Hedge fund short-sellers take aim at green energy stocks
Huge investor inflows have sent shares in sustainable groups surging in recent years
Hedge funds have been cranking up their bets against sustainable energy stocks, wagering that as interest rates rise, investors will be less forgiving of companies with strong environmental credentials but weak earnings.
Shares in sustainable stocks have drawn in billions of dollars of inflows from ethically minded investors in recent years, lifting the valuations of some stocks to eye-watering levels.
Already, some of those stocks have begun to fall back as the US Federal Reserve prepares to start withdrawing its pandemic-era support — a process that is pulling down many high-growth assets, especially in the tech sector. But doubters say green stocks have much further to fall.
“In a bear market, a company doesn’t trade at 60 times earnings just because it does something morally good,” said Barry Norris, chief investment officer at Argonaut Capital. “People will be a bit more hard-nosed about it.”
Norris is shorting a number of wind power stocks and has recently increased his bet against Danish wind turbine maker Vestas Wind Systems. In November the company warned of an “increasingly challenging global business environment for renewables”, citing global supply chain problems and higher costs.
The company’s shares soared from DKr130 at the start of 2020 to peak briefly above DKr300 a year ago, although they have fallen back to about DKr170. However, Norris believes Vestas, whose margins are contracting, is now “the most expensive it has ever been”.
Shares in green companies are not the only ones trading with elevated valuations. Tesla, the electric car maker, is priced at a forward price to earnings rate of 92 times, while Nvidia, another popular stock in recent years, is priced at 43 times.
Germany’s Nordex has also been targeted by short-sellers, with bets against the wind turbine manufacturer soaring from 0.79 per cent of the company’s shares a year ago to more than 7 per cent, according to data group Breakout Point. That makes it one of Europe’s most shorted stocks based on disclosed short positions.
Among hedge funds betting against it are $52bn-in-assets Millennium Management, AKO Capital and Gladstone Capital.
It is a risky strategy. Government-supported efforts to shift the global energy reliance away from fossil fuels point to heavy demand for companies in the sector. One executive told the Financial Times their fund “won’t touch” bets against such stocks, because of the increasingly favourable regulations and weight of money pouring into the sector.
But hedge funds in the US and UK have been buying the lowly valued shares of oil and gas companies discarded by investors focused on environmental, social and governance (ESG) factors.
Betting against companies whose stories of helping the environment are stronger than their earnings, or against those that have exaggerated their ethical credentials, has also become increasingly attractive.
The prospect of four rises in US interest rates this year is also now providing a challenge for lossmaking green stocks. Higher interest rates mean higher borrowing costs for companies and a lower value ascribed to future cash flows.
Funds have targeted hydrogen stocks, with disclosed bets against Norwegian hydrogen technology group Nel, which reported a loss of NKr1.4bn ($156m) in the first nine months of last year, jumping from 1.8 per cent a year ago to 7.8 per cent, according to Breakout Point. Helikon Investments, Crispin Odey’s Odey Asset Management and WorldQuant have short positions against Nel, whose shares have risen from NKr5 three years ago to more than NKr35 a year ago but have since dropped to about NKr11.
“There is no obvious valuation support with Nel,” said James Hanbury, a partner who manages about $1.3bn in assets at Odey, in a note to investors seen by the FT.
The company is “lossmaking, cash consumptive, they continue to fail to win material contracts or partnerships, their medium-term capex needs are not fully funded and, on top of this, the [Odey] team perceive the business to be a commoditised technology offering”, he said.
He added that while hydrogen would play “a big role” in the transition to cleaner energy, there will “inevitably be many companies in the space that will not succeed economically”. Odey declined to comment.
A spokesman for Nel said the company is “the technology and market share leader in an industry that is at the beginning of significant growth and industrialisation”, adding that its investment was “backed by a robust financial position”.
Hedge funds have also increased their bets against France’s McPhy Energy from 0.5 per cent a year ago to 5.5 per cent and against Norwegian plastic recycling technology company Quantafuel from zero a year ago to 4.3 per cent.
“We think the end game this year will be to short the Ark-type of stocks in solar [and] hydrogen,” said Renaud Saleur, a former trader at Soros Fund Management who now heads Anaconda Invest, referring to more speculative groups. He is short hydrogen groups ITM Power and McPhy and solar technology company Enphase Energy.
Some managers have even risked bets against electric vehicle stocks, which has proved to be one of the most volatile corners of the market.
Argonaut’s Norris has put on a short position against Tesla in recent days, and is also betting against Rivian. He said the company, whose investors include Amazon and Daniel Loeb’s Third Point, is on a “ridiculous valuation” and lacks first-mover advantage in the sector, while he also highlighted Amazon’s recent decision to order electric vans from a rival.
“My view is that we’re going into a bear market and we’re past the point of peak speculation,” he said. “This is exactly the sort of stock you don’t want to own.”
Switzerland’s crypto valley looks past cold market winds
Zug finds itself on the front line of global finance dealing with digital assets
Tiny Zug was once an innocent sort of place, known for its baking nuns, half-timbered houses and a kirsch-soaked torte favoured by Audrey Hepburn.
Then it became a low-tax paradise and a magnet for corporate letterboxes: home to Glencore and other, even less cuddly behemoths. And now, in the unassuming business parks and low-rise office blocks that gently sprawl from the small old town centre, it has become Europe’s cryptocurrency kingdom.
Or, as the clever marketeers of Zug like to call it: “Crypto Valley”. In a recent report, one local investor, CV VC, wrote that there were now 960 crypto start-ups in Switzerland, employing more than 5,000 people. Nearly half of the start-ups — 433 — are based in Zug.
None of this is hard to miss these days: visitors to the country might conclude, based on advertising footage, that distributed ledger technology was third only to chocolate and luxury watches in Swiss contributions to the world. The fintech bro has almost become a more common fixture in the vastly overpriced bars of Zurich than the Paradeplatz banking pro.
But there is a cold wind blowing through crypto valley, as there is across the blockchain world. UBS this week warned of a looming “crypto winter” as the Federal Reserve raises rates. Bitcoin’s price collapse in recent days is the first sign that the party is over, the bank’s analysts believe.
And so quiet Zug finds itself on the front line of global finance. Switzerland, at least, seems to think crypto is here for the long term. While other governments seek to rein in crypto businesses, the country has been keen to promote them in recent months. In February 2021, Bern introduced a new “blockchain law” to codify how digital assets should be treated by the courts when it comes to the peculiar aspects of things such as proof of ownership and custody.
The market regulator, Finma, has meanwhile been extremely proactive in trying to engage with and understand the new crypto world. It has even licensed two crypto banks in the country: Seba and Sygnum. Switzerland, Finma’s position indicates, intends to have a first-mover advantage when it comes to crypto fintech.
The big figures in the industry — hardly a surprise — see a prosperous Swiss future for crypto too. On a recent visit to Sygnum’s offices, chief executive Mathias Imbach told me that the volatility and exuberance many sober investors have associated with crypto is just froth but beneath it are some serious propositions and investment opportunities.
Underpinning the Swiss interest in crypto and the crypto world’s enthusiasm for Switzerland, of course, are some shared values: a belief in the power of technology for example, and more importantly, a libertarian bent that favours political and institutional freedom.
But there is an elephant in the room here, perhaps an even bigger one than the vertiginous sell-off in cryptocurrencies in recent months. And this, it would seem, Switzerland still does not have a long-term answer for, regardless of where crypto prices are in a year’s time or how institutionalised the industry has become.
Crypto technologies and businesses are increasingly at the centre of global illicit financial flows and criminal enterprise. Western intelligence agencies, an old source from a previous reporting gig told me recently, are very worried about the ways in which crypto technology is enabling illicit financial and political activities.
Meeting with a crypto asset manager in Zug on a freezing morning a few weeks ago, over coffee in his office, I got a disarmingly frank assessment of the problem in Switzerland: for sure, there are a number of unscrupulous outfits in crypto valley, he said. And perhaps worse, there are an even larger number of very naive entrepreneurs keen for cash and clients, who consider themselves unbound by the rules governing mainstream finance.
Crypto asset management, the asset manager added, has become the go-to home for many compliance-averse financial advisers who were booted from Switzerland’s scandal-prone private banks in recent years. And many of crypto valley’s clients, it seems, are politically exposed persons that have been “off boarded” from banks’ books amid reputational fears over white-collar crime.
In Zug, therefore, it seems that — regardless of the prevailing market weather, winter or summer — crypto’s bright future risks being a repeat of Switzerland’s murky financial past.
JPMorgan to start converting $9bn in mutual funds to ETFs in April
The four funds bled a combined $2bn during the 12 months ended November 30
JPMorgan will in April begin converting $9.1bn in mutual funds to ETFs, the company has disclosed.
The $1.3bn Inflation Managed Bond Fund is expected to convert on April 8 into the Inflation Managed Bond ETF, filings show. The $1.2bn Market Expansion Enhanced Index Fund will switch over on May 6 into the Market Expansion Enhanced Equity ETF, and the $1.8bn Realty Income Fund will convert on May 20 into the Realty Income ETF. The $4.8bn International Research Enhanced Equity Fund will become the International Research Enhanced Equity ETF in June.
The funds’ boards approved the conversions on January 13, the filings show. The four funds have closed to new investors and ended charges for subscriptions and redemptions, both of which were previously disclosed.
JPMorgan has also begun waiving 12b-1 distribution fees — charges levied on mutual funds for marketing and distribution — on each of the four funds, the filings show.
JPMorgan could have begun waiving its 12b-1 fees as early as August, when it announced that the group would convert the four mutual funds to ETFs, but it is unclear if it was required to do so, Andrew Davalla, a partner at Thompson Hine, told Ignites.
It is also unclear whether JPMorgan is permitted to use the distribution fees of a mutual fund to market or advertise for the ETF to which it will convert, he added. ETFs do not charge 12b-1 fees.
JPMorgan declined to comment on why the company approved the 12b-1- fee waivers this month.
More than 60 per cent of each of the four converting mutual funds have assets owned by affiliated JPMorgan mutual funds and target-date retirement funds, filings show. The vast majority of those affiliated fund assets are in institutional-grade share classes and therefore do not charge 12b-1 fees, filings show.
The four funds bled a combined $2bn during the 12 months ended November 30, according to data from Morningstar Direct.
Closing Stock Market SummaryThe S&P 500 fell 1.2% on Tuesday in another volatile session. The benchmark index was down as much as 2.8% in the morning, then briefly peaked above its flat line in the afternoon. Growth stocks paced today's decline and accounted for the underperformance of the Nasdaq Composite (-2.3%).
The Dow Jones Industrial Average (-0.2%) was unable to hold onto a late gain and closed slightly lower. The Russell 2000 fell 1.5%.
From a sector perspective, the information technology (-2.3%), communication services (-2.2%), and consumer discretionary (-1.8%) sectors underperformed with steep losses. Conversely, the energy (+4.0%) and financials (+0.5%) sectors were only sectors that closed higher amid higher oil prices ($85.37, +2.06, +2.5%) and Treasury yields. For emphasis, the energy sector rose 4%.
The early weakness was symptomatic of the recent tendency to sell into any indication of strength (yesterday's specifically), which raised concerns about Monday's comeback being a potential head fake.
Encouragingly, the major indices traded well above yesterday's lows, which was good for overall sentiment and may have signaled an underlying hope that Fed Chair Powell could sound less hawkish than feared following the FOMC's policy statement tomorrow.
As for the intraday rebound, there wasn't any specific news to account for the price action, although better-than-expected earnings reports did appear to be an influential driver in the Dow's relative outperformance despite an initially mixed response.
Dow components Johnson & Johnson (JNJ 167.63, +4.66, +2.9%), American Express (AXP 172.96, +14.03, +8.8%), IBM (IBM 136.10, +7.28, +5.7%), 3M (MMM 173.73, +0.93, +0.5%), and Verizon (VZ 52.90, -0.06, -0.1%) each topped EPS estimates, and VZ was the only one that didn't close higher. AXP stood out with a 9% gain, followed by IBM's 6% gain.
General Electric (GE 91.11, -5.80, -6.0%) disappointed shareholders with a revenue miss and downside FY22 EPS guidance, while Microsoft (MSFT 288.49, -7.88, -2.7%) investors leaned cautiously in front of its earnings report after the close.
Microsoft, like other growth stocks, also had to contend with upwards pressure in interest rates. The 10-yr Treasury note yield rose five basis points to 1.78% while the 2-yr yield rose five basis points to 1.02%. The U.S. Dollar Index increased 0.1% to 95.98.
Separately, NVIDIA (NVDA 223.24, -10.48) fell 4.5% amid a Bloomberg report indicating that the company is planning to scrap its $40 billion acquisition of Arm Holdings due to ongoing regulatory issues. The FTC said it's going to sue to block Lockheed Martin's (LMT 387.18, +13.85, +3.7%) $4.4 billion acquisition of Aerojet Rocketdyne (AJRD 36.65, -8.35, -18.6%).
Reviewing Tuesday's economic data:
- The Conference Board's Consumer Confidence Index dropped to 113.8 (Briefing.com consensus 112.0) from a downwardly revised 115.2 (prior 115.8) in December. The dip came after three consecutive monthly increases but is still well above the 87.1 reading registered in the same period a year ago.
- The key takeaway from the report is the moderation in the outlook, which points to some potential weakening economic activity in the short term.
- The November FHFA Housing Price Index increased 1.1% m/m following a 1.1% increase in October, and the November S&P Case-Shiller Home Price Index increased 18.3% yr/yr following a revised 18.5% increase (from 18.4%) in October.
Looking ahead, investors will receive New Home Sales for December; Advance Intl. Trade in Goods, Retail Inventories, and Wholesale Inventories for December; and the weekly MBA Mortgage Applications Index on Wednesday. Of course, the FOMC Rate Decision will follow the data in the afternoon.
- Dow Jones Industrial Average -5.6% YTD
- S&P 500 -8.6% YTD
- Russell 2000 -10.8% YTD
- Nasdaq Composite -13.5% YTD
After Hours Summary: MSFT rebounds during earnings call, now up 3%; TXN +3.7% also higher on earnings; FFIV -13.6%, NAVI -9.3% lower on earningsAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: LRN +6.6%, TXN +3.7%, MRTN +3.5%, MSFT +2.7%, AGYS +1.5%, HA +0.2%
Companies trading higher in after hours in reaction to news: ET +3.3% (increases dividend), PROG +1.3% (announces new patent), SONY +0.6% (ATVI will release next 3 games of Call of Duty on Sony PlayStation, according to Bloomberg), ATVI +0.4% (ATVI will release next 3 games of Call of Duty on Sony PlayStation, according to Bloomberg), SB +0.3% (to acquire vessel), F +0.3% (CEO to meet with President Biden to discuss Build Back Better, according to CBS News), GM +0.2% (CEO to meet with President Biden to discuss Build Back Better, according to CBS News), DASH +0.1% (names Netflix exec to its board)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: FFIV -13.6%, NAVI -9.3%, CNI -5.1% (also names new CEO; also approves new C$5 bln normal course issuer bid; increases dividend by 19%; announces resolution agreement with TCI), COF -3.7%, UMBF -3.4%, QCRH -1.1%, FCF -0.1%, RNR -0.1%
Companies trading lower in after hours in reaction to news: EFTR -4.1% (stock offering), MRUS -3.3% (MRUS regains worldwide rights to MCLA-145 from INCY), SRRA -2.8% (stock offering), GSL -2.1% (provides update on recent chartering and refinancing activity), EGHT -1.6% (stock offering), INCY -0.9% (withdraws NDA for parsaclisib; confirms opt-out of development of MCLA-145)
SAT to Go Digital
New college entrance exam to roll out in U.S. in 2024; test will be one hour shorter
Put away your No. 2 pencils: The new SAT is digital and will be a shorter, simpler and perhaps easier test.
The shift will begin internationally in March 2023 and in the U.S. in March 2024, said Priscilla Rodriguez, vice president of college readiness assessments at the College Board, the nonprofit that runs the exam. The PSAT will also go digital.
“The digital SAT will be easier to take, easier to give and more relevant,” Ms. Rodriguez said.
The new test will take about two hours, down from three. Reading passages will be shorter and will be followed by a single question, and math problems will be less wordy, Ms. Rodriguez said. Calculators will be allowed for all math questions, and scores will be returned in days instead of weeks. The test will be administered only at schools or testing sites.
The SAT has lost market share to its rival, the ACT, and colleges and universities are moving away from requiring the tests as part of the application process. Schools cite concerns that the test scores are often closely tied to a student’s race and wealth, and hurt the admissions odds of low-income students and those from communities of color.
This year, more than 76% of all four-year colleges and universities won’t mandate an entrance exam score for admissions, according to FairTest, a nonprofit that advocates for a more limited use of standardized tests. Most will continue making the tests optional through at least the 2023 admissions cycle. The move away from the standardized tests accelerated in 2020 after the University of California dropped the exam just as the pandemic forced testing sites to close, making the exam difficult to administer.
This shift has dented the College Board’s balance sheet. In 2020 its fees from programs and services declined to $760 million from $1.05 billion the prior year, according to financial statements. Last January the company laid off about 14% of its employees and eliminated SAT subject tests.
Bob Schaefer, the executive director of FairTest called the move a marketing ploy that wouldn’t make the test more fair or valid for assessing college readiness.
The digital test will continue to be scored on the 1600-point scale. Students will be able to take the digital exam on their own tablet or laptop or on a device provided to them. The College Board has been hit with security breaches in the Middle East and Asia and said the digital platform will make the test more secure. The new format enables each student to have a unique test form, making it “practically impossible to share answers,” according to the College Board.
John Barnhill, a College Board Trustee and associate vice president for academic affairs at Florida State University, said he believes the largest impact will be on international students, who will have greater access to the test.
“Testing internationally has been very problematic,” he said. “There aren’t as many tests available, and sometimes there are some dramatic cancellations.”
For admissions officers, the critical question will be how reliable the scores are, and that remains to be seen, he said.
The College Board piloted the test this fall, and Christal Wang, a junior at Thomas Jefferson High School for Science and Technology in Arlington, Va., is among the students who volunteered to take it. Because the digital exam was an hour shorter, she said, it was significantly easier.
“It doesn’t test your attention span the same way,” she said. “You definitely don’t feel as strained.”
Ms. Wang said she was pressed for time taking the old test but finished with time to spare on the digital exam. “What I would tell other students is that you don’t have to practice reading the same way,” she said.
Unilever: ice cream split is the cherry on top of lacklustre management reshuffle
Simplification helps cost allocation but disregards business realities
Unilever is back in defensive mode. With an activist hedge fund on board and a failed £50bn bid for GSK’s consumer arm behind it, the consumer products group has reverted to an old playbook. The restructuring Unilever unveiled on Tuesday may already have been afoot. But it echoes the panicked response to Kraft Heinz’s abortive bid in 2017.
The latest rejig aims to simplify the group’s complex matrix, where geographic and category functions criss-cross. About 1,500 jobs — 1 per cent of the workforce — will go, reducing senior management roles by 15 per cent. A cynic would say deputy heads are rolling to protect the beleaguered C-suite led by chief executive Alan Jope.
Simplification helps cost allocation but disregards business realities. Managing beauty in Brazil or China are very different in terms of supply chain, distribution and marketing. Some executives will need to juggle adeptly. The divisional head of home care oversees a portfolio that includes “water & air”.
Disconcertingly, Nitin Paranjpe, crowned chief operating officer in 2019, takes on the newly minted role of chief transformation officer and chief people officer. Given “transformation” should be at the heart of Unilever it is odd to twin the role with an HR one.
Investors must hope any job cost savings are reinvested. Total staff costs have drifted lower in the past three years, to 12 per cent of sales in 2020, as expected given more automation. But there is scope to funnel more investment into brands and marketing, stuck at 14 per cent in the three years to 2020.
The most promising move is splitting ice cream from the rump of the foods division, rechristened nutrition. Ice cream, with brands like Wall’s and Ben & Jerry’s, is the jewel worth perhaps half the overall food portfolio. A split should facilitate any disposal later. That apart, there is not much to see here. Jope will need to pull a bigger rabbit out of the hat at next month’s results announcement.
U.S. Companies Down to Five-Day Supply of Key Chips, Report Says
Commerce Department survey says companies typically had 40-day supply in 2019
WASHINGTON—U.S. manufacturers and other companies that use semiconductors are down to less than five days of inventory for key chips, the Commerce Department said Tuesday, citing the results of a new survey.
In 2019, companies typically maintained 40 days of inventory for key chips, according to the Commerce Department report. Now for the same chips—defined as 160 products that companies identified as being the most challenging to acquire—companies are operating with fewer than 5 days of inventory, the report said.
Commerce Secretary Gina Raimondo said the survey results show the urgency for Congress to approve the U.S. Innovation and Competition Act, which includes $52 billion to boost domestic chip production.
“We aren’t even close to being out of the woods as it relates to the supply problems with semiconductors,” Ms. Raimondo told reporters Tuesday. “The semiconductor supply chain is very fragile and it is going to remain that way until we can increase chip production.
Since September, the Commerce Department has sought detailed industry data from the major companies in the semiconductor supply chain. Its report was based on a survey of companies, including material and equipment providers, semiconductor manufacturers and automotive, industrial and healthcare companies that need chips for their products.
The thin inventories are a source of particular concern because of how a single shutdown can then ripple through the supply chain. With these wafer-thin inventories, a closure of an overseas factory earlier in a company’s supply chain, for more than a few days, can cause them to exhaust their inventories.
“This means a disruption overseas, which might shut down a semiconductor plant for 2-3 weeks, has the potential to disable a manufacturing facility and furlough workers in the United States if that facility only has 3-5 days of inventory,” the Commerce Department report said.
The Commerce Department released its findings as part of a push to revive the U.S. Innovation and Competition Act.
The Senate passed its version of the $250 billion measure to boost high-tech research and manufacturing on a bipartisan vote last year, but the measure hasn’t advanced in the House. It includes $52 billion specifically targeted toward growing domestic chip production.
“This semiconductor shortage is the result of a significant mismatch in supply and demand, further exacerbated by the pandemic,” the Commerce Department said.
It cited insufficient manufacturing capacity as the No. 1 problem, “and that’s what the president’s proposal is designed to accelerate.”
President Biden has often highlighted the shortage of semiconductors in efforts to control supply-chain problems and inflation. While the focus has largely been on their use in automobiles and resulting production slowdowns, the president has noted their use in a variety of products, from refrigerators to hospital equipment.
“America invented these chips,” Mr. Biden said at an event last week touting Intel Corp.’s plan to invest at least $20 billion in new chip-making capacity in Ohio. Over the years, more chip production moved overseas, mainly to lower cost countries in Asia.
The White House, citing industry data, says chip companies have announced nearly $80 billion in new investments in the U.S. that should unfold through 2025. “We are going to stamp everything we can ‘Made in America,’ especially these computer chips,” Mr. Biden said.
The Commerce Department’s summary of its information highlighted particular chips—certain nodes of microcontrollers, analog chips and optoelectronic chips—that are suffering from a particularly acute supply shortage.
The data showed that these chips typically had a lead time—the time from start to delivery of the product—of between 84 and 182 days. By late 2021, that had doubled for some key products, and the lead time had stretched to 103-365 days.
The Commerce Department said it would also take further steps to increase transparency of the supply chain, noting that the industry is so complex that producers at the beginning of the supply chain are far removed from the end users and thus don’t always have an ability to see how much demand there will be for certain products, while chip consumers “don’t always know where the chips they need originate.”