Tuesday 21/08/18

1. In MACROECONOMIC NEWS TODAY, Venezuela gets drastic with its currency and Qatar steps in yet again for Turkey
2. In ELECTRIC VEHICLE-RELATED NEWS, Tesla’s nightmares continue and the City of London considers banning non-EVs
3. In M&A AND IPO NEWS, Pepsi buys SodaStream, Tyson buys Keystone and Ant Financial postpones its flotation plans again
4. In OTHER NEWS, I bring you some impressive mattress skills. For more details, read on…

So Venezuela ditches zeros and Qatar pledges more for Turkey…

Venezuela lops five zeros off the bolivar to halt economic collapse (Financial Times, Gideon Long) highlights some drastic action as the government devalued Venezuela’s currency by 95% as part of a desperate attempt to address an annual inflation rate of over 80,000% (which the International Monetary Fund thinks will hit 1m% this year). It is also slashing fuel subsidies and hiking up the minimum wage by 3,000%. From today, Venezuelans will see the introduction of new banknotes called “the sovereign bolivar”, with a 500 new bolivar note being worth 50,000,000 old bolivars (around $8 at the current black market rate). President Nicolas Maduro announced that the new bolivar will be pegged to the petro, a state-run cryptocurrency he launched earlier this year with an exchange rate of 60 new bolivars to the petro, which is itself worth $60. * SO WHAT? * Insane. Here are some fun facts: the petro is not recognised on any trading platform and the government can just pump them out whenever it wants to (“he [Maduro] might as well have chosen pegging it to unicorns”, according to Russ Dallen, head of Caracas Capital). Venezuela now has the highest inflation rate ever recorded in Latin America (beating Nicaragua in early 1991) and “the steepest plunge in activity endured by any Latin American country in the past 40 years”, according to 

London-based consultancy EM Funding. According to IMF data, Venezuela’s economic contraction of 47% over the past five years is worse than the deep recessions in Peru in the early 90s and in Argentina in the early 2000s. The massive rise in the minimum wage (from less than $1 to around $30) is supposed to help workers cope with the huge price increases, but employers are tearing their hair out and saying that job cuts are inevitable. Maduro said that he wants to increase pump prices to international levels by phasing in cuts to fuel subsidies that have made petrol virtually free in the country, creating a massive black market in fuel that is taken across the border to Colombia and sold at a profit. Extreme situations require extreme measures – but I hope that Maduro’s unfortunate countrymen can cope with the new moves.

Qatar agrees $3bn currency swap with Turkey (Financial Times, Andrew England and Laura Pitel) shows that Qatar is stepping up to help Turkey, by agreeing a $3bn currency swap (which will effectively give Turkey indirect access to dollars) to help the country’s financial system, as part of the $15bn it pledged to invest last week as Turkish authorities attempt to arrest the slide in the lira caused by concerns over monetary policy and an overheating economy. * SO WHAT? * Qatar’s show of solidarity with Turkey is payback for the time when the latter came to the former’s aid as Qatar suffered an embargo last year from Saudi Arabia, the UAE and Egypt. We’ll see soon enough whether this boost will be enough to bring Turkey back from the brink and save face for Erdogan who STILL refuses to hike interest rates.

In electric vehicle-related news, Musk continues to suffer flak and the City considers EV zones…

Tesla had a bad day yesterday as JPMorgan cuts Tesla target over lack of buyout funding (Financial Times, Mamta Badkar and Shannon Bond) highlights a dramatic about-turn by the analyst who raised his price target to $308 the day after Musk tweeted he had enough backing to take the company private and then cut it yesterday back down to $195, the level it had been prior to “tweetgate”. The analyst said, in his updated note, that he did not believe the funding had been secured and that he was reverting to valuing the company on its fundamentals. Doubt over Musk’s plan sees Tesla shares fall (Daily Telegraph, James Titcomb) shows further potential problems as there are rumours that Saudi Arabia’s Public Investment Fund (PIF) – the very one that Musk claimed was backing a buyout – is currently looking at putting as much as $1bn into Lucid Motors – a California car maker involving several ex-Tesla engineers. Some Tesla suppliers fret about getting paid (Wall Street Journal, Tim Higgins, Marc Vartabedian and Christina Rogers) puts the boot in further as it cites the results of a survey conducted by a well-regarded automotive supplier association (the Original Equipment Suppliers Association) which found that the

majority of respondents (admittedly, from a rather small sample) believe that Tesla is now a financial risk to their companies. * SO WHAT? * Tesla is definitely not having a fun time at the moment and if current investigations find that Elon Musk lied about having secured a backer, things will get a whole lot worse. Like I said yesterday, the shares could plunge to such an extent that the PIF DOES scoop it up for way less than $420 and bag itself a “bargain” of sorts. It could then, years later when everyone has moved on, put it back ON the market so that it can sell off a chunk to crystallise some of the value of its investment, keep a controlling stake and sit back and watch the money roll in! This is purely hypothetical of course! As far as these stories go, though, analysts change their target prices all the time (so nothing particularly surprising there), the PIF is probably just spreading its exposure to Lucid Motors (which it is perfectly entitled to do. Yes, $1bn is chunky, but then again so is its investment in Tesla) and the Tesla supplier thing is annoying, but the WSJ always seems to have something negative to say about Tesla and the survey it mentions is very narrow. I’m not particularly a Tesla fanboy – I’m just trying to give you a balanced view.

City of London weighs limited ban on non-electric vehicles (Financial Times, Leslie Hook) is an interesting article which shows that the City of London is looking at having a “low-emission” street and banning non-electric vehicles from it as levels of nitrogen dioxide have been above legal limits since 2010. * SO WHAT? * OK, so this is only slightly more than a twinkle in the eye of authorities, but it shows the way thinking is going. Stuff like this will continue to put the die in diesel as more and more cities consider going in this direction.

In M&A and IPO news, Pepsi gulps up SodaStream, Tyson buys Keystone and Ant Financial postpones its IPO again…

Pepsi’s $3.2bn SodaStream deal puts fizz into healthier drinks (The Guardian) is a story doing the rounds this morning as Pepsi tries to take the fight to Coca-Cola by buying SodaStream – the company founded in the UK in 1903 and now owned by Israelis – at a 10.9% premium to Friday’s closing price. The deal is expected to complete by January and Pepsi says that the company will benefit from its strong distribution power. * SO WHAT? * Sounds reasonable on a strategic basis and there is a lot of upside to go for! Given that it was the gadget to have in the 70s and 80s, there is some evidence that a market has been there in the past – it’s just whether newer generations will take it up. Apparently, 16% of Swedish households have a SodaStream currently according to PepsiCo/SodaStream: bubble economics (Financial Times, Lex), so if Pepsi could replicate at least some of that Swedish success elsewhere, then happy days!

Tyson Foods to acquire Keystone Foods in $2.16billion deal (Wall Street Journal, Jacob Bunge) heralds a deal by Tyson Foods to buy a top meat supplier to fast food chains including McDonald’s in an effort to boost sales and get economies of scale as tariffs squeeze US meat companies. This all-cash deal will push Tyson’s business mix towards higher-profit products like chicken nuggets and fish fillets and away from “commodity meat” whose margins are thinner and whose prices are more volatile. Tyson is the largest US meat supplier by sales.

In Ant Financial IPO plans pushed back again (Financial Times, Henry sender and Louise Lucas) we see that the much-anticipated Initial Public Offering (IPO) of Ant Financial, the electronic payment affiliate of Alibaba valued at $150bn in its recent June fundraising, will be delayed yet again as it continues to burn cash and come under increasing pressure from Beijing, which is cracking down on non-traditional financial institutions. * SO WHAT? * Big financial services companies are tiring of this non-bank behaving like a bank but not having to adhere to tighter restrictions and authorities are now starting to take a much closer look at some of Ant Financial’s core businesses such as micro lending and wealth management, according to Ant Financial: a bug’s life (Financial Times, Lex). It looks like Ant Financial has some growing up to do…

…And finally, in other news…

Yesterday, I brought you some impressive tempura-making skills – well what about something a bit more outdoorsy today: Man successfully surfs inflatable mattress over giant wave (Metro, Zoe Drewett https://tinyurl.com/ybh2twhv). Duuuuuude!

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