Monday 29/06/20

  1. In MACROECONOMIC & OIL NEWS, UK inflation may be higher than originally thought and shale producer Chesapeake Energy files for bankruptcy
  2. In FINANCIALS NEWS, Wirecard continues to have repercussions and Lloyds Bank searches for new areas
  3. In RETAIL-RELATED NEWS, Intu falls into administration, M&S and Next eye up Victoria’s Secret, retailers brace themselves for returns and bike sales rocket up
  4. In INDIVIDUAL COMPANY NEWS, Facebook faces more flak
  5. AND FINALLY, I bring you a classic moment…



So UK inflation could actually be higher and Chesapeake Energy falls…

Prices are rising faster than official figures suggest (Financial Times, Chris Giles) cites research from the National Institute of Economic and Social Research (NIESR) which claims that price measures used by the Office for National Statistics (ONS) are low-balling the real inflation rate. It says that the ONS puts too much weight on goods and services that were simply unavailable during the outbreak. 16% of the normal “basket” includes things like haircuts and restaurant meals. The Bank of England’s CPI rate fell to 0.5% in May. * SO WHAT? * I don’t think it takes a genius to come to this conclusion. The fact is, NO figures are going to be accurate during this crisis because everyone’s just doing the best they can having never experienced anything like this before. I think it’s ridiculous to start chopping and changing the contents of the basket all the time because, as far as I can see, the whole point of having it is that you can make reasonable like-for-like comparisons over time. By all means change a few items

here and there to reflect the real world on an ongoing basis, but changing them for a few months sounds a bit silly to me. If you change the basket, when are you going to change it back again? I think it’s better for people to take the next few months’ readings with a massive pinch of salt but keep everything the same.

In Fracking trailblazer Chesapeake Energy files for bankruptcy (Wall Street Journal, Rebecca Elliott) we see that a pioneer in US shale production joined some of its rivals when it filed for bankruptcy protection yesterday. The company was once America’s second-largest gas producer, but in its race for growth it accumulated huge debts which meant it was particularly exposed when oil prices took a huge dive. * SO WHAT? * It is interesting to note that with an oil price of around $35 a barrel, consultants at Deloitte reckon that about 30% of large public US shale producers are insolvent (i.e. their net liabilities are greater than their discounted future value). It ain’t pretty at the moment, but I suspect that there will be consolidation going on in the industry driven by companies that have strong balance sheets being able to cherry-pick companies and/or assets at bargain prices over the coming months. Oil prices do seem to be stabilising at the moment around the $40 a barrel mark, so I guess things could be worse.



Wirecard repercussions continue and Lloyds Bank thinks about its business mix…

Following on from Wirecard filing for insolvency last week, Germany to overhaul accounting regulation after Wirecard collapse (Financial Times, Olaf Storbeck and Guy Chazan) shows that the government is stepping in to tighten oversight of accountancy firms. It’s all kicking off now! EY accused of failing to act on Wirecard worries (The Times, James Hurley) shows that although EY had concerns about Wirecard as far back as 2016, it just signed off on the accounts anyway! When you consider that EY were also the auditors of NMC Health and Thomas Cook, you can see that their reputation is going to be taking a battering – and so it should. Interestingly, over 1,000 Wirecard shareholders are now joining together in a legal action in Germany regarding £910m for its audit “work”. It really does sound like the 💩 is going to hit the fan. To make things worse, Wirecard UK ordered to freeze customer funds by finance regulator (The Guardian, Mark Sweney) shows that the UK’s Financial Conduct Authority (FCA) has

now ordered Wirecard’s UK arm “to cease all regulated activity and freeze all its assets and funds”. The disaster continues…

Lloyds’ to push further into wealth management and insurance (Financial Times, Nicholas Megaw and Stephen Morris) shows that the UK’s biggest high street bank is considering a broadening of its offering in order to reduce reliance on interest-rate dependent business. There have been internal concerns that its business is too exposed to consumer banking in one country and when you consider that each 0.25% cut in interest rates slices £150m from Lloyds’ annual net interest income, you can see that it needs to look elsewhere to make some proper money. As a result, it is going to try to deepen its efforts in wealth management and insurance. * SO WHAT? * It’s about time!!! UK interest rates were hardly stellar before, but given that they are now at a historical lows it makes sense to make more effort elsewhere in the business. It’ll no doubt take a while to see any benefits coming through but I would have thought that wealth management and insurance are very hot areas right now. The problem is, I would imagine that they won’t be the only ones to consider expansion so I would expect them to come up against quite a lot of competition for talent. 



Intu gives up, M&S and Next vie for Victoria’s Secret, apparel retailers face concerns over returns and UK bike sales get a huge boost..

Shopping centre owner Intu collapses into administration (The Guardian, Zoe Wood) is just further evidence of carnage on the high street as the company was unable to convince lenders to give them any further slack and had to appoint KPMG on Friday afternoon to handle its administration. Fun fact: Intu’s shopping centres are individually owned by Special Purpose Vehicles (SPVs) which stand outside of the insolvency process, so they can continue to trade as normal. Creditors have also agreed to release £12m to keep the malls going during the administration process. * SO WHAT? * Current thinking suggests that the group will be broken up. Although it owns nine of the UK’s top 20 shopping centres, it is unclear what buyer demand is going to be like for anything other than their best venues.

Meanwhile, M&S and Next compete for UK arm of Victoria’s Secret (The Guardian, Sarah Butler) shows that the two high street stalwarts are slugging it out to take control of the UK arm of lingerie brand Victoria’s Secret. Although buying the brand would probably help to attract a younger audience, M&S might come up against competition concerns (it already controls almost one third of the UK lingerie market, with 36% of the market in bras!) so Next might be more successful. Having said that, it already has a number of brands and previously bought Lipsy to broaden its portfolio. * SO WHAT? * It’s good to see that these companies are considering ways of

broadening their product line-up and appeal, but they’ve got to make sure they make the right choice otherwise things could very rapidly go from bad to worse as the costs involved in a not-very-good acquisition could exacerbate a current lack of sales.

Talking of potential wobbles, Returns may come back to bite fashion retailers (The Times, Ashley Armstrong) cites some retail consultant concerns regarding the potential effect of a lengthening of return deadlines from the usual 28 days up to 100 days in some cases. It is possible that retailers could be deluged with unwanted stuff as a result of this, with fears that the 30% average return rate will increase. * SO WHAT? * Given that retailers are already sitting on mountains of unsold stuff due to lockdown, the prospect of rising costs due to increased returns (plus more expensive delivery charges) will make many apparel retailers very nervous. It’s certainly something they will want to keep a close eye on.

UK bike sales up 60% in April as lifestyles change (The Guardian, Sarah Butler) shows another interesting trend as consumers bought bikes in their droves during lockdown! Bike sales had been trending down at the beginning of the year but their sales shot up by 60% in April, although sales of bikes worth over £3,000 fell. Electric bikes saw sales up by 50% during that month and repairs are in strong demand as commuters try to resuscitate their ageing steeds. * SO WHAT? * I must say that I thought we’d reached peak cycling, but coronavirus has provided an unexpected boost in demand. I’m not sure how long this uptick will last  because I think it will depend on where the demand really is – if it’s commuters buying bikes then I would argue they will only buy one bike and keep it until the thing falls apart, but if there’s a renewed interest in cycling as a leisure activity then higher sales could be sustainable IMO. 



Facebook continues to get flak…

Drinks giants join Facebook advertising boycott (Daily Telegraph, Matthew Field) shows that Starbucks and now Diageo have joined some of the world’s biggest advertisers (who include Unilever, Coca Cola and PepsiCo) in an ad boycott against Facebook for not doing enough to stamp out hate speech. Still, according to Facebook’s in a fix but the ad boycott won’t break it (Daily Telegraph, James Titcomb) it’s not ideal for Facebook, but as Mark

Zuckerberg is CEO, chairman and biggest shareholder, he can do what he likes. His advertising customer base is incredibly broad, limiting the impact of any boycott, and past boycotts have shown that advertisers come crawling back soon enough. This happened with YouTube in 2017 when ads appeared next to not-very-savoury content and in the aftermath of the Cambridge Analytica scandal in 2018. Advertisers just can’t ignore Facebook – especially in current times as I would have thought more people are spending more time on their networks than they normally do and so if they want more sales they are going to have to go where all their customers are eventually!



…in other news…

Today has been yet another quiet day regarding amusing/interesting “alternative” stories, so I’ll just leave you with this absolutely brilliant sketch of two Scottish guys in a lift: “Eleven”. Love it. It’s a classic!

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Some of today’s market, commodity & currency moves (as at 0742hrs 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 **
6,159 (+0.20%)12,089 (-0.73%)4,910 (-0.18%)
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿

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