CITY 4917 August 2019 THE WEEKShares worldwide sufferedawave of
selling–exacerbated by fears sparked
by renewed protests in Hong Kong and
apolitical shake-up in Argentina.
Meanwhile, keybond yield curves,in
both the US and Britain, “inverted” for
the first time inadecade, flashing a
traditionally ominous recessionary
signal. Investors were reported to have
rushed into bond funds at the fastest
rate since the financial crisis in the first
half of 2019. German investors are at
their most pessimistic since the
eurozone debt crisis, as the country
battlesadeepening industrial downturn.
The UK Government stepped up
preparations forapossible no-deal
Brexit, prompting the pound to continue
falling. President Trump’s national
security adviser,John Bolton,said the
UK was “first in line” foratrade deal
with the US and proposed an accelerated
series of agreements ona“sector-by-
sector” basis. Manufacturing would be
first; trickier areas like financial services
and agriculture would need more time.
The secretive state-owned oil company
Saudi Aramcoheld its first-ever earnings
call ahead of what could be the biggest
IPO of all time, reporting total revenues
of $163.9bn in the first half. Hedge funds
took record short positions in both the
debt and equity ofAston Martin,betting
that the luxury carmaker will continue to
struggle. Malaysia charged 17 former
and currentGoldman Sachsbankers
over the corruption investigation in its
state fund 1MDB.Cathay Pacific/Versace: China crisis
Most companies hate getting involved in politics–but sometimes they have no choice,
said Jack Torrance in The Daily Telegraph. Take Hong Kong’s flagship airline, Cathay
Pacific, which is currently wedged betweenarock andavery hard place. Under the
auspices of “improving safety for passengers”, China’s aviation regulator has ordered
it to ban any staff supporting the current pro-democracy protests from flying on routes
over the mainland. With little option but to comply, the airline has fired two employees
and suspended two pilots. That figure could rise following this week’s airport protests.
This is “the starkest sign yet of Beijing’s growing readiness to make high-profile
businesses choose” between Hong Kong and China, said Sue-Lin Wong in the FT.
Cathay’s main shareholder is Swire Pacific, whose history stretches back to the colonial
era. But Beijing’s flag carrier, Air China, also ownsamajor stake. And Cathay is far from
alone, said Quartz. Versace has become the latest brand to express its “apologies” to
China for selling an “innocent-looking” T-shirt implying Hong Kong was independent.
The fury over that is “a reminder of how rattled China is”, said Lex in the FT. Yet it has
huge market power. “For big businesses fond of signalling liberal credentials, the choice
is atricky one.” Suffice to say, “those Versace T-shirts have already been destroyed”.
National Grid:sparking mayhem
Whenablackout hit almostamillion British homes and caused travel chaos last Friday,
the joke on Twitter was that someone had tried “turning the UK off and back on again”,
said the FT. Given the country’s “febrile pre-Brexit state”, it wasanice line in gallows
humour. But for National Grid, “the worst blackout since 2003” led to uncomfortable
questions about its monopoly position running Britain’s fast-changing electricity system.
Chiefly: is it up to the job? National Grid is navigating the Government’s “ambitious
overhaul” of energy supplies, “which involves dramatically increasing the amount of
wind and solar on the grid”. And, plainly, it is struggling, said Jillian Ambrose in The
Guardian. The company blamed the power cut on the unexpected shutdown of both a
gas-fired plant in Bedfordshire and the Hornsea wind farm in the North Sea. But industry
sources say it has also had “three blackout near-misses in as many months”. Renewables
certainly make it more difficult “to balance the frequency of the grid”, but National Grid
was supposed to have “response tools” to tackle this. The fact that mayhem was sparked
by “just two generation sources dropping out of the supply mix” is surely troubling.
Dr. Martens:kicking on
Profits at Dr. Martens surged by 70% in the year to March, boosted by successful new
designs, such as its “vegan” range of boots, said Jasper Jolly in The Guardian. Sales of
the vegan boots–which replace the leather upper with synthetic polyurethane plastic –
have increased by “multiple hundreds of per cent” in recent years, according to CEO
Kenny Wilson. Since 2014, when the shoemaker was bought by private equity house
Permira for £300m, it has almost tripled its annual revenues to £454m. Other successful
departures from the original Dr. Marten boots beloved by skinheads include sandals,
versions for children andacollaboration with designer Marc Jacobs. Permira is now
reportedly thinking about cashing in on its investment. Shares in DMs, anyone?
Burford/Muddy Waters: grubby “bear attack” grips LondonCarson Block, founder of the San Francisco
hedge fund Muddy Waters, hasaformidable
reputation as “one of the world’s most feared
short-sellers”, said Laurence Fletcher in the FT.
He roots out companies “he believes are using
suspect accounting practices”, takesashort
position, betting that their shares will fall, and
then stagesahigh-profile “bear attack”. The
effect can be “devastating”, as litigation finance
specialist Burford Capital–one of London’s
fastest-growing listed companies–discovered
last week. Shares plunged by 60%, wiping some
£1.2bn offits valu einaday,after MuddyWaters
releasedadamning 24-page analysis of “a poor
business masquerading asagreat one”.Burford has launchedafurious counter-attack, said Nils Pratley in
The Guardian, describing the report as “false” and–“perhaps
inevitably foracompany thatmakes its living by funding other
people’s court cases”–summoninglegal experts to investigatepossible market manipulation. “It should calm
down.” Grumbling about short-sellers is
pointless: “the only effective defence is point-
by-point rebuttal”. Burford’s problem is that
some of the claims made by Muddy Waters –
that it exaggerates investment returns–“are
not new”. The broker Canaccord, which isn’t
“in the shorting game”, recently noted 20
similar areas of concern (see page 52).What of the allegations of illegal market
manipulation, asked Alistair Osborne in The
Times. The City watchdog is making inquiries.
Even so, it seems unlikely Burford’s army of
lawyers will pin anything on Muddy or its boss,
“apart from the existence of slippery high-
frequency traders feeding on rumour”. In fact, Burford seems to
be acting “straight out of the short-seller’s own playbook:
chucking enough mud around in the hope some sticks”. Could
this possibly be because Muddy has raised “legitimate” worries?Muddy’s Carson Block: fearedSeven days in the
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