Dec 11 Bank Dividends, Supply Chain Issues, Valuations Matter? Prison for short sellers & Updates


11 Dec

MARKETs @ 11:45am 
Except for S Korea markets are struggling to find a driver to move higher with the US announcing a new stimulus package. In most cases investors are being cautious ahead of the weekend; especially as covid cases seem to be surging.
S Korea moved higher as data showed in the first 10 days of December exports were +26.9% YoY. Apart from that no data out in Asia to drive markets.
But Monday Japan’s Tankan survey we be released pre market and later we get Industrial Production, Capacity Utilisation and the Tertiary Industry Index.
Also on Monday we get China House Price Index and could get Vehicle Sales and FDI data.
JAPAN 
Nikkei 225 Opened slightly lower saw a small pop to 28,000 but then sold down to 26,550 level before trending slightly higher into lunch. Currently -144pts (-0.5%) @ 26,613.
Topix Opened higher and tested to 1,785 before selling down to 1,771 and then trading sideways into lunch. Currently -1pt unch @ 1,775
S KOREA  
Data showed Exports +26.9% YoY in the first 10 days of December giving the market a +VE boost
Kospi Opened higher and rallied to 2,774. Then traded sideways 2,764/2,781 Currently +18pts (+0.7%) @ 2,765
Kosdaq Opened higher rallied to 927 and then sold down to 923 before rebounding and trading sideways 925/928 currently +4pts (+0.4%) @ 926
TAIWAN 
Opened higher at 14,300 and initial ticked up to 14,353 but then trended lower to 14,080 before bouncing. Currently -92pt (-0.7%) @ 14,164.
CHINA 
Opened higher at 4,958 but trended lower through the morning session to 4,867 at lunch -65pts (-1.3%). Investors worry about further sanctions from Trump before he leaves office.
HONG KONG 
Opened @ 26,634 +224pts vs +156pts ADR’s. Initial ticked lower but then rallied to test 26,700 but failed to break out then sold down to 26,445 level before a small bounce Currently +70pts (+0.3%) @ 26,487
EUROPE  Expect a lower open as markets prepare for the no deal Brexit.
Data due GERMANY Inflation Rate, Bundesbank Semi Annual Forecasts
US Futures opened Dow +20pts but initially rose to +30pts, S&P flat and NDX slightly lower now flat.  Stimulus the key needed to drive markets higher.  FDA final approval for the emergency vaccine use would also be +VE.
Data due PPI, Core PPI, Michigan Consumer Prelim Data (Sentiment, Expectations, Current Conditions, Inflation Expectations, 5 year Inflation Expectations) Baker Hughes Total Oil Rig Count.
Fed Speaker Quarles

On line
US science panel backs Pfizer/BioNTech’s Covid-19 vaccine
FDA poised for final decision after receiving endorsement from advisory committee. The vaccine passes an important committee meeting which did raise some important questions like the relatively short length of the human trials, the potential side-effects for people with allergies or pregnant women, long term effects and the impact on 16 and 17 yr olds. But the majority of the committee felt the benefits outweighed the concerns. Voting was 17 in favour, 4 against and 1 abstained. Now we await the final approval. That will probably give the US markets a further boost and give some certainty that the pandemic will be brought under control.

Print Edition
China curbs HK access for US diplomats.   A small symbolic gesture which too an extent illustrates the lack of measures that Beijing can take to retaliate against the US sanctions on members of the NPC without escalating matters.  Whilst announcing the move the foreign ministry spokesperson, warned the US to “stop meddling in Hong Kong’s affairs and China’s internal politics, stop walking further and further along this dangerous and mistaken path”.  China says that it will enforce unspecified “countermeasures” against those “US government officials, lawmakers, and NGO workers and their families” who have “displayed malicious behaviour and bear major responsibility on the Hong Kong question”.

Watchdog says UK banks can resume paying dividends.   Key being that the Bank of England’s Prudential Regulation Authority (PRA)said yesterday that its latest test of banks’ capital positions had found they were resilient to “a wide range of economic outcomes, including economic scenarios that are materially more severe than current central expectations.”
Whilst it has given permission it did add that distributions should be “within an appropriately prudent framework.” It also set a limit of 25% of a bank’s cumulative profits over the previous two years or 0.2% of its risk-weighted assets; whichever is the higher.
It also advised a “high degree of caution and prudence” when deciding on cash bonuses for senior staff.
The PRA had a dialogue with the the ECB before making the decision and it will be interesting to see whether the ECB follows the same course of action.
HSBC is currently +1% in Hong Kong and Standard Chartered +2.3%
See Lex UK bank payouts: happy Brexitmas 'It is sensible to return lenders to greater control of their capital in stages. The transparency of the formula also reduces the danger that the regulator may have to reject specific payout plans, implying that the lender is financially fragile. A very British compromise.'

Covid-19 triggers ‘perfect storm’ for shipping supply chains
Looks at how covid has impacted the industry with staff illnesses, quarantining and social distancing at a time when consumer demand and factory supply chain demands have increased.It has caused terminal congestion because of the shortage of drivers to move containers out of the terminals at a time when many companies are trying to restock. Honda this week announced that it was stopping UK production because of a shortage of parts. Just in time supply chains will be under review going forward no doubt. There are backlogs of ships awaiting berths too. It also mentions that there are too many containers in the wrong place too; something that is hitting China badly as it exports 3 containers for every 1 it imports according to a recent Reuters report. The overall impact has also been an increase in rates as exporters compete for space. At the same time as airfreight capacity has dropped significantly too.

Sony buys anime streaming service; Crunchyroll, from AT&T for $1.2bn For Sony this builds on its position as a supplier of content for films, music and games and is inline with other recent acquisitions.  Makes sense for Sony.
'Tony Vinciquerra, chief executive of Sony Pictures Entertainment, said: “We have a deep understanding of this global art form and are well-positioned to deliver outstanding content to audiences around the world.”
Sony has been boosted by Demon Slayer: Mugen Train, which was produced by its anime and music production unit Aniplex.
It is on course to be the most profitable film produced in Japan after raking in ¥28.8bn ($276m) in the first 52 days following its release. ‘ Sony’s shares are trading higher today.

Airbnb and DoorDash IPOs leave gig economy issues unresolved.  Asks the question are these good businesses?
'Using apps to organise informal markets has undoubtedly resulted in important new forms of competition and unleashed extra resources in the economy. That includes giving more people scope to join a part-time labour force (this is the “gig” part of it) and extending the use of assets like private cars and homes (the “sharing” part).But that has not translated into profits. Even the flattering financial metric these companies prefer — adjusted earnings before interest, tax, depreciation and amortisation — showed all four to be lossmaking in the 12 months leading up to their listings, with some $3.3bn in red ink between them.
So are their business models half-baked, or just half-evolved?’
Notes there are two ways to profitability; consolidation and the exercise of power as intermediaries. 'The history of the internet has been one of ceaseless disintermediation and reintermediation. That is, of newcomers cutting out old businesses to supposedly “free” consumers, before inserting themselves as the new bottlenecks. As they aggregate consumer orders, mobile apps are starting to find themselves in a powerful position.This may not be a welcome development for some providers of services that are being sucked into the gig economy’s orbit. Restaurants, for example, have come to rely on online ordering and deliveries during the pandemic. But if a handful of apps comes to represent a significant share of their sales — and if those apps have the power to redirect customers to other meal providers offering better terms — the results could be painful.
For investors in the newly public gig sector, it looks like being a work in progress for some time to come.’
See also Lex Airbnb: up, up and away.  'Compared to fellow newly listed stock DoorDash, Airbnb has a proven path to profitability as long as management continue to keep a lid on costs. Yet, for Airbnb to justify its lofty valuation it will need more than fiscal discipline. It needs outlandish growth.
The frenzied debut suggests that investors looking for a bargain should stay at home.'

South Korean regulator threatens to jail short-sellers under new rules. Refers to naked short selling.  The article also looks at the current ban on short selling in S Korea which has annoyed many traders but particularly hedge funds.  S.Korea, Malaysia and Indonesia are currently the only counties that operate such a ban.  S Korea’s is due to end in March 2021, it was originally for 6 months but then extended.  It notes the current strength of the S Korean markets with the Kosdaq trading at 14x projected earnings a near decade high; driven by strong interest in tech names like Samsung Electronics and SK Hynix.

High valuations are a warning to equity investors  Notes that the current optimism in equities is shifting as investors look post pandemic.  'In the yield-starved pre-Covid-19 world, a common mantra of the bulls was the acronym Tina — there is no alternative. Now that has mutated to Trina — there really is no alternative.’
So should investors be cautious? It notes every market rally is different there are common themes;
'The first is the role of implicit assumptions that may appear bullish but can also be seen as an important risk factor. Second, there is never a single cause — it is always the layering of risks and assumptions that leads to the ultimate crisis. The current complacency about global equities has many of these characteristics.’
Says there are 3 critical assumptions;
1 Valuations don’t matter
2 Interest rates will stay low for an extended time
3 Loose monetary and fiscal policy combined with the Covid vaccine will return us to the “status quo ante” and the investment regime of the past five years.

But of course valuations do matter, less in the short term but more in the longer term. Looks at key levels of US share prices to earnings as a key, also notes that at Absolute Strategy Research their 'valuation composite, which combines six common valuation metrics such as prices relative to earnings and cash flow, shows valuations more extended than at any time since January 2000.’
Notes the same with the “Tobin’s Q” ratio. Basically saying that traditional valuation metrics are less meaningful given that future earnings are discounted by rates now close to zero.
The article worries that 'bullish investors are looking to “have their cake and eat it”. They expect unemployment to fall and earnings to post a healthy recovery, yet expect policymakers to keep interest rates on hold and bond yields to remain low and stable.’
But questions if policy makers will allow that. Notes we could see a return to the ’taper tantrums” of 2013. But also notes the Fed may have more problems controlling longer term bond yields if current expectation play out. 'The danger in relying on overvalued bonds to justify overvalued equity valuations is that any volatility in rates, driven by activity or inflation, could destabilise the equity market complacency. The combination of both bond and equity valuations being this stretched has only been seen twice since 1950, in 1998-99 and 1986-87. Neither of those periods ended well.’
It also notes that people seem to think that the vaccines will just extend the previous cycle rather than recognising that there were serious issues before Covid hit.
The rotation into value names also means valuations become more important. Good news is that 2021 is likely to see a meaningful recovery. Bad news is that it will probably see an investment regime that challenges the current valuation assumptions.
Great final quote 'Sometimes it isn’t what you know is risky that is dangerous, it’s the things that you think are safe but aren’t that are the problem.'

For interest
Opinion The clear, yet overlooked, risk of a tech crash. Our reliance on tech could be our downfall in the next global crisis.  The fact that 'Unless we upgrade our security, governance and regulatory regimes, we will remain worryingly vulnerable to the crippling of critical infrastructure, either by malicious design or by default. Call it a tech crash.’
Looks at how FireEye a US cyber security company who’s job is to protect its clients from hackers, but it was itself hacked. The hackers tole the tools FireEye uses to 'hacks into its clients’ systems to highlight their own vulnerabilities’.
It goes onto looks at how hacking has been used over the year and how we need to be enforcing greater security because of the risks.
He finishes by saying 'William Gibson, the science-fiction writer who coined the term cyber space, told me earlier this year that we may be the last generation to draw any distinction between our offline and online worlds. He is doubtless right. It is time we governed our physical and virtual worlds as one.'

Facebook begins legal battle to avoid break-up. FTC and 48 state attorneys hope to convince courts that an allegedly ‘buy or bury’ approach has damaged competition.    
An interesting read but the fact that the share price barely moved on the news shows that at this stage the market does not expect the result to be radical.See also LEX Facebook/FTC: burning platform Facebook believes that its success has made it a target for grandstanding regulators. True, but irrelevant to the inquiry. A single company with such vast influence, even if legitimately gained, must be assessed for broader harmfulness. Any paranoia Mr Zuckerberg may currently feel could be a little soothed by the necessary corollary: the whole of Big Tech should receive the same critical scrutiny.'


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