STOCKS AND OIL FALL: Here’s what you need to know

Slip n slide

Stocks closed lower to start a relatively quiet week in terms of economic data.

Crude oil fell to a one-month low, extending declines from Friday when Saudi Arabia said it would only agree to curb its production if Iran does too.

First, the scoreboard:

  • Dow: 17,727.59, -65.16, (-0.37%)
  • S&P 500: 2,064.67, -8.11, (-0.39%)
  • Nasdaq: 4,889.05, -25.49, (-0.52%)
  • WTI crude oil: $35.70, -$1.09 (-3%)

Merger Monday

The big deal announcement of the day was that Alaska Air is buying Virgin America for $2.6 billion, or $4 billion including debt. Alaska Air outbid JetBlue, which made a pretty close offer according to Virgin America CEO David Kush in an interview cited by Bloomberg.

If Virgin Group founder Richard Branson had his way, the deal would never had happened.

From a blog he wrote after the announcement (emphasis ours):

In 2007, when the airline started service, 60 per cent of the industry was consolidated. Today, the four mega airlines control more than 80 per cent of the US market. Consolidation is a trend that sadly cannot be stopped. Likely feeling the same competitive pressures as Virgin America, Alaska Airlines approached Virgin America with a proposal to merge.
The board of Virgin America has accepted an offer from Alaska, and if the merger is approved by Virgin America shareholders and regulatory authorities, the two airlines will become one.

I would be lying if I didn’t admit sadness that our wonderful airline is merging with another. Because I’m not American, the US Department of Transportation stipulated I take some of my shares in Virgin America as non-voting shares, reducing my influence over any takeover. So there was sadly nothing I could do to stop it.

The news sent Virgin America shares up 40% to an all-time high, while shares of Alaska Air (parent company of Alaska Airlines) sank some 4%.

Alaska Air is paying a hefty price. Business Insider’s Ben Zhang reports that $57 per share in cash — what Alaska Air will pay — is a premium to the $26-$37 range that Virgin America shares traded at over the last year (Virgin America shares hit an all-time high of $55.43 on Monday.) Also, the $2.6 billion price tag is about 16 times the airlines 2015 earnings.

But the premium will buy the combined company West Coast influence to compete with stalwarts like JetBlue and Southwest, and more influence in the East Coast, where Alaska Airlines is not really known.

The deal would not be complete without some good-old cost-saving synergies — $225 million net at full integration. This could mean some workers lose their jobs, but that’s still unclear.

US Economy

The data calendar was light today (full preview of the week here) but we got a weak factory orders print, and downward revisions to February durable goods.

Factory orders fell 1.7% during the month, while the 1.6% print of January was revised lower to 1.2%.

Durable goods fell 3%, and 1.3% excluding transportation. Both missed expectations and were revised lower from preliminary readings of -2.8% and 1% respectively. The biggest drops were in orders for commercial aircraft, and in the mining, oil and gas industries.

JP Morgan’s Daniel Silver wrote in a note: “The trends in the factory goods data have been soft lately, with some of the most severe weakness coming in the core capital goods data. It is likely that this weakness reflects effects of the stronger dollar, drop in energy prices, and persistent inventory correction.”


Boston Federal Reserve president Eric Rosengren and the Minneapolis Fed’s Neel Kashkari spoke today.

The crux of Rosengren’s speech on economic and cybersecurity risks was that the market is too pessimistic on interest rates.

The fed fund futures market’s expectation for short-term rates has been much lower than the Fed’s for a while now. And with the Fed recently reducing its forecast for rate hikes this year from four to two, the gap shrunk.

But the bigger point is there’s still a gap, and Rosengren does not think it’s necessary. After all, stock market volatility has calmed, and there’s no convincing evidence that global economic weaknesses will drag down the US economy in a big way.

He says that when expectations tumbled after the stock market sell-off earlier this year, that was an overreaction.

From his speech:

While problems could still arise, I would expect that the very slow removal of accommodation reflected in futures market pricing could prove too pessimistic. While it has been appropriate to pause while waiting for information that clarified the response of the U.S. economy to foreign turmoil, it increasingly appears that the U.S. has weathered foreign shocks quite well. As a consequence, if the incoming data continue to show a moderate recovery — as I expect they will — I believe it will likely be appropriate to resume the path of gradual tightening sooner than is implied by financial-market futures.

Kashkari spoke on his favourite topic: ending too big to fail, at a symposium with the same name.

Since becoming the Minneapolis Fed’s president, he has campaigned widely for the big banks to be broken up. He oversaw the Troubled Asset Relief Program (TARP) that bought assets from banks after the 2008 financial crisis.

“If we can truly address the risks posed by large banks, perhaps we can relax the burdens small banks are facing,” according to the Wall Street Journal.

He’ll be speaking again later this evening, as well as Dallas Fed president Rob Kaplan.

Panama Papers

This bombshell data dump with 11.3 million documents was probably the biggest news of the weekend, and one of the largest leaks in history.

The documents were leaked from Panama-based law firm Mossack Fonseca, and shared with the International Consortium of Investigative Journalists, which spans 78 countries. It’s still unclear who the original source is.

They detail how Mossack Fonseca helped its clients evade taxes and launder money, amid other things.

Below, some of the key findings:

  • At least 140 politicians, athletes and other public figures have offshore holdings, which could be a way to keep domestic governments from tracking funds.
  • Over 500 major banks, including UBS, HSBC and Société Générale have helped create offshore companies. The Saudi crown prince owns one of them.
  • Several of Russian President Vladimir Putin’s close associates are named. Sergei Roldugin, Putin’s best friend, is central to a ring of about $2 billion in transactions between Bank Rossiya and several offshore companies.
  • There are at least 33 people and companies the US government blacklisted for their alleged links to Mexican drug lords and terror organisations.
  • Altice, a French telecoms firm beloved by hedge funds, used the law firm Mossack Fonseca in 2008 and 2010 for “incidental transactions for reasons of strict confidentiality and in perfectly legal conditions with no tax impact, let alone foreign, near or far, for any purpose of evasion, concealment, or tax optimization.”


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