TheChek News Flow

Barron’s Weekend Summary: Legal sports gambling has now spread to 30 states and Washington, D.C.—home to more than 130 million people

* Cover Story:

-Legal sports gambling has now spread to 30 states and Washington, D.C.—home to more than 130 million. In the four years that it has been legal, both the amount of money bet on sports and the amount counted as revenue by gambling companies have risen nearly 1,000%, to $57B and $4.3B, respectively, according to the American Gaming Association, or AGA.

* Interview:

Carly Tripp oversees $144B as global chief investment officer and head of investments for Nuveen Real Estate, one of the nation’s largest real estate investment managers, which scooped up more than $10B in U.S. property last year. While many other investors were bearish on retail property as the pandemic hit, Tripp rightly spotted opportunities among the subset of retailers that correctly anticipated how shoppers might want to buy in a pandemic. Tripp talked with Barron’s from Davidson, N.C., about some of her latest contrarian ideas, including why renting may be preferred to owning a home, why office space isn’t dead, and the best types of malls, senior housing, and industrials to own.

There are good reasons to be a big fish in a small pond

British finance is having a moment of existential angst after the owner of Arm Ltd. said it was leaning toward listing the chip designer—Britain’s biggest tech company—on Nasdaq rather than the London Stock Exchange.

Weighing on the British mind: Is London, for centuries a center of global finance, becoming a backwater? It has few of the go-go technology and biotech stocks that offer growth. The total value of the FTSE 100, the local benchmark, is only fractionally more than that of Apple, and it is dominated by the businesses of the last century: banks, oil, miners, tobacco and pharmaceuticals. The index only has four tech stocks, and partly as a result it is one of the cheapest markets in the world.

Yet, SoftBank Group, 9984 -2.30% the Japanese owner of Arm, should reconsider. Sure, Nasdaq is the go-to global market for tech. But that is exactly why London should be appealing, as local investors starved of growth stocks lavish it with attention it is unlikely to receive on the other side of the pond. There are solid reasons to think London would provide at least as good a valuation as New York, and it might well get a scarcity premium.

Why London?

London’s tech sector may be small but it has a higher valuation, on price to 12-month forward earnings, than the U.S., Europe or Japan, according to MSCI’s definitions, which differ from FTSE’s. Still, MSCI includes just three U.K. tech stocks (accountancy software firm Sage, industrial software group Aveva and safety, health and environment group Halma ), so look to Arm’s own history.

Before SoftBank bought it in 2016, Arm—then with its primary listing in London—traded at a significant valuation premium to U.S. chip makers and was among the most expensive on both forward PE and on enterprise value to earnings before interest, taxes, depreciation and amortization. No one seemed to have trouble paying a premium for Arm back then.

London’s naysayers will point to two high-profile local flotations that flopped: food-to-the-door group Deliveroo and online retailer THG PLC. Investors soured on THG after the founder and CEO blamed short sellers for poor stock performance, and worsened when he told GQ magazine that listing in the U.K. “sucked from start to finish” and he should have IPO’ed in the U.S. to avoid attention.

Deliveroo plunged by a quarter on its first day of trading last March, and is now down more than 60% from the listing price. But its float coincided with pandemic winners falling out of favor as Covid-19 retreated, not only in the U.K. but in much of the world. By the end of November, Deliveroo shareholders would be unhappy, but the stock had lost exactly as much (adjusted for currency) as operators of rival food delivery services, Netherlands-listed Just Eat Takeaway and the U.S.’s Uber Technologies. Deliveroo stock has fallen faster in the past couple of months, but there is no reason to blame that on its miserable listing experience.

What if Deliveroo had chosen Nasdaq, instead of London? It’s impossible to be sure, but British companies Cazoo Group and Arrival are useful comparisons. Cazoo, an online car retailer, announced a deal to list in the U.S. via a special-purpose acquisition company, or SPAC, two days before Deliveroo shares started trading. Since then the stock has fallen very nearly as much as Deliveroo—and the same applies since Aug. 27, when the SPAC deal was completed.

Electric-bus maker Arrival completed its SPAC deal on Nasdaq a few days before Deliveroo’s float, and instantly tumbled 17%, before recovering—but is now down even more than Deliveroo.

Investors everywhere are less interested in fast-growing but loss-making companies and more worried about the outlook for the gig economy, and that applies to those few flying the Union Jack, too.

Arm would surely be treated differently from stocks such as Deliveroo, as it has a long-established business at the cutting edge of microchip design and is far bigger. At the $40 billion Nvidia was prepared to pay in late 2020, it would rank 21st in the London market, making it bigger than major U.K. market names such as aerospace and defense group BAE Systems and credit agency Experian. Arm would also be the biggest tech stock. It ought to qualify for the British and European indexes, too, attracting passive funds.

List in the U.S. and Arm would be just one among many. At $40 billion, it would rank only as the 14th-largest semiconductor stock, and 80th in the Nasdaq. As a British company with global sales, it probably wouldn’t qualify for the S&P 500, which brings large amounts of passive money, although it should be in the Nasdaq-100 and so the popular QQQ ETF.

There are three reasons other than pure valuation why SoftBank might prefer Nasdaq. The first is money: Being a big fish in a small pond helps get attention, but means it’s hard to sell a lot of stock quickly. SoftBank has historically tended to hold on to much of its stake after IPOing a company, but might want to sell down its Arm holding fast to get cash.

The second reason is that British investors are persnickety about corporate governance, never SoftBank’s strong suit. London’s listing rules have been relaxed to allow some practices, such as dual share classes, common in U.S. tech. But many British institutional investors continue to object to the lower standards here and in other areas, such as separating chairman and chief executive, which American shareholders often let slide.

The third is the local expertise. It’s good for a company to have a deep pool of nearby specialists, not least to reduce market misunderstanding, and the U.S. has a plethora of analysts and investors focused on tech, unlike London. But there are enough; Europe’s other semiconductor stocks don’t seem to have a problem getting their message across.

Whether SoftBank picks London or New York, it has serious work to do to get it ready by March 2023, as it hopes: Arm’s latest accounts weren’t passed cleanly by its auditor because of legal problems at its Chinese joint venture, a major black mark against an IPO on both sides of the Atlantic.

If Arm’s new (American, California-based!) CEO does eventually go with Nasdaq, at the very least he’s going to need to have a decent justification to make his case to British politicians anxiously watching London’s financial rankings.

Stan Kroenke’s $5 billion SoFi Stadium is the site of this year’s Super Bowl. It also sparked a civil war among NFL owners.

INGLEWOOD, Calif.—When National Football League owners approved the Rams’ move from St. Louis to Los Angeles in 2016, it marked a triumphant return for America’s most popular sport to America’s second most populous city. Rams owner Stan Kroenke went on to build the stadium that will host Sunday’s Super Bowl, a $5 billion palace that was constructed to be the crown jewel of the NFL’s future.

It also marked the beginning of a civil war inside the NFL, pitting Kroenke against the other billionaires who run the league.

The fallout from the team’s relocation, and the subsequent litigation, remains the subject of acrimony among owners—who believe Kroenke has tried to renege on his agreements with them, people familiar with the matter said.

The stadium that Kroenke built here, SoFi Stadium, is the crowning achievement in the career of a notoriously private real estate tycoon, who married into the Walmart fortune and eventually became one of the most controversial sports owners in the world.

Frustration with Kroenke might be the one thing that unifies fans across his sporting empire, including jilted Rams supporters in St. Louis and Arsenal die-hards in the English Premier League. His family also own the NBA’s Denver Nuggets, the NHL’s Colorado Avalanche, and the Colorado Rapids of Major League Soccer. Together, they add up to an unrivaled collection of sports assets.

Kroenke, through a spokeswoman, declined to be interviewed for this article.

Few episodes have been more dramatic than the Rams’ exit from St. Louis, which like other team moves came with the threat of potential litigation. Before ownership approved the relocation, one of the deciding factors was Kroenke’s agreement to indemnify his cohorts from potential costs.

That agreement proved to be relevant. St. Louis, St. Louis County and the St. Louis Regional Convention and Sports Complex Authority sued the NFL and its 32 teams in 2017 over the Rams’ departure, alleging they violated the league’s own relocation rules when the team bolted to Los Angeles.

As the league suffered repeated legal setbacks in the case, the situation grew contentious. Bills mounted for the league and teams. Some owners were fined by the court for refusing to turn over financial records. And as the threat of a January 2022 trial loomed—just weeks before his new stadium was set to host the Super Bowl—the league and other owners wound up in a dispute with Kroenke.

Tensions erupted when owners learned, at a meeting in October, that Kroenke held a different view of the indemnification agreement and thought that the rest of ownership would have to share in the cost of the case, the people said. Kroenke believed the matter simply had to do with the way the agreement was written and which costs he had agreed to cover, one of the people said. Others saw it as an attempt by him to dump the growing bill on his colleagues.

Then, in November, Kroenke’s representatives sent a letter to the other owners and league officials claiming he could settle his part of the litigation individually for between $500 million and $750 million, while the league and the 31 other teams would still be on the hook.

Owners were outraged because it would leave them still fighting over a matter they believed was Kroenke’s responsibility. They also believed it was a strategic error that cost them hundreds of millions, people familiar with the matter said, because when the content of the letter became public, they thought it raised the cost of a future settlement for all of them.

Sure enough, the next week, all of the parties agreed to settle the case with the St. Louis authorities. The price tag: $790 million, or just above the number floated in the letter.

That didn’t settle the internal discord, however. The sides remain at odds over Kroenke’s share of the bill, the people said. Fewer owners are expected to attend this year’s Super Bowl because of the lingering distaste over this issue, one of the people said.

“It is the most contentious dispute in more than a decade,” a person familiar with the matter said.

Kroenke isn’t much more popular across the Atlantic, where he criticized as the aloof, largely absent owner of Arsenal since he took a controlling stake in the club in 2011.

For most of his tenure, the main group of people at his throat were Arsenal fans. They viewed him as too slow to replace the club’s long-term manager Arsène Wenger after years of underachievement. Then, once Kroenke made the change in 2018, they accused him of botching the succession. Arsenal hasn’t qualified for the Champions League, the tournament reserved for European soccer’s elite, since the 2016-17 season.

Then last year, Kroenke also managed to lose allies among a majority of Premier League club owners. They resented him for participating in the failed effort by 12 European clubs to create a Super League—a controversial money-spinning project that would have taken the rebel teams out of the Champions League and created something closer to an NFL of soccer.

Arsenal was one of the Premier League’s six clubs to sign up for the promise of more guaranteed income, regardless of on-field performance. The 14 uninvited teams viewed it as a reckless, greedy move that threatened the very integrity of their league. The whole project fell apart in 48 hours.

Kroenke had been “interested from an early stage,” according to one Super League insider, and fell in line with the league’s other American owners who were truly driving the project—including Joel Glazer, of Manchester United and the Tampa Bay Buccaneers, and John W. Henry, of Liverpool and the Boston Red Sox.

Only after the Super League collapsed, amid furious uproar from the fans, did Kroenke or his family say anything about it in public.

“It was never our intention to cause such distress,” he said in a message signed by the Arsenal board rather than Kroenke personally. “However, when the invitation to join the Super League came, while knowing there were no guarantees, we didn’t want to be left behind to ensure we protected Arsenal and its future.”

The Super League fiasco was one reason why Arsenal supporters found themselves again calling for Kroenke’s ouster. In their campaign, which featured regular protests inside and outside the stadium, they found an unlikely ally. He was a lifelong Arsenal fan from Sweden who had made a little money with a venture called Spotify. Not only did Daniel Ek, the company’s co-founder and CEO, despise the Kroenke ownership—he proposed to end it by bidding around $2.4 billion for the club.

Kroenke wasn’t interested in selling.

U.S. and Europe are learning to live with the virus, but Beijing’s zero-Covid strategy could hit supply chains

The direct economic harm caused by the Omicron variant of Covid-19 in highly vaccinated countries appears so far to be relatively modest and short-lived, but its indirect hit could prove significant if China resorts to repeated lockdowns in its effort to suppress the virus within its borders.

Omicron led to a fresh surge in infections wherever it gained a foothold, a rise in deaths, and disruptions for businesses as infected workers sought medical treatment or quarantined.

China is the world’s leading supplier of the parts other manufacturers use to make the products households buy, which are known by economists as intermediate goods. Should it have to lock down significant parts of its economy, the impact would likely be felt in lower growth and higher inflation in Western economies.

“Lockdown risks therefore continue to rise in China, even as they decline elsewhere,” said Frédérique Carrier, head of investment strategy at RBC Wealth Management. “Increased pandemic restrictions could lead to additional supply-chain disruptions, hold back the normalization of the global economy, and fuel global inflation, while capping Chinese economic growth.”

The International Monetary Fund’s economists estimate that supply-chain problems knocked between one half and one full percentage point off global economic growth in 2021, while pushing inflation higher. In other words, the global economy would have grown by as much as 6.9% last year, compared with the 5.9% expansion it actually recorded, if there had been no supply problems.

There are some signs that supply-chain problems are easing. A new supply- blockages measure developed by economists at the Federal Reserve Bank of New York showed a record level of strain in November, but a decline in December and January, which they said “seems to suggest that global supply chain pressures, while still historically high, have peaked and might start to moderate somewhat going forward.”

A prolonged series of new lockdowns in China, however, could reverse that progress and be a significant drag on growth this year.

“China’s zero-Covid strategy could exacerbate global supply disruptions,” said Gita Gopinath, the IMF’s first deputy managing director.

According to the World Trade Organization, Chinese businesses sold $354 billion of intermediate goods to overseas buyers in the three months through June 2021, way more than the next largest exporter, which was the U.S. with $200 billion. The U.S. is the largest market for Chinese exports of intermediate goods, but South Korea, Japan, Germany and India also account for a significant share.

China would likely face a surge in deaths if it were to abandon the zero-Covid strategy now. About 86% of China’s population has been fully vaccinated, but the vaccines most widely used, developed by Sinopharm and Sinovac, use inactivated virus. Those are widely believed to be less effective against Omicron infections than the mRNA vaccines developed by Moderna Inc. and by Pfizer Inc. with BioNTech SE.

China is accelerating its efforts to produce domestic mRNA vaccines and medicines for Covid-19, said an official familiar with the matter. If it were to be successful, the need for lockdowns would become less pressing. But few expect a shift away from zero-Covid to happen soon.

“We really depend on China succeeding in this transition,” said Jörg Wuttke, president of the European Union Chamber of Commerce in China and chief representative of German chemical company BASF SE in the country. “But frankly, it doesn’t look good.”

Assessing the scale of the threat to global supply chains is difficult, given uncertainties about how rapidly Omicron can spread in an environment where restrictions are as tight as they are in China.

Two factors could lessen the impact of a more-rapid spread than has so far occurred. First, economists see the willingness to live with the virus in the U.S. and Europe as opening the way for a greater shift back to spending on services and away from spending on goods this year. That would ease some of the demand pressures on supply chains.

It is also possible that Chinese authorities could manage the zero-Covid policy to support exports, given the drag on growth from problems in the country’s property market and weak consumer spending at home.

“We believe the government will make efforts to minimize the supply disruptions, including some loosening/improvement in the zero-Covid policy implementation,” economists at Barclays Bank wrote in a note to clients.

Epidemiologists had feared restrictions could lead to the world becoming more susceptible to a severe outbreak

The peak of the influenza season may have been artificially suppressed through measures to curb the pandemic, raising the possibility of a rare spring or summer surge later in the year, health experts have warned.

The 2020-21 flu season was exceptionally mild in most of the world as the curtailment of social mixing amid coronavirus curbs largely eliminated cases.

Epidemiologists and doctors have long feared that last year’s hiatus may have led to a loss of immunity that could render the world susceptible to a severe outbreak. Up to 650,000 people die each year from respiratory diseases linked to seasonal flu, according to the World Health Organization.

Pasi Penttinen, principal expert for coronavirus and influenza at the European Centre for Disease Prevention and Control, said it was possible that, as a side benefit of restrictions such as face masks and travel curbs put in place to slow the Omicron wave, the influenza peak had already passed. However, he warned that the risk this year was that the flu would linger for longer than normal.

“It’s a very rare occurrence but . . . in this situation, where you haven’t had circulation for two years and you have a very different pattern of human behaviour due to the public health measures, it’s a real possibility in my view,” he added.

He pointed to the H1N1 pandemic in 2009 as an example of a wave that had started during the summer, outside the normal flu season.

In the US, Alicia Budd, an epidemiologist in the domestic influenza surveillance team at the Centers for Disease Control and Prevention, agreed that a later peak was possible, pointing to events unfolding in the southern hemisphere, which sometimes acts as an early indicator of what will transpire several months later in the northern hemisphere. South American countries including Brazil, Chile, Paraguay and Uruguay were all currently experiencing rises in flu infections outside their normal seasons, she said.

But the threat of a so-called twin-demic — a simultaneous outbreak of flu and Covid-19 — in the northern hemisphere this winter is receding, providing relief for health systems battling the hyper-transmittable Omicron wave and the backlog of treatment created by its more virulent predecessor Delta.

So far, there is little sign of a surge in cases, with detected cases and positivity rates now falling even from the relatively low levels seen at the end of last year.

Penttinen said that there was still “a lot of uncertainty and unclarity about the data”, citing pandemic-related changes in information flows that could be reducing the number of infections reported in some areas.

The flu vaccine, reformulated each year and heavily promoted through public health campaigns in some countries, offers a line of defence. Penttinen warned, however, that the vaccine this year was “likely to be suboptimal” against the currently dominant H3N2 strain.

This, he said, was “the subtype which we are actually most concerned about because it causes the most severe outcomes in the elderly”. In the past such outbreaks in Europe have led to several countries reporting “that their healthcare systems couldn’t cope with it. You have major nursing home outbreaks,” he added.

Even during normal seasons, Penttinen said, estimates had to be made six to 12 months in advance about which viruses would be in circulation when calculating the formulation. “But this year it probably was the most difficult decision that there has been in the history of influenza vaccines because it’s such an unusual situation with such limited circulation of the virus,” he added. However, protection against severe disease would be higher, he emphasised, demonstrating the vital importance of immunisation.

Budd cautioned that while flu hospitalisation rates in mid-January were “lower than they were during any of the four seasons immediately preceding the pandemic”, flu seasons sometimes unfolded at different rates and it was too soon to definitively declare 2021-22 a mild year.

However, John McCauley, director of the World Influenza Centre at London’s Francis Crick Institute, said, while not impossible, he would be surprised to see a significant number of cases in the northern hemisphere in the late spring and summer.

“It would be pretty unusual to see anything coming up much later than two or three weeks time,” he said. “Once you get towards the end of March, it’s usually all over.”

Calls for audits of private funds and more transparency around fees and performance metrics are overdue

Perhaps the most devastating political legacy of the 2008 financial crisis was the sense among a large swath of the American population that the system was rigged. Homeowners and taxpayers took the fall, while big banks got bailed out and “nobody went to jail”, as financial reform activists still frequently point out.

The US Federal Reserve’s well-intentioned but necessarily inadequate (when not combined with smart fiscal policy) programme of quantitative easing raised wages a bit, but boosted asset prices significantly. The rich got richer, and inequality grew. And while the formal banking system was mostly brought to heel, money — like risk — moved into the shadows.

Those less regulated areas of finance, like private equity, hedge funds and venture capital, have exploded to a value of $18tn, with more capital being raised in private markets over the past decade than in public ones.

So, last week’s announcement by the Securities and Exchange Commission of more regulation for private markets — including audits of private funds, more transparency around fees and performance metrics, prohibitions on preferential terms for different investors, and so forth — was welcome and much needed. It is a sign that progress has been made. Regulators such as SEC chair Gary Gensler, who deserves praise for the energy with which he’s pursuing not only private market regulation but cryptocurrencies and cyber security risk, too, are trying to get ahead of the next crisis before it happens.

Yet the rise of these markets, which now represent a significant chunk of the investments of retirement plans, state pensions and non-profit and university endowments in the US, also illustrates the ways in which policymakers and politicians have failed since the crisis to put finance back in the service of the real economy. Wall Street is not primarily a helpmeet to Main Street, as it once was. It’s the tail that wags the dog.

No sector illustrates this more than private equity, which has got rich over the past several years, in part, by exploiting devastation left behind by the subprime crisis. Large companies were able to scoop up properties at rock-bottom prices, outbidding not only individuals but even other large and more heavily regulated institutional players in the housing market, including big banks.

The story of private equity making eye-watering profits buying foreclosed properties is now well known. But it continues to generate outrage, as evidenced by last week’s Senate Committee on Banking, Housing and Urban Affairs session, which examined how large institutional landlords have changed the housing market. “Investors are raising rents 50 per cent, issuing eviction notices and leaving toxic mould and pest infestations to grow worse, all in the name of their own bottom lines,” said committee chair Sherrod Brown.

I’ve seen many such properties with my own eyes, and, to be fair, I’ve seen some well cared for PE-owned rental homes, too (though they tend to be in richer areas where tenants can pay more). But the fact that a multinational PE firm can become the country’s biggest landlord is something that simply doesn’t sit well with a lot of Americans. It illustrates all too starkly how the financial markets seem to exist in a closed loop of service to themselves.

As Eileen Appelbaum, co-director of the Center for Economic and Policy Research, put it in her influential book with Rosemary Batt, Private Equity at Work, the rise of private equity represents “a fundamental shift in the concept of the American corporation — from a view of it as a productive enterprise and stable institution serving the needs of a broad spectrum of stakeholders, to a view of it as a bundle of assets to be bought and sold with an exclusive goal of maximising shareholder value.”

Why would public pension funds (which now represent 35 per cent of PE capital) invest in a way that could cause harm to their own retirees by pushing up rents? In part because they are desperate to keep returns as high as they’ve promised in an era in which that will become harder.

This may or may not be a smart move. Despite some recent strong performance, academic research shows historic returns often don’t outperform the wider market or even match it after huge carry fees are taken. Either way, principal-agent issues make it unlikely that a pension fund manager in charge of picking investments is going to raise a hand to say what most of us intuitively know, which is that we’re best off sticking our money in an index fund and forgetting about it.

I suspect that there will be an increasing political focus on how, almost 15 years on from the start of the subprime crisis, the relationship between finance and the real economy has yet to be rebalanced. Over the past few years, private funds have moved from housing into education and healthcare (it’s worth noting that aside from recent Covid-related economic disruptions, those areas are two of the most significant drivers of long-term inflation). Already, there are stories of how private investors looking for higher returns have raised costs and reduced the quality of care.

I’m not optimistic about how those stories will end. The light the SEC has shone on financial darkness is a bright spot in an otherwise troubling tale.