A Modern Day Tale of Two Cities

“The U.S. economy and the stock market are not the same thing.

The stock market is currently sitting near all-time highs. Meanwhile, the U.S. economy remains anemic with the unemployment rate painfully high.

Generally speaking, the stock market represents large corporations who can borrow cheaply from the bond markets and take advantage of low overseas tax rates.

Yet small business can do neither of those things. They are also America’s most important job creators.

The lead economists of the National Federation of Independent Business (NFIB), which produces the widely-followed small business optimism report, recently gave a presentation at the Richmond Fed’s Credit Market Symposium titled “One Country, Two Economies.”

In it, they lay out the state of small business, which is much weaker than what is being seen in the stock market.

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While it sounds crazy there actually was a study done about front page covers and what ever the cover said to do turned out to be the wrong move over 60% of the time.

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“ZURICH (Reuters) – Swiss industrial group ABB is to buy U.S. solar energy company Power-One Incfor about $1 billion, betting that growth in emerging markets will revive a sector ravaged by overcapacity and weakening demand in recession-hit Europe.

The world’s biggest supplier of industrial motors and power grids said on Monday it had agreed to pay $6.35 per share in cash for Power-One, the second-largest maker of solar inverters that allow solar power to be fed into grids.

The offer price is 57 percent above Power-One’s closing price on Friday, boosted by $266 million in net cash held by debt-free Power-One. Stripping out its cash pile, Power-One’s enterprise value stands at $762 million, valuing the bid at a more modest 6.4 times 2012 core earnings.

As solar power gets closer to competing with conventional forms of energy such as gas and coal, demand for solar panels that harness the sun’s energy is rising.

The same goes for solar inverters, which are needed to feed that power into large electricity grids from commercial solar panel installations and smaller units on factories and homes.

“We consider the acquisition of Power-One as a smart strategic move for ABB to broaden its solar product portfolio at the right time,” Vontobel analysts said.

The solar inverters business is one of the last profitable parts of the solar value chain – mainly due to its relatively complex technology – while makers of cells and panels have suffered massively from the fact that their products are easy to replicate.

Peers like Germany’s Siemens and Bosch recently ended ventures in the solar industry after oversupply, weak economies and a cut in government subsidies triggered a collapse in demand for solar panels and prices slumped, leading to a wave of insolvencies in the industry.

Even makers of the solar inverters have suffered….”

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“DUBLIN (Reuters) – Irish drugmaker Elan rejected a reduced $11.25 per share bid from Royalty Pharma , putting the ball back in the U.S. investment company’s court in an increasingly convoluted takeover saga.

Royalty made its initial approach in February, attracted by the promise of lucrative revenues from Elan’s multiple sclerosis drug Tysabri. But Elan has fought to maintain its independence through a series of maneuvers designed to frustrate the bid, which is contingent on 90 percent acceptances.

Royalty last week lowered its bid for Elan to $11.25 a share from an earlier $12 offer, pricing in the result of a $1 billion share buyback by Elan. The $12 per share offer had valued Elan at $7.3 billion and had been sweetened from an initial proposal.

Buoyed by the outcome of the buyback, Elan, which claimed last month that most of its shareholders did not view Royalty’s original proposal as worth consideration, strongly advised shareholders to take no action in relation to the bid.

“The offer from Royalty Pharma grossly undervalues Elan’s current business platform and our future prospects. As a result the board unanimously and without reservation rejected the offer,” Elan Chairman Robert Ingram said in a statement on Monday.

As part of the share buyback, U.S. healthcare firm Johnson & Johnson cut its stake in Elan to 4.9 percent from 18 percent, accounting for more than 90 percent of shares repurchased.

Analysts were divided as to whether the buyback’s outcome signaled confidence in Elan’s plans to reinvent itself through a series of acquisitions, or speculation that Royalty would eventually return with a higher bid.

But after 73 percent of shares excluding Johnson & Johnson’s were not tendered at any price in the pre-announced $11.25 to $13.00 range, Royalty may have to come back with a better offer.

VAST MAJORITY…”

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“CHICAGO (Reuters) – Caterpillar Inc cut its full-year outlook for 2013 on Monday to reflect a drop in demand for heavy equipment from its mining customers.

The Peoria, Illinois-based company said it now expects to a report a profit of $7 a share on sales of $57 billion to $61 billion in 2013. That was down from a previously estimated profit of between $7 and $9 a share on sales of $60 to $68 billion. The company said the cut was necessary “because our expectations for mining have decreased significantly.”

The news came as the company, the world’s largest maker of construction and mining equipment, reported a weaker-than-expected first-quarter profit….”

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“PAWTUCKET, R.I. (AP) — Hasbro says its first-quarter loss widened as the toy maker absorbed heavy restructuring charges and foreign exchange rates flattened its international revenue. The performance still topped Wall Street expectations.

The Pawtucket, R.I., maker of Transformers and Monopoly says it lost $6.7 million, or 5 cents per share, in the three months ended March 31. That compares with a loss of $2.6 million, or 2 cents per share, a year ago.

But Hasbro Inc. earned 5 cents per share when a restructuring charge is excluded. Analysts expected adjusted earnings of 4 cents per share….”

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“HOUSTON (AP) — Halliburton says it lost $18 million in the first quarter on litigation-related charges related to the 2010 Gulf of Mexico oil spill. But it made money if the unusual items are excluded, and beat Wall Street expectations.

The oil services company’s loss attributable to common shareholders amounted to 2 cents per share. That compares with net income of $627 million, or 68 cents per share, a year earlier.

Excluding one-time items, however, the company posted adjusted earnings of 67 cents per share. That beat the 57 cents that analysts expected…”

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Gold is up $40 currently, and money managers were buying during last week’s debacle in price….

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“Flextronics International Ltd. (FLEX), a supplier of cameras and battery charges to Apple Inc. (AAPL), is seeking Chinese, Japanese and Korean car makers as customers to boost growth in its automotive business.

The Singapore-based company aims to double its revenue from the High Reliability Solutions group, which includes automotive, medical, aerospace and defense, every three to five years, Paul Humphries, president of the division, said in an interview in Shanghai today. Sales for each business are expected to increase between 10 percent and 20 percent annually, he said.

Flextronics, which also makes lighting and entertainment systems for automakers, is increasing focus on Asian car makers after its revenue declined for five straight quarters. Total vehicle sales in China this year are forecast by the country’s industry group to surpass 20 million units for the first time….”

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“Brent crude futures rose to a one- week high above $100 a barrel on speculation last week’s drop was excessive.

Brent advanced as much as 1.2 percent after the contract’s 14-day relative strength index slipped to 31 on April 19 signaling prices had declined too rapidly. The Stoxx Europe 600 Index increased as much as 0.9 percent. Money managers reduced net-long positions, or wagers that West Texas Intermediate will rise, by 6.8 percent in the week ended April 16, according to the U.S. Commodity Futures Trading Commission. They trimmed holdings on Brent for the second week to the lowest since Dec. 18, data from ICE Futures Europe exchange show.

“There’s a recovery from the sell-off last week and crude is growing in tandem with equities,”Andrey Kryuchenkov, an analyst at VTB Capital in London, said by phone today. “Some buy orders may have been triggered by Brent breaching $100, so computers are driving the market to a degree.”

Brent for June settlement rose as much as $1.15 to $100.80 a barrel and was at $100.69 as of 12:02 p.m. London time. The front-month European benchmark grade was at a premium of $11.67 to June WTI.

WTI for May delivery, which expires today, was at $88.71 a barrel, up 70 cents, in electronic trading on the New York Mercantile Exchange, after dropping 3.6 percent last week. The more-active June future was up 71 cents at $88.98. The volume of all Brent contracts traded was 0.9 percent below the 100-day average while WTI was 8.6 percent above….”

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“U.S. stock futures rose, signaling the Standard & Poor’s 500 Index will rebound from its biggest weekly drop in five months, as the Group of 20 finance ministers failed to oppose Japan’s monetary policies at a meeting.

Power-One Inc. soared 56 percent in early New York trading after ABB Ltd. agreed to buy the maker of solar-power inverters for about $1 billion. Eldorado Gold Corp. and Barrick Gold Corp. each gained more than 3 percent as the price of the precious metal rose. Caterpillar Inc. (CAT)fell 0.9 percent after cutting its revenue forecast for the year.

S&P 500 (SPX) futures expiring in June advanced 0.4 percent to 1,554 at 7:39 a.m. in New York. The equity gauge fell 2.1 percent last week, its biggest drop since November, as earnings from Bank of America Corp. and International Business Machines Corp. missed estimates and asChina’s economy unexpectedly slowed. Contracts on the Dow Jones Industrial Average climbed 50 points, or 0.4 percent, to 14,520 today.

“It’s encouraging to see that there’s no resistance from the G-20 leaders to Japan’s monetary policies,” Veronika Pechlaner, who helps manage about $1.5 billion as investment manager atJersey, Channel Islands-based Ashburton Ltd., said by phone. “Markets are taking that as a positive as they expect the trend in quantitative easing and yen weakness to continue.”

Japan’s Stimulus…”

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“Hermes International SCA (RMS), the French maker of Kelly handbags, reported the slowest revenue growth in more than three years because of diminishing gains in the leather-goods unit and a drop in watch sales.

Revenue in the first quarter of 2013 climbed 10 percent to 856.8 million euros ($1.1 billion), Paris-based Hermes said today in a statement. Analysts predicted 854 million euros, according to the average of five estimates compiled by Bloomberg. Excluding currency swings, sales advanced 13 percent, the least since the last three months of 2009.

Weaker performances in leather-goods and watches took the shine off a stronger showing from the clothing unit. Leather- goods sales, Hermes’s biggest source of revenue, gained 7.3 percent excluding currency swings, about half the rate of the year-earlier quarter and the slowest since the third quarter of 2007. The slowdown may have been caused by reduced output, said Rodolphe Ozun, an analyst at Bank of America Merrill Lynch.

“The slowdown in leather goods highlights in our view the normalization of production in this segment and should continue in the coming quarters,” Ozun wrote in a report.

Hermes rose 1 percent to 251.30 euros at 11:15 a.m. in Paris, mirroring gains by stocks acrossEurope. That gave the saddle maker a market value of 26.5 billion euros.

All product categories posted revenue growth except tableware and watches, Hermes said. Sales of timepieces declined 5.3 percent, excluding currency shifts, as the Chinese market slowed at the start of the year, Hermes said.

Chinese Demand…”

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“European stocks rebounded from the biggest weekly drop in five months and Italian note yields slipped to a record as the country elected a president and the Group of 20 nations offered no opposition to Japan’s stimulus policies. The yen weakened while gold rose for a fifth day.

The Stoxx Europe 600 Index (SXXP) increased 0.8 percent at 7:25 a.m. in New York as UniCredit SpA, Italy’s biggest bank, advanced 4.5 percent. Standard & Poor’s 500 Index futures added 0.5 percent. Italy’s two-year note yield fell as much as 13 basis points to 1.208 percent. Japan’s currency depreciated for a fifth straight day, slipping 0.2 percent to 99.72 per dollar. Gold jumped 2.2 percent.

President Giorgio Napolitano will be sworn in for a second seven-year term today and could begin consultations on a new government as soon as tomorrow. Bank of Japan Governor Haruhiko Kuroda said he was emboldened to press ahead with policy that includes buying 7 trillion yen ($70.1 billion) of bonds a month after the G-20 backed stimulus efforts. European Central Bank Governing Council member Klaas Knot said yesterday data for the 17-nation currency bloc show that economic risks persist.

“This morning we have a little bit of relief from the Italian situation,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “Maybe the Napolitano re- election is what it will take to get a more stable political situation. We’ve seen a little bit softer U.S. housing data recently but overall the trend is for structural improvement.”

Italy Banks

Four shares gained for every one that declined as the Stoxx 600 rebounded from last week’s 2.5 percent slide. UniCredit and Banco Popolare SC led a rally in Italian banks, advancing more than 4 percent. Delhaize Group SA (DELB) climbed 12 percent to the highest level since November 2011 after the Brussels-based retailer reported earnings that beat analyst estimates….”

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“China Mobile Ltd. (941), the world’s largest phone company by subscribers, reported its weakest profit growth in three quarters as higher costs eroded gains from an increase in users of high-speed network services.

Net income rose to 27.9 billion yuan ($4.5 billion) from 27.8 billion yuan a year earlier, the Beijing-based carrier said in a statement to the Hong Kong Stock Exchange today. Profit was expected to be 28 billion yuan, based on the median of five analysts’ estimates compiled by Bloomberg News.

Chief Executive Officer Li Yue is fighting to maintain his lead in smartphone users over China Unicom (Hong Kong) Ltd. (762) and China Telecom Corp. by subsidizing handsets for third-generation data users and adding fourth-generation services. The company last month said it will bear costs for the TD-LTE network, or 4G network, previously borne by its state-owned parent, boosting the listed unit’s capital spending 49 percent to 190.2 billion yuan this year….”

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“The yuan fell, following its best week in six months, after the People’s Bank of China set the currency’s fixing at a level that prevents it from strengthening.

The PBOC cut the reference rate by 0.03 percent to 6.2415 per dollar today. That’s more than 1 percent weaker than April 19’s closing price, meaning the currency had to fall to stay within its permitted trading band. China needs to sacrifice short-term growth to make structural adjustments, central bank Governor Zhou Xiaochuan told Bloomberg News outside a meeting of the International Monetary Fund in Washington on April 20. The economy expanded 7.7 percent in the first quarter from a year, earlier, compared with 7.9 percent in the previous three months.

“The market has downsized expectations for growth recently after a weak gross domestic product print,” said Sacha Tihanyi, a currency strategist at Bank of Novia Scotia in Hong Kong. “But I am still bullish on the yuan.”

The yuan fell 0.08 percent to 6.1826 per dollar in Shanghai, according to the China Foreign Exchange Trade System. The currency gained 0.24 percent last week, the most since the period ended Oct. 14. One-month implied volatility, a measure of exchange-rate swings used to price options, fell five basis points, or 0.05 percentage point, to 1.44 percent.

The 7.7 percent growth rate in the first quarter is “overall normal” compared with the government’s 2013 target of 7.5 percent, the PBOC’s Zhou said. “China’s undergoing economic restructuring, which sometimes is not in lockstep with growth,” he said….”

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“Australia has lost A$7.5 billion ($7.7 billion) in revenue since the October mid-year budget review due to its strong currency and lower terms of trade, worsening its budget position, Treasurer Wayne Swan said.

“We’ve been hit in Australia with a high dollar, lower terms of trade, which has had a dramatic impact upon the profitability of companies and prices more generally in the economy,” Swan said in an interview on the Australian Broadcasting Corp.’s ‘Insiders’ program yesterday. That’s caused “a sledgehammer to revenues in the budget since the mid-year update of something like A$7.5 billion.” …”

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“Pacific Investment Management Co.’s top debt picks are utility and energy companies that will benefit as China shifts to a consumer-driven economy, while indebted companies tied to the old export-led model suffer.

“We put our highest conviction in utility and energy sectors,” Raja Mukherji, Hong Kong-based head of Asian credit research at Pimco, manager of the world’s biggest bond fund, said in an e-mail interview on April 12. A shortage of energy resources and undeveloped distribution networks for consumers “creates opportunities if we can invest in the future winners early,” he said.

Utility and energy bonds gained 0.7 percent and 0.8 percent this year through April 18, the second- and third-worst performers among 12 Chinese sectors tracked by Bank of America Corp. That compares with a 2.6 percent return for real-estate bonds and an average of 2 percent for all dollar-denominated Chinese debt. Energy bonds handed investors a 37.4 percent return, topping an index average of 24 percent during China’s economic slowdown from April 2010 to September 2012.

Fitch Ratings Ltd. cut China’s sovereign ranking this month and Moody’s Investors Service lowered its outlook to stable from positive, citing risks from rising debt loads and the potential impact on the economy. LDK Solar Ltd. failed to fully pay notes last week after rival solar panel producer Suntech Power Holdings Co. defaulted on $541 million of bonds on March 15.

Slowing Economy…”

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“The yen weakened, falling toward 100 per dollar for the first time since April 2009, after Bank of Japan (8301) Governor Haruhiko Kuroda said he was emboldened to press ahead with a campaign to defeat deflation.

Japan’s currency dropped against 15 of its 16 major counterparts after the Group of 20 offered no opposition to the central bank’s monetary stimulus policies at a meeting last week inWashington. Sweden’s krona strengthened after Riksbank Deputy Governor Lars E.O. Svensson said he will leave the central bank after failing to get support for deeper interest-rate cuts. The euro rose for a third day versus the yen after Giorgio Napolitano was re-elected to a second term as Italian president.

“The BOJ has definitely altered the psychology of the market” toward the yen, said Stephen Gallo, European head of currency strategy at Bank of Montreal in London. “The safe- haven attributes of the yen have been fundamentally and drastically altered for the foreseeable future.”

The yen fell 0.2 percent to 99.74 per dollar at 6:54 a.m. in New York after depreciating to 99.90, the weakest since it declined to a four-year low of 99.95 on April 11. Japan’s currency dropped 0.2 percent to 130.09 per euro. The euro was little changed at $1.3044.

G-20 finance chiefs and central bankers meeting on April 19 praised the measures taken by the BOJ this month aimed at increasing inflation to 2 percent within two years. They signaled Japan’s focus on supporting domestic demand was strong enough to allow them to ignore the side-effects on their own economies of a sliding yen.

‘More Confidence’…”

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World Markets

Currencies

Commodities

USD Libor

Euribor

Yields for Italy, Spain, France,  and Germany …