Tuesday 24/09/19

  1. In INDIVIDUAL COMPANY NEWS, I give you more on Thomas Cook – the why, the winners and losers and why liquidation and not administration, Juul’s (and vaping’s) worsening nightmare and Google’s game service
  2. In CAR NEWS, Hyundai & Aptiv embark on a $4bn joint venture while VW voices its eagerness to form battery alliances
  3. In MACRO NEWS, the Eurozone economy continues to slow as there’s more evidence Germany will go into recession
  4. In OTHER NEWS, I bring you deep-fried Jaffa Cakes 🤢 and the kindness of strangers…



So Thomas Cook fallout continues, Juul’s nightmare gets worse and Google launches a gaming service…

Given the nature of its business and the brand name, it’s not surprising that Thomas Cook continues to be all over the newspapers today. Just in case you spent yesterday in a cave, rocking backwards and forwards whilst sticking your fingers in your ears and saying “Lalalalalala”, Why the world’s oldest tour operator failed (Daily Telegraph, Oliver Gill and Michael O’Dwyer) does a great job of summarising the story so far. Basically, the main problems started when it merged with MyTravel in 2007 that lumbered it with massive debts at a time when customers were increasingly shifting online. The company almost went under in 2011 but managed to negotiated its financing and thus a stay of execution. However, a few years later, the heatwave in summer 2018 decimated the market for last-minute holidays which left the company wearing a boatload of rooms it had previously booked in anticipation and fears of terrorist attacks hit demand for previously-popular destinations such as Turkey and Tunisia. Things continued to get worse in 2019 as customers delayed holiday bookings because they wanted to wait and see what happened with Brexit (plus sterling continued to weaken) and then when it tried to sell its airline to raise some cash, it failed. Eventually, its biggest shareholder – China conglomerate Fosun with an 18% stake – looked like it was going to inject a ton of cash but then panic increased among suppliers that they weren’t going to get paid, so demanded more cash in advance while hedge funds bought up bonds and shorted the stock, making the whole situation go from bad to worse. In addition to customers and employees who lost out big time in this whole debacle, Thomas Cook boss in crosshairs over company liquidation (Daily Telegraph, Michael O’Dwyer and James Burton) shows that chief exec Peter Fankhauser is facing increasing pressure for letting the company die (whilst getting paid handsomely as he oversaw its demise), Watchdog under fire on Thomas Cook shares (The Times, Alex Ralph, Ben Martin and Dominic Walsh) shows that now the Financial Conduct Authority (FCA) is being accused of not intervening quickly enough and Condor airline in €200m bailout plea to German government (Daily Telegraph, Justin Huggler) shows that Thomas Cook’s highly profitable German airline Condor is now struggling to survive. Meanwhile, Hedge Funds will gain from demise (Daily Telegraph, Tom Rees) shows that some will profit from the demise as speculators benefited from short-selling Thomas Cook shares for months and using credit default swaps (CDS) – which are derivatives which pay out of a company defaults on its debt. All in all, Thomas Cook: the dear departed (Financial Times, Lex) blames the demise on a string of chief execs that made the wrong decisions and didn’t take the online threat seriously enough quickly enough. For those of you who like more detail, Why Thomas Cook has gone into liquidation not administration (Financial Times, Matthew Vincent) says that the company did not go into administration because an administrator has to stump up cash in this process to keep a business going while it finds buyers. Given the scale and complexity of Thomas Cook’s debt, liquidation was the only option in

this case as previous opportunities to pay down debt and restructure had been missed. The whole thing is a huge mess. * SO WHAT? * I think that we will see a continuous flow of negative news on Thomas Cook’s failure as the repercussions play out. Its rivals Tui and Dart saw their share prices rise yesterday in anticipation of them getting more business but it may be short-lived given that they continue to face the perennial banana skins of online competition, terrorism and climate change. There is now talk of potential regulation to claw back back of top executives who have been judged retrospectively to have played a part in a company’s demise, but I suspect anything along those lines would take ages – if ever – to be implemented.

Then in Federal prosecutors conducting criminal probe of Juul (Wall Street Journal, Jennifer Maloney) we see that things are continuing to get worse for the king of vaping as the US attorney’s office of the Northern District of California is conducting a criminal investigation into Juul Labs, although the details are sketchy at this stage. * SO WHAT? * This latest investigation is in addition to others being conducted by the FTC, the FDA and other state attorneys general who are looking into alleged questionable marketing practices among other things. However, that could well be small beer against the potential nightmare they could face if a link between vaping and various lung conditions can be found. ‘The bells start going off’ How doctors uncovered the vaping crisis (Wall Street Journal, Brianna Abbott) makes for alarming reading and if what is alleged is true, could open up a massive can of worms in terms of litigation and class action lawsuits around the world (not to mention the needless deaths and suffering in the process). Some countries are already implementing vaping bans, taking decisive action before the conclusion of any other investigations. A nightmare for tobacco companies who thought they’d found a new product with growth potential. Even worse for those who die as a result of using them or suffer because of the chemical exposure to their lungs…

On a slightly lighter note, Following Apple’s lead, Google launches subscription videogame service (Wall Street Journal, Sarah E. Needleman) shows that Google is launching Play Pass for $4.99 a month after Apple launched a similar service last week for mobile gaming, called Apple Arcade, for the same price. Play Pass started on Android services in the US yesterday and will be rolled out internationally in the coming months. It has over 350 games and apps and won’t feature ads or prompt gamers to buy anything. Apple Arcade “only” has over 100 games, but unlike for Play Pass, they are new and exclusive for the service. * SO WHAT? * This is just a natural development for mobile gaming IMO and is a precursor for the introduction of Google Stadia, which is a bigger scale game streaming service that will give access to console-quality games. This service is slated to launch in November and will cost $10 a month. I believe that streaming is the future of gaming and that the next generation of consoles will be the last due to hard copy games becoming increasingly obsolete and vast improvements in processing speeds. However, the success of the service will be heavily dependent on 5G rollout which will be needed to provide the necessary speeds for a non-frustrating experience. Services like this will give players like Apple and Google access to very nice steady revenue streams.



Hyundai and Aptiv strike an autonomous deal and VW seeks battery partners…

Hyundai Motor and Aptiv seal $4bn autonomous car joint venture (Financial Times, Song Jung-a) heralds a chunky joint venture between the South Korean car giant and the Dublin-based auto technology group Aptiv to develop autonomous cars by 2022. This will be Hyundai’s biggest investment yet in future mobility tech as it tries to make up for being late to the party versus its peers. Aptiv, which used to be known as Delphi Automotive, will contribute its autonomous driving technology to the venture while Hyundai (along with affiliates Kia Motor and Hyundai Mobis) will provide vehicle engineering services, R&D and access to its intellectual property. It aims to start testing completely autonomous systems in 2020 with a view to churn out driverless platforms by 2022. * SO WHAT? * As many regular readers of Watson’s Daily will know, I am highly sceptical about the practicality of driverless vehicles although I like the idea in theory (it would be brilliant for the freedom and mobility of the elderly and disabled, for instance). Surely we should start with something “easy” like driverless trains (no traffic to worry about) before wading

into the far more complicated situation on our roads with all the ethical, legal and practical considerations that need to be taken into account. I think this is all noise, but it’s probably a good move for Hyundai who now stand NOT to lose out IF a driverless boom takes off. 2022? My *rse.

Volkswagen keen to forge battery technology relationships (Financial Times, Joe Miller) heralds an additional commitment to the €1bn already earmarked by the company for battery tech as it looks to open up to third parties in a bid to keep its target of launching up to 70 new electric vehicles over the next decade. At the moment, the company’s current providers “can only fulfil 50-60% of [VW’s] total need by 2023”, hence the need to open things up. Stefan Sommer, VW’s supervisory board member for procurement added that “We need huge capacity for battery cells…six or seven times the size of [the Salzgitter] factory”. * SO WHAT? * This all sounds great but EVs still account for a teeny weeny proportion of new car sales, although obviously they are shouting about the massive percentage increases in new cars sold. Potential partners may fear committing too much money to something where the projection of future demand looks over-inflated (after all, why would a company as big as VW not be willing/able to do this themselves??), but I guess it’s a good idea in theory. The major obstacle to it all remains the virtually non-existent charging structure in many developed countries and will remain so for years to come IMO.



The Eurozone economy continues to look tricky as Germany edges closer to recession…

Eurozone economy slows amid trade decline and Brexit fears (The Guardian, Phillip Inman) cites the latest Purchasing Managers Index for manufacturing in Germany

which showed a sharp decline on the back of weaker demand as Brexit concerns and ongoing tariff problems continue to bite. Simon Wells, chief European economist at HSBC, observed that “Today’s PMIs make grim reading, particularly for Germany. Since the peak of the German manufacturing PMI in December 2017 there have been a few occasions where signs of stabilisation have been snuffed out”. * SO WHAT? * Given that Germany is the major engine of the Eurozone economy, the latest gloomy figures would seem to support the ECB’s recent moves to implement stimulus measures.



And finally, in other news…

I thought I’d leave you today with something a bit grim in Chip Shop is making battered Jaffa Cakes – and people are very sceptical (The Mirror, Courtney Pochin https://tinyurl.com/y4wsclw4) – bleurrgggghhh 🤢- and something altogether more palatable in Sports fan asks for beer money and ends up raising $1m for children’s hospital (Sky News, Sanya Burgess https://tinyurl.com/y595l2m5). But deep-fried Jaffa Cakes, people?? That’s just WRONG!!!

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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 **
7,326 (-0.26%)26,950 (+0.06%)2,992 (-0.01%)8,11212,342 (-1.01%)5,631 (-1.05%)22,099 (+0.09%)2,986 (+0.29%)
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿

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