David Fuller and Eoin Treacy's Comment of the Day
Category - Autonomies

    Copper Falls to 8-Month Low on Concern Oil Slump Will Cut Costs

    This article by Agnieszka de Sousa for Bloomberg may be of interest to subscribers. Here is a section: 

    Mining is an energy-intensive industry and lower oil costs have a deflationary impact on producers, according to Macquarie Group Ltd. Copper also declined as a strike was set to end at Peru’s Antamina mine, the world’s sixth-largest copper mine.

    “Whatever positive connotations lower energy might have for global growth, the extent and pace of the decline in oil seems the more worrying factor for the moment,” RBC Capital Markets Ltd. said in a note.

     

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    Heineken Takes Beer Out of Man Cave With $300 Dispenser

    This article by Matthew Boyle for Bloomberg may be of interest to subscribers. Here is a section: 

    The Sub’s upscale design plays into the growing trend of more refined at-home drinking -- fancy cocktails, fine wine, craft beer -- which “communicates a certain status” among consumers, said Ben Voyer, a social psychologist at the ESCP Europe Business School. While mainstream beer volumes are falling, sales of premium-priced beers such as Heineken’s Affligem and the tequila-flavored Desperados are on the rise. In Italy, half of all Torps sold are Affligem, an ale started at a Belgian abbey founded in 1074.

    Heineken fell 0.6 percent to 61.12 euros at 1:23 p.m. in Amsterdam. Even for the man who has everything, though, the Sub is “ridiculously” expensive, said Euromonitor analyst Spiros Malandrakis, who predicts it will fail unless Heineken licenses its technology to other brewers to widen the selection of brands. That strategy helped make Keurig Green Mountain Inc.’s coffee machines ubiquitous in American kitchens.

    That won’t happen with the Sub, however, according to Nasard. “We’re not a service provider.” Instead, Heineken -- which has introduced a cheaper $235 plastic version of its machine -- plans to keep this Christmas gift in the family.

     

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    Email of the day on the outlook for 2015

    Hi David & Eoin, I wanted to get FTM thoughts and opinion on where the best investment returns could be had over the next 12 months and what would be the key things to watch for? Thanks for an excellent service 

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    Being Tesco Stinks, but Shopping at Tesco Is Great

    This article by Mark Gilbert for Bloomberg may be of interest to subscribers. Here is a section: 

    The two discounters are chipping away at the market share of their bigger competitors. Aldi's market share is now 4.9 percent, up from 3.9 percent a year ago; Lidl is up to 3.5 percent from 3 percent. Tesco, meantime, is down to 28.7 percent from almost 30 percent 12 months ago. Asda, which is owned by Wal-Mart Stores, is unchanged at 17.2 percent, while J Sainsbury has slipped to 16.4 percent from 16.8 percent.

    Overall grocery sales are down 0.2 percent in the past year, which Kantar says is the first contraction since it began surveying the market in 1994. Kantar also tracks a basket of 75,000 products; it says shoppers are paying 0.4 percent less for their groceries than they did a year ago.

    U.K. food prices have declined for four consecutive months, according to the Office for National Statistics, dropping at an annual pace of 1.4 percent in both September and October:
    Lewis, who's been at Tesco since Sept. 1, is unlikely to be looking forward to Christmas. The race to the bottom in prices will make it hard to generate yule-time profit, and his company is still under investigation by the U.K. Serious Fraud Office for fiddling its accounts in recent years. Only five of the 26 analysts who cover the company recommend that investors buy Tesco shares, with 14 holds and seven saying sell.  

    In a report published this week, Goldman Sachs analysts said the only way for U.K. supermarkets to make money is to close stores and cut capacity. They're correct; Internet shopping and delivery-to-home services are making edge-of-town superstores increasingly anachronistic, while town centers are flooded with smaller stores that are indistinguishable from the supermarket chains. As well as ending some of its overseas adventures, Tesco needs to shrink more than its prices.

     

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    Australia Needs Stimulus to Avoid Recession, Morgan Stanley Says

    This article by Mark Mulligan, Jens Meyer for The Sydney Morning Herald may be of interest to subscribers. Here is a section: 

    Morgan Stanley said in its note on Wednesday that a series of external and internal shocks had forced it to downgrade a more upbeat macro-economic forecast at the beginning of this year.

    Foremost of these was oversupply in bulk commodities such as iron ore, which has driven down the price of Australia's biggest export to near five-year lows, along with "further signs" that China would have to accelerate its own economic rebalancing act away from property and exports.

    The bank also singled out the federal government's "alarmist" narrative about a budget emergency, which had dissuaded discretionary consumer spending and private sector capital expenditure. It also accused the government of lacking focus in its infrastructure agenda.

    On the property boom, it noted that "the housing recovery has come through even more quickly than we forecast, pulling some growth into 2014 at the expense of 2015". It urged a "delicate mix of jawboning and macro-prudential policies" to cool prices and speculative investment.

    Morgan Stanley said all this "puts an already weak labour market at greater risk". Job-shedding from the resources sector and a spluttering "East Coast recovery" would drive the jobless rate from 6.2 per cent now to 6.8 per cent, it said.

     

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    Making sense of Samsung Group reshuffling

    Thanks to a subscriber for this informative report from Deutsche Bank. Here is a section: 

    Since Samsung Group's Chairman Lee began experiencing health issues in May of this year (based on press reports from Chosun Ilbo, etc.), the group has announced a series of internal business transactions including IPOs and reorganizations of its subsidiaries. Although Samsung Group has not formally indicated that transition in management control is in process, we believe the market regards this as the primary motivation for the recent developments. Based on our extended analysis of these events and the evolving regulatory backdrop, we see Samsung Life (Buy) and Samsung C&T (Buy) as key beneficiaries that also offer upside to target prices. 

    Recap of key events since May 2014 
    Over the last five months, Samsung Group has announced a number of transactions to recalibrate its businesses, which many investors appear to believe are likely also designed to strengthen management control for the next generation. Key announcements include IPOs of Samsung SDS and Cheil Industries (aka Samsung Everland), a merger between Samsung Heavy and Samsung Engineering, and removal of cross-holdings. 

    Samsung Life a likely beneficiary of further restructuring 
    Given potential revisions to the Insurance Act, we believe that a likely additional transaction is for Samsung Life to spin off a separate non-financial entity that holds shares in Samsung Electronics. We would view this as a positive for Samsung Life’s shares, as it should lead to improvement in ROE on the back of a lighter capital base. We estimate that the Samsung Life operating entity’s ROE ratio should double to 10% from 5% as a result of a spin-off. Although the Samsung Life operating company’s RBC (risk-based capital) ratio could decline to about 250% from the previous 379%, this would still be one of the highest RBC ratios in the Korean insurance sector. 

    SEMCO and Samsung C&T to recognize gains from IPOs 
    Samsung Group has announced its intent to IPO Samsung SDS and Cheil Industries, which may consist mainly of shares owned by affiliate companies. The Lee family has a majority stake in both companies and, while it is apparently not planning to sell its shares during the IPO, the family could utilize the shares at a later point to help fund potential inheritance or strengthen control in key affiliates. Our analysis shows that SEMCO and Samsung C&T should recognize valuation gains worth 21% and 14% of market capitalization, respectively, upon IPO. According to regulatory filings, SEMCO will be the only major shareholder to sell its SDS shares through the IPO, and we expect SEMCO to use the proceeds to strengthen its balance sheet.

     

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    Insights in 140 Words October 31st 2014

    Thanks to a subscriber for this edition of Deutsche Bank’s weekly missive. Here is a section on Facebook:

    Facebook - Leave aside Mark Zuckerberg's dystopian goal of "connecting the whole world". Before then investors must think about the eight per cent drop in Facebook's share price since Wednesday. To understand why jitters surround a company that is growing sales and earnings 60 and 90 per cent respectively, look through a DuPont analysis lens. Multiply the current ebit margin of about 40 per cent by an asset-turn of 0.6 times and a leverage ratio of 1.2. That spits out a return on equity of 17 per cent, adjusted for tax. Given that asset-turn and leverage are unlikely to change much, shareholder returns become a margin game. Hence the reaction when Facebook said spending would increase 50 to 70 per cent in 2015. The rise equates to almost half of current ebit or the entire projected increase in gross profits next year.

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    Ackman $5.3 Billion Allergan Bet Examined Before Ouster Vote

    This article by Edvard Pettersson for Bloomberg may be of interest to subscribers. Here is a section:

    Bill Ackman’s accumulation of $5.3 billion in Allergan Inc. stock will be scrutinized by a judge who will decide whether the hedge fund manager can vote his 10 percent stake to help seal a hostile takeover bid by Valeant Pharmaceuticals International Inc.

    Allergan, the maker of the anti-wrinkle treatment botox, seeks a court order barring Ackman from voting the shares held by his PS Fund 1 at a Dec. 18 meeting, where shareholders will be asked to remove six directors who oppose Valeant’s $54 billion unsolicited bid.

    Ackman calls Allergan’s request “drastic and unprecedented,” while the company alleges the activist investor acquired his shares through insider trading. The decision by U.S. District Judge David Carter, who will hear arguments today in Santa Ana, California, may determine the outcome of the vote.

    “An injunction would substantially tilt the playing field because a majority of outstanding, as opposed to voting, shares must vote in favor of removing directors for this proposal to pass,” Ackman said in a court filing. “If PS Fund 1 cannot vote its shares, they will effectively become ‘no’ votes.”

    Valeant, based in Laval, Quebec, wants to buy Allergan to expand its portfolio and become one of the world’s largest drugmakers. Allergan Chief Executive Officer David Pyott has fought to keep the company independent, announcing a restructuring that includes cutting 1,500 jobs.

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    From mobility to connectivity

    Thanks to a subscriber for this interesting report from Deutsche Bank focusing on the Internet of Everything theme which is likely to continue to gain attention over the coming decade. Here is a section: 

    IoT-driven demand for servers to all benefit the Asian technology supply chain in 2015-20. In this report we focus on devices which have yet to become connected and will be new growth drivers in 2015-20. We expect the upstream semiconductor sector to see incremental sales contribution from IoT and wearable ICs in 2015-20. We anticipate server demand to benefit the downstream hardware sector more than the upstream semiconductor sector.

    Internet of Things – the connectivity theme After the mobility theme drove the proliferation of smartphones and tablet PCs since 2005, we expect the connectivity theme to trigger IoT demand in 2015-20. We expect 1) low-power application processors and microcontrollers with connectivity and embedded memory, and 2) MEMS (micro-electro-mechanical systems) sensors to be the major growth drivers for the upstream semiconductor sector. The key IoT applications for the downstream hardware sector include smart cities, home automation, eHealth, retail, smart cars, logistics, industrial control, smart metering, and smart agriculture and farming. In our view, IoT will provide benefits such as life quality improvement, productivity improvement, energy saving, and security enhancement.

    Wearable devices to be key products in an IoT world
    Wearable devices can be connected to mobile devices and belong to the concept of IoT. Major applications for wearable devices will be entertainment, healthcare monitoring, mobile communication (connection with mobile devices), and mobile payment, in our view. We expect wearable device units to grow at a 25% CAGR in 2015-20.

    IoT infrastructure should drive continuous server demand growth
    We believe IoT infrastructure will be based on the current cloud architecture. Once IoT connects more objects, machines, and networks for global cloudbased services, data will be routed through servers for applications and data analysis. The uptake of IoT should therefore result in growing demand for data analysis and storage in servers and continue to drive demand for servers in 2014-18 with 4.3% unit CAGR 

     

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