FT : Super-rich once again dig down into the dark heart of London

Super-rich once again dig down into the dark heart of London
Basement mining is back in fashion amid falling house prices and higher stamp duty

London might once have been an industrial city but now it relies on natural resources. Mining, mostly. At least that’s the impression a visitor would get wandering the city’s most affluent streets. A common sight is the hoarding around a ground floor with a boxed-in conveyor belt sticking out at an awkward upward angle, spouting earth into a skip in the road. This is the sign of the space-mine, the conjuring of domestic square footage from underground as the capital’s prime natural resource.

The issue of mega-basements has been back in the news recently with coverage of the feud between Holland Park neighbours Jimmy Page and Robbie Williams. The one-time Led Zeppelin guitarist is an architecture aficionado who lives in the remarkable Victorian Tower House, designed by the eccentric architect William Burges. He has argued that Mr Williams’ proposed dig would adversely affect the structural integrity of the Grade I-listed house. Mr Williams, who is planning to add to his 46-room house the usual subterranean gym and swimming pool, argues the disruption would be no worse than a passing car. Musos who might once have been throwing TVs out of their windows are now arguing about the finer points of Pre-Raphaelite interiors.

The basement boom started not in prime postcodes but among the merely-prosperous middle classes of Fulham and Wandsworth, with families expanding their cellars to accommodate relatively modest playrooms and dens. But both developers and the super-rich spotted an opportunity. Big basements had always been too expensive to be worthwhile, until London’s increasingly insane property prices flipped everything.

The prime property mining frenzy reached its apogee in 2016, when Foxtons’ founder Jon Hunt proposed a glass-bottomed pool for the garden of his Kensington home. It would have given views down to a three-storey basement with tennis court and car carousels for a revolving display of the estate agent’s Ferrari collection. The plans were subsequently scaled back (after his diplomatic neighbours, including the French ambassador, threatened to invoke the Geneva Convention to stop him).

Since that golden age of excavation, the boroughs of Westminster and Kensington & Chelsea, which had always been the sites of the most furious digging, have imposed a limit of a single subterranean storey. However, an exception is being made for the Duke and Duchess of Cambridge, who have applied to excavate a two-storey basement beneath the Orangery of the Grade I-listed Kensington Palace, an extension which will give them 22 rooms.

Despite stricter rules and the advent of unexplained wealth orders, the “iceberg” basement is back in fashion thanks to a combination of tumbling super-prime property prices in London and increased stamp duty costs, which make it extremely expensive to move. Over the past decade designs for nearly 5,000 basements had been given the go-ahead by local authorities in London, with some proposals being bigger than the houses that sit above them. Mostly these vast caverns appear to contain pools, saunas, gyms, home cinemas, virtual reality golf courses and playrooms.

The suspicion is that these projects are more about vanity than function. Most of the houses are owned by individuals or couples and it is difficult to imagine those subterranean multimedia rooms or saunas being heavily used. Who really needs 50 rooms?

Many of the newer applications include accommodation for staff, nannies and au pairs, a miserably literal translation of Fritz Lang’s 1927 film Metropolis in which the elite live a care-free life in skyscrapers and roof gardens while the poor are confined to dark underground caverns. Which is how it once was. The underworld was not only a metaphor but a literal description of the fetid cellars in which the poorest Londoners lived. In the 19th century, Friedrich Engels commented on how the most impoverished industrial workers were pushed underground, which had the effect of making them invisible to the middle classes.

The interconnecting cellars of rookeries such as London’s St Giles were built beside the muddy banks of rivers and drainage ditches so there would be less excavation work and cellars frequently flooded with liquids worse than water. As housing improved cellars were reserved for coal storage, boxes of unwanted wedding gifts and gas meters, and then became bomb shelters during the Blitz. Now even the underground is being appropriated by the super-rich.

London’s growth has long been predicated on financial speculation and burgeoning property prices. The carving out of its earth seems to somehow exemplify a perverse economy in which a huge, dark void has become the ultimate symbol of status and wealth.

>>> Barrons weekend summary: Positive feature on AAPL; positive on DXC, M

Barrons weekend summary: Positive feature on AAPL; positive on DXC, MS, MYL, T

* Cover story: Barron’s list of best income investments for 2019 includes picks from 11 sectors that should deliver yields from three to 10 percent: MLPs, junk bonds, European dividend stocks and funds, U.S. dividend stocks and funds, preferred stock, REITs, telecoms, municipal bonds, utilities, investment-grade bonds, Treasuries.

* Features: 1) Positive on AAPL: Despite the company’s recent guidance bombshell, investors should hold onto their shares—the stock is currently tied to iPhone sales, but its future is tied to a lucrative installed base of about 1.3B devices; 2) Positive on T, DXC, MS, MYL: These four humbly price stocks are worth a look by bargain hunters—they have single-digit P/E ratios, and have received fresh Buy recommendations from analysts during the past three months; 3) Roy Johnson, known for his success at reinventing AAPL’s stores and his failure to rejuvenate JCP, is running a Silicon Valley startup called Enjoy that hopes to make online shopping less impersonal; 4) A growing number of companies are working to build more inclusive and diverse workplaces, bolstered in party by an expanding body of research about the benefits of such efforts; 5) “As sustainable investing evolves, it looks more and more like good, old-fashioned stock picking.”

* Tech Trader: The Consumer Electronics Show, which kicks off in Las Vegas on January 6, comes “against a backdrop of a shaky stock market, tariff talks with China, and threat of a recession roiling the tech and chips markets.”

* Trader: The stock market isn’t at the ‘end of bear market’ cheap, says Jim Paulsen of Leuthold Group, but is at a level that offers some potential upside again, provided inflation and interest rates stop rising; Columnist Ben Levisohn says his best call last year was a recommendation on March 3 to sell LB, shares of which continued to fall amid changing consumer tastes; “Utility stocks lived up their reputation as a solid defensive play in 2018, and they have the potential to keep outperforming, especially if more volatility ensues.”

* Mutual Fund Quarterly: 1) Given enough time and positive shifts in corporate policy, ESG investors should be able to forgives companies that have engaged in egregious behavior; 2) Q&A with Carson Block, founder of Muddy Waters, who talks about his approach to investing according to environmental, social, and governance factors; 3) Barron’s list of the top 20 sustainable mutual funds—all of which beat the market by focusing on good corporate governance—is topped by Polen Growth, Fidelity Focused Stock, and Calvert Equity; 4) Jerome Dodson, founder of Parnassus Investments and a major player in sustainable investing, takes far more than three or four metrics into account when deciding whether to buy a stock, and he rarely wavers from his own strict guidelines; 5) Of the 78 actively managed U.S. stock funds that have a sustainability goal of some sort, 54 did not make Barron’s list of the most sustainable funds, some because of their small size, others because they had an average or below-average sustainability rating.

* European Investor: Positive on Fugro: Netherlands-based company is a good contrarian play: a small cap hit hard by the drop in oil prices and Europe’s yearlong economic and geopolitical woes.

* Emerging Markets: Geopolitics are top of mind for emerging markets investors this year, but national politics in countries such as Brazil—where newly elected president Jair Bolsonaro may push through market reforms—also loom large.

* Commodities: “African swine flu, possibly brutal winter weather, and falling beef production could propel prices for cattle futures more than 15% higher over the next two quarters or so.”

Barron's : It’s Been a Rough 20 Years for Stocks. The Next 20 Should Be a Lot Be

It’s Been a Rough 20 Years for Stocks. The Next 20 Should Be a Lot Better

Annual predictions are so yesterday.

A higher-than-expected December payrolls number helped push the market up 3.4% on Friday. Yet stocks had their worst first two days of the year since 2000. Where the market will be in a year has little to do with where it is now. Twelve months ago, stocks were coming off a 22% return in 2017 and feeling fine, thank you very much—until September. Then, the wheels fell off.

Ironically, there is more certainty in picturing the market’s next 10 or 20 years. That’s the time frame investors should use. They rarely examine the trailing returns of past decades, but they should. There’s one number that explains a lot of things: 5.52%. Over the 20 years ended 2018, that’s been the nominal compound annual growth rate (CAGR) of the S&P 500.

It might not feel like it after a decade-long bull market, “but we are coming off 20 of the worst years for compounded returns since the Great Depression,” says Nicholas Colas, co-founder of DataTrek Research. The average trailing 20-year market CAGR since 1928 is 10.7%. Blame the two negative-35%-plus bear markets since 2000.

This low return has given birth to, among other things, the rise of passive investing and the growth of exchange-traded funds. It has forced commissions down and encouraged the use of automation to further reduce broker expenses. Institutional investors, pension funds, and sovereign-wealth funds have taken on more risk—shoveling money to venture capital and private equity—to make their required rates of return, typically 7% to 10%, Colas says.

It is hard to imagine our most recent big winners, the Amazon.com s (ticker: AMZN), Alphabet s (GOOGL), and Apple s (AAPL) of the world doubling their market capitalizations in the next 10 years (a 7% CAGR). To start seeing better long-run returns, the market needs lots of new blood, he says, a fresh crop of disruptive tech companies, to come public. The good news is that some, like Uber Technologies and Lyft—and potentially Airbnb and others—are preparing to do so.

The best thing about sitting at the low end of a historical range is that mean reversion should start to kick in, Colas says, and the next 10 to 20 years from here will likely be pretty good. Happy now? As for 2019, tell me if there will be a recession, and I’ll tell you where the market is going.

One of the most important and constant supports to this nearly decade-old bull market has been the liberal use of shareholders’ money by corporate executives to buy back company shares. In comparison, individuals haven’t participated in this long rally to the extent they have in past bulls. They still smart from those awful bear markets.

In 2018, Barron’s published numerous articles on the buyback crescendo, the latest on Dec. 21. In it, we cited market observers and numbers suggesting that this year could produce another bumper crop of buybacks.

But what if they are wrong and CEOs close or tighten the buyback spigot? Not everyone sees a rosy future for repurchases this year, and it might pay to know why. A significant reduction in buybacks could put a lid on any potential near-term equity market recovery.

Stephanie Pomboy, founder of the economic research firm MacroMavens, avers that the “enormity of the role of buybacks” in supporting the stock bull market isn’t fully appreciated. “But it will be, in its absence,” she says.

The 14% drop we’ve seen in stocks since Sept. 20 should embolden CEOs, still flush with cash, to keep buying back their shares, right? But there’s a couple of things wrong with that. First, managements are notoriously bad timers, often loading up the truck when times are good and their stock prices high, making for a poor return. When markets fall and stocks are cheaper—or just when the return to shareholders would be better—the big bosses get cold feet and don’t buy back shares. A market swoon inclines them to husband their cash, in case things get worse.

Corporate debt issuance fell 21% in 2018, Pomboy notes, and investors are now finally waking up to the deflation of the corporate credit bubble that fueled the buyback bonanza.

A sixfold increase during the postcrisis recovery since 2011 suggests that repurchases fit the definition of bubble, she argues. At more than $700 billion worth in 2018 alone, they’re already larger than the subprime mortgage market was in 2007. Bulls expect even more buybacks this year.

Since the market returned to precrisis levels in early 2011, buybacks have totaled some $4 trillion, or one-third of the $12.5 trillion gain in the S&P 500. Excluding financials, which have been net issuers of equity, buybacks represent a big chunk of the $8.6 trillion gain in the rest of the S&P 500. “Half the recovery due to buybacks? I don’t think that is on anyone’s radar,” Pomboy says.

She notes that share repurchases are an income stream, not an asset you can borrow against and “lever up.” Nevertheless, levering up expected gains is where the trouble lies, she predicts.

Like dividends, stock buy-ins are increasingly viewed by equity investors as permanent, she says. One danger is that the evaporation of financing for these repurchases challenges this expectation.

And, by reducing the number of shares outstanding, buybacks have inflated earnings-per-share comparisons, helping profit growth look better, providing another boost to the bull market. Since 2011, S&P 500 “buyback-inflated” EPS earnings rose 67%, she points out, compared with the 23% gain in aggregate U.S. corporate profits recorded for the same period by the U.S. Bureau of Economic Analysis.

There’s no genuine investor angst over the buyback bubble’s potential impact. “Why would there be? Buybacks are only ever going to go up, just like home prices,” she says. As is the case with bubbles, this one will be revealed only as it bursts, Pomboy adds.

This column marks my last for Barron’s. After two decades, it’s time for a new challenge. I will miss the deadline excitement, the market discovery, my colleagues, and Barron’s readers. For years, Saturday mornings have been a ritual for me, with emails that come in about my articles—some nice and some less so, but all of them passionate. That’s something that unites Barron’s writers with readers. I’ll miss that the most.

I have been lucky enough to enjoy an exhilarating and happy ride here, and I am proud to have had my name associated with the best financial publication around. Long may Barron’s give you an edge.

Barron's : Why There’s Still Plenty of Value in Apple’s Core

Why There’s Still Plenty of Value in Apple’s Core

Wall Street is a curious place.

Last summer when Apple (ticker: AAPL) shares soared, analysts kept raising their price targets to higher and higher levels. This week after the company dropped a guidance bombshell, many of the same analysts slashed their forecasts. The Street’s reactive stance does little to help retail investors who watched Apple lose $75 billion in market value on Thursday before they could even think of hitting the sell button.

In the end, investors are better off holding on anyway. While Apple’s stock performance is currently tied to iPhone sales, its future is tied to a lucrative installed base that’s estimated to be 1.3 billion devices. CEO Tim Cook needs to find a better way to monetize that base with more services revenue. The latest slip-up is sure to accelerate those efforts.

In lowering Apple’s December-quarter revenue guidance to “approximately $84 billion”—versus the Wall Street consensus of $91.3 billion—Cook largely blamed China. “While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China,” he wrote in a letter on Wednesday.

The company also provided a litany of other reasons such as iPhone battery replacements, lower carrier subsidies, and currency movements, but didn’t touch upon the most obvious one—Apple flubbed the product cycle, meaning the features on its models released last fall weren’t compelling enough.

When asked for comment, an Apple spokesperson said the company had nothing to add beyond its announcement.

New Street Research analyst Pierre Ferragu, who issued a prescient Sell rating on Apple in August, estimates that 80% of the guidance miss was due to a lower level of upgrades with the rest due to China issues. In November, he told Barron’s that sales of the iPhone XR were performing poorly. “iPhone users love their phones so much that they stick to them longer,” he wrote in an email on Thursday.

Customer loyalty remains the good news. On Thursday, Ferragu raised his rating on Apple shares to Neutral, saying he no longer sees reasons for Apple to underperform.

Every few years, investor sentiment on Apple swings from extreme pessimism to extreme optimism: from the disappointment of the iPhone 5C, to the massive success of the large-screen iPhone 6, to the underperforming iPhone 6S.

Another mediocre product cycle doesn’t change Apple’s attributes: a bulletproof balance sheet, a stellar brand, a loyal customer base, and a sticky ecosystem of software and services. iPhone users are still likely to upgrade to another iOS device due to its high levels of customer satisfaction.

Apple shares now trade for 12 times projected fiscal-2019 earnings per share of $12.24, compared with 14.2 times for the S&P 500. The smartphone maker’s stock averaged a forward earnings multiple of 13.6 over the past five years, according to Bernstein. Apple is even cheaper when taking account of its $130 billion net cash position. The forward P/E ratio is about 10 when Apple’s net cash is stripped out.

Barron’s has covered Apple’s ups and downs over the past two years. At year-end of 2017, we predicted Apple’s market value could rise to $1 trillion in 2018. It reached that milestone in August.

Then, in November, we suggested that Apple stock could fall about 15% to $165 as the weak iPhone product cycle became increasingly evident. Apple shares hit $165 a month later. We said that was a good entry point, even with a bumpy ride still to come. Our latest call was a bit early, with the stock now trading at $148.26.

Our primary argument was that investors should wait until the lackluster iPhone product cycle was fully incorporated in Wall Street models. Sure enough, following Apple’s uncharacteristic guidance cut on Wednesday evening, Wall Street has now lowered its expectations to an 11% drop in iPhone units for fiscal 2019. That means the compelling entry point we predicted has arrived.

Marcelo Lima, a hedge-fund manager at Heller House, tells Barron’s that while the company has recently fallen behind its competitors in some technologies, the stock market is too pessimistic over Apple at its current valuation.

Apple’s “earnings multiple is implying no growth. That’s too draconian,” he writes in an email. “I think Apple will continue to innovate and give consumers reasons to buy new iPhones in the future.”

Another key difference from prior down cycles is that Apple is more committed to a shareholder return that could support its stock price. Cook this week reaffirmed Apple’s goal to be “net-cash neutral” over time, basically hinting at larger share buybacks or dividends.

“The new guidance resets the bar and the bad news is now out of the way,” RBC Capital Markets analyst Amit Daryanani told Barron’s. “Apple, with its strong balance sheet and aggressive buyback, remains a core large-cap tech holding.”

The analyst said that Apple can generate earnings growth of 10% even if iPhone sales flatline in coming years. That’s a reminder that Apple’s bottom line is still benefiting from its profitable services segment, along with continuing buybacks.

There’s also the real possibility that Apple could revitalize iPhone sales, resuming Apple’s growth characteristics.

Perhaps Apple will launch a better lineup later in 2019. But it’s more likely that a wave of fifth-generation wireless technology, or 5G, could drive an iPhone revival. That’s probably a 2020 or 2021 story, but investors could begin recognizing the opportunity sooner, much as they did in the year leading up to the 2014-release of the iPhone 6, when Apple finally delivered a larger-size model.

With Apple’s stock down, there are multiple ways to win. The stock now yields a generous 2%. Assuming Apple’s multiple returns to its 13.6 average, the stock is worth $166.46. Add back $27 in net cash per share—a logical step given that Apple has finally promised to bring its cash position to zero—and Apple is worth $194, 31% above its latest close.

>>> Embraer/Boeing: Bolsonaro champions changes in terms of merger agreement (tr

Embraer/Boeing: Bolsonaro champions changes in terms of merger agreement (translated)
04 JAN 2019
Brazil’s President Jair Bolsonaro has championed changes to the terms of the business combination between Brazil-based Embraer [NYSE:ERJ] and Chicago, Illinois-based peer Boeing [NYSE:BA], Valor Econômico reported.
The president was cited in the Portuguese-language item as saying that the merger is necessary and would be a positive accomplishment. However, Bolsonaro added that “everything” should not be transferred to the “other side” in five years, since Embraer is Brazil’s legacy.
Under the terms of Embraer and Boeing’s business combination, their joint venture (JV) will comprise the commercial aircraft and services operations of Embraer, in which Boeing will hold an 80% stake and Embraer the remaining 20%, as reported. Boeing has agreed to pay USD 4.2bn for its stake in the JV.

>>> Smith & Nephew CEO rejects break-up in favour of growth via acquisitions

Smith & Nephew CEO rejects break-up in favour of growth via acquisitions
05 JAN 2019
Smith & Nephew’s [LON:SN] recently installed chief executive, Namal Nawana, has opted against breaking up the UK-based medical devices group, The Times reported. Nawana said he has conducted a review of the company in his eight months at the helm and decided focusing on growth and efficiencies as an independent business would create value for its shareholders.
The CEO went on to say that Smith & Nephew is financially well positioned for M&A deals, whether initial bolt-on acquisitions or larger transactions in the future, the item reported. He pointed to the company’s robust balance sheet, with 0.9 times leverage.
Smith & Nephew has a GBP 12.5bn (USD 15.9bn) market cap.
The group could seek to expand its orthopaedics operations into spinal, shoulder, foot and ankle surgery or grow its ear, nose and throat business, the report said.
The US activist investor Elliott Advisers is rumoured to have been pressing Smith & Nephew to make disposals and thus increase its potential attractiveness as a takeover target, the report said.