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

    Bailed Out Indian Lender Returns to Profit After Cutting Costs

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

    Yes Bank Ltd., which is emerging from India’s biggest financial bailout, returned to profit in the quarter ended September after its tax and operating costs fell.

    It reported a net income of 1.3 billion rupees ($17.7 million) in the quarter, compared with a 6 billion rupee-loss a year earlier, the Mumbai-based lender said in a filing Friday. The bank was teetering on the edge of insolvency before being bailed out in March at a cost of $1.3 billion.

    Yes Bank’s expenses fell 30%. The bank set aside 19.2 billion rupees as Covid-related provisions, the results showed. Yes Bank’s gross bad loan ratio was 16.9% at the end of September, compared with 17.3% three months earlier.

    “The bank has been able to register a very significant improvement in the operating profit side,” Chief Executive Officer Prashant Kumar said at a briefing. “This will continue in the future also and we believe that because of our operating profits, by and large, we will be able to take care of our any credit costs which may happen due to the impact of the Covid.”

    Kumar, who was brought in to turn the bank around in March, is facing one of his toughest challenges after India’s economy posted the worst contraction among major economies last quarter. Kumar has made restoring the faith of the bank’s depositors a priority and is planning to nearly double deposits to 2 trillion rupees by March 2021.

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    Expectations and the Role of Intangible Investments

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

    The primary task of an investor is to anticipate revisions in expectations. This requires an understanding of price-implied expectations and having a sound thesis for why the market will revise those expectations. The primary purpose of financial accounting is to provide a company’s external parties, including current and prospective shareholders and creditors, with the information they need to make informed economic decisions.

    Earnings are deemed to be “the single most important output of financial reporting.”42 It used to be that earnings were on the income statement and investments were recorded mostly on the balance sheet. The rise of intangible investments means that the bottom line is now a mix of earnings and investment. The goal of this report is to allow an investor to untangle these pieces and assess them properly.

    Earnings are less relevant for value today than in the past. This is because of the rise of intangibles and the increase in non-recurring, or ancillary, items reported in earnings.43 We focus on the former, but investors seeking to understand value must thoughtfully deal with both.

    Baruch Lev, a professor of accounting at New York University Stern School of Business, argues that earnings have become less relevant for value over time.45 He supports this claim by analyzing the correlation between contemporaneous earnings and market value. He further develops a proxy for intangible investment, R&D plus SG&A spending as a percentage of assets, which allows him to separate the universe of stocks into those that are above the median, the “top spenders,” and those below, the “bottom spenders.”

    Exhibit 7 show the results of this analysis by decade from the 1950s through the 1990s and from 2000 to 2016. A couple of features stand out. First, there is a monotonic decline in earnings relevance for the top spenders. This coincides with the rise of intangible investment. Second, the relevance gap between the top and bottom spenders, which was modest in the 1950s, grows over time. The earnings relevance for companies that rely mostly on intangibles is low, and reclassifying investment improves the signal.

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    Grains Have 'Immediate Upside' Says Goldman Sachs

    This note from Dow Jones may be of interest to subscribers. Here is a section:

    A report from Goldman Sachs says that the commodity sector is likely on its way up in 2021 due to inflation. However, while grains futures have been traveling higher, momentum is likely to slow down for agriculture in general, the report says -- pointing to energy and metals as more likely areas of growth. "Goldman Sachs analysts acknowledged that the non-energy commodities have 'immediate upside' potential due to the strong Chinese demand and weather driven risks, but they see that momentum fizzling in 2021," says Arlan Suderman of StoneX. Corn futures on the CBOT are up 0.7% Thursday, while soybeans are up 0.4%. Meanwhile, wheat is down 0.8%. 

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    Compton Launches Largest Universal Basic Income Program In The Nation

    This article from CBS news may be of interest to subscribers. Here is a section:

    Compton, with a population of 95,000, has upwards of 1 in 5 residents living in poverty, double the nationwide average, city officials said. Local housing assistance in the city is at capacity, and 46% of its residents are renters. Since the outset of the pandemic, city officials say its unemployment rates have skyrocketed to 21.9%, and a growing segment of its population are relying on food pantries.

    “People in our community are going through tough times, and I know that guaranteed income could give people a moment to navigate their situation, and have some breathing room to go back to school, explore a new career path, spend time with their children, or improve their mental and emotional wellbeing.”

    A number of cities across the country are expressing more willingness to consider universal basic income, and the concept was the basis of tech entrepreneur Andrew Yang’s presidential run. The California city of Stockton launched their program last year, and Los Angeles and Long Beach exploring their own pilot programs.

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    The Race to Hydrogen Goes Beyond Brexit With Italy-U.K. Deal

    This article by Chiara Albanese and Alberto Brambilla for Bloomberg may be of interest to subscribers. Here is a section:

    Italy’s Snam SpA will brush aside Brexit and invest 33 million euros ($39 million) in ITM Power Plc, which produces electrolyzers, a crucial component in the hydrogen technology.

    The investment is part of a 150-million pound ($197 million) capital increase by ITM. The accord is part of Snam’s expansion in the technology after the European Union put hydrogen at the heart of its measures to cut greenhouse gases and become climate neutral by 2050. Hydrogen, if made with renewables, could replace coal, oil, and eventually natural gas, and help eliminate about a third of emissions from industries like steel and cement by mid-century, according to BloombergNEF.

    “The hydrogen sector is like the internet before the dot com boom,” Marco Alvera, chief executive officer of Snam, said in an interview. “What matters now is to unlock potential technology and to find the right positioning.”

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    Bitcoin Surges to Highest Since July 2019 After PayPal Embrace

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

    Bitcoin surged to the highest level since July 2019 after PayPal Holdings Inc. announced it will allow
    customers to use cryptocurrencies.

    The largest digital coin increased as much as 4.9% to $12,488 Wednesday, surpassing the previous high for the year of $12,473 set in August. Gains among so-called alt coins were even larger, with Litecoin jumping more than 11% and Bitcoin Cash surging 8%.

    PayPal customers can use select cryptocurrencies including Bitcoin, Ether, Bitcoin Cash and Litecoin on the platform. Mike Novogratz, who runs Galaxy Investment Partners, on Twitter called it “the biggest news of the year in crypto,” adding that banks will embark on a race to service digital currencies.

    “We have crossed the rubicon,” he said. The news sparked an exuberant response from crypto fans who pointed to a string of recent announcements that suggest wider acceptance by old-school financial mainstays. Two public companies -- Square Inc. and MicroStrategy Inc. -- said recently that they invested in Bitcoin. And Fidelity Investments announced in August that it’s launching its first Bitcoin fund, adding its establishment name and star power to the often-maligned asset class.

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    Thanks to a subscriber for this article from SeekingAlpha by Scott Galloway. Here is a section:

    Airbnb is also a better value than hotels, offering more space but with less Covid (no check-in, elevators, or common areas) at a lower cost. A crisis is a terrible thing to waste, and Covid afforded the CEO the cloud cover to cut costs and refocus on the core business. In May Airbnb laid off a quarter of its staff (1,900 employees). CEO Chesky managed to pull a Bezos and was seen as a hero for his empathetic approach to layoffs (generous severance, extended healthcare, and a website of Airbnb employees who were laid off to help them find new leads). Firing people, sending out private pics — tomato/tomahto. Chesky and co-founders relinquished their salaries, cut pay in half for executives, and slashed nearly $1 billion in marketing expenses. The firm is in fighting shape.

    The reduced cost structure and market recovery mean the path to profitability has become bigger, better lit, and shorter. There are rumors the firm will accelerate into/through profitability in 2021. The story here won’t be one of distant, but burgeoning, profits.

    The story stock of 2020, where the narrative rode shotgun as the numbers sat quietly in the backseat, was Tesla. Airbnb will not electrify the world, but it will host it and reshape the resources required to let people tap into a basic instinct: to explore with others. What Airbnb lacks in story (unlikely Mr. Chesky can land two Brooklyn studio apartments on dual barges concurrently), it makes up in performance. There is no better vision than performance.

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    Fed Keeps Bond-Market Tantrums at Bay With Stealth Yield Control

    This article by Liz Capo McCormick for Bloomberg may be of interest to subscribers. Here is a section:

    “Yields are almost behaving as if we have yield-curve control already,” said Esty Dwek, head of global market strategy for Natixis Investment Managers, which oversees about $1 billion. “The yield rise will probably remain contained because the Fed is more important than anything else and they will limit it.”

    Call it stealth yield-curve control, as Fed policy makers have pushed back on the idea of capping yields. It’s a step that central banks in Australia and Japan have already taken. The Bank of Japan has been pinning 10-year rates at around zero, while the Reserve Bank of Australia targets three-year yields at 0.25%.

    U.S., yields have been boxed in from both directions. On the upside, the potential for Fed action should the economic picture darken, along with overseas buying and haven demand because of worries about the pandemic, are keeping long-term yields in check. On the downside, the central bank’s reluctance to drive policy rates below zero creates a floor.

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