>>> What to look at today - 15th & 16th of July 2017

Weekly Performance
Dow +1.04% S&P +1.41% Nasdaq +2.59% Russell +0.92% Brazil +5% (+8.35% in $) Mexico +2.20% (+5,27% in $) Nikkei +0.95% (+2.20% in $) Hang Seng +4,14% CSI +1.29% Shanghai +0.14% EuroStoxx +1.79% (+2.41% in $) FTSE +0.37% CAC +1.75% DAX +1.96% Ibex +1.59% MIB +2.27% SMI +1.70%
Equity markets moved up early in the week while interest rates appeared to stabilize. Stocks quickly brushed aside volatility induced by the latest revelations out of Washington D.C. that President Trump’s son met with Russian operatives during the 2016 election. By Wednesday, Fed Chair Yellen’s testimony was seen largely in a dovish light when she noted the federal funds rate would not have to rise all that much further to get to a neutral policy stance. Global bond prices continued to rise even in the face of various press reports suggesting the ECB is close to signaling its own QE taper. By Friday, soft readings for both US consumption and consumer prices cemented the week's tone of a lower US dollar, stabilizing global rates, and rising equity valuations. The Dollar index finished the week at its lowest level since September, while gold prices rose to the highest point in about 2 weeks. WTI crude prices rose 5% helped by larger than expected draw downs in US inventories. By Friday, the VIX dipped back below 10, closing near a record low, while the Transports, S&P 500 and Russel 2000 all finished the week at an all time closing high. The NASDAQ had its best week in almost 3 months. For the week the S&P gained 1.4%, Dow added 1% and the NASDAQ jumped 2.6%. 
In corporate news this week, Target raised its Q2 guidance and indicated a broad-based improvement in traffic, giving a much-needed boost to the beaten-down retail sector. Amazon saw a huge spike in Echo sales during its annual Prime Day promotion, with demand for the smart speaker reaching seven times last year’s levels. And as banks kicked off earnings season, JPMorgan reported profits came in well above consensus, and CEO Dimon pointed to strong loans and deposits growth, as well as double-digit boosts to card sales and merchant processing volumes. Citi posted an earnings beat on notable strength in its fixed-income segment. Wells Fargo earnings also topped Street estimates, but disappointed on revenues and warned costs may remain inflated in the short term.

Macro :
- U.K. Businesses Urge Min. Wage Freeze on Brexit Fear: S. Times
- David Einhorn’s Greenlight Capital Hedge Fund Fell 4% in 2Q
- Goldman Lowers Odds of December Fed Rate Hike to 50% From 55%
- Netanyahu Says Israel Rejects South Syria Cease-Fire: Haaretz

Keep an eye on :
- ADS GY : Adidas Shares Could Double as Profit Margins Expand - Barron's
- AF FP : Air France-KLM Stake in Kenya Airways to Fall on Debt Conversion
- AIR FP : Airbus U.K. Unit CEO Kahn Replaced by Bennett: Telegraph
- AZN LN : AstraZeneca’s Pascal Soriot Is Said to Plan on Staying as CEO
- BMW GY : Germany, Carmakers Reach Diesel Emissions Agreement: Spiegel
- CXDG PL : Caixa Geral Hires Societe Generale for Sale of Spain Unit: Eco
- DAI GY : Mercedes-Benz Recalls 16,301 Cars in China Over Brake Problem
- DAI GY : Germany, Carmakers Reach Diesel Emissions Agreement: Spiegel
- AM FP : France to Sell 63 Mirage Planes to U.S. for Training: Les Echos
- DIS US : Disney Announces New Attractions, Theme Parks
- EZJ LN : EasyJet Is Said to Confirm CEO McCall Resigning for ITV Job: Sky
- ENEL IM : Enel Starts to Sell Assets; Continues Being Operator: CEO
- FCA IM : Fiat Chrysler Recalls Some 2011-2015 Dodge, Fiat Vehicles
- G1A GY : Gea Group Lowers 2017 Ebitda Outlook Amid Additional Costs
- IPR PL : Impresa Says Extends Bond Sale Period Deadline to July 19
- JUN3 GY : Jungheinrich Could Bypass Possible U.S. Import Taxes: WamS
- NAS NO : Norwegian Air U.K. Unit Gets Tentative Approval by U.S. DOT
- OERL SW : Oerlikon open to more technology buys, Drives unit to be sold to the right buyer at the right time
- PWTN SW : Panalpina Sea Freight Result Is Improving: CEO Tells Basler
- POP SM : EU Names Mazars as Monitoring Trustee for Popular: Expansion
- PAH3 GY : Porsche Says Racing Decision Near as Spiegel Reports on F1 Plans
- RB/ LN : Unilever Is Said to Table Bid for Reckitt’s Food Div.: S. Times
- CFR VX : Richemont’s Kern Pushed Digital Before Departure, Le Temps Says, Kern Takes Less Than 5% of Breitling Capital for CEO Role: NZZ
- RIO LN : Rio Tinto’s Aluminum Smelter Workers in B.C. Vote for Strike
- SAN FP : Sanofi: Zika Vaccine License Fee to U.S. Army May Be Significant
- S US : Sprint Chairman Is Said to Seek Investments From Buffett, Malone
- TEVA IT : AstraZeneca’s Pascal Soriot Is Said to Plan on Staying as CEO
- TOD IM : Tod’s Ends Collaboration With Aquilano and Raimondi on Fay Brand
- UNA NA : Unilever Is Said to Table Bid for Reckitt’s Food Div.: S. Times
- VNA GY : Vonovia to Consider Acquisitions if Property Prices Fall: WamS

FT : Will the death of US retail be the next big short?

Will the death of US retail be the next big short?

In the first of a series looking at the rise of online shopping, the FT assesses how damaging the ‘Amazon effect’ could be for traditional retailers

For a small band of hedge funds that slapped down prescient bets against the tottering US housing market, the financial crisis was the biggest money-spinner in generations. Some investors think they have now found the next “big short” in the retail industry.

The reshaping of how Americans shop by the internet is accelerating. The US retail industry faces a growing headache, with 10 companies pushed into bankruptcy already in 2017, according to Standard & Poor’s. Even Sears, a once mighty department store chain founded in 1886, is now tottering.

“We think the magnitude of this short could be bigger than subprime,” says Stephen Ketchum, the head of Sound Point Capital, a hedge fund that manages more than $13bn in assets. “Go to the Amazon website and type in ‘batteries’. What you see is just the tip of the future iceberg. And retail is the Titanic.”


The relentless rise of online shopping is posing a huge challenge for US shopping malls, developers and investors who own shares and bonds in household names. The core problem is a dramatic overbuilding of stores, coupled with the rise of ecommerce, Richard Hayne, Urban Outfitters’ chief executive, told analysts on a conference call earlier this year. “This created a bubble, and like housing, that bubble has now burst,” Mr Hayne said. “We are seeing the results: Doors shuttering and rents retreating. This trend will continue for the foreseeable future and may even accelerate.”

The impact is far-reaching. Credit Suisse estimates that as many as 8,640 stores with 147m square feet of retailing space could close down just this year — surpassing the level of closures after the financial crisis and dotcom bust. The downturn is hitting the largely healthy US labour market — the retail industry has lost an average of 9,000 jobs a month this year, according to the Bureau of Labor Statistics, compared with average monthly job gains of 17,000 last year.

$477bn Amazon’s market capitalisation. Its shares make up a third of the S&P 500 retail index

0.9 Employees required for every $1m of sales for online stores, compared with 3.5 for a physical store

Shuttered shopping malls and struggling department stores are the most visible example of what analysts have termed “the Amazon effect”, as spending migrates from bricks-and-mortar shops to the online realm dominated by the likes of Jeff Bezos’s internet retailing giant. But it is also likely just the first stage, with some investors predicting that every corner of commerce is about to experience a painful burst of creative destruction as shoppers migrate online.

“There’s a big shakeout in how people consume goods,” says another big hedge fund manager. “It will have a massive economic impact . . . It is already a bad year, and it feels like it has the momentum to become something bigger.”

When Amazon swooped for the Whole Foods grocery chain this summer, it sent shivers down the spines of many investors. Traditional supermarket chains like Walmart and Kroger in the US, Tesco and Sainsbury in the UK and Carrefour and Metro in Europe were long thought to be relatively insulated from the online retailing wave, but their shares all slumped as investors reappraised that assessment in the wake of Amazon’s acquisition.

“Buying patterns are permanently changing,” says Wayne Wicker, chief investment officer of ICMA-RC, a pension fund for US public sector workers. “These things creep up on you, and suddenly you realise there’s trouble. That’s when people panic and run for the exit.”


So far the S&P 500’s retailing index has held its head above water, climbing more than 10 per cent this year. But the only reason it is not doing much worse is because Amazon makes up a third of the gauge, and its shares have climbed more than 33 per cent already this year. The online giant’s shares are now worth $477bn, more than half as much as the rest of the listed US retailing world. Without Amazon, the index’s market capitalisation has largely flatlined since early 2015.

“So far, groceries have been very resilient to digitisation, but Amazon is trying to systematically break this consumer dependence: shift staples to digital; create a network of small brick-and-mortar stores to service perishables,” says Trevor Noren, analyst at 13D Research. “If Amazon or someone else succeeds, it will eliminate one of the primary reasons people still go to shopping centres.”

Shopping malls and department stores are the biggest losers from this shift, and the pain is worsened by a flurry of construction in the decades leading up to the financial crisis. PwC estimates that there is about 24 sq ft of retailing floorspace per person in the US, compared with 11 sq ft in Australia — the only other developed country that comes close to the US — and between 2 and 5 sq ft in Europe.

Bank of America Merrill Lynch estimates that US retail floorspace is down 10 per cent since 2010, while department store sales are down 18 per cent. “The department store industry I think is largely in a death spiral,” Bill Ackman, the Pershing Square hedge fund manager, said at a conference in May.

The pace is accelerating. So far this year, the shuttering of 76m sq ft of retail space has been announced, according to CoStar, a data provider — almost as much as the eight-year high of 82.6m during the whole of 2016. PwC estimates that at least 90m sq ft will be closed this year, but Credit Suisse estimates that based on current trends it could be a record-smashing 147m sq ft.

“It’s a slower bleed than the housing crash, but that was a cyclical story. Retail is different because it’s slower, but secular,” says Nadeem Meghji, head of North American real estate at Blackstone, the world’s biggest investor in property.

The concern is that this could cause collateral damage to the broader commercial and even residential real estate market, as shuttered shops, malls and stores are redeveloped for other uses. Jay Sellick, senior managing director of 13D, predicts this will be the “next stage of this crisis”, weighing on the $4tn worth of mortgages in the commercial real estate market, which already “appears overbuilt and over-indebted”.

Yet the decline of the iconic American shopping mall is only the most visible aspect of a far broader revolution that is upending the entire world of commerce. Online-only purchases account for just over 10 per cent of all US retail sales, but the share is growing quickly, says Credit Suisse. Across the board, consumption patterns are evolving, especially among younger Americans who are much more comfortable with an online-only experience than their parents.


10 Bankruptcies in the US retail sector so far this year
90m sq ft PwC’s estimate of US retail floorspace that could be closed this year. Credit Suisse says it could hit 147m sq ft

9,000 Average number of jobs lost each month this year in the retail industry

Even dedicated turnround investors are sitting on their hands. Private equity firms and hedge funds that specialise in corporate upheaval — so-called distressed debt investors that snap up struggling companies, taking them over in a restructuring and hopefully engineering a recovery — are largely shunning traditional retail, wary of the immense challenges, according to restructuring advisers.

Victor Khosla, founder and senior managing partner of Strategic Value Partners, a $6bn distressed debt hedge fund, says the list of troubled retailers his firm now monitors is “extraordinarily long”, but he is staying well away.

“Trying to figure out the bottom is hard. We have spent a lot of energy understanding these businesses, and have concluded that the vast majority of them are uninvestable,” he says. “Many of these were great businesses at some point in time, but the internet and changing consumer habits have destroyed them.”



Some retail chief executives who have managed to build relatively successful digital operations complain that their share prices are too low and are unfairly punished for the broader industry malaise. That may be, but “I remember hearing homebuilders say the same in 2006”, one hedge fund manager recalls, pointing out that even for traditional retailers the shift will be painful, given that people tend to make less impulsive purchases on the internet.

“A lot of incidental consumption doesn’t happen online. Most people don’t wander the digital aisles,” he says. A dollar spent in a shop in practice only translates to 80-90 cents online, even though costs are lower. Data released on Friday showed that core retail sales in June fell for a second month running for the first time since early 2015.

Some investors are unconvinced that traditional players have what it takes to compete with their online rivals, given the latter’s advantages in technology and data. “[In] whatever area they are competing for shopping dollars, it is like the old-world retailers are bringing a knife to the fight, and the tech companies are rocking a heat-seeking missile,” says another hedge fund manager.



Still, hedge fund managers stress that the “retail big short” is going to be fundamentally different from the housing downturn — far more halting and slow — which makes it hard to carry out anything other than tactical, opportunistic trades. Moreover, it will not entail the global, systemic dangers that the subprime-triggered financial crisis did.

Some of the damage is already priced into the bonds and stocks of retail companies, and the slowness of the shakeout makes it tricky and expensive to make outright bearish wagers on what some analysts are calling a “retail-mageddon”.

“Because it is such a slow bleed, it is important to get both the direction and the timing right,” Mr Ketchum says. “We are focused on shorting the companies that have reached a tipping point for one reason or another.”

Some hedge fund managers are more sceptical. David Tawil, president of Maglan Capital, says: “Although it is a good short, I don’t think that, at this point, it is the short, nor is it a big short.”


In addition, retail is not going away, and as some chains go out of business the survivors will pick up some of their customers. Most economists expect wage growth in the US labour market to pick up in the coming years, helping to support consumer spending.

“Websites cannot give you goosebumps, and that is where physical stores still have an advantage,” says Byron Carlock, head of PwC’s US real estate practice. “I don’t see consumers shying away from consuming. Good retailers will figure it out.”

But what looks like a slow-moving train wreck could speed up should American consumers — who at the moment are enjoying low interest rates and subdued unemployment — suffer another shock. For example, in the unlikely event that the Federal Reserve embarks on aggressive rate rises and pushes the economy into a recession, retailers could be hit both by higher borrowing costs and consumers tightening their belts.

The impact of the retail sector’s problems on the fabric of the US labour market is likely to be severe. Goldman Sachs estimates that ecommerce companies only require 0.9 employees per $1m of sales compared with 3.5 for a bricks-and-mortar store, and the sector is on course to lose about 100,000 jobs this year.

This may be small compared with the overall retail economy — which employs almost 16m — but it is likely only the beginning of a broad, accelerating trend as even more shopping migrates online.

“The social and economic consequences are going to be huge,” warns Mr Meghji. “It’s a massive secular change to how our economy and society operates.”

WSJ : Two VIP Billionaires Teamed Up to Run Luxury Hotels. It’s Been a Slog

Two VIP Billionaires Teamed Up to Run Luxury Hotels. It’s Been a Slog
Bill Gates and Prince al-Waleed bought Four Seasons for $3.8 billion near a market peak, feuded over matters large and small, then made up; inside a rare partnership of giants

A decade ago, two of the world’s wealthiest men came together to buy Four Seasons Holdings Inc., home to some of the most expensive lodging around.

The deal was surprising both for its lofty price tag, $3.8 billion, and for the unusual partnership, involving tech titan Bill Gates and Saudi Prince al-Waleed bin Talal.

The financial crisis soon pummeled the luxury-hotel business. The partners then took to feuding, about matters ranging from helping fund new hotel developments to who should be chief executive. After a truce in 2013, they have been trying to whip their investment into shape.

It has been no slam dunk, falling short of ambitious targets for new hotel developments. At the same time, the focus on fast growth has been causing some business partners and industry analysts to question whether standards and brand appeal can be maintained as Four Seasons hotels become more numerous.

In buying Four Seasons, Mr. Gates and Prince al-Waleed were at the forefront of an investment trend. The superrich, often through structures called family offices, increasingly have been teaming up to acquire whole companies, planning to keep them long term.

Family offices hold more than $4 trillion in assets, approaching the total invested in hedge funds and private-equity funds combined. The wealthy clans sometimes invest together because they consider themselves like-minded in being long-term investors. That doesn’t guarantee an easy partnership, however, as evidenced in this deal, as it was described by former executives, current and former board members, business partners and industry observers familiar with events at Four Seasons.

The first Four Seasons was a motor lodge in a rundown part of Toronto, opened in 1961 by Isadore Sharp, a son of Polish immigrants to Canada. By the time he began looking to sell the publicly traded company in 2006, Four Seasons was a renowned name in lodging, known for personalized service and top-of-the-line amenities.

Rather than owning its hotels, Four Seasons forms partnerships with investors and developers, then keeps tight control by managing the properties. Four Seasons hotel owners include billionaires such as Oracle Corp. founder Larry Ellison and Beanie Baby mogul Ty Warner.

By 2006, Prince al-Waleed’s investment firm, Kingdom Holding Co., already owned about 25% of Four Seasons stock as well as several Four Seasons hotels. Mr. Sharp consulted him about his sale plans. Prince al-Waleed recommended bringing in Mr. Gates’s investment firm, Cascade Investment LLC, which also owned some Four Seasons shares.

The three men agreed to a deal in which Cascade and Kingdom would each own 47.5% of the company, while Mr. Sharp would have the other 5% and remain chief executive for five years.

The sale closed in early 2007, near the peak of the real-estate boom. The price, 47 times one measure of earnings, reflected the era’s optimism, as well as projections that Four Seasons would continue to expand at an increasingly rapid pace

“From a valuation perspective, they were seen as having paid a lot of money,” said Jonathan Stanner, former CEO of Strategic Hotels & Resorts Inc., who partnered with Four Seasons to build hotels. “But people reasoned that as long-term investors they could justify the high price.”

The purchase brought together family investment firms with quite-different cultures. Cascade is run by Michael Larson, a low-profile money manager with a brusque manner and penchant for the color pink. Mr. Gates rarely gets involved. Cascade doesn’t have a website and provides scant details of its investments.

Kingdom welcomes publicity, putting out press releases, photos and video clips documenting Prince al-Waleed’s meetings. The prince shot to prominence in 1991 after buying a stake in a predecessor to Citigroup Inc. Forbes confirms that he once accused the magazine of understating his wealth in its annual ranking of the richest people.

Mr. Sharp, in an autobiography, told of being hosted by Prince al-Waleed on his 288-foot yacht in the south of France and joining the prince on the slopes at Jackson Hole, Wyo. Cascade executives, in their work, didn’t share this taste for the high life. When the Four Seasons board met one year at the George V in Paris, a luxury hotel owned by Kingdom, some Cascade employees stayed in more modest accommodations.

Kingdom, which had bought much of its Four Seasons stake in 1994 for less than the 2007 deal price, was happy to let Mr. Sharp continue to run the show. Cascade had paid a premium price, based partly on rosy growth projections from Mr. Sharp’s bankers. The bankers said the company could more than double its number of hotels in a decade, to 160.

The 2008 financial crisis left that plan in tatters, as both hotel developers and luxury-minded travelers cut back. “One can only imagine Cascade felt it had been bamboozled,” said Laurence Geller, an investor who has in the past owned numerous Four Seasons hotels and now owns a property from a rival brand. “What was said was not reality.”

Kingdom marked down the value of its Four Seasons holding every year between 2008 and 2012, according to annual reports it publishes because a small portion of Kingdom trades in Riyadh. The value recovered slightly in the next two years but was still below the 2008 value as recently as 2014, the most recent available data. Cascade doesn’t disclose how it values its Four Seasons stake.

Sarmad Zok, the chief executive of Kingdom’s hotel business, said both investors are happy with their partnership and the performance of their investment.

As occupancy rates fell in the recession, some hotel owners pushed Four Seasons for cost cuts, from scrapping huge displays of fresh flowers to outsourcing laundry.

At one meeting, Cascade executives argued that to save money at a Cascade-owned Four Seasons in Whistler, British Columbia, they should stop replacing guests’ sheets every day unless requested. Mr. Larson’s view was that wealthy travelers were also environmentally conscious. Mr. Sharp disagreed, saying guests paying as much as $700 a night should have their sheets washed daily, according to people familiar with the meeting.

In a compromise, guests were given the option of placing a pine cone on their sheets if they didn’t need them washed every day.

Mr. Sharp said he didn’t recall those conversations with Cascade.

Mr. Sharp stepped down as CEO in 2010 but set the condition that he should be succeeded by his protégé, company president Kathleen Taylor, who then took over. Cascade executives would have preferred an outside candidate because they felt that Ms. Taylor didn’t represent enough of a break with the past and wouldn’t engineer the rapid expansion they were counting on, according to people familiar with the company.

Kingdom executives were supportive of Ms. Taylor, which surprised some Cascade executives who thought that their partners felt the same.

During Ms. Taylor’s tenure, the rift became a distraction. The board found it hard to approve capital commitments needed to win over investors in new hotels. Cascade executives sometimes withheld their support to signal they wouldn’t put capital behind a chief executive they didn’t support, those familiar with the company said.

After months of tension, top executives from Cascade and Kingdom met to settle the matter, gathering in early February 2013 at London’s Savoy hotel. Joining were Mr. Gates and Prince al-Waleed, in one of the few times the two billionaires sat down to discuss their investment.

The meeting ended with a decision to replace Ms. Taylor. “It was time to make a change,” said Mr. Sharp, who drew the job of dismissing her. “It was my role to take the responsibility,” said the founder, now 85. Ms. Taylor declined to comment.

With this dispute over, Cascade and Kingdom sought to put aside their remaining disagreements and push growth and profitability, moving swiftly to make up for the years lost to the recession and its aftermath. Cascade’s hotel specialist, Randy Jack, and Kingdom’s Mr. Zok led the search for Ms. Taylor’s successor and picked Allen Smith, a veteran of real-estate investing.

Messrs. Jack and Zok became more active in running Four Seasons, discussing the business regularly and together courting potential new hotel developers.

Some differences persisted. A few months after the truce, Prince al-Waleed said publicly he favored an initial public offering of Four Seasons within a couple of years.

Cascade appeared to disagree, releasing a brief statement saying it was “in for the long term.”

“There are times when we have a divergence of vision, and when that happens, we have a discussion and the best idea prevails,” said Mr. Zok.

Hotel analysts say Four Seasons has been growing faster than most other five-star brands, at a time when the luxury market is enjoying a boom. In the U.S., luxury room rates and occupancy levels are at or near their highest levels ever, according to industry data tracker STR Inc.

Still, Four Seasons is falling somewhat short of its internal goals, even after revising them downward after the recession. In 2013, the company set a target for 120 hotels by end of this year, according to a person familiar with the matter. It now has 105 properties in operation, with more than 50 under development or in the planning stage. A Four Seasons spokeswoman said the company hopes to get to 108 properties by the end of 2017.

Four Seasons has grown partly by breaking with industry conventions. In New Orleans it plans a 330-room hotel, defying a common belief that building much beyond 200 rooms means luxury service suffers.

The company is comfortable with a larger property in New Orleans because the city is “supply starved with luxury product,” said Mr. Smith, the CEO. He said Four Seasons has quite a few other hotels with over 300 rooms, and “the reviews in terms of service levels remain exceptionally high.”

Four Seasons also has sometimes opened a second hotel in a city, such as New York and Boston. Traditionally, it avoided doubling up for fear of angering an existing owner. Mr. Smith said the company pursues the strategy “judiciously” and “with sensitivity to the owners involved.”

It has become more ambitious globally, opening hotels in emerging markets. The company recently expanded its board to include younger representatives as it tries to woo millennials and engage guests using technology and apps.

Some new Four Seasons properties, such as a 77-room hotel in Miami Beach, have opened to strong reviews. Nadim Ashi, whose investment firm owns the property, said room rates are averaging $1,000 a night.

Four Seasons decentralized some functions last year after listening to some hotel owners’ complaints. They no longer have to buy supplies such as light fixtures from the company, giving them more control of costs.

Some of the changes risk Four Seasons’ reputation, said Piers Schmidt, founder of Luxury Branding, a U.K. consultancy. In a survey his firm did in 2015, based on analysis of hotel reviews on travel website TripAdvisor , Four Seasons ranked 13th. Other surveys rank Four Seasons higher; a 2017 J.D. Power study about North American hotel guest satisfaction that was just released ranked Four Seasons third in the luxury segment, behind JW Marriott and Ritz-Carlton.

Mr. Schmidt said luxury brands that expand rapidly risk diluting their culture by hiring staff too quickly or promoting managers too fast, and “I do believe that’s the case with Four Seasons.”

Four Seasons spokeswoman Sarah Tuite called the results from Luxury Branding’s study “inconsistent with what we see in multiple third-party tracking sources.”

Four Seasons has seen an exodus of veteran executives in recent years. Mr. Smith said that “invariably, changes ensue” when a company shifts from founder-led to a more corporate structure.

A rapid expansion of this sort raises a different concern to Ellis O’Connor, co-head of MSD Hospitality, a unit of Michael Dell’s family office that owns two Four Seasons hotels. “With luxury hotel operation, scarcity is part of the allure,” Mr. O’Connor said. “You can’t turn it into a commodity and get above-market rates.”

People familiar with the Four Seasons operation said Cascade and Kingdom appear determined not to weaken the chain as it grows, and have broken off 14 partnerships with hotel owners whose properties weren’t up to standard.

That is a “clear indication we are striking an appropriate balance between growing the brand and actively managing the quality of our portfolio,” Mr. Smith said. “We will never compromise quality for the sake of growth.”

WSJ : Elon Musk Lays Out Worst-Case Scenario for AI Threat

Elon Musk Lays Out Worst-Case Scenario for AI Threat
Powerful technology will threaten all human jobs, could even spark a war, Tesla CEO says

Elon Musk warned a gathering of U.S. governors that they need to be concerned about the potential dangers from the rise of artificial intelligence and called for the creation of a regulatory body to guide development of the powerful technology.

Speaking Saturday at the National Governors Association meeting in Rhode Island, the chief executive of electric-car maker Tesla Inc. and rocket-maker Space Exploration Technologies Corp. laid out several worst-case scenarios for AI, saying that the technology will threaten all human jobs and that an AI could even spark a war. “It is the biggest risk that we face as a civilization,” he said.

Mr. Musk has been vocal about his concerns about AI and helped create OpenAI, a nonprofit research group that aims for the safe development of the technology. He suggested to the governors that a regulatory agency needs to be formed to begin gaining insight into fast-moving AI development followed by putting regulations into place.

“Right now the government doesn’t even have insight,” he said. “Once there is awareness people will be extremely afraid, as they should be.”

Proponents of AI say such concerns are premature, given the current state of the technology. Arizona Gov. Doug Ducey, a Republican who said that he has spent his own career trying to reduce government regulations, questioned Mr. Musk over the suggestion of creating new rules, saying he was unsure what policy makers could do beyond pushing for a slowdown in development.

“I was surprised by your suggestion to bring regulations before we know what we are dealing with,” Mr. Ducey said.

“For sure the companies doing AI—most of them, not mine—will squawk and say this is really going to stop innovation,” Mr. Musk said. But he said he doubted that such a move would cause companies to leave the U.S.

During his talk, Mr. Musk also was asked about the pressures that come from the valuation of Tesla, whose stock has risen more than 50% this year ahead of the introduction of a new sedan. The market capitalization has made Tesla bigger than Ford Motor Co. and, at times, larger than General Motors Co. Those auto makers, unlike Tesla, are profitable and sell many more vehicles than the niche luxury brand.

Mr. Musk reiterated that shares of Tesla are trading at a price “higher than we have any right to deserve” and that the high price reflects the optimism of the future of the company, he said.

“Those expectations sometimes get out of control,” he said. But Mr. Musk said he is committed to making Tesla a success. Besides selling shares to pay for taxes, Mr. Musk said he is avoiding selling company shares. “I’m going down with the ship,” he said.

WSJ : New Jets Threaten Airbus and Boeing Duopoly

New Jets Threaten Airbus and Boeing Duopoly
Competitors from China, Russia and Canada are moving into the so-called single-aisle air market

LE BOURGET, France—Boeing Co. and Airbus Group SE suddenly have competition.

For nearly two decades, the two have had the global market for big commercial jets largely to themselves. That is all changing, with three new competitors—from China, Russia and Canada—rolling out their own entries into the so-called single-aisle market.

Orders for these new jets are few for now, and the Russian and Chinese makers won’t deliver planes for years. It is also uncertain how popular they will become.

Boeing and Airbus, meanwhile, are selling plenty of their own tried and tested work horses in the category.

Still, if even one of these new competing jets is a hit, it could threaten one of the most lucrative sectors for Boeing and Airbus.

“I don’t have any problem buying Russian or Chinese aircraft,” if a viable model emerges, Akbar Al Baker, chief executive of Qatar Airways, one of the world’s biggest jet buyers, said recently.

The sudden competition is unfamiliar for both jet makers, and it adds pressure on them as they face waning demand in other markets. Bigger, long-haul jets aren’t selling nearly as well as single-aisle, or narrow-body, jets and both Boeing and Airbus have struggled recently with big cost overruns and delays for some of their military programs.

The narrow-body market has been the industry’s sweet spot for years. Large airlines and fast-growing budget ones love them for their size and fuel efficiency. At the Paris Air Show last month, Boeing introduced the latest and biggest version of its 737 Max, with 230 seats. Boeing has a backlog of over 3,600 orders for its 737 Max family of jets.

Airbus, meanwhile, has sold more than 5,000 of its A320neo family, the competitor to the 737 Max. It started delivering them to customers last year.

Amid that booming market, three new competitors have swept in. China flew its C919 narrow-body for the first time in early May. The Chinese jet, built by state-owned Commercial Aircraft Corp., known as Comac, has secured more than 500 orders, mainly from Chinese buyers. First delivery is expected around 2020.

Comac didn’t respond to requests for comment.

Russia’s MC-21, which can seat as many as 211 passengers, also made its maiden voyage in May. The aircraft is manufactured by Irkut Corp. , which says it has taken in 175 orders and will deliver its first in 2019 as it prepares for further tests.

Canada’s Bombardier Inc., meanwhile, began delivering a 130-seat version of its CSeries plane in November. The CS300 competes with the smallest models of the Airbus and Boeing short-haul planes. It is already in service with two European airlines. Bombardier so far has 237 orders for the jet.

Deutsche Lufthansa AG and Air Baltic executives have praised the plane’s low noise and fuel efficiency.

“The interest level in the program continues to rise,” said Bombardier’s commercial-airplanes boss, Fred Cromer.


China and Russia have yet to win backing for their planes from big-name Western carriers. Many of those buyers aren’t convinced the newcomers can in the near term provide the required globally available spare parts and repair services to keep operations humming.

Meanwhile, other plane makers, such as Brazil’s Embraer SA, have avoided going head-on against Boeing and Airbus and stuck to building smaller airliners.

The Chinese jet might be the most significant threat to Airbus and Boeing. Its ambitions are underpinned by the government’s long-term focus and deep pockets and a domestic airline market large enough to keep local aircraft production busy.

“Are they a threat in the next five to 10 years to Airbus and Boeing? Probably not,” said Airbus’s chief plane salesman, John Leahy.

“In 20 years, I think they will be one of the big three manufacturers of aircraft,” Mr. Leahy added.

China has also been working closely with U.S. and European suppliers. The C919 is powered by engines made by a consortium of General Electric Co. and France’s Safran SA. Honeywell International Inc. and Rockwell Collins Inc. are also partners. Like Boeing and Airbus, the newcomers act as integrators of components made around the world.

The Chinese plane still lags behind the performance of the newest Boeing and Airbus jetliners. It is projected to have a shorter range and be less fuel-efficient. But industry officials believe that will change.

“The Chinese will drastically change the duopoly, but with the next aircraft, not the C919. With this one, they are going to learn,” said Jerome Rein, partner at Boston Consulting Group.

Boeing is moving some work completing aircraft to China to help maintain access to the rapidly expanding market. Airbus already assembles some of its single-aisle planes in Tianjin, near Beijing.

“Our team has to wake up every day to be mindful that competition evolves and evolves quickly and we have to stay ahead of it,” said its commercial-airplanes boss, Kevin McAllister.

Boeing also has gone after rivals through litigation. The U.S., on Boeing’s behalf, 13 years ago sued the European Union at the World Trade Organization for what it calls unfair European government support for Airbus. The case and a counterclaim, remain under way.

This year, Boeing challenged Bombardier’s sales of a smaller version of the CSeries, the CS100, to Delta Air Lines Inc. at the U.S. International Trade Commission. It accuses the Canadian company of selling the plane below cost.

Bombardier dismisses the accusation, saying that new planes are often heavily discounted. It also said that Boeing has no standing to challenge its deal for the 100-seat plane because the U.S. plane maker has no rival product. The U.S. review is continuing.

FT : Barry Callebaut signals global chocolate revival

Barry Callebaut signals global chocolate revival
Swiss group says innovation and sharp fall in cocoa prices will drive growth

Global chocolate sales are poised for a revival as industry innovation and tumbling cocoa bean prices spur growth, the chief executive of the world’s biggest supplier of chocolate and cocoa products has forecast.

Antoine de Saint-Affrique, chief executive of Switzerland’s Barry Callebaut, said sales had accelerated in recent months and would return to a “normal rhythm” of growth. “From a market dynamics standpoint, I’m absolutely convinced the worst is over,” he told the Financial Times.

The world’s confectionery companies, many of which are Barry Callebaut’s customers, have been hit in recent years by the trend for healthier foods as well as higher cocoa prices. Global chocolate confectionery market volumes declined 1.5 per cent in 2015 and 0.4 per cent last year, according to Euromonitor.

However, cocoa bean prices have reversed direction over the past year, falling roughly 40 per cent.

“We are passing the prices up and down to our customers,” said Mr de Saint-Affrique, although it would take time before retail prices also fell. “That’s why I’m telling you, I’m rather optimistic . . . We are going to get back in positive territory.”

He expected chocolate companies to offer more discounts and promotions “to ignite” the market. “It should go back to what was a normal rhythm of growth, which is somewhere around 1-2 per cent,” he added.

Price falls would be only one factor driving a recovery, however. Innovations were another, such as chocolate-covered protein bars. “As with many things, they taste better when you put chocolate in,” said Mr de Saint-Affrique.

This month, Nestlé, the world’s largest food and drink company, announced it was opening a new factory in Japan to expand production of KitKat chocolate bars in flavours such as pistachio and raspberry.

Barry Callebaut has expanded production of “heat resistant” chocolate, for sale in hotter countries. Its latest push is in providing a variety of chocolate mixtures for more than 1,200 small ice-cream parlours in Italy.

Confectionery makers would also expand into new markets, said Mr de Saint-Affrique. “There are still plenty of places where they are still at the discovery stage of chocolate.”

Jean-Philippe Bertschy, analyst at Vontobel, said Mr de Saint-Affrique’s projection for volume growth was “a bit aggressive”.

He added: “The US and German market have declined in volume by an average of 1 per cent since 2011 — and the UK and France were flat. Of course, there is significant growth potential in emerging markets, but China has been a very challenging market so far and it remains to be seen if the Chinese — or consumers in other Asian markets — will really eat more chocolate in coming years.”

Last week, Barry Callebaut reported its sales volumes rose 2.8 per cent to 1.4m tonnes in the nine months to May 31, with growth accelerating to 5.5 per cent in the final three months of the period. The increase was flattered as Barry Callebaut completed a programme of ending less-profitable cocoa contracts, but the group reaffirmed its medium-term target of an average volume growth rate of 4 to 6 per cent.

The falls in cocoa bean prices follow good harvests in the main producing countries, Côte d’Ivoire and Ghana. But they have meant lower revenues for the government as well as farmers. “You don’t want prices to stay low for a long time,” Mr de Saint-Affrique warned. Barry Callebaut last year said it would make its production entirely “sustainable” by 2025 with the help of bean-tracking technology created by SAP, the German software group.

Les Echos : Les ventes de PSA patinent toujours

Si Peugeot se porte correctement, Citroën et surtout DS reculent fortement. Le groupe espère récolter le fruit de ses nouveaux lancements de voitures au second semestre.

Heureusement qu'il y a l'Iran. Les ventes de PSA ont légèrement progressé au premier semestre de l'année grâce au redémarrage de sa production sous licence en Iran, qui a compensé l'effondrement des volumes en Chine. Le constructeur automobile français a vendu 1,58 million de véhicules dans le monde entre janvier et juin, contre un peu plus de 1,54 million à la même période en 2016 . La marque Peugeot a enregistré une hausse de 15 % de ses ventes (grâce à l'Iran), tandis que Citroën recule de 12 % et DS de... 46 %.

Le groupe automobile sauve toutefois la mise grâce aux véhicules utilitaires, qui confirment leur bonne dynamique, et surtout à la zone Moyen-Orient et Afrique, où ses ventes ont plus que triplé, à 277.931 unités (+217,93%) - grâce aux 207.900 véhicules produits en Iran sous licence Peugeot chez Iran Khodro. Sans cela, PSA afficherait une baisse de plus de 10 % de ses ventes.

Recul en Europe

En Europe, de loin le premier marché du groupe, les facturations ont baissé de 2 %, avec 1,03 million d'unités écoulées. Pour Jean-Philippe Imparato, le patron de Peugeot, la glissade résulte d'un « déstockage » (il a fallu achalander les concessions pour accompagner les lancements du Peugeot 3008 ou de la nouvelle Citroën C3), et de la volonté - de rigueur dans le groupe depuis trois ans - de privilégier la marge au volume.
« Peugeot reste en ligne sur son objectif de 2 millions d'unités vendues en 2017. Notre portefeuille de commandes est en hausse de 72 % par rapport à l'an dernier, cela augure d'un très bon second semestre », assure le dirigeant, qui dit profiter d'un « effet de halo » provoqué par les bons débuts du Peugeot 3008, qui pèse 30 % des ventes (205.000 commandes depuis l'automne dernier). D'ici à la fin de l'année, PSA commercialisera en sus une nouvelle version de la Peugeot 308 et un petit SUV Citroën, le C3 Aircross, sur le Vieux Continent.

Casse-tête chinois

De l'autre côté du globe, la Chine demeure un sérieux problème pour Carlos Tavares et son état-major. « En Chine, il y a trois sujets, concède Jean-Philippe Imparato. lI nous fallait des SUV, nous avons une gamme complète depuis juin. Nous devons aussi restructurer notre réseau pour l'adapter à la concurrence qui s'accroît, et baisser nos stocks, qui étaient jusqu'à récemment de deux ou trois mois », détaille le dirigeant du Lion, qui assure que le groupe a entamé son rebond et « commence à limiter la casse » sur place.

En attendant, les ventes chinoises ont dévissé de 49 % en un an, à 152.380 unités. Et l'objectif du million de véhicules vendus dans la zone en 2018 paraît peu accessible pour le moment. Face à ce constat, PSA s'est résolu à reconfigurer une partie de son appareil industriel chinois. En juin, la coentreprise avec Changan a été recapitalisée, et son usine de Shenzen, dédiée à DS, va produire des véhicules pour le partenaire chinois.

Nous refusons la guerre des prix.
Là-bas, la marque premium de PSA a sombré, ne plaçant que 3.157 voitures à des clients chinois... « En tant que jeune marque, nous refusons la guerre des prix », explique Yves Bonnefont, le patron de DS, qui avoue « souffrir sur les volumes ». Sa marque n'a vendu que 28.000 voitures en six mois, une chute de 46 %. « Nous savions que 2017 allait être une année de transition avant l'arrivée de notre nouvelle génération de voitures », ajoute le dirigeant, qui attend beaucoup de la constitution de son réseau propre. « Aujourd'hui, les concessionnaires Citroën ne vendent qu'une DS de temps en temps. Ils n'ont pas l'habitude de recevoir un client premium et de parler de nos produits », dit-il.

FT : Overfunding floats Silicon Valley’s bubble economy

Overfunding floats Silicon Valley’s bubble economy
Vast investment into companies in hot sectors generates spiralling valuations

Just a few years ago, Jawbone, the nearly defunct maker of wearable technology, was handing out its brightly coloured fitness tracking wristbands like lollipops to VIPs at Davos. Today, it’s selling itself off piece by piece. You could argue that the company was a victim of many things, like being too early into the market (it launched Bluetooth-enabled devices in the late 1990s), or not realising soon enough that things like sleep monitoring and step tracking would eventually be apps that would live on the largest platforms run by companies like Apple and Google, rather than standalone technologies that would warrant their own devices and ecosystems.

But you could just as easily argue that this Silicon Valley unicorn, which at its peak boasted a valuation of $3.2bn and attracted money from the world’s most successful venture capitalists (Sequoia Capital, Kleiner Perkins Caufield & Byers, Andreessen Horowitz, and Khosla Ventures), was a victim of its own success. The company burnt through so much money and reached such sky-high valuations that it became like one of its users — too rich and fat for its own good.

Last year, the company had to turn to the Kuwait Investment Authority to keep running — never a good sign given that sovereign wealth funds aren’t exactly the smart money in Silicon Valley. (They tend to come in big but late, offering loads of cash when others won’t.)

A company with a lower valuation that had burnt through less cash might have made a good acquisition target, or might have done a successful initial public offering. Instead, the demise of Jawbone has become yet another sign of the bubble economy in the Valley.

It’s a bubble that’s different — but also the same — as the last time around. In 2000, start-ups like pets.com were able to go public and jack up share prices even as they were losing hundreds of millions of dollars. The digital ecosystem has since grown, changed and deepened — today it’s harder for companies to get funded just by sticking “.com” behind their names.

But now, as then, you don’t necessarily need profits or paying customers to draw investor interest, but rather “users” in a hot market niche. Compelling narratives develop around these sectors (wearables, electric cars, the “sharing” economy). Firms send market signals about their own “value” with announcements that play off these narratives (for example, Uber’s $680m purchase of self-driving truck firm Otto).

Venture capitalists and private equity investors keep the bubble going by buying into it at higher and higher valuations. The smartest ones guarantee their own success by taking rich advisory fees along the way and exiting before disaster via the secondary market for private shares. And this is, as behavioural economist Peter Atwater recently pointed out to me, unusually liquid thanks in part to the last several years of central bank-enabled easy money.

The virtual money — generated by valuations that are based as much on narrative as fact — is used to pay nosebleed salaries (it can cost upward of $2m in cash and stock options to recruit a driverless-car engineer in the Valley these days). These then distort the price of real estate, services and labour in bubble economies. You’ll weep when you see the prices of depressing ranch-style homes off Highway 101, which runs through Silicon Valley. The whole cycle is straight-up “madness of crowds”, as described by Charles Mackay in 1841.

“In some ways Jawbone reminds me of Palm [the former personal digital assistant maker], in the sense that there was a real market there,” says investor Tim O’Reilly, the chief executive of O’Reilly Media, and author of a forthcoming book about the role of Silicon Valley in our bifurcated economy. “But in another way, it reflects the financialisation of the tech sector. Jawbone rode a wave of enthusiasm that was ultimately speculative in nature and reflective of the ‘tulip’ quality of the tech market right now.”

The problem with investing in the New New Thing is that typically only a few firms win. As the tech-phobic Warren Buffett once pointed out to me, 2,000 or so car companies operated around the time that Henry Ford started his assembly lines. Investing in the auto sector was correct. But investing in most of those companies wasn’t.

These days, a glut of money eager to bolster gains in a low-return world has lifted the economy of Silicon Valley to ridiculous heights. Yet at the end of the day, the real winners are likely to be the small number of platform giants like Amazon, Google, Facebook and Apple that can use their network effect to capture and control the data, which have become the new oil in our digital economy. Indeed, new academic research by Google, in conjunction with Carnegie Mellon University, shows that it’s not so much the brilliance of an algorithm, but the sheer amount of data that you pump into it, that allows for everything from more accurate searches to better facial recognition to sharper cancer research.

I’d look carefully at the valuations of most tech firms, private and public, aside from the platform giants. The latter can marshal that data to dominate the hottest sectors in tech — and potentially every other industry. It’s their bubble economy. We’re just living in it.

(ZH) A Bearish Citi Warns "Bigger Forces Are At Play", Pointing To Its 'Chart Of

A Bearish Citi Warns "Bigger Forces Are At Play", Pointing To Its 'Chart Of The Week'

Over the next three weeks, the investing world will shift its attention away from the endless chatter of central bankers and concerns about the state of the economy, and instead focus on second quarter earning season, which launched on Friday with results from the three biggest US banks which showed that chronically low volatility is anything but good for trading revenues (as Jamie Dimon made all too clear in a bizarre Friday rant). As previewed last week, and is the norm, we get most of the US numbers first, followed by Europe and then Japan.
And yet, despite expectations for a Q2 S&P500 EPS increase of roughly 7% Y/Y, suggesting solid economic growth, Citi warns that "we may be approaching a cyclical peak." The biggest concern is that recent economic data, especially the "hard" variety, has been anything but good.

In Citi's chart of the week, the bank shows the fall in the US Hard Data
Surprise Index which on Friday tumbled to a fresh two-year low. The fall to such low levels occurred
due to the near one standard deviation miss in June retail sales. In
contrast, US soft data surprises are staging somewhat of a recovery at
the moment having bounced off recent lows of -56 to -6. This increase
was largely due to positive surprises from both ISM surveys.

In addition to the broader Citi Economic Surprise Index, which is now at mid-2015 levels, the Atlanta Fed Nowcast is also beginning to turn over once again (RHS top).
For now, as Citi's Jeremy Hale notes, forward expectations of earnings for current year and next year in the US are holding up reasonably well compared to previous years (Figure 4, top LHS), however the real question is what happens in Q3/Q4, because as BofA's Michael Hartnett said earlier this week "the most dangerous moment for markets will be when rising rates combine in three or four months’ time with an inflection point in corporate profits. In anticipation of this, we would use the next couple of months to buy volatility, and within fixed income slowly reduce exposure to IG, HY, and EM bonds."
Another concern has emerged. As Citi adds, looking at the driver of these earnings expectations, the commodity rally over the past 12 months has caused analysts to revise higher expectations of forward earnings to relevant sectors, so one would expect oil & gas and basic materials to have large increases in EPS projections. However, given that crude oil continues to make lower highs and lower lows since the start of the year, with increasing non-OPEC production and concerns about the ability of OPEC cuts to sustainably increase the oil price, it’s possible that we begin to see downgrades in these expectations if oil continues to trend lower.
But even if one assumes that somehow future earnings are not dinged as a result of recent oil price weakness, Citi points to something else entirely: the collapse in correlations between earnings and price return since the financial crisis...
... and warns that there are "bigger forces at play" when it comes to future asset prices. Or rather one force: central banks, and specifically "the advent of QE and the ‘easy money’ that has dominated asset markets in this cycle."


The gradual reduction of these purchases and movement to less easy policy from developed market Central Banks potentially leaves asset markets in somewhat of quandary. Our credit colleague Matt King presents a chart which particularly resonates with us, showing asset purchases on a 12 month rolling window vs. risk asset momentum (Figure 5, bottom RHS).
The fit, as Hale admits, "is rather incredible, and ultimately what these charts clearly illustrate is just how important unconventional monetary policies have been for markets in recent years. As such we agree that the removal of CB liquidity, especially if occurring at the same time across the main Central Banks, cannot be ignored."


For risk assets, we are cognizant of recent market experience. In 2015, UST real 10y yields jumped 80bp running into the first Fed hike in December. With a significant lag, equities ended up correcting about 14-15%. In contrast, when real yields rose a similar 80bp in the second half of last year, equities barely noticed (Figure 6 LHS).

One difference is in the data which was weakening sharply in the first episode even before real yields rose (a Fed policy error?). But in the 2016 event, data was strengthening, the global recovery broadening and EPS recovering.
Which brings us back to the chart of the week, and the steep decline in the "hard" data : while until now conventional wisdom has generally assumed that the US economy is broadly rebounding, with conventional wisdom assuming a replay of the 2016 event, Citi cautions that "the fall in the Citi US data change index currently is interesting." One can insert a different word here.
Where does the above leave Citi?


Taking all of this into account, we harbor growing concerns for equity markets and entered into a cross-asset trade, where we positioned for equity market downside, funded via selling volatility in oil markets.
To which Janet Yellen had a response: she pulled at 180 and turned dovish this week, sending global stocks to all time highs, followed by even worse economic data in the US, which in turns sent the S&P to a new all time high as animal spirits got reignited...
... or perhaps it was just more people like Citi, shorting the market then being forced to immediately cover once their narrow stop losses were triggered. As JPM's Prime Broker Service showed last week, the amount of short covering just hit a YTD high.
Although, if that is indeed the catalyst for the latest burst of the "Icarus Rally" higher, it probably won't last. As of this week, the short interest in the SP& is back to level seen just before the last financial crisis...
... which means that what few bears remained in this market have now been flushed.