Stocks pulled back slightly today as the busy earnings week continued. The S&P 500 fell 0.4% to 2,143 and the Dow Jones lost 0.3% to 18,169. Economic data today showed that consumer confidence missed expectations, perhaps as a result of political uncertainties, while the Case-Shiller home price index rose in line with estimates. Under Armour reported today and despite growing profits this quarter lowered growth expectations for the future, which as a result led the stock price to fall. GM and Caterpillar both issued negative guidance in the quarters ahead which led to falling stock prices. Conversely Lockheed Martin and Procter & Gamble both beat estimates and prices rose as a result. Rates continued to indicate more Fed rate hike expectations. The two year yield rose 1bp to 0.86% and the ten year yield fell 1bp to 1.76%. 2yr vs 10yr flattened to 0.90%. The dollar was mixed on the day against peers. USD fell marginally against EUR to $1.0886. USD rose marginally against JPY to Y104.22. USD rose 0.5% against GBP to $1.2175 after another sharp selloff brought it to $1.20 before coming back. Oil prices continued to pull back. WTI fell 1.4% to $49.83 and Brent lost 1.6% to $50.65.
LendingClub is set to enter the auto loan space. This is significant because many analysts believe the auto loan lending space has been heating up over the last few years, and on the other end peer to peer lenders such as LendingClub have been struggling to convince investors on the viability of those platforms. LendingClub will enter this space by first offering refinancing options to owners of cars that are less than seven years old. Additionally at the start these options will only be available to customers in California. LendingClub earlier this year fired its CEO and 12% of its workforce after mismarketing loans to investment banks to be securitized. Analysts have been waiting for the company to break into new areas of consumer lending, however it has had limited success in doing so. One of the main challenges in entering into the auto loan space is that the margins will be smaller. For example credit card rates are typically around 13%, so LendingClub has plenty of room to undercut those rates while still leaving room for itself to make money and cushion investors from losses. The average rate on auto loans is much lower, slightly higher than 5%. As such LendingClub will struggle to beat those rates while still leaving margins for itself and investors. Additionally since loans on LendingClub’s platform have reported rising delinquencies and defaults investors will demand higher returns which further would cramp margins.
Merger arbitrage traders have decided to steer clear from the AT&T and Time Warner deal. Time Warner’s deep discount to the acquisition price would result in a 17% annualized return if the deal actually closes next year. However merger arb traders do not appear willing to stomach the regulatory risk. According to one research provider the market is pricing in just a 28% of the deal closing at the current stated terms. Both the increasing size of deals and the number of days they take to close are factors that are turning away merger arbs. Larger deals are more likely to be turned down by regulators. More time for the deal to close may allow deal terms to change, which also could hurt traders seeking to profit from the already specified deal. Regulators have honed in on large mergers recently. The Justice Department has sued to block deals between Cigna-Anthem, Humana-Aetna, Staples-Office Depot, and Halliburton-Baker Hughes. They have taken similarly tough stances on tax inversions. Some arbs have increased their attention on deals that they believe will fail by shorting companies that are set to be acquired.
Continuing with the trend of low rates pushing investors further out on the yield curve, Austria is set to issue 70 year bonds. The e2bn bond will be due in November of 2086. France, Belgium, Spain, and Italy have all raised debt maturing in 50 years or more this year. Mexico, the Philippines, Belgium, and Ireland have all sold 100 year bonds in the current environment. Investors have two options to increase returns in the current environment. They can take more duration risk or they can take more credit risk. The fact that these countries have been pushing out their issuances on the yield curve indicates that investors are willing to take more duration risk. The Austria bonds priced at a yield of around 1.5% which indicates that investors expect inflation to remain very low throughout the next 70 years.