Wednesday 30/10/19

  1. In MACRO & OIL NEWS, BoJo gets his election, Macron’s labour reforms bear fruit, Saudi Aramco announce a cut-down IPO and BP suffers from weather and weaker oil prices
  2. In CAR NEWS, strikes cost GM $3bn while Fiat and Peugeot’s owner consider a merger
  3. In RETAIL NEWS, Amazon cuts fees on speedy deliveries and M&S announces “buy-now-pay-later”
  4. In INDIVIDUAL COMPANY NEWS, Beyond Meat’s early backers sell while Lloyd’s faces opioid fallout of epic proportions
  5. In OTHER NEWS, I bring you a ghoul/ghost puzzle…

1

MACRO NEWS

So BoJo gets his election, Macron’s labour reforms kick in, Saudi Aramco announces its IPO and BP suffers…

General election set for December 12 as MPs vote to break Brexit paralysis (Financial Times, George Parker, Sebastian Payne and Laura Hughes) highlights the latest development on the Brexit/BoJo rollercoaster as he got his wish to hold a General Election on December 12th  after Labour eventually decided to go with it rather than drag things out any longer. He also reappointed 10 of the 21 MPs he sacked last month for going against him over Brexit, potentially removing the threat of these rebels standing as independents and splitting the Conservative vote. BoJo’s Brexit deal will be suspended in the meantime. Interestingly, opposition parties failed to move forward the date of the poll to December 9th and to extend the vote to 16 and 17 year olds. The House of Lords is expected to rubber stamp legislation to hold the December 12th election. * SO WHAT? * It’s a gamble, but clearly one that BoJo thinks he has a decent chance of winning. However, predecessors Theresa May and David Cameron completely misjudged the mood of the electorate and lost key votes that led us to this current state of affairs – Cameron regarding the referendum and May in thinking she could increase her majority. Although the Conservatives are ahead in the opinion polls at the moment, things can change and there’s still time for others to play catch-up. I guess that BoJo’s game plan is to win a majority, which will make pushing through Brexit way easier (depending on whether he gets it and how big it is) without having to rely on the DUP. Fun facts: this will be the first December election in almost a hundred years, the second general election since 2016’s referendum and the third in less than five years.

Hopping over the Channel for a minute, Macron’s labour market changes begin to bear fruit (Financial Times, Hannah Copeland and Valentina Romei) shows that the French president’s labour reforms are showing early signs that they might actually be working. He has capped the cost to employers of unfair dismissal, carried out a tax overhaul and made low-wage work more attractive by reworking benefits. He has also made it more expensive for some employers to hire people on short-term contracts and beefed-up training and skills initiatives. Another crucial area he is working on currently involves the replacement of 42 pension schemes with one system whilst pushing up the retirement age above 62. Although France’s economy is actually doing quite well against a tricky global economic backdrop its unemployment numbers remain stubbornly high – in fact, the fourth highest in the EU after Italy, Spain and Greece. However, the latest figures show that French unemployment fell to 8.5% in the second quarter of 2019 – its lowest level for ten years – and the number of temp contracts has been falling steadily since 2018. Macron is trying to reduce unemployment to below 7% by 2022 and

these figures would seem to vindicate his actions thus far. * SO WHAT? * This all sounds like things are moving in the right direction in terms of reducing headline unemployment levels but two problems need to be addressed for this to work on a long-term basis: making work more attractive than living on benefits (French benefits can be pretty generous) and how to bridge the gap between workers’ skills and the jobs available. Macron has more chance to push reform through than his predecessors given his broad-based support and the relative current strength of France’s economy – but if things turn down at all, employers and unions will be on his back. Bearing in mind the ongoing US-China trade tensions and a shaky German economy, continued strength in the French economy is not a given.

Delayed Aramco float imminent after scaled-down listing (Daily Telegraph, Simon Foy) highlights the listing that everyone has been waiting for – the initial public offering of Saudi-state-owned Saudi Arabian Oil Company, aka Saudi Aramco, aka Aramco. HOWEVER, it will only list between 1% and 2% of the company on its domestic Tadawul stock market, as opposed to the 5% it was originally thinking of floating on the domestic and international markets (the latter of which got markets around the world fawning over the regime to get the business). The timetable would suggest that the launch will be on November 3rd, with trading to commence on December 11th but Aramco’s spokesman said that “The company continues to engage with the shareholders on initial public offering readiness activities. The company is ready and timing will depend on market conditions and be at a time of the shareholders’ choosing”. * SO WHAT? * This is an important development given that this sounds like it might actually happen. Flotation has been booted into the long grass thus far because of weaker oil prices, increasing scepticism over IPOs generally and the target of a $2tn valuation (yes – you read that right – TWO TRILLION DOLLARS. That’s like TWO Apples/Googles/Amazons at their peak) looking more and more distant by the day. As for the international flotation, everyone has been jockeying for position but Tokyo seems to be the current front runner due to the current political uncertainty in the UK and Hong Kong.

Then in BP profits tumble after weaker oil prices and hurricane impact (The Guardian, Jillian Ambrose) we see that the oil major’s profits have taken a big dent due to weaker oil prices, various one-off weather-related costs and the falling value of its investments affected at least in part by downbeat forecasts for the global economy. * SO WHAT? * Current chief exec Bob Dudley will be stepping down at the beginning of next year to be replaced by BP’s current exploration and production boss Bernard Looney, who is expected to come up with a road map for a low-carbon future. Good luck with that – an oil company coming up with a low-carbon future?? That’s like tobacco companies coming up with a no-cigarette future, oh wait – that’s going to happen too, apparently. Did I just see a pig fly past my window?? 😜🐷

2

CAR NEWS

GM counts the cost of strikes while Fiat and Peugeot cosy up…

GM factory strike to hit bottom line by nearly $3bn (Wall Street Journal, Mike Colias) quantified the cost of a 40-day strike (the longest nationwide strike for 50 years, no less!) at its US factories as it announced cuts to its full year profit forecasts. General Motors said that it cost it all of its free cash flow for the entire year and almost $3bn in lost earnings. Despite this, the company managed to announce market expectation-busting third quarter results and investors seemed to be looking forward to strong earnings in 2020 as the share price actually jumped by 4.3% in trading yesterday. * SO WHAT? * Its refreshed line-up of pick-up trucks is expected to do well but sluggish markets in China and South America are of particular concern. The industry itself continues to see weaker sales as the US-China trade war continues to hit tariffs and consumers get increasingly reluctant to spend on big ticket items like cars etc.

Fiat Chrysler, Peugeot owner PSA in talks to combine (Wall Street Journal, Ben Dummett, Nick Kostov and Christina Rogers) highlights the prospect of Fiat Chrysler and PSA Group merging to form a $46bn company that would be the world’s 4th biggest auto manufacturer, as Fiat Chrysler said in a short statement that “There are ongoing discussions aimed at creating one of the world’s leading mobility groups”. It sounds like the two are mooting the possibility of an all-share “merger of equals”, but negotiations are still at a very early stage. The talks come only months after Fiat Chrysler walked away from another combo with Renault due to resistance from the French government (a big shareholder) and its alliance partner Nissan. * SO WHAT? * Investors were piqued by the possibility (Fiat Chrysler’s New York quoted shares were up by 7.5% overnight), but as we’ve seen already these things don’t always run smoothly as merger talks have tended to fail due to politics getting in the way and/or internal power struggles. There is pressure to consolidate in the industry due to rising costs (due to tightening emissions regulations necessitating higher input costs and the introduction of electric models) and falling sales so we’ll just have to see how this latest attempt pans out.

3

RETAIL NEWS

Amazon cuts delivery fees and M&S offers “buy-now-pay-later”…

Amazon is cranking the pressure up on grocery retailers in Amazon cuts fees on fast grocery deliveries (Daily Telegraph, Hannah Boland) as the company has announced it is scrapping fees for existing US Prime customers for its grocery deliveries. Until now, users had to pay $14.99 a month to get Amazon Fresh deliveries. This move sparks speculation that it’ll happen in the UK. * SO WHAT? * This is clearly a move to put pressure on other grocery retailers and was bound to happen given Amazon’s desire to expand in this area, not to mention its moves to squeeze out more from its logistics networks. Will supermarkets respond? Or CAN they respond given that

delivery as a proportion of overall costs for supermarkets is probably higher than it is for Amazon? 

M&S launches ‘buy now, pay later’ service to attract younger customers (The Guardian, Zoe Wood) signals a punchy move by the troubled high street stalwart as it tries to attract younger customers in the run-up to Christmas. It is working together with Clearpay to offer customers the ability to pay for orders of over £30 in four interest-free installments over six weeks with a maximum spend of £800. * SO WHAT? * This is clearly a response to the rise of rival Klarna (which already has over 4,000 retail partners in the UK including Asos, Boohoo and JD Sports), which is already successful as a service that is highly valued by younger customers on tighter budgets. Shoppers that use these payment plans tend to spend more, more often and are therefore an attractive demographic – but whether they will want to spend it at M&S is another question!

4

INDIVIDUAL COMPANY NEWS

Beyond Meat suffers and Lloyd’s of London could be facing a big opioid headache…

Private backers set for Beyond Meat payday (Financial Times, Miles Kruppa) highlights the fact that early investors in Beyond Meat decided to take some money off the table as they sought to crystallise massive share price gains when their lock-up expired yesterday. Early stage investors like Kleiner Perkins and Obvious Ventures were among those who were able to use the opportunity to sell – and the shares cratered by a whopping 22% as a result, despite the company announcing its first ever quarterly profit. * SO WHAT? * As I said in yesterday’s Watson’s Daily, you can’t blame investors for selling down given the company’s stupendous outperformance since it floated. I still like the fact that Beyond Meat makes real stuff that is continuing to benefit from increasing its distribution channels – unlike companies whose prospects of turning a profit stretch way out into the distance (e.g. Uber etc.). Naysayers will say that competition in this area is increasing, that rivals are more attractive and that meatless

is just a fad – but supporters will probably say that this is a short-term blip and that as long as it keeps signing new distribution deals with supermarkets and restaurants, its stellar growth rate will continue. I would add that if the company can push down its production costs, its growth could be sustained for even longer – but that will presumably come with economies of scale as its orders increase. Exciting times!

Lloyd’s faces legal battles over $50bn opioid crisis (Daily Telegraph, Harriet Russell) highlights something that could spell potential catastrophe for private investors in Lloyd’s, known as “names”, who underwrite tons of policies in return for potential profits made from premiums. Basically, a tsunami of insurance claims relating to pharmaceuticals companies covered by Lloyd’s insurers is expected and could potentially drown a number of them in the process. Some experts believe that the potential volume of claims could have a similar effect on the market that asbestos claims had in the 90s, where Lloyd’s almost collapsed. The US opioid epidemic is alleged to have caused the deaths of 400,000 Americans over the last twenty years, so the potential for claims is enormous. If you combine this along with herbicide claims (Bayer/Monsanto) and talcum powder (Johnson & Johnson) you have a big problem on your hands if you are an insurer.

5

OTHER NEWS

And finally, in other news…

I thought I’d leave you with something today to while away a few moments in Can you spot the ghost among the ghouls? (Mailonline, Chloe Morgan https://tinyurl.com/yy7l3bjn). How frustrating is this?!?

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Some of today’s market, commodity & currency moves (as at 0912hrs 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 **
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿

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