FT : Texas anti-ESG law endangers financial stability, says Raskin

Texas anti-ESG law endangers financial stability, says Raskin
Ex-Fed official says blacklisting of companies over climate policies encourages risky investment

New laws in Texas and other US states that punish financial firms for “boycotting” oil and gas endanger global financial stability by encouraging risky loans to energy firms, former deputy Treasury secretary Sarah Bloom Raskin has said.

Large banks including JPMorgan Chase, Wells Fargo, NatWest and Goldman Sachs will feel obliged to continue lending to energy companies at current levels even if there are good risk management reasons to cut back, said Raskin, who has also served as a US Federal Reserve governor. Her nomination to return to the Fed to head banking supervision was blocked by Republicans earlier this year.

Raskin, now at Duke University, is concerned because the banks cited their lending to energy companies as proof they are not hostile to fossil fuel in official letters to the state of Texas earlier this year. The Texas comptroller Glenn Hegar then left them off the official list of financial institutions that the state has earmarked for divestment. BlackRock and nine European asset managers and banks were not so lucky.

Current lending levels will effectively become a “floor” for future loans for fear of angering Texas and other conservative states that have enacted laws targeting investing based on environmental, social and governance factors, Raskin said. “These laws are, in essence, forced fossil fuel financing laws,” she said.

“We could see a decoupling of underwriting from risk management,” she said. “Corners will be cut and, if examiners don’t notice, this then can become a financial stability problem. It’s not just going to happen at one large bank; it could be the same dynamic with many of them.

“The cocktail of loose underwriting, coupled with inappropriate pricing, insufficient insurance and collateralisation, isn’t a particularly tasty one when you have missing the ingredient of internal risk management processes.”

Bank supervisors at the regional Fed banks, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency “have got to kick the tyres on what these laws could do. Without that, banks could find themselves running haphazardly,” she said.

There is precedent for Raskin’s concerns. In 1984, Continental Illinois became what was then the largest US bank rescue largely because of its exposure to bad oil and gas loans made during the 1970s and 1980s energy boom in Texas and Oklahoma. Lending standards were relaxed during the run up in oil prices and Continental Illinois failed to react when prices started to fall in 1981.

Anti-ESG pressure is already starting to affect the way some banks are addressing climate change. Mark Carney, the former Bank of England governor, conceded last week that tough new targets on coal funding being proposed by a UN-led emissions standards body had been rolled back after banks objected to them over fears they would be sued.

Raskin said there is a risk that regulators will exacerbate the dangers posed by the anti-ESG laws if they fail to focus on their impact on risk management. “The examiners’ first instinct is to not see the underlying dangers to risk management because they will see these laws as politically motivated. Any law these days related to climate is one that examiners will note and then run the other way,” she said.

The Fed is starting to delve into the financial risks posed by climate change. It announced last week that the six largest US banks — Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo — will participate in a pilot programme that will allow regulators to measure the impact of various climate scenarios on specific portfolios and business lines.

Michael Barr, who replaced Raskin as Joe Biden’s pick to lead supervisory matters at the Fed, said in his first public remarks since assuming that role that the central bank’s “mandate in this area is important, but narrow, focused on our supervisory responsibilities and our role in promoting a safe and stable financial system”.

For Raskin, the Fed’s congressionally mandated focus on achieving price stability and a healthy labour market does limit its ability to deal head-on with an issue like climate-related risks. But over time, the central bank will need to push further in that direction, she said.

“When it comes to these state laws, the federal regulators are not particularly well-disposed in evaluating them beyond something to comply with. It would be more effective to see a full-throated recognition of the essence of these laws, but the federal regulators tend to look for cover when it comes to issues that they perceive as political,” she said.

One area Raskin said the Fed should focus on is retooling its models as it relates not only to climate considerations, but also to broader shifts in the foundations of the economy owing to the pandemic.

“When you have these major dislocations in an economy, it’s a good opportunity to refresh,” she said. Regressions in models are based on past data and what we’re trying to do is model an economy that in several ways — including the effects of climate — may not be operating the way it has in the past.”

FT : Credit Suisse reassures investors over bank’s financial strength

Credit Suisse reassures investors over bank’s financial strength
Executives contacted clients after credit default swaps suggested growing worries over group’s health


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Senior Credit Suisse executives spent the weekend reassuring large clients, counterparties and investors about the Swiss bank’s liquidity and capital position in response to concerns raised about its financial strength.

Executives hit the phones after spreads on the bank’s credit default swaps, which offer protection against a company defaulting, rose sharply on Friday, indicating investor worries over the bank’s financial health.

“The teams are actively engaging with our top clients and counterparties this weekend,” said a Credit Suisse executive involved in the discussions. “We are also getting incoming calls from our top investors with messages of support.”

The executive denied recent press articles that the bank had formally approached investors about potentially raising more capital, insisting that the bank was trying to avoid such a move with its share price at record lows and higher borrowing costs due to rating downgrades.

Having seen Credit Suisse’s share price drop more than 25 per cent last month to below SFr4, chief executive Ulrich Körner sent a company-wide memo on Friday to try to reassure staff over the bank’s capital position and liquidity.

His move also followed a sharp rise in credit default swaps, a gauge of investor sentiment towards risk, that have jumped more than 50 basis points over the past two weeks, hitting 250bp on Friday.

In a subsequent briefing note on topics to discuss with clients sent to Credit Suisse executives on Sunday, following rumours about the bank’s financial health on social media, staff were told: “A point of concern for many stakeholders, including speculation by the media, continues to be our capitalisation and financial strength.

“Our position in this respect is clear. Credit Suisse has a strong capital and liquidity position and balance sheet. Share price developments do not change this fact.”

A top executive at a firm that was contacted by Credit Suisse said his view is that the Swiss bank is “the worst big bank in Europe”, but it is not in immediate danger.

“We are not having meetings on this topic,” he said. “I don’t think it’s a crisis.” The bank’s falling share price reflects its deep woes and the lack of any obvious solution, the executive said.

While the local Swiss bank is highly profitable and the global private bank still has a strong brand, potential investors and buyers are concerned that the investment banking arm could have concealed expensive liabilities.

Körner and the bank’s board, chaired by fellow former UBS executive Axel Lehmann, are due to present a plan to revamp the business to address the investor concerns on October 27 along with its third-quarter results.

Analysts at Deutsche Bank last month estimated the restructuring would leave a SFr4bn hole in Credit Suisse’s capital position.

“We will be doing asset sales and divestitures just so we can fund this very strong pivot we intend to achieve towards a stable business,” said the senior executive at the bank involved in investor calls.

Credit Suisse declined to comment.

Korner, who previously ran Credit Suisse’s asset management business, was installed as chief executive over the summer with a brief to strip back the group’s investment bank and slash costs — moves that are likely to lead to thousands of job cuts.

The board’s latest plan is to split the investment bank into three and resurrect a “bad bank” holding pen for high-risk assets and business units earmarked for disposal, the Financial Times has reported.

“No doubt there will be more noise in the markets and the press between now and the end of October,” Körner wrote on Friday. “All I can tell you is to remain disciplined and stay as close as ever to your clients and colleagues.”

Uncertainty over the bank’s future has already led to a number of executive departures. Jens Welter, who had been co-head of global banking, is the most recent high-profile defector, having agreed to join Citigroup.

>>> Hartnett: Short Stocks Until Halloween, Then Brace For The Rally

 Hartnett: Short Stocks Until Halloween, Then Brace For The Rally



Earlier today, we quoted Bloomberg strategist Simon White who agreed with us - and with BofA's Michael Hartnett and Morgan Stanley's Mike Wilson - saying that the lack of a spike in the VIX, alongside the Fed now being well into its hiking cycle, suggests that "it believes the Fed put is getting nearer. Certainly, current oversold conditions suggest a short-term bounce is at hand."

But while generally accurate, even White's assessment was rather vague. Instead, for a much more definitive take we once again go to the man who remarkably has called every reversal in the market (in the case of the latest bear market bounce, to within half a tick in spoos) and in his latest must read Flow Show note Hartnett describes in which the selling continues for another 45 or so days, then we bounce hard following a coordinated G20 intervention... and then tumble again when we hit the "big low" in Q1 where the recession and credit shocks force Powell and the Fed into a full-blown pivot panic.

Here is Hartnett's "tactical bear" tiemline  for the next 6 months: “short twos (2Y TSYs) & spoos” until Halloween, when the S&P plunging to 3333 will force “policy panic” just in time for the Nov 16th G20 meeting, at which point stocks rally... but the “Big Low” will not hit until Q1 when recession/credit shocks = “peak Fed”, “peak yields”, “peak US$”; at that point Hartnett's "trade of 2023" kicks in which, as a reminder, is short $, long EM, small cap, cyclicals.

And, as before, Hartnett's macro trade reco is simple enough: "nibble 3600, bite 3300, gorge 3000."

That's the quantitative aspect, the qualitative aspect is also familiar enough to anyone who has been reading Hartnett in recent year, and it all boils down to the simple maxim: "Markets stop panicking when Central Banks start panicking" and while we have had an appetizer of what is coming, the big central bank entree still awaits, to wit: "BoJ buys yen, BoE flips from QT to QE = panic, but neither credible (BoE QE + tax cuts = inflation, BoJ YCC), nor coordinated, so impotent." What is needed for a credible pivot? Well as the word itself suggests "Fed/Treasury panic requires US credit event."

Having revealed his medium- and longer-term views, Hartnett then turns to the near-term where he sees mostly pain as the last pillar of NYSE composite support crumbles:

The Biggest Picture: NYSE Composite (US stocks, ADRs. Bond ETFs) breaks 14k = 200-week MA, ‘18 & ‘20 highs...Wall St losses now forcing liquidation.

Ironically, investors already took the hint, judging by the latest weekly flows:

  • Inflows $7.6bn to equities, outflows $1.4bn from gold (14th week, longest streak since Jan’14), $13.7bn from bonds, $52.8bn from cash (quarter-end).

  • Flows to Know: a. UK equity outflows on pace for worst year ever ($18bn); b. biggest outflow from IG/HY/EM debt debt in 13 weeks ($13.7bn); c. largest outflow from TIPS since May’22 ($1.9bn).

  • BofA Private Clients: $2.8tn AUM...61.1% stocks, 19.8% bonds, 12.0% cash; 31st week of private client inflows to bonds (note 2-year Treasuries yielding 240bps more than S&P500 dividend yield); GWIM ETFs...into staples, out of MLP, materials, gold.

What about the time-tested BofA Bull & Bear Indicator, which remains at a 0.0 max bearish reading amid deteriorating bond flows, credit technicals, it's been here for about 4 months now, wasn't it supposed to be a “contrarian buy”? Well, as Hartnett explains, the answer is no - as in 2008 - when a 2-sigma credit event is brewing.

Hartnett next takes readers on a brief chronological ride through his investment thesis that defined late 2021 and most of 2022, and which was proven 100% accurate:

2022 in a Nut: inflation shock caused rates shock which now threaten recession shock & credit event; Wall St disorder in 2022 reflects painful regime change as bullish deflationary era of peace, globalization, fiscal discipline, QE, zero rates, low taxes, inequality gives way to inflationary era of war, nationalism, fiscal panic, QT, high rates, high taxes, inclusion.

The biggest catalyst for the tradition to a recession shock and credit event, is central banks going Cold Turkey: there have been 294 global rate hikes since Aug 2021 vs 1302 rate cuts since Lehman. More remarkable is that in the past 7 months there has been QT of $3.1tn (contrast with Fed/ECB/BoJ/BoE QE liquidity buying of $11tn during COVID);

This tsunami of rate hikes and QT shock have hit Wall Street's addiction to liquidity: not surprisingly, the global stock & bond market cap has cold-turkey collapsed $46.1tn since Nov'21!

And it's going to get even worse: picking up on another of his favorite themes, Hartnett warns that war is always Inflationary; indeed the war is what caused the latest fiscal panic: UK + EU have announced $1.4tn of fiscal stimulus to ease energy shock and build military; this only exacerbates the trend of higher inflation & yields as this week's BOE pivot showed; see UK inflation & yields during WW1 & WW2...

... and asset  performance during geopolitical events past 70 years.

And speaking of central bank intervention during times of war - this may come as a surprise to many - the Fed started the original Yield Curve Control just 4 months after Pearl Harbor (April’42) to help fund war and keep interest rates flat. Expect no less during this war.

* * *

Hartnett next refreshes readers on a topic he has covered at length in recent months, namely the parameters and history of Bear Markets: some context: the S&P 500 is in the 20th bear market over the past 140 years, where the average peak to trough decline is 37.3%, and average duration 289 days (Table 2);

Repeating what he said back in May, Hartnett then observes that while history no guide to the future, "history says bear market ends Oct 19th 2022 (35th anniversary Black Monday) with S&P 500 @ 3020."

Then again, that may prove an optimistic take, because as Hartnett himself acknowledges, rates are now higher than in the 2018 meltdown, while LQD, HYG, ACWX, EEM, LQD, EMB are all below 2018 lows; At the same time, far, far from 2018 lows are US stocks, big Tech, private equity.

On the other hand, we are nearing the "Oversold Entry Level" : by this, Hartnett means that in the past 100 years, buying at -20% below the 200dma was a good entry point back into stocks (today that would be 3374... which also happens to be the pre-COVID 2020 high)...

... and while this has worked almost always, there have been a few clear exceptions: the 1931 depression, 1937 Fed policy mistake, 1974 stagflation, 2008 GFC; In other words, a monster undershoot requires monster credit event & recession (Chart 4, Table 1).

But while the Fed will inevitably overshoot in the opposite direction as they always do, there is another far bigger problem: the entire modern financial system is busted, a topic Hartnett covers in "The Modern Prometheus" - consider the record surge in bids accepted for NY Fed's overnight reverse repos, from $0 in Feb '21 to $2.4tn

This, as Hartnett himself writes, "reflects broken, freaky post-QE financial system plumbing, and ’22 fear, manifesting in US dollar shortage, 2-year swap volatility exploding - as we noted yesterday, we just saw a collapse in 2Y USD swap spreads...

... while at the same time, € rates volatility has quietly surged above GFC highs...

... which leaves us with the following potential credit events to end monetary tightening:

  • government debt (UK, Japan)
  • household debt (Australia, NZ, Canada, Sweden)
  • 2024 refinancing cycle for US corporations
  • US shadow banking exposures to credit
  • syndicates loans,
  • illiquid PE (the new “too big to fail”)
  • real estate

Hartnett concludes with his latest take on asset allocation and Expected Returns: the issue is that neither has yet to experience “regime change”; after all, asset allocation to stocks remains high by historic standards (e.g. private client allocation = 62% vs lows of GFC 39%, US debt debacle 54%, China deval 56%, COVID 54%; This means that without a big adjustment lower in equity exposure (it’s already happened in credit exposure) it would be tough for expected returns to get anywhere near historic annual 10%, let alone 14% seen past decade...

... and while the market story of 2023 won’t be downside, Hartnett expects more limited upside from risk assets.

Miss Tweed : YNAP SERIES:2-What it takes to mend YNAP

YNAP SERIES:2-What it takes to mend YNAP

urning around Yoox-Net-A-Porter (YNAP) is the biggest challenge José Neves faces since launching Farfetch in 2008. The CEO of the luxury marketplace is walking a tightrope. Farfetch’s image and credibility in terms of strategy and execution are at stake. If Neves can’t improve the fortunes of the online fashion and luxury retailer, it may be that no one can.

Five weeks after Farfetch announced the long-awaited deal to take on YNAP, the 48-year-old Portuguese entrepreneur is already working on preparing its integration. Farfetch has agreed to buy 47.5 percent of YNAP from luxury group Richemont and committed to buying a further majority stake if the online fashion and luxury retailer becomes profitable in three to five years from now.

Turning the business into a profitable venture is not easy. For Neves and his teams, the plan is to focus on the technology aspects of the deal first and worry about changing YNAP’s business model and corporate culture later. The transaction still needs to get regulatory clearance too, which could take five to eight months.

Right now, Neves’ teams are working on re-platforming YNAP’s online businesses with Farfetch’s e-commerce technology. This alone is not a straightforward task. YNAP is made up of four companies: the online fashion wholesalers Net-A-Porter and Mr Porter and discount retailers Yoox, based in Italy. Then there’s the Outnet which operates out of the UK.

Online luxury retail is one of the most vibrant segments of the global luxury goods industry, with annual sales growing at 15-20 percent a year on average since the pandemic. The technology needed to make it work is complex, but Farfetch appears to have won the race on that front, competing head-on with giants such as Amazon. Farfetch has invested a lot of money into artificial intelligence, stock management software and cross-border shipping as has its arch-rival. Neves’ technology is considered best-in-class in the online fashion industry by specialists. That is why Richemont Chairman Johann Rupert chose Farfetch to fix YNAP. The company’s problems have stemmed in part from having failed to crack the technology aspects of e-commerce, as Miss Tweed was first to report in October 2020.

BUSINESS MODEL
Once YNAP’s re-platforming is on track – a delicate process likely to last more than a year senior Farfetch sources say – the next thing Farfetch will have to work on is YNAP’s business model and profitability. Farfetch needs to figure out how to make Net-A-Porter (NAP) and Mr Porter evolve from a wholesale to an e-concession model. How long this process will take is a top concern for Farfetch investors. “We have very little visibility on that front,” one long-term investor told Miss Tweed on condition of anonymity.

E-concession means that the online fashion retailer holds a brand’s stock in its own warehouse, but at the same time the brand still owns that stock and controls image and the price of its products. Wholesale, on the other hand, is when a multi-brand retailer such as NAP buys stock from a brand and sells it online. The online retailer owns the stock and can do whatever it wants with it, such as selling the stock at big discounts, something brands often fear because it can harm their exclusive image.

For example, when a collection becomes out of season a few months later, items not sold at full price are offloaded at a discount via The Outnet and other discount retailers. This is the business model NAP has been using ever since Natalie Massenet founded the company in 2000. However, in the past three years, NAP started letting brands sell handbags and shoes on its website on an e-concession model. It’s a good move. It is also what big brands like Gucci want as they work to tighten control over their pricing and brand image and cut the number of wholesalers they work with.

Still, for NAP, that means it needs to downsize the number of wholesale buyers it employs and invest in people excellent at building relationship with brands and promoting their goods.

Since the beginning of the year, Kering has demanded online wholesale websites such as NAP, Mytheresa and MatchesFashion only sell its brands through e-concessions, a senior industry source told Miss Tweed. This applies to Gucci but also to sister brands Balenciaga, Saint Laurent and Alexander McQueen. Another major brand expected to demand the same is Moncler, the source said. Prada and others could follow suit. Kering and Moncler refuse to comment on such internal online policies.

On an e-concession model, the margin the online fashion retailer makes is much smaller than wholesale, around 30-35 percent versus 40-45 percent on a wholesale model. That is why NAP’s cost base will have to come down if it wants to become profitable again since revenues from wholesale will decline. Comparatively Farfetch’s marketplace model takes a commission estimated at around 20-25 percent. In a marketplace model, the brand or the multi-brand retailer puts online its digital catalogue but it generally ships the product to the customer unless it has agreed to put its stock with Farfetch. Farfetch now makes more revenue from brands on an e-concession basis than from boutiques using the marketplace model, the company said.

CREATIVE TALENT
The only problem is that to increase sales, NAP will have to make significant investments, not only in brand marketeers but also in creative talents who can write beautiful and inspiring stories and publish relevant videos that will make consumers want to spend time on the Net-A-Porter website and pull out their credit card. The problem is that editorial content is not Farfetch’s forte. The good news is that Farfetch knows that, company insiders say.

When you look at the originality and richness of the content on rival wholesalers such as Germany’s Mytheresa and Canada’s Ssense, you understand why NAP is trailing behind and has become a shadow of its former self. The landing page of NAP looks quite bland compared to theirs. The website quickly goes into long lists of products while MyTheresa offers more curated looks and different ways of wearing things while Ssense publishes off-the-wall, zany stories about personalities, art and social trends on top of looks people can shop.

Smaller rivals can provide inspiration for Farfetch. In 2021, Californian private equity firm Sequoia Capital took a minority stake in Canada’s Ssense in a deal that valued the Montreal-based online retailer at more than CA $5 billion. As part of the deal, it hired Angelica Cheung, Vogue China’s former editor, to help expand in the Middle Kingdom and invade Farfetch’s and YNAP’s turf where the two companies have big ambitions. Asia represents around 30 percent of turnover for Farfetch.

While Farfetch will help NAP expand its e-concession deals with brands, the retailer will no doubt retain a wholesale business, albeit smaller than before. That’s because small brands prefer to work on a wholesale basis than on e-concession basis. The latter allows them to turn collections into cash quickly while on an e-concession basis, they only get paid once a product is sold.

The fashion and luxury industry is closely watching what Farfetch does with NAP. Industry observers wonder what will happen to British online retailer MatchesFashion. The business has been lossmaking for nearly three years now. Its controlling shareholder, the private equity firm Apax, has been losing patience and changing CEO every other year to try to reverse its fortunes without much success. Apax bought MatchesFashion in 2017 for $1 billion after a fierce bidding war against rival private equity firms. Now it is trying to figure how to sell it as no one is hurrying to buy it. Comparatively, Mytheresa is profitable and upgraded its guidance earlier this year. Since its New York flotation in January 2021, the company’s share price has lost around one third of its value. However, it is a less spectacular drop than Farfetch’s share price which went from $73 in 2021 to below $10 where it still lingering today. Mytheresa’s growth prospects remain strong and the company signed this year a series of smart partnerships with second-hand specialist Vestiaire Collective that will widen the customer base of both companies.

RETAIL ENTERTAINMENT
When Natalie Massenet founded Net-A-Porter she created a concept called “retail entertainment.” She made it fun to shop online. Customers discovered new brands and looks and loved learning about fashion’s movers and shakers and reading about fascinating personalities.

NAP helped young-up-and-coming brands get noticed and the website grew into a fashion authority. When Richemont, NAP’s main investor for many years, sold control of the company in 2015 to Italy’s Yoox, NAP embarked on a downward spiral. Massenet, who was not informed of the transaction nor consulted about it, jumped ship. Rapidly, the people she had hired who had made the company a success also walked out. The center of power moved to Italy and employees who remained at NAP became depressed after having lost their inspiring leader and her lieutenants. People often forget that what’s important is not the company you work for but the person who is going to be your boss. That is what makes all the difference. Richemont did not think about the human aspect of Yoox-NAP deal.

Yoox thought NAP’s editorial creativity was not that important. It killed Porter magazine which published portraits of inspiring and free-spirited women and helped strengthen NAP’s image and credibility as a fashion curator and barometer.

Adding to its woes, NAP adopted Yoox’s technology which turned out to be a disaster. Farfetch is going to fix the company’s technology problems but it will also need to help the website regain its editorial strength. That means it will have to spend quite a bit of money recruiting people who can bring back some of NAP’s lost magic. But who’s going to apply to work for a company that has suffered so much and where moral is low? That is one of the many issues Jose Neves will have to think about.

The same goes for Mr Porter whose editorial is also no longer what it was. Today, the website carries long articles with “words by” and no description about the author. Men don’t visit Mr Porter to read long articles but to find out about what’s new and exciting in menswear. Farfetch also knows that too, senior managers at the company say.

YOOX AND THE OUTNET
Another item on Farfetch’s long to-do list is fixing Yoox and The Outnet. The two online retailers sell out-of-season stock at heavily discounted prices. Farfetch CEO José Neves thinks that “outlet” has become a dirty word for brands as discounts harm their image.

Neves plans to rebrand Yoox and turn it into a destination for circular fashion. He wants it to become a website selling vintage and pre-owned items, a senior Farfetch executive told Miss Tweed. Yoox will become an "end-of-cycle and circular fashion” online retailer, the executive explained. Farfetch wants to relaunch the Yoox brand with a new logo, aesthetics, and ethos. It is also considering injecting in it some stock from The Outnet as well as some of Farfetch’s catalogue of pre-owned goods. It is still early days but that is the plan, the senior Farfetch executive said. But as to whether Yoox and The Outnet could eventually be merged, it’s not clear yet.

WHY A GOOD DEAL?
As part of the agreement with Richemont, Farfetch will re-platform most of the Swiss luxury group’s 20 brands from Cartier and Van Cleef & Arpels to Chloé, IWC and Vacheron Constantin. That represents another major construction site on which execution will have to be irreproachable.

Richemont’s brand will also have to agree to sell on the Farfetch marketplace. Some jewelers such as Van Cleef & Arpels are not very fond of e-commerce to begin with and are not particularly keen on selling their Alhambra sautoirs and necklaces that can cost €2,000 to €7,000 next to other brands, managers at VCA have told Miss Tweed. But the French brand does not have much of a choice. “The deal is not complete until all the maisons sign a contract with FPS (Farfetch Platform Solutions) and the marketplace agreement and commit to a launch date before the deal is completed. So right now, there are negotiations,” a person close to Farfetch told Miss Tweed.

With YNAP, Farfetch will double in size in terms of gross merchandise value (GMV). Investors and analysts estimate that it will inherit around €2.5 billion in GMV from YNAP itself and another €1 billion in turnover from Richemont’s brands selling online.

Once they do the maths, investors understand that Farfetch is actually paying very little for YNAP since it will receive in incremental business and profits an amount roughly equivalent over time to what it will pay for the company in shares once the deal closes and once it acquires the remaining controlling stake in YNAP.

Farfetch will also inherit a business with no debt, with €290 million of cash on its balance sheet and it will be able to draw on a 10-year €450 million credit facility to fund YNAP’s losses should there be any in the future. The deal is an excellent one for both Farfetch and Richemont. It aligns the interests of both companies. The priority now is ensuring a smooth transition from a technological point of view and putting back some enthusiasm into YNAP’s teams. That may take some time but José Neves is confident he can pull it off.

(ZH) 'Mild' Recession Likely To Be Worse Than Expected

'Mild' Recession Likely To Be Worse Than Expected

A recent MarketWatch article discussed JPMorgan’s Chief Operating Officer, Daniel Pinto, views about a coming mild recession.
“Pento said he’s reluctant to shed talent right away and may look to pick up bankers let go by other firms as inflation feeds talk of layoffs and recession on Wall Street.
Acknowledging that there could be a roughly 50% chance of a ‘mild recession’ ahead, Pinto said Tuesday he’s not expecting the investment banking business to come anywhere near the blockbuster results of 2021.”
However, it isn’t just JP Morgan. The global rating agency, Fitch, and Deutsche Bank recently slashed growth forecasts, predicting a “mild recession.”
“The eurozone and UK are now expected to enter recession later this year and the US will suffer a mild recession in mid-2023.” – FItch
“We forecast that the U.S. economy will enter a mild recession in H1 2023.” – Christian Nolting, Deutsche Bank
These are only a few of the analysts’ comments of late. As the Federal Reserve continues reiterating a more aggressive monetary policy stance, analysts are finally shifting from a “slow growth” to a “mild recession” view.
The problem, however, is that analysts are almost always overly optimistic. Therefore, the risk of a recession becoming “worse than expected” is a rising probability.
Such is the case given U.S. inflationary pressures and crushingly high energy prices in the Eurozone. Given the global linkages in supply chains, consumption, and production, a deeper recession in the Eurozone will add to the domestic downturn, leading to a policy mistake.
Such was a point recently by Paul La Monica via CNN Business:
“The big problem facing the Fed: The economy still seems to be running too hot for its taste. Inflation is undoubtedly a major problem, but the job market is strong, consumers are still spending at a healthy clip, and housing prices remain high despite a substantial spike in mortgage rates.
‘This data will likely encourage the Fed to continue staying in overdrive but also increases the odds that sooner or later they will make a policy mistake by tightening financial conditions too much to fight inflation,’ said Timothy Chubb, chief investment officer at Girard, in a report.
In other words, the Fed’s rate hikes could ultimately lead to the economy cooling off more than the central bank would like.”
In other words, a “mild recession” in the U.S. could be much worse.
Downgrades To Come
The problem for the Fed, and Wall Street economists and analysts, is they make assessments based on lagging economic data like employment. Yes, employment was strong last month, but as shown below, that data has a historical tendency to reverse sharply.
Furthermore, that type of data is also regularly subject to extensive negative revisions in the future. The other problem is that monetary policy has a 9-12 month lag effect. As noted previously:
“As the Fed continues to hike rates, each hike takes roughly 9-months to work its way through the economic system. Therefore, the rate hikes from March 2020 won’t show up in the economic data until December. Likewise, the Fed’s subsequent and more aggressive rate hikes won’t be fully reflected in the economic data until early to mid-2023. As the Fed hikes at subsequent meetings, those hikes will continue to compound their effect on a highly leveraged consumer with little savings through higher living costs.
Given the Fed manages monetary policy in the “rear view” mirror, more real-time economic data suggests the economy is rapidly moving from economic slowdown toward recession.”
The Economic Output Composite Index (EOCI) is a comprehensive measure of the overall economy. The EOCI index contains more than 100 leading and lagging economic data points covering the economy’s manufacturing and service sectors. Some data points included are the ISM surveys, Chicago PMI, CFNAI, Fed regional surveys, the NFIB survey, and the Leading Economic Index. Not surprisingly, the EOCI composite index has a very high correlation with economic growth, and readings below 30 indicate recessions. With the EOCI index currently below 32, the risk of a recession is rising.
As the economic data continues to weaken, we are seeing analysts slashing earlier estimates of solid growth at the beginning of the year to slow growth in the second quarter, and now a “mild recession.” To wit:
“On its own, the higher rates path and lower growth trajectory imply higher odds of a recession, although the increase in recession risk is partially offset by an improving outlook for goods inflation and recent declines in inflation expectations that lower the chances that the Fed will hike aggressively enough to cause a recession. In addition, strong household balance sheets and an improving outlook for real income limit the odds that the economy will slip into a recession in the near-term and are part of the reason why we expect that any post-covid US recession would likely be mild. Nevertheless, on net we see somewhat higher risks of a recession following our forecast changes, and are therefore raising our odds of a recession in the next 12 months to 35%.” – Goldman Sachs
The problem with Goldman Sachs’s comments is that the average American household balance sheet is anything but strong. As we showed just recently:
In other words, the coming recession will likely not be a “mild one.”
Earnings Recession To Follow
Why is this important from an investment view?
As discussed recently, the estimated earnings for the S&P 500 companies remain highly elevated. Such gives a false sense of security to investors looking at “forward valuations,” assuming stocks are fairly priced. In reality, most companies in the index remain overvalued despite the price decline in 2022.
“Despite the recent downward revisions, the current estimates still exceed the historical 6% exponential growth trend, which contained earnings growth since 1950, by one of the most significant deviations ever.The only two previous periods with similar deviations are the ‘Financial Crisis’ and the ‘Dot.com’ bubble. “
More significant about that analysis is that earnings estimates DO NOT SURVIVE recessionary drags in the economy. As shown, the composite economic index (EOCI) is already signaling that earnings will decline further as the economy slows. The deeper the recession, the deeper the earnings decline will be.
The “forward” earnings estimate annual change also suggests even a “mild recession” will push estimates substantially lower. During every previous recessionary period since the turn of the century, forward estimates declined to a negative 20% annual rate of change.
Given that the whole point of the Fed hiking rates is to slow economic growth, thereby reducing inflation, the risk of a recession remains elevated. Unfortunately, with the economy slowing, as higher interest rates and prices weigh on consumers, additional tightening could exacerbate the risk of a recession.
Therein lies the risk. Since earnings remain correlated to economic growth, earnings decline as rate hikes ensue. Such is especially the case in more aggressive campaigns. Therefore, market prices have likely not discounted earnings enough to accommodate a further decline.
In other words, “fair value” for the market could still be substantially lower.
Navigating The Recession
From our perspective, the risk of deeper recession remains elevated, particularly as the Fed aggressively hikes rates.
While there is always a possibility that the economy could avoid a “recession,” those odds are slim at best. Therefore, as investors, we should at least prepare for a storm and then cross our fingers and hope for the best. The guidelines are simplistic but ultimately effective.
  1. Raise cash levels in portfolios
  2. Reduce equity risk, particularly in high beta growth areas.
  3. Add or increase the duration in bond allocations which tend to offset risk during quantitative tightening cycles.
  4. Reduce exposure to commodities and inflation plays as economic growth slows.
If a recession occurs, the preparation will allow you to survive the impact. Protecting capital from the inherent destruction will mean less time spent getting back to even after the storm passes.
Alternatively, it is relatively straightforward to reallocate funds to equity risk if we avoid a recession or if the Fed does revert to monetary accommodation.
Investing during a recession is difficult. However, you can take some steps to ensure that increased volatility is survivable.
  • Have excess emergency savings so you are not “forced” to sell during a decline to meet obligations.
  • Extend your time horizon to 5-7 years, as buying distressed stocks can get more distressed.
  • Don’t obsessively check your portfolio.
  • Consider tax-loss harvesting (selling stocks at a loss) to offset those losses against future gains.
  • Stick to your investing discipline regardless of what happens.
While the media tries to pick the next market bottom, it is better to let the market show you. You will be late, but you will have confirmation the selling is over.
If I am correct, the recession could be worse than expected, and prices will decline further.

FT : Qatar funds RWE’s $6.8bn green energy deal in US

Qatar funds RWE’s $6.8bn green energy deal in US
German utility buys Consolidated Edison’s solar parks and wind farms in landmark transaction

RWE is doubling down on the world’s second-biggest renewables market with the acquisition of a portfolio of US solar parks and wind farms from Consolidated Edison Inc in a $6.8bn deal funded by Qatar.

RWE late on Saturday night announced that it was acquiring the green energy arm of its New York-based peer. The transaction, which is one of the biggest green deals in US history, will be funded by Qatar’s sovereign wealth fund, which is providing €2.4bn of cash and will take a 9 per cent stake in the German company in return.

The funding will be provided by a mandatory convertible bond that will turn the Qatar Investment Authority into RWE’s single largest shareholder.

Qatar already holds stakes in Volkswagen and Porsche, while the country’s royal family is the single largest investor in Germany’s largest lender, Deutsche Bank.

RWE has been the country’s best-performing blue-chip over the past 12 months, with profits buoyed by large rises in electricity prices due to Europe’s worsening energy crisis in the wake of Russia’s invasion of Ukraine. In July, it raised its profit outlook by more than third.

Over the past year, shares in RWE are up 24 per cent while the wider German market has lost 21 per cent during the same period.

Chief executive Markus Krebber said the deal was a “major boost” for RWE’s carbon-free energy business in the US, where the German group will become the fourth-largest renewables player. Krebber said that the region was “one of the most attractive and fastest-growing markets for renewable energy”.

Consolidated Edison said that it would abandon a previously planned $850mn capital increase, adding that it will continue to make “significant investments” in green energy projects in New York.

The acquisition, which will mean 500 employees switching from Consolidated Edison to RWE, almost doubles the German group’s green electricity generation capacity in the US to 7 gigawatts. RWE’s development pipeline will grow to 24 gigawatts. After the deal, solar will account for 40 per cent of the group’s US portfolio, compared with just 3 per cent at the moment.

The solar parks and wind farms acquired from Consolidated Edison currently generate $600mn in earnings before interest, tax, depreciation and amortisation. Including debt, RWE is valuing the new assets at 11 times ebitda including debt. The German group said it would continue to pay out a dividend of at least €0.90 per share as the transaction will be earnings accretive from year one.

Historically, RWE has been one of Europe’s single largest carbon dioxide emitters as it owns lignite mines and coal-fired power plants in western Germany. The Essen-based group says it wants to be carbon-neutral in under 20 years and plans to invest €50bn in green energy by 2030, with Krebber saying the company is committed to be “one of the world’s leading drivers of the global energy transition”.

Last year, RWE’s carbon dioxide emissions rose 24 per cent, according to its sustainability report. Germany is bringing old, idled coal-fired power plants back on the grid as it braces for potential energy shortages during the winter if Russian gas deliveries are halted.

TechCrunch : Telegram cuts subscription fee by more than half in India

Telegram cuts subscription fee by more than half in India

Telegram has cut the monthly subscription fee for its premium tier by more than half in India, just months after introducing the offering as it attempts to aggressively cash in on a large user base in one of its biggest markets.

In a message to users in India on Saturday, Telegram said it was making the subscription available in the country at a discount. The monthly subscription now costs customers 179 Indian rupees ($2.2), down from 469 Indian rupees ($5.74) earlier. The app’s monthly subscription, called Telegram Premium, costs between $4.99 to $6 in every other market.

Users who have not received the message are also seeing the new price in the settings section of the app, they said and TechCrunch independently verified.

India is one of the largest markets for Telegram. The instant messaging app has amassed over 120 million monthly active users in the country, according to analytics firm data.ai. (An industry executive shared the figures with TechCrunch.) That figure makes the app the second most popular in its category in the country, only second to WhatsApp, which has courted over half a billion users in the South Asian market.

Telegram, which claims to have amassed over 700 million monthly active users globally, introduced the optional subscription offering in June this year in a move it hopes will improve its finances and continuing to support a free tier. Premium customers gain access to a wide-range of additional features such as the ability to follow up to 1,000 channels, send larger files (4GB) and faster download speeds.

The Dubai-headquartered firm joins a list of global tech firms that offer their services for lower cost in India. Apple’s music app charges $1.2 for the individual monthly plan in the country, whereas Netflix’s offerings starts at as low as $1.83 in the country.