Imagination at Work?
Contributed by Doug Walters
GE received approval to proceed with its planned split-off of its 85% stake in its financial subsidiary Synchrony. Management placed a carrot in front of shareholders to entice them into Synchrony shares. Is it a trick or treat?
Want some candy?: To entice GE shareholders into the deal, GE is offering an exchange of just $100 of GE shares for $107.50 of Synchrony – an immediate paper profit.
Frightfully imaginative: GE’s engineers have a reputation for ingenuity, but perhaps the creativity of their corporate finance office is underappreciated.
- A successful split-off will benefit GE by: improving focus on the industrial businesses and reducing the outstanding GE shares.
- However, most important is that the deal is tax free, likely saving GE billions over a traditional sale.
Trick or treat?: We are not inclined to accept the exchange offer. We prefer to hold the GE shares which we believe offer exposure to the rebirth of a world class industrial giant. Removal of the financial business overhang combined with a substantial buyback is likely to continue to benefit GE’s market valuation.
In a sweet month for stocks, the Dow Jones Industrial Average posted its best performance (+8.5%) in over four years as China fears and Fed worries dissipated.
House Party: Paul Ryan was elected Speaker of the House and actual legislation was passed in a big week.
- The inability of Washington to pass solid policy that would clear the way for economic growth has been one of the hallmarks of this slow recovery. The Fed’s easy money masked much of the dysfunction but not all.
- We are hopeful that this week’s action is a sign of more effective, pro-growth governance in the future.
Candy Stores: Walgreen (WAG) will buy Rite-Aid (RAD) for over $9B in a merger of two top drugstore chains.
- The deal will face regulatory scrutiny as consumers will no longer be able to walk across the street to the nearest competitor for better bags of treats.
Boots on the Ground: Markets will keep a closer eye on escalation in Syria as the U.S. steps up our presence.
Looking Ahead to Next Week
Freaky Friday: Next week will be highlighted by the October employment report, following September’s negative surprise which came in at only a 142k job gain.
- Hampered by shaky international markets, and slower domestic consumer activity, this could mark the 3rd month in a row with fewer than 200k jobs added.
Oh, the Horror! Strategic holdings posting earnings next week include media content companies Walt Disney (DIS) and Time Warner (TWX), among others.
- Top selling horror movies have been the best bet for DIS, TWX and the like, averaging 2,000% return on investment vs. only 1,200% for the top comedies.
- Fun Fact: Disney’s 1993 Halloween cult classic ‘Hocus Pocus’ has amazingly continued to grow its DVD sales during the digital age with over 2.7M units sold in 2015.
Scared Straight: Former NYS assembly speaker Shel Silver heads to court next week, accused of using his position to obtain an estimated $4 million in kickbacks.
Investment Strategy Update
STRATEGIC Asset Allocation
Mega Month: The largest of the large pulled ahead this month as mega-cap names outpaced mid and small cap stocks. While small cap had a solid month, it remains down on the year. A central bank fueled rally seems to have benefitted multi-nations to the detriment of domestically focused smaller companies.
Rating the Fed: While global central banks continue to pledge support, U.S. bond markets are once again preparing for lift off. The yield curve has crept higher this month thereby causing a down month for bonds.
Rainy day fund: Cash levels are slightly higher than normal, as we await better opportunities through higher yields or equity market dislocations.
Freight fest: Health Care was as sweet as candy, while Technology sector was hit by an egg thanks to…
- The chip maker NXP Semiconductors (NXPI) reported a light quarter, but it was the guidance trim that caused a scream. As a treat the company announced a 20 million share stock buyback, but it was not enough to calm investors nor prevent fear from spreading to other chipmakers.
STRATEGIC Equity Income
Sinking its teeth: Rising interest rates were the goblin that startled dividend stocks. A proposal for higher capital buffers for banks spooked the financial sector. In other news…
- Pfizer Inc. (PFE) is sinking its teeth into Botox maker Allergan (AGN). If the acquisition goes through Pfizer will be able to move its domicile to the tax friendly shores of Ireland. The rumored deal horrified politicians as it would mean the iconic company will no longer call America home.
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