FT : Anglo chief admits selling De Beers is biggest challenge

Anglo chief admits selling De Beers is biggest challenge
Miner has pledged to dispose of or list world’s biggest diamond business even as market remains weak

Anglo American chief executive Duncan Wanblad has admitted that selling the diamond business De Beers will be the hardest part of a radical restructuring the miner must deliver after rejecting a £39bn takeover bid from rival BHP.

A promise to dispose of De Beers, the world’s biggest diamond business, is part of a plan that amounts to breaking up Anglo that Wanblad pitched to shareholders as a superior alternative to selling the company to BHP.

Other elements include demerging its Johannesburg-listed Anglo American Platinum business, selling its metallurgical coal business in Australia and shuttering or offloading its nickel mines in Brazil. That would leave Anglo as a leaner business focused on copper, iron ore and fertiliser.

Wanblad said he was “undaunted” by the challenge of exiting four businesses in 18 months but stressed that securing a buyer or a listing for De Beers would be the most challenging.

“It is the one that is real bottom of cycle,” he told the Financial Times, referring to the slump in natural diamond prices that has already forced De Beers to cut this year’s production targets. “That [process] is going to take the longest.”

The 107-year-old Anglo had been working out how to streamline the sprawling business for several months but was forced to fast-track the strategy after BHP made its takeover approach in April.

BHP eventually dropped its six-week pursuit on Wednesday in the face of resolute opposition from Anglo’s board, leaving Wanblad under pressure to deliver on what he has promised.

Wanbald said Anglo would run the four transactions and restructuring in parallel, adding he had “great confidence” in Anglo’s ability to execute. “Investors are going to see continuous focus on delivery until we get it done in the next 18 to 24 months,” he said.

The 57-year-old South African added that he was fully committed to each disposal and would not change course, even if commodity markets shifted in favour of one of the businesses he has promised to exit. “That’s where I’m headed and I’m going to be undaunted in terms of getting from here to there,” he said. 

Under Mark Cutifani, Wanblad’s predecessor, Anglo unveiled a similar radical plan in 2016 as Anglo faced a debt crunch but some asset sales such as Kumba Iron Ore were abandoned as performance improved.

Analysts have said that selling De Beers will be complicated by the rise of lab-grown diamonds and its ties to the government in Botswana, where it sourced almost 80 per cent of its stones last year. 

Based on valuation estimates by Wood Mackenzie, a consultancy, De Beers would account for almost half of the $25bn that Anglo could secure from the sales. Its current value on Anglo’s balance sheet is $7.3bn.

“If they try to run a sales process, I think there will be limited interest. At this stage, an IPO or listing feels more likely,” said Rob Wake-Walker, a consultant at WWW International Diamond Consultants. “People will find it an incredibly complex and difficult deal to proceed with. If you’re not experienced in having a government partner, it’s a difficult one.”

De Beers is yet to finalise a 10-year sales agreement with the Botswana government which owns 15 per cent of the diamond miner. Wanblad said that he hoped an agreement would be finalised within the next few months, saying that it had not been derailed by the BHP takeover battle. On Friday, Al Cook, the new boss of De Beers, set out plans to streamline the business.

FT : Nvidia market cap jumps by $350bn amid ‘gamma squeeze’

Nvidia market cap jumps by $350bn amid ‘gamma squeeze’
Options trading frenzy fuels wild swings in share price

Nvidia has gained $350bn in market value in wildly volatile trading since it reported first-quarter earnings just over a week ago, driven in part by a feedback loop of trading in the chipmaker’s huge options market. 

The company was valued at $2.69tn by Friday’s close, more than JPMorgan, Berkshire Hathaway and Meta combined, despite a pullback at the end of the week. It has added roughly $350bn since May 23, when it announced surging revenue growth over the first three months of the year. At the peak earlier in the week its value had risen by nearly half a trillion dollars, growing by a sum close to the market capitalisation of Tesla in just a few days.

Although many investors have been drawn to Nvidia by its bumper earnings, analysts say the past week’s rally bears the hallmarks of a so-called “gamma squeeze”. In such a market phenomenon, bulk buying of call options — derivatives that give traders the right to buy at a preset price and which can pay off it a stock rises — forces brokers on the other side of the trade to buy shares in the underlying stock to protect themselves.

As Nvidia’s share price climbed this week, bullish traders purchased more and more call options, forcing brokers to purchase further Nvidia shares. This pushes the company’s share price higher, boosting demand for calls, all of which drives a self-fuelling cycle of further dealer hedging. 

“Nvidia has become a one-way wrecking machine,” said Charlie McElligott, an equity derivatives strategist at Nomura. Dealers who sold call options are having “to go out and buy Nvidia to stay hedged into the rally”.

Shares closed down 0.8 per cent on Friday, but the chipmaker has nevertheless dramatically closed the gap with Apple and Microsoft, for a long time the two largest companies on US markets.


Gamma squeezes “need a trigger”, said Steve Sosnick, chief strategist at Interactive Brokers. “An earnings beat, raised guidance and a stock split . . . are all potential triggers,” he added, referring to a 10-for-1 stock split that Nvidia announced along with its earnings.

Such squeezes are not uncommon. The meme-stock rally of early 2021 that centred on video game retailer GameStop was another example of traders buying short-dated, out-of-the-money call options that forced brokers to snap up the company’s shares, driving a huge, if shortlived, rally. 

Unlike GameStop, Nvidia boasts profit margins above 50 per cent and has lately come to embody investors’ hopes about the potentially transformative effect on the global economy of generative artificial intelligence, a technology that runs on the company’s chips.

Even investors who think Nvidia’s rally may have gone too far have found the stock hard to ignore. “If you were designing a perfect momentum stock, Nvidia would be it,” said Aswath Damodaran, a New York University professor and expert on equity valuation, referring to companies that are borne upwards by their own past performance.

Excitement around generative AI and the Nvidia chips that underpin it has intensified to such a degree that “when Microsoft announces a huge capex [capital expenditure] spend [with] Nvidia the recipient of that capex spend, both stocks rally endlessly on the same news,” said Ritholtz Wealth Management chief executive Josh Brown in a note to clients this week. 

“It’s a carousel that feeds on its own momentum and everyone’s having the time of their life. Until one of that carousel’s ponies stumbles. Or some CFO somewhere looks at the spending, compares it to the actual return on investment, and decides to slow things up,” Brown added. 

FT : GSK set to face jury trials over heartburn drug Zantac

GSK set to face jury trials over heartburn drug Zantac
Judge rules experts’ evidence admissible, leaving route open for 72,000 cancer sufferers to bring cases

GSK and other pharmaceutical groups are set to face jury trials in cases brought by more than 72,000 cancer sufferers who allege a heartburn drug caused their condition, after a judge in Delaware ruled that plaintiffs’ scientific evidence could be heard.

The ruling by Judge Vivian Medinilla means that scientific experts will be able to testify before a jury that there is a link between the plaintiffs’ cancers and their exposure to NDMA, a probable human carcinogen, through Zantac. GSK and other companies dispute these claims.

GSK, which developed the drug, could face costly compensation payouts if juries find it liable for the plaintiffs’ cancers. So could other companies that marketed Zantac including Boehringer Ingelheim and Sanofi.

The companies involved have seen tens of billions of dollars wiped off their market capitalisations because of the cases and have settled several; the vast majority of the remainder are in Delaware.

Although Medinilla’s ruling is not an endorsement of the plaintiffs’ evidence, it exposes the companies to the unpredictability of a jury trial.

In her conclusion, Medinilla said: “In Delaware . . . trial courts entrust questions of science to the scientists . . . it would be improper to simply dismiss these experts as ‘poseurs or witnesses for hire’.”

Brent Wisner, co-lead counsel in cases brought by plaintiffs in the Delaware and California state courts, said the ruling “moves us one step closer to justice for our clients”.

“This case has always been about getting the science in front of a jury . . . Now the writing is on the wall. GSK, Boehringer Ingelheim, and Sanofi will need to answer for their 40 years of misconduct,” he said.

GSK said it “will immediately seek an appeal”. “[The] scientific consensus is that there is no consistent or reliable evidence that ranitidine increases the risk of any cancer and GSK will continue to vigorously defend itself against all claims,” the company said, referring to the generic name for Zantac.

In 2022 a Florida federal court decided that other scientific experts’ findings about the carcinogenic nature of Zantac were based on “unreliable methodologies”.

Zantac was a best-seller for GSK after its US approval in 1983. It was the first drug to achieve blockbuster status by generating more than $1bn in revenue, and was later also sold by other pharma groups.

But in 2019 Valisure, an independent laboratory in Connecticut, reported that it had discovered “extremely high levels” of NDMA in ranitidine. NDMA is a substance also found in cigarettes and processed foods that is classed as a probable human carcinogen. The companies have challenged the lab’s methods.

The US Food and Drug Administration and the European Medicines Agency recommended suspension of the use of ranitidine products and the FDA asked all manufacturers to withdraw products based on the drug.

This was largely unnoticed by investors until 2022, when an analyst note published by Morgan Stanley estimated the potential liability at up to $45bn. Companies linked to the drug lost a combined $40bn in value in days.

GSK, Sanofi and Pfizer have sought to settle numerous cases relating to Zantac. Last month Pfizer offered up to $250mn to settle more than 10,000 lawsuits. In the first instance to go before a jury, GSK and Boehringer Ingelheim last month won a case in Illinois.

FT : Sanofi pushes ahead with €20bn consumer healthcare spin-off

Sanofi pushes ahead with €20bn consumer healthcare spin-off
The deal is expected to be one of Europe’s largest this year as EU IPO market shows signs of recovery

Sanofi will press ahead with plans for a spin-off of its consumer division, which could be one of Europe’s biggest deals this year, adding bankers to work on a sale process and preparations for a public listing expected to value the business at about €20bn.

Goldman Sachs and Morgan Stanley will work alongside BNP Paribas and Bank of America on a sale and potential float expected to take place as soon as the end of the year, according to people familiar with the matter.

The processes will run in tandem, a common deal structure known as a “dual track”. Rothschild has also been working with Sanofi since the start of the process.

The consumer division, which accounts for 10 per cent of Sanofi’s sales, has drawn interest from potential private equity bidders, the people said. Analysts at Jefferies estimate the consumer care spin-off could be worth between €18bn and €20bn.

The step-up in preparations come as the European IPO market has shown signs of recovery this year, with a strong listing from Swiss skincare company Galderma, though the debut of German beauty retailer Douglas flopped in March.

In October, the French pharmaceutical company announced plans to separate its consumer healthcare business in the fourth quarter of 2024 at the earliest, saying “the most likely path” would be the creation of a publicly listed entity with its headquarters in France.

“At a certain point you have to decide what’s best for consumer, and what’s best for Sanofi,” chief executive Paul Hudson told the Financial Times in an interview in December.

“For us, being a pure-play biopharma with a different sort of probability of success [and] longer-term thinking . . . works for us. For consumer, being able to manage their own business, move at their own speed and make acquisitions works for them.”

The move makes Sanofi the latest Big Pharma company to seek to separate low-margin, consumer businesses from divisions focused on innovative new medicines that offer higher returns.

In 2022, GSK spun off its consumer healthcare business Haleon, a joint venture with Pfizer, while Johnson & Johnson also listed its consumer business Kenvue in 2023. Pharma companies have been able to sell off stakes in the listed businesses to generate cash for mergers and acquisitions, with GSK exiting its position in Haleon and Johnson & Johnson selling its remaining stake in Kenvue last month.

Hudson has sought to refocus the company on developing treatments for rare diseases and immunology since his appointment in 2019 as the company seeks to build up its pipeline and reduce dependence on hit drug Dupixent. Recent launches include Beyfortus, which prevents a common respiratory virus in children, and Altuviiio, a drug used to manage bleeding in haemophilia A patients.

However, his plan for Sanofi to invest heavily in research and development rather than focus on deals in the coming years took investors by surprise when it was announced in October. Shares tumbled about 20 per cent on the announcement, though they have gained back some of that ground in 2024 for a market value of €112.3bn.

The business remains reliant on its blockbuster asthma drug Dupixent, which brought in €10.7bn in sales in 2023, a quarter of total revenue. Sanofi is seeking new approvals for Dupixent to treat chronic obstructive pulmonary disease, a lung condition associated with smoking.

On Friday, Sanofi said the FDA had asked for more information before approving its broader use but the European Medicines Agency gave the drug a preliminary recommendation for COPD.

Goldman Sachs, Morgan Stanley, Bank of America, BNP Paribas and Rothschild declined to comment.

Sanofi said it did not comment on “market rumours”, adding “preparation for this potential separation project is progressing. We are keeping all options open to maximise value creation for all our stakeholders.”

FT : Can Czech billionaire Daniel Křetínský get Royal Mail to deliver?

Can Czech billionaire Daniel Křetínský get Royal Mail to deliver?
New owner must modernise group and repair fractured relations with workers

Defending the government’s move to privatise Royal Mail in 2013, the then business secretary Vince Cable insisted it was “logical”.

The plan was “consistent with developments elsewhere in Europe”, he argued, where other privatised postal services “produce profit margins far higher than Royal Mail’s but provide high-quality services”.

A decade later, unlike many of its peers across Europe, Royal Mail has failed to deliver. The 508-year-old group has been beset by strikes, losses and late deliveries: it posted just 75 per cent of first class mail on time during the 12 months to March compared with 92 per cent 11 years earlier.

The plunge in the share price of its owner International Distribution Services (IDS) added to the woes, setting the stage for Czech billionaire Daniel Křetínský to swoop.

On Wednesday, London-listed IDS said it had reached an agreement to sell its business to Křetínský’s EP Group for 370 pence per share, a significant discount on its 455p price after Royal Mail listed in 2013. The holding company changed its name to IDS in 2022.


With Royal Mail about to get a new owner, attention is turning to Křetínský’s chances of transforming the business. Analysts say he is about to take charge at a difficult time, with the need to pump more money into modernisation to catch up with European peers and capitalise on growing demand for online shopping deliveries.

“This is what makes it an interesting bid: we’re at a point of almost maximum uncertainty [for Royal Mail],” said Alexander Paterson, an analyst at Peel Hunt. Other postal services were “generally far further advanced” with automation of mail sorting, he added.

“That’s one thing I would expect to be accelerated if Royal Mail is owned privately by someone who is able to invest more capital,” Paterson said.

Křetínský, whose takeover bid will be scrutinised by politicians and regulators, faces a tough task in growing a business that must meet its universal service obligations of delivering items everywhere in the UK for the same price.

An example of a misfiring service was highlighted in north London during May’s local elections, when many voters in Hendon failed to receive their postal ballots in time, according to local councillor Mark Shooter. Other residents have reported delays including for hospital appointment letters.

Royal Mail said the problems in Hendon were a result of “resourcing issues”, adding that it had a recruitment plan in place and had made alterations to routes to help deliver a more reliable service.

But Hendon is not alone in complaints about a deteriorating service nationwide.

One of the biggest problems for the group is the sharp decline in letter deliveries following the rise of email, which has hit revenues. It delivered 20bn letters in the year to March 2005, compared with less than 7bn during the most recent year.

Indeed, setting out the plans for Křetínský’s takeover this month, IDS warned that Royal Mail’s long-standing obligation to deliver all letters six days a week was holding back its ability to provide an “economically sustainable service”.

With the shift in demand to parcels, the company has called for regulator Ofcom to cut second-class letter deliveries to three days per week, which it said would save up to £300mn annually and free up money for investment.

But even if it can persuade the regulator to make the change, Royal Mail needs to repair its fractured relationship with the roughly 110,000 workers who deliver its mail. Even after reaching a deal on pay and working terms following 18 days of strikes in 2022, low morale and high vacancies have continued to impact performance.


“This is incorrect . . . to say, in effect, the reason Royal Mail is vulnerable to this type of bid is the government not reforming the [universal service obligation],” said Dave Ward, general secretary of the postal workers’ union, which is eager to protect employment practices as the company faces competition from delivery groups that employ staff on lower wages and temporary contracts.

“They have grossly mismanaged [and] attacked their own workers,” he said.

Some business groups have also rejected Royal Mail’s excuses over falling letter deliveries.

David Falkner, a member of the council of the Greeting Card Association, pointed out that while the decline in letter volumes had mostly been steady, the fall-off in Royal Mail’s performance took place suddenly around the time of the Covid-19 pandemic.

Besides the disruption caused by the pandemic, he said the service had been undermined by the adoption in 2020 of a “Delivery to Specification” system, which allows the company to hold second-class mail until the last permissible day for delivery, in the hope other items for the same address will arrive.

“Something systemic has changed,” Falkner said, adding that his 3D pop-up card making business Cardology now sent them by more expensive tracked post. Previously, it had been devoting the equivalent of half an employee’s working week to dealing with customer queries about delays.

Royal Mail has insisted Delivery to Specification improves efficiency by reducing the number of visits that postal workers make to each address. It insists that, because it prompts staff to deliver items on the last permissible day, it had had no effect on service quality.

Although stressing the company’s regulatory requirements had been a “heavy burden”, Peel Hunt’s Paterson said it had “under invested” as a publicly listed business. “I’ve always been surprised [that] Royal Mail has kept [its range of services] narrow,” he said.

With a vast network of postal workers already regularly visiting addresses nationwide, it could expand its services at relatively low cost, potentially collecting more online shopping returns or delivering food, he explained.

However, Křetínský has already laid out plans to plough money into Royal Mail, saying a key ambition is to invest in parcel lockers that enable consumers to collect purchases at their own convenience, an increasingly popular service offered by the likes of Amazon that has eaten into the group’s market share.

Dutch postal provider PostNL, in which Křetínský holds a roughly 30 per cent stake, had made significant progress on automation about eight years ago, while Royal Mail remains “in the early stages”, Paterson pointed out.

“That is something Křetínský might actually be able to help with,” he said.

FT : China hits out at ‘aggressive’ Taiwan for military build-up

China hits out at ‘aggressive’ Taiwan for military build-up
Defence minister Dong Jun says new Lai government is eroding prospects for unification

China’s defence minister has delivered a scathing attack on Taiwan’s new president Lai Ching-te, warning that Taiwan’s ‘aggressive’ behaviour and foreign moves to abet it were eroding prospects for peaceful unification.

Dong Jun said Lai and his new government were “now using military means to reject unification and making a lot of noise about arming themselves”.

“Facing the strong military of the big motherland, such armed conspiracies will be futile [and] will only lead to their own destruction more rapidly,” Dong told the IISS Shangri-La Dialogue in Singapore, Asia’s largest security conference.

Driven by China’s increasing military intimidation campaign since Lai’s Democratic Progressive party took power in 2016, Taipei has increased defence spending and started reforming its armed forces, including compulsory military service and more rigorous training.

Dong told the conference: “We always strive for peaceful unification. But the prospects for that are currently being eroded by the ‘Taiwan independence’ separatists and external forces” — a reference to the US, which has prodded Taiwan to do more for its own security.

Moves such as selling weapons to Taiwan “send very wrong signals to ‘Taiwan independence’ forces and embolden them to become very aggressive”, Dong said.

He added: “I call on the ‘Taiwan independence’ forces to wake up and return on the path to unification. Diligently study the relevant laws and don’t touch upon the red lines of the Anti-Secession Law.”

The law, adopted by Beijing in 2005, spells out that China shall use “non-peaceful means” if anyone causes Taiwan’s secession or if “prospects for peaceful unification [are] completely exhausted”.

Lai and his DPP reject Beijing’s claims and insists Taiwan, under its official name Republic of China, is a sovereign independent nation — a position backed by majority public opinion.

Lai’s inauguration on May 20 was followed by two days of Chinese military exercises around the island that the People’s Liberation Army said was a “punishment”.

Taiwan expressed regret about Dong’s “provocative, irrational” comments.

“The Chinese Communist party has once again threatened Taiwan and neighbouring countries with militant statements; the risk that its totalitarian system damages regional security has already risen,” said the Mainland Affairs Council, the cabinet-level China policy body.

Dong’s language towards Taiwan contrasted with China’s efforts to manage its military relationship with the US more carefully. On Friday, Dong met US Defence Secretary Lloyd Austin for the first time, talks both sides described as positive.

In Dong’s speech to the conference he portrayed China as a responsible great power seeking to safeguard regional peace and stability.

“We advocate the settlement of disputes through dialogue and consultations and not the law of the jungle,” he said, pledging to support weaker states by helping them educate their military and assist with humanitarian and disaster relief.

Dong also repeated China’s pledges to work towards a peaceful resolution of the Ukraine conflict, but gave no new detail. He said Beijing was not providing weapons to either conflict party and was strictly controlling exports of dual-use goods.

“The Chinese military never acts from position of strength . . . but others should not [ . . . ] impose their will on us,” Dong said. He added that countries in Asia-Pacific had the capability and confidence to solve their own problems and did not need to “take orders from hegemonic powers”.

Both remarks are common swipes at the US and its military dominance in the region. On Friday, a senior Chinese military official described Washington’s moves to strengthen its alliances as attempts to create an Asia-Pacific Nato”.

Dong spoke about those grudges in less sharp terms than past Chinese defence ministers, echoing Austin’s tone who also largely avoided castigating China directly in his speech a day earlier.

But Dong angrily rejected a challenge from the audience that actions by the Chinese coast guard against Philippine ships in the South China Sea ran counter to its stated peaceful intentions. Hitting out against Manila’s position that it is within its rights accessing and using the disputed Second Thomas Shoal, Dong said the Philippines was “blackmailing justice and kidnapping the law”.

The US rejected Dong’s arguments. “Every year for three years, a new Chinese defence minister has come to Shangri-La. And every year, they’ve given a speech at complete odds with the reality of the PLA’s coercive activity across the region,” said a US official. “This year was no different.”

>>> Barron’s Weekend Summary

Barron’s Weekend Summary: The Federal Reserve is unlikely to lower interest rates in 2024


Cover:
-The Federal Reserve is unlikely to lower interest rates in 2024 due to elevated inflation, a resilient economy, and a softening labor market. This is because these conditions are expected to persist through year end. Despite an inflation scare earlier in the year, the rate of price growth continues to move slowly towards the Fed's 2% annual target, allowing the central bank to keep its federal-funds rate target in the range of 5.25% to 5.50%, where it has been since July 2023. The Fed's policy stance is higher for longer than anticipated, as the U.S. economy has been stronger for longer than anticipated. Investors were banking on at least six interest-rate cuts totaling 1.5 percentage points over the next 12 months, based on pricing in the interest-rates futures market. However, the data has not complied with either forecast, and inflation remains uncomfortably stuck at nearly 3%, above the Fed's annual target.

Interview:
-The Eurozone economy is improving, inflation is cooling, and the European Central Bank is expected to cut interest rates by a quarter of a percentage point this month, beating the Federal Reserve. James Rossiter, head of global macro strategy at TD Securities, believes that the economy has diversified its growth drivers and is expected to have a soft landing. Rossiter, who has worked at the Bank of Canada, the Bank of England, and the ECB, contributed the opening essay in TD Cowen's annual European Best Ideas report, highlighting four themes likely to play out in Europe for the rest of the year: macroeconomics will remain a key driver of markets, growth is likely to rebound, integration has made the region more robust to external shocks, and US elections are a bigger issue for Europe than the electoral contests in its own backyard. TD's top 26 stocks include ASML Holding, Booking Holdings, LVMH Moët Hennessey Louis Vuitton, Novo Nordisk, and Universal Music Group, all either listed in Europe, headquartered there, or heavily dependent on the region as an end market.

Tech Trader:
-China has launched a $48B fund to build a world-beating semiconductor industry, surrounded Taiwan in a military war game. Semiconductor investor Paul "Chip" Schorr warns that if China were to take over Taiwan, advanced servers based on Nvidia chips would not be as popular. Schorr has secured $120M from the US Commerce Department to expand Polar Semiconductor's factory in Minnesota, which makes power management chips for auto and aerospace customers. The federal contribution is part of the $53B aimed at returning chip production to American shores under the Biden Administration's Chips and Science Act. The Chips Act money helps US factories match China's cost profile. More than 90% of leading-edge processor chips are made in Taiwan by firms like Taiwan Semiconductor Manufacturing, and nearly all memory and logic chips that accelerate artificial intelligence are fabricated there, in Korea, or Japan.

The Trader:
-Travel stocks experienced turbulence this week, with American Airlines Group lowering earnings guidance, causing shares of other airlines to slide. Airbnb, however, remained relatively unscathed, falling 0.2%. Shares are down 8% since May 8, when the company reported first-quarter earnings. The problem was that the stock had already risen double digits for the year coming into earnings, reflecting heavy optimism as the company guided for a second-quarter deceleration of sales growth to 9%, or $2.71B. The fact that Airbnb shares barely moved could be a sign that its recent troubles have passed. Wedbush Securities analyst Scott Devitt upgraded the stock to Outperform from Neutral, predicting sales growth to reaccelerate during the third quarter and a strong consumer spending backlog that should materialize over the summer.
-Investors have been overly optimistic about the stock market, with bulls outnumbering bears and Wall Street strategists raising price targets. The S&P 500 index has gained 26% since October's bottoming. However, Renaissance Macro Research's Jeff deGraaf suggests that markets can become too optimistic, with a recent survey putting the number of bulls at 60%, even though the S&P 500 had risen about 5% over the previous 13 weeks. This could lead to returns being below average when bulls are excessive to historical returns. Fund managers, who have just 4% of their portfolios in cash, are of particular concern, as anything below 4% is a sell signal. This hesitation could leave stocks with a dearth of buyers and put them in a vulnerable spot. Weakness is already creeping in, with the S&P 500 on pace to drop 1.2% this past week.

Features:
- US retailers have experienced a volatile season of earnings reports, with investors giving outsized stock gains to companies that beat expectations and pummeling the shares of others that disappointed. This volatility is partly due to a broader shift in investor strategy, which was successful in the years following the Covid-19 pandemic. However, now that consumer trends have normalized, chasing specific trends isn't enough to give stocks a lift. The industry's fiscal first-quarter earnings season highlights that it's a stock picker's market, and company execution matters. For example, Abercrombie & Fitch's shares soared 24% after reporting earnings, while American Eagle Outfitters fell close to 8%. Consumers are being more selective about what and where they buy, and companies with strong brand momentum have kept shoppers engaged and saw stock gains after reporting results. The macroeconomic environment played a role in crowning the season's winners, with big-box retailers such as Walmart and Costco Wholesale showing signs of gaining more market share in the latest quarter.
-Trump Media & Technology Group stock closed lower on Friday after former President Donald Trump was found guilty in a hush-money trial. Trump criticized the verdict earlier in the day, stating that it should never happen to other presidents and that there was nothing illegal. Trump was convicted of falsifying New York business records and attempting to influence the 2016 presidential election by paying off actress Stormy Daniels, who alleged an affair with Trump. The 12-person jury convicted Trump on all 34 counts after deliberating for two days. Trump's nearly 115M shares in Trump Media were valued at around $5.9B, with a net loss of $58.2M in 2023. Trump Media's trading is largely disconnected from the company's fundamentals, with its Truth Social platform being a niche player in social media. The stock is seen as a bet on Trump himself rather than a company with significant revenue and profits.

Europe:
-European telecommunications providers are merging and acquiring to consolidate their way out of competition. Swisscom recently agreed to buy Vodafone's Italian business for EUR 8B ($8.7B), French champion Orange merged its Spanish operations with local operator Masmovil at a EUR 19B valuation, and Telecom Italia sold its fixed-line assets to private-equity giant KKR for EUR 22B. Companies are trying to consolidate their way out of ruinous competition, with growth in core cellular and broadband services slowing down and too many players keeping prices down. Overcapacity makes connectivity a commodity, and debt from building 5G networks has risen with interest rates. Stocks reflect these concurrent calamities, with returns on most companies being negative over the past 10 years. The Holy Grail for telecom dealmakers is a "four to three" transaction, with regulators generally favoring competition.

Emerging Markets:
- -Mexico is set to elect its first female president in a historic election, with two women competing for the top spot. Claudia Sheinbaum, the protégé of outgoing President Andres Manuel Lopez Obrador and former mayor of Mexico City, is widely expected to win the race against conservative opposition candidate Xóchitl Gálvez. This could boost investors' interest in Mexico, which is well-positioned to benefit from the U.S.-China rivalry. The iShares Mexico exchange-traded fund has returned an average 13% over the past three years, but higher-for-longer interest rates in the US and uncertainty around elections have contributed to a pullback of about 4% so far this year. The Goldilocks outcome for the stock market is a solid win by Sheinbaum by a wide enough margin to avoid contested elections and prevent disruptive agendas.The risk to markets in the short-term comes from a loss for Sheinbaum or a narrow win that leads to a contested election. However, past selloffs on domestic politics have been relatively short-lived and shouldn't significantly change economic fundamentals, according to Laura Geritz, founder of investment firm Rondure Global. She favors consumer-oriented stocks like Coca-Cola Femsa and tequila maker Becle, which gets 80% of its sales from the US, Mexico, and Canada. JP Morgan strategist Adrian Huerta expects the Mexican stock market to rise closer to its bull-case target of 63,000, representing over a 10% increase from current levels.

Commodities:
-ConocoPhillips has acquired Marathon Oil for $22.5B, marking the latest consolidation deal in the oil industry. The deal follows Exxon Mobil's $60B acquisition of Pioneer Natural Resources and Chevron's $53B purchase of Hess, part of $250B in oil and gas mergers-and-acquisitions activity in 2023. Standard Oil, once controlling 90% of the US market, faced accusations of monopoly and was broken up into 34 smaller companies in 1911. The company's ruthlessness frightened competitors and spurred attacks from politicians and journalists. Standard Oil was controlled by a "trust" comprising nine men controlling 41 companies, owning everything from pipelines and tankers to railroads. The company has been trying to get back together ever since.

Streetwise:
-Homeowner's insurance premiums have risen 70% over the past three years, with 18 states experiencing unprofitable insurance industries. Car coverage costs have also increased by 48% over the same period. Inflation and litigation are key factors contributing to this increase. Insurance can be a lucrative business, but insurers must keep their combined ratio below 100% and put customer money to profitable use between collecting premiums and paying out claims. Volatility in earnings can occur due to insurers having to ask state regulators for permission to raise prices, which can take time. Allstate experienced a 41% increase in earnings per share in 2020, but it is expected to approach $15 a share in earnings in the coming years. The term "social inflation" refers to liability judgments that have gone wild, with the median size of nuclear verdicts increasing by 35% from 2015 to 2020. This is due to the public's numbness to the numbers, declining sentiment towards big companies, and a shift in tort reform.

>>> Weekend Papers Summary

Weekend Papers Summary

FINANCIAL TIMES
-Donald Trump's campaign has broken its fundraising record after his felony conviction, raising $34.8m. The verdict found Trump guilty on all 34 counts in his 'hush money' case, marking an unprecedented era in US presidential politics. Trump hailed the verdict's impact on his fundraising efforts, stating that they raised $39M in a 10-hour period with small money donors. He will appeal against the "scam" verdict and called the ex-president a "POLITICAL PRISONER" on its website. President Joe Biden reaffirmed the rule of law in the country by the New York jury.
-US President Joe Biden has announced that Israel has offered a new proposal in negotiations with Hamas to free hostages and bring about a lasting ceasefire. The move comes after a new wave of international condemnation of Israel's conduct of the war against Hamas following a deadly strike and ground operations in Rafah, southern Gaza. The Israeli proposal consists of three phases: a "full and complete ceasefire" over six weeks, the release of all hostages, a "permanent cessation of hostilities" and the withdrawal of Israeli troops from Gaza, and the reconstruction of Gaza, aimed at broader Middle Eastern stabilization.
-France has been downgraded by S&P Global, affecting Emmanuel Macron's credibility as a steward of the economy. The agency changed France's long-term issuer rating from AA to AA- with a stable outlook, citing concerns that government debt as a share of GDP would increase through 2027. S&P also noted France's lower-than-expected growth and political fragmentation, which could make enacting reforms or addressing budgetary imbalances difficult for Macron's government. The downgrade risks significant political fallout for Macron, but the financial impact is likely to be limited. The news comes as Macron's centrist alliance faces a broad defeat in European elections on June 9. Opposition parties are preparing to debate two no-confidence motions to object to the government's budget handling.
-US Defense Secretary Lloyd Austin has accused China of dangerously harassing the Philippines, highlighting the country's aggressive actions, including using water cannons to block resupply missions at the Second Thomas Shoal. Austin spoke at the Shangri-La Dialogue defense forum in Singapore, a day after Filipino President Ferdinand Marcos Jr warned of China's "illegal, coercive [and] aggressive" activity towards his country. He emphasized that every country, large or small, has the right to enjoy its maritime resources and operate wherever international law allows. Austin's comments came after his first meeting with a Chinese defense minister since late 2022.
-Philippine President Ferdinand Marcos Jr. has warned that the country's stand-off with China could escalate into war if a Filipino citizen is killed in violent confrontations with the Chinese coast guard. Marcos said that if a Filipino serviceman or citizen is killed by a wilful act, it is close to an act of war. He also mentioned that the US, which has a mutual defense treaty with the Philippines, holds "to the same standards". The Chinese coast guard's actions and Manila's pushback have raised concerns that the territorial dispute in the strategic South China Sea could trigger armed conflict.
-Senior African National Congress (ANC) leaders are discussing the future of President Cyril Ramaphosa and potential coalition partners amid South Africa's general election losses. The ANC's performance was 41%, significantly lower than expected, and would deprive it of its governing majority. This has complicated the search for a partner to extend its rule in South Africa since 1994. The poor showing has also cast doubt on Ramaphosa's future, who took over six years ago with the promise to reinvigorate the ANC but has instead led to its worst-ever election performance.
-Eurostar, the UK's monopoly on passenger trains linking the UK to continental Europe, is facing a significant competitive threat in its 30-year history. Up to five companies are exploring rival operations to run trains through the Channel Tunnel, including Virgin Group, Evolyn, and Dutch start-up Heuro. Industry executives say there are at least two other contenders. Access to lucrative rail lines in Europe is at stake, with new subsidies and simplified regulations freeing up the path. Eurostar's cross-channel business made £122M in net profit after tax from £1.3B in revenues last year.
-US inflation remained at 2.7% in the year to April, according to the Federal Reserve's target for price pressures. The personal consumption expenditures index (PCE) data aligned with economists' expectations, with the headline PCE index at 2% and core PCE at 2.8%. Fed officials are expected to need more data on inflation before lowering borrowing costs from 5.25% to 5.5%. This data could help cut rates ahead of the November presidential elections, potentially benefiting incumbent Joe Biden.
-Japan spent a record ¥9.8T ($62B) from late April to May to boost the yen, but the currency has resumed its slide towards 34-year lows, highlighting the struggle Tokyo faces to stabilize its exchange rate. Analysts say the Bank of Japan faces a "huge dilemma" as it comes under pressure to raise rates at a faster pace due to weak economy and sluggish consumption. The yen briefly strengthened to ¥151.85 to the US dollar after the sale of dollar reserves to purchase the Japanese currency.

THE NEW YORK TIMES
-President Biden has declared that Hamas is no longer capable of carrying out a major terrorist attack on Israel and has endorsed a new plan offered by Israel to win the release of hostages and end the fighting in Gaza. He stated that it is time for the war to end and that the deal is an opportunity to prove whether Hamas truly means it. Biden's statement reveals his true agenda, which is to make public elements of the proposal to pressure both Hamas and Israel to break out of a deadlock that has resulted in the killing of thousands of Palestinians. American officials have described Hamas's leader, Yahya Sinwar, as interested only in his own survival and his family and inner circle. Israeli Prime Minister Benjamin Netanyahu has little incentive to move to a real cease-fire, as he is likely to lose his power if surviving hostages are returned.
-The top four congressional leaders have invited Israeli Prime Minister Benjamin Netanyahu to address a joint meeting of Congress, despite a heated debate over his reception. The invitation comes amid deep political divides in the US over the Israel-Hamas war, which has intensified following Israel's recent attacks in Rafah. Speaker Mike Johnson had been pushing for the invitation, as some Democrats, particularly progressives, condemn Netanyahu's tactics in the war. Republicans have backed Netanyahu's policies, while Democrats view his far-right government as an obstacle to peace.
-President Biden has defended the New York jury's guilty verdict against former President Donald Trump, describing him as a lawbreaker and a victory for the rule of law. He dismissed claims that the prosecution was a political witch hunt and stated that it was not a case brought by his administration. Biden emphasized that the American principle that no one is above the law was reaffirmed, stating that Trump was given every opportunity to defend himself in a state case, not a federal one. The jury, consisting of 12 citizens, heard five weeks of evidence and reached a unanimous verdict, finding Trump guilty on all 34 felony counts.
-The Manhattan district attorney, Alvin L. Bragg, thanked over 500 prosecutors in his office for their patience and hard work, and assured them that they would do everything in their power to restore normal operations as quickly as possible. Bragg returned to his routine trial check-ins, listening to a police officer testify against a man accused of rape and robbery. Trump has criticized the verdict in the case, claiming it was a result of a corrupt system. Bragg, who has vowed to appeal, declined to respond to Trump's attacks or comment on any potential prison sentence. He stated that the jury's voice matters the most, and the jury has spoken, ending the news conference after 15 minutes.
-The far-right Alternative for Germany (AfD) party, once aiming to move from the margins to the mainstream, has faced a stiffening backlash due to scandals and missteps. The party, which is the second-most popular party in Germany, has been labeled a "suspected" extremist group by German authorities. The party has cast aside some important members and caused fellow far-right parties abroad to shun it. The party's prospects are shakier about a week before elections begin for the European Parliament. However, polls suggest that it is still likely to win more seats in both the European Parliament and state elections than before. The party's leader, Alice Weidel, expressed disappointment with the recent week and the lack of a mandate in local elections in Thuringia.
-During the Indian high-stakes election, a wave of confusing deepfakes is sweeping the country, causing confusion and adding to the already misinformation-heavy social media landscape. The volume of online detritus is too large for any election commission to track or debunk. Vigilant fact-checking outfits have emerged to fill the breach, with hundreds of government workers and private fact-checking groups taking up the task. Surya Sen, a forestry officer in Karnataka, has managed a team of 70 people to hunt down deceptive A.I.-generated content, stating that social media is a battleground this year.
-Secretary of State Antony J. Blinken has hinted that President Biden may allow Ukraine to use US-made weapons to target a wider range of targets within Russia, beyond the ones approved for the current assault on the Kharkiv area. Blinken stated that the US will continue to adapt and adjust as necessary. The phrase "adapt and adjust" was used to suggest Biden might grant Ukraine permission to use the weapons to strike in Russia. American officials confirmed that Biden had made this decision in recent days and informed Ukraine, but the permission to strike in Russia was limited to sites used by Russia for the assault on Kharkiv.
-Southern Baptists will vote on whether to oppose in vitro fertilization at their annual meeting in Indianapolis in June. This is the first time the largest Protestant denomination in America will ask representatives of its tens of thousands of member churches to consider such a proposal. The outcome could lead to a declaration that I.V.F. is morally unacceptable, advancing the "fetal personhood" movement and causing turmoil for evangelical families who rely on fertility treatments. The denomination's primary focus has been working to end abortion. A resolution titled "On the Ethical Realities of Reproductive Technologies and the Dignity of the Human Embryo" calls on Southern Baptists to reaffirm the unconditional value and right to life of every human being, including those in an embryonic stage.
-Hunter Biden, the son of former President Biden, is facing a cash crunch due to a lack of liquid assets. Lawyer Kevin Morris, who has played a significant role in Biden's life, has informed associates that he may need to sell some real estate holdings or other assets if others do not step up to fill the gap. Morris hopes to pressure the president's advisers into helping find new donors. While financial troubles are not new for Biden, they add stress and uncertainty and could limit his ability to hire expert witnesses or specialists in the gun case or his tax charges trial in California in September. Biden was charged with lying about his drug use and illegally possessing a.38 handgun in Delaware in 2018.
-The Pentagon is focusing on supporting Ukraine and containing Middle East risks as Israel fights Hamas. However, China's growing military is considered the "pacing challenge," potentially pulling the US into war if neglected. Defense Secretary Mike Austin assured diplomats and officials in Singapore that Washington could handle these global demands.

THE NEW YORK POST
-Columbia University has set up a new anti-Israel encampment on campus during its alumni weekend. The demonstrators, members of Columbia Students for Justice in Palestine, are demanding that the school divest from Israel-associated companies amid the Jewish state's ongoing retaliatory military offensive in Gaza. The protesters, who are demanding that the school divest from Israel-associated companies, have set up tents on the Manhattan campus' south lawns alongside a giant white party tent already in place for the alumni event festivities that end Saturday.
-A special committee of Paramount Global's board of directors has recommended a $3B takeover bid from Skydance Media, potentially ending the drama over the company's fate. Skydance, run by tech heir David Ellison, has offered to acquire Shari Redstone's National Amusements for cash and merge the Hollywood studio with his own shop. Redstone has been weighing bids from several suitors and has not seen Skydance's latest proposal. Skydance had offered $2B for Redstone's 77% stake in National Amusements, which led to outcry from Paramount's major investors that a merger would devalue their stock. Skydance is getting financial backing from RedBird Capital and KKR and will now give $3B to Paramount's other investors in cash and debt repayment.

FT : Hargreaves Lansdown co-founder blames share slump

Hargreaves Lansdown co-founder blames share slump on former management ‘shambles’

As private equity circles, biggest shareholder says ‘non-productive parts of the business mushroomed’

The billionaire co-founder of Hargreaves Lansdown, the investing platform facing a takeover offer from private equity, has blamed former management for presiding over “a shambles” that halved the share price.

Peter Hargreaves, who is also the largest shareholder in the retail investing business, told the Financial Times that the company’s shares had come under pressure as profits have taken a hit.

“When I ran [Hargreaves Lansdown], it always improved its profit by more than 10 per cent,” he said. “If the profits are going up, the rate at which they’re increasing has a huge effect on the share price. A change from double-digit growth in profit to a reduction in profit is huge.”

the tenure of Chris Hill, chief executive from 2017 to last August, the shares rose to a high of £24 in 2019, before tumbling to £8. Profit before tax fell by 8 per cent to £182.5mn in the six months to the end of December compared with a year earlier.

The co-founder’s comments come shortly after Hargreaves Lansdown’s board rejected a bid from a group of private equity firms led by CVC Capital Partners — an offer that valued the company at £4.67bn. The approach, which emerged last week, boosted shares in the Bristol-based business above £10.

Hargreaves also blamed escalating costs for the company’s share price weakness in recent years. “The non-productive parts of the business mushroomed: marketing, HR,” he said. “[Management] didn’t know what they were doing, they hadn’t got a grasp on what was needed on the technology side. They had a lot of consultants who didn’t know what they were doing, either.”

Staff costs increased almost 200 per cent between 2013 and 2023, while revenues were up only up 93 per cent in the same period, according to FT calculations. Hargreaves Lansdown was ejected from the FTSE 100 at the end of last year for the first time since 2011. The company said in early 2022 it would spend £175mn over five years to upgrade technology and improve its efficiency.

Dan Olley, who took over as chief executive last year, has already reviewed technology spending and ditched some of the projects that were aimed at supporting its ability to give advice digitally. The share price has risen since the company’s quarterly results a month ago.

“Hargreaves Lansdown was never about advice; it was about giving great information,” said Hargreaves. “They lost sight of what they were supposed to be doing.”

FT : Boom in US penny stock trading prompts warnings of frothy markets

Boom in US penny stock trading prompts warnings of frothy markets
Volumes for some sub-$1 shares are above those of Tesla and Apple as retail investors target cheap but volatile names

A scrap metal merchant and an electric vehicle maker that has sold just four cars top the list of so-called “penny” stocks that are out-trading the likes of Tesla and Apple, prompting some analysts to warn that markets are becoming overheated.

Seven of the top 10 most traded US equities in May, as measured by the number of shares bought and sold, are penny stocks worth less than $1, according to Cboe Global Markets. None of the companies are profitable.

The huge volumes in so many little-known stocks suggest a renewed appetite among retail investors for cheap names in which they believe they can quickly make a lot of money.

“When markets get frothy, the speculative froth often hits penny stocks as well — this is a classic sign of market peaks,” said James Angel, a finance professor at Georgetown University.

“Penny stocks tend to be extremely volatile, so you can make or lose a ton of money very quickly,” he added. “That appeals to the speculative urge.”


The frenetic trading comes after a strong rally in US blue-chips over the past seven months, with tech stocks reaching a new record high this week, although on Friday the benchmark S&P 500 index recovered from early lows, but still suffered its first weekly decline in more than a month.

Scrap metal merchant Greenwave Technology Solutions, whose website proclaims “scrap is the new precious metal”, topped the leaderboard for May. It has 588mn shares outstanding, and a daily average of 510mn shares were traded during the month, according to Cboe Global Markets data.

Over that time, its market capitalisation swung between $4mn and $159mn and the value of its shares from 4 cents to 16 cents. The company did not respond to a request for comment.

The only large-cap company to make the top 10 most-traded was Tesla, a regular favourite among active traders. 

While, in value terms, trading in penny stocks is a tiny fraction of the turnover of mega-caps, investors’ increased interest has coincided with a resurgence in so-called “meme” stocks such as retailer GameStop and cinema chain AMC, which benefited from frenzied retail investor interest in 2021. 

AMC was the sixth most-traded US stock in May with volumes more than 7 times their recent average.

“Penny stocks are not the same as the meme stock phenomenon, but let’s say they rhyme. It’s people willing to put fundamentals aside and chase returns,” said Steve Sosnick, chief market strategist at retail broker Interactive Brokers. 

Sosnick’s own weekly scan of the most-traded stocks on Interactive Brokers’ platform has recently thrown up several lesser-known microcap companies.

“It’s emblematic of what I consider to have become a very frothy market,” he added.

Stocks that trade under $1 for a certain period are at risk of being delisted by exchanges and, for that reason, institutional investors tend not to touch them.

The rise in volumes has reawakened concerns about the impact of their financing methods on shareholders as well as the rules that allow them to remain listed. 

Several of the most traded stocks by volume in May have sold new shares recently. The deals, typically in the form of bonds that convert into stock at a discount to the market price, dilute existing shareholders and swell trading volumes when the new shares are resold, which often happens quickly.

Electric vehicle maker Faraday Future Intelligent Electric was the second-most-traded stock in May. Its 2023 accounts, filed this week after a delay due to staffing issues, showed sales of four cars and leases for a further six since a long-delayed launch last year. They also contained a warning that “it will likely file for bankruptcy protection if it is unable to access additional capital”.

Several posts on social media platform Reddit focused on the wild swings revealed in Faraday’s share count. This has soared from 57mn in November to 1.4bn by February, when it did a so-called “reverse split”, swapping three existing shares for one new one. Its latest filing shows 440mn shares outstanding.

Reverse splits have become a common tool for sub-dollar companies as a way of boosting share prices and warding off the threat of delisting. There are 471 companies currently with shares trading under $1 in the US, according to S&P Global Market Intelligence data, up from 125 a year ago.

More than 70 reverse splits have been announced so far this year, according to data provider Wall Street Horizon. The number of such share swaps roughly doubled in 2023 to 219 compared with the previous year despite a major rally in stock markets after a tough 2022.

Greenwave announced a 1-for-150 reverse split this week, effective from Monday. Faraday Future, which is still behind with its financial filings and whose shares have halved since it published its 2023 accounts, has appealed against a delisting decision by Nasdaq.

“The company expects its securities to continue to trade on Nasdaq in the normal course during the pendency of the hearing process,” it told the Financial Times.