A Time to Give Thanks

by Shawn Narancich, CFA
Executive Vice President of Research

Define Quiet

Another week, another record high for stocks. This has become the drill in 2017, as markets haven’t seen a weekly pullback in the S&P 500 greater than 2 percent in well over a year. A lack of volatility and another quarter of supportive earnings is doing the trick, bringing blue-chip equity returns above the 18 percent return mark year-to-date. With 95 percent of companies having now reported, third quarter earnings season has unofficially concluded. In this season of bounty, we give thanks for another quarter in which corporate America underpromised and overdelivered, with S&P 500 sales and earnings both having risen by approximately 6 percent. While this is slower than the double-digit growth logged in the first half of 2017, earnings expansion again exceeded expectations. We now begin the holiday season, as marked by this week of Thanksgiving. Stock and bond markets were open for limited trading on Friday, but trading volumes mid-week had already begun to wane ahead of what for many professional investors is a four-day weekend. Despite the typical lull in activity ahead of the holiday, this week has been atypically eventful.

Not on Their Watch?

Threatening to derail AT&T’s planned acquisition of content creator Time Warner, the U.S. Department of Justice (DoJ) sued to block the combination this week. Antitrust law typically pushes back on proposed deals that combine competitors in the same industry, which are deals known as “horizontal combinations.” In this case, we have AT&T, a leader in wireless communications and video distribution attempting to buy a content creator. Neither business overlaps with the other and no competitor would be eliminated by combining the two companies. The last time the U.S. government sued to block one of these so-called “vertical” combinations was in 1979 when it unsuccessfully challenged the merger of a manufacturer of truck wheels with a truck trailer manufacturer. 

I’ll See You in Court!

The DoJ is claiming that AT&T will be able to withhold content from video distribution competitors like Comcast and Charter, or otherwise make it prohibitively expensive to purchase. But such a move lacks economic rationale.  For AT&T to earn acceptable returns on this acquisition, it will need to sell Time Warner network content from CNN, TBS, TNT and HBO to other video distributors. AT&T attorneys are prepared to fight the DoJ lawsuit, and will undoubtedly make this argument before the U.S. District Court Judge should the case actually go to trial.  For now, the state of U.S. antitrust law has been turned on its head, but without good legal precedent for the DoJ’s lawsuit, our best guess is that AT&T will prevail with few if any concessions.

 Keystone XL

In addition to the DoJ drama unfolding, investors were confronted with another interesting regulatory development this week. The state of Nebraska has greenlighted the final leg of an oil pipeline planned to deliver Canadian oil to the U.S. mid-continent. Final approval wasn’t without a wrinkle, however, as Nebraska has proposed a lengthier and more costly route than the one preferred by TransCanada. Even if it agrees to the alternative route, the Canadian pipeline company faces a slew of additional lawsuits that threaten to delay what has already been an excruciatingly long regulatory approval process. Perhaps in recognition of these ongoing complications, TransCanada’s stock failed to deliver any cartwheels, rising a modest 1.6 percent on the news. 

Regulatory reform enacted since last fall’s presidential election has been a key factor we’ve cited in giving businesses the added confidence to invest and expand. While final state approval of Keystone is a positive regulatory development at the margin, the U.S. government’s challenge of the AT&T/Time Warner deal is not.

Takeaways from the Week

  • Stocks continue to set new highs amid surprisingly low volatility
  • Regulatory developments this week were a mixed bag for corporate America

Disclosures