Thursday 27/09/18

  1. In MACROECONOMIC NEWS, the US raises interest rates, Argentina moves closer to an IMF deal and Macron loses steam in France
  2. In RETAIL SECTOR NEWS, Sears slides further, Amazon opens a New York store, Boohoo profits climb and Halfords expresses an interest in Evans
  3. In INDIVIDUAL COMPANY NEWS, Sky sees a changing of the guard
  4. In OTHER NEWS, I bring you a punchy seal. For more details, read on…



So the US raises interest rates again, Argentina gets closer to a deal and Macron’s popularity continues to slide…

Fed raises rates and says pace will accelerate (The Times, Simon Duke) heralds the Federal Reserve’s latest decision to raise its benchmark lending rate by 0.25% to a range of 2% to 2.25%.  This is the third rate rise so far this year and it indicated that one more rise is on the cards later this year, to be followed by another three next year. * SO WHAT? * Fed Chairman Jerome Powell forecast GDP growth of 3.1% this year and gradual growth for at least three more years, powered by low unemployment and inflation. Although this rising interest rate trend shows confidence in the economy, not everyone is going to like this – the emerging markets with tons of dollar-denominated debt, for starters, because the cost of their debt will go up. Given the turmoil they are in currently, this could actually worsen their plight. Donald Trump wasn’t too chuffed either as he said that “I’m worried about the fact that they seem to like raising interest rates”. I guess it’s not in his interest to hike the rates too much because the Fed’s actions are akin to someone taking all the beer away a few hours after the party has started and replacing with soft drinks – and Trump likes to party.

Exit of central bank chief clears path to Argentina-IMF deal (Financial Times, Benedict Mander, Robin Wigglesworth and Colby Smith) explains why the resignation of Argentina’s central banker has effectively smoothed the way for an IMF bailout. Basically, Luis Caputo had a tendency to intervene on foreign exchange

markets whereas the IMF prefer freely-floating currencies, so they didn’t like that. His replacement, Guido Sandleris, used to be an adviser to the IMF and previously worked for economy minister Nicolas Dujovne, one of the people involved in the current IMF-Argentina bailout negotiations. * SO WHAT? * So it looks like the IMF got their inside man, which means that they will have far more control over the process and what happens afterwards. Argentina’s first deal with the IMF, one of the biggest the IMF has ever done, failed within three months and so this time around there is much more pressure to get it right – hence the desire for more control.

I thought it was worth pointing out Emmanuel Macron loses political capital as reform benefits stutter (Financial Times, Harriet Agnew) because it illustrates the French president’s dramatic fall in popularity, less than 12 months into his term. Since sweeping into office he has used his hefty legislative majority to push through a number of pro-business reforms aimed at revitalising the Eurozone’s second biggest economy and creating jobs. Right now, the benefits of these reforms have yet to filter through to show palpable economic growth or any meaningful dent in unemployment and so belief in his vision is taking a bit of a battering. * SO WHAT? * This will make his next moves on reforming the pension system and cutting thousands of civil service jobs trickier than it otherwise might have been. His popularity ratings have fallen to a record low of 29%, according to pollsters Ifop and he is increasingly seen to be aloof and out of touch with the electorate. Having said that, he’s only 12 months in and he’s managed to cover a lot of ground in that time. The French people may have to be more patient to see the benefits of reform come through, but the pressure is most definitely on.



In retail sector news, Sears gets more grief, Amazon opens up a shop in New York, Boohoo sheds tears of joy and Halfords offers Evans a potential lifeline…

Trailblazing retailer Sears fights for its survival (Financial Times, Alistair Gray and Andrew Edgecliffe-Johnson) highlights the continued travails of what was once America’s biggest employer. As I said in the Tuesday edition of Watson’s Daily, Sears’ billionaire chairman Eddie Lampert – via his hedge fund ESL – has put forward a financial restructuring plan for board and investor approval that will reduce the company’s $5.6bn debt burden. Sears has suffered over the years from the success of “big-box” discounters such as Walmart and then the rise and rise of e-commerce. It has closed over 3,000 stores since 2011 and now only has less than 900 left. Lampert believes that the company could become an “ecosystem of services, products and retail touch points” but his strategy is facing a great deal of scepticism, not least because he also happens to be the company’s biggest shareholder (via ESL). * SO WHAT? * Lampert has sold off a lot of Sears’ assets over the years and there is a very real possibility that creditors will sue him for selling them off too cheaply (they’ll argue that he sold them to “himself” in what they would argue is a clear conflict of interest) in the event of a bankruptcy. It’s all very finely balanced, but is another example of the downfall of the once-mighty department store. It just goes to show how impressive the performances of Nordstrom and Macy’s are in comparison as they are all facing the same changes in consumer behaviour.

Elsewhere in retailer-land, Amazon is opening New York store to sell highly rated products (Wall Street Journal, Laura Stevens) shows the continued trend of e-tailers dabbling in re-tail as Amazon opens a store (called Amazon 4-star) today in the SoHo neighbourhood that will carry

goods that are curated in part by local consumers’ online shopping habits. This increases its physical store portfolio that already includes over a dozen bookstores, a few cashierless Go stores and, of course, the Whole Foods grocery stores. Consumers can check the online prices with a phone or scanner and Prime customers will be offered the same price as online whereas non-members will have to pay the list price. * SO WHAT? * I think that this sounds like a brilliant idea – and is something that other retailers will find pretty much impossible to replicate. It will also presumably have the side benefit of persuading more people to join Prime. I wonder what this will do to the ongoing independence of reviews and whether we will see a big increase in the number of “sponsored” reviewers.

Boohoo profits soar 22% in six months, helped by cycle shorts (The Guardian) highlights a strong performance by the online fashion retailer, whose sales were driven by success in cycling shorts, playsuits and 90s-inspired fashions as total sales rocketed by 50%. CFO Neil Catto said that the company continued to benefit from the ongoing shift to online shopping. Not bad for a company starting 12 years ago in Manchester! Fun fact – Boohoo’s valuation now stands at £2.44bn which is over 20 times more than 240-year-old Debenhams

Halfords offers to ride to the rescue for Evans (Daily Telegraph, Oliver Gill) follows on from what I was saying last Friday as it turns out that Halfords is one of a number of parties to have made initial offers to the company’s advisers. Evans is trying to sort out a £10m rescue package to get it through the traditionally slow autumn and winter seasons as it continues to struggle with turning a profit – it announced a £17.4mloss before tax in the year to October 2017. * SO WHAT? * Although it’s good that there are a number of interested parties, it would be interesting to know how many of them actually want the bike business or if they really want access to the store estate for redevelopment or just selling off. I would have thought that Halfords would be a good strategic fit in theory, but is it wise at this point to double down your exposure to a declining sector?



In individual company news, it’s the end of one era for Sky and the beginning of another…

End of era as Murdoch sells £11.6bn Sky stake (The Times, James Dean) sounds a nostalgic note as Rupert Murdoch’s 21st Century Fox has agreed to sell its 39% stake in Sky to Comcast for £11.6bn and Comcast’s Sky roils European broadband (Financial Times, Nic Fildes) 

looks at what could have happened and what might happen now that Comcast has got its way. Comcast could try to invest in telecoms and build on its expertise in broadband (it is the largest broadband company in the US) by snapping up smaller operators such as TalkTalk. * SO WHAT? * North American telcos have had a tricky time of it in cracking Europe thus far, but Comcast’s acquisition of Sky has given the company a powerful base from which to expand. This move could also hasten further consolidation amongst competitors such as Vodafone and Virgin Media or Three and O2 in mobile. 



…And finally, in other news…

I thought I’d leave you with a violent seal in Seal jumps out of the sea and slaps innocent man in the face with an octopus (Metro, Rob Waugh How very dare you!

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