Category Archives: Fixed Income

Staples Would Get 60% Boost From Office Depot Takeover: Real M&A

Staples Inc. (SPLS) has a chance to increase next year’s earnings by at least 60 percent through an acquisition of Office Depot Inc. (ODP), the only other major U.S. office-supplies chain still in business.

With analysts estimating that more than $1 billion of costs could be cut by combining the struggling retailers, earnings per share in the 2015 calendar year would rise about 60 percent in an all-stock merger, according to data compiled by Bloomberg. If Staples were to pay entirely with cash or debt, the accretion would be twice that, while a mix of cash and stock would yield something in between, the data show.

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2014 Was an M&A Bonanza for the Ad Tech World

Consolidation has long been predicted in the advertising technology market, and based on the M&A activity of 2014, the deal-making appears to be well under way.

In January, Facebook snapped up video ad firm LiveRail for an estimated $400 million. Yahoo spent more than $200 million on mobile ad firm Flurry in July and then agreed to acquire video ad network BrightRoll for $640 million.

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World Led by U.S. Poised for Fastest Growth Since 2010

According to Bloomberg,

The world economy is primed for its fastest expansion in four years, with the U.S. propelling the improvement in output.

Global growth will accelerate at least 3.4 percent in 2014 from less than 3 percent this year as the euro area recovers from recession and China and other emerging markets stabilize, according to economists at Goldman Sachs Group Inc., Deutsche Bank AG and Morgan Stanley. The U.K. will be a standout, while Japan risks damping the mood by suffering a mid-year slowdown after an April increase in sales taxes.

“So far it’s been a very bumpy, below-par and brittle expansion,” said Joachim Fels, co-chief global economist at Morgan Stanley in London. “Next year could bring a very important transition: a transition to a sounder, safer and more sustainable recovery.”

The upturn should prove bullish for equities and bearish for bonds. If it boosts corporate confidence in the durability of growth, it could further fuel demand, raising the odds that 2014 will break the pattern of recent years and come in better, rather than worse, than projected.

“An improving global-growth picture is widely forecast but, in our view, also still doubted in the investor community,” said Dominic Wilson, chief markets economist at Goldman Sachs in New York. “We therefore see room for markets to price in a better cyclical story.”

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Jobless Reports Fuel Fed Bets, U.S. Stocks Drop After GDP Jobless Reports Fuel Fed Bets

According to Bloomberg,

(Corrects Dollar General stock price in 17th paragraph.)

U.S. stock-index futures fell, signaling equities will extend a four-day slide, after data showing faster-than-forecast economic growth fueled speculation the Federal Reserve will curb stimulus spending.

Aeropostale Inc. lost 3.8 percent as the retailer’s fourth-quarter loss forecast was wider than estimated. Apple Inc. rose 1.4 percent as China Mobile Ltd. moved closer to offering its 759 million subscribers iPhones. General Growth Properties Inc. added 4.5 percent as Standard & Poor’s said it will add the mall owner to its benchmark index this month.

S&P 500 Index (SPX) futures expiring this month fell 0.3 percent to 1,787.20 at 9:12 a.m. in New York. Dow Jones Industrial Average contracts lost 39 points, or 0.3 percent, to 15,847 today.

“The numbers today pave the way for the Fed” to cut stimulus, Matthew Kaufler, a portfolio manager at Federated Investors Inc. in Rochester, New York, said by phone. His firm oversees $363.8 billion. “There’s angst in the short run, but I think it’s only positive in the long run that the Fed begin to taper and extricate itself from being the ultimate market maker.”

The S&P 500 has surged 26 percent this year, challenging 2003 for the biggest annual gain in the last 15 years, as the Fed refrained from reducing its monthly bond purchases and corporate earnings surpassed estimates.

Stimulus Bets

The central bank has said it will start slowing the pace of stimulus if the economy improves in line with its forecasts. Policy makers, who next meet Dec. 17-18, will probably wait until the March 18-19 Federal Open Market Committee session before reducing monthly bond purchases to $70 billion from $85 billion, according to the median estimate in Bloomberg’s latest survey of economists conducted on Nov. 8.

The U.S. economy expanded in the third quarter at a faster pace than initially reported, led by the biggest increase in inventories since early 1998. Consumer spending slowed. Gross domestic product climbed at a 3.6 percent annualized rate, up from an initial estimate of 2.8 percent and the strongest since the first quarter of 2012.

Separate data showed applications for U.S. employment benefits unexpectedly fell last week to the lowest level in more than two months. Jobless claims decreased 23,000 to 298,000 in the week ended Nov. 30, the Labor Department said.

Data tomorrow may show the unemployment rate fell to 7.2 percent, matching the lowest level since 2008.

Fed Bank of Atlanta President Dennis Lockhart, a backer of record stimulus, said today the central bank when considering tapering should announce a total limit on purchases or a timetable for dialing down the program.

‘Transition Process’

“If and when the FOMC arrives at a decision to wind down asset purchases, it’s my view that it will be helpful to the transition process to provide as much certainty as possible about how this will be done,” Lockhart said in a speech in Florida.

The S&P 500 has retreated 0.8 percent in the past four sessions, dropping to a two-week low after closing at a record on Nov. 27. The index fluctuated yesterday before closing lower by 0.1 percent, as optimism that lawmakers in Washington were close to a budget deal offset better-than-forecast jobs data that fueled stimulus-tapering concerns.

The gauge’s rally this year has pushed valuations higher, with the equity benchmark trading for about 16.1 times its constituents’ projected earnings, up 23 percent from the beginning of 2013 when it traded at 13.1 times projected profit.

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Bezos Says Amazon Tests Drones for Same-Day Parcel Delivery

According to Bloomberg,

Amazon.com Inc. is testing drones to deliver goods as the world’s largest e-commerce company works to improve efficiency and speed in getting products to consumers.

Chief Executive Officer Jeff Bezos unveiled the plan on CBS’s “60 Minutes” news program in the U.S., showing interviewer Charlie Rose the flying machines that can serve as delivery vehicles. Bezos said the gadgets, called octocopters, can carry as much as 5 pounds within a 10-mile radius of an Amazon fulfillment center. Amazon may start using the drones, which can make a delivery within 30 minutes, within five years pending Federal Aviation Administration approval, Bezos said.

“It will work, and it will happen, and it’s gonna be a lot of fun,” he said in the “60 Minutes” interview broadcast yesterday.

Amazon's Prime Air

Amazon, based in Seattle, has been introducing ways to get products to consumers faster, seeking to keep shoppers coming back to its Web store instead of going to brick-and-mortar retailers. The company said last month it was teaming up with the U.S. Postal Service to begin Sunday delivery to members of its $79-a-year Prime program.

Delivery drones also are being used by the Australian company Zookal to deliver textbooks, said Oliver Lamb, director of Sydney-based Pacific Aviation Consulting. In China, the SF Express delivery company is experimenting with drones in the southern city of Dongguan, according to a report by the Civil Aviation Resource Net of China.

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Administration Says Obamacare Website Repair Goals Reached

According to Bloomberg,

President Barack Obama raised the stakes on his three-year-old health-care overhaul yesterday, declaring that fixes to his administration’s troubled insurance exchange website make it ready to sign up 800,000 people a day.

The site, healthcare.gov, is sure to be tested immediately today — “Cyber Monday” — when deals from online retailers draw more Americans to their computers and the Internet.

The site’s stated new capacity of 50,000 simultaneous users hasn’t been proven in the real world, and U.S. officials aren’t certain the site will hold up, according to a person familiar with the repairs who asked not to be identified because the information isn’t public. At the same time, the reduced error rate of 0.75 percent per page, down from 6 percent in October, still means many users will encounter a glitch in clicking through multiple pages to enroll in a health plan.

If consumers find continuing problems with the site “it is going to help drive this to a huge advantage for the Republican party, for a broader agenda which will not be just fixing the website; it’ll be scaling back the law,” said Robert Blendon, a professor of health policy and political analysis at the Harvard School of Public, in a telephone interview.

The effect of the repairs may not be known until the middle of January, when the administration reports on enrollment in December. About 100,000 people signed up for coverage through the federal system last month, a roughly four-fold increase from October even as healthcare.gov was undergoing repairs, said a person familiar with program’s progress.

Open Mind

Healthcare.gov

Healthcare.gov

The enrollment jump may be an encouraging trend for the administration, signaling that consumers are keeping an open mind about the U.S.-run exchange even as it suffered software glitches and breakdowns. Americans face a mid-December deadline to sign up for coverage beginning Jan 1.

In a report released yesterday by the Health and Human Services Department, the administration said it has fixed or improved more than 400 software issues and made the site between two and five times faster through a series of hardware upgrades, including new servers. The site’s average response time has fallen from eight seconds in October to less than one second over the past three weeks, the report said.

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EU’s Highest-Paid Bankers in U.K. as Bonus Awards Exceed Cap

According to Bloomberg,

Top U.K. investment bankers were paid an average of 1.95 million euros ($2.65 million) in 2012, as bonuses continued to exceed caps set to take effect next year, according to the European Union banking regulator.

The highest-paid bankers in the U.K. had an average bonus-to-salary ratio of 370 percent, according to the European Banking Authority survey of EU finance workers who earn more than 1 million euros a year. In France, the ratio was 495 percent.

The EU brokered a deal in February to outlaw banker bonuses that are more than twice fixed pay, a move lawmakers said would prevent excessive payouts and curb irresponsible risk-taking. The U.K. government challenged the caps at the EU’s highest court in September, saying they were illegal.

“Self-regulation does not work and the report illustrates why the European Parliament took the unprecedented step of inserting a hard bonus cap in the absence of action by the industry,” Arlene McCarthy, a U.K. lawmaker in the European Parliament’s Socialist group, and lead legislator on a previous round of EU bonus rules, said in an e-mail.

Britain was home to 2,188 investment bankers earning more than 1 million euros in 2012, the highest amount in the EU, while Spain had 37, the London-based EBA, set up in 2011 to harmonize banking rules in the EU, said in the survey. France and Germany had 117 and 100.

Capping Bonuses

Workers Pass Clocks in the Canary Wharf Business District (Bloomberg)

Workers Pass Clocks in the Canary Wharf Business District (Bloomberg)

The EBA said in May that any banker paid more than 500,000 euros should be covered by the new rules capping bonuses. The watchdog also targeted the best-paid 0.3 percent of staff in a bank, and some bankers with bonuses higher than 75,000 euros.

The boost to fixed pay means “less alignment between performance and pay,” Syed Kamall, a U.K. Conservative party lawmaker who represents London in the European Parliament, said in an interview.

Senior retail bankers in Spain were better paid than their investment banking colleagues, and were the highest-earning in Europe in 2012, making an average of 2.2 million euros a year, according to the report. That’s compared to 1.7 million euros for investment bankers there.

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