Category: Investment Grade Weekly

Fund Flows & Issuance: According to Lipper, for the week ended January 25th, investment grade funds posted a net inflow of $1.589bn. The total year-to-date net inflow into investment grade funds ended the week at $9.697bn. Per Bloomberg, investment grade corporate issuance through Thursday was ~$25bn. Thus far, $146.8bn of investment grade corporate bonds have been issued in January.

(WSJ) Apple Sues Qualcomm Over Licensing Practices

• The suit, filed Friday in federal district court in the Southern District of California, claims that Qualcomm leveraged its monopoly position as a manufacturer of baseband chips, a critical component used in cellphones, to seek “onerous, unreasonable and costly” terms for patents, and that Qualcomm blocked Apple’s ability to choose another supplier for chipsets.
• The complaint seeks $1 billion in rebate payments that Apple says Qualcomm has withheld as retribution for Apple’s participation in an investigation by South Korea’s antitrust regulator.
• Apple said in a statement that it sued Qualcomm “after years of disagreement over what constitutes a fair and reasonable royalty.”

(Bloomberg) Ford Seen as ‘Canary’ With Record Leases Spurring Used Glut

• A glut of used vehicles has started to depress prices. That trend will intensify as Americans will return 3.36 million leased cars and trucks this year, another jump after a 33 percent surge in 2016, according to J.D. Power. The fallout has already begun, with Ford Motor Co. shaving $300 million from its financial-services arm’s profit forecast for this year.
• “Ford is the canary in the coal mine,” said Maryann Keller, a former Wall Street analyst who’s now an auto industry consultant in Stamford, Connecticut.
• This drag may be hitting the rest of the industry, too. A National Automobile Dealers Association index of used-vehicle prices declined each of the last six months of last year. When auto lenders lease out vehicles, they charge the customer a monthly payment and make an assumption of the car or truck’s value when it will be returned for resale. If vehicles are depreciating more than expected, losses can pile up.
• “We haven’t seen anything that suggests that what’s happening to our portfolio is different from what’s happening across the industry,” Bob Shanks, Ford’s chief financial officer, told analysts in November.
• Another way automakers could cope is by expanding their offerings of certified pre-owned vehicles — used cars with extended warranties — to try to bolster prices.
• The question for auto companies is whether pulling those levers will offset any losses from overlooking the true cost of using hefty incentives and discounted leases to boost new-vehicle sales.

(Bloomberg) Dow Sees DuPont Merger Closing in 1H, CEO Says on Conf. Call

• Dow Chemical says DuPont merger could be a “2Q close”; confident that company can solve EU antitrust concerns, CEO Andrew Liveris said during conf. call.
• Says other jurisdictions will “fall in line” after EU
• Sees Trump using executive orders to lift regulatory burdens
• Sees DOW benefiting from infrastructure plan, Keystone Pipeline decision
• DOW is a big U.S. exporter, so Trump border tax “big positive”
• Sees Trump lifting regulatory burdens in 30-60 days
• Sees new plant delays maintaining ethylene operating rates

Fund Flows & Issuance: According to Lipper, for the week ended January 18th, investment grade funds posted a net inflow of $1.893bn. The total year-to-date net inflow into investment grade funds ended the week at $8.108bn. Per Bloomberg, investment grade corporate issuance through Thursday was ~$29bn. Thus far, $121.8bn of investment grade corporate bonds have been issued in January, besting consensus estimates of $112bn.

(Press Release) IBM Reports 2016 Fourth-Quarter and Full-Year Results

• Highlights
  • Diluted EPS from continuing operations: GAAP of $4.73; Operating (non-GAAP) of $5.01
  • Revenue from continuing operations of $21.8 billion
  • Strategic imperatives revenue for full-year 2016 of $32.8 billion up 13 percent (up 14 percent adjusting for currency) represents 41 percent of IBM revenue
  • Cloud revenue of $13.7 billion for full-year 2016, up 35 percent
    
    • Cloud as-a-service annual exit run rate of $8.6 billion at year end, up 61 percent year to year (up 63 percent adjusting for currency)
  • 2017 EPS Expectations: GAAP of at least $11.95; Operating (non-GAAP) of at least $13.80
• “In 2016, our strategic imperatives grew to represent more than 40 percent of our total revenue and we have established ourselves as the industry’s leading cognitive solutions and cloud platform company,” said Ginni Rometty, IBM chairman, president and chief executive officer. “IBM Watson is the world’s leading AI platform for business, and emerging solutions such as IBM Blockchain are enabling new levels of trust in transactions of every kind. More and more clients are choosing the IBM Cloud because of its differentiated capabilities, which are helping to transform industries, such as financial services, airlines and retail.”

(NYT) Morgan Stanley Nearly Doubled Profit From Year Earlier Fourth Quarter

• Morgan Stanley roared in the fourth quarter, but it also exposed the limits of animal spirits. The bank led by James Gorman almost doubled its profit in the period from a year earlier to $1.7 billion. As at rivals, though, return on equity remains subpar.
• Some banking businesses do not fare well when too much hangs in the balance, as occurred with an OPEC meeting, an Italian constitutional referendum and the American election late last year. Fees from new stock sales, for example, fell 5 percent from the third quarter at Morgan Stanley, 19 percent at JPMorgan Chase and 34 percent at Bank of America.
• Trading desks ought to have been reaping the benefit from market mood swings. They certainly performed better in last year’s final quarter than during the same span in 2015. Morgan Stanley’s fixed-income, currency and commodities dealers raked in, at $1.5 billion, nearly three times as much revenue.
• Profitability also remains subdued. With annualized return on equity of 8.7 percent in the fourth quarter, Mr. Gorman is inching toward his 2017 goal of 9 percent to 11 percent. For now, Morgan Stanley keeps failing to cover its cost of capital, generally assumed to be 10 percent for large banks.
• Business may pick up in time, but that story has been told for years. What could power earnings is largely beyond Wall Street’s control: more and faster interest-rate increases from the Federal Reserve and financial rule changes from Washington.
• Morgan Stanley is well placed to benefit from both. It is growing its lending business and its mostly domestic wealth-management unit accounts for an increasing share of the company’s profit. With a capital ratio of 16.8 percent, the bank holds more excess than rivals and thus has plenty to return to shareholders if regulators allow.

(Bloomberg) Key Republicans at Tom Price Hearing Still Wary on Health Law Repeal

• A hearing on President-elect Donald Trump’s choice for health secretary became an arena Wednesday for key Republicans to stress their opposition to overturning the current health law without a clear replacement.
• The panel was considering the selection of Rep. Tom Price (R., Ga.), but much of the session focused on GOP plans for undoing the health law. Sens. Lamar Alexander (R., Tenn.) and Susan Collins (R., Me.) pointedly told Mr. Price their concerns about an initial Republican strategy of repealing the law without an agreed alternative in hand.
• Mr. Alexander, who chairs the Senate Health, Education, Labor and Pensions Committee, warned that the fragile insurance market in his state means he cannot support anything that would trigger further disruption. He finished on a similar note, telling Mr. Price he was confident he had secured his agreement.
• “What I heard from you, I believe I’m correct about this, is that while we intend to repair the damage of Obamacare and that will eventually mean repealing parts of it—major parts of it—that won’t become effective until there are practical, concrete alternatives in place to give Americans access to health care,” he said.
• The GOP-controlled Senate and House have taken their first procedural steps toward repealing the ACA, passing a budget that directs lawmakers to start drafting legislation to dismantle much of the law. But Republicans’ 52-48 Senate majority offers little room for defections as they move ahead.

(Bloomberg Intelligence) Dakota Access Still Has Path to Completion Despite Corps’ Review

• The Dakota Access Pipeline project may be delayed by a new Army Corps environmental review, but that isn’t likely to stop the project from being completed.
• The pipeline lost a court bid to block the Army Corps from preparing an environmental impact statement on the lake crossing, opening up the project to a period of public comment and review ending Feb. 20.
• While publication of the EIS notice somewhat hems in the incoming Trump administration, the new president’s appointees may still withdraw it or reverse course.
• In the interim, the federal district court in Washington could also agree with Dakota Access that the easement was actually granted in July, negating the EIS process completely.
• If the EIS process is allowed to go to completion, that process may last as long as six months.