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It's the latest Wall Street parlor game: parsing the effect of Brexit on the U.S. economy.
While the effect on U.S. stocks has been fairly muted so far, with the S&P 500 down only roughly 1 percent since the vote, we can already see broader effects on the global economy. Notably, we have seen tighter financial conditions, some bank contagion, and some dramatic currency moves, with the British pound down 13 percent against the dollar, and the yen up 5 percent.
But there's one other effect of Brexit that has been little discussed: The effect on direct foreign investment in the U.S.
I'm not talking about buying or selling U.S. stocks or bonds. Those are indirect investments. Direct investments are when a foreign company sets up a subsidiary in the U.S., or merges with a U.S. company, or engages in a joint venture.
In 2015, the U.K. was the largest single source of foreign direct investment in the U.S. It accounted for $483 billion of the $3.1 trillion in foreign direct investment in the U.S. that year. That's about 16 percent of all foreign investment.
Brexit may have slowed global markets, but the initial public offering (IPO) business is continuing to recover. May had a measly 8 filings, but a flurry of filings at the end of last week brought the June total to 17. We already have two for July.
On Monday, Japanese messaging app Line increased the price range of its IPO, the first IPO of the year to do so. It will be the biggest IPO of the year when it begins trading in the U.S. next Thursday.
The price talk is now 35 million shares at 2,900 to 3,300 yen, or about $30.50 at the midpoint, up from 2,700 to 3,200 yen.
That is a billion-dollar IPO, folks.
The road show is reportedly going very well, and there is talk the book could close as early as today. One unusual aspect of the Line IPO: the procedure follows Japanese rules. So it will be pricing Monday night, but not trading in the U.S. until Thursday, and not trading in Tokyo until Friday (this is a dual listing). That means it will not trade until three days after it prices, which introduces significant price risk for the IPO — but those are the rules.
Line is getting all the attention, but there are plenty of other IPO players entering the game. Yesterday AdvancePierre Foods Holdings, a major food manufacturer, announced terms and will likely begin trading next Friday at the New York Stock Exchange under the symbol "APFH."
It's a substantial offering: 18.6 million shares at $20 to $23, which is a $400 million IPO at the midpoint (the average IPO is roughly $100 million). This is an Oaktree Capital-backed leveraged buyout, created when Oaktree merged Pierre Foods and Advance Brands in 2010.
Several well-known consumer names have filed recently. Last Friday, Yeti Holdings filed to raise up to $100 million. Yeti makes coolers and outdoor gear. Don't laugh: It had sales of $608 million for the year ending March 31. That's a lot of coolers.
Acushnet, which makes Titleist golf balls and other golf equipment, filed for a $100 million IPO that will likely be increased. It booked $1.5 billion in sales for the 12 months ended March 31.
After Twilio's blowout debut, French-based data integration platform Talend filed last week. It simplifies the process of aggregating multiple data sets for analysis. Competitors include Informatica and Tibco, as well as more traditional enterprise software vendors like IBM, Microsoft, Oracle and SAP. Customers include AOL, Citi, GE Healthcare, Groupon, Lenovo, Orange, Sky and Sony. Silver Lake is a backer.
There's a surprising lack of small biotech IPOs among the recent filings, but there was a filing from Medpace Holdings, a contract research organization that provides research services to the pharmaceutical and biotech industries.
Finally, here's a surprise: Centennial Resource, an oil and gas exploration and production (E&P) company based in the Permian Basin, has filed for a $100 million IPO. You can see the effect the oil collapse has had on these small E&Ps: revenue went from from $24.1 million in the first quarter of 2015 to $15 million in the first quarter 2016. Sales are small, but just the fact that we have an E&P IPO is a sure sign some of the deer-in-the-headlight fear that gripped the oil markets in the early part of the year has let up a bit.
This is the first energy IPO since Sunrun in August, 2015, but that was a solar company. Green Plain Partners, another MLP, this one for ethanol, was in June of last year. There were a few midstream (pipes) IPOs around this time, as well.
You have to go back to August 2014 when Independence Contract Drilling, which provides rigs for E&Ps in the Permian Basin, went public. That's the last driller or E&P company that went public.
Bottom line: There hasn't been an E&P-related IPO in almost two years!
What will be the main theme in the second half of 2016? It's all about "TINA" vs. earnings/ valuations.
Besides determining if Brexit is a long-term problem for U.S. stocks or a short-term blip, the main issue is the tension between investors who believe that with rates lower for longer, "there is no alternative" to owning stocks (TINA) and those who believe valuations and earnings estimates remain way too high and that the market will correct lower as soon as the majority realizes this. So, who's right here?
What will be the Brexit vote's impact on third-quarter earnings?
The question is easy to frame but difficult to answer. Will Brexit be a long-term market-moving event or a short-term phenomenon? Will it prove as big a problem for the markets as, say, China's currency devaluation in August, or the oil collapse that roiled markets in the first quarter of this year?
This is not over, however, and unfortunately the Brexit issue has come at a bad time for U.S. earnings.
Simply put, Brexit may torpedo any chance of a return to positive earnings growth for the S&P 500 for the year.
We are approaching the end of the quarter. While the S&P 500 is down only 1 to 2 percent in the second quarter, broad swaths of the market have seen significant declines, including banks, restaurants, airlines, retailers and many big-cap tech stocks.
Sectors in Q2:
With many stocks down double digits, and many underperforming the markets because they were on the wrong side of the Brexit trade, history would indicate a likelihood of at least modest buying in the most beaten-up sectors heading into the close of the quarter on Thursday.
That is what we are seeing. Once again, restaurants, banks, retailers and airlines lead the advancers. That's a good sign that there is at least short-term, end-of-the-quarter buying interest.
Traders were cheered yesterday when New York Stock Exchange volume closed on the heavy side, with advancers leading decliners by 6 to 1. That is a sign that buying interest, in addition to seller exhaustion, was driving prices.
Indeed, the markets have made a remarkable turnaround in the last 24 hours. U.S. stocks have posted a modest bounce. The dollar has stopped rising. Gold and copper are firmer.
The CBOE Volatility Index is at 17, nearly back to where it was when the Brexit fears first surfaced in the middle of June.
Gold, at roughly $1,324, is elevated. And the best that can be said of the U.S. 10-year Treasury yield is that it has at least stopped dropping and is finding some support near 1.46 percent.
It's true that all this is very much hostage to Brexit headlines. But even fairly tough words from European Commission President Jean-Claude Juncker that there could be "no negotiation without notification" has not spoiled the buying mood.
We are entering earnings period, which also means that some companies are entering a blackout period where they cannot buy back stock.
There's a significant trader mythology around this period, the implication being that the market is in trouble because companies cannot buy back their stock.
It's not that simple.
The first problem is that this Brexit thing has come at a rather inopportune time. A lot of companies have seen significant price declines, and may see more in the coming week or so. You can bet they would like to buy back stock at these lower prices, but to the extent they are restricted due to a blackout period it could be an issue for them.
The first to be reporting will be the big banks, including JPMorgan on July 14. That means some banks may not be able to buy back stock at precisely the moment the stocks have dropped to much lower levels than a month before.
But not all blackout periods are the same, indeed, not all companies follow the blackout period.
That's because there is no federal law or even a rule that mandates a blackout period.
The reason blackout periods exist at all is because corporate executives as well as corporations buy back stock. These company executives may have access to inside information, particularly in the period when they are gathering corporate financial information immediately before an earnings report. The goal of the blackout is to prevent insider trading.
Companies are allowed to buy back their shares, but they have to do it in a certain manner to avoid the appearance that they are manipulating the stock. Under a rule created in 1982 by the SEC (it's called Rule 10b-18, if you really need to know), companies cannot buy back their stock at the very beginning or end of the trading day (in the last 10 minutes), they have to use a single broker for the trades, they have to buy shares at the prevailing market price, and they can't be more than 25 percent of the average trading volume over the previous four weeks.
A separate SEC rule (Rule 10b5-1) allows companies to set up regular plans to buy or sell their stock. As long as they adopt a specific "Trading Plan" to sell stock at some kind of pre-established buying or selling program they can be protected from accusations that they are buying or selling stock based on inside information.
Unfortunately, companies don't provide much color on how they decide to buy back stock. They are required to provide quarterly reports on how much they are buying broken down by month, but there's usually not much more than that.
So, for example, a company could start a plan to purchase X amount of shares if it hits a certain price. Or it could say, buy 1 million shares a day as long as the price is lower than X price, or higher than X price. Or it could say, buy 50,000 shares every day at the prevailing market price throughout the day.
Get the point? Every company conducts a buyback in a different manner.
Let's get back to this "blackout" period: each company decides how long their blackout period should be. Generally, they don't tell us what the period is because the SEC does not "mandate" that there should be a specific blackout period. And the company does not want shorts to know when they may or may not be buying back stock.
Still, there are "rules of thumb" that a lot of traders use. Most traders assume that companies stop buying at least a week or more before, and start buying again a few days after their earnings report. So it's certainly reasonable to assume most companies have at least a two-week blackout period each quarter.
Here's where it gets confusing: while most companies may have blackout periods, it is perfectly legal to continue to repurchase shares during the blackout period as long as the company is adhering to a 10b5-1 plan.
In other words, we can't really make any generalizations that companies are invariably not buying back their stock, even during the period around their earnings report.
You can see this in some company reports. If all companies really stopped buying back stock in the month of their earnings report, you would think there would invariably be a big dip in buybacks in that first month.
But you don't always see that. Take Wal-Mart as an example. They reported earnings on February 18th. In their quarterly earnings report, they noted that they bought back stock pretty consistently in all three months: 13.8 million shares in February, 13.9 million in March, 12.5 million in April. So there was no dip in February when they reported earnings.
Why not? It's likely they had a 10b5-1 plan and stuck to it, even buying through their blackout period..
And how did they determine when they were buying back their stock? This is all they said: "The Company regularly reviews its share repurchase activity and considers several factors in determining when to execute share repurchases, including, among other things, current cash needs, capacity for leverage, cost of borrowings and the market price of its common stock."
Not much to go on, eh?
Or take JPMorgan. They reported January 14. But they bought back the most stock in January: 14.1 million shares, 8.0 million shares in February, and only 6.9 million shares in March.
This looks like they continued to buy back stock right through their earnings period, again likely using a 10b5-1 plan.
To make things more complicated, companies don't have to use 10b5-1 plans to buy back stock. They can just do it manually. If they do that, they certainly would have to adhere to blackout periods to avoid accusations that they are buying back their shares when they are in possession of materially relevant information.
The bottom line: blackout periods certainly exist, but they may not be the big drag on the market that everyone thinks they might be.
But that doesn't mean this Brexit thing has not come at a bad time. Look at the banks. JPMorgan is down 10 percent in two days. Remember February 11, when Jamie Dimon turned the market around by announcing he was personally purchasing $25 million in JPMorgan stock?
He did that because he had reported earnings on January 14th and was well outside any blackout period. This was a special, unannounced buyback so he certainly would not have done anything like that near his earnings. The company announced a $1.9 billion buyback a month later.
But JPMorgan is reporting in less than two weeks. Highly unlikely that bank executives would come out and make any announcements about any buybacks in this period leading up to earnings.
But I bet they would like to!
I forgot to Sell in May!
The Brexit is proving to be mind-bogglingly complex, but for those interested in the stock market, it boils down to three immediate knock-on effects:
Working out the impact on various sectors is complicated because almost all the players in the biggest sectors have global exposure. So simply buying consumer staples like Procter & Gamble is no panacea; they get almost two-thirds of their revenues overseas.
One thing we do know: the companies with the largest exposure overseas have already been reducing their earnings and revenue projections by a greater degree than companies with a more U.S.-based focus.
Where do we go from here? The markets were positioned for a remain vote and we are dealing with that fallout. We have dodged the immediate bullet: Today's U.S. open, while down notably, was orderly and devoid of the massive trading halts we saw on the last big down day (Aug. 24).
My colleague Kayla Tausche just did a hit for us from London. It was raining so hard the poor woman was soaked by the time she finished.
If this keeps up, her next hit will be a shot of her floating down the Thames.
This makes me nervous, because it's widely believed that bad weather will favor those who want to leave.
But I seem to be decidedly in the minority. The stock market is acting like the "remain" vote is a fait accompli. What do they know the rest of us don't?
Twilio priced 10 million shares at $15, above the initial price talk of $12 to $14 a share.
It's the year's first unicorn to go public, and the first IPO to price above its proposed range since December. It's the first Silicon Valley tech IPO since Square went public in November.
Why the pricing above the range?
Wall Street may now be comfortable with the idea of a Hillary Clinton victory, but her policies may be negative for many companies.
That's how much of the $51 trillion in company debt is coming due between now and 2021, according to S&P Global Ratings.
Shares of liquor maker Diageo jumped roughly 2.5 percent.