10 Year Treasuries Trade in Tightest Range Since July on Fed Speculation

      What seems to be somewhat of a surprise recently is the fact that US treasuries are trading at their tightest ranges since July, which most believe is due to Fed speculation.  10 year US treasuries have been trading within a quarter percent point, a record low, as potential forecasted job growth failed.  This is leading to speculation that the Federal Reserve will, as a part of QE3, announce another round of bond purchases and further increase their balance sheet. Yields on the 10-year treasury note benchmarks have risen from the least in more than 2 weeks after the United States Labor department showed figures that the US has added approximately 146,000 jobs in November, causing the unemployment rate to drop to 7.7 percent.  Federal Reserve officials have expressed that they will continue to buy bonds until the job market improves greatly.  Industry leaders expect easing to continue, guaranteeing that we will “see more balance sheet operations,” expecting the Fed to continue to be “hyper active.”

      Hedge fund managers and other speculators have increased their long positions in 10-year treasury notes according to the US Commodity Futures Trading Commission according to recent data.  As expected, volatility in these treasuries dropped further this week to the smallest value in over 5 years.  Bank of America’s volatility index, the MOVE, touched just 51 basis points on Dec 3, the lowest it’s been since April 1988.  Looking at all these numbers, the obvious question that follows, especially to us students is – who cares? In all actuality, this is a great sign for the Untied States economy.  What these numbers demonstrate, and what can be seen in the market, is a sense of stability.  The volatility that has been plaguing out economy over the last year and a half is finally leveling off. Confidence in the markets, it seems, has finally been restored.

- Vivek Shah

Foreign Retailers Poised to Enter Indian Market

                 The lower house of India’s parliament, the Lok Sabha, today voted to allow foreign supermarkets to conduct business in India. The Congress Party backed government managed to push the measure through, after to minority parties abstained from voting. India badly needs Foreign Direct Investment (FDI) as its once booming economy has slowed to around 5.5% percent growth in GDP and is suffering from high inflation.

            The move to open the retail sector to foreign investors was first approved in September, and did not need parliamentary approval. However in the face of opposition protests, Indian Prime Minister Manmohan Singh decided to put the measure to vote in both houses of parliament. The vote passed with 253 members for and 218 against while 74 abstained. The measure has been largely contended because many believe that it will put many small stores out of business. However, the passage of the measure in the lower house raises hopes that it can also be passed in the upper house, where it faces a tougher challenge.

            Allowing foreign retailers would enable the likes of Wal-Mart, Tesco, and Carrefour to enter the market. India’s retail sector is expected to grow to $725 billion by 2017. The entry of supermarkets would greatly change India’s retail sector, which has traditionally been dominated by small owner manned shops.

            The government and many economists applauded the vote, believing that investments made by foreign retailers would bring much needed capital into the economy. Under heavy pressure due to high inflation, the rupee has fallen 18% against the dollar. Foreign retailers could also help improve India’s supply chain, where many agricultural products spoil before they can reach the market. India’s SENSEX stock index increased by 0.2% to 19391.86, a 19-month high, riding investor confidence that the measure will pass through the upper house of parliament as well. 

-Ashish Sathe

Cash-Trapped Companies

Recently, we’ve heard a lot about companies holding excess cash on their balance sheets. Many claim that if these companies invested some of the cash they’re been hoarding, the US economy would get the boost it needs. Ironically, even though American companies currently hold near record amounts of cash, many of them are “cash poor” in the US. This is because a majority of their cash is trapped in foreign countries, mainly in Europe and Asia. The list of companies with cash aboard is extensive and includes some major US companies such as Johnson & Johnson, GE, Whirlpool and Microsoft.

So why can’t they just bring the cash back to the US? This mainly has to do with the fact that these companies would incur a 35 percent tax rate on corporate profits from the cash they bring back. A recent WSJ article mentioned the company Emerson Electric, which holds almost $2 billion in cash abroad, has only been able to bring back $500 million to the US. This meant that the company had to resort to borrowing money in the US for share buybacks, to pay out dividends and even to pay its taxes. This impact is being seen on many American companies that claim they would gladly bring more cash holdings back to the US if the effect of taxes were minimized. They state that being able to move their funds back will definitely boost capital spending in the US and help improve the job market. The Obama administration is proposing a lower tax rate, but a solid plan has yet to be developed. 

-Ritika Gawande 

Photo Credit: http://tedfreeway.com/2010/10/26/trapped-overseas-billions-could-be-stranded-waiting-to-return/

Losses to Autonomy and the Unending Nightmare for H-P

            While the news broke surrounding Hewlett Packard’s sudden write-down of its November 2011 acquisition of Autonomy nearly two weeks ago, developments continue to plague H-P as it settles this mammoth blunder. 

            On November 20^th, H-P’s stock went tumbling 12% as the company announced a massive $8.8B write-down, primarily tied to its acquisition of Autonomy.  H-P directly accused Autonomy of "serious accounting improprieties, disclosure failures and outright misrepresentations".  The Founder of Autonomy, Michael Lynch, has openly rejected these accusations, and has gone as far as sending an open letter to H-P’s board asking for an explanation of what these supposed “accounting improprieties” are.     

            Unfortunately, the write-down of Autonomy is only the most recent in a slieu of problems that have been plaguing H-P as the stock has fallen over 50% this year, amid management turnover, decreased product demand, and growing debt. 

            While it might seem permissible for a company to have large write-downs in the case of accounting misrepresentations, too many flags have been thrown to look at this as a one-sided mistake.  The market was openly pessimistic about H-P’s acquisition from the beginning.  From the time H-P announced the Autonomy acquisition to the time the deal was completed, H-P’s market capitalization dropped $15B from $58.5B to $43.5B.  Additionally, H-P’s share price drop of 12% on the $8.8B write-down announcement represented a $3B drop in the company’s market capitalization, implying that the market had already priced in a $5.5B loss. 

            One of the most appalling details about the Autonomy write-down is the uncanny resemblance of the acquisition write-down to the original acquisition premium.  H-P originally paid a $5.2B acquisition premium on Autonomy back in 2011.  Now it has made a $5B write-down on that original acquisition ($3.8B of the original $8.8B write-down was not due to Autonomy).

            A year after H-P’s acquisition, the company has written down nearly the entirety of its original acquisition premium.  Even if Autonomy is guilty of the accounting misrepresentation it is accused of, can anyone really find H-P free of blame?             

-Kyle Cameron

Boeing Renews Labor Talks

Boeing Co and the union that represents its 23,000 engineers and technicians agreed to resume labor talks earlier this week. Both sides have now been sparring over mediation of the talks as well as dates and times to meet. Boeing stated late Friday that the union declined its offer to attend meetings with the Federal Mediation and Conciliation Service on Monday. The Society of Professional Engineering Employees in Aerospace, or SPEEA, said that it contacted the mediator before Boeing, and have been accommodating in the places to meet. It has taken a bigger initiative in setting up dates, and has been the one waiting for Boeing to confirm these meetings. 

"I've responded that we have a mediator assigned to us ... but if Boeing is dissatisfied with that mediator, they need to take that up with FMCS not us," Ray Goforth, SPEEA executive director, said.

"We also don't see the need to meet in a hotel. I offered to meet on Boeing property if that would make them comfortable."

Both sides have been seeking to negotiate since April for a labor contract that ended November 25th. An analyst at Sterne, Agee & Leach that has followed Boeing stated that he has hope that the dispute will be resolved with mediation. He notes that there has not been a strike by the SPEEA since 2000 and are rare.

Boeing states that it has offered a fair proposal in a tough economic environment. The new proposal would still cut back the growth rate of compensation of for both engineering and technical employees significantly. These disputes come at a time when Boeing has enjoyed record production rates and orders, and is looking to increase jet production from 52 to 60 per month.

Boeing's stock price only dropped 3 cents to $74.09 reflecting the opinion that this conflict will be resolved in the near future and will not cause any serious damage to Boeing's production.

-Rishi Chheda

New Hope for a Fiscal Cliff Solution

          

            President Barack Obama met with a group of CEOs from some of America’s largest companies yesterday regarding the upcoming fiscal cliff. Approximately 14 CEOs participated in the meeting, including Llyod Blankfein of Goldman Sachs, Joe Echevarria of Deloitte, and Marissa Mayer of Yahoo.

            The CEOs want the government to act fast before a combination of over $500 billion of spending cuts and tax hikes takes effect in 2013. Economists predict that the policies could cut GDP growth by up to four percent and raise unemployment by one percent, sending the US back into a recession. Losses from the economy are estimated at $280 billion from ending the Bush era tax cuts, $125 million from the expiration of the payroll-tax holiday, $40 million from expiring emergency unemployment benefits, and $98 billion from spending cuts under the Budget Control Act, as estimated by J.P. Morgan analysts.

            Republican and Democratic party leaders in Congress are currently at a gridlock over the relative levels of spending cuts and tax hikes. Obama along with the Democrats in the Senate are calling for around $80 billion in spending increases, while Republicans are resisting letting tax rates raise for Americans earning over $250,000.

            The general consensus among the CEOs was to allow tax rate increases for the richest Americans. Echevarria said that most CEO’s agreed that there needs to be a revenue increase. Business leaders agreeing to the tax increases could possibly cause Republicans to end their long standing opposition to tax increases, without fear of angering wealthy individuals. This new development increases the chances that a deal will be reached before the deadline, averting a financial disaster. Investor optimism for a deal caused the S&P 500 to increase 0.8% on Wednesday.

Ashish Sathe

Disney and the Biggest Entertainment Franchises

At the beginning of this month, Disney announced their acquisition of Lucasfilm, keeper of the Star Wars franchise, for $4.05 billion. Once again, the mass media giant is proving that it is willing to pay huge money to land a big franchise.

Three years ago, Disney acquired Marvel Entertainment for $4.24 billion and that led directly to the production and release of a series of massively successful superhero movies, including Thor and Captain America last year and The Avengers earlier this year, which grossed $1.5 billion worldwide in box offices. In addition, Disney and Marvel currently have a number of sequels to these movies and even more related films in the pipeline. Dating back even further, Disney’s acquisition of Pixar for $7.6 billion brought with it the animation studio’s list of film series, including Toy Story and Monsters franchises. With the purchase of Lucasfilm, Disney is hoping to take over, revive, and build upon the existing Star Wars franchise in a similar fashion.

According to Lazard Capital Markets analyst Barton Crockett, this deal with Lucasfilm looks even more promising than the Marvel acquisition and “for about the same purchase price, Disney is buying another big, young male skewing franchise to expand its diversification from young females.” This is a great strategy for Disney and really filled in the gap in their audience appeal as the more traditional image of Disney is definitely heavily skewed to the female population. Lucasfilms will not only give Disney the rights to Star Wars which Disney is already taking advantage of with its planned introduction of Star Wars VII in 2015, but also the Indiana Jones franchise and a special-effects powerhouse, Industrial Light and Magic.

More recently, Disney has released an entire series of events planned in 2013. With its D23: The Official Disney Fan Club, Disney will be hosting many events in major cities such as Boston, Chicago, and Los Angeles, in the US. And just yesterday, Disney’s Board announced that it will be increasing annual cash dividend by 25% to $0.75 per share. All the signals are positive and Disney seems to be riding on a great wave, and it will be very interesting to keep a close eye on this media giant in early 2013.


Jennifer Zhang