WASHINGTON, October 29, 2015 – Takeover fever is in the news today once again, although the market in general doesn’t seem much impressed. The Dow, the S&P 500 and the NASDAQ are continuing to get hit Thursday as we near the 1 p.m. hour EDT, with utilities suffering in particular.
Yet the urge to merge remains strong, perhaps because, last week aside, stock prices of takeover targets have gotten a lot cheaper since August. In news from the financial sector this morning, word is that Cleveland bank Keycorp (KEY) could be ready to announce a takeover/merger with Buffalo’s First Niagara (FNFG) as early as Friday morning, although neither institution is claiming victory just yet. Given that a deal might be inked tomorrow, however, that’s a pretty fair indication that it’s likely to happen.
On the healthcare/pharmaceutical front, surprise news popped up that one pharma giant, Pfizer (PFE) may be interested in taking over another one, namely Allergan (AGN), which itself only recently was merged into a larger pharma entity that assumed the famous Allergan name.
While we live with a essentially socialist regime in Washington, one that’s instinctively averse to big corporate mergers as a matter of ideology, the proposed pharma merger, at least, is probably part of a passive and ongoing plot to use the pricing advantages of larger pharmaceutical and healthcare companies as an incentive to merge, creating fewer and fewer of them and potentially leading to virtual one-payer control of the entire medical sector by the Federal government.
In the meantime, however, it will mean bigger pharmaceutical and drug companies (re: the recently announced merger of Walgreen’s [WBA] with Rite Aid [RAD] and less consumer choices. The reward all around is supposed to be lower prices for consumers, but we’ve heard that one so many times before that we know it’s not really true in the long run.
As far as the bank blend is concerned, Keycorp, while smaller than the late, great National City Bank back in those pre-crash days, did ultimately manage to survive the Great Recession’s early carnage. (The latter Cleveland banking giant was folded into Pittsburgh’s PNC.) Now healthier, though not spectacularly so, Key likely sees its close-by neighbor as a synergistic way to grow its modest empire by adding what amounts to contiguous territory in Pennsylvania and upper New York State.
For its part, First Niagara was also a survivor in the banking carnage of 2007-2009, and was authorized by the Feds to grow its own portfolio by scooping up the area U.S. branch banks that the beleaguered HSBC was giving up along with grabbing select properties that PNC/National City were forced to divest in their own little arrangement with the Fed.
But, unlike Keycorp, First Niagara has had a tough time righting its profit numbers since its acquisitions. Its previous CEO resigned under pressure in 2013, and its new boss has clearly been cleaning up the books, right-sizing, and getting FNFG ready to “restore shareholder value” by getting bought out by someone else, at a modest premium, of course.
Trading in FNFG was briefly halted this morning, as insiders had clearly glommed onto the merger rumors whereupon they commenced an attempt to gap the stock up into the stratosphere. But once word leaked out that Key might offer only a “modest” premium to First Niagara’s Wednesday afternoon closing price caused FNFG shares to actually trade down when they re-opened some 5-10 minutes later.
Previous word on the whisper takeover number had been $13 plus or minus per share, which initially caused FNFG to jump up from the $9 to the $10 range in September when word first leaked. The stock briefly peaked this morning at over $11 before the halt. But when trading resumed, it had retreated back to the mid-$10 range. We’re watching this one with some anticipation, since we already owned shares of FNFG around the time those September rumors surfaced.
In other banking news, another of the Maven’s small bank holdings, New York Community Bancorp (NYCB) announced it would be acquiring another small New York bank, Astoria Financial (AF).
Although this acquisition will be immediately accretive to NYCB’s book value, investors weren’t impressed and drove the stock down this morning. That’s likely because, in conjunction with the deal, NYCB announced it would be issuing new shares (seen as dilutive) as well as cutting its outsized dividend to pay for the deal.
We did the only sensible thing, however, and picked up some more shares. Under the idiotic Dodd-Frank law, strong small and regional banks will likely start earning money quicker and more easily than their TBTF (Too Big To Fail) banking neighbors, so when those interest rates finally begin their slow upward ratchet, these banks should start getting a bigger bid and sooner.
That said, the Maven regards these small bank positions as long termers with a slow fuse. Trigger happy traders need not apply. Fingers crossed.
On other fronts, as you may recall, the Maven warned earlier this week that investors and home traders should be wary of moving on stocks too fast until Apple (symbol: AAPL) earnings and Wednesday’s Federal Reserve minutes were out of the way. For once in this confusing 2015 action, that advice proved reasonably astute.
Apple reported blowout earnings Tuesday. But instead of its usual post-earnings haircut, the stock had a healthy bull run yesterday, although it’s settled down a bit in Thursday morning trading.
Ditto the effects of the Fed minutes, reported Wednesday (at least to the public) at 2 p.m. EDT. Somewhat earlier, hedge funds, very rich people and the usual insiders began kicking stocks up bullishly prior to the news, indicating they knew full well the Fed wasn’t about to announce an interest rate increase.
Oddly enough, though, a few minutes after the minutes’ “public” release, stocks took a pretty good hit. Hard to say why, really, given the reasonably good news that the tape had effectively pre-announced. But it was what did not appear in Wednesday’s Fed release that gave some traders and analysts pause.
What close readers of the text did not see was language indicating that the continued interest rate increase pause would remain in place indefinitely. In fact, it looks like the door is definitely back open for a small December rate hike announcement, something that most traders and analysts had been completely discounting for the last two weeks at least.
The mood brightening about a half hour after yesterday’s announcement and stocks closed up nicely. But this morning, sobriety seems to have returned to markets once again. Most stock sectors are down. Except energy and big oil.
After yesterday’s surprising news on the domestic energy front—a big and unexpected drawdown in U.S. oil supplies—goosed heretofore sinking oil prices mightily, traders launched into a buying panic, leading to big moves up in that sector. Those moves have continued today, BTW, particularly among oil refiners like Valero (VLO), which stand to benefit whichever way those prices go, it seems.
Again no trading tips today. Until we can figure out whether the market will ultimately like or hate those interest rate hikes that may or may not be happening, it’s hard to place bets. We’ve already picked up a few utility shares that are now getting slapped around today as a result of the Fed’s waffling, so what’s the point in getting something else in any sector (except maybe for more FNFG and NYCB), since any random sector may get smacked around tomorrow.
For old buy and hold dudes like the Maven, these are troubled times indeed. Best thing is to remain cashy, keep that powder dry, occasionally shoot at targets of opportunity and hope this year’s early Santa Claus rally resumes within a fortnight.