Friday, July 10, 2015

Stock and Bond Market Mid-Year Part 1

Into its sixth year, the bull market continues to grind along – each year being marked by very different characteristics. This year, stocks gasp for air after each rally and then shedding its gains with fits of tempered volatility. Prior to the last week of June, the S&P 500 has gone without gains or losses of 2% for over six months, which is the longest streak since 2007. Meanwhile, the financial markets remain in a state of suspended animation - waiting…and waiting…and waiting. Waiting for the Federal Reserve to raise interest rates, waiting for the Europeans to dissolve a partnership with a failed Greek economy and waiting for the energy sector to stabilize.

On April 23, the Nasdaq Index topped its March 2000 record (5048) when the Dot-com bubble popped. It took more than 5,500 days and a lot of help from Apple, Amazon the Bio-tech sector. Currently, the Nasdaq stands at 4986.

The U.S. dollar is also flirting with a historic high against the Euro as Greece tips toward default. Although it is a great time to take a European vacation, it is not so good if you want to sell American-made goods abroad. For much of 2014 and during the first quarter of 2015 the euro declined nearly 15% to almost even with the U.S. dollar. During the second quarter, the U.S. dollar gave back some of it gains to trade at the $1.11 level. Last summer, traders accepted $1.39 Euros for each U.S. dollar. The impact on America’s largest corporations is decreased earnings. With a substantial portion of international revenues these companies are seeing their earnings power being reduced by the reset from Euros to U.S. dollars. That’s why the earnings news from stocks, such as Procter & Gamble & Caterpillar caused the Dow Jones Industrial Average to slide into negative territory.

A relatively strong economy in the U.S. is one reason for the strong dollar. The Federal Reserve’s monetary policy has also had an impact on currencies as well. That trend is unlikely to change as the U.S. raises rates and other countries in Europe cut them. Would you rather buy a U.S. 10-year bond that pays 2.39% or a German 10-year bond that only pays 0.75%? Investors are answering that question by dumping their euros to buy dollars. That's why Deutsche Bank, Europe’s largest bank, expects the euro to keep falling to 90 U.S. cents by the end of 2016 and 85 cents by the end of 2017.

Monday, June 1, 2015

Starbucks Adds Some Foam to the Balance Sheet

The bonds are mostly to refinance Starbucks’ existing $550 million 2017 bonds, which have a 6.25% coupon. The additional debt can be used for share buybacks, dividends, acquisitions or general expansion plans, according to the company
Standard & Poor’s Ratings Services is giving the new bonds an A- credit rating. The rating agency projects that with the additional bonds, Starbuck’s total debt to EBITDA will increase to 1.1x from 1.0x before the addition of this debt. According to S&P’s release:
We expect Starbucks will continue to deliver solid performance gains as it grows its store footprint, mainly in international markets, and remains focused on product innovation. We believe the company could pursue more aggressive capital allocation practices, but its financial policies will keep credit protection measures in line with our current assessment of its financial risk profile.

Friday, April 24, 2015

AT&T Sells Bonds to Finance its Purchase of DirecTV

AT&T bond sale aimed at financing DirecTV acquisition.  AT&T completed a $17.5 billion corporate bond sale to help pay for its DirecTV acquisition.

The offering, which drew mixed reviews on Wall Street, is the second largest this year alone behind a $21 billion offering by Actavis in March. The all-time topper was a $49 billion deal by Verizon in September 2013.

 Investors reportedly jumped at the offering "enticed in part because the new bonds, which will mature in five to 31 years, offered more interest that the company's existing debt," a Wall Street Journal story said.