MarketView for December 20

 

 

Summary

 

The major equity indexes rebounded from early losses on Thursday after Republican House Speaker John Boehner said he would keep working on a solution to the "fiscal cliff" while also slamming President Barack Obama's approach to budget talks.

 

NYSE Euronext (NYX.N) was the S&P 500's largest gainer, rising 34 percent to $32.25 after IntercontinentalExchange indicated that it planned to acquire the operator of the New York Stock Exchange for $8.2 billion. ICE shares were up 1.4 percent to end the day at $130.10.

 

Republicans in the House of Representatives pushed ahead with their own plan to avoid a series of steep tax hikes and spending cuts due in early 2013, complicating negotiations with the White House. Obama has vowed to veto the plan. However, the late news is that the plan did not have sufficient votes and was pulled by the Speaker. This does not bode well for the markets tomorrow.

 

Investors have hoped for an agreement soon between policymakers, but progress has been slow. Boehner said he expected to continue to work with Obama, but repeated his charge that the president and Senate Democrats were trying to "slow walk" the country over the fiscal cliff.

 

Stocks rallied earlier in the week on signs of progress in the fiscal cliff negotiations. But with the S&P 500 up 14.8 percent so far this year, investors are taking the opportunity to engage in some hedging as 2012 comes to a close.

 

Herbalife lost 9.6 percent to end the day at $33.74 following news that hedge fund manager Bill Ackman was betting against the company as part of his big end-of-the-year short.

 

The economy grew 3.1 percent in the third quarter, faster than previously estimated, while the number of Americans filing new claims for jobless benefits rose more than expected in the latest week.

 

Existing home sales rose 5.9 percent in November, more than expected, and by the fastest monthly pace in three years. An index of housing shares gained 0.78 percent. However, KB Home fell 6.4 percent to $15.60 as the company reported higher homebuilding costs and expenses in the fourth quarter.

 

Approximately 6.4 billion shares changed hands on the three major equity exchanges, roughly in line with the daily average so far this year of about 6.46 billion shares.

 

IntercontinentalExchange Proposing Deal to Acquire NYSE Euronext

 

IntercontinentalExchange, is proposing to acquire NYSE Euronext in an $8.2 billion deal. The deal will link up two powerful derivatives exchange and clearing house operators, but threatens to further reduce the clout of the New York Stock Exchange. While the New York Stock Exchange has stood for 200 years as an iconic symbol of U.S. capitalism, it is almost an afterthought in this deal.

 

For ICE, the crown jewel of NYSE Euronext is Liffe, Europe's second-largest derivatives market. Liffe will help ICE compete against U.S.-based CME Group, owner of the Chicago Board of Trade. Derivatives’ trading remains highly profitable for the exchanges, and new rules next year will dramatically expand the demand for clearing over-the-counter contracts.

 

The stock market businesses are less valuable to ICE. The company said it will try to spin off the Euronext European stock market businesses in a public offering, generating speculation it may also have little interest in the NYSE trading floor. Profits from stock trading have been significantly eroded by new technology and the rise of other places for investors to trade, including venues known as "dark pools."

 

ICE's Sprecher will be CEO of the combined organization, and the NYSE Euronext CEO will be president, a ceremonial title at many U.S. companies. In an interview, Niederauer said he would remain at least through 2014 as an "important senior member" of Sprecher's management team.

 

Niederauer will also be CEO of the NYSE Group. The combined company will be based in New York and Atlanta, where ICE is headqurtered.

 

Sprecher and Niederauerhave been friends for years, but the two stopped talking for about six weeks in 2011 when ICE teamed up with Nasdaq OMX Group to make an unsolicited bid for NYSE Euronext. That bid came even as the New York Stock Exchange operator was trying to sell itself to Deutsche Bourse. Regulatory concerns killed both deals.

 

Without the Nasdaq or Deutsche Bourse's huge equity operations, ICE alone has far less overlapping business and should face easy approvals, antitrust lawyers said.

 

The deal values each NYSE Euronext share at $33.12, a 28 percent premium to the stock's closing price on Wednesday. NYSE Euronext stock rose 34 percent to end at $32.25 on Thursday. ICE's shares fell as much as 4 percent but finished regular trading at $127.60, up 1.4 percent on the day.

 

ICE said it would pay annual dividends of $300 million to the companies' shareholders once the deal closes, about what NYSE pays its shareholders now.

 

The deal reflected Niederauer's inability to get his company's share price out of the doldrums. Before the latest ICE offer emerged, NYSE Euronext's shares had fallen by nearly a third since ICE and Nasdaq launched their thwarted joint bid.

 

Further consolidation of exchanges was "inevitable" and ICE was a "great partner," Niederauer said on a call with analysts, so continuing on alone did not make sense.

 

"We can sit here and keep slugging away and keep working hard, but the bottom line is we had not delivered, in my mind, sufficient returns to shareholders," Niederauer said. NYSE bought Euronext, including Liffe, for 8 billion euros in 2007.

 

Sprecher incorporated the stalled stock price - and the unrecognized value of Liffe - as part of his pitch. The two sides negotiated in secret for about eight to 10 weeks, the two CEOs said. In options markets, there were some signs that word might have leaked out, with a sudden upswing in the demand for call options on NYSE, which perform well when a company's share price rises.

 

ICE started out as an online marketplace for energy trading before Sprecher initiated a string of acquisitions from the London-based International Petroleum Exchange in 2001, to the New York Board of Trade and, most recently, a handful of smaller deals, including a climate exchange and a stake in a Brazilian clearing house.

 

ICE's current main operations are in energy futures trading and, it has steered clear of stocks and stock-options trading, key businesses for NYSE Euronext. In clearing, ICE has a popular U.S. over-the-counter and listed business, while Liffe's operation is strong in futures and based in Europe. Concerns over a small amount of competing derivatives business could be addressed with straightforward divestitures, Rosborough said. "It's an open question about whether it will generate questions," he added. "If there is a fix, it will be relatively easy fix."

 

Sprecher said the deal had been "well received" by regulators after he and Niederauer completed a "whirlwind tour" in the United States and Europe ahead of Thursday's announcement. Officials at the European Commission, the Department of Justice and Securities and Exchange Commission declined to comment.

 

Last year, Justice Department objections blocked ICE and Nasdaq OMX's $11 billion bid on concerns the tie-up would dominate U.S. stock listings. The rival $9.3 billion bid by Deutsche Boerse fell afoul of European regulators.

 

A combined ICE-NYSE Euronext would leap-frog Deutsche Boerse to become the world's third-largest exchange group with a combined market value of $15.2 billion. CME Group has a market value of $17.5 billion, Thomson Reuters data shows.

 

ICE said it expected to achieve $450 million in cost savings from the takeover. In the first year after the deal closes, additional earnings of 15 percent are expected.

 

With the deal still a long way from completed, Sprecher and Niederauer said they planned to keep the high-profile NYSE trading floor running. "The floor has value and in particular, it has a lot of brand value," Niederauer said. "So we are committed. Jeff is committed."

 

The exchange was prepared to shut down the floor temporarily during superstorm Sandy and trade completely electronically, Wall Street executives said.

 

Shareholders will have the option of accepting $33.12 in cash per NYSE Euronext share or 0.2581 ICE share or a mix of $11.27 in cash and 0.1703 ICE share, subject to a maximum cash consideration of $2.7 billion.

 

Economy Improving...Slowly

 

Our domestic economy grew faster than previously thought in the third quarter, helped by exports and government spending, but a sluggish global demand and belt-tightening by Washington looks set to put on the brakes again.

 

Other data on Thursday showed factory activity in the mid-Atlantic region picked up this month, while home re-sales in November were the best in three years, indicating the economy retained some vigor early in the fourth quarter. However, a rise in first-time applications for unemployment aid last week suggested job growth remains modest.

 

Gross domestic product expanded at a 3.1 percent annual rate in the third quarter, the Commerce Department said. It was the fastest pace since late 2011 and more than double the second quarter's 1.3 percent rate. A month ago, the department said GDP grew at 2.7 percent pace during the July-September period.

 

It is possible that businesses have hunkered down in the current quarter out of worry that currently stalled budget talks in Washington will fail to steer clear of a $600 billion "fiscal cliff" that could tip the economy back into recession. Even if a deal is reached to avoid the brunt of the blow, a tighter fiscal policy and cooling global economy are still likely to weigh on U.S. growth in coming quarters.

 

In a second report, the National Association of Realtors said sales of previously owned homes surged 5.9 percent in November to a seasonally adjusted annual rate of 5.04 million units. It was the fastest sales pace since November 2009 and confirmed a housing recovery was strengthening.

 

KB Home, the nation's fifth-largest homebuilder, reported a 20 percent rise in quarterly revenue in the latest quarter as selling prices rose, although higher costs still squeezed its margins.

 

Separately, a factory gauge from the Philadelphia Federal Reserve Bank showed activity in the mid-Atlantic region turned up this month after slipping in November, a finding that should ease fears of a hard landing for U.S. manufacturing.

 

In a fourth report, the Labor Department said initial claims for jobless benefits increased 17,000 to a seasonally adjusted 361,000 last week, in the low end of the range they held before Superstorm Sandy struck in late October.

 

The data covered the survey period for the government's report on December nonfarm payrolls and suggested another month of modest employment growth. Job gains so far this year have averaged 151,000 per month, not enough to significantly lower unemployment.

 

In the third quarter, the economy was also buoyed by a big inventory buildup, which added 0.73 percentage point to GDP growth. Economists expect inventories to weigh in the fourth quarter.

 

While growth in consumer spending, which accounts for about 70 percent of U.S. economic activity, was raised by 0.2 percentage point to a 1.6 percent rate, it was little changed from the second quarter's pace.

 

Exports grew at a healthy 1.9 percent rate, rather than the 1.1 percent reported a month ago, while imports fell for the first time in more than three years in a sign of sluggish domestic demand.

 

Government spending was revised to a 3.9 percent growth rate from 3.5 percent, with spending by state and local government growing for the first time in three years.

 

Taking out the boost from inventories and government, demand in the economy remained weak, rising at just a 1.5 percent rate - the slowest since the end of 2009 - and a step down from the 1.9 percent pace logged in the second quarter.