Thanks to the orchestrated bullishness of a dozen Wall Street sell side analysts and the mother of all short covering rallies, Uber has managed to claw back its losses from 38 to its IPO offer price of $45 though the latest management disaster and sacking of Dara’s handpicked COO and marketing lady wunderkind will slam the shares tonight. Uber has also benefited from a short covering rally from when it was 18% underwater below its IPO price and the bullish bid in the stock market on hopes Trump exempts Mexico from tariffs while Fed Chairman Powell would respond to a economic slump with 50 basis points in policy rate cuts. While Uber’s first earnings report beat Street consensus, the ugly fact remains that Uber once again lost $1 billion in the last three months and is on the precipice of a price war with Lyft/revenue sharing dispute with its own drivers. I am skeptical about the bullish cheerleading from banks who were members of the Uber IPO underwriting syndicate. No institutional Mamma admits her baby is born ugly!
Uber is uber-expensive for a firm that trades at 6 times revenue and will lose at least $1 billion every three months in 2019 and 2020. Amazon, an infinitely more attractive global E-commerce/cloud franchise, trades at just above 3 times revenues – and Amazon does not face cutthroat competition from Lyft, Didi, Grab, Yandex Taxi, Ola etc. The political wind is also stacked against Uber as populist/leftist municipal governments in the US, Europe, UK and Latin America will impose higher wages for drivers, as New York City just did. Uber cannot remotely compete with Waymo, Tesla and Apple in the Darwinian economics of driverless cars. I see no reason to change my view that Uber shares will fall to 30 – 32. This is a strategic short.
I instinctively grasped that Beyond Meat would dramatically change the carnivore culture of humanity in the US and become a global sensation for animal lovers/vegans/environmentalists/millennials/Buddhists/Hindus and Jains. The ethical treatment of animals is a cause core to my being so I became a cheerleader for Beyond Meat, though I know nobody in the UAE who was allocated shares in the $240 million IPO in early May. The IPO offer price was $25 and Beyond Meat is up 400% in only a month, making it one of history’s fairytale investments. I profiled the deal in my newspaper/online financial market website columns/LinkedIn just after the IPO. What now?
Beyond Meat surged 38% after CEO Ethan Brown blew away the Street’s best and brightest on his conference call. Even though the firm forecast a mere $210 million in 2019 revenues, Brown spoke about the sheer scale of his growth runway and his innovative Manhattan Beach Project, echoes of Robert Oppenheimer and the Manhattan Project to build the atom bomb that incinerated Hiroshima/Nagasaki, a curious analogy for a company dedicated to save the lives of animals!
Beyond Meat trades at more than $8 billion valuation at 138 as I write, its 38% post earnings rise due to a quintessential short covering squeeze, not fresh accumulation. I would short the shares here for a 105 target or at least not buy this puppy at these nosebleed valuations. This IPO is phantasmagoric, Salvador Dali-surreal, the financial equivalent of Gabriel García Márquez’s magical realism. Net-net, only a masochistic nutcase would buy the Beyond Meat IPO at 138. Beyond Meat at these levels is at the epicenter of a speculative mania, like Dutch tulips in Rembrandt’s Amsterdam, Kuwait’s Souk Al Manakh and the dotcom bubble. This bubble will burst. The shares could easily lose half their value but the business will endure, grow, globalize even if the shares fall to 60, when I promise I will write another column on this IPO!
I had profiled Lucking Coffee Inc. ADR, China’s wannabe Starbucks and predicted $14, well below its $20 IPO offer price, as a credible accumulation zone. After a 50% pop on its first trading session, the Luckin IPO plunged to 13.6 as the financial markets went ballistic once US-China trade talks broke down. Eerily enough, this was just below my accumulation zone. The shares then soared from 14 to 21 and now trade at 19 as I write. An IPO with a 13.71 – 25.90 range in its first months as a public company is not exactly meant for widows, orphans and those without abdominal fortitude. Yet I believe this is a strategic investment theme I can buy for the long term – the quest to convert 1.2 billion Chinese from tea to coffee addicts with cheap, takeaway/carry kiosk-shops across the Middle Kingdom is a noble one, unlike the British Empire’s quest to turn the Manchu Chinese into opium (Indian afeem) addicts in the 1840’s. At current price, the Luckin IPO is a triple bagger for $56 target but the ride will be the mother of all gut churning, margin call provoking rollercoasters. But not guts, no glory – or as I learnt at Penn – no gorii Lol!
My Long Canadian dollar trade idea was a strategic winner!
Published on June 10, 2019
I had a recommended buying the Canadian dollar (loonie) at 1.3450 on May 13, 2019 on my syndicated financial press articles and on my LinkedIn wall. I had explained the macro, relative interest rate spreads and positioning factors that anchored my bullish strategy call on the loonie. Three weeks after publication of this strategy call, the foreign exchange market has vindicated my bullish conviction trade on the loonie. The Canadian dollar closed at 1.3265 on Friday 7 June. This means the loonie trade is almost 2 big figures in the money. Time to take profits? Absolutely not. I am proud of this macro trade idea, not just because it was so profitable but also because the Canadian dollar appreciated while West Texas crude tanked in a vicious bear market since early May, down 22% to $51 a barrel.
There are myriad to expect further appreciation of the Canadian dollar to my 1.30 – 1.31 target. US Treasury-Canada government bond spreads have dramatically narrowed in the loonie’s favour. US May payroll growth of only 75,000 contrasts with strong Canadian relative economic data momentum. Bearish short loonie positions on the Chicago IMM futures pits have fallen dramatically. Risk-reversals in the foreign exchange options markets suggest the loonie bulls in the smart money constellations have begun to assert their impact on options pricing.
Even crude oil could be a positive catalyst as Saudi Oil Minister Khalid Al Falih is “certain” that Russia will agree to extend the OPEC plus cuts at the OPEC ministerial meeting in Vienna later this month. Above all, there is a renewed bid in the Euro despite Mario Draghi and a renewed bid in sterling despite the prospect of Prime Minister Boris Johnson, the no-deal Brexit snake oil salesman who is the front runner in the Tory leadership contest to succeed Theresa May.
The resolution of the Mexican tariff fiasco will be positive for the Canadian dollar, which is also positively correlated to risk assets and the S&P 500 index/NASDAQ. The Canadian dollar is undervalued on most bank econometric equilibrium models. Ironically, the loonie’s correlations with West Texas plunged after crude oil surged above $60 in March/April and did not rise even whom WTI tanked in May and early June. This is a game changer data point for loonie bulls on Planet Forex such as moi! Wall Street expects two Fed Funds rate cuts (50 basis points cumulative) at the July and September FOMC conclaves while the Bank of Canada will keep policy on hold. This means it makes strategic sense to be a loonie El Torro in June for a fair value target of 1.30. It is never prudent not act when Mr. Market misprices an asset and offers me a gift. The Canadian dollar at 1.3450 was such a gift and I decided to share it with my friends and readers in a profitable strategy call.
The loonie has now closed above its 1.3276 200 day moving average. The message of the charts is crystal clear, fade any rally in the buckeroo! New money who did not act when I published my strategy idea at 1.3450 can position to go long Canada on any pullback to 1.3340. Good luck, or in deference to my son Sarie who just graduated from McGill University in Montreal, bon chance!
President Trump’s decision to suspend tariffs on Mexican exports to the US means the Mexican peso becomes a compelling buy on Monday. As Mexican dictator Porfirio Diaz once lamented “Pobre (poor Mexico. So far from God, so close to the United States”. The Mexican peso’s one-week implied volatility has spiked to 45, the highest in the world.
The Mexican peso was slammed last week after Moodys cut the outlook for its sovereign debt rating from stable to negative while Fitch reduced its rating from BBB+ to BBB. Fitch’s downgrade was based on government oil monopoly Pemex’s dismal credit trends, not just Trump’s tariff threats.
In any case, the Mexican peso is a buy at 20 for a 19 target. Selling one-week implied volatility Mexican peso puts at 45 is a trade guaranteed to print mucho dineros. Hola Jefe!
The coming 25% fall in India’s Nifty index as the shadow banking crisis goes systemic!
Published on June 8, 2019
Amid the triumphalist euphoria over the BJP’s landslide win in the 2019 general election and the political death rattle of the Nehru-Gandhi dynasty’s Congress, the risk of a financial market blowout in the world’s darling emerging market has gone systemic. I am now convinced that India’s BSE Sensex/Nifty index can fall a vicious 25% this summer or autumn. The jewel in the crown will become the time bomb in the tiara. Why?
One, India’s GDP growth rate hit 8% in spring 2018 but slowed alarmingly to 6.5% by December 2018 and as low as 5.8% in the first quarter of 2019, even lower than China. This is bad news for the India bulls since consumption, capex and exports are all slowing in unison. The slowdown in retail sales has accelerated to a mini-crash. For instance, April car sales fell by a shocking 17%.
Two, Dewan Housing Finance just missed a bond payment and had its rating slashed to default by Cresil. This means the Modi government now faces a shadow banking crisis, a “Lehman moment” that will trigger contagion across asset classes and stock market sectors since so many corporate bond funds will be forced to slash their NAV and sell their bond holdings as dozens of shadow banks without access to the RBI’s lender of the last resort liquidity window fail. In retrospect, the IL&FS debacle last September demonstrated that Indian finance had hit an iceberg that has now morphed into potential macro Armageddon, the new BJP Finance Minister Nirmala Seetharaman simply does not have the international stature or contacts to inspire confidence in Wall Street or the global capital markets, given her mediocre performance as Commerce Minister and a BJP spokesperson – Sarah Huckabee Sanders as Treasury Secretary would not exactly make “Davos Man” turn cartwheels with joy!
Three, the BJP will learn the steep price of protectionism for the Indian domestic market as Trump threatens to impose punitive tariffs on Indian exports to the US. The BJP has a bigoted, small town teawallah, petit bourgeois hostility towards India’s English-speaking liberal elites who run its globalized businesses. The RSS, whose gunmen assassinated Mahatma Gandhi at Birla House all those years ago, are not exactly welcoming to Western multinational corporations. Vietnam and Thailand, not India will benefit from the reconfiguration of China based corporate supply chains.
Four, India faces a youth unemployment crisis that evokes the License Raj era social distress of the late 1970’s. This will force the BJP to expand public sector spending and widen social safety nets, at the cost of slippage in its fiscal deficit targets. The ugly truth is that India’s economic reform era since 1991 has simply failed to create an export-oriented mass market manufacturing sector that could replicate the Asian Tigers’s success in the global marketplace. Unlike Japan in the 1960’s, South Korea and Taiwan in the 1970’s, Hong Kong and Singapore in the 1980’s, Indian business has simply not succeeded on the global stage in manufacturing other than IT services. In fact, Indian oligarchs routinely move their production and factories offshore.
Five, India’s central bank has been far too restrictive in monetary policy at a time of genuine distress in the housing finance/shadow banking system, the post-rupee demonetization property market and the gutted state owned bank lending binge. It amazes me that India has some of the world’s highest real interest rates when its near bankrupt finance/banking sector argues for negative real interest rates.
Of course, now that the BJP has snuffed out the RBI’s political independence by sacking two internationally respected governors Dr. Raghuram Rajan and Dr. Urijit Patel, its RSS apparatchiks in the central bank will eventually be forced to slash interest rates. Yet this will mean a catastrophic plunge in the Indian rupee, possibly down to 90 – 95 against the US dollar as the repo rate is slashed to 1%.
Six, Indian equities trade at stratospheric valuations relative to the MSCI emerging markets index, which has been brutally derated since late 2017 due to US-China trade tensions, King Dollar and contagion risk in Argentina/Turkey from 13 to 10.4 times forward earnings. Yet a stock market trading at a growth multiple well above 22 times earnings cannot survive the traumatic escalation of shadow banking risk. Non-bank finance companies, after all, have been a critical component in Indian loan growth and economic optics.
Seven, the Dewan Housing Finance Corp default on June 4th is the tip of the iceberg and sets in motion a financial implosion whose endgame will be a spike in borrowing costs and the virtual seizure of Indian bond markets, mutual fund industry and banking system. Is this scenario remotely reflected in Nifty’s 11850 levels as I write? Absolutely not. I am no Cassandra on India. Au contraire. In 2002, after a trip to Mumbai and Dalal Street, I published an article in a Dubai newspaper that the Sensex could well triple to 10,000 from its then 3000 and chump change level. My Indian friends thought I was bonkers but I was only discounting the valuation impact of a Darwinian industrial restructuring in the late Vajpayee era. In any event, the Sensex rose from 3000 in 2003 to 21000 in early 2008 before its epic 60% fall in the global financial crisis. I sense a similar ursine trap now. Indian grizzlies are nasty killers of leverage punters. Economic growth has fallen to a five-year low. The RBI is clueless and behind the curve. The Jet Airways default was a disaster. The state-owned banks have been gutted by decades of corruption, mismanagement and political theft.
Anil Ambani’s (sadly another Wharton guy bites the dust) precipitous fall demonstrates how so many Indian business empires are leveraged Ponzi pyramids. Bollywood’s Eros Media has its ratings slashed ten notches to default. My call? Get smart. Get real. Get short. Banking crises always end in tears and I will carry the trauma of Lehman Brothers to my grave.
The world’s hottest property investing themes
Published on June 6, 2019
Real estate equities are the best performing sector on Wall Street in 2019, with the benchmark Nareit index up 17% as I write. This is no surprise. The financial markets have bid up the valuations of sectors with no exposure to US-China trade tensions. The plunge in the US Treasury yield curve has been a steroid shot for real estate investment trusts (REIT’s) as it reduces their costs of borrowing and raises the present value of their rental portfolio cash flows. A 4% plus yield is compelling in a world when the yield on the ten-year US Treasury note (and the S&P 500 index) is 2.10%. Fed Fund/Eurodollar futures markets now price in a 50 basis point rate cut in the July or September FOMC conclaves. Refugees from FANG shares terrified about the antitrust sword of Damocles over Google will continue to rotate to real estate.
After all, the US economy’s 3% GDP growth, Goldilocks inflation, 50-year lows in the unemployment rate and robust wage growth anchor smart money flows into real estate equities. Yet I must warn my readers that valuations are no longer dirt cheap. Some property markets face a supply glut or secular decline (suburban shopping malls as 70,000 stores close) and individual names can be gutted due to mismanagement or excessive leverage even in a bull market. Real estate is unquestionably not a defensive, low beta sector, as some of its acolytes contend.
While my bullishness on US REIT’s since December 2018 has been vindicated, I am far more selective about specific property micro-markets, investment themes, corporate balance sheet leverage and acquisition strategies. As always, my focus remains on the hottest growth segments of the world property markets – data center, E-commerce, senior housing and refrigerated warehouses/cold storage. These are sectors which simply do not exist in the GCC stock exchanges, where illiquid brick and mortar real estate will continue to fall in prices as rents decline, expat tenant demand contracts, geopolitical risk rises, chronic supply gluts define most segments and exorbitant service charges fleece investors. Dumb money that pays 50% developer profit margins is destined to hemorrhage money in the brick and mortar off plan Ponzi rollercoasters of the Gulf. That much, at least, is certain.
Technology is redefining the economics of property investing, as it is has done since the invention of the telegraph, the internal combustion engine and the automobile in past centuries. Big Data, driverless cars, robotics, E-commerce, E-mobility, artificial intelligence etc. will all have a seismic impact on property investing in the next decade.
I have long been an investor in global data center REIT’s listed in New York. Why? The tenants in Big Tech are the crème de le crème of Silicon Valley’s corporate credits. Huge upfront infrastructure costs makes supply limited and complex fit outs mean long life leases with rent escalation clauses embedded. After all, a data center landlord needs to provide world class fiber optics networks, the digital back bone of E-commerce and cloud computing. This is an oligopolistic industry with only six listed companies that dominate the global data center market.
In property investing, I detest generic sectors with no barriers to entry, pricing power or insulation from inevitable supply gluts – like homes and offices. Retail? As obsolete as horse carriages, black and white TV and brontosaurus. This is a lesson leveraged punters learnt the hard way in the GCC brick and mortar property bear market. This makes data center REIT’s irresistible to me, where landlords can raise prices, tenants cannot leave and growth metrics are viral. In economics, natural oligopolies always print long term cash for investors especially as new cyber-security protocols raise barriers to entry. Net operating income for a well-managed data center REIT is one third its construction/fit-out cost. This property micro-market can well deliver 15-20% CAGR in the next decade, as it has done for me since 2013.
Senior housing is another no-brainer growth theme in property investing. The 76 million US Baby Boomer generation, the biggest, richest cohort in human history, has begun to retire. The “golden oldies” (aged 65 or over) population will double in the next two decades, as happened in Japan. This makes a compelling argument to invest in senior housing landlords.
Industrial/logistics REIT’s are also a no brainer in the Age of Amazon, the Death Star of retail stores and retail brands worldwide. I have made no secret of my attraction to Prologis, the world’s largest listed industrial REIT that owns 780 million square feet of state-of-the-art logistics/warehouse assets.
Americold Realty (symbol COLD) is up 50% since its IPO in 2018. COLD is a red-hot property theme as there is a chronic shortage of refrigerated warehouses worldwide. This is a stellar 25% margin business. Amazon-Whole Foods and food delivery services make this a secular growth puppy. If space was the final frontier for Star Trek, online groceries (2% now, 15% of all goods in a decade) is the final frontier in E-commerce. Cold storage is a play on the consumer backlash against food preservatives and non-organic food that only benefits oncologists. The average US cold storage warehouse is 34 years old at a time when demand is set to surge for cold storage real estate – hello? We sure wuz born at night – only not last night!
Prime Minister Bo Jo and the sterling bulls
Published on June 5, 2019
The old Westminster axiom that “all political careers end in failure” certainly holds true for Theresa May, whose last official act was to host (what cannot be cured must be endured!) President Trump on his state visit to Her Majesty’s sceptered isle by the silver sea. London bookies give 2 – 1 odds for Boris Johnson (Bo Jo) to win the crowded Tory leadership contest and thus become the First Lord of the Treasury/the next UK Prime Minister. This prospect does not surprise me. After all, Johnson is the darling of the Conservative Party membership in the shires and most MP’s believe, despite his political opportunism in the Leave campaign and monumental gaffes as Foreign Secretary (the wankera from Ankara – wicked LOL!) the former mayor of London is the only Tory leader who can beat Jeremy Corbyn in a general election.
His legacy as an empathic One Nation Tory who helped London host the 2012 Olympics, reinvented public transport and sought amnesty for illegal immigrants is nothing to be ashamed about. Johnson studied classics at Oxford and can electrify the House of Commons with his wit and intelligence in the Charles Fox/Winston Spencer Churchill parliamentary tradition. He is the perfect antidote to the grey, boring grandees of the Tory party, geriatric male versions of Theresa May. Unlike his fellow Old Etonian David Cameron, Johnson can even mesmerize the hoi polloi with his ideas, sloppy goofiness and sunny message.
It is no coincidence that sterling plummeted from 1.3170 to 1.2550 after the City of London cottoned on to the new political reality in Westminster – that Mrs. May’s tenure in office was over and Boris Johnson, with his nonchalance over no deal Brexit, would be the next occupant of 10 Downing Street. Yet the financial markets, as usual, have miscalculated the paradoxical idiosyncrasies of British politics. Bo Jo is the ultimate pragmatist, a master of political reinvention and parliamentary piffle paffle. He knows that the UK cannot afford the trauma of a no deal Brexit. So his first act will be to announce that he will fly to Brussels to negotiate a trade deal before the October 31st deadline to leave the EU. Unlike Mrs. May, Boris Johnson has the intellectual flexibility to forge a deal acceptable to both the Tory elite in Westminster and the EU’s nomenklatura in Brussels.
Nigel Farage’s rampage in the European parliamentary elections only reinforces the urgency of the Conservative Party to rally around an inspirational, charismatic leader – and Jeremy Hunt, Saqib Javid and Michael Gove simply cannot hold a candle to Bo Jo. If Johnson fails to negotiate Brexit, Jeremy Corbyn’s doctrinaire socialists could well govern Britain, a catastrophic scenario for global investors. If the political arithmetic in Westminster or the tough love obduracy of the EU necessitates, Boris Johnson will not hesitate to call for a general election and a new referendum.
The US Dollar Index’s failure to scale its triple top highs at 98.30 have given a bid to the British pound. While sterling has risen from four month lows against the US Dollar, it is also a victim of Wall Street’s risk aversion spasm, the escalation of the US-China trade war and rising geopolitical risks in the Middle East.
A no deal Brexit scenario means sterling can well fall to 1.18, the Singapore flash crash lows in October 2016. However, if Johnson makes a bold declaration of intent to negotiate a trade deal with the EU, we could see the mother of all sterling short covering rallies. I expect the US Dollar Index to test its 200 day moving average at 96.40 in any case as US Treasury-JGB yields and thus dollar-yen collapses on Fed rate cut expectations. This means it is time to buy sterling at 1.26 for a 1.32 target, albeit (comme toujours!) with a tight stop. June in England? The Tories are in power, the Queen’s at Ascot, all’s well with the world.
US-British geopolitics also make me an embryonic sterling bull. Trump promised the UK a “big trade deal” once it leaves the EU but bitterly criticized free riders in NATO who take advantage of the Pentagon/Uncle Sam security umbrella. The biggest free rider in Europe is, of course, Deutschland AG, which spends a mere 1.25% of its GDP on defence and uses its weak Euro to become the world’s second largest exporter after China. This means Trump will impose 25% auto tariffs on German exports but exempt the UK, a game changer scenario for post Brexit sterling. If Bo Jo is anointed First Lord/PM, as Trump wants, expect Washington to support “the greatest alliance the world has ever known”.
Sterling punched above its weight in international finance due to legacy of the British Empire, the North Sea oil bonanza and the City of London’s role as a magnet for global capital since the Thatcher era privatizations of British state assets. It could regain its lost allure in a Trump-Bo Jo bromance!
