Thursday 29/11/18

  1. In MARKETS AND BITCOIN NEWS, the US markets breathe a sigh of relief and Bitcoin perks up
  2. In FAANG NEWS, Netflix commits to more production as Google and Facebook fuel a UK ad boom
  3. In RETAIL-RELATED NEWS, Ikea’s profit falls by 40% and the Wagamama deal goes through
  4. In INDIVIDUAL COMPANY NEWS, Altria takes a drag of Juul Labs and On the Beach kicks sand in Thomas Cooks’ face
  5. In OTHER NEWS, I bring you some giant animals and “Skip Lady”. For more details, read on…



So US markets rally and Bitcoin gets a boost…

Fed Chairman’s remarks spark a market rally (Wall Street Journal, Amrith Ramkumar and Nick Timaraos) highlights the reaction to what Jerome Powell said in a speech at the Economic Club of New York yesterday where he said interest rates are “just below” general estimates of what would be a neutral level (i.e. the optimal level for the economy). This signals a change in direction given that, in early October, he said that the Fed’s interest rate was a “long way” from neutral, which prompted a market sell-off. The Fed is still expected to raise the federal funds rate band to between 2.25% and 2.5% next month, though. * SO WHAT? * This is a significant climb-down from the Chairman’s previous position where it looked very much like there were going to be a few more gradual raises over the course of next year. Generally speaking, markets tend to go weaker when interest rates go up because a higher interest rate makes borrowing more expensive for both companies and individuals which means that companies may be less inclined to borrow money to invest and 

individuals may have less disposable income to spend because household debt costs increase. Trump has been vocal about his opposition to too many interest rate rises because he believes that it will choke off economic growth. Clearly a severe cooling off of the economy would not be good for votes at the next election, but if it does cool off, you can bet your bottom dollar that he will dump all the blame on Powell.

Bitcoin is back as markets eye currency (The Times, James Dean) heralds a return to form for Bitcoin as it had its best day for seven months in trading yesterday after a torrid time last week, when it had its worst week in five years. It eventually gained by 10.7% versus the dollar yesterday on reports that the Nasdaq exchange is going to offer bitcoin futures next year, following CME Group and CBOE – which would enhance its credibility amongst investors. Intercontinental Exchange is also expected to start offering bitcoin derivatives in January. * SO WHAT? * It seems to me that Bitcoin is continuing to gain credibility bit by bit from the mainstream – with more markets offering legitimate ways to trade the cryptocurrency and Fidelity Investments getting involved a few months back. It is volatile, but it seems to me like it is here to stay.



In FAANG news, Netflix commits to more as Facebook and Google ads power forward…

In Netflix to boost shows made on Continent and UK by a third (Daily Telegraph, James Cook) we see that that the streaming giant has committed to increase the amount of European shows it produces by a third next year as it continues to put pressure on traditional broadcasters. Out of 221 news shows, 150 will be original. * SO WHAT? * This is a serious move by Netflix and will put enormous pressure on incumbent broadcasters to up their game. It also makes efforts from the likes of Apple look pretty pathetic in comparison. As far as I am concerned, once you have scale, content is key to keeping your subscribers – and if you OWN that content, it makes your offering far stickier. This is clearly what Disney is hoping with its new channel and separation from Netflix, but I don’t think that they necessarily have the scale – or at least not to the same extent as Netflix. Still, this is something that will develop over the coming years as streamers aim to provide quality AND quantity for their customers.

Google and Facebook fuel UK advert boom despite print slump (The Guardian, Mark Sweney) cites findings from advertising media company GroupM which show that overall spending on traditional media – including TV and newspapers – is on the wane whilst digital advertising with the likes of Google and Facebook continues its meteoric rise. Despite current uncertainty in the UK economy ad spend is set to break the £20bn barrier for the first time next year and Adam Smith, the futures director at GroupM, pointed out that “digital is now around 60% of all advertising investment and accounts for all net UK advertising growth. Digital is commanding a rising share of overall marketing effort from a wider base of marketeers large and small”. Most of the growth is coming from small and medium-sized companies as the giants are currently trimming their digital ad budgets. * SO WHAT? * This is quite an impressive stat, don’t you think? It’s particularly impressive given that ad spend is often seen to be a leading economic indicator in that it is one of the first expenditures to get cut in an economic downturn and one of the first to trend positively in an upturn. No wonder the likes of WPP are trying to streamline their offering in the face of this massive and unrelenting competition. 



In retail-related news, Ikea’s profit falls by 40% and the Wagamama deal goes through…

Ikea profits plunge 40% as strategic overhaul costs bite (Financial Times, Richard Milne) highlights some tricky times for the big retailer as it grapples with its transition from its existing model (out-of-town stores) to its new model (a mix of out-of-town plus smaller town centre outlets and a better online offering) which will involve lower profits for the next three years and some big staff cuts. The Swedish company’s performance was hit by increased costs involved in investing in its logistic and digital operations to power this transformation. When asked about the falling profits, CFO Juvencio Maeztu gave a quite unusual answer when he said “It’s part of the plan. We decided a year ago that we did not want customers to pay for the transformation. It’s a conscious decision to lower the profit to finance the business transformation [and] we expect to keep the same level of profit for the next three years”. * SO WHAT? * It’s interesting to see a company like Ikea being so candid about its transformation given that it’s actually doing quite well. Usually, you only see this kind of stuff after a company has been on the skids and some

new CEO comes in all guns blazing. The CFO said that the transformation process is expected to take four years and that the business model needed changing after 75 years of operating the current one. He then sounded quite philosophical when he observed that “the world is changing and we have to be humble and we have to be critical with ourselves. It’s good to have this feeling of being strong and being weak at the same time”. It sounds to me like Ikea has got its feet planted firmly on the ground and has a good grasp of what it needs to do to survive for the long term. It just needs to execute now! If only more companies were like this!

The Restaurant Group prevails as Wagamama deal is passed (Daily Telegraph, Oliver Gill) heralds the end of a somewhat nervy period for the Restaurant Group as it battled with shareholders to buy Wagamama for £559m since it announced its intentions. Most investors thought that the acquisition was good strategically, but balked at the deeply discounted rights issue to finance it. 40% voted against the acquisition, so it was not exactly a ringing endorsement and the shares fell by 15% on the news. * SO WHAT? * Any disgruntled shareholders selling out now would crystallise a huge loss considering that the shares have tanked since the deal was first announced. It’s a question of whether they should just shut up and hang on for the ride or sell out and take the hit.



In individual company news, Altria takes an interest in Juul Labs and On the Beach kicks sand in Thomas Cook’s face…

Following on from the recent high-profile heavy FDA crackdown on e-cigarettes, Altria in talks to take significant minority stake in Juul Labs (Wall Street Journal, Dana Mattioli and Jennifer Maloney) shows that the Malboro maker is willing to take a risk by taking up a big slice of e-cigarette startup Juul Labs in to get greater access to an increasingly fraught area of the tobacco market. A deal isn’t imminent, but if it happened it would be big as Juul was most recently valued at $16bn this summer (but that was when everything was hunky dory and before the FDA decided to urinate over its rather

popular parade). Juul Labs’ products are thought to account for 75% of the e-cigarette market, so Altria would get a significant boost in that product segment while Juul would be able to benefit from Altria’s distribution.

I thought I would mention On the beach growth leaves Thomas Cook in the shade (Daily Telegraph, Oliver Gill) because the market value of this online holiday start-up founded in a terrace house in Macclesfield in 2004 briefly rose above that of the rather larger Thomas Cook in trading yesterday! The FTSE 250 company announced a 24% rise in annual pre-tax profits despite this year’s extremes in temperature. Interestingly, On the Beach generated annual sales of £104.1m versus revenues of £9.6bn for Thomas Cook over the same period. The company’s chief exec said that they probably did better than rivals because they do not have an agreement to fill hotel rooms, which meant that Thomas Cook and the like were left wearing capacity they couldn’t sell, contributing to their poor performance. What a contrast, though!



…And finally, in other news…

Do you like animals? Well how about the big ones in Knickers the giant cow to Bopper the dog – these are the world’s biggest animals (The Mirror, Rhian Lubin MASSIVE!

And finally, I thought I’d leave you with Skip woman wanted to help customers but turned into a meme sensation instead (Metro, Basit Mahmood

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

Some of today’s market, commodity & currency moves (as at 0825hrs 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 **
7,005 (-0.18%)25,366 (+2.50%)2,744 (+2.30%)7,29211,299 (-0.09%)4,98322,263 (+0.39%)2,567 (-1.32%)
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿

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