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

    China, U.S. Agree to Tariff Rollback If Trade Deal Reached

    This article from Bloomberg news may be of interest. Here is a section:

    “If China, U.S. reach a phase-one deal, both sides should roll back existing additional tariffs in the same proportion simultaneously based on the content of the agreement, which is an important condition for reaching the agreement,” Gao said.

    Such an understanding could help provide a road-map to a deal de-escalating the trade war that’s cast a shadow over the world economy. China’s key demand since the start of negotiations has been the removal of punitive tariffs imposed by Trump, which by now apply to the majority of its exports to the U.S.

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    Expedia and TripAdvisor Lead Sharp Sell-Off in Online Travel

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

    According to Piper Jaffray, “the most concerning trend” in the quarter was “the reduced efficiency of SEO,” or search engine optimization. Google, part of Alphabet Inc., is favoring its own “Hotel Finder” platform, along with paid links for search results, and this trend could require higher marketing costs.

    D.A. Davidson noted that Expedia is exploring alternatives to mitigate its “reliance on search/Google,” but wrote that it sees “no alternatives that will be able to efficiently ‘move the needle’ from a volume perspective anytime soon.” Morgan Stanley wrote that Alphabet is now the “best way to invest in travel.”

    TripAdvisor’s adjusted earnings and revenue both missed the lowest analyst estimates. The results “more than disappointed,” Jefferies wrote, reiterating its underperform rating. Analyst Brent Thill added that TripAdvisor’s preliminary 2020 outlook “is not encouraging,” in part because of “continued SEO pressure from Google.”

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    Chesapeake's Covenants Could Pinch in 2020

    This article by Allison McNeely may be of interest to subscribers. Here is a section:

    The company warned there is doubt about its ability to continue operating. Its shares and bonds have plunged since reporting earnings Nov. 5.

    *Based on price assumptions of $55 per barrel for oil and $2.50 per million British thermal units for natural gas as well as no debt reduction, Chesapeake is likely to trip its leverage covenant by the third quarter of next year, if not sooner, CreditSights analysts Jake Leiby and Michael Mistras wrote in
    the report.

    **They predict Chesapeake will have a free cash flow shortfall of about $50 million in 2020 and finish the year with gross leverage of 4.6 times debt to a measure of earnings, above the 4.25 ratio in its covenant.

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    Brazil's Oil Flop a Warning for Majors and Aramco

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

    Offshore oil investment was all the rage among Big Oil during the supercycle, with capital expenditure almost quadrupling in the decade up to 2014. That is the problem. The majors poured money into large, multi-year projects prone to delays and, because of their often bespoke engineering, spiraling budgets. The result: tumbling return on capital and an inability to dial back investment quickly when the oil crash hit in 2014. Roughly 3,000 new offshore projects sanctioned between 2010 and 2014 have either barely generated any value for oil companies or are expected to generate none at all, according to a recent study published by Rystad Energy, a consultancy:

    More recent investments score better, mostly because the boom tailed off, with offshore capex falling by more than half between 2014 and 2018. That took the heat out of industry inflation; and, because of the bonfire of returns in the prior decade, oil majors got smarter about such things as standardizing offshore equipment design to cut costs and shorten schedules. The pace of new projects has picked up again after the slump. Exxon, for example, has effectively opened up an entire new offshore zone with its Guyanese fields.

    Still, one look at the stock prices of oilfield services firms, especially offshore-focused types such as Transocean Ltd. and Noble Corp. Plc, tells you this investment wave is nothing like the tsunami of yesteryear. Bad memories combined with unease about both near- and long-term oil demand make bold bets on big, multi-year offshore projects a tough sell with investors more interested in payouts. Even Exxon’s success in Guyana gets overshadowed by the fact that the company’s capex bill leaves it borrowing to pay its dividend. And Exxon, like Chevron Corp. and other majors, has swung more of its spending toward shorter-cycle onshore fracking in North America.

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    Commerce: a force for good

    This admittedly self-serving report from Shopify may be of interest to subscribers. Here is a section:

    The success of millions of independent business owners is critical to our world’s economic prosperity. Every new business adds more value to the world. It’s not a zero-sum game, and commerce benefits from more voices rather than fewer. But entrepreneurship is challenging. That’s why we remove barriers and friction for independent business owners. We create tools for anyone, anywhere, to start and grow a business and impact the global community.

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    On Target November 6th 2019

    Thank to Martin Spring for this edition of his letter which may be of interest. Here is a section on the Dollar:

    Are we about to see a “currency pact” between the US and China? Investment bank Jefferies’ Hong Kong-based Christopher Wood sees it as a possible significant development in the difficult ongoing trade negotiations between the two countries.

    It could give Donald Trump “a face-saving ‘out’ in terms of declaring victory in negotiations, where he has clearly over-estimated his leverage, for the simple reason that the Chinese leader has more tolerance to take pain than does America’s.”

    A currency agreement based on a Chinese commitment not to engage in a competitive devaluation of its renminbi makes sense as both Washington and Beijing want the same thing. Neither wants a stronger dollar and a weaker yuan.
    Beijing may see such an agreement as a way at least to end an escalation of the trade war or even to end it. It has no desire to see a major devaluation against the dollar. That would encourage accelerating capital outflow – “the Achilles heel of China’s command economy” -- at a time when such pressures are rising because wealthy citizens are keen to achieve international diversification. The outflow reached about $240 billion in the 12 months to the second quarter.

    Devaluation would also make Chinese consumers poorer in dollar terms, undermining the policy of seeking to make the economy more driven by domestic consumption. And it would undermine the current successful policy of attracting foreigners to invest in China’s stock and bond markets.

    “The last thing China needs right now is a further sharp appreciation of the US dollar – and that also seems the last thing Trump wants.”  

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