New Zealand
The New Zealand market (NZX 50, +0.1%) was basically flat on a quiet day of trade as the local market braces for the start of its earning season. Hallensteins Glasson was up +2.8% as it’s tipped to replace Pushpay in the NZX Top 50, as well as delivering a robust half-year result last week. Rakon moved to $1.05 amid continued support for the stock over $1.00.
Australia
The Australian market (ASX 200, +0.4%) was up on Monday, after a strong lead from Wall Street over the weekend, as markets brace for RBA’s interest rate decision today. Bond markets pricing in a high probability of the central bank holding interest rates flat at today’s announcement.
Most sectors were higher, led by energy and financials performing well, while tech stocks were weaker. Good results for Woolworths (WOW) as sales gained +8% — the supermarket saw more sales of its private label products (higher margin) versus other brands, as third-party suppliers continue to be squeezed by supermarket’s own-product offerings. Australia’s most valuable private tech company Canva is considering delaying its IPO to wait for market conditions. This is due to heavy write-down in valuations across the sector reflecting inflated private market valuations vs. public valuations. Canva has 4000 registered shareholders and 3500 staff and requires a listing on public markets to help realize these gains.
US
JP Morgan got a deal on First Republic
First Republic has been written up elsewhere, so we will keep this brief. JP Morgan recently purchased the carcass of First Republic: they got a pretty good deal! They received aprox. $186B of assets – $30B of bonds, $150B of loans, and the rest is change. On the other hand, they assumed all the liabilities that they wanted, while First Republic’s corporate debt and preferred stock effectively got vaporised. JP Morgan kind of got to say – we’ll have these liabilities, but not those. JP Morgan will pay the FDIC (the government agency that seized First Republic) $10B now and $50B in five years. There’s around $19B of assets left over at First Republic that JP Morgan isn’t taking (they don’t want them), so the cost to the US Govt is around $13B. JP Morgan also gets to add to its asset book $186B, which brings the total book to about $3.9 trillion. JP Morgan got a pretty good deal.
The difference between SVB and First Republic is quite significant. SVB was a tech bank which had too much money and bought bonds which yielded too little. First Republic mostly gave loans to the very rich, except the loans were low interest. Interest rates are obviously the core of the problem. But JP Morgan already has a large book of assets, and laddered bonds, and a risk management department, so it’s actually purchased something quite safe: mortgages of rich people who will probably pay the mortgages back. And it avoids the possibility of a bank run, because it is so big.
We are not going to toot our own horn too much: we like JP Morgan very much and continue to be buy rated on the stock. In the wider view, though, it seems to be signaling this trend of bigger fish (whales, really) absorbing smaller fish and maximising efficiencies of scale. It’s a good time to be a big bank. It’s not so good to be a small bank.
Adidas made too many Yeezys
For a few years Adidas seemed to have a slight edge over rival Nike. They sold the-artist-formerly-known-as-Kanye-West’s Yeezy shoes and people lined up to get them. Then last year Kanye West changed his name to Ye and proceeded to make a bunch of anti-sematic comments and Adidas promptly severed the relationship (like many German companies, the founders of Adidas were members of the Nazi party). Now Adidas stands to make a $1.3B loss on unsold Yeezy product. Investors are suing! The suit seems a little flimsy – it is basically “maybe sometime in 2018 some employees complained about interacting with Kanye West”. The bigger issue is that Adidas over-relied on a star designer and now has a whole lot of inventory outstanding. This is something Nike has avoided – and the proof is in the pudding – Nike’s return on invested capital is ~22% while Adidas’ sits around ~5%; Nike’s operating margin sits at 12% vs. Adidas’ ~4%. We remain buy rated on Nike.
Week ahead
Tuesday: RBA (Reserve Bank of Australia) Interest Rate Decision, Eurozone Inflation (CPI) Data
Earnings from: Pfizer, Starbucks, BP
Wednesday: Eurozone Unemployment Data
Earnings from: PepsiCo, Qualcomm Inc, Airbus, Estee Lauder Companies
Thursday: US Fed Interest Rate Decision (FOMC)
Earnings from: Apple Inc, ANZ, NAB, Booking Holdings, Shopify
Friday: ECB (European Central Bank) Interest Rate Decision, US Non-Farm Payroll
Earnings from: Macquarie Group