>>> Barron's Weekend Summary

Barron's Weekend Summary: Cover story says North American railroads CSX, UNP, and CNI face a range of challenges; Features positive on UHAL, TPR

* Cover story: North American railroads such as CSX, UNP, and CNI have long been Wall Street favorites by applying productivity gains and price increases to the rising freight volumes that came with economic expansion, but volume is declining amid economic worries and the trade war, while price competition from truckers is growing—leaving efficiency gains the only way to find continued profits.

* Tech Trader: Cautious on AAPL: Company’s recently announced $4.99/month price for its Apple TV+ streaming service looks appealing, but the limited number of shows it offers compared to NFLX and DIS could soon put a dent in its appeal and detract from Apple’s profitability.

* Trader: The fact that the cost of capital is so much lower than it was in 2000 makes companies with fast growth but no profits attractive to investors today, says State Street’s Michael Arone, and is the reason that value stocks will continue to lag as long as real interest rates remain near zero; + UAL: The market may be too negative about the effect of the BA 737 Max grounding on the carrier, and could be missing potential catalysts for United’s stock, including continued expansion of premium plus seating, better credit-card economics, and spring investor day; Positive on FDX: Fears about AMZN’s shipping ambitions are overdone, and the company receives only a small portion of sales from Amazon, and it will benefit from growth in other e-commerce areas,—and while some investors may want to play FedEx with options, long-term investors should simply buy the stock outright.

* Profile: John Miller and Tim Ryan, managers of the Nuveen Strategic Municipal Opportunities fund have a 25-member muni-bond analyst team; one area of focus is distressed bonds, such as those of electric utility FE’s subsidiary FirstEnergy Solutions.

* Interview: Sean Darby, Hong Kong-based chief global equity strategist for Jefferies, talks about the European Central Bank’s launch of a major stimulus package and the political protests in Hong Kong, and says the U.S. and China are more alike than most people think.

* Features: 1) Positive on UHAL: Parent-company of truck-rental service U-Haul “is one of the better kept secrets in the stock market,” partly because if has virtually no analyst coverage, communicates little with investors, and is run like a private business—and the shares look appealing at about $380; 2) Positive on TPR: The holding company that owns Coach, Kate Spade, and Stuart Weitzman has struggled in tough year for retail stocks, but the weakness presents a turnaround opportunity for new chief Jide Zeitlin and for investors—shares yield about 5.3% and the company has just $369M in debt; 3) Interview with Bob Bakish, president and chief executive of VIA, who “has found some answers to television’s existential challenge: how to follow viewers, wherever they choose to watch,” an ability he’ll put to the test when he takes over a combined CBS-Viacom; 4) Positive on APA, COG, CXO, COP, CLR, DVN, FANG, EOG, MRO, NBL, OXY, PXD: Dividends haven’t been a priority for the oil exploration and production sector, but that’s changing in some cases—some of these companies are maturing and changing their capital allocation approaches, potentially signaling better days ahead for income investors.

* Top 100 Independent Advisors: Spuds Powell of Kayne Anderson Rudnick Investment Management holds the No. 1 spot on Barron’s list of top independent advisors, followed by Charles Zhang of Zhang Financial, Kimberlee Orth of Ameriprise Financial, Stephen Cassaday of Cassady & Company, and Edward Cronin of Manchester Capital Management; Profiles of Scott Hanson of Allworth Financial (No. 34); Sarat Sethi of Douglas C. Lane & Associates (No. 28); and Lisette Cooper of Athena Capital Advisors (No. 50); RIA firms face a challenge in today’s market: There’s a quest for scale that will let firms deliver a high-end client experience at a reasonable cost, but there’s also the possibility that growth outpaces a firm’s ability to handle the rate of change.

* European Trader: Positive on L’Oréal: The French cosmetics giant missed consensus sales-growth forecasts for the second quarter, but it’s taking steps to boost sales growth, its fundamentals remain solid, and it’s a strong long-term bet.

* Emerging Markets: “Investors in emerging market sovereigns have been richly rewarded this year, even relative to other sectors of a surging fixed-income market. Yields, which run inversely to prices, have plunged faster than U.S. Treasury debt, tightening the average spread on dollar-denominated emerging market bonds by 90 basis points.”

* Commodities: “Emerging markets have beefed up gold holdings, undeterred by prices near their highest levels in more than six years, as countries such as Russia and China diversify their foreign-exchange reserves—a trend that is likely to continue.”

* Streetwise: Stocks that got too expensive used to eventually sell off, while stocks that sold off too far would rebound, but over the past decade, pricey momentum stocks have gotten pricier, and value stocks have stained the carpet—until recently, when they’ve rallied.

(ZH) Oil To Hit $100? Pompeo Blames Iran For "Unprecedented" Drone Attack That C

Oil To Hit $100? Pompeo Blames Iran For "Unprecedented" Drone Attack That Crippled Largest Saudi Oil Processing Facility

Update 2: In a sharp, if perhaps not unexpected, escalation, US Secretary of State - now without John Bolton by his side - tweeted at 4pm on Saturday, that contrary to earlier reports, "there is no evidence the attacks came from Yemen" and instead accused Iran of launching today's "unprecedented attack on the world’s energy supply" which has now indefinitely taken offline as much as 5mmb/d in Saudi crude production.
In a follow up tweet, Pompeo said that he calls "on all nations to publicly and unequivocally condemn Iran’s attacks" which is odd as not even Saudi Arabia accused Iran of today's aggression (which many speculated could have been a Saudi false flag in hopes of sending the price of oil soaring ahead of the Aramco IPO). Pompeo concluded that "the United States will work with our partners and allies to ensure that energy markets remain well supplied and Iran is held accountable for its aggression."
Will this pivot away from Houthis to Iran as the "origin" of the attack be sufficient grounds to re-inflame tensions between the US and Iran, especially following last week's news that one of the reasons Bolton was fired was due to his hard-line stance on Iran even as Trump was willing to sit down with the Tehran regime for negotiations. Since the deep state stands to make much more money from war rather than peace, our guess is that the answer is a resounding "yes."
Secretary Pompeo

✔@SecPompeo
·
h
Tehran is behind nearly 100 attacks on Saudi Arabia while Rouhani and Zarif pretend to engage in diplomacy. Amid all the calls for de-escalation, Iran has now launched an unprecedented attack on the world’s energy supply. There is no evidence the attacks came from Yemen.
Secretary Pompeo

✔@SecPompeo

We call on all nations to publicly and unequivocally condemn Iran’s attacks. The United States will work with our partners and allies to ensure that energy markets remain well supplied and Iran is held accountable for its aggression

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Update: The WSJ is out with an update hinting at just how much the price of oil is set to soar when trading reopens late on Sunday after the Saudi Houthi false-flag drone attack on the largest Saudi oil processing plant:
Saudi Arabia is shutting down about half of its oil output after apparently coordinated drone strikes hit Saudi production facilities, people familiar with the matter said, in what Yemen’s Houthi rebels described as one of their largest-ever attacks inside the kingdom.
The production shutdown amounts to a loss of about five million barrels a day, the people said, roughly 5% of the world’s daily production of crude oil. The kingdom produces 9.8 million barrels a day.
And while Aramco is assuring it can restore output quickly, in case it can't the world is looking at a production shortfall of as much as 150MM barrels monthly, which - all else equal - could send oil soaring into the triple digits. Just what the Aramco IPO ordered.
Krishnan Viswanathan@kxviswan123

Supply loss from KSA may be as high as 150 MM barrels/month. Oil may hit $100.

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What appears to be the most devastating Yemen Houthi rebel attack on Saudi Arabia to date, took place overnight on the world's largest oil processing facility as stunning videos emerged of massive explosions rocking the major Aramco Buqyaq facility.
Fires burned into the morning daylight hours, with explosions also reported at the Khurais oil field, in what the Houthis said was a successful attack involving ten drones. "These attacks are our right, and we warn the Saudis that our targets will keep expanding," a rebel military spokesman said on Houthi-operated Al Masirah TV.

Barron's : L’Oréal Is Changing the Face of Its U.S. Business to Boost Sales

L’Oréal Is Changing the Face of Its U.S. Business to Boost Sales

French cosmetics giant L’Oréal had a rare misstep in July after missing consensus sales-growth forecasts for the second quarter, but its fundamentals remain solid, and it’s a strong long-term bet.

The world’s biggest beauty firm last week took steps to boost sales growth after demand slowed for makeup in the U.S., including changing its top executive there. L’Oréal CEO Jean-Paul Agon told Barron’s that the growth in makeup would ‘‘reaccelerate’’ with new products and repositioning of brands. “We are doing everything to restimulate the market,” he says about the U.S.

Over the past five years, the maker of Maybelline, Garnier, and Lancôme has been a stock market star, and strong growth in sales and profit helped lift the shares 96.2%, compared with a 53% rise in the Dow Jones Industrial Average.

In July, the stock (ticker: OR:France) posted a 12.1% rise in half-year operating profit to 2.8 billion euros ($3.1 billion) on the back of a 10.6% increase in reported sales to €14.8 billion. The shares lost 4.1% on the day due to missing some forecasts, and have rebounded since to about €251.

Despite the stock fetching a hefty 31 times this year’s expected earnings, broker Mainfirst rated it Outperform in an August note, with a €270 price target, 7.5% ahead of the recent close. Mainfirst analyst Marion Boucheron wrote that L’Oréal should continue to grow about twice as fast as most home- and personal-care players.

She forecasts a 33% increase in earnings before interest and taxes margin, which doesn’t include exceptional costs, to €6.4 billion by 2021. Broker Liberum estimates a 29% rise to €6.2 billion of Ebit, but on an adjusted basis, due to better margins from innovations, and savings from the efficient use of digital advertising.
L’Oréal was founded in 1909 by Eugene Schueller, a French chemist of German descent, and went public in 1963. It has a market value of €141.9 billion and is geographically spread out over 130 countries with 86,000 employees. It has a 12% share of the €175 billion market and produces a wide range of branded skin care (31.8% of sales), makeup (27.4%), hair care and colorants (27.1%), and perfumes (9.3%), which are sold via four major divisions.

Each division—professional products, consumer products, L’Oréal Luxe (upscale cosmetics and fragrances), and Active Cosmetics (skin-care and beauty products sold in health-care outlets)—targets a different channel. The largest division, consumer products (44.1% of sales), focuses on the mass market.

Last week, Agon appointed the boss of L’Oréal China, Stéphane Rinderknech, as president and CEO of L’Oréal USA. “We really intend to bounce back in the U.S., but it may take some time,” Agon says.

Pierre Tegner, an analyst at broker Oddo BHF, said that with new management, “the group has given itself the means to change the trend in North America.” But North America isn’t L’Oréal’s biggest market; it contributes 25.7% of group sales. The leader is “new markets” including Asia-Pacific, contributing 45.9% of group sales, and western Europe, at 28.4%.

L’Oréal looks to capitalize on demand for skin-care products and growth in e-commerce, especially in China. “We are perfectly on plan for this year for the group,’’ Agon says. “This first half is one of the best we have ever had.’’

If Agon is able to fix the blemish on its U.S. business, the stock will continue its stellar growth.

FT : Takedown by Elliott’s Paul Singer of AT&T is on the money

Takedown by Elliott’s Paul Singer of AT&T is on the money
Activist is right to go after mindless dealmaking and growth without profits

I never thought I would write these words: Paul Singer is totally right. I am no big fan of shareholder “activists” like him. In fact, I think the old sobriquet, “corporate raiders”, was more accurate. But the letter that Mr Singer’s investment firm Elliott Management sent last week to AT&T’s board of directors couldn’t be truer.

The telecoms group, which orchestrated a controversial and ill-advised merger with Time Warner last year, is an underperforming, mismanaged dodo bird of a company — big enough to have racked up $190bn in debt yet not large enough to fend off the Big Tech apex predators ready to eat its lunch.

I predict it will someday be a case study about how corporate arrogance destroyed a tonne of value. It is also a marker for where tech, media, and the market in general may be headed.

It is tough to argue with Mr Singer’s maths. Elliott, which owns a $3.2bn stake in AT&T, says the company “not only failed to keep pace with the broader market, but has actually underperformed by over 150 percentage points” over the past decade. Not good, especially at a time when most boats were rising.

Still, that alone wouldn’t make me cheer for activist involvement. Corporations can underperform for many reasons, including investing in their future. It is a shame that markets all too often penalise a company for building its business rather than handing money back to shareholders.

But that is not the case with AT&T. Over the past 10 years, it has tried to buy growth, awkwardly, with a series of expensive merger and acquisition deals. These include a failed attempt to buy T-Mobile, the purchase of DirecTV at the very peak of the traditional television market, and most recently Time Warner. Elliott correctly points out that this has made AT&T “an outlier in terms of its M&A strategy: most companies today no longer seek to assemble conglomerates”.

Too many of those that do so are trying to compete with the sheer heft of the platform technology giants, with no coherent strategy. This is particularly true at the intersection of technology and media. Google’s YouTube has a billion users. Apple and Facebook together spend billions on video content. Amazon and Netflix are moving into the premium space once solely occupied by Time Warner’s groundbreaking cable network, HBO. And the AT&T merger has driven away top talent, like former HBO chief Richard Plepler and other senior executives, who could undoubtedly see that content would not be king in the new organisation.

This is not a morality play about spoiled creatives resisting bean-counters. It is a culture problem. After AT&T completed its DirecTV acquisition, the entire management team from that company also departed. The result is a corporation that is bigger but certainly not better. I suspect that AT&T will struggle to invest in top quality content and 5G — the high-speed network that should ultimately be its bread and butter — while servicing in its massive debt. That will be particularly true if interest rates start to rise.

Bottom line: scale as strategy is played out in this late stage, overleveraged market. Being the biggest can help, but it can also hurt. Silicon Valley’s content might become less profitable if a recession leads to a downturn in the advertising market. Uber is laying off hundreds of people and warning that it can no longer just grow without worrying about profits.

Whatever their size, the winning companies will be those that are profitable. That may sound obvious, but it hasn’t been for the past decade, as easy money has dulled investor senses. Now, they are waking up and want to see results. The scepticism over WeWork’s upcoming initial public offering is a case in point. For every dollar the company earns, it spends two, maths that works better on private ledgers than in the public markets.

All this chimes with Mr Singer’s move on AT&T. Activists are often the canaries in the coal mine for large, lasting market trends. When Carl Icahn demanded a few years back that Apple return billions in cash to investors, it signalled a broader shift towards record corporate share buybacks and dividend payments.

Elliott’s letter could mark a similar turning point. The growth of passive investing in entire markets has masked a wide divergence in corporate value within sectors. I think you will now see activists start circling like sharks around fat corporate seals in telecoms, media, and utilities that have most obviously tried to buy growth.

Meanwhile their Big Tech competitors are already being circled by regulators. Last week, California passed a new law aimed at forcing many companies to treat gig workers as employees, which would be a huge cost hit for companies like Uber. Attorneys-general from 50 US states and territories in the US have launched an antitrust investigation into Google’s dominance of search and advertising, while New York is leading a probe of Facebook’s monopoly power. And in Europe, the EU competition commissioner Margrethe Vestager, long a thorn in Silicon Valley’s side, has been given a broader remit that includes digital policy.

Twilight is falling in the valley of corporate giants.

FT : Lib Dems pledge to revoke Article 50 if they win election

Lib Dems pledge to revoke Article 50 if they win election
But candidates in Leave areas worry that the focus on Europe could cost the party seats

The Liberal Democrats have doubled down on their pitch as Britain’s “party of Remain”, voting at their party conference on Sunday to cancel Brexit if they came to power at the next election — without recourse to a second referendum 

Jo Swinson, the new party leader, claimed on Sunday she could be Britain’s next prime minister and that she wanted to revoke Article 50 and scrap Brexit in the unlikely event she was running the country in the near future. 

That policy was endorsed by party activists, sharpening the election dividing line with Labour, whose contorted Brexit position involves supporting a second EU referendum but refusing to say whether it would campaign for Remain in all circumstances. 

After the conference vote, Ms Swinson, said: “We will do all we can to fight for our place in Europe, and to stop Brexit altogether.” Against the backdrop of cloudless skies on the Dorset coast, the mood was defiantly upbeat. 

But even the most optimistic Liberal Democrat activists would admit it is unlikely that Ms Swinson will lead her party from a parliamentary representation of 18 to more than 300 in an election that could happen within weeks. 

More likely the Lib Dems will continue to work with Labour and other opposition parties in pushing for a second referendum. 

The party’s unequivocal pro-EU stance has galvanised members and helped to more than double its membership to 120,000 since the 2016 EU referendum. It is targeting dozens of seats at the election, many in Remain-supporting Tory seats in the south. 

The Lib Dems have provided a new home to three Europhile Tory MPs — Sam Gyimah, Sarah Wollaston and Phillip Lee — and three Labour MPs opposed to Jeremy Corbyn: Luciana Berger, Angela Smith and Chuka Umunna.

With 18 MPs, polling at almost 20 per cent and enjoying a run of electoral successes in 2019, the Lib Dems are unique among the big UK-wide parties in not being split down the middle on the biggest issue of the day: Brexit. 

But the party, which is only now recovering from the trauma of five years of coalition with the Conservatives from 2010-2015 and the subsequent electoral wipeout, is not entirely comfortable with its stridently pro-EU position. 

Former Lib Dem MP Simon Hughes called on members to reject the policy, saying it would “take the focus away” from getting another referendum. He said that since Brexit was decided in a referendum: “it can only be the people who can reverse it.”

The fear stalking the Bournemouth conference hall is that Boris Johnson will carry out his promise and strikes a Brexit deal, potentially taking Britain out of the EU before a general election takes place. 

“Then we are skewered,” said one Lib Dem MP. Although the party would continue to campaign for a close trading relationship with the EU, the visceral appeal to voters that Brexit could be stopped would be lost. 

The party would then have to have a frank conversation with itself on whether it would then campaign to take Britain back into the EU — and on what timeframe. Voter fatigue over Brexit is prevalent. 

There is also a concern among Lib Dem candidates in Leave areas of the country that the party’s overarching focus on Europe could cost it seats to the Tories at an election, where Mr Johnson will pose as the champion of Brexit. 

Norman Lamb, who has represented the strongly pro-Leave North Norfolk seat for 18 years, told the BBC’s World this Weekend: “I really don’t want the party to be seen as a single issue party. I think there’s a danger of that.” 

The risk is particularly acute in the south west of England which is traditionally a Lib Dem heartland but is strongly pro-Brexit. In recent years the party’s old supporters have drifted away to Ukip — and latterly the Brexit party — and the Tories. 

“I want to ensure we can win seats like North Norfolk and in the south west,” Mr Lamb said. “The balance of opinion there is very different to what it is in south-west London.” 

Meanwhile Ed Davey, Lib Dem treasury spokesman, will on Monday commit the party to a programme to promote “green capitalism”. 

The party would introduce regulations to force companies and financial institutions to be transparent about their carbon investments and legislation requiring them to say how their business strategy moves them towards net zero carbon. 

Other policies include a relaunched regional growth fund — a flagship policy of the Con-Lib coalition — and investment in new east-west rail connections in the north and Midlands. 

The Lib Dems are also proposing initiatives to promote life-long education and training and a “wellbeing budget” to help vulnerable people, including tackling mental health issues and domestic violence.