Thursday 23/08/18

  1. In MARKETS NEWS TODAY, the S&P officially has the longest bull run ever
  2. In CAR-RELATED NEWS, Geely becomes China’s third largest car-maker and Continental hits the skids
  3. In OIL-RELATED NEWS, Saudi Aramco gets shelved and we see another way of playing frackers – water
  4. In INDIVIDUAL COMPANY NEWS, Xiaomi sees a jump in revenues, Avast has strong numbers and Target is the latest US retailer to report positive results
  5. In OTHER NEWS, I bring you some impressive fireworks. For more details, read on…



So the US bull run continues…

Following on from what I said yesterday, Bull market sets record despite US turmoil (The Times, James Dean) shows how the S&P500 index, the broadest measure of American companies, reached the landmark of the 3,453rd



day of being in a bull market. A bull market is generally accepted as being a period where the stock market climbs without a drop of 20% or more (so it’s not the same as the market rising all the time), which gives leeway for “corrections” which are falls of between 10 and 20%. Trump was keen to Tweet his “congratulations” to the market by saying “Longest bull run in the history of the stock market, congratulations America”. Ironically, he might be the one to spark a correction (but not a bear market, surely – corporate is too strong at the moment for that IMHO) given what’s going on with his former cronies in the law courts at the moment.



In car-related news, Geely becomes China’s #3 and Continental hits a rough patch…

In Geely becomes China’s third-largest carmaker (Financial Times, Sherry Fei Ju and Tom Mitchell) we see that the Chinese owner of Volvo and Lotus has just overtaken Nissan, Toyota and Honda in terms of car sales in China – behind only GM and VW in the world’s largest car market. It unveiled profits at its latest results that were 36% higher than the previous year as car sales have been turning up since February when they had a bit of a blip. Other major domestic manufacturers such as Chang’an and Brilliance have, in contrast, suffered with sales falling by over 10% in the first six months of this year and Great Wall, BMW’s local partner, saw a massive 21.3% dive in sales last month. * SO WHAT? * Geely is a great success

story and it benefitted from an impressive 126% year-on-year hike in exports. Did you know that Geely now owns almost 10% of Mercedes-Benz owner Daimler and became its largest shareholder this year? Although they are doing well now, you do wonder how Geely will fare in the ongoing US-China trade war.

Continental shares suffer worst fall in almost a decade (Financial Times, Peter Campbell) highlights the German tyremaker’s second profit warning of the year as it slashed its forecasts for 2018 due to weakening sales and margins, forex fluctuations and increased warranty claims – all of which resulted in the stock falling by 14% in trading yesterday. The company has been hit by falling demand for tyres as well as higher costs involved in developing tech for hybrid and electric vehicles and increasing production in the US and Thailand. The company is due to publish third-quarter results on November 8th. * SO WHAT? * The tyre industry had been expected to perform strongly in the second half of the year as Northern Europeans buy winter tyres and demand rises in America. The industry also weathered higher raw material costs last year, so Continental’s gloom is particularly stark.



In oil-related news, Saudi Aramco shelves its flotation plans and there’s an interesting alternative way to invest in fracking – water…

Saudi oil firm puts ‘largest ever’ flotation on hold (The Guardian, Martin Chulov) is a story doing the rounds today as stock exchanges around the world (but especially New York and London) had been salivating at the prospect of a partial float of the state-owned Saudi Arabian oil company Aramco – only for it to be “indefinitely postponed” due to concerns over its valuation. The valuation of the 5% stake was thought to be as high as $2tn at one stage – so you can see why the exchanges were falling over themselves to do the listing. * SO WHAT? * I think this is just noise – and possibly a negotiating tactic. Oil prices are relatively high at the moment and it looks like they aren’t going to weaken too much in the near future what with Iran sanctions and increasing costs for US frackers etc. so it means that there is less urgency for a flotation. Given that a sale of the stake was supposed to finance Prince Mohammed Bin Salman’s economic plan to reduce Saudi Arabia’s reliance on oil revenues, you do wonder why they are delaying – which is what makes me 

think this could be a negotiation tactic as it is in their interest to get on with it. Some say the delay is due to disagreement on the valuation, but I’d say that this is probably BS IMHO.

I thought that The next big bet in fracking: water (Wall Street Journal, Christopher M.Matthews) had an interesting angle on the fracking industry as it turns the spotlight on companies who support shale drillers. Fracking involves blasting a mix of water, sand and chemicals down big holes to release oil and gas from rock formations miles below he surface. This process also releases briny water that’s been trapped beneath ground and the problem frackers face is what to do with all this water. Just to give you an idea, energy consultancy Wood Mackenzie estimates that in some parts of the Permian Basin wells produce ten times as much water as hydrocarbons, so the race is on to invest in water waste disposal specialists. WaterBridge Resources is one such company and is building a network of pipelines that will transport water away from some of the area’s biggest producers. It announced plans for an IPO back in June and others are expected to go down the same road. Solaris Water Midstream is another company that is attracting investment from private equity firms and other investment management companies. * SO WHAT? * Given the likely increases in production, you can see why this area is red hot as wastewater firms are in prime position to benefit. I wonder whether this could be a backdoor way for ethical investors to invest in oil as they could argue that the recycling of waste water IS OK and look past the companies that they are helping.



In individual company news, Xiaomi, Avast and Target all report strong growth…

Xiaomi sees revenues rise 68pc in first results after float (Daily Telegraph, Matthew Field) heralds a return to form for the Chinese smartphone giant after a tricky float. These first results – the first since it went public in July on the Hong Kong Stock Exchange – showed strong revenue growth and profits of around $2bn – versus a loss in the same quarter last year. Just by way of reminder, Xiaomi makes cheap smartphones with thin margins – 8.8% per handset versus around 60% for some iPhones – but its cheap and cheerful phones have proved to be a hit in emerging smartphone markets like India. * SO WHAT? * Given the rocky ride it got to flotation, this was a much-needed performance. At one stage, the company bandied about valuations of $100bn but investors were having none of that and, in the end, the company had to settle for a $55bn valuation and postpone plans to list in mainland China. Shares in Xiaomi fell by around 20% in the lead up to the results versus where they were a month ago, but they gained on the positive results announcement.

In Avast secures strong growth in first results since listing (Daily Telegraph, Matthew Field) we see that the

company behind the world’s most popular antivirus software (AVG) reported a decent 10% earnings uplift versus the previous half year in its first set of results since floating on the London Stock Exchange in May. Revenues, the number of paying customers and average revenue per customer were all up and the company’s chief exec Vincent Steckler, said that “looking ahead, we are confident that we can continue to execute the strategy we outlined at IPO and we are on track to deliver on full-year guidance of high single-digit revenue growth, with slight Ebitda margin improvement”.

Following on from what I said yesterday about the success of up-market housing and furniture companies in the US, Target ‘hits bullseye’ with strong sales growth (Financial Times, Jessica Dye) shows the latest US retailer to announce a strong performance as it reported strong growth in digital sales and its best quarterly sales growth for 13 years! It topped its performance off by nudging up its full-year forecasts and its share price is now up by over 27.6% year-to-date. * SO WHAT? * This came after Walmart results knocked it out of the park last week and Lowe’s – the US home improvement chain – also had a good day yesterday despite downgrading its full-year sales growth forecast at the same time as announcing solid revenue growth for the quarter. If wage growth gathers pace, I would expect there to be more good news to come although it’s not all rainbows and unicorns – US department store chain JC Penney hit record lows last week and Macy’s got the cold shoulder from investors despite announcing generally positive results.



… And finally, in other news…

I love fireworks! Do you? When I lived in Japan, I saw some of the best firework displays I’d seen in my life at various venues although I think that fireworks here in the UK (especially the London ones at New Year) are catching up. They are a summer thing in Japan, so if you have a few spare minutes during the day, have a look at this display from a recent festival: Amazingly beautiful animated fireworks show Japan’s fireworks are on a whole other level (SoraNews24, Casey Baseel It’s quite relaxing to watch!

As always, thank you for reading Watson’s Daily!