Thursday 16/04/20

1. In MACRO & OIL NEWS, the EU clamps down on bonus and dividend payouts while oil demand continues to be weak
2. In SECTOR-BY-SECTOR NEWS, US banks make big loan loss provisions, US airlines now have the finance but no passengers, UK retail remains hard-hit and insurers are warned to cough up
3. In INDIVIDUAL COMPANY NEWS, ByteDance hires on TikTok boom, Airbnb raises another $1bn and Smithfield Foods closes pork processing factories
4. AND FINALLY, I bring you some egg-citing hacks…

So the EU clamps down on dividends and bonuses while oil prospects continue to look poor…

EU bars bailed-out companies from paying dividends and bonuses (Financial Times, Javier Espinoza) highlights rule changes in the EU that will ban dividends, share buybacks, bonus payouts and buying out rivals or other operators in the same sector whilst still paying back state aid. Similar moves were made in the banking sector during the global financial crisis and are aimed at heading off “undue distortions of competition”. Brussels is also putting in place deadlines by which state aid must be paid back – but they aren’t as stringent as the ones put in place on the banks during the financial crisis. * SO WHAT? * This sounds like a reasonable move in principle – after all, the state is going to need to get the money back at some point and this will, in theory, act as an incentive for companies that are doing well to pay the money back as quickly as possible. Income investors (those who invest in shares to get income from dividends etc.) and senior execs won’t be too pleased but then again there’s no such thing as a free lunch.

Meanwhile, Oil prices slump as market faces lowest demand in 25 years (The Guardian, Jillian Ambrose) shows that the recent production cuts – the biggest ever – are failing to boost oil prices. The International Energy Agency (IEA) said that the market will see the lowest demand for oil for 25 years due to the global lockdown and Global oil storage close to being ‘overwhelmed’ (The Times, Emily Gosden) shows that storage facilities around the world are nearing capacity. Onshore storage tanks are already full and there are now dozens of tankers anchored around Europe doing nothing because they need the onshore storage to empty before they can discharge their cargoes. * SO WHAT? * Cutting oil production isn’t going to work very well if there is no demand on the other side of the equation. The fact that oil reserves are nearing capacity means that it will take some time before production cuts take hold anyway because these reserves have to be run down before there is any semblance of supply/demand balance. The sooner the world economy starts moving again, the sooner this bottleneck will loosen – but at the moment it looks like it will be in place for some time yet. Some countries are starting to edge towards normality but it will be a very gradual and tentative process so I would expect weak oil prices to persist for a while yet.

US banks put aside big provisions, US airlines have money but no passengers, UK retail continues to suffer and UK insurers are warned to pay out…

This week is, as you know, a big week for US bank results announcements. Biggest Wall Street banks set aside $25bn for loan losses (Financial Times, Laura Noonan and Robert Armstrong) highlights the big loan losses announced by Bank of America, Citigroup and Goldman Sachs yesterday ($12.8bn) which followed those announced the previous day by JP Morgan Chase and Wells Fargo ($12.3bn). On the plus side, stellar trading revenues were a bright spot as bank clients traded in volatile markets and it is worth noting that all of them had still announced profits despite huge increases in reserves. Still, it’s too early to get too excited.

In Airlines have the cash. Now they need passengers (Wall Street Journal, Alison Sider) we see that although troubled US airlines now have some much-needed cash to survive, they are going to have to get some passengers pronto otherwise the $25bn in payroll assistance will have been in vain. Delta Airlines and United Airlines have already said that they may have to shrink in order to adapt to a gradual rise in demand – and you would have thought others will be at least thinking the same thing. * SO WHAT? * Until travel restrictions are lifted, demand will be zilch. Even then, I suspect that it will be a slow and cautious recovery as business passengers will probably have become more accustomed to doing videoconferencing and leisure travellers may also be wary of travelling initially. I expect

we will all be in some kind of virtual limbo until a vaccine/cure is found.

Retailers reeling from record sales slump (Daily Telegraph, Laura Onita) just reinforces what we all know already as the latest figures from the British Retail Consortium (BRC) and KPMG showed the worst sales fall on record last month as shops up and down the country shut their doors. Separate data from Barclaycard showed that spending also fell by 6% year-on-year. Online sales, on the other hand, rose by 18.8% (excluding food). * SO WHAT? * This just puts a figure on what we already know, but the situation could get worse as not all shops were closed initially. 

In Pay claims or explain why not, insurers are warned (The Times, Ben Martin) we see that the head of the Financial Conduct Authority (FCA) wrote to insurance company chiefs outlining how to handle business interruption claims and saying that they should explain any disagreements with their approach. This follows recent rumblings about a group of customers discussing legal action against Hiscox because they believe the company is failing to pay out on valid claims. * SO WHAT? * Although it feels like paying out is the right thing to do morally, the fact that most business interruption policies to NOT cover pandemics would suggest that insurance companies are within their rights not to pay. This sounds to me like the regulator is trying to make the insurers look like the bad guy and put more “moral” pressure on them because there’s not really much they can do about it themselves apart from make some noise. It seems increasingly likely to me that the government is going to have to get involved at some point in backing policies somehow if it really wants to cover businesses for coronavirus losses – and this is something that is happening right now in state-owned Chinese insurance companies.

ByteDance hires on TikTok’s booming popularity, Airbnb gets another $1bn and Smithfield Foods closes factories…

ByteDance looks to hire 10,000 thanks to TikTok boom (Financial Times, Ryan McMorrow) shows that TikTok’s popularity has benefited the Beijing-based ByteDance as bored users globally get creative during the lockdown. In China, the company has improved its ecommerce capabilities in order to monetise its Douyin platform (China’s TikTok) which now has 400m users. The company is famed for its generous pay and benefits and its growing success means that it is on track to employ more staff than chief rival Tencent. The company was valued at around $75bn two years ago and is now thought to be worth around $90-100bn. * SO WHAT? * It’s always good to see some companies doing well from these difficult circumstances. However, it will be vital for ByteDance to consolidate its successes quickly to take advantage of its current momentum.

Elsewhere, Airbnb raises another $1bn (Financial Times, Miles Kruppa) shows that the travel company still has pulling power as far as investors are concerned as it has

managed to raise another $1bn only one week after raising the same amount from investment firms Silver Lake and Sixth Street. * SO WHAT? * I think this shows two things – firstly, that investors believe in the company’s business model and secondly, that Airbnb is doing the right thing in shoring up its balance sheet early. At the moment, the company is saying that it can return to 2019 levels of revenue by January 2021, but I guess it all depends on how long travel restrictions go on for. I actually like this company more than some of the other cash-burning start-ups because barriers to entry are quite high, it is cash generative and it doesn’t own loads of expensive assets. If it can weather the current storm, I would expect it to do quite well once normality returns.

Smithfield to close more pork plants over coronavirus pandemic (Wall Street Journal, Jacob Bunge) shows that America’s biggest pork processor is having to close two more pork-processing factories as more employees fall ill to the coronavirus. Other meat processors have also been experiencing the same thing as their production lines necessitate employees working in close quarters. * SO WHAT? * Companies such as Smithfield, Tyson Foods, Cargill and JBS have been paying bonuses to workers and implementing what distancing policies they can, but clearly it’s not enough and if things get worse, this supply chain bottleneck could have consequences to the end customer with shortages likely if things don’t change.

And finally, in other news…

Have you had the misfortune of running out of eggs so far in this lockdown? I have. So when I saw Fresh Out of Eggs? These Replacements Can Go in Almost Any Recipe (Popsugar, Jenny Sugar https://tinyurl.com/y7lmep3y) I thought I’d share this vegan wisdom! None of these will be appearing in a fry-up, but they could help you in baking…