FT 23 June: Softbank, N Korea, TV and more

FT 23 June: Softbank, N Korea, TV and more

Japan, S Korea and Taiwan opened higher but then sold down on the mis-interpretation of remarks by Peter Navarro on the US/China trade deal.  Those remarks were clarified and the markets recovered to greater or lesser degrees.
China opened lower but is working higher.
Hong Kong opened lower but worked higher through the morning.
US Futures were choppy but currently trading slightly +VE

On-line Edition
SoftBank executives set to lose profits from Wirecard trade.
Unit of Japanese technology group engineered intricate $1bn bet on German payments company’s stock. Looks at how SoftBank Investment Advisers (SBIA) put together a Euro 900m investment via a Convertible Bond as Softbank announced a strategic co-operation agreement. But then SBIA cut its exposure by selling new bonds exchangeable for Wirecard stock. Credit Suisse sold the Euro 900m bond to investors. The trade was conceived by Akshay Naheta a former DB trader and ally of Rajeev Misra who heads the Vision Fund from London. It seems the Softbank did not fund the deal but Mr Naheta and Mr Misra along with the Abu Dhabi’s sovereign wealth fund Mubadala.
Now the deal is in tatters. Mr Neheta has been assigned a new role within Softbank. Credit Suisse’s clients are facing large losses as the bond was quoted at Euro 13 cents on Monday.
Another mis step by Softbank, although to be fair a lot of other investors were caught by Wirecard’s fraud too. See

North Korean provocations raise fears of military escalation Kim Jong Un is using threats against Seoul to reset negotiations with US, analysts warn. It is likely to remain a tinder box as the North comes under more pressure as sanctions bite.
The problem for North Korea seems to be that the world is occupied by bigger issues. The risk is that is makes its issue bigger!

Print Edition
Japan rushes UK over first post-Brexit trade deal with six-week timetable.
It will not leave much time for negotiations and seems to limit the scope for the UK to see much in the way of trade liberalisation. So the question arises will it be a good deal. Many wonder whether the UK is up to negotiation good deals having been apart from the process whilst part of the EU. The deal is to be based on the existing EU-Japan agreement but the UK hoped to improve or remove Japanese tariffs on goods and agriculture.

‘Health halo’ products prove to be spice of life for consumers. Looks at how demand for turmeric, ginger and other spices has increased as people look to boost their immune systems +VE for Asian producers. Mentions Olam in Singapore which reports increased demand for turmeric, ginger and black pepper. +VE

Digital ads set to eclipse old industry Overall spending set to fall 12% but newspapers and TV will bear brunt of pain. Spending on adds on Google, Facebook and Alibaba with this year be larger than on traditional media.
'Excluding online ads sold by old media outlets such as news publishers or broadcasters, digital marketing is predicted to account for more than half the $530bn global advertising industry in 2020, according to GroupM, the media buying agency owned by WPP.’ Other agencies agree. It is also interesting that they have not seen the cuts that traditional ad spending has during the downturn, in fact I would be surprised if it hasn’t seen significant increases. It quotes a senior advertising executive who said 'there were “fundamental shifts” in the market, particularly for television. “This shock may do for free-to-air broadcast television what the financial crisis did for newspaper advertising,” they said. “It never recovered for newspapers. The question is how can broadcasters stop that from happening to them.”’
I think the key for the broadcasters will be finding their niche but their business model will have to change and be more honest. In reality TV has never been free; when I was growing up in the UK the BBC was paid for via the TV licence fee and the other stations by advertising. Just as with game on ones phone today; you can pay a subscription to watch without ads or free with ads. As most entertainment companies have learnt its all about content and that is the true for the TV companies and newspapers too. For the free to air TV companies its harder because they don’t have direct insight into who is using their service in the same way the on-line platforms can. I think that over time unless they can move into the digital, on-line world; the Free-to-air TV companies are going to slowly fade away.
It also raises the point about personal information and whether the likes of Google, Facebook and others should have it for free? But that’s a bigger question.
Read also French investor trio in TV sector deals push. Underlines the importance of content and probably that size matters in order to be able to handle the costs. Again Bundesliga’s match rights drop €200m in value after pandemic

Virus blights Boeing, Berkshire and brewers Industrials, financials, energy and media hit hard as existing problems are amplified. It is generally negative about the implications of covid-19 related social distancing requirements on Airlines, Brewers, Casino’s, Heavy Industrials (from Cars to Chemicals), Energy and Financials.
Key is that this is not going to be a permanent problem assuming that a vaccine and cure are found. But we don't know how long we will have to wait for that solution. Which makes it difficult to work out whether the costs associated with measures instigated now will be cost effective. Equally if a break through is made in the near future a lot of measures that have been instigated are likely to be written off as wasted money. I think that until we know much more about the virus and its operation; businesses will have to be cautious and the recovery therefore will be muted. Investors should be reviewing their valuations and I am sure a lot will during the forthcoming earnings season to work out at what level a number of these currently stressed industries make good investments. For some timing and debt will be break factor that takes them from ‘stressed' to being ‘distressed'. This week investors will watch the banks and the results of the Fed’s stress tests and then wondering how you test the other sectors of the economy.

Long live Powell, the new monarch of the bond market. Makes the point that whilst Powell told Congress that they didn't want to be like an elephant in the bond market; their size mean that they are.
It notes that banks since renaissance times have been the 'central locus of capitalism’. But now the bond market, according to the Bank of International Settlements , represents half go the global debt. But via securitisation loans can be repackaged and sold to investors. Which is healthy as long as there aren’t issues that might be dangerous for investors or the functioning of the payments system that banks dominate. But there are implications for monetary policy in times of crisis. It notes 'Central banks were originally set up to backstop commercial lenders and began regulating the level of economic activity by controlling the price of their funding. But the rising importance of the bond market means they have had to dabble more in what would once have been considered unorthodox areas.’
But finance has advanced from those earlier, simpler days. It uses the analogy for car mechanics; used to be they could fix any combustion engine today presented with a Tesla you need a different type of mechanic.
It expects that going forward there will be more scrutiny of the fixed income sector, as the banks saw after the 2008 bailout. The big question is whether the Fed become permanently involved and whether it will follow the BoJ in instituting ‘yield curve control’ ? Both of which have big implications for the US monetary policy.

For Interest
Billionaire CQS hedge fund trader Hintze knocked by $1.4bn virus loss
London philanthropist emerges as one of the pandemic’s biggest industry casualties. Looks in some detail at how the fund has suffered. It took some early extreme positions that didn't work. An interesting read and it highlights that to outperform these days means looking at riskier trades. I think a lot of that is still because cash is mispriced due to Central bank intervention since 2008 which was never unwound but that is the world in which we live and operate.
It is also with noting that Sir Michael recently told investors “The key point for me is to make your money back,” Sir Michael told investors, adding that he was “heavily” invested in the fund himself. “Not just make our money back but make the money back and then some.”
Without doubt that passion will be key to returning to profits. Covid has changed the world and understanding the changes is key to determining new strategies.

Zero fees help Citadel cash in on retail investing boom Higher volumes and wider spreads have driven outsized returns for liquidity providers. Looks at how Citadel and Virtu have made money from increased retail trading. But the practice of buying order flow (Payment for order flow, or PFOF) is raising concerns. Again nothing is for free; TD Ameritrade with offer free trading made $202m from selling its equities and options flow, Robinhood made $91m.
An interesting insight into US trading but not currently seen to the same extent in Asia; where retail still operates though local brokers but I suspect it will not be long before the likes of Virtu and other look to build similar business here.

Feedback and comment welcomed