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America's "Retail Apocalypse" Is Really Just Beginning

This article by Matt Townsend, Jenny Surane, Emma Orr and Christopher Cannon for Bloomberg may be of interest to subscribers. Here is a section: 

Until this year, struggling retailers have largely been able to avoid bankruptcy by refinancing to buy more time. But the market has shifted, with the negative view on retail pushing investors to reconsider lending to them. Toys “R” Us Inc. served as an early sign of what might lie ahead. It surprised investors in September by filing for bankruptcy—the third-largest retail bankruptcy in U.S. history—after struggling to refinance just $400 million of its $5 billion in debt. And its results were mostly stable, with profitability increasing amid a small drop in sales.

Making matters more difficult is the explosive amount of risky debt owed by retail coming due over the next five years. Several companies are like teen-jewelry chain Claire’s Stores Inc., a 2007 leveraged buyout owned by private-equity firm Apollo Global Management LLC, which has $2 billion in borrowings starting to mature in 2019 and still has 1,600 stores in North America.

Just $100 million of high-yield retail borrowings were set to mature this year, but that will increase to $1.9 billion in 2018, according to Fitch Ratings Inc. And from 2019 to 2025, it will balloon to an annual average of almost $5 billion. The amount of retail debt considered risky is also rising. Over the past year, high-yield bonds outstanding gained 20 percent, to $35 billion, and the industry’s leveraged loans are up 15 percent, to $152 billion, according to Bloomberg data.

Even worse, this will hit as a record $1 trillion in high-yield debt for all industries comes due over the next five years, according to Moody’s. The surge in demand for refinancing is also likely to come just as credit markets tighten and become much less accommodating to distressed borrowers.

 



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Email of the day on feudalism in the modern era

I was thinking back to our dinner at the club in LA, and remembering that you stated that the Princes of the Sauds owed allegiance to their King, comparing them to the Barons of Europe in the middle ages. You said that sooner or later, the finances of the Kingdom would have to be enhanced, and that the Princes would be called upon to do so, just as the Barons of long ago were required to collect taxes and give treasure to the Crown. The parallels between today in the Kingdom of Saudi Arabia and those days so long ago are amazing!

We have now seen the first round of the tax collection begin, and those who were arrested were quite likely opposing the new "taxes", if not plotting actual rebellion (in which case they will almost certainly be executed). There is a clear message here for the rest of the Princes...

Now this is the stuff that historians truly love. 

 



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How To Diversify Your Portfolio and Transfer Wealth Across Generations Without Financial Advisory

Thanks to Bernard Tan for this note which offers an interesting perspective on why truly global companies, that dominate their respective niches, with long track records, tend to outperform over time. Here is a section:

I’m going to use 3M to illustrate the following points. 

1. Equities as an asset class is often perceived as riskier than others but there is one sector within equities that I will argue is safer than everything else including fixed income and real estate. 

2. If you invest in a world class, global scale company that is from this sector, you are already fully diversified, hedged and all the macro economic issues and challenges taken care of. 

3. This sector is resilient in the face of even a global financial crisis because frequently, these companies do not have high financial leverage. (Caveat: In recent years, it has become less true in the US and Europe) 

What is 3M really? It is a deep physics, chemistry and material science company. Everything they do is about manipulating the atoms and molecules of nature to create functional materials that we can use in our daily lives.  

With each passing year, 3M piles on more patents, a bigger library of chemicals and processes, more knowhow. All this knowledge is cumulative. The company is now 115 years old. All that accumulated intellectual property is practically unassailable. There will never be another company like 3M anywhere else in the world. Certain segments of their business can be separately attacked but there will never be another company that can challenge 3M on most fronts simultaneously.  

This is the nature of science and intellectual property. The strength is cumulative over time. In contrast, for real estate companies and banks, big or small has no bearing on vulnerability to debt crisis storms, as we all learnt in 2008. The underlying strength is not cumulative over time, not the way it is for a science and intellectual property company.

 



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Constructive on structural and cyclical growth outlook

Thanks to a subscriber for this report for Deutsche Bank highlighting some of the achievements India has made in improving governance. Here is a section:

 

While the long term structural macro outlook remains unambiguously positive, we think India is also poised for a cyclical upturn in growth, and that the worst of the growth-slowdown, caused by temporary disruption and technical factors related to external trade, is behind us. The economy has already started to stabilize post GST and high frequency indicators are showing a rebound, which should eventually reflect a recovery in July-Sep’17 GDP growth (DB estimate 6.4%). While we expect growth to average around 6.6% during FY18, we are more optimistic about the outlook for FY19 and beyond.

We also note that growth momentum generally improves in the year prior to the elections (India’s next general elections are to be held in May 2019 or earlier), which is likely to play out in this cycle as well. We think given the various reforms that are operational at this stage and that have been implemented by this government so far, it is reasonable to expect growth to return close to 8.0% by FY20, absent any external shock that could jeopardize this baseline outlook.



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Alibaba Caps $250 Billion Rally With Accelerating Sales Growth

This article by Lulu Yilun Chen for Bloomberg may be of interest to subscribers. Here is a section:

Alibaba Caps $250 Billion Rally With Accelerating Sales Growth – Alibaba’s “new retail” plan carries a simple premise -- to combine its online merchants with a vast swathe of physical stores now divorced from the internet, stripping out layers of profit-sipping middlemen and boosting Alibaba’s e-commerce in the process. Those outlets double as storage and delivery centers.

But the execution involves a battery of expensive and time-consuming investments: buying into department stores such as Intime, setting up “smart” grocery stores like Hema, investing $15 billion into expanding its delivery network into remote regions, and enlisting some half-a-million mom-and-pop stores that now serve the countryside.

Alibaba is trying to transform the way retailers large and small manage their inventory based on real-time demand. And drawing more physical customers into its network boosts its own online orders and provides abundant data to target future consumers.



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Deep Dive into Digital Era of Gaming

Thanks to a subscriber for this report from Barclays which may be of interest. Here is a section:

Gaming data points available today point to an industry facing challenges: The number of physical games sold in the US has declined every year for the better part of the last decade, the install base of consoles is well below the prior cycle peak, and the physical attach rate of software is below where it was in the last two console cycles. However, this is the old way of analyzing this business and in the new “Digital Era” of video games, the business has shifted from one that is hit-driven and reliant on physical retail to an industry that is largely online (over 60% digital and could arguably shift completely online longer term), more recurring and predictable, more monetize-able, and significantly more profitable. 

When we consider that the number of games sold as digital copies continues to grow at 20- 30% each year, notably the market for console software is actually growing – albeit at a single-digit rate. Add to that, the install base of hardware continues to progress towards 100mn+ HD units and, while the physical attach rate of software is below where it was in the last two console cycles, the focus on deeper engagement and higher player monetization through digital content appears to be largely offsetting the impact of fewer game sales. We remain optimistic that newer hardware including Nintendo’s Switch and Microsoft’s Xbox One X can re-invigorate the market for games and are encouraged by some early trends. US retail sales are tracking up mid-single digits year over year in 2017 and, adjusting for sales of digital games, it appears that the number of games sold each year in the US is stable y/y. 

In the Digital Era, gaming content will always be available and players will have access to games in more ways than ever. The industry will become far more global and fragmented across devices than before, which will increase the potential audience for gaming content substantially. We are cautiously optimistic on the potential for traditional video game publishers to further penetrate the rapidly-growing markets in China and on Mobile, however, and we remain on the sidelines regarding the emerging interest in eSports and VR. Nonetheless, we still believe the value proposition of games remains very high relative to other forms of media and we are encouraged that the new revenue TAM in the Digital Era is dictated only by the amount of time players have to engage with games, rather than by the number of consoles in their hands.

 



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Email of the day on investing in Africa

Thank you for a very informative big picture on Friday. Do you know of any fund managers that are investing in Africa with good track records for us to consider investing with?



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Chinese EV market nearing 2% penetration

This article from mining.com may be of interest to subscribers. Here is a section:

In 2016 Chinese electrical vehicle makers represented 43% of the global EV market, or 873,000 units, overtaking the United States for the first time, according to a July report by McKinsey & Company. The report notes that not only did China up its share of the EV market by 3% compared to 2015, it also made gains on the supply side of EVs including components such as lithium-ion batteries and electric motors. "One important factor is that the Chinese government provides subsidies to the sector in an effort to reduce fuel imports, improve air quality, and foster local champions," McKinsey explained.

The Chinese government has announced that "new energy vehicles" (NEVs, which includes hybrids) should account for 8% of the passenger vehicle market by 2018, 10% by 2019 and 12% by 2020, according to EV Volumes.com.



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Missile Defense: Money Well Spent; Budgets Unlikely to Stay Flat

Thanks to a subscriber for this report from Deutsche Bank which may be of interest to subscribers. Here is a section:  

The threat from expanding missile technology by potentially adversarial nations is on the rise and has been since the early 2000s (see Figure 3). The most visible signal of that being the acceleration in missile technology breakthroughs and launches by North Korea. On the back of this accelerating tension is a rising tide of political support. A bipartisan call for higher missile defense spending seems to be gaining traction, with the "Advancing America's Missile Defense Act of 2017" gaining 27 cosponsors in the Senate (21 Republicans, 5 Democrats and 1 Independent) introduced in May 2017. The bill laid out a few points for its rallying cry, but in particular drove home that a 23% decline in Missile Defense Agency budget since 2006 (while Iran and North Korea activity was going in the opposite direction) needed to be corrected. In the Bill, there is explicit language to: 1) increase the number of ground-based interceptors (by 28 with expansion to 100 interceptors vs. the 44 scheduled to be in place at the end of 2017, 2) reintroduce the development and deployment of space-based missile defense sensors (e.g. Space Tracking and Surveillance System--STSS), and 3) evaluation and testing of radar and sensors for the ground-based midcourse systems (e.g. LRDR) as well as the system as a whole (for which testing funding has declined over 83% since 2006). More additions are possible following recommendations from the Department of Defense's upcoming Ballistic Missile Defense Review ("BMDR") and Missile Defeat Review ("MDR"). Even more near-term, the DoD this week released details of a budget reprogramming request for 2017 for over $400M ~5% of the Missile Defense budget) toward previously unfunded missile defense efforts consistent with the desires laid out in the "Advancing America's Missile Defense Act of 2017". 



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Catalan Independence Drive to Haunt Madrid Whatever Happens Next

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

Catalonia, which includes Barcelona and accounts for a fifth of Spain’s economy, is attempting to become the first of 17 autonomous regions that already enjoy a measure of self-government to hold a binding plebiscite on independence. It staged a nonbinding ballot three years ago that was backed by about 80 percent of voters, though barely 30 percent of those eligible turned out.

The rebel administration is pressing ahead with the referendum even after Rajoy’s government seized 10 million ballots, deployed thousands of police and arrested more than a dozen Catalan officials.

“This is the most serious constitutional crisis Spain has faced,” said Alejandro Quiroga, professor of Spanish history at the University of Newcastle in the U.K. “The Catalan question could trigger a competition among the other regions to test how far they can go. It’s a very complex matter.”

 



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