Wednesday Morning Reads
- Supply-Chain Woes
- Oil Prices Hit Seven-Year High
- Governments No Match for Markets
- German Yields Cross Zero Threshold
- Wall Street Traders Muscle Into the Middle of Crypto
- How ‘Safe’ Assets Have Become Investors’ Biggest Risk
- U.S. Mortgage Interest Rates Climb for 4th Straight Week
- High U.S. Meat Prices
- Big Tech and Foes Spar
- What’s All the Hype About the Metaverse?
- JPMorgan Raises Salaries
- Standard General, Apollo Close In On $9 Billion Deal for Tegna
Everybody is still talking about Microsoft's (MSFT) $69B acquisition of Call of Duty maker Activision Blizzard (ATVI), which would be the biggest deal in its history and more than 2.5x what it paid for LinkedIn five years ago. It would also make Microsoft the world's No. 3 gaming company by revenue - if regulators permit it - and result in the tech industry's largest-ever takeover (topping Dell's (DELL) $67B purchase of EMC in 2016). Activision Blizzard closed the session yesterday up 26% on the news, while Microsoft slipped back 2% in typical M&A fashion.
By the numbers: Despite the record price tag, Microsoft has added $1T in market cap in the last year alone, so the deal would represent only a small piece of the company's valuation. Before the announcement, Activision Blizzard shares were also off 40% from their February 2021 peak, resulting in an attractive price point to scoop up the video game developer. On top of all this, Microsoft has cash of $130B on its balance sheet, allowing it to fund the deal without needing to raise any debt or issuing stock.
There are several reasons Microsoft is blowing $69B on a future in gaming. It already has a subscription-based game business for Xbox and PC called Game Pass (with 25M subscribers) and is developing a cloud gaming service. Activision could also fill its presence in mobile gaming via popular game studio King, which is the maker of Candy Crush. Many are also touting the deal as a way for Microsoft to get into the Metaverse as global tech giants stake their claims to a virtual future.
Warning label: The purchase of Activision will come with some baggage as the game developer faces many claims of sexual misconduct and discrimination. Reports suggest that several dozen employees have already "exited" the company and 44 have been disciplined in response to the allegations. Microsoft will have to clean up the "frat boy" culture over the next year, with current CEO Bobby Kotick (who has been tied to the reports) scheduled to leave his role once the deal closes.
The selloff in Treasuries isn't staying in the U.S. as traders ramp up bets on further bond declines across the globe. Overnight, benchmark German debt yields turned positive for the first time since early 2019, with the rate on the 10-year bund climbing four basis points to 0.02%. While the ECB is currently behind the normalization path of the Federal Reserve and Bank of England, traders are weighing the prospect of tighter policy.
Analyst commentary: "Positive yields are here to stay," declared Antoine Bouvet, a rates strategist at ING Groep. "It's a brand new world."
Eurozone inflation hit a record high of 5% in December, triggering fears of prolonged price pressures across the bloc. Much like the Fed, which ruled out rate hikes through 2023 before its "transitory" forecast was retired, many are now pricing in a more aggressive stance from the ECB. Last month, the central bank said it would cut its monthly asset purchases - but pledged to continue its unprecedented level of stimulus in 2022 - though coming inflation data may change that position.
Hut, hut, hike! In the meantime, predictions surrounding the number of rate increases the Fed will have to implement this year keep going up. Futures markets are now betting on four to five hikes in 2022, up from forecasts of three to four as of Friday. The momentum has seen the U.S. 10-year Treasury yield climb 39 basis points so far in January to 1.9%, pushing the tech-heavy Nasdaq Composite Index to the brink of a correction.
Goldman Sachs (GS) reported some hefty profits on Tuesday, earning nearly $4B in the fourth quarter, or $10.81 a share, but that wasn't enough for investors. The stock slid 7% for its worst day in 18 months, shedding about $10B in market value since Friday's close. Don't forget that it was also a big down day for the market in general, with the Dow Jones and S&P 500 (both of which Goldman is a part of) slumping 1.5% and 1.8%, respectively.
Bigger picture: Not only did Wall Street's premier investment bank miss Q4 profit forecasts of $4.1B, or $11.81 a share, there were several other areas that dinged sentiment. Compensation costs and bonuses tied to capital markets businesses (like investment banking) caught the Street by surprise, with the expenses rising 33% Y/Y to $17.7B. Trading revenue of $4B also came in below the consensus of $4.2B, while the provision for credit losses totaled $344M in Q4, compared with $293M a year earlier.
"Goldman Sachs had an impressive record year, but a thud of a quarter," noted David Hendler, analyst at Viola Risk Advisors.
Snapshot: JPMorgan (JPM) and Citigroup (C) topped Q4 estimates last week, but their shares also sold off on higher-than-expected expenses. "Wage inflation everywhere. There's no question that inflationary pressures around compensation had an impact," noted Goldman Sachs CEO David Solomon, who is trying to diversify the bank with more consistent revenue streams like consumer banking and asset management. Stay tuned... He also told analysts that specifics of Goldman's "next phase" strategy would come in February.
For the third time in two months, AT&T (NYSE:T) and Verizon (NYSE:VZ) have delayed the implementation of their 5G networks around key U.S. airports. It's a big decision for the companies, which spent nearly $70B on C-band spectrum rights, though they didn't provide details on zone size adjustments or how long the suspension might last. While the FAA worries that new cellular frequencies could endanger aircraft by throwing off radio altimeter readings, the FCC and other regulators around the world feel otherwise.
Quote: "We recognize the economic importance of expanding 5G, and we appreciate the wireless companies working with us to protect the flying public and the country's supply chain," said Transportation Secretary Pete Buttigieg.
Airlines are still scrambling to retool their schedules as the FAA begins updating its guidance on which airports and aircraft models will be affected by the latest changes (the regulator had previously issued nearly 1,500 notices of 5G restrictions). Dubai's Emirates has suspended flights to nine U.S. cities, while Japan's two major airlines, All Nippon Airways (OTCPK:ALNPY) and Japan Airlines (OTCPK:JAPSY), said they would curtail all Boeing (NYSE:BA) 777 flights headed to America. Other carriers that are canceling flights or switching aircraft models include British Airways (OTCPK:ICAGY), Korean Air Lines, China Airlines, Cathay Pacific (OTCPK:CPCAY), Air India and Singapore Airlines (OTCPK:SINGY).
Outlook: "The U.S. made all possible spectrum available on a licensed basis to telecom operators," said Vivekanand Subbaraman of Ambit Capital. "Other countries have not done that. That's why it's turning out to be a U.S.-specific issue." There is a lot riding on the American rollout of 5G networks, especially with other nations getting a head start on the technology. The Chamber of Commerce even sees 5G as vital for U.S. economic growth over the next few years, and if consumers start feeling there are problems with the technology, it could be a major setback.
In Asia, Japan -2.8%. Hong Kong +0.1%. China -0.3%. India -1.1%.
In Europe, at midday, London +0.2%. Paris +0.5%. Frankfurt +0.2%.
Futures at 6:20, Dow +0.2%. S&P +0.3%. Nasdaq +0.4%. Crude +1.1% to $85.76. Gold +0.3% at $1818.10. Bitcoin +0.1% to $41943.
Ten-year Treasury Yield +3 bps to 1.9%
Today's Economic Calendar
What else is happening...
Every holding is red... Cathie Wood's ARKK closes at an 18-month low.
Key Iraq-Turkey oil pipeline knocked offline by explosion.
Permian crude production rose to new record in December.