Gravitas Spark CrowdFunding

Author: Gary McCarthy

Is There A Sequel To The FAANTAM ‘Menace’ ………..?

I can remember working in Tokyo when the grounds of the Japanese Imperial Palace had an implied valuation greater than the entire state of California. Fun times and fantasy didn’t last. Sadly, only Hollywood can deliver entertaining sequels for decades. Financial markets are thrilling investors right now but I’m beginning to wonder whether we are entering fantasy territory? Let’s revisit Japan and California again.

The combined value of just three Californian companies – Apple, Alphabet(Google) and Facebook – plus Microsoft, up the road in Seattle, currently exceed the value of the entire $4.7 trillion Japanese economy. We didn’t even need to include the $1.5 trillion Amazon in that calculation but bear with us. Here are a few other fantastic data points driving current markets.

• These same five companies have delivered 35% returns to investors year-to-date. The next 495 biggest stocks have declined by 5% in the same period.

• The FAANG stocks – Facebook, Apple, Amazon, Google and Netflix – recently hit a new 22% high as a percentage of the value of the overall S&P 500 index.

• The Wall Street Journal reported this week that 78% of the S&P 500 returns over the past 5 years came from the technology and e-commerce sectors.

• Tesla is not even included in the S&P 500 because, up until this week’s quarterly results, it had failed to make profits for four consecutive quarters….ever. At its recent $300 billion valuation Tesla is the tenth biggest company in the world by value. That’s $100 billion more than Toyota which sold 10.6 million cars in 2019. I kept the ‘0.6’ in that figure because Tesla didn’t even reach that mark and probably won’t this year either.

Clearly, this concentration of euphoria in such a small number of stocks causes some unease and resonates with veterans of the TMT fantasy party of 1999. Perhaps we have seen this movie before or this is the original ‘FAANTAM Menace’ like its Star Wars contemporary which had its first release, ironically enough, in 1999 too.

The FAANTAM stocks – Facebook, Alphabet, Apple, Netflix, Tesla, Amazon and Microsoft – are my own $7 trillion(!) creation but I’m struggling to see how any sequel could thrill investors to the same extent. Right now investors are enjoying the possibilities of these companies dominating their respective global markets for years to come. They could be right but do not be too surprised to see potentially darker sequels. Here are two potential contenders for an eventual trilogy:

Inflation Strikes Back: Yes, some inflation is a good thing. But too much inflation and things go horribly wrong quickly. Why? Equity markets might look a little stretched but debt markets are incredibly vulnerable if interest rates rise to counter inflation. The IIF estimates total global debt will reach $257 trillion in 2020 as central banks and governments reflate a pandemic crippled economy. Global equity markets, for perspective, are valued at around $90 trillion.

Revenge of The Dragon: China is being battered on the political front at the moment. UK moves on Huawei, Australian C19 fury, US consulate closures, Indian military skirmishes and Hong Kong protests are pushing China further into an isolated corner. The back lash from China could be very painful given their critical positioning in global trade. All the FAANTAM valuations assume singular global trade and technology platforms. Clearly, a world divided into two different trade and technology ecosystems is not a friendly one for equity valuations.

Unlike Hollywood, there will be no great appetite to view those sequels.

July 24, 2020
A Big Jack Needed For Punctured Economics

Jack Charlton saved my Dad’s business. The economic text books won’t make the specific connection but my Dad remains convinced. Back in the early ’80s Ireland was crippled with terrorism, perma-recession, huge government deficits, whopping interest rates, rampant inflation, political chaos and misguided currency policies. The Emerald Isle was not exactly an investment capital paradise. Every day my Dad dropped me to school on his way to a small food factory on Distillery Road in the shadow of Croke Park, and one day I was particularly troubled in the car.

The Irish Times headlines and sport were the daily balance of conversational fare but no sporting story could offset that day’s assault of gloomy economic and political news. The concerned eleven year old asked, “How will Ireland get better Dad?” The response took a while and was initially downbeat, “The country has gone sour”. There was a further pause, and then a more upbeat prediction, “There is great talent here but the country needs to see and feel what success looks like. Confidence is everything for countries and economies. Ireland will find it.” Confidence. So true. So powerful.

Fast forward 10 years and Jackie’s Army had visited Germany in ’88 and surprised all in Italia ’90. Dreams literally happened. My Dad’s business survived the 80’s and Ireland cranked up the international investment welcome message with an army of goodwill ambassadors following a Geordie’s football team. A strange combination, impossible to predict a decade earlier. Even Irish food factories attacted US multi-national attention by 1990. Confidence is everything. Fast forward to today.

Jack Charlton’s funeral is this week and the global economy is gripped by a pandemic, huge human death tolls, massive job losses, soaring debt and increasing geopolitical tensions. Plenty of sour. However, this is not the ‘80s. Cynicism and pessimism are, of course, to be found. But….. confidence remains. The data does not lie. Here are a few things which caught my eye in recent days.

• China: Yes, China faces a more challenging trade environment as tensions develop with the other economic and technology superpower, the US. But check out the most exposed major export economy to China. The DAX share index in Germany has just turned positive for the year. Clearly, markets are discounting a less chaotic future for China than headlines would suggest.

• Europe: The agreement by EU nations on a pandemic economic recovery deal was tortuous but remarkable in one respect. For the first time ever EU governments have agreed to share the credit risks of the rescue funds required for countries with weaker balance sheets. This sends an important signal of confidence in those challenged economies of Spain, Italy etc.

• Investment: Typically, investment capital is scarce in recessionary times and provided only by the very large institutions. Not so right now. An army of retail investors is driving share prices of hot stocks like Tesla and the mega-technology names to new highs on an almost daily basis. Yes, there is cyncism that this will end badly. In one trading session this week the combined value of Facebook, Apple, Alphabet, Netflix, Tesla, Amazon and Microsoft increased by $291 billion. News did not drive this. Confidence in the future did. One can only hope the FAANTAM confidence continues and does not become the ‘FAANTAM Menace’ for private investors’ trading accounts.

• Valuation: Valuations of companies can be calculated using lots of different multiples of profits, cash flows and sales but all are doing the same thing; discounting the future. Currently, there are 500 companies in the US with valuations even higher than the FAANTAM club. The median multiple of sales in this group of 500 is 13x and on average net income is currently negative. Now that’s confidence; investor belief that current losses will turn into profits.

So despite, a challenging global economic environment it is clear there remains encouraging levels of confidence out there. That is a much better starting point than early ‘80s Ireland but one suspects there will be tough days ahead. Inspirational leadership will help. The Tangerine Tyrant in Washington will not. As we say good-bye to Jack we should remember the transformative powers of confidence. One image always stays with me of how confidence can just grow.

My Dad didn’t live to see Ireland play the mighty Italy in the Giants Stadium in 1994 but 80% of the crowd that day were Irish. It was magical and unexpected. They must have been confident. They were right. So was my Dad. Thanks Jack.

July 22, 2020
Corporate Activity is the Long View Tell

The pubs are back and so are the heroic trader tales, growing by the billion every day. By now readers may have heard about a new army of day-traders investing their stay-at-home savings in financial markets. There are some pretty good tales too; the Nasdaq hitting all time highs, gold flying to record prices, Chinese stocks up 10% in 48 hours, Amazon trading over $3,000 per share and Tesla up 42% in just 5 days. Whoop whoop. Welcome to a financial world with $10 trillion of central banking largesse.

Tesla might win the trader-tastic trophy this week given it is now the most valuable car company in the world. Elon Musk’s electric vehicle franchise is currently worth almost $250 billion or, to put it in a more domestic context, that’s the gross national product(GNP) of Ireland from as recently as 2017! Tesla has lost almost one billion dollars in each of the last two years so investors are certainly taking a very long term view on cash returns from this business of making……automobiles. Or possibly not.

The vast majority of buyers of Tesla stock through the pandemic lock-down are “trading” a short term view of further upside and hoping to exit with a quick profit. Nice if you can do it, yet all retail trading website disclaimers state clearly that most don’t. The track record of longer term investors is much better and this article is focused on a particular type of buyer, the corporate strategic buyer. These guys don’t have the luxury of a quick exit . They are in for the long haul and therefore their mergers and acquisitions (M&A) activity is a better barometer of confidence in the future. Clearly, a global pandemic has hit C-suite confidence but the data suggests some cautious optimism. Here are a few data tells:

• Bloomberg tells us the first 6 months of 2020 saw global M&A activity fall by 50% to $1 trillion. But that’s still $1 trillion of long-term wagers on the future.

• The Asia-Pacific region showed remarkable resilience with just a 7% decline compared to the similar period in 2019.

• According to Crunchbase global venture funding in younger companies was $129 billion in H1. That’s also just a 7% slip from last year.

• And at last, Warren Buffett is dipping into his $137 billion cash pile at Berkshire Hathaway to buy a gas pipeline from Dominion Energy for $10 billion.

• The FT is also citing data from Refinitiv showing private equity(PE) firms upping their activity. These firms are also long-term thinkers and they accounted for 16% of all M&A activity in H1. That’s the highest share for PE since 2007 and they have another estimated $2.5 trillion to spend.

It is not all dreamy optimism. US activity has collapsed by 90% and 44 deals have been pulled. That contrasts sharply with previous periods of turmoil and possibly reflects an executive pool truly exhausted by all that Trumpy winning. We just won’t go there today… and one can only hope Florida’s school children take the same view.

But let’s finish on a more upbeat note and return to our previous theme of a possible surprise recovery for the “sick man” of financial markets, Europe. We note with interest that European deal activity has slipped by just 15% in 2020 so far. It is early days yet but, when Buffett and Europe are leading again, there are grounds for longer term optimism. Natural gas and Europe are quasi-inflationary bets so it won’t be just us watching carefully. Indeed, feel free to listen to the day trader tall tales but we can assure you the bond trader tales could be seismic….and very very real.

July 8, 2020
Biden Our Time For A Market Panic

“Daddy, what did YOU do in the Great War?” was the teaser line in a recruitment poster used by the British Army in 1915. Nowadays there are no great wars. No teasing either, as Fawlty Towers fans have recently discovered. Wars are now cultural and the war against racism is finally going mainstream. The scale of street protests across the globe in support of Black Lives Matter have not been seen since 1968. And that year of 1968 did resonate with me as a reference point. On lots of levels actually.

China in that tumultuous year was in the throes of social and political chaos as Mao Zedong sought to reassert his authority in bloody fashion. The current political crack down in Hong Kong is thankfully less brutal at this point but Western observers should not be so quick to judge. The US in 1968 was horribly divided over the Vietnam War but at least there was bipartisan agreement that the USSR was the enemy.
The nation needed a unifying belief to overcome the horrors of MLK and Bobby Kennedy assasinations, a rogue Nixon administration and endless body bags returning from Indochina. Not so today.

These are very different days. Sure, military-style crack downs on the streets of Washington DC and other US cities in recent weeks have highlighted an increasingly polarised political and social environment in the world’s most powerful nation. However, there is an incredible lack of common ground across the US as to how to fight two deadly foes today. The current occupant of the White House and at least 40% of the US electorate seem to think the explosion of the Covid-19 virus in GOP-governed states and Russo-Taliban bounties on the heads of its servicemen in Afghanistan do not merit any protective action. Arguably, both are now the biggest single threats to US democracy.

Fox News chyrons might even use the “War on…….” headlines but that wouldn’t really fit the current editorial skew. However, this is where it gets interesting. Another war, the war against racism, is starting to impact voter intentions. The Atlantic magazine has been around since 1857 so it has seen plenty but a recent article by David Graham really caught the eye. The opening line expressed a view held not just in Wall Street but in most of the major capitals of the world – “ the only thing more futile than looking for Donald Trump to pivot was expecting the American people to do so”. Depressing, but probably true. Until now.

In the past few weeks something has changed. Joe Biden is now leading Trump in most polls by double digit percentages. But the driver is neither the economy nor the White House response to the pandemic. Both issues when surveyed by Siena/New York Times generate approval ratings in line or above his overall low approval. Instead, the driver of the Trump poll implosion appears to be race. Both the New York Times and Harris/Harvard surveys show approval ratings on race relations well below overall approval rates. That is stunning because usually Trump exploits racial tension to rally his base support. The “very fine people” tweets, the “white power” videos and the “looting starts, shooting starts” dog whistles are no longer having a positive poll impact, particularly with white females. Dare we hope for a panic of conscience?

That is not the only area of panic. By all accounts financial advisors on Wall Street are warning wealthy clients of a Biden election win and higher taxes ahead. Whatever about tax evasion strategies, there also seems to be some early evasive moves by the GOP establishment to prepare for a ‘social distancing’ strategy towards the White House. The GOP goal is to protect suddenly vulnerable Senate seats in red states like Texas. Simultaneous leaks to the press on this defensive strategy appear more than a coincidence and one wonders whether the Taliban bounties were the final blow to the charade that Donald Trump puts the US first. A dawning realisation that the very rich, Russia, Trump properties, the energy sector and Saudi, and the domestic Christo-Taliban were the main beneficiaries of Trump’s transactional style of politics could prompt a very severe political and financial backlash.

The problem for stock markets is that, when incumbent parties lose elections, the sell-offs usually happen in the months preceding the election. This chart from the excellent John Authers at Bloomberg captures Wall Street’s fear of change as a well known phenomenon since 1936; note the S&P 500 rolling over in Sept/Oct when the opposition ends up winning in November:

It is not all about finance. There is a genuine cultural battle taking place in the US. Too many people who should know better have chosen to turn a blind eye to corruption, trampling of the Constitution, probable treason and, at the very least, culpable homicide on a large scale. So back to that war question at the beginning of this article and a potential distancing by former members of the Trump cult.

Here’s the five questions every Trump enabler won’t want to hear when interviewing over the next ten years for a position of responsibility – take your pick from board director, educational leader, financial advisor, senior management position, political appointment and practically any other fiduciary position.

1. When did you speak out about the racist overtones in White House communications?

2. Is there any written record of your unease about White House relations with the Kremlin and Russian interference with the US democratic process?

3. Did you share your concerns with anyone in authority about the President’s wilful undermining of the Constitution and the corruption of the Attorney General’s position and the Department of Justice?

4. Did four years and 18,000 recorded lies cause you to doubt the assurances of the President on public health in the face of the Covid-19 pandemic?

5. Were you still a member of the GOP in 2020?

The difficult question in the 1970’s was did you serve in ‘Nam? Vietnam was an embarassing foreign policy failure with huge human loss, and combined with the exit of Nixon from the White House in disgrace, the US psyche and confidence remained damaged throughout the 1970s. Confidence is key in financial markets. It evaporated and stock markets kept falling for the rest of the decade. This writer’s fear is that a modern day combination of presidential criminality and cultural turmoil will erode confidence once again. Think of 1968 and 1974 as a double whammy of social and political shock. Then check out this chart of the Dow Jones Index from 1968 to 1980:

A multi-year halving of asset values might sound overly gloomy but there is no doubt the growing prospect of a Biden win, and social backlash, could spook markets. Mark Twain, the great American humourist, was reputed to have given us the maxim about history not repeating itself but certainly rhyming. Look at that chart again and then archive footage of 1968 civil unrest plus an ignominious 1974 Marine One helicopter departure from the White House lawn. Then ask yourself what did YOU do, say or write in 2020….?

July 4, 2020
Charting The Uncharted Territory of Covid-19 Recovery

So, this might be the strangest financial quarter of all time. At one point, a third of the planet’s population was in pandemic lock-down plunging economic activity into a deep freeze. And yet, global stock markets are about to post a stunning recovery from pandemic despair with a whopping three month return of 18% for investors. I’m half expecting Monty Python’s limbless Black Knight to appear on CNBC and tell Jim Cramer, “Tis but a scratch…”. Please excuse the effort at dark comedy; rather treat it as a weak effort on my behalf to hide confusion.

Yep, no point hiding it. It’s all very confusing for me. Rather than blather on about accepted capital markets norms in long paragraphs of text I thought some financial charts might be a better way of explaining my confusion. Don’t get me wrong, I am not saying stock markets and investors are Black Knights of laughable optimism. Quite the contrary, equity markets and investors discount the future (not present challenges) and I have absolutely no evidence to suggest that economic activity will not return to its pre-Covid scenario of Goldilocks growth and low inflation. No, my confusion is that nearly all financial instruments/assets are rising in value. Arguably, these other assets are discounting a less brilliant future.

Traditionally, gold and bonds have been considered “safe havens” to protect wealth in times of turmoil. These two asset classes have not just been flying in recent months, but actually for more than 20 years. Bloomberg and Gavekal illustrate in the chart below that gold has been quietly killing equities on performance over the past two decades.

The stellar performance of bond markets thanks to low interest rates is probably more widely known but it might surprise to see the tech-powered S&P 500 struggle to keep up, even in recent FAANG-tastic years….

Leaving aside twenty year trends, it is rather strange to see bonds, equities and gold all roaring higher during what we can all agree is a period of significant uncertainty. Of course, there is another explanation for investors buying all asset classes – the enormous monetary stimulus coming from central banks and governments. Current estimates of that funding pulse are as high as $10 trillion. If we assume global GDP has a very painful year-on-year contraction of 5% in 2020 that would equate to a $4 trillon loss. That sounds like a $10 trillion injection to plug a $4 trillion hole leaving a balance of $6 trillion likely to rush into the financial system. What’s not to like about that if you are an investor in risk assets?

It is early days yet but an interesting possibility that a massive emergency stimulus response to a pandemic could rip up the sclerotic inflation play book of the past twenty years. In that instance, the “sick man” of financial markets, Europe, could finally attract real interest and performance. I leave you with a chart of European equities still almost 10% lower than two decades ago, and a potential and much needed Covid19 recovery….

July 1, 2020
Taking Back Control In A Brexit Clown Car

Ooooohhh that was quick. Can it really be four years since the UK voted to leave the EU? Well, we are nearly there. In January the UK will leave the EU, with or without a trade deal agreed, and three Prime Ministers later we shall all agree this is “Taking Back Control”. Or, maybe not. Financial markets are probably the best data points to measure how much control is expected to be achieved. The charts are less than flattering. One chart in particular caught the eye in the past few days; Bloomberg has highlighted the serial underperformance in all four years of the UK’s flagship index, the FTSE 100:

Yes, the performance is being measured in US dollar terms but then the 20% decline of the once proud Pound Sterling tells its own story of faded glory. It’s not just this writer flagging the ‘downgrading’ of the UK’s economic influence in global financial markets. As Boris Johnson shuts foreign aid departments and spends on new yachts and government jet re-sprays, one could only gasp at the following Financial Times headline in the recent days:

Pound is becoming emerging market currency, says Bank of America analyst

The analyst, Kamal Sharma, didn’t pull any punches – “trading conditions in the pound and the big swings in exchange rates make it a better match with the Mexican peso than the US dollar…..We believe sterling is evolving into a currency that resembles the underlying reality of the British economy: small and shrinking with a dual deficit problem”. The prospect of the Great British Peso would prompt giggles if it were not so serious. The delusion that Boris Johnson’s government are going to masterfully execute a post-Brexit trade deal is becoming more stark by the day and in danger of entering fantasy territory. Look no further than the latest gems from Johnson’s cabinet.

The embarassing policy U-turn on school lunches was apparently inspired by Daniel Rashford rather than the footballer, Marcus Rashford, according to health secretary, Matt Hancock. In fairness, Hancock will need a dose of Harry Potter magic to resurrect his career after the contact tracing app debacle. Not to be outdone, the doppleganger for Alan B’stard in the cabinet, Dominic Raab, reached into the fantasy vaults and credited Game of Thrones with the inspiration for taking the knee in the Black Lives Matter protests. Clearly, the Secretary of State for Foreign Affairs has his finger on the global pulse. What could possibly go wrong with a complex Brexit negotiation?

The exceptionalism of the UK and US has been an accepted positive feature of geopolitics for decades but the twin challenges of CV-19 and globalism in trade have revealed a more malign, nationalistic application. As the Donald announces restrictions on H-1B visas for high skilled personnel and Boris considers a paint job for “Air Farce One”, both countries are breaking all the wrong records in containing a global pandemic. Exceptionalism now means exceptional incompetence. But, where does that leave “Brexit Means Brexit”?

The honest answer is nobody knows but we will know a lot more before January. The Japanese have just given the UK government 6 weeks to negotiate a post-Brexit trade deal. The mind boggles. As we watch the UK Prime Minister being mauled on a daily basis in Westminster by opposition leader, Keir Starmer, and his forensic demand for answers/truth one wonders how the detail-oriented Japanese will cope with the sheer vacuousness of the Number 10 clown car during negotiation. The tragic cast of Gove, Raab, Rees Mogg etc. in the same Brexit chariot of delusion only adds to very real fears of a bad Brexit.

Financial markets have already voted. Global investors in currencies and equities have priced real economic damage rather than the fantasy that Harry Potter magic or Tyrion Lannister cunning will appear at the trade negotiation tables. It will all become very real if the debt markets take fright. UK national debt levels are now more than 100% of GDP. If bond markets move, they will move very very fast. There will be no time for test drives and eye-sight checks. Just a sad Chernobyl reminder of how lots of little lies can incur a very large debt to the truth…..

June 25, 2020
Ten Big Lessons From The House of WireCard(s)….

In 25 years of writing financial commentaries and research notes I have only received two abusive phone calls from ‘offended’ companies. The first was from the investor relations department of Anglo Irish Bank. In that instance, our caution on there being any value in Anglo’s shares crystalised swiftly, as did the conclusion of that desperate call. The second call was from further afield in 2015 and only an early chapter in a shocking financial implosion beginning to hit the headlines in recent days.

The second caller claimed to be from a German investment fund which owned shares in a “hot” German payment processing technology play, Wirecard AG. My offence was to publish a list of long and short positions in a fund I was running at the time. One of the shorts listed was Wirecard and my “bet” was executed using a derivative instrument, a CFD(remember them!!), which would earn profits if the Wirecard share price fell in value. The weird thing about the call was that, between expletives, the caller’s defence of the company seemed too close to the script coming from Wirecard’s own investor relations department. The other weirdness was that, after the call, my search for the details of this German fund came up with nothing. So did the bet.

The share price rose another 10% over the next few weeks. Wirecard was now a losing position in the fund. That’s a lonely place in the investment world where portfolio managers tend to only talk about their winning positions. Despite excellent analyses by Dan McCrum in the FT and an independent research house, Zatarra, on accounting ‘funnies’ at Wirecard, I was forced to cut my losses. And so, that’s where my personal Wirecard story and my chances of being in a Teutonic version of The Big Short movie ended. But the Wirecard machine in 2015 was really only picking up speed. Here are a few milestones reached before implosion this week:

• More than 300,000 corporate customers wooed onto its e-commerce payment services platform and its “Beyond Payments” tag line….

• Almost 6,000 employees in 26 countries

• A peak market valuation of €25 billion which exceeded the combined market capitalisations of Germany’s largest two banks, Deutsche Bank and Commerzbank AG.

• 2018 entry into the Dax 30 index of Germanys top publicly listed companies.

• A digital partner of choice for all the top global payment players – Visa, AMEX, Mastercard, Google Pay, Apple Pay.

• Wirecard Bank also secured a banking licence.

But the tag line “Beyond Payments” resonated for all the wrong reasons this week as Wirecards’s auditors, EY, stated that €1.9 billion of “cash” was missing, beyond payment so to speak. This number neatly equates to the entire acccumulated profits reported by Wirecard since 2012. The market reaction has been vicious; the Wirecard share price has collapsed by 80% in 24 hours and the CEO/founder has resigned.

The courage of short sellers who endured commercial pain and FT journalists who experienced serious litigation threats was ultimately vindicated but there are serious questions to be asked of the investment community and regulatory authorities who ignored multiple warning signs or “red flags”. Sadly, many of these same questions have arisen before on the post-mortems of the Enron, Anglo and Madoff scandals. However, it is no harm to highlight a few lessons to be learned and hopefully assist earlier discovery of the next fraud. Here’s our lesson list based on what we know so far:

1. The financial world is swamped in regulations and compliance procedures to protect investors, particularly retail investors. Wirecard’s fraud happened in full view of professional portfolio mangagers and regulators. Fraud is a fact of financial life, diversification is too.

2. Overly defensive national regulators should be a risk “red flag”. The German regulator, BaFin, threatened criminal proceedings against the FT journalists and briefly banned short selling of the shares….

3. Equity analysts still try to curry favour with big companies by publishing favourable analyses. Out of 25 analysts covering Wirecard, just 2 analysts had a “Sell” recommendation. What “analysis” were the other 23 doing given the company’s multi-year track record of information blocking, even with its auditors….

4. Heavy acquisition activity is a great way to hide fraud and keep invesment bankers happy with juicy advisory fees. Wirecard was flashing warning signals in the accounting world years ago with dubious profits funnelled through Dubai, Singapore and….. Dublin.

5. Short sellers who make profits on falling share prices don’t usually receive good press. However, they are an essential part of the investment process in shining a forensic torch on financial statements.

6. Big fraud stories tend to happen in clusters particularly during economic shocks. Luckin Coffee didn’t grab the same headlines as Wirecard but a 93% share price implosion and $12 billion spilt out of that China cup in recent months.

7. Short selling strategies are very very difficult. Wirecard was a multi year story with huge pain points along the way; the share price quadrupled from when it first caught my eye in 2015.

8. Fraud “in plain sight” is possibly going to be more prevalent going forward. Thanks to social media, free money/capital, disinformation campaigns and litigation, bad actors can fight facts and the rule of law for a very long time. Look to the recent political world for some startling examples of ‘total denial’.

9. Finance is a global system. Call it a “supply chain”. Interruption can be very damaging. The increasing move against globalism is possibly not in investors’ favour if national regulators hide problems behind national flags.

10. The German authorities have dropped the ball badly on Wirecard. Confidence in the regulator, BaFin, is shot and questions will resurface about the health of Deutsche Bank and its enormous derivatives trading book. BaFin is Deutsche Bank’s regulator but will anybody believe their assurances as to Deutsche’s stability right now?

The Wirecard story has plenty more startling revelations to come. I have no doubt. The movie is also a certainty. There are lots of fawning enablers, dopey regulators and corporate dirty tricks on the money side and a few brave journalists and analysts on the truth side. This story will hopefully end with a positive message that some individuals were, in fact, beyond payment and trusted their senses. Even their dress sense. It turns out that those with a keener eye for fashion and a knowledge of the Theranos “Bad Blood” debacle might have picked up a clue. It seems that CEOs, male or female, sporting black turtleneck sweaters are probably now a “red flag” for investor fraud…..

June 19, 2020
ESG Goes MEGA: Making Europe Good Again….

The current perceived wisdom of markets is that doing good helps financial performance. Doing good even has its own fancy financial acronym these days – ESG. That covers corporate adherence to Environment, Social and Governance standards. In fact, more than $30 trillion of investment funds are now using ESG metrics/data in their decision making. It would seem the performance debate over ESG is now over which raises an awkward query for this writer. If ESG is a such a big driver of performance why does Europe’s equity markets lag the US so badly?

The data rarely lies. The following chart provides a stark reminder of a European Stoxx50 index going precisely nowhere over the past 5 years while US indices, like the S&P 500 and Nasdaq, roar ahead.

Of course, there are other macro drivers of equity markets. One of the most topical themes these days is the massive underperformance of the value style of investing. Europe is clearly more exposed to more traditional companies and business models and definitely lacks the turbo boost coming from the US technology titans. A $6 trillion boost no less. Yes, the 5 largest tech companies in the US have a market value equivalent to China’s GDP from just a decade ago. And yet, markets are supposed to discount the future. Technology is certainly the future but what about the future US?

Recent headlines from the US do not look out of place in a banana republic with ESG alarm bells ringing very loudly. Check out this medley of mayhem:

Trump demanded 10,000 active-duty troops deploy to streets – CBS News

Justice Department Reversal “Gross Abuse of Power” – New York Times

Revolt of The Generals – Washington Post

Trump Threatens to Invade Seattle – Vice.com

After Facebook staff walkout, Zuckerberg defends no action on Trump – Reuters

The media fixation on the unstable non-genius in the White House almost misses the point. The bigger ESG issue is the passive acceptance by half the legislators in the country(Republican party) of the potential corruption of the DOJ, the military and a massive social media company with a user base twice the size of China’s population. Trump is merely a symptom of decades-long social dysfunction. Yes, George Floyd’s death has forced the national address of systemic racism and a wave of corporate PR statements recognizing the issue and a firm commitment to do good, better. ESG box ticked, move along? Ehhh, not so fast. Where is the corporate concern on the following….

• The US has a prison population of well over 2 million. That is 25% of the global prison population for a country with less than 5% of the planet’s population.

• More than 300 million guns owned in the US.

• Thousands of immigrant children held in cages.

• Toddlers causing death/serious injury with guns annually exceed all Jihadi/Islamic terrorist activity.

• The top 1% of the population in 2018 held over $25 trillion in wealth which exceeded the wealth of the bottom 80%. With 40 million now out of jobs and the Nasdaq hitting all time highs one shudders to think where the current disparity lies.

• 1,000 people are killed by US police annually.

One suspects the most wide-scale street protests seen since 1968 are about far more than George Floyd’s gruesome murder. Europe is not a perfect place but the Covid-19 pandemic has surprisingly revealed a crisis response far more coherent than originally feared. It is early days yet in a hopeful recovery but one wonders if financial markets over time will see Europe through a more atttractive ESG prism. How ironic it would be if European capital markets over the next decade outperform the US due to the comeback of social values rather than financial value…..

June 12, 2020
Back to Work – All is Very Good!

Well, that was quick. As Main Street tip-toes back to work, Mr. Market has voted with a loud and large V. That’s the ‘V shaped” recovery of financial charts all over the world, particularly in the US. Check out the S&P 500 recovery and its move back into positive territory for 2020. Whooodathunk!

That is a 40% move since the lows of March. The tech-heavy Nasdaq index has had an even stronger rocket ride; it hit all time highs yesterday and is actually up 10% in 2020. Wall Street is doing its market thing and looking through the current turmoil and “discounting” a better future. Even if a company is “dead”. Rental zombie, Hertz, filed for bankruptcy a few weeks ago but the share price (yes, the equity) gained 115% yesterday. Chesapeake Energy with its $8 billion of Q1 losses and debts in write-off mode went a bit better; just the 181% trip to the stars yesterday. The market is always right, right? Honestly, we just don’t know. Benjamin Graham puts it better – “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”

Investors have voted and followed a wall of central bank emergency funding into risk assets. Back on Main Street business owners are weighing up the challenges presented by an ongoing global pandemic, lost revenues, new regulations, new behaviours and their costs. Oh, and Covid-19 is still here – WHO said it recorded its highest daily tally of new infections on Sunday (136,000). Interestingly, for those assuming all will return to pre-Covid exuberance, the National Bureau of Economic Research didn’t quite get the White House ‘Keep-America-Great’ memo. It turns out that the US officially went into recession in February. Yes, the US economy was already contracting before lock-down. Who cares, say investors clocking gains every day. Dare we say exuberance is back? Buckle up, we have a transport dream to sell you.

Nikola Corp makes hydrogen and battery powered trucks. Not one truck has been produced yet, we don’t know who will make them and the company has zero revenues to date. The Nikola share price doubled on Monday and the value of the company now exceeds $33 billion. That is now $3 billion higher than the value of the 117 year old Ford Motor Company and its annual revenues of $150 billion. Punchy stuff. I think we can agree Wall Street has voted for a big V-shaped recovery. ‘Mission Accomplished” springs to mind.

There is one tiny flaw in that prognosis. Main Street gets to vote too. Up until now, most business people with US commercial interests would tell you their local contacts/partners are emphatic President Trump will be re-elected. With the most recent CNN poll putting Biden 14 points ahead of Bunker Boy, one wonders is that confidence about to be tested? As Main Street returns to work and polls its pandemic pain through the hot summer months, what are the chances Mr Market reaches for the weighing-scales and reins in its exuberance. Then, we may appreciate “V’ is for volatility too.

June 10, 2020
SME Survival: Three Numbers, Three Truths…

If it wasn’t so awful you would laugh. The Twitter Toddler is hiding in a bunker in the White House, with the lights off, as fires burn on Lafayette Square. Meanwhile, I keep thinking of those final non-responsive two minutes and 53 seconds of George Floyd’s life. Three police officers watched and did nothing. We should be angry but save some indignation for closer to home. Our SME sector which employs more than 1 million people is struggling to survive and we are watching and waiting for a new government more than 100 days after our election. The SME companies gasping for breath don’t have much time and three numbers indicate a fatal lack of commercial awareness.

The first number is 11 million. That is the grand total of euros provided to small businesses in the two months since the government launched its SME main support scheme. Eleven million! It gets worse; a tiny number, 400 companies out of 250,000 in the SME sector, have succeeded in accessing a funding lifeline. Apart from the fact that the support is coming in the form of debt capital with unattractive terms, there is the additional problem that our banks are being asked to take on some of the risk too. This introduces our second number. It is bigger than our first number.

Four billion. Yes, that is the estimate by J.E. Davy and Goodbody Stockbrokers of the euro value of bank loan losses stemming from the Covid-19 crisis. The three banks, AIB, BOI and PTSB, are currently tasked with supporting the government SME support schemes. The truth is they really have too many fires to fight in their existing loan books. The combined loan books of these three domestic banks, outside of mortgages, are in the region of €100 billion. One suspects that 4 billion figure (or 4% of book) from the broker analysts is a little optimistic and you can bet the banks fear the same. So, it is difficult to see how the banks have any incentive to increase their risk at this time of maximum uncertainty. And, here’s the really worrying number. It is much much bigger.

The Central Bank of Ireland as the oversight authority and regulator of the Irish banking system publishes lots of really good data. In a recent report, “Covid-19 and the transmission of shocks through domestic supply chains”, the authors Samantha Myers and Fergal McCann stated that trade credit activity is ‘relatively large’ in Ireland. For illustration, they stated that as recently as Q3 2019 outstanding trade credit liabilities stood at €250 billion. Ireland currently has entire sectors of the economy shut down. Would 10% or €25 billion be an unreasonable estimate of the true scale of the evaporation of supplier/creditor capital?

We will soon find out but two months into this crisis there are three very clear truths emerging. They are as follows:

1. Existing government capital support(not payroll) schemes are not working
2. The expectation that Irish banks will add to risk books is commercial nonsense.
3. The cascading effects of a freeze in trade credit chains are much bigger than current estimates of SME support(but not accessed) required.

The purpose of this article is not meant to be gloom and doom. The creation of awareness is a necessary catalyst to prompt leadership and one can be more hopeful of new thinking from here than from 1600 Pennsylvania Avenue. In fact, very close to home, there are three exciting companies about to raise more than €500,000 on the SparkCrowdfunding platform. Now think, that’s almost 5% of the national total from government in the past 8 weeks! These fund raises are an excellent example of combining a good government incentive (EIIS Tax Scheme), equity capital(not debt), alternative pools of capital(retail investors) and technology(Spark). So, thinking positively, the SME sector can be helped. And, we have more time than two minutes and 53 seconds. But not much more.

June 2, 2020