samro

[samro]

The most controversial use of corporate cash could hit $1 trillion this year

Cash money. (Image: Flickr)

The most controversial use of corporate cash will hit a $1 trillion milestone.

There are four basic things companies can do with the cash they accumulate: 1) they can reinvest in their business by growing their operations; 2) they can acquire another business; 3) they can return it to shareholders in the form of dividends; or 4) they can return it to shareholders by buying back stock.

Since the financial crisis, lackluster growth prospects have prevented corporations from aggressively investing in their own businesses. While there has been a moderate amount of merger and acquisition activity, the big story of the ongoing economic recovery has been companies shoveling out cash in the forms of growing dividends and increased buybacks.

“Since 2009 total payouts to shareholders, which includes dividends and buybacks, have increased by 20% per year for the S&P 500,” Barclays’ Jonathan Glionna said. “We estimate total payouts for the S&P 500 will reach $1 trillion for the first time ever in 2016. This will include approximately $400 billion in dividends and $600 billion in gross share repurchases and will culminate six years of substantial growth in payouts. As recently as 2010, total payouts were just $500 billion per year.”

Annual cash payouts are about to hit $1trillion. (Image: Barclays)

Deploying cash through dividends and buybacks is controversial since it is not as productive to the economy as business investment. Much of this money that returned ends up being saved by shareholders.

Buybacks are particularly controversial because they inflate earnings per share by reducing share counts. The controversy is made that much more heated because companies have been increasingly buying back shares with borrowed money.

The real problem: Cash payouts are outpacing earnings

Glionna believes this trend of booming cash payouts is plateauing as they are now exceeding the pace of corporate profits.

“The growth rate of payouts has far exceeded the growth rate of earnings or cash flow, leading to a high payout ratio and elevated borrowing needs,” he said. “The result has been a rise in leverage, with companies in the S&P 500 adding $1 trillion of debt during the last three years.”

Companies are sending cash out faster than the cash is coming in. (Image: Barclays)

Without a big pop in earnings, this growth in cash payouts is unlikely to be sustained.

“Over the last few years payouts have exceeded earnings for the S&P 500, which is rare,” Glionna observed. “It almost happened in 2014, when the total payout ratio was 99%. In 2015, it did happen. It will happen again in 2016, based on our estimates, as net income is likely to be less than $900 billion against $1 trillion of dividends and buybacks.”

Before the 1990s, cash payouts were far more conservative.

“Prior to 2015, companies in the S&P 500, in aggregate, had paid out more than they earned only six other times during the last 50 years,” Glionna said.

This does not bode well for the stock market, whose marginal buyers have included corporations buying back stock and investors seeking growing dividends.

–

Sam Ro is managing editor at Yahoo Finance. Read more:

Bank of America strategist warns stocks are nearing ‘Tech Bubble’ levels

Companies are increasingly buying back stock with borrowed money

This $10 trillion stat destroys a popular myth about the stock market

A growing chorus of strategists are sounding the same warning about 2017

The next selloff could be triggered by something we’re not discussing right now

The stock market enters Q4 in a precarious position

[samro]

Bank of America strategist warns stocks are nearing 'Tech Bubble' levels

Another bubble? (Image: Wikimedia Commons)

The stock market is getting expensive, and the analysts at Bank of America Merrill Lynch warn that many stocks are reaching valuations last seen during the tech bubble of the late 1990s.

The most popular way to measure value in the stock market is to take the price and divide it by earnings. This is the price/earnings (P/E) ratio. When the P/E ratio is above average, stocks are arguably expensive. When it’s below average, stocks are arguably cheap.

Most analysts have already observed that the average P/Es for the S&P 500 (^GSPC) are well above their five- and 10-year long-term averages, but they aren’t yet at levels seen during recent bubbles.

But the median P/Es tell a far more frightening story.

“The S&P 500 median P/E is currently at its highest levels since 2001 and suggests that the average stock trades a full multiple point higher than the oft-quoted aggregate P/E,” Bank of America Merrill Lynch’s Savita Subramanian observed. “This puts it in the 91st percentile of its own history and just 14% from its Tech Bubble peak.”

Median P/Es are looking rich. (Image: Bank of America Merrill Lynch)

The disparity between the mean and median can be explained by the fact that there are many more stocks today with elevated valuations. But during the Tech Bubble, a relatively small group of stocks  with eye-popping valuations skewed the mean higher.

Subramanian offered more color.

“Elevated stock valuations within the S&P 500 are driven chiefly by the mid caps—the most expensive size segment we follow—the median mid-cap stock trades in the 92nd percentile of its history,” she said. “The group keeping the S&P 500 aggregate forward P/E 30% below its Tech Bubble levels is the mega caps, which are trading well below their valuations at that time. The 20 largest stocks in 2001 were trading at a median P/E of 25x; today the 20 largest trade at 17x.”

All of this becomes much more troubling when you assume forecasts for forward earnings will come down. In fact, that’s exactly what Subramanian and many of her peers warn. Should those earnings estimates come down without a concurrent move in stock prices, valuations will only go higher.

–

Sam Ro is managing editor at Yahoo Finance. Read more:

A growing chorus of strategists are sounding the same warning about 2017

The next selloff could be triggered by something we’re not discussing right now

The stock market enters Q4 in a precarious position

UBS: Wall St.’s 2017 earnings forecast is ‘irrationally exuberant’

You’re probably using P/E ratios incorrectly

[samro]

A growing chorus of Wall Street experts are sounding the same warning about 2017

More and more Wall Streeters are sounding the same warning. (Image: Wikimedia Commons)

A growing minority of Wall Street strategists are warning clients that next year won’t be much better than this year.

“2017 expectations … overstated,” RBC Capital Markets’ Jonathan Golub writes.

In a note to clients on Monday, the veteran Wall Street stock market strategist warns that his peers are far too optimistic about the prospect for S&P 500 (^GSPC) earnings growth. In particular, he warns about forecasts for the energy and banking sectors, which have been crushed by low oil prices and depressed interest rates, respectively.

“Consensus estimates are for 15% EPS growth in 2017,” Golub observes. “This number would be 11% excluding Energy and Banks.”

Golub further acknowledges the long history of earnings estimates being slashed as years progress, and he even modeled his own trajectory for how estimates for 2017 earnings will be cut.

Earnings estimates could follow history down. (Image: RBC)

“Given the normal path of revisions, estimates are likely to decline 5% through the end of 2017,” Golub says. “This should bring next year’s growth to roughly 6%, a much more reasonable assumption.”

Golub sounded his warning as early as July, and he joins other forecasters — including JPMorgan, Citi, Morgan Stanley, UBS, and Bank of America Merrill Lynch — who believe the double-digit earnings growth expected by the consensus is not going to happen.

The urgency of this discussion is heightened by the fact that market valuations are stretched.  Currently, the forward 12-month P/E ratio, which is based on forecasts for earnings growth in the next 12 months, is high at around 16.7. This is far above the 5-year average over 14.9 and the 10-year average of 14.3. There are a couple of ways for valuations to revert back to more modest levels including falling stock prices or surging earnings.

Without the support of earnings growth, prices become that much more vulnerable to volatility.

–

Sam Ro is managing editor at Yahoo Finance. Read more:

A rebellion is forming among Wall Street’s forecasters

The next selloff could be triggered by something we’re not discussing right now

The stock market enters Q4 in a precarious position

UBS: Wall St.’s 2017 earnings forecast is ‘irrationally exuberant’

Tom Lee: The market ‘NEEDS TO BOUGHT AGGRESSIVELY’

Deutsche Bank: ‘An 8-10% S&P decline looms’

[samro]

America's labor market just crossed a historic milestone

There’s lots to celebrate lately. (Image: Wikimedia Commons)

The US economy just crossed a historic inflection point.

Buried in the new US employment report is an impressive stat about the labor market.

“For the first time in almost 20 years, we are now seeing a decline in the number of people outside the labor market,” Deutsche Bank’s Torsten Slok observed.

The number of people outside the labor force is shrinking. (Image: Deutsche Bank)

Let’s unpack this a little bit.

As the population grows and people get older, more and more Americans reach that 16+ working age. From there, you can either: 1) join the labor force, which means you have a job or you’re looking for work, or 2) you stay out of the labor force, which means you don’t have a job and you’re not looking for work. If you’re part of this latter group, you may decide to enter the labor force further down the road.

Economists, politicians and pundits often address this metric by citing the labor force participation rates, which is the labor force represented as a percentage of the working age population. Currently, the labor force participation rate sits at 62.9%. Of the 254 million Americans in the civilian population, 159.9 million are in the labor force.

In September 444,000 people entered the labor force from outside the labor force. Think about what that means. Simply put, it means more competition for folks looking for jobs.

“The fact that there are fewer outsiders in the labor market to come in and take jobs from insiders has given more bargaining power to insiders and resulted in more upward pressure on wages, in particular for non­-managers,” Slok argued.

Worker pay is on the rise. (Image: Deutsche Bank)

The big reason for all of this is because so many Americans are going to work or they feel confident enough to enter the labor force to look for work.

All of this is confirmation that the labor market is getting tighter.

So while this is bad news for corporate profit margins, it’s great news for American workers as their paychecks grow.

“We are at full employment,” Slok said.

–

Sam Ro is managing editor at Yahoo Finance. Read more:

US adds 156,000 jobs, unemployment rate rises to 5.0%

A rebellion is forming among Wall Street’s forecasters

The next selloff could be triggered by something we’re not discussing right now

The stock market enters Q4 in a precarious position

UBS: Wall St.’s 2017 earnings forecast is ‘irrationally exuberant’

[samro]

US adds just 156,000 jobs, unemployment rate rises to 5.0%

The US labor market stumbled a bit in September.

US companies added just 156,000 jobs during the month, missing expectations for 172,000. Meanwhile, the unemployment rate climbed to 5.0% from 4.9% a month ago.

Average hourly earnings climbed by just 0.2% month-over-month, which was weaker than the 0.3% expected by economists.

CareerTrends | Graphiq

The increase in the unemployment rate was largely due to 444,000 Americans entering the workforce during the month, bringing the labor force participation rate up to 62.9%.

Below is a look at unemployment rates by demographic:

(Image: BLS)

The services sector dominated job creation during the month, with payrolls increasing by 157,000. Manufacturing jobs fell by 13,000. Mining and logging, which includes energy production jobs, showed 0 growth. Government jobs fell by 11,000.

“Big miss was government, which declined instead of rising,” tweeted economist Diane Swonk.

(Image: BLS)

While the monthly numbers were a disappointment, the big picture continues to be an encouraging one.

“Steady growth in aggregate hours and gains in earnings imply solid consumer spending,” Renaissance Macro’s Neil Dutta said.

As economist Justin Wolfers notes, this was the 72nd consecutive month of job gains, which compares to the previous record of 48 months of gains. And for those interested in politics, Wolfers also tweeted that 10.6 million jobs have been created under the Obama administration.

Job creation scorecard: Obama: 10.6 million so far George W. Bush: 1.3 million Bill Clinton: 22.9 million George H.W. Bush: 2.6 million

— Justin Wolfers (@JustinWolfers) October 7, 2016

As always, these monthly numbers are subject to revisions.

Other labor market measures look strong

Earlier this week, two widely-followed reports on the US economy reflected continued strength in the labor market.

First was the ISM non-manufacturing survey, which tracks activity in the US services sector. The employment sub-index surged 6.5 points to 57.2 in September, signaling acceleration in service sector job growth.

The ISM surveys look good for employment. (Image: Wells Fargo)

Second was the Department of Labor weekly report on employment insurance claims. According to the report, the four-week moving average for initial weekly jobless claims fell to 253,500, which was the lowest level since December 8, 1973. This measure has been below 300,000 for 83 consecutive weeks.

Jobless claims are historically low. (Image: Wells Fargo)

While these monthly and weekly reports are subject to revisions, the longer term trends hold and continue to reflect a very strong labor market.

This puts pressure on the Federal Reserve to tighten monetary policy with an interest rate hike. The last time the Fed hike rates was December of last year. Forecasters think the next hike could come at the Fed’s Federal Open Market Committee (FOMC) meeting on December 14. However, there are those who believe a rate hike could come at the November 2 FOMC meeting, despite it being a meeting with no post-meeting Q&A with Fed Chair Janet Yellen.

–

Sam Ro is managing editor at Yahoo Finance. Read more:

A rebellion is forming among Wall Street’s forecasters

The next selloff could be triggered by something we’re not discussing right now

The stock market enters Q4 in a precarious position

UBS: Wall St.’s 2017 earnings forecast is ‘irrationally exuberant’

Tom Lee: The market ‘NEEDS TO BOUGHT AGGRESSIVELY’

Deutsche Bank: ‘An 8-10% S&P decline looms’

[samro]

A rebellion is forming among Wall Street's stock market forecasters

It takes guts to stray from the herd. (Image: IMDB/Paramount)

In the next few weeks, companies will reveal their third quarter financial results. Importantly, many companies will also offer their expectations for 2017.

This guidance for 2017 will be critical as S&P 500 (^GSPC) earnings have effectively seen no growth in 2015 and 2016. Meanwhile, the consensus among forecasters is that earnings will surge by 13-14% in 2017.

However, Wall Street’s forecasters are far from unanimous in their calls for 2017.

“We are in an odd position of thinking that this year’s numbers might be achievable but next year’s are likely way too high,” Morgan Stanley’s Adam Parker said on Monday. Parker expects 2017 earnings per share to grow by around 3.2% from his estimate of $123 in 2016.

2017 earnings forecasts look way too high. (Image: Morgan Stanley)

Last month, UBS’s Julian Emanuel characterized the consensus forecast for 2017 as “irrationally exuberant.” He estimates S&P EPS will grow 5.9% next year.

This discussion is not news to Yahoo Finance readers. Months ago, forecasters began to raise serious doubts about these optimistic 2017 assumptions.

“Don’t believe the hype: 2017 earnings growth likely to be closer to 5% and not 14%,” JPMorgan’s Dubravko Lakos-Bujas said in a July note to clients. “For those placing faith in the grossly enthusiastic consensus EPS growth assumptions in the coming years, these hockey-stick projections will likely be revised down sharply.”

Citi recently surveyed clients about what they thought of 2017 forecasts, and about 90% of respondents agreed the numbers were too high.

Investors say earnings forecasts are too high. (Image: Citi)

The good news about all this is that more and more investors may already be prepared for bad news.

“The likelihood for estimate cuts as we head into 2017 already seem to be baked into money managers’ mindsets and therefore should not be market disruptive,” Citi’s Tobias Levkovich said on Friday. Levkovich expects S&P EPS to grow by around 6% in 2017.

Still, this does not necessarily mean bad news will be well-received. As such, as earnings season kicks off, guidance should be watched closely.

“Expectations for 2017 earnings growth are nearly double what we expect (+14% vs. +7%), and if companies continue to guide below consensus this quarter (the guidance ratio has been falling in recent months), downward revisions and poor performance could ensue,” Bank of America Merrill Lynch’s Savita Subramanian said. “Watch guidance this quarter as the corporate outlook could continue to weaken.”

The urgency of this discussion is heightened by the fact that market valuations are stretched.  Currently, the forward 12-month P/E ratio, which is based on forecasts for earnings growth in the next 12 months, is high at around 16.6. This is far above the 5-year average over 14.8 and the 10-year average of 14.3. There are a couple of ways for valuations revert back to more modest levels including falling stock prices or surging earnings. Without the support of earnings growth, prices become that much more vulnerable to volatility.

To recap, Morgan Stanley, UBS, JP Morgan, Citi, and Bank of America Merrill Lynch all expect 2017 earnings growth to be about half of what the consensus is calling for.

–

Sam Ro is managing editor at Yahoo Finance. Read more:

The next selloff could be triggered by something we’re not discussing right now

The stock market enters Q4 in a precarious position

UBS: Wall St.’s 2017 earnings forecast is ‘irrationally exuberant’

Tom Lee: The market ‘NEEDS TO BOUGHT AGGRESSIVELY’

Deutsche Bank: ‘An 8-10% S&P decline looms’

[samro]

The next market selloff could be triggered by something we're not discussing right now

Something’s coming. (Image: Flickr/Susanne Nilsson)

There seems to be no shortage of events on the calendar that threaten to derail the global economy and financial markets.

There’s the US presidential election, which includes a candidate who has promised his constituents to turn the American political system upside down. There’s the prospect of the Federal Reserve hiking interest rates for the first time since December. There’s the upcoming earnings season, during which US companies are expected to report declining profits.

“Beyond Clinton vs. Trump, the elections in Germany, France, the Netherlands, and probably Spain, as well as the Italian constitutional referendum and British withdrawal from the European Union, could also create volatility,” Goldman Sachs’ Jan Hatzius said. “Beyond politics, there are two economic risks that have been with us for some time, namely a sharper­-than­-expected credit adjustment in China and the structural design flaws in the euro area.”

Are we missing anything?

Unknown unknowns

HSBC’s Ben Laidler looked back at recent sell-offs in the stock market and identified the news events that may have triggered those moves.

“Our analysis of the eight pullbacks seen in this bull market show little consistency in causality,” Laidler said. “However, if a pullback comes, it will likely be caused by something we are not discussing right now.”

That’s a scary statement, but an important one for investors who are assessing the risks to which they are exposed. It echoes a memorable quote from former US Defense Secretary Donald Rumsfeld: “As we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know.”

In its new Guide to the Markets, JP Morgan Asset Management includes an annotated chart of the S&P 500 (^GSPC) and the CBOE Volatility Index (^VIX), which highlights the news surrounding recent pullbacks in stock prices.

A brief look back at this bull market’s pullbacks. (Image: JPMorgan Funds)

Certainly, no one predicted the flash crash of 2010, the BP oil spill or the outbreak of Ebola.

And so, Laidler’s expectation for the next selloff to be triggered by some unknown unknown isn’t crazy. If you’re not sold, consider some more recent events.

Wells Fargo and Deutsche Bank have dominated headlines in the financial markets in recent weeks. Wells paid $185 million in fines and fired 5,300 employees for fraudulently opening around 2 million unwanted accounts. Deutsche Bank has seen its shares plummet amid concerns about the health of its balance sheet in the wake of a $14 billion fine from the US Department of Justice.

What do these two stories have in common? Beyond being big banks, they both represent massive stories that very few were worried about just a month ago.

And such is the nature of risk in the markets. It’s always something, and it’s almost impossible to see it coming.

– Sam Ro is managing editor at Yahoo Finance. Read more:

The stock market enters Q4 in a precarious position

UBS: Wall St.’s 2017 earnings forecast is ‘irrationally exuberant’

Tom Lee: The market ‘NEEDS TO BOUGHT AGGRESSIVELY’

Deutsche Bank: ‘An 8-10% S&P decline looms’

Morgan Stanley: ‘We think the US stock market is going higher’

Summer’s over: Markets brace for the fall

[samro]

The stock market enters Q4 in a precarious position

No amount of uncertainty and bad news seems to be able to keep the financial markets down for long.

On Friday, stock markets rallied again, sending the S&P 500 (^GSPC) up 17 points to close the third quarter at 2,168. The S&P continues to be within striking distance of its Aug. 23 all-time high of 2,193.

Surprisingly, this market strength comes as expectations for earnings growth have persistently disappointed for years. Because earnings are the most important driver of stock prices, this has left many investors lost and confused.

Risk assets continue to rally despite disappointing earnings growth expectations. (Image: HSBC)

Many analysts attribute some of the counterintuitive trend to low inflation and depressed interest rates. But most analysts warn that it nevertheless has made for stretched valuations, which makes the market more vulnerable to a volatile sell-off.

Valuations are stretched

“As has been highlighted often of late, almost any way that you look at it, stock market valuations [as measured by the price-to-earnings ratio] are at elevated levels based on their history,” Gluskin Sheff’s David Rosenberg noted on Friday. “We currently have a market in which the cost to buy one dollar of future earnings is historically elevated.”

The S&P 500’s forward P/E ratio is well above average. (Image: Gluskin Sheff)

Currently, the forward 12-month P/E ratio, which is based on forecasts for earnings growth in the next 12 months, is high at around 16.6. This is far above the 5-year average over 14.8 and the 10-year average of 14.3.

There are a couple of ways for valuations revert back to more modest levels including falling stock prices or surging earnings.

Earnings season will be telling

Currently, analysts have high hopes for earnings growth to come roaring back in the fourth quarter of this year and all of 2017.

“We believe this earnings season is important to the near-term future of the bull market,” Schwab’s Liz Ann Sonders, Brad Sorenson and Jeffrey Kleintop said on Friday. “With valuations at least modestly elevated by most measures, earnings need to start to carry the weight if this bull market is to advance.”

In a few weeks, earnings season kicks off. In addition to reporting earnings for the three months ending in September, companies will also share what they expect for the remainder of the year as well as next year. Currently, the consensus expects S&P 500 earnings to surge 13%-14% in 2017.

UBS’s Julian Emanuel is among the analysts who are skeptical that 2017 will deliver. Indeed, history shows that expectations for earnings almost always begin the year too optimistically.

Will earnings growth deliver in 2017? (Image: UBS)

“Taken in context with a 3Q Earnings Reporting season which begins on October 10th (the day after the next Clinton vs. Trump debate) that is likely to feature corporate commentary guiding down bottoms-up consensus’ ‘irrationally exuberant’ 13.8% growth forecast for 2017 (UBSe 5.9%), stocks look poised to remain volatile into, and perhaps beyond, the November 8th Election,” Emanuel said on Friday.

It’s worth noting that earnings haven’t been just lackluster; they’ve been negative.

“For Q3 2016, the estimated earnings decline for the S&P 500 is -2.1%,” FactSet’s John Butters said on Friday. “If the index reports a decline in earnings for Q3, it will mark the first time the index has recorded six consecutive quarters of year-over- year declines in earnings since FactSet began tracking the data in Q3 2008.”

In summary: Stock prices are near record highs despite months of declining earnings, which has stretched valuations to worrisome levels. Meanwhile, almost all analysts argue the market needs robust earnings growth for the rally to continue. But some analysts warn that the consensus estimate for earnings growth is far too optimistic. And so, you can begin to see why the stock market is in a precarious position.

– Sam Ro is managing editor at Yahoo Finance. Read more:

UBS: Wall St.’s 2017 earnings forecast is ‘irrationally exuberant’

Tom Lee: The market ‘NEEDS TO BOUGHT AGGRESSIVELY’

Deutsche Bank: ‘An 8-10% S&P decline looms’

Morgan Stanley: ‘We think the US stock market is going higher’

Summer’s over: Markets brace for the fall

The stage is set for the next 10% plunge in stocks

[samro]

Larry Summers makes the case for no Fed rate hike in 11 tweets

Lawrence Summers

The Federal Reserve will update the world on its plans for monetary policy at 2 p.m. ET.

Economists expect the Fed will keep its benchmark interest rate unchanged at a very low range of 0.25%-0.5%. The last time the Fed adjusted rates was back in December 2015.

In a series of 11 tweets early Wednesday, former Treasury Secretary Lawrence Summers explained why the Fed should not tighten monetary policy with a rate hike today.

Summers, who in 2013 was considered a frontrunner to be chairman of the Fed, reiterated arguments made by many economists: Inflation expectations are falling, the labor market has shown cracks, and uncertainty around the world and in financial markets is elevated. He concluded by saying that tighter monetary policy would likely strengthen the dollar, which makes US goods more expensive to foreign buyers. With anti-globalization, protectionist policies being touted in the presidential campaigns, a stronger dollar would further hurt the standing of US-based multinational corporations.

See all 11 of Summers’ tweets below.

There are many reasons, each of which would be reason enough alone, for the Fed not to raise rates today 1/11

— Lawrence H. Summers (@LHSummers) September 21, 2016

The Fed should not raise rate because total hours worked in US are flat to down over last 6 months 2/11

— Lawrence H. Summers (@LHSummers) September 21, 2016

The Fed should not raise rates because inflation expectations are falling not rising 3/11

— Lawrence H. Summers (@LHSummers) September 21, 2016

The Fed should not raise rates because in the 8 year of recovery it should be targeting inflation above 2% so inflation averages 2%. 4/11

— Lawrence H. Summers (@LHSummers) September 21, 2016

The Fed should not raise rates because it lacks the tools to respond if a downturn comes 5/11

— Lawrence H. Summers (@LHSummers) September 21, 2016

The Fed should not raise rates because it will come as a shock at a fragile moment 6/11

— Lawrence H. Summers (@LHSummers) September 21, 2016

Fed should not raise rates b/ the economy is sign. weaker & inflation expectations weaker than when it erred (judged expost) last Dec. 7/11

— Lawrence H. Summers (@LHSummers) September 21, 2016

Fed should get off the idea credibility requires raising rates now, Dec or at any point b4 inflation expectations are accelerating. 8/11

— Lawrence H. Summers (@LHSummers) September 21, 2016

There are much better ways than rate increases for dealing with any concerns about bubbles 9/11

— Lawrence H. Summers (@LHSummers) September 21, 2016

The Fed should take on board that with the economy so slow over the last 3 quarters rates may not be below neutral now. 10/11

— Lawrence H. Summers (@LHSummers) September 21, 2016

Tightening now will induce artificial dollar strength, which is hardly a good thing given the magnitude of protectionist pressures 11/11

— Lawrence H. Summers (@LHSummers) September 21, 2016

Yahoo Finance will cover the Fed decision live on Wednesday afternoon.

– Sam Ro is managing editor at Yahoo Finance. Read more:

UBS: Wall St.’s 2017 earnings forecast is ‘irrationally exuberant’

Tom Lee: The market ‘NEEDS TO BOUGHT AGGRESSIVELY’

Deutsche Bank: ‘An 8-10% S&P decline looms’

Morgan Stanley: ‘We think the US stock market is going higher’

Summer’s over: Markets brace for the fall

The stage is set for the next 10% plunge in stocks

[samro]

UBS: Wall Street's forecast for 2017 looks 'irrationally exuberant'

This looks risky. (Image: Wikimedia Commons)

Forecasting earnings for 2017 is arguably Wall Street’s most controversial task. After all, earnings are the most important driver of stock prices in the long run.

With stock prices near all-time highs and valuations stretched, forecasts for earnings would have to be optimistic. Indeed, FactSet data show that analysts are expecting earnings to jump an impressive 13.4% year-over-year in 2017, following what’s expected to be no growth in 2016.

But history, for what it’s worth, doesn’t bode well for that big growth number.

Check out this chart from UBS’s Julian Emanuel, which shows how estimates for 2016 and 2017 earnings growth have evolved in the past two years. As 2016 happened, 2016’s earnings estimates were adjusted down.

Earnings forecasts tend to be cut as the year rolls on. (Image: UBS)

In his note to clients, Emanuel characterizes these 2017 forecasts as “irrationally exuberant.” He believes it is just one of many risks that make the stock market vulnerable.

“The sideways market of July and August, historic in its lack of movement over seven listless weeks, has yielded to a resumption of volatility as uncertainty surrounding US politics, excessive earnings optimism for 2017 (see chart) and the newest concern, Global Central Bankers’ changed messaging with regard to their willingness to provide accommodation in line with market expectations has brought pressure to bear on the S&P 500,” Emanuel wrote.

Emanuel joins his peers at Goldman Sachs and Deutsche Bank, who have been warning clients of downside.

Valuations are stretched

The stock market has exhibited a bout of volatility in recent weeks, leaving investors and traders wondering if the next big move will be up or down. The consensus seems to be leaning toward the latter.

For the past five years, the S&P 500 (^GSPC) has trended higher as earnings and expectations for earnings growth have been lackluster. This divergence is capture by the growing price/earnings (P/E) ratio, a measure of stock market value.

Currently, the forward 12-month P/E ratio, which is based on forecasts for earnings growth in the next 12 months, is high at around 16.7. This is far above the 5-year average over 14.8 and the 10-year average of 14.3.

The forward P/E is way above average. (Image: FactSet)

To be clear, P/E ratios will drift from the averages for years. Nowhere is there a rule that the stock market should make sense. Still, elevated valuations bring no comfort to investors.

– Sam Ro is managing editor at Yahoo Finance. Read more:

Tom Lee: The market ‘NEEDS TO BOUGHT AGGRESSIVELY’

Deutsche Bank: ‘An 8-10% S&P decline looms’

Morgan Stanley: ‘We think the US stock market is going higher’

Summer’s over: Markets brace for the fall

The stage is set for the next 10% plunge in stocks

[samro]

Why Wall St. bull Tom Lee thinks the market 'NEEDS TO BOUGHT AGGRESSIVELY'

After a long and quiet summer, volatility has returned to the stock market, causing Wall Street’s top strategists to warn that stock prices could tumble by as much as 10%.

But veteran strategist Tom Lee of Fundstrat Global Advisors believes now’s the time to be putting money into the S&P 500 (^GSPC), which is currently down 3% from its Aug. 23 high of 2,193.

“We believe this 3% pullback NEEDS TO BE BOUGHT aggressively,” Lee wrote on Friday. Emphasis his.

Lee considers the simple history of stock price moves.

“Newton’s ‘law of motion’ applies to stocks in mid-September — 90% of time, if stocks up between 5% to 20%year-to-date (YTD), gains continue to year-end (YE),” Lee observed. “Since 1940, to gauge what stocks do between 9/15 and YE is simply look at YTD performance. When stocks are up 5% or better, they rally into YE 87% of the time (90% when between 5% and 20%). When stocks are down YTD (thru Sept), they historically show no further advance until YE.”

Tom Lee observes that stocks tend to rally into the end of years. (Image: FundStrat Global Advisors)

This line of reasoning may be a little oversimplified for most investors, especially considering the lineup of market-moving events going into the end of the year. It’s worth noting that Lee’s study found that the pattern he observed also held during election years.

Lee went further to consider fundamental and economic reasons why markets could rally from here.

“Why is this ‘law of motion’ at work?” Lee wrote. “We believe this law of motion is simply reflecting that whatever forces and factors drive YTD gains, are likely to remain in place into the end of the year. And we see this at work in 2016—(i) global search for carry; (ii) US economy remains on strong footing; (iii) underinvested investors (performance chase) and (iv) contrarian sentiment.”

Lee has 2,325 target for the S&P 500.

– Sam Ro is managing editor at Yahoo Finance. Read more:

Deutsche Bank: ‘An 8-10% S&P decline looms’

Morgan Stanley: ‘We think the US stock market is going higher’

Summer’s over: Markets brace for the fall

Don’t be fooled by the calm in the markets

The stage is set for the next 10% plunge in stocks

[samro]

Why market watchers are obsessing over the Fed's Lael Brainard right now

Monday comes with what may be the year’s most closely watched speech from a member of the Federal Reserve Board who is not Chair Janet Yellen.

At 1:15 p.m. ET, Fed Governor Lael Brainard will speak on the economic outlook and monetary policy at the Chicago Council on Global Affairs. While the event had reportedly been in the planning phase for some time, it was only on Thursday that the organization revealed when she would speak. This has led some market watchers to speculate that Brainard, who is a known dove, may offer a hawkish tone, which could in turn be seen as a sign the Fed will hike rates at its Sept. 20-21 Federal Open Market Committee (FOMC) meeting. The Fed last raised rates in December 2015.

“It could be a coincidence, but it could also be an important opportunity for the Fed to raise market expectations and give the FOMC more room to maneuver at the September meeting,” Deutsche Bank Chief Economist Peter Hooper said on Thursday. “Certainly a good case can be made for moving ‘soon’ (in September) given: (1) payroll growth in recent months now averaging in excess of where the Fed wants to see it, (2) generally improving signs for consumer spending and overall GDP growth (the latest ISM notwithstanding), and (3) relatively favorable financial conditions.”

A rate hike in September would arguably be in line with the language Yellen offered at last month’s Kansas City Fed Economic Policy Symposium in Jackson Hole, Wyoming.

“Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” Yellen said.

Federal Reserve Governors Jerome Powell, from left, Daniel Tarullo and Lael Brainard, talk.

Hooper sees a 50% chance of the Fed hiking rates on Sept. 21. A handful of economists believe the odds are higher.

“We will look to [Brainard’s] speech in Chicago on Monday for a signal on the likelihood of a September hike,” Barclays’ Michael Gapen said. “Nonetheless, given the tenor of recent FOMC communication, we continue to see September as the most likely time of the next rate hike.”

To be clear, the consensus is that the Fed won’t hike at its September meeting, and therefore Brainard won’t be saying anything to suggest otherwise. Regardless, every trader and market economist will be listening.

“Brainard, on Monday will be very closely watched,” said Art Cashin, UBS Financial Services’ director of NYSE floor operations.

“Brainard has been one of the most dovish voters on the committee, arguing for prudent risk management and the benefits of waiting before hiking rates,” Credit Suisse’s James Sweeney said. “Although we expect her to stick with caution, any hawkish rhetoric would warrant market attention.”

The event will be streamed live at TheChicagoCouncil.org. Stay tuned.

– Sam Ro is managing editor at Yahoo Finance. Read more:

Deutsche Bank: ‘An 8-10% S&P decline looms’

Morgan Stanley: ‘We think the US stock market is going higher’

Goldman Sachs boldly strays from the herd with a contrarian Fed call

Summer’s over: Markets brace for the fall

Bullishness in the derivatives market has hit a 3-year high

The stage is set for the next 10% plunge in stocks

[samro]

Deutsche Bank: 'An 8-10% S&P decline looms'

This has been the calm before the storm. (Image: Flickr / Anthony Quintano)

Friday was a rough day for the markets.

The S&P 500 (^GSPC) fell a whopping 53 points, or 2.45%, to close at 2,127. This came after 42 straight trading sessions where the S&P made a move no greater than 1%. So, the market was arguably due for some volatility.

Deutsche Bank’s David Bianco believes there’s a lot more downside to look forward to.

“An 8-10% S&P decline looms,” Bianco said on Friday. “S&P realized volatility has been extremely low the last 6 weeks, but we think this is the quiet before the storm.”

He identified five “catalysts to increased volatility” in the weeks ahead:

Analysts cutting their outlooks for earnings in 2017.

The Fed not hiking rates in September, while offering no clarity on when the next rate hike will occur.

Capital expenditures going sideways.

The US presidential election and related policy uncertainty.

Low bond yields distorting valuations in various stock market sectors.

What makes market particularly vulnerable is the combination of bullish sentiment and complacency observed.

“We take concern with this very low volatily amidst low volume and high PEs,” Bianco said. “One of our favorite risk sentiment indicators, which we use in a contrarian fashion, the PE/VIX ratio signals a very complacent market.”

The markets look complacent. (Image: Deutsche Bank)

Bianco joins his peers on Wall Street who have been warning clients of heightened volatility and lower stock prices.

On Friday, Goldman Sachs’ David Kostin also offered a list or reasons why stocks should go down. From Kostin’s note: “Five reasons we continue to forecast S&P 500 will end 2016 at 2100, roughly 1% below the current level: (1) Our Sentiment Indicator shows an extreme bullish reading of 95 which suggests the index will decline during the next four weeks; (2) Political uncertainty will rise as the election approaches leading to a lower P/E multiple; (3) Recent economic data has disappointed; (4) Downside risk to EPS forecasts; (5) Equity valuation remains extended.”

But to be clear, this is not a unanimous view.

“We think the US stock market is going higher,” Morgan Stanley’s Adam Parker said last Monday. Rather than focusing on the near-term, Parker looks longer term arguing that the S&P heads to 2,300 in 12 months and 3,000 by 2020.

One thing’s for sure: there are a lot of important events coming up, and it’s unclear how any of these events will turn out.

– Sam Ro is managing editor at Yahoo Finance. Read more:

Morgan Stanley: ‘We think the US stock market is going higher’

Summer’s over: Markets brace for the fall

Bullishness in the derivatives market has hit a 3-year high

Don’t be fooled by the calm in the markets

The stage is set for the next 10% plunge in stocks

[samro]

A detailed timeline of how the Verizon-Yahoo deal went down

On July 25, 2016, Verizon Communications (VZ) announced it entered an agreement to buy the operating businesses of Yahoo (YHOO) for $4.8 billion.

However, this deal didn’t just happen overnight. (Although there were many late nights as you will read.)

Back on December 9, 2015, Yahoo announced that it would suspend work on what could’ve been the spin-off of its stake in Alibaba (BABA). A few weeks later on January 15, Yahoo’s board had a conference call with advisors at Goldman Sachs, JP Morgan, Bank of America Merrill Lynch, Skadden Arps and Wilson Sonsini to discuss what the company could do next. That call focused on the potential spin-off and sale of Yahoo’s operating businesses.

With its quarterly earnings announcement on February 2, Yahoo announced it was considering “strategic alternatives.”

A new proxy statement filed with the SEC offers some color on what followed: “Over the next several weeks, the Financial Advisors communicated with a total of 51 parties to evaluate their interest in a potential transaction. Between February 19 and April 6, 2016, a total of 32 parties signed confidentiality agreements with Yahoo, including 10 strategic parties and 22 financial sponsors. All of these potential bidders received access to a virtual data room…”

The five-month long process involved a variety of deal structures proposed and many of back-and-forths. The number of bids gradually fell, and in the final days it was either going to be Verizon or a party referred to as “Sponsor B.”

But as time went on, the board also acknowledged the risks associated with the process going on for too long. From the evening of July 22 according to the proxy: “The Board concluded that the risks of delaying signing a transaction with Verizon for an inferior offer from Sponsor B outweighed any potential benefit of pursuing further negotiations and noted that, in the proposed transaction with Verizon, the Board retained a customary “fiduciary out” to pursue an unsolicited potentially superior proposal that emerged after signing the transaction agreements.”

From the late night hours of July 22 to the crack of dawn July 23, lawyers finalized the paperwork. And on the morning of July 23, Yahoo and Verizon signed the deal.

In a 6-page section of Yahoo’s new proxy filing with the SEC, Yahoo lays out a detailed timeline of how the deal went down. See it below.

Disclaimer: Yahoo is the corporate parent of Yahoo Finance. Yahoo Finance covers Yahoo as it does any other large public company.

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Strategic Alternatives Process

Following the December 9, 2015 announcement, Yahoo’s management and advisors continued to evaluate alternative transactions that would separate Yahoo’s stakes in Alibaba and Yahoo Japan from its operating business.

On January 15, 2016, the Board held a telephonic meeting with members of management and representatives of Goldman Sachs, J.P. Morgan, BofA Merrill Lynch, Skadden, and Wilson Sonsini Goodrich & Rosati (“Wilson Sonsini”), legal counsel to the Board, participating for portions of the meeting. Prior to these advisors joining the meeting, members of management presented and the Board approved a strategic operating plan, an earlier version of which had been discussed at the Board’s December 2, 3, and 17, 2015 meetings, designed to simplify Yahoo’s operating business, narrowing its focus on areas of strength to better fuel growth, drive revenue, and increase efficiency. In addition, representatives of Yahoo’s financial advisors and Skadden presented the Board with potential strategic alternatives intended to achieve Yahoo’s objectives of maximizing stockholder value and execution certainty while minimizing time to execution and transaction complexity. The Board and Yahoo’s advisors discussed, among other factors, the feasibility, potential tax implications, and likely timing of these potential alternatives, focusing primarily on a reverse spin-off of Yahoo’s operating business and a sale of that business to a third party, including certain variations of these primary alternatives.

Following the January 15 Board meeting and prior to the engagement of the Financial Advisors by the Strategic Review Committee, BofA Merrill Lynch was not requested to, and did not, provide any further financial advice to Yahoo or the Board and its engagement by Yahoo subsequently expired. BofA Merrill Lynch was engaged by Verizon in March 2016 in connection with Verizon’s participation in the strategic alternatives process described below.

On January 31, 2016, the Board met telephonically, with members of management and representatives of Goldman Sachs, J.P. Morgan, Skadden, and Wilson Sonsini participating. At the meeting, the Board, members of management and the advisors present at the meeting discussed the strategic alternatives of the reverse spin-off and a sale of Yahoo’s operating business. The Board also authorized the formation of a special committee of the Board, named the Strategic Review Committee, to be composed of certain independent members of the Board, to consider and evaluate possible strategic transactions involving Yahoo’s operating business and all matters pertaining thereto on Yahoo’s behalf. The Strategic Review Committee was initially composed of Maynard G. Webb, Jr., who served as Chairman, H. Lee Scott, Jr., and Thomas J. McInerney. The Board resolved that it would not approve or recommend to Yahoo’s stockholders for approval any strategic transaction related to Yahoo’s operating business without a prior favorable recommendation of such transaction by the Strategic Review Committee. The Strategic Review Committee was further authorized to retain, at Yahoo’s expense, such outside counsel, financial advisors, and other outside advisors as the Strategic Review Committee deemed appropriate to assist in its prescribed duties.

Following the Board meeting, the Strategic Review Committee retained Cravath, Swaine & Moore LLP (“Cravath”) as its legal counsel.

On February 2, 2016, concurrently with its announcement of its quarterly and annual financial results for the periods ended December 31, 2015, Yahoo issued a press release announcing its strategic operating plan, which included exploring certain non-strategic asset divestitures. In that press release, Yahoo also indicated that, in addition to continuing to work on a reverse spin-off transaction, the Board would also explore other strategic alternatives for separating Yahoo’s operating business from its Alibaba Shares.

In the days following the February 2, 2016 announcement, Goldman Sachs and J.P. Morgan, as well as members of the Board and Yahoo’s management team, received general indications of interest in investments in or acquisitions of all or part of Yahoo’s operating business from numerous parties, including a senior executive of Verizon approaching Mr. Webb to express Verizon’s interest in a potential transaction with Yahoo. In addition, after Marissa A. Mayer, Yahoo’s Chief Executive Officer and President, acting with approval of the Strategic Review Committee, had contacted representatives of both Yahoo Japan and SoftBank, the controlling shareholder of Yahoo Japan, to inform them that Yahoo was exploring strategic alternatives, a senior executive of SoftBank approached Ms. Mayer to request a meeting to discuss a potential transaction involving Yahoo and Yahoo Japan, subject to Yahoo committing to a 30-day exclusivity period. The Strategic Review Committee was kept informed of each of these indications of interest.

On February 4, 2016, the Strategic Review Committee held a telephonic meeting. Representatives of Cravath reviewed with the members of the Strategic Review Committee their fiduciary duties and other relevant legal considerations, as well as the scope of the authority delegated to the Strategic Review Committee by the Board. The Strategic Review Committee identified a number of investment banks as potential financial advisors to assist it in carrying out its responsibilities. Because the parties potentially interested in acquiring Yahoo’s operating business included financial sponsors, the Strategic Review Committee also advised members of management not to engage in any discussions with interested parties about terms of employment, co-investment, or rollover of equity unless first discussed and authorized by the Strategic Review Committee.

On February 10, February 11, February 12, and February 15, 2016, the Strategic Review Committee held telephonic meetings, with representatives of Cravath participating, during which the Strategic Review Committee considered whether to engage one or more of the investment banks (including Goldman Sachs and J.P. Morgan) that the Strategic Review Committee had identified as potential financial advisors at its February 4, 2016 meeting and subsequently interviewed. The Strategic Review Committee considered the capabilities and experience of the various candidates that it met and reviewed the disclosures provided by the investment banks regarding certain relationships they had with potential bidders for Yahoo or its assets, Yahoo and other parties with whom Yahoo had significant relationships. After considering the information provided by the investment banks in their disclosures and during their interviews, the Strategic Review Committee decided to engage Goldman Sachs and J.P. Morgan, each of which was familiar with Yahoo based on its prior work for Yahoo, including with respect to the suspended Aabaco spin-off and the potential reverse spin-off, and PJT Partners LP (“PJT Partners”), which had not previously worked with Yahoo, as its financial advisors. Goldman Sachs, J.P. Morgan, and PJT Partners are referred to as the “Financial Advisors.”

On February 12, 2016, the Board met and discussed the progress of the Strategic Review Committee, including its selection of financial and legal advisors.

Outreach to Potential Bidders

After engaging each of the Financial Advisors, the Strategic Review Committee directed the Financial Advisors to begin reaching out to potential interested parties, including those parties that had contacted representatives of Yahoo, Goldman Sachs, and J.P. Morgan about a potential transaction following the February 2, 2016 earnings announcement, to evaluate their interest in a potential transaction involving Yahoo or its assets.

On February 19, 2016, the Strategic Review Committee updated the Board on its progress. Mr. Webb informed the Board that the Strategic Review Committee had met numerous times and explained its recent activities, including the engagement of, and commencement of work with, the Financial Advisors. He also outlined the outreach process, including work underway by management to prepare a management presentation and potential timing for meetings with interested parties.

Also on February 19, 2016, Yahoo issued a press release announcing the formation of the Strategic Review Committee and that the Strategic Review Committee had engaged the Financial Advisors and Cravath as the Strategic Review Committee’s financial advisors and legal counsel, respectively.

Over the next several weeks, the Financial Advisors communicated with a total of 51 parties to evaluate their interest in a potential transaction. Between February 19 and April 6, 2016, a total of 32 parties signed confidentiality agreements with Yahoo, including 10 strategic parties and 22 financial sponsors. All of these potential bidders received access to a virtual data room, which initially included a management presentation (which included three years of forecasted financial information for Yahoo which had previously been reviewed by the Board) and publicly available documents but was later updated with customary due diligence materials and was further updated regularly throughout the strategic alternatives process in response to due diligence questions and requests from potential bidders.

The Strategic Review Committee discussed the ongoing outreach process with representatives of the Financial Advisors and Cravath at telephonic meetings held on February 25 and March 3, 2016.

On February 25, 2016, Mr. Webb and Ms. Mayer met with representatives of SoftBank. At the February 25 meeting, Mr. Webb and Ms. Mayer received a letter from Yahoo Japan to the Board, dated February 25, 2016, setting forth the material terms of a non-binding proposal for a merger of equals transaction between Yahoo and Yahoo Japan. Yahoo Japan’s proposal, which was subject to due diligence, negotiation of final documentation, and approval by Yahoo Japan’s board of directors, contemplated that Yahoo’s existing stockholders would receive a 50 percent stake in the combined entity and approximately $14.0 billion in cash, reflecting an equity value for Yahoo of $29.05 per fully diluted Yahoo share. Yahoo Japan’s proposal also contemplated a commitment by Alibaba to purchase approximately 50 percent of Yahoo’s stake in Alibaba in six equal annual installments over a six-year period commencing one year after the closing of the transaction. The letter was not signed or acknowledged in writing by Alibaba. The letter conditioned further discussions regarding the proposal on Yahoo’s entry into a 30-day exclusivity agreement on or before March 1, 2016.

On February 26 and February 29, 2016, the Strategic Review Committee held telephonic meetings, with representatives of Cravath and, for certain portions, certain representatives of one of the Financial Advisors and Ms. Mayer participating, to discuss the non-binding proposal set forth in Yahoo Japan’s letter. The Strategic Review Committee subsequently received advice with respect to the Yahoo Japan proposal from each of the Financial Advisors. The Strategic Review Committee considered, among other things, the fact that Yahoo Japan’s proposal offered no premium for Yahoo’s shares and that the contemplated repurchase by Alibaba of a portion of its shares would be fully taxable. Members of the Strategic Review Committee also discussed Yahoo Japan’s proposal, and the Strategic Review Committee’s views with respect to such proposal, with each other member of the Board. After careful consideration, the Strategic Review Committee concluded that the terms described in Yahoo Japan’s letter were not compelling and that Yahoo should not enter into the proposed exclusivity agreement, but the Strategic Review Committee would be open to continuing a dialogue with SoftBank and Yahoo Japan about a potential transaction on more attractive terms. After the Strategic Review Committee’s position was communicated orally to SoftBank by a representative of one of the Financial Advisors, SoftBank and Yahoo Japan each declined to enter into a confidentiality agreement in connection with the strategic alternatives process and did not thereafter participate in such process.

On March 8, 2016, Mr. Scott resigned from the Strategic Review Committee given his other responsibilities, including as Chairman of Yahoo’s Nominating and Corporate Governance Committee. At a Board meeting on the same day, Catherine J. Friedman and Eric K. Brandt were appointed as independent directors of Yahoo to fill vacancies created by the recent resignations of two independent directors. The Board also appointed Mr. Brandt to replace Mr. Scott on the Strategic Review Committee.

On March 9 and March 14, 2016, the Strategic Review Committee held telephonic meetings and discussed with its advisors the status of the strategic alternatives process. At the March 14 meeting, the Strategic Review Committee also discussed potential approaches to the Excalibur IP Assets in relation to the strategic alternatives process with a view to most effectively monetizing those assets. The Strategic Review Committee subsequently decided to pursue a separate sale process for the Excalibur IP Assets and to permit bidders for Yahoo’s operating business to participate in the Excalibur IP Assets process as well.

On March 14, 2016, the Board met telephonically, with members of management and representatives of Wilson Sonsini and Cravath participating, to discuss with members of the Strategic Review Committee the proposed management presentation and forecasted financial information to be included in the presentation.

Between March 18 and April 1, 2016, seven potential interested parties, including Verizon, each attended separate half-day in-person management presentations at Skadden’s Palo Alto offices. These potential interested parties were previously selected by the Strategic Review Committee and its advisors as the initial group to receive management presentations based on, among other things, the level of interest they had shown in the process and their perceived viability as potential buyers. The presentations were given by Yahoo’s management team, including, among others, Ms. Mayer, Ken Goldman (Chief Financial Officer), Ronald S. Bell (General Counsel and Secretary), and Ian Weingarten (Senior Vice President, Corporate Development and Partnerships).

On March 22, 2016, the Strategic Review Committee held a telephonic meeting and reviewed with representatives of Cravath drafts of the engagement letters negotiated with each of the Financial Advisors. Each of the Financial Advisors executed engagement letters with Yahoo, dated March 23, 2016, with respect to its role as a financial advisor to the Strategic Review Committee.

On March 22, 2016, the Board met telephonically, with members of management and a representative of Wilson Sonsini participating, to discuss with members of the Strategic Review Committee the management presentations that were recently made to potential bidders.

During the period from March 23 through April 6, 2016, at the direction of the Strategic Review Committee, the Financial Advisors sent process letters to potential bidders that had executed confidentiality agreements. These process letters set forth guidelines for the submission of a preliminary non-binding indication of interest in the acquisition of or strategic investment in one or more of Yahoo’s assets and established April 11, 2016 as the deadline to submit such preliminary non-binding indications of interest. The process letters noted, among other things, that Yahoo was open to considering proposals for Yahoo’s operating business or its principal non-operating assets, as well as for the whole company.

On March 24 and March 31, 2016, the Strategic Review Committee held telephonic meetings, with representatives of the Financial Advisors and Cravath participating, to discuss, among other things, the in-person management presentations to date and the response of the initial group of potential bidders that attended such presentations. The Strategic Review Committee subsequently decided, in consultation with Yahoo’s management, that, given the number of additional interested parties and taking into account management’s time, an audio recording of the management presentation would be made available to the interested parties that were not invited to attend in-person management presentations.

On March 24, 2016, Yahoo received notice from Starboard of its intention to nominate nine persons, including Tor R. Braham, Eddy W. Hartenstein, Richard S. Hill, and Jeffrey C. Smith, for election to Yahoo’s Board at its 2016 annual meeting of stockholders and to solicit proxies from stockholders in support of its nominees.

Indications of Interest

From April 1 through April 8, 2016, a total of 19 interested parties that had signed confidentiality agreements with Yahoo attended audio recorded management presentations at the offices of Cravath, in New York, Skadden, in New York or Palo Alto, or certain of the Financial Advisors’ offices. All potential bidders who attended either an in-person or audio recorded management presentation were invited to participate in individualized follow-up question-and-answer sessions with Yahoo’s management team, including Ms. Mayer and Mr. Goldman.

Beginning on April 4, 2016, and on most weekdays thereafter until Yahoo and Verizon entered into the Stock Purchase Agreement, the Strategic Review Committee held a standing daily call with members of Yahoo’s management team, including Ms. Mayer, Mr. Goldman, Mr. Bell, and Mr. Weingarten, and with representatives of the Financial Advisors, Cravath, Skadden, and Wilson Sonsini.

On April 5 and April 7, 2016, the Strategic Review Committee held telephonic meetings, with representatives of the Financial Advisors and Cravath, and, for the April 7 meeting, Skadden participating, and discussed, among other things, feedback from potential bidders and the process for the Strategic Review Committee’s review of the initial indications of interest. The Strategic Review Committee decided to extend the due date for preliminary indications of interest to April 18, 2016. At the April 7 meeting, a representative of Skadden also presented potential structures for separating Yahoo’s operating business from its other assets in connection with a potential transaction. Although the Strategic Review Committee was primarily focusing on the auction process at this time, it was noted that much of the work relating to the potential separation structures would also apply to a reverse spin-off if the Board chose to pursue such a transaction.

Throughout April until April 18, 2016, the potential bidders continued to engage in extensive due diligence discussions with Yahoo’s management team, with the assistance of the Financial Advisors, and to request and receive due diligence updates to the virtual data room.

On April 11, 2016, a strategic party referred to as “Strategic Party A” submitted a preliminary non-binding proposal providing for a $1.0 billion to $2.0 billion strategic investment in Yahoo, after which Yahoo’s operating business would be spun off. After consideration of the proposal and discussion with its advisors, the Strategic Review Committee determined not to pursue it at that time, pending completion of the sale process.

At a Board meeting held at Yahoo’s Sunnyvale headquarters on April 13 and April 14, 2016, members of the Strategic Review Committee and representatives of the Financial Advisors updated the Board on the status of the strategic alternatives process. The Board also discussed with Skadden and Cravath the proposed transaction structure of a sale of Yahoo’s operating business.

On April 18, 2016, 14 parties (in addition to Strategic Party A), including three strategic bidders and 11 financial sponsor bidders, submitted preliminary non-binding indications of interest with respect to a transaction with Yahoo. Ten of these proposals contemplated an acquisition of Yahoo’s operating business on a cash-free, debt-free basis (alone or in conjunction with certain of Yahoo’s other assets) for enterprise values as follows:

• proposals that assumed that both the Excalibur IP Assets and a parcel of owned real estate located in Santa Clara, California (the “Excluded Real Estate”) would be included in the transaction from a financial sponsor referred to as “Sponsor A” ($7.5 to $8.0 billion) and from Verizon ($3.75 billion);

• proposals that assumed that the Excalibur IP Assets (but not the Excluded Real Estate) would be included in the transaction from a strategic party referred to as “Strategic Party B” ($4.5 billion), and a financial party that owns a strategic asset referred to as “Sponsor B” ($5.0 to $5.5 billion); and

• proposals that assumed that neither the Excalibur IP Assets nor the Excluded Real Estate would be included in the transaction from financial sponsors referred to as “Sponsor C” and “Sponsor D,” which were working together with the prior consent of the Strategic Review Committee ($5.5 billion), and five other financial sponsors, which are referred to as “Sponsor E,” “Sponsor F,” “Sponsor G,” “Sponsor H,” and “Sponsor I,” respectively ($6.0 billion, $5.0 billion, $5.7 billion, $5.0 to $6.0 billion, and $4.51 billion, respectively).

The remaining four indications of interest included:

• a proposal from a financial sponsor that owned a controlling interest in an Internet company for a Reverse Morris Trust transaction in which Yahoo’s operating business would be spun off and then merged with the smaller Internet company owned by the financial sponsor, the terms of which were based on an indicated enterprise value of $4.379 billion for Yahoo’s operating business;

• an oral offer from a bidding group consisting of two financial sponsors to acquire Yahoo’s operating business for $2.0 billion;

• a proposal to acquire Yahoo’s operating business for $3.0 to $4.0 billion from a group of private equity bidders that had declined to enter into a confidentiality agreement and therefore had not participated in the first-round due diligence process; and

• an indication of interest from a financial sponsor that did not specify an enterprise value or value range and offered to support a third-party transaction.

None of the initial indications of interest received in the process contemplated an acquisition of Yahoo in its entirety.

Between April 18 and April 21, 2016, at the direction of the Strategic Review Committee, representatives of the Financial Advisors contacted the potential bidders, including Verizon, that had submitted proposals contemplating an acquisition of Yahoo’s operating business on a cash-free, debt-free basis to clarify the terms of, and to obtain additional information with respect to, their proposals.

Between April 19 and April 21, 2016, each of the Financial Advisors provided the Strategic Review Committee with updated disclosures regarding certain of its relationships with the potential bidders.

On April 20 and April 21, 2016, the Strategic Review Committee held telephonic meetings, with representatives of the Financial Advisors and Cravath participating, to review and evaluate the first-round proposals and to discuss which bidders would be invited to the next round of the strategic alternatives process. Representatives of Cravath reviewed with members of the Strategic Review Committee their fiduciary duties and other relevant legal considerations. Representatives of the Financial Advisors presented to the Strategic Review Committee their preliminary financial analyses of the initial indications of interest and described their discussions with each potential bidder, including their views on each bidder’s financial capacity to close a transaction, industry experience, level of engagement in the process, and other factors affecting whether to invite such bidder into the next round of the process. The Strategic Review Committee also determined not to pursue any of the initial indications of interest contemplating alternative transaction structures, which involved additional complexities and contingencies, concluding that pursuing a sale of Yahoo’s entire operating business through a competitive auction process offered a better chance of maximizing value for Yahoo stockholders and noting the potential to revisit such proposed alternative structures in the future.

Following the Strategic Review Committee meeting on April 20, 2016, the Strategic Review Committee and representatives of the Financial Advisors and Cravath participated in a call with members of Yahoo’s management team to discuss the first-round proposals and the Strategic Review Committee’s analysis of these proposals and to obtain management’s input.

On April 21, 2016, Yahoo entered into a purchase agreement to sell the Excluded Real Estate. Yahoo completed the sale of the Excluded Real Estate for total proceeds of $246 million, net of closing costs of $4 million, on June 16, 2016.

On April 22, 2016, the Board held a telephonic meeting, with members of management and representatives of the Financial Advisors, Cravath, Skadden, and Wilson Sonsini participating, during which members of the Strategic Review Committee and representatives of its advisors discussed with the other directors the first-round proposals and the Financial Advisors presented preliminary financial analyses of Yahoo and its assets.

Later on April 22, 2016, the Strategic Review Committee had a meeting, with representatives of the Financial Advisors, Cravath, and Skadden participating. The Strategic Review Committee decided to invite into the next round of the process nine bidders that had submitted initial indications of interest: Verizon, Strategic Party B, the Sponsor C / Sponsor D bidding group, Sponsor A, Sponsor B, a bidding group consisting of Sponsor E and Sponsor F, which, at the recommendation of the Strategic Review Committee to enable them to submit a more competitive bid, were working together, Sponsor G, Sponsor H, and Sponsor I. On behalf of the Strategic Review Committee, the Financial Advisors invited these bidders into the next round of the strategic alternatives process.

From April 23 until July 18, 2016, numerous due diligence meetings and calls were held among representatives of Yahoo and its advisors, the potential bidders, including Verizon, and their advisors, and the Strategic Review Committee’s advisors. During this period, additional documents were posted to the virtual data room, including in response to potential bidders’ due diligence requests.

On April 26, 2016, Yahoo entered into the Starboard Settlement Agreement with Starboard and certain of Starboard’s affiliates to settle the proxy contest pertaining to the election of directors at Yahoo’s 2016 annual meeting. Pursuant to the Starboard Settlement Agreement, the Board appointed Messrs. Braham, Hartenstein, Hill, and Smith to the Board effective April 26, 2016, and Yahoo agreed to nominate the Starboard designees for election to the Board at the 2016 annual meeting. Also pursuant to the Starboard Settlement Agreement, Mr. Smith was appointed to the Strategic Review Committee in place of Mr. Webb, and Mr. McInerney became chair of the Strategic Review Committee. However, as provided by the Starboard Settlement Agreement, Mr. Webb was invited to continue to attend, and participate in, all Strategic Review Committee meetings. Thereafter, Mr. Webb attended most meetings of the Strategic Review Committee. The Starboard Settlement Agreement also required Yahoo to submit to a stockholder vote any decision recommended by the Strategic Review Committee and approved by the Board to sell Yahoo’s operating business or any similar transaction.

Between April 28 and May 17, 2016, representatives of each of the remaining potential bidders, including Verizon, and their advisors participated in meetings with Yahoo’s management, including Ms. Mayer, Mr. Goldman, Mr. Bell, Lisa Utzschneider (Chief Revenue Officer), and Mr. Weingarten, at its Sunnyvale headquarters as part of their due diligence. Also during this period, certain bidders, including Verizon, requested and subsequently participated in calls and meetings with representatives of Yahoo, Skadden, and Cravath to discuss issues related to legal and financial considerations with respect to the transaction, including considerations relating to Yahoo’s capitalization structure.

On May 2, 2016, at Verizon’s request, Mr. Webb met with Lowell McAdam, Chairman and Chief Executive Officer of Verizon. During the meeting Mr. McAdam discussed Verizon’s interest in a potential transaction involving Yahoo’s operating business. Mr. Webb suggested that Verizon raise any specific issues with the Strategic Review Committee and its advisors.

On May 5, 2016, the Strategic Review Committee held a telephonic meeting, with representatives of the Financial Advisors, Cravath, and Skadden participating, during which the representatives of Skadden and Cravath reviewed with the Strategic Review Committee the key proposed terms of the initial drafts of the purchase agreement and reorganization agreement prepared by Skadden in consultation with Cravath.

On May 11, 2016, the Strategic Review Committee held a telephonic meeting, with representatives of the Financial Advisors and Cravath participating, during which the representatives of Cravath reviewed with the Strategic Review Committee revised drafts of the purchase agreement and reorganization agreement prepared by Skadden, and the Strategic Review Committee discussed the timeline for the next round of the process, including a potential interim bid date of June 6, 2016. On May 12, 2016, after the Strategic Review Committee interviewed several prospective intellectual property advisors and discussed them with members of Yahoo’s intellectual property team and Mr. Bell. Yahoo, on behalf of the Strategic Review Committee, entered into an engagement letter with Black Stone IP, LLC as an advisor in connection with a possible transaction to monetize the Excalibur IP Assets, either with a buyer of Yahoo’s operating business or another third party.

Also on May 12, 2016, initial drafts of the purchase agreement and the reorganization agreement were made available to potential bidders through the virtual data room. To minimize the liabilities that would be retained by Yahoo post-closing, the initial draft purchase agreement was structured similar to a typical purchase agreement in a public company acquisition, with no post-closing indemnity by Yahoo and limited closing conditions. In addition, the initial draft purchase agreement provided, in the case of a strategic buyer, that Yahoo’s unvested employee equity awards would be assumed or substituted for comparable buyer equity awards, and, in the case of a financial sponsor buyer, that these awards would be accelerated at closing. The draft purchase agreement also provided that Yahoo would be required to pay the buyer a termination fee equal to 2.5 percent of the base purchase price if, among other reasons, the purchase agreement was terminated by the purchaser after the Board changed its recommendation for the transaction or by Yahoo to accept a superior proposal (the “Yahoo termination fee”), and, in the case of a financial sponsor buyer, that Yahoo would be entitled to a reverse termination fee equal to 7.5 percent of the base purchase price if the buyer did not consummate the transaction as a result of its debt financing not being available (the “reverse termination fee”), and to specific performance if the buyer’s debt financing was available.

Interim Proposals

On May 13, 2016, the Financial Advisors provided each of the nine remaining bidders with a process letter setting forth the process and guidelines for the submission of interim non-binding proposals for the acquisition of Yahoo’s operating business and establishing June 6, 2016 as the due date for interim proposals. The process letter instructed bidders to submit as part of their interim proposals a list of the key issues they had identified in the draft transaction agreements. Bidders were instructed to assume that the transaction would exclude the Excalibur IP Assets and that any sale of the Excalibur IP Assets would be subject to a royalty-free license to the Excalibur IP Assets solely for the benefit of Yahoo’s operating business.

On May 19, 2016, the Strategic Review Committee held a telephonic meeting, with representatives of the Financial Advisors and Cravath participating, to discuss the feedback received from bidders and to receive an update on the ongoing due diligence process.

Between May 20 and May 30, 2016, representatives of Cravath, Skadden, and the Financial Advisors participated in calls with representatives of certain of the remaining bidders, including Verizon, and their respective legal counsel, to discuss their approach to the ongoing strategic alternatives process and the transaction agreements. The representatives of the Strategic Review Committee’s advisors and Skadden stressed that, in addition to focusing on value, the Strategic Review Committee was seeking proposals that would provide high certainty of closing and leave the post-closing entity with limited liabilities unrelated to the assets retained by Yahoo.

During the week of May 23, 2016, with the approval of the Strategic Review Committee, representatives of each of Verizon and Strategic Party B met separately with Yahoo’s management team, including Ms. Mayer, Mr. Goldman, Mr. Bell, and Mr. Weingarten, at its Sunnyvale headquarters to discuss potential revenue and cost synergies as part of their due diligence investigation.

On May 24, May 26, and May 27, 2016, the Strategic Review Committee held telephonic meetings, with representatives of the Financial Advisors and Cravath participating, to discuss the progress of the strategic alternatives process and feedback received from the bidders.

On May 31, 2016, the Board held a meeting, with members of management and representatives of the Financial Advisors, Cravath, Skadden, and Wilson Sonsini participating, at which the Board received an update on the strategic alternatives process, including the key terms of the initial drafts of the purchase agreement and reorganization agreement, the status of the bidders’ due diligence, and the proposed schedule for the remainder of the strategic alternatives process. They also described the status of a process to potentially sell the Excalibur IP Assets.

Also on May 31, 2016, Yahoo and Excalibur entered into a patent assignment, pursuant to which, among other things, Yahoo assigned to Excalibur all right, title, and interest to the Excalibur IP Assets. Concurrently, Yahoo and Excalibur entered into a patent license agreement, pursuant to which, among other things, Excalibur granted to Yahoo and certain affiliates a non-exclusive license under the Excalibur IP Assets solely for the Yahoo operating business.

Between May 23, 2016 and June 2, 2016, representatives of Sponsor G, Sponsor H, and Sponsor I communicated to representatives of the Financial Advisors that they were withdrawing from the process.

On June 2, 2016, the Strategic Review Committee held a telephonic meeting, with representatives of the Financial Advisors and Cravath participating, to discuss the process for review of the second-round bids due on June 6, 2016.

On June 3, at Sponsor B’s request, Mr. Webb met with representatives of Sponsor B. During the meeting the representatives of Sponsor B discussed Sponsor B’s interest in a potential transaction involving Yahoo’s operating business. Mr. Webb suggested that Sponsor B raise any specific issues with the Strategic Review Committee and its advisors.

On June 6, 2016, Yahoo received non-binding interim proposals to acquire Yahoo’s operating business, including lists of the key issues identified in the draft transaction agreements, from each of Verizon, Strategic Party B, the Sponsor C / Sponsor D bidding group, Sponsor A, Sponsor B, and the Sponsor E / Sponsor F bidding group. The six interim proposals included the following base purchase prices and key terms, among others:

• Verizon proposed a $3.85 billion base purchase price. Its proposal contemplated that (i) the Excalibur IP Assets would be excluded from the acquired assets, but a royalty-free license to the Excalibur IP Assets would be granted for the benefit of Verizon and its current and future affiliates, (ii) Verizon would substitute cash-settled restricted stock units having equivalent value for unvested Yahoo RSU awards, but Yahoo would bear 50 percent of the cost of the Yahoo RSU awards and Verizon would not assume or grant options in substitution for any Yahoo options, (iii) Yahoo would indemnify Verizon for breaches of representations and warranties under the purchase agreement, and (iv) the Yahoo termination fee would be 4 percent of the base purchase price.

• Strategic Party B proposed a $3.75 billion base purchase price. Its proposal contemplated that (i) the Excalibur IP Assets would be included in the acquired assets, (ii) Strategic Party B would issue Strategic Party B restricted stock units and options having equivalent value for unvested Yahoo RSU awards and unvested Yahoo options, respectively, (iii) Yahoo would indemnify the buyer for breaches of representations and warranties under the purchase agreement, and (iv) the Yahoo termination fee would be five percent of the base purchase price.

• Sponsor A proposed a $5.0 billion base purchase price if the Excalibur IP Assets and certain minority investments were included in the acquired assets or a $4.7 billion base purchase price if the Excalibur IP Assets and certain minority investments were excluded from the acquired assets. Its proposal contemplated that (i) the cost of Yahoo equity awards would generally be retained by Yahoo, (ii) there would be no indemnification for breaches of representations and warranties under the purchase agreement, (iii) the Yahoo termination fee would be 3.5 percent of the base purchase price, and (iv) the reverse termination fee would be 5 percent of the base purchase price, with Yahoo being entitled to specific performance if the debt financing was available.

• Sponsor B proposed a base purchase price of $4.0 billion to $4.5 billion. Its proposal contemplated that (i) the Excalibur IP Assets would be included in the acquired assets, (ii) the cost of Yahoo equity awards would generally be retained by Yahoo, (iii) there would be no indemnification for breaches of representations and warranties under the purchase agreement, and (iv) the sole termination remedies would be liquidated damages in amounts to be negotiated, with no provision for specific performance.

• The Sponsor C / Sponsor D bidding group proposed a $2.75 billion base purchase price. This proposal contemplated that (i) the Excalibur IP Assets would be excluded from the acquired assets and (ii) Yahoo would retain the cost of equity awards. The Sponsor C / Sponsor D bidding group did not submit a list of key issues identified in the draft transaction agreements.

• The Sponsor E / Sponsor F bidding group proposed a $5.25 billion base purchase price. This proposal contemplated that (i) the Excalibur IP Assets would be excluded from the acquired assets, (ii) the cost of Yahoo equity awards would generally be retained by Yahoo, (iii) there would be no indemnification for breaches of representations and warranties under the purchase agreement, but the buyer would purchase representation and warranty insurance at Yahoo’s cost, and (iv) Yahoo would be entitled to specific performance if the debt financing was available and the buyer failed to consummate the closing when required; otherwise, a reverse termination fee of an unspecified amount would be the remedy.

Between June 6 and June 8, 2016, representatives of the Financial Advisors had numerous discussions with the six bidders who submitted second-round proposals to clarify the terms of and obtain additional information with respect to their proposals, including the reasons for any significant changes from the valuations they had provided in their initial indications of interest.

On June 8, 2016, the Strategic Review Committee met, with representatives of the Financial Advisors and Cravath participating, to review the interim proposals, including the bidders’ issues lists and the additional feedback received from the bidders, and to discuss next steps. Representatives of the Financial Advisors provided an overview of the second round of the strategic alternatives process and provided their preliminary financial analyses of the interim proposals. Representatives of Cravath reviewed with the Strategic Review Committee the transaction agreement issues lists submitted by the bidders. The Strategic Review Committee preliminarily decided that, because the price offered by the Sponsor C / Sponsor D bidding group was significantly lower than the prices indicated in the other bidders’ proposals, and representatives of the Sponsor C / Sponsor D bidding group had indicated that they did not expect further due diligence or partnering opportunities would meaningfully change their valuation, the Sponsor C / Sponsor D bidding group would not be invited to the next round of the strategic alternatives process.

On June 9, 2016, the Strategic Review Committee and representatives of the Financial Advisors and Cravath participated in a conference call with Mr. Webb, certain members of Yahoo management, including Ms. Mayer and Mr. Bell, and representatives of Skadden and Wilson Sonsini to review the interim proposals.

On June 10, 2016, the Board held a telephonic meeting, including certain members of management, to discuss the interim proposals and other matters discussed at the Strategic Review Committee’s June 8, 2016 meeting. Representatives of the Financial Advisors, Cravath, and Skadden provided the Board with an overview of the interim proposals and the Financial Advisors presented their analyses of each of the bids. Following the Board meeting, and taking into account the Board’s discussion and direction, the Strategic Review Committee decided to invite to the next round of the strategic alternatives process each of the remaining five bidders: Verizon, Strategic Party B, Sponsor A, Sponsor B, and the Sponsor E / Sponsor F bidding group. At the Strategic Review Committee’s direction, the Financial Advisors communicated the Strategic Review Committee’s decision to the bidders and began to arrange calls to provide the bidders and their advisors with feedback on their transaction agreements issues lists.

On June 12 and 13, 2016, Yahoo uploaded revised transaction agreements and draft disclosure schedules, respectively, to the virtual data room, reflecting the corporate structure of Yahoo Holdings.

On June 13, 2016, the Strategic Review Committee held a telephonic meeting, with representatives of the Financial Advisors and Cravath participating, to discuss the bidders’ ongoing due diligence requests and discuss certain issues relating to the transaction agreements.

Between June 13 and June 19, 2016, representatives of Skadden and Cravath held conference calls with representatives of each of the remaining bidders, including their legal advisors, during which the representatives of Skadden and Cravath provided feedback to each of the bidders on the transaction agreement issues lists they had submitted with their interim bids. The Strategic Review Committee’s advisors also advised the bidders that mark-ups of the transaction agreements would be due on June 20, 2016, and, for financial bidders, near-final drafts of debt commitment letters would be due on June 30, 2016.

On June 16, 2016, the Strategic Review Committee held a telephonic meeting, with representatives of the Financial Advisors and Cravath participating, at which the Financial Advisors updated the Strategic Review Committee on, among other things, the feedback received from each of the bidders regarding remaining due diligence items and their expected timing for completion of their due diligence review. The Strategic Review Committee expressed a desire for bidders to be guided to submit final mark-ups of the transaction agreements that would enable Yahoo to be in a position to enter into definitive transaction agreements with the winning bidder as soon as possible after final bids were received.

Initial Mark-Ups

Between June 20 and June 24, 2016, each of the remaining five bidders submitted initial mark-ups of the transaction agreements. Verizon’s mark-up of the purchase agreement improved certain of the terms previously indicated in the issues list it submitted on June 6, 2016. In particular, Verizon’s mark-ups did not contemplate indemnification for breaches of representations, warranties, and pre-closing covenants under the purchase agreement (although it did include indemnification for pre-closing taxes) and provided that Verizon would assume the full cost of unvested Yahoo RSU awards. The mark-ups submitted by Strategic Party B, Sponsor A, Sponsor B, and Sponsor F were generally consistent with the key issues lists previously submitted by those bidders.

On June 24, 2016, the Strategic Review Committee held a telephonic meeting, with representatives of the Financial Advisors, Cravath, and Skadden participating, to discuss issues raised by the transaction agreement mark-ups the bidders had submitted. The Strategic Review Committee also discussed the timeline for the remainder of the sale process.

Interim Mark-Ups and Final Proposals

On June 21, 2016, principals of Sponsor E and Sponsor F informed Mr. McInerney and representatives of one of the Financial Advisors that Sponsor E intended to withdraw from the auction process, but that Sponsor F continued to be interested in acquiring Yahoo’s operating business and wished to remain in the process. In the following days, members of the Strategic Review Committee and representatives of the Financial Advisors had numerous discussions with principals of Sponsor F to discuss whether it was feasible for Sponsor F to obtain equity financing without Sponsor E’s participation. Based on these discussions, the Strategic Review Committee ultimately determined to permit Sponsor F to remain in the process.

Between June 26 and July 1, 2016, representatives of Skadden, Cravath, and the Financial Advisors participated in conference calls with representatives of each of the five remaining bidders to provide them with initial feedback on their mark-ups of the transaction agreements submitted the previous week, as well as to obtain clarification from the bidders with respect to certain of their changes to the initial drafts.

On June 27, 2016, at the direction of the Strategic Review Committee, representatives of the Financial Advisors distributed to the five remaining bidders a process letter setting out the process and guidelines for the submission of final acquisition proposals and establishing July 18, 2016 as the final bid deadline. The process letter provided for submission of interim mark-ups of the transaction agreements on July 6, 2016, and, based on feedback to be provided by Skadden and Cravath on such interim mark-ups, the submission of final mark-ups of the transaction agreements on July 14, 2016. The process letter further requested that the bidders submit executed debt and equity financing commitment letters (if applicable) with their final proposals, and noted that the Strategic Review Committee would attach considerable importance to the certainty of the financing commitments in its evaluation of the final proposals.

On June 27, 2016, at Verizon’s request, members of the Strategic Review Committee, together with a representative of one of the Financial Advisors, met with Mr. McAdam and other members of Verizon’s management team to discuss Verizon’s participation in the sale process and Verizon’s interest in a potential transaction involving Yahoo’s operating business.

On June 29, 2016, the Board held a meeting at Yahoo’s Sunnyvale headquarters, with members of management and representatives of the Financial Advisors, Cravath, Skadden, and Wilson Sonsini present, to discuss, among other things, the strategic alternatives process. At the meeting, members of the Strategic Review Committee reviewed the interim proposals received from the five continuing bidders, and the Financial Advisors presented the Board with a comparison of the financial aspects of the bids, as well as their preliminary financial analysis with respect to Yahoo’s operating business, including the relative advantages and disadvantages, as well as the expected timing, of a reverse spin-off compared to a sale of Yahoo’s operating business. The representatives of Cravath and Skadden reviewed with the Board potential issues raised by the bidders’ mark-ups of the transaction agreements. A representative of Wilson Sonsini reviewed the Board’s fiduciary duties and other legal considerations. The Board also expanded the Strategic Review Committee’s authority, by authorizing it to consider, evaluate, and make recommendations to the Board regarding the potential monetization of the Excalibur IP Assets, consideration of a reverse spin-off, capitalization and initial investment objectives of Yahoo following a sale of its operating business or a reverse spin-off, the disposition of the Alibaba Shares and the Yahoo Japan Shares, and the repatriation of cash to Yahoo’s stockholders.

Yahoo held its annual stockholders meeting on June 30, 2016. At the annual meeting, Yahoo’s stockholders elected each of Yahoo’s director nominees to the Board.

On July 1, 2016, the Strategic Review Committee held a telephonic meeting, with representatives of its advisors and Skadden participating, to review the discussions held with the bidders regarding their initial transaction agreement mark-ups, as well as the status of the bidders’ due diligence review and the financial sponsor bidders’ progress in securing equity and debt financing commitments.

On July 6, 2016, Yahoo received interim mark-ups of the transaction agreements from Verizon, Strategic Party B, Sponsor A, and Sponsor F. In its interim transaction agreement mark-ups, Verizon further improved the terms of its bid by, among other things, eliminating the pre-closing tax indemnity (with certain exceptions) and lowering the Yahoo termination fee from 4.0 percent to 3.5 percent. The transaction agreement mark-ups from Strategic Party B, Sponsor A, and Sponsor F that submitted interim mark-ups at that time were generally less favorable to Yahoo than Verizon’s mark-ups on non-price terms, including indemnification, closing conditions, the Yahoo termination fee, and, where applicable, the reverse termination fee.

On July 7 and July 11, 2016, representatives of Skadden and Cravath held telephonic meetings with representatives of each of the four bidders that had submitted interim mark-ups on July 6, 2016 to clarify certain terms of, and provide feedback on, their interim mark-ups, consistent with the guidance provided by the Strategic Review Committee.

On July 7, 2016, the Strategic Review Committee held a telephonic meeting, with representatives of its advisors participating, to discuss the status of the sale process and the discussions with each of the five remaining bidders and to receive an update from Cravath on the most significant issues raised by the interim mark-ups of the transaction agreements received so far. At the meeting, the Strategic Review Committee discussed Sponsor F’s request to have discussions with David Filo, a director and co-founder of Yahoo, its Chief Yahoo, and its largest individual stockholder, regarding the possibility of Mr. Filo providing equity financing in a bid by Sponsor F. Following discussion, in order to enable Sponsor F to present the best possible bid, the Strategic Review Committee decided that it would permit the bidder to have discussions with Mr. Filo regarding his potential participation in a bid by Sponsor F, so long as Mr. Filo was willing to enter into such discussion and, if so, that he recuse himself from all further Board discussions regarding the sale process and not receive any further information about the bidding process for as long as Mr. Filo contemplated such participation. On behalf of the Strategic Review Committee, a representative of Wilson Sonsini discussed with Mr. Filo whether he would be willing to have discussions with Sponsor F on these terms. Mr. Filo indicated that he would be willing to discuss a potential equity participation in a bid by Sponsor F or, if requested, by another financial sponsor bidder if it would help to facilitate maximizing stockholder value in the strategic alternatives process. The Strategic Review Committee also determined that if any other bidders requested to have discussions with Mr. Filo going forward, the Strategic Review Committee would evaluate those requests on a case-by-case basis. Throughout the week of July 11, 2016, the Strategic Review Committee had numerous discussions with representatives of Cravath, Wilson Sonsini, and the Financial Advisors regarding Mr. Filo’s potential equity participation in a bid by Sponsor F. Mr. Filo agreed to the restrictions on his access to discussions and information proposed by the Strategic Review Committee.

On July 10, 2016, the Strategic Review Committee had a conference call with representatives of the Financial Advisors, Cravath, and Skadden to review issues raised by the interim mark-ups of the transaction agreements submitted by the bidders. At the meeting, the Strategic Review Committee provided Skadden and Cravath with guidance with respect to the feedback they would deliver to the bidders in accordance with the process outlined in the process letter.

On July 11, 2016, Sponsor B submitted its interim mark-ups of the transaction agreements, which did not contain significant improvements compared to Sponsor B’s prior mark-ups. The next day, principals of Sponsor B met with Mr. Webb to discuss its interest in pursuing a potential acquisition of Yahoo’s operating business.

On July 14, 2016, representatives of Skadden and Cravath held a conference call with representatives of Sponsor B to provide them with feedback on their interim mark-ups of the transaction agreements. Also on July 14, 2016, Verizon, Strategic Party B, Sponsor A, and Sponsor F submitted revised, final mark-ups of the transaction agreements.

On July 18 and 19, 2016, all five bidders submitted to the Strategic Review Committee their final acquisition proposals, and Sponsor B also provided revised mark-ups of the transaction agreements and executed equity and debt financing commitment letters. Sponsor A and Sponsor F did not submit executed financing commitments. The final proposals included the following terms, among others:

• Verizon increased its base purchase price to $4.8258 billion. Its final proposal (i) continued to exclude the Excalibur IP Assets from the acquired assets and narrowed the scope of the royalty-free license to the Excalibur IP Assets that would be granted for the benefit of Verizon and its current and certain future affiliates, (ii) continued to provide generally for the substitution of cash-settled Verizon restricted stock units for unvested Yahoo RSU awards and no assumption or substitution of any Yahoo options, (iii) continued to provide for no indemnification for breaches of representations and warranties under the purchase agreement, and (iv) lowered the Yahoo termination fee to 3.0 percent of the base purchase price.

• Strategic Party B lowered its base purchase price to $2.9 billion. Its proposal (i) excluded the Excalibur IP Assets from the acquired assets, but provided that Strategic Party B and its controlled affiliates would be granted a full license to the Excalibur IP Assets, (ii) continued to provide for the substitution of Strategic Party B restricted stock units and options for unvested Yahoo RSU awards and unvested Yahoo options, (iii) continued to provide that Yahoo would indemnify the buyer for, among other things, breaches of representations and warranties, and (iv) revised the Yahoo termination fee to 3 percent of the base purchase price, subject to escalation by 1/30 of 0.5 percent each day (i.e., 0.5 percent per month) if the stockholder meeting was not held within six months following the announcement of a transaction.

• Sponsor A reduced its base purchase price to $4.0 billion. Its proposal provided (i) that the Excalibur IP Assets would be excluded from the acquired assets, (ii) that the cost of equity awards would generally be retained by Yahoo, (iii) that Yahoo would bear severance costs of terminating a certain number of employees (which Sponsor A estimated to be $200 million to $300 million), (iv) for indemnification for breaches of representations and warranties under the purchase agreement regarding the business in the reorganization agreement, and (v) a Yahoo termination fee and a reverse termination fee of 3.25 percent and 5.5 percent, respectively, of the base purchase price. Sponsor A also proposed an alternative transaction, pursuant to which the majority of the assets of Yahoo’s operating business would be separated from a liquidating trust holding the remainder of the operating assets, including all of Yahoo’s physical assets, as well as certain legacy liabilities, and the liquidating trust would be acquired by Sponsor A through a combination of equity and vendor financing provided by Yahoo, though no purchase price for the liquidating trust was specified.

• Sponsor B proposed a $4.05 billion base purchase price. Its proposal provided (i) that the Excalibur IP Assets would be included in acquired assets, (ii) that the cost of equity awards would generally be retained by Yahoo, (iii) that Yahoo would implement an employee reduction plan prior to the closing and a portion of the related severance would be borne by Yahoo, (iv) for no indemnification for breaches of representations and warranties under the purchase agreement, (v) a Yahoo termination fee and a reverse termination fee each equal to 4.0 percent of the base purchase price, and (vi) that a reverse termination fee would be the exclusive termination remedy of Yahoo, meaning that Yahoo would not have the right to cause the buyer to close if its debt financing was available.

• Sponsor F reduced its base purchase price to $4.35 billion. Its proposal provided (i) that the Excalibur IP Assets would be excluded from the acquired assets, (ii) that the cost of equity awards would generally be retained by Yahoo, (iii) for no indemnification for breaches of representations and warranties under the purchase agreement, and (iv) a Yahoo termination fee and a reverse termination fee equal to 3.75 percent and 7.5 percent, respectively, of the base purchase price.

On July 18 and July 19, 2016, the Strategic Review Committee had multiple conference calls with its advisors to discuss the final proposals. The Strategic Review Committee considered that (i) Verizon’s bid offered the highest base purchase price, (ii) Verizon had submitted the transaction agreement mark-ups that were most responsive to the Strategic Review Committee’s concerns regarding value, certainty of closing, and leaving the post-closing entity with limited liabilities unrelated to the assets retained by Yahoo, (iii) Verizon had sufficient funds to finance the transaction, whereas the financing of the financial sponsor bidders was less certain, and (iv) Verizon had substantially completed its due diligence review, whereas the financial sponsors needed additional time to complete their due diligence review. In light of these and other factors, the Strategic Review Committee recommended that Yahoo should proceed to negotiate definitive transaction agreements with Verizon on an expedited basis. The Strategic Review Committee also determined, after reviewing proposals received to date for the Excalibur IP Assets, to recommend to the Board that Yahoo should retain the Excalibur IP Assets at that time.

Also on July 18 and July 19, 2016, the Financial Advisors contacted each of the other four bidders to obtain additional information with respect to their proposals, and to discuss whether they could enhance their prices for Yahoo’s operating business.

Later in the evening on July 19, 2016, the Board, with members of management, representatives of the Strategic Review Committee’s advisors, Skadden, and Wilson Sonsini present, convened to discuss the final proposals received by the Strategic Review Committee. As previously arranged, Mr. Filo did not participate in this Board meeting or any other subsequent Board meetings relating to the proposed transaction and was not given access to materials for the meeting, including the final proposals. At the meeting, representatives of the Financial Advisors reviewed with the Board each of the final proposals. Representatives of Skadden and Cravath then reviewed with the Board the key issues raised by the final mark-ups of the transaction agreements submitted by the bidders. After discussion, considering the factors differentiating Verizon’s bid described above, the Board determined that Yahoo should proceed to negotiate definitive transaction agreements with Verizon on an expedited basis.

Skadden distributed revised versions of the transaction agreements to Verizon and Wachtell, Lipton, Rosen & Katz (“Wachtell”), Verizon’s legal counsel, early on the morning of July 20, 2016. Yahoo Holdings was also formed on July 20, 2016. Beginning later on July 20, 2016, and through the evening of July 22, 2016, Skadden and Wachtell exchanged revised drafts of the transaction agreements, and representatives of Skadden, in consultation with representatives of Cravath, and representatives of Wachtell negotiated the terms of the transaction agreements. Also during this time, the parties negotiated the terms of the Excalibur License Agreement.

In the evening of July 20, 2016, members of the Board, with members of management and representatives of the Strategic Review Committee’s advisors, Skadden, and Wilson Sonsini present, received a telephonic update on the status of the negotiations with Verizon and its advisors.

Also on July 21, 2016, the Strategic Review Committee held a telephonic meeting, with representatives of the Strategic Review Committee’s advisors participating, to discuss the status of discussions with Verizon. Representatives of Cravath reviewed with the Strategic Review Committee the material open items in the transaction agreements and the Strategic Review Committee provided feedback on certain of those matters.

In the afternoon on July 22, 2016, the Strategic Review Committee, together with representatives of its advisors, held a telephonic meeting. Representatives of Cravath reviewed with the Strategic Review Committee its fiduciary duties and other relevant legal considerations in connection with recommending a potential transaction to the Board. The representatives of Cravath also reviewed with the Strategic Review Committee the terms of the proposed transaction agreements to be entered into with Verizon and provided the Strategic Review Committee with an update on the status of negotiations. Representatives of the Financial Advisors then each reviewed with the Strategic Review Committee their financial analyses of Yahoo and its operating business. The Strategic Review Committee also discussed with its advisors a communication received by Mr. Webb from the principal of Sponsor B reiterating Sponsor B’s interest in an acquisition.

After the Strategic Review Committee’s meeting, on July 22, 2016, members of the Strategic Review Committee had a call with a principal of Sponsor B, during which the principal indicated that the Strategic Review Committee should expect to receive the revised proposal within the next few hours, but did not disclose any specific monetary terms of the revised proposal. Later that evening, just prior to the scheduled start of a Board meeting, the Strategic Review Committee received from Sponsor B a revised proposal to acquire Yahoo’s operating business for an enterprise value of $4.8 billion contingent on, among other things, Yahoo retaining the cost of its equity awards and Yahoo and Sponsor B agreeing on a key employee reduction plan to be executed prior to closing, on the allocation between Yahoo and Sponsor B of the severance costs related to the reduction plan, as well as several other contract concessions.

In the evening of July 22, 2016, the Board held a telephonic meeting, with members of management and representatives of the Strategic Review Committee’s advisors, Skadden, and Wilson Sonsini participating. All of the members of the Board were in attendance, except for Mr. Filo. A representative of Wilson Sonsini reviewed with the directors their fiduciary duties, as well as the scope of the authority delegated by the Board to the Strategic Review Committee. A representative of Skadden then reviewed with the Board the terms and conditions of the proposed transaction with Verizon contained in the purchase agreement and related transaction agreements. Representatives of Skadden and Cravath also updated the Board on the status of the negotiations. The Board then discussed with the Strategic Review Committee’s advisors, Skadden, and Wilson Sonsini Sponsor B’s revised proposal. The Board considered, among other things, that the price offered in Sponsor B’s revised proposal was lower than the price offered by Verizon and that Sponsor B’s proposal did not assume the Yahoo RSU awards, the certainty of the Verizon bid, the risk of losing the Verizon bid if Yahoo were to delay signing and pursue further discussions with Sponsor B, and the fact that Sponsor B’s offer was subject to confirmatory due diligence and the negotiation of definitive transaction agreements. The Board concluded that the risks of delaying signing a transaction with Verizon for an inferior offer from Sponsor B outweighed any potential benefit of pursuing further negotiations and noted that, in the proposed transaction with Verizon, the Board retained a customary “fiduciary out” to pursue an unsolicited potentially superior proposal that emerged after signing the transaction agreements. Representatives of J.P. Morgan and Goldman Sachs then described certain hedge and warrant transactions relating to the Convertible Notes, with respect to which J.P. Morgan and Goldman Sachs are counterparties to the Company, noting that these interests had been disclosed to, discussed with, and considered by the Strategic Review Committee and the Board in connection with their respective engagements as financial advisors to the Strategic Review Committee. They also discussed with the Board the potential impact of the proposed Sale Transaction on the hedge and warrant transactions, including the value that Goldman Sachs and J.P. Morgan could potentially receive under various assumptions as a result of their interest in the hedge and warrant transactions, based on theoretical models. Representatives of the Financial Advisors then jointly reviewed with the Board their joint financial analysis of the purchase price to be paid by Verizon to Yahoo in connection with the Sale Transaction (the “Cash Consideration”), which is $4,825,800,000 in cash, subject to adjustments as provided for in the purchase agreement, together with the general substitution of cash-settled Verizon RSU awards for unvested Yahoo RSU awards held by employees of Yahoo Holdings immediately prior to the closing of the Sale Transaction (the “RSU Substitution”). At this meeting, each of the Financial Advisors then rendered its oral opinion to the Strategic Review Committee and the Board, each of which were subsequently confirmed by delivery of a written opinion, to the effect that, as of the date of such opinion, and based upon and subject to the factors and assumptions set forth in such Financial Advisor’s written opinion, the Cash Consideration to be paid in the Sale Transaction, together with the RSU Substitution, pursuant to the purchase agreement, was fair, from a financial point of view, to Yahoo.

The Board meeting was then recessed and the Strategic Review Committee held an executive session, during which the Strategic Review Committee unanimously recommended to the Board that the Board approve the purchase agreement and the reorganization agreement negotiated with Verizon and the transactions contemplated by those agreements. The Board meeting was reconvened immediately thereafter and, after receiving the recommendation of the Strategic Review Committee, the Board, by unanimous vote of all directors present at the meeting (which excluded Mr. Filo), (i) determined that the Sale Transaction Agreements and the Sale Transaction are expedient and for the best interests of Yahoo and its stockholders, (ii) approved the Sale Transaction Agreements and the Sale Transaction, (iii) recommended, subject to the terms of the Stock Purchase Agreement, that the Yahoo stockholders adopt a resolution authorizing the Sale Transaction, and (iv) directed that the Sale Transaction be submitted for consideration by the stockholders at the special meeting.

Following the meeting, until early morning on July 23, 2016, representatives of Skadden, in consultation with Cravath, Weil, Gotshal & Manges LLP (which acted as intellectual property counsel to Yahoo), and Wachtell finalized the terms of the Sale Transaction Agreements, and on the morning of July 23, 2016, Yahoo and Verizon executed the Stock Purchase Agreement, Yahoo and Yahoo Holdings executed the Reorganization Agreement, and Yahoo and Excalibur executed the Excalibur License Agreement.

On July 25, 2016, Yahoo and Verizon issued a joint press release announcing the transaction and the execution of the Sale Transaction Agreements.

[samro]

Wells Fargo downgrades Apple

The iPhone 7 sure looks like the iPhone 6.

The investment analysts at Wells Fargo have downgraded Apple (AAPL) from outperform to market-perform, which means they no longer expect the stock to deliver above average returns.

“We see risk/reward as balanced,” Wells Fargo’s Maynard Um said.

This follows Apple’s big Keynote event on Wednesday, where the tech behemoth unveiled the iPhone 7, the iPhone 7 Plus, and the Apple Watch 2.

Overall, the details announced where largely in line with expectations. The iPhones will feature a powerful 12-megapixel camera, a 4.7″ Retina HD display, and memory capacities as high as 256GB. They’ll be water resistant. Notably, the new iPhones will have no headphone jack; users can opt for wireless headphones, headphones with a Lightning cable, or headphones attached to a $9 adapter. The Apple Watch 2 will be water-proof.

It’s fair to say no one was blown away by the announcement. Um was among analysts who saw no reason to adjust forecasts higher.

“We think water resistance and improved camera are visibly the most attractive, though expected, features,” Um said of the iPhones. “However, we see risk that prior high end 128GB buyers may not necessarily opt to purchase the 256GB high-end this year. While the Lightning to 3.5mm dongle will allow people to use existing headsets, it will limit the ability to use a headset and charge at the same time, creating some inconvenience.”

Um’s downgrade was largely due to his “belief that several near-term positives for the stock such as 1) 14th week in the December quarter, 2) March quarter y/y growth given lack of channel inventory adjustment and 3) stable gross margins, are embedded in the stock.”

Um believes Apple shares are worth $105-$120 per share, down from a his previous estimate of $115-$125.

Apple shares closed Wednesday at $108.36.

Read more:

Meet Apple’s iPhone 7 and its ten major new features

Apple unveils the Apple Watch 2

Apple is trying to pacify headphone jack fans with this $9 dongle

Why the headphone jack must die

[samro]

Morgan Stanley bull comes out, predicts the S&P heads to 3,000

“We think the US stock market is going higher,” Morgan Stanley’s Adam Parker said on Tuesday.

This is a jarring call, especially as we enter the fall season, which is historically associated with volatility. This year in particular, fall comes with a series of major risk events that do not appear to be priced in the financial markets. Indeed, this week’s Barron’s cover story is titled: “Strategists Say Beware the Bear.”

To be clear, Parker’s call consists of 12-month price targets that go well beyond this year’s fall.

“We are raising our 12-month price targets for the S&P 500 – base case from 2200 to 2300, bear case from 1600 to 1800, and our bull case from 2400 to 2500,” Parker said.

The US stock market continues to defy the odds, with the S&P 500 (^GSPC) rallying for seven and a half years in what has been one of the most impressive bull markets in history. At 2,179, The S&P is up 227% from its March 2009 low.

One important metric that has market skeptics on guard is the price/earnings (P/E) multiple, which is stretched well above its long-term averages. For some experts, this leaves the stock market vulnerable to a sharp correction.

The market is more expensive than usual. (Image: Morgan Stanley)

But Parker has long been a vocal critic of folks who think of P/E multiples in this “hubristic” way. Specifically, he believes it’s almost a waste of time to predict where the P/E multiple will head in the near term. Indeed, he actually raised his P/E forecast to 17.7x (from 17x), which is far above the 13.8x average.

“While we have argued many times that we think forecasting the market-level price-to-earnings ratio is difficult, our best guess is that growth and interest rates ultimately matter in the long term,” Parker said.

Here are Parker’s four arguments for being bullish (verbatim):

1) “Bond yields are so low and seem risky – the old “relative to other asset classes” argument.

2) “70% of the global equities that trade $100 million or more each day are in the US – the old liquidity argument.

3) “The US is the only major region with potentially positive EPS growth as a base case – the old fundamental argument.

4) “Investors aren’t positioned for big upside- whether you look at futures, options, prime brokerage data, surveys, or anecdotally from meetings, we don’t see excessive optimism among the client base – i.e., the old positioning argument.”

In addition to upgrading his 12-month price target, Parker also reiterated his forecast that the S&P 500 heads to 3,000 by 2020.

“We still believe this to be true, as most US consumer metrics appear directionally positive (housing, jobs, delinquencies, obligations, confidence, personal spending, etc.); corporate excess seems under control; and low growth is still the base case economic forecast,” Parker said.

“With few other attractive investment alternatives, we see the US equity market as the beneficiary of further appreciation.”

– Sam Ro is managing editor at Yahoo Finance. Read more:

Summer’s over: Markets brace for the fall

Bullishness in the derivatives market has hit a 3-year high

Don’t be fooled by the calm in the markets

The stage is set for the next 10% plunge in stocks

[samro]

Summer's over: Markets brace for the fall

August was unusually quiet in the US markets and economy, which could be the set-up for a volatile few months ahead.

Labor Day marks the unofficial end of summer for the US. Kids return to school after their summer vacations, and the US Senate and House of Representatives head back to Washington after their lengthy summer recess. On Wall Street, traders and rainmakers close their summer homes in the Hamptons and head back to work.

“The end of summer marks a quickening in the pace of life and a longing for just a few more minutes on the deck or in the back garden,” Morgan Stanley’s Andrew Sheets wrote on Sunday. “The recent calm, with the S&P 500 moving less than 1% for 39 straight days, only makes that feeling stronger. After the relentless sell-off that rang in 2016, and the early summer shock of Brexit, the respite has been welcome. And yet it comes with a nagging suspicion. Markets like this rarely last. They will be interrupted by something.

“What will it be?”

A long list of catalysts for market volatility

US Jobs: Things kicked off on Friday with the August US jobs report. The report was actually disappointing relative to market expectations, which caused most economists and Fed-watchers to push back their expectations for an interest rate hike from the Federal Reserve. Indeed, the futures market assigns a very low 22% probability that the Fed hikes rates at its Sept. 20-21 Federal Open Market Committee (FOMC) meeting.

Fed’s FOMC meetings: Despite the low implied probability of the Fed acting on Sept. 21, Goldman Sachs and Barclays economists are straying from the herd and telling clients that the Fed will indeed hike rates at that September meeting. Such a surprise move could spark volatility in the markets. Should the Fed wait, then it will likely raise rates in December. Whenever the next hike occurs, it would be the first hike since December of 2015.

European Central Bank meeting: The ECB meets this week and announces an update to monetary policy on Thursday. In addition to the persistent economic woes plaguing countries like Greece, Spain and Portugal, the UK’s unexpected Brexit vote has introduced another major source of economic uncertainty to the region. Economists expect no change in policy rates, which already includes a negative 0.4% deposit facility rate. If anything, the ECB could announce an extension of its asset purchase program (similar to the Fed’s quantitative easing program).

Bank of England meeting: The BoE’s Monetary Policy Committee (MPC) meets on September 15. Like the ECB, the BoE is wrestling with the uncertainty brought on by the Brexit vote. Interestingly, the impact has been surprisingly benign. “With recent activity releases suggesting the economy may have continued to expand last quarter…and fiscal adjustment due later this year, the central bank should remain in a watchful mode,” JPMorgan’s Bruce Kasman said. “However, the forward-looking elements of the business surveys hint that the adjustment to Brexit will build. If realized, the MPC will likely ease before year-end.”

Bank of Japan meeting: The BoJ announces an update to monetary policy on Sept. 21, hours before the Fed’s announcement. Like its G-4 central bank peers above, the BoJ is scrambling to get growth and inflation up. At the Kansas City Fed’s Economic Policy Symposium in Jackson Hole, BoJ governor Haruhiko Kuroda said “the Bank will continue to carefully examine risks to economic activity and prices at each monetary policy meeting and take additional easing measures without hesitation.” Economists believe this was a pretty blunt signal that the BoJ expects to cut rates further and increase its program of buying Japanese government bonds.

US presidential election: Campaign season kicks into high gear after the Labor Day, building up to presidential debates scheduled for Sept. 26, Oct. 9, and Oct. 19 (The vice presidential debate will be held on Oct. 4). Polls show that Democratic nominee Hillary Clinton has the lead over Republican nominee Donald Trump. But anything can happen between now and Election Day, Nov. 8.

Markets have a terrible track record in September

For what it’s worth, the historical data show that September is not a great month of stocks.

“‘Closing up the beach house’ and ‘Back to school’ tends to be associated with equity market weakness,” UBS’s Julian Emanuel said on Thursday.

September usually isn’t great for stocks. (Image: UBS)

For what it’s worth, the September drag has gotten less bad in more recent periods. From LPL Financial: “Going back to 1950, the average return has been a loss of 0.52% with a positive return for the month only 44% of the time. Going back to 1928, the return drops to -1.06% on average and again positive 44% of the time. But the past 10 years September has been near the middle of the pack, up 0.3% on average and higher six times.”

September has been getting less bad. (Image: LPL Financial)

“Seven of the worst 26 months [since 1926] ever happened in September,” Ritholtz Wealth Management’s Michael Batnick observed. “If money was only invested in this month, $100 in 1926 would turn into $42 today.”

Batnick continued: “So yeah, it’s true, September has by far been the worst month historically. But are you really going to act on this? Come on. I mean really, come on.”

But some equity strategists would argue that it’s different this time. They point to two troubling signs:

1) The VIX (^VIX) is low. The VIX represents the premium options traders pay to protect themselves from volatility and downside. And that premium is below average, a sign of complacency in the face of all of those catalysts listed above.

“With the VIX hovering near multi- year lows, is the market adequately pricing in uncertainty related to politics (in the US and abroad), the Fed’s intentions, and the sustainability of ultra-low interest rates?” Emanuel said. “Unlikely.”

Traders and investors aren’t worried about anything these days. (Image: UBS)

2) Stock prices (^GSPC) are high. This is troubling when valuations are high, positioning is bullish, and trading volume is low.

Low volumes signal low confirmation. (Image: BMO)

“[W]e believe most investors have decided to minimize the importance of fundamental investing and instead are consumed with following the herd, chasing performance and not questioning consensus,” BMO’s Brian Belski warned. “These are the same investors, in our view, that believe that there is no way the Fed can raise rates before the election, that the US cannot grow without the rest of the world coming along as well, and that Mrs. Clinton’s future presidency is a slam dunk.”

In other words, investors seem pretty sure about the outcomes of all of the catalysts we listed above.

“If there is one thing we know for certain — nothing is certain within an investing climate, culture and landscape that are being bullied by regulation, compliance, doubt, and the overarching fear of not wanting to be wrong,” BMO’s Belski said. “Therefore, as markets enter the last four months of 2016, there remain more questions than answers in our view — issues that may indeed challenge the low volume new price highs that were scored this past summer.”

Assuming everything goes right, the markets and the economy may close out the year just fine. But should something go wrong, it would appear the markets are unusually vulnerable.

– Sam Ro is managing editor at Yahoo Finance. Read more:

What it means to be ‘hawkish’ and ‘dovish’ on monetary policy

Warren Buffett has a simple explanation for why economic growth has been weak

Bullishness in the derivatives market has hit a 3-year high

Don’t be fooled by the calm in the markets

The stage is set for the next 10% plunge in stocks