FT : China holds the key to solving the Korean puzzle

China holds the key to solving the Korean puzzle
Avoiding an escalation from words to missiles in the coming weeks is the priority

Kim Jong Un has got the measure of Donald Trump. The North Korean leader has found America’s most vulnerable point: the inability of its president not to respond to aspersion. Whatever the accuracy of the ballistic missiles that Pyongyang has devised, its leader’s insults have hit their desired mark.

Donald Trump, sitting at an outdoor table at his New Jersey golf club with his wife Melania at his side, hit back with apparently improvised remarks that further provocation would receive “fire and fury and frankly, power”. This response not only reveals a lack of understanding that a significant threat can come from a much less “powerful” nuclear armed country — precisely the point of this crisis — but advertises again the US president’s inability to tolerate any slight, whether from “fake news media”, an independent-minded attorney-general, or the rogue leader of the world’s most isolated state.

Where does this war — so far of words — go next? None of the options for dealing with the crisis is good. But some are far worse than others.

Much depends on what Mr Kim wants. Analysts I talked to this week in Japan agreed that his prime objective was to be treated by the US as “an equal”. In a sense, by provoking Mr Trump’s remarks, he has already achieved that. What then? We know he wants the regime to survive and to retain nuclear weapons: he has said so. Does he want to “force” the retreat of regional patrols and defences by the US and its allies? Probably a goal, even if unrealistic. To probe the routes to reunification of the Korean peninsula on his terms? That may be in the mix — but we could be trying too hard to discern strategy in what may be mainly a reflexive grab at status.

Alas, the same is true of the US, where the president’s compulsive need to defend status is clearer than any strategy. Mr Trump’s rhetoric boxed him in; it appeared to commit the US to a military response to almost any provocation. More gravity but not more clarity followed in twin statements: Rex Tillerson, secretary of state, soothingly maintained that diplomacy had some way to go, and James Mattis, defence secretary, asserted America’s right to defend its citizens with force if necessary.

Although the impression in the region was of incoherence, these are not necessarily contradictory. Each principle deserves a part in US strategy. But they are no substitute for a single, clear statement from the president. As it is, Mr Trump has alarmed allies and further energised Pyongyang without making clear to either what the US really intends to do.

What the president should do is try to turn this into a much longer discussion, in which the US has a chance of persuading China to put more pressure on North Korea than it has yet done.

For all Mr Tillerson’s optimistic noises, an immediate diplomatic solution seems out of reach. Pyongyang has shown no interest in a return to talks which demand it freeze or dismantle its nuclear capability. For all Mr Mattis’s emphasis, the attractions of further discussing military options simply illustrate how horrendous the consequences would be. North Korean action could stretch from a conventional military attack on South Korea to nuclear attack across the region and perhaps on the US. A US strike, conventional or nuclear, would ultimately overpower the regime, but at phenomenal human cost. Nor would the US be thanked in the region, by allies never mind China. Hence the hour-long call by Moon Jae-in, South Korea’s president, to Mr Trump, arguing against military action.

There are only two other options. The first is to recruit China’s help more successfully than Mr Trump has yet done. One unfortunate aspect of his bellicose remarks is to distract attention from the real achievement of getting UN Security Council support in the past week, including backing from China and Russia, for more sanctions on Pyongyang. These do not, though, extend to blocking fuel or food, which China still sends over the border to North Korea. Beijing’s claims to lack influence are also disingenuous. For all its protestations, China’s desire to keep the Pyongyang regime in place has determined its actions, both to avoid reunification of the peninsula into a single US ally and to avoid a flood of refugees. But that, surely, is now surpassed by its desire not to see war on its doorstep.

The second step for the US is to work with South Korea and Japan to strengthen defences. That would require Mr Trump to reverse the “America first” rhetoric that has cast doubt on whether he values those alliances. But Mr Mattis and other realists around him might more easily persuade him of their value now.

There are no right answers that unlock the puzzle. The US does need to protect its people and help its allies in the face of a regime that appears to threaten them so catastrophically. But avoiding an escalation from words to missiles in the coming weeks should be the priority. China, as it has never acknowledged, is the key to any negotiated solution, and the only way to get there is with more time.

WP - China warns North Korea: You’re on your own if you go after the United Stat

China warns North Korea: You’re on your own if you go after the United States

BEIJING — China won’t come to North Korea’s help if it launches missiles threatening U.S. soil and there is retaliation, a state-owned newspaper warned on Friday, but it would intervene if Washington strikes first.
The Global Times newspaper is not an official mouthpiece of the Communist Party, but in this case its editorial probably does reflect government policy and can be considered “semiofficial,” experts said.
China has repeatedly warned both Washington and Pyongyang not to do anything that raises tensions or causes instability on the Korean Peninsula, and strongly reiterated that suggestion Friday.
“The current situation on the Korean Peninsula is complicated and sensitive,” Foreign Ministry spokesman Geng Shuang said in a statement.
“China hopes that all relevant parties will be cautious on their words and actions, and do things that help to alleviate tensions and enhance mutual trust, rather than walk on the old pathway of taking turns in shows of strength, and upgrading the tensions.”
In an editorial, The Global Times said China should make it clear to both sides: “when their actions jeopardize China's interests, China will respond with a firm hand.”
“China should also make clear that if North Korea launches missiles that threaten U.S. soil first and the U.S. retaliates, China will stay neutral,” it added. “If the U.S. and South Korea carry out strikes and try to overthrow the North Korean regime and change the political pattern of the Korean Peninsula, China will prevent them from doing so.”
The Global Times warning comes at the end of a week of threat and counterthreat between Washington and Pyongyang, and as the United States weighs up its options to deal with the threat of North Korea’s nuclear and missile program.
The Global Times said both sides were engaging in a “reckless game” that runs the risk of descending into a real war.
The brinkmanship weighed on world financial markets for a fourth consecutive day. Main indexes were down in Frankfurt and Paris, and London’s FTSE 100 touched its lowest level since May. Asian markets also slumped, including South Korea’s KOSPI dropping 1.8 percent. Wall Street futures were down.
On Tuesday, President Trump threatened to respond to further threats from North Korea by unleashing “fire and fury like the world has never seen.” Pyongyang in turn threatened to strike the U.S. territory of Guam in the Western Pacific with ballistic missiles.
In this U.S. Department of Defense, a B-1B Lancer prepares to take off from Andersen Air Force base, Guam on Aug. 7. (Richard P. Ebensberger/AFP/Getty Images)
The Global Times also cited reports that the Pentagon has prepared plans for B-1B strategic bombers to make preemptive strikes on North Korea's missile sites, and a strongly worded ultimatum from Secretary of Defense Jim Mattis that North Korea should not consider “actions that would lead to the end of its regime and destruction of its people.”
The paper’s comments also reflect the 1961 Sino-North Korean Treaty of Friendship, Cooperation, and Mutual Assistance, which obliges China to intervene if North Korea is subject to unprovoked aggression — but not necessarily if Pyongyang starts a war.
“The key point is in the first half of the sentence; China opposes North Korea testing missiles in the waters around Guam,” said Cheng Xiaohe, a North Korea expert at Renmin University of China in Beijing.
With the situation on the Korea Peninsula sliding dangerously toward the point of no return, Chinese media are starting to declare their positions on any potential war, he said. “Secondly, in a half-official way, China is starting to review and clarify the 1961 treaty.”
China has become deeply frustrated with the regime in Pyongyang, and genuinely wants to see a denuclearized Korean Peninsula. But it has always refused to do anything that might destabilize or topple a regime which has long been both ally and buffer state.
That’s because Beijing does not want to see a unified Korean state allied to the United States right up against its border: indeed, hundreds of thousands of Chinese soldiers died during the 1950-53 Korean War to prevent that happening.
So for now, the current uneasy status quo for China still seems better than the alternatives.
That is doubly true ahead of an important Communist Party Congress in the fall, at which President Xi Jinping wants to project an aura of stability and control as he aims to consolidate his power at the start of a second five-year term.
Nevertheless, experts said debate is underway behind the scenes in China about its support for the North Korean regime.
In an article on the Financial Times China website in May, for example, Tong Zhiwei, a law professor at the East China University of Political Science and Law in Shanghai, argued that China should make terminating the 1961 treaty a near-term diplomatic goal, because North Korea, also known as the DPRK, had used it as cover to develop its nuclear program and avoid punishment.
That, he wrote, was not in China’s interests.
“In the past 57 years, the treaty has strongly protected the security of the DPRK and peace on the Korean Peninsula, but it has also been used by the North Korean authorities to protect their international wrongful acts from punishment,” he wrote.
Meanwhile, China has reacted strongly to the United States sending a warship close to an island it controls in the South China Sea.
The U.S. Navy destroyer, USS John S. McCain, traveled close to Mischief Reef in the disputed Spratly Islands on Thursday, in the third “freedom of navigation” exercise in the area conducted under the Trump administration, Reuters reported.
China’s Defense Ministry said two Chinese warships “jumped into action” and warned the U.S. ship to leave, labeling the move a “provocation” that seriously harms mutual trust.
China’s Foreign Ministry said the operation had violated international and Chinese law and seriously harmed Beijing's sovereignty and security.
“The Chinese side is strongly dissatisfied with this and will lodge solemn representations to the U.S. side,” the ministry said in a statement.

>>> NVIDIA: Color on Qtr --> -6.7% pre-open, 1mil shares traded @ 152.48

NVIDIA: Color on Qtr (164.74)
  • Mizuho Securities raises tgt to $180 from $170. Firm notes NVDA reported a strong JulQ GAAP rev/EPS of $2.23B/$0.92 well above consensus of $1.96/$0.70. Data Center revenues were up 2% q/q (176% y/y) despite consensus for down 2%, while automotive continues to grow, up 1% q/q and 19% y/y. NVDA was off in after hours with the modest q/q DC growth, but firm believes NVDA will continue to drive a paradigm shift in the data center with the trend towards massively parallel computing as Enterprise and Hyperscale move to faster and smarter platforms. Strength in the quarter was driven by strong GPU demand, up 21% q/q with strong cryptocurrency mining demand (additional ~$150M topline) and gaming up 16% q/q. NVDA noted JulyQ was a transition quarter for datacenter with the introduction of the new Volta with 10x performance over its prior Tesla/Pascal and was launched commercially only in late July.
  • RBC Capital notes NVDA reported solid results across the board with gaming upside, sequential growth in Data Center (+176% y/y despite a product transition) and a modest uplift from crypto-currency. Overall, firm thinks expectations were simply too high into the print and the secular story remains unchanged. After the company reported another solid quarter driven by GPU upside (+59% y/y), firm is taking upside case EPS to $6.00+ for CY18 (up 50c) from $5.50+ stated in prior reports. The Data center segment continues to show robust growth, where firm remains bullish on the shift to parallel processing and Nvidia's ability to continue to raise DGX prices. Increasing estimate for crypto-currency related revenue for both AMD and NVDA to $250M (from $175M) and $150M (from $75M).
  • Needham Research believes NVIDA is the future computing platform company, servicing broad markets via its unified CUDA ecosystem and experiencing growth across all business segments. Firm remains confident in its gaming division growth (eSports, gaming laptops, gaming in the cloud) and see particular strength in its automotive roadmap (both AI cockpit and future ADAS/AV) as well as new applications within the data center division as Volta now targets the inference market. Even with the removal of this quarter's crypto currency tailwind, firm believes that in future quarters NVDA can generate $4.50 of earnings power in FY19.
  • Stifel Research notes Nvidia turned in a solid beat and raise quarter. Some investors may be disappointed that much of the revenue beat came from the highly volatile cryptocurrency market and not from hyperscale data centers' adoption of GPUs. In firm's view, revenue related to hyperscale data center is notoriously lumpy and investors should not expect steady sequential growth in this business. In the longer term, Stifel does expect GPU adoption in hyperscale data centers and ~15%-20% y/y growth. NVDA share valuation of ~40x forward non-GAAP earnings keeps firm on the sidelines.
  • Nomura lowered tgt to $90 from $110 on concerns of gaming environment.
  • Citigroup said it was buyers on the after market decline.
  • BofA/Merrill believes sell off could be enhanced buying opportunityfor 80% of large cap active managers that do not own the stock.
  • Jefferies would be buyers on the decline.
  • Bernstein raised is tgt to $180 from $165.
  • J.P. Morgan raised tgt to $145 from $122.

>>> Impala Asset Management (Robert Bishop) discloses updated portfolio position

Impala Asset Management (Robert Bishop) discloses updated portfolio positions in 13F filing: Closes out X FLR LVS NFX NKE GPS HRI FL CFX CLR positions
Highlights from 2017 Q2 filing as compared to 2017 Q1 filing:
  • New positions in: HCC (~1.26 mln shares), NAV (~1.13 mln), BLDR(~0.62 mln), HAL (~0.57 mln), GLW (~0.52 mln), NCLH (~0.43 mln),TEX (~0.25 mln), GDI (~0.21 mln), DOOR (~0.19 mln)
  • Increased positions in: TECK (to ~12.56 mln shares from ~10.19 mln shares), SBLK (to ~1.95 mln from ~0.56 mln), CENX (to ~2.8 mln from ~1.71 mln), HOG (to ~2.08 mln from ~1.3 mln), STAY (to ~0.82 mln from ~0.07 mln), TGB (to ~2.88 mln from ~2.28 mln), CAT (to ~1.01 mln from ~0.65 mln) OLN (to ~1 mln from ~0.64 mln), HZO (to ~1.8 mln from ~1.51 mln), SUM (to ~1.41 mln from ~1.14 mln)
  • Maintained positions in: SWFT (~2.72 mln shares), TRN (~1.96 mln)
  • Closed positions in: X (from ~1.84 mln shares), JNUG (from ~1.03 mln), FLR (from ~0.72 mln), LVS (from ~0.7 mln), NFX (from ~0.57 mln), NKE (from ~0.57 mln), GPS (from ~0.4 mln), HRI (from ~0.4 mln), FL (from ~0.38 mln), CFX (from ~0.33 mln)
  • Decreased positions in: STNG (to ~2.5 mln shares from ~3.16 mln shares), LPI (to ~2.42 mln from ~2.96 mln), NEM (to ~0.68 mln from ~1.21 mln), UNP (to ~0.65 mln from ~0.93 mln), MSFT (to ~0.13 mln from ~0.37 mln), DHI (to ~0.25 mln from ~0.48 mln), CSX (to ~0.95 mln from ~1.12 mln), HES (to ~0.82 mln from ~1 mln), TTWO (to ~0.82 mln from ~0.96 mln), RIO (to ~3.31 mln from ~3.66 mln)

>>> Snap Color on Quarter --> -11.8% pre open 3.6mil shares traded @ 12.04

Snap Color on Quarter
  • Stifel lowers their SNAP tgt to $18 from $22, reiterates Buy. Firm notes that Snap's 2Q results were slightly below consensus expectations, with revenue ~2% below Street estimates and net DAU additions of +7mm q/q versus consensus forecasts for +9mm q/q. They believe a primary driver of Snap's light 2Q revenue was its ad buying mix shifting significantly to the recently launched API / self-serve platforms, which pressured ad pricing on 2Q placements but this should benefit the platform through broadened advertiser demand over time. User growth remains healthy, particularly in the key U.S. and Canada markets, even in the face of heightened competitive concerns. They are lowering their expectations for revenue growth in 2017 as pricing presents a near-term headwind; however, they continue to recommend the company as SNAP shares could offer compelling upside when monetization reaches an inflection point.
  • RBC lowers their SNAP tgt to $20 from $31, reiterates Outperform. Firm notes that Q2 Revenue, EBITDA, and DAUs fell short of Street expectations - Revenue by 3%, EBITDA by 7%, and Net DAU's by 2MM. While results are weaker than expectations, they still argue against results altering their long-term thesis. Way too early with much of the market still up for grabs.
  • Needham reiterates Underperform. Firm notes that SNAP missed their estimates. Daily Active Users (DAUs) reached 173mm, up 7mm and 4% q/q. ARPU grew 17% q/q to $1.05. They felt there were several things that were different on the 2Q17 call compared to the 1Q17 call; a) Evan Spiegel was much more engaged with Wall Street (positive); b) SNAP's messaging was about being the best place for advertisers to reach young people (15-25) on smartphones (positive)- dearth of "camera company" language; c) SNAP is introducing new products that are harder to replicate by competitors (positive); d) SNAP's new auction prices are down 80% for app installs (negative), which is attracting new advertisers to try SNAP (positive); and e) SNAP bought Placed in order to prove that SNAP ads get users to purchase goods in the real world (we'll see if this works out for SNAP).
  • Pivotal reiterates $9 tgt, reiterates Sell. Firm notes that Snap reported decent 2Q17 results, with relatively in-line revenues vs. the forecast. Costs were higher than we expected, but then so too was usage, coinciding with the company's Map product launch. Commentary around like-for-like advertiser spending increases, new ad product launches and geographic expansion can also be viewed favorably. However, our overall financial model remains relatively unchanged post these results.
  • Monnes Crespi Hardt downgrades to Neutral from Buy. Firm notes that in short, the thesis has changed. What's unfortunate is that despite all the media frenzy over Facebook's (FB/Neutral) ‘Snap-killing' features, they see the slower-than-expected ramp in revenue as largely self-inflicted. Their initial favorable outlook was predicated on: (1) better pulse on mobile content experiences versus peers and, in turn, opportunities to aggressively invest and capitalize; (2) steep trajectory in ARPU as growth is accessed from the most affluent of markets; and (3) rapid iterations on the product front. What's happened is that the priorities don't seem to be fully aligned with the company's strengths.

>>> J. C. Penney misses by $0.05, beats on revs; reaffirms FY18 EPS and comp gui

J. C. Penney misses by $0.05, beats on revs; reaffirms FY18 EPS and comp guidance (4.71)
  • Reports Q2 (Jul) loss of $0.09 per share, excluding non-recurring items, $0.05 worse than the Capital IQ Consensus of ($0.04); revenues rose 1.5% year/year to $2.96 bln vs the $2.84 bln Capital IQ Consensus.
    • Comparable sales declined (1.3)% vs. -1.1% estimates, resulting in a positive two-year stack of 0.9%.
  • Co reaffirms guidance for FY18, sees EPS of $0.40-0.65 vs. $0.49 Capital IQ Consensus. The Company has updated its cost of goods sold guidance and reaffirmed the remaining 2017 full year guidance. Comparable store sales: expected to be -1 % to +1 %; COGS +30-50 bps.
  • "We are pleased to deliver a top line sales increase of 1.5 % and quarterly sequential improvement of 220 basis points in our comp sales performance in go forward stores. While broader retail remains challenged, we are encouraged by the improved performance in our total apparel business, including a significant acceleration in kids' apparel. Nearly all categories delivered improved sales results during the quarter, with our growth initiatives in beauty, home refresh and omnichannel continuing to deliver positive sales growth." Ellison continued, "During the second quarter, we liquidated inventory in 127 of our closing stores which had a negative impact on gross margin and EPS. These events were isolated to the second quarter. As such, we are reaffirming our EPS guidance for the year, and remain confident in our ability to further strengthen our balance sheet, while driving sustainable growth and long-term profitability for JCPenney. To that end, we are pleased that we are off to a strong start in August for the all-important back to school season. We are excited by this momentum and expect to deliver improved results in the back half of the year."

>>> US Gapping down

Gapping down
In reaction to disappointing earnings/guidance
:

  • UNXL -27.3%, (also discloses entry into equity purchase agreement with L2 Capital relating to an offering of an aggregate of up to 14,146,649 shares ), JCP -22.5%, LXFT -17.8%, SNAP -11.3%, NVDA -8.4%, BBOX -7.4%, UPLD -6.3%, KINS -5.4%, SPHS -5.2%, BIOC -4.8%, CXRX -4.6%, CBAY -3.9%, TU -1.6%, MGA -1%

Select China related names showing weakness after Shanghai closed down 1.6% overnight:

  • WB -2.9%, NTES -2.6%, MOMO -2.6%, SINA -2%, CTRP -2%, BIDU -1.6%, JD -1.5%

Select NVDA peers/related names trading lower:

  • AMD -2.3%, MU -1.6%, SOXX -1.2%, XLNX -1%

Other news:

  • ETRM -35.3% ( commences public offering to consist of units comprised of one share of series B convertible preferred stock and one warrant to purchase shares of common stock)
  • IONS -6.3% (announces 'a reprioritization of its pipeline and strategic review of its Rare Diseases business', after GSK (GSK) declined its options on inotersen and IONIS-FB-LRx)
  • NCLH -4% (launches secondary public offering of 15 million of its ordinary shares by certain funds affiliated with Apollo Global, Star NCLC Holdings Ltd. and certain funds affiliated with TPG Global)
  • TXMD -3.5% (announces regulatory update regarding the NDA for TX-004HR)
  • CBI -2.7% (continued weakness)
  • SQ -1.6% (continued weakness - closed down nearly 4% today)
  • LYV -1.5% (following late move lower on reports that Amazon may sell event tickets)
  • KSS -1.1% (in sympathy with JCP)

Analyst comments:

  • LTC -1.7% (downgraded to Underperform at BMO Capital Markets)
  • KR -1% (initiated with a Underweight )
  • NNA -0.7% (downgraded to Neutral at Citigroup)
  • FRTA -0.6% (downgraded to Equal Weight from Overweight at Barclays)
  • SHPG -0.5% (downgraded to Equal Weight from Overweight at Barclays )
  • GS -0.5% (downgraded to Hold from Buy at HSBC Securities)

>>> US Gapping up


Gapping up
In reaction to strong earnings/guidance
:

  • VIVE +27.5%, AEZS +15%, CDNA +14.9%, CHMA +14.3%, (also has reached agreement with the FDA on the design of a new Phase 3 clinical trial for its octreotide capsules product candidate, Mycapssa), HEAR +11.9%, ANW +10.8%, TTD +7.5%, AMRS +5.9%, CWH +5.7%, EPAY +4.9%, CAPR +4.7%, NDLS +3.8%, CATB +2.5%, CYTX +2.4%, WPM +1.6%, CRSP +1.1%, ZSAN +1.1%

Other news:

  • DRYS +4.9% (announces agreement to conduct a private placement and subsequent rights offering at $2.75/share; terminates common stock purchase agreement with Kalani Investments)
    • TOPS +41.8% (following stock offering news from peer DryShips (DRYS))
  • CUDA +3.9% (to Join S&P SmallCap 600)
  • XXII +3.2% (ongoing volatility)
  • STX +3% (ValueAct Capital discloses 7.2% active stake after increasing position to 21 mln shares (showed 9.54 mln share position at end of Q1))
  • KURA +2.3% (prices offering of 7.7 mln shares of common stock at $6.50 per share)
  • EFII +2% ( files to delay its 10-Q; updates Q2 expectations excluding any adjustments from ongoing assessment/audit review)
  • ETSY +0.9% (Pres/CEO disclosed purchase of 64000 shares worth approx $1 mln)

Analyst comments:

  • PM +0.9% (upgraded to Hold at SBG Securities)
  • SBBP +0.8% (initiated with an Outperform at Oppenheimer; $12 tgt)