Steinhoff Disintegrates As Biggest Shareholder Caught In Margin Call "Death Spiral"

The stock of scandal-plagued retailer Steinhoff plunged for the third consecutive day, bringing its total drop in the past 3 days to over 50%, as its biggest shareholder and former Chairman, Christo Wiese, was caught in a vicious margin call, and increased the amount he has raised from selling shares in various related entities such as food retailer Shoprite Holdings Ltd. to 3.3 billion rand ($259 million) as his net worth continues to disintegrate amid the accounting scandal which some - this website included - have likened to a modern-day Enron.

Christo Wiese: largest Steinhoff shareholder and 4th richest South African

Wiese’s liquidation of assets comes as Steinhoff’s stock extended its drop this month to 93%, fueled by the resignation of CEO Officer Markus Jooste after auditors refused to sign-off on the furniture and clothing company’s 2017 earnings.

Things deteriorated two days ago when the company - whose bonds were recently purchased by the ECB - announced its lenders were pulling credit lines, and added that it isn’t yet able to assess the magnitude of financial irregularities disclosed two weeks ago. Steinhoff also said it didn’t know when it would be able to publish audited results for 2017 and 2016, nor whether additional years will need to be restated, prompting the liquidity exodus.

Meanwhile, the liquidations continues as both the company and its shareholders scramble to obtain liquidity to cover securities thay have margined with company assets. Steinhoff, which is run from South Africa but has its main stock listing in Germany, faces a potential fire sale of its global retail holdings as it battles for survival according to Bloomberg. Wiese, the chairman of Shoprite, sold 1.1 billion rand of the grocer’s shares on Tuesday, according to a statement, following the sale of stock worth 2.2 billion rand in the last week.

Weise is caught in a classical - and accelerating - margin call death spiral, where he has to liquidate increasingly more assets to meet liabilities following the more than 90% decline in the value of his holdings in Steinhoff. In other words, the more he sells, the more he has to sell, and as the chart below shows, he is doing just that.

Meanwhile, a unit of Barclays Africa separately applied for liquidation of a company called Mayfair Speculators Pty Ltd., which owns racehorses, property and Steinhoff shares and is linked to former CEO Jooste, Bloomberg reports. Mayfair is being probed by the bank for moving 1.5 billion rand of assets to its holding company in August ahead of information about Steinhoff’s accounting irregularities being released, according to the documents.

And while both the company and its largest shareholders are caught in a "death spiral" which ends with the stock hitting zero, there is still no news whether the ECB has finally sold its Steinhoff bonds which have a distinct chance of ending up totally worthless.

UBS Is Using Ethereum Technology To Soften The Impact Of MiFid II

After devising blockchain-based systems to help facilitate equity and bond trading (remember Goldman’s cryptocoin?) as well as derivatives clearing, some of the leading banks in the blockchain space are banding together to build a system that they hope will help banks streamline another essential function: Compliance.

According to CoinDesk, UBS is leading an Ethereum-based project designed to make it easier for banks to reconcile a wide range of data about their counterparties. Barclays, Credit Suisse, KBC, SIX and Thomson Reuters have also signed on to the project. The project is meant to soften the impact of MiFid II, a set of new European banking regulations that will go live shortly after New Year’s.

Traditionally, regulated firms use what are called "legal entity identifiers" that are stored in a global data system to execute transactions on behalf of clients, even if those clients themselves don"t have one of the codes. But as part of a sweeping regulatory change called the Markets in Financial Instruments Directive (MiFID) II, scheduled to go live in the EU on Jan. 3, 2018, all eligible legal entities will be required to have and use these codes.

 

Instead of mandating that each of these institutions perform these checks independently, though, the banks built Madrec to mutualize much of the effort in a potentially industry-wide reconciliation process hosted in the Microsoft Azure cloud.

In an interview with CoinDesk, Peter Stephens, the head of UBS’s blockchain research and development efforts, explained how the system was designed, and to what end. Surprisingly, out of the many blockchain or distributed ledger projects that UBS is involved with (R3, Hyperledger etc.), Stephens said he expects the compliance project to be the first to go live.

Built over a six-month period, the platform evolved into a smart contract-powered network designed to integrate with identifiers endorsed by The Legal Entity Identifier Regulatory Oversight Committee (LEI ROC) and others. The reconciliation of the LEI reference data includes industry classification and information from the European Securities and Markets Authority (ESMA).

 

Instead of each company checking the information independently, and reconciling the results periodically, the blockchain smart contracts will ensure accuracy in almost real-time.

 

To do this, the anonymized reference data is hashed to the Ethereum blockchain, while the source data itself remains within the institution. The smart contracts then reconcile the data, letting users quickly identify anomalies and reconcile them.

 

Since every eligible entity will be held to those same standards, Stephens argues that helping one another ensure the accuracy of their work will only positively impact their respective bottom lines, leaving room for competition elsewhere.

UBS is hardly the only major European bank that’s investing heavily in blockchain technology. In a presentation obtained by CoinDesk, Christian Nolting, also the bank’s global head of wealth, and Marcus Muller, global head of the CIO office, explained digital currencies and blockchain to their fellow bankers.

In the presentation, the bankers asserted that the  “opportunities associated with blockchain technologies are huge,” and could be fully put into practice within the next few years.

And in what"s possibly one of most grandiose predictions about blockchain"s impact on the global economy, the bankers predicted that roughly 10% of the global gross domestic product (GDP) would be tracked or otherwise "regulated" by a blockchain by 2027.

Read the presentation in its entirety below:

 

Cio Insights Reflections - Cryptocurrencies and Blockchains - Emea - Client Ready by zerohedge on Scribd

 

These Are The 30 Biggest Risks Facing Markets In 2018

Once upon a time, Wall Street analysts had just two things to worry about: interest rate risk and corporate profits - virtually everything else was derived from these.  Unfortuantely, we now live in the new normal, where central banks step in every time there is even a whiff of an imminent market correction (as BofA explained last week), and the result is that nobody know what is and what isn"t priced into the market any more, simply because the market in the conventional sense of a future discounting mechanism no longer exists (as Citi explained earlier this summer).

Which is why, paradoxically, even as the VIX slides to record lows, the number of things to worry about on Wall Street grows longer and longer. In fact, according to Deutsche Bank"s Torsten Slok, there are no less than 30 material risks investors should beware in the coming year, ranging from a U.S. equity correction to a reversal of Brexit to Irish presidential elections, to a "Bitcoin crash," rising inflation, danger from North Korea and results from special counsel Robert Mueller"s probe.

The risks should be thought of “not only as potential VIX-boosters but also as potential sources of faster or slower growth than what we have in our baseline forecast,” Slok explained in his note, which also shows that even without a major risk materializing, the GDP rebound of 2017 is unlikely to persist.

As for the recent surges and drops in Bitcoin, "you wonder where prices will even be by the end of 2017," Slok said during an appearance on CNBC"s Trading Nation broadcast.

Predicting that price swings of the cryptocurrency will remain an issue in 2018, Slok said questions about Bitcoin regulation, transparency and disclosure issues remain unanswered. "It"s mainly because it is something that I think financial markets so far have been discounting as a small issue," Slok said. "We do worry a bit that it could become more systemic, in particular, if the current trends continue into 2018."

But the Deutsche Banker"s biggest worry is understandably a spike in inflation in the coming months. Low national unemployment, growth projections for the nation"s gross domestic product, and other financial measures signal a potential rise, Slok said. As we have reportedly previously, virtually every bank from BofA to Goldman to Barclays has warned that their optimistic forecasts are null and void if inflation in the coming months spikes, forcing the Fed to tighten monetary conditions at a faster pace.

On the geopolitical front, U.S. and global uncertainty about North Korea"s test launches of ICBMs capable of reaching the U.S. mainland and other potential targets could roil financial markets. Slok cited fear that we could have a "further escalation of the situation."

The bank"s worry list, in random order and featuring both upside and downside concerns for financial markets, questioned whether Jerome Powell, the incoming Federal Reserve chairman, will be "politically driven or driven by the incoming data."

Other risks include tests for the Fed"s near chair, the potential replacement of BOJ"s head Haruhiko Kuroda, the ECB announcing its QE exit in Q2, housing bubble bursts in Canada, Australia, Sweden or Norway, a correction in the U.S. stock market where there is a mismatch between valuation and fundamentals, a harder landing than expected for China as economic growth there slows, and many other risks which would all weigh on financial markets.

"Are markets ready for even a small correction?” the Deutsche Bank strategist asked rhetorically, reminding his reads that there has not been one for "a long time."

The full list of 30 risk factors is below.

The Seven Questions Goldman"s Clients Have About "Rational Exuberance"

In mid-November, just days after Barclays released its 2018 equity outlook with the title "Rational Exuberance"...

... Goldman"s David Kostin decided that imitation was the sincerest form of unveiling a non-contrarian year-end forecast, and in presenting his revised S&P price target for 2018 of 2,850 - which accounts for GOP tax reform - "borrowed" the Barclays title for his own year ahead preview...

... despite admitting that valuations have never been higher, thus suggesting that contrary to the title, the exuberance is anything but rational.

To be sure, despite their hyperbolic titles, both Barclays and Goldman simply went with the sellside flow: in fact, in addition to Barclays and Goldman, Wall Street strategists polled by Barron"s said they expect about a 7% S&P gain for 2018 same as basically every single year, according to Sentiment Trader who points out that "they"re not stupid, they go with the base rate." Indeed, there is power in numbers, because if everyone is wrong about the year ahead, it is the same as nobody being wrong, something Wall Street discovered in 2007.

And yet, with not one but two banks mangling Alan Greenspan"s infamous words to justify their late cycle bullish outlook which both admit is not deserved on a fundamental basis, Goldman"s clients remain confused, and in his Weekly Kickstart, Goldman"s chief equity strategjst David Kostin writes that he has spent the last two weeks meeting with investors to discuss his outlook for US equities in 2018, including the impact of tax reform.

"Our Nov. 21 report, entitled Rational Exuberance, describes our expectation that 14% EPS growth, driven by healthy economic growth and a 5% boost from tax reform, will lift the S&P 500 index to 2850 by year-end 2018 (+8%)."

While it will hardly come as a surprise, Kostin confirms that as we reported last week most investors remain exceptionally bullish despite the all time high in the S&P and despite record valuations, instead betting that the Fed will always step in to keep the upward mometum in risk assets; still while "most clients agree with our bullish sentiment but they questioned several of our specific views."

Below Kostin addresses seven of the most common investor questions prompted by his forecast, or specifically the things Goldman"s clients think is irrational about "rational exuberance.":

1. How can you be “rationally exuberant” about the path of US stocks in 2018 when equity valuations are so high? Although the median S&P 500 stock trades in the 99th historical valuation percentile, valuations are typically poor indicators of short-term returns. Moreover, in contrast to the “irrationally exuberant” market of the late 1990s, today’s equity valuations are justified by a macro environment of extremely low rates, modest inflation, high corporate profitability, and a stable economy. Nonetheless, earnings growth, rather than higher valuation, drives our 2018 forecast. 

 

 

2. If the out-of-consensus US Economics forecast for the Treasury yield curve is wrong and rates stay low in 2018, could equity valuations rise further? The “melt-up” scenario of a forward P/E that rises to 19x or 20x is possible, but unlikely. Our forecast for a stable 18x forward P/E multiple at year-end 2018 assumes the economic expansion continues, ROE rises, and the equity risk premium (ERP) narrows. However, in contrast with market pricing (2 hikes) and almost every client we have met (2 or 3 hikes), our economists expect the Fed will raise rates four times next year as the labor market tightens and inflation firms. A rising term premium should lift the 10-year Treasury yield to 3.0% and restrain further P/E multiple expansion.

 

3. Why did you downgrade the Information Technology sector when it has twice the sales growth and twice the margins of the rest of the S&P 500? The Tech sector’s low effective tax rate (19% vs. 26% for the S&P 500) means it has little to gain from tax reform. Recent performance supports our view. Regulatory risk is another reason for our downgrade. However, we recommend a Neutral weight (24%) in the sector due to strong fundamentals. Investors with sufficiently long investment horizons may find policy-driven weakness an opportunity to add to positions in the sector’s strongest secular growth constituents, which we believe remain attractive. We recommend overweight positions in Financials and Industrials. Both sectors pay above-average effective tax rates and are likely beneficiaries of tax reform. In addition, each sector has fundamental tailwinds such as deregulation and rising capex spending that should boost earnings in 2018.

 

4. Following value stock outperformance during recent weeks, do you still recommend growth as a style in 2018? Concentrated positioning and correlation with the Technology sector are clearly short-term headwinds to growth stocks. In fact, the  acceleration in already-strong US economic activity should have led value stocks to perform even better than they have during the past several months (Exhibit 2). However, our economists’ forecast of 2.5% US GDP growth in 2018 portrays an economic environment typically conducive to growth stock outperformance and suggests that our sector-neutral growth factor should fare well during the course of the year.

 

 

5. Is the equity market already pricing the full impact of tax reform? The prediction market shows roughly 80% odds of passage. Equity market indicators such as Altaba (AABA) and our High Tax Rate basket (GSTHHTAX) send broadly similar signals. However, lingering uncertainty regarding both the provisions that will be included in the final legislation as well as the potential impact of several proposals, such as limiting interest deductibility and the treatment of cross-border transactions, suggest more rotation at the industry and stock levels remains in store.

 

 

6. What does the Senate proposal to delay the tax rate cut until 2019 mean for S&P 500 earnings and performance? The delay in rate cut until 2019 will save roughly $140 billion in government revenue but weigh on 2018 EPS as firms face several base-broadening provisions without the offsetting benefit of the rate cut. However, we expect the net 5% boost to future earnings will be unaffected, as would our 2019 EPS estimate of $158. The likelihood that companies pull forward capex and other expenses into the higher-tax year of 2018 may even boost economic activity and provide a net 2019 earnings benefit to S&P 500 companies beyond our current f orecast. In total, particularly against a backdrop of low discount rates, we expect little impact on stock performance from a potential delay in tax cut.

 

7. How big a risk to EPS is the Senate’s proposal to limit interest deductibility at 30% of EBIT? The proposal would have a minor impact on S&P 500 firms but pose a greater risk to more highly-levered small-caps. Consensus 2018 estimates show 5% of S&P 500 constituents but 15% of the Russell 2000 paying interest expense above 30% of EBIT. However, the proposal suggests incremental downside risk to buybacks and credit issuance as companies adjust corporate structures in response. In addition, the pro-cyclical proposal would have a much greater potential effect on US firms in environments of higher rates or weaker earnings; the current ratio of S&P 500 interest expense to EBIT is nearly the lowest in at least 35 years.

 

Finally, for those who have missed the barrage of year-ahead outlooks from Goldman in the past two weeks, here is a summary of what the world"s most influential bank believes will happen in the next 12 months: "We forecast the S&P 500 index will rise by 8% to 2850 by year-end 2018. EPS will benefit from tax reform and climb by 14% to $150 while the forward P/E multiple remains stable near 18x. Growth style will prevail over value and Industrials and Financials will outperform while Consumer stocks lag. Thematically, we prefer firms that prioritize investing for growth via capex and R&D. Most clients agree with our bullish sentiment but they questioned several of our specific views. Investors have a less hawkish view than Goldman Sachs economics on the bear flattening of the yield curve and implications for equity valuation and continue to focus on the implications of tax reform."

Amazon Strikes Again: CVS To Buy Aetna For $69BN In Year"s Largest Deal, "Reshaping Health Care"

A deal that was months in the making is finally official, with Aetna"s board of directors approving on Sunday the health insurer’s sale to drugstore chain operator CVS Health Corp for approximately $207 per share in cash and stock, in a deal worth $67 billion, multiple news sources reported on Sunday afternoon. The purchase price represents a premium of 29% to where Aetna shares were trading before the WSJ first reported that the two companies were in talks in October.

The deal will be this year’s largest corporate acquisition, and in combining one of the nation’s largest pharmacy benefits managers (PBMs) and pharmacy operators with one of its oldest health insurers, will "reshape health care" by bringing a large insurer and a big provider of pharmacy services under one roof.

According to the agreed terms of the deal, which will be announced later on Sunday, Aetna shareholders will receive $145 per share in cash and 0.8378 CVS Health shares for each Aetna share. According to Reuters, "Aetna shareholders will own about 22% of the combined company, while CVS shareholders will own the remainder." As part of the acquisition, three Aetna directors, including Aetna’s Chairman and CEO Mark Bertolini, will join CVS’s board of directors. After the deal closes, Aetna will operate as a separate unit run by members of the current management.

The acquisition will be financed with a mix of cash and debt. Barclays, Goldman Sachs and Bank of America have committed to provide $49 billion of financing, Bloomberg reported.

With Aetna currently employing 49,500 while CVS has 204,000 full and part-time employees, the combined company will boast a quarter million workers, if only for the time being. The deal, which is expected to close in the second half of 2018, will create cost savings of about $750 million, which means tens of thousands of layoffs.

Some more on the companies" background: CVS, with annual revenue of $178 billion, is a major pharmacy-benefits manager in addition to its vast collection of drugstores, some of which already have retail clinics. Aetna, with revenue of around $63 billion, is the third-largest U.S. health insurer, providing coverage to around 22.2 million members enrolled in employer, Medicare, Medicaid and other plans.

The deal comes as healthcare payers and pharmacies are responding to rapidly changing factors, including Obamacare, rising drug prices "and the threat of competition from online retailers such as Amazon.com", Reuters noted. In fact, as Morgan Stanley pointed out two weeks ago, Amazon"s imminent entry into the healthcare sector has been cited as one of the primary catalysts behind the AET/CVS deal:

As a reminder, this is how Morgan Stanley summarized the rationale behind the just announced merger:

Drug retailers have the most opportunities to adjust their business models and lower cost structures to defend against Amazon. Within the drug supply chain, the threat of Amazon’s entry into drug retail is accelerating vertical integration, and is cited as a driver behind the rumored CVS/Aetna merger. In our view, the combination would diversify profits away from the supply chain, help create a narrow preferred network, and act as a first step in repurposing the retail footprint to create a new healthcare-retail delivery model. If drug retailers don"t change  this model, we estimate ~10% risk to profits. CVS has also announced free same-day delivery in New York City, proactively preparing for a potential Prime Now entry, in our view.

As a result, the deal “feels more defense than offense,” Ana Gupte, an analyst with Leerink Partners LLC, said recently. In Aetna’s case, “I don’t see a path to growth” in its current configuration, she said.

“One of the problems with the health-care system is it’s so fragmented and there’s so little coordination,” Bessemer Ventures" Steve Kraus told Bloomberg. “A better vertically integrated less-siloed system is a good thing in my mind.”

In this context, Reuters points out that CVS plans to use its low-cost clinics to eventually save more than $1 billion per year on health care costs for Aetna’s roughly 23 million medical members. It adds that a combined insurer and PBM will also likely be better placed to negotiate lower drug prices, and the arrangement could boost sales for CVS’s front-of-store retail business.

It"s not just imminent layoffs however, as the combined company expects to invest billions in the coming years to add clinics and services, largely financed by diverting funds away from other planned investments.

That could eventually cut costs substantially, with the clinics serving as an alternative to more expensive hospital emergency room visits.

 

Meanwhile, deeper collaboration between Aetna’s insurance business and CVS’s PBM division could drive down drug costs by adding clients and boosting the PBM’s leverage with drugmakers.

In recent years, independent PBMs have been criticized for keeping drug prices high amid potential conflicts of interest with insurance company clients, because they could potentially keep cost savings from drug negotiations rather than passing them on to patients.

Alternatively, PBM margins have been pressured and health insurers have sought to cut costs amid steep prescription drug price rises and requirements to care for even the sickest patients under the Affordable Care Act.

* * *

Analysts cited by Reuters said the CVS-Aetna deal could prompt other healthcare sector mega-mergers, as rivals scramble to emulate the strategy.

It could spur a merger between Walgreens Boots Alliance Inc and Humana Inc, or between Humana and Wal-Mart Stores Inc, Ana Gupte, analyst at Leerink Partners, said recently.

On Nov. 30, Express Scripts Holding Co.’s top executive said the company would be open to a deal at the right price, though wasn’t actively looking for one. “We don’t need to sell to be very successful in the future, but we are always open to others who may all of sudden conclude they want what we have,” Express Scripts CEO Tim Wentworth said in an interview. He also mentioned the possibility of partnering with Amazon on a drug distribution arrangement.

The deal, and any subsequent follow through, is not without risk of regulatory intervention: last year Aetna tried to buy rival Humana Inc to gain leverage to control costs, but antitrust regulators killed the deal as well as a proposed merger between Anthem and Cigna. Furthermore it is unclear if the DOJ, which recently sued to block the Time Warner-AT&T deal, won"t issue another antitrust veto. That could happen if the DOJ shifts its attention to vertical mergers:

Although CVS and Aetna’s planned merger does not directly consolidate the health insurance or pharmaceutical industries, the U.S. Department of Justice has been taking a closer look at so-called vertical mergers, where the companies are not direct competitors.

 

Last month, the Justice Department sued to block AT&T Inc’s planned $85.4 billion merger with Time Warner Inc, saying the integration of a content producer with a distributor could reduce consumer choice.

Reuters concedes that "the CVS-Aetna deal could attract similar scrutiny if regulators feared it could block Aetna customers from frequenting other pharmacies or contracting with other PBMs" even as four antitrust experts said there is little doubt the deal will be approved, although it might need to meet conditions to convince antitrust enforcers to sign off.

It is unclear whether it would be evaluated by the U.S. Federal Trade Commission or the Justice Department but that decision might be made based on which agency is less busy, said Matthew Cantor of law firm Constantine Cannon.

 

“(The companies) want the FTC to get it. The reason that the FTC is better at this point is that the Justice Department has just broken with decades of precedent of how to deal with vertical mergers,” said Cantor, referring to the decision to refuse conduct remedies and file a lawsuit to stop AT&T from buying Time Warner.

According to Bloomberg Intelligence"s Jennifer Rie, the CVS-Aetna deal antitrust prospects may depend on which U.S. regulator is tasked with reviewing it.

The Federal Trade Commission has been less critical of consolidation among companies in adjacent businesses, known as vertical consolidation. The Justice Department, on the other hand, last month sued to block the merger of AT&T Inc. and Time Warner Inc., a vertical deal.

 

Michael Newshel, an analyst at Evercore ISI, said the DOJ effort to block the AT&T-Time Warner deal does raises concerns but a CVS-Aetna deal does have a path forward. Aetna would likely need to divest some or all of its Medicare drug plan business, he said.

In addition to regulatory risk, the combination faces substantial challenges, "including the huge operational task of knitting together the companies’ diverse operations so that customer experiences are smooth and seamless. The deal isn’t likely to deliver as many cost-cutting benefits as combinations with more direct overlap, such as Aetna’s scuttled acquisition of Humana, analysts said. CVS will need to keep much of Aetna’s infrastructure since it doesn’t currently provide health insurance."

As noted by the WSJ, as part of the deal CVS plans to repurpose portions of its pharmacies so they become community health centers where customers can go to get answers to more questions about their health and coverage and how to manage the cost of it. The pharmacies will have space dedicated to wellness, and provide services for things like vision, hearing and nutrition.

Meredith, Koch Brothers Buy Time Inc In $2.8 Billion Deal

Confirming rumors that had swirled over the past 10 days, on Sunday night Meredith Corp., publisher of Better Homes & Gardens, Martha Stewart Living and Family Circle announced it has agreed to acquire all of Time Inc"s outstanding shares for $18.50/share or $1.85BN; including the assumption of Time"s debt, the deal is valued at a total of $2.8 billion. Meredith has secured $3.55BN in debt financing from RBC Capital Markets, Credit Suisse, Barclays and Citigroup Global Markets, according to the FT.

More importantly, the acquisition is also backed with a $650 million preferred equity commitment from Koch Equity Development, the private equity firm of Charles and David Koch, giving the conservative billionaires a stake in one of America’s best-known publishers. That said, the Kochs will not have a seat on Merediths board and, the company said, “will have no influence on Meredith’s editorial or managerial operations”.

That remains to be seen, especially if Trump now develops aspirations toward Meredith"s Man of the Year award. Needless to say, it is the Koch"s takeover of Time that is giving the left nightmares:

This item about Koch having “no influence” over TIME should give you as much assurance as WSJ’s “editorial independence committee,” which caved to Murdoch just 4 months after the acquisition https://t.co/JUlSLktdih

— Bill Grueskin (@BGrueskin) November 27, 2017

In any case, this is Meredith’s third run at 94-year-old Time according to the FT, which publishes Time, People and Sports Illustrated magazines. The deal has been approved by both companies’ boards and is expected to close in the first quarter of 2018.

As the WSJ reports, "the deal caps the end of an era."

Time, whose namesake Time magazine hit the newsstands in March 1923, emerged as one of the country’s great journalistic enterprises, shaping both the political and cultural landscapes. But in recent years, the magazine publisher lost ground as a shift among readers to digital platforms cut into traditional print revenue and a new generation of online rivals emerged.

Like most other legacy media outlets, Time has been trying to transform itself from a print to a digital media business in the face of successive years of declining revenues but has been shackled with a $1.2bn long-term debt burden. The $2.8bn deal value includes assumption of Time Inc’s debt.  The company has been making sweeping cost cuts, eliminating 300 jobs, cutting back the circulation and frequency of some of its best-known magazines, and attempting to sell its UK magazines division. Time Inc. has also been investing in online video and branded content and even a subscription services for pet owners, yet its print magazine circulation and advertising still account for about two-thirds of total revenue. In the first nine months of the year, magazine revenue dropped 17% to $1.3 billion. Time Inc. claims 30 million print subscribers, although that sounds like the fakest news yet. Time expects to generate about $1 billion this year in nonmagazine revenue.

Time has struggled to find a path to growth since its spinoff from Time Warner in 2014. The publisher’s shares lost more than a third of their value, even as Time has cut traditional jobs while adding digital staffers, reorganized its ad sales and scaled back the circulation and frequency of some titles. As the FT adds:

"Time Inc’s 3½-year run as a standalone publisher has been rocky. It has been hard hit by the erosion of print and has not recorded revenue growth over the past six years. A strategic reorganisation aimed at growing digital revenues and reaching a wider audience has shown some progress, but has been overshadowed by the woes of its traditional magazine business, where revenues have dropped 14 per cent from a year ago."

Time"s new owner, Iowa-based Meredith, publishes monthly magazines aimed at women, including Better Homes & Gardens, Martha Stewart Living and Family Circle, and has long coveted Time titles such as People and InStyle. It has tried and failed to reach a deal twice before. In 2013, talks with Time Warner, which then owned Time Inc, fell apart and the publisher was spun off as an independent company.

Stephen Lacy, Meredith’s chairman and chief executive, said the combined company will be able to reach almost 200 million consumers across all platforms, including digital. “The vision is the absolute premiere media company in the country with premium branded content on every platform,” Mr. Lacy said in an interview. “We’re very excited to bring these businesses together.” Lacy said he has never met with the Koch brothers. “They won’t have a seat on the board of which I chair,” he added.

Meredith’s own magazine revenue has slipped slightly, but it has somewhat of a buffer thanks to its ownership of local television stations. For the fiscal year ended June 30, revenue at its magazine group fell 2% to $1.08 billion, while its TV station group saw revenue rise 15% to $630 million.

Few in the magazine industry have been spared the downturn in print and difficulties of building a sustainable digital business. Condé Nast, the owner of Vanity Fair and Vogue, is slashing budgets and staff; Vanity Fair’s new editor has been tasked with trimming its costs by 30 per cent. Rolling Stone, the iconic rock-and-roll magazine, is being sold by its founder.

As the WSJ concludes, for Time CEO Rich Battista, the sale may be bittersweet. Soon after he took the reins in September 2016, Time found itself the target of several interested buyers, and then a sale process dragged on for months with no deal. While Mr. Battista has emphasized the company’s digital efforts and ramped up the production of TV programming and video, he had relatively little time to shift Time toward a more robust digital future.

“As a publicly traded company, and one operating in such a dynamic industry as media, we know circumstances can change quickly,” Mr. Battista said in a memo to employees. “Meredith presented us with an opportunity to combine companies to create even greater scale and financial flexibility.”

Finally, in light of the animosity between the Koch"s and Trump, the president can forget being Time man of the year for 2017 or as long as the billionaires are de facto in charge.

$1 Trillion Norway Wealth Fund Sees "Red Flag" In Real Estate Market

Back in September, we pointed out that assets managed by Norway"s sovereign wealth fund had surged to over $1 trillion after they made the controversial decision to increase their exposure to global equity bubbles (see: Norway Wealth Fund Assets Surge To Over $1 Trillion On Massive 70% Allocation To Equities).  The move has worked out perfectly in the short term, though we still have our doubts as to whether the "greater fool" theory works over the long term...certainly it never has before but maybe this time is different.

Alas, as Bloomberg points out today, bubbles in equity markets aren"t the only ones to have attracted the attention of Norway"s wealth management team which is scooping up commercial real estate projects all over the world, despite their own acknowledgement of "red flags."

There may be worrying developments in some property markets, but the world’s biggest sovereign wealth fund says it has no intention of pulling back from real estate.

 

A gap is opening between what stock-pickers think real estate is worth and what assets could be worth in the physical market, a potential sign that a correction could be looming. For example, the largest real estate investment trust in the U.K., Land Securities, now trades at a 36 percent discount to net asset value.

 

“It’s clearly a red flag in pricing if anything is too far off in any direction,” Karsten Kallevig chief executive officer of Norges Bank Real Estate Management, said in an interview at his Oslo office on Wednesday.

So where are the Norwegians looking to lease you some office space?  Well, only in "prime spots" like New York"s Times Square...

Kallevig, 43, now oversees $24 billion in key real estate, including much of London’s Regent Street, as well as properties on Times Square and the Champs Elysees, among other prime spots. Overall, the fund holds about $1 trillion in stocks, bonds and real estate, and is in the process of building its property holdings to about 7 percent of its total portfolio.

 

So far, the fund still has an appetite for new acquisitions. “I haven’t pulled back mandates, that’s for sure,” Kallevig said.

 

After splitting off from the rest of the fund’s benchmark portfolio and increasing its scope to buy real estate last year, Kallevig is expanding his internal top management team. In September, he appointed two new chief investment officers to oversee the U.S. and European markets.

 

The fund’s strategy is to focus on about 10 global cities. The new CIOs see similarities in Europe and the U.S., and are competing with largely the same bidders on both sides of the Atlantic for the most prestigious properties. “It’s the same type of names we’re seeing across all our markets, the deals that we target are relatively large,” Per Loken, who’s in charge of the U.S. markets, said in an interview.

Of course, they may want to take note of the tiny surge in commercial real estate capacity in New York that has recently resulted in massive tenants like Ernst & Young abandoning their 1 million square feet of office space in Times Square in favor of something in a less touristy area of town.

The most recent is Ernst & Young LLP. Its departure from 5 Times Square, announced this month, may leave the tower’s million or so square feet of office space empty. The neighborhood’s effective office rents -- the rents that tenants actually pay, after concessions -- have fallen by 1 percent annually for two years, according to CoStar Group Inc., a research firm that tracks office leasing.

 

One problem is a rise in tourism and a proliferation of panhandlers. Some are dressed as Elmo and Spider-Man; others, like the “desnudas,” are hardly dressed at all.

 

“It’s not ideal to wind through costumed characters on your way to work,” said Lauren Baker, New York City market analyst for CoStar. “There’s so much noise and commotion.” The neighborhood “obviously isn’t ideal for professional tenants,” she said.

As a study released last month by the New York Building Congress noted, a massive supply glut of new office space flooding the city has certainly made it easier for large firms like E&Y to find great deals.

The non-residential sector, which was responsible for 32 percent of all New York City construction spending in the decade between 2006 and 2015, accounted for 41 percent of all spending in 2016. The only other time over the past two decades that non-residential accounted for such a large share was 2010, when the rebuilding of the World Trade Center was at its peak and billions of additional dollars were being invested in the new Barclays Center and the renovation of Madison Square Garden.

 

At the moment, the primary driver of non-residential spending continues to be office construction, which is at its highest levels in three decades. The Building Congress estimates that 15 million square feet of office space will be completed in Manhattan alone during the three-year forecast period, with an additional 2 million square feet of office space anticipated for completion in the boroughs of Brooklyn and Queens.

On the bright side, at least Norway will be able to offer new tenants a first row view of Times Square"s "desnudas" and other charming panhandlers.

Get Out Now: SocGen Predicts Market Crash, Bear Market For The S&P

While the charade of sellside analysts releasing optimistic, and in the case of Barclays and Goldman "rationally exuberant"previews of the year ahead...

... is a familiar, long-running tradition on Wall Street, rarely has the intellectual dishonesty and cognitive dissonance been quite so glaring: take Goldman, which while admitting that valuations have never been higher, and the upside case never more reliant on just one piece of legislation which has a significant chance of not passing (GOP tax reform for those unaware), Goldman still has to temerity to predict not only no bear market in the next three years, but goes so far as to suggest an "irrationally exuberant" target of 5,300 in three years.

And as of this morning, the penguins are on full parade, with virtually not a single big bank predicting the market will drop in the coming year. Here are the latest S&P price targets, EPS forecasts and implied PE multiples, for the year ahead:

• Bank of Montreal, Brian Belski, 2,950, EPS $145.00, P/E 20.3x


• UBS, Keith Parker, 2,900, EPS $141.00, P/E  20.6x


• Canaccord, Tony Dwyer, 2,800, EPS $140.00, P/E 20.0x


• Credit Suisse, Jonathan Golub, 2,875, EPS $139.00, P/E 20.7x


• Deutsche Bank, Binky Chadha, 2,850, EPS $140.00, P/E 20.4x


• Goldman Sachs, David Kostin, 2,850, EPS $150.00, P/E 19x


• Citigroup, Tobias Levkovich, 2,675, EPS $141.00, P/E 19.0x


• HSBC, Ben Laidler, 2,650, EPS $142.00, P/E 18.7x

Good luck with all those 20x P/Es in a world in which rates are rising and central bank balance sheets will start contracting in one year.

Luckily, there is the occasional honest bank, like Macquarie (whose Viktor Shvets has become one of our favorite commentators for his objective, no nonsence analysis) and - as of this morning - SocGen, whose strategist Roland Kaloyan has written a note which warns that with bond yields rising (see the crash in China overnight, where the Shanghai Composite tumbled the most in 17 months on the realization that rising rates is bad for stocks), there is effectively no upside left in stocks, which coupled with the prospect of a US economy recession in 2020 will "crimp returns in 2019" Furthermore, in light of the record vol shorts, SocGen jumps on the VIX-squeeze crash bandwaon, warning vol positioning could "strongly deteriorate the risk reward profile of equity markets."

In not so many words: with little stock upside left, with the threat of rising interest rates slamming P/E multiples, with the economy in deep in late cycle, with equities trading at record valuations, with everyone short vol and just begging for a vol short squeeze, SocGen"s advice is simple: get out now.

Here is SocGen:

We are less enthusiastic about equities heading into 2018 – We do not see much upside on our major equity targets for the next 12 months. We expect stretched valuations and rising bond  yields to limit equity index performances in 2018 and the prospect of a US economic slowdown in 2020 to further cramp returns in 2019. We also raise some concerns about the quantity of shorts on volatility, which could potentially strongly deteriorate the risk reward profile of equity markets.

Specifically, with regards to the S&P, SocGen reports that US equities are now at - or rather about 100 points above - their fair value:

The S&P 500 has reached our target for the end of this cycle (2,500pts) and is now entering expensive territory. Indeed, on all the metrics, US equities are trading at levels only seen during the late-90s bubble. Since Trump’s election, the US equity market has risen 24%, but only half of this came from earnings growth. The other half has been driven by P/E expansion. According to our calculations, the US equity market is already pricing in potential tax reform. The rise in bond yields and Fed repricing should be headwinds against further US equity rerating.

If that wasn"t enough, SocGen also notes that its valuation model suggests "that upside on the S&P 500 is limited: the US equity market is already pricing in a rebound in growth and inflation. The rise in bond yields and Fed repricing should be a headwind against further US equity rerating."

In practical terms, this means that SocGen is predicting that the S&P, which is already 100 points above the bank"s year end target of 2,500, will tumble to 2,000, or more than 20%, before rebounding modestly to 2,200 just as the US economy succumbs to a recession, at which point all bets are off. And not just the S&P, but virtually all major European bourses are due for a bear market in the coming 12 months.

Here are some of the key arguments behind SocGen"s bearish outlook, first a familiar discussion of the risk posted by the biggest vol short ever observed.

Equity volatility, both realised and implied, has been edging ever lower for quite some time now. Being invested in a simple systematic short VIX future volatility has been strongly rewarding: +290% over the last two years. However, when the tide turns (i.e. VIX spikes), the drawdown can be significant. The quantity of short positioning on VIX open in the market (see right chart) would potentially amplify any spike of the VIX.

The risk of a VIX surge ties into the question of how the market"s risk/return profile will be shaped in the coming year based on what the prevalent VIX level is:

The risk /reward ratio as measured by the Sharpe ratio has been very attractive for US equities: good expected return supported by reasonable valuation and EPS growth, a very low Fed fund rate and an ultra-low volatility regime. At the current 12-month forward P/E, we factor in our Fed Fund scenario (2.25% by end-2018) and a different volatility regime. A change of VIX regime from 10% to 15% would push the US equity Sharpe ratio back to its historical average.

Then there is the already record stretched valuations, something even Goldman admitted earlier this week, with "US equities trading above their long-term average and at a level only seen during the dotcom bubble."

US equities have not been in attractive territory valuation-wise for a while. Indeed, on all the main valuation metrics, US equities are trading above their long-term average and at a level only seen during the dotcom bubble. However, expected earnings growth for the next 12 months (12%) is below the 20y annual earnings growth average (14%).

The last risk is that bond yields are going higher, forcing a contraction to PE multiples, as investors shift away from equities into bonds, as the dividend yield on US stocks at 2.0%, is now lower than the 10Y yield  of 2.3%.

Under our scenario, US Treasures will reach 2.70% at the end of 2018. This should be a headwind for equity markets. Indeed, our US equity risk premium is at 2.9%, one standard deviation below the long-term average . Any increase in bond yields would push the equity market further into expensive territory relative to bonds The dividend yield offered by US equities (2.0%) is already lower than the current US longterm bond yield (2.3%).

Finally, SocGen points out something that few other analysts  have admitted: half the S&P rally since the Trump election has been on the back of multiple expansion, with just 48% the result of earnings growth. Furthermore, as SocGen calculates, assuming tax reform passes, a decrease in the US tax from 35% to 20% as planned by Trump’s tax reform would theoretically boost earnings by 8.5%. The 12-month forward P/E has risen 12% over the last 12 months. In other words, contrary to conventional wisdom, more than 100% of Trump"s tax reform is already priced in.

Since Trump’s election, the S&P 500 has risen 24%. Only half of this performance has been driven by earnings growth; the other half is from P/E expansion. Assuming that analysts have not factored tax reform into their earnings forecasts, tax reform expectations have been the driver of P/E expansion. The S&P 500 index tax rate is currently 26.6%. Assuming that US companies generate 43% of their profits abroad (here) and pay 35% of their US profits on taxes (i.e. with no loopholes for US profits), the average tax rate outside the US would be 15.5%. A decrease in the US tax from 35% to 20% as planned by Trump’s tax reform would thus theoretically boost earnings by 8.5%. The 12-month forward P/E has risen 12% over the last 12 months.

Separately, turning to Europe, Socgen acknowledges the euro zone"s economic recovery is in full swing but - in yet another bearish thesis - argues that the current valuations don"t leave "much meat on the bone" and that the expected rise in the Euro could also weigh on exporters in particular, and European stocks in general. Additionally, with the European Central Bank set to progressively unwind its stimulus package, investors are increasingly wary of the amount of debt some companies have accumulated thanks to historically low interest rates.

Cable group Altice, whose shares have collapsed more than 50% in the last 30 days due to concerns on its €50 billion euros pile of debt, and whose debt plunge has been seen by some as the catalyst for the recent junk bond swoon, is an example of what is likely to come, Societe Generale said.

And while the French bank saw pockets of growth in Germany, France and in sectors such as financials, but warned that political risks are still present, notably in Spain with the Catalonia crisis and Italy which faces general elections in 2018. Oh, and the UK too: "We also recommend staying away from the UK as Brexit negotiations are accelerating and several scenarios are possible: only a soft Brexit would be supportive for the FTSE 100.

And yet, after all that, not even Socgen is willing to bite the bullet, and warn that ahead of what clearly is "a bear market is coming" call, investors should dump risk: so ingrained is the desire to run with the penguin herd, that even the most contrarian calls are doused in such a big layer of caveats, Arnold could easily driver his hummer on top of.

To wit: "But then again, should we be outright bears? After all, we do see some value pockets in the market and some specific themes (M&A, consumer in the eurozone)."

Which almost explains the report"s cover page...

Moody"s Boosts Modi: India Gets First Sovereign Credit Upgrade Since 2004

Moody’s upgrade to India’s credit rating comes as a much-needed boost for India’s Prime Minister, Narendra Modi, who has been criticised for the fallout from the goods and services tax (GST) and demonetisation reforms. Indeed, Moody’s argued that Modi’s reforms will help to stabilize India’s rising debt levels. According to Reuters.

Moody"s Investors Service upgraded its ratings on India"s sovereign bonds for the first time in nearly 14 years on Friday, saying continued progress on economic and institutional reform will boost the country"s growth potential. The agency said it was lifting India"s rating to Baa2 from Baa3 and changed its rating outlook to stable from positive as risks to India"s credit profile were broadly balanced. Moody"s upgrade, its first since January 2004, moves India"s rating to the second lowest level of investment grade. The upgrade is a shot in the arm for Prime Minister Narendra Modi"s government and the reforms it has pushed through, and it comes just weeks after the World Bank moved India up 30 places in its annual ease of doing business rankings.

Moody"s believes that Modi’s reforms have reduced the risk of a sharp increase in India’s debt, even in potential negative scenarios. On the GST reform, which converted India"s 29 states into a single customs union, the rating agency expects it to boost productivity by removing barriers to inter-state trade. In addition, the recent $32 billion recapitalisation of state banks and the reform of the bankruptcy code are beginning to address India’s sovereign credit profile.

"While the capital injection will modestly increase the government"s debt burden in the near term, it should enable banks to move forward with the resolution of NPLs."

Following the upgrade, India’s S&P BSE Sensex Index rose 1.1%, with metals, property and banks the strongest performers. The Sensex has risen 25% so far in 2017, while the banks sector is 42% higher. Retail investors have piled into financial assets and the banking system has been awash with funds since Modi unexpectedly banned high denomination bank notes last November.

As Reuters notes, the Indian government had been unsuccessful at persuading Moody’s to upgrade the rating in 2016.

Last year, India lobbied hard with Moody"s for an upgrade, but failed. The agency raised doubts about the country"s debt levels and fragile banks, and declined to budge despite the government"s criticism of their rating methodology. The government cheered the upgrade on Friday with Economic Affairs Secretary S. Garg telling reporters the rating upgrade was a recognition of economic reforms undertaken over three years.

The Rupee and Indian bonds also rallied on the Moody’s announcement – although some debt traders expressed scepticism that the rally was sustainable.

"It seems like Santa Claus has already opened his bag of goodies," said Lakshmi Iyer, head of fixed income at Kotak Mutual Fund said. "The move is overall positive for bonds which were caught in a negative spiral. This is a structural positive which would lead to easing in yields across tenors," she said. 

 

The benchmark 10-year bond yield was down 10 basis points at 6.96 percent, the rupee was trading stronger at 64.76 per dollar versus the previous close of 65.3250. "We have been expecting it for a long time and this was long overdue and is very positive for the market. Looks like sentiments are going to become positive," said Sunil Sharma, chief investment officer with Sanctum Wealth Management. However, debt traders said the rally was unlikely to last beyond a few days as the coming heavy bond supply and hawkish inflation outlook were unlikely to change soon.

 

"Who has the guts to continue buying in this market?" said a bond trader at a private bank.

India has basked in its status as the world’s fastest growing major economy and Moody’s forecasts suggests that it will continue to outpace China’s roughly 6.5% growth, but only marginally. In the fiscal year to March 2018, Moody’s expects the Indian economy to grow at 6.7% versus last year’s 7.1%. From Reuters.

Moody"s noted that while a number of key reforms remain at the design phase, it believes those already implemented will advance the government"s objective of improving the business climate, enhancing productivity and stimulating investment. “Longer term, India"s growth potential is significantly higher than most other Baa-rated sovereigns," said Moody"s.

Bloomberg published some initial reactions from portfolio managers and analysts.

Luke Spajic (head of portfolio management for emerging Asia at Pacific Asset Management Co. in Singapore)

• “The upgrade came sooner than expected. India has undertaken some tough but necessary reforms like demonetization and the GST, the benefits of which are yet to be fully calculated”


• “India is on the right long-term path with capital markets -- in both debt and equity -- pricing in potential improvements in investment quality”

Lin Jing Leong (investment manager, Asia fixed income, at Aberdeen Standard Investments in Singapore)

• “The upgrade has been long time coming” given Modi’s reform ambitions. “This is not a surprise -- we do believe all the rating agencies have been behind the curve somewhat”


• Initial Indian market reaction is likely to be knee-jerk, but we still expect dollar-India credit spreads, onshore India bonds and the rupee to continue outperforming the broader Asia and emerging-market bloc.

Navneet Munot (chief investment officer at SBI Funds Management Pvt. in Mumbai)

• This will boost global investors’ confidence in India, but factors like world monetary policy shifts and company earnings will also be key to foreign inflows.


• Investors like us who have long positions on India always expected an upgrade.


• The firm has been boosting equity holdings in Indian corporate lenders, industrial and telecommunications companies.

Nischal Maheshwari (head of institutional equities at Edelweiss Securities Ltd. in Mumbai)

• Equity markets have already given a thumbs up to the news”.


• It will lead to a reduction in borrowing costs, which is a major improvement.


• “For foreign investors in equity, it doesn’t change much as their concerns around high stock valuations remain. However, their commitment to the country is in place and the upgrade will only help reiterate their position”.

Shameek Ray (head of debt capital markets at ICICI Securities Primary Dealership in Mumbai)

• Foreign investors won’t be able to take full advantage of the positive sentiment from the upgrade as quotas for them to buy into rupee-denominated government and corporate debt are full, Ray says.


• “Whenever these quotas open up there will be keen interest to take India exposure,” but in the meantime Indian companies will get more access to offshore markets.


• “We could see them pricing dollar or Masala bonds at tighter levels”.

Ken Hu (chief investment officer for Asia-Pacific fixed income at Invesco Hong Kong Ltd.)

• The upgrade confirms Invesco’s positive view on India’s structural economic reforms.


• “With more political capital, Modi and his party are able to launch more difficult but more impactful structural reforms. The positive feedback loop will continue to lead to more credit rating upgrades of India in future”.

Chakri Lokapriya (managing director at TCG Asset Management in Mumbai)

• The upgrade is “very positive for banks, infrastructure and cyclical sectors”.


• “Banks will benefit strongly as their credit costs come down leading to a reduction in interest costs for infrastructure and manufacturing companies”.

Ashley Perrott (head of pan-Asian fixed income at UBS Asset Management in Singapore)

• The upgrade is a bit of a surprise, so the market is likely to see some initial bond-spread tightening.


• “But raising one notch does not make much difference from a fundamental perspective”.

Avinash Thakur (managing director of debt capital markets at Barclays Plc in Hong Kong)

• “The upgrade should help issuers from India as they are no longer on the cusp of investment grade”.


• “It makes a big difference to investors and we will see more dollar bond supply from India”.