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EU antitrust official sees more scrutiny for Facebook, others

ROME (Reuters) – Facebook and other tech giants may attract more regulatory scrutiny in future because of their market power, a senior EU antitrust official said on Tuesday.

Tommaso Valletti, chief economist at the European Commission’s competition unit, rejected calls by some – especially in the United States – for regulators to adopt a hands-off approach to avoid stifling innovation.

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Unlike internet search engine Google which has been in the EU antitrust crosshairs for close to a decade, Facebook has not drawn the attention of the Commission, the world’s most aggressive competition enforcer.

Chief Executive Mark Zuckerberg will meet leaders of the European Parliament on Tuesday, although questioning is likely to focus on how the data of millions of Facebook users ended up in the hands of a political consultancy.

So far, the German Federal Cartel Office is the only competition authority to have taken action against Facebook but only on privacy grounds, saying it abuses its market dominance by gathering data on people without their proper consent.

That could change in the future, Valletti told a conference in Rome organised by the Jevons Institute and the Global Antitrust Institute.

“These are markets which ought to be analysed more rather than less because they have fundamental problems of economics,” he said. Even when markets appeared to have fair competition, often they were concentrated in the hands of a few dominant players, he said.

Valletti cited two-sided markets connecting separate user groups – which in the case of Facebook are consumers and advertisers.

“There is no way from the economist’s point of view … why we should intervene less in these markets. If anything I would expect more intervention in two-sided markets,” he said.

Valletti said fears that regulatory action could hurt Facebook were exaggerated.

Reporting by Foo Yun Chee, editing by Louise Heavens and David Stamp

GM, Tesla shares rise after China says it will cut tariffs on car parts and vehicles

Auto stocks rose Tuesday after China said it will slash tariffs on some car parts and vehicles as part of ongoing trade negotiations with the United States.

The Chinese Finance Ministry said tariffs on certain vehicles will come down to 15 percent from as much as 25 percent while levies on some parts will be brought down to 6 percent effective July 1.

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Shares of Ford, General Motors and Tesla all rose on the news, gaining about 1 percent on Tuesday.

China is a big market for these automakers. GM sold more than 4 million cars in China last year for the first time, while Tesla doubled its revenue from China to $2 billion in 2017. Ford, meanwhile, sold 1.19 million vehicles in China in 2017, a 6 percent slowdown from the previous year.

“We welcome China’s announcement to reduce auto import tariffs,” a Ford spokesperson told CNBC.

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China’s announcement comes after Treasury Secretary Steven Mnuchin told CNBC on Monday the U.S. has made “very meaningful progress” with China on trade matters, noting: “Now it’s up to both of us to make sure that we can implement it.”

Mnuchin’s comments followed remarks he made over the weekend when he said the prospect of a trade war between the U.S. and China was “on hold” as the two countries worked to smooth out trade relations.

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The remarks pushed U.S. equities higher on Monday, with the Dow Jones industrial average rallying nearly 300 points to close above 25,000 for the first time since March.

Fred Imbert

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J.C. Penney CEO Quits to Join Lowe’s

Marvin Ellison is quitting his job as chief executive of struggling J.C. Penney Co. to take over leadership of Lowe’s Cos., another retailer in need of a revamp.

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The retail veteran joined Penney in 2014 and shifted the department-store chain away from apparel toward appliances. Last year, he closed hundreds of stores and slashed jobs. But the company’s sales continue to lag behind rivals.

Lowe’s, meanwhile, has been searching for a new CEO that can improve results at the home-improvement chain, which faces pressure from an activist investor and has trailed behind sales gains at Home Depot Inc.

“This is the most challenging and competitive retail market that we’ve seen in over 50 years,” Mr. Ellison told analysts last week on a conference call. Before Penney, he previously worked at Home Depot and Target Corp.

On Tuesday, Lowe’s said it had hired Mr. Ellison and he would join the company on July 2. Penney shares slid 3.6%, while Lowe’s edged up 0.4%.

Penney said Tuesday it was launching a search for a new CEO. It created an office of the chairman consisting of the chief financial officer, the chief information officer and other executives who will manage the day-to-day responsibilities until a successor is found.

Mr. Ellison joined Penney when it was in crisis after former CEO Ron Johnson’s failed experiment to revamp the 116-year-old chain. While Mr. Ellison stabilized sales, the company remains challenged, which could make it more difficult for it to find a new CEO. It is carrying a hefty debt load and it is unprofitable. It lost $78 million in the most recent quarter, compared with $187 million a year ago.

“The turnaround program that Ellison put in place at JCP has partly delivered but is still far from complete,” said Neil Saunders, managing director of GlobalData Retail, a consulting firm. The “exit will also raise speculation that he is not particularly optimistic about the future prospects of JCP.”

Penney’s same-store sales for the three months to May 5 rose a scant 0.2%, below the company’s own expectations and less than rivals such as Macy’s Inc. and Kohl’s Corp., which both reported strong results for the period.

Write to Imani Moise at imani.moise@wsj.com and Suzanne Kapner at Suzanne.Kapner@wsj.com

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Airbus says obeying WTO subsidy verdict as sanctions loom

PARIS (Reuters) – Airbus (AIR.PA) said on Tuesday it had taken steps to comply with a World Trade Organization (WTO) ruling on subsidies for its A350 and A380 jets, which has seen the United States and Europe trade legal blows on behalf of Boeing (BA.N) and Airbus.

The move comes days after the United States won a partial victory against European Union support for Airbus at the WTO, clearing the way for possible U.S. sanctions in a 14-year-old dispute over claims of illegal handouts for planemakers.

The EU says it expects to strike a similar legal blow later this year in a parallel WTO case about U.S. support for Boeing, raising the prospect of a tit-for-tat sanctions battle.

The row threatens to exacerbate transatlantic tensions over U.S. aluminum and steel tariffs, and the impact on European firms from Washington’s decision to exit an Iran nuclear pact. But both sides agree any sanctions would not happen before 2019.

In a rare public face-off between key strategists behind the long-running dispute, Boeing’s chief external lawyer in the case told BBC radio that the United States would be free to target any European products, not just aerospace.

“The WTO will decide what the proper number is and … give the U.S. that authority,” Robert Novick, co-managing partner at U.S. law firm WilmerHale, told the BBC Today program.

“In parallel, the U.S. will develop a list of products on which it might consider imposing counter-measures,” he added.

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JC Penney shares plunge as CEO Marvin Ellison leaves for Lowe’s

Lowe’s Companies is poaching J.C. Penney Company CEO Marvin R. Ellison.

The home improvement retailer announced Tuesday it is naming Ellison president and CEO, effective July 2. Ellison will take over for Robert A. Niblock, who previously announced his intention to retire.

Ellison is chairman and CEO of J.C. Penney, which he has attempted to steer through a turnaround. Prior to J.C. Penney, Ellison worked more than 12 years at Lowe’s rival Home Depot, including serving as executive vice president of U.S. stores.

Shares of J.C. Penney were down 9 percent, while shares of Lowe’s were up 2 percent in premarket trading.

A spokesperson for J.C. Penney told CNBC that it was just informed by Ellison a couple days ago of the move, and it was not aware when it last reported earnings. It currently has four executives filling in to run day-to-day decisions. It is looking for both internal and external candidates.

The highly leveraged department store has struggled to compete within the quickly evolving retail landscape, as consumers shift their shopping online and away from the mall, where many J.C. Penney stores are located. Last year, it closed more than 100 stores.

Similarly affordable rival, Kohl’s, meanwhile, has benefited from a store footprint situated away from malls. Its also taken bets like forging alliances with Amazon and Under Armour.

J.C. Penney also has been squeezed by discounters Walmart and Target as they have improved their clothing selections. Target, meanwhile, has been focusing on building out its private label apparel brands.

Under Ellison, the J.C. Penney has taken a number of efforts to help steward a turnaround, including a focus on beauty and appliances. In March, it eliminated 230 positions and announced the departure of executive vice president of Penney’s omnichannel business, Mike Amend,

Lowe’s board also named Richard W. Dreiling, a director of Lowe’s since 2012, chairman, effective July 2.

Lauren Hirsch – CNBC

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Eight energy stocks to buy as oil prices keep climbing

Barring a recession, which doesn’t seem likely, oil prices seem intent on rising higher.

Some investors still don’t believe it. They haven’t bought into the trend yet. That makes energy stocks a contrarian play, despite the 48% gain in the SPDR S&P Oil & Gas Exploration & Production ETF XOP, +2.46% since last summer, compared with 13% for the S&P 500 Index SPX, +0.74%

Here’s a guide to energy stocks to buy. And my column Monday on the reasons why crude oil prices are headed higher.

Total (TICKER:TOT) and Royal Dutch Shell (TICKER:RDS.A)
Morgan Stanley thinks Brent crude LCON8, +0.87% will reach $90 a barrel by 2020. That would be a healthy move off recent levels of around $79. A good way to play that is to buy the majors, or the biggest of the big energy companies like Shell and Total, says Morgan Stanley analyst Martijn Rats. He thinks a move to $90 for Brent would boost their valuations by 30%.

A significant move up in oil revenue against what will most likely be flat capital spending at these companies — combined with some asset sales — will boost their free cash flow substantially. This will also help them right-size their balance sheets. Rising free cash flow and balance sheet deleveraging have historically supported higher valuations at energy giants like these. Meanwhile, you get pretty decent dividend payouts if you buy the energy giants now. On average, the majors yield 4.8%.

Rats singles out Royal Dutch Shell for its healthy pipeline of projects that will add cash flow, its strong network of retail gasoline stations, and a growing chemicals business. All of this will support improvements in balance sheet strength, which will back dividend growth and reduce worries among investors about Shell’s debt. Rats thinks the stock could advance 25% in the next year. Shell currently yields 5.2%.

Rats singles out Total because it will post the fastest production growth among the majors. He expects 5% annual production growth over the next four years on a flat capital spending budget. He also likes the high free cash flow coverage of its dividend payout. The strengthening free cash flow will support 10% annual dividend growth for the next few years and a multi-billion dollar share buyback. Total currently pays a 4.6% dividend yield.

Continental Resources (TICKER:CLR)
Investors continue to misunderstand the Continental Resources story, and this creates a buying opportunity, says Morgan Stanley analyst Drew Venker. The knock on Continental Resources is that it has excessively high costs, too much debt, and lower quality assets in the Bakken Formation at a time when everyone is hungry for Permian Basin plays.

“We disagree on each,” says Venker.

As a portion of sales, costs are among the lowest in the group. Adjusted for debt levels, production growth is among the best. And the perception of high leverage is “outdated” since Continental’s net debt to cash flow is only slightly higher than at the favored oil companies operating in the Permian. “Continental is one of few stocks within our diversified large-cap coverage that offers investors exposure to low-cost oil outside of the Permian,” says Stifel analyst Derrick Whitfield.

Comstock Resources (TICKER:CRK)
This little Texas-based natural gas company has been battling bankruptcy worries for the past year. Hence the wicked volatility of its stock. But all that changed in May when Dallas Cowboys owner and oil magnate Jerry Jones struck a deal with management. In the deal, Comstock will swap a huge amount of newly issued stock for oil and gas assets owned by Jones. He’s putting in North Dakota oil and gas properties valued at $620 million. Jones will own 84% of the company, assuming shareholders sign off, which is likely. Cash flow from those properties will help Comstock pay off debt maturing near term, and quell bankruptcy worries, for starters. Medium term, the Jones property cash flow should fund healthy production growth.

Comstock owns decent natural gas properties in the Haynesville Shale, and it has been posting solid production growth even without help from Jones — 55% in the first quarter. Cash from Jones properties’ oil production will support much more Haynesville drilling for natural gas. This will create 30% natural gas production growth in 2018 and 50% growth in 2019, Comstock predicts.

“That’s why Jerry invested. He wants to see all this happen,” says Comstock CFO Roland Burns. “His properties are generating a lot of cash. He is marrying his assets with assets that have a tremendous amount of investment opportunity. We can really ramp up activity without raising debt because we have all this internal cash flow that needs to be reinvested.”

All of this suggests the stock could rise. “The new Comstock Resources is one of the biggest transformations we’ve seen in exploration-and-production land,” Coker Palmer analyst David Beard wrote in a recent research note. “Most, if not all, of the balance sheet issues should be resolved.”

He puts a fair value of $13 on the stock, which recently traded at $10.60. His fair value assumes the stock trades in line with peers in terms of enterprise value to cash flow. (Enterprise value is market value plus net debt.) Beard thinks the stock has upside potential to $25. “We feel the shares have more upside from here and are buyers on weakness.”

Four energy-services companies
Last summer, most energy stocks were a contrarian play. The crowd is not fully on board yet. They still aren’t, but now you have to drill down a bit more in the sector to find the really out-of-favor names. Heartland Advisors money manager Colin McWey thinks he’s found one in TechnipFMC FTI, -0.44% a company that helps develop and produce offshore energy fields.

Offshore assets can be more expensive to develop, and it takes a long time. So these projects got shelved when oil prices tanked. Now that oil has come back, offshore projects probably will, too. And that should help TechnipFMC .

The bullish twist for investors is that TechnipFMC offers a wide range of services and equipment. This saves customers from having to assemble customized production tools from several different suppliers. “Historically, energy producers were cobbling together different solutions from different vendors in a way that was clunky,” says McWey. “TechnipFMC has a completely integrated model.”

Back onshore and in the U.S., rising prices for West Texas Intermediate CLM8, +0.21% creates more cash flow for energy companies. So they are increasing production. This will continue to be good news for companies offering production services and equipment, says Mike Breard, an energy analyst at Hodges Capital Management.

Three he favors are: Helmerich & Payne HP, +0.86% which supplies rigs; Propetro Holding PUMP, -1.90% which offers production equipment and services; and Solaris Oilfield Infrastructure SOI, -2.70% which supplies specialized gear like silos to help manage the delivery of sand used in fracking.

Michael Brush

The stock market’s ‘broken leg’ is nearly healed, analyst says

Is the U.S. stock market, after a few months of hobbling, about to resume its run upward?

If 2017 was a year of no volatility or pullbacks, then 2018 so far has been a year of standing still. While Wall Street has seen volatility return this year, with more than three times as many 1% moves as were seen over all of last year, the result of all that sturm und drang has basically been a wash. The Dow Jones Industrial Average DJIA, +1.21% and the S&P 500 SPX, +0.74% are only slightly higher on the year.

The range-bound trading environment followed a sharp pullback for the Dow and S&P 500 that they have yet to recover from. In early February, both swiftly tumbled more than 10%, putting them into correction territory, where they have remained.

The Wells Fargo Investment Institute compared that correction to a broken leg, in the sense that such injuries take time to heal. The range that indexes have been stuck in for months, it suggested, was similar to a cast being placed over a broken bone.

“This phase typically can’t be hurried; it can take anywhere from months to years as the leg (or in this case, the market) heals,” wrote Sameer Samana, a global equity and technical strategist at the firm. “In this phase, it is important not to overreact to every market move higher and lower, and it is more valuable to confirm that buyers continue to engage at important support levels.”

Recent trading has suggested this is the case, Samana wrote. He noted that multiple times thus far this year, the S&P 500 has touched or breached its 200-day moving average, a closely watched level used as a proxy for a security’s long-term momentum trends. However, of all those times, the benchmark index only closed below that level once. Every other time it rebounded above it, which suggested the level was a support line that was unlikely to be decisively broken absent a sudden and dramatic change in the economic environment.

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As the market “heals,” Samana wrote, it should be able to break out of the “cast,” or move decisively in one way or the other. While this could mean a decisive turn lower, the analyst suggested a move higher was more likely in the current environment.

“With respect to future market direction, we believe that the technical breakout often turns to a resumption of the trend that was in place before the correction,” he wrote. “That is why we expect U.S. markets to break higher. As that occurs, we also expect investors to feel a sense of ‘missing out’ on the market’s gains. They should come back into equity markets with additional assets, if history is any guide.”

Ryan Vlastelica