BArron's : Luxury Stocks Face Trade Threats

Luxury Stocks Face Trade Threats


If you’re tracking the global trade fights, this can’t feel like a great time to own European companies that export posh goods. All of them would face challenges in a full-blown trade war.

However, Gucci parent Kering (ticker: KER.France) and Louis Vuitton parent LVMH Moët Hennessy Louis Vuitton (MC.France) could be relatively insulated, reckon UBS analysts, led by Helen Brand.

“Overall, soft luxury tends to be a little bit more defensive than hard luxury,” she tells Barron’s, referring to sellers of handbags and shoes, versus jewelers and watchmakers. “You don’t get the sort of destocking and restocking that you get in a wholesale channel.” And she adds: “Also, it’s just a slightly lower price-point product than a luxury watch or such.”

Kering boasts brands, including Gucci and Balenciaga, that are showing real power, the analyst argues. “The brand heat is so strong that you hope they could still gain market share, even in a slower market,” Brand says, adding that LVMH has developed one of the sector’s best brand portfolios, too. UBS has Buy ratings on Kering and LVMH, along with price targets that imply rallies of about 25% and 15%, respectively.

The bank has sounded somewhat cautious on the sector recently, as trade-war fears have persisted. An all-out trade war could trigger a 30% slide in some European luxury stocks, it reckons. In this situation, which UBS views as an unlikely worst-case scenario, global gross domestic product growth would slide by one percentage point, and worldwide stock markets would dive by more than 20%. That would hurt both the wealth effect—the tendency of individuals to spend more when their investments are doing well—and consumer confidence.

Other banks also have sounded skittish toward the sector. “Europe’s most emblematic and successful current counterpart of America’s Nasdaq universe is its luxury goods companies,” wrote Kepler Cheuvreux strategist Christopher Potts in a recent note. “Accordingly, we are reducing our exposure to these stocks because they have become expensive and over-popular.”

Burberry Group (BRBY.UK), Salvatore Ferragamo (SFER.Italy), and Swatch Group (UHR.Switzerland) could face the biggest losses, according to UBS. Burberry and Ferragamo might be particularly vulnerable because the trade conflicts have erupted as they have been trying to regain momentum with consumers, Brand notes.

“If we were to see the real weakness in terms of trade wars, I think it’s more difficult to turn around a brand with that backdrop,” she says. Meanwhile, Swatch would be hamstrung by its big exposure to Chinese shoppers and its relatively cyclical business, with steep fixed production costs.

In addition, the luxury sector’s stocks are trading at a higher-than-usual premium to the broad market—roughly 70%, versus a historic average around 40%—Brand and her colleagues note. Burberry and Ferragamo look especially expensive, fetching 28 and 32 times forward-year estimated earnings, respectively, compared with the Stoxx Europe 600 benchmark’s 14.

The other players don’t have valuations that are quite as lofty, but they’re not cheap. Kering and Swatch change hands at 21 times expected forward-year profits, while LVMH’s multiple is 23.

Barron's : Where the Bond Market’s Next Big Problem Could Start

Where the Bond Market’s Next Big Problem Could Start

After the extraordinary rise in U.S. corporate borrowing in recent years, the investment-grade bond market resembles an aged forest, littered with kindling and vulnerable to a lightning strike. And this sector—not high-yield or junk debt—could be where the next market conflagration starts.

The enormous increase in issuance of the lowest-quality investment-grade credits over the past 10 years—BBB-rated bonds that sit just above junk—is akin to the accumulation of brush and dead trees on the forest floor. They make for an inviting target because there are currently almost $3 trillion worth of U.S. BBB bonds, up from roughly $700 billion in 2008.

What could provide the spark? When the next recession hits—after nearly a decade of uninterrupted economic expansion and record mergers-and-acquisitions activity, it’s hard to argue this is far off—ratings downgrades could cascade and BBB bonds could sell off sharply. As many of them become “fallen angels” and slide into junk status, the smaller high-yield bond market could have a hard time absorbing the new supply without sharp price discounts.

Investors aren’t being adequately compensated for this risk, since the current yield on triple-B debt is 4.3%, a typical spread of 60 basis points (a basis point is 1/100th of a percentage point) to the 3.7% for more creditworthy A-rated debt despite the elevated risk. As a result, bond owners should, at the least, look to lighten their holdings of heavily indebted companies in the group. High-yield bonds are traditionally considered an equity alternative, so if junk yields rise substantially, they could attract money away from stocks, as well.

Among triple-B credits, companies such as AT&T (ticker: T), United Technologies (UTX), and Newell Brands (NWL) have piled on debt to make acquisitions. After closing on its Time Warner purchase, for example, AT&T owes about $190 billion. For BBB companies, an unexpected economic slowdown could hamstring profit growth, making it tough to pay down debt.


Many investors think of all investment-grade debt as low-risk, unaware that BBB credits now make up nearly half of the $6 trillion investment-grade world. In contrast, in 2008, amid the financial crisis, they accounted for less than a third of the total.


The BBB crowd isn’t just bigger now; it’s also riskier. Since the crisis, leverage, measured by debt divided by annual average earnings before interest, taxes, depreciation, and amortization, or Ebitda, has increased markedly for BBB credits. It now averages 3.2 times Ebitda—a gauge of cash flow—compared with 2.1 in 2007. A record 37% of companies have debt that is five times or more their Ebitda, notes Pomboy.

This bulge in BBB-rated paper is due in equal parts to new companies issuing bonds and to existing issuers greatly increasing their borrowing, says Erin Lyons, a senior analyst at CreditSights, an independent bond research firm. In both cases, companies have taken advantage of abnormally low rates to borrow for investment, acquisitions, and stock repurchases, she adds.

Some of this is a natural outgrowth of an extended bull market. Leverage rises, credit quality falls, and excesses build.

Leverage can remain high for years before it becomes a problem, notes Adam Richmond, Morgan Stanley’s head of U.S. credit strategy. The excesses, however, provide the “ingredients for a default/downgrade cycle,” he warns. Eventually, problems come to a head, often triggered by tighter Federal Reserve monetary policy, worsening credit conditions, and weakening economic growth, in that order, he adds. The components for such a turn in the cycle are in place, says the credit analyst, and “bigger fundamental challenges in credit are six to 12 months away.”

Any economic slowdown that impairs debt service and generates a higher default rate could hit a lot of the companies just a notch away from non-investment-grade status, says David Rosenberg, chief economist and strategist at Gluskin Sheff. With liquidity starting to dry up, “there is at most 12 months left in expansion,” he predicts. “Liquidity is your best friend in an expansion, but the biggest coward in a recession.”

Cracks in creditworthiness can start to appear in a number of places.

In the case of obligations issued to back M&A, for example, the BBB ratings are often predicated on management’s postdeal deleveraging plans, says Dan Fuss, manager of the Loomis Sayles Bond fund and a veteran of 60 years investing in fixed income. But those plans can hit obstacles. “It doesn’t take much to go down one-third of a letter,” say BBB to BBB-, and a “whole lot less” to go to a negative outlook from a rating firm. The change may be driven by something outside management’s control. The risks are more acute these days because of companies’ high leverage, Fuss observes. If BBB credits were classified solely on leverage, about 28% of the investment-grade index would already be rated as junk, he estimates.

With a record amount of this debt, there is an elevated risk of companies falling to junk status in the next recession.

Mariarosa Verde, a senior credit officer at Moody’s Investors Service, notes that typically 5% of Baa (Moody’s equivalent to S&P’s BBB) gets downgraded in a given year. But in a recession, that rises to 10%. “If you are a bondholder, you want to be aware of this,” she adds. Given the current elevated leverage and number of companies, other observers worry that it could be more than 10% in the next recession.

Anticipating where problems may arise isn’t easy. Carol Levenson, director of research at the independent credit research firm Gimme Credit, notes that “the downgrades will come after the fact [of a slowdown or recession].”

Consider Newell Brands, which owns a number of prominent brands, including Rubbermaid and Yankee Candle. Its leverage is over four times Ebitda, more than two years after Newell acquired consumer-products maker Jarden, she says. With activists now on Newell’s board and unexpected deterioration in some of its businesses, there is uncertainty about whether it can meet its stated leverage-reduction targets, Levenson says. The company recently warned investors that tariffs could cost it $100 million annually. Moody’s placed its marginally investment-grade rating on review for a possible downgrade to junk.

Newell declined to comment to Barron’s.

Other investment-grade credits with relatively high leverage based on 2018 estimated Ebitda, such as AT&T (3.2 times pro forma) and United Technologies (four times), also are at risk of a downgrade if the economy turns south, according to Gimme Credit. Leverage is high at these and other BBB companies because of recent acquisitions or stock buyback programs to benefit shareholders.

An AT&T spokesperson said it expects 2018 free cash flow of about $21 billion with additional growth in 2019. The company said it is confident of plans to reduce its net-debt-to-adjusted Ebitda ratio to “at or near 2.5 times” by the end of 2019. United Technologies declined to comment.

Serious problems for BBB bonds would also affect bonds rated above and below them. In a recent report for S&P Global Market Intelligence/LCD, Martin Fridson asks how high the Fed can raise interest rates before companies strain to service their debt. After piling on deal leverage, if BBB segment companies are downgraded to junk, equity markets and other risk assets might start to struggle, as well, he writes.

At the Precipice
AT&T, United Technologies, and Newell Brands have all taken on substantial amounts of debt, raising the risk for credit downgrades.
Company/S&P-Moody's Corporate Ratings Debt/Ebitda Comment
AT&T/BBB/Baa2 3.5 With $190 billion in debt and acquisitions of DirectTV and Time Warner, leverage is signifcantly higher; legacy AT&T revenue and margins are struggling, and there is integration risk.
United Technologies/A-*/Baa1 ~4.0** UTX is adding about $15 billion in debt for its Rockwell Collins acqusition. Risks include cyclical businesses, merger integration, and activists who could push shareholder enhancements over debt reduction.
Newell Brands/BBB-/Baa3*** 4.4 With activists on Newell’s board and deterioration in two businesses, there is uncertainty about whether it can meet leverage reduction targets.
*Most recent debt issue rated BBB+ by S&P **Initial estimate post Rockwell Collins acquisition ***Under Moody's review for downgrade

Sources: S&P Global Ratings; Moody's; Bloomberg; FactSet

Ray Kennedy, a high-yield portfolio manager at Hotchkis & Wiley, notes that when BBB debt—more than twice the size of the $1.2 trillion in junk debt—falls, the high-yield market expands. Some investors, such as certain insurance companies, aren’t allowed to hold junk and will become “forced sellers,” he says, intensifying the downdraft. Only 10% of the junk market is composed of bonds that originally were investment-grade but later were downgraded to junk. That’s far below the median of 15.5% and the historical peak of 32% in 2002-03. So, a large influx of fallen angels would be far from unprecedented.

In a crunch, investors trying to go up the ratings scale would “have a limited pool of choices,” warns Joseph Kalish, chief global macro strategist at Ned Davis Research Group. Higher-quality credits, such as AA or AAA-rated bonds are now just some 10% of the investment-grade universe, versus 20% to 25% in 1999-2000, he says. Investors could turn to U.S. Treasuries but would have to give up over one percentage point of yield. That’s significant in the fixed-income world.

Of course, the bulge in higher-risk paper hasn’t yet been much of a problem for investors, with annualized gross domestic product climbing more than 4% in the second quarter, U.S. corporate earnings growing more than 20%, and interest rates, while rising, remaining at subdued levels.

But suggestions of what could come have already appeared, says Lyons. Rate spreads between Treasuries and the Bloomberg Barclays U.S. Aggregate Bond Index, which represents investment-grade debt, widened sharply at the end of June, to 125 basis points from about 85 in January. They have since narrowed to 112 basis points.

Bond bulls like to point out that Corporate America’s huge $2.1 trillion cash pile will soften the pressure on creditworthiness. That’s double what it was in 2009 for U.S. nonfinancial companies, according to Standard & Poor’s Global Ratings. However, over half of that—$1.2 trillion—is held by just 25 companies, or 1% of the issuers, including Apple (AAPL) and Microsoft (MSFT). Removing those 25 paints a more sobering picture, S&P recently reported: More than 450 investment-grade companies had cash-to-debt ratios more similar to those of speculative-rated issuers—such as junk—than to their investment-grade cousins in the top 1%. The deterioration of credit quality, Kalish says, means the corporate debt market is in a worse position to cope with a recession than it was on the eve of the 2008 financial crisis.

Bottom line: The BBB-rated credit market is bigger than ever, and so is the risk investors will face when a slowdown arrives.

Barron's : Blockchain Is Starting to Show Real Promise Amid the Hype

Blockchain Is Starting to Show Real Promise Amid the Hype

 

PHOTO: TIM BOELAARS

The blockchain revolution is here.

The technology long associated with Bitcoin is now being used to make businesses as varied as trade finance, videogaming, travel insurance, and diamond mining more efficient and more secure.

The blockchain revolution is also far, far down the road. If it ever comes.

Partnerships and initiatives featuring blockchain seem to be trumpeted every day. Projects that actually solve real-world problems are much rarer. The research firm Gartner surveyed 3,160 chief information officers this year and found that only 1% had put blockchain to work.

Take the Australian mining giant BHP Billiton (ticker: BHP), which announced in 2016 that it would use blockchain to track its supply chain, including the movement of rock and fluid samples. But after the company tested it in a pilot project, a BHP executive said this month that the technology “hasn’t reached the point of maturity where we think it applies to us.”

As the technology reaches what Gartner calls the “peak of inflated expectations,” executives and investors need to learn to assess the hype versus the real potential.

Businesses that aren’t already considering how to use blockchain to restructure their operations, particularly in finance and logistics, risk their software—and even their business models—becoming outdated.

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“We really see this as transformative in the same way that the internet changed communication,” says Marie Wieck, general manager for blockchain at IBM (IBM), which has more than 1,500 staff members working on the technology.

Still, it’s a bit like trying to pick future winners and losers of the internet back in the early 1990s. Tomorrow’s Facebook—and its Pets.com—are not yet visible on the horizon.

What is this technology that has its proponents so excited? A blockchain is a database run by software that bundles information, protects it using cryptography, and stores it on the computers of participants. Akin to a ledger, it lets its participants interact with one another without using a central intermediary. As a result, transactions can be done faster and more cheaply.

It’s the absence of a middleman that’s the key to blockchain’s potential, contends Brian Behlendorf, the executive director of Hyperledger, an arm of the nonprofit Linux Foundation that has become a central player in blockchain development.

“Blockchain is not a technological solution to a technological problem,” he says. “It’s a technological solution to a political problem. A political problem within business. You don’t want a PayPal or an eBay or an Uber or a Facebook at the center of a lot of markets, because that gives a tremendous amount of power to those entities, greater than arguably even AT&T had when it was at the center of the phone market.”

The lack of central authority can also be an obstacle, however. Blockchains used by businesses tend to be permissioned—participants must prove who they are, and their access to information is limited based on their specific needs. Getting competitors to agree on terms can be challenging.

Today, the technology is growing largely through consortiums that allow companies to share the cost of developing software and make sure they’re building systems that will be compatible with one another. Those efforts have shown how blockchain can standardize business processes that are still largely paper-based or are using outdated technology, and how it can bridge gaps in industries where trust is a problem.

Blythe Masters, a former top JPMorgan Chase executive who is now CEO of Digital Asset Holdings, sees the inefficiencies in transactions and record-keeping as a rich opportunity for blockchain.

“Fifteen years ago, if someone had said to you we’re going to see the advent of the self-driving car on the streets before we see T+2 settlements [trades getting settled two days after they take place] and before you can walk from one doctor’s office to the next and have your health-care records precede you there, you would have been declared crazy, right?” Masters says.

“It is those kind of delays and extraordinary inefficiencies that have plagued financial services and big enterprises in other industries like health care. You’ve seen extraordinary speed of revolution in the Big Tech sector, and you haven’t seen it elsewhere in enterprise. That’s where this is going, and so what’s fascinating about this is the sheer scale of the potential for applications.”

Blockchain will generate $5 billion worth of business value in 2018, Gartner estimates. The value will grow, but it’s likely to stay modest for years, before ramping up more impressively about a decade from now, exceeding $3.1 trillion in 2030, the firm says. That’s more than Britain’s entire annual economic output today.

Some blockchain executives chuckle nervously when presented with that number. One fell silent, then joked that she was going to put it in her investor pitch deck.

Others are more willing to embrace the number.

The $3 trillion figure “does not seem crazy to me,” Masters says. Her firm won a contract to re-engineer the clearing and settlement process at the Australian Securities Exchange using blockchain. “When you think about the potential addressable market here, it doesn’t seem crazy at all.”

For investors, there are few ways to invest directly in blockchain. Some exchange-traded funds have been introduced, including Amplify Transformational Data Sharing (BLOK), Reality Shares Nasdaq NexGen Economy (BLCN), and Innovation Shares NextGen Protocol (KOIN), but they offer minimal real revenue exposure to the technology, which is currently generating little revenue.

Big companies—particularly IBM and Microsoft (MSFT)—have invested heavily in developing blockchain. Neither company breaks out its blockchain-based revenue in public financial documents, and they didn’t share the data with Barron’s. WinterGreen Research, a Massachusetts company that tracks technology trends, estimates that IBM and Microsoft together control 51% of the blockchain market, which overall generated $706 million in revenue last year.

“I believe we are furthest along,” says Wieck of IBM, which has worked with more than 500 clients.

Some of the early blockchain success stories weren’t created by tech giants, however.

AXA (CS.France), the French insurance company, is using blockchain technology to transform the flight-insurance industry. Its product, called Fizzy, allows fliers to buy insurance that immediately pays out if their flight is delayed by more than two hours, for any reason.

“Blockchain is useful because it allows me to say to the customer that you don’t have to trust the insurer on the data we are using,” Laurent Benichou, Fizzy’s founder, tells Barron’s. “Your policy is on the blockchain. AXA publicly commits to indemnify you if you are eligible. Because a smart contract is triggering the indemnity, the customer can know that we are honest with the data that we use. Potentially, for a paranoid customer who assumes we cheat, we say it’s not AXA anymore that’s a party to the transaction that will decide whether you get indemnified.”

The project, which has recorded about 11,000 transactions so far, won’t do much to change the near-term financial prospects for AXA, which reported 98.6 billion euros ($112.5 billion) in revenue last year. But Benichou expects airlines to begin offering this kind of service more widely to customers in the years ahead, and “when they do, it will be a huge market.”

What’s more, he thinks it can be used more broadly to insure against different kinds of events.

“We could do a Fizzy for weather forecasts; we could do a Fizzy for pollution. Each time we have an open data set, we are able to do a variation of Fizzy.”

Blockchain technology has also proved useful in other transactions where trust issues previously hampered the market.

In India, small businesses have been seeking a way to get their outstanding invoices from other businesses paid faster. Lenders have previously been wary of financing these transactions, in part because of the risk of double invoicing—that the businesses would receive financing from multiple banks for the same transaction.

But a company in New York, MonetaGo, designed blockchain software that records the invoices and keeps track of transactions that have already been financed. The blockchain records the transactions without revealing details about them that would erode the competitive positioning of the companies involved. The project has been live since March, and activity has steadily grown, says Jesse Chenard, MonetaGo’s CEO. He expects that MonetaGo can make about $20 million annually on the service in India.

The system has been embraced by major industry players in India.

‘“This technology threatens profit margins across the board,” contends Brian Behlendorf, the executive director of Hyperledger.’

“We’ve introduced a capability for financiers to securely share data that they would never have shared before,” Chenard says. “In order to share it before, they would have had to share the details of those invoices, and nobody would have trusted each other to not look at the competitor’s information.” Hiring a third party to oversee invoices for all financiers would have been “cost-prohibitive,” he adds.

“When we started in India, we said, ‘We’re a blockchain company, we can do anything with blockchain,’ ” he says. “The worst part about going in and saying, ‘Hey, I’m a blockchain company’ is that they send you to the innovation team. And as much as people like IT, it’s a cost center.”

Now “our pitch is completely different. We ask to talk to the person in charge of trade finance and say, ‘Would you like to reduce fraud on receivables financing?’ The answer is almost always yes.”

Cost has stalled the adoption of blockchain. Some of the existing players within industries may have to accept lower returns in the future if blockchain is adopted—a prospect that makes blockchain a threat as much as an opportunity.

“This technology threatens profit margins across the board,” Behlendorf of Hyperledger contends.

International Data Corporation estimates that companies will spend $1.5 billion on blockchain this year, double last year’s amount. But even corporations that believe in the technology are loath to spend too much on it, because they have no guarantee of returns.

“Blockchain challenges what you do rather than amplifying what you do,” said Rajesh Kandaswamy of Gartner. “Technologies like mobile amplify what you do. Mobile was additive for banks. Blockchain as an underlying technology makes you rethink your business processes or even your business model. That will take years for people to pass.”

The companies spending most heavily on blockchain projects are often central players in the industries where they operate—some of them could be considered the middlemen that blockchain had promised to dislodge.

Broadridge Financial Solutions, a major player in the proxy-voting industry, has spent about $150 million on blockchain, and ran proxy voting for Banco Santander’s annual meeting on the software, according to CEO Rich Daly. Nasdaq has used it to allow private company stock transfers, among other applications.

The Australian Securities Exchange’s decision late last year to rebuild its equity clearance system using blockchain technology could lead to other exchanges moving to similar software. ASX says its system could allow trades to be settled faster than the current two days when it goes live in 2020 or 2021.

In the U.S., another central intermediary is similarly upgrading its software to a blockchain platform, and expects to go live even sooner than ASX. The Depository Trust & Clearing Corp., or DTCC, a holding company that settles and clears the vast majority of financial trades in the U.S., is building a blockchain-based system to record the 15 million credit derivatives transactions it processes on an annual basis. The system, now conducted on a more costly mainframe run by DTCC, is projected to go live with its first phase of the blockchain project in the first half of next year.

“The industry saw the value in distributed ledger in terms of its auditability, and the sharing of data between participants on a near real-time synchronized basis,” says Jennifer Peve, the co-head of DTCC’s office of financial-technology strategy. Blockchain will also eventually give participants a “single source of truth on the network” that will make it easier to reconcile trades.

Still, Peve says there are limits to the technology. The software isn’t ready to replace the DTCC’s equity clearing and settlement software, for instance, because it still can’t process the 100 million or so transactions that run through the system each day. “It’s going to take some time before it can support those volumes,” she says.

Major banks are exploring blockchain through other avenues, too, though it’s early days for most projects. A private company called R3 built a blockchain software program called Corda Enterprise that allows businesses to trade syndicated loans, among other capabilities.

JPMorgan Chase has developed its own software called Quorum, built on the public blockchain Ethereum, that’s designed to reduce paperwork and lag time in financial transactions. The software, downloadable on JPMorgan’s website, is somewhat unusual for the bank, whose chief executive, Jamie Dimon, has called Bitcoin a “fraud.” But Dimon has since conceded that “the blockchain is real” and is clearly carving out a niche for the bank.

How these many blockchain projects will work together remains a mystery. R.A. Farrokhnia, executive director of the Columbia Fintech Program, says that blockchain still “needs its Cisco,” referring to the company that built the internet’s modern-day switchboard. (Cisco Systems, as it happens, is working on blockchain, but is apparently not the “Cisco” of it.)

IBM wants to stand at the center of many of these partnerships. In banking, one of the most ambitious projects that IBM has worked on is a trade finance consortium in Europe called we.trade. Deutsche Bank, HSBC, and seven other banks are leading the project, which went live in June with seven trades in its first five days.

Trade finance—banks lending money to businesses trading across borders—is a paper-heavy process that can take a week or more for transactions to clear. With we.trade, trades can settle in real time once the conditions of the transactions are met. There’s no guarantee that any one platform will become dominant. HSBC has also executed trade finance deals on the Corda blockchain, and Barclays has completed trades working with another start-up.

Finance attracts most of the headlines in the blockchain world, but the biggest long-term opportunity may be in managing supply chains, which are now traced on pieces of paper, Excel spreadsheets, and incompatible computer systems. The Danish shipping giant A.P. Moller-Maersk is working with IBM on a project called TradeLens that will digitize and standardize shipping documents and place them in a blockchain database.

ILLUSTRATION: NONE

“The documentation now is all over the place,” says Peter Levesque, the CEO of Modern Terminals, which runs shipping terminals in Hong Kong and mainland China and has signed on to the Maersk project. Some shipping deals still depend on fax machines, he notes. TradeLens takes all of the data the company tracks in different formats and “puts it all in one place.”

Blockchain, he says, “won’t change our operations, but it will make our operations more efficient, because we’ll have better scheduling of ships and better berth planning just by having more data sooner.”

The food-supply chain is also a juicy target for blockchain entrepreneurs, because identifying the original source of a food product—tainted romaine, for instance—can take days.

Walmart, Nestlé, Dole Food, and other companies are building a platform with IBM called Food Trust that would put the whole food-supply chain—farm to supermarket —on a blockchain that presumably can track the entire chain in seconds. The software can now track about 50 products, far from the whole supermarket but enough to get a sense of the software’s viability.

That includes more than following a head of lettuce as it’s trucked across the country; the software has been tested on trickier tasks, like tracking all of the ingredients in a container of Gerber’s sweet potato-apple-pumpkin puree baby food.

IBM says it expects to start offering the software for sale to the public in the next few weeks. The product is being packaged as a cloud-based subscription service, priced based on the size of the enterprise. For small businesses with under $50 million in revenues, it goes for $100 a month; for larger ones, the price goes up to $10,000.

Despite the efforts by companies like IBM, it is probably a mistake to think that Big Tech alone will dominate blockchain technology. Blockchain may be separate from cryptocurrency, but the entrepreneurial spirit behind digital coins is also present in the field.

One of the most important consortiums developing blockchain’s technical standards, the nonprofit Enterprise Ethereum Alliance, wants more small players to get involved, says its executive director, Ron Resnick. As with any modern tech platform, blockchain’s value will eventually be determined by the usefulness of the apps that end users can access.

The little companies “are driving this,” Resnick says. “They can move faster than a bigger company.”

Big, risk-averse companies like Royal Dutch Shell are in the Ethereum Alliance, but the organization also has members from the world of cryptocurrencies. Big oil companies won’t be issuing digital coins anytime soon, but the alliance does connect them with developers focused on building public open-source products.

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That world is likely to influence the development of blockchain, too. AXA is exploring whether cryptocurrencies could further speed its Fizzy product, and Peve of the DTCC is hoping the open-source community can fix blockchain’s scaling problem, for instance.

“Never underestimate some motivated kid,” says Amber Baldet, who ran JPMorgan’s blockchain division before leaving to co-found her own blockchain company called Clovyr earlier this year. “It’s not just requirements driven by institutions trying to transition their existing business model to a new technology. It’s working alongside some real disruptors and being able to benefit and take cues off of really new innovation.”

Baldet adds: “Some of the innovation is initial-coin-offering scams and some is throwaway work that’s bad ideas, but somewhere in there might also be completely revolutionary business models and brand new products.”

 

WSJ : Deutsche Bank Brings Noble Bondholders A Surprise Offer

Deutsche Bank Brings Noble Bondholders A Surprise Offer
The German bank launched an unexpected offer to buy bonds of the embattled commodity trader

Deutsche Bank DB -0.09% has launched an unexpected offer to buy bonds of Singapore-listed commodity trader Noble Group Ltd., days before a shareholder vote on a $3.5 billion restructuring.

The embattled Noble has been pursuing the restructuring for months as it seeks to stay afloat, address a liquidity crunch and in due course provide a return to shareholders who have watched the company’s market value decline to about $110 million from a peak of more than $11 billion in 2011.

It wasn’t immediately clear if Deutsche Bank was acting on behalf of another company or for itself, although banks typically handle bond tenders like this for clients. The potential impact on the reorganization was also unclear, since if bondholders who have already signed up for the restructuring sell their holdings, the new buyer would still be obliged to back the plan.

“The offer has surprised everyone,” said Sandra Chow, head of Asian research at CreditSights in Singapore. “It could be from someone trying to scuttle the restructuring process or may even be from someone who wants to take control of Noble’s assets at a cheaper price.”

According to the notice sent to Noble’s bondholders by Deutsche Bank’s London branch, the offer started on Wednesday and gives investors until Aug. 24 to tender their bonds.

The offer covers roughly two-thirds of the debt under restructuring, or $2.34 billion of three separate bonds issued by Noble that are due in 2018, 2020 and 2022. The minimum purchase price is 45 cents on the dollar, according to the notice, which was reviewed by The Wall Street Journal. These bonds recently traded between 46 and 48 cents on the dollar, according to Thomson Reuters .

Deutsche Bank, which declined to comment, is a creditor to Noble and has agreed to provide trade finance facilities to the company under its restructuring. Noble didn’t respond to a request for comment.

The offer comes after Noble had already secured the support of 86% of noteholders—much higher than the minimum 75% it needed. The company needs more than half of shareholders to approve the restructuring at a meeting on Aug. 27. Deutsche Bank is expected to announce the result of its bond offer Aug. 28.

About 30% of Noble’s shareholders, including the company’s founder Richard Elman and Abu Dhabi-based Goldilocks Investment Co. have already backed the restructuring.

In the past, there have been reports about Chinese interest in Noble. But no deal could be reached, especially as Noble has been battered by accusations of accounting irregularities, first leveled in early 2015 by a then-anonymous blogger known as Iceberg Research. The firm has denied the allegations.

Since announcing its restructuring plans in January, Noble has twice sweetened the deal for shareholders. In June, Noble said shareholders would get 20% of the equity in the new group, up from the 15% offered earlier. Creditors will get a 70% stake, while 10% will go to management.

Reuters - ValueAct takes $1.2 billion stake in Citigroup: letter

(Reuters) - Activist investing firm ValueAct Capital Partners invested $1.2 billion in Citigroup Inc, citing the U.S. bank’s low risk and reliable revenue and not calling for major changes, according to a letter seen by Reuters on Monday.

The hedge fund also invested about $1 billion in SLM Corp’s student lender Sallie Mae. Citigroup shares rose 1.5 percent after the news while SLM’s stock was little changed.

In the letter ValueAct sent to clients, the firm said it built its roughly $1.2 billion Citigroup position over the last four to five months and is adding to it “opportunistically.”

ValueAct said that the bank could return about $50 billion in cash to shareholders over the next two years, according to the letter. That would be $10 billion more than the $40 billion management has said it intends to return.

“We have been having constructive conversations with ValueAct and welcome them as investors,” Citigroup said.

The San Francisco-based hedge fund said the time is right to invest in the banking system because of effective intervention by regulators after the financial crisis and greater transparency.

“The U.S. banking system now has a structurally lower risk profile than any time in our investing lifetimes,” ValueAct said in the letter.

It made its investment in Citigroup at a time the bank’s stock price has sharply lagged its rivals, including JPMorgan Chase & Co and Bank of America Corp.

But what appeals to ValueAct is the consistent and reliable nature of the bank’s business as it services large multinational companies with day-to-day activities, according to the letter. For example, Citigroup manages their cash and the timing of their payments and receipts, as well as hedging out currency risk.

It is less active in the flashier mergers and acquisitions business than some of its rivals but that may be a plus, according to ValueAct’s letter. The bank is now “growing in a sustainable fashion” the hedge fund said, adding, it is “less exposed to both earnings volatility and risk of capital impairment and is better capitalized and more securely funded than at any point in our lifetime.”

While ValueAct is known as an activist investor, it prefers to conduct discussions with companies behind closed doors instead of on cable television. The hedge fund is often asked to join the board of its investment targets and it said that its partner Brandon Boze has been named chair at the CBRE Group Inc board, where ValueAct has invested roughly $1 billion.

ValueAct now has roughly 40 percent of its capital committed to the financial sector, including on investments in Morgan Stanley and KKR & Co LP.

Earlier in the year, the firm returned some $1.5 billion in capital to investors and said that it is now fully invested. Some large hedge funds have chosen to give money back at a time they have found it tough to find new opportunities.

Since its launch in 2000, ValueAct’s flagship fund has gained an average 14.6 percent a year after fees, making for one of the industry’s best long-term records.

>>> Weekly Market Update

Weekly Market Update: Markets Shake Off Trade and Contagion Concerns Again


Global markets were forced to contend with elevated bouts of volatility this week, but ultimately US stock indices stayed within reach of the all-time highs hit earlier this year. Emerging market FX swings precipitated a spike in risk off sentiment through mid-week. A plunging Turkish Lira brought about worries regarding European bank exposure, and contagion fears were exacerbated by another move lower in the Yuan which approached levels not seen in nearly a decade. China growth concerns emerged after another string of disappointing economic data came alongside weak corporate reports by several Chinese tech darlings. US stock markets continued to outperform the rest of the globe and the Dollar index surged above 96. Treasury prices also benefited modestly from risk-off flows keeping yields subdued and flattening the US 2-10 year spread back below 25 basis points. Late in the week equities surged on news the US and China would restart trade negotiations in Washington next week ahead of a multilateral summit in November. For the week the S&P and DJIA each gained 0.1%, while the Nasdaq slipped less than 0.1%.

In corporate news this week, Walmart posted its biggest rise in US sales in over 10 years amid improved e-commerce growth and strong fresh food sales. Macy’s shares fell despite reporting an earnings beat and raising guidance as investors saw slipping market share against its online and lower cost rivals. Nvidia shares tumbled after reporting lower than expected revenue guidance and seeing no contribution from crypto-specific products going forward. Applied Materials also fell on guidance and pointed to near-term softness in customer spending. Constellation Brands made a $4B bet on the emerging cannabis industry, taking a 38% stake in Canopy Growth and hinted it may begin selling a drinkable product in Canada by next year. VFC announced a plan to split off its denim business into a separate company. Tesla shares on Friday saw their worst day since late March after a New York Times interview with CEO Musk in which he described a difficult year leading the company.


MONDAY 8/13
VFC Announces Intention to Create Two Independent, Publicly Traded Companies
(TR) Speculation that Turkey could release the US pastor Brunson held under house arrest by Aug 15th - twitter

TUESDAY 8/14
(DE) GERMANY Q2 PRELIMINARY GDP Q/Q: 0.5% V 0.4%E; Y/Y: 2.0% V 2.1%E
(UK) JUN AVERAGE WEEKLY EARNINGS 3M/Y: 2.4% V 2.5%E; WEEKLY EARNINGS (EX BONUS) 3M/Y: 2.7% V 2.7%E
(UK) JULY JOBLESS CLAIMS CHANGE: +6.2K V +9.0K PRIOR; CLAIMANT COUNT RATE: 2.5% V 2.5% PRIOR
*(EU) EURO ZONE Q2 PRELIMINARY GDP Q/Q: 0.4% V 0.3%E; Y/Y: 2.2% V 2.1%E
*(DE) GERMANY AUG ZEW CURRENT SITUATION: 72.6 V 72.1E; EXPECTATIONS SURVEY:-13.7 V -21.3E
HD Reports Q2 $3.05 v $2.84e, Rev $30.5B v $30.0Be
(CN) China govt launches WTO dispute settlement procedure over US photovoltaic subsidies
GOOGL Reportedly plans to invest $375M in Oscar Health - press
EGN To be acquired by Diamondback for 0.6442 shares/shr, valuing it at $9.2B

WEDNESDAY 8/15
(ID) INDONESIA CENTRAL BANK (BI) RAISES 7-DAY REVERSE REPO BY 25BPS TO 5.50%; NOT EXPECTED
*(UK) JULY CPI M/M: 0.0% V 0.0%E; Y/Y: 2.5% V 2.5%E
700.HK Reports Q2 (CNY) Net 17.9B v 19.3Be, Rev 73.7B v 77.7Be
WEED.CA Constellation Brands to acquire 38% stake for C$48.60/shr valued at C$5B in strategic partnership
M Reports Q2 $0.59 (ex asset sale gain) v $0.49e, Rev $5.57B v $5.59Be
*(US) AUG EMPIRE MANUFACTURING: 25.6 V 20.0E
*(US) Q2 PRELIMINARY NONFARM PRODUCTIVITY: 2.9% V 2.4%E; UNIT LABOR COSTS: -0.9% V 0.0%E
(US) JULY INDUSTRIAL PRODUCTION M/M: 0.1% V 0.3%E; CAPACITY UTILIZATION: 78.1% V 78.2%E
*(US) DOE CRUDE: +6.8M V -2.5ME; GASOLINE: -0.7M V -0.5ME; DISTILLATE: +3.6M V +1ME
(TR) Qatar has pledged to invest $15B in Turkey economy - Turkish press
CSCO Reports Q4 $0.70 v $0.69e, Rev $12.8B v $12.8Be
(CN) China Commerce Ministry (MOFCOM): China Vice Commerce Min to visit the US for trade talks in late Aug, to meet with US Treasury Undersecretary Malpass

THURSDAY 8/16
CARLB.DK Reports H1 (DKK) Adj Net 2.51B v 2.29B y/y, Adj EBITDA 6.48B v 6.63B y/y, Rev 31.0B v 30.6Be
*(UK) JULY RETAIL SALES (EX-AUTO/FUEL) M/M: 0.9% V 0.0%E; Y/Y: 3.7% V 2.8%E
WMT Reports Q2 $1.29 v $1.21e, Rev $128.0B v $125.6Be
(US) JULY HOUSING STARTS: 1.17M V 1.26ME; BUILDING PERMITS: 1.31M V 1.31ME
(US) AUG PHILADELPHIA FED BUSINESS OUTLOOK: 11.9 V 22.0E (lowest level since Nov 2016)
NVDA Reports Q2 $1.94 v $1.83e, Rev $3.12B v $3.11Be

FRIDAY 8/17
(US) President Trump has reportedly asked SEC to consider allowing US companies to report corporate results on 6-month basis – press
(CN) US and China reportedly plot roadmap to resolve trade dispute before Pres Trump-Pres Xi meeting in Nov - press

>>> Week in Review

Week In Review: Hodgepodge of Headlines Helps Fuel Rebound

The S&P 500 advanced 0.6% this week -- recouping last week's modest decline -- amid a host of retail earnings, more volatility in the Turkish lira, and another (minor) chapter in the U.S.-China trade war saga. The blue-chip Dow outperformed the S&P 500, rallying 1.4%, but the tech-heavy Nasdaq lagged, losing 0.3%.

Retailers stepped up to the earnings plate this week, with Walmart (WMT), Home Depot (HD), Macy's (M), Nordstrom (JWN), Advance Auto (AAP), and J.C. Penney (JCP) all reporting their quarterly results. The market's reaction to the reports was mixed.

In the session immediately following their respective earnings releases, Walmart spiked 9.3%, Home Depot lost 0.5%, Macy's plunged 16.0%, Nordstrom spiked 13.2%, Advance Auto climbed 7.8%, and J.C. Penney plunged 27.0%. On a related note, the July Retail Sales report came in better-than-expected, showing a month-over-month increase of 0.5% (Briefing.com consensus +0.1%).

Non-retail names reporting earnings this week included Cisco Systems (CSCO), NVIDIA (NVDA), and Deere (DE). Cisco Systems and Deere rallied in the session immediately following their releases, adding 3.0% and 2.4%, respectively, but market-darling NVIDIA tumbled, losing 4.6%, after disappointing guidance overshadowed upbeat results.

In other corporate news, Tesla's (TSLA) chief executive, Elon Musk, attempted to clarify last week's tweet about taking Tesla private, saying that his claim that funding has been secured is based on repeated conversations with Saudi Arabia's sovereign wealth fund. Mr. Musk also did a high-profile interview with The New York Times, in which he discussed his personal struggles, calling this past year "the most difficult and painful" of his career. Tesla shares ended the week lower by 14.1%.

In currencies, the Turkish lira followed up last Friday's 16% plunge with another slide on Monday, touching a new all-time low against the U.S. dollar, but then rebounded for the next three sessions. That streak ended with another tumble on Friday, but the currency still finished with a weekly gain of 6.1%.

On the trade front, reports that the U.S. and China will resume trade talks by the end of the month helped equities rally on Thursday. The talks will mark the first official negotiations since a breakdown two months ago, but it's worth noting that the talks are expected to be between low-level officials. In addition, The Wall Street Journal reported late on Friday that Chinese and U.S. negotiators are planning talks to try to end their trade disagreement ahead of multilateral meetings between President Trump and President Xi in November.

Elsewhere, West Texas Intermediate crude futures tumbled 2.5% to $65.94 per barrel this week, touching a fresh two-month low on Wednesday after the Energy Information Administration's weekly inventory report showed an unexpected build of 6.8 million barrels. The drop in oil prices weighed on the energy group, which finished at the bottom of the sector standings with a loss of 3.6%.

Most S&P 500 sectors finished the week in positive territory, with less-risky, countercyclical groups -- including consumer staples (+3.2%), utilities (+2.5%), and telecom services (+3.7%) -- leading the charge. The top-weighted technology sector underperformed, shedding 0.2%, but remains 2018's top-performing group with a year-to-date gain of 15.6%.

>>> US Close Dow +0.43% S&P +0.33% Nasdaq +0.13% Russell +0.43%


Closing Market Summary: Positive Trade Headlines Fuel Late Uptick

The S&P 500 advanced 0.3% on Friday, securing a weekly gain of 0.6%, helped by a Wall Street Journal report that Chinese and U.S. negotiators are planning talks to try to end their trade disagreement ahead of multilateral meetings between President Trump and President Xi in November. The Dow added 0.4% on Friday, and the Nasdaq ticked up 0.1%.

Friday's gains were broad-based, with all 11 S&P sectors closing in the green. The industrials (+0.6%), materials (+0.7%), consumer staples (+0.7%), and real estate (+1.0%) sectors were the top performers, while consumer discretionary (+0.1%), financials (+0.2%), and technology (+0.2%) finished at the back of the pack.

Stocks opened roughly flat and stayed largely unchanged until the afternoon when the WSJ report crossed the wires, pushing the market to new highs.

In corporate news, Tesla (TSLA 305.50, -29.95) tumbled 8.9% following a New York Times interview with its CEO, Elon Musk, in which he discussed his personal struggles, calling this past year "the most difficult and painful" of his career. The NYT also reported that some of Tesla's board members are concerned over Mr. Musk's use of Ambien and recreational drugs.

On the earnings front, NVIDIA (NVDA 244.82, -12.62) and Applied Materials (AMAT 43.77, -3.66) tumbled 4.9% and 7.7%, respectively, after they reported worse-than-expected guidance, which overshadowed their better-than-expected earnings. The Philadelphia Semiconductor Index lost 0.7%.

Conversely, Nordstrom (JWN 59.18, +6.90) spiked 13.2% after reporting above-consensus earnings and guidance for FY19, and Deere (DE 140.59, +3.24) climbed 2.4% despite missing bottom-line estimates and issuing below-consensus guidance for the current quarter.

Away from stocks, the Turkish lira lost 3.6% against the U.S. dollar, ending its three-session rebound, and U.S. Treasuries spent most of the day in the green, but finished the session little changed. The yield on the benchmark 10-yr Treasury note finished flat at 2.87%.

Reviewing Friday's economic data, which included July Leading Indicators and the preliminary reading of the University of Michigan Consumer Sentiment Index for August:

  • The Conference Board's Leading Economic Index increased 0.6% in July (consensus +0.5%), and the June reading was left unrevised at +0.5%.
    • The key takeaway from the report is that it points to a sustained pace of economic expansion for the foreseeable future.
  • The preliminary reading of the University of Michigan Consumer Sentiment Index for August slipped to 95.3 (consensus 97.8) from 97.9 in July.
    • The key takeaway from the report is that the overall decline was driven by concerns about the prices of large household durables.

Looking ahead, investors will not receive any economic data on Monday.

  • Nasdaq Composite +13.2% YTD
  • Russell 2000 +10.3% YTD
  • S&P 500 +6.6% YTD
  • Dow Jones Industrial Average +3.8% YTD