Tuesday February 21

Stocks rose today as investors returned after the long weekend. The S&P 500 and the Dow Jones each rose 0.6% to 2,365 and 20,743 respectively. The KBW Bank index rose 0.6% while utilities outperformed rising 1.1%. Economic data today showed that the PMI Manufacturing Flash Index came in at 54.3 which is a slight slowdown and below consensus, however still a solid rate of expansion. Across the globe PMI numbers came in well which is what contributed to the optimism in markets today. Composite PMI in the eurozone was at the highest level in nearly six years. In Europe France’s 10 year bond yield rose 2bp after polls shifted in Le Pen’s favor. The 2 year Greek bond yield also fell 154bp to 8.18% after reports of progress being made with creditors. In the U.S. the 2 year Treasury yield rose 2bp to 1.21%. The 10 year Treasury yield rose 1bp to 2.43%. 2yr vs 10yr finished at 1.22%. In FX markets the dollar was for the most part stronger. USD rose 0.7% against EUR to $1.0538. USD rose 0.5% against JPY to Y113.69. USD fell 0.1% against GBP to $1.2475. Oil prices were higher on the day as investors continue to hope that Opec’s cuts will fully materialize. WTI rose 1.2% to $54.02 and Brent rose 1% to $56.72.

Large banks have been less willing to make loans to commercial real estate developments going towards apartment buildings. That is a shift from recent years. After the financial crisis less individuals and families could afford their own homes for a variety of reasons including tighter lending standards and depleted savings. That led to an increase in demand to rent apartments and as a result rental rates rose by 26% since 2010. However there is now an oversupply of apartment units and it is expected that the sector is going to face problems going forward. To add to the supply problem more than 378,000 apartments are going to become available this year which is the highest level in 30 years. Last quarter 88,000 units were completed and made available but just 50,000 of those ended up being rented. As banks pull back from lending to the space developers will have to go to other sources of credit which carries a higher cost. Those sources of capital could include mezzanine loans and preferred equity. In earnings calls from U.S. Bancorp, BB&T, and PNC Financial executives have voiced concerns over that sector. Janet Yellen similarly mentioned the problem briefly in a testimony last week. Rents in major cities have been fell in 2016 from the previous year and nationwide rent growth has slowed down.

On Sunday Kraft pulled its bid for Unilever just two days after approaching the company for a $143bn takeover. Shares in both companies fell and Unilever’s stock price lost 6.6% yesterday in London. Unilever’s shareholders don’t like this development because they have been pushing for the consumer goods company to sell off some of its businesses to boost returns to shareholders. Regardless that this deal will not go through it shows that Unilever’s executives need to do something soon to appease shareholders. Unilever’s operating margins are just 15% which lags peers while Kraft’s leads the group at higher than 25%. Share price performance at Unilever has also underperformed peers going as far back as 2009. Kraft on the other hand has already achieved a lot of the synergies and increased efficiencies following the Heinz acquisition and now investors may be looking for another acquisition to increase returns. Kraft will now be looking for other targets and some analysts are eying Mondelez International due to its presence in emerging markets and shared history with Kraft. Companies that produce goods such as Kraft and Unilever are struggling as consumers shift towards healthier alternatives. Unilever was an attractive takeover for Kraft because of its presence in personal and home care businesses which boast higher margins. That could provide investors with some direction for what Kraft might be looking for next. Colgate Palmolive fits that description in some ways and could be a potential target for either Unilever or Kraft.

Yahoo and Verizon came to an agreement today about how to modify the terms of their deal in light of the recent data breaches. Verizon wants to acquire Yahoo to combine it with AOL in order to compete with Facebook and Google in the digital advertisement realm. However after Yahoo announced two data breaches that left more than one billion accounts were hacked and names, email addresses, birthdays, phone numbers and passwords were stolen. That put the deal on hold as Verizon went to consider the potential fallout from those disclosures. Separately the SEC is still investigating Yahoo’s disclosures of those events regarding how much the company knew at what point in time and whether or not that was appropriately communicated to shareholders. Yahoo is also facing several class-action lawsuits. The final deal reduced Yahoo’s value from $4.8 to $4.45 for a $350mm cut in valuation. Verizon is planning on combining Yahoo’s digital advertising and websites with AOL. Those two companies combined have just 2% of global digital advertising revenue compared with Google and Facebook which have 32% and 13% respectively.

Tuesday February 21

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