Closing Stock Market SummaryThe S&P 500 fell 1.2% on Wednesday for a second straight decline that tempered the recent bullishness in the market. The Nasdaq Composite declined 0.8%, the Dow Jones Industrial Average declined 1.2%, and the Russell 2000 declined 1.3% after setting an intraday record high early in the session.
For most of the day, the market struggled to gain any traction despite a host of positive news related to a vaccine, economic data, and corporate earnings. Presumably, this was because the market was pricing in a lot of the good news in its record-setting rally this month and needed to consolidate those gains.
Selling appeared to pick up late in the afternoon after New York Governor Cuomo announced that New York City public schools will temporarily close due to surging coronavirus cases. Mr. Cuomo previously warned this was a legitimate possibility, but the decision served as a convenient excuse to curb risk sentiment today.
All 11 S&P 500 sectors finished in negative territory, led lower by the energy (-2.9%), utilities (-1.9%), health care (-1.8%), and real estate (-1.7%) sectors with losses over 1.5%. The industrials sector (-0.5%) was the relative outperformer today.
The industrials sector and other cyclical groups appeared to draw early support from Pfizer (PFE 36.31, +0.27, +0.8%) and BioNTech (BNTX 90.44, +3.51, +4.0%) indicating that their COVID-19 vaccine is 95% effective after concluding their Phase 3 study. The companies will soon file an FDA application for emergency use authorization.
Separately, October housing starts increased a faster-than-expected seasonally adjusted annual rate of 1.53 million units (Briefing.com consensus 1.445 mln), Target (TGT 166.85, +3.81, +2.3%) reported strong quarterly results, and Tesla (TSLA 486.64, +45.03, +10.2%) was upgraded to Overweight from Equal-Weight at Morgan Stanley.
Tesla and Target reacted positively to their related news, but investors took profits in Boeing (BA 203.30, -6.75, -3.2%) and Lowe's (LOW 146.72, -13.14, -8.2%) despite some good news. The FAA approved the 737 MAX safe to fly again, and Lowe's beat top and bottom-line estimates but its Q4 EPS guidance may have disappointed.
U.S. Treasuries finished near their flat lines in a lackluster session for bonds. The 2-yr yield and 10-yr yield increased one basis point each to 0.17% and 0.88%, respectively. The U.S. Dollar Index finished flat at 92.40. WTI crude futures gained 0.9%, or $0.37, to $41.80/bbl following a smaller-than-expected weekly inventory build.
Reviewing Wednesday's economic data:
- Housing starts in October increased 4.9% m/m (and 14.2% yr/yr) to a seasonally adjusted annual rate of 1.53 million units (consensus 1.445 mln), hitting their highest pace since February when they stood at 1.567 million. Building permits were flat at 1.545 million (consensus 1.55 mln), but remained ahead of the 1.536 million pace registered in January.
- The key takeaway from the report is that there was continued strength in single-family starts, which jumped 6.4% m/m to a seasonally adjusted annual rate of 1.179 million. That is 14.5% higher than the pace for single-family starts seen in February and reflects the strong demand for new homes that has been driven by the pandemic, low mortgage rates, and the tight supply of existing homes for sale.
- The weekly MBA Mortgage Applications Index decreased 0.3% following a 0.5% decline in the prior week.
Looking ahead, investors will receive the weekly Initial and Continuing Claims report, Existing Home Sales for October, the Philadelphia Fed Index for November, and the Conference Board's Leading Economic Index for October on Thursday.
- Nasdaq Composite +31.5% YTD
- S&P 500 +10.4% YTD
- Russell 2000 +6.0% YTD
- Dow Jones Industrial Average +3.2% YTD
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Deutsche Börse/ISS: saints go marching in
Deal will help group capitalise on rising investor demand for recommendations on ethical investment
If data is the new oil, then stock exchange groups are fast becoming petrol stations for financial services. Deutsche Börse picked up a fresh set of pumps with attached convenience store this week after agreeing to buy a majority stake in shareholder advisory group Institutional Shareholder Services for €1.9bn.
ISS is a powerful supplier of advice on how shareholders should vote on everything from takeovers to executive pay. Buying the US-based business should help Deutsche Börse capitalise on growing demand from investors for recommendations on ethical investment, marshalled under the banner of “environmental, social and governance” or ESG. ISS should mesh with other ancillary services sold by the German group’s Clearstream subsidiary.
Data, analytics and research are becoming an important business for exchange operators. They yield reliable subscriptions revenues in contrast to volatile income from listings and securities trading. London Stock Exchange Group’s ambitious purchase of analytics and data platform Refinitiv for $27bn reflected the same trend.
LSE, which Deutsche Börse failed to buy in 2017, has outpaced and outgrown its erstwhile suitor by acquiring data assets, notably index compilers. ISS is too small to redress the balance for Deutsche Börse, but does operate in an interesting niche. It leads an effective global duopoly in governance-related matters with a 63 per cent market share, far ahead of rival Glass Lewis.
This duopoly, combined with the rapid growth of three large US passive managers, raises questions concerning a concentration of voting power. These may eventually apply in the expanding field of ESG too. However, ethical investment badly needs greater standardisation. That gives groups such as ISS a substantial growth opportunity.
Scarcity value is another reason Deutsche Börse is paying a full price for ISS. This equates to 23 times this year’s ebitda, a premium to an information services sector trading closer to 20 times.
Deutsche Börse’s own shares trade at a steep discount to those of LSE. The German group would need to do a lot of bolt-on deals to energise its stock as comprehensively as the UK group’s transformative purchase of Refinitiv assets has done.
RSA’s Hester picks the last minute to bow out on a high
Intact and Tryg offer shareholders welcome certainty; Croda confounds with move into fragrances
Stephen Hester, the sometimes testy gardener-banker-insurance boss, is as happy as one of the Newfoundland dogs pictured in his office. Newfies are never more fulfilled than when pulling in fishing nets. Mr Hester has netted a bid for RSA Insurance from Canadian and Danish rivals Intact and Tryg at a rocking price. The overseas duo are offering 685p a share or £7.2bn — a 50 per cent premium to RSA’s pre-bid price.
RSA’s shares haven’t been as high since 2018. The last offer — from rival Zurich at 550p a share in 2015 — didn’t come close. Mr Hester, who was recruited in 2013 to turn the ailing RSA round and (it was assumed) flog it, said Zurich’s offer was too early and too low. Fairly, it turns out. RSA’s returns on equity have risen from well below 13 per cent two years ago to near the top of the range at 17 per cent. RSA’s so-called combined ratio — costs and expenses against premiums — has inched down to 90 per cent in the year to date. That compares with a sector average creeping up towards 100 per cent.
Still, Mr Hester has cut it fine. The offer from Tryg and Intact was nearly too late.
The outlook for the insurance industry in the UK — maturing and fearsomely competitive — was already grey and share prices were weakening. Covid has only made it worse. Regulatory scrutiny is increasing. RSA itself is part of a High Court tussle over business interruption claims. Recession and low interest rates will compress investment income used to bolster earnings and dividends.
There’s long been chatter about insurers consolidating to offset thinning margins. Some chatterers will hope another interloper from overseas, where the sector is more highly rated, will be prepared to pay more. Most don’t though, which is probably why RSA’s shares are trading at 672p. Few rivals have the wherewithal to pay £7bn for a business so focused in Canada, Scandinavia and the UK. As Mr Hester says, neither Tryg nor Intact could have done it on their own. Aviva has been tipped as a possible suitor for RSA but its new top brass is wisely in disposal mode. It is more likely that Aviva will be broken up than do the breaking.
Of course, the Intact-Tryg deal contains considerable execution risk. It has satisfied RSA pension trustees, but the break-up is astonishingly complex and will not complete until well into next year.
Nonetheless, Cevian Capital, the activist and RSA’s biggest shareholder, has already said yes. Other investors should also plump for the certainty of cash in an uncertain world. It’ll make them as jaunty as a Newfie, too.
Croda’s move into scents lacks sensibility
For 95 years, the only fragrances made by Croda were incidental to its main trade of extracting sheep grease. No longer. The Yorkshire chemicals group is buying Iberchem, a scent maker founded among the orange groves of Murcia, Spain.
Steve Foots, Croda's chief executive, set out a grand plan to turn Croda into an ingredients one-stop-shop for the small manufacturers that make up three quarters of its customer base. The move into fragrances has been four years in the making, he says, though he had never previously mentioned it. A price of €820m means the current owner, private equity fund Eurazeo, will double its money having bought a 70 per cent stake in the business for €270m in 2017.
The market had been expecting acquisitions from Croda, but not this one. Recent excitement had centred around life sciences rather than personal care following a contract win to supply ingredients for Pfizer's Covid vaccine candidate. Longer term speculation tended to involve Ashland Global, Croda's closest match in the US, where any combination would allow for deep cost cutting.
Iberchem promises growth, not synergies. The company achieves double-digit sales growth by delivering 4,000 new products annually and has a quarter of its 850 staff working in research and development. A perpetual need for novelty makes fragrances only averagely profitable, and since Iberchem will be left to run independently there is little scope for improvement.
Croda wants to earn back the deal's cost of capital within five years, estimating €48m of revenue synergies or nearly 25 per cent of Iberchem’s 2020 sales. Getting there depends on cross selling, which won’t be easy. Croda’s sales force specialises in advising customers on which type of gloop they need, but scent buyers usually know exactly what they want.
Mr Foots says he won’t compete with the leading fragrance makers, but they want to compete with him. Givaudan and Symrise, Europe’s sector leaders, have been moving on to Croda’s turf. Competition will make life even tougher for a company that, according to JPMorgan analysts, has been growing earnings organically at just 2 per cent since 2014. While the addition of a fast growing business will help prop up sales, the strategic arguments don’t yet pass the smell test.
RSA’s Hester picks the last minute to bow out on a high
Intact and Tryg offer shareholders welcome certainty; Croda confounds with move into fragrances
Stephen Hester, the sometimes testy gardener-banker-insurance boss, is as happy as one of the Newfoundland dogs pictured in his office. Newfies are never more fulfilled than when pulling in fishing nets. Mr Hester has netted a bid for RSA Insurance from Canadian and Danish rivals Intact and Tryg at a rocking price. The overseas duo are offering 685p a share or £7.2bn — a 50 per cent premium to RSA’s pre-bid price.
RSA’s shares haven’t been as high since 2018. The last offer — from rival Zurich at 550p a share in 2015 — didn’t come close. Mr Hester, who was recruited in 2013 to turn the ailing RSA round and (it was assumed) flog it, said Zurich’s offer was too early and too low. Fairly, it turns out. RSA’s returns on equity have risen from well below 13 per cent two years ago to near the top of the range at 17 per cent. RSA’s so-called combined ratio — costs and expenses against premiums — has inched down to 90 per cent in the year to date. That compares with a sector average creeping up towards 100 per cent.
Still, Mr Hester has cut it fine. The offer from Tryg and Intact was nearly too late.
The outlook for the insurance industry in the UK — maturing and fearsomely competitive — was already grey and share prices were weakening. Covid has only made it worse. Regulatory scrutiny is increasing. RSA itself is part of a High Court tussle over business interruption claims. Recession and low interest rates will compress investment income used to bolster earnings and dividends.
There’s long been chatter about insurers consolidating to offset thinning margins. Some chatterers will hope another interloper from overseas, where the sector is more highly rated, will be prepared to pay more. Most don’t though, which is probably why RSA’s shares are trading at 672p. Few rivals have the wherewithal to pay £7bn for a business so focused in Canada, Scandinavia and the UK. As Mr Hester says, neither Tryg nor Intact could have done it on their own. Aviva has been tipped as a possible suitor for RSA but its new top brass is wisely in disposal mode. It is more likely that Aviva will be broken up than do the breaking.
Of course, the Intact-Tryg deal contains considerable execution risk. It has satisfied RSA pension trustees, but the break-up is astonishingly complex and will not complete until well into next year.
Nonetheless, Cevian Capital, the activist and RSA’s biggest shareholder, has already said yes. Other investors should also plump for the certainty of cash in an uncertain world. It’ll make them as jaunty as a Newfie, too.
Croda’s move into scents lacks sensibility
For 95 years, the only fragrances made by Croda were incidental to its main trade of extracting sheep grease. No longer. The Yorkshire chemicals group is buying Iberchem, a scent maker founded among the orange groves of Murcia, Spain.
Steve Foots, Croda's chief executive, set out a grand plan to turn Croda into an ingredients one-stop-shop for the small manufacturers that make up three quarters of its customer base. The move into fragrances has been four years in the making, he says, though he had never previously mentioned it. A price of €820m means the current owner, private equity fund Eurazeo, will double its money having bought a 70 per cent stake in the business for €270m in 2017.
The market had been expecting acquisitions from Croda, but not this one. Recent excitement had centred around life sciences rather than personal care following a contract win to supply ingredients for Pfizer's Covid vaccine candidate. Longer term speculation tended to involve Ashland Global, Croda's closest match in the US, where any combination would allow for deep cost cutting.
Iberchem promises growth, not synergies. The company achieves double-digit sales growth by delivering 4,000 new products annually and has a quarter of its 850 staff working in research and development. A perpetual need for novelty makes fragrances only averagely profitable, and since Iberchem will be left to run independently there is little scope for improvement.
Croda wants to earn back the deal's cost of capital within five years, estimating €48m of revenue synergies or nearly 25 per cent of Iberchem’s 2020 sales. Getting there depends on cross selling, which won’t be easy. Croda’s sales force specialises in advising customers on which type of gloop they need, but scent buyers usually know exactly what they want.
Mr Foots says he won’t compete with the leading fragrance makers, but they want to compete with him. Givaudan and Symrise, Europe’s sector leaders, have been moving on to Croda’s turf. Competition will make life even tougher for a company that, according to JPMorgan analysts, has been growing earnings organically at just 2 per cent since 2014. While the addition of a fast growing business will help prop up sales, the strategic arguments don’t yet pass the smell test.
Investors hire convicted trader to help fight forex case against banks
Former BNP Paribas employee who pleaded guilty to foreign exchange rigging taken on as $400-an-hour consultant
A former BNP Paribas trader who pleaded guilty to rigging foreign exchange benchmarks has been hired as a $400-an-hour consultant by investors suing banks including Barclays and UBS for alleged forex manipulation.
Allianz, Pimco and a number of other investors have brought a multimillion pound lawsuit against eight banks including Barclays, Citigroup and HSBC in London’s High Court. They have also brought a parallel lawsuit against global banks, including Bank of America, in the Southern District of New York.
According to court documents filed with the Southern District of New York court, the investors bringing the lawsuit are set to hire Jason Katz, a former Barclays and BNP Paribas currency trader who in 2017 pleaded guilty in the US to price-fixing charges with unnamed conspirators.
Lawyers for 14 banks involved in the lawsuits have filed court documents asking a US judge to make a court order preventing Mr Katz, who may also be called by either side as a factual witness in a trial, from seeing confidential information in the lawsuit. They claimed his involvement runs the risk of “interfering with the recollection of a key fact witness”.
The filing also claims that Mr Katz’s proposed pay “is excessive by any reasonable measure” given the former trader is “currently unemployed” and “cannot credibly claim that his services are worth $400 an hour to anybody other than the plaintiffs”.
Mr Katz told his sentencing hearing in 2017 that he was a “full-time stay at home dad” who “spent the last few years learning about growing and building a real estate business”.
The banks say that they first learnt of the claimants’ retention of Mr Katz after an application was made to London’s High Court for permission to show him confidential bank documents.
Boris Bronfentrinker, partner at Quinn Emanuel, a law firm that is acting for Allianz said: “We can confirm that the UK claimants have made an application to add Jason Katz to the confidentiality ring in the circumstances where the banks have objected to his inclusion. They are trying to preclude him from accessing documents which are necessary for him to assist the claimants in pursuing their claims against the banks.”
Barclays declined to comment.
Probes by US, UK and Swiss regulators into alleged forex manipulation have led to a dozen banks paying almost $12bn in fines around the world and led to several traders facing criminal charges in the US.
Arrival/Spacs: coming to America
Warm welcome reflects high expectations it will have to work very hard to justify
America attracts dreamers. The latest ambitious would-be immigrant is UK-based electric vehicle upstart Arrival. It is set to be welcomed into New York by none other than a “blank cheque” entity, as special purpose acquisition companies are known.
At least five American electric or autonomous vehicle companies have listed their shares through recent Spac mergers. With so much capital sloshing around, it’s only natural that Spac financiers have had to look beyond America’s shores. When demand for a stock market asset is hot, you need new propositions to keep it that way.
Arrival’s landfall is supposed to involve a listing on Nasdaq at a $5bn enterprise value. Almost $700m in cash from the likes of Fidelity would grace its balance sheet. Like American counterparts, the group is justifying its juicy present-day valuation with revenues and profits that are years away.
Arrival says it will have $14bn of revenue from selling electric buses and vans in 2024 — even though production will not begin until late next year. Relationships with the likes of UPS give it confidence. Provocatively, Arrival also believes it can generate healthy cash flow quickly, in part, because of its “microfactories” whose localised production is meant to reduce capital expenditure. The group is projecting free cash flow of $1.4bn and a gross margin of 26 per cent by 2024.
Five auto tech companies that have gone public via Spacs now trade between $16 and $25, well ahead of the $10 Spac price. Arrival’s own analysis shows that its theoretical valuation is in line with those other deals. Shares have a habit of running up afterwards — and sometimes crashing, as demonstrated by electric trucks group Nikola.
Shares in Arrival’s Spac, CIIG Merger Corporation, jumped on Wednesday to more than $13 per share, suggesting Wall Street finds Arrival’s speculative financial projections promising. New immigrants to America have not always been treated so well. But the warmth of Arrival’s welcome reflects high expectations it will have to work very hard to justify.
Can Rimowa Pull a Louis Vuitton?
Alexandre Arnault, chief executive of the LVMH-owned maker of hardshell suitcases, is betting that softening up — and inching toward the hyper-competitive handbag market — will drive growth during this tough time for the travel industry.
Imagine leading one of the fastest-growing brands within a powerhouse portfolio of more than 70, and all that momentum vanishing within an instant.
That’s essentially what happened to 28-year-old Alexandre Arnault, chief executive of German-engineered luggage label Rimowa, in which the French group run by his father took a €640 million majority stake in 2016. By 2019, after a few years of reorganisation, the brand had succeeded in turning its suitcases into fashionable status symbols, collaborating with the likes of Virgil Abloh and Supreme, and was growing rapidly — on track to hit its long-term target of close-to €1 billion in sales by the middle of the decade.
Then the pandemic hit, sinking the travel sector. International tourist arrivals plunged 63 percent during the first half of 2020, according to the United Nations World Tourism Organisation (UNWTO). International tourism remains largely on pause, as a new wave of lockdowns and quarantine requirements sweeps much of the world. Even with a vaccine on the way, the organisation expects it’ll take two-and-a-half to four years for travel to return to 2019 levels.
It’s no surprise, then, that Rimowa’s sales are down almost 50 percent in 2020. The brand did not benefit much from the surprise rebound in luxury spending over the summer, which propelled LVMH stablemates Louis Vuitton and Dior back to growth sooner than many analysts had expected.
“[Covid] doesn’t make it super easy to sell the product,” Arnault said. “It’s not a secret that things have not been going well at all.”
There have, however, been bright spots that have allowed Rimowa to perform better than some competitors during this period. (Samsonite, for instance, saw sales decrease by about 54 percent in the first half of 2020.)
Because Rimowa is vertically integrated, the company was able to wind down production and pick it back up when needed. That, plus a well-timed exit from some less-than-favourable wholesale partnerships, saved the brand from having to run end-of-season sales to move unsold suitcases. Luggage is also selling briskly online and should level off at 20 percent to 25 percent of overall sales in 2021.
And what has been selling well, Arnault said, is newness and novelty, like the brand’s collaboration with Moncler via its “Genius” marketing program.
But for Arnault, the company’s long-standing plans to scale Rimowa by moving the hard-shell stalwart’s lineup beyond travel essentials — from traditional luggage to products that aid in overall mobility — are being rolled out just in time.
This week, Rimowa launches its first range of soft bags dubbed “Never Still,” a roundup of unisex backpacks, weekend bags and totes made in Italy from waterproof canvas and full-grain leather. Starting at €600 for a small backpack and climbing to €1,200 for a weekender bag, the line — set to arrive in stores mid-January 2021 — is Rimowa’s first full-blown attempt at everyday essentials. It had previously waded into the market with its “Personal” case, first launched in collaboration with Dior’s Kim Jones in 2019, and more broadly with the launch of sunglasses earlier this year. There are also iPhone covers and recently rolled-out packing cubes, all to help make Rimowa “part of the clients' lives in a broader way,” Arnault said.
“We want to make sure we can be with the client everywhere,” he said.
The soft bag range inches Rimowa further into the hyper-competitive market for luxury handbags, which LVMH dominates and hit €57 billion in 2019, according to Bain & Company. The group’s expertise allowed Rimowa to access the best factories, source the best materials and hire top talent to develop the designs.
But is the brand strong enough to stand out in a market where uncertain consumers are favouring names they know and trust — like Louis Vuitton, Chanel and Hermès? And how will Rimowa translate its sharp, no-nonsense brand image into soft goods?
Arnault wanted the bags to be function-first. Despite lacking the hard shell Rimowa’s rolling luggage is best known for, each piece has structure and incorporates identifiable markers of the brand’s signature luggage designs, like mimicking the grooves on the front of a Rimowa hard shell. The collection is genderless, and the colour story — black, with fashion colours like soft moss and dusty rose mixed in for good measure — is in line with its effort to attract a wider range of customers, including younger women and men.
“We purposefully chose not to make full-on leather backpacks,” he said. “Rimowa has a slick, German look that’s industrial in a way … we picked materials that have the sturdiness and rigidness of Rimowa, but are softer and more wearable in everyday life.”
With the big move into softer goods, is a play in apparel — another expertise of the group — on the horizon?
Louis Vuitton, the French trunk maker that became LVMH’s crown jewel, launched ready-to-wear under the supervision of Marc Jacobs in 1997, bringing a highly marketable fashion sheen to the once dusty brand, about a decade after Bernard Arnault acquired LVMH and several decades years after the introduction of its first handbag. While the speed of innovation is certainly faster these days, Arnault said it’s not where his mind is at.
“I’m not going to say never,” he said, “But clothes are not coming any time soon … we only have one shot at our first shot.”
Plus, that old playbook may not even work with the modern consumer. Rimowa has taken cues from other LVMH brands by launching a series of high-visibility collaborations — with everyone from Supreme to Abloh to Kim Jones — which make up a single-digit percentage of sales but have an outsize marketing impact. The company has also introduced smaller accessories, like iPhone cases, at a more accessible price point to appeal to younger customers. In this era, however, the runway dream may be less relevant for a consumer more interested in newness than star designers.
“It only makes sense to represent more than just hard cases and Rimowa will be able to make that transition,” said Robert Burke, a retail advisor. “They could certainly enter product categories like sweaters, accessories and jackets with a great deal of credibility. I’m not sure if we’ll see a full-blown runway show, but a focused [lineup] that relates back to travel and lifestyle makes a lot of sense.”
For now, Arnault believes that tourism, still the core driver of Rimowa sales, will bounce back — and hitting that €1 billion sales goal is possible. While business travel has been changed forever, consumers — especially young ones — still have wanderlust, and will be scheming to get back on a plane in the near future.
“Fast forward six, nine months and people will still be excited to go to places,” he said. “I, myself, am super excited.”