Monday 03/09/18

1. In MACROECONOMIC NEWS, Turkey faces more turmoil and Europe faces a major changing of the guard
2. In CAR-RELATED NEWS, Ford looks at ditching Mondeo and Tesla’s Musk continues to make life difficult for himself
3. In INDIVIDUAL COMPANY NEWS, Coke’s sip of Costa could be the first of many deals, Chinese bike-sharer Ofo gets sued and investors guess who might be next to exit the UK high street
4. In OTHER NEWS, I bring you an officially-approved way of nodding off and an amazing example of what Minecraft can do. For more details, read on…

So Turkey faces more drama, as does Europe with upcoming elections of senior bods…

Turkey braced for further turmoil amid signs of corporate distress (Financial Times, Laura Pitel) suggests that Turkish stock markets are going to be in for more trading tumult as cracks continue to develop in corporates which are creaking under the increasing strain of runaway inflation, causing cashflow problems and debt payment delays. The central bank is continuing to resist calls to increase interest rates to calm the situation (because President Erdogan is firmly against this – and he rules with an iron grip) and the release of annual inflation data is imminent. Jason Tuvey, senior emerging markets economist at Capital Economics, believes this release “will provide the first hard evidence of the impact of the lira’s collapse this month on the wider economy”. * SO WHAT? * Turkey’s currency has already fallen by 40% so far this year versus the dollar and many of the country’s companies have a lot of dollar-denominated debt. If the situation doesn’t improve soon, bad debts will go through the roof and Turkey’s banking system will start to look extremely shaky – and there are doubts that the banks themselves will have the ability to refinance. So far, only Qatar has offered concrete help in the form of a $15bn investment package, but they are the only ones who’ve stepped up. Turkey’s new finance minister, Berat Albayrak, continues to reiterate that Turkey has no plans to ask the IMF for a bailout.

Europe fires the starting gun in race for top jobs (Financial Times, Alex Barker, Jim Brunsden and Guy Chazan) highlights imminent changes for a lot of senior roles in the EU, which could have a sizeable impact on the European landscape. In 2019, there will be new presidents appointed for the EU’s four most important institutions – the European Commission, the European Council, the European Central Bank and the European Parliament. There will also be a whole host of other senior positions up for grabs in addition to these, such as the EU’s foreign policy chief, Nato’s secretary-general and various European Commission posts. Fredrik Reinfeldt, a former Swedish premier, observed that we are in a crucial period what with “Trump as president of the US, Brexit in the UK, Italy going from being one of the most pro-EU countries to one of the most anti, and nationalist sentiment raging in eastern Europe”. * SO WHAT? * As you can imagine, there’s a lot of jockeying for position as candidates position themselves for some juicy roles. However, as far as I can see it, this is a process that will take quite some time and comes at a crucial point in Europe’s history. I would have thought that British Brexit negotiators will want to string out talks to overlap with this period of European uncertainty in the hope of a better deal and that, on the other side, European negotiators will want to get them done and dusted before that in order to nail down the pesky Brits. We’ll just have to wait and see!

In car-related news, there are rumours of Ford abandoning the Mondeo (and even Europe) and Elon Musk just can’t help making things harder for himself…

Ford ‘to ditch Mondeo range and scrap thousands of jobs’ (Daily Telegraph, Lucy Burton) is a pretty dramatic headline for a story which highlights the mounting speculation that Ford is looking at slashing costs by ditching its Mondeo range and up to 24,000 workers as major cuts to its European operations – especially in Spain and Germany – are being considered. There are also rumours that the company will ditch the Galaxy and S-Max in favour of higher-margin SUVs and cut the number of dealerships. Another more dramatic theory is that it could move some or all of its European operations into a joint venture with a rival such as VW. * SO WHAT? * The company announced a few months ago that it was targeting $25.5bn in cost savings between 2019 and 2022 and these latest rumours would appear to be part of that. Ford has had a difficult year what with higher aluminium and steel prices, plunging demand for diesels and the increasing spectre of Brexit hanging over its most profitable market. I suspect that other car manufacturers will be watching Ford’s moves with great interest.

Musk dives into troubled waters with Tesla (The Times, Simon Duke) speculates at Elon Musk’s state of mind as

his recent Twitter outbursts (wrongly accusing British cave-diver Vernon Unsworth of being a “paedo guy” in July and then the following month saying that he was going to take Tesla private) have now been followed up with him going back to the subject of Unsworth and saying “You don’t think it’s strange he hasn’t sued me?” in his latest Twitter rant. He said in a recent interview with The New York Times that he was worn out following 120-hour weeks and it’s also been said that he hasn’t had a full week off since 2001. Concerns over his mental health well-being have led Tesla’s board to accelerate its plans to hire a second-in-command to work with Musk. Elon Musk faces his own worst enemy (Wall Street Journal, Tim Higgins, Tripp Mickle and Rolfe Winkler) notes that although his single-mindedness has helped him to great triumphs, it could equally be his biggest downfall. It also gives you a very interesting summary of how he’s got to where he is and his motivations – so if you need a refresher, have a read!  * SO WHAT? * Musk has just brought a whole heap of trouble to his own doorstep with some rather ill-advised Tweets and is currently under investigation by the US Securities and Futures Commission for his recent assertion that he had the finance in place to take Tesla private. If he is found to have been lying about this, he could be barred from serving as a company director – not great timing as he’s also fighting an investor lawsuit, working overtime to hit (self-imposed) production targets and burning through cash like there’s no tomorrow – Tesla went through $739m in the second quarter alone and now has $2bn of debts. Musk is sailing extremely close to the wind and if he gets ousted for some reason, Tesla will be in a whole world of trouble because as far as most people are concerned, he IS the company.

In individual company news, the Coke/Costa deal could stimulate more activity, Ofo gets a dose of reality and investors look at who could be next for the chop on the UK high street…

Coke’s Costa deal is a taste of things to come (Financial Times, Alistair Gray and James Fontanella-Khan) suggests that Coke’s £3.9bn deal to buy Costa Coffee could signal a growing willingness by food and drinks companies to makes changes to their existing business models to adapt to evolving consumer tastes for healthier and fresher products. Although £3.9bn is small beer versus Coke’s $191bn market cap, some observers believe that this is one of the most important strategic moves the beverage maker has ever made. Coke’s chief exec James Quincey says that the new combo provides “opportunity for great value creation, through the combination of Costa’s capabilities and Coca-Cola’s marketing expertise and global reach” as well as assistance in repositioning itself as a “total beverage company”. * SO WHAT? * There is a feeling that Coke has missed the boat regarding the coffee boom of recent years and has fallen behind the likes of Nestle and JAB, so this latest move suggests a major step in the right direction. Also, the fact that this acquisition is so small in comparison to Coke’s overall size means that it is a low-risk foray into a business (bricks-and-mortar retail) where it has a lot to learn. As one US-based adviser put it “If a large company does a smallish deal that doesn’t go well, it’s not the end of the world. But if they get it right, and it generates huge returns, they become geniuses”. This latest deal, though, will no doubt stoke the collective appetite of large consumer groups for companies such as Illy or Lavazza in Europe or Dunkin Brands in the US.

Chinese bike-share group Ofo sued for alleged $10m in unpaid bills (Financial Times, Gabriel Wildau) shows how the mighty fall as the once-funky start-up backed by deep-pocketed Alibaba is facing the ignominy of being taken to court by the venerable Shanghai Phoenix Bicycles for $10m in unpaid bills. This follows recent threats made by a smart-lock producer that it would freeze locks on Ofo bikes if it didn’t receive payment. * SO WHAT? * Bike-sharing has been a super-hot space for a while now and companies in this area have had to sink a LOT of money into it to get the necessary scale as the market has become more cutthroat. Meituan Dianping-owned Mobike has invested a ton in its fleets and is taking market share by selling rides below cost, for instance. All of this scramble for scale has led to an overcapacity in bikes, leading to a sharp drop for producers after the excitement of the last few years and now Shanghai Phoenix is calling it in. One possible escape route for Ofo is the possibility of being bought out by ride-hailing app Didi Chuxing, which has been in talks to acquire the company.

Markets ask who will go next on the UK high street (Financial Times, Jonathan Eley) takes a look at who might be next for the chop on the perilous UK high street as pound shops, fashion and homeware retailers and department stores all look likely contenders. Shares in UK food retailers have risen by 30% so far this year, but those of general retailers have gone down by about 10%. * SO WHAT? * Part of this parlous state for the general retailers could be something to do with the amount of debt they have. While food retailers have been reducing theirs, generals haven’t – making them far more vulnerable to a downturn. Stores that look particularly vulnerable at the moment include the likes of Debenhams, McColl’s, DFS and privately-owned holding companies for Goldsmiths and Oasis. Another problem they face is a weaker pound which has pushed up prices of imports. Retailers are certainly having a tricky time of it at the moment and Zelf Hussain, a partner at PwC, warned that investors should keep a close eye on retailers that have high debt levels and big store estates, particularly in fashion which can be very hit-and-miss re getting the product right.

…And finally, in other news…

Do you find it hard to nod off? Well maybe you should try this: Army’s sleeping technique that will get you to sleep in 120 seconds (Metro, Zoe Drewett https://tinyurl.com/ydx44j8r).

AND FINALLY, I thought I’d leave something amazing for those of you who like a bit of Minecraft: Japanese players spent more than four years building this modern Japanese city in Minecraft (SoraNews24, Koh Ruide https://tinyurl.com/yb97zo6w). I don’t play it myself, but even I can see how amazing this is!

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