Archive for December, 2015

• Dow/DuPont to Merge. Then Split Up.
  Eddy Elfenbein, December 9th, 2015 at 1:23 pm

  The Wall Street Journal is reporting that Dow Chemical (DOW) and DuPont (DD) are currently discussing a possible merger. This would be a very large deal. Both companies are worth about $60 billion. Combined, the companies have been around for 331 years. DuPont is also a member of the Dow Jones Industrial Average. In effect, Dow could join the Dow. Both stocks are up about 10% today.

  The companies are talking about merging and then breaking up into three different companies. That’s becoming more common these days. Still, there’s no guarantee they’ll get anti-trust approval. The Feds are going after the Staples/Office Depot merger which hardly seems dangerous.

  The economics aren’t hard to miss. Whenever a commodity falls in price, there’s greater pressure for industry consolidation. It was 17 years ago, almost to the day, when Exxon and Mobil got hitched. This was also the time when oil bottomed out near $10 per barrel. Eighteen months ago, oil was at $107 per barrel.

  DuPont’s famous slogan was “Better Living Through Chemistry.” There’s something about that slogan I find so appealing. It’s hard to think of something that better reflects 20th century American optimism. The idea that science can and will make the world a better place. It’s sad that that slogan seems so hokey in our advanced and cynical times.

  I’m also skeptical of mergers, especially big ones. The track isn’t promising. Too many companies enter into mergers defensively. The thinking is, “it may not be great, but if we don’t do this now, they’ll strike a deal with someone else soon.”

  The other big news item today is that Yahoo (YHOO) said it will keep its stake in Alibaba (BABA) but spinoff its core Web business.

  The new structure essentially maintains Yahoo’s strategy of separating its valuable Alibaba investment from the rest of the company, which will be focused on Yahoo’s Internet properties.

  The new Yahoo will be two companies: One will have a 15 percent stake in Alibaba, and the other will have everything else, including search, email, the Tumblr social media service and various sites like Yahoo Finance.

  There was an interesting episode that could one day lead to a finance class. Yahoo’s stock got spooked because of the tax implications of selling Alibaba. But Yahoo’s board didn’t think it would face any taxes. The board eventually gave into what the shareholders thought.

  CEO Marissa Mayer’s original plan was to spinoff Ailibaba along with some other Yahoo businesses into a new company called Aabaco. That’s all gone now. The sad fact is that without Alibaba or Yahoo Japan, core Yahoo isn’t worth very much.

• Morning News: December 9, 2015
  Eddy Elfenbein, December 9th, 2015 at 7:11 am

  Pickup in China Inflation Points to Stimulus Effort

  Who’s the Bear Driving Up the Price of U.S. Stock Options? Banks

  Guess What Happened The Last Time Junk Bonds Started Crashing Like This?

  Yahoo to Spin Off Core Businesses, Including Yahoo Japan

  Dow Chemical, DuPont in Merger Talks

  China Resources Said To Offer $2.46 Billion for Fairchild

  AB InBev’s Brito Says Deal Would Boost U.S. Beer Competition

  Kinder Morgan: Irrational Panic or Realization of Reality?

  It’s All Gone Wrong for One of World’s Biggest Mining Companies

  Volkswagen Says Carbon Deviations Much Smaller Than Suspected

  Stakes Are High In Hunt for Bitcoin’s “Messiah”

  Chipotle’s Safety Woes Worsen as Scores of Students Fall Ill in Boston

  Yogawear Retailer Lululemon’s Quarterly Profit Falls 12%

  Joshua Brown: Scenes From the Future of Wealth Management

  Jeff Carter: The User Experience

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• High Beta Pain
  Eddy Elfenbein, December 8th, 2015 at 11:04 am

  There’s been a notable decline in the relative strength of high beta stocks. In English, these are stocks that have more pronounced moves than the rest of the market. So when the market goes up, they go up a lot. When the market’s down, they’re down a lot. Traders like to play high beta names for short-term fun.

  There’s an ETF loaded with high beta stocks (SPHB) and it’s been badly lagging the rest of the market even though the broader market has been rather flattish.

  Check out this chart:

  

  The SPHB’s relative strength peaked in April, but it’s really crumbled in the last few days.

• Morning News: December 8, 2015
  Eddy Elfenbein, December 8th, 2015 at 7:13 am

  Yen Embraced by U.S. Banks as Heir Apparent to Dollar’s Throne

  China Forex Reserves Fall to Lowest Level in More Than Two Years

  How Futures Markets View Rate Hikes

  OPEC Takes Down Oil Majors as Lower-for-Even-Longer Kicks In

  Ex-Im Bank Is Reopened, but Big Loans Are Stalled

  Norfolk Southern Quickly Rebuffs Canadian Pacific’s New Offer

  Anglo American’s Overhaul: Dire Straits in Mining

  Qualcomm is Accused of Violating Antitrust Rules in Europe

  Why Keurig Green Mountain Had No Choice But To Sell Itself for $13.9 Billion

  Toll Brothers Posts Weaker-Than-Expected Profit

  USPS Launches Exactly The Same Digital Service It Killed In Startup Outbox

  Chipotle’s Biggest Strength Is Suddenly Its Biggest Weakness

  Rio Tinto Now Has a Pair of 60-Year-Old Legal Problems in Canada

  Cullen Roche: ETFs Don’t Kill Investors, Investors Kill Investors

  Joshua Brown: I Think I’m Dumb

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• Six-Year Low for Crude
  Eddy Elfenbein, December 7th, 2015 at 4:49 pm

  Here’s the chart for West Texas Intermediate Crude. The spot price closed at $37.65 per barrel today. That’s the lowest price since February 18, 2009.

  

• Bloomberg on Cognizant
  Eddy Elfenbein, December 7th, 2015 at 3:18 pm

  Bloomberg had a nice article on Cognizant Technology Solutions (CTSH):

  On the penthouse floor of an office building in Midtown Manhattan, Cognizant has furnished a suite of rooms with hardwood floors and vintage furniture that wouldn’t look out of place in East Egg. Dotting the walls are framed photos of Elvis Costello, Charles Darwin, Martha Graham, and Pablo Picasso, and the office’s two terraces have views of the East River and the Chrysler Building. It’s a long way from the meeting rooms at Cognizant’s headquarters in Teaneck, N.J., and even farther from the cubicles that fill the company’s offices in India, where three-quarters of its 220,000 employees work.

  The Manhattan setup is part of Cognizant’s effort to remake itself as a technology consultant instead of a cheap data-processing workhorse. In India, wages are rising and competition for labor is growing, so hiring tens of thousands of employees each year is no longer a guaranteed way to expand the business. In the U.S., congressional efforts to reduce the number of temporary visas outsourcing companies receive each year would further complicate Cognizant’s traditional business model. And worldwide, corporate clients that once relied on outsourcers to manage big SAP and Oracle databases have begun shifting the work to cloud services that require less hands-on management. New demand for the traditional outsourcing work “has ground to a halt,” says Bloomberg Intelligence analyst Anurag Rana. “IT budgets at best are flat to slightly up.”

  And so Cognizant is working to create an image of quality over quantity. The company has 5,500 consultants, up from fewer than 1,000 in 2010, pitching strategic advice on IT, mergers, and customer service to clients such as the New England Health Exchange Network and Singaporean retailer NTUC FairPrice. The company is still adding workers to its outsourcing business but says it plans to slow hiring. “Five years ago it was more, ‘Tell us what to do, and we’ll do it well,’ ” says Cognizant President Gordon Coburn. “Today, we’re sitting at the table helping to generate ideas on how you can improve your processes.”

  So far, Cognizant, which was spun off from credit reporter Dun & Bradstreet in the 1990s, has focused on advising clients concerned that digital upstarts could take away their customers. “Our clients are asking the question, ‘Will I be Ubered?’ ” says Malcolm Frank, executive vice president for strategy and marketing. Thanks to the investments Cognizant has made in consulting, he says, the company’s become a good judge of which businesses are at risk.

  Cognizant, which posted $10.3 billion in revenue last year, is still small compared with consulting heavyweights Accenture ($30 billion) and IBM’s services division ($51 billion). But Cognizant’s shift toward consulting appears to be paying off: Profit is expected to approach $2 billion next year, up from $1.7 billion this year, $1.4 billion in 2014, and $884 million in 2011, according to data compiled by Bloomberg.

• The Rise and Fall of SWN
  Eddy Elfenbein, December 7th, 2015 at 12:26 pm

  Related to my previous post on oil, check out the long-term chart on Southwestern Energy (SWN).

  

  This was one of the super-star stocks of the last decade. Note that the graph is logarithmic so those are massive gains. In three years, the stock jumped nearly 15-fold. In 2005, SWN split 2-for-1 twice.

  Eighteen months ago, SWN was at $47 per share. The stock just made another 52-week low today of $7.12 per share.

• OPEC Has Surrendered
  Eddy Elfenbein, December 7th, 2015 at 11:12 am

  The news today is that oil prices are down again. But I think the more important news is that OPEC no longer effectively exists. They’ve surrendered. Of course, there’s still something called OPEC and it will continue to be influential. But at a very basic level, if a cartel can’t or won’t control prices, then it’s not a cartel. There’s really not much else to say.

  The new production limits are limitless. Plus, there’s the issue of Iranian oil coming back online at some point. The giant as always is Saudi Arabia, and if they wanted, they could unleash a massive supply of oil onto the world. We’re seeing a rift grow between the core members of OPEC and the more marginal players (the ones like Ecuador or Venezuela which I always forget are in OPEC.) The marginal players are losing and badly.

  In the U.S., the junk bond market is closely tied to oil production. As oil has fallen, junk bond spreads have increased. Again, it’s very basic. As long as the money flows, the oil will flow. As far as the U.S. is concerned, that funding will continue to dry up.

• SBNY May Be the Best Bank in the World
  Eddy Elfenbein, December 7th, 2015 at 10:13 am

  Friday was an interesting day for the market. Thanks to the strong jobs report and comments from Mario Draghi, investors lifted the S&P 500 back over 2,090. I was invited to be on CNBC’s Trading Nation on Friday afternoon, but the televised part was bumped due to the dramatic news conference held by police in San Bernardino. (The other clips we did are on CNBC’s website here, here and here.

  A few items from our Buy List. On Thursday, Express Scripts (ESRX) increased the authorization of its stock buyback program by 60 million shares. The company now has approval to buy back 265 million shares of its own stock.

  Oracle (ORCL) said it will report earnings December 16. That will be the final Buy List earnings report of this calendar year.

  I also liked this piece on why Signature Bank (SNBY) may be the best bank in the world.

  The kind folks over at Expecting Alpha took a closer look at our 2016 shopping list.

• Morning News: December 7, 2015
  Eddy Elfenbein, December 7th, 2015 at 7:07 am

  OPEC’s Divisions Keep Oil Low and Volatile

  China Adds Most Gold in November in 5 Months as Price Slumps

  Reaping What They Sowed

  A Revolving Door Helps Big Banks’ Quiet Campaign to Muscle Out Fannie and Freddie

  Citigroup Said to Fall Under ECB Supervision After Units Combine

  The DOJ Just Put Electrolux Shares Into a Spin Cycle

  French Shipping Company CMA CGM, Buying Neptune Orient for $2.4 Billion

  Why Reckitt Wants Part of Pfizer

  AIG Offering Up to $1 Billion Stake in Chinese Insurer PICC P&C

  Despite Low Oil Prices, Gates Looks to Gulf in Anti-Poverty Campaign

  Toshiba Accounting Scandal Draws Record Fine From Regulators

  Martin Shkreli, the Bad Boy of Pharmaceuticals, Hits Back

  Sarcasm and Doubt Precede VW’s Update on Chearting Inquiry

  Cullen Roche: How Much Can The Fed Raise Rates?

  Joshua Brown: 10 Million Finance Jobs Lost Since 2000

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