FT Weekend Zoom, HSBC, Fed's policy, Retail players in the US and more.

FT Weekend  Zoom, HSBC, Fed's policy, Retail players in the US and more.

Before my run down of the FT I’d like to note a piece I read from Natixis Economic Research, thanks to Alicia Garcia Herrero

China’s fiscal response to Covid-19: Closer to a “whatever it takes” than it looks.

It looks at the Chinese fiscal deficit and notes the difficulty in measuring it due the fact that there four fiscal accounts. One on balance sheet, and then the off balance sheet accounts such as the local government financing vehicles (LGFVs). They look at the issue in some detail but the key takeaway for me was jump in LGFV’s which China has leant on the past to avoid a slow down in the economy. Because of this China is, to an extent, constrained in its ability to set out big up front stimulus and hence we haven’t see the large plans that other countries have offered. At the Two Sessions it lifted quotas for local government special bond issuance and announced a special treasury bond for the first time since 2007. So infrastructure spending will continue and I think that is also seen in the continued iron ore imports from Australia despite the covid-19 investigation tiff. But the key question, beyond the size of the deficit, is how effective will it be supporting households and ensuring employment.
I also think that China is constrained by its commitment to Belt and Road schemes, especially it the light of a number of the countries involved requesting delays or rescheduling's. For Chinese investors the lack of defined stimulus schemes is a concern because they know it directly impacts the real prospect for jobs; especially at the SME’s who are the major generators of jobs. That is the real driver of consumer confidence. On Monday we get Chinese Retail Sales along with House Price Index; NBS press conference, Fixed Asset Investment (YTD), Industrial Production and Unemployment; all are expected to show MoM improvements and will be watched very carefully!

Zoom faces fire over technology that lets China censor individual users Its developing a feature that will allow Beijing to block users in China from taking part in video calls and in doing so is raising concerns about China’s ability to influence western tech companies.
Key point not directly mentioned in the article
The request to shut down these calls must have come within minutes of them starting or that China knew about the calls in advance. That would mean that either the Chinese had access to the system that invites participants or that its monitoring systems can move so incredibly fast. Thinking of the millions of calls that take place everyday!
That either, reveals the lack of security in the Zoom encryption or the fact that it has already opened up its encryption to the Chinese? Especially as China requested it shut down a call which it declined, because there were no China based participants.
The article does note Zoom is already under fire because it has servers in China and one third of its developers are based in China.
Coming at a time when China is telling the world its national security law for Hong Kong is nothing to worry about I would say this is a worry. It will probably mean good business for IT system designers as a large number of Hong Kong companies will be probably looking to relocate their servers outside Hong Kong on security grounds.
Back to the article
The news follows its admission that it disabled the accounts of some individuals that China has labelled dissidents, who were commemorating the Tiananmen Square massacre via a call. Zoom says its is developing the technology to ‘comply with requests from local authorities’ although it didn’t name which ones. It said it managed to track the location of the Chinese labelled ‘dissidents’ using their IP addresses.
Also this week Apple removed a pod cast app from its China online store at China’s request.
KEY again this move by China is similar to its request in 2017 that Cambridge University Press block on-line access to hundreds of scholarly articles; many of those covered Tiananmen Square too.
Worth noting that those China calls dissidents in the free west we would call them the opposition party. Much of this is related to Tiananmen Square which is an event that the Communist party in China is rightly ashamed of but rather than admit its mistakes it is trying to cover-up and write out of history.
As one of the ‘dissidents’ said “Companies with a conscience should not accept requests from dictatorships,” |
It is going to make ESG a big issue for fund managers; which as Mark Tinker of Market Thinking points out is the latest benchmarking wheeze (see https://market-thinking.com/2020/06/and-for-your-next-trick/ ) .
Zooms moves must also raise serious doubts about Hauwei’s claims that it does not allow Beijing access to its systems. If Beijing can make requests of international companies and have then accepted are we really to believe that its domestic companies are not even more compliant.

HSBC backlash betrays west’s wishful thinking. Makes the point that in reality when put on the spot HSBC did not have a choice furthermore its statement gives no indication as to whether its ‘heart’ is in the decision and lastly whether it is a British Bank. The article outlines how HSBC has faced many trials and tribulations in the past and that the real key for the bank is its ability to do business. So whilst governments and politicians may rant and rave and call on it to give allegiance investors should be worried about the trade and capital flows that are its business.
Not mentioned in the article but expanding the concept; as a general principle companies should not be political. Difficult when you are owned by the government as is the case of Chinese SOE’s. But for most companies it is about commerce and the ability to do business. When governments call on companies to endorse their actions it is usually because those actions don’t have credibility. Getting them endorsed by those with a vested interest in remaining in business I don’t think persuades anyone that the action is right but rather exposes it for the sham it is.

Investors reset for Fed’s single-minded pursuit of policy goals. Notes that when central banks get involved is trying to mitigate shocks to the economy market forces are interfered with, usually with adverse effects and asset allocations are complicated. The Fed this week made it clear that it is pursuing maximum employment and stable prices. So what does that mean for portfolio’s?
First to achieve its goal the Fed looks likely to stop the T10 rising. That is important because it is a key benchmark not just for home and other loans but fro valuing other assets; like equities, corporates loans and more.
Keeping it low is complicated by the US Treasury selling loads of debt hence the expectation for buying long dated paper and maybe even formal yield control (like Japan). But it points out that lead to what Pictet calls ‘a debt dominance monetary regime’ but others like Blackrock alluded too last year when it called on the need for monetary and fiscal effort and it was obviously noted from the seen response. But Blackrock also called for “proper guardrails and a clear exit strategy to mitigate a risk of uncontrolled deficit spending with commensurate monetary expansion and, ultimately, inflation”. Whilst many don’t expect inflation the elevated debt will constrain the Fed over time and make ’normalisation’ more difficult. Although what is normalisation the days? Pre covid-19, pre GFC pre…..
Investors are used to this is was the same after the GFC; slow real growth, low inflation and rising government and corporate debt. So will the latest moves enhance those over already seen? The Fed’s outlook would suggest so with the addition of elevated unemployment. Currently value stocks are out of favour but they are likely to see a future ‘mini-cycles' as the pandemic fades. But for longer term allocations the focus the article suggests will be on buying on dips those companies with solid growth prospects, preferably at the forefront of disrupting old business models (and I would add minimal debt although if you don’t believe in inflation debt os less of an issue). On that basis Tech and Healthcare are looking expensive. However as BCA Research notes “Growth stocks are not a bubble if bond yields stay ultra-low,” "The upshot is that high absolute valuations of growth stocks are contingent on bond yields remaining at ultra-low levels. And that the biggest threat to growth stock valuations would be a sustained rise in bond yields.”
An interesting read personally I still think that inflation is a significant threat.

FT BIG READ. MARKETS The rise of the ‘retail bro’ Betting on the US managing a quick recovery from the pandemic, traders like Dave Portnoy are driving up some stocks. But many professional fund managers question the fundamentals of the broader rally.
THE KEY I think is that day traders are generally small and there is usually enough liquidity in the market for them to sell their positions in minutes. When you are a fund and hold 5% of a company you can’t do that. Over the past couple of years the hedge funds I’ve dealt with have increasingly looked at the stocks they invest in and size of positions they hold on the basis of liquidity and being able to exit a position in two or three days. If day traders were on the same scale I doubt they would be so bullish.
Generally the article builds on yesterday’s OPINION Myths can make ‘smart money’ act dumb. Looking at how day traders have come to prominence since the March market sell-off. As I said yesterday the key determinant should be their long term performance.
Today’ s article notes that many are surprised at the market’s strong rebound which has helped the likes of Mr Portnoy. Where as a lot of very bright and experienced people have been wrong footed, by the disconnect between fundamentals and markets.
Is it all down to the likes of Mr Portnoy and the stay at home retail investors? The article says they are too small and are merely passengers on the momentum play into equities after government and central bank actions have 'pushed government bonds to unpalatable highs’. That maybe true but at times of low volumes, ie when a lot of established funds are not trading, then they could be a significant influence. In Asia retail still outweighs institutional money in many markets.
But whether or not they are the drivers they have been influential in some stocks like Hertz and JC Penny; seen from the rise in holdings according to the online broker Robinhood.
There has also been a boom in on-line account openings according too ETrade (a similar rise has been seen in Japan too).
One point to watch will be whether Thursday’s sell off hurt them or whether they remain committed to the markets. Mr Portnoy claimed on Thursday to be ’nine steps ahead’ one wonders how his returns were for Thursday and whether on Thursday evening he was so bullish about Friday? An important point is whether as Mr Buffett, who he ridicules, says you have the cash. Day traders often rely on margin and when the market falls as it did on Thursday; that can wipe you out and leave you still with liabilities.
I think, as I said yesterday, that many professional investors were caught out in the initial sell off. Not least because they suddenly found they needed cash in order to support some of their other less liquid investments and so were effectively forced sellers initially. Another unintended consequence of Bank interest rates being near zero; they had no money in the bank. A knock on effect would be that a number of other fund managers were then forced to liquidate positions to provide for redemptions.
Post the initial sell off, with no playbook to follow some funds were caught out by relying on their established/historical indictors. They failed to fully take into account the level of government and central bank stimulus, the extent of the ‘forced' sell-off and the potential for a swift rebound. Because this time it was different.
But there were others with cash who had been under invested and able to put money to work.
Additionally the Central banks and governments were there to give support and have continued to do so. On that, I think that the Fed’s inaction this week was right and shows that they are more concerned about the longer term fundamentals than the short term market reaction.
There is still a lot we don’t know about the recovery not least because we still don’t fully understand the covid-19 virus and don’t have a vaccine or a cure. As the articles says we don’t know 'If all the stimulus succeeds only in supporting assets held by the rich and fails to deliver long-term succour to ordinary workers and taxpayers, economists worry that the whole exercise could well be deemed an ugly mistake.'
So trying to estimate when normality returns, when jobs return, is just a guess!
It points out that taxation is going play a big part in the recovery and paying for the stimulus, that we have sen applied. Most doubt the public will foot the bill which means that corporate taxes are likely to rise and that will impact stock returns. Manufacturing costs are also likely to rise again hurting corporate returns and then there will be the rise in interest costs that will be associated with the millions borrowed by companies in order to survive until normality returns.
With so many unknowns many fund managers have, maybe, been over cautious and remained true to their long term players instincts and missed the day trading opportunities but they are there for the long term. In the same light whist many retail players have made money we don’t hear about the ones that have lost money. It is largely those that invested since March 23. What about those that invested on March 16? The article cites an investor whose previous attempts at making money from the stock market blew up but this time he made money out of Luckin Coffee; I am sure many didn’t.
That investor said “The one thing I’ve learnt”, he says, “is that right now in the stock market, a company’s health does not correlate with the stock price one bit.” That is not broadly and in a few cases does that hold.
Read also Top-flight US hedge fund Renaissance sheds 20% in sharp reversal of fortune. Again the key is that a lot of funds are too large to be able to react quickly to the changing fortunes of the markets. Even its market neutral global fund was caught because the sell off was global and I would guess that by the time it had exited out of some the long positions, it had missed the opportunity to reinvest at attractive stocks at the bottom prices. Hedge funds used to be small and nimble but that is no longer the case. Success has been their downfall because by nature that are not that scalable. Many of their greatest successes where in smaller companies where they either had greater holding power or the ability to exert pressure on management for change. Today their size often precludes then from buying those small medium sized companies where such gains can be made. Renaissance Tech is a $75bn fund firm; it needs large companies, where significant gains can be made, to invest in.
In the same vein It seems rash to bet that worst is over for US oil stocks Again notes day traders involved and notes that a number hedge funds are waiting on the sidelines. Again for a small day trader there may be money to be made but for larger funds I think prudence says wait.

Investors enjoy equity-like gains from rocketing bonds. US blue-chip groups’ debt surges as buyers clamour for unusually high interest rates. Key being the high rates being offered (relative to US Treasuries) and helped by the Fed’s move to step into the corporate bond market. Most of these are long dated but it notes that even some shorter dated bands are doing well. Some say it is the start of a new credit cycle but as with all things at the moment we still don’t really know how long the threat from covid-19 will last.

Mortgage powerhouse Quicken files for listing This will be an important one to watch. A challenger to traditional lenders; 'becoming the largest mortgage originator ahead of Wells Fargo in 2018, with more than $80bn in new loans. Last year the company closed nearly $145bn in mortgages.’
But coming at a time when 'millions of homeowners have skipped payments on their mortgages.’ US home loans in forbearance end of May 8.5% from 3.7% first week April. Also new legislation means borrowers can defer mortgage payments for up to a year but the sums will be eventually repaid, in many cases by extending the term of the loan. But by that time the borrow may have gone bust or unable to pay having had a years free accommodation. So a huge unknown risk. Missed payment also put mean that the Mortgage Back Securities that the mortgage loans are repackaged into require top up payments to the bond holders.
At the same time Quicken is currently looking good because people are re-financing their mortgages at lower rates, for which it gets a fee each time.
I have huge concerns about the potential for losses in the short term. Refinancing of mortgages is only likely to become more problematic; as mortgage rates have little room to go lower and defaults are likely to increase because we don’t know when normality returns. All we do know is that the outlook for businesses and jobs will be tougher than it was pre covid-19.

Hertz seeks to tap speculators’ fervour with $1bn stock offering in bankruptcy It will be interesting to watch if the stock, recently so loved by day traders according to Robinhood, can attract long term investors? Shows how the current circumstances are revealing new practices never seen before. A company in Chapter 11 selling stock, while its bonds are trading at highly distressed levels (40 cents on the dollar) which would normally mean shareholders are wiped out. Plus it is saying that it can’t afford some of the leases on its cars; those it hadn’t purchased.
The offering comes with warnings 'a disclosure stating that “an investment in Hertz’s common stock entails significant risks, including the risk that the common stock could ultimately be worthless”, it wrote.’
The stock dropped from $20 in February to $0.56 on May 26 and then rebounded to $5.55 last Monday before selling down to $2.06 on Thursday and last traded on Friday at $2.83. If the company can sell the stock then it will be a new first and it would mean that the money would be free of covenants that usually bind a company in chapter 11.
For all the hype the risks still remain and the company would still need to revamp its business model. Historically it took the view of buying a high proportion of its vehicles and then selling them at the end of the lease period or at a set milage/time. That has worked well in the past. But the covid-19 shutdown means it has been unable to sell those vehicles at the end of their leases, it has also seen an increase in early returns and little new business. Worth remembering that the industry used to say that Hertz was an auto dealership with a leasing business! If it gets out of Chapter 11 that model may need to change.
The alternative business model used by a number of other car rental firms is to lease vehicles from the manufacturers and then at the end of the lease return them to the manufacturers for them to resell. Less profit but less liability too. As ever in business risk and reward that normally worked but covid-19 times are not normal.

International tribunal attacks US sanctions as ‘unacceptable’. After yesterday’s news that the US was, in my opinion to its shame, imposing sanctions on The International Criminal Court it has rightly come out and denounced the the US saying 'sanctions imposed on it by the US are an “attack against the interests of victims of atrocity crimes” and an “unacceptable attempt to interfere with the rule of law”.
In my view the US administration is wrong in its current course of action. In not allowing any of its military actions to be investigated, it is no different than China in trying to cover up and write out of history Tiananmen Square. If it is confident it has nothing to hide then is should allow investigations to take place. Just as it is currently seeing a backlash from its failure over the years to monitor and investigate the actions of its police forces, it could find itself on the wrong side again if it does not allow a lawful and open system to investigate its military. That will not be just from its own citizens but from the world. Beijing must rightly be smiling at the US’s hypocrisy

Activists defy Seoul edict to stop anti-Kim leaflets. The dilemma of the the government good relations with N Korea or the suppression of those that want to receive the oppression of the North Korean people? Currently the government is more concerned about its relationship with regime in the North than the people of the North it would appear. Many think the increased sabre rattling by North Korea reflects the pressure it is suffering from the sanctions, which could mean that it becomes more desperate and unstable. One to keep a watch on. Currently the Trump is showing no interest in the issue which is another problem for Kim Jung Un.

Abe rival launches re-election bid to remain Tokyo governor. Yuriko Koike, is expected to win easily despite hostility from the local arm of the Liberal Democratic party (PM Abe’s party) and allegations that she overstated her academic record. She runs as an independent after her “Party of Hope’ failed to get recognition in the 2017 National Elections and will remain a threat to PM Abe on the national stage.
Editorial Resilience does not have to lead to trade barriers. A look at supply chains and how to make them better. How to go from 'just in time' to 'just in case’ without costly duplication and redundancy and how to make it cost efficient via tax policy. In notes the political divergence between US, EU and China which will lead to some re-regionalisation but hopefully with the minimal amount of degloabalisation. A good read.

For interest
Hong Kong on the brink 
Beijing’s tightening grip on the supposedly autonomous territory has sparked international alarm, writes Sue-Lin Wong. Two books ask what can be done
'Two new books by pro-democracy advocates help us understand the 2019 protests and the increasingly hardline response they sparked from an anxious, angry Chinese leadership. Unfree Speech by Joshua Wong, the youthful face of Hong Kong’s democracy movement, is a rallying cry for grassroots mobilisation around the world. Antony Dapiran’s City on Fire combines relentless on-the-ground reporting with a deep understanding of the city’s political, economic and social undercurrents.’

Can the pandemic end the great innovation slowdown? Incentivise invention, take advantage of catastrophe and never forget the simple solution: Tim Harford on why the history of technology has much to teach us about how to fight our current crisis — and transform our future
Teaser 'The world has a technology problem. By that, I mean that we currently lack the technology to deal with the coronavirus pandemic. We don’t have a cheap, easy, self-administered test. We lack effective medicines. Above all, we don’t have a vaccine.
But I also mean something vaguer and more diffuse. We have a technology problem in the sense that scientific and technological progress has been sputtering for a while. That is evident in the data. The 2010-19 decade of productivity growth in the UK was the lowest for the past couple of centuries, and corona-virus can take no blame for that.'

Can I terminate an out-of-control robot? Tech World Is the Covid crisis the push we need to replace human-to-human contact with androids? Leo Lewis remains unconvinced. A teaser 'I have been wondering about the solidity of my legal position if I had just smashed a robot to pieces. It would not have been a premeditated attack, you understand, but I do already know my victim’s name’.
'A call to the police in Tokyo’s Shakujii district draws a more practical answer: “It depends on the situation,” says the duty officer.'

Feedback and comment welcomed.