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Value investing guru says the Federal Reserve has broken the stock market

Seth Klarman, the founder of hedge fund Baupost Group, has told clients central bank policies and government stimulus have convinced investors that risk “has simply vanished”, leaving the market unable to fulfil its role as a price discovery mechanism.

The private letter to investors in his fund, which was seen by the Financial Times, amounts to a damning critique of recent market behaviour by one of the world’s foremost value investors.

Mr Klarman criticised the Federal Reserve for slashing rates and flooding the financial system with money since the onset of the coronavirus pandemic, arguing that the central bank’s moves have made it difficult to gauge the health of the US economy.

“With so much stimulus being deployed, trying to figure out if the economy is in recession is like trying to assess if you had a fever after you just took a large dose of aspirin,” he wrote. “But as with frogs in water that is slowly being heated to a boil, investors are being conditioned not to recognise the danger.”

US stocks are up more than 75 per cent since their low in March, while spreads on corporate debt — a measure of how much extra interest corporate borrowers have to pay compared to the US government — returned to pre-Covid levels this month.

Mr Klarman — who founded Boston-based Baupost almost four decades ago and has grown it to $30bn in assets under management — underperformed the market in 2020.

He has been intensifying his criticisms of US central bank interventions for the past several months. In the latest quarterly letter, Mr Klarman referred to the Fed as an “800-pound gorilla” that has priced out investors who typically provide liquidity in moments of distress.

“The biggest problem with these unprecedented and sustained government and central bank interventions is that risks to capital become masked even as they mount,” he said.

Mr Klarman also said the Fed policies had exacerbated economic inequality, referring to a “K” shaped recovery that has seen “the fortunes of those already at the top bounding swiftly upward, while those at the bottom remain on a downslope without end”. 

Using Tesla as an example, Mr Klarman said shares in the “barely profitable” electric carmaker had soared “seemingly beyond all reason”, briefly making the company’s founder Elon Musk the richest person in the world. Low interest rates have made projected cash flows more valuable, he said, a point many investors have unwisely used to justify valuations on companies that sit far above historic norms.

“The more distant the eventual pay-off, the more the present value rises,” he wrote. “When it comes to the value of cash flows, the vast and limitless future, yet to unfold, has gained considerable ground on the more firmly anchored present.”

The Fed’s policies and programmes “have directly contributed to exceptionally benign market conditions where nearly everything is bid up while downside volatility is truncated”, he added. “The market’s usual role in price discovery has effectively been suspended.”

Mr Klarman said investors were now in a constant hunt for yield that was driving them to riskier corners of the markets, including investment grade corporate debt, private credit or junk bonds. 

The Fed’s drastic measures had helped to boost economic activity and rescue ailing businesses, Mr Klarman said. “But they have also kindled two dangerous ideas: that fiscal deficits don’t matter, and that no matter how much debt is outstanding, we can effortlessly, safely, and reliably pile on more.”

Governments allege shortfall in deliveries is endangering their immunization campaigns

Tension is rising between European authorities and Pfizer Inc. and BioNTech SE after officials said the companies had unexpectedly cut their deliveries of Covid-19 vaccines and put their immunization schedules at risk.

The Italian government asked the country’s attorney general to study whether it can take legal action after Pfizer cut deliveries of its vaccine for this week by 29% as it retools its Belgium factory, a government spokeswoman said Wednesday.

Separately, the German state of Hamburg said Pfizer had delivered fewer vials of vaccine to the city than expected this week.

In Europe, Pfizer and BioNTech initially shipped vials of five-vaccine doses, but because of a precautionary practice known as overfilling, the vials contained enough extra liquid for a sixth dose. After the European Union’s drugs agency ruled on Jan. 8 that six doses could be obtained from a vial, the companies cut the number of vials delivered, arguing that their contract was for a certain amount of doses, not vials. The companies have said they were on schedule to deliver the number of doses they had promised.

A Hamburg government spokeswoman said the state has struggled to extract the sixth dose as special syringes are required and authorities haven’t been able to purchase them in sufficient quantities. This has left their mobile vaccination teams that inoculate care homes unable to use the full amount of vaccine, she said.

Hamburg authorities said their vaccination plans relied on obtaining 10% more doses than the state will be able to extract from the vials because of the relabeling of five-dose vials into six-dose vials.

“Six vials used to be delivered for 30 vaccine doses until now, but now there are only five,” said Hamburg State Health Minister Melanie Leonhard in an emailed statement. “The amounts [of vaccine] that were supposed to be delivered have been reduced.”

Pfizer in a statement didn’t specifically address the situations in Hamburg or Italy, but said it planned to fulfill its supply vaccine to countries in line with its agreements with governments and as permitted by regulatory authorities.

The company said its agreements were always based on delivery of doses, not vials. Pfizer and BioNTech raised their manufacturing target for this year to two billion doses in part because of the revised six-dose-per-vial label, the company said.

A spokeswoman for BioNTech declined to comment on the Italian government’s allegations and said vaccine sales contracts were for doses, not vials.

Pfizer said last week that Europe would suffer a temporary shortfall in deliveries that would be offset later because of production upgrades at its Belgian factory.

The Italian government said that Pfizer first informed it of a drop in deliveries on Friday and that the company then told the government on Tuesday that there would be an additional cut next week.

“The government is worried and alarmed,” the government spokeswoman said. “It deplores the company’s behavior.”

Pfizer unilaterally decided to cut the deliveries to some Italian regions more than others, according to Italian authorities, prompting many local administrations to complain that they were struggling to secure enough doses for the second injection, which is needed for the best immunity against the virus.

The regions that suffered smaller cuts are donating some of their doses to the most affected regions so that they can complete the second round of inoculations, the government spokeswoman said.

Other EU countries are also affected by the cuts, but none have so far said they would take legal action. A spokesman for Germany’s Health Ministry said there was no legal remedy against reduced deliveries. Health Minister Jens Spahn said Wednesday that he was frustrated at Pfizer’s sudden announcement last week about disruptions at its European plant.

“The problem is above all how short-notice Pfizer’s announcement has been, and that is annoying,” Mr. Spahn told journalists. “I understand the reasons, they have to scale up…it is good that they are expanding their capacities but it is very, very displeasing that they announced it overnight.”

Separately, a German government spokesman said some states besides Hamburg were also missing the special syringes needed to extract the sixth dose from the relabeled vials. But he added that there was no legal recourse against the companies as the EU itself had declared that a vial now contains six doses.

Pfizer markets the vaccine together with their German partner, BioNTech SE. The EU has so far ordered 300 million doses from Pfizer and BioNTech, and negotiations are continuing for another 200 million shots.

—Jared Hopkins contributed to this article.

Write to Bojan Pancevski at bojan.pancevski@wsj.com and Giovanni Legorano at giovanni.legorano@wsj.com

Corrections & Amplifications

An Italian government spokeswoman said Wednesday that the government asked the country’s attorney general to study whether it can take legal action after Pfizer cut deliveries. An earlier version of this article incorrectly gave the date as Tuesday. (Corrected on Jan. 20)

The Trump administration issued a flurry of sanctions after Election Day, a move that could complicate foreign policy for the Biden administration, sanctions policy observers said.

The U.S. Treasury Department’s Office of Foreign Assets Control announced 307 designations of blacklisted individuals and entities between Nov. 3 and Tuesday, the last full day under the Trump presidency, according to data analysis from law firm Gibson, Dunn & Crutcher LLP. Sanctions designations at the end of the Trump administration moved at a faster pace than during the rest of President Trump’s time in office, with an average of about 1,000 entities and individuals blacklisted each year.

The Trump administration also levied more sanctions between election day and Inauguration Day than did other recent administrations, the analysis showed. The number of sanctions rose by roughly 53% from the number of designations OFAC imposed under President Obama between the 2016 election and inauguration of Mr. Trump. President George W. Bush imposed about 81 sanctions between Election Day in 2008 and Inauguration Day in 2009.

On Tuesday, OFAC imposed sanctions on three individuals, 14 entities and six vessels for allegedly facilitating the evasion of U.S. sanctions on Venezuela’s oil sector.

The difference in the number of postelection sanctions imposed under the Obama and Trump administrations is in line with how frequently the two administrations imposed sanctions during their time in office, according to Adam M. Smith, a partner at Gibson, Dunn & Crutcher.

The surge in sanctions after elections generally could be the result of the outgoing administration trying to solidify foreign policy strategies and responding to urgent crises that may emerge regardless of the election, Mr. Smith said. The sanctions after the 2020 elections, for instance, consist of designations of individuals and entities over allegations of human rights abuses and interference in U.S. elections.

The Trump administration leaned heavily on economic sanctions as a foreign policy tool over the past four years. Many of its postelection sanctions were related to Iran or China, continuing a theme in 2020 as a whole, according to an analysis of designations data by the Center for a New American Security, a Washington, D.C., think tank. The organization’s study found that Iran was by far the most prominent target of U.S. sanctions last year.

“The number of overall designations remained high in 2020,” Sam Dorshimer, a co-author of the CNAS study, said. “It just shows that sanctions has been and will continue to be a key policy tool.”

The volley of postelection sanctions on Iran could be seen as the outgoing administration’s effort to complicate the Biden administration’s policy objectives, observers said.

Advisers to President Biden have signaled the new administration would seek to rejoin the nuclear deal with Iran, which would mean a lifting of nuclear-related U.S. economic sanctions on Iran.

In a parting shot at outgoing administration, Iran on Tuesday sanctioned President Trump and nine other U.S. officials for their role in terrorist activities against Iran. On Wednesday, China said that it would sanction 28 senior American officials who served in the Trump administration as part of a testy send-off.

Reversals in U.S. foreign policy approaches and sanctions policies between two U.S. administrations can make compliance more challenging for businesses, Mr. Smith said. “It’s just confusing for a business environment when there’s no predictability, when you’re dealing in an administration-driven decision-making process” that can result in significant changes in what deals are allowed and what are prohibited, he added.

Activist takes aim at agricultural giant worth $33 billion

Starboard Value LP is seeking to take control of agricultural giant Corteva Inc.’s CTVA 0.30% board and replace its chief executive, according to people familiar with the matter.

Starboard, led by CEO Jeff Smith, has privately nominated eight directors to Corteva’s 12-person board, the people said. Starboard is aiming to oust Corteva Chief Executive Jim Collins over what the activist says is mediocre performance. It has an unnamed replacement in mind.

Corteva, which was part of DowDuPont before it was spun out of the industrial conglomerate in 2019, is one of the world’s largest sellers of seeds and pesticides, with a market value of $33 billion.

In October, Starboard disclosed a roughly 1.6% stake in Wilmington, Del.-based Corteva. Mr. Smith said in a presentation at the time that the company’s adjusted earnings before interest, taxes, depreciation and amortization were little-changed from when it was formed in 2019, lagging behind peers.

In response to a question about that criticism on Corteva’s earnings call in November, Mr. Collins said he agrees the business has room to improve its margins. “Probably the only question in that whole discussion is our view of the timing of that improvement,” he said.

Starboard has been in on-and-off talks with the company since the fall and nominated board members before the deadline to do so in late December, the people familiar with the matter said. Efforts to head off a proxy fight at the annual meeting in the spring have so far been unsuccessful. The current board fully supports Mr. Collins, some of the people said.

Corteva and other farm suppliers have struggled in recent years. Since 2013, a succession of bumper crops in the U.S. and elsewhere have helped swell global grain supplies and push down crop prices. Reduced income for farmers has made it harder for seed and pesticide suppliers to raise prices.

Crop prices have staged a major rally in recent months. Mr. Collins and other Corteva executives have talked up the company’s new lineup of crop seeds. They include biotech soybean seeds that pair with a herbicide designed to defeat hard-to-kill weeds.

New York-based Starboard is one of the most active corporate agitators. ON Semiconductor Corp. recently named a new CEO and added two directors to its board after discussions with the hedge fund.

England’s lockdown fails to suppress rise in Covid transmissions

Imperial College study shows ‘no evidence of decline’ and slowly increasing R number

The lockdown in England has failed so far to suppress coronavirus transmission, according to the latest survey, which indicated a “worrying” possible uptick in infections.

The closely watched React-1 study led by Imperial College London concluded that prevalence of the virus, known as Sars-Cov-2, was “very high with no evidence of decline”. The finding was based on the analysis of 142,900 nose and throat swabs from a representative sample of the English population between January 6 and 15.

The researchers estimated that the reproduction number R, which measures the average number of people one individual infects, was between 0.94 and 1.15, with a central estimate of 1.04 — meaning the rate of infection is rising slowly.

Paul Elliott, one of the co-leaders of the study, said his team would continue to monitor closely data that pointed to “worrying suggestions of a recent uptick in infections”.

Prof Elliott warned that unless infections were brought down, the NHS would struggle to cope. “If prevalence continues at the high rate we are seeing, then hospitals will continue to be put under immense pressure, and more and more lives will be lost.”

The study estimated that 1.58 per cent of the population in England was infected, an increase of more than 50 per cent since the previous round of testing from November 25 to December 3. Prevalence was highest in London, at 2.8 per cent, more than twice the level in the last testing round.

Recent data and scientific modelling have sent mixed signals on the direction of the pandemic in England.

Official daily test results have shown a downward trend this week. At the end of last week two other studies — the Zoe Covid study, based on reports from people with a symptom-tracking app, and an analysis by Cambridge university’s Medical Research Council Biostatistics Unit — concluded that the R number had fallen below 1.

But the Scientific Advisory Group for Emergencies, the government’s advisory panel, put the R for England at 1.2 to 1.3 in its latest estimate, published at the end of last week.

Steven Riley of Imperial College, co-leader of React-1, speculated that there had been a fall in infections during the Christmas and new year period, when most people were at home and social interactions were limited, followed by a rise after the festive season as many people returned to work despite the introduction of the third lockdown in England in early January.

Matt Hancock, health secretary, said the study showed “why we must not let down our guard over the weeks to come”.

IPO provides lucrative exit for creditors of bankrupt former parent company Neiman Marcus

Mytheresa, the German online luxury retailer, was valued at $2.2bn in its initial public offering in New York on Wednesday, capping an extraordinary leap in its valuation over the past two years and validating hedge funds that fought vicious legal battles for a piece of the company.

The Munich-based group, which was once part of bankrupt US retailer Neiman Marcus, said it had priced its shares at $26 apiece, the top of its targeted range.

Mytheresa sells over 200 luxury brands including Burberry and Prada and boasted more than half a million active customers at the end of September. It shipped over 1m orders to 133 countries in its past fiscal year, according to its IPO prospectus, with net sales of €450m, an 18.6 per cent increase on the previous year.

At its offer price, Mytheresa’s market capitalisation of $2.2bn represents a leap from valuation estimates in recent years and a big win for private equity group Ares Management, Mytheresa’s principal shareholder. Neiman Marcus, the department store chain owned by Ares and Canadian pension plan CPPIB, acquired Mytheresa for just $200m in 2014.

The online retailer became a bone of contention in a complex debt restructuring executed by Neiman in 2019 as its core department store business faltered, and then again after its bankruptcy.

Ares had controversially transferred Mytheresa out of the reach of Neiman’s creditors in 2018, but as a part of the restructuring settlement returned portions of the company to hedge funds and other creditor groups in the form of preferred and common stock.

Ares and CPPIB last year agreed to hand over a further $172m of their Mytheresa interests to unsecured creditors after one hedge fund holdout, Marble Ridge Capital, persuaded the bankruptcy court to allow an investigation into the original transfer deal. The Neiman owners did not admit to any wrongdoing.

Marble Ridge has since been wound down after its founder Daniel Kamensky was charged with fraud, extortion and obstruction of justice over his dealings regarding Neiman Marcus.

When an expert witness for creditors last year valued Mytheresa at $925m, Ares and CPPIB told the bankruptcy court that figure was “astronomically high” and had “no resemblance to reality”. In 2019, Neiman bankers had received bids for Mytheresa that had not exceeded $500m.

The bumper IPO therefore provided Mytheresa’s owners with a significant payday. Together they are selling 2m of their shares, worth $52m.

The stock will make its trading debut on the New York Stock Exchange on Thursday.

The listing comes after an upbeat start to the year for IPOs. It also signals continued investor appetite for consumer-facing companies with a technology edge. Last week, shares in online lender Affirm and ecommerce platform Poshmark priced above initial expectations and then doubled on their market debut.

Mytheresa will continue to be led by chief executive Michael Kliger and will keep its incorporation in the Netherlands for tax reasons. Its prospectus lists as a risk factor having to file its taxes in other jurisdictions, such as the US.

The company, which operates only two physical stores in Munich, said 53 per cent of gross merchandise sales were generated on mobile devices in the 2020 fiscal year.

It touted its children’s and men’s units, launched at the beginning of 2019 and 2020, respectively, as potential growth engines.

Household names like McDonald’s start to modify practices to aid farm animals’ health, growth and digestion

Mention antibiotic resistance and few people would link what is increasingly being recognised as a growing global health crisis with a Big Mac.

But in the US, animals farmed for food account for most of the use of medically important antibiotics such as tetracyclines, whose overuse results in drug-resistant “superbugs” that affect humans.

That has led campaigners to push for change through household-name retailers and fast-food restaurants such as Walmart, Wendy’s and McDonald’s.

“Awareness of antibiotic risk has increased among both shareholders and consumers,” says Christy Spees, environmental health programme manager at As You Sow, a campaign group focused on shareholder advocacy.

“At the same time, I am consistently surprised by how many people aren’t yet aware of the critical problem of antibiotic use in farm animals.”

Use of the drugs goes well beyond fighting infections. In recent decades they have also been used to promote growth and to enable animals to digest food more efficiently, especially in industrial-scale farms.

But a turning point came in 2018 when McDonald’s — one of the world’s largest buyers of beef — set out a new policy limiting use of medically important antibiotics in its beef supply chain. Progress among beef producers had lagged behind chicken farmers, which in the US sharply cut antibiotic use over the past decade.

Bruce Feinberg, senior director of global quality systems at McDonald’s, says: “While the chicken supply chain tends to be more vertically integrated and data on the use of antibiotics is fairly accessible, that’s not always the case for beef.”

The announcement from McDonald’s followed pressure from shareholders such as the $270bn group BMO Global Asset Management, as well as directly from activists, who protested outside its branches with signs calling for the fast food group to “hold the antibiotics”. The new McDonald’s policy included a plan to measure antibiotic use in its top 10 beef sourcing markets and develop reduction targets.

It was “a major act of leadership and certainly an important signal to the marketplace,” says Ms Spees.

Wendy’s and Taco Bell were among others following suit with new goals for antibiotic reduction in beef production, albeit less ambitious ones. McDonald’s has not yet set out antibiotic reduction targets for key markets, which it pledged to do in 2020, but says it will do so in the coming months.

Filtering down

Yet while big brands have recognised the scale of the problem, the impact of such moves at farm level has been mixed.

Sales of antibiotics considered important in human medicine, for use in farm animals in the US, began rising again in 2018 after a steep decline in 2015-2017; between 2018 and 2019, the most recent data available, sales rose 3 per cent, according to the US Food and Drug Administration. Cattle and pigs each accounted for more than 40 per cent of the drugs used in animals.

Globally, detailed data is harder to come by, but scientists have estimated that almost three-quarters of antimicrobials are consumed by farm animals. A 2015 study estimated the global use of antibiotics in farm animals would increase by 67 per cent in the two decades from 2010. 

Such a rise is not inevitable, however. Both China and the US have since launched new regulations that aim to cut antibiotic use, while the EU has gone further: from next year it will ban the routine preventive use of antibiotics in farm animals. In 2017 China prohibited the use of the antibiotic colistin in animal feed after the discovery in 2015 of a gene that could make bacteria immune to it.

Pressure on supply chains from the Covid-19 pandemic, which has particularly affected meat suppliers, has diverted companies’ attention as they wrestle with immediate logistical issues.

But Maria Lettini, executive director of Fairr, an investor network focused on intensive animal production, says that “now is the moment to really increase our awareness campaign with consumers” and push more big food brands and the meat producers that supply them to set out measurable targets on antibiotics.

She says a heightened awareness of the importance of effective medical treatments — including the use of antibiotics to treat secondary infections in Covid-19 patients, such as bacterial pneumonia — presents an opportunity for a “refocus”.

Progress will require rethinking the intensive farming systems in countries such as the US and Brazil, for example by allocating more space per animal and reducing stress factors in order to cut infection risk, Ms Lettini adds. “There would be a cost increase or a revenue loss, depending how you approach it.”

The biggest barrier to progress in beef and pork, Ms Spees says, “is that supply chains rely very heavily on confinement systems and feedlots”, in which animals are kept in an area and supplied with food so they gain weight quickly and efficiently. “Antibiotics have become the go-to ‘Band-Aid’ solution to prevent and treat illness under illness-promoting conditions.”

Clean but mean

Covid-19 has also raised questions about a potential contribution to antimicrobial resistance from another set of household-name brands: cleaning products that target bacteria and viruses. Such products are being used much more since the pandemic began.

Evidence on the impact of such products is mixed: some studies have shown that particular disinfectants contribute to the development of antibiotic resistance in laboratory environments, but others have failed to produce evidence of this in a real-world context. The US in 2016 banned disinfectant products such as triclosan for use in hand and body washes, citing a possible risk of antibiotic resistance as one reason.

Both Unilever and Reckitt Benckiser, makers of Domestos and Lysol disinfectants respectively, argue that their products reduce infections in humans and therefore the need for antibiotic treatments. But Jonathan Hague, vice-president for science and technology at Unilever Homecare, says he expects antimicrobial cleaning products to draw more scrutiny in future.

For food outlets, that scrutiny is already taking place, while evidence is plentiful of the livestock industry’s role in antibiotic resistance.

As for McDonalds’s, Mr Feinberg says the food industry has plenty more to do when it comes to antibiotic resistance, which will require “accountability and leadership from all companies and their supply chain partners”.