Monday 22/07/19

  1. In MACRO NEWS, expectations of both the Fed and ECB cutting interest rates increase
  2. In RETAIL & RESTAURANT NEWS, US retail gets squeezed by rents and online while restaurants are having to offer more to attract staff and “Mr” Ted Baker mulls taking the company private
  3. In FUTURE TRENDS NEWS, internet advertising growth looks like slowing and graphene ain’t all it’s cracked up to be
  4. In INDIVIDUAL COMPANY NEWS, Johnson & Johnson faces a major test from today on talc litigation
  5. In OTHER NEWS, I bring you a pizza wedding…



So expectations of interest rate cuts build both in the US and Europe…

Federal Reserve sets sights on quarter-point rate cut (Financial Times, James Politi) shows that recent public appearances by Fed officials indicate that a 0.25% cut in the interest rates looks increasingly likely. If this happened, it would be the first cut in almost ten years. They are thinking of doing this to simultaneously stimulate the economy and avoid a potential slowdown (the latter of which may occur as a result of the US-China trade war, amongst other things). * SO WHAT? * Some Fed policymakers have been urging a more dramatic 0.5% cut, but I don’t think that the market is pricing this in at the moment. Central banks tend to favour more gradual moves unless something really drastic happens – they usually don’t like to play all their cards all at once.

ECB ponders rate cut to spur on eurozone (Daily Telegraph, Tom Rees) heralds an action that markets seem to be expecting will take place this Thursday – that the ECB

could cut interest rates to stimulate a sluggish European economy. You read that correctly – yes, the interest rate in the Eurozone at the moment is ZERO, but the market is thinking that ECB could cut the rate to -0.5% (or at the very least drop a very heavy hint that this is the way things are going). Germany has been having car (and leadership!) troubles and Italy has had a brush with recession as manufacturing activity and trading have slowed down due to the whole Trump tariff/ongoing US-China trade shenanigans, so a certain amount of economic stimulation is needed. * SO WHAT? * I think that Europe has kept its interest rate artificially low for quite some time, meaning that it has no more powder to keep dry (unlike, say, the US). Going to negative rates is pretty drastic on a regional basis – and although it will surely increase lending, I think that there’s a real risk of this resulting in an increase in bad debt. If trade conditions worsen, this could become a nightmare death spiral as indebted industries go bust in increasing numbers. On the other hand, if Trump and Xi reach some kind of agreement to sort out their differences sooner rather than later we could well start to see things turning around quite quickly – which would be handy for Trump as he will be seeking a second term next year.



US retail suffers high rents and online competition (sound familiar??), restaurants have to offer more to attract staff and Ted Baker might go private…

US retailers quicken exit from malls as online shopping bites (Financial Times, Alistair Gray) shows that it’s not just UK retailers who are suffering from being squeezed from online competitors and greedy landlords as the latest figures suggest that retailers have exited US malls at the fastest pace in almost a decade. Over 74,000 shops have been closed this year alone, with Sears, Victoria’s Secret and Charlotte Russe being among those to abandon – and JC Penney could be going the same way as investors took fright at its nigh-on $4bn debt pile on Friday, sending its shares down by 17%. It’s not been bad across the board, however, as some chains have been supported by increased consumer spending (on higher wages caused by a tight labour market) – and some landlords are getting creative with filling vacant spaces with other tenants including hotels and storage companies. * SO WHAT? * The landscape is clearly changing, but one of the more worrying aspects of these figures is that a two-tier performance track is emerging as A++ grade malls are continuing to see average occupancy rates of 97% while D grade centres are seeing occupancy rates of around 67%, according to Green Street Advisors. It just goes to show that retail is changing EVERYWHERE.

Following on from this, With so many vacant stores, e-commerce is only part of the problem (Wall Street Journal, Suzanne Kapner and Esther Fung) looks at how retailers’ problems are being made worse by landlords continuing to demand high rents. For instance, Barneys New York has just called in the advisers and is mulling over several options, including filing for bankruptcy, as it seeks to renegotiate the lease on its flagship Madison Avenue store and other locations after the landlord asked for a rent hike from $16.2m to $27.9m earlier this year. Commercial rents in San Francisco are up by 53% from a decade ago and in Miami, the uptick has been 46% meaning that some chains would end up paying away over 30% of their sales in rent! * SO WHAT? * Basically, tenants argue that rents are too high

while landlords say they can’t reduce rents because it would violate their loan agreements and lower the valuation of their properties making it harder for them to borrow in future. Many landlords are opting to sit it out and wait for a rebound in the market, but if retailers are opting for fewer outlets due to changes in customer behaviour landlords will die a drawn-out death. I think that the spaces have to be repurposed – but if the rents are high, the case for having physical prescence in a mall (especially if you’re not a retailer) is not going to be that compelling. If that’s the case, then rents would have to come down – which is the problem that retailers are having in the first place!!! Surely lower rents with shorter contracts is the best way forward for everyone, no?

As I mentioned earlier, given the currently tight US labour market, Restaurants sweeten pay and perks to find scarce workers (Wall Street Journal, Heather Haddon) shows how workers are benefitting as employers are having to offer more money and other attractions to retain and attract employees. Many places have upped their wages but McDonalds, for instance, is using the $150m windfall it got last year from Trump’s tax code change to offer more college scholarships for employees and their families. Chipotle started offering performance bonuses last month of a week’s wages for those who help them to hit targets. * SO WHAT? * This is obviously great news for employees and it’s something that restaurants will have to do for now. However, these perks will be the first things to go in the even of a downturn – so let’s hope that employees get the benefits while they can.

Former boss ready to dress Ted Baker for private party (The Times, Gurpreet Narwan) contends that the founder of Ted Baker, Ray Kelvin, is thinking about plans to take the company private. The founder of the FTSE 250 company, who owns over a third of the shares, agreed to step down as CEO in March after allegations of inappropriate workplace behaviour from his staff. However, it is generally thought that Ray Kelvin IS Ted Baker and that he needs to make a return to get the company back on track. Given the current allegations hanging over him, this would be nigh on impossible for a quoted company – but it MIGHT be possible if the company was taken private with the right backers. At the moment, this is all speculation, but it does sound quite juicy!



Internet advertising growth may be pausing for breath and graphene promises look like pipe dreams…

Internet advertising to grow at slowest rate since 2001 dotcom bust (The Guardian, Mark Sweney) cites some research by global media agency group Zenith which suggests that the internet could lose its crown for being the fastest growing sector of the advertising market for the first time in 20 years as brands opt to move away from riskier space towards the traditional areas of cinema, billboards and posters. According to this research, internet advertising is set to grow by 10% worldwide next year – its lowest level since 2001 – meaning that cinema advertising will leapfrog it with a projected 12% growth rate as it takes advantage of more people heading to the multiplexes. Interestingly, the report shows that smaller local businesses prefer to spend heavily, if not exclusively, on platforms such as Google and Facebook, while bigger brands prefer to spend most of their advertising budgets on traditional media. * SO WHAT? * Let’s not get too carried away here – internet advertising will still account for half of the $650bn global advertising market. Although I can see that brands are conscious of being tarnished with scandals involving the likes of Facebook and Google, I still think that online advertising effectiveness is far more measurable

than traditional advertising and is therefore more efficient in terms of judging bang for buck (as long as the data is correct). I’m sticking my neck out here, but I think that if there is any dip in online advertising I think it’ll be short-lived. If Facebook and Google manage a good PR campaign to get in everyone’s good books again, I think they will start to motor once more.

Graphene is less wonderful as an investment material (Financial Times, Kate Burgess) is a really interesting article on where we are currently with the much-hyped super-material discovered in 2004 by some Manchester University scientists that is billed as being ultra-thin, ultra-flexible, ultra-strong and superconductive. The problem is that it is incredibly expensive (it can cost up to £125,000 per kg) meaning that manufacturers would rather use cheaper and well-known materials that graphene – no matter how amazing it is. London-quoted Versarien said last week that “revenues of any material amount have yet to be achieved” but still harbours hopes of producing 30 tonnes of the stuff over a year when it become commercially viable. * SO WHAT? * Graphene really is a super-material and new uses for it are being found all the time. However, it’s still not being produced in enough quantity at a price that makes it commercially viable and so after much hype, companies such as Haydale Graphene, Applied Graphene Materials and Directa Plus have continued to struggle. Let’s hope that they can hang on long enough to benefit from this amazing material.



Johnson & Johnson faces an important test today…

Johnson & Johnson faces key test in defence against talk-safety lawsuits (Wall Street Journal, Peter Loftus and Sara Randazzo) heralds the commencement of pre-trial proceedings in Trenton, New Jersey, of talcum powder-related lawsuits. Complainants allege that J&J’s baby

powder and other talc products cause cancer – but J&J says that it doesn’t. It is facing 14,200 claims and was last year ordered by a St Louis jury to pay $4.69bn to 22 women and families who blamed ovarian cancer diagnoses on baby powder. * SO WHAT? * If the judge decides there is a sound scientific base for the claims, it will trigger 12,000 current federal court cases (and probably kick-start many more). If that happens, things could get extremely bad for J&J (although they are already bad for the complainants).



And finally, in other news…

Given that we are at the start of the wedding season, I thought it would be appropriate to mention this as an option to pizza fans: Chicago Town creates bridal package with six-tier pizza cake and pepperoni dress (The Mirror, Courtney Pochin Couples wanting a pizza the action 😜 need to be getting married in the UK on or before December 21st, with the honeymoon to be taken before the end of 2020. Yum.

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