Thursday 07/11/19

  1. In MACRO, TRADE & OIL NEWS, economists cut Germany growth forecasts, UK pay hits new highs, China restarts Canadian pork and beef imports and Brazil’s oil auction is a disaster
  2. In HIGH STREET NEWS, M&S stumbles on, Pizza Express gets a cash injection, Clarks faces more closures and Intu suffers from troubled tenants
  3. In INDIVIDUAL COMPANY NEWS, investors try to cash in on Airbnb, Uber sees new lows and Virgin ditches BT for Vodafone
  4. In OTHER NEWS, I bring you the benefits of sarcasm and a badly-packed BMW…



So Germany’s economic outlook gets downgraded, UK pay hits new highs, China lifts the ban on Canadian pork and beef imports and Brazil’s oil auction goes very badly…

Germany’s top economists slash growth forecasts (Financial Times, Martin Arnold) highlights the conclusions published in the Council of Economic Experts’ annual report which cut Germany’s growth forecasts this year from 0.8% to 0.5% and for next year from 1.7% to 0.9%. The report was submitted to parliament yesterday and requires an official response from the government within the next two months. * SO WHAT? * Germany’s economy has grown by 2% on average per annum in the last five years. However, a combination of a political limbo (Merkel is still at the top, but can’t really do anything as her support shrunk significantly at the last election), Brexit uncertainty and the impact of the ongoing US-China trade war (because of Germany’s particular exposure to manufacturing and exports) has put the brakes on Europe’s biggest economic engine to the extent that it’s now on the verge of recession. Third quarter GDP figures are due to be announced next Thursday and most economists are expecting more contraction. The council is calling for the government to increase infrastructure spending and cut taxes to get them out of this current rut. Given how important Germany’s economy is to Europe, the situation will be watched very closely. At least France is doing quite well at the moment – otherwise Europe would be facing a real disaster.

Pay hits new peak to boost Tories (Daily Telegraph, Russell Lynch) cites the latest figures from the Resolution Foundation think tank which show that average weekly pay is on track to beat the August 2007 peak of £513 (adjusted for 2019 prices) either this month or next. * SO WHAT? * This will be officially confirmed by releases early next year but will be welcomed by BoJo as he embarks on the election campaign trail. Last time there was a general election (2017), wages were falling so he will no doubt use this in addition to record low unemployment as ammo to woo voters. Although consumers are still buying as a result of more jobs and higher wages, they’re yet to be convinced enough to buy big ticket items. I think that there is a huge amount of pent-up spending potential out there that could be released if we had some degree of certainty on Brexit – but I’m increasingly coming to the conclusion that

uncertainty will continue to drag on unless there is a landslide victory for LibDems or Conservatives (not so sure about Labour as my impression is that they will drag things out longer – but like I said to you the other day, I’ll come back to you on this once I read all the parties’ manifestos).

China lifts ban on Canadian pork and beef exports (Financial Times, Jason Kirby) is clearly good news for Canadian farmers who have been suffering since the ban was imposed after Canada arrested Huawei exec Meng Wanzhou on US fraud charges. The official explanation for the ban was that China claimed to have found falsified export certificates for Canadian meat, but many observers link Whanzhou’s arrest to the ban. * SO WHAT? * Canadian farmers will be breathing a collective sigh of relief as monthly Canadian meat exports have fallen from $125m to just $400,000 in September – and farmers in the pork industry had been aiming for $1bn-worth of exports to China before they got slapped with the ban. Presumably, the fact that China has had to kill about half of its pig population due to the outbreak of African swine fever is what’s really behind this backtracking so suppliers will be nervous about how robust this latest move is. Beijing still has bans on other Canadian agricultural products including soyabeans and canola seed.

Given the fanfare in the build up to yesterday’s oil auction in Brazil, Brazil’s blockbuster oil auction falls flat (Financial Times, Bryan Harris and Andrew Schipani) heralds a rather embarrassing outcome for what was supposed to be a real bonanza for Brazil. The world’s oil majors backed away from bidding on virtually all the offerings which were supposed to net President Bolsonaro’s administration $25bn in licencing fees and production compensation. The bidding was for four deepwater oilfields (Buzios, Itapu, Sepia and Atapu) off the south-east coast of Brazil and two got offers (Buzios and Itapu) while the other two got the lowest possible bids.  Sepia and Atapu are expected to return to auction next year under new rules. * SO WHAT? * It seems that the auctions failed due to a combination of Brazil losing this game of chicken and oil majors being put off by high prices, complicated sharing rules, doubts about Brazil’s regime and increasing pressure to decrease reliance on fossil fuels. What a comedown for the auction that had been billed as the biggest ever one of its type. I am proud to say that I got more bids for when I sold my sofa on eBay years ago than the Brazilians did for their oil assets 😜 This is likely to dent confidence in Bolsonaro’s regime and potentially limit further investment from overseas as investors will be sceptical about whether the country can really pull away from its protectionist past.



M&S woes don’t go away, Pizza Express gets a boost, Clarks targets more store closures and retail landlord Intu suffers from troubled tenants…

M&S profits tumble after fashion fails (The Times, Ashley Armstrong) highlights continued gloom at the high street stalwart as falling sales on the clothing side of the business proved to be a drag on profits. There had been speculation about M&S separating the clothing and food business into separate entities, but chairman Archie Norman ruled it out as being “completely impractical”. * SO WHAT? * The clothing business continues to disappoint as it failed to order enough of its popular products in the right sizes, but the company said that its turnaround efforts are starting to bear fruit (no pun intended) in the food business with sales outperforming supermarket rivals. This should hopefully improve given that M&S will start to deliver groceries online via Ocado next year. The transformation of the whole company is not going to happen overnight, but the pressure is on. I have faith given that I’ve seen such a tranformation before in the early noughties under “lucky” Luc Vandevelde – so it CAN be done! I think the difference this time, though, is the speed with which the competition can develop and the changing behaviour of the customer base. Let’s hope that M&S can drag itself back from blandness!

Pizza Express given £80m injection to slice away debt (Daily Telegraph, Oliver Gill) heralds a positive bit of news for a change in the world of pizza as the chain’s Chinese owner, Hony Capital, has decided to give it an £80m cash injection to pay down debt. * SO WHAT? * This is great, but

given that Pizza Express has an eye-watering £1.1bn in loans, clearly more has to be done. Still, it’s better than nothing – and the company maintains that 95% of its restaurants in the UK and Ireland are profitable, with no plans for closures outside normal attrition. It would be a ballsy buyer to come along how and shoulder all that debt in a casual dining sector that’s going down the tubes. Let’s hope that this latest injection will be more than the equivalent of re-arranging the deck chairs on the Titanic.

‘Stress’ forces Clarks into store closures (The Times, Ashley Armstrong) highlights ongoing troubles at shoe retailer Clarks as losses continue to deepen and sales continue to fall. 18 UK stores have already been shut down with “a meaningful number” of closures to come next year, according to CFO Paul Kenyon. * SO WHAT? * The company has tried cutting back staff hours in an effort to reduce the wage bill, but ongoing customer migration to online shoe shopping and a big bust-up with the previous CEO have not helped the retailer’s cause. Clarks’ future is looking VERY uncertain IMO.

It’s not just the shops themselves that are suffering as Pain for Intu properties (The Guardian, Zoe Wood) shows that landlords are feeling the pinch as their tenants are all going bust, asking for lower rents and/or entering into CVAs (Company Voluntary Arrangements). Intu saw rental income fall by 9% this year and said that it expects this fall to continue next year as the retail sector continues to suffer. * SO WHAT? * Even though everyone knows how nightmarish the situation is at the moment, Intu’s share price fell by a whopping 17% yesterday following the update as it mooted the possibility of selling assets (which I would imagine is understandable) and raising equity (which is what I suspect is behind the fall as investors will not appreciate being asked to put even more money in a tricky sector).



Investors try to get a slice of the action in Airbnb, Uber shares hit record lows and Virgin abandons BT for Vodafone…

Investors seek to cash in on Airbnb (Financial Times, Miles Kruppa) shows that investors are trying to buy into Airbnb ahead of the company’s planned public listing next year. It seems that American venture capitalists and private market brokers like EquityZen have been creating a number of Special Purpose Vehicles (SPVs) which hold equity in Airbnb. Investors in these SPVs won’t hold actual stakes in the company BUT they will get rights to proceeds from a future IPO or sale. Trading in some of these SPVs imply a current company valuation of $11bn more than its latest funding round in 2017 when it had an implied valuation of $31bn. * SO WHAT? * It seems to me that Airbnb will be a pretty decent prospect given that it says it has raked in over $1bn in revenues in the second quarter, actually went into profit in 2017 and 2018 and is currently sitting on a $3.5bn cash pile that should mitigate any losses this year. It’s not keen on SPVs but seems relatively powerless to do anything about them at the current time.

Uber shares hit record low as post-IPO lockup expires (Wall Street Journal, Heather Somerville) highlights the expected share price weakness of the ride hailer as the “lockup” period (where certain shareholders aren’t allowed to sell their shares) expired yesterday. The shares are now trading at 43% lower than their flotation price, so I guess that there will be a lot of shareholders out there who would have been making a decision re hanging on to them and waiting for a recovery or just cutting their losses and running. 130million shares of Uber were traded yesterday versus the 65-day average of 11million. The share price had already fallen by about 10% this week ahead of the lock-up expiry. * SO WHAT? * I don’t think this is a complete disaster as everyone knew about the expiry – so actually, now this is no longer hanging over them, investors (and the company!) may be able to concentrate more on the performance of the core business. Although it’s not looking particularly great at the moment, at least it will have one less thing to worry about.

Then in Virgin switches 3m phone users to Vodafone and costs BT £200m (Daily Telegraph, Christopher Williams) we see that Virgin will be switching allegiance away from BT in a five-year arrangement that is due to kick-off in late 2021. Having said that, Virgin Media will begin using Vodafone sooner to offer 5G services. Given that this is a big slice of profits for BT, it’s unsurprising that its share price fell by 4.7% on the news in trading yesterday.



And finally, in other news…

Today, I thought I’d bring you an interesting insight as to the positive aspects of sarcasm in 5 Benefits of Sarcasm, According to Science (mental_floss, Jake Rosen This made me think of one of my all-time favourite sketches about being a “sarcasmaholic” here. These guys are brilliant and responsible for this genius sketch about elevators and Scottish accents. I could not stop laughing when I saw the latter sketch in particular – it still makes me laugh now and I’ve seen it loads of times! Just for the squeamish out there, I will warn you that there is some swearing involved in these short videos…

Also, I thought I’d include something today on how NOT to pack your car in Woman caught using BMW convertible to transport a double bed (Metro, Richard Hartley-Parkinson I would not like to have been driving behind that!

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Some of today’s market, commodity & currency moves (as at 0909hrs 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 **
7,397 (+0.12%)27,4933,077 (+0.07%)8,41113,180 (+0.24%)5,867 (+0.34%)23,330 (+0.11%)2,979
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿

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