TheChek News Flow

Barron’s Weekend Summary: Cover story reports on the 100 best annuities based on various metrics; An Arm Holdings IPO would end the drought in hardware listings in the tech sector

* Cover story: Barron’s list of the 100 Best Annuities; “For nervous investors looking to tuck some guarantees into their portfolios against this backdrop of uncertainty—whether it be downside protection, a fixed rate of return with upside potential, or a steady income stream for life—more independent financial advisors are recommending a product they once eschewed: annuities”; Barron’s offers a list of the top annuities in several categories: Guaranteed Income, No Frills; Deferred Income Annuities; Guaranteed Income with Some Liquidity and Growth Potential; Downside Protection with Stock-Like Returns; and Tax Deferred Savings.

* Tech Trader: A rebound in tech IPOs has largely been the result of software and cloud companies listing, but while hardware startups have remained on the sidelines—the last time a major chip company went public was nearly a decade ago—the dry spell could end if SoftBank launches an IPO of Arm Holdings, which farms out manufacturing of its designs, making it an intellectual property play as well.

* Trader: Signs are emerging that investors are growing less enamored of tech stocks—several metrics offer warnings signs about the historic run in the sector, and investors are unlikely to see stocks continue to move higher uninterrupted; Positive on WFC: Though the bank has much to fix, its stock is cheap relative to its peers, and while there’s no guarantee that Wells can engineer a turnaround quickly, it’s a potentially good comeback story for investors.

* Interview: Dan Clifton, the head of Strategas Research Partners’ policy research unit, expects that a new round of economic stimulus to address the effects of pandemic will be completed by the end of July, and talks about why the market is forecasting a Joe Biden presidency.

* Profile: Jim Madden, portfolio manager of the Trillium ESG Global Equity fund, says trying to make macro forecasts or calling a top or bottom to the market is detrimental to managing money; the fund integrates ESG and financial metrics, looking for high-quality companies with the ability to grow (top 10 holdings: MSFT, AAPL, GOOGL, PYPL, ADBE, Roche Holding, V, TSM, MSCI, NVDA).

* Features: 1) Positive on MSCI: Shares have rallied 45 percent this year and trade for 47 times 2021 estimated earnings; revenue from index licensing and related fees is expected to grow at an annual rate of nine percent over the next four years, and while a stumble could send shares down, they likely have more upside; 2) A look at various index providers, which “set the rules by which companies are admitted to stock indexes—rules related to market-capitalization, corporate domicile, and financial viability, for example—thereby influencing asset flows, demand for individual securities, and in many cases, the composition of our portfolios”; 3) Positive on DG, DLTR: For many of the more than 30 million Americans relying on unemployment benefits because of the coronavirus pandemic, dollar stores, which are focused on value, are the only option for many goods—and for investors they are a growth story when other retailers are not; 4) Story on Barron’s list of the Top 100 Women Advisors of 2020 says that “less than 20 percent of the industry’s financial advisors are women, a number that remains stubbornly stuck, even after two decades of gender-equity initiatives by the largest wealth management firms"; The list is topped by Kimberlee Orth of Ameriprise Financial Services, Karen McDonald of Morgan Stanley Wealth Management, and Stephanie Stiefel of Neuberger Berman; 5) Positive on GHC: The low-profile diversified holding company run by the Graham family, former owners of the Washington Post, “amounts to an undervalued, small-scale Berkshire with a good chance of a positive catalyst in a potential TV spinoff,” and it has a dividend yield of 1.6 percent; 6) A coronavirus vaccine authorization before November 3 could be a big political win for the Trump administration, which has made the rapid development of a vaccine the cornerstone of its pandemic response, but former FDA officials warn that such an October surprise could undermine trust in the vaccine and kneecap a recovery.

* Top 100 Women: Barron’s profiles some of the women on its list of the Top 100 Women Advisors, including Leslie Lauer, manager of the Employee Stock Ownership Plan Group at UBS; Elizabeth Weikes, principal with The Weikes Group in J.P. Morgan Securities’ wealth management division; Johanna Walters, a partner at Merrill Lynch’s Walters Bailey Associates; Barbara Yee, the founder of NY Pine Group at Morgan Stanley; Lee DeLorenzo of United Asset Strategies; Tracey Gluck, founder of J.P. Morgan’s The Gluck Group; Judith Lee, president of Merrill Lynch’s Women’s Exchange; and Carla Harris, vice chairman and managing director at Morgan Stanley.

* Follow-Up: Positive on GS: The firm’s blowout quarter wasn’t a fluke, and it is the rare big financial company with an improving business and earnings outlook, and a stock that looks reasonably priced at little more than 10 times forward earnings and at tangible book value.

* European Trader: Positive on Tele2: The company, which provides mobile and fixed-line services in Sweden, and is active in Estonia, Germany, Latvia, and Lithuania, saw lower revenues from roaming fees as locked-down customers stopped traveling during the pandemic, but because more than 80 percent of its revenues come from the stable Swedish market, it is well-positioned for a comeback.

* Commodities: “More than two years after China’s launch of yuan-denominated crude-oil futures, global interest in the contracts has seen a notable increase—but analysts don’t expect the contracts to become widely used anytime soon, citing challenges linked to currency and availability to international traders.”

* Streetwise: “Stockflation seems likely—this past week the S&P 500 index briefly erased its losses for the year, even though second-quarter earnings will be grisly, and the pace of recovery is uncertain,” says columnist Jack Hough. “The promise of very low interest rates for years to come helps explain the appeal of stocks, even at elevated valuations.”

EU leaders deadlocked on recovery fund in marathon summit

Meeting enters third day as bloc haggles over size and conditions of €750bn recovery plan

Divided EU leaders headed for their third day locked in talks over Europe’s proposed €750bn response to the coronavirus pandemic, as they battled to overcome differences that have split north and south, and east and west.

After two days of marathon summit negotiations in Brussels, European leaders on Saturday evening failed to bridge deep differences over the size, design, and conditions attached to a planned multibillion-euro package of loans and grants designed to revive Europe’s economy after months of hibernation.

The summit has laid bare divisions pitting a group of richer “frugal” member states — Austria, Sweden, Denmark and the Netherlands — against the biggest recipients of EU pandemic emergency funds.

Frugal capitals are demanding drastic cuts to a €750bn package as their price for signing up to a final compromise, while Spain, Italy and others have pushed back against substantial cuts, forcing talks to spill into Sunday.

At the start of Sunday’s talks, Germany’s Angela Merkel told reporters she was uncertain “whether a solution will be found”.

“There is a lot of goodwill but there are also a lot of different positions,” she said. “I will do my part in this. But it is also possible that there will be no result today.”

Non-frugal leaders emphasised their desire to reach a deal, but warned that it could not come at the expense of whittling down Europe’s economic response to Covid-19.

A deal “will not be built on sacrificing Europe’s ambition,” France’s Emmanuel Macron said. “Not out of principle, but because we are facing an unprecedented health, economic and social crisis, because our countries need it, and because the unity of Europe needs it.”

His stance was echoed by other leaders including Greek prime minister Kyriakos Mitsotakis, who said: “We simply cannot afford to either appear divided or weak.”

Sunday’s talks are set up to be a crunch moment for the EU’s ability to respond to the worst economic crisis to hit Europe in the postwar era.

The proposals on the summit table are the fruit of months of work by Brussels to craft an effective response, but they take the EU into the uncharted territory of allowing the union to borrow massively on the financial markets. The talks are also tied up with negotiations on the bloc’s next long-term budget, forcing leaders to confront longstanding divisions over EU economic policy.

Diplomats said Charles Michel, European Council president, would need to table a fresh compromise addressing the outstanding issues on Sunday, or risk failure in the first face-to-face summit of EU leaders in five months. The splits cover everything from the volume of recovery aid to how to police countries’ respect for the rule of law, to how to make sure capitals honour commitments to economic reform.

A diplomat from Germany, which holds the rotating presidency of the EU, said the meeting entered a crucial phase overnight as leaders from France, Germany, the Netherlands, Italy and others held bilateral talks late into the morning.

Hungary’s illiberal premier Viktor Orban also emerged as a roadblock to a deal after he entered the summit threatening to veto a compromise that tied distribution of aid to respect for the rule of law. During Saturday’s sessions, Budapest demanded that any potential sanctions to suspend cash payments could only be done with the unanimous support of all governments — in effect handing one country a veto.

Mr Orban’s stance was backed by Poland and Slovenia. All three rejected a draft plan that that would require a qualified majority of member states to back potential cash sanctions. Western governments, including the frugals and France, have called for a stringent system under which money would be withheld for governments who breach the EU’s fundamental rights. One diplomat said Hungary and Poland’s stance was designed to extract more money as part of a final compromise.

Progress on multiple fronts stalled on Saturday despite Mr Michel tabling a compromise in the morning that trimmed €50bn off the total amount of grants to be doled out under the recovery plan.

By late afternoon, leaders from the frugals and Finland were pushing for substantial cuts to the level of grants in the €750bn package, creating a new deadlock in the talks. Southern countries with the backing of France and Germany have insisted the grants element should be ringfenced at €400bn from a current €450bn, diplomats said. A Franco-German proposal from May called for at least €500bn in grants.

In a tense meeting with frugal leaders after the summit, Ms Merkel and Mr Macron were visibly frustrated by the demands for lower grants and prematurely left the talks. “They were not happy with the frugals’ demands on the size of cuts,” said one diplomat. 

A demand from Mark Rutte, Dutch prime minister, to unilaterally veto grant payments to stricken countries if they do not meet reform demands also continued to spark resistance from Italy.

Italy’s prime minister Giuseppe Conte said his country was “sharply confronting” frugal capitals in order to rescue a sizeable recovery package. “[Our] tools must be proportionate to the crisis and effective. Our answer must be prompt, solid, robust,” Mr Conte said during a break in the summit.

But diplomats said these governance rules remained a major sticking point going into Sunday. Both Madrid and Rome have said they cannot accept a system where finance ministers would need to unanimously back a decision on whether to resume cash payments or not.

Mr Michel’s compromise plan kept the overall size of the EU’s borrowing plan at €750bn, but shifted the balance between loans and grants. Cuts to the overall volume of grants were done by scrapping a proposed recapitalisation tool for struggling companies worth €26bn and trimming an initiative to stimulate private investment from €30bn to €11bn.

Azeri protesters demand move to open war after fighting revives tensions over Caucasian enclave

One of the world’s longest-running territorial disputes in the Caucasus Mountains has erupted anew after 20 people died last week in fighting on the border between Armenia and Azerbaijan.

The skirmishes began about 300km north of the contested enclave of Nagorno-Karabakh on July 12 and prompted tens of thousands of protesters to storm Baku’s parliament in anger and demand a return to full-on war. The fighting died down after two days before shelling resumed.

It was not immediately clear what caused the violence, which both countries accused each other of starting. Zaur Shiriyev, Caucasus analyst for the International Crisis Group, said the violence probably began as a small incident that escalated due to a loss of faith in a decades-long multinational peace process. 

The sudden escalation comes as both countries are struggling to contain the coronavirus pandemic: Armenia, which has a population of just 3m, has recorded nearly 35,000 Covid-19 cases. Meanwhile, energy-rich Azerbaijan’s economy has taken a hit from falling oil prices.

“Negotiations aren’t yielding any results. That raises the tensions on international border areas, so each side has been expecting the other to attack,” Mr Shiriyev said.

War broke out in the final years of the Soviet Union after ethnic Armenians in Nagorno-Karabakh fought against Azerbaijan’s control. The conflict raged until a ceasefire was brokered in 1994. Violence has since erupted regularly along the line of contact. Four years ago, fighting caused more than 100 deaths. 

The territory of less than 150,000 people lies within Azerbaijan’s borders but is populated by Armenians who run their affairs with political and military support from Yerevan. The conflict has destabilised a vital region for oil supplies to Europe, via a pipeline to Turkey.

Russia, the main mediator in the conflict and a close ally of Armenia, called on both sides to show restraint and discussed the clashes at a session of President Vladimir Putin’s security council on Friday. Turkey, which backs Muslim-dominated Azerbaijan — as well as opposing sides to Russia’s proxies in the Syrian and Libyan wars — blamed Armenia for starting the fighting.

“There is no one capable of deterrence or restraint,” said Richard Giragosian, director of the Regional Studies Center, a think-tank in Yerevan. “The real question is less about international mediation and much more about how far Armenia and Azerbaijan want to continue this escalation. Armenia now feels compelled to respond, and we are in a tit-for-tat situation that is spiralling out of control.”

Hope for reconciliation rose in 2018 after Armenia’s “velvet revolution” ousted longtime president Serzh Sargsyan, head of a “Karabakh clan” that had tightly controlled the country for years, and brought protest leader Nikol Pashinyan to power.

Armenia and Azerbaijan launched direct communication channels to minimise shooting incidents at the front lines and declared early last year they would “prepare the population for peace”.

Azerbaijan’s hopes that Mr Pashinyan, an ex-journalist with no ties to Nagorno-Karabakh, could fundamentally narrow the gap between the countries’ positions on the conflict may have been misplaced. Mr Pashinyan visited Nagorno-Karabakh a day after becoming prime minister and has returned several times since, including a trip for the inauguration of the enclave’s new de facto president in May. 

“All of those moves suggest that there’s going to be no change in Armenian policy, which is received in Azerbaijan as the continued policy of annexation,” said Laurence Broers, Caucasus programme director for Conciliation Resources. “The longer the conflict goes on, the less likely it is that Azerbaijan is going to get minimal concessions or results, never mind the return of Nagorno-Karabakh itself.”

Mr Pashinyan’s rhetoric is less bellicose than his predecessor’s. His wife, journalist Anna Hakobyan, launched a social media campaign to stop the fighting. But public tensions remain high in Azerbaijan after this week’s clashes claimed the life of Azerbaijani Major General Polad Hashimov, the highest-ranking officer to be killed in the conflict since the wars. 

About 30,000 pro-war protesters clashed with police in downtown Baku after a soldier’s funeral on Tuesday, demanding that Azerbaijan abandon negotiations entirely and move to open war with Armenia.

Two days later, Azerbaijan’s president Ilham Aliyev sacked his foreign minister, who he said had “been involved in some useless negotiations” trying to grant access for World Health Organization officials to help deal with the pandemic in Karabakh.

“What kind of negotiations over Covid can we be carrying out with an enemy country, and country at war with us? It’s absurd,” Mr Aliyev said. “It means we are going to start co-operating with Armenia?!”

The unexpected outpouring of pro-war sentiment presents an unusual challenge for Mr Aliyev, whose government is normally quick to stifle dissent and prevent public rallies. On Tuesday, however, police stood by before some protesters broke into the parliament building, chanting “End the quarantine and start the war!”

Mr Aliyev later said that most of the protesters were peaceful patriots led astray by opposition activists, who he said were “worse than Armenians”.

“A lot of public opinion is more radical than the government can be,” said Thomas de Waal, a senior fellow at the Carnegie Endowment for International Peace. “Aliyev’s riding a tiger — he’s providing this bellicose rhetoric, which he probably doesn’t really believe in, but it sets the public mood.”

Executives reflect on prime conditions created as coronavirus panic shook markets

Wall Street’s top five banks have posted their best quarter for trading in a decade after the coronavirus pandemic led to frenzied market conditions and radical interventions from central banks.

JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup posted combined trading revenues of $33.4bn in the second quarter, their highest tally since the $33.7bn they made in the first quarter of 2010. The gains cushioned the blow of more than $20bn of provisions for loan losses on the banks’ income statements.

But executives are already warning of a sharp drop-off. Just hours after announcing his bank’s 80 per cent rise in trading revenues from a year earlier, JPMorgan Chase boss Jamie Dimon suggested analysts could “halve” that haul as a predictor for the rest of the year. Other executives agreed with the thrust of Mr Dimon’s argument: this was a blowout quarter and unlikely to be repeated. 

“It was probably as good an environment as you could have,” said Carey Lathrop, co-head of global markets at Citi and a 32-year trading veteran. He described two key factors: clients rapidly adjusting their portfolios to deal with fast-changing economic forecasts, and the huge bond-buying programmes launched by the US Federal Reserve and other central banks — which had also slashed interest rates.

The flurry of activity lifted trading volumes in the earlier part of the quarter, multiplying bankers’ fees as they put through higher numbers of buy and sell orders. Bankers said daily volumes at some trading desks were three to five times normal levels.

Fast-moving prices in the March sell-off had widened the gap between the cost of buying an asset and selling it. “Volatility ticking up led to elevated client activity and wider bid/offer spreads,” Jim Esposito, Goldman’s co-head of global markets, told the Financial Times. “This increased client activity fell to the bottom line.”

Jon Pruzan, chief financial officer at Morgan Stanley, also identified wider bid/ask spreads as a significant contributor to the growth in revenues.

Traders said that the Fed’s promise in March to buy sovereign bonds in unlimited amounts and to buy corporate bonds for the first time, followed by a pledge in early April to buy riskier credit, helped to stabilise the market.

The actions changed investors’ mindset from “‘how far can this go, how negative can it get?’ to ‘what assets should I be buying right now?’” said Troy Rohrbaugh, head of global markets at JPMorgan, which posted market-leading trading revenues of $9.7bn for the quarter.

The result was more investors buying and selling stocks and bonds, helping to offset the effects of shrinking bid/ask spreads, as uncertainty faded. At the same time, fears of recession and a cash crunch prompted big companies to raise record amounts of debt, which generated follow-on trading in secondary markets. One final tailwind was an increase in the value of bonds and derivatives held by the banks, which had been marked down at the end of the first quarter.

Fixed income markets were the best performing in the second quarter, with revenues across the five US banks almost doubling. Executives said the standout segment was rates, which includes sovereign bonds, financing and related derivatives, but noted that trading of commodities, currencies and corporate bonds was also very lively.

Analysts expect that the US banks’ rivals across the Atlantic should get a similar, if smaller, boost in their results. Kian Abouhossein, an analyst at JPMorgan, said European banks would likely post a 40 per cent increase in their fixed-income trading revenues for the second quarter, led by a 69 per cent increase at Barclays and a 45 per cent rise at BNP Paribas. Deutsche Bank is expected to report a smaller rise of about a fifth. On average, European banks make about half the fixed-income trading revenue of their US peers.

With the second half well under way, Wall Street is already seeing trading activity taper. “June was a transition month and now in July volumes are back to somewhere very similar to what we have seen in recent years,” said Hans Mikkelsen, a credit strategist at Bank of America. The volume of daily trading in top-rated bonds has fallen about a third from its peak to $20bn, BofA’s research shows. 

At Citi, Mr Lathrop described a “slowdown” in July which he expected to continue into August, contributing to a second-half performance that was similar to that of the past few years. 

Amrit Shahani, research director at industry monitor Coalition, said that trading revenues in the third and fourth quarter would probably be at least 20 to 30 per cent lower than the second quarter, across big US and European banks.

Potential sources of volatility remain, including the US presidential election in November, tensions between Beijing and Washington and the surge in Covid-19 cases in the US.

But Mr Rohrbaugh said he “wouldn’t expect anywhere near the same level of volatility that we saw earlier in the year. The markets were reacting to a much higher level of uncertainty then.”

Ericsson/5G: tough call

The Swedish telecoms equipment maker has more in its favour than market opportunity

Ericsson’s moment has arrived. The Swedish telecoms equipment maker’s biggest rival — China’s Huawei — has been ejected from 5G networks across the globe. Under government orders carriers are ripping out kit made by Huawei and, in several countries, replacing it with Ericsson’s.

Second-quarter results reported on Friday suggest the company is up to the task. Bucking the trend set by most companies in a pandemic-ravaged quarter, the Swedish group lifted sales slightly to SKr55.6bn (£4.83bn) compared with a year ago. Operating income was up 3 per cent at SKr3.85bn. Investors cheered, sending the stock up by a tenth to its highest level in more than a decade.

The group has more in its favour than market opportunity. Without Huawei, the market for radio access networks — which connect devices to the core network — is virtually a duopoly for Ericsson and Nokia. Nokia has a new boss but the same morass of legacy issues — plus a wrong bet on the chips driving 5G technology. Samsung of South Korea commands a far smaller share. It is championing the as-yet untested virtualised RAN — off-the-shelf hardware with customised software.

More crowded, and profitable, is the core network. This has attracted new players as diverse as Oracle in the US and Rakuten, the Japanese group best known for its ecommerce business. Still, Ericsson has been steadily investing in R&D, to the tune of $4.25bn last year — 17 per cent of sales.

It is not a home run. Ericsson has filed just shy of 1,500 5G patent families according to iPlytics, by January 1. Patents are a crude measure, but that is half Huawei’s cache and behind both Samsung and Nokia.

More importantly, the future of 5G is far from assured. 5G has become a political fight and there is currently scant commercial appeal. Vodafone has called for the UK to can its spectrum auction. Carriers, obliged to spend more to rebuild networks face a lag on recouping costs given limited Internet of Things applications. Ericsson is in a better position than the market it is targeting.

Coronavirus and series of crises have placed heavy pressure on Natixis’ share price

French co-operative bank BPCE has explored buying the 30 per cent of Natixis it does not already own after the investment bank’s shares were hammered by the pandemic, according to people briefed on the situation. 

The potential deal would also follow a series of crises at Paris-headquartered Natixis that has called parts of its business into question.

BPCE, which is unlisted, had worked with advisers on a buyout plan in recent months, the people said.

The same people cautioned however that the situation was at an early stage, other options were also being considered and there was no guarantee that a bid for Natixis shares would occur.

One person added that the publication of a report about BPCE’s deliberations might cause bankers and lawyers to temporarily stop work on any deal. The revelation also comes as many in Paris head off on holiday, a period during which dealmaking tends to go on hiatus.

Natixis declined to comment and BPCE did not respond to repeated requests for comment.

Along with the rest of Europe’s banks, Natixis has been hit by negative interest rates and the pandemic. It has also had its risk management scrutinised by investors following large losses on equity derivatives and in one of its prominent asset management subsidiaries. 

The shaky performance has knocked the French bank’s shares by almost 40 per cent so far this year, giving it a market capitalisation of €7.7bn, according to Reuters data. The Stoxx European Banks index has lost just over 30 per cent of its value over the same time.

Successive crises, combined with the pressures afflicting the banking industry generally, have pushed Natixis’s share price down to about 60 per cent below its 2018 peak.

Its equity trading division, which makes complicated trades for clients, has suffered since 2018, when its ability to manage risk came under fire after a €260m loss linked to South Korean derivatives emerged in late 2018.

Problems resurfaced in the first quarter of 2020 as companies slashed dividends due to Covid-19 — hitting Société Générale and BNP Paribas at the same time, and helping push Natixis to a €204m loss. 

SocGen has already put its equity business under review and analysts at Jefferies argue Natixis’ division “is in pain” and “a strategic review is needed . . . considering the accumulation of ‘accidents’ over the past two years”.

More broadly, questions have been raised about the bank’s multi-boutique asset management strategy, which involves Natixis taking majority stakes in smaller fund management and advisory boutiques that continue to be run at arm’s length

Last year, the Financial Times revealed that H2O Asset Management, one such entity, had put more than €1bn of investors’ money into illiquid bonds linked to Lars Windhorst, a controversial German financier. The news triggered €8bn in outflows in the weeks that followed. Investors have pulled about €1bn out of poorly performing H2O funds this year.

BPCE, formed by the merger of French mutual banks Caisses d’Epargne and Banques Populaires more than a decade ago, already bought Natixis’s consumer finance, factoring, leasing, sureties and guarantees, and securities services businesses in a €2.7bn deal in 2018.

Laurent Mignon, chief executive of BPCE, had previously run Natixis, turning it round after the financial crisis before handing the reins to current chief, François Riahi, in 2018.