“Man, European debt crisis optimism has me feeling swell to kick off this week”
Dow: 13,118 (+0.16%) S&P 500: 1,394 (+0.23%)
Perpetual summer daiquiri hangover? Weekend jet ski fatigue? Maybe even the late-night reading distraction of Sunday’s coveted MarketSnacks “Week in Review?” We’re not sure what’s responsible, but Mondays haven’t been good for investors recently. The Dow Jones Industrial Average has suffered losses in each of the last 9 Mondays, its longest such streak since ’73…until today. Adding to Friday’s 217-point leap following the Labor Department’s much-anticipated July employment report, the blue-chip Dow added 21 points to start the week. Struggling big box Best Buy made headlines and Knight Capital is holding on for dear life, but confidence in European leaders’ developments pulled 3 out of every 5 American stocks up.
German government comes out in support of bond-buying program
Europe’s sovereign debt crisis, in a Fiat-sized nutshell, is that governments have so much debt that investors are afraid to lend them any more in fear of not getting paid back. So when Spain tries to raise much-needed cash, it issues a bond that promises to pay you €1,000 in 2 years, but investors will only offer like €900 for it. That sucks for Spain because they have to pay an interest of 11% in this simplified hypothetical. The European Central Bank‘s bond-buying plan purchases lots of Italian and Spanish bonds with freshly printed euros in order to drive up that price and reduce the borrowing cost to sustainable levels (~4% for 10-year bonds is pretty good for Spain historically). Today the German government publicly threw its support behind the plan publicly for the first time, which is big news since they hold the biggest purse that ultimately is responsible for the purchased bonds if they can’t get paid back.
Best Buy founder offers $8.8 billion for company in a leveraged buy out
Richard Schulze founded Best Buy (BBY) in 1966 and was Chairman of the big-box electronics chain until last year. But after letting the company go public in the 80s with an Initial Public Offering, he slowly sold shares and now owns just 20% of it. Today Schulze said that he can’t standby any longer as BBY gets run over by Apple and Amazon. Apple stores are so much trendier/shinier and you can literally type in your credit card info on Amazon.com for a new computer – that you just tested in your nearby Best Buy. Schulze sent a letter to the Board of Best Buy offering to buy the rest of the shares of the company for $24-26 each. He believes that only with full control of the company can he initiate the quick and drastic changes needed to resuscitate it back to profitability. This would be a leveraged buyout (LBO), meaning he would spend a ton of his own private money, but use a lot of debt from banks to pay the $8.8 BN price tag that his $24/share offer implies. Naturally the share price jumped today 13% to $20 as the board considers Schultz’s decision, because the shares trading for $17.60 on Friday are worth $24 if the board takes the offer. Fast times in LBO land…MarketSnacks will keep you up to speed as this goes on.
Knight Capital sells $400 in stock to prevent bankruptcy after trading glitch
Remember the brokerage firm that’s flailing around Wall Street trading like a pint-sized female Olympic gymnast on the uneven bars? Computer glitches at Knight Capital (KCG) disrupted trading in over 140 stocks last Tuesday, causing Knight shares to fall 60% the next day. The mishap cost the firm $440 million (over 4 times their entire earnings from 2011) – in the digitized computer trading world, with Knight’s orders off by even fractions of a second, a lot of cash can be lost on the millions of trades in that short amount of time. But with bankruptcy looming this weekend, Knight today announced it sold $400 million worth of new company shares, giving others equity (ownership) in the firm while generating new, much need emergency capital (i.e. cash) for itself to stay afloat. Since future profits will have to be divvied out to millions more new shareholders, the stock’s value was severely diluted by this move and Knight shares dropped another 24% today.
Tomorrow:
- A slim amount of econ data this week…
- June Consumer Credit
- Earnings: Walt Disney, CVS, MolsonCoors, Office Depot
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