Barron’s Weekend Summary: A Barron's analysis finds that four states fined Dollar General a total of more than $1M for price inaccuracies in 2021 and 2022
Cover Story:
-A Barron's analysis finds that four states fined Dollar General a total of more than $1M for price inaccuracies in 2021 and 2022. More than 100 people shared complaints about pricing errors at Dollar General with the Ohio Attorney General’s office, according to court filings. Some described feeling scammed, told of heated in-store arguments, and explained how they relied on the store while living on a fixed income or using food-assistance benefits. “The amounts are small but add up,” said one, in a complaint to the attorney general. “I only want to pay the fair price without feeling cheated.”
Interview:
Logic propels value-oriented juggernauts such as Costco Wholesale to keep winning new and loyal customers each year, while magic helps explain why so many shoppers are eager to part with more than $7,000 for a rare Louis Vuitton Capucines bag. “Even curbside pickup can be magical,” says Oliver Chen, a senior equity research analyst at TD Cowen. Barron’s spoke with Chen about consumer spending trends: The consumer is generally becoming more discerning. Inflation is taking more wallet share, specifically for food and essentials, and housing costs and interest rates are higher, too. That is putting pressure on spending for other, more-discretionary items. Higher costs are having a disproportionate impact on middle- and lower-income consumers: Walmart and Grocery Outlet Holding are benefiting, while discretionary [retailers] including Macy’s, Target, and Nordstrom are seeing a negative impact. Entry-level luxury is also under pressure, which is a newer phenomenon.
Tech Trader:
Google, a unit of Alphabet, on Tuesday launched a beta version of Bard, a general purpose chatbot along the likes of Open AI’s ChatGPT and its corporate cousin, Microsoft’s Bing Chat. Tech Trader has tested Bard, comparing the results to both Bing Chat and ChatGPT, and the results are fascinating and a little alarming. For one thing, it would appear that Bard “thinks” of itself as a tall, hot-looking white guy. Malcolm Harris, the author of the new book Palo Alto: A History of California, Capitalism, and the World, says there’s something predictable about a Google chatbot describing itself as tall and fair-skinned. “That’s precisely the man Silicon Valley imagines itself to be,” Harris says. “Silicon Valley’s tech often implies a user just like that one, but so far we haven’t been able to entice the tech itself to say the quiet part aloud … I’m not surprised to see the outlier height; the Stanford milieu has a century-long obsession with tall people. The school asked applicants for their height stats into the ’80s, with a preference that left the dorms chronically short of extra-large seven-foot beds during the 20th century.”
The Trader:
-This past week, the Dow Jones Industrial Average gained 376 points, or 1.2%, the S&P 500 index finished up 1.4%, and the Nasdaq Composite rose 1.7%. All three fell about 1% after the Federal Reserve raised rates a quarter point on Wednesday. The go-nowhere action of the market over the past few days—despite some significant events, such as Fed speeches and Credit Suisse agreeing to be taken over by rival UBS Group UBS –0.94% (UBS)—is emblematic of recent trading. The S&P has bounced between 3700 and 4200 for the past few months.
-In a scary market, investors should seek security—cybersecurity, that is.
-With bank stocks tanking, the Fed still raising rates, and recession risks rising, finding safe places to invest in appears harder than ever. But in a dangerous world—one where a hack might just be a click away—demand for cybersecurity is growing. It’s likely to stay healthy, even in an economic downturn. Cybersecurity “spending has held up extremely well—Rock of Gibraltar-like spending,” Wedbush analyst Dan Ives tells Barron’s.
Features:
-Preferreds are a senior form of equity whose dividends come before those of common stock. Preferred shares issued by banks, however, account for about two-thirds of the $400 billion market and the twin bank failures have highlighted the credit risk in these securities. In fact, the preferreds issued by SVB Financial Group and Signature Bank, the failed banks’ parents, might have little or no recovery value. Trading in their New York Stock Exchange–listed preferred and common shares has been halted. And an unlisted SVB preferred issue aimed at institutional investors was fetching about 10 cents on the dollar late this past week over the counter.
While this is certainly worrisome, preferreds still offer a lower-risk way to invest in banks than common shares, and some pros say they now look especially appealing. After its 8.5% drop this month, the sector’s largest exchange-traded fund, the $12.4 billion iShares Preferred and Income Securities, yields 6.5%. What’s more, preferreds issued by most banks now yield over 6%, a nice premium to the 3.7% on a 30-year Treasury bond.
-TikTok’s future as an independent business is in doubt. On Thursday, members of Congress spent more than 5 hours pummeling TikTok CEO Shou Zi Chew with questions about the company’s ties to China’s leadership and the Chinese Communist Party. Not a single member of the committee stood up for the company, which is fascinating, given that TikTok’s short-form video social network is so popular, with 150M monthly active users in the US alone. It is now clear that Congress—and the White House—want TikTok spun off from its Chinese parent ByteDance. And if that doesn’t happen, they say they will shut it down.
European Trader:
-The rising cost of food, the impact of Covid-19, and a price war in Belgium weighed on Dutch retailer Koninklijke Ahold Delhaize in 2022, dragging its stock down almost 8%. But the grocer, which owns Stop & Shop, Hannaford, Food Lion, and online grocery-delivery operator FreshDirect in the U.S., is a strong defensive play because it is well-placed to combat a recession after posting an upbeat outlook. Its shares (ticker: AD. Netherlands) are up 14.4%, to 30.71 euros ($32.91), this year and could rise further.
While inflation is a key worry for European food companies, Ahold is in a better position than most because up to 63% of its sales—and 70% of its operating income—come from the U.S. (The grocer has American depositary shares that trade under the ticker ADRNY.)The U.S. saw lower inflation than Europe in February. Profit margins at grocers are some of the thinnest in retail, so lower inflation will drive down costs.
Emerging Markets:
-Emerging market banks aren’t immune to the turmoil sweeping their Western peers. They are holding up better, though. Shares in Singapore’s biggest bank, DBS Group Holdings, have held up even since March 8, when news of Silicon Valley Bank’s collapse catalyzed market calamity. Indian investor favorite HDFC Bank is off 5%; Itau Unibanco Holding (ITUB), Brazil’s top private financier, is down 8%. That compares with a 10% selloff for BNP Paribas, the largest bank in the Europe Union, and 14% at Bank of America (BAC). Distance from the crisis epicenter may explain part of this outperformance, but not all. Past shocks and endemic volatility have left emerging market financial sectors, on the whole, more consolidated, more firmly regulated, and more careful about matching assets to liabilities than the US and Europe.
Commodities:
Diesel prices at the pump have fallen to their lowest in over a year. That’s good news for consumers, but the decline in prices for the fuel suggests a gloomy outlook when it comes to the US economy. Diesel fuel is ubiquitous in our economy,” says Brian Milne, product manager, editor, and analyst at DTN. It’s a “critical component in industrial production and…supply-chain dynamics.” Weaker demand, however, has led to lower diesel prices. US government data show diesel demand in the first 10 weeks of this year down 12.6% from the comparable period in 2022, says Milne, with the steep drop in demand due to slowing growth in parts of the economy, especially for heavy industry and construction. This slowdown is further pressured by higher interest rates and the recent bank failures increasing expectations for a recession, he says.
Streetwise:
Investors have been rattled by two big US bank failures and high-profile bailouts. Some money managers are warning followers that we’re not safe yet. “Time is running short before the fire becomes a conflagration,” tweeted Pershing Square CEO Bill Ackman this past Thursday. I looked it up in hopes that it was a spa treatment or dessert. Turns out it’s a bigger fire. Investors are particularly down on midsize banks. “There’s not a great place for regional banks, we think, in portfolios now,” says Brad Neuman, director of market strategy at Alger, a money manager.
Weekend Papers Summary
NEW YORK TIMES
-Conflict in Syria Escalates Following Attack That Killed a U.S. Contractor
Iran-backed militias launched attacks against coalition bases after the U.S. responded to a drone attack, in some of the worst fighting in Syria since 2019. President Biden sought to tamp down fears that the strikes could spiral out of control, while warning Tehran to rein in its proxies.
-Former Trump Officials Must Testify in 2020 Election Inquiry, Judge Says
The ruling paves the way for testimony from Mark Meadows and others. Separately, a Trump lawyer appeared before a grand jury for the Mar-a-Lago documents case.
-The GOP demands on the prosecutor in the Trump case test the limits of oversight power. The Manhattan district attorney is resisting demands by House Republicans that he provide information about the hush money inquiry, setting up a potential legal showdown.
-Los Angeles schools and 30,000 workers reach tentative deal after strike. The three-day walkout included Los Angeles Unified School District teachers, gardeners, bus drivers, cafeteria workers and special education assistants.
-No letup in Bakhmut as Ukraine and Russia Brace for Battles Elsewhere
Both sides expect a Ukrainian offensive as the Bakhmut fight continues, but the head of the Wagner group said Russia must be clearer about its goals.
-Gordon E. Moore, Intel co-founder behind Moore’s Law, has died at 94
His prediction in the 1960s about exponential advances in computer chip technology charted a course for the age of high tech.
-Crisis in Israel tests the complicated ties between Biden and Netanyahu
President Biden has stressed that shared democratic values have to be at the core of a United States-Israel relationship.
-Israel’s army fears effect of judicial crisis on battlefield readiness.
A judicial overhaul has prompted many military reservists to avoid volunteer duty. Military leaders have privately warned that this might require scaling back operations.
-french anger shifts from pension law to Focus on Macron
After ramming through a law raising the retirement age without a full parliamentary vote, the French president faces something approaching a constitutional crisis.
-Chocolate factory explosion in Pennsylvania leaves two dead and nine missing. Eight people were also taken to a hospital after the explosion at the R.M. Palmer Company chocolate factory in West Reading, Pa., on Friday, officials said.
-Two migrants found dead and 13 others ill on train in Texas. The migrants were found trapped inside a sweltering shipping container that was stopped near a town in Uvalde County, according to officials.
THE FINANCIAL TIMES
-The US Securities and Exchange Commission has raised concerns over Rokos Capital Management after the hedge fund was forced to hand over large amounts of cash to its banks as collateral when an outsized bet on US government bonds backfired earlier this month.
-For more than a century and a half, Credit Suisse stood as a symbol of Swiss financial power, stability and prestige. But its fall from grace in recent years has underscored the fragility of its reputation, tarnished by a series of self-inflicted scandals.
“It is shocking to lose a 167-year-old bank in 72 hours,” said Oswald Grübel, a former chief executive of both Credit Suisse and UBS, who added that the lender’s decline began after the financial crisis, from where it “went down and down and down”.
-Olaf Scholz has rejected comparisons between Deutsche Bank and Credit Suisse as a slump in the German lender’s shares sparked a further day of turmoil for the banking sector.
Speaking after Deutsche shares fell as much as 14 per cent on Friday, Germany’s chancellor sought to shore up confidence in the country’s biggest bank, with investors still nervous after the forced takeover of Credit Suisse last weekend.
-Oil prices slid on Friday after US energy secretary Jennifer Granholm said it would take “years” to replenish the country’s strategic stockpiles, undermining hopes that the federal government would soon return to the market as a major buyer. Brent crude, the international benchmark, slipped as much as 4% to $72.68 a barrel. West Texas Intermediate, the US marker, fell by a similar margin to $66.82 a barrel following Granholm’s comments and amid a broader sell-off in US markets.
-Top Democrats lashed out at a “new wave” of climate denialism in the Republican party at a corporate conference this week, warning “Maga ideology” was becoming a major risk to US industry and business. John Podesta, President Biden’s senior clean energy adviser, cautioned Wall Street investors that Republican attacks on “woke capitalism” were “irresponsible” and against free market principles.
-First Republic was engulfed in a distracting internal succession crisis in the months before the US Federal Reserve imperiled its business model by embarking on an aggressive cycle of interest rate rises, according to people briefed on the matter. After decades of rapid growth, when it won plaudits for providing personalized service to wealthy customers, First Republic found itself scrambling in early 2022.
-Chaos in the US banking sector has caused historic swings in bond markets this month and prompted the Federal Reserve to ditch plans for more rapid interest rate rises. But judging by moves in Wall Street’s flagship stock index, the crisis appears to have been a non-event. The S&P 500 is flat so far this month, and volatility indicators suggest investors are not expecting wild swings in the next few weeks.
-Federal Reserve officials on Friday defended their decision to press ahead with their monetary tightening campaign this week despite ongoing stress across the US banking sector, citing continued concerns about elevated inflation. On Wednesday the central bank raised rates by a quarter point for the second time in a row, lifting federal funds rate to a new target range of 4.75% to 5%, even as midsized lenders struggled to weather the fallout from the implosion of Silicon Valley Bank.
-France has postponed the highly symbolic state visit by the UK’s King Charles III that was due to begin on Sunday because of the escalating protest movement against President Emmanuel Macron’s plan to raise the retirement age. The delay is an embarrassing setback for Macron, who has staked his reformist credentials in his second term on raising the retirement age in the face of widespread opposition.
-Brazilian president Luiz Inácio Lula da Silva will propose a “peace club” with China to mediate an end to the conflict in Ukraine when he travels to Beijing this week to meet President Xi Jinping.
The leftwing Brazilian leader is seeking to restore Brazil’s diplomatic clout following the relative isolation of the previous Jair Bolsonaro government, but has resisted aligning with western countries sending weapons to Ukraine to repel Russia’s invasion.
-The UK competition regulator has performed a U-turn on Microsoft’s $75B acquisition of the Call of Duty maker Activision Blizzard, clearing a huge roadblock to the deal’s global prospects. After reviewing what it called “new evidence”, the Competition and Markets Authority said on Friday that it no longer thought there would be a “substantial lessening of competition” in the console market if the Xbox maker takes over the publisher of the bestselling game franchise.
-Paul Rusesabagina, who inspired a Hollywood film about his role in protecting hundreds of Tutsis from Hutu death squads during Rwanda’s 1994 genocide, is to be released from jail following a presidential pardon from Paul Kagame. Rusesabagina was sentenced in 2021 to 25 years in jail on terrorism charges. Authorities said Rusesabagina, who was critical of Kagame’s regime, was a member of Rwanda’s Movement for Democratic Change, a political group opposed to the government. Its armed wing, the National Liberation Front, has been accused of carrying out attacks in Rwanda. Rusesabagina denied all the charges and refused to take part in the trial, which he and his daughters had called a “sham”.
NY POST
Republican lawmakers ripped President Biden on Friday over his response to drone and rocket attacks by Iranian-backed militants in Syria that killed a US contractor and wounded six other Americans.
The Pentagon said Thursday that the 80-year-old president ordered retaliatory airstrikes in response to the deadly drone attack on a coalition base in eastern Syria. The US strikes reportedly killed 11 people, including six confirmed pro-Iran militants and two Syrians. On Friday, Iranian-backed proxy forces responded to the US airstrikes by launching rockets at a US base in northeast Syria. White House national security spokesman John Kirby called the Iran-backed missiles “completely ineffective” and noted that no US personnel were harmed.
-The Post claims that Treasury Secretary Janet Yellen is once again on thin ice inside the Biden Administration over her handling – or mishandling - of the banking crisis that keeps roiling markets, The Post has learned. “The question is when will Sleepy Joe & Co. finally act? They need to put Yellen out of her misery and end ours by handing her job to someone who knows how to deal with the very real possibility of banks failing on a scale not seen since the 2008 financial crisis and a possible deep recession. The Post claims that the “political types in the White House — the people that craft messaging and give input on cabinet choices — have been increasingly wary of Yellen’s ability to do the job despite her expansive resume and years running the Fed.”
Rules for winding up big banks do not work, Swiss finance minister warns
Karin Keller-Sutter says following the protocols ‘would have triggered an international financial crisis’
The global regulatory regime for “too big to fail” banks set up after the 2008 crisis does not work, according to Switzerland’s finance minister.
In an interview with Swiss newspaper NZZ on Saturday, Karin Keller-Sutter — who was at the centre of Swiss authorities’ rush to rescue Credit Suisse last weekend — said following the emergency protocols that are at the centre of the regulatory architecture for big banks “would have triggered an international financial crisis”.
Capital buffers and extra regulatory rules on risk have been useful for navigating times of stress, Keller-Sutter said, but in a real crisis, plans to facilitate the orderly rescue or wind-down of big banks are inadequate.
“Personally I have come to the conclusion . . . that a globally active systemically important bank cannot simply be wound up according to the ‘too big to fail’ plan,” she said. “Legally this would be possible. In practice, however, the economic damage would be considerable.”
Last weekend was “clearly not the moment for experimentation”, she added in her first interview since the crisis erupted. “The crash of Credit Suisse would have dragged other banks into the abyss.”
The finance minister, who took up her post at the end of December, said concerns over Credit Suisse’s liquidity had been her first question to civil servants when she started in office.
She said she asked three months ago: “When will the point be reached at which the authorities have to intervene; at which point will Finma come to the conclusion that CS is no longer viable?”
Keller-Sutter sat at the centre of the emergency negotiations, representing Switzerland’s governing Federal Council and co-ordinating with the Swiss National Bank and market regulator Finma.
The eventual rescue plan, in which the bank was taken over by its bigger rival UBS, has come under intense criticism, much of it focused on the decision by Finma to wipe out SFr16bn of convertible bonds while preserving some value for Credit Suisse equity holders.
Bondholders have pledged to take Swiss authorities to court in what could be a lengthy and high-profile litigative process.
Keller-Sutter did not answer questions on the decision to wipe out Credit Suisse’s subordinated debt holders, but told NZZ that the takeover by UBS was the only viable option, and the government did what it could to facilitate the deal while seeking to reduce any burden on Swiss taxpayers.
Domestically, the merger of the country’s two biggest banks — for which the government has written a SFr9bn guarantee and authorised a SFr100bn liquidity line from the SNB — has proved deeply unpopular.
A poll released on Friday showed that three-quarters of Swiss people surveyed supported legislation to break up the new entity, with a majority harbouring serious concerns that the government had overstepped its authority.
Massive New Los Angeles Transfer Tax
Effective April 1, 2023, a new documentary-transfer tax will be imposed on residential and commercial real-property sales and transfers within the City of Los Angeles where the consideration or value is greater than $5 million. The new tax was approved by a ballot initiative entitled Measure ULA (United to House L.A.) in the November 8, 2022 election and is commonly known as the “mansion tax” but is officially called the “Homelessness and Housing Solutions Tax.”
The current documentary-transfer tax in the City of Los Angeles is a combined city and county tax of 0.56% of consideration or value. The new tax, which is in addition to the current transfer tax, is 4.00% of consideration or value if the consideration or value exceeds $5 million and 5.50% of consideration or value if the consideration or value exceeds $10 million. The tax applies to the total consideration or value and not just to the amount in excess of these thresholds. The tax applies regardless of whether the property is sold at a gain or a loss. For example, if a property is sold for $20 million, the total transfer taxes will be $1.212 million ($112,000 for the current transfer tax plus $1.1 million for the new transfer tax). These thresholds are adjusted annually according to the Consumer Price Index. The new law does not specify whether the tax is to be paid by the seller or the buyer, so allocation of the tax is subject to negotiation.
Exemptions from the tax are granted to nonprofit entities, governmental entities, and certain organizations primarily involved in affordable-housing development and property management.
Revenue generated by the new tax is intended to be used to fund affordable housing and tenant assistance programs, including development, construction, acquisition, rehabilitation, and operation of housing. Proponents of the tax project that the tax will generate up to $1 billion.
The City director of finance is authorized to issue rules and regulations necessary to enforce and administer the tax. It is expected that such rules and regulations will cover the applicability of the tax to equity transfers, affiliate transfers, estate-planning transfers, conversions from one type of entity to another, mortgage foreclosures, and deeds in lieu of foreclosure. Under the current tax, equity transfers of 50% or more are subject to the tax, and certain affiliate transfers, estate-planning transfers, conversions, mortgage foreclosures, and deeds in lieu of foreclosure are exempt.
A lawsuit has been filed against the City by the Howard Jarvis Taxpayers Association and the Apartment Association of Greater Los Angeles to invalidate the tax as a violation of the California Constitution, which prohibits taxes on real property where the proceeds would be used for specific purposes.
The Glazers keep their options open
It’s been almost six months since the Glazers said they would explore a sale of Manchester United, the football club owned by the Floridian family since 2005.
Two suitors have emerged so far: UK chemicals billionaire Jim Ratcliffe and Sheikh Jassim, the son of one of Qatar’s richest men. Ratcliffe submitted his second bid — putting a value on the club above £5bn — on Thursday evening.
But supporters are still worried that the Glazers won’t sell up in full, and are instead planning to extend a stay that has been protested from day one. Many are still angry at the amount of debt put on the club to fund the original takeover, as well as fading fortunes on the pitch.
If the Glazers want to remain in charge, they will have plenty of options. A number of US investment firms, including Elliott Management, are keeping a watchful eye on the process in case an opportunity arises.
The Glazer siblings could opt to sell a slice of the business, leaving some of them in control but bringing in new minority shareholders.
They could also seek some new financing, perhaps with a view to investing in the club’s infrastructure. Old Trafford, once the pinnacle of English football stadiums, and the Carrington training ground both need money spent on them. But that sort of funding won’t come cheap, and the club already has sizeable debts.
Another option could be to copy what Real Madrid and Barcelona have done — take in money tied to a particular revenue stream, such as commercial or media rights. Barcelona sold off a chunk of its future TV revenue, generating more than €500mn in cash. Real Madrid received €360mn in return for rights to stage non-football events at its revamped stadium. In both cases, this came from Sixth Street, another US investor keeping close tabs on the Man Utd process.
People close to one of the bidders warned this week that the Glazers might be stringing everyone along to augment their negotiating power as they explore other options that would leave them at the helm of one of the world’s most famous sports teams.
On the other hand, one private investment firm speculated that they were being used to squeeze every penny from Ratcliffe and Sheikh Jassim. Paranoia is everywhere.
United’s New York-listed shares have roughly doubled since the club was put on the block. But there have been a few bumps along the way, and the current enterprise value of roughly $5bn (£4.1bn) remains some way short of Ratcliffe’s latest offer. The market looks positioned for a deal, but has yet to be convinced.
Brussels agrees deal with Germany in spat over combustion engines ban
EU will exempt cars which run on certain types of fuel from new law after lobbying from Berlin
Brussels has agreed to exempt cars which run on certain types of fuel from the EU’s new law which will ban the sale of combustion engines from 2035, after Germany threatened to block it.
Frans Timmermans, the EU’s climate commissioner, tweeted on Saturday that the European Commission had “found an agreement” with Berlin over the “future use of e-fuels in cars” after more than three weeks of negotiations to save the law.
E-fuels such as e-methane or e-kerosene are made with captured CO₂ and hydrogen produced from renewable or low-carbon electricity. They are often considered carbon neutral, but the technology is at its early stages.
German transport minister Volker Wissing said: “This clears the way for vehicles with internal combustion engines that run on CO₂-neutral fuels only to be newly registered after 2035.”
Wissing had announced earlier this month that Berlin would block the phaseout of internal combustion engines in the bloc, just days before it was due to have its final rubber-stamp vote. He wanted exemptions for e-fuels to protect Germany’s car industry, he said.
According to some research, including by automotive supplier association Clepa, the switch to electric cars could cost hundreds of thousands of jobs over the coming decades as electric engines require fewer parts than combustion engines.
On Saturday, Wissing said a path and timetable had been agreed to implement the exception from the new law. A separate category would be added to the law to cover cars that only use e-fuels, he said. “We would like this to be completed by autumn 2024,” he added.
A commission official said that an official announcement would be made on Tuesday, when the planned phaseout is expected to be approved by EU energy ministers.
Green groups and some EU member states, including France, had heavily criticised the German move to give e-fuels an exemption from the new law. Car manufacturers including Volvo and Ford have also attacked the idea, saying that the industry had invested heavily in electric vehicles.
The law was agreed last year between the EU’s three institutions, including the council of member states; it is extremely rare for such deals to be reopened.
The deal does not require text changes to the new law but will create a new category of e-fuel cars in the future, a commission official said. It is expected that vehicles’ engines would have to be adapted so they could run on e-fuels only and not on fossil fuels.
Julia Poliscanova, director at green lobby group Transport & Environment, said: “E-fuels are an expensive and massively inefficient diversion from the transformation to electric [which is] facing Europe’s carmakers. Europe needs to move forward and give clarity to its automotive industry which is in a race with the US and China.”
She added: “For the sake of Europe’s climate credibility, the 2035 zero-emissions cars deal needs to enter law without any further delay.”