Friday 14/09/18

  1. In MACROECONOMIC NEWS, Turkey hikes the interest rate at last and UK manufacturing growth is on a winning streak
  2. In RETAIL-RELATED NEWS, Sears’ sluggishness continues, John Lewis’ profits are down 99% but Morrisons unveils its best sales in years
  3. In INDIVIDUAL COMPANY NEWS, we see more discussion on Apple’s path ahead, Netflix’s foray into film and another senior executive departure for Tesla
  4. In OTHER NEWS, I bring you some EXCITING facts about Slough. Yes, you read that correctly – I said SLOUGH. And the word “exciting”. All in the same sentence. For more details, read on…

1

MACROECONOMIC NEWS

So Turkey hikes at last and UK manufacturing reports some good news…

Turkey lifts bank rate again in battle with inflation (The Guardian, Phillip Inman) shows that the central bank finally caved to intensifying international pressure and surprised investors by raising the main short-term interest rate from 17.5% to 24% in an attempt to calm skyrocketing inflation (it’s now at a 15-year high of almost 18%) and avert a deepening of the currency crisis. The Lira has still fallen by 39% versus the dollar since the start of the year – despite yesterday’s 3% rise on the interest rate news – but Erdogan’s influence has been such that the central bank has been very reluctant to do what everyone else knew it should. In the end, he reiterated his opposition to raising rates, describing them as an “instrument for exploitation” and blamed the currency crisis on a foreign conspiracy. * SO WHAT? * Investors were probably surprised by the size of the hike and Erdogan will win out whatever happens now. If the interest rate hike works, he can just let his central bank get on with it and move on to other foreign conspiracy theories and if it doesn’t, he can say that he was right all along. Let’s hope for Turkey’s sake that the rate hike does its job. The problem is that the central bank 

has left it so long to act that it has revealed all sorts of other weaknesses as a result.

There’s some news to cheer about in Manufacturing enjoys longest period of jobs growth for 40 years (Financial Times, Gavin Jackson) which cites the latest figures from the Office for National Statistics which show that the UK’s manufacturing sector has seen its longest period of sustained employment growth in 40 years as companies re-shore factory jobs that went abroad. On the downside, some economists warn that this upward trend in employment is exacerbating the UK’s sluggish productivity problem as jobs are favoured over increasing capacity in the form of machinery and other equipment. * SO WHAT? * Nice to know, but surely this streak will come to a juddering halt as we enter the uncertainty of Brexit. I actually think that these niggles about investing in people over machinery is misguided as, terrible though it sounds, it’ll be easier to sack people rather than rip out or resell new machinery if things go badly next year. If I was a manufacturer, I would be holding off from buying any shiny new kit until I knew more about Brexit impact and let the economists tear their hair out over productivity. I’d be protected either way – if Brexit goes badly, I can sack workers and have a ready-made excuse for doing so with limited blow-back. If, on the other hand, it goes well then I can go out, buy the new kit and probably employ more people into the bargain!

2

RETAIL-RELATED NEWS

In retailer-related news, Sears’ weakness continues, John Lewis announces a massive fall in profits and Morrisons enjoys its best sales figures in years…

Sears reports widening losses and tumbling sales (Wall Street Journal, Suzanne Kapner) highlights tricky times for the American department store retailer as it announced quarterly sales down by 26% as it continues to cut store numbers. Sears has closed 384 stores since last year and now 866 remain, but it has found it tough to attract shoppers. * SO WHAT? * The company needs to do something other than closing unprofitable stores as other retailers are seeing the benefits of rising wages and a stronger US economy – and Sears badly needs to get a piece of the action. For instance, Walmart and Target last month reported some of their best sales numbers in a decade. One of the main drags that Sears has had to contend with, however, is its $4.5bn in pension obligations since 2005. If it doesn’t do something drastic quickly about both its overall offering and its pension liabilities, there’s a big danger that it could slide into oblivion.

Talking of poor performances, John Lewis bitten by price pledge as profits drop 99pc (Daily Telegraph, Ben Woods and Jack Torrance) shows that the company’s long-held “never knowingly undersold” slogan has bitten the company in the &rse as it managed contributed a £40m blow to profits as price-matching has reached an “unprecedented level”. John Lewis’ chairman, Sir Charlie Mayfield, defended the 100-year old pledge by saying that “It is the most comprehensive price promise in the market and no one else has anything quite like it. If you think about the huge value that comes from the trust that customers have as a consequence of it, it is extremely valuable”. Department stores fell into loss, but Waitrose supermarkets showed a small like-for-like increase in sales. * SO WHAT? * I think that slogan is out-dated and also inaccurate considering that it doesn’t include the likes of Amazon and AO.com. I also wonder whether they are inadvertently attracting the wrong types of customers with this kind of promise these days – is someone who haggles about £20 off a washing machine the sort of customer that will spend loads at your shop?

I would suggest that if they are so worried about being “never knowingly undersold” they need to look at their pricing strategy as a whole. I think that consumers like the whole quality proposition that John Lewis has and should be prepared to pay a premium for things like better delivery, better warranties and an overall more pleasant in-store experience. Get real, John Lewis – ditch the promise and concentrate on improving your offering because everyone around you can move faster.

It’s not all bad in retail – Morrisons reports best sales figures in years (The Times, Deirdre Hipwell) heralds some rare good news amongst supermarkets as Wm Morrison announced its strongest quarterly growth figures in nine years. David Potts – the ex-Tesco man brought in to do a turnaround job  at the company – can take a lot of credit for this as, under his stewardship, he’s managed to shore up the balance sheet and improve the overall shopping experience via refits and investments in service improvement as well as broadening its product range and efficiency. He’s also managed to help the company keep up with the times by enhancing its online offering through its partnership with Ocado and distribution agreement with Amazon amongst other things. The shares have risen by 16% so far this year. * SO WHAT? * A solid performance in a very difficult environment. To be honest, though, I think that Morrisons still has more to do. As far as I can see, the main difference between themselves and the likes of Tesco, Sainsbury’s and Asda is their online strategy – which has worked very well. Other than that I fail to see a real identity coming through, and I think that this is going to be increasingly important as supermarkets risk becoming much of a muchness. It’s all a bit like what I’ve been saying about department stores – Morrisons needs to concentrate on the customer experience to differentiate itself from its online and offline competitors to achieve longer term survival. At the end of the day, you don’t need to position yourself as a premium offering to give customers that special feeling – anyone who goes into an Aldi or Lidl loves that feeling of bagging a “limited stock” seasonal bargain in the centre aisle, don’t they? For instance, I bought a £16 rucksack the other day (excellent quality – I’ve had loads of “proper” rucksacks in my time!) from Lidl. I felt like I’d bagged a bargain, but from Lidl’s point of view I just spent £16 that I wouldn’t have spent otherwise. If Morrisons can capture that feeling and supply it to their customers, that will give them something the other UK incumbents just don’t have currently.

3

INDIVIDUAL COMPANY NEWS

In individual company news, there’s a lot of chat about Apple post its product reveal, Netflix moves into film and Tesla’s woes continue…

There’s continued chat about Apple after it revealed those new phones and a bigger watch. It all seems to centre around whether punters are going to be willing to part with a ton of cash for a phone – Replacement battery cost rise may drive upgrades (Daily Telegraph, Matthew Field) suggests one way. This article highlights Apple’s move to increase the cost of replacing a battery from £25 to £65 – not that far shy of the £79 it used to charge until it was forced into cutting the price considerably when it had to admit that it was “strangling” the capabilities of older phones to make users upgrade to newer ones. As far as the Watch is concerned, Apple: Watch and learn (Financial Times, Lex) says that its impact is still insignificant versus the iPhones despite its increasing popularity and that the bigger problem that Apple has to face in the near term is the impact of Donald Trump’s trade war with China/the world. If, incidentally, you are interested in seeing a review on the new Watch, have a look at Apple Watch series 4 first look: a medical wearable in pretty disguise (Wall Street Journal, David Pierce).

Elsewhere, Netflix sets its sights on the silver screen

(Financial Times, Anna Nicolaou) shows that Netflix, having become a major player in TV, is now concentrating efforts on doing the same in movies. It just brought eight films to the Toronto International Film Festival, including a critically-acclaimed film called Roma (directed by Gravity’s Alfonso Cuaron) and opened the festival with another film called Outlaw King, the first time a streaming service has ever been given such a high profile slot. * SO WHAT? * I think this is interesting because we might be seeing the beginning of a huge sea-change in the film industry as Netflix goes against traditional wisdom and releases its films at the same time as they go onto the cinemas. This could be a huge game changer and has so far been met with fierce resistance from the established players. Some smaller film-makers believe that Netflix and Amazon are able to fund movies turned away by others because there is less focus on ticket sales. It’s early days yet, but a situation worth monitoring!

The bad news continues for Elon Musk in Bumpy ride for Tesla as it loses second top executive in days (Daily Telegraph, Margi Murphy) as the company’s vice-president of worldwide finance and operation, Justin McAnear, resigned after three years in the role to become the CFO of another company. This follows closely after the recent departures of its chief of HR, communications director and senior vice-president of software engineering and doesn’t paint the company in a good light following allegations of a toxic working atmosphere. Not great.

4

OTHER NEWS

…And finally, in other news…

The Berkshire town of Slough often gets a bad rap, so I thought I’d redress the balance by bringing your attention to this: From Mars Bars to Thunderbirds: Eight things Slough gave the world (BBC online, Adam Whitty https://tinyurl.com/yct7xdkq). Who knew??

As always, thank you for reading Watson’s Daily!

Some of today’s market, commodity & currency moves (as at 0805hrs green is up, red is down). THIS IS INTENDED AS A ROUGH GUIDE ONLY!

FTSE 100 *Dow Jones *S&P 500 *Nasdaq *DAX *CAC-40 *Nikkei **Shanghai
7,282 (-0.43%)26,146 (+0.57%)2,904 (+0.53%)8,014 (+0.75%)12,056(+0.19%)5,328 (-0.08%)23,095 (+1.20%)2,681 (-0.19%)
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿
$69.0108$78.24581,207.321.310781.17012111.921.12026,563.81

(markets with an * are at yesterday’s close, ** are at today’s close)