Blain’s Morning Porridge – October 14th 2019
“Give away 28 points to Japan, and you deserve to struggle.”
I watched one of the most startling and exciting games of Rugby on Sunday. Japan rewrote the rules – they deserved the win and progression in the World Cup. Their exuberant play reset everything we thought about the order of the Rugby World – I’ve already put money on them to thrash South Africa. After being stunned into a coma for the entire first half, Scotland played Scots rugby: inspired yet conservative, lots of phases but going backwards and losing ground, too many optimistic forward passes and multiple errors, fast but leaden, and they lost. Watching Japan was like watching an Indiana Jones movie – every time a Scot got a whiff of the ball, the Brave Blossoms were all over him like Army Ants. It was relentless and remorseless. Japan has become a rugby power.
My son summed it up best: “Fantastic Game, Crap Result.”
Back on Planet Market:
Not a big surprise to read that Softbank is going to take over Wee-Work to ensure its financial viability over the medium term – and to get some cash from JP Morgan. That’s going to be an aggressive work-out, putting the financials of the over-levered borrowed-long, lent-short company into some form of order. The consequences on the property sector and users could be significant.
In the wake of the dramatic floundering of Wee-Work, it/s going to be another pivotal week for the stock market – and the key name to watch will be Netflix. The US streaming behemoth innovated the streaming revolution. It’s been spending billions on new programming, hiking its subscription charges, and raking up the losses. Sound familiar? It will report Q3 numbers on Wednesday.
Why is it so critical? Netflix – already down 20+%, is likely to confirm the “profits don’t matter when you are building market share in a disruptive market”model is dead. The future valuations of all the disruptive tech unicorns are on the line. As many analysts warned (including me) they are proving to be irrational bull-market plays – spend billions now to attract customers and justify the ultra-high valuations with some techno-babble about how the customer behavioural information they garner is valuable.
The value of data is certainly true to a degree – the information Tesla has garnered from its integrated reporting from its cars is exceedingly valuable in terms of machine learning for driverless cars. Knowing what viewers watch, and being able to predict what they want to watch next has a clear value in programming and ad terms. But racking up the losses in a market now switching from bull to bear fundamentals doesn’t work any more.
This week’s Netflix numbers could set the new reality. It will show competition was the element everyone ignored. Being a high spending low revenue unicorn really sucks. Last quarter Netflix saw its domestic subscriber base contract. If you look at the top 10 programmes watched by US viewers over half are either super-hero linked or kids programme – guess who is going into competion with Netflix next: Disney. The other half are old programmes owned by franchises intending to launch their own streaming services. And Apple will be next up with its offering – and it plans to eat Netflix’s lunch of sophisticated content.
Watch this space…
Meanwhile, as I perused the papers over the weekend, I realised it’s not just about politics, but it does serve to amuse us. Let’s examine the stories you did not read over the weekend:
The EU and UK are edging towards a Brexit agreement. The latest European proposal retains the difficult word, but offers to make it more palatable by adding a hyphen and presenting it in the form of “Back-Stop”. Boris is willing to accept the less contentious lower-case “back stop”, but Jacob Rees Raving Monster believes a compromise to benefit all parties can be reached by pushing Europe a little harder and they will agree to Ireland being chucked out the EU thus resolving the border issue in perpetuity – he describes it’s a pragmatic return to the status quo of these historically indivisible islands. Jeremy Corbyn has asked John McDonnell where the toilets are.
The reality is everyone hopes for a last minute agreement between Boris and Brussels – but how realistic is any final solution? Parliament would still have to vote on it – and the swing has been towards Parliamentary support for a second referendum. With the Labour party unable to agree on clear policy but undergoing a further swing hard-leftwards, (the Times reports McDonnell has effectively taken control), the chances of Boris winning support for a deal that is basically the Theresa May deal, looks low. An Election beckons, but that takes us into Nov/Dec. Chances of a no-deal Brexit implosion look increasingly likely even though everyone is pretending otherwise. Little chance of the EU agreeing this week, and Oct 30thlooks a second to midnight!
The brutal reality is – Brexit is not going away any time soon.
EU Diplomats in Brussels are terrified of a possible Liberal UK election victory, fearing the worst possible Brexit result – the UK remaining and playing in-out hokey-cokey for the next 50 years.
My Yooropean chums tell me the EU wants the UK to remain in Europe. Really? It’s certainly possible – many soft Brexiteers would probably now vote remain. That won’t change the UK resentments over the EU and the reality a significant number of die-hard Brexiteers will continue to fight to leave, or that the Conservative party has purged its Remainer tendency.
Basically, Brexit is not a simple solution. The Liberal position of staying-in and pretending it never happened is not an option.
Back in ‘Merica… fresh from declaring victory over China in recent trade discussions, Trump’s latest tweets on invading Canada have caused a minor stir. His comments the Canadians are suspiciously close to the Mexicans in their demands for a trade deal, and they weren’t there at the Alamo, have really caught the electorate’s mood say right-wing commentators. Invading Canada ranks high on agri- and rust-belt voters priorities.
The reality is Trump’s Trade Deal last week was a de-escalation of the China trade war before it damages his electoral base too deeply – hence the agreement to hold off further Tariff hikes on the quid pro-quo of the Chinese vice-premier sort-of-saying China will buy more US agri-products. Trump’s intent is to look tough for his electorate and give them bread and circuses. It begs the question – Who does Trump think he is: a strong imperial Caesar? Or is he a bumbling Mussolini?
Back in Frankfurt, Mario Draghi’s final few days in the ECB Bunker see the recriminations continue… “Where did it all go wrong” ask his supporters, while the Bundesbankers dust of their maps of Italy’s state assets..
The great hope for Europe (as per the vision of President Macron), is a new coming together in monetary and fiscal harmony across the Eurozone, with the new fiscally fluent ECB, under his handpicked governor, Christine Legarde, driving the banking union bus. Unfortunately, the Northern Europeans seem to have other ideas. This is going to be the key battle in Europe over coming years – between closer fiscal union vs monetary conservatism. Macron is betting he can win while Germany is distracted under the fading final years of the Merkel chancellorship. The likelihood looks increasingly to be European gridlock.
Lots more to talk about, but out of time, and back to the day job…
Bill Blain, Shard Capital