FT 17 June My letter, FOMO, BOJ, BEIJING embarrassed, SMIC, Oura and more


FT  17 June My letter, FOMO, BOJ, BEIJING embarrassed, SMIC, Oura and more

Markets Opened lower with weak data out of Japan
Japan Sold down but then rebounded and have basically traded sideways
S Korea Rebounded from a weak start and again traded sideways in a helta skelter fashion.
Taiwan opened higher and traded sideways
China traded sideways just below yesterday’s closing level
Hong Kong rebounded from initial low and traded sideways in the green.
Europe looks like opening slightly lower with rising concerns over the India/China clash. I am surprised it hasn’t had greater coverage so far.
US Futures falling along with oil futures on fears of second wave of covid-19


Just blowing my own trumpet but I had a letter published in the FT today
Another suggestion for the Rhodes plinth
I write in response to your recent piece by Ann Olivarius (“Rhodes must fall, but who should stand in his place?” Opinion, June 16).
I would have thought in the light of the current protests that rather than the two black figures suggested; Lucy Banda-Sichone and Alain LeRoy Locke, who, I must say sound worthy of a memorial, it might be better to have four unnamed figures, two black, two white; to represent the fact that all lives matter and all our destinies are in the hands of the youth of today.
How we treat, teach and interact with them will decide all of our futures.
Andrew Sullivan Hong Kong


Bearish fears prevail on concerns over virus wave. Looks at the results of the latest Bank of America survey. The main point is that Fund managers have a Fear Of Missing Out
Key points are:-
Nearly 80% of fund managers think stocks are too expensive.
They think the biggest risk is second wave covid-19
50% think stocks are poised to fall back into a bear market
Hedge Funds have pumped up exposure to equities to the highest level since Sept 2018
Cash levels have dropped to 4.7% from 5.7% in May
The reality is that Fund managers biggest fear is of missing out and that is why, despite worrying about stocks being expensive, they have been buying. As we approach the next quarter earnings we could be in for some real shocks. Analysts predictions have not been coloured by company guidance. Hence the normal pattern of company’s influencing analysts lower and then surprising on the upside is unlikely to occur. Of course there is the chance that analysts go ultra conservatives, fearing the worst but there has been little sign of that so far.
Of course there is also the fact that we are actually seeing some second covid-19 waves! See below Fresh Beijing outbreak piles pressure on Communist party and read Warning signs from Seoul The country has been praised for its decisive response to coronavirus but its difficulty in controlling new outbreaks demonstrates that governments need to remain vigilant and be willing to change tack.
I remain cautious, expecting more downside. Stick to good companies, market leaders with little debt, at valuations you are happy with and wait.

BoJ lifts lending to $1tn and rules out rate rises for years. As expect the BoJ left most things unchanged and again signalled it would be years before interest rates rise in Japan. I still think that policy is wrong. Japanese companies are cashed up but not sending and households and returns are getting no return on their savings. The pandemic is likely to make the situation even worse for households as some firms are using the pandemic as an excuse to fire staff; something that is usually very difficult to do.
On the bright side the BoJ did announce it was raising its Covid-19 programme by Yen 35tn. Making the money available to banks at zero interest rate as long as they boost lending to companies. That could be a lifeline to the SME’s but its a loan and will need repaying. Prudent businesses will be wary of taking loans whilst they have no income with which to repay the loans. The Government has already come under fire for the costs involved in securing government grants as the fees and expenses associated with qualifying are often more than the grants.
The BoJ also said the main lending programme was Yen 90tn with another Yen 20tn to buy commercial paper.

China’s top chipmaker bets on Shanghai listing. SMIC hopes homecoming from New York will give it capital to close gap with rivals. Key is that China want so build plants that can provide chips that are on a par with advanced plants in other countries. The recent sanctions on the use of US equipment to make chips that are supplied to Huawei has only heightened its importance. So after delisting from New York it has got approval to list in Shanghai on the new Star market. The money it raises will help China’s ability to make chip for domestic use but its technology is still quite basic. Analysts quotes in the article estimate that China’s about 5 years behind TSMC. But what is key to remember is that TSMC is not waiting for China to catch up, it is still moving forward. As Huawei’s founder is quoted as saying last year 'unlike building roads and bridges, “throwing money” is not enough for the semiconductor industry — one also needs to “throw mathematicians, physicists, chemists”.’
There was a question over whether the capital raised would be used to ramp up existing production or focusing on trying to catch-up in advanced chips; the aim it seems is to try and catch-up.
There is still the concern of more US sanctions, which the prospectus warns of and risks associated with getting raw materials and equipment.
There is also a question mark over whether SMIC can supply Huawei? Whilst not supplying Huawei would not be a big impact on its business it would be a defeat after having creating a home grown chip champion.
The big sticking point seems to be over EDA tools; the software needed to design chips and turn them into customised sets of instructions for plants to carry out, which is from the US. China is looking at domestic alternatives but that too takes time.
It appears very likely that the chip supply chain will bifurcate with one set of tools for China and another for the rest of the world.
It is clear that the US has the advantage here, just as China through Huawei is looking to take the advantage in 5G specification and hence the reason for the US amending the Huawei Bill so that US engineers can sit on the panels and forum that will set the specifications for 5 and 6G and the internet of things
Read also China stocks lifted by easing of Huawei ban. I think some of that buying was without realising what the amendment really was about.
See also LEX Huawei/5G: dialling it back this modest retreat by the US proves a key point. American hopes of creating a technosphere that excludes China are balanced by a danger: a hinterland where it is the US that finds itself marginalised.

Fresh Beijing outbreak piles pressure on Communist party Infection clusters in capital pose economic and political test for leadership. Last week the party faced outcry over poverty and now its over covid-19. This week the outcry is that it’s OK to lock-down other cities, so why not Beijing?
To date the party leaders have managed the crisis, safe behind Beijing’s walls. But now covid-19 virus has come to them and they reacted by areas and putting the city to go onto a ‘wartime’ footing. For the party the problem is that having had its propaganda machine tell everyone it was under control, to now have an outbreak in Beijing is politically embarrassing; domestically and internationally.
It has also highlighted the lack of testing facilities and hospital’s have been overwhelmed and people have had wait with some being told to come back in four days.
The incident could have implications on economic stability because of the impact on peoples sentiment and specifically consumer confidence.
On the political front the Beijing clean up will put Cai Qi in the spotlight as the capital’s party boss and a protégé of President Xi. Cadres in other cities have been sacked over mishandling covid-19 outbreaks so this will be crucial for President Xi and Mr Cai.
This will be an embarrassment for the party and as I wrote yesterday puts more pressure on the social contract between the party and the ordinary people as they watch to see how differently those in Beijing are treated.
It will also be interesting to see the spin the party puts on the origin of these outbreaks. Currently it seems to be being blamed on salmon; and has prompted a ban on imported salmon which resulted in a drop in salmon prices in Europe and weakness in Bakkafrost and SalMar.

Nissan says Ghosn coup emails ‘fake’. Carmaker denies financial misconduct allegations were part of a conspiracy. But Bloomberg has printed its story and it is a slight -VE Proving the authenticity or otherwise, of the emails will be key.

Virus-detecting ‘smart rings’ to be trialled by staff at Las Vegas resorts. A smart ring by a company called Oura that can accurately predict the onset of covid-19.It’s a wearable ring originally designed as a sleep tracker which monitors not just heart rate, heart rate volatility along with body temperature and respiratory rate. Initial trials reveal that its can predict covid-19 three days before symptoms occur. Studies so far show the people are contagious two day before symptoms occur. The ring costs US$299 Link to company website. https://ouraring.com

Chinese killed 20, says India. Makes the front page with a fuller report on page 3; India blames China for death of 20 troops in border clash. I wrote about the growing tension on Monday as the FT reported Nepal snubs India with Himalayan claim. The escalation to fights resulting in deaths raises the issue to a whole new level. Both sides are saying no shots fired and India is conceding that some of their deaths were due to the injuries at high altitude and sub zero temperatures; but still a death is a death. In the conflict with Pakistan Modi had sanctioned reprisals and will be under pressure from Indian militants to do the same with China which would merely escalate the predicament. So it will remain fraught.
It is more pressure for President Xi and it also illustrates how sabre rattling can get out of control. In recent weeks there have been ’near misses’ between Chinese and US warships. China has sent planes over the line of control with Taiwan. I think we are likely to see more instances going forward. At present the markets are paying little attention to the matter. When first announced yesterday the Indian market sold down but then recovered and closed higher.
Everybody knows it doesn’t make sense to start a war and so are presuming it will not happen. But both China and India have highly nationalistic factions and mistakes happen. For investors there is little they can do to hedge of mitigate this risk except to stay in highly liquid stocks.

Seoul to react ‘strongly’ after N Korea destroys liaison office. Happening just hours before the clash between India and China, I think shows the tensions that are at play currently. The demolition came a few hours after North Korea said it would re-occupy border areas that where disarmed back in 2018. The demolition follows threats from North Korea over anti Kim Jong material being sent into the north from defectors. For the North to react this way suggests that things are getting very bad in the North as a result of the sanctions that the US imposed. Again like the incident with China it is not something that investors can hedge against. But it does hurt senitment.

Powell sees uncertainty over US recovery even as retail sales rally. Before the Senate Banking committee yesterday he took a cautious tone.n. He noted some stabilisation and modest rebounds but stated that uncertainty remained. His testimony came just after a very good set of Retail Sales numbers, much better than expectations. More pent up demand than had been expected? Although no breakdown of how much was on-line and how much high street shopping but the biggest increases were clothing, furniture and sports/leisure goods. Then was Electronic/Applicances, Auto, F&B, Miscellaneous and gas stations.
Powell noted that many Americans would remain unemployed for a long time even as businesses re-hired. Also that the longer the downturn the greater the risk on long term damage from businesses closing. Additionally that covid-19 remained a big unknown in terms of containment and cure. Until covid-19 is dealt with a full recovery will not be possible. He also mentioned that the corporate bond buying would be dependant on market conditions; that prompted a tantrum from market traders. It is, economically, the right decision and Also I think that the FED is not going to pander (at least at this stage when markets have recovered so much) to trader’s ‘wishes’. They will do what was necessary to keep the markets operating but he did not want to be an ‘elephant’ in the market.
Read also Fed’s Powell says bond-buying launch shows determination to meet promises

US banks face scrutiny after dividends exceed profits. 'The Federal Deposit Insurance Corporation is monitoring US banks’ dividend policies after they declared payouts totalling almost twice their earnings in the first quarter, eroding capital cushions as the coronavirus crisis took hold.’

Slip-ups and lack of deals stir fears that Buffett has lost his magic touch Berkshire watchers lament ‘chronic underperformance’ but stock picker’s strategy may yet pay off. Looks at his recent performance.
It notes 'The famed stockpicker had his worst performance versus the S&P 500 in a decade in 2019, and 2020 is shaping up to be nearly as bad. Instead of taking advantage of the coronavirus crisis that hit markets in March, Mr Buffett was a casualty. Instead of highlighting Berkshire’s balance sheet strength, the crisis exacerbated longstanding concerns over its direction. Some longtime Buffett watchers argue that it is time to fundamentally rethink Berkshire’s mix of businesses and investments.’
People point to his Kraft Investment, The Occidental deal and his selling of US airlines in April. Plus the fact he did not jump into buy at the market lows in March despite having cash.
I think there are four basic issues.
Firstly on Kraft and Occidential maybe he should the been more aware of the downside but them most of the market did not see it coming either. On the airlines; yes there have rebounded but due to huge government and other loans. He is right to say that when they resume they will be very different businesses; whether the current share prices/valuation are correct remains to be seen. I’m with him on this; I doubt it. The IEA oil forecast out yesterday doesn’t see air travel back to normal oil demand until 2022. Securing cheap finance is one thing ; seeing profitable ticket sales again is another. IATA expects most airlines to be making heavy losses into 2021. [see ‘Dire’ aviation outlook puts oil demand recovery on hold for two years or more]
TWO is size; as I wrote at the weekend regarding the recent good performance of day traders; their position size is small; they can get in and out in minutes if not seconds. Berkshire Hathaway can’t.
THREE is the fact that in the previous crisis companies went to Berkshire Hathaway looking for assistance/a bailout and as such he was able to negotiate a good deal. That didn’t happen this time. The Fed and other Central Banks and governments stepped in as gave away public money. Effectively distorting the market. But credit to Buffett he said in May '“We haven’t seen anything attractive,” he told his shareholders in May. The Federal Reserve “did the right thing and they did it very promptly and I salute them for it”, he told them, referring to the US central bank’s decision to backstop the debt markets. “But a lot of companies that needed money . . . got to finance in huge ways.”’
Lastly his investment style has always been to invest in companies he understands, he admits he did understand the tech sector. Not really surprising for a man that has lived in the same house for as long as he has and only recently got a mobile phone and likes reading company reports…. Hard copy. Investors have always known that; he made it quite clear; you don’t buy Berkshire Hathaway if you want a tech investment. But now the issue is not just understanding tech but investing in size at a reasonable price. He holds Apple which is good. As to other tech companies maybe Berkshire Hathaway investors will have to waiting for the new Fund Managers fro that. Although that is not to rule out that if the markets see another significant sell off that he won’t be in there buying haven learnt from missing the March sell off. He does learn from his experiences after all!
A nice closing quote in the article '“Berkshire Hathaway remains designed to reward investors over time but not on time,” said Thomas Russo, a managing member of Gardner Russo & Gardner, which owns Berkshire stock.'

For interest
Time to bring back annuities in battle against virus crisis.
Suggest govenments offer annuities rather than bonds. A nice idea but unlikely to get much taken up.

How Covid-19 will change the world The society that emerges will probably be even less co-operative and effective than before the crisis. By Martin Wolf

Feedback welcome