Housing, Inflation, Regulation, and More
I would like to wish you a happy new year, and I hope you have enjoyed the holidays. If you enjoy my post, please do share it with others, and subscribe.
Unfortunately, due to it have being the last week of the year, last week, there wasn’t much going on in the news, so do bear with ‘The Week’s Briefing’, and the rest of the post, being a lot shorter than normal.
Please read the disclaimer at the end before continuing
The Week’s Briefing:
M&A
Admiral Group, the UK insurance firm, sold its price comparison division, and Confused.com, to property search site, Zoopla, in a £508 million deal.
JP Morgan Chase & Co. to buy cxLoyalty, a credit card loyalty platform. The financials of the deal were not disclosed.
OceanFirst Financial CEO, Chris Maher, looks at a possible ‘merger of equals’ next year to boost the bank’s assets, currently standing at $11.7bn, to ~$20bn.
New York Life Insurance Co. finally completed its acquisition of Cigna’s life, disability and accident insurance unit, which was announced in a $6.3bn deal, in December, 2019. This is the largest deal in the New York Life Insurance Co.’s 175 year history
Banking, Insurance & Regulation
Index funds to face scrutiny from anti-trust regulators under new proposals by the FTC, and the DOJ.
Large asset managers have increased staffing in the EU by 38%, since 2015 (excluding the UK).
Sheila Patel, Chairman of Goldman Sachs’ asset management unit, is to retire from Goldman Sachs, after nearly 2 decades at the firm.
PNC Financial Services Group has filed a trademark infringement lawsuit against Plaid.
Ant Group may be required to divest its equity stakes in other banking related/finance companies.
Economics
U.S. weekly jobless claims fall, again, declining to 787,000, for the week ending Dec. 26. This beat estimates, which expected claims to rise to 828,000.
Strong housing demand, and limited supply, caused home prices, in October, to rise at the fasted rate in 6 years, rising 7.9% in October (YoY), according to the S&P CoreLogic Case-Shiller 20 City Home Price Index, led by Phoenix, with a 12.7% YoY rise in prices - its 17th consecutive month of gains.
U.S. 30Y Mortgage rates end 2020 at near record lows, after making numerous record lows throughout the year - mainly due to the FED purchasing nearly a trillion dollars worth of MBS’s.
- The CCP’s Crackdown on Jack Ma, and Ant Group
After a push by watchdog agencies to further regulate financial holding companies, regulators in China plan to push Ant Group to divest its minority equity stakes in other banking related companies, in an attempt to curb Ant’s (and Jack Ma’s) influence over the industry.
Ant has been told, by the central bank, that it must draw up a plan to revamp its business, and come up with a timetable, as soon as possible. This could, possibly, result in Ant encompassing all of its financial operations into a holding company, and be regulated like a bank. This would mean that they would be restricted under additional capital requirements, and come under further regulatory scrutiny. Such a plan would put Ant’s wealth management, insurance, consumer lending, payments and MYbank businesses all into the holding company - all of these require licenses to operate. This would deal a huge blow to Ant Group’s investors, as it would mean that the growth of their most profitable units could come to a near halt, or be suppressed for at least a few years.
This all comes at a difficult time for Jack Ma, as not only is his Ant Group facing scrutiny, but anti-trust regulators have also launched an anti-monopoly investigation into his other business, Alibaba, sending Alibaba’s U.S. listed ADR’s dropping 10% over the news. Not to mention that just in November, Ant Group was set for the largest IPO ever, planning to raise $37bn, at a near $300bn valuation, before the government, and regulators, put all such plans of an IPO on hold, for the foreseeable future.
- The $2.6bn New York Life Insurance Co. and Cigna Deal:
In December, 2019, NYLIC announced that they were to acquire Cigna’s unit that sells life and disability insurance policies, through employers. A deal this size is a rarity for NYLIC, which is a mutual insurance company, owned by its policy holders. The deal finally closed this week.
This was not the first deal in the space, Lincoln National Corp. acquired a group-benefits unit from Liberty Mutual Holding Co. for $3.3bn in 2018, and, in 2017, Hartford Financial Services Group Inc. bought Aenta’s life and disability division, for $1.45bn. Not to mention, MetLife, in a bid to focus more on selling policies through employers, spun-off Brighthouse Financial Group in 2017, with more than $220bn in assets.
Selling insurance polices through employers releases some of the low interest rate pressure on insurance firms, as it is a more lucrative market segment. This has led to large M&A activity in the space over the last few years.
- Antitrust Regulators Question Whether the Index Fund Industry Deserve More Scrutiny.
Index funds have changed the business of money-management since they became widely available in 1976. Just three companies oversee 80% of all indexed money, those being Blackrock, State Street and the Vanguard Group, and, together, their portfolios own over 20% of the average S&P 500 company.
A new proposals, by the U.S. Federal Trade Commission (the FTC), much of that could change. Two of those proposals would lead all their investments coming under scrutiny from both the FTC, and the Department of Justice (the DOJ).
The concern raised, is that, when one institutional investor is the largest shareholder of multiple companies in the same industry, it suppresses competitive forces, and motivation , for companies to gain their market share, and lower prices. This would then (theoretically) mean that the owner of rival companies would prefer that they don’t compete intensely, as that would eat away at their profits. A 2018 study apparently showed this within the pharmaceutical industry, where the same institutions are the largest shareholders in branded drug companies, and generic drug makers, the generic brand companies are less likely to sell cheaper versions of the brand-name drug producers.
As these index fund providers have grown, it has led regulators, and policy makers, to become more concerned about monopolies in the space.
Currently, these funds are not required to notify regulators, the SEC, before purchasing a large number of shares in a company, unlike other investors, for example, an activist hedge fund looking to gain control of a company, by waging a proxy battle. This would change, under proposals by the FTC.
Another change would be that these funds must report their holdings to the government, along side regulators, so that the government can gain insight into their large equity stakes in companies, of the same industry (this is called common ownership).
- General Market and Economic Observations
Since my last post, the $900bn stimulus deal was passed, and the S&P 500 is up another 1 or 2 percent, ending 2020 on a high note, up over 15%. The housing market has been just as hot through 2020, supported by the FED purchasing nearly a trillion dollars in Mortgage Backed Securities (MBS’s), pushing mortgage rates to their lowest levels, ever (as you can see in the chart below), down around 100 bps since the year started.
Housing is up a few percent through 2020, however the data has a multiple-week delay, so the full 2020 results have not yet been released.
Other assets that have ended the year on a high, are safe haven assets such as Gold (up ~23% in 2020), but most notably, food prices, with the BBG agricultural index up ~23% on the year. This is shown in the chart below from Bloomberg, comparing the performance of Gold, to the BBG Agricultural Index:
Inflation has been evident in all asset prices, except for actual inflation measurement indexes. That is because they are weighted toward items, such as airline tickets, shoes, suit prices, which were in little demand this year, due to the pandemic, and so inflation measures, overall, were low, despite inflation picking up in prices of other items, that were in more demand, as a result of the pandemic. Assuming a full re-opening is successful next year, inflation, theoretically, should pick up, as items that were in low demand this year, such as men’s formal suits, should see a pickup in demand, as companies return to offices, and people start travelling again, and returning to normal. Inflation picking up would likely lead to yields (the risk-free rate) going higher, making excessive market valuations, currently justified by low risk-free rates, unsustainable. Inflation is a key risk to the markets in the long run, and it’s very possible that this has not yet been priced into current valuations.
To end, I would now like to return to the housing market. While house prices have had more than a ‘v-shaped’ recovery this year, tenants, and home owners with mortgages, have not. While the unemployment rate has dropped significantly from its peak, in March, there are still over 5 million people collecting unemployment benefits, as shown in initial jobless claims reports.
For much of the year, landlords have not been able to evict tenants, as they are protected by the federal eviction moratorium, which just expired, at the start of the month, but was extended through January, in the new stimulus bill, some states have even extended it further. According to a report by Bloomberg, 11.4 million U.S. households may be more than 3 months behind on their rent, amounting to approximately $70bn owed in unpaid utility bills, rent and late fees (approximately $6,000 per household). This falls far short of the $600 stimulus cheques, that were just sent out. A possible spike in delinquency rates, and evictions may prove to be a problem for the housing market, in the future. However, the housing market may continue to run strong in the future, driven by a fundamental gap between supply (which has dropped significantly post-GFC) and demand. Although, if house prices rise at too fast a pace, demand may dry up due to housing becoming unaffordable, for many.
Some other things:
Here is an extract from David Einhorn’s Greenlight Capital’s Q3 2020 investor letter, which is self explanatory, and worth a read:
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