FT Weekend US fire sale? China sanctions on US & Canadians, Taiwan, Covid, Trade and more


28 Mar

On Line 
Investors hunt for source of fire sale that sent stocks tumbling
Friday’s block trade selling spree on Wall Street hit several Chinese groups and US media companies. No answers but many think that a hedge fund or family office may be in trouble after the block sales of several Chinese technology companies and US media groups on Friday to the value of US$19bn. Which GS said was a ‘forced deleveraging’.
Stocks involved included Baidu, Tencent Music, Vipshop, Discovery, Shopify, Farfetch and ViacomCBS shares.
Initial thought to have been linked to the new measure introduced by the SEC to force Chinese tech groups to delist from US exchanges but that was discounted as further US names were offered too.
No doubt the rumours will continue but it underlines that not everyone will have been positioned well in the recent rotation from growth into value.

China places sanctions on US and Canadian citizens
Retaliation for western action over Uyghurs underscores worsening relationship between Beijing and Washington
With sanctions being placed on 'Gayle Manchin, chair of the US Commission on International Religious Freedom, and Tony Perkins, the vice-chair of the commission. China also targeted Michael Chong, a Canadian lawmaker, and a Canadian parliamentary committee that deals with human rights.’
It signals a dramatic worsening of relations and likely to hurt the markets on Monday as investors watch for the next stages.

US fears China is flirting with seizing control of Taiwan
Chinese warplanes fly through island’s air defence zone in latest show of strength by Beijing.
Looks at the escalation with 20 planes testing Taiwan’s air defences on Friday, just after Taiwan and the US agreed to boost co-operation between their coast guards.
'“As we prepare for a period in which Xi Jinping will likely be entering his third term, there’s concern that he sees capstone progress on Taiwan as important to his legitimacy and legacy,” the official added. “It seems that he is prepared to take more risks.”’
I think it shows the pressure that President Xi in under domestically as international relations with many countries are coming under pressure and the EU deal is put into doubt after imposing sanctions on EU officials.The article concludes
'Towards the end of the Alaska meeting, Yang told Blinken and Sullivan that he hoped to welcome them in Beijing for more discussions. According to people familiar with the situation, Blinken leaned across the table and said, “thank you”, which prompted a discussion on the Chinese side about whether the US was accepting the invitation. After the Chinese had conferred for some time, Yang asked Blinken what he meant by “thank you” and whether his reply meant the US negotiators were prepared to hold follow-on discussions in Beijing. “Thank you means thank you,” Blinken replied, signalling to Yang and Wang that the answer for now was “No”.’
In my view the key for Taiwan is for a whole host of nations to stand up in support and to recognise it for the country it is. The west has watched what happened in Hong Kong, they should not do the same over Taiwan not least because they cannot afford to lose access to the technology that comes from Taiwan.

China and Iran sign 25-year agreement to expand ties
Beijing has become Tehran’s most important commercial partner as US sanctions have tightened.
A positive press release for China but in terms of new business it remains unclear of what changes Partly because some changes would still require agreement with the new US administration and removal of sanctions. But also because 'Iranian business figures say China has not proved reliable in bigger contracts and they fear history might repeat itself despite the new agreement.’
I certainly doubt the deal with Iran would make up for the deal with the EU not being ratified.

China embraces ‘steel camels’ to transport goods to Europe
Manufacturers turn to rail in face of shipping container shortages, high costs and delays.
Rail traffic is increasing but it cannot replaced sea freight it cites the example ‘Yangshan port near Shanghai alone processed nearly 2m twenty-foot containers in January, compared with 209,000 containers in total over January and February by rail.’
But for some it is at least a temporary alternative and will help China Railway Express, the state-backed company who certainly in the early stages was only running services because of the subsidies.

Myanmar suffers bloodiest day since coup as more than 100 killed
Global defence chiefs issue rare statement condemning bloodshed on armed forces holiday.
Local media says 114 people killed, comes as Russia looks to increase its ties with the generals; with the Russia’s deputy defence minister Alexander Fomin, arriving in Myanmar on Friday in the most high-profile show of support for the junta since the coup. At least seven other countries sent representatives for the Armed Forces Day parade, including China, India and Thailand.

Front Page
Europe warns of ‘breaking point’ as third wave hits hard
• Covid infections spiral and jabs falter
• Hospitals fear being overrun by April
A reminder that covid is far from being under control in Europe. Also the fact that governments are struggling to get doses, putting pressure on the drug makers and arguing amongst themselves about about how the distribute 10m BioNTech/Pfizer jabs.
'EU leaders also gave their tentative backing to tougher curbs on vaccine exports after the European Commission reported that 77m doses had been exported from the bloc while 88m doses were delivered to its members. Some 21m doses were sent to the UK, the EU said. EU capitals are furious that no vaccines have come from the UK in return.
Hopes rose yesterday that Astra-Zeneca may make up some of the shortfalls after Halix, a contractor in the Netherlands, was given the go-ahead to begin supplying its jabs to the EU.’
Read also
AstraZeneca vaccine gains cautious acceptance in Europe despite scares.  Early indications show many people want the shot that was banned temporarily over clot fears.
Macron criticised after surge in Covid-19 infections and  
India rethinks jab exports as domestic demand rises. India says it is “calibrating” its vaccine exports in an attempt to balance surging domestic demand with international orders, raising doubts over the Serum Institute of India’s capacity to meet its commitments.  Effectively suspending exports but not banning drug shipments.

Step aside, human: Morningstar puts robots to work writing analyst reports
Robots are being put to work at Morningstar to write analyst reports that help investors navigate their way through thousands of funds as they choose saving and retirement plans.'
At this stage they will explain the rationale behind Morningstar’s analyst rating on a fund, which run from gold, silver and bronze, to neutral or negative. The ratings, similar to Wall Street buy or sell recommendations, are separate from Morningstar’s better-known star rating system, which measures funds’ past performance.
Morningstar said that, based on three years of data, the robot ratings already used to generate analyst recommendations on thousands of smaller funds had performed as well as those generated by human analysts.’
Another move in automation, it acknowledges the need for people to actually interview the funds and the teams but says a lot of the rest can be done by computer. But then goes on to say that it's giving its analysts more time to focus on the larger funds.
Raises the question the if it works well on small funds why not use it in the larger funds too.
From my experience as an analyst the time consuming part was always finding the base data to put into your model along with then running scenarios so that you could find a best fit with the companies historical data. The fun was meeting the company and trying to get as much information out of them as possible about management thinking and direction.
If automation can be used for inputting data it would give analysts more time for understanding management and macro implications which should result in better advice for clients.
Time will tell, automation and the use of algorithms should be useful tools but I don’t think the full answer.

The latest Suez crisis: how one ship blocked global trade (Front page)
White House offers help to unblock Suez Canal (Page 2)
A warning from Soren Skou, chief executive of AP Moller-Maersk, adds to growing concern that the disruption to global trade will soon start having an impact on already stretched manufacturing industries from cars to plastics.It has also implications for ships being re-routed with the risk of piracy down the west coast of Africa.
All of which means higher shipping costs and costs to business. The question is who willed up paying them; companies or consumers.

INSIDE
Germany’s highest court halts EU recovery fund ratification
Due to an appeal being brought by a group of Eurosceptics; a group called Bündnis Bürgerwille. or the Citizen’s Will Alliance. On its website, it said that EU treaties do not allow the bloc to take on debt. “That didn’t prevent the European Council from passing an ‘own resources’ resolution which allows the EU to raise debt on capital markets for the first time,” it said.
Interestingly the group is not opposed the recovery fund, just the way that it is being financed.Whilst it is expected to just be a temporary blip could they don’t rule out it could be more involved.

Beijing targets British critics of Uyghur oppression in Xinjiang
Looks at China’s imposition of sanctions on a number of UK politicians, lawyers and academics who have criticised its actions in Xinjiang. Banning then and their family members from China, including Macau and Hong Kong, or doing business with Chinese individuals or entities. It follows China imposing sanctions on members of the EU who also criticised CHina’s actions.
The UK’s response by Dominic Raab, the UK’s foreign secretary, who strongly criticised the decision Friday said “It speaks volumes that, while the UK joins the international community in sanctioning those responsible for human rights abuses, the Chinese government sanctions its critics,” he said. “If Beijing wants to credibly rebut claims of human rights abuses in Xinjiang, it should allow the UN High Commissioner for Human Rights full access to verify the truth.”
It does seem a very simple solution. Previously China had said it would allow the UN High Commissioner access but has yet to make the arrangements.
The article also mentions 'China also imposed sanctions against the chambers of one of Hong Kong’s non-permanent judges. Lord Lawrence Collins joined Essex Court Chambers as an arbitrator member in 2012, according to the chambers’ website.’ Again because of and opinion they wrote saying 'that found a “credible case that acts carried out by the Chinese government against the Uyghur population in . . . Xinjiang . . . amount to crimes against humanity and the crime of genocide”.’.
For investors it will be interesting if the situation in Xinjiang raises ESG issues for fund managers.

FT BIG READ. GLOBALISATION A creaking global economy
The Suez Canal accident has drawn attention to the fragility of global supply chains that have been buffeted by the pandemic. Many of the ideas underpinning trade are also being challenged.
An interesting read; basically companies looked to ‘just in time’ in order to improve margins and hold less inventory which was efficient and seemingly with little risk until we got first a trade war with between the US and China and then the pandemic. Then more recently further events like a fire at a Chip making factory, a cold snap in Texas and now the Suez Canal being blocked.
Just in time makes sense financially but it has its risks as have now been revealed and business will change but in most cases it will take time to re-order existing systems. Furthermore a number of governments are pushing for self reliance; something that China has been focused on for years.
I think that supply chains will remain global but that communication between the various parts has to improve. The Japan auto makers are suffering less from the chip shortage because they give the chip makers their production plans up to three years out; both sides have visibility. There will be ‘black swan’ events like fires, power outages and canal blockages they are unknown, having a chain that has enough slack in it to cope is what is needed
At the end of the day it is all about cost, reliability and communication; which is the essence of every good business.

Editorial How to handle the gamification of investing
Regulators are fretting about the new breed of young day traders.Looks at how the British financial regulator has an Instagram account and hopes to be able to use the media that novice traders refer to, in order to try and educate them about the risks of modern on-line trading.
Also makes the point that low interest rates are part of the reason for the surge in on -line trading. Low interest rates are supposed to be good for the economy but that isn’t true for the whole economy. It may be good for some businesses but it is not good for savers or pensioners who are forced to take on more risk, at times when they can ill afford to. It notes the mis-selling of policies to pensioners recently.
Post war pensioners worry about the costs based on their experience and hence save; Japan being the classic example but I know from my own aunts and uncles too. When they were getting an income on their savings and pensions that felt able to spend but when they get nothing and see their pot of money decreasing they don’t.
For the young, saving for a deposit when savings rates are zero puts the goal of home ownership out of reach. Hence to move to attractive and apparently easy money. Unfortunately it is not and many face loses they cannot afford.
China has been aware of the risks and the public opinion backlash and in recent years has tried to be more careful about explaining the risks, although many have learnt the hard way. Lets hope they are more successful in the UK.

Editorial Covid-safe holidays are the desired destination
Locked-down travellers crave a change of culture, cuisine and climate
Looks at experiments in overseas travel, 'Next month, a select group of nearly 200 people will depart from the Netherlands for an eight-day “trial” getaway on the Greek island of Rhodes. They will be barred from leaving their all-inclusive resort hotel — where they will be the only guests — even to go to the beach. They must provide negative PCR tests for Covid-19 before travelling out and back, and quarantine for up to 10 days on return.’ Over 25,000 people signed up for the chance.
Makes the point that governments need to find ways to make safe travel possible. There will still be risks, especially as the virus has shown its ability to mutate and the fact that it will take a long time before the world is inoculated. But governments need to work out what is possible rather than what is not. Australia and NewZealand are working on plans, Taiwan, Philippines and Singapore too.
For investors it does suggest that airlines will see a sharp pick up once governments can agree standards. I also think that business men will want to travel too; part of the joy of the job is actually meeting clients.
The editorial concludes 'Next month’s Dutch experiment is due to be followed by another with fewer restrictions; the government is planning trial trips, too, by car, coach, train, and cruise liners. Greece will also begin accepting test-run flights from the UK next month. The risk of mutant strains is real. But Covid-safe travel, not banning foreign summer holidays, should be the desired destination.’
See also Biggest test looms for carriers and crew after year on the tarmac
Operators seek to retrain staff and gauge demand as they await reopening of borders.

Notebook Virus jabs are at the sharp end of political risk. by Gillian Tett
Looks at how governments ratings are impacted by their handling of vaccinations and the implications for the political outlook. It quotes Tina Fordham, 'a former political analyst at Citi who is now a partner at advisory firm Avonhurst, points out that when the 2008 crisis ended, it did not lead to political peace. On the contrary, the past decade delivered rising populism, despite economic growth, which led to events such as the Brexit vote and election of Donald Trump.’
Others agree with her outlook but there is a counter outlook too, those who expect a replay of the ‘Roaring 20’s’ which could reduce political volatility. My initial thoughts that having seen the havoc that Trump caused that maybe people would be less inclined to go that route again. But we cannot be sure, Biden seems to be getting good support as he deals with the pandemic as is PM Johnson. European leaders may not do so well.

Opinion Pandemic comfort food offers too much solace 
Starts with 'As Mary Poppins sang in the 1964 film, “Just a spoonful of sugar makes the medicine go down/In a most delightful way.” The song was inspired by the lyricist’s son being given his oral polio vaccine with sugar, and Krispy Kreme followed nanny’s edict this week, offering all Americans vaccinated against Covid-19 a free glazed doughnut daily for the rest of the year.’
Looks at comfort food and how pre covid there was a move to healthier food options. But now there is a change, with a move back to high sugar content options because comfort food triggers real 'feelings of psychological relief, and one study found that highly stressed women who gained weight as a result of “emotional eating” later coped with stress more calmly.’
It says that 'Habits acquired over months at home will be hard to break. Nearly half of US millennials surveyed by American Psychological Association this month said they had put on unwanted weight in the pandemic, reporting an average gain of 18.5kg. That is a lot of doughnuts.’ Studies show it can take as little as 21 days to form a habit but the average is 66 days and it can take until 254 days for it to be fully formed. On those numbers a lot of new habits have been formed.
Breaking those new habits may be difficult; 'One Mondelez report on snackers around the world found that more of them ate for comfort in the pandemic and bought “nostalgic snack brands from childhood”.’
The other problem is that 'There is visceral pleasure in consuming chocolate, ice-cream and snacks that are made to be distracting and indulgent.’
So key will be reverting back to previous moderation. 'One study of older adults in the US found that putting on some weight with comfort eating of the nostalgic kind was healthier than being too thin, especially among over-65s. The pandemic binge will leave no permanent damage if moderation returns and comfort no longer has to come in a packet.’
But it notes two problems; the food companies know all this and 'have now learnt that traditional formulas can be sold effectively as comfort food, with some tweaking to combine nostalgia with social responsibility. Kraft is now testing recyclable fibre-based cups for macaroni and cheese.’
Secondly 'the pandemic may entrench an inequality in fitness and nutrition that was already growing — in short, the better-off are more likely to eat healthily and to take physical exercise.’
For investors it seems, short term that food companies are likely to do better than fitness ones, Peloton’s stock price peaked back in January and is currently testing 6 month lows. Kraft is trading at a 12 month high on a reasonable path as are General Mills, JM Smucker and Campbell Soup but after much more volatility. Mondelez (owner of Cadbury and Grenade (makes Carb Killa protein bars) is also testing the 12 month highs.
The key is that the food companies can vary their recipes whereas Peloton relies on you wanting to exercise. From the couch its easy to see which is the better investment.

Companies & Market 
Banks take stake in US mall to keep American Dream alive
• JPMorgan and Goldman step in • Pandemic wreaks havoc on $5bn project.
It was to be the Mall of malls 'billed as a tourist destination given its proximity to Midtown Manhattan, and boasted luxury department store tenants, a Nickelodeon theme park and indoor ski resort. But the first part of the mall opened just weeks before coronavirus swept across the US.’It is now in disarray due to the impact of the pandemic. Tenants withdrawing is just one of the issues. The size of the project meant that there are multiple lenders involved and hence structuring an agreement is tricky but hopes are it will happen this week.That then leaves the question about what will happen next. Are the new players long or short term players and what new is going to happen to the Mall?
Nice quote “It would have been much better if American Dream would have burnt down or a hurricane had hit it, financially, because we would have been covered by insurance,” Kurt Hagen, a Triple Five executive, told a city council meeting earlier this month. “This pandemic that we didn’t see coming has not been covered and is the worst scenario imaginable.”
The project has had a number of owners since its first conception; which gives a hint about the complexity and changing nature of Malls.
It does illustrate two things though.
First is that lenders don’t really have an option, it recently renegotiated with them to take interest only payments on the loans until maturity. That shows they have little alternative because there is unlikely to be anyone out there that would consider taking over the project.
Secondly that the banks are very bullish on the recovery.
In my view this is a mall that, because of its size and location a number of option for its future but at this stage there is not a clear path. Recently the FT did an interview with the manager of another smaller mall who had done well by providing good basic services and working well with their tenants. Landlord tenant relationships are going to be key whilst we wait to see the next stage of the office, mall, logistics and even residential.

WeWork’s Spac merger sets stage for new IPO bid. 
Following on from the above WeWork back in focus, merging with BowX Acquisition whose share price rallied 20% on Friday on the news. WeWork will get $800m from institutional investors such as Starwood Capital, Fidelity and BlackRock, as well as $483m in cash that BowX raised in its initial public offering.Another case of institutions betting on a swift recovery. WeWork is expecting a significant recovery by 2024, giving itself a reasonable time line for the recovery but it still needs 70% occupancy to breakeven before you start seeing profit.
It’s also pitching itself as a tech platform rather than an ordinary landlord. I still struggle to see how it is a tech platform as it is providing office space.

Under the hood Heavy reliance on tech leaves carmakers vulnerable
Amid a chip supply shortage, big brands are being pushed to the back of the queue behind the heft of Silicon Valley’s outsized demands. An interesting read showing the hierarchy of business; auto makers used to demanding terms from their suppliers are finding that they have a lack of clout when it comes to negotiating for chips!

Vaccines required investors who were long-term greedy. By Tom Braithwaite
Starts with a quote from Boris Johnson to MP’s “The reason we have the vaccine success is because of capitalism, because of greed, my friends,”
The article shows that whilst that is true in some cases, its not the case in the UK where the vaccine was developed by Oxford University and the motive was saving lives. AstraZeneca is helping on a not-for-profit basis as is Johnson & Johnson and GlaxoSmithKline and Sanofi have committed to although they have failed with their initial efforts.
Moderna, Pfizer and BioNTech are all for profit although not profiteering whilst there is a pandemic. However under ’normal circumstances’ they will be profit orientated.

Goldman analysts’ 95-hour week stirs soul searching on Wall Street
Staff protest leads sector to promise change but hurdles remain to better work-life balance
A look at the industry work practices. Interestingly one of the first and easiest responses it to pay bonuses to staff. Another response is to hire more staff.
But perhaps the most important thing the industry needs to do is have better leadership. Managers who are promoted because the can lead and manage not just because they generate a lot of profit for the company. Managers that understand the balance between the task, the team and the individual.
The problem is not all-nighters, it is constant all-nighters. Good managers when their staff have worked hard give them a break.
Equally the top management needs to realise you cannot constantly squeeze a set number of people and expect them to produce more and more without giving them more resources.
There have been great advances in productivity thanks to tech but there are limits.I would doubt that any of the leaders of the banks was expected to work as hard when they started as they now expect starters to work.
Equally maybe if they paid starters less but employed more the issue could be addressed but the problem is not just the salary but the total staff cost. So maybe they ought to look at the top management salaries and their total costs first and ask if it is money being well spent or whether it has got out kilter.
Mr Solomon’s pay was reported at $2m basic, $4.65m in cash bonus and $10.85m in stock compensation based on the banks performance. For that I’m going to guess he didn’t work any all-nighters in 2020. He benefited directly to the tune of $10.85m from everyone's hard work. He has no doubt steered the company though a tough time and the company share price reflects that too at just off a 5 year high.
But maybe it's time to stop the cost cutting at junior levels and add more staff and listen to the good managers and do a bit of compensation cutting at the top for the long term good?

BlackRock slashes fees on ETF range in mission to woo ‘every type of client’
Cutting fees to compete with rival Vanguard and hoping that cheaper fees will attract more customers and hence faster asset growth. Notes 'The BlackRock iShares Morningstar US equity style box ETF range will carry annual fees of between 3bp and 6bp. “Style box” ETFs classify their constituents based on a combination of size and metrics measuring their bias towards growth or value.’
They are also looking to split the EFT unit size to make them more affordable, like a share split.'The ETFs will track new “broad style” indices from Morningstar that cover larger market segments than their predecessors. They have been designed to reduce the number of building blocks required to build a diversified portfolio.
’'Ron Bundy, president at Morningstar Indexes, said the new indices would “empower investors to make better informed style investing decisions.”More smaller companies and micro-cap stocks have been added to the Morningstar broad style indices which have a total of 4,105 constituents. ETF providers historically have avoided exposure to micro-cap companies as the high trading costs and poor liquidity of these tiny stocks diminish the efficiency of index-tracking funds. The original Morning-star style indices had 1,393 constituent companies at the end of December’
An interesting read especially considering the move by Morningstar to using robots for in its report writing process.

US junk bond issuers deliver $140bn quarter on demand for higher yields
A rush to the market to raise money in many cases to pay existing debt and owners dividends.
It concludes 'However, some investors and analysts are beginning to signal a more cautious approach as rising inflation expectations knock US government bond prices, which has begun dragging down junk bonds.
“Right now the market is favourable, so you see a flood of issuance,” said Gary Pokrzywinski, chief investment officer for Strategic Income Management, an asset management firm focused on corporate debt. “If markets start to struggle, it will shut down. High-yield issuers learned a long time ago that they need to come to market early to refinance their debt. So when markets are open, you see a flood of bonds.”

Event funds return to form after deal drama. 
Many expect a bumper year of corporate deals and restructurings for the rest of this year.
'Paul Singer’s Elliott Management wrote to investors earlier this year that event arbitrage and activist bets had contributed to its gains in 2020 and offered further opportunities to make money this year. “There looks to be no diminution of the number, and quality, of potential opportunities in these areas,” the firm wrote in a letter seen by the Financial Times.’
An interesting read with some insight into how they operate;
'The trade for event-driven funds is typically fairly simple. Managers buy shares in the target company and bet on a falling share of the acquirer, wagering that they will profit as the spread on the deal closes.
What can make such trades more interesting is what managers call “hair” on a deal: complexity such as the structure of the deal or tough regulatory hurdles that take time to analyse.
Providing a thick carpet of that hair have been worries over who US president Joe Biden will appoint in key antitrust roles and fears that chilly US-China relations will lead China to fail to approve another deal, as it did with Qualcomm’s merger with NXP in 2018.’
The possible down side is Spacs which have seen a sell-off recently.
I agree, I think there will be a lot of deals; many related to supply chain re-organisation with some operations being taken in-house again. In Asia Japan also looks prime as activists become more empowered.

The Long View. Inflation merits a lower place on the fear table for now  By Robin Wigglesworth
'Fund managers now think inflation is the single biggest danger to markets, according to Bank of America’s latest survey of investors, the first time it has topped the fear table. Not coincidentally, a bond market “tantrum” was pinpointed as the second-biggest tail risk.’
Notes 'the inflation narrative has gone way beyond what the markets are actually pricing in, which in turn has arguably gone way beyond what is actually likely to happen.’
The key is that this time the Fed is focused on wage inflation rather than other types. It has learnt from what happened after the GFC and is not looking to make the same mistakes.
A good read and I agree that as the US T10 yield moves higher it will attract more foreign buyers. With the Japanese running into their year end at the end of March they have scaled back their purchases but I would expect then to be more active in April; attracted by the good yield relative to the JGB’s

Lex China/baijiu: liquidity hangover
Starts 'Alcohol will in “no way” protect against Covid-19, notes the WHO. An apt reminder, judging by last year’s surge in booze consumption.’
Concludes 'China’s penchant for high-end liquor has been uneven in the past. Kweichow Moutai sales suffer from persistent production constraints. Efforts to revamp its direct distribution channels have yet to deliver. Partial state ownership and a poor public image of its products, used as official gifts, mean policy changes have been a risk.Bottles of rare Moutai baijiu have long attracted speculators. If the bet fails, investors can always drink them over dinner. Falling share prices offer no such comfort.'

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