TheChek News Flow

Adam Korn supervised 5,000 engineers working to electronify Goldman trading floor

Goldman Sachs Group Inc.’s GS 0.53% “straders,” the hybrid trader-coder whose star has been on the rise inside the Wall Street firm, are losing their ringleader.

Adam Korn, who represented a new kind of Wall Street trader—one reared on computer code, not instinct—is leaving the firm, people familiar with the matter said Monday. His departure follows that of Martin Chavez, a technologist and trading executive who left at the end of last year. More resignations are expected across the firm in the coming weeks, as 2019 bonuses are paid out.

An 18-year Goldman veteran, Mr. Korn most recently supervised 5,000 engineers working to electronify the trading floor and build new software for clients. The most ambitious, called Marquee, is laying digital pipelines to replace a trading flow that still relies on phone calls and paper tickets.

Goldman has long prided itself on its engineering chops. Its house-built trading and risk-management software, known as SecDB, led a digital revolution on Wall Street in the 1990s, and today about one-quarter of its employees are coders.

But more recently, Chief Executive David Solomon has hired from Silicon Valley and promoted investment bankers into senior tech roles, pulling from traders’ rival tribe. Last fall he hired a pair of outsiders, Amazon.com Inc. veteran Marco Argenti and former Yahoo executive Atte Lahtiranta, to help lead Goldman’s technology efforts.

That has appeared to leave less room for executives like Mr. Korn, an applied math and economics double-major at Brown University who joined Goldman in 2002. He spent his early years churning out code in the corner of the firm’s stock-trading floor and later became Goldman’s first “strader,” a hybrid role that combined risk-taking trader and tech whiz.

He helped lead the development of Marquee, which allows clients to trade, manage risk and access Goldman’s data and research without picking up the phone.

Mr. Korn will remain an adviser to Marquee and will work with Goldman executives evaluating and investing in financial-technology companies, people familiar with the matter said.

Ford miscalculated the White House’s desire to make a deal with California on fuel-economy regulations and irritated its peers

When Ford F 1.81% Motor Co. Executive Chairman Bill Ford Jr. called the president last spring, he was hoping to defuse what was looking like a lengthy legal battle over the nation’s fuel-economy regulations for vehicles.

The Trump administration wanted to significantly ease U.S. environmental rules. California had sued to stop that. The car industry was caught in the middle. Mr. Ford, calling from his Dearborn, Mich., office, urged the president to broker a compromise with California, according to people with knowledge of the conversation.

President Trump was puzzled and told Mr. Ford his view was out of step with his industry peers. “He basically said: ‘You’re on your own’ ” to Mr. Ford, one of the people briefed on the call said.

The call was part of a nearly yearlong push to fend off the expense and delays of competing fuel standards, but Ford miscalculated the White House’s appetite for a deal. Its efforts ultimately backfired, putting it at odds with the administration and other big car makers.

When Ford eventually made its own deal with California last summer, it drew an antitrust inquiry and spurred the administration to speed up efforts to strip California’s authority to set its own tailpipe standards.

It also irritated Ford’s biggest rivals, including General Motors Co. and Toyota Motor Corp., which have since sided with the Trump administration on the issue.

The industry—more polarized than ever—is now facing a confrontation that could last for years, leaving it in a costly limbo.

The Trump administration in the coming weeks is expected to finalize new fuel-economy rules that significantly dial back the targets adopted under President Obama. Mr. Trump’s legal fight with California, the state that is the U.S. auto industry’s biggest market, is expected to be bitter and drawn-out.

It is part of corporate America’s struggle, three years in, to find a way to operate with the Trump White House—where a disagreement could launch a barrage of negative tweets and when dramatic policy shifts come without warning. In the auto industry, none of the major players have managed to forge a way forward.

In its own deal with California, Ford agreed with the state to meet targets tougher than Mr. Trump’s proposal but still tamer than the Obama-era requirements. Executives hoped the agreement would show the White House and other auto makers that California was willing to compromise.

Mr. Ford said the pact will allow the company to plan its vehicle lineup without being at the mercy of a legal fight. “We have this heavy commitment to electrification,” he said in an interview. “This is where the rest of the world is taking us anyway. If you start to add it all up, a giant rollback wouldn’t have helped us at all.”

Three other car companies— Volkswagen AG , BMW AG and Honda Motor Co. —followed with similar agreements with the state.

In October, GM, Fiat Chrysler Automobiles NV and Toyota sided with the Trump administration in challenging California’s authority. The companies said at the time they believed the federal government is best positioned to set a single national standard. Their decision drew praise from Mr. Trump.

“This has put the auto industry in a quagmire,” said Brett Smith, a director at the Ann Arbor, Mich.-based Center for Automotive Research.

Unsure which side will win, car companies still need to move ahead with planning new vehicles that are designed and engineered years in advance of hitting showrooms, Mr. Smith added.

The nation’s fuel-economy regulations, in place since 1975, have broad influence, including on a vehicle’s engine and the mix of models offered. The existing rules were agreed to in 2012 in collaboration with California, when gasoline prices were higher, and sought to cut U.S. tailpipe emissions in half for new cars by 2025.

In recent years, average fuel prices have stayed well below $3, and U.S. car buyers have chosen heavier, less fuel-efficient SUVs and trucks, which made the regulations tougher to hit. Executives lobbied for more flexibility.

The industry initially saw an ally in Mr. Trump. Days after his inauguration in January 2017, the chief executives of Ford, GM and Fiat Chrysler met with the president at a White House breakfast. They asked him to consider a review of the Obama-era rules, believing them outdated.

Ford’s then-CEO Mark Fields was outspoken on this point, arguing publicly that the regulations would hurt U.S. manufacturing jobs. Two months later, at a rally in Michigan, Mr. Trump agreed to re-evaluate the rules.

By spring 2018, auto executives were getting nervous. The White House signaled it wasn’t only looking to ease the regulations, but to break with California, which under the Clean Air Act can request waivers to impose stricter pollution controls than those of the federal government.

More than a dozen other states follow California’s rules—covering more than 40% of U.S. vehicle sales—leaving manufacturers concerned about differing regulations.

At the industry’s urging, Mr. Trump asked administration officials to negotiate with California. They were to meet with Mary Nichols, an environmental lawyer who was first appointed to the state’s powerful air-resources board in 1975. California’s waivers have long afforded its regulators vast influence over setting auto-market standards.

Talks with California didn’t get far before the EPA issued its proposed rule in August 2018, confirming what many auto executives feared: Rather than merely relax the targets, the White House wanted to freeze the requirements altogether at 2020 levels, nixing the 5% annual improvements set under Mr. Obama. That would forgo about one-third of the greenhouse-gas reductions expected when the current rules were agreed to.

Administration officials said the proposal would boost sales and lower sticker prices, enticing more buyers. Mr. Trump has said the move was intended to help the U.S. auto industry.

In recent months, the Trump administration has shown a willingness to bend—the final rule is expected to include a 1.5% annual increase in the fuel-economy targets, rather than a wholesale freeze.

California and environmental lobbies are still gearing up for a fight. Environmental groups ran an ad in several U.S. newspapers in January focused on GM, Toyota and other auto makers who sided with the Trump administration, saying the companies were “attacking crucial clean-car standards that are helping to address climate change.”

Environmental leaders have praised Ford’s California deal, after having criticized the company previously for not opposing the proposed rollback. In May 2018, Public Citizen, a consumer-advocacy group, drove a Ford sedan with a faux black cloud protruding from its tailpipe to the company’s headquarters with a sign reading: “Don’t let Ford roll back clean air standards!”

For the 62-year-old Mr. Ford, such criticism was bothersome, colleagues said. He considers himself an ardent environmentalist, spending much of his Ford career championing green causes, including the industry’s first hybrid-electric SUV and insisting on a sustainable roof, planted with greenery, on Ford’s largest factory.

By early 2019, he had dispatched a top lieutenant, Joe Hinrichs, to Washington to press the White House to negotiate with California. Mr. Hinrichs, president of Ford’s automotive operations, met more than a half-dozen times over several months with senior White House officials, including Vice President Mike Pence, said people with knowledge of the meetings.

In one, Mr. Hinrichs urged senior adviser Jared Kushner to reach out to California Gov. Gavin Newsom, whom Mr. Kushner had joined months earlier to survey wildfire damage, and ask about a compromise, the people said.

White House officials felt they were getting nowhere with California, believing the state was slow-walking talks in hopes Mr. Trump would lose the election in 2020, according to current and former administration officials.

California, meanwhile, felt the administration was insistent on revoking the state’s waiver and not interested in compromise, Ms. Nichols said. “The administration’s desire to get California completely out of the picture was always sort of hanging over our head,” she said.

Around this time, Ford staffers had been quietly talking with California regulators about a fallback plan that eventually evolved into a deal.

After the failed call to Mr. Trump, Mr. Ford convened a meeting with Ford Chief Executive Jim Hackett, Mr. Hinrichs and other executives about dealing directly with California as a way to align the company’s U.S. emissions goals with stiffer rules overseas.

Ford executives discussed possible backlash from Mr. Trump, but Mr. Ford said customers might reward them for opting to meet more stringent environmental targets, said a person who attended the meeting.

Company executives thought the California agreement could be an olive branch, showing state officials were willing to meet Mr. Trump halfway, said Mr. Hinrichs in an interview. “We wanted to continue the dialogue, and encourage others to continue the dialogue,” he said.

The White House was no longer interested in talking.

Ford wasn’t an obvious candidate for pushing stiffer fuel-economy rules. The company’s truck-and-SUV-heavy lineup ranked third-to-last in fuel economy of 13 major auto makers, according to the most-recent EPA data. But the company has new hybrid and electric vehicles in development that will help improve fuel-efficiency, executives reasoned.

Honda, already a leader in fuel economy, came to terms with California, encouraged by Ford’s move, people familiar with the matter said. Volkswagen, investing billions into electric cars, also signed on, seeing the proposed freeze as out of step with emissions regulations in its two biggest markets, China and Europe, said one company executive. By mid-July, California also had a commitment from BMW.

Other car companies were approached, but GM was purposely left out. The group worried the company was meeting with the administration and would try to derail their effort, Ms. Nichols said.

When the pact was publicly revealed July 25, the president was frustrated, telling advisers he felt betrayed by the companies, according to White House officials. Mr. Trump believed he had given them what they had asked for and couldn’t understand why they were siding with California. He later tweeted that company founder Henry Ford —Mr. Ford’s great-grandfather—would be “rolling over.”

GM executives were irritated, too, having been excluded from discussions, according to people familiar with their thinking.

A month after the California deal was revealed, Ms. Nichols said her team flew to Detroit and met on the 39th floor of GM’s headquarters with Chief Executive Mary Barra to discuss joining. After hearing the proposal, Ms. Barra believed the terms didn’t offer enough incentive for electric vehicles, a major focus for the company, people briefed on the meeting said.

California officials tried to recruit other auto makers. The governor personally called a Toyota executive. The company felt the deal de-emphasized hybrid cars, its specialty, and wasn’t eager to provoke the administration, which has threatened import tariffs on foreign-built cars, according to a person briefed on the exchange.

Inside the White House, anger was festering. The administration wanted to prevent other auto makers from joining, and accelerated efforts to revoke California’s waiver.

In September, the Justice Department dropped another bombshell: It had opened an antitrust investigation into whether Ford, Honda, Volkswagen and BMW had violated federal law in forging their pacts with California.

The probe blindsided Ford executives and some felt it was politically motivated, according to two people with knowledge of the reaction. A company spokeswoman said Ford is cooperating with the Justice Department.

A White House spokesman referred questions to the Justice Department, which declined to comment on the accusations. At the time the probe became public, a person familiar with the investigation said the Justice Department’s antitrust division is acting on its own accord and without direction from or coordination with the White House.

The shock of a federal investigation had a chilling effect on the ongoing talks between the four auto makers and California, as well as the state’s efforts to recruit others.

BMW, Volkswagen and Honda all said they planned to adhere to the California deal regardless of other companies joining, but declined to comment further.

White House officials began calling car companies not aligned with California to muster support for the administration’s efforts to remove the state’s waiver, according to people at those companies and administration officials.

GM was initially reluctant to take a stance, and other auto makers, including Toyota, didn’t want to intervene without GM, the U.S.’s largest auto maker by sales, making the first move. A weekend call in October from a senior White House adviser persuaded GM executives to publicly back the administration, the people said.

The following Monday, GM, Toyota, Fiat Chrysler and two other car companies said they sided with the Trump administration. More auto makers joined the group shortly after.

Ford executives said they would stick to their agreement with California, even if most competitors haven’t followed. “We believe we’re on the right side of this debate for the long term,” Mr. Hinrichs said.

PMI rises to 8-month high on reduced uncertainty but downturn continues

The persistent decline in UK construction activity eased at the start of the year, benefiting from a reduction in political uncertainty that boosted client demand and improved sentiment in the sector.

The IHS Markit/Cips UK construction purchasing managers’ index rose to an eight-month high of 48.4 in January from 44.4 in December, and higher than the 46.6 expected by economists polled by Reuters.

A reading below 50 indicates a majority of businesses reporting falling output compared to the previous month.

“The construction sector downturn lost intensity in January amid slower reductions in house building, commercial work and civil engineering activity,” said Tim Moore, economics associate director at IHS Markit.

Housing was the best performing sector while commercial activity decreased for the 13th consecutive month in January, but the rate of contraction was much weaker than in December and the softest since the start of 2019.

Survey respondents widely commented on a boost to client demand from easing political uncertainty, according to the report, while optimism among construction companies rose to the highest level since April 2018.

The construction purchasing managers’ index comes a day after the index for manufacturing showed business conditions in that sector had stabilised in January after a year of high volatility linked to Brexit uncertainty.

Incoming economic data is being closely tracked to monitor the impact of the UK’s official departure from the EU on January 31 as well as the effect of the decisive December general election result on business and consumer spending and investment.

Its valuation is a vindication for those YouTube commentators, institutional investors and clean energy enthusiasts who believe that the electric car company is on track to dominate in the new-world market of vehicles that silently glide down our streets. The $750-plus price tag is also a slap in the face of those — from the bleeding short-sellers to Street analysts to this very blog — who have been sceptical of Saint Elon of Musk and his company.

So what’s changed since fears last year the company might be heading for a brick wall?

Judging by its fourth-quarter results, quite a lot. Since posting a free cash flow burn on $944m in 2019’s first quarter, the company has recorded three successive periods of cash generation — the latest figure an impressive $976m. Cash flow improved so much so that, despite that dreadful first quarter, free cash flow for the year came in to $973m.

Margins have also improved, with Tesla’s 2019 ebitda margin rising 1.5 percentage points year-on-year to 9.1 per cent, and even on a net income basis, Tesla has been posting GAAP profits. Although the margins themselves are not much to write home about, at just 2.3 per cent and 1.4 per cent for the last two quarters respectively.

Despite these positives, top-line growth from its automotive segment also came to standstill year-on-year, as lower asking prices counterbalanced its record deliveries of 367,656 cars.

Turning to the balance sheet, and Tesla has developed a sizeable cash buffer of $6.3bn, up from $3.7bn at the end of 2018. In part thanks to its improved cash generation, and in part thanks to the $2.3bn it raised in May last year. With a net debt to trailing twelve months ebitda ratio of 3.3 times, down from as high as 17.2 in 2018’s third quarter, it’s fair to say worries over the company’s liquidity have dissipated for the time being.

Yet while Tesla’s operational improvements are worthy of the praise its been garnering from some corners of the media, let’s take a look to see whether they justify the company’s explosive price action over the past nine months.

Let’s start with 2019’s free cash flow figure of $973m, which we define as operating cash flow minus both capital expenditure and the net cost for solar energy systems.

The first point is that stock-based compensation, a non-cash cost for a corporate but not a shareholder, came to $898m for the year, or 92 per cent of free cash flow. Of that $898m, just under a tenth of the cost came from Musk’s ludicrous-mode pay packet, revealed chief financial officer Zach Kirkhorn on the conference call. Ex-stock based compensation, free cash flow would have been just $75m.

Second, Tesla has turned the taps on its capital expenditure off. In the first quarter, the company said:

Our 2019 capex, the vast majority of which will be to grow our capacity and develop new vehicles, is expected to be about $2.0 to $2.5 billion.

In the end, 2019’s capex came to just $1.3bn — a $1bn saving which is roughly equivalent to its total free cash flow.

Kirkhorn acknowledged on the call that Tesla has got better at spending cash, not that impressive a feat given the “alien dreadnought” production system ended up with Model 3s being made in a giant tent. But spending $1bn less than expected nine months ago is more than just counting the cents.

Indeed, when you compare Tesla’s capital expenditure as per cent of sales versus its larger rivals, you realise just how tight its budgeting has got:

If Tesla had no new models, or factories, on the horizon this may be more understandable. But this year the Model Y is due to go into production, with the Cybertruck, Roadster and Semi-truck all set to follow in the not too distant future:

Which is hard to square with diminutive capital expenditure and therefore a property, plant and equipment balance that’s down 8 per cent year-on-year:

A further few notes.

Tesla’s receivable balance — the money owed to it from customers — remains a question mark. Despite year-on-year revenues for the fourth quarter growing just 2 per cent, from $7.2bn to $7.4bn, its accounts receivable was up 39.5 per cent to $1.3bn. As FT Alphaville noted in December, for a company that collects its money from customers upon delivery, the balance is pretty high. Apples-to-apples comparisons of this metric with its rivals, as Tesla likes to make, are particularly tricky given that, unlike its competitors, the company runs its own dealership network.

The other balance sheet items which has our scratching our heads is Tesla’s inventory balance. Even though deliveries exceeded production by 7,204 units, inventory remained flat at $3.5bn. Although this may be interpreted either as bullish — the company is stocking up on raw materials ahead of future demand — or bearish — it can’t shift some of the higher-priced vehicles it produced during the quarter. The inventory breakdown will be in the 10-K, so we’ll find out then (whenever it arrives, Tesla not liking to follow common practice here by releasing it the day after earnings).

To focus on this quarter’s financials might feel a little asinine to the wildly optimistic bulls, some of whom believe a fleet of high-yielding self-driving autonomous taxis is just a few years away (barring regulatory approval). So where do analysts estimate Tesla’s numbers will be in 2024?

In four years, the Street reckons Tesla will bring in $66.4bn of revenues, $10.7bn of ebitda (16.1 per cent margin) and earnings per share of $24.15 — for a five-year forward price-to-earnings ratio of 30 times. For comparison, midlife crisis specialist Ferrari currently runs ebitda margins of 28 per cent, and trades at 40 times earnings today. And, crucially, on non-mass market sales of just $4bn.

Ferrari, of course, has made no promises of a 500-mile range battery, self-driving cars, or a rocket enabled electric supercar so perhaps its discount to Tesla’s valuation is justified in an era of rapid technological change. The market is beginning to think so. You might be surprised to hear that we’re not so sure.

* Altice Europe Raised to Outperform at Exane; PT 8 euros

* Alumasc Raised to Buy at Peel Hunt; PT 140 pence (+)

* Atlas Copco Raised to Equal-Weight at Morgan Stanley

* Axactor SE Raised to Buy at Arctic Securities; PT 21 kroner

* Capita Raised to Hold at Deutsche Bank

* Cofinimmo Raised to Overweight at JPMorgan; PT 155 euros (+)

* Delivery Hero PT Raised to 83 euros at Deutsche Bank

* eDreams ODIGEO Raised to Buy at Deutsche Bank; PT 6.80 euros

* Electrolux Raised to Neutral at Citi

* Glenveagh Raised to Buy at Jefferies; PT 1.03 euros

* HeidelbergCement Raised to Outperform at On Field; PT 88 euros

* Iliad Raised to Outperform at Exane; PT 155 euros

* Inditex Raised to Top Pick at RBC (+)

* Keywords Studios Raised to Buy at Berenberg

* Kone Oyj Raised to Neutral at BofA (+)

* Northern Drilling Raised to Buy at SpareBank; PT 20 kroner

* Signify PT Raised to 40 euros from 33 euros at Berenberg

* Worldline Raised to Buy at SocGen; PT 80 euros (+)

>>> Down

* AB Foods Cut to Sector Perform at RBC; PT 2,850 pence

* Atresmedia Cut to Neutral at Citi

* Cancom Cut to Hold at Commerzbank; PT 55 euros

* HeidelbergCement Cut to Neutral at Davy

* Ingenico Group Cut to Hold at SocGen; PT 123.10 euros (+)

* LafargeHolcim Cut to Neutral at On Field; PT 60 Swiss francs

* Morgan Sindall Cut to Hold at Liberum

* Orange Cut to Hold at Berenberg

* Paradox Interactive Cut to Sell at Berenberg

* Royal Mail Cut to Sell at Berenberg

* Swatch Cut to Add at AlphaValue

>>> Initiation

* ASTM SpA Rated New Buy at MainFirst; PT 35.70 euros

* Barratt Reinstated Neutral at JPMorgan; PT 820 pence

* Bellway Reinstated Overweight at JPMorgan; PT 4,890 pence

* Berkeley Reinstated Neutral at JPMorgan; PT 5,370 pence

* Countryside Reinstated Neutral at JPMorgan; PT 510 pence

* Crest Nicholson Reinstated Underweight at JPMorgan

* DSV PANALPINA A/S Reinstated Neutral at BofA; PT 840 kroner (+)

* FirstGroup Rated New Buy at Peel Hunt; PT 164 pence

* Instone Real Estate Rated New Buy at M.M. Warburg (+)

* Kuehne + Nagel Reinstated Buy at BofA; PT 190 Swiss francs (+)

* Persimmon Reinstated Overweight at JPMorgan; PT 3,310 pence

* Redrow Reinstated Overweight at JPMorgan; PT 930 pence

* SSAB Re-Initiated Hold at Handelsbanken; PT 30 kronor (+)

* Taylor Wimpey Reinstated Overweight at JPMorgan; PT 250 pence

* Tullow Rated New Hold at Renaissance Capital; PT 62 pence

* Vistry Group Rated New Underweight at JPMorgan; PT 1,300 pence

>>> Call

* Atlas Copco Risk-Reward Balanced, Upgraded at Morgan Stanley

* Alfa Laval Results Solid With Profit Beat, Morgan Stanley Says (+)

* Capita Raised at Deutsche Saying Cost Concerns Now Priced In

* Electrolux Short-Term Negatives Priced in, Upgraded at Citi

* Europe Postal Sector Relief Unlikely, Royal Mail Cut: Berenberg

* FirstGroup Break-Up Could Deliver Considerable Value: Peel Hunt

* Inditex Raised to Top Pick at RBC on Benefit From Weaker Euro (+)

* Pandora FY Ebit as Expected, 2020 Guidance Somewhat Light: GS (+)

* UBS Positive on U.K. Homebuilders, Raises Targets Across Sector (+)

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