|Bid||44.15 x 137000|
|Ask||44.47 x 10000|
|Day's range||44.44 - 44.60|
|52-week range||33.86 - 44.87|
|Beta (3Y monthly)||1.35|
|PE ratio (TTM)||9.50|
|Forward dividend & yield||1.26 (2.84%)|
|1y target est||N/A|
(Bloomberg) -- The eurodollar options market, where investors bet on U.S. interest rates, is typically quiet during Asian trading hours. The lack of liquidity hasn’t stopped the building of huge positions in recent weeks.A series of block trades, similar in size and structure, has led to speculation that at least one investor is betting big that the Federal Reserve will cut rates only once more, at most, in this cycle. The hedge for just one transaction last week was equivalent to more than four times the average daily volume for September contracts in the region.With Fed Chairman Jerome Powell sticking to his view Wednesday that rates are probably on hold after three straight reductions, investors have dialed back expectations. Futures show close to zero easing priced in for the remainder of this year, and a quarter-point cut in 2020.“The Fed shows no signs of hurrying to cut rates,” said Jun Kato, chief market analyst at Shinkin Asset Management in Tokyo. “With Powell repeating that the U.S. economy is in a good shape, speculation that there won’t be any more cuts is gaining momentum.”That view appears to underlie the eurodollar positions constructed during Asian hours over a period of three weeks, based on an analysis of the options purchased and sold and open interest changes.The trades started drawing attention from Oct. 24 after a series of large block transactions. From then, they have proceeded like clockwork every few days, with the latest showing a build up of 98.00 puts and 98.75 calls.For an illustration of how the trades work, take a look at a risk-reversal bet placed on Nov. 12 on the level of 3-month Libor in September 2020. The investor bought one put option with a target of 2%, and sold a call at 1.25%, a strategy that will make money if markets price out more than one Fed cut and incur losses if expectations for more easing increase.In total, there are are around 280,000 short positions in calls targeting a strike equivalent to 1.25% for the September 2020 and March 2021 eurodollars contracts. That means if markets start to price more than two Fed rate cuts by this time, someone holding that position would stand to suffer heavy losses.On the flip side, not all economists agree that the Fed will cut rates even once. Morgan Stanley predicts the central bank will remain on hold through 2020 in its global strategy outlook.The trades stand out not only for their size, but also their timing, during less liquid Asian hours.Less Liquid“Simply believing a Fed on hold in 2020 brings us closer” to the 98 strike, at least through the end of this year, said Albert Marquez, who covers interest rates at Chicago Capital Markets.Alternatively, the trade might be to take advantage of elevated call skew, he said. Executing during Asian hours is strange, though, as “the amount of edge given up at that time is exaggerated,” he said.Pricing has probably been expensive as dealers who take the other side of the bet need extra compensation for the risks of hedging positions in thin markets, according to traders in London and Chicago who asked not to be named as they aren’t authorized to speak publicly.For example, the risk-reversal trade on Nov. 12 was for 80,000 options. Market pricing at that time meant a dealer accepting it would have to sell around 32,000 equivalent Eurodollar futures to hedge it. So far this month, the average daily trading volume during Asia hours for September 2020 contracts is just a little over 7,000, according to data compiled by Bloomberg.A similar structure counting on minimal deviation in expectations for Fed policy was bought during the U.S. session Friday, and open-interest changes subsequently indicated it was for new risk.Eurodollar futures are the most-traded interest-rate derivatives. They are standardized, exchange-traded instruments that allow traders to bet on the direction of short-term interest rates and are priced off three-month Libor fixing at expiry.(Adds additional structure bought during U.S. hours Friday in 14th paragraph)\--With assistance from Chikako Mogi, Elizabeth Stanton and Edward Bolingbroke.To contact the reporter on this story: Stephen Spratt in Hong Kong at email@example.comTo contact the editors responsible for this story: Tan Hwee Ann at firstname.lastname@example.org, ;Benjamin Purvis at email@example.com, Cormac MullenFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg Opinion) -- As recently as March, Daimler AG, the German carmaker, promised to put 10,000 autonomous taxis on the streets by 2021. But this week, Daimler chairman Ola Kaellenius announced that the company was taking a “reality check” on the project and focusing on self-driving long-haul trucks instead. It’s fine that self-driving cabs aren’t coming as fast as some expected — and it’s even better that Silicon Valley-style big talk appears to be going out of fashion.Kaellenius’s “reality check” has some solid business reasons: Daimler is cutting costs and can’t commit to a large, capital-intensive project without a clear idea of what kind of first-mover advantage it might confer. But mostly, it comes because of a long-obvious technical problem. Making sure self-driving cars aren’t a menace in city traffic is a job that’ll take more than a couple of years. Investigators are still trying to get to the bottom of the March 2018 accident in which a driverless Uber killed a pedestrian in Tempe, Arizona, and it appears Uber Inc.’s cars had been involved in dozens of previous nonfatal incidents in the course of the same testing program. No one wants to be in the same situation as Uber — so General Motors Co. subsidiary Cruise won’t be launching self-driving taxis in San Francisco this year, as previously promised, and maybe not next year, either. There's been lots of news stories about Waymo Llc, an Alphabet Inc. subsidiary, launching a self-driving taxi service in Arizona, and in April, it even put an app for it on the Google Play store. But in September, Morgan Stanley lowered Waymo’s valuation because of delays in the commercial use of its technology, and last month, Waymo chief executive John Krafcik said driverless delivery trucks could come before a taxi service.For European carmakers, which have to deal with older cities not laid out on a grid, launching autonomous taxi services appears even more daunting than for Americans. They know it’s a long way from Tempe to Amsterdam or Rome. That’s one reason Volkswagen AG, a latecomer to self-driving development, isn’t worried about being overtaken. Alexander Hitzinger, chief executive of Volkswagen’s autonomous-vehicle subsidiary, said in a recent interview that even an industry pioneer such as Waymo was “a long way away from commercializing the technology” and that Volkswagen’s autonomous vehicles would be developed by the mid-2020s.That time frame may be no more realistic than the previous hype about big 2019 and 2020 launches. Autonomous car developers can complain all they want about unpredictable human drivers and pedestrians who are causing all the accidents with their flawlessly superhuman creations, but nobody is going to clear the cities of people to give self-driving cars a spotless safety record. And making sure that, after millions of hours of training, artificial intelligence is finally able to drive like a human after a few hundred hours on the road, is not all that’s required for robotaxis to be viable. There's still the whole matter of figuring out how to reduce rather than increase urban congestion by using cars that don't “think” like humans.It’s also dangerous to adopt any kind of specific framework for the launch of automated truck services, even though that’s an easier project than taxis because the routes are fixed. The presence of humans in what is still a predominantly human world has rather unpredictable consequences for robot behavior. And the first movers have an obvious disadvantage: Like Uber with a taxi, they can get burned in ways that could set the whole business back years, and the earnings potential is unclear.None of this means, of course, that self-driving development has failed or even hit a dead end. Given enough time and a few technological breakthroughs, autonomous vehicles will be safe around actual people in actual winding, narrow, crowded streets. Engineering challenges exist to be overcome. The problem isn’t with the tech, which is moving along at a reasonably rapid pace, but with how that progress is communicated.Nobody forced experienced managers at venerable companies such as Daimler or GM to make overly optimistic statements about self-driving taxi launches. Waymo is a cash-burning startup, and it’s difficult to hold it responsible for getting ahead of itself. But the adults in the room look silly for having tried to play catch-up. There’s no reason for the big car companies to make any promises on self-driving at all. Unlike with vehicle electrification, which is part of many countries' climate policies, there’s no regulatory pressure to eliminate human drivers. And autonomous mobility-related business models are purely theoretical at this point.It would be enough for companies involved in autonomous car development to say they’re working on it. Pretty much all the big players are, to some extent. The time for any other kind of announcement will come when someone is really ready to launch a commercial service, whenever that may be. No rush.To contact the author of this story: Leonid Bershidsky at firstname.lastname@example.orgTo contact the editor responsible for this story: Tobin Harshaw at email@example.comThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Leonid Bershidsky is Bloomberg Opinion's Europe columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
(Bloomberg) -- Goldman Sachs Group Inc. agreed to pay $20 million to settle an investor lawsuit accusing traders at the bank, along with 15 other financial institutions, of rigging prices for bonds issued by Fannie Mae and Freddie Mac.As part of the settlement, disclosed Friday in a court filing, Goldman Sachs will cooperate with investors in their case against the other banks. The firm also agreed to make changes to its antitrust-compliance policies related to bond trading. A federal judge in Manhattan must approve the settlement before it can take effect.Investors sued after Bloomberg reported in 2018 that the U.S. Department of Justice was investigating some of the world’s largest banks for conspiring to rig trading in unsecured government bonds.Goldman Sachs has turned over 71,000 pages of potential evidence, including four transcripts of chat-room conversations among its traders and some from Deutsche Bank AG, BNP Paribas SA, Morgan Stanley and Merrill Lynch & Co., according to court papers filed Friday. The bank agreed to provide additional help, including deposition and court testimony, documents and data related to the bond market.Goldman Sachs isn’t the first to resolve the civil claims. In September, Deutsche Bank agreed to settle for $15 million. First Tennessee Bank and FTN Financial Securities Corp. agreed to a $14.5 million settlement later in September.Among the firms remaining as defendants in the case are Credit Suisse AG, Barclays PLC and Citigroup Inc.The case is In re GSE Bonds Antitrust Litigation, 19-01704, U.S. District Court, Southern District of New York (Manhattan).To contact the reporter on this story: Bob Van Voris in federal court in Manhattan at firstname.lastname@example.orgTo contact the editors responsible for this story: David Glovin at email@example.com, Steve StrothFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- Oil advanced for the first time in three days after a report that OPEC sees a potential reduction in supply from outside of the group.Futures rose as much as 1.3% in New York Wednesday after the American Petroleum Institute reported that U.S. stockpiles fell 541,000 barrels last week, according to people familiar. Apart from a “sharp” cut in projected output from non-member countries next year, the Organization of Petroleum Exporting Countries also sees a possible “upswing” in the forecast for demand growth, according to Secretary-General Mohammad Barkindo. The comments underscore a more upbeat outlook for the oil market into the new year.When the OPEC news hit the market, prices “started to rally from the red to the green,” said Bob Yawger, future divisions director for Mizuho Securities in New York. “Until this turnaround, things were getting ugly.”While crude prices have picked up over the past month, they’re still down about 14% from the peak reached in April as the prolonged U.S.-China trade dispute saps an already-fragile global economy and crimps fuel demand. OPEC, which cut production this year to prop up the market, has signaled it’s unlikely to take stronger action to prevent a renewed glut in 2020.Meanwhile, Federal Reserve Chairman Jerome Powell said the current stance of monetary policy is likely to be sufficient provided the economy stays on track, but warned that “noteworthy risks” remain to record U.S. expansion.“The market is digesting chairman Powell’s speech,” said John Kilduff, partner at Again Capital in New York. “This is a bit of positive pull up from Powell. It’s the fact that the Fed is going to be on hold because the economic outlook is looking brighter and is a key aspect to the energy market these days because of the focus on the demand.”West Texas Intermediate for December delivery traded at $57.45 at 4:37 p.m. after rising 32 cents to settle at $57.12 a barrel on the New York Mercantile Exchange.Brent for January rose 31 cents to close at $62.37 a barrel on the London-based ICE Futures Europe Exchange, and traded at a $5.17 premium to WTI for the same month.Read: Global Oil Demand to Hit a Plateau Around 2030, IEA PredictsThe industry-funded API also reported that stockpiles in Cushing, Oklahoma, fell 1.18 million barrels while gasoline and distillate inventories gained by a combined 3.15 million barrels. The Cushing fall would be first decline in over five weeks, if U.S. Energy Information Administration data confirms it.Meanwhile, in the U.S., crude stockpiles probably rose by 1.5 million barrels last week, according to the median estimate of analysts surveyed by Bloomberg.“Thursday is going to be the next big test here,” Yawger said in anticipation of the EIA report. “Whichever number is bigger will be the way most likely that the market will trade to.”To contact the reporter on this story: Jacquelyn Melinek in New York at firstname.lastname@example.orgTo contact the editors responsible for this story: David Marino at email@example.com, Christine BuurmaFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- Takeaway.com NV Chief Executive Officer Jitse Groen said it doesn’t make sense to overpay in its bid to gain control of U.K. rival Just Eat Plc.“I don’t want to be the idiot that runs into a ratio that doesn’t make any sense,” Groen said Wednesday at the sidelines of the Morgan Stanley European Technology, Media & Telecom Conference in Barcelona.Takeaway is currently battling Prosus NV, which officially filed its hostile offer for Just Eat on Monday. Just Eat investors have complained about both the 710 pence-per-share cash offer from Prosus and Takeaway’s all-stock offer, currently valued at about 626 pence. Neither company has indicated that they’d raise the bid.“We will be disciplined in our approach as in all M&A situations,” a spokesman for Takeaway said in an email. “For obvious regulatory reasons, we cannot speculate about the terms of the offer.”Takeaway published a presentation on Wednesday expanding on the rationale behind its bid, adding that it expects to launch its Scoober courier service to the U.K, which is projected to incur costs in the tens of millions of euros per year.Takeaway also pointed out that it expects to cut costs by consolidating Just Eat’s five IT platforms, starting in Continental Europe.Just Eat and Takeaway have a lot of overlap in their shareholder base and so the Takeaway offer is getting a lot of investor support, Groen said.Aberdeen Standard Investments, which holds about 5% of Just Eat, said that Prosus needs to increase its offer by 20%. The investor also wanted Takeaway to increase its bid. Eminence Capital, which holds about 4%, in September said Takeaway’s bid undervalued Just Eat and that it planned to vote against that deal.“The Takeaway.com materials published today continue to underestimate the level of investment required in a sector that is changing rapidly,” Prosus said in a statement Wednesday.(Updates with comment from Takeaway in fourth paragraph.)To contact the reporter on this story: Amy Thomson in Barcelona at firstname.lastname@example.orgTo contact the editors responsible for this story: Giles Turner at email@example.com, Andrew PollackFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- Analysts from Morgan Stanley to UBS Group AG to Societe Generale SA are taking an increasingly cautious stance on Mexico, warning that measures needed to bolster growth may come at the expense of government finances.They see a moribund economy and little hopes for a pickup without fiscal stimulus, a situation that runs up against President Andres Manuel Lopez Obrador‘s pledges to maintain a primary budget surplus. Already nervous about the president’s populist tendencies, they cite the spending versus growth dilemma as one of the biggest tests for his government as it looks toward its second year in power.“The main risk for Mexico is by the end of next year as we head toward the midterm elections and see how the AMLO administration is going to deal with potential slow growth,” said Bertrand Delgado, a strategist at Societe Generale.In Morgan Stanley’s view, the risks are too close for comfort. The bank on Wednesday closed its bullish call on the peso, rates and bonds from the state-owned oil company. UBS is cautious on Mexican fixed-income assets, citing the risk of worsening public finances and rating cuts. Foreign bondholders have already been pulling money out of the country, with overseas holdings of Mexico’s domestic debt down to 55% of the total outstanding from a peak of 66% in 2017.Mexican assets staged a broad sell-off in the months leading up to Lopez Obrador’s widely anticipated election win in July 2018, based on concerns he would boost state meddling in the economy. But there’s been a partial recovery since his inauguration in December. The peso is up 2.8% this year, among the best in emerging markets, and average overseas bond yields have dropped a full percentage point. The benchmark stock index has gained 5.4%, though that’s less than half the jump for MSCI’s Emerging Market Stocks Index.“It looks so-far-so-good in terms of conversations between the AMLO administration and the business and investor community,” said Delgado, who says gains could continue for a while before the ultimate reckoning comes for Mexico.For Alejo Czerwonko, a strategist at UBS in New York, that reckoning could come from a downgrade of Mexico’s credit rating sometime over the next year, which makes him bearish on the long-term investment outlook for Mexico.“In spite of the commitment to fiscal responsibility, the risk of deteriorating public finances persists,” he said. “Sovereign rating downgrades remain a question of when, not if.”Negative OutlooksMoody’s Investors Service Inc. and S&P Global Ratings have negative outlooks on the sovereign credit, while Fitch is neutral. Petroleos Mexicanos, the state oil company known as Pemex, is among the biggest drags on government finances, and that burden will continue as the company struggles to boost output while coping with more than $100 billion of debt.While Lopez Obrador has promised funds and a lower tax burden to rescue Pemex, the company was slashed to junk by Fitch in June, and a similar decision by either Moody’s or S&P would almost certainly push its bonds off the main investment-grade indexes and lead to a forced sell-off.Lopez Obrador has promised to preserve fiscal discipline and Finance Minister Arturo Herrera promised as recently as July that he’d hit this year’s 1% primary budget surplus target.But the fiscal pressure is amping up amid weak growth. Gross domestic product edged up just 0.1% in the third quarter after the economy barely avoided a technical recession in the second. Mexico’s central bank, known as Banxico, is expected to lower interest rates in coming months to boost growth, which could reduce the appeal of the peso for investors who borrow in dollars to purchase higher-yielding currencies.“Banxico has embarked on what is likely to be a protracted easing cycle, which would erode the peso’s carry advantage over time,” said Ilya Gofshteyn, a New York-based strategist at Standard Chartered. “We expect this to be a drag on the peso’s performance in the second half of 2020.”To contact the reporters on this story: Justin Villamil in Mexico City at firstname.lastname@example.org;Andres Guerra Luz in New York at email@example.com;Sydney Maki in New York at firstname.lastname@example.orgTo contact the editors responsible for this story: Carolina Wilson at email@example.com, Brendan WalshFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- Morgan Stanley was accused of using “pump and dump” tactics to manipulate European bond markets and stave off a $20 million loss after its bets on the French sovereign turned sour amid the Greek debt crisis.The bank’s London desk was long on French bonds and short on German debt, betting the spread would narrow, said Bernard Field, an official at the Autorite des Marches Financiers. But the opposite scenario played out as Greece’s impasse with creditors deepened, causing the desk to lose $6 million on June 15, 2015 and an extra $8.7 million at market open the next day, Field said.To narrow its losses and avoid hitting a $20 million loss-limit set by Morgan Stanley’s management, the London desk allegedly acquired futures on French and German bonds on June 16, 2015, with the sole objective of increasing the market value of French and Belgian bonds before “massively and instantaneously” selling the latter, Field said at a Paris hearing.“This was clearly a pump and dump strategy,” added Camille Dropsy, another AMF official speaking on behalf of investigators. “Morgan Stanley consciously fooled the market.”‘High Standards’Morgan Stanley said in an emailed statement it “absolutely and categorically rejects the AMF’s allegations.” It said it was dismayed on learning investigators are seeking a 25 million-euro fine ($28 million). “The firm will continue to defend vigorously its integrity and high standards of professional behavior.”The AMF enforcement committee assesses market-abuse cases ranging from insider trading to publishing misleading information. It has the power to impose civil fines and bans and typically issues decisions several weeks after hearings.According to AMF investigators, Morgan Stanley’s tactic enabled the London desk to avoid about 5 millions euros in losses, said Field, who added that French and Belgian bonds are considered interchangeable.Field, who plays the role of a devil’s advocate in the case, disagreed with investigators on several points. In particular, he said the case should focus only French bonds traded on a platform regulated by the AMF, narrowing the loss Morgan Stanley is accused of unfairly avoiding to 1.7 million euros.‘No Impact’Stephane Benouville, a lawyer for the bank, said the accusations don’t stand up to scrutiny. He said the futures the London desk bought had no impact on French bonds and complained that AMF investigators hadn’t bothered trying to prove any effect.“When you listen to the prosecution it seems we’re being told that Morgan Stanley should have sat on its positions,” Benouville said. “If we weren’t allowed to deal German futures, French futures or French bonds what were we allowed to do? Sit tight as losses piled up?”Benouville said any decision to fine Morgan Stanley would send a message that market makers aren’t allowed to hedge themselves and exit risky positions. Ciaran O’Flynn, a managing director speaking on behalf of the bank at Friday’s hearing, went further.“As a market maker and like all market makers, we must provide a price to clients when they want it. We do not control when that will happen,” O’Flynn said. “All market makers, to provide that function, need to know that at a certain point they will be able to exit the risk. It is fundamental to the provision of liquidity to begin with. Any suggestion otherwise exhibits a poor understanding of the basis function of market making.”To contact the reporter on this story: Gaspard Sebag in Paris at firstname.lastname@example.orgTo contact the editors responsible for this story: Anthony Aarons at email@example.com, Peter Chapman, John AingerFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- Google’s moves to cram the top of its search results with more and more advertising is hammering the online travel industry, one of the company’s biggest customers.Expedia Group Inc. fell the most in 14 years on Thursday and TripAdvisor Inc. dropped the most in two years after the companies reported dismal third-quarter results and laid the blame on Google. Booking Holdings Inc.’s shares dropped 8%, too, wiping out a combined market value of more than $13 billion from the three online travel agents.Google dominates the online search market, with at least three quarters of the market. People use the search engine to research trips, so for at least a decade online travel agents have refined their websites with trustworthy content and easy booking tools to show up high in Google results.This search engine optimization, or SEO, worked well until about five years ago. Around that time, Google began placing more ads on the top of search results, pushing down the free listings. The internet giant also built new travel search tools, which were mostly paid listings, too. This means online travel agents now must pay billions of dollars each year to Google to ensure they show up high in search results and get clicks from travel planners.The online travel industry has been concerned about Google’s changes since at least 2016. But the full impact was felt this week.“Google has got more aggressive,” TripAdvisor Chief Executive Officer Stephen Kaufer said during a conference call with analysts late Wednesday. “We’re not predicting that it’s going to turn around.”Free traffic is “shrinking all the time,” Expedia Chief Executive Officer Mark Okerstrom said the same day. “Google does continue to push for more revenue per visitor. And I think it’s just the reality of where the world is.”The industry has been trying other marketing channels, such as social media and more TV advertising. But Google’s search engine is so pervasive that online travel agents have to keep buying ads from the company to keep traffic coming to their sites.D.A. Davidson analysts wrote that Expedia is exploring alternatives to mitigate its “reliance on search/Google,” but they see “no alternatives that will be able to efficiently ‘move the needle’ from a volume perspective anytime soon.”Carnage in the online travel industry comes as antitrust scrutiny of Google is ramping up in the U.S. State, federal and congressional probes are all underway to determine whether the company violates competition law. One area of concern is vertical search, where Google uses its main search engine to promote its own industry-specific products over those of other companies. Travel is one example where this is happening, along with local search, contractor marketplaces like Angie’s List and shopping-comparison services.Google has been a rising risk for the travel industry for a while, but executives have been generally hesitant to blame it for poor results. The search giant is one of the most important sources of traffic and business for online travel agencies, so they have tried to maintain a good relationship. But this quarter, Google’s impact was so painful that industry executives and Wall Street analysts couldn’t avoid it.“We see these Google changes as a potential headwind to OTA profitability,” Morgan Stanley analyst Brian Nowak said in a note to clients. This trend isn’t going away, and people who want to invest in the online travel sector should do it through Google stock, he added.Booking Holdings, the largest online travel agent, was peppered with questions about Google during a conference call with analysts on Thursday.Glenn Fogel, Booking’s chief executive officer, said the company’s future success will rely on reaching people without Google getting in the way.“What we know is most important is for us to get customers to come to us directly,” he said. Building brand strength and retaining customers better means the company “will not be as dependent on other sources of traffic,” he added.\--With assistance from Ryan Vlastelica, Olivia Carville and Ian King.To contact the reporters on this story: Gerrit De Vynck in New York at firstname.lastname@example.org;Kiley Roache in New York at email@example.comTo contact the editors responsible for this story: Jillian Ward at firstname.lastname@example.org, Alistair Barr, Andrew PollackFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
Cue has appointed Credit Suisse and Morgan Stanley to raise $300-$400 million as part of its initial public offering (IPO) due early next year, the sources said. Cue is a digital agency that works with Chinese tech companies like ByteDance, Baidu and Tencent <0700.HK> to source advertising on their popular Chinese apps like WeChat, Douyin, Jinri Toutiao, and Kuaishou. The Shanghai-based company was formed in March last year when four digital firms consisting of WIN, AnG, Wina Tech and Qixin were merged into a partnership and the business was backed by KKR .
(Bloomberg) -- Another large block trade in Uber Technologies Inc. priced overnight in the wake of its IPO lockup period expiration, a person familiar with the matter said.Morgan Stanley sold two million shares on behalf of an unknown holder at $26.75 each, the person said, a 0.71% discount to Wednesday’s closing price.It’s the latest of several blocks in this year’s largest U.S. IPO since selling restrictions lifted on Wedesday for pre-IPO shareholders and other insiders. Shares erased earlier pre-market gains to traded little changed.To contact the reporter on this story: Drew Singer in New York at email@example.comTo contact the editors responsible for this story: Brad Olesen at firstname.lastname@example.org, Courtney DentchFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- Morgan Stanley is wading back into a difficult niche of the Hong Kong stock market, betting it’s found a way to complement its business serving wealthy clients.As protests roiled the city in recent months, the bank quietly began offering derivatives in Hong Kong known as callable bull or bear contracts, which track the performance of underlying assets without buying them directly. This week, the firm also began issuing warrants that can be traded at the Hong Kong Stock Exchange, helping fill a void left by European banks that have been pulling back from equities units with low returns.Together the listed contracts amount to a $733 billion market in Hong Kong, but because of thin spreads banks have to amass market share to produce adequate profits. For New York-based Morgan Stanley, the new retail products may provide a way to neutralize risks in its growing private bank in Asia. Many wealthy clients want the firm to help them bet stock prices will remain relatively steady -- known as shorting volatility -- trades that typically involve selling derivatives. Now, essentially taking the other side, retail investors can buy Morgan Stanley’s new contracts to bet on price swings.“We have returned to the HKSE warrant market with the technology and client focus necessary to establish a successful standalone business,” Craig Verdon, head of the institutional equity division for Asia said in a statement. “We anticipate synergies with our growing wealth-management business and our leading cash-trading client franchise.”Citigroup, JPMorganEuropean banks such as Barclays Plc, Standard Chartered Plc and Deutsche Bank AG have been paring Asia equities businesses including warrants trading as part of broad restructuring efforts, giving some rivals an opening.Citigroup Inc. also aims to return to that business in Hong Kong after exiting it years ago, a person familiar with its planning said, asking not to be named discussing internal deliberations. A spokesman declined to comment. JPMorgan Chase & Co., a more established player in that part of the Hong Kong market, began expanding its business into Thailand last year.Stock derivatives are popular in Asian markets, and investor demand for contracts to bet on equities in Hong Kong has remained robust despite the banks’ comings and goings. For small investors, warrants and other listed derivatives provide exposure to moves in an underlying stock or index for a fraction of the price of buying them directly. Trading in Hong Kong-listed structured products rose to a record $733 billion last year, a 38% increase from the start of the decade.Asia’s stock derivatives have proven tricky at times for overseas banks. France’s Natixis SA was left reeling last December after trades linked to volatile Korean financial products known as autocallables went awry, triggering losses and provisions of 259 million euros ($286 million).Technology FocusMorgan Stanley was among banks that quit the listed-warrants business in Hong Kong years ago, getting out just before the global credit crisis because of too little volume at the time. The lean spreads can make profits difficult, despite the risks.“Scale is incredibly important in this business, given the volatility of the market and the ongoing investments required to lead the market in serving clients,” Yowjie Chien, JPMorgan’s Hong Kong-based global head of warrants & options electronic client solutions, said in an interview. “We’ve grown significantly in terms of market share over the last nine years.”Morgan Stanley is hoping cutting-edge technology can help it with that challenge and allow it to operate a high-speed platform. The bank has assembled more than a dozen people dedicated to its new warrants unit, according to a person with knowledge of its business. Roughly two-thirds of that group will focus on the underlying tech, with the remainder working in quant strategy, trading and sales, the person said.Listed structured products amounted to more than 20% of trading volume at the Hong Kong stock exchange last year. Bull or bear contracts allow retail buyers to make leveraged bets. To limit their losses, the products are canceled if underlying stocks exceed predetermined amounts.Morgan Stanley does little retail business in the region. It offers wealth management to retail investors in Australia and provides some products to third-party private banks that incorporate them into their own retail offerings. While the new warrants are a retail product, Morgan Stanley will issue them on the exchange and won’t interact directly with buyers.The bank is returning to the market as regulators, hoping to cultivate a wider range of warrants and derivatives contracts, adjust rules to speed up product approvals. Executives declined to say how much they hope to earn by offering the contracts.(Adds description of contracts in third-to-last paragraph.)To contact the reporter on this story: Cathy Chan in Hong Kong at email@example.comTo contact the editors responsible for this story: Candice Zachariahs at firstname.lastname@example.org, David Scheer, Jonas BergmanFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg Opinion) -- Germany’s finance minister Olaf Scholz acknowledged this week that the European Union needs to make progress on cementing a banking union. The bloc’s growing reliance on American and British banks to underwrite the bulk of its capital markets activity, combined with the prospect of Brexit putting up barriers to European lenders accessing London-based capital, helps explain his new urgency.While domestic politics is playing a part in Scholz’s newfound warmth for the project (as my colleague Leonid Bershidsky argues here) and his insistence on important red lines may hinder progress (as Ferdinando Giugliano suggests here), he described his key motivation in an article for the Financial Times succinctly:Now that the U.K., home to London's capital markets, is on the verge of withdrawing from the bloc, we must make real progress. Being dependent for financial services on either the U.S. or China is not an option. So if Europe does not want to be pushed around on the international stage, it must move forward with key banking union projects, as well as the complementary project of capital markets union.Companies in Europe, the Middle East and Africa have raised more than $78 billion in equity offerings this year. In equity underwriting, Wall Street banks are becoming more dominant as Deutsche Bank AG and BNP Paribas SA, the EU-27’s biggest players in this field, cede market share.More than 40% of that underwriting business was led by JPMorgan Chase & Co., Morgan Stanley, Goldman Sachs Group Inc. and Citigroup Inc. Deutsche Bank’s market share has more than halved in three years.There’s a similar picture in the league tables for international bonds, where borrowers have raised more than $3.8 trillion this year. JPMorgan’s position as top lead underwriter in that category gives it a market share of almost 8% for the past three years, double that of Deutsche Bank. While BNP has increased its share to 4.4%, it remains well behind JPMorgan, Citi and Bank of America Corp. as well as London-based HSBC Holdings Plc and Barclays Plc.So Scholz is absolutely right to worry that the EU risks being starved of capital if its financial services industry continues to stumble from crisis to crisis and its markets remain fragmented. The plan earlier this year to create a national banking champion by merging Deutsche Bank with Commerzbank AG — a project endorsed by Scholz — was doomed to fail. But a cross-border European champion able to compete with Wall Street and the City of London is sorely needed.To contact the author of this story: Mark Gilbert at email@example.comTo contact the editor responsible for this story: James Boxell at firstname.lastname@example.orgThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
(Bloomberg) -- Uber Technologies Inc.’s new target of achieving profitability by 2021 impressed analysts, even as shares fell amid continued competitive pressures in the food delivery business and ahead of a lock-up expiry on Wednesday.Third-quarter results were weighed down by the Eats segment, where bookings came in well below analysts’ estimates. Overall, the results prompted a mixed response from Wall Street, with analysts at RBC Capital Markets and Morgan Stanley boosting their price targets noting signs of improvement in the main ride-hailing unit, while DA Davidson and Wedbush lowered their targets citing negative market sentiment, weak results and slower growth estimates.Analysts also cautioned that longer-term investors becoming able to sell down holdings from Nov. 6 could weigh on the shares.Uber shares fell as much as 9% to an all-time low in New York on Tuesday. Peer Lyft was down as much as 2.2%.Here’s a summary of what analysts have had to say.Citi, Itay Michaeli(Buy, price target $45)More positives than negatives, with clear improvements in ride fundamentals, demonstrated by a segment Ebitda margin of 22% versus 8% in the first quarter.Ride improvements offset Eats softness, which shouldn’t come as a surprise given recent signs of competitive pressures.New break-even target implies at least $1.3b upside to 2021 consensus Ebitda.RBC Capital Markets, Mark S.F. Mahaney(Outperform, price target raised to Street-high $64 from $62)“Bad news. Good news. Great News:” Bookings, users and trips came in slightly lower than expected, while Rides and Eats revenue beat and the Ebitda loss was materially better than expected.Goal of Ebitda profitability in 2021 is achievable, and would be well ahead of Street.Wedbush, Ygal Arounian(Outperform, price target $45 from $58)“Overall this was a B- quarter by Dara & Co. as the company missed underlying bookings and ridesharing metrics which will be viewed mixed to negatively by the Street.”“Despite the clearer path to profitability, mixed results and still-negative investor sentiment is leading to a lower target multiple.”Morgan Stanley, Brian Nowak(Overweight, price target raised to $55 from $53)Target of Ebitda profitability in 2021 is $775m better than Morgan Stanley’s estimate, demonstrating impact of scale, expenditure discipline, and higher efficiency.More importantly, messaging on food delivery indicates market is becoming more rational, although fourth quarter is expected to be another tough one for Eats.New segment disclosures (for example on rides margins) will enable investors to appreciate value of each core businesses.Loop Capital Markets, Jeffrey Kauffman, Rob Sanderson(Buy, price target $48)“Fairly solid results” with better ride revenue and loss margin similar to Lyft Inc. Tough dynamics in Eats, which faces difficult comparatives, was similar to competitor GrubHub Inc.More signs of improvement than deterioration since the IPO. Shares to stabilize once expiration passes.DA Davidson, Tom White(Neutral, price target $35 from $44)“Our 2020 and 2021 revenue estimates decline by 3% and 10%, respectively, due primarily to more conservative Eats growth assumptions.”“Near-term visibility for Eats remains limited in our view, but we continue to believe that, over the long-term, Uber’s multi-product platform can be a critical differentiator in the crowded online food delivery space.”MKM Partners, Rohit Kulkarni(Neutral, price target $32)“Baby step” on path toward profitability, with top and bottom lines beating expectations.That said, “lofty” goal of reaching break-even on Ebitda during 2021 is surprising. Gross bookings continue to decelerate and variable costs, including on marketing, rise.No evidence yet that Uber has been able to stabilize bookings growth via a reduction in incentives offered to both drivers and riders.(Updates share move in fourth paragraph.)\--With assistance from Kit Rees and James Cone.To contact the reporters on this story: Joe Easton in London at email@example.com;Esha Dey in New York at firstname.lastname@example.orgTo contact the editors responsible for this story: Beth Mellor at email@example.com, Brad Olesen, Janet FreundFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg Opinion) -- Larry Kudlow, President Donald Trump’s top economic aide, said on Friday that he’s working on a plan to cut taxes for the American middle class that would be announced ahead of the 2020 election.In the eyes of Moody’s Investors Service, several Democratic presidential candidates already have a similar proposal.In a sweeping report on the potential impact of student-loan forgiveness on the U.S. economy and the government’s finances, analysts led by William Foster made this striking statement: “In the near term, we would expect student loan debt cancellation to yield a tax-cut-like stimulus to economic activity.” The idea is that because more than 90% of the debt has been issued or guaranteed by the federal government, lowering or erasing those interest payments is tantamount to slashing taxes owed to ultimately the same source.Even for a subject like student loans that has been poked and prodded from every direction, this framing is novel. But it makes sense that Moody’s, which assesses the creditworthiness of sovereign governments like the U.S., would draw such a parallel between tax cuts and student loan relief as forms of fiscal stimulus. As the analysts noted, universally canceling student debt would barely impact America’s national debt because Treasuries have already been issued to finance the loans. Rather, one issue is that the government would lose the revenue from loan repayments, which amounted to about 0.4% of gross domestic product in 2018.Admittedly, it’s somewhat laughable to call that a concern, given that the nearly $1 trillion U.S. budget deficit is already practically unprecedented for a period outside of recession or wartime. The Trump administration’s 2017 tax cut relied on the assumption that accelerated economic growth would cover lost revenue, yet real GDP growth in the third quarter was 1.9%, Commerce Department data showed last week, the second-slowest annualized pace since Trump was elected. Candidates like Senator Elizabeth Warren of Massachusetts, by contrast, have mostly specified how they plan make up the revenue lost from forgiving student loans (in her case, a wealth tax).A more pressing question about canceling student loans revolves around whether doing so targets the segment of the population that needs the fiscal boost the most. My fellow Bloomberg Opinion columnists have weighed in on this, with Michael R. Strain arguing Warren’s plan helps the well-off, while Noah Smith thinks her income-based repayment plan is a good start and necessary to alleviate the $1.5 trillion debt’s drag on economic growth.Other candidates have proposed a more targeted approach. Mayor Pete Buttigieg of South Bend, Indiana, for instance, has said he would eliminate the debts of students who attended “low-quality, overwhelmingly for-profit programs” that failed the federal gainful employment rules, which were meant to root out higher-education programs that leave graduates with excessive debt relative to their job prospects. Moody’s analysts seem to fall somewhere in between. Here’s the upside of forgiving student loans:“Increased student debt can explain about 20% of the reduction in homeownership rates among young adults between 2005 and 2014, likely a reflection of a student loan borrower's reduced ability to save for a down payment on a home or qualify for a mortgage. Limited savings can also delay the pace of household formation, as the costs of starting a family can be prohibitive without sufficient savings. Meanwhile, high delinquency among student loan borrowers also impairs credit scores, which can further weigh on an individual's ability to access the credit necessary to start a business or purchase a home.”That likely resonates with a lot of young adults. But Moody’s analysts give a nod to Strain’s view on who would get most of the benefits:“The stimulative effect of a total student debt cancellation on the economy will be partially diluted by the relatively high-income levels of the majority of beneficiaries. … Nearly two-thirds of outstanding education debt is held by households in the upper half of the U.S. household income distribution, whose balance sheets are relatively healthy and whose propensity to consume savings from debt relief is lower than for earners on lower rungs of the income distribution.”And to Buttigieg’s point about for-profit colleges in particular:“In 2016, 32% of bachelor’s degree recipients from for-profit institutions had debt loads of $50,000 or more, compared to just 7% and 12% of peers at 4-year public and private nonprofit institutions, respectively. Although for-profit institutions educate less than 10% of U.S. undergraduates and graduates, their students represent nearly one-third of delinquent federal loan borrowers and are twice as likely to have delinquent loans than their counterparts at public and private nonprofit peer institutions.”I’m not in the business of opining on policy proposals. As Moody’s notes, the issues around the “moral hazard” of loan forgiveness are real and deserve to be debated publicly among elected officials.But from my vantage point within financial markets, the concept of student-loan forgiveness as a sort of tax cut is intriguing. Much of the talk among investors lately has centered on the limits of monetary policy and how governments are going to have to step up and do more to keep the economic expansion alive — or to combat the next downturn. I’ve written before that ultra-low bond yields are a sign that markets are begging for infrastructure spending, an oft-cited way to provide a fiscal jolt.Giving today’s young adults the chance to buy homes and start businesses sooner — like previous generations, before college costs exploded — might be an equally effective boost. After all, what good are interest rates at near-record lows to people who don’t take out mortgages or small-business loans? Morgan Stanley, for one, is counting on unshackled millennials and Generation Z to carry the U.S. economy and stock market for years to come.It’s starting to look as if a “tax cut 2.0” will be on the ballot in 2020. While that’s the language of the Republican Party, the Moody’s analysis is a reminder that there’s more than one way to reduce what some Americans owe the government and boost the U.S. economy in the process.To contact the author of this story: Brian Chappatta at firstname.lastname@example.orgTo contact the editor responsible for this story: Daniel Niemi at email@example.comThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
(Bloomberg Opinion) -- Wall Street should fear Senator Elizabeth Warren, but not for the reason it thinks.Some of Wall Street’s biggest stars have howled recently about how Warren would wreck the U.S. economy and the stock market if she were elected president or merely continued to make strides in that direction. Billionaire Paul Tudor Jones predicted last week at the Robin Hood Investors Conference in New York that the S&P 500 Index would decline 25% and that U.S. economic growth would be cut in half if Warren were to win. Leon Cooperman, Rob Citrone and Jeffrey Vinik have also said that the market would react negatively.Those fears are misplaced. Presidents have far less control over the U.S. economy than many think. Most recently, President Donald Trump tried to boost the economy with his sweeping Tax Cuts and Jobs Act, but its effects have been negligible so far. Also, no one can reliably anticipate the stock market’s reaction to events. Instead, Wall Street ought to worry about what Warren would do to the rarefied world of private equity, particularly leveraged buyouts, or LBOs.LBOs are simple transactions in concept, similar to buying a home. LBO firms acquire companies by putting down a small percentage of the purchase price and borrowing the rest. That liberal use of leverage magnifies returns, which is the main reason LBOs have historically been among the best performing investments. They can also play a useful role. When a public company wants to go private, a firm with multiple business lines wants to shed a division or a business owner wants to cash out, LBO firms are often the buyers.The problem is there’s more money chasing LBOs than deals to accommodate it. Roughly $1.2 trillion was invested in the strategy as of March, according to research firm Preqin, double the amount invested across all private equity strategies in 2000. The unsurprising result is that companies are fetching higher purchase prices, if investors can find deals at all. In a 2018 survey, private equity firms cited high valuations, a scarcity of deals and intense competition as their biggest challenges, according to financial data company PitchBook.The numbers bear it out. In the first half of 2019, LBO investors paid 11.2 times Ebitda, or earnings before interest, taxes, depreciation and amortization, according to Morgan Stanley, nearly 70% more than the 6.7 times they paid in 2000. LBO firms have been able to offset higher purchase prices with help elsewhere. For one, interest rates have declined significantly over the last two decades, with the 10-year Treasury yield falling to less than 2% from close to 7% in 2000. Investors have demanded little more for low-quality debt in recent years, which features prominently in many LBO deals. Those low rates have allowed LBO firms to borrow or refinance more cheaply. In addition, the U.S. has enjoyed the longest economic expansion on record since 2009, which has helped bolster their portfolio companies’ profits. Third, rising valuations have allowed LBOs to sell their investments at ever higher multiples.Those tailwinds could evaporate quickly, but that hasn’t dissuaded investors, at least so far. They still expect higher returns from private equity than they do from U.S. stocks and bonds and a smooth ride, given that private assets are sheltered from turbulent public markets. Those perceived advantages have made private equity a fixture of institutional portfolios and, increasingly, those of individuals.To accommodate the flood of investment, LBO firms are venturing farther from their traditional turf and into every conceivable corner of the economy, including pet stores, doctors’ practices and newspapers. The industry says its expanding reach leaves companies better off, but there’s mounting evidence that companies acquired through LBOs are more likely to depress wages, cut investment or go bankrupt, in many cases because of their debt load. When that debt proves too burdensome, workers and their communities and the taxpayers who inevitably support them all lose, while LBO firms still collect their fees and dividends. Leverage is risky business, as the 2008 financial crisis laid bare, and the growth of private equity is spreading that risk well beyond its small sphere of well-heeled investors. Numbers for private equity are famously guarded, but one way to get a sense of the risks and rewards that come with the industry’s use of leverage is by looking at the stock performance of publicly traded private equity firms.The S&P Listed Private Equity Index, which includes industry titans Blackstone Group Inc., Apollo Global Management LLC and KKR & Co., tumbled 82% from peak to trough during the financial crisis, including dividends. That exceeded the 79% decline for the S&P 500 Financials Index, the sector whose excessive use of leverage triggered the crisis, and the 51% decline for the S&P 500. Since the crisis eased in March 2009, however, the private equity index has outpaced the financials index by 1.3 percentage points a year through October and the S&P 500 by 2.4 percentage points.That brings us back to Warren, who has said that “private equity firms are like vampires — bleeding the company dry and walking away enriched even as the company succumbs.” Warren has also called private equity “legalized looting” that “makes a handful of Wall Street managers very rich while costing thousands of people their jobs, putting valuable companies out of business and hurting communities across the country.”Warren introduced a sweeping bill in July titled — what else — the “Stop Wall Street Looting Act” that would, at the very least, fundamentally transform the industry. Her proposal would ratchet up the potential liability of private equity firms by putting them on the hook for debts of their portfolio companies, holding them responsible for certain pension obligations of those companies and limiting their ability to collect fees and dividends. It would change tax rules to deny private equity firms preferential rates on the debt they put on portfolio companies and close a loophole that allows them to pay lower taxes on investment profits. It would also modify bankruptcy rules to make it easier for workers to collect pay and benefits and harder for executives to walk away with bonuses. Steve Biggar, an Argus Research Corp. analyst who covers private equity firms, called Warren’s plan an “industry-destroying proposal.”Of course, the industry is just as vulnerable to a sustained downturn or higher interest rates, given its cocktail of leverage and high valuations. In the meantime, as more Americans encounter the fallout from failed LBO deals, support for regulation of private equity is likely to grow. And if Warren occupies the White House, she may well lead the charge.To contact the author of this story: Nir Kaissar at firstname.lastname@example.orgTo contact the editor responsible for this story: Daniel Niemi at email@example.comThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young. For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
(Bloomberg) -- Want the lowdown on European markets? In your inbox before the open, every day. Sign up here.The chief executive officer of jewelry maker Pandora A/S is trying to reassure investors that better days are around the corner, after a profit warning on Tuesday sent the company’s shares plunging as much as 13%.“Normally I don’t focus on what happens with the share price, but in this case I think it’s relevant to say why people should consider Pandora as a holding,’’ CEO Alexander Lacik said in a phone interview.Pandora, which makes mid-priced jewelry, delivered its first net loss since its initial public offering almost a decade ago. The company, which is in the middle of an inventory clean-up program that Lacik acknowledged is proving costlier than first assumed, cut its forecast for organic growth and warned investors it will only reach the lower end of its target for operating profit this year.Lacik said that Pandora, which is based in Copenhagen, has received “strong early positive signals’’ from its brand relaunch and that an improvement in so-called like-for-like sales continued into the fourth quarter.Analysts blamed the restructuring for the bad result, but said it wasn’t clear that the company was yet on the right track.Morgan Stanley said Pandora’s outlook is improving, but next year is still a “black box,” with results so far not adequate to suggest brand recovery over the medium term.“Pandora is in the middle of a turn-around and in such a phase, not all key figures are equally charming,” Per Hansen, an investment economist at Nordnet, said in a note. “Cleaning up costs money.” But it still remains “too early to claim that the turnaround is a success.”Pandora is trying to revive interest for its charms and bracelets by changing its brand and simplifying its product range. The company said third-quarter organic growth declined 14%, due to a change of payment terms in Italy and the continued clean-up of wholesale inventory through inventory reduction. Pandora also said the positive sales effect from new store openings was lower than expected.The Profit Warning -Pandora cut its Ebit-margin guidance to a range of 26-27% from 26-28% previously. It now sees negative organic growth in the range of 7-9%, compared with the 3-7% decline predicted earlier. At the same time, Pandora is stepping up plans to cut costs.Lacik rejected the notion that Pandora’s lowered outlook constitutes a profit warning, because the Ebit margin forecast was still within the previous range, he said. It “would be a bad outcome” if the company’s former reputation for serial profit warnings, which cost his predecessor his job, continued under his watch, Lacik said.But the CEO warned that Pandora’s efforts to clean up its business will also impact next year’s results. “Into 2020 you should probably see us still in negative like-for-like territory,’’ he said.What Bloomberg Intelligence SaysWhile not a quick fix, Pandora’s rebranding strategy will likely rekindle desirability for the name in 2020, in our view. New CEO Alexander Lacik is so far embracing the plan, with an added emphasis on investment in brand relevance. New designs, collaborations and fewer promotions will aid its jewelry charms offer. A store and product realignment includes a smaller retail footprint and inventory buybacks.----Deborah Aitken, Senior Analyst for Luxury Goods, HPC & Food, at Bloomberg IntelligenceEven with Tuesday’s decline, Lacik is on track to deliver a 15% share-price gain in 2019, which would end two years of stock-market losses for Pandora. The CEO promised that the net loss last quarter wouldn’t be repeated.“It just happened to all pile up in one quarter and the lion’s share is related to inventory reduction,’’ he said. “So it’s entirely a one-off.’’To contact the reporter on this story: Christian Wienberg in Copenhagen at firstname.lastname@example.orgTo contact the editor responsible for this story: Tasneem Hanfi Brögger at email@example.comFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- Explore what’s moving the global economy in the new season of the Stephanomics podcast. Subscribe via Pocket Cast or iTunes.Turkish inflation ended a run of surprises, slowing in line with forecasts as it capped a turnaround from a currency crash in 2018.Consumer prices grew an annual 8.6% in October, the slowest in almost three years and down from 9.3% in September, according to data released by Turkstat on Monday. After six straight months of undershooting estimates, the result matched the median in a Bloomberg survey of 19 economists.“We expect inflation to rise to double digits again in November due to the reversal of base effects in November and December,” Nihan Ziya Erdem, chief economist at Garanti Securities, said before the data release.Still helped along by a more stable lira and weak demand after a recession, the deceleration is losing momentum as the statistical effect of a high base of comparison after last year’s price spike is starting to wear off.Boasting among the highest real borrowing costs in emerging markets, Turkey’s central bank is coming off three rounds of interest-rate cuts totaling 10 percentage points that brought its benchmark to 14%. The looming reversal in inflation could, however, put in doubt further monetary easing at this year’s final meeting next month.The lira gained 0.2% against the dollar on Monday, appreciating for a second day. It’s still down about 2.5% in the past three months, among the worst performers in emerging markets.“The ongoing improvement in the inflation outlook paves the way for another cut on Dec. 12,” Morgan Stanley economist Ercan Erguzel said in a report. “Yet, the main driver of the decision should be the lira’s performance in the next five weeks.”A period of acceleration in prices will continue through the first quarter, according to Governor Murat Uysal. In its quarterly report last week, the central bank lowered its inflation estimate for the end of 2019 to 12%, from 13.9%.Treasury and Finance Minister Berat Albayrak said on Thursday that he estimates Turkish inflation slowed to around 8% in October and pledged a permanent drop to single digits starting from next year.Goldman Sachs Group Inc. expects price growth to end the year at 11% and then stabilize around 10% in the long run. “Orderly” moves in Turkey’s currency against the dollar could even push inflation toward 8% under its model, but “risks are actually more skewed towards higher inflation figures,” Goldman Sachs economists including Kevin Daly said in a note.“The authorities are prioritizing growth over disinflation, creating risks for the lira,” the Goldman economists said. “Going forward, we expect inflation to start rising once again as base effects become less pronounced.”(Updates with lira’s performance in sixth paragraph.)\--With assistance from Harumi Ichikura.To contact the reporter on this story: Cagan Koc in Istanbul at firstname.lastname@example.orgTo contact the editors responsible for this story: Onur Ant at email@example.com, ;Lin Noueihed at firstname.lastname@example.org, Paul AbelskyFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- Treasury 10-year yields may surge while stocks grind higher over the next six months after the Federal Reserve’s third interest-rate cut, according to JPMorgan Chase & Co.The market reaction to the Fed’s “insurance” rate cuts has been most akin to a similar path taken in the mid-1990s, JPMorgan strategists said.“Assuming markets continue to follow the trajectory of the 1995 mid-cycle episode, this implies modest 5% or so upside for equities over the next six months, very big 100 basis point upside in the 10-year U.S. Treasury yield, steepening of the UST curve, and little change in the dollar or credit spreads,” strategists led by Nikolaos Panigirtzoglou wrote in a note Friday.The prediction comes with some big caveats, though.It assumes that the U.S. macro picture remains consistent with a mid-cycle adjustment, with resilience in employment and consumer confidence, as well as a rebound in manufacturing, JPMorgan said. It would also require a reversal of the pattern that has seen retail investors buy bond funds and sell equity funds at an unusually heavy level, and a re-steepening at the front end of the U.S. forward curve.Investors should monitor the gap between the one-month USD-OIS rate two-years forward minus the equivalent one-year forward. That “would need to enter positive territory on a sustained basis from here for us to be confident that the mid-cycle adjustment thesis is tracking,” the strategists wrote.(Adds link to Fed cut story in second paragraph.)\--With assistance from Stephen Spratt.To contact the reporter on this story: Joanna Ossinger in Singapore at email@example.comTo contact the editors responsible for this story: Christopher Anstey at firstname.lastname@example.org, Andreea Papuc, Tan Hwee AnnFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- Saudi Arabia will compromise on valuation to ensure the initial public offering of Aramco is a success.The Kingdom is ready to accept less than the $2 trillion Crown Prince Mohammed bin Salman has long insisted the state oil giant is worth. Bankers will instead target a valuation of $1.6 trillion to $1.8 trillion after the record share sale was given the green light by Prince Mohammed on Friday, according to people briefed on the matter.The willingness to accept a lower valuation shows the prince has put getting the deal done above being proved right on his $2 trillion estimate. The IPO -- a centerpiece of the Vision 2020 plan to transform the Saudi economy -- is still likely to set records, outstripping the $25 billion by Alibaba Group Holding Ltd. in 2015.Aramco is also considering boosting next year’s dividend by a further $5 billion to $80 billion to win over investors, the people said, asking not to be identified before an official announcement.Although Saudi Arabia’s richest families will underpin demand for IPO, expected to start trading in mid-December, bankers are still trying to woo international investors and have invited money managers in London for meetings next week, people said. A boost to the dividend would complement that effort, bringing yields closer, though still below, those paid by oil majors like Royal Dutch Shell Plc and Exxon Mobil Corp.An official intention to float will be made on Sunday, people said, firing the starting gun on a six-week sales campaign before the shares begin trading on the Riyadh exchange in mid-December. Aramco’s press office declined to comment.The partial privatization will be a deal like few others and the biggest change to the Saudi oil industry since the company was nationalized in the 1970s. Aramco, which pumps 10% of the world’s oil from giant fields beneath the kingdom’s barren deserts, is the most profitable company globally and the backbone of the kingdom’s economic and social stability.Grabbing a role in the deal has been one of the most hotly contested mandates for global banks. More than 20 are working on the deal, with the top roles going to firms including Morgan Stanley, Citigroup Inc., Goldman Sachs Group Inc., and JPMorgan Chase & Co.First suggested by Prince Mohammed in 2016, the IPO was delayed several times as international investors balked at his $2 trillion valuation. An earlier plan to kick off the share sale in mid-October was shelved after bankers received lukewarm interest from money managers.To get the deal done, Aramco’s bankers will need hefty contributions from the kingdom’s wealthiest families, many of whom have already been targeted in the 2017’s corruption crackdown that saw scores of rich Saudis detained in Riyadh’s Ritz-Carlton Hotel. Authorities said they raised over $100 billion in settlements from people accused of graft.Local asset managers, including those looking after government funds, have also been asked to make significant contributions, while domestic banks have been told to lend generously so retail investors can buy Aramco shares, according to people familiar with the situation.Aramco must also contend with the strengthening global movement against climate change that’s targeted the world’s largest oil and gas companies. Many fund managers are concerned the shift away from the internal combustion engine -- a technology that drove a century of steadily rising demand -- means consumption of oil will peak in the next two decades.Since Prince Mohammed first mooted the IPO in early 2016, Saudi Arabia and Aramco have re-worked the company’s tax burden to boost profits and hence its appeal to investors. Riyadh first cut the income tax Aramco pays, and more recently it also lowered the royalty the company pays when oil prices are relatively low. The measures boosted the valuation of Aramco, but analysts and investors all but indicated they weren’t enough to reach the $2 trillion.In a bid to further make the stock more attractive, Aramco already announced plans to pay $75 billion in dividends next year. It’s now considering raising that to $80 billion. At $1.8 trillion that would mean a yield of 4.4%, a decent payout in a low-interest-rate world, but still lower than the 5% Exxon investors currently get.Aramco is still holding meetings with its bankers to nail down the details of the offer, and the dividend plan and the valuation could still change.Investors who buy into the IPO have been guaranteed that the dividend won’t fall until after 2024, regardless of what happens to oil prices. Instead, Aramco will cut back on payouts to the government if it has to reduce the total dividend.(Adds story tout.)\--With assistance from Melissa Cheok.To contact the reporters on this story: Matthew Martin in Dubai at email@example.com;Dinesh Nair in London at firstname.lastname@example.org;Archana Narayanan in Dubai at email@example.com;Javier Blas in London at firstname.lastname@example.orgTo contact the editors responsible for this story: Will Kennedy at email@example.com, Lars PaulssonFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- Apple Inc. executives put aside their typical praise of the iPhone’s sleek design and breakthrough technology on Wednesday for more mundane topics such as installment plans, trade-in programs and giveaways.This is the reality for the Cupertino, California-based technology giant. The smartphone market is saturated and growing slowly at best, so Apple must find new ways to persuade consumers to upgrade their iPhones and sell them digital services and accessories.Fiscal fourth-quarter results, reported Wednesday, suggested the strategy is beginning to work. While iPhone revenue dropped 9%, overall sales rose and the company forecast more top-line growth for the key holiday period. The shares gained 1.6% to $247.14 as the market opened Thursday, valuing the company at $1.1 trillion.Services and accessory revenue jumped to records as users bought apps for their existing iPhones, attached wearable devices like AirPods and Apple Watches, and subscribed to services like Apple Music and iCloud storage.But the plan will only keep working if the installed base of active Apple devices grows steadily, led by the iPhone. That will be a challenge because consumers aren’t upgrading to newer handsets as often as they once did. Over the last three years, the average age of a smartphone has increased more than three months to 19.5 months, according to research by UBS. In a survey by the investment bank, respondents said they plan to replace their devices every 28.5 months, or almost two-and-a-half years.During a conference call with analysts on Wednesday, Apple Chief Executive Officer Tim Cook and Chief Financial Officer Luca Maestri described a potential solution to this upgrade problem: A new feature for the Apple Card that lets users pay for their iPhones over 24 months with no interest and manage that payoff program directly from their iPhone.“One of the things we are doing is trying to make it simpler and simpler for people to get on these sort of monthly financing kind of things,” Cook said. “We are cognizant that there are lots of users out there that want sort of a recurring payment like that in the receipt of new products.”The CEO did brag about the latest iPhone’s camera, but conversation soon turned to more prosaic topics. Morgan Stanley analyst Katy Huberty asked whether it was realistic to expect the iPhone business to return to growth in 2020. Cook refused to be drawn into a long-term prediction but said he was encouraged by the initial reaction to the new phones.When asked about about China, Cook said new iPhone pricing, a monthly payment program and trade-in offers have helped to improve performance in the country.Other analysts asked whether offering Apple’s new TV+ streaming service free for a year with a new device purchase was the start of a broader bundling of hardware and services. Cook said he wanted to grow the TV+ audience quickly and saw this as a way to do it. He wouldn’t rule out attaching another free service offer to hardware purchases in the future.Maestri said Apple is continuing to push its trade-in program, which lets users bring in an old iPhone for a credit toward a new model. Sales volume through that program is five times larger than in the fiscal fourth quarter last year, the CFO noted.Cook also indicated that wearables continue to keep the Apple ecosystem strong. He said three-fourths of Apple Watch purchases in the fiscal fourth-quarter were by users who had never bought that device before. The CEO wouldn’t say how those sales were driven by existing iPhone owners, but the underlying message was clear: Wearables like the Apple Watch and AirPods keep people tied to their iPhones and help Apple to squeeze more money of a product that’s still struggling to grow.(Updates with share trading in third paragraph)To contact the reporters on this story: Mark Gurman in San Francisco at firstname.lastname@example.org;Ian King in San Francisco at email@example.comTo contact the editors responsible for this story: Tom Giles at firstname.lastname@example.org, Alistair Barr, Andrew PollackFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
All of the future models in this list, once they identify as LGBT+, can be in any position in a company and can be any nationality and based in any country.
(Bloomberg Opinion) -- The S&P 500 Index was little changed one day after setting a new record. That makes perfect sense. The market just capped one of its strongest periods of the year, having risen a little more than 5% over the previous three weeks. It’s as good a time as any to reassess the broad landscape. And when they do, traders will find that the primary drivers behind the rally remain firmly in place.To be clear, this has nothing to do with things like irrational exuberance or animal spirits. Rather, the most attractive aspect of the market is the fact that almost nobody believes in it, leaving a lot of cash on the sidelines to come pouring in when the traditional drivers of equities like rising earnings and a stronger economy come back into play. The latest evidence that there is no conviction in the market came in a report by Credit Suisse Group AG’s prime brokerage, which showed that market-neutral quantitative funds had cut their gross stock allocations to the lowest in almost five years. That dovetails with one of the more comprehensive measures of investor sentiment: State Street Global Markets’ monthly index, which is derived from actual trades and covers 15% of the world’s tradeable assets. It shows that investors this year have been less confident in the outlook for equities than even during the financial crisis. And despite this year’s big gains in equities, investors continue to put money into cash. Money-fund assets stood at $3.49 trillion as of last Wednesday, up from $2.88 trillion a year earlier, according to the Investment Company Institute.All this negative sentiment is about the only thing the stock market has going for it at the moment. UBS Group AG equity strategists led by Francois Trahan published a research note titled “If History Were a Perfect Guide … Stocks Would Be in a World of Trouble Here.” In that report, the strategists forecast that the expected rate of 12-month earnings growth will turn negative in coming months, reports Bloomberg News’s Vildana Hajric.A WARNING ON RATE FUTURESWhenever the Federal Reserve concludes a monetary policy meeting and announces its decision, the knee-jerk reaction is to look at the reaction in futures to gain a sense of where the market sees interest rates heading and trading accordingly. Doing so on Wednesday, though, could prove to be a costly mistake. Jim Bianco of Bianco Research pointed out in a note to clients on Tuesday that market-based measures calculating the probability of future Fed actions have become distorted and unusually volatile because of the disruptions in the repo markets. Things are so bad that the Fed has been forced to step in and provide daily liquidity injections. And U.S. Treasury Secretary Steven Mnuchin told Bloomberg News on Tuesday that he is open to loosening financial crisis-era regulations that have stiffened liquidity rules for big banks to relieve possible cash crunches in short-term funding markets. This all impacts the effective federal funds rate, which is heavily influenced by repo rates. Bianco figures that the number of Fed rate cuts implied by the futures markets has vacillated between 4.08 and 0.68 since mid-September. “The consensus forming in the market is the Fed will cut tomorrow and signal they are done,” Bianco wrote in the note. “While this seems a likely scenario, it is worth noting the market’s true odds of further cuts are likely understated due to the liquidity problems in the repo market.”DON’T FORGET ABOUT CANADAThere’s also a central bank meeting in Canada on Wednesday. Unlike the Fed, the Bank of Canada isn’t forecast to ease monetary policy, keeping its benchmark rate at 1.75%. If true, then Canada will be home to the highest policy rate among the world’s major economies, according to Bloomberg News’s Theophilos Argitis. (The Fed’s new rate will probably be in a range of 1.50% to 1.75% if it cuts.) One reason policy makers in Canada are unlikely to reduce rates is because core inflation has been stable near the Bank of Canada’s 2% target for more than a year. This helps account for the strength in Canada’s dollar. The so-called loonie has advanced about 7.50% this year to its strongest since early 2015 against a basket of nine developed-market peers. That gain is the strongest of the group. And traders are confident that it could rise further. The three-month risk reversal rate, which is a barometer of investor positioning and long-term sentiment, is the most bullish for the Canadian dollar against the U.S. dollar since 2009, according to Bloomberg News’ Robert Fullem. Even so, it’s not as if Canada’s economy is going gangbusters. Economists expect growth to slow to 1.5% over the next two years, slightly below potential. The bulls need to aware that the Bank of Canada will provide an update to its outlook on Wednesday, and any downbeat forecasts may hit the loonie especially hard given its recent gains.THE WON IS WINNINGIt was just a few months ago that many pundits were pointing to South Korea as proof the global economy was in serious trouble. The Asian nation is a bellwether for global trade and technology, with its economy heavily dependent on exports from such global giants as Samsung Electronics Co. and Hyundai Motor Co. And back then, exports were dropping fast, helping to push the won to its weakest level since early 2016. Now, though, the won is looking up in what may a sign that the global economy may not be in as bad a shape as thought. South Korea’s currency has appreciated 5.08% since mid-August, making it the best performer after the U.K. pound among 31 of the most widely traded currencies tracked by Bloomberg. But all these good vibes may be premature. The South Korean government is forecast to say Thursday that exports dropped 13.5% in October, the 11th consecutive monthly decline. So why is the won rising? According to Morgan Stanley, it may have more to do with a rapid jump in the nation’s bond yields, which have attracted foreign investment. Yields on the nation’s 10-year notes have jumped about 0.6 percentage point to 1.79%. Yields on government debt globally have only increased about 0.2 percentage point to 0.88% in the same period, according to the Bloomberg Barclays Global Aggregate Treasuries Index. In a world with about $14 trillion of negative yield debt, anything that pays a premium rate is going to attract capital.WINTER IS COMINGThe market for natural gas just strung together its best two-day period since January, soaring as much as 14.8%. That’s good for those who are long natural gas but not so much for those dreading the arrival of cooler weather in the U.S. The reason is because the rally has a lot to do with forecasts for a frigid start to November, according to Bloomberg News’s Kriti Gupta. This weekend in New York, for example, the temperature is forecast to dip below 40 degrees Farenheit (4.44 Celcius). As Gupta points out, the jump in natural gas prices offers some relief to long-suffering bulls. Even with the latest gains, prices are still down more than 20% from a year ago and have been mired below $3 per million British thermal units as record production refills storage caverns ahead of the winter. As such, the bulls may need a long stretch of below-average cold weather to keep gas prices aloft this winter. Stockpiles are above normal heading into the peak heating season, erasing a deficit that had widened to more than 30% below the five-year average earlier this year, according to Gupta. Production from shale basins is near an all-time high, buoyed by output from West Texas’s Permian Basin, where gas is extracted as a byproduct of crude oil.TEA LEAVESBefore the Fed announces its decision on interest rates Wednesday, market participants will get their first look at how the economy performed in the third quarter when the Commerce Department releases its estimate of gross domestic product for the three months ending Sept. 30. This will probably be one of those times when the headline numbers matter less than the report’s details. Most everyone is in agreement that growth slowed markedly last quarter, with the median estimate of economists surveyed by Bloomberg calling for a slowdown to 1.6% on an annualized basis from 2% in the second quarter. But what’s most likely to get the most attention is what the report says about personal consumption, which rose at an outsized 4.6% rate in the second quarter, underscoring the strength of the consumer as manufacturing began to falter. Economists are looking for an increase of 2.6% for the third quarter, which is more in line with the average of 2.4% since the economy emerged from the last recession. Any number that disappoints to the downside is likely to have investors rethinking their renewed appetite for equities are other risky assets.DON’T MISS Fed Wants a Break. Will Bond Traders Allow It?: Brian Chappatta Wealth Tax Would Make the U.S. Economy Less Dynamic: Karl Smith Tech and Manufacturing Look Ready to Trade Places: Conor Sen What the Pound is Saying About Jeremy Corbyn: Marcus Ashworth Italian Debt Risk Is Back With a Vengeance: Ferdinando GiuglianoTo contact the author of this story: Robert Burgess at email@example.comTo contact the editor responsible for this story: Daniel Niemi at firstname.lastname@example.orgThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Robert Burgess is an editor for Bloomberg Opinion. He is the former global executive editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
(Bloomberg) -- Explore what’s moving the global economy in the new season of the Stephanomics podcast. Subscribe via Pocket Cast or iTunes.The Bank of Japan is likely to save its limited policy ammunition for a clearer deterioration of economic conditions when it meets Thursday, just hours after an expected interest rate cut by the Federal Reserve.That’s the view of a majority of economists surveyed by Bloomberg this month, despite the central bank’s call for a review of prices at the meeting. Since the BOJ’s September gathering, data for the world’s third-largest economy has continued to show domestic demand holding up while a U.S.-China truce on trade has reassured markets. That has weakened the yen and cooled speculation of easing this week, even if the Fed lowers U.S. rates.Still, a complete lack of action by Japan’s central bank could give the impression it is falling further behind a wave of rate cuts around the world. While the size of the BOJ’s stimulus program is far bigger in scale than those of its global peers, Governor Haruhiko Kuroda’s challenge is to avoid sowing seeds of doubt over his willingness to take more action and the availability of effective ammunition should he do so.One way the central bank could further demonstrate its readiness to act is by altering its guidance on policy to strengthen or lengthen its pledge to keep rates at rock bottom levels. Alternatively, the BOJ could come up with fresh wording to indicate its strong commitment to add stimulus if needed.Were the BOJ to pull one of its major policy levers this week, in what would now be a surprise outcome, it would probably lower its negative interest rate. Since the last meeting, Kuroda has repeatedly referred to lowering short-term rates if action to spur prices is needed.The BOJ is expected to release its policy statement early afternoon together with a quarterly economic outlook report. Kuroda usually holds a press conference after the decision at 3:30 p.m.What Bloomberg’s Economists Say“We think the costs of adding stimulus outweigh the benefits. If there are any changes, they won’t be dramatic -- the BOJ could extend its forward guidance and add more operational flexibility to how it manages yields.”Yuki Masujima, economistClick here to read moreWhat to look forKuroda is likely to emphasize the bank’s vigilance and its willingness to take additional action if needed. The BOJ’s forward guidance currently pledges to keep interest rates extremely low at least until spring 2020. That time frame could be extended, or the commitment strengthened by, for instance, additionally linking the guidance to price momentum.Another option is adding language to the policy statement. The bank added a line in July to say it “will not hesitate” to expand stimulus if risks rise. Additional wording could be used to signal the bank’s heightened resolve to continue watching inflation momentum with great interest.The tone of the bank’s review of inflation and economic conditions at the meeting could offer an indication of the BOJ’s stance on making its policy more expansionary. The bank’s call in September for the review had fueled expectations of action in October.Any remarks on Kuroda’s readiness to lower the negative interest rate, its effectiveness and its drawbacks will come under close scrutiny, after his recent comments suggested this might be his favored easing option.The 10-year government debt yield targeted by the BOJ has moved back into a permitted trading range, relieving pressure on the bank to take further steps to prop it up. Kuroda has also talked a lot about a bond yield curve in recent weeks, describing a steeper yield curve as desirable. Bond traders will try to gauge if Kuroda is satisfied by the curve’s recent steepening.The impact of an Oct. 1 sales tax hike on the economy is still one of the factors closely tied to the likelihood of BOJ action through its guidance. While economists and policy makers are expecting less damage to the economy than on previous occasions, given a raft of government countermeasures, BOJ watchers will parse Kuroda’s comments on the tax closely.Policy RecapPledge to keep interest rates extremely low until at least around spring 2020.A rate of -0.1% on some reserves financial institutions keep at the central bank.Yield target of about 0% for 10-year Japanese government bonds, with a trading range of about 0.2 percentage point on either side of the mark.A target of increasing JGB holdings by about 80 trillion yen ($734 billion) a year is now secondary to controlling interest rates. The actual pace of purchases has fallen to well below half that rate.A guideline to increase holdings of exchange-traded funds by 6 trillion yen a year. Actual purchases vary widely from month to month, depending on market conditions.To contact the reporter on this story: Toru Fujioka in Tokyo at email@example.comTo contact the editors responsible for this story: Malcolm Scott at firstname.lastname@example.org, Paul Jackson, Jason ClenfieldFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- Banks and lawyers involved in Cum-Ex trades started to hide their ties to short selling as early as 2009 amid a government crackdown on the controversial tax practice.A lawyer who was heavily involved in Cum-Ex deals told a Bonn court Tuesday that people involved started omitting the phrase short selling from communications to avoid scrutiny after Germany issued new rules in 2009 targeted that element in the transactions. Nevertheless, everyone involved knew what they had to do without spelling it out, he said.“If was like in soccer: if two teams meet, no one explicitly needs to tell them to bring a ball,” the 48-year old witness told the court. “In Cum-Ex, everyone worked to keep the ball in the game.”The testimony is part of the Bonn trial against former bankers Martin Shields and Nicholas Diable, who are charged with helping to organize deals that led to more than 400 million euros ($437 million) in lost taxes. German authorities say Cum-Ex, where investors collected multiple refunds on taxes withheld on stock dividends, may have cost taxpayers more than 10 billion euros.“We as advisers and also the banks immediately switched and avoided the word short selling in written communication,” the lawyer, who is not being identified by German media, told the court.Short selling, another controversial practice where traders bet that a company’s share price would drop, was a key element of Cum-Ex deals.In Cum-Ex trades, short sellers sold a stock shortly before a dividend was due but only delivered after the payout date. The buyer was granted a substitute reimbursement in lieu of the dividend that made him eligible for a tax refund, even though no such tax had been paid, prosecutors claim. That refund made the Cum-Ex trade profitable, and the spoils were shared among all participants.The windfalls made Cum-Ex a popular practice for a variety of bankers. Lawyers helped in the practice with written legal opinions that said the deals were legal or by finding new ways to operate once lawmakers revised rules.“Of course we had a disturbing feeling,” according to the lawyer, who like Shields and Diable, is cooperating with prosecutors. “But we all also had a deep, common longing: we wanted it to continue, and we did everything to make it continue.”The good times were threatened, however, in 2009 when the German Finance Ministry issued a letter saying that dividend tax refunds would no longer be granted for trades where buyers and short sellers cooperated.The industry reacted by “twisting” communications and the overall set-up so that buyers would be able to claim they didn’t know who the seller was, the lawyer said. One of the changes was to add brokers to the trading chain to help veil who did what. The Cum-Ex market only needed three days before everyone found a way to dodge the new rules, he said.“Bankers and traders saw to it that the machinery could go on,” he said.The lawyer who testified Tuesday is also being investigated in Germany for his participation. He was the first witness to cooperate with Cologne prosecutors, and he also helped to convince other suspects, including several former traders, to change sides and share their knowledge with investigators. They all hope their cooperation will help them dodge jail time.Cum-Ex exploited how Germany taxed dividend payments, and allowed multiple people to claim ownership of tax refunds, a maneuver named after a Latin term meaning “With-Without.” In 2012, Germany revised its tax laws in an effort to end it, but whether the tactic is illegal is still being contested.Various roles were necessary for the transactions, including buyer, short-seller, custody bank and providers of leverage. According to a court document, investment banks often took several of these roles. The documents list more than 20 lenders. Among those active in Cum-Ex-related short selling were Macquarie Group, Morgan Stanley, JPMorgan Chase & Co. and Bank of America Merrill Lynch, Barclays Plc, Santander and Nomoura, according to the document.(Updates with details if testimony starting in second paragraph.)\--With assistance from Donal Griffin.To contact the reporter on this story: Karin Matussek in Berlin at email@example.comTo contact the editors responsible for this story: Anthony Aarons at firstname.lastname@example.org, Christopher Elser, Benedikt KammelFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.