS; 144a/Reg-S
USD deal is expected to follow
* Southern Co. (SO) Baa2/A-; calls May 17-18, sees $8b
issuance this yr
* Priceline Group (PCLN) Baa1/BBB+, has asked BAML/GS/WFS to
arrange investor calls today;last priced a new USD deal in
March 2015
* Kallpa Generacion (KALLPA) Baa3/na/BBB-, mandates managers
for investor meetings May 12-18; 144a/Reg-S deal may follow
* Apple (AAPL) Aa1/AA+, may return to market
* It priced $12b in 9 parts Feb. 16
* Re-opened 3 of the above issues for $3.5b March 17
* Merck & Co (MRK) A1/AA; has not priced a new issue since
Feb. 2015, has $1.5b maturing May 18
* General Electric Company (GE) A3/AA-, has yet to issue YTD;
parent GE Co has $11.1b maturing this year, including $2.3b
this week

MANDATES/MEETINGS

M&A-RELATED

* Abbott (ABT) A2/A+; ~$5.7b St. Jude buy, ~$3.1b Alere buy
* $17.2b bridge loan commitment (April 28)
* Air Liquide (AIFP) –/A+; ~$13.4b Airgas buy
* $10.7b financing incl bonds, EU3b-3.5b equity (April 26)
* Sherwin-Williams (SHW) A2/A; ~$9.3b Valspar buy
* $8.3b debt financing expected (March 20)
* Nasdaq (NDAQ) Baa3/BBB; Marketwired buy
* $1.1b bridge (March 10)
* Mylan (MYL) Baa3/BBB-; ~$9.9b Meda buy
* $10.05b bridge (Feb 17)
* Dominion (D) Baa2/A-; ~$4.4b Questar buy
* $1.5b issuance expected to fund deal (Feb 1)
* Shire (SHPLN) Baa3/BBB-; ~$32b Baxalta buy
* $18b loan to be refinanced via debt issuance (Jan 18)
* Walgreens Boots (WBA) Baa2/BBB; ~$17.2b Rite-Aid buy
* $7.8b bridge, $5b TL, debt shelf (Jan 7)
* Molson Coors (TAP) Baa2/BBB-; ~$12b MillerCoors buy
* $9.3b bridge (Dec 17)
* Teva (TEVA) Baa1/BBB+; ~$40.5b Allergan generics buy
* $22b bridge; $5b TL commitment (Nov 18)
* Duke Energy (DUK) A3/A-; $4.9b Piedmont Natural buy
* $4.9b bridge (Nov 4)
* Aetna (AET) Baa1/A; ~$28.9b Humana buy
* $13b bridge (August 28)
* Anthem (ANTM) Baa2/A-; ~$50.4b Cigna buy
* $26.5b bridge (July 27)

SHELF FILINGS

* Reynolds American (RAI) Baa3/BBB filed automatic debt shelf;
sold $9b last June (May 13)
* Quest Diagnostics (DGX) Baa2/BBB+, files debt shelf; last
issued in March 2015, $300m matured last month (May 13)
* Statoil (STLNO) Aa3/A+, files debt shelf; last issued USD
Nov. 2014 (May 9)
* Corporate Office (OFC) Baa3/BBB-; debt shelf (April 12)
* Rogers (RCICN) Baa1/BBB+; $4b debt shelf (March 4)

OTHER

* Ford Motor Credit (F) Baa2/BBB; may have ~$7b issuance this
yr (May 10)
* Wal-Mart (WMT) Aa2/AA; 2 maturities in April (April 1)
* GE (GE) A1/AA+; $25b debt possible for M&A, buybacks (Jan
29)

Angst About China Credit Bubble

May 17th, 2016 6:06 am

Via Bloomberg:

  • Fink says he is still “bullish” on China in long term
  • BlackRock CEO says China’s leaders have done a “good job”

BlackRock Inc.’s Laurence D. Fink, who oversees the world’s largest money manager with $4.7 trillion of client assets, said “we all have to be worried” about China’s mounting debt amid slowing growth, even as he remains bullish on the economy in the long run.

 

“You can’t grow at 6 percent and have your balance sheets grow faster,” Fink said in a Bloomberg Television interview with Angie Lau on the sidelines of a forum in Hong Kong on Tuesday. “In the future, I would prefer seeing the economy growing 6 percent with some form of deleveraging,” he said.

China, whose surprise August yuan devaluation sent shock waves worldwide, is dividing the biggest names in finance more than any other market. While Fink said in April that investors would regret not betting on China this year because government stimulus may result in higher economic growth than many expect, billionaire investor George Soros said last month that the nation’s debt-fueled economy resembles the U.S. in 2007 and 2008, at the onset of the global financial crisis.

New credit in China increased a record 4.6 trillion yuan ($706 billion) in the first quarter, surpassing the level of 2009 during the depths of the global financial crisis. Total debt from companies, governments and households was 247 percent of gross domestic product last year, up from 164 percent in 2008, according to data compiled by Bloomberg.

Some investors are betting the credit bubble will pop, devastating the economy. Kyle Bass, the founder of Hayman Capital Management, a Dallas-based hedge fund firm, told investors earlier this year that China’s banking system may see losses more than four times those suffered by U.S. banks in the financial crisis.

The world’s second-largest economy grew 6.7 percent in the first quarter, within a government target range, with surging credit in March shifting concern back to the durability of the recovery.

Growth in aggregate financing fell below analyst estimates last month in a Bloomberg survey, after the record flow of credit in the previous three months led policymakers to shy away from boosting growth at all costs. Commercial banks may be becoming more reluctant to lend after soured loans rose to the highest level in 11 years, with defaults spreading from small private firms to large state-owned enterprises. Nonperforming loans rose 9 percent to 1.39 trillion yuan in March from December, the fastest increase in three quarters, data from the China Banking Regulatory Commission showed this week.

At the forum in Hong Kong, Fink said he is very impressed with China’s leaders, especially with respect to how they’ve sought to transform the manufacturing and export-oriented economy into one that’s domestic and services-oriented. It took some developed economies 50 years to manage that, and several recessions during the process, Fink said.

“I would say the Chinese leadership has done a very good job of identifying the need to reorient their economy, much more proactive than other leaders of other countries,” Fink said.

China has had to grapple with a global and domestic economic slowdown during this transition as well as excessive leverage of many of its financial institutions, Fink said.

“They need to be more aggressive in their reforms,’’ he said, adding there are still too many state-owned companies and signs of credit explosion again in the last three or four months. “However, I’m relatively bullish on China.”

Fink said the “safest neighborhood” to invest right now is North America. Negative rates are “terrible” for Japan, which is overly reliant on monetary policy, he said.

China’s August devaluation, growth concerns and capital outflows fueled speculation of further depreciation in the first quarter, with hedge fund managers from Bill Ackman to Crispin Odey positioned for declines.

“I believe China would be very against their plan to devalue the currency,’’ Fink said on Tuesday. “Their plan is about domestic consumption, having cheaper import prices, whether it’s agriculture goods, energy goods or the important goods of what Chinese are demanding in their purchases. A devaluation would only make that more difficult.”
Fink built BlackRock from a bond shop started in a one-room office to a global money manager with much of the growth fueled by acquisitions, including the 2009 purchase of Barclays Plc’s investment unit.

A Consensus Market

May 17th, 2016 6:02 am

Via the WSJ:

By James Mackintosh
Updated May 16, 2016 3:11 p.m. ET

It isn’t what you worry about that hurts your portfolio. It is what you know for sure. Two things most of us think we know for a fact, after years of extraordinary central-bank intervention and miserable growth, are that we will have more extraordinary central-bank intervention and more miserable growth.

Investors have tested the first assumption. Earlier this year, fears rose that central banks were running out of ammunition. Markets fell.

But no one seems even to question the second. There is too much debt everywhere, emerging markets are in crisis and political uncertainty reigns on both sides of the Atlantic. Of course there won’t be a return to strong growth. The result is that investors have bought far longer-dated government bonds than they would usually be comfortable with and pushed safer shares to very high valuations.

This is dangerous. Not because I’m predicting strong growth (the weak economic outlook is self-evident, right?), but because, when everyone agrees, anything that shakes that belief has an exaggerated effect on markets.

And it will be shaken, because it is a belief about the economy, and the economy doesn’t follow a smooth path. After a quarter or two of decent growth or pay rises—likely even in long periods of slow growth—investors will start to worry that maybe the economy is fine after all. They will price in higher inflation, higher interest rates and higher sales, they will sell bonds and they will switch from boring, low-risk stocks to cyclical shares more sensitive to growth.

The danger isn’t so much that investors are wrong, but that they are too uniformly confident in their view.

Consider economic forecasts. The average prediction is for the U.S. to expand 2.4% next year, according to Consensus Economics, the lowest since the gloom of 2012. Much more worrying is the groupthink behind this consensus, with economists in near-complete agreement. The gap between the highest and lowest forecast is among the smallest since 2007, having reached the lowest last summer since data started in 1989. Economic forecasts aren’t very reliable, but when they are all the same, they are liable all to be wrong at once—as in 2007.

 

There is no way to record the scale of consensus in the market, but valuations offer a clue. At the moment they suggest a worrying agreement that everything is going to be awful for a long, long time.

The pricing of bonds maturing far in the future are very expensive. The lower that inflation is expected to be, and the weaker is economic growth, the more alluring they become. Investors can’t take their eyes off them. Returns this year are more than 25% on the longest Japanese bond and more than 10% on the longest-dated British, U.S. and German bonds. The 30-year U.S. Treasury yields a paltry 2.59%, down from a post-Lehman peak of 4.8% in 2010.

In the stock market, the same bet is boosting the safest shares, particularly those with a secure dividend used as a proxy for bonds.

Shares in companies defined as “quality” by MSCI recently traded at their highest valuation premium to the wider global market since 2002, measured by price to book, price-to-cash earnings and price-to-forward earnings. MSCI defines quality as consistency of earnings, lower leverage and higher return on equity.

Even more extreme have been stocks with low volatility. “Minimum variance” ETFs, which aim for only small moves in price, have been by far the most popular among style funds this year. The valuation premium of minimum volatility reached the highest since MSCI started tracking it in 2001, while the rise in price briefly pushed the dividend yield of MSCI’s global minimum volatility index below that of the wider market for the first time since the aftermath of Lehman’s failure.

The demand for quality and consistency of earnings, together with the desire for stable dividends, helped companies such as Coca-Cola Co. , General Mills Inc. and Johnson & Johnson to new highs as the consumer staples sector soared to valuations last seen in 2001.

All this makes perfect sense so long as the twin assumptions hold. If the Federal Reserve has our back, we want to take risk. If the economy is going to be a bit rubbish, we want to buy stocks with reliable profit and dividend streams, as well as take risk on long-dated bonds.

Will everyone continue to believe this? My guess is that doubt will creep in soon, just because there is too much certainty. Like economists, I have no better ability to forecast quarterly growth figures than the average dartboard, but when everyone thinks the same, it is usually something worth worrying about.

IMF Pushes for Long Term Debt Relief for Greece

May 17th, 2016 5:57 am

Via WSJ:
By Marcus Walker
Updated May 17, 2016 5:31 a.m. ET
8 COMMENTS

BERLIN—The International Monetary Fund is pressing the eurozone to let Greece skip paying interest or principal on bailout loans until 2040, say officials familiar with the talks.

The IMF wants the loans to Greece to fall due gradually in the following decades, and as late as 2080, according to the IMF’s proposal.

Greece’s interest rate on eurozone loans would be fixed for 30 to 40 years at its current average level of 1.5%, with all interest payments postponed until loans start falling due, under the IMF proposal.

The IMF’s proposal, presented to eurozone governments late last week, would keep Greece’s annual debt-service needs below 15% of its gross domestic product, under the IMF’s relatively pessimistic forecast for Greece’s long-term economic trajectory.

The IMF’s demands—which one official from a eurozone country described as “hardcore, really”—go far beyond what Greece’s European creditors have said they are willing to do to help Greece regain its financial health.

Eurozone governments, led by Germany, are reluctant to make such major concessions on their loans to Greece, which currently total just over €200 billion ($226 billion) with around another €60 billion to come under the latest Greek bailout plan.

But Germany, the eurozone’s dominant economic power, also wants the IMF to rejoin the Greek bailout as a lender. The IMF hasn’t yet signed up to the Greek program agreed last summer.

Greek Bailout Deal Must Have Concrete Debt Relief, State Minister Says (May 13)
International Monetary Fund Faces Pressure From Germany Over Greece (May 12)
Greek Prime Minister Alexis Tsipras Expresses Optimism Over Bailout Talks (May 10)

German Chancellor Angela Merkel has long viewed the IMF as essential to the credibility of the Greek bailout. Her government promised Germany’s parliament, the Bundestag, last year that the IMF would join the new bailout program before Europe disburses further money to Athens.

The chancellor and many of her lawmakers believe that, without the IMF, the eurozone wouldn’t be able to enforce rigorous fiscal and economic overhauls in Greece in return for loans. The European Commission, which partners the IMF in overseeing the bailout, is seen in Berlin as too soft on Greece. Finland and the Netherlands also want the IMF on board.

The U.S. government is pressing both the IMF and the eurozone to find a compromise on debt relief that allows for full IMF involvement in the bailout. The U.S., conscious of the European Union’s multiple current challenges and political fragility, wants to avoid a repeat of 2015’s Greek crisis, when the country came close to bankruptcy and exit from the euro. Some U.S. officials fear a deal could fail because of inflexible positions on all sides.

The German Chancellery is pushing hard for a deal with the IMF, say people familiar with the talks. But the IMF has said it cannot rejoin the bailout unless the eurozone deeply restructures its Greek loans. Greece’s debt burden is “highly unsustainable,” IMF head Christine Lagarde said recently.

A major Greek-loan restructuring would require a contentious debate and vote in the Bundestag, with the potential for a rebellion among conservative lawmakers and a boost to the rising right-wing populist party AfD.

German officials thus want to make only limited adjustments to Greece’s loan terms now, and postpone major changes that would need a Bundestag vote until 2018—after Germany’s national elections in 2017.

German and other eurozone officials are in negotiations with the IMF aimed at finding a formula that would assure the IMF that Greece’s debt will be restructured, while letting Germany delay final decisions until 2018.

The IMF’s push to lock in low interest rates for Greece for decades to come is hard for the eurozone to digest. The bloc’s bailout vehicles, such as the European Stability Mechanism, would then need subsidies from national budgets to cover a part of their own funding costs. IMF staff “like solutions that imply budgetary transfers,” said a European official.
International Monetary Fund Managing Director Christine Lagarde pictured in Washington earlier this year. ENLARGE
International Monetary Fund Managing Director Christine Lagarde pictured in Washington earlier this year. Photo: Associated Press

If the IMF and Germany can’t bridge their differences, the eurozone will to have to press ahead with its next batch of loans for Greece without the Washington-based fund. Many European officials say talks with the IMF could continue later.

But a debt deal would become politically more difficult as Germany’s election year of 2017 approaches, some participants in the talks point out. Failure to bring the IMF back on board now could therefore mean the end of its role in Greece, except as a technical adviser. That would be a major embarrassment for Ms. Merkel.

Many European officials are hoping for a deal by the time eurozone finance ministers meet on May 24, allowing a disbursement soon afterward. But some negotiators believe more time may be needed.

The IMF is also at odds with eurozone authorities and Greece’s government over how to ensure Athens hits its budget targets. But Greece is expected to pass the bulk of the fiscal measures creditors want from it by next week. The crucial fight is now among the creditors. “Greece is basically out of the picture,” says another European official. “This is a dialogue between the IMF and the countries that really want the IMF.”

A solution is needed by June, when Greece needs fresh bailout funds to pay expenses including pensions and wages that its depleted cash reserves can no longer cover, according to officials involved in the talks.

Greece is entering the seventh year of its troubled bailout still struggling to begin a recovery. The country has largely closed the gaping budget deficit that triggered its debt crisis. But the IMF-European bailout, including more than 30% of GDP in cumulative austerity measures so far, contributed to a 25% decline in the country’s economic output since before the debt crisis.

Write to Marcus Walker at [email protected]