Category: Investment Grade Weekly

Fund Flows & Issuance: Per Bloomberg, investment grade corporate issuance for the holiday shortened week was $11bn. Investment grade corporate issuance so far for the month of April is $31.1bn.

(Forbes) Defying Critics, Apple Continues To Gain On PC Rivals

• If you read enough tech news, you “know” that Apple is blowing it with the Mac. For months now, the headlines have been clear: “How Apple Alienated Mac Loyalists,” Bloomberg wrote back in December. And just yesterday on FORBES, Ewan Spence reported on a Laptop Mag report about Apple’s dwindling customer satisfaction ranking in “Apple Losing Out As Consumers Reject New MacBook Pro.” With this kind of drumbeat, it wouldn’t be surprising to learn Apple is indeed losing market share. Except that it isn’t. On the contrary, the two firms that track PC sales both agree Apple is gaining share in the PC market — as it has nearly every quarter for the past several years.
• Here are the figures for Q1 of 2017: Gartner says Apple sales were up 4.5% over a year ago and market share rose from 6.3% to 6.8% worldwide. That puts Apple in Gartner’s top 5 ahead of flagging Acer. Apple’s total is just 7% behind fourth-place Asus in shipments, suggesting the Mac maker could leapfrog it as well soon. IDC has slightly different figures, with Apple’s Mac total rising 4.1% and share growing from 6.7% to 7.0%. In Gartner’s math, Apple is already fourth. Both agree Apple delivered a bit over 4.2 million computers, a figure which Apple always clarifies by offering a precise number with earnings. (Those are due in a few weeks.)
• Notably, Gartner thinks the PC market contracted by 2.4% over 2016 while IDC sees it growing by a mild 0.6%. Part of that difference is methodology: Gartner doesn’t include Chromebooks in its numbers but does include 2-in-1s like the Surface (iPad Pros? nope). IDC includes Chromebooks, which it credited for at least part of the overall increase, but excludes all detachable tablets — so that means Surface and iPad Pro are out.
• But no matter how you slice and dice the data, it’s good news for Apple, which saw 4%+ unit growth against a flat or shrinking PC landscape. While Apple remains a small slice of the market, it helps to have some perspective on how that slice has grown. Back in 2010, the PC market was a robust 351 million units for the year (per Gartner). Apple wasn’t in the top 5, but searching through its earnings reports yields a total of 14.4 million Macs that year. That was good for just over 4% of the PC market.

 
(Moody’s) Moody’s says AT&T’s $1.6 billion acquisition of Straight Path is positive

• Moody’s Investors Service, (“Moody’s”) said AT&T Inc.’s (Baa1, review for downgrade) planned acquisition of Straight Path is positive. AT&T announced yesterday a definitive agreement to purchase Straight Path Communications for $1.25 billion in stock plus certain liabilities of Straight Path that values the transaction at approximately $1.6 billion. Straight Path is one of the largest holders of wireless spectrum licenses in the 28 GHz and 39 GHz bands, which AT&T intends to deploy in conjunction with its proposed 5G wireless architecture.
• We view this transaction as a strategic positive as it gives AT&T access to key infrastructure elements to pursue its 5G wireless capabilities and keeps AT&T on pace with Verizon in this effort. The relatively small purchase price will result in a very large spectrum position for AT&T, at least on par with Verizon’s 5G holdings following its 2016 acquisition of XO Communications.
• We believe that 5G wireless services are unlikely to reach scaled deployment for at least 3 years. Carriers have articulated plans to deploy 5G as a fixed wireless solution initially, with more advanced mobile applications to follow. We think the technology will be competitive with traditional broadband services, but we think the economics of a fixed 5G architecture may not be competitive with cable broadband’s embedded cost structure. Therefore, we think that wireless carriers must offer additional functionality with 5G to differentiate it from traditional broadband in order to drive the inevitably higher price points that will lead to a profitable business.
• Despite its large pending acquisition of Time Warner, AT&T continues to assemble assets that support its core wireless business. In addition to the Straight Path transaction, AT&T announced in January that it will acquire FiberTower, a holder of 24 GHz and 39 GHz licenses for an undisclosed amount. We view these deals as strategic positives, but not material to the near term (0 to 3 years) financial performance. However, these small strategic asset purchases are essential to AT&T remaining competitive and perpetuating its market share.

(Bloomberg Gadfly) Walmart Fights Amazon With Cheap When People Want Easy

• Wal-Mart Stores Inc. on Wednesday unveiled a new discount program to entice customers to pick up online orders from its stores. The idea is: If it’s cheaper for Walmart to get stuff to its 5,000 stores, rather than millions of individual households, than why not pass along part of that discount? It has the extra benefit of getting customers back into stores to buy more.
• In an era where Amazon.com Inc. has trained shoppers to be so lazy that they can order cardboard boxes and packing tape an hour before they are ready to pack up their goods and move to another apartment, it’s unclear consumers are going to want to work that hard just to save Walmart, and themselves, a buck or two.
• For many of Walmart’s low-income customers, every penny counts. But the retailer has said one reason it bought Jet.com last year was that Walmart’s online customers tended to be wealthier shoppers who would spend more for the higher-end brands Jet.com could offer.
• It can’t hurt for Walmart to try the discount program out — testing and learning about what its customers want. But it will likely realize that instead of trying to figure out how to make things easier for Walmart, it should worry more about making things easier for people to shop with the retailer. If not, any advantage Walmart is building online will have a short shelf life.

Fund Flows & Issuance: According to Lipper, for the week ended March 29th, investment grade funds posted a net inflow of $3.966bn. Per Lipper data, the year-to-date net inflow into investment grade funds was $39.090bn through March 29th. Per Barclays, investment grade corporate issuance through Thursday was $21.25bn. For the month of March, $128.57bn in investment grade deals priced. This compares to $128.58bn in March of 2016. Q12017 was the largest IG corporate issuance quarter on record at $397bn. Dealers on the street are expecting issuance to abate somewhat in the April, which stands to reason given earnings blackout periods.

(Bloomberg) DuPont, FMC to Swap Crop Protection and Health & Nutrition Units

• DuPont agrees divest its Crop Protection business, including certain R&D capabilities, and to buy FMC’s Health & Nutrition business.
  
  • Deal includes $1.6b to DD to reflect difference in value ($1.2b cash, $425m working capital)
  • Sale satisfies DD’s EC commitments regarding Dow merger
  • FMC buying DD’s Cereal Broadleaf Herbicides, Chewing Insecticides portfolios, including Rynaxypyr, Cyazypyr, Indoxacarb; assets being divested generated 2016 rev. ~$1.4b
  • DD buying FMC’s Health & Nutrition business, which generated 2016 rev. >$700m from 2 main segments: texturants as food ingredients, pharmaceutical excipients
  • FMC sees immediately accretive to adj. EPS on closing; will update outlook on earnings call scheduled for May 2
  • DD/FMC deal close due in 4Q, subject to DD/DOW merger, regulatory approvals
  • DOW/DD extend outside date of deal to Aug. 31; see deal closing between Aug. 1 and Sept. 1
  • Material Science Company now expected to be first spin-off
  • Evercore, Goldman advising DD
  • Dyal, Citi advising FMC; Citi provided financing advice, committed debt facilities

(Bloomberg) Union Pacific Rattles Its Cash Coffer With $1 Billion Debt Issue

• Union Pacific’s $500 million debt offering of 10-year and $500 million of 30-year bonds has the use of proceeds earmarked for general corporate purposes, including refinancing maturities, working capital and buybacks. The rail operator has about $500 million of maturities in 2017. The incremental $500 million of debt may put adjusted debt-to-Ebitda at about 1.8x, assuming the company meets consensus 2017 Ebitda. This level of leverage is below its 2x target and in-line with single A rated peer Canadian National.

(Bloomberg) Oil Set for Biggest Weekly Gain in 2017 as OPEC Eyes Extension

• Oil headed for its biggest weekly increase this year amid speculation OPEC will extend its deal to curb output and ease a global glut.
• Futures are up 4.7 percent in New York this week, climbing back above $50 a barrel after Kuwait Oil Minister Issam Almarzooq reiterated support for prolonging a six-month deal to trim supply past June. Still, prices are down 6.5 percent this quarter, their biggest three-month loss since late 2015, as U.S. crude stockpiles continue to pile up.
• The latest comments from Kuwait’s oil minister are bolstering confidence in OPEC’s commitment to drain swollen stockpiles ahead of the group’s next formal ministerial meeting on May 25 in Vienna. Five producers from the Organization of Petroleum Exporting Countries joined with non-member Oman on Sunday to voice support for an extension. Optimism over the cuts had wavered recently amid a surge in U.S. supply, with the nation boosting crude output last week to the highest in more than a year.
• “OPEC is fully aware that running down the crude overhang will take more than six months, so a rollover of the deal is still the most likely outcome,” said Amrita Sen, chief oil analyst at Energy Aspects Ltd. “Overall balances are heading in the right direction, but only crude stock draws will help prices break out of the current range-bound trading.”

Fund Flows & Issuance: According to Lipper, for the week ended March 15th, investment grade funds posted a net inflow of $451.607m. Per Lipper data, the year-to-date net inflow into investment grade funds is just shy of $30bn through March 15th. Per Wells Fargo, investment grade corporate issuance through Thursday was 25.4bn, up +14% y/y.

(Bloomberg) Fed Notches a Win in Central Bank Battle With Markets on Outlook

• That’s the takeaway from the past three weeks, which have shown the Federal Reserve regaining command of the outlook for U.S. monetary policy. Traders have moved more into step with Fed officials’ dot-plot chart for projected interest-rate increases — a big contrast from last year, when the market called the central bank out on its plans for four rate hikes.
• The difference can be most clearly seen with the Fed, which began 2016 with an expectation to raise its benchmark four times. Futures traders gave that outcome just 14 percent odds, and proved right to do so — in the end, there was only the one quarter-point move. This year began with the market again disbelieving the Fed and its outlook for three hikes, placing minority odds on that many moves. Now, the probability is around 57 percent.
• “The latest market reactions to the FOMC decision seems to suggest that there is a great deal of credibility in the r* being low,” said Stephen Jen, the London-based chief executive of hedge fund Eurizon SLJ Capital Ltd., using the economics term for equilibrium interest rate.
• For now at least, the mood music is shifting the way of central banks as policy makers adapt to the improving world economy. That offers officials a respite to work on the next big challenge: whether and how to shrink their gargantuan balance sheets.

(8-K Filing) VEPCO brings a new 10yr bond

• On March 13, 2017, Virginia Electric and Power Company (the Company) entered into an underwriting agreement (the Underwriting Agreement) with Deutsche Bank Securities Inc., J.P. Morgan Securities LLC and Wells Fargo Securities, LLC, as Representatives for the underwriters named in the Underwriting Agreement, for the sale of $750,000,000 aggregate principal amount of the Company’s 2017 Series A 3.50% Senior Notes due 2027. Such Senior Notes, which are designated the 2017 Series A 3.50% Senior Notes due 2027, are Senior Debt Securities that were registered by the Company pursuant to a registration statement on Form S-3 under Rule 415 under the Securities Act of 1933, as amended, which registration statement became effective on December 19, 2014 (File No. 333-201153). A copy of the Underwriting Agreement, including exhibits thereto, is filed as Exhibit 1.1 to this Form 8-K.

(Bloomberg) Oil Set for Weekly Gain as Saudis Say Willing to Extend Curbs

• Nationwide crude inventories decline from record weekly level
• Saudi Arabia says output cuts may be extended beyond June
• Oil last week broke below $50 a barrel for the first time since December as rising U.S. output countered production curbs by members of the Organization of Petroleum Exporting Countries and other nations. While markets are still struggling to clear a surge in supply from OPEC at the end of 2016, compliance with the cuts remains above 90 percent, the International Energy Agency said.
• “The recovery at this stage remains fragile,” said Ole Sloth Hansen, head of commodity strategy at Saxo Bank A/S in Copenhagen. “The market managed to find support at key levels following a small drop in U.S. crude inventories. We are very likely to see an extension to the current production-cut deal if the aim is to bring stocks down to the five-year average.”

Fund Flows & Issuance: According to Lipper, for the week ended March 8th, investment grade funds posted a net inflow of $3.482bn. Per Lipper data, the year-to-date net inflow into investment grade funds is $29.434bn through March 8th. Per Bloomberg, investment grade corporate issuance through Thursday was just over $50bn –that total will grow for the full week with at least two new deals still pending as of Friday morning. Year-to-date investment grade corporate issuance will finish the week at ~$330bn. Per Wells Fargo, 2017 investment grade issuance is outpacing 2016 issuance by +11%.

(Bloomberg, Press Release) Toll Brothers, Inc. Prices $300 Million of Senior Notes

• The Notes have a coupon of 4.875% and will pay interest semi-annually on March 15 and September 15, commencing September 15, 2017.
• The Company expects to use the net proceeds from the Offering for general corporate purposes, which may include repayment of indebtedness.

(Bloomberg, Moodys) Moody’s Upgrades Vulcan Materials to Investment Grade

• Moody’s Investors Service (“Moody’s”) upgraded the senior unsecured debt ratings of Vulcan Materials Company (“Vulcan”) to Baa3 from Ba1. The rating outlook is stable.
• The upgrade reflects continued improvement in Vulcan’s financial ratios resulting from debt reduction and improved operating performance. The company’s adjusted debt-to-EBITDA declined to 2.5x for the year-end 2016 from 2.8x at year-end 2015 and 3.7x at year-end 2014. Adjusted operating margins have also improved over the same periods, increasing to 19.5% from 17.3% and 11.4%, respectively. Moreover, the rating upgrade reflects Moody’s belief that Vulcan has the willingness and ability to defend its investment grade rating in a downturn.

(Bloomberg, Kepler Cheuvreux) BASF Likely to Acquire Agro Assets Divested Due to M&A: Kepler

• Agro M&A to continue as Bayer/Monsanto and Dow/DuPont have to sell assets to obtain regulatory approval for their respective deals, Kepler Cheuvreux says in note.
  
  • Says BASF could approach regulatory bodies to express their interest in assets that are expected to be sold by Bayer and Dow/DuPont
  • Sumitomo could look to add to its agrochemical set-up
  • Private equity or generic firms such as FMC or Nufarm may also be interested
  • Bayer likely to divest their Liberty Link franchise, along with cotton and other selected seeds
  • Dow’s Mycogen seed assets likely to be put up for sale
  • This is a portfolio of corn, soya, sunflower, and canola with sales of $1.5b
  • Dow’s portfolio could sell for $7.5b or to 5x sales
  • Bayer’s Liberty Link alone may be worth up to EU4.8b
  • BASF is one of the top candidates for these “stranded” assets

(Bloomberg, Reuters) Bayer, Monsanto Said to Start $2.5b Asset Sales Next Week: Rtrs

• Bayer and Monsanto plan to start selling assets worth ~$2.5b to get regulatory clearance for their merger, Reuters reports, citing unidentified people close to matter.
  
  • Bayer’s advisers plan to send information packages next week to possible buyers: Reuters
  • Bayer, Monsanto declined to comment to Reuters
  • NOTE: Feb. 23, Bayer/Monsanto Deal More Than 80% Likely to Close: Citi

Fund Flows & Issuance: According to Lipper, for the week ended February 22nd, taxable bond funds posted a net inflow of $3.987bn. The weekly average inflow thus far in 2017 remains just north of $4bn per week. Per Bloomberg, investment grade corporate issuance through Thursday was $13.925bn. February issuance stands at $75bn, while year-to-date investment grade issuance has now topped $231bn, up about 21% year-over-year.

(Bloomberg) Fitch Upgrades Pioneer Natural Resources to ‘BBB’

• The upgrade reflects Fitch’s view that the company will be able to execute its medium-term growth targets given its competitive full-cycle breakeven oil price, favorable hedge position and policy, and strong liquidity position, while reducing gross debt and maintaining a leverage profile generally consistent with or better than similarly rated North American (N.A.) exploration and production (E&P) peers. Fitch’s base case currently forecasts that in 2019 Pioneer’s core Permian production will exceed 300 thousand boe per day (mboepd), gross debt/EBITDA will be below 1x, and liquidity will remain strong.

(Bloomberg) Merck Takes $1.9B Writedown as Hepatitis C Market Shrinks

• Merck & Co., one of the U.S.’s biggest drugmakers, will write down most of what it paid for a promising, experimental hepatitis C drug in 2014, partly because of the extreme success of other new therapies has left a shrinking market.
• In a filing Thursday, Merck said it would take a $2.9 billion charge, or $1.9 billion after taxes, on uprifosbuvir, which it bought in 2014 in its $3.9 billion acquisition of Idenix Pharmaceuticals Inc. and is still in clinical trials. Merck said it now values the drug at $240 million.
• The market for treatments for hepatitis C, a virus that attacks the liver and can lead to cirrhosis or liver cancer, has been declining recently, with fewer patients to treat following major breakthroughs in science that brought to market highly effective, fast-working cures.

(Bloomberg) HP’s Earnings Show the PC Market Is Finally Starting to Recover

• Prior to HP Inc’s January quarter earnings report, there were already plenty of signs that the hard-luck PC market was beginning to stabilize. Shipment estimates from major research firms, as well as earnings reports from the likes of Microsoft, Intel, AMD, Seagate and Western Digital, pointed to a market whose sales declines were narrowing considerably from the steep levels seen during the first half of 2016.
• HP’s numbers went beyond that, however. They suggest the steady arrival of compelling new hardware and form factors, together with an aging installed base and favorable annual comparisons, is positioning the PC industry to deliver positive growth over the near-term.
• HP Inc., which contains the former Hewlett-Packard’s PC and printing businesses, reported fiscal first quarter revenue of $12.68 billion (up 4% annually) and adjusted EPS of $0.38. The former trounced a consensus analyst estimate of $11.83 billion, while the latter slightly beat a $0.37 consensus.
• HP also guided for second quarter EPS of $0.37 to $0.40, in line with a $0.38 pre-earnings consensus. Fiscal 2017 (ends in October) EPS guidance of $1.55 to $1.65 was reiterated.
• Shares rose 8.6% to $17.60 on Thursday, hitting their highest levels since the old HP broke up in late 2015.

Fund Flows & Issuance: According to Lipper, for the week ended February 15th, investment grade funds posted a net inflow of $3.054bn. The total year-to-date net inflow into investment grade funds ended the week at $20.342bn. Per Bloomberg, investment grade corporate issuance through Thursday was $25.05bn. Year-to-date investment grade issuance has now topped $218bn, up over 60% from this point last year.

(Bloomberg) 600 MHz Spectrum Auction Highlights Telco Demand Shift

• The 600 MHz auction’s assignment phase will end no later than March 30, 24 days after it begins, as the spectrum sale nears a close. Carriers including AT&T, T-Mobile and Verizon and others such as Dish and Comcast bid $19.6 billion for the licenses in the forward portion of the auction and now will compete for their exact frequency allocations in the assignment phase of the auction.
• Once bidding ends, the FCC will announce the winners and down payments will then be due within 10 days.
• Broadcasters including 21st Century Fox, Gray TV, Tribune and Sinclair won’t receive proceeds at least until payments are made by forward auction bidders. Broadcasters will be paid out when license applications from winning forward auction bidders are approved on a rolling, per-license basis.

(Press Release, Conference Call) Masco reported 4Q and full year results

• Masco has around $600mm in cash over in Europe and other jurisdictions
• The company is seeing strong demand in their Repair & Remodeling products across all product lines and price points. R&R accounts for 83% of total sales (unchanged)
• 2016 Revenue influenced by:
  
  • Decreased by $68mm (1% of revenue) due to currency translation.
    
    • Currency translation is expected to affect sales by $100mm during 2017
  • Decreased by $21mm (.3% of revenue) due to warranty reserve increase in their Milgard window business in Q3
• Masco is still focusing on bolt-on strategies in either their plumbing or decorative architecture segments, which has been unchanged over the past several quarters
  
  • One change, in their comment, was that they are also looking at other areas, but the focus is still on plumbing and decorative architecture
• Masco returned $585mm to its shareholders through dividends and share repurchases during 2016 (compared to $546mm in FCF)

(Bloomberg) Ford’s Dozing Engineers Side With Google in Full Autonomy Push

• As Ford Motor Co. has been developing self-driving cars, the U.S. automaker has started noticing a problem during test drives: Engineers monitoring the robot rides are dozing off.
• Company researchers have tried to roust the engineers with bells, buzzers, warning lights, vibrating seats and shaking steering wheels.
• BMW, Mercedes-Benz and Volkswagen AG’s Audi plan to roll out semi-autonomous cars starting next year that require drivers to take over with as little as 10 seconds notice.
• Ford plans to skip that level altogether. The automaker has aligned with Alphabet Inc.’s Waymo, which made similar discoveries related to human inattention while researching Google’s driverless car.

Fund Flows & Issuance: According to Lipper, for the week ended February 1st, investment grade funds posted a net inflow of $2.657bn. The total year-to-date net inflow into investment grade funds ended the week at $12.355bn. Per Bloomberg, investment grade corporate issuance through Thursday was $45.8bn. For the month of January, new issuance came in at $178.45bn, one of the largest months on record.

(Conference Call, CAM Notes) Simon Property Group Reports Full Year 2016 Earnings

• Conference Call Highlights:
  
  • SPG currently has 434 department store spaces in their portfolio
    
    • 1 current vacancy
  • Also of the recently announced department store closures, 1 was in their portfolio
  • SPG says they saw more stores closings in 2015 than 2016 (non-department)
  • On Traffic:
    
    • Gift cards sales were up 14% which, SPG believes, is a good indicator of traffic
    • Premium Outlet traffic (counted by cars entering parking lot) was up 1.5% YoY
  • David Simon stated on the call that they believe retailers are spending a lot of capital on internet sales, “and between that and the promotions required to get them to buy online between the cost of shipping and the returns, it’s not a great model for them.”
  • Mall & Premium outlets catering to foreign buyers were negatively affected by the strong dollar during the quarter (same as last)
  • Retail centers outside of tourist oriented malls were stable during the quarter
  • As far as development pipeline:
    
    • Redevelopment expansion projects are happening at 29 properties for approximately $1.1bn (their share)
    • Five outlets are currently under construction (all open in 2017):
    • Domestic: Norfolk, VA
    • The Clarksville Premium Outlet (D.C.) opened in late October and, “had the strongest open of any premium outlet in a long time.”
    • Internationally: France, South Korea, Malaysia and Canada.
    • One new mall is currently under construction: The Shops of Clearfork (Fort Worth) which is anchored by Niemen is to open in the fall of 2017
    • Brickell City Centre (Miami) opened in the 4th quarter

(Bloomberg) Apple, Microsoft Borrow Now Instead of Waiting for Tax Reform

• This year, tax reform could give U.S. companies access to hundreds of billions of dollars they have stashed overseas. Many corporations can’t wait that long.
• Apple Inc. and Microsoft Corp. combined sold $27 billion of debt this week to fund their daily operations, repay maturing debt, and buy back shares. Those bond sales might be unnecessary if new tax laws come this year, because under President Donald Trump’s proposed plan, companies could pay a one-time 10 percent levy to bring back money held overseas, less than a third of the current rate.
• Whenever companies can bring back cash, corporate bond issuance will likely drop, by as much as $150 billion a year, Bank of America Corp. estimated in November. That’s equal to more than 10 percent of the U.S. investment-grade debt issued last year, according to data compiled by Bloomberg. The companies with the most overseas cash tend to be in the technology and pharmaceutical industries.
• The U.S. last saw a tax holiday under a 2004 law. As part of that legislation, companies were allowed to bring back foreign earnings for one tax year at essentially a rate of 5.25 percent if they reinvested the funds in programs like worker hiring or capital investments. Although that holiday had a time frame of a single tax year, a program like the House Republicans’ could be implemented almost immediately, and last at least 10 years, Mills said.
• For now, companies don’t mind heading back to the debt markets, considering the low yields and minimal volatility, said Dave Novosel, a bond analyst at research firm Gimme Credit.
• “Markets are still pretty good. Why not take advantage of it?,” Novosel said. “A month from now, or two months from now, things might not be as good depending on what happens with Trump and Congress.”

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.