Sept 5 Weekend FT Thoughts Softbank's whale, Partying in China, Yum? and more


09 Sep

Sept 5 Weekend FT Thoughts  Softbank's whale, Partying in China, Yum? and more

MARKETs Expect lighter volume Monday with US Markets closed for Labour Day
JAPAN Pre market  Foreign Exchange Reserves, Later Leading Economic Index and Coincident Index.  Softbank in focus on being exposed as the call options whale in the US likely to put the stock under pressure.
S KOREA  No data due
TAIWAN After market will publish Balance of Trade, Exports, Imports.
CHINA Pre market Balance of Trade (July was $62.33b F/cast is for $47b), Exports (July was +7.2% F/cast is for +6.5%), Imports (July was -1.4% F/cast is for +0.1%). Later Foreign Exchange Reserves.  Potential sanctions against SMIC likely to worry investors.
HONG KONG ADR’s indicate -76pts but expect some margin call selling initially.  News that SMIC (981 HK) may be sanctioned by the US is also likely to put stocks under pressure.
EUROPE to open as normal
US Market closed Monday Labour Day


SoftBank unmasked as ‘Nasdaq whale’ that stoked huge tech rally Option trades fuelled surge in US tech stocks. Boom makes US shares vulnerable to volatility. Story also reported in ZeroHedge, Wall Street Journal.
Basically after buying up stakes in the big US tech names its also started buying call options in the same to estimated to be in the region of $4bn (said the WSJ). That would have meant the banks selling those options would have to go into the market and buy the underlying to hedge themselves. As the values of the call options increased those banks would have to increase their hedges by buying more underlying those pushing the markets higher. All in August which is generally a quiet month.
The guys behind it, at Softbank know a lot about derivative trading as they are largely the credit derisive team from Deutsche Bank that were responsible for the 2008 CDS fiasco.
(See Market Thinking for more detail https://market-thinking.com/2020/09/softbank-again/ )
With the pull back in those stocks over the past couple of days; the value of Softbank’s position is unclear but any unwinding of the position will lead to volatility in the Nasdaq. With the US closed on Monday it is likely to mean a volatile start for the Nasdaq on Tuesday.
Monday in Asian it is likely to put more pressure on Softbank which was already under pressure on Friday. The Apple supply chain names will also probably see pressure too.

China cuts loose as revellers shed masks and party. China is making a statement that covid is under control with large scale parties and gatherings taking place without masks. Admittedly people have to have their temperatures taken and have their government designed app scanned but then it’s party time. It is stark contrast to S Korea and Japan that have seen recent resurgences in covid cases much of which is linked to close social gatherings.
The reopening will be welcomed by the retail and hospitality sectors notes ‘... while many middle-class professionals are engaging in “revenge spending” after months of being unable to splash the cash, lower-income workers are still suffering. Economists say China’s economy is stuck in two-track growth, widening the wealth gap.’
Wuhan did undergo mass testing which found only 300 non-symptomatic cases; which is one reason for the confidence in re-opening coupled with the government tracking app.
This may encourage more mass testing in order to give authorities a better understanding of the risks in specific areas.
Good news for the makers of the testing equipment.
Worth also reading Opinion Lockdowns are too blunt a weapon against Covid If the US economy is to recover, targeted interventions are needed.
'We know what needs to be done: make wearing masks a patriotic duty; approve and provide cheap, rapid testing; invest in contact tracing and quarantine; and implement a national surveillance system, such as wastewater testing, for use once the virus is suppressed.
With these tools, and others, we can beat the virus and get on the road to recovery without resorting to more economic lockdowns.’

Fast-food operator Yum China raises $2bn in ‘homecoming’ Hong Kong float. Looks at the secondary listing which was priced on Friday; 42m shares at HK$412, according to the company, which represented a discount of almost 5% to the closing level of its New York-listed stock a day earlier. But some worry still, it follows recent listings but it isn’t in the new tech/ecommerce economy that has garnered so much attention recently. That is why the stock was not priced at the high end of its range. It starts trading on Thursday. It is a good play on the growth in China for western food. Although there are concerns post covid I think Chinese consumers will be keener on food chains with operating standards and hygiene systems than local mum and pop noodle shops (although I think personally that loss of local cuisine is a shame). Yum Brands has the systems in place to scale its operations and there are plenty of cities in China which will warn to the brand. But it is not without local competition and with the sell off in the US on Thursday and Friday it may struggle on its first day in my view.
Whist a number of companies are taking secondary listings in HK as insurance against the possibility of Trump forcing them to delist. There is still the chance that he further weaponises US investment money in my view. The administration has already curtailed the use of Federal pension funds investing in Chinese companies and could look to widen that. News that SMIC could face sanctions is just another example.
Read also LEX Yum China/eating out: recipes for disappointment 'Investors may be hoping robot waiters will quell infection. But the business model still relies on premises closely packed with human diners.Yum China’s US and Hong Kong shares will equalise in price when the latter starts trading next Thursday. A bigger realignment — of restaurant shares with diminished prospects — is already simmering. '

US unemployment rate drops to 8.4% as labour market rebounds further. Looks at Friday’s number and notes that the pace of rehiring appears too be slowing MoM. The number is also flattered by the temporary hiring of government workers for the 2020 US census. Hiring in leisure and hospitality slowed MoM, along with healthcare, education and manufacturing. Retail hiring saw a small increase.
It looks like the easy re-hires have been done, going forward employers are going need to see real demand before taking on new hires. An important part of that will come from Congress agreeing a new stimulus package.
Read also The Fed’s inflation target is doomed without Congress

Abe loyalist in pole position to be Japan’s next leader. Workaholic chief cabinet secretary wins support of ruling party’s leading factions. Looks at the background of the person that many considered 'A kingmaker, they thought, but never the king. Not for the first time, Mr Suga was underestimated.’
Interestingly it notes that 'Whereas Mr Abe is a conservative, Mr Suga belongs more to the free market wing of the LDP, aiming to shake off the shackles of Japan’s regulatory state.’
It concludes that '“He’s not a visionary. He wants to get things done.”’
There is plenty that needs to get done in Japan, and dismantling regulation is key to much of it but whether he can use his political power and adeptness at using the bureaucracy to make those changes will be key. With a general election due next year, some will view him as being on probation. So he will need all his skills to effect changes before that election to really be able to claim the top job.

Editorial Buffett’s bet on Japan is a statement on US market. Investor’s contrarian interest deserves attention of money managers.
Most investors are net underweight Japan and foreigners have been net sellers of Japan for around five years. Japan brokers have been pushing it as the the best value in the world on a price to book basis.
Now Buffett has made a move out of the US where he hasn’t found companies to invest in and he has also found new competition from the government denying him the opportunity of being a white knight to good companies in short term difficulty. He may also be saying something about the current ’toppy’ nature of US markets running up to what is likely to be a messy election.
The question the article asks is will Buffett’s move entice others to follow, which could be very significant for the Japanese markets. It will be also interesting to see if, after the trading houses, he looks for other examples of mis-pricing in Japan, of which the article believes there are many to be found.
It summarises
'Yet by investing in Japan even as its Abenomics narrative evaporates, Mr Buffett is making a statement, as a value investor, about the US domestic market and the extremity of its current profile. He has chosen to make his statement using the most visible antithesis of that market: cash-rich, high-yielding, undervalued and unloved Japanese equities. Investors hungry for new opportunities will be hoping Mr Buffett is arriving early to a new trade, not late to an old one.'


For Interest
Russia vaccine trial receives positive review. Strong immune response achieved but scientists warn on size of study. The initial response is that the trials are positive but the sample size was small; just 76 people for the likelihood of picking up adverse reactions was small. Also the fact that they say it is ‘sufficient’ to defend all patients and could last two years was rather vague.
But I think it is a more positive reaction than had initially been expected when the tests results were first announced. It also encourages me to think that we will, in a matter of months rather than years, have a well tested and approved vaccine that will allow people to get back to normal living. That will prompt many investors to review the back to work stocks in the near future in my view.

FT BIG READ. US EQUITIES. Markets plan for a messy election result
The stock market has soared under Donald Trump. But with the president raising questions about whether he will accept defeat in November, investors must assess the risk of a disputed outcome.
'For Mohamed El-Erian, a senior economic adviser at the insurer Allianz, the stakes of the 2020 election could not be higher — something he frets that markets have yet to fully grapple with. “A vibrant market-based system depends on the robustness of institutions and the rule of law. They are critical underpinnings,” Mr El-Erian says. “If continuously eroded, as most developing countries find out, an adverse tipping point becomes highly likely.”'

Tesla and the audacity of hype Not only about Tesla but the wider markets
It mentions about Ballie Gifford reducing its holding; some interesting quotes
'First, returns in stock markets are infinitely more extreme and concentrated than most people assume. Citing the research of Hendrik Bessembinder, a professor at Arizona State University, Mr Anderson says: “All the excess returns in world markets since 1990 have come from just 1.3 per cent of companies.”
Second, some of these intellectual property-rich companies, such as Google and Alibaba, generate increasing, rather than diminishing, returns because of scale effects in a networked world, as described by Brian Arthur, professor at the Santa Fe Institute.’
But most interestingly
'To be sure, Tesla’s current valuation looks irrational. But rationality has been stretched thin in all kinds of ways in 2020. In a world awash with central bank cash, many other market valuations look just as screwy. There are now about $14tn of global bonds trading on negative yields.’
The fact that a lot of high tech companies are very profitable (even if Tesla isn’t ) should be of more interest to antitrust regulators than short sellers.
Worth a read

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