TheChek News Flow

Carnival stock continues to recover from an awful 2022. Shares of the world’s biggest cruise company have a healthy gain so far in 2023, though down from a summer high. Nonetheless, a Carnival director just bought up $4.5 million of shares on the open market.

Carnival stock (ticker: CCL) dropped 60% in 2022 and touched multidecade lows. As the company navigated a route through a waning but-still-present pandemic, CEO Arnold Donald stepped down after a nine-year run. Shares now sport a year-to-date gain of about 40%, despite a double-digit percentage drop from a July high. In September, Carnival reported its first profitable quarter since the pandemic began, but its forecast disappointed, as the company said that it expected fuel costs to rise. The entire travel sector tumbled after Hamas attacked Israel on Oct. 7.

On Oct. 10, Carnival director Randall J. Weisenburger paid $4.5 million for 350,000 shares, an average price of $12.99 each. He purchased the shares through a limited partnership that now owns 961,238 Carnival shares, according to a form Weisenburger filed with the Securities and Exchange Commission. He also owns 278,368 shares in a personal account.

Carnival didn’t make Weisenburger available for comment. A Carnival director since 2009, Weisenburger is a former chief financial officer of Omnicom Group (OMC) and is a managing member of private-investment firm Mile 26 Capital. He last bought Carnival stock on the open market in May 2022, when he paid $1.2 million for 100,000 shares, an average price of $11.76 each.

Think New York is expensive? Try...Frankfurt or Munich?

UBS recently published the 2023 edition of its Global Real Estate Bubble Index. Two usual Asian suspects, Tokyo and Hong Kong, came near the top of the charts. The real surprise was how frothy Europe is looking.

The index ranked just two U.S. metros as overvalued: Miami and Los Angeles. That compares with eight in Europe, led by Zurich with a score of 1.71, Munich at 1.35, and Frankfurt at 1.27. The Big Apple looks like a relative bargain at 0.47, and San Francisco a steal at 0.27.

These figures come with a big asterisk, says Matthias Holzhey, the UBS report’s lead author. Each city is compared with its own price history, so U.S. locations look better relative to the excesses of 2006. But the Bubble Index also considers apples-to-apples metrics like price-to-rent and price-to-average-income ratios.

However you slice it, the outlook for European, particularly German, real estate is rotten.

U.S. housing prices have been frozen in place, more or less, by the unique prevalence of 30-year fixed-rate mortgages. Europe is on a patchwork of shorter-term if not outright adjustable-rate mortgages.

That will force an increasing number of owners to sell, says Pablo Espinosa Uriel, an investment strategist who studies housing markets at German financial giant Allianz. “There is growing consensus that the fall in prices will come mainly in 2024,” he says.

The European Central Bank has hiked its prime rate from 0% to 4.5% over the past 15 months. The Bank of England zoomed from zero in late 2021 to 5.25% now.

The United Kingdom has the second-highest proportion of adjustable-rate mortgages in Europe—more than 40%, according to the World Economic Forum. (The leader is Spain, where prices never fully recovered from earlier crashes.) “People’s mortgage payments could double when they reset,” says David Aikman, a finance professor at King’s Business School in London. “It’s hard to see how it all adds up.”

U.K. housing prices have already fallen 25% in real terms since 2015, though, Holzhey says, partly on Brexit-related anxiety.

Germany remained in a state of irrational exuberance until ECB rate hikes began to bite. It entered 2023 leading Europe in several undesirable categories, according to Allianz: Price-to-rent ratios soared to 1.6, compared with 1.35 in No. 2 France. Some 15% of German households spent more than 40% of disposable income on housing, double the proportion of runners-up Spain and Italy.

Stretched valuations in Zurich and Geneva are less immediately threatening as the Swiss National Bank has held interest rates to 1.75%. German housing prices are already off 14% from a peak in March 2022, Allianz calculates.

The rest of Europe is following, with a 5% to 10% drop projected by the end of 2024. That still won’t be enough to bring buyers out at current interest rates, Allianz figures. Prices on average will have to fall more like 15% to match the purchasing power potential buyers have lost to tighter money and inflation.

Higher interest rates are naturally choking the supply of new housing, too. Construction permits in Germany fell by a quarter in the first half of 2023 compared with the prior year.

The bright side is that the current European housing correction sets the stage for a sharp rebound if and when interest rates fall again, Holzhey predicts. “The moment central banks start to cut, you will see a jump in prices,” he says.

Meanwhile, maybe take a look at San Francisco.

BMW boasts that it makes the “ultimate driving machine.” The company may also have the ultimate electric-vehicle stock not named Tesla

BMW (ticker: BMW.Germany) isn’t known for EVs. It’s a luxury auto maker that makes sleek, stylish—and pricey—sedans such as the 8 Series Gran Coupe, the M3 sports car, and the X5 Sports Activity Vehicle. But the German company has also become a stealth EV play. It delivered 93,931 all-battery electric vehicles, or BEVs, during the third quarter of 2023, more than General Motors, Ford Motor , and Rivian Automotive combined.

Some traditional auto makers have larger EV businesses, but few can match BMW’s sales mix. The larger Volkswagen (VOW.Germany), for instance, sold 210,000 BEVs during the third quarter, but that amounted to 9% of total sales. BEVs made up 15% of BMW’s total third-quarter sales, up from less than 9% the year before, a number that doesn’t include its hybrid sales. That puts the company in an enviable position. “BMW has both kept powertrain options open and been methodical about developing EVs,” says Jefferies analyst Philippe Houchois.

BMW’s EV lineup doesn’t look all that different from its traditional one. It includes all-electric versions of the i4, i5, and i7 sedans, as well as the electric iX sport utility vehicle. At their core, they’re the same cars that BMW drivers already know, just electrified. The iX xDrive50 SUV, which starts at about $90,000, has the handling, ride, and build quality that BMW drivers should expect—we took one for a drive—but it’s quieter, roomier, and goes from zero to 60 in 4.5 seconds

Producing a great EV or two by itself doesn’t make an auto stock worth owning. But it does mean that a traditional car maker has a viable business model down the road, even if the global market for gas-powered cars is half its current size in 2030, as Wall Street, and the car companies, expect. Without the existential risk of a declining gasoline-car business, investors can evaluate BMW stock based on its fundamentals.

Not everything is perfect. Pricing, for instance, will act as a headwind. New-car prices in the U.S. are still up more than 20% from prepandemic levels, which has been helpful for operating profit margins that are expected to hit 11% at BMW in 2023, up from a historical average of 9%. Wall Street projects that margins will fall back to 9% in coming years, pressuring earnings, which could hit $17.50 a share in 2024 after peaking at almost $29 in 2022.

But declining earnings don’t have to mean a falling stock. Jefferies’ Houchois has a Buy rating and a $116 price target on the shares, up 14% from a recent $101.53. That price implies that the stock can trade at seven times his below-consensus earnings estimate of $16.20 a share in 2024. And if BMW can defend margins better than the market expects? Houchois sees potential for the stock to hit $143, up 41%.

What is the market missing? Houchois points to three things: capital efficiency, a fortress balance sheet, and a below-the-radar decision about its Chinese business.

BMW purchased a majority stake in its Chinese joint venture in 2022. Now it consolidates its Chinese business in its financial statements instead of reporting it as equity income. More important, it now fully controls its own stake in the world’s largest market for new cars and new EVs. That’s the right choice, says Houchois.

The company has also been careful with its spending. Wall Street expects BMW to invest about 6% of sales back into the business over the next three years, a little less than the rate that GM is projected to invest. That amounts to almost $30 billion, leaving an estimated $24 billion in free cash flow, with some flowing into dividends.

European auto makers typically declare a variable payout once a year, and BMW dispersed $9 a share in 2023. Based on cash flow expected in coming quarters, investors can expect something from $6 to $9 a share in 2024. At the midpoint, shares would yield 7% based on recent prices.

BMW’s balance sheet looks rock solid, too. Not including its finance arm, which makes car loans to customers eager to buy new BMWs, the company has $20 billion more cash than debt on the books, or almost a third of its market capitalization. Adjusting for cash takes the price/earnings ratio on estimated 2024 earnings to about four times. Traditional auto makers rarely trade with premium multiples, especially with the uncertainty of the EV transition under way.

That seems too low for an auto maker doing all the right things. It may take time, but you can add BMW stock to your list of EV winners.

The stock market closed out the week with decent losses, plagued by uncertainty surrounding potential developments in the Israel-Hamas conflict and ongoing interest rate volatility. As a result, today's trade had a risk-off vibe ahead of the weekend when participants cannot react in real-time while the markets are closed for trading.

The 10-yr note yield hit 5.00% yesterday for the first time since 2007. It was met with resistance there and the 10-yr yield pulled back to 4.92% in overnight action. It would eventually retest 4.99%, but once again it was met with resistance. The 10-yr note yield ultimately settled at 4.92%, which is six basis points lower than yesterday.

The disappointing action today also stemmed from the ongoing dysfunction in the House of Representatives. Following three failed rounds of voting, Rep. Jim Jordan (R-OH) lost the status of Speaker of the House nominee after a GOP conference vote went against him by a "wide margin," according to Punchbowl News. The House will now head home for the weekend without another vote, according to CNBC.

Weakness in regional bank stocks following some disappointing earnings news was another overhang for the market today. Regions Financial (RF 14.44, -2.04, -8.5%), Comerica (CMA 37.95, -3.54, -8.5%), and Western Alliance Bancorp (WAL 42.22, -3.86, -8.4%) were among the losing standouts in that regard. The SPDR S&P Regional Banking ETF (KRE) declined 4.0%.

Meanwhile, Dow component American Express (AXP 141.57, -8.05, -5.4%) reported better than expected earnings and reaffirmed FY23 guidance, but still sold off amid concerns about the potential for a future deterioration in credit quality.

The major indices settled near their worst levels of the day, which left the S&P 500 below its 200-day moving average (4,233). Many stocks participated in the downside move that was led by the mega cap stocks. The Vanguard Mega Cap Growth ETF (MGK) fell 1.5% while the market-cap weighted S&P 500 declined 1.3%. The Invesco S&P 500 Equal Weight ETF (RSP) dropped 1.3%.

Eight of the 11 S&P 500 sectors closed down by at least 1.0%. The defensive-oriented consumer staples (-0.4%) and health care (-0.4%) sectors saw the slimmest declines. On the flip side, the energy (-1.7%) and information technology (-1.7%) sectors logged the steepest losses.

There was no U.S. economic data of note today and there is no data of note on Monday.

Nasdaq Composite: +24.1% YTD

S&P 500: +10.0% YTD

Dow Jones Industrial Average: -0.1% YTD

S&P Midcap 400: -1.5% YTD

Russell 2000: -4.6% YTD

Official says ‘umbilical cord’ will be cut with worker crossings stopped

Israel plans to cut ties with the Gaza Strip when its war with Hamas is over, officials said on Friday, as the country’s troops prepare for an expected ground offensive.

In the most explicit comments yet on the government’s strategy, defence minister Yoav Gallant told the Knesset foreign and defence committee that Israel would no longer have “responsibility for life in the Gaza Strip” once the war was over.

He added that the conflict, which he said would take place in three phases, would create “a new security reality” for Israeli citizens.

Israeli forces have been bombarding Gaza since Hamas militants staged the deadliest-ever attack on Israeli soil almost two weeks ago. But while officials have made clear they intend to destroy Hamas, they have not detailed their plans for the territory after the war.

Israel withdrew from Gaza in 2005, but in the years since it has continued to provide some electricity to the enclave. It has also allowed a limited number of Gazans into the country to work, and some goods to enter the territory.

A second Israeli official said: “Israel will not be part of the solution in terms of giving [Gazans] work. We’ve disconnected the umbilical cord.”

The official added that the crossings from Gaza to Israel that functioned before the war would not be reopened, saying: “That’s over.”

Gallant said Israel’s war with Hamas would fall into three phases, with the first consisting of the current aerial bombardment and ground operations aimed at “neutralising terrorists and destroying Hamas infrastructure”.

He said the second phase would involve lower-intensity fighting to eliminate “pockets of resistance” in Gaza, and the third would require the “removal of Israel’s responsibility for life in the Gaza Strip and the establishment of a new security reality” for Israelis.

Other ministers have hinted at how the government’s thinking is evolving, with agriculture minister Avi Dichter saying on Thursday that Israel would enforce a buffer zone within the Gaza Strip once the war was over to prevent Gazans from coming close to the border.

The comments come as the long-awaited delivery of aid to Gaza’s 2.3mn people has been delayed by disagreements over how to ensure the supplies cannot be used by Hamas, according to three people familiar with the matter.

US president Joe Biden on Wednesday secured an agreement with Israel to let water, food and medicine into Gaza. However, the people said aid may not enter the enclave on Friday as had been hoped because a process for verifying the supplies had not yet been agreed.

Israel has demanded the UN inspect aid entering Gaza to ensure it cannot be used for military purposes by Hamas, according to a senior UN official. The discussions are centred on the movement of aid from Egypt to Gaza via the Rafah crossing on the enclave’s southern border.

Another concern is that UN officials wanted to ensure a steady flow of aid, rather than a one-off delivery of 20 truckloads, the people added. Before the war, about 450 trucks entered the strip from Egypt every day, according to a UN official.

Three people familiar with the matter said discussions over allowing dual and foreign nationals out of Gaza were also happening in parallel to those on the supply of aid.

The UN’s Office for the Coordination of Humanitarian Affairs said on Friday it was “encouraged by [internal] reports that the different sides are nearing an agreement on the modalities and that a first delivery is due to start in the next day or so”.

ngress for $10.6bn in military support for Israel as part of a $105bn package that also includes $61.4bn for Ukraine.

Egypt will on Saturday host a summit aimed at discussing “current developments and the future of the Palestinian cause and the peace process”, according to people briefed on the discussions.

A large number of leaders from the Middle East are expected to attend, but many European capitals are unwilling to participate due to a push by the hosts to include a call for a ceasefire in the draft summit statement, and to exclude any explicit reference to Israel’s right to self-defence.

According to two people familiar with the matter, French foreign minister Catherine Colonna plans to attend instead of President Emmanuel Macron, while German chancellor Olaf Scholz will be represented by foreign minister Annalena Baerbock.

Israeli jets have been bombarding the Gaza Strip since Hamas carried out its attack on Israeli two weeks ago. The assault killed more than 1,400 people and injured more than 3,500, according to Israeli officials, while at least 203 were taken hostage.

Israel has also cut off deliveries of electricity, fuel and goods, and severely restricted water supplies, exacerbating the already dire humanitarian conditions in the coastal enclave.

Palestinian officials said on Thursday that 4,137 people have been killed and 13,162 injured in Israeli strikes on Gaza.

On Friday Israel said it would evacuate citizens from the northern town of Kiryat Shmona, amid fears that its war with Hamas could escalate into a broader regional confrontation.

The Iran-backed Hizbollah group in southern Lebanon and Israeli forces have been exchanging cross-border fire in recent days, with the Israeli army hitting targets in Lebanon after Hizbollah fired at least 20 rockets into northern Israel on Thursday.

Transaction shows Indian conglomerate has maintained lenders’ trust despite fraud allegations

Indian tycoon Gautam Adani has secured a $3.5bn refinancing package from 10 international banks, showing his industrial conglomerate retains the backing of lenders after it was the target of fraud allegations.

Lenders including Barclays, BNP Paribas and Deutsche Bank acted as arrangers and bookrunners on the refinancing, while DBS Bank, First Abu Dhabi Bank, Mizuho Bank and MUFG Bank also underwrote the three-year loan.

The Adani Group, an empire that includes India’s biggest commercial port operator and seven airports, has managed to maintain good relationships with financiers after New York-based Hindenburg Research accused it of stock market manipulation and accounting fraud in late January.

The group strongly denied the allegations but lost $150bn of market value at the lowest point of a trading rout.

“This showcases Adani’s robust access to the global financial market and strong liquidity position,” the group said in a statement.

Adani and its bankers have spent months working out a deal to refinance a $3.5bn short-term loan it took as part of its $10bn acquisition of Swiss building materials group Holcim’s two India assets last year, which made Adani one of the country’s biggest cement producers.

That international loan was crucial to Adani beating bidders that included Kumar Mangalam Birla’s UltraTech Cement and Sajjan Jindal’s JSW Group.

Adani’s expansion into cement comes as India’s government increases capital spending to improve infrastructure from transport to logistics in the world’s most populous country.

After the Hindenburg attack, the Adani Group moved to pay off $2.65bn of share-backed loans, which had been affected by the fall in prices at listed Adani businesses. It has also said it is working to bring down group companies’ debt-to-earnings ratios.

Ambuja and ACC — the companies Adani bought from Holcim last year — are prized cash-generating assets. The group confirmed that dividends from the companies would be paid out to Mauritius-based vehicle Endeavour Trade and Investment, the holding company, which will service the loan.

Endeavour was used to buy Holcim’s shareholdings. The entity’s ultimate beneficial owner was disclosed in filings last year as Gautam Adani’s brother Vinod and his wife Priti, who are not part of Adani’s management. However, Adani also said in filings that Endeavour “belongs to the Adani Group”.  

The group added another asset to its cement portfolio this year, buying Indian company Sanghi Cements in a $600mn deal.

“Adani Cements is back on their growth path through organic and inorganic initiatives,” said Satyadeep Jain, an analyst who covers the cement sector at Ambit Capital, citing the Sanghi deal and capacity expansion plans.

The refinancing comes in a heated political environment, with India’s main opposition party Congress promising to investigate the Adani Group if it wins office next year.

“It appears the banks are supremely confident that there will be no political upheavals,” said Hemindra Hazari, an independent analyst.

Confident, wealthy buyers increasingly prefer minimal logos and timeless clothes

When anyone can look rich, moneyed classes need not try. A shift towards quiet luxury offers hope for the fashion minnows competing against the huge marketing budgets of an LVMH or Kering. One small Italian brand Brunello Cucinelli, which reported third-quarter revenues on Thursday evening, has long embraced “elegant casual”. It has a successful niche with minimal branding.

Something has changed within luxury. Higher inflation has eaten a hole in the pockets of the aspirational buyers of luxury goods, thinks Luca Solca at Bernstein. Yet Cucinelli, an Italian maker of £7,000 cashmere coats, thrives. Its currency-adjusted sales through September this year jumped 29 per cent, and its full year outlook improved. Although Asia/Middle East has been its strongest region, led by China, Cucinelli’s sales in Europe and the Americas each exceeded 20 per cent growth. A 4 per cent bounce in the share price duly followed on Friday.

Quiet luxury eschews bling. This is something that the confident, wealthy buyer increasingly prefers, especially in China. Almost half of Chinese high-end fashion buyers prefer minimal logos and timeless clothing pieces, according to a regular quarterly survey by Vogue and Barclays Research.

Minnows do not always find a profitable niche. Salvatore Ferragamo, known for upmarket leatherwear, has yet to find its feet in the midst of its recent reboot. Unlike other smaller Italian brands, such as Tod’s or Cucinelli, Ferragamo’s operating profits have yet to return to pre-pandemic levels. A market value down by a fifth over the past year compares unfavourably with Cucinelli’s, up by a quarter.

As when sailing yachts, luxury businesses must turn their sails to find the fairest wind. China’s sluggish economic recovery and inflationary headwinds elsewhere means making a splash no longer fits the mood. That trend will suit those fashion brands keen on a quiet revolution.

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