David Ross

What I Think I Learned Last Week #22

I hope everyone has survived the “Great Nutella” Riots of 2018.

The IMF expects world output to grow 3.9% this year and next, the strongest figure since 2011 and a 0.2% improvement on previous forecasts. They cited changes to the US tax code as being responsible for half that upward revision.

US fourth quarter GDP growth of 2.6% was disappointingly low as expectations were for a 3.0% print.

Derrick Wood of Cowen pointed out that in 1955, the average lifespan of a company labeled as Fortune 500 was 75 years; in 2015, it was 15 years; in 2017 it is down to just 8.2 years. In fact, 52% of Fortune 500 companies have exited in the last 15 years. The point is that technology is disrupting long-established companies at an accelerating rate, and if companies do not adapt, they will not survive. To adapt in today’s technology-driven world, companies need to be much more data-driven.

One way to adapt is through mergers and acquisitions, and we sure saw a lot of that last week:

· Celgene, one of the US’s biggest biotech companies, agreed to buy the 90% of Juno Therapeutics it does not already own for $9 billion in cash, a 91% premium to Juno’s undisturbed stock price.

· Bioverativ jumped 61.9% as it agreed to be acquired by Sanofi for $11.6 billion in cash, representing a 64% premium to prior close. Bioverativ was spun out of big biotech Biogen last year after Biogen couldn’t find any companies willing to buy it for about $3 billion, according to the Wall Street Journal.

· Insurer AIG agreed to buy reinsurer Validus Holdings for $5.56 billion in cash, a 46% premium to its previous closing price.

· Bacardi, the privately held rum maker, is acquiring the maker of Patrón tequila, also privately held, for $5.1 billion.

· Feeling the pinch of being middlemen, agricultural giants Archer Daniels Midland and Bunge are talking about a merger that would be worth $30 billion.

· Richemont is paying $3.3 billion to buy the Yoox Net-a-Porter it does not already own.

Another way to adapt is through cost cuts and restructuring:

· Carrefour will cut thousands of jobs in France and close 273 stores. The company also announced the “potential acquisition” of a stake in Carrefour China by Chinese tech giant Tencent.

· Toys R Us will be closing 1 in 5 of its US stores.

· Kimberly-Clark is cutting 5,000 jobs and closing ten factories.

The Wall Street Journal points out that US scientists helped devise the Crispr gene-editing biotechnology tool. First to test it in humans are Chinese doctors. Why, they ask? Because China is unhampered by regulatory rules on human trials.

The S&P 500 has hit its 14th record close in January. That marks the most records for the S&P 500 in a single month since June 1955.

Is this irrational? Not at all. At the start of the year, the earnings per share estimate for the S&P 500 was at $146. Now that estimate is $154. The positive earnings momentum is the fuel behind this market.

The Trump administration fired the first shot in the trade wars, announcing tariffs on washing machines and solar panels. The US will impose four-year tariffs of up to 30% on solar modules and three-year duties of up to 50% on washing machines.

Dollar Doldrums: Treasury Secretary Steve Mnuchin told reporters at the World Economic Forum in Davos that a weaker dollar is good for the US (to be fair, he said for trade and he did not imply that a weak dollar was in fact policy). Then Draghi said that he was confident the eurozone would hit its inflation target and he was very calm about the recent euro strength. All of this accelerated the downward trend in the dollar. Later, President Donald Trump said he ultimately wants the dollar to be strong, prompting a strong reversal.

Finally, Insee, the French national statistical institute, revealed this month the number of babies born in France fell for the third consecutive year in 2017. There are some serious problems in the world if the French aren’t even doing THAT anymore!

And that’s what I think I learned last week……