TD Ameritrade, ‘Time to Fade the M&A Euphoria?’

Buyout chatter is heating up in the brokerage space. One analyst says that now is the time to cash out if you own TD Ameritrade (AMTD).

Bloomberg reports that privately held online broker Scottrade Financial is for sale. Ben Levisohn noted that TD Ameritrade, Charles Schwab (SCHW), E*Trade Financial (ETFC) and maybe some banks all are potential buyers.

William Katz at Citigroup notes that, TD Ameritrade’s shares are up 6% so far this month (in part because of separate speculation about a TD/E*Trade deal), and that now is probably the time to sell. He asks, “Time to Fade the M&A Euphoria?”

“While both potential deals offer EPS accretion, we believe the sharp rally in [AMTD] shares: 1) amply discounts most likely accretion scenarios; yet, 2) leaves no room for a bad outcome, which we define as: AMTD opts not to pull the deal trigger; ETFC acquires Scottrade; or, a third party enters the M&A fray outbidding AMTD. As such, we are inclined to fade the rally, particularly as rate(s) expectations remain largely muted. …

Of the two prospective combinations, we believe AMTD/Scottrade is the more likely though could raise strategic, long-term questions for investors around growth, strategy and resultant P/E multiple.”

Here’s why Scottrade appears to be the likelier deal, according to Katz:

“Several factors lead us to conclude that a deal between AMTD and Scottrade may be more likely than a deal between AMTD and ETFC. We also believe it would be easier for AMTD to craft a deal for Scottrade relative to ETFC – though this latter point is based on several very broad metrics based on Consensus expectations (Figure 6). In turn:

There is greater EPS accretion for Scottrade than ETFC; The deal is smaller and seemingly offers lower execution risks; Such a deal is less likely to drive a strategic response by SCHW given the smaller size of Scottrade, and thus better protects EPS accretion upside; and, the revenue dis-synergies and cost reductions are more manageable, we believe.”

A.M. Funds Roundup: Deutsche Bank, Deutsche Bank, Deutsche Bank

Links to the best reading in funds investing:

• Probably not worth owning a Deutsche Bank (DB) exchange-traded notes at this point — Chris Dieterich, Barron’s
• Some hedge funds and money managers including AQR and Millennium Management are reticent about holding accounts at Deutsche Bank — Rob Copeland and Jenny Strasburg, The Wall Street Journal
• Other hedge funds (presumably getting prime services elsewhere) are shorting Deutsche Bank — Giles Turner and Laurence Fletcher, The Wall Street Journal

Now Is The Time To Sell Deutsche Bank ETNs

Concerns about the financial condition of Deutsche Bank (DB) are again raising questions about exchange-traded notes, debt instruments issued by banks that promise the performance of an index in exchange for a fee.

Exchange-traded notes ARE NOT THE SAME as exchange-traded funds, even though both trade in real time, like stocks. ETNs carry credit risk; they are unsecured bonds. Deutsche Bank has 21 ETNs available to U.S. investors with about $720 million in assets, according to data firm XTF. You won’t find record of them on DB’s website. Ron Rowland, portfolio manager at Flexible Plan Investments, has some advice: “Dump Deutsche Bank ETNs Now.”

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Financial ETFs Flinch on Deutsche Bank Worries

Deutsche Bank’s (DB) precipitous stock plunge is weighing heavily on financial-sector exchange-traded funds.

A  7.2% plunge for German bank’s U.S.-listed shares weighed heavily on global financial markets. Bloomberg reports that a handful of hedge funds that partner with Deutsche Bank to clear derivatives trades had withdrawn their business.

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A.M. Funds Roundup: Smart Beta Mushrooms

Links to the best reading in funds investing:

• The number of smart-beta ETFs is mushrooming because of course it is — Ben Johnson, Morningstar
• The man who coined “risk parity” – Dani Burger, Bloomberg
• A subsidiary of Och-Ziff Capital Management (OZM) plead guilty in a federal probe into millions of dollars of bribes funneled to African officials — Bloomberg

• “What makes the S.E.C.’s case against Mr. Cooperman different is that he essentially concedes receiving the information about the impending asset sale from an unnamed company executive and then trading on it” — Peter J. Henning, New York Times 
• No, diversification through global stocks isn’t dead — Jeremy Schwartz, WisdomTree
• But what about the tax efficiency of financial-stock ETFs that just underwent a REIT sector re-balance? — Jeff Benjamin, InvestmentNews

Moonshot Crude: Reports of Oil Production Cap Vaults Oil Prices

Crude prices are off to the races.

Oil darted higher after a Reuters report that the Organization of Petroleum Exporting Countries has reached a deal to limit oil production in November.

West Texas Intermediate crude jumped 4.9% to $46.85 a barrel and Brent crude added 5.3% to $49.00 in recent trading. OPEC ministers in Algiers were meeting this afternoon to discuss a proposed cut to the cartel’s oil production, the latest attempt to stem a two-year crude-oil rout.

The WSJ reports that the meeting began after Iran said it would be willing to consider capping its output at 4 million barrels a day–up from 3.6 million a day now. If that condition were met, speculation was that a broader deal to limits output overall from OPEC, the world’s oil cartel, might be met.

The United States Oil Fund (USO) surged 5.2% in recent trading, while the United States Brent Oil ETF (BNO) jumped 5.6%. Oily stocks including Exxon Mobil (XOM) similarly soared. XOM popped 4.1% and was the top-performing stock on the Dow Jones Industrial Average.

Bill Miller Says He’s Looking Forward To Life Without Legg

Will newly found independence allow famed stockpicker Bill Miller to resurrect his mojo?

Daisy Maxey at The Wall Street Journal caught up with Miller, who says he relishes the prospect of becoming a smaller, more nimble firm.

Miller last month announced plans to buy out Legg Mason’s (LM) stake in his advisory firm, LMM, effectively ending ties between the two parties. LMM controls the Legg Mason Opportunity Trust (LMOPX), among other strategies. Maxey writes that Miller plans to rename the fund the Miller Opportunity Trust.

Maxey also writes that Miller’s departure from Legg should “permit him to manage money as he did when Legg Mason was a small regional brokerage in the early 1980s.” She goes on:

“While Legg Mason Opportunity’s strategy won’t change, the plan is to reorganize it as a non-diversified fund, as it originally was, which will give its management team more flexibility to be more concentrated in their investments, says Neil O’Callaghan, president and chief compliance officer at LMM.”

Should the reorganization garner shareholder approval, the firm will be in command of distribution and carry greater freedom to reach out to investors who “get” the Bill Miller Story. Here’s what he told Maxey:

“There were a variety of policies that Legg [Mason] maintains for its affiliates with respect to communicating with shareholders,” he says. “One of the advantages of this transaction will be more flexibility to communicate with clients and be more expansive and perhaps more candid than we could with a very large company’s oversight.”

Miller, who was named fund manager of the decade in 1999 by Morningstar, beat the S&P 500 in what was then his Legg Mason (now ClearBridge) Value Trust (LMVTX) for 15 years running before its track record was tarnished in the rubble of the financial crisis. He’s not been associated with that fund since 2012.

Miller recently won approval to open Miller Value Partners, the parent that will oversee quant-focused hedge funds.

Coty Gets The Nod To Join S&P 500

Beauty product specialist Coty (COTY) will be added to the S&P 500 Index of large-cap stocks, replacing beaten-down Diamond Offshore Drilling (DO), according to index provider S&P Dow Jones Indices.

The addition of Coty, maker of Cool Water cologne and myriad other products, will mean one more consumer staple stock in the index. Coty, with a market cap of $7.96 billion, will join Estee Lauder (EL) as the benchmark’s second “personal product” industry stock, according to FactSet.

Diamond Offshore, a Houston-based offshore driller, has seen its stock price crater alongside the price of oil since 2014. The stock is down nearly 70% since the June 2014, reducing the company’s market value to around $2.2 billion. The index provider made the switch since Diamond Offshore is “ranked at the bottom of the S&P 500 and has a market capitalization more representative of the mid-cap market space.” 

The changes will take effect after the close of trading on Friday. Shares of Coty rose 0.9% in recent trading on an otherwise down day for U.S. stocks. Index additions result in forced buying from index-tracking funds and can prompt active managers who use the S&P 500 to add to positions as well.

A.M. Funds Roundup: Another Big Hedge Fund Closure

Links to the best reading in funds investing:

• MarketAxess Holdings (MKTX), an electronic bond-trading platform, is elbowing into the market formerly owned by big dealers — Joe Rennison, Financial Times
• Blue Apron, the company the delivers uncooked ingredients to your house for you to cook, is looking to go public --Alex Barinka and Kiel Porter, Bloomberg
• Blackstone Group’s (BX) top deal-maker is having a hard time making deals – Devin Banerjee, Bloomberg
• Two Sigma Investments, one of Wall Street’s most successful quant-trading shop, is looking to get into the insurance game — Bradley Hope and Leslie Scism, The Wall Street Journal
• Richard Perry’s hedge fund is closing — Katia Porzecanski and Katherine Burton, Bloomberg

Longtime Hedge Funder Richard Perry Closing Main Fund

In case you missed it: Richard Perry, an old-school hedge funder, is hanging up his spurs.

Perry told clients on Monday that he will wind down his flagship fund, lamenting in a letter that “market headwinds” and the broad trend for investors to move away from hedge funds has complicated the game, according to various press accounts. Here’s the background from Bloomberg:

“It’s a remarkable turn of events for Perry, who is one of the longest-standing hedge fund managers. He was part of an elite group of proteges of Robert Rubin at Goldman Sachs Group Inc. who went on to run marquee hedge funds. Over the fund’s first two decades, Perry posted an average return of 15 percent without ever having a down year.”

But, Perry wasn’t immune to the acute, recent trend away from hedge funds. Bloomberg says that the flagship has shed more roughly half its assets. Now, the event-driven fund will give back most of its money back to clients next month. Less liquid positions will be sold more slowly, over the next year or longer.