FT : Unilever finds Kraft Heinz helps concentrate minds

Unilever finds Kraft Heinz helps concentrate minds
Bid from US rival inspires consumer goods group to rewrite growth story

Nothing concentrates the mind like money. Or the prospect of an imminent demise. Author and barrister Sir John Mortimer was of the former view. Author and general know-it-all Samuel Johnson was of the latter. Unilever chief executive Paul Polman, however, appears to have time for both.

This would explain why he penned his ‘Connected 4 Growth’ story for money-seeking shareholders last November — but felt a need to rewrite it in April, after Kraft Heinz threatened to consume his consumer goods group.

Few are of the view that Kraft will bid again, when the takeover rules permit it to next month. That would require a change of heart, or an exit, on the part of its billionaire backer Warren Buffett. Still, Unilever’s half-year results can be read as an indication of how much the possibility has concentrated minds further. Comparing what Mr Polman first wrote in November with his text on Thursday makes for interesting literary analysis.

In ‘Connected 4 Growth’, he foretold a margin improvement of 40-80 basis points, up from 20-40. Thursday’s wording suggested another rewrite: a 180 bps rise to 17.8 per cent in the first half, getting closer to the 20 per cent target that was inserted into his April draft. Full-year margin guidance was increased to a 100 bps improvement.

Mr Polman used the wording “sales growth ahead of market” in November. On Thursday, he told of 3 per cent growth, a full percentage point ahead of market and of previous quarters. Some aspects suggested a loss of concentration, though. Analysts noted that homecare and personal care growth had fallen to the lowest and second lowest level, respectively, in seven years, and total sales volumes were flat — all the increases were from price inflation.

Mr Polman had also described better cash conversion in November, alluding to free cash flow as 90 per cent of core net profit. But, on Thursday, he was more taciturn, writing only of a £600m improvement in overall cash flow levels, despite the same amount going into the pension fund.

Understandably, most of his newfound concentration came in April, when ‘Connected 4 Growth’ was embellished with the 2020 margin target, higher leverage and a €5bn share buy-back. Even insiders admit the words came more easily “in the crucible of the Kraft bid”. But the results suggest a greater desire to use superlative, rather than comparative adjectives, where possible.

For shareholders, though, two questions arise. First, how much do flat sales volumes undermine the narrative of ‘Connected 4 Growth’? Second, does shifting executive pay targets from core to underlying earning measures — excluding restructuring — make sense . . . or open up the possibility of being told more stories?

FT : UK abandons rail upgrades and delays decision on network funding

UK abandons rail upgrades and delays decision on network funding
Electrification of lines to cut costs and reduce carbon emissions abandoned

The Department for Transport has come under attack for abandoning several rail upgrade projects and delaying a decision on future railway funding.

Plans to electrify the UK’s railways to cut the cost of trains, increase reliability and reduce carbon emissions were scrapped by the government on Thursday. Network Rail, which owns and runs most of Britain’s railways, has had a series of budget overspends in the past few years.

Projects that have been axed include the Cardiff-to-Swansea section of the Great Western network, the Midland mainline and the short Oxenholme-to-Windermere line in the Lake District.

The DfT said that passengers would instead benefit from “bi-mode” trains that can use overhead electrical wires and have diesel engines.

The abandoning of the modernisation schemes came on the same day that Chris Grayling, the transport secretary, postponed until October a decision on future rail funding.

Mr Grayling was due on Thursday provide details of funding for Network Rail for the period from 2019 to 2024. Instead, he said he needed more time to get further “assurance” on costs and that Network Rail should focus on day-to-day maintenance of the railways over that period, rather than big projects.

“Before committing to the specific levels of funding required, I have decided that the government requires more assurance on the likely costs of the work programme. Network Rail’s progress on improving its efficiency in recent years has fallen short of my expectations.”

Network Rail controls 2,500 stations as well as tracks, tunnels and level crossings but it has been repeatedly criticised for missing targets on its five-year investment programme, as well as budget overspends and punctuality failures.

Lilian Greenwood, head of the House of Commons’ transport committee, said: “Today’s announcement raises serious questions about the government’s willingness to invest in the long-term future of our railways . . . The government’s failure to provide details on specific infrastructure enhancements is also deeply concerning.”

Industry commentators said the delay in funding details was worrying. “It does suggest there is a lack of confidence across government in Network Rail’s ability to deliver,” said Rupert Brennan Brown, a long-time railway industry observer. “We always knew [the 2019 to 2024 period] would be challenging for enhancements — the big projects — but the fact that day-to-day work is being subject to further scrutiny is interesting.”

The funding postponement comes as industry regulator the Office of Rail and Road said Network Rail is carrying out core work 5 per cent less efficiently than it did three years ago.

In its annual review of the group, which was published on Thursday, the ORR warned that Network Rail has deferred £3.7bn of work to renew the railway in its current five-year funding period in order to remain within its budget.

Lianna Etkind of Campaign for Better Transport said: “Five years ago the government were trumpeting the biggest investment in railways since the Victorians. Today, passengers face spiralling fares while investment is put on the back burner.”

(TechCrunch) Tech’s 5 biggest players now worth $3 trillion

Tech’s 5 biggest players now worth $3 trillion

Tech’s most valuable players today crossed the $3 trillion aggregate market cap mark according to Google Finance data. It’s a feat that marks a new threshold for tech amidst the current boom.
As “Nasdaq 5,000” was a critical moment in the dot-com rally, the $3 trillion result for the firms that we call the “Big 5” is notable. This is largely because the biggest tech companies — ranked by market cap, as revenue comes in varying quality — have helped fuel the growth of various indices that are setting records themselves.
The current market rally is, in some ways, a technology rally. Let’s examine the number, how we got here and why it matters.
$3 trillion and counting
According to our public spreadsheet that sources data from Google Finance, the Big 5 (Apple, Alphabet, Amazon, Facebook, Microsoft) are worth $3.03 trillion when combined. To double-check that number, we ran the same count with Yahoo Finance, summing to a $3.002 trillion.
(Wolfram Alpha, which we’ll get to in a moment, spits out a result of $2.978 trillion. So we’re two for two on the result totaling $3 trillion or more, and one for one that easily rounds up. Not bad.)
To reach today’s threshold, the Big 5 had to go on a lengthy tear. Here are their gains, as measured from their respective 52-week lows:
  • Apple: 56.63 percent
  • Amazon: 44.61 percent
  • Facebook: 44.55 percent
  • Microsoft: 39.54 percent
  • Alphabet: 33.45 percent
When you measure down from 52-week highs, the group’s laggard is Apple, off 3.59 percent. Alphabet is closest to the metal, off just 0.24 percent. What matters, however, is that their collective rally has reached a new watermark, not that any one company is “ahead.”
So why do we care?
Why this matters
As mentioned in our opening paragraphs, the setting of new thresholds is something often done in peak moments, or at least periods when things are better than normal. For tech, that’s now.
We’re racing around what we said about the matter in May, which we should quote here:
But the Big 5 are rapidly approaching thirteen-digit club. If the largest tech companies manage to reach that value mark in the current business cycle, and before its turn, it will be interesting to see if it will be the new Nasdaq 5,000, a prior psychological barrier set during the first dotcom boom, and it was only recently put to bed as hopelessly dated.
Now, a few months later, they’ve made it.

The moment comes despite some tension in the tech industry. Despite, say, chop among some previously high-flying private tech companies — shutdowns, layoffs, Theranos — and some unicorns that are going public — Blue Apron, Tintri — things are buoyant in broader tech. And after a long rally marked recently by sharp share price gains among the largest tech companies, the $3 trillion mark could stand up over time as a good thumb-sized measurement to vet future rallies against.
And, perhaps, even more, it can help us understand how concentrated the tech industry is at any given point. In the era of platform players racing to control the digital lives of both consumers and enterprises, it’s perhaps not surprising that the biggest companies are worth so very much; if the tech industry changes, becoming more fractured, that could shift. (We would need to do separate work to create a Gini coefficient for tech market cap, but the general point stands.)
For fun, here’s the chart, via the excellent Wolfram Alpha, that shows the aggregate change in value of the Big 5 over time:
(As you can see, earlier in the year, the Big 5 flirted with $3 trillion. But we never saw the $3 trillion mark reached at market-close until today.)
Good times (for now)
The situation throws light on a number of things we discuss in the pages of Crunchbase News, which are largely dedicated to private companies and their financials.
We can distill it into two parts:
  • It could help drive M&A activity in the sector. If M&A currently disappoints, something that is niche-dependent inside of the sector, this milestone may not excite you. After all, if companies are flush and not buying, what will happen when their market cap is cut by, say, 20 percent? Moral: M&A could get a lot worse.
  • The gap between private and public valuations is still yawning. Fewer unicorns are going public this year than expected, and there have been valuation cuts required to get some offerings out the door. Similar to our first point: If this is as good as it gets for IPOs when markets are hot, it may not bode well as to what will come when market conditions fluctuate.
In sum: It’s a big day for tech’s biggest players, even if it isn’t the most intriguing of them all or the simplest to explain.
We’ll keep an eye on the Big 5 and see how high they can get before the market decides to run a little profit taking.

(ZH) The "Wipeout Scenario": 250% Losses If VIX Spikes To 20

The "Wipeout Scenario": 250% Losses If VIX Spikes To 20

How Bad a Damage If Volatility Rises: The Bear Trap of Short Vol ETFs
As if there was any need for any more threats to financial stability in a world overburdened with debt facing rising interest rates on bubble valuations in both bonds and equities, within an environment dominated by economic policy shifts and political gridlock, there is a potential bear trap right in today’s most fashionable investment products, which risks deflating fast: Short Vol Exchange-Traded Notes and, more broadly, volatility-driven investment vehicles. In this note we will discuss briefly the former. A full analysis and access to our data room is available upon request.

Years of Central Banks’ hyper-activism, financial repression and regular bail-out of financial assets led to a collapse in volatility, and the ensuing investment mania in volatility-driven strategies: risk parity funds in primis, vol-levers of all types, but also exchange-traded notes directly linked to volatility. Among these, Short Vol ETFs have grown relentlessly, oftentimes including leveraged plays, oftentimes sold to retail, fully or partially un-aware of how quick wipe-out-type risks can materialize on such products, and how close we got to such wipe-out risks. For the purposes of our scenario analysis, we will define a wipe-out risk as one of losing more than 75% of the original investment.
We find that the total size for vol-linked ETFs, after leverage and Beta-adjusted is almost $40bn.

The conventional wisdom goes that VIX has never historically moved up so much and for so long as to wipe-out short vol strategies. It would typically require a doubling up of VIX in short order, which has never occurred on a daily basis across modern history.
However, as VIX drags itself around rock-bottom historical levels, often at sub 10-levels, while equity valuations are the highest in history, the risk of volatility doubling up is today materially higher than it has ever been. If VIX was at 20, to double up it would have to move to 40: a statistical outlier. But VIX trades around 9/10 now, from where doubling up simply takes it to 18/20 territory, which is actually spot on the average for VIX on recorded history since 1993 (while median is 15.95). VIX was actually higher than that 30% of the times. If and when it happens, such ETFs would suffer dramatic losses. For wider moves than that, some of the volatility-linked instruments would be almost wiped-out. In others, where a short-vol position can easily be extracted by shorting a leveraged long-vol exchange-traded note, the investor would stand to lose up to 650% of the capital invested.
It is one thing for short-vol ETF to be exposed to rising levels of volatility up to the point where they face wipe-out event risk. Any investment can go sour, and even very badly so. It is quite another for such small moves in volatility to be enough to trigger a wipe-out event. What strikes is then how close we drifted to the cliff, thus with how big a probability it will happen at some point down the line. Indeed, doubling up from where volatility stands now is easy, and simply means moving towards historical averages.
We performed an analysis on some of the largest notes linked to volatility, both from an historical perspective (Regression Analysis) and taking into account the sensitivity of the specific note (Formulaic Analysis). Our analysis shows that if VIX goes from 9.60 to 18/20 in absolute values (it was approx. 40 as recently as Aug2015), and stays there for 8 / 10 days in backwardation, VIX-based ETFs may stand to lose up to 55%. Short positions on long-vol ETFs can then lose up to 250% of capital with VIX at 20. Losses are higher in case of wider backwardation of the term structure of the VIX (i.e. front contracts trading higher than back contracts), or the longer VIX stays elevated while in backwardation, or clearly the higher it goes. For example, if VIX quadruples from here to 40, losses on a UVXY position would amount to a staggering 656%!
Additional risks arise as ‘liquidity gates’ may be imposed, even in the absence of a spike in volatility. In 2012, for example, the price of TVIX ETN fell 60% in two days, despite relatively benign trading conditions elsewhere in the market. The reason was that the promoter of the volatility-linked note announced that it temporarily suspended further issuances of the ETN due to “internal limits” reached on the size of the ETNs. Furthermore, for some of the volatility-linked notes, the prospectus foresee the possibility of ‘termination events’: for example, for XIV ETF a termination event is triggered if the daily percentage drop exceeds 80%. Then a full wipe-out is avoided insofar as it is preceded by a game-over event.
The reaction of the investor base at play – often retail – holds the potential to create cascading effects and to send shockwaves to the market at large. This likely is a blind spot for markets.
To be sure, low volatility has further ramifications above and beyond short-vol exchange-traded notes. An artificially low volatility environment, generated by the passive flows of Central Banks (in excess of $300bn per month at present) and rule-based investing vehicles (we count almost $8trn at play today between risk-parity, vol-levers, ETFs, passive index funds), breeds market fragility. It may well represent the calm before the storm. A state of persistently low volatility offers the fiction of innocuous, ever-trending markets, which entices new swathes of unfitting investors in, mostly retail-type ‘weak hands’. Weak hands are investors who are brought to like an investment by certain characteristics which are uncommon to the specific investment itself, such as its featuring of a low volatility. It is in this form that we see bond-like investors looking at the stock market for yield pick-up purposes, magnetized by levels of realized volatility similar to what fixed income used to provide with during the Great Moderation. Weak hands investors are the first to leave should the low-volatility regime shift gear, adding to the fragility of the market. We discussed it here.
Market fragility must surely be a concern in the current investing environment. Yet, the psychological damage on investors and their behavioral reaction function to a sudden risk-off environment can never be as certain and direct as a wipe-out risk to a whole cluster of them. That is the nature of the risk that short-vol vehicles are facing today.
A synopsis of the data analysis follows below.
Frequency of VIX at different levels: 30% of the times in the last 25 years VIX printed above 20
Mean VIX on recorded history since 1993 is 19.63
Median VIX is 15.95

Fat Tail of VIX distribution:
Extreme returns on VIX are more frequent than a normal distribution would project, as confirmed by the Shapiro-Wilk reject of the null hypothesis of normality. A cursory look at the shape of the returns distribution of VIX shows high Leptokurtosis. This is reflected in the frequency with which VIX has doubled up, in a window of just 14 days: 6 times in the last 9 years.
Regression Analysis and Formulaic Analysis of a few major volatility-linked ETNs
Losses can compound fast for moves in VIX which are both relatively small and frequent in history. According to both an historical and a formulaic analysis, Vix at 20 implies losses up to ~280% across instruments, depending on the shape of the term structure (contango vs backwardation) and how long a period the drift and shape are sustained for.


Case Studies:
August 2011: (XIV) VelocityShares Daily Inverse VIX Short-Term ETN
XIV lost almost 75% of its value when the VIX rose from 18 to 45 during the month
August 2015: (UVXY) ProShares Ultra VIX Short-Term Futures ETF
During August 2015 VIX climbed from 12 to 40 in just a few days, on fears of China’s devaluation. A short-vol position in UXVY (short the note) would have lost 100% of its capital already as VIX traded at just 25. It ended up losing 270% as VIX was nearing 40.
May 2010: (VXX) iPath S&P 500 VIX Short-Term FuturesTM ETN
UVXY is a leveraged instrument, but unlevered short volatility strategies can have large swings too. During May 2010, a short-vol position in VXX ETN would have experienced a loss of 82% of the capital.