Wells Fargo Reputation Problem Affecting Its Commercial Lending

While Wells Fargo’s peers JP Morgan Chase and Citigroup’s loan book gave optimistic outlook, Wells Fargo’s senior management expects its two key classes of business loans to fall from second quarter levels. Wells Fargo’s total loans outstanding was warned of soft lending, down by $3 billion from previous quarter.

The Chief Financial Officer Mr. Shrewsberry provided several possible causes to this tough time to grow its loan book, mainly due to its reputational issues which may most likely be hurting its commercial-lending business, not just the consumer business.

Wells Fargo’s governance controversies haven’t been limited to the retail bank. Recently the Justice Department is probing into Wells Fargo’s wholesale-banking unit committed fraud by editing customers’ documents without proper consent. Wells Fargo’s also booked $171 million of costs for compensation to customers who were improperly charged for currency trades. These revelations of governance issues will most likely escalate Wells Fargo’s loan book’s problematic outlook because of soft lending. Given all these negative news, it is reasonable to assume more borrowers might turn away from Wells Fargo and borrow from its credible peers for lending rather than from this controversial bank.

https://www.wsj.com/articles/wells-fargos-problems-spread-to-business-lending-1537020001

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Staples To Acquire Essendant in $996 Million Deal

Staples Inc., an American multinational office supply retailing corporation, on Friday September 14th, announced a definitive agreement to acquire Essendant, formerly known as United Stationers, a national wholesale distributor of office supplies, with consolidated net sales of $5.3 billion. According to the definitive agreement, Staples will acquire all of Essendant’s outstanding shares of common stock for $12.80 a share. The transaction value is worth $482.7 million in cash, or $996 million including net debt.

Prior to the acquisition agreement with the office-supplies retailers of $12.80 a share, Essendant had a pending offer with Genuine Parts, a supplier of automotive parts as well as office products. On Thursday, April 12th, Genuine Parts said it would spin-off its wholesale distribution business S.P. Richards and merge it with Essendant (ESND.O) in a tax-free transaction for shareholders, as it focuses on its industrial and auto parts businesses. Genuine Parts said on this Monday that it would not extend a new offer and expected the deal agreement to end.

The Staples proposal has met resistance from Essendant shareholder Pzena Investment Management, which as of June 10, Pzena was Essendant’s largest shareholder, with a 12.9% stake. Pzena Investment Management insisted that the Genuine Parts offer was still superior. Staples on Friday announced it would pay the $12 million breakup fee to Genuine Parts as part of its agreement with Essendant.

https://www.wsj.com/articles/staples-to-acquire-essendant-for-482-7-million-1536933114

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Salesforce Founder Marc Benioff buys Time Magazine for $190 million

Eight months ago Meredith Corp. purchased Time Inc., and has now sold off its segment to Benioff. The sale is expected to close within 30 days. Paper publications and magazine services have declined over the last few years because everything is now shifting to digital.

Over the past few years, many wealthy tech families have been purchasing publications, Benioff is the latest to join the list. He thinks that Time has an amazing brand and is in the forefront of journalism for years because of its ability to depict the American’s point of view. Over the years, Time’s magazine has been reducing printing costs and investing in digital opportunities. Times has decreased its physical circulation from 3 million to 2.3 million in a 6 months period. Now, due to its expanding digital presence, it has increased its platform’s unique visitors from 27.4 million in 2015 to 31.7 million in 2018.

Despite expansion, the Benioff family will face issues such as declines in print advertising and newsstand sales. Many magazines have struggled to translate to online platforms due to declining revenues however Times Magazine’s expanding user base will provide solid cash flows for expansion and further digital investments.

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Comcast and Fox to Settle Fox Deal via Blind Auction

Over the past 5 years, the growth of DTC (Direct-to-Consumer)/On-Demand services has transformed the face of the technology industry. Companies like Netflix and Amazon have been major competitors with a growth rate of over 95% in the past year. Users have been migrating from cable and broadcast television onto DTC platforms which has severely damaged the business segments of Comcast and Disney, who as a result, are trying to transition to DTC. Disney recently won a bidding war to acquire $71 billion of Fox’s assets including their online platform Hulu. However, Disney is also going after sky, a company in which Fox owns 39% stake. Indubitably, Fox’s ability to obtain the remaining 61% may have played a major role in the successful execution of the deal.

Sky is the largest pay-TV operator in Europe with 23 million customers and their own On-Demand service, Now TV. This will allow Comcast and Fox to accelerate their transition to online streaming and give them access to new customers to migrate onto those platforms. For the last two year, Fox and Comcast have been locked in a bidding war and the war is reaching its final phases.

Regulators have decided to settle the bidding war by doing a blind auction next week. Blind auctions are when bidders submit secret offers to a third-party arbiter and the one with the highest bid will win. Blind auctions are common for commercial transactions, but are very rare in deciding potential M&A deals for large scale public companies. If neither of the competitors drop out of the bid war by Saturday, then they will head to a blind auction overseen by UK regulators. Comcast seems to have an upper hand in this because they still have a plethora of excess cash and stocks to finance the bid since they withdrew bidding offers for Fox when competing with Disney.

https://www.cnbc.com/2018/09/17/comcast-and-fox-on-course-to-settle-pursuit-of-sky-with-blind-auction.html

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Boston Fed Published Research Regarding Monetary Policy Framework

There are beliefs among market participants that the Fed is applying early 2000 thinking to its current policy approach. As the role of the Fed becomes increasingly intertwined with the economy compared to decades ago, with an unprecedented large balance sheet and real interest rate near the bottom; challenges faced by FOMC require constant reflection on the current market environment.

“First, admittedly the choice of the 2 percent inflation target reflected a commonly used target of other central banks, and was consistent with a literature that viewed a 2 percent target as likely to be in the neighborhood of optimal. However, much of that literature was based on before-crisis research that estimated that the effective lower bound for the policy interest rate would rarely be hit…”

With unemployment at ultra-low, many notches below the Fed’s long-term estimate of near 4.5%, is it a mistake that we’ve been focusing on the wrong target this entire time?

https://www.bostonfed.org/news-and-events/news/2018/boston-fed-economists-suggest-a-new-model-for-periodically-evaluating-monetary-policy.aspx

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Additional Tariff – Escalating Trade War

Major players in the market have been watching the tariff talks as soon as the news release in the week that dialogues will resume between Beijing and Washington regarding coming to a mutual agreement. The market rally after was short-lived as major indices paired the gains by the end of the week. Looking back, although no one expected a resolution coming out quickly from the dialogues that took place a month ago, it was still incredible that two sides slapped $16 billion of tariffs on each other as they were actively engaging in solving the discrepancy.

The second round of $200 billion tariffs just ended their comment period and the President tweeted after “I hate to say this, but behind that there is another $267 billion ready to go on short notice if I want.” Let’s ponder on this for a second, China will have to seek other retaliatory measures since their total import does not exceed $150 billion, they could only target those US corporations which operate in China and sell goods and services in China. If that were to take place, it will definitely go contrary to the current administration’s pro-business agenda.

Therefore, the next round is likely the point where average American will hear from major firms how tariffs are hurting their businesses, perhaps that will delay the roll-out of even bigger scale trade war.

https://www.theguardian.com/us-news/2018/sep/17/donald-trump-united-states-threatens-to-impose-200bn-import-tariffs-on-china-in-trade-war

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U.S. Consumer Confidence Brightens

U.S. consumer sentiment, published by University of Michigan survey every month, is at 100.8 – one of the highest number recorded in recent years, representative of a 6.0% year over year change. An index number of 100 represents the conditions in 1966 – the index’s baseline. This signals far better optimism of consumers in comparison to the sluggish gains recorded for the recovering years after the great recession.

Many tailwinds play into the current phenomenal, including a tight labor market and an increase in household income due to the tax-cut. Wages have seen upward pressure as the economy is experiencing full-employment at 3.9% while the labor market continues to provide more jobs than the number of people who are actively seeking.

Another highlight of the survey is that a slight majority of respondents expects the current expansion to continue uninterrupted over the next five years. Considering that we are already experiencing the longest bull markets in history, the prospect of having the longest period of economic growth would undoubtedly help businesses to continue investing in capital expenditure.

https://www.wsj.com/articles/u-s-consumer-sentiment-jumps-in-early-september-1536935921

Posted in Consumer Confidence, Consumer Spending, dollar, dollar general, Fed, Federal Reserve Bank, Forecasts, GDP, Global News, Global Trade, Macro/Sector News, stock market, stocks, Uncategorized | Tagged , , , , , , , , , , | Leave a comment