ARTICLES

An Alternative To Money Market Funds
Sarasota Herald Tribune and Naples Daily News

May 2019

April is behind us and what a month it was!! The Federal Reserve concluded its 2 day meeting May 1 making clear a rate hike is unlikely in 2019. As a result, the US appears to be entering a Goldilocks scenario as the US economy grew at a 3.2% rate in the first quarter with low inflation. Meanwhile, the April Nonfarm Payrolls Report released May 3 showed the unemployment rate was at 3.6%, a 50 year low.

GE made headlines in late February when it announced an agreement to sell its biopharma unit to Danaher for $21.4 billion. This move was made to fund the reserve shortfall its health care insurance arm faced. GE reported its Q1 results April 30 and the shares rallied on news GE’s cash burn was not as bad as feared. GE’s debt at the end of Q1 was reported as $107.5 billion, a drop of $2.5 billion from the end of 2018. GE is forecast to earn about 50c for 2019 and its share price now sits around $10 per share, giving it a Price Earnings ratio of 20x. That is rather high for a firm in the midst of a restructuring.

A bidding war for Anadarko Petroleum (APC) has begun. Last month, APC agreed to a $65 per share cash and stock acquisition by Chevron (CVX). Occidental Petroleum (OXY) later offered $76 per share in cash and stock. Initially, the OXY proposal would require approval of both the OXY and APC shareholders due to New York Stock Exchange rules as the OXY proposal would see OXY issue over 20% of its outstanding shares to complete the deal as proposed. The CVX deal did not.

In an attempt to get around this rule, OXY subsequently made a deal with Warren Buffett where he would acquire $10 billion in preferred equity in OXY on terms quite favorable to Mr Buffett. CNBC reported that Mr Buffett was willing to invest up to $20 billion to enable OXY to complete its purchase of APC. Mr Buffett’s investment is contingent on OXY completing this acquisition.

Several OXY shareholders have voiced opposition to the APC deal, especially the arrangement OXY made with Mr Buffett. On May 3, Bloomberg reported that Carl Icahn had taken a stake in OXY who may seek to put OXY in play. OXY holds its annual meeting May 10 in Houston. If a bid were to be made for OXY, keep in mind it has a limited path to fight any deal since its Board is elected annually. Insiders own less than 1% of its outstanding shares and there is only one class of common stock in its capital structure.

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