Daily Agenda: Markets Tire of Greek Brinksmanship

Comcast abandons Time Warner Cable deal; PBOC raises yuan currency band; Google co-founder buys D.E. Shaw stake.


Andrew Harrer

Greek Finance Minister Yanis Varoufakis told French reporters today that his country is prepared to leave the euro zone if its conditions cannot be met. After a meeting today of the Eurogroup, all 19 euro zone finance ministers in Riga, Latvia to discuss the stalemate, neither side is expressing optimism for a last-minute breakthrough. For investors tiring of Athens’ incessant brinksmanship, the response has been an orderly retreat in Greek sovereign debt markets rather than a crash. The Eurogroup will hold its next meeting on May 11, the day before Greece needs to pay €750 million ($812.2 billion) back to the International Monetary Fund. Despite moves this week by Athens to force local public-sector entities to deposit their cash reserves into the Bank of Greece, bond markets are clearly indicating that the risk of a Greek default remains high.

Comcast gives up on Time Warner Cable bid. Reports indicate cable and broadcasting company Comcast has shelved its $45.2 billion proposed acquisition of Time Warner Cable out of antitrust concerns. Analysts had anticipated that, had the merger gone through, it would have spurred a wave of further consolidation within the cable industry. Banks that will forgo advisory fees include Morgan Stanley and boutique advisers Allen & Company and Centerview Partners.

Beijing sends yuan higher. The People’s Bank of China today raised the daily reference rate for the yuan to its highest level against the U.S. dollar since January. The reference rate, which is the center point for a currency band of 2 percent above and below, has now increased by 0.4 percent for the year even as the central bank takes further liquidity actions in an attempt to stem the tide of capital outflows.

Schmidt buys D.E. Shaw stake. It was announced yesterday that Hillspire, the family office of Google co-founder Eric Schmidt, acquired a 20 percent ownership stake in hedge fund firm D.E. Shaw from the remains of Lehman Brothers Holdings for $500 million. Lehman had initially paid $750 million in 2007. D.E. Shaw manages roughly $36 billion in assets. Separately, Google yesterday reported a 12 percent increase in revenues for the first quarter of 2015 versus the same period in 2014 after equity markets closed. In their guidance for shareholders, company management said that a strong dollar and weaker advertisement sales continue to be headwinds.

IFO index hits 10-month high. April business sentiment data released today by the IFO Institute saw German business leaders at their most confident since mid-2014. The headline index reached 108.6 in the sixth consecutive rise.

U.S. warns Russia over Ukraine. U.S. State Department officials yesterday accused the Russian government of military build-up on the border of Ukraine as hostilities between Moscow-backed separatists and Kiev continue to simmer. In particular, the U.S. takes exception to surface to air missiles placed in the region as well as an increased number of troops.

Portfolio Perspective: MLP Yields Appear Resilient in Oil SlumpLowell Miller, Miller/Howard Investments

Despite low energy prices, payouts on master limited partnerships (MLPs), look safe. Analysts do not expect midstream MLPs to cut cash distributions although growth may slow, given the persistently in low oil and gas prices. Indeed, during the first quarter, nearly all MLPs — except upstream producers — increased their distributions, and that’s the best test of industry health. MLPs still offer more yield income compared to real estate investment trusts (REITs), utilities and corporate bonds. These are yielding 3.3 percent to 3.5 percent versus the 5–7 percent available from quality and seasoned MLPs.

Fee-based pipeline and terminal operators should continue to see their earnings grow. Their profitability depends more on volume than on oil and gas prices, and volumes are strengthening in end-user markets. MLPs with crude product storage terminals may benefit from rising utilization and storage rates. Analysts project that companies in the Alerian MLP index will see a five-year annual earnings growth rate of 9 percent. It’s nearly as fast as the S&P 500’s projected five-year growth rate of 10 percent and much faster than the 5.3 percent for utilities and 6.2 percent for REITs.

Modest valuations and the stresses on producers may encourage more M&A, especially from exploration and production companies looking to divest midstream assets. As we saw with the Shell-BG deal, suitors hungry for growth are willing to pay a heavy premium for an accretive acquisition. To be sure, commodity price volatility, uncertainty in interest rates and production cuts across the oil and gas sector weigh on MLP performance, but it may be more a matter of reducing a very strong growth rate to one that is merely strong.

Lowell Miller is the founder and director of research at Miller/Howard Investments, an SEC-registered investment firm in Woodstock, New York.