|Bid||21.98 x 1800|
|Ask||21.99 x 1000|
|Day's range||21.92 - 22.12|
|52-week range||18.02 - 22.96|
|Beta (3Y monthly)||0.25|
|PE ratio (TTM)||4.80|
|Forward dividend & yield||1.01 (4.61%)|
|1y target est||N/A|
(Bloomberg) -- Let’s do it again.The Federal Reserve made crystal clear that it doesn’t want U.S. money market rates to spike again like they did early this week, announcing it will -- for the third day in a row -- inject cash into this vital corner of finance.On Thursday, the New York Fed will offer as much as $75 billion in a so-called overnight repurchase agreement operation, adding temporary liquidity to restore order in the banking system. It made the same offer Tuesday and Wednesday, deploying a tool it hadn’t used in a decade. This latest action follows the Fed’s reduction in the interest rate on excess reserves, or IOER, another attempt to quell money-market stresses.The prior operations have calmed markets, with repo rates declining to more normal levels, after jumping to 10% on Tuesday, four times where it was last week. Overnight general collateral repurchase agreement rates continued to retreat Thursday, trading around 2.1%, according to ICAP.After policy makers wrapped up a two-day meeting, Fed Chairman Jerome Powell said Wednesday that the central bank will keep doing these repo operations if that’s what it takes to get markets back on track. He spoke hours after the effective fed funds rate busted through the central bank’s cap, evidence Powell and his colleagues were losing their grip on one of their most important levers for controlling the financial system.To keep things calm, “the Fed is going to have to keep coming in and doing these operations daily,” said Scott Buchta, head of fixed-income strategy at Brean Capital. “Powell kind of minimized the issues of this week at the press conference, but overall the Fed probably did the best they could do for now to address this. But they will likely need to take more action ahead or at least discuss those plans further at their October meeting.”Powell also said the Fed would provide a sufficient supply of bank reserves so that frequent operations like the ones they’ve done this week aren’t required.The only way “to permanently alleviate the funding stress is to rebuild the buffer of reserves in the system,“ according to Morgan Stanley strategist Matthew Hornbach.Relying on repo operations doesn’t resolve the issue of reserves declining as the Treasury rebuilds balances, Hornbach wrote in a note. Having regular operations will also increase market uncertainty as the Fed could halt purchases at any time, while the size of its buying will have to expand over time as reserves drop, he said.“It is certainly possible that we’ll need to resume the organic growth of the balance sheet sooner than we thought,” Powell said, referring to the central bank potentially buying securities again to permanently increase reserves and ensure liquidity in the banking sector.Fed policy makers on Wednesday also lowered their main interest rate for a second time this year.Many strategists had predicted the Fed would take even more aggressive measures to reduce pressures in overnight lending. One idea that’s gotten a fair amount of attention is something called a standing fixed-rate repo facility -- a permanent way to ease funding pressures, as opposed to the ad-hoc operations the Fed has used this week. Many analysts even predicted a Wednesday announcement that the Fed would start expanding its balance sheet.That didn’t happen. However, with the Fed apparently ready to keep injecting liquidity whenever it’s needed, “it’s enough for now,” said Jon Hill of BMO Capital Markets.“Though they didn’t announce a standing repo facility, what they did in essence is set up a ‘sitting’ one that can stand up when it needs to,” Hill said. “The market now knows the Fed will come in during stress conditions. So this will kind of operate in the pressure-valve way that was so needed.”(Updates with Thursday repo open in fourth paragraph.)To contact the reporters on this story: Liz Capo McCormick in New York at firstname.lastname@example.org;Alexandra Harris in New York at email@example.comTo contact the editors responsible for this story: Benjamin Purvis at firstname.lastname@example.org, Nick Baker, Mark TannenbaumFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- Every major U.S. electricity grid is getting significantly greener.Except for the massive one serving 65 million Americans.That’s just as problematic as it sounds for the policymakers, power providers and climate activists looking to wean Americans off fossil fuels. While members of other systems move quickly to add solar and wind to their mixes and slash carbon emissions, the network that keeps the lights on from Chicago to Washington has effectively doubled down on natural gas.In the past two years, it has boosted the amount of power generated with gas by 11,131 megawatts. And developers are planning 34,507 megawatts more. Meanwhile, solar and wind account for 1% of the grid’s installed capacity. “How do you manage the gas build-out with more states boosting renewables targets?” asked Toby Shea, a New York-based analyst at Moody’s Investors Service. “There’s already an overbuild of gas.”It’s not that there’s no interest in the renewable trend in the 13 states connected to what’s called the PJM Interconnection. In fact, it has been inundated with applications from renewable developers — 67,000 megawatts of wind and solar in total, from 684 projects.But there’s also this economic reality: PJM crisscrosses a section of the U.S. that’s home to some of the world’s most abundant natural gas reserves. As fast as the cost of wind and solar energy has been dropping, gas in some of these parts is cheaper.The hundreds of cities, counties, states and utilities linked to PJM have different and often competing goals and interests. Some are keen on getting greener, and the continued gas build-out threatens those ambitions.But the rush to make electricity without carbon emissions could put the gas plants in a bind. The potent brew of falling costs for emissions-free renewables could jeopardize facilities that are built to last for decades. They could end up as expensive bit players, filling in only during extreme weather or when the wind or sun aren’t cooperating.By 2035, it will be more expensive to run 90% of the gas plants being proposed in the U.S. than it will be to build new wind and solar farms equipped with storage systems, according to the Rocky Mountain Institute, a nonprofit supporter of cleaner energy. It will happen so quickly, the institute says, that plants will become uneconomical before their owners finish paying for them.More than half of U.S. states — including New Jersey, which is in PJM — have required renewables in their electrical blends. This group includes California, which aims to get all of its electricity from emission-free sources by 2045. Even oil-mad Texas is favoring clean power, because wind and solar are so cheap in the Lone Star State. There’s little debate, though, that natural gas is still needed. A Texas heat wave that drove its grid to the brink of blackouts last month was a reminder of how essential the fuel remains. Even in California, gas continues to provide round-the-clock power.“We just can’t turn that gas off today,” said Joseph Fiordaliso, president of the New Jersey Board of Public Utilities. “The infrastructure was built years ago. We have to build the infrastructure for wind.”As a grid, PJM is most focused on providing reliability at the lowest cost, said Stu Bresler, its senior vice president of markets and planning. In other words, just because projects are in the queue — gas-fired, wind or solar — doesn’t mean they’ll come to fruition.There is, however, a $70 billion offshore wind market forming off the Atlantic coast. And while renewable energy is still a fraction of PJM’s grid today, Bresler said, ``It’s still growing, and we're going to continue to see penetrations of solar and wind’’ as some states work to meet their renewable energy goals. He also pointed out that renewable energy makes up a larger share of the actual power generated in PJM -- as much as 5%. It makes sense, considering solar and wind farms have essentially zero fuel costs and can produce cheaper than other resources. The gas-fired bet once seemed pragmatic. Appalachia needed new electricity to replace gigawatts of retiring coal-fired power and nuclear reactors. The cheap shale reserves were right there. Meanwhile, the region isn’t endowed with the sunshine of California or the constant breezes of Texas. ``PJM doesn’t have the advantage geographically when it comes to wind and solar,’’ Bresler said.Private equity responded by pouring in tens of billions of dollars to build a new gas-fired fleet.Several of the nuclear plants are now being subsidized to stay online. As for gas, the threats posed by renewables prompted Devin McDermott, a commodities strategist at Morgan Stanley, to write a recent research note that he titled, “Could natural gas be a bridge to nowhere?”His question takes the premise that has underpinned the boom and flips it on its head: What if grids need new gas plants for only half of their lives? The economics do seem to be changing. In Texas, a gas plant built in this decade went bankrupt in 2017, in part because it struggled to compete with the state’s cheapest power sources: renewables.Among the half-dozen competitive power markets in the U.S., PJM is a big draw for investors, thanks to its size, capacity payments granted through an annual auction and the proximity to shale formations, said Mark Florian, head of the global energy and power infrastructure team at BlackRock Inc.Ravina Advani, head of energy, natural resources and renewables at BNP Paribas SA, estimated that there will be $6 billion of debt financings supporting new gas-fired plants in PJM by mid-2020.Last year’s auction was a boon for developers. More than $8 billion in supplier payments were granted for the year starting in June 2021. But the next auction, originally scheduled for May and then for August, won’t be held until a federal agency decides how to balance the competing interests of states and power generators in PJM’s territory.Backers of gas-fired units are “taking a lot of risk going into this type of market, when it’s already oversupplied and with renewables coming,” said Moody’s Shea. “It’s just a matter of time.” (Updates with comments from senior vice president at PJM starting in 13th paragraph)\--With assistance from Dave Merrill, Christopher Cannon, Hannah Recht and David R Baker.To contact the authors of this story: Brian Eckhouse in New York at email@example.comNaureen Malik in New York at firstname.lastname@example.orgTo contact the editor responsible for this story: Lynn Doan at email@example.com, Simon CaseyReg GaleAnne ReifenbergFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg Opinion) -- The Federal Reserve’s interest-rate decision on Wednesday was never going to be easy for Chair Jerome Powell.He and his colleagues had to reach consensus on how to weigh the U.S.-China trade war against a still-solid labor market and American consumer, not to mention signs of a pickup in inflation. They had to contend with whipsawing bond markets, which were pricing in almost three quarter-point rate cuts for 2019 at the start of September but expected fewer than two ahead of the Federal Open Market Committee’s meeting.Then came repo madness.Incredibly, and seemingly out of nowhere, the usually tranquil plumbing of the financial system went haywire. And that might be putting it mildly. The rate for general collateral repurchase agreements in the more than $2 trillion repo market reached a record 10% on Tuesday. The effective fed funds rate broke policy makers’ 2.25% cap on Wednesday. This isn’t supposed to happen.And yet, this week’s developments didn’t even merit a mention in the FOMC statement. Some analysts, like Matthew Hornbach at Morgan Stanley, said it was likely the Fed would announce permanent open market operations. Jeffrey Gundlach, chief investment officer of DoubleLine Capital, said in a webcast on Tuesday that the central bank might expand its balance sheet as a way of “baby stepping” to more quantitative easing.This doesn’t mean the Fed doesn’t care, or that it won’t ultimately adopt those measures. Most likely, it just didn’t have enough time to react in a big way. Policy makers did drop the interest rate on excess reserves, or IOER, by 30 basis points to regain control over short-term rates. The IOER rate had been set at the upper bound of the fed funds range until June 2018, when the Fed raised it by only 20 basis points. It’s now down to 1.8%, while the 25-basis-point cut to the fed funds rate sets the range at 1.75% to 2%. Basically, if stress in funding markets keeps pushing short-term rates higher, the sharper cut in IOER makes it somewhat less likely that the fed funds rate will breach the upper bound.Powell eventually addressed repo markets head-on, largely at the prodding of reporters: “Going forward, we’re going to be very closely monitoring market developments and assessing their implications for the appropriate level of reserves.And we’re going to be assessing the question of when it will be appropriate to resume the organic growth of our balance sheet. And I’m sure we’ll be revisiting that question during this inter-meeting period and certainly at our next meeting.We’ve always said that the level is uncertain. That’s something we’ve tried to be very clear about. We’ve invested lots of time talking to many of the large holders of reserves to assess what they say is their demand for reserves…But yes, there’s real uncertainty, and it is certainly possible that we’ll need to resume the organic growth of the balance sheet earlier than we thought. That’s always been a possibility.”The key word he seemed to stress was “organic.” That’s because any hint of expanding the balance sheet can be misconstrued as a resumption of post-crisis quantitative easing. However, it would be a mistake to consider it the same as QE. Hornbach explained it eloquently on Bloomberg TV before the Fed’s decision:“Quantitative easing, the purpose of that is to expand reserves in the system from the status quo of the reserves that are needed to keep liquidity and the fed funds target within that range. When you start losing control of the target rate, you need to increase reserves in the system, but that’s not necessarily quantitative easing as we know it in a traditional sense. They’re not trying to ease monetary policy, they’re trying to get better control over that short-term interest rate.”That’s the type of nuance that can get lost on investors if the Fed, and those who write about it, aren’t careful.In fact, Wednesday’s interest-rate decision could be seen as something of a “hawkish cut.” Policy makers’ “dot plot” signaled sharp divisions among policy makers, as Powell predicted, with the median estimates calling for no more rate cuts through 2020. It then shows one quarter-point hike in 2021 and another in 2022, albeit with many different estimates.Five of them appeared to indicate they didn’t agree with the decision to reduce rates on Wednesday. That almost certainly includes Esther George and Eric Rosengren, who openly dissented. James Bullard dissented as well, but because he favored a 50-basis-point cut. On any other Fed day, this squabble between the hawks and doves would take center stage. After all, it’s the first decision with three dissents since 2016 and the first with dissents in both directions since mid-2013. Citigroup Inc.’s Economic Surprise Index, for one, suggests those who opposed easing policy have a point: It’s at the highest level since April 2018. President Donald Trump, to no one’s surprise, sides with Bullard. He tweeted almost immediately after the Fed decision that Powell and the central bank have no “guts.”The real test of the Fed’s mettle will be if the short-term rate markets continue to exhibit stress. The New York Fed has been the subject of market ridicule for having to cancel its first overnight repo operation in a decade on Tuesday because of technical difficulties and for being late to do so in the first place. Powell said that funding markets “have no implications for the economy or the stance of monetary policy.” That’s true — but only until they do.To contact the author of this story: Brian Chappatta at firstname.lastname@example.orgTo contact the editor responsible for this story: Daniel Niemi at email@example.comThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
(Bloomberg) -- They’re longer than classics like Henry David Thoreau’s “Walden” and modern hits like J.K. Rowling’s “Harry Potter and the Prisoner of Azkaban” but nowhere nearly as engaging.Yet each week, American state and local governments crank out the doorstops by the dozens, creating a dismal stack of soporific homework for money managers studying whether or not to buy their bonds.So Morgan Stanley, one of Wall Street’s biggest investment banks, experimented with farming out the job of reading 120,000-word bond prospectuses to robots, seeing if the results could yield a sort of CliffsNotes that may separate the signal from the noise.Strategists Michael Zezas and Mark Schmidt ran 150 official statements through a machine-learning program. They said it revealed some patterns that could help investors avoid credit-rating downgrades or defaults without reading through hundreds of pages of reports.They focused on bonds issued by local agencies that are backed by riskier projects like continuing-care retirement centers, hospitals and speculative real estate developments. That’s where doing close research is most important because local governments almost never default on their own bonds. Here’s some lessons:More words, better odds: Official statements for continuing-care retirement centers that didn’t default averaged 20,194 words longer than those that did, they found. The tendency also held true for so-called dirt bonds sold for real estate projects.Executive bios: Speculative developments tend to rely on the word “Mr.” to highlight the management of the project, since the riskier deals need to play up their executives’ skills as a key selling point.Boring is better: Higher-quality debt tended to have more references to the financial statement than defaulted or downgraded debt. The more “boring” the documents, the better, the strategists said.It was Morgan Stanley’s first time using natural language processing on municipal-bond issuers’ official statements, Zezas said in an email. The bank reported the results to clients to show how Morgan Stanley takes a quantitative approach to its research.He said they used relatively new techniques and principles outlined by a Stanford University professor, who experimented with it as a way to sift through the huge amounts of information involved in modern political affairs.Zezas said the bank plans to further test its conclusions. Their next step is to gather more official statements, get more data and solicit feedback from clients. The bank said the findings could help analysts when they are asked to provide a quick take on a new bond deal, not serve as their computerized replacements.“We don’t recommend cursory credit analysis,” Zezas and Schmidt said in their report to clients. “However, sometimes a simple rule-of-thumb can help.”\--With assistance from Jeremy R. Cooke.To contact the reporter on this story: Amanda Albright in New York at firstname.lastname@example.orgTo contact the editors responsible for this story: Elizabeth Campbell at email@example.com, William Selway, Michael B. MaroisFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg Opinion) -- September is only halfway done and already the S&P 500 Index is up 20% for the year. This is a remarkable achievement, given that earnings growth has stalled and the bond market is pricing in almost a 40% chance of a recession over the next 12 months. That just shows the degree to which lower interest rates have supported stocks. And yet, as is often the case in life, too much of a good thing isn’t always, well, good.This year’s rally – during which the S&P 500’s forward price-to-earnings multiple expanded to 17.6 from 14.5 at the start of January – can be credited to the Federal Reserve’s dovish pivot, which led to the central bank’s first rate cut since 2008 and sparked big declines in market rates. The yield on the benchmark 10-year Treasury note dropped to as low as 1.43% earlier this month from 2.80% back in January.Simple discounted cash-flow analysis shows how lower rates make future earnings more valuable now, justifying higher multiples for equities even without profit growth. So, logic would dictate that the lower rates go, the better for equities. But the experience in Europe shows that there comes a point where ever lower rates begin to work against stocks.In a research note last week, the strategists at Bank of America pointed out how even though 10-year bond yields in Germany have fallen below zero, stocks there only trade at a multiple of about 14 times earnings. That’s little changed from mid-2014, when yields were around 1.25% and the European Central Bank cut its benchmark deposit rate to below zero. The same is true for the broader euro zone, with the Euro Stoxx 600 Index trading at 14.5 times projected earnings, not much different from mid-2014.Of course, the euro zone’s struggles are worse than the U.S. Still, the increasing globalization of the world economy means America is having a much harder time shrugging off the slowdown elsewhere. Morgan Stanley says the U.S.’s share of global gross domestic product has shrunk from 22% in 1990 to 15% today. That’s a big reason traders are pricing in at least three more Fed rate cuts over the next 12 months, bringing its target rate for overnight loans between banks to 1.50% from 2.25% currently.On top of that, the number of Wall Street strategists slashing their Treasury yield estimates has grown in recent weeks, citing the outlook for weaker global growth and inflation. UBS Group AG and BNP Paribas SA, which are among the select group of dealers authorized to trade with the Fed, both slashed their 10-year forecasts, predicting yields will drop to 1% by the end of 2019. Could yields go even lower, tracking those in Europe and Japan by following below zero? Former Fed Chairman Alan Greenspan doesn’t thing that’s a crazy idea, telling Bloomberg News last month that he wouldn’t be surprised if they turned negative.It’s true that the stock market posted a massive rally between early 2009 and mid-2015, rising as much as 215%, as the Fed kept rates near zero and pumped money directly into the financial system via quantitative easing. But that was a time when investors largely believed that central banks still had a lot of arrows left in their quivers to stimulate the economy. That’s not really the case now. The S&P 500 fell four straight days after the Fed cut rates on July 31, dropping a total of 5.59%.Also back then, profits were in recovery mode and stocks were relative cheap, with the forward price-to-earnings ratio holding below 14 for much of that time and peaking at around 17 times in late 2014 – about where it is now - just before the S&P 500 turned in its first annual decline since 2008. This year, though, earnings growth is flat and Bank of America’s strategists are telling its clients that forecasts for an 11% increase next year are “too high.” Stocks have had a good run, with the S&P 500 closing last week at 3,007. The median estimate of strategists surveyed by Bloomberg in January only expected the benchmark to rise to 2,913 this year. But with economists moving up their time frame for when the next recession will hit to 2020 from 2021, earnings estimates coming down and price-to-earnings ratios on the high side, it won’t be easy for stocks to keep marching higher even if the Fed does continue to slash rates. To contact the author of this story: Robert Burgess at firstname.lastname@example.orgTo contact the editor responsible for this story: Beth Williams at email@example.comThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Robert Burgess is an editor for Bloomberg Opinion. He is the former global executive editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
(Bloomberg) -- Treasuries extended their September tumble, sending the benchmark 10-year yield to its highest level since early August, amid stronger-than-expected U.S. economic data.Bonds fell after August retail sales and the September University of Michigan consumer sentiment index increased more than forecast, buoying confidence in the economic expansion. Yields across the curve rose, with the 10-year climbing more than 12 basis points to 1.90%, up from a three-year low of 1.43% early this month. The spread between 2-year and 10-year yields, considered a recession indicator when it inverts, as it did in August for the first time since 2007, widened back above 9 basis points.The decline in Treasuries comes as some central-bank officials are re-evaluating the effectiveness of easing efforts ahead of the Federal Reserve’s Sept. 18 meeting. Odds of a quarter-point rate cut, which futures had fully priced in for weeks, slipped to reflect a small chance of no change. Helping fuel the move, top European Central Bank officials questioned the quantitative-easing plan unveiled Thursday. Yields climbed across developed markets: In Japan, the 10-year rate had its biggest intraday jump in more than year.“Central banks are looking at how much effect they are having by continuing to lower rates,” said Jason Ware, head of institutional trading for 280Securities in San Francisco. “The market may have overshot to the downside and driven yields too low with an overly grim outlook on what’s happening in the economy.”Traders also pared expectations for how much more the Fed will lower rates this year, and now see less than a half-point of additional easing. At one point last month, the market had priced in almost 70 basis points of further cuts in 2019 as trade friction mounted.The increase in U.S. 10-year yields spurred a jump in futures volume as the rate exceeded its 50-day average.As Treasury yields surged, U.S. dollar swap spreads -- the gap between the fixed component of a swap and the matching Treasury yield -- also climbed. That’s typically a sign of paying flows exacerbating moves that support higher yields as big investors look to reduce portfolio duration.Lack of interest from homeowners to refinance their mortgages in a rising yield environment may be one of the factors that would drive investors to reduce duration by selling Treasuries, or paying in swaps.In August, Treasuries had their biggest monthly gain since the depths of the 2008 financial crisis and yields tumbled on the back of sliding yields in Europe and concern about the U.S.-China trade war. The magnitude of the rally left the market vulnerable to a sell-off, interest-rate strategists at Morgan Stanley said last week.(Adds swaps in sixth, seventh paragraphs and strategists in eighth paragraph.)\--With assistance from Edward Bolingbroke.To contact the reporter on this story: Vivien Lou Chen in San Francisco at firstname.lastname@example.orgTo contact the editors responsible for this story: Benjamin Purvis at email@example.com, Mark Tannenbaum, Elizabeth StantonFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- Cloudflare Inc., a firm that helps websites protect and distribute content, priced its shares above an already elevated target to raise $525 million.San Francisco-based Cloudflare sold 35 million shares on Thursday for $15 each, the company said in a statement confirming an earlier report by Bloomberg. On Wednesday the company had increased its target ranged for the shares to $12 to $14, after earlier marketing them for $10 to $12.Cloudflare is valued in the listing at $4.4 billion based on the shares listed as outstanding in its filings with the U.S. Securities and Exchange CommissionAbout 10% of Fortune 1,000 companies are paying Cloudflare customers, according its filings. The company said its security services blocked an average of 44 billion cyber threats a day during the second quarter.For the first six months of the year, Cloudflare lost $37 million on revenue of $129 million, compared with a loss of $32 million on revenue of $87 million for the same period last year, it said.8chan, ShootingsCloudflare acknowledged in its filings that its risks included negative publicity from the use of its network by 8chan, a website favored by white supremacists and used by gunmen before mass shootings in El Paso, Texas and Christchurch, New Zealand, this year. It also cited the use of its services by neo-Nazi website the Daily Stormer around the time of the 2017 protests in Charlottesville, Virginia.Conversely, it also faced concerns about censorship for terminating the accounts of such groups, it said.The company has a dual-class stock structure giving its Class B stockholders 10 votes per share, according to its filings. Co-founder and Chief Executive Officer Matthew Prince will control 12.9% of the company and have 17.1% of the voting power, the company said.The offering is being led by Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. Cloudflare’s shares are expected to begin trading Friday on the New York Stock Exchange under the symbol NET.(Updates with valuation in third paragraph)To contact the reporters on this story: Crystal Tse in New York at firstname.lastname@example.org;Nabila Ahmed in New York at email@example.comTo contact the editors responsible for this story: Liana Baker at firstname.lastname@example.org, Michael Hytha, Anne VanderMeyFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg Opinion) -- It’s been a busy week for General Electric Co. On Tuesday, the company announced it would sell another chunk of its stake in its Baker Hughes oil and gas venture, ultimately raising about $3 billion. Two day later, it said it would buy back up to $5 billion of bonds. This activity gave CEO Larry Culp something concrete to point to on Thursday when he took the podium at a Morgan Stanley conference to update analysts and investors on the industrial conglomerate’s turnaround progress. “We’re doing what we said we would do," Culp said. That means "tending to the balance sheet, making sure that we’re strengthening our overall financial position, and making sure that we’re in a position to run the businesses better."GE’s efforts to reduce its bloated debt load are a positive; that’s what it’s supposed to be doing. Culp’s ability and willingness to be proactive is undoubtedly an improvement over former CEO John Flannery’s long stretches of paralysis. But the timing of this flurry of deleveraging steps strikes me as slightly curious.Most companies wouldn’t go around buying back bonds when rates are so low; they would swap them out for new bonds at better terms. GE, however, has pledged not to add any new debt through 2021, and appears to be trying to signal its liquidity is such that it doesn’t need to. Yet Culp has also talked about running the company with a higher cash balance in order to reduce its reliance on commercial paper. And the $21.4 billion divestiture of GE’s biopharmaceutical business to Danaher Corp. – the linchpin in Culp’s debt reduction plan – hasn’t closed yet.Perhaps the Baker Hughes stake sale and the bond buyback were planned well in advance; perhaps GE is just being opportunistic and taking advantage of recent trading conditions. I can’t help but notice, though, that GE’s actions this week appeared to hit at the heart of criticisms made by Bernie Madoff whistle-blower Harry Markopolos last month in a lengthy, explosive report.Markopolos has an agreement with an undisclosed hedge fund that will give him a share of the profits from bets that GE shares will decline. GE has called his allegations “meritless.” His report claimed GE needed to immediately funnel $18.5 billion in cash into its troubled long-term care insurance business and accused the company of avoiding a writedown on its Baker Hughes stake. One way to read the debt buyback is that GE must not be too worried about a fresh cash shortfall at the insurance unit if it’s willing to plop down $5 billion to repurchase bonds on a voluntary basis. And GE’s stake sale this week will bring its holdings in Baker Hughes below 50%, which will prompt a charge that could be in the ballpark of $8 billion to $9 billion but also allow management to put one more inevitable writedown behind them.(1)There were a number of flaws in the Markopolos report, not least his liberal use of hyperbole, but it struck a nerve with investors who were already wary of more negative surprises at GE and the opaqueness of its underlying financials. Whether or not there’s any truth to his allegations, being on the hot seat like that appears to have shaken GE executives as well.What’s most telling is the one Markopolos criticism that GE hasn’t yet moved to address, and that is the lack of detailed transparency in its financial statements and the seeming differences in its aviation unit’s accounting relative to engine partner Safran SA. Culp missed an opportunity when he became CEO to move away from GE’s historical tendency to rely on a myriad of adjustments and a micromanaging of Wall Street expectations to bolster the appearance of the company’s results. This week’s actions and Culp’s presentation were in a way a reminder that of all of Markopolos’s claims, questionable as the others may be, that one has the potential to stick.Otherwise, the key takeaways from Culp’s Thursday presentation were that he expects the drop in interest rates to result in a “somewhere south” of $1.5 billion hit to its GAAP reserve assumptions for the long-term care insurance business, before accounting for any other adjustments as part of a third-quarter test. GE's projected pension benefit obligations, meanwhile, will also increase because of the drop in interest rates. Offsetting that is an improvement in returns, but GE is still looking at an impact in the $7 billion range, Culp said. Neither of those figures are disastrous, but serve as a reminder that it’s not just regular old debt that’s looming over GE. There are many other demands on its cash.Culp gave no update to GE’s expectation for roughly zero dollars in industrial free cash flow this year. Interestingly, he did allude to the idea that the company’s forecasts for 25 to 30 gigawatts of gas turbine demand this year may prove overly dire; still, I remain skeptical of GE’s ability to drive a huge surge in free cash flow at the power unit over the next few years. Other challenges at the company include persistent questions about the true underlying free cash flow of the aviation unit, the loss of cash-flow contributions from divested assets and the need to backstop its huge underfunded pension balance with more cash. Culp didn't rule out additional contributions to the pension over the next few years.Progress on the debt reduction front is good, but without a significant increase in free cash flow, it will be a while before GE can shift investors’ focus elsewhere. (1) GE said in July that deconsolidating Baker Hughes's results from its own would prompt a $7.4 billion writedown, based on the company's stock price at the time of $24.84. This week, it said every $1 change in Baker Hughes's stock price would increase or decrease that number by about $500 million. GE's share offering was priced at $21.50 and the stock was trading on Thursday for about $22.50.To contact the author of this story: Brooke Sutherland at email@example.comTo contact the editor responsible for this story: Beth Williams at firstname.lastname@example.orgThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
(Bloomberg) -- Donald Trump said he would award a medal to a retired Army colonel he credited with saving about 2,700 people at the World Trade Center during the Sept. 11 terrorist attacks, as the president remembered the 18th anniversary of the incident.Trump said he would soon posthumously award the President’s Citizens Medal to Rick Rescorla, who at the time of the attacks was vice president of security at Morgan Stanley.“Rick died while leading countless others to safety,” Trump said at a ceremony at the Pentagon on Wednesday. “We will ensure the memory of his deeds will never ever be forgotten; his memory will forever endure.”Trump took part in a moment of silence at the White House before traveling to the Pentagon’s 9/11 memorial. The president congratulated himself for raising U.S. defense spending and warned adversaries not to attack the U.S. again.“We do not seek conflict but if anyone dares to strike our land, we will respond with the full measure of American power and the iron will of American spirit,” he said.Trump announced on Saturday that he had planned -- and then canceled -- a secret meeting with leaders of the Taliban to be held Sunday at Camp David to discuss ending the war in Afghanistan. The U.S. launched its war against the militant group, then controlling Afghanistan, after its leaders refused to surrender Osama bin Laden and other leaders of al-Qaeda. Trump now says peace talks are “dead,” and U.S. troop reduction plans in Afghanistan are unclear. “We’d like to get out, but we’ll get out at the right time,” Trump said on Monday.‘Policemen’ NowTrump ousted National Security Advisor John Bolton on Monday, and Afghanistan was one of the key flashpoints between the men. Trump has made clear he wants the U.S. out of Afghanistan -- and even said he could end the war quickly at a cost of millions of lives, which he said he doesn’t want to do. “We’ve been policemen there for a long time, and the government is going to have to take responsibility or do whatever it is they do,” he said Monday.U.S. lawmakers passed a law in July to provide lifelong medical care to Sept. 11 first responders. At the signing ceremony, Trump highlighted his own view of the attack, saying: “I was down there. I spent a lot of time down there with you.”In the aftermath of the attacks, more than 200 New York City firefighters have died, while hundreds more first responders have claimed illness and disability from working on the site of the attacks.To contact the reporter on this story: Josh Wingrove in Washington at email@example.comTo contact the editors responsible for this story: Alex Wayne at firstname.lastname@example.org, Elizabeth WassermanFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
Morgan Stanley’s investment bank continues to suffer from the same headwinds that hit revenues in the first half of the year, while its net interest income will fall thanks to a “dramatically different” interest rate environment, finance boss Jon Pruzan. Speaking at the Barclays financials conference in New York on Wednesday, Mr Pruzan said client activity was down in equities trading thanks to “a lot of uncertainty about what’s going to happen next” in everything from trade wars to the global economy. In fixed income, the credit business is going well but foreign exchange trading volumes are at “very low levels” he said, while in investment banking, new listings are “clearly much slower than they were last year”.
(Bloomberg) -- Morgan Stanley has hired Umi Mehta, an investment banker focused on internet companies, from Bank of America Corp. in Silicon Valley, according to people familiar with the matter.Mehta has started work as a managing director of global internet at Morgan Stanley’s office in Menlo Park, California, working alongside Kate Claassen as co-head of the group, said the people, who asked to not be identified because the hiring isn’t public.Representatives for Bank of America and Morgan Stanley declined to comment.Mehta joined Bank of America in 2010 and was most recently a managing director and head of U.S. internet investment banking, according to his LinkedIn page. Mehta previously worked at Royal Bank of Canada and Bank of Montreal.He has advised clients including Uber Technologies Inc., AppLovin Corp., Carvana Co., Angie’s List Inc., Chegg Inc., Rent the Runway Inc., Wix.com Ltd. and Zynga Inc., the people said.Morgan Stanley has advised on some of this year’s biggest internet-related IPOs, including ride-hailing giant Uber, which raised $8.1 billion in May.More listings are on the way from companies including home fitness start up Peloton Interactive Inc., which filed for an IPO last month.Online fashion marketplace Poshmark Inc. has delayed its IPO until next year to focus on improving sales, people familiar with the matter said last week.To contact the reporter on this story: Liana Baker in New York at email@example.comTo contact the editors responsible for this story: Daniel Hauck at firstname.lastname@example.org, Matthew Monks, Nabila AhmedFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- Terms of Trade is a daily newsletter that untangles a world embroiled in trade wars. Sign up here. Undaunted by Turkey’s near-certain failure to come close to its economic growth goal this year, President Recep Tayyip Erdogan has set a target for 2020 that’s twice as ambitious.Gross domestic product must grow 5% in 2020, a target the government is “going to lock in on,” Erdogan told an economy forum on Wednesday. The official goal of 2.3% for this year is all but unattainable after a continuous annual contraction that started in the fourth quarter of 2018. Morgan Stanley estimates Turkey’s potential growth at about 3.7%.Erdogan, who advocates an unorthodox theory that high interest rates cause rather than curb inflation, made clear that easier monetary policy will be the centerpiece of Turkey’s efforts to replicate growth levels last seen before a currency crash last year. Reiterating that he’s “allergic” to elevated borrowing costs, the president said the central bank under its new governor is committed to bringing interest rates lower.“The policy rate will fall further,” Erdogan said, citing the recent slowdown in consumer inflation. “I’m opposed to elevated levels of interest rates.”With the economy still fragile but on the mend, a government approach that’s starting to take shape is focused on creating incentives for banks to ramp up credit while lowering the cost of money. But the fixation on growth at all costs risks spooking the market and exposing the vulnerabilities that pushed Turkey to the brink a year ago.Chasing GrowthIn a sign that investors remain on edge, the lira traded weaker against the dollar after Erdogan’s comments, on course for its first drop in five days.The aim unveiled by Erdogan is comparable to the targets in the government’s medium-term program before the Turkish currency’s meltdown upended its plans in 2018. The goal for economic growth in 2020 was revised to 3.5% a year ago, with new projections due soon.For now, a slump in investment and subdued bank lending are in the way of faster recovery. The International Monetary Fund sees Turkey’s GDP expansion at under 3% in 2020-2021 and rising to around 3.5% in the following two years. The most upbeat forecasts for next year put growth at 3.5%, according to a Bloomberg survey of analysts, whose median is 2.2%.Cheaper MoneyErdogan’s call for lower rates also sets the tone for the central bank as it prepares to review borrowing costs a week from now. The second straight cut is probably a given with inflation heading for lows not seen since last year’s currency crash. A more stable lira and the effect of a high base of comparison could push price growth into single digits as early as this month.Governor Murat Uysal had only been in office a few weeks when he slashed the benchmark by 425 basis points to 19.75% in July, the biggest rate cut in at least 17 years. His predecessor was fired for not cutting rates quickly enough.The new governor signaled that more cuts were on the cards but also vowed to preserve “a reasonable rate of real return” for investors. Adjusted for prices, Turkey’s rate is now at 4.7%, above peers such as South Africa, Russia and South Korea.Still, stimulus alone may not be enough for an economy more burdened by leverage than in the past, according to Morgan Stanley.“Monetary and fiscal policy were better equipped to cope with economic slowdowns previously,” Ercan Erguzel, an economist at Morgan Stanley, said in a report. “So, a strong recovery from 2020 onwards may not be a foregone conclusion.”To contact the reporter on this story: Cagan Koc in Istanbul at email@example.comTo contact the editors responsible for this story: Onur Ant at firstname.lastname@example.org, ;Lin Noueihed at email@example.com, Paul Abelsky, Mark WilliamsFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
Morgan Stanley doesn't believe the S&P; 500's current breakout above 3,000 will last. It also doesn't expect Fed rate cuts to rekindle growth.
Morgan Stanley (MS) is optimistic about Disney’s (DIS) solid pipeline of Marvel superhero movies and the company’s new streaming service.
Yet in recentyears, Box and other cloud companies have shown that's just not true, craftingsolutions for even the most regulated industries
Bank of America CEO Brian Moynihan just went a long way in showing not all millenials are broke.