TheChek News Flow

Major oil companies cannot afford their dividends

Companies pay dividends to reward their shareholders, and to signal confidence. Management is pushing out its chest: we will be here for years to come, and we have the money to prove it. That confidence has to be backed by growing cash flows. But in the commodities sector, now is not the time for such bravado. Big mining companies have already made the tough decisions on dividends. Major oil companies — ExxonMobil, Chevron, Royal Dutch Shell and BP — should follow suit.

In theory, better earnings — and therefore dividend growth — do not necessarily require rising revenues. Get costs down, and perhaps do an acquisition or two, and over time profits should expand enough to give your shareholders something for hanging around. But the reality of commodity industries is that the advantages of lower costs get competed away over time. Consider that the price of a basket of the major commodities has fallen over 1 per cent annually in real terms since 1934, according to research from Robeco, an asset manager.

Certainly oil prices have struggled in recent years. Adjusted for inflation, Brent crude prices at $22 per barrel are not much above their average since 1983. As cash flow has withered the oil companies have done what they can to cut costs and capital spending. However, some of the biggest companies — such as BP and Shell — still need to sell off parts of their businesses, and perhaps borrow a bit more, to pay dividends.

So the big producers cannot maintain their dividends if oil prices do not go up. In order to pay a dividend, the largest oil producers need oil at $63 just to cover dividends and investment with cash flow, according to consultants Wood Mackenzie. Even if that break-even price comes down in years to come, the threat to dividends is clear. Brent is currently struggling to stay above $50.

Confidence is fine. False confidence is dangerous. Four of the oil majors so far refuse to cut their dividends. They will need to do so.

Dow-0.13% S&P -0.01% NAsdaq+0.10% Russell +0.57% Brazil +1.37% EuroStoxx -2.52% FTSE -0.83% CAC -2.21% Dax -1.58% Ibex -3.05% MIB -4.05% SMI -2.02% Nikkei -2.21% Hang Seng +0.75% CSI +2.15% Shanghai +1.88%

Major equity indices retreated slightly from record highs in light summer trading, while the 10-year Treasury yield crept up toward 1.6% this week. Crude futures continued to march higher with Brent breaking above $50/bbl for the first time since early July and WTI topping $48/bbl, even as the Baker Hughes rig count rose for the eighth straight week. The greenback hit seven-week lows against the Yen and Euro before mounting a small recovery on Friday. For the week, the DJIA lost 0.1%, the S&P500 slipped less than 0.1%, and the Nasdaq edge up 0.1%.

Macro :

- Uber Said to Tell Backers It Won't Pay Above $2 Billion for Lyft

- Goldman Says Don’t Bet on Dollar Selloff as Dovish Fed Priced In

- BOJ Gov Kuroda: there is room to take rates further negative; sees sufficient chance of more easing in Sept

- Dow Jones Bearish Bias Amplified as FX Risk Ratio Breaks Uptrend

- Fed’s Fischer Says U.S. Growth to Pick Up as Investment Recovers

Keep an eye on :

- AIR FP : Airbus Offers Overtime to Boost A350 Output: Telegraph

- BABA US : Alibaba Seeks to Expand Alipay With U.K. Retailers: Telegraph

- CSGN VX : Credit Suisse Will Consider Swiss Deals After Unit IPO: Blick

- ENI IM : Eni Chief Descalzi Says Contract Talks With Iran Remain Ongoing

- FB US : Zuckerberg Sells ~$95m in Facebook Shares for Philanthropy, Facebook CFO David Wehner Sells ~13% of Reported Holdings

- LYFT IPO : Lyft Said to Fail to Find a Buyer, Despite Talks: NY Times

- MGGT LN : Meggitt Chairman Said to Have Met With Elliott Twice: Telegraph

- SAN FP : Sanofi Updates NDA on Diabetes Product; Pdufa Date Now in Nov.

- SNH GY : Steinhoff thirsty for more deals in bid to double valuation in five years

- VIV FP : Vivendi Declines to Comment on Mediaset Lawsuit Filed in Milan - see press release http://bit.ly/2b8CRda

- VOD LN : Vodafone's fixed lines in the Netherlands attract interest from T-Mobile and Fiber - report

- VOW3 GY : UBS Says Supplier Dispute May Cost VW Up to EU100m a Week: Welt

- VOW3 GY : VW to Reduce Wolfsburg Golf Production on Lower Demand: Bild

- WPP LN : WPP’s Sorrell Warns of Prolonged, Costly Brexit: Sunday Express

Google has long held the spotlight in developing driverless technology; however, with the emergence of Otto and Elon Musk’s announcement of a Tesla Semi, “driverless trucks” are coming to the forefront of the autonomous vehicle conversation.

One major reason the trucking industry is so interested in driverless technology is a chronic shortage of truck drivers, which is threatening to get worse as the Baby Boom generation hits retirement age.

But despite the increased spotlight on autonomous trucks, the reality is that trucking technology still has a long way to go before we see trucks on the road without drivers.

In the meantime, many new technology advances are already helping with the driver shortage by expanding the impact of today’s drivers — while also making trucks and highways safer.

These advanced technology systems, collectively referred to as “Advanced Driver Assistance Systems” (ADAS), begin with simple convenience tools, like power steering, cruise control and automated gear changing. These tools are so common in passenger cars that most of us take them for granted, but they are crucial stepping stones toward higher degrees of vehicle autonomy.

Tools like traction control and anti-lock braking systems (ABS) go beyond mere convenience, and are especially helpful for truck drivers. They act as skill compensators, making it easier and safer for drivers to address challenging road conditions.

The same goes for advances in electronic stability control (ESC) — the computerized technology improves a vehicle’s stability by actively assessing road conditions to adjust vehicle handling in order to reduce potential skidding and roll overs. Radar and digital-camera technologies further elevate ADAS by compensating for drivers’ blind spots and detecting lane departures.

Ultimately, the goal is to convert most accidents into near-misses — or better.

Even more impressive is what happens when these tools work together. The combined technology is capable of detecting objects in the truck’s path, alerting the driver, then automatically braking the vehicle — if necessary — in advance of a potential collision. Adaptive cruise control also uses laser- and radar-based systems to help trucks maintain a safe distance from the vehicle ahead.

In the trucking business, beyond the obvious importance of assisting the driver in safer vehicle operation, risk mitigation is also a powerful motivator. Because trucks and the cargo they carry are significantly bigger than passenger vehicles, truck accidents can carry major price tags. By reducing the kinetic energy of an accident, such systems can mitigate both personal injury and property damage. Ultimately, the goal is to convert most accidents into near-misses — or better.

In addition to an end goal of autonomy, risk avoidance is a powerful incentive for trucking companies to adopt such technologies. Combining these tools enables vehicle platooning — the ability to line up trucks in a row and automatically brake and accelerate them as one. Demonstrations of this technology in Nevada, and most recently in Europe, shows how close the industry is getting to fully autonomous trucks.

This technology is continually being perfected through initiatives like Mcity, a public-private R&D partnership at the University of Michigan that is working to develop a commercially viable ecosystem of connected and automated driverless vehicles in urban and suburban environments.

Frankly, there’s never been a more exciting time to be part of the trucking industry. Innovations in vehicle-to-vehicle, vehicle-to-infrastructure and vehicle-to-anything communication will push the envelope beyond even these advances. By improving the flow of traffic, such systems can enable today’s highway infrastructure to be used more efficiently.

As a result, beyond improved productivity for drivers, we’ll also see a reduction in the number and severity of accidents, greatly improved fuel economy and significant environmental benefit. While there is still time before on-highway driverless trucks are the norm, there are still several technologies available today that augment drivers’ skills to make the road smoother and safer.

Technology in the mobility space has made travel safer, faster and more convenient. The results have been incredible: The Insurance Information Institute found a 33 percent decrease in automobile deaths in the past three years. The same survey found that nine models registered zero fatalities per vehicle per million. Mobility has also become more accessible with ride-hailing apps like Uber and Lyft delivering more than one million rides a day in more than 60 countries.

Despite the upside, there are consequences to innovation. On May 7th of this year, a Tesla owner died while using the Autopilot feature. His vehicle crashed into a truck after his Tesla failed to differentiate the white color of the truck against the backdrop of the sky. This event may change the narrative and public appeal for autonomous driving. It puts into perspective how close the future actually is and whether or not society will fully embrace it.

Autonomous driving promises to decrease the automobile death toll. Last year there were 35,000 automotive-related deaths, accounting for .01 percent of the U.S. population. While it may not seem like a high number, those deaths are the result of people, not an algorithm that holds a passenger’s life within its source code. This brings us to question the liability programmers and the code they write be given the power to determine life and death for consumers who buy their cars. And ultimately, who is liable in the case of an accident or even death?

The next critical step is the proliferation of autonomous driving and the task of safely embedding its utility within the framework of our society. With these issues in mind, private companies and governmental agencies are taking appropriate steps to address them. Google has been testing and building a fleet of self-driving cars that have completed 1.5 million miles of road tests.

In 2014, the U.S. Department of Transportation approved vehicle-to-vehicle technology that enabled vehicles to “talk” to one another and can help prevent human errors that often lead to collision. And this March, General Motors acquired a startup called Cruise Automation for $1 billion to launch a highway-oriented, cruise control system for their Cadillac C6 line. Technological and governmental infrastructure for autonomous vehicles is well on its way to maturity.

But there are a number of factors that will decide whether the mass adoption of autonomous driving will actually happen. Consumer acceptance is one factor. Not everyone may want a self- driving vehicle. Americans actually love cars; Experian Automotive reports that each household owns 2.28 cars on average. If the idea of autonomous vehicles were to become widely adopted, the end user will eventually need to view travel and car ownership as separate concepts, a concept highlighted in Elon Musk’s master plan.

Deloitte believes there are four future stages of mobility: incremental change, car sharing, driverless revolution and accessible autonomy. The road that our current model is headed down is a driverless revolution, where consumers may still own their car but the vehicle will have the capabilities to operate itself. While all four stages may exist simultaneously, they may not necessarily distribute evenly among every segment of the population. The driverless-revolution stage may indicate incremental change from what we have now, much like GM’s new self-driving Cadillac technology.

Accessible autonomy will impact auto insurance significantly. For starters, fewer accidents will result in fewer claims and less in losses for insurance carriers. David Zuby, EVP and Chief Research Officer at the Insurance Institute for Highway Safety stated, “Vehicles equipped with front crash prevention technology have a 7-15% lower claim frequency under property damage liability coverage.” This is a win-win situation; not only will technology prevent accidents, insurance companies will pay out fewer claims.

Insurance companies will also need to develop new, innovative products before autonomous vehicles become widespread. Crash-prevention technology will play a huge role in lowering premiums during the driverless-revolution stage. Insurance companies will need to find new products they can sell. In the car-sharing stage, insurance companies sold gap insurance and ride sharing policies to companies like Uber and Lyft. Drivers needed coverage when they picked up and dropped off guests.

The premiums from the new policies cost more, as well. Geico’s personal policies for a male living in Chicago would cost $1,140, while its ride-sharing policy for the same individual would cost $3,743. Autonomous car policies could follow the same pricing increase strategy.

The Tesla incident may deter the public from fully embracing autonomous vehicles. Self-driving cars may never reach accessible autonomy and might only be an add-on feature. It is very likely that the driver will still be liable for the actions of their vehicles. This means that drivers will still need auto insurance. Driving technology may never replace drivers, but it could help us become less injury prone.

Mediaset files for damages over Vivendi failure to complete Mediaset Premium deal in timely manner

Mediaset has announced that it has filed for damages over Vivendi's failure to execute a binding agreement to acquire its pay TV subsidiary Mediaset Premium. Mediaset filed the claim for damages of EUR 50m a month with the Milan Tribunal starting from 25 July 2016.

Mediaset noted that the filing did not take into account more serious damages that would be caused if Vivendi does not honour the completion of the contract, which Mediaset estimates at EUR 1.5bn.

The present claim is for damages relating to Vivendi's failure to execute the contract on time.

As investors squabble over when the Federal Reserve might lift short-term interest rates, central bankers meeting in Wyoming this week are likely to be debating what they might do if a future downturn forces them to put monetary policy into reverse.

Policymakers will meet at the mountain resort of Jackson Hole amid concerns that central banks’ recession-fighting firepower is thin, and that an overhaul may be needed for how authorities steer their way through the economic cycle.

Last week John Williams, the president of the San Francisco Fed, floated reform ideas that challenged some of the basic assumptions of the central banking tribe. Among his suggestions was the idea of aiming for a higher inflation target to boost central banks’ room for manoeuvre when a downturn strikes.

Mr Williams was not calling for changes anytime soon, but the reason for his suggestion was clear. Eight years after the crisis, an unprecedented cascade of monetary stimulus has still left many leading economies nursing pedestrian growth rates and sluggish inflation. With rates at or close to the floor, there is little or no room for further cuts to spur growth.

“This debate is really about the next recession and how much room there will be to act against it,” says Donald Kohn, a former vice-chairman of the Federal Reserve Board who is now at Brookings. “We do need a further rethink about how much scope central banks have to ease.”

Policymakers are uneasy because of evidence that the so-called neutral rate of interest — the rate that is consistent with an economy operating on an even keel — is stuck at deeply depressed levels. The possible drivers for this decline include puny productivity growth, population ageing, and a glut of worldwide savings. The phenomenon is being seen across a number of large economies, among them the US, Canada, the euro area and the UK.

With neutral rates on the floor, central banks are left with a shrinking degree of influence over the economy. They can slow activity by lifting policy rates, but there is little scope for stimulus via cuts. Tim Duy, a professor of economics at the University of Oregon, says: “Central banks appear to lack the ability by themselves to guide activity as much as they need to.”

Central bankers insist they have more tools at their disposal than some claim. In Europe and Japan central banks are experimenting with negative rates as well as asset purchases as they look for ways to ease further. The Bank of England has been spurred by Brexit in to launching a stimulus effort via a rate cut and new asset purchases.

A recent paper from the Federal Reserve Board argued that deploying rate cuts, asset purchases and forward guidance together could be even more effective than a hypothetical scenario where the central bank could cut rates as deeply into negative territory as it wanted rather than being constrained by the zero lower bound.

Nevertheless, the appeal of shooting for higher inflation is that it implies higher longer term interest rates and therefore more rate-cutting firepower when a downturn strikes. Joseph Gagnon, a former Fed economist now at the Peterson Institute for International Economics, says it is a notion whose time has come.

“If you had gone into the recession with 4 per cent inflation not 2 per cent then the whole structure of interest rates would have been higher,” he says.

Raising the inflation target is not, however, a “slam-dunk” policy change, Mr Kohn argues. Moving to a 3 per cent inflation target would require a “very serious conversation with Congress” over whether it met the definition of price stability in the Fed’s legislation, for instance.

In addition, some costs might be hard to quantify. Former Fed chairs Alan Greenspan and Paul Volcker used to define price stability as the rate where households and businesses do not have to pay attention to inflation. “Two per cent might be on the edge, but 3 per cent might be over it,” he said.

FT View

The Fed ponders making a change to its target

epa05214728 A Federal Reserve security agent prior to Chair of the US Federal Reserve Janet Yellen's press conference at the Federal Reserve in Washington, DC, USA, 16 March 2016. The presss conference comes at the conclusion of a two-day meeting of the Federal Open Market Committee (FOMC), led by Fed Chair Yellen. EPA/SHAWN THEW

Shifting the inflation goalposts should not be the immediate priority

If it lifted the inflation target, a central bank would then need to prove to the markets it could actually engineer an acceleration in price growth to that new goal. If it failed it would undermine credibility.

Some economists argue more heavy lifting will need to be done by the fiscal authorities in future downturns, rather than central banks. Mr Duy, for example, is in favour of a higher inflation target or alternatively a nominal gross domestic product target, but he also says that in the US new “automatic stabilisers” are needed in budget plans to support the economy during a downturn.

The trouble is that proposals that led to bigger budget deficits in a downturn would likely founder in the face of sceptical Republicans on Capitol Hill — just like proposals for central banks to pursue higher inflation.

For the time being, the path-breaking ideas being discussed by central bankers are likely to remain stuck in the realm of theory.

Is greed good? No, it’s seriously bad for your wealth

Avarice, the love of money, is one of the seven deadly sins. Throughout world cultures, the belief is deep that avarice is an evil, to be avoided.

But there is also a noble intellectual tradition that holds that it is good for the economy. For the Scottish enlightenment thinker David Hume, it was “the spur of industry” — which helped to drive the “invisible hand” of the market as discovered by his fellow countryman Adam Smith.

More recently, and bluntly, Michael Douglas’ character Gordon Gekko in the film Wall Street, declared that “greed is good”.

The opposing views of the priests, and of the founding fathers of free-market capitalism, are clear enough. God and Mammon have often been in conflict. But now, armed with the tools of behavioural finance, which applies behavioural psychology to finance, it is possible to choose between the two. And fresh international research, produced under the auspices of State Street’s centre for applied research, suggests that greed is not good after all. In fact, avarice can be seriously bad for our wealth.

Psychologists now have a clear definition for love of money. It is not about any instrumental need for money to fulfil our other goals, which all of us have, but rather about a love or need of money for its own sake.

Using the Money Ethic Scale developed by Thomas Li-Ping Tang in 1992, State Street developed an Investor Love of Money Scale (ILOMS). Researchers asked interviewees in 20 countries a series of questions designed to find out how important money was to their self-esteem. They also tested how they would respond in a series of financial situations. For example, they would ask if money was a symbol of success, if they talked about it a lot, or if they wanted to be rich.

The results were clear. The more someone had an emotional attachment to money, the more likely they were to make mistakes with money. A series of behavioural biases that lead investors into predictable mistakes have been diagnosed over the years. Avarice exacerbates all those biases.

The avaricious were more likely to buy at the top and sell at the bottom — which for investors is the cardinal sin, worse than all others. They also had shorter time horizons and were more inclined to hyperactive investing behaviour. Trade frequently and you are guaranteed to pay more in trading fees, but you are highly unlikely to produce any extra returns.

Money lovers were also more likely to believe that they could wait until later in life to save — a belief which has grown even more wrong-headed as lower bond yields make it harder to buy a retirement income. And in consequence they were less likely to contribute to any retirement plan and less likely to contribute even as much as 6 per cent of their income if they had one. Hence, they ironically appear to be on course for becoming a burden on their more prudent peers.

Those who cared less about money were more likely to adopt a far better strategy and pay regular amounts into diversified retirement plans with constant allocations. Such plans effectively require taking some profits at the top and buying when securities are cheap. To use other psychological terms, they showed greater self-control or emotional intelligence. If there is any clear message from the research, it is that governments need to prod everyone ever more clearly in that direction; giving people the choice not to save, or to trade too heavily, is a recipe for disaster.

Avarice is universal, but it plainly differs according to economic development. Prosperous nations, where people have less need to worry about money, are also the least covetous of it. Switzerland and the Netherlands had the lowest ILOM scores, with the British — unsurprisingly given national embarrassment at talking about money — not far behind. The top of the list is dominated by the growing economies of the emerging world — China, India and Brazil.

There is, however, one big outlier. Despite its wealth, and despite its deep religiousness, the US is near the top of the avarice league.

This result is striking but not surprising. Money matters to people far more in the US. Look no further than the presidential campaign. One of the few things that unites two deeply disliked candidates is an Achilles heel when it comes to money. Donald Trump is plainly desperate for everyone to believe that he is rich; and Hillary Clinton often makes obvious and baffling political mistakes — such as taking a fat speaking fee from Goldman Sachs as she prepared her candidacy — because she seems to want and desire money.

Nevertheless, America built the most successful capitalist economy. So maybe David Hume was right all along. But look at the success of Wall Street. State Street’s survey suggests that to profit from people’s avarice, you should give them ample opportunity to trade too heavily and convince them they can make an easy buck. Wall Street has been built on doing just that. Those who paint the world’s biggest financial centre as profiting from greed have a point.

Avarice, indeed, is the vital ingredient for any financial industry. The market often behaves as though it is efficient. It is through irrational behaviour, indulged in by many, that the possibility of making money is created. Those who love money not wisely but too well have created the opportunity for great investors, in control of their own emotions and less in love with money, to build their fortunes.