Thursday 09/08/18

1. In MACROECONOMIC NEWS TODAY, Saudi Arabia gets proper shirty with Canada and the pound’s weakness puts it back to October lows
2. In INDIVIDUAL COMPANY NEWS, Tesla’s the talk of the day with everyone trying to guess did he, didn’t he, could he, who could afford it etc, Samsung unveils some chunky investment plans and Ryanair gets tough
3. In RETAIL AND SPENDING-RELATED NEWS, France’s Casino has a shocker, Homebase announces closures and job losses and experts predict big rent rises
4. In OTHER NEWS, I bring you something to make bike riding a little more interesting. For more details, read on…

So the Saudi Arabia/Canada spat gets serious and the pound hits new lows…

In Saudi Arabia sells Canadian assets as dispute escalates (Financial Times, Simeon Kerr) we see that Saudi Arabia is not taking too kindly to Canada criticising the arrest of a female activist (Samar Badawi) and has decided to show its displeasure via its central bank and state pension funds ordering their overseas asset managers to sell their Canadian equities, bonds and cash holdings “no matter the cost”. Third-party fund managers are thought to invest over $100bn of Saudi money in global markets, with admittedly only a small proportion of it in Canada, but the sell-off started in earnest on Tuesday. So far in addition to the sell-off, in response to this criticism, Saudi Arabia has kicked out the Canadian ambassador, frozen new trade and investment with Ottawa, suspended a student exchange programme to Canada, stopped Saudi Arabian Airlines flying to Canada and ended all medical treatment programmes in Canada – pretty serious stuff, at least symbolically. The government media office denied giving the order for the sell-off, but it was confirmed by other sources. * SO WHAT? * This is obviously a pain in the *rse for Canada but such petulant actions by Crown

 Prince Mohammed bin Salman aren’t going to engender confidence from other countries thinking of investing in Saudi Arabia as part of the Crown Prince’s efforts to wean his country off reliance on oil revenues. Still, I guess he can afford to stick it to everyone else given the strong oil price and the fact that the US is in its pocket given that the latter needs Saudi Arabia to make up for the oil shortfall resulting from its recently re-imposed sanctions on Iran. Canada is taking a noble stance but I bet that no-one’s going to be rushing to be associated with them…

I said yesterday that if you are holidaying in Turkey at the moment or in the near future you will be enjoying yourself even more than usual given the lira has gone through the floor, but then again the pound isn’t doing particularly well as Pound’s weakness sends it back to October lows (Financial Times) shows that it really is weakening against the Euro as it fell below the 90p level for the first time since October when traders were getting excited about the European Central Bank unwinding its stimulus package. * SO WHAT? * The value of the pound versus the Euro is widely seen to be a bellwether of Brexit negotiations, which haven’t yet produced a deal. Jane Foley, a strategist at Rabobank, said that “if the market believes a hard Brexit is inevitable, we expect that [the] euro-sterling rate is likely to test and potentially break above parity” whereas others believe that the euro will also suffer in the event of a hard Brexit. The euro has had a mixed year so far after a good year last year as it is stronger versus the pound, the dollar bloc countries and the Swedish Krona, but weaker against the yen, Norwegian krone and the Swiss franc.

In individual company news, Tesla comes under the spotlight, Samsung announces some big investment plans and Ryanair gets shirty…

Following on from Elon Musk’s controversial tweet over the weekend about him potentially taking Tesla private, there’s been a LOT of debate! SEC probes Tesla CEO Musk’s tweets (Wall Street Journal, Dave Michaels and Michael Rapoport) says that US regulators are asking Tesla whether Musk was telling the truth in his tweet – if he wasn’t, he’ll get punished and potentially expose himself and the company to lawsuits; Tesla board say they knew of proposal to go private (The Guardian, Edward Helmore) implies that it is true because they had several meetings about it last week (but really – are they going to deny it?? Yes, they’re “independent” but really??); Doubts over Musk’s resources to fund buyout (The Times, James Dean) looks at the funding options the company could be considering – raising new debt (unlikely as it’ll be VERY expensive), private equity (tricky because you tend to need to generate cash for this, which Tesla doesn’t) or get sovereign wealth funds, big pension funds and tech investment funds to invest (such as Saudi Arabia’s Public Investment Fund currently has 3-5%, China’s Tencent has 5% and Japan’s SoftBank via its Vision Fund – which hasn’t yet invested in Tesla, rather one of its rivals). This article also suggests that there might be another ulterior motive for his tweets – that in March next year, one of Tesla’s convertible bonds, worth $920million, is due to mature and if Tesla’s share price goes above $359.90 at maturity, bond holders will be repaid in Tesla shares whereas if it ends up below that price the company will have to repay bondholders $920m in cash. Tesla: ride or die (Financial Times, Lex) says that there will be many investors who will be keen to sell up for a price that is 10% above the company’s all-time high but then it suggests that he should be careful what he wishes for because although private capital market investment has its upside in terms of less week-to-week performance scrutiny and more freedom to reach his longer-term goals, it’s private equity investors who got Uber founder Travis Kalanick sacked after they tired of his antics. The implication here is that he would be gleefully jumping out of the frying pan into the fire. If you want more on the pro’s and con’s of whether Tesla should go public or private, then you could do worse than have a look at Tesla’s big question: better or worse off as private company (Wall Street Journal, Mike Colias and Rolfe Winkler). Pro’s of going private include the ability to stop naysayers and short-sellers affecting the valuation of the company, the ability to shield its financial health from rivals and that it could focus more on the long term, giving him more creative freedom to achieve the company’s goals. Con’s of going private are that Tesla would be cutting itself off from a source of capital that has been largely favourable towards its over time despite its huge losses and production target misses, it wouldn’t be

completely free of scrutiny as it will still need to increase production at a reasonable clip, it might end up paying a lot for the privilege in terms of paying back the investment with interest and it would also take away an attractive recruiting tool – stock options. * SO WHAT? * There’s too much happening at the moment to know the actual outcome, but I am sticking with my initial conclusion – that Elon Musk is yanking our chain. Even if he WANTS to go private I just think that it will be an enormous uphill task for him to undertake at such a crucial stage in Tesla’s development. On balance, I think that if he is confident that he can hit and exceed the production targets he is better off staying public. If anything, I think that taking the company private could be interpreted as being a cop out and an indirect admission that he WON’T be able to meet the targets – which would make it more difficult for him to get private equity investment in the first place.

In Samsung outlines $160bn investment plan to underpin profits (Financial Times, Bryan Harris) we see that the company is planning a sizeable investment over three years in new technologies with the end goal of ensuring profitability against the backdrop of Chinese competition, and comes just days after Samsung Electronics, the tech division of the South Korean conglomerate, announced its first profit fall for seven quarters. $22bn will go towards tech including AI, automotive electronics components and biopharmaceuticals, with Samsung Electronics accounting for most of that spend. The remaining $138bn is earmarked for semiconductor and display manufacturing facilities in addition to external start-up projects. * SO WHAT? * This is a big deal from a big company – Samsung Electronics alone accounts for almost 20% of the value of korea’s main Kospi Composite stock index, but it has acknowledged that things will be getting trickier as time progresses as the likes of Chinese tech groups such as Xiaomi and Huawei continue their stellar growth momentum. As Sanjeev Rana, an analyst at CLSA put it, “Samsung needs to find new growth areas as their existing businesses are saturated. They are a little late to areas such as artificial intelligence but they don’t need to start from scratch. With that money, they can do M&A”. Punchy.

You’ll probably be hearing about this a lot at the moment, but Fresh crisis for Ryanair as more pilots take strike action (Daily Telegraph, Oliver Gill) highlights the chaos being caused by the prospect of one sixth of flights being grounded tomorrow in co-ordinated strikes as German pilots are joining action planned by their counterparts in Ireland, Sweden and Belgium – with the Dutch pilot’s union VNV considering its options. They are striking because they believe that their salaries are made up of an unusually high variable component based on their flying frequency. * SO WHAT? * This is clearly a pain for Ryanair, but the real issue is that this isn’t the first time that Ryanair has had problems in the recent past. If people start avoiding Ryanair because of a perception that it is prone to disaster, this could become a major long-term problem. Reputational risk is not to be sniffed at here. As for the pilot’s part, maybe they should head off to America as Facing a critical pilot shortage, airlines scramble to hire new pilots (Wall Street Journal, Robert Wall and Andrew Tangle).

Meanwhile, in retail and consumer-related news, Casino has a shocker, Homebase announces closures and losses whilse rents are likely to see chunky increases…

Casino shares plunge to 22-year low on valuation concerns (Financial Times, David Keohane) heralds some difficult times for the French retailer as concerns increase about its debt against a backdrop of tightening competition. A report from Bernstein said that the scale of Casino’s debt is undervalued by investors, which was obviously denied by the company. The shares fell by 10%, contributing to Casino’s shares falling by 36% so far this year.

There’s more bad news for UK retailers in Homebase jobs at risk as 60 stores face closure (The Times, Tabby Kinder) highlights the latest developments for the troubled

retailer as 60 of its 249 stores are to close as part of a company voluntary agreement to be announced next week with over 1,000 jobs hanging in the balance. Hilo Capital bought the DIY chain in May for £1 from Australian retailer Wesfarmers, which was hoping to rebrand the chain as Bunnings originally. * SO WHAT? * It’s just the latest retailer casualty in a sorry list that includes the likes of Carpetright, Mothercare and New Look. It’s funny,  though, because the number of store closures and job losses seem to differ considerably depending on which newspaper you look at. Homebase store closures put 2,000 jobs at risk (Daily Telegraph, Ben Woods) and Homebase set to announce closure of 80 stores with loss of 1,000 jobs (The Guardian, Sarah Butler) make you wonder what the actual figures really are! Still, we’ll get the detail next week.

There’s bad news for renters out there in Rents could go up by 15% in five years, experts predict (The Guardian, Julia Kollewe) as a report from the Royal Institution of Chartered Surveyors (Rics) forecasts that rents will go up by almost 2% across the UK over the next 12 months and by 15% by the middle of 2023, with East Anglia and the south-west are likely to see the sharpest rises. This is largely to do with small landlords selling up after the removal of tax breaks and higher stamp duty on second homes, which has made buy-to-let properties less attractive as an investment. Equally, renters are on the increase as they not able to afford to buy their own home.

…And finally, in other news…

Do you like multi-tasking? Feel that “just” riding a bike could be pepped up a bit? Well maybe you need to have a look at this guy’s set-up: Grandfather uses 11 smartphones attached to a bicycle to play Pokemon Go (Metro, Jimmy Nsubuga https://tinyurl.com/ycdmvc89). Nice.

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