Thursday 01/08/19

  1. In MACRO NEWS, the Fed cut interest rates, but not by as much as everyone was hoping
  2. In TECH NEWS, Alphabet overtakes Apple, Spotify disappoints and TikTok runs into India trouble
  3. In RETAIL-RELATED NEWS, Next bucks the gloom but Intu is wallowing in it
  4. In INDIVIDUAL COMPANY NEWS, EssilorLuxottica agrees a deal for GrandVision, Aston Martin has another shocker and Travis Perkins wants to offload Wickes
  5. In OTHER NEWS, I bring something that’ll make your eyes go funny…



So the Fed cut interest rates, but markets were hoping for more…

Fed cuts rates by a quarter point in precautionary move (Wall Street Journal, Nick Timiraos) signals the first cut in US interest rates since 2008 as the central bank tries to head-off an economic slowdown. The federal funds rate was cut by 0.25% to the 2-2.25% range, disappointing the markets which had been hoping for a 0.5% cut, or at least some kind of commitment to potentially making more cuts. * SO WHAT? * Trump used the opportunity to slag off 

Jerome (aka “Jay”) Powell, chair of the Federal Reserve, on Twitter (where else??) by saying “What the market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle…As usual, Powell let us down”. He would say that because if Powell had chopped the interest rate by 0.5% and stated that more cuts were to come, the markets would have shot up, making Trump look good (which he wants, going into election year next year). The thing is, Trump’s trade war against China is one of the main causes of the global slowdown and it seems to me that he’s trying to shift the blame of economic sluggishness on the Fed instead.



Alphabet overtakes Apple, Spotify slows down and TikTok hits problems in India…

Google parent Alphabet overtakes Apple to become new king of cash (Financial Times, Richard Waters) signals quite a significant development as Apple, which has been the company with the largest cash reserves for the last ten years, has lost the top spot to Google due to putting a $122bn dent in its cash pile by buying back stock and paying dividends over the last 18 months. Alphabet has been far less generous on the buy-back front spending, on average, only $1.7bn a quarter over the last four years. As things stand now, Alphabet has $117bn in cash and marketable securities versus Apple with “only” $102bn – down from $163bn at the end of 2017. * SO WHAT? * It’s probably not a great moment for Alphabet to have such a huge amount of cash sloshing around given that it has paid €8.2bn in antitrust fines to the EU over the last two years and is now under investigation in Washington amid allegations of Big Tech companies being “too powerful”. I think that the most interesting thing here is that Alphabet’s cash comes almost entirely from its search advertising business and strong growth from YouTube. Other businesses like cloud computing, smartphones and home automation are believed to have been consuming cash at a rapid rate. I think that if Alphabet is restricted in making major acquisitions (regulators will be on them like a ton of bricks in the current climate) and that they are already pouring money into existing businesses, surely the only way to satisfy shareholders is with higher dividends and share buy backs. Windfalls to come, possibly?

Spotify’s slowing subscribers is music to ears of rivals (Daily Telegraph, Natasha Bernal) shows that Spotify fell short of market expectations in terms of new subscribers, but the total number of paying subscribers now stands at 108.5m. The number of active users has also risen by about 20% thanks to an increase in demand and expansion of its podcast capability. The shares weakened a bit on the news, but given that they have strengthened by over a third this year, this just seems to be small beer.

TikTok runs into Hindu-Muslim furore in India (Financial Times, Stephanie Findlay) highlights problems in the viral video app’s #1 overseas market following the arrest of three of its biggest stars for inciting religious violence. The three are part of a group of five Muslim men (called “Team 07”) in their early twenties who produce short comedy videos which have amassed them tens of millions of TikTok followers. However, earlier this month, Team 07 made a serious video about a Muslim man who was tied to a pole and brutally beaten in northern India on suspicion of theft, which went viral. The stars went on to say that if the man’s children wanted to avenge his death, they shouldn’t be labelled as terrorists. This created an almighty furore between the Hindu majority and Muslim minority and the Hindu nationalist political party is now pressing charges. * SO WHAT? * TikTok, which is owned by ByteDance, has over 120m users in India and it has already come under fire from critics as “degrading culture and encouraging pornography”. It maintains that it complies with all regulations and recently announced plans to build a $100m data centre in India in an attempt to appease an increasingly annoyed New Delhi. Clearly it could do without this hassle in its biggest overseas market. I suspect, though, this will be a good learning experience for the company for when they expand into other countries.



Next bucks the gloom while retail landlords get bogged down by it…

In Next is all smiles after boost from online sales (The Times, Ashley Armstrong) we see a buoyant apparel retailer (yes, they do exist!) announcing a 4% rise in full-price sales (boosted by a solid online performance) over the second quarter, prompting it to lift full year guidance. Its shares climbed to their highest level this year to £60.64. Well done, Next! It just goes to show that success is possible in this area…

However, it’s back to the gloom in Intu shares hit record low as rental income tumbles (The Guardian, Sarah Butler) as Intu Properties, which owns properties such as the Trafford Centre in Manchester and Birmingham’s Merry Hill, saw its share price fall off a cliff in trading yesterday (30% – ouch!) as it said that it might have to raise money to reduce its £4.7bn in debt. The fact that this was announced

at the same time as it unveiled worsening losses, scrapped the dividend and warned of continued weakness in rents made for a rough day. Funnily enough, Retail landlords lose £1bn after Intu warning (The Times, Louisa Clarence-Smith) shows that other landlords exposed to retail such as Hammerson, Capital & Counties, Newriver Reit, British Land and Landsec were all weaker following Intu’s statement. * SO WHAT? * The company’s new strategy is to turn its  emptying spaces into homes, hotels and hot-desking offices over the next five years – but TBH, is it actually going to be able to last that long?? Property prices and rents are falling and tenants are leaving. This is the same for the whole sector exposed to retailers – which means that all of the companies are going to be selling off properties (but who to??) meaning that prices will get even worse in some kind of death loop. They need money and they need it quick – but the problem is that I think this is going to become a money pit that may have no end. Analysts at Peel Hunt said that it would be good for all concerned for the company to go private, so that it can get on with what it needs to do under less public pressure – and I would be inclined to agree.



EssilorLuxottica’s €7bn deal for GrandVision, Aston Martin’s nightmare continues and Travis Perkins puts Wickes on the block…

EssilorLuxottica agrees €7bn deal for rival GrandVision (Financial Times, Rachel Sanderson and David Keohane) heralds a deal that will expand EssilorLuxottica’s retail footprint mainly in Europe by adding over 7,200 stores (including the Vision Express chain) globally, over 37,000 employees and €3.7bn in annual revenue. The company bought HAL Optical Investments’ 76.72% stake in GrandVision at €28 per share and it sounds like the company will be looking at further acquisitions in places like Latin America, India and China.

Aston Martin shares plunge after carmaker posts near-£80m loss (The Guardian, Mark Sweney and Sean Farrell) highlights continued challenges for the luxury carmaker as it warned that sales of its special edition higher-priced cars were falling, which led to a further sell-off only a week after it announced a shock profit warning. The shares which floated at £19 last October fell 12% in trading yesterday to just £4.98. * SO WHAT? * News like this just makes the launch of its 4×4, the DBX, later on this year that much more important.

Wickes set for DIY in Travis sale (The Times, Ashley Armstrong) shows the rather unsurprising news that Travis Perkins is to sell its Wickes retail chain. Profits at Wickes have dropped by almost a third in the last two years (although it made a “strong recovery” in the second quarter) and Travis Perkins is keen to move away from the retail customer to concentrate on the far more lucrative trade customer segment. * SO WHAT? * DIY chains aimed at retail customers have all been having problems over the last few years as real estate activity has slowed and people have become less inclined to Do It Themselves, so this doesn’t come as too much of a surprise. It’ll be interesting to see if this prompts any consolidation in the sector, but I’m not sure there will be the appetite for it among its competitors as business is pretty slow for all of them. Maybe a private equity investment where they can get in and get costs down to the bone etc. would be the most likely scenario. Or what about someone completely random with loads of cash like Ikea perhaps?? 



And finally, in other news…

I thought I’d bring you something that will make your eyes go funny today in Optical illusion: Are these images black and white or colour? (Sky News, Catrin Rutland Tricky.

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Some of today’s market, commodity & currency moves (as at 0840hrs 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 **
7,587 (-0.78%)26,864 (-1.23%)2,980 (-1.09%)8,17512,189 (+0.34%)5,519 (+0.14%)21,541 (+0.09%)2,909 (-0.81%)
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿

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