Langton Capital – 2019-11-05 – PREMIUM – Hubris, consumer spending, McD, Staycity, Shake Shack etc.:
Hubris, consumer spending, McD, Staycity, Shake Shack etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
So, now that Halloween and Bonfire Night are pretty much in the rear-view mirror, the shops will be having it that it’s Christmas tomorrow.
In fact, one can almost feel the ‘seasonal aisles’ being stripped of their cobwebs, skulls and pumpkins and re-dressed in the garish red and silver tinsel that seems to be associated with the upcoming, much-longer, festive period.
And, as any kid will tell you, it’s 50dys from Bonfire Night to Christmas Day and, as it’s th3 5th of November today, that means Xmas Day (and therefore New Year’s Day) will be a Wednesday.
Which is pretty good news for the UK’s pubs & clubs as, without wiping out an existing weekend, we could be persuaded to pack another weekend-type drinking session into a Monday and a Tuesday meaning that the transfer of cash from the consumer to the pubs’ tills could be a little more acute than usual.
So, we’d better get saving up then. On to the news:
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BOOK REVIEW: WHEN GENIUS FAILED – ROGER LOWENSTEIN (I of II): Mr Lowenstein’s grandeur & decline book was published in 2000 in the wake of the LTCM collapse. 5 Nov 2019:
From birth to maturity. Executive summary:
• LTCM was a hedge fund run by supermen for supermen. PhDs were at the core of the business. Nobel prize winners were recruited, Robert Merton and Myron Scholes amongst them. The firm produced 40% compound for four years. And then it all went wrong.
• Step forward Mr Buffett because the lessons, obvious with hindsight, are don’t gear up too much, don’t use derivatives and don’t begin to believe that the face staring back at you from your shaving mirror is that of an entitled genius.
• The firm, at one point, had perhaps $4bn of equity but $1tn of exposure, mostly via derivatives. It was the full one trillion that would have hit the fan had the Fed not obliged Wall Street to step in, take over the failed firm’s position, and manage its subsequent closure.
• When Genius Failed remains one of the great books on hubris. Schadenfreude is alive & well and living in these pages.
• John Meriwether (Salomon’s arbitrageur) bet on convergence. Diverged prices would, over time, come together. If the price of one asset fell and the price of a similar asset did not, it made sense to buy the former and short the latter. This worked until it did not.
• The firm was ‘snatching nickels from in front of a steam-roller’. Whilst the music continued playing, the presence of the steam roller could be (and was) ignored.
• Meriwether hired pointy heads from academia. They believed in efficient markets. They doubled up when bets went against them and, for many years, they were right more frequently than they were wrong.
• Meriwether managed people rather than money. He massaged egos.
• With hindsight, the early to mid-90s were the golden years for hedge funds. Meriwether set up LTCM and the company was 20-30x levered, even in the early years.
The golden years:
• The performance was good and fees were high. LTCM charged 2% per annum and 25% of profits with a 3yrs lock-up, take it or leave it. Warren Buffett did not invest. Nor did Goldman Sachs.
• The fund behaved arrogantly. It would not let counterparties see both sides of a trade. Risk was opaque.
• The top partners scooped the pot. But most of them put their bonuses back into the fund.
• LTCM made millions betting on a convergence of Euro bond interest rates ahead of currency union in Europe.
The first seeds of doubt:
• Lowenstein says the fund ‘trusted its models more than it did its intelligence’. It was confident but it remained thinly capitalised.
• There was no guarantee that the past foretold the future. However, LTCM made 28% in 1994 (20% after fees).
• Using a mean reversion model means that it is critically important that you get the mean right.
• To ‘assume’ famously makes an ‘ass’ out of U and me and indeed it is true that assumptions, if too firmly (and perhaps groundlessly) held, can cause problems.
A few of LTCM’s major assumptions:
• Despite their accumulated degrees, second degrees, PhDs and Nobel Prizes, the LTCM fund managers assumed that volatility would be constant
• The firm assumed that, even in extremis, correlations would not simply go to one.
• They assumed that liquidity would always be there.
• They assumed that prices would not ‘gap down’.
• They believed that their definition of ‘normal’ (i.e. the mean to which prices would revert) was correct.
• They did not foresee that 10yr data may not include 100yr events.
• The were fooled, moreover, by the fact that they were nearly always right. But not always.
• A different topic tomorrow but on Thursday we’ll cover hubris, denial and collapse.
GENERAL NEWS – PUBS & RESTAURANTS:
• UKHospitality has called on the Government to help employers reduce wage costs by scrapping National Insurance Contributions on the first £12,000 of earnings. UKHospitality Chief Executive Kate Nicholls said: ‘We certainly want our fantastic team members to be rewarded fairly for the great work they do. We pride ourselves on being the UK’s foremost experiential sector and the great people who work in our venues are a huge part of the reason we succeed’.
• Barclaycard has reported that consumer spending grew by 1.5% in the year to October, slightly below the rate of general inflation. The company says that spending on ‘essentials’ rose by just 0.2%.
• Barclaycard reports that supermarket spending was up by 1.5% but spending on fuel was down by 3.9% year on year.
• Spending on non-essentials was up by 2.0% but Barclaycard reports 22% of respondents saying that they were spending less than usual on leisure activities and evenings out. Spending on entertainment fell by 3% in the month.
• Barclaycard reports that spending on food and takeaways was up by 6.9% in October versus the same month a year ago. It says pubs and clubs saw sales rise 5.5% in the month. Barclaycard says ‘ongoing economic uncertainty combined with a bleak start to autumn led many Brits to stay in rather than spend out last month, choosing takeaways and evenings at home over socialising at bars or restaurants.’ It says ‘as we head into the festive period, shoppers are also feeling cautious about their finances with many expecting to spend less than normal this Christmas.’
• Shares in Shake Shack fell by more than 15% yesterday as the company updated on sales trends. The company’s Q3 numbers beat expectations but it reduced guidance regarding the outlook.
• Shake Shack reported revenue up 31.9 per cent from a year ago to $157.8m in the Q3 with earnings at 31c, up from 17c a year earlier. However, the company downgraded its forecast for LfL sales growth to 1.5% from the 2% to which the market had previously been guided.
• Shake Shack CEO Randy Garutti said ‘this has been the biggest development year in Shack history as we’ve grown our presence around the country and internationally in the new markets of Mainland China, Singapore, the Philippines and Mexico. In 2020, we will continue to expand even further within key domestic and international markets.’
• US coffee trader Sustainable Harvest has acquired the contracts and trading team of Twin Trading, the UK non-profit coffee trader that closed its doors last month.
• The BRC reports that UK shoppers spent some 0.6% more this October than they did in the same month last year.
• The Fuller’s pub The Conductor has teamed-up with Sipsmith, the gin distiller, to open a pop-up Victorian Hot Gin Bar.
• Complaints of food poisoning, allergic reactions and foreign bodies found in food increased by 55% last year in December. David Bashford, Managing Director – Food Alert, said: ‘While Christmas is a critically important trading opportunity for operators it can also pose a risk from a food safety perspective. Maintaining standards during the Christmas rush is difficult and all it takes is one minor mistake and the consequences can be enormous’.
• The first compostable one-cup coffee pods from a major group, Lavazza, will go on sale this week. It is estimated that 20bn one-cup coffee pods are consumed globally each year.
• Puttshack will open its new site at 1 Poultry in Bank on the 22nd November, featuring three 9-hole courses with capacity for 650 people.
• Severance pay for former McDonald’s CEO Steve Easterbrook will be at least $675,000 and will include a more restrictive two-year non-compete clause than his existing employment contract.
• The Inn Collection Group has received planning permission for a 40-bedroom pub on Sunderland’s seafront. Sean Donkin, managing director of The Inn Collection Group, said: ‘The Inn Collection Group has a proven track record in delivering purpose-built inns operating on a model that provides value for money accommodation, quality beverages and home-made pub fare served all day, 365 days a year to local people and visitors’.
• In the US a major study into whether calorie labeling on fast food menus reduces the amount customers purchase has found that it does. The research group, BMJ found that the positive effect ‘diminished’ over one year of follow-up.
• The All-Party Parliamentary Group for Hospitality claim a digital services tax will not be enough to solve the pub sector’s problems on its own. Pub trade bodies have said the Government must ensure revenue from a tax on online businesses is used to reduce the burden that the sector faces from business rates.
• Rabobank reports new US tariffs introduced on EU goods are likely to push up prices for French and Spanish wine by around 10-15%. The US market accounts for around 18% of France’s wine exports, and around 12% of Spain’s.
• Pret is trialling scan & go technology provided by SFD Systems, allowing customers to pay for their food and drink using electronic shelf-edge labels.
HOLIDAYS & LEISURE TRAVEL:
• Aparthotel operator Staycity is to open its Edinburgh Grassmarket site on 2 December. The group has now opened its first site in Germany, in Berlin at the former Checkpoint Charlie crossing point, with the group’s CEO Tom Walsh saying ‘one of the key prerequisites for Wilde [its premium hotels] is that they’re central to the heart of the city. Both the Berlin and Edinburgh properties are in stunning locations with the best each city has to offer on their doorstep. It’s exciting to see the Wilde brand taking shape as we add to the estate.’
• Staycity now has 500 apartments in major UK cities and 850 apartments in Germany.
• The Business, Energy and Industrial Strategy Committee has accused business secretary Andrea Leadsom and her department of showing ‘an extraordinary lack of interest’ ahead of the collapse of Thomas Cook. The committee also issued a damning verdict of mismanagement by successive bosses.
• Egyptian tourism generated £9.91bn in revenue in 2018-19, despite UK flight restrictions to one its key destinations, Sharm el-Sheikh. The Foreign and Commonwealth Office lifted its restrictions on flights between the UK and Sharm el-Sheikh on October 22.
• The UK’s top long-haul inbound tourism markets are the US, Australia and India, the same as the year before. Strong growth has been recorded from several countries, most notably Bangladesh, up 32.5%, China, up 19.8% and Taiwan, up 16%.
• Saga will build its first river cruise ship, Spirit of the Rhine, set to launch in spring 2021. The 95-cabin ship will sail on European rivers, with room for 190 passengers.
• Some major investors in Uber will be free to sell stock on Wednesday as a lock-up period is due to expire. The news has sparked concerns of a slump in its share price.
• Marriott has reported Q3 numbers saying that it added 17.7k rooms in the quarter but adjusted net income fell by 18% to $488m. Adjusted EBITDA was flat at $901m. The group earned a diluted 116c per share compared with 143c in the same quarter last year.
• Marriott CEO Arne Sorenson comments ‘it’s been just over three years since the completion of the Starwood acquisition. In that time, we’ve realized meaningful synergies, enhanced guest satisfaction, and recycled more than $2.2 billion of assets.’ Sorenson says ‘our worldwide comparable systemwide constant dollar RevPAR increased 1.5 percent, consistent with our guidance, while our global RevPAR index rose 210 basis points. Our sales organization is hitting its stride.’
• Regarding the outlook, Marriott says it expects systemwide REVPAR in Q4 to be flat to up 1%.
• A report released by a cross-party MPs recommends a maximum stake limit similar to the £2 limits imposed on FOBTs for online casinos. The report also recommended an end to betting by credit card and restrictions on “VIP” accounts.
• The above report, recommending a £2-per-bet limit on popular online games by the Gambling Related Harm All Party Parliamentary group sent shares in Britain’s biggest betting companies down on Monday.
FINANCE & ECONOMICS:
• The IHS Markit UK Construction PMI for October rose to 44.2 from 43.3 in September. Any number below 50.0 implies contraction. Markit says ‘UK construction companies experienced a downturn in business performance during October as political uncertainty and subdued economic conditions again combined to hold back sales.’ It goes on to say ‘there are clear signs that construction firms are positioning for an extended soft patch for project starts.’
• The much larger services PMI is due out at 9.30am today.
• Sterling lower at $1.288 and €1.1575. Oil up at $62.31. UK 10yr gilt yield up 6bps at 0.72%. World markets higher yesterday with Far East up in Tuesday trade.
• Brexit & politics.
o Deputy speaker Sir Lindsay Hoyle promoted to the top job.
o FT points out that both political parties are promising a spending splurge that will see government expenditure back up to 1970s levels. Cambridge Economics reports ‘it’s very rare in an election that the political parties are competing with each other to spend more money . . . you probably have to go back to the mid 1960s to find the last time that happened.’
START THE DAY WITH A SONG:
Yesterday’s song was Do You Remember the First Time? by Pulp. Today, who sang:
“You don’t want to hurt me,
But see how deep the bullet lies
Unaware I’m tearing you asunder
Ooh, there is thunder in our hearts”
RETAIL WITH NICK BUBB:
• BRC Retail Sales for October (the 4 weeks to Oct 26th): We flagged yesterday that the overnight BRC Retail Sales survey (which remains the most reliable guide to monthly High Street trends for major retailers) was likely to be a bit brighter, with a better month for Fashion likely to push overall Non-Food sales over the line, despite “big-ticket” spending weakness. And the total October outcome was indeed a better-looking +0.1% LFL (after -1.7% LFL in September). The exact Food/Non-Food LFL sales split for October is, as usual, buried in the 3-month moving averages of +0.5% and -1.8% respectively, but it looks like Food was a bit disappointing and was only just up LFL and that means that Non-Food must have been no worse than flat LFL last month…Demand for Clothing and Footwear was certainly boosted by the more autumnal weather and increased discounting, but Household Appliance and
• ABF (Primark): The giant food conglomerate ABF has reported its final results today (for y/e Sept xx) and the big focus is, as usual, on the performance of mighty Primark, which notched up a chunky operating profit of £913m (up 8%) on sales of just under £7.8bn (up 4%). The operating margin of 11.7% was better than expected, with the impact of a stronger dollar largely offset by lower mark-downs and better buying. LFL sales were down by 2%, with the weak trading in Germany called out (as it has prompted a change of MD there). UK sales were 1% down LFL, but Primark say that still represented outperformance against the market. Most of the big store openings in the new-year will be in Spain and France, but one UK highlight will be the Primark opening in the Trafford Centre in Manchester in March.
• Topps Tiles: Out of the blue, Topps Tiles has announced that Matt Williams, the CEO, has decided to step down at the end of the month, following the announcement of the full year results. Rob Parker, the long-serving CFO, will be appointed as the new CEO from the same date. There is no clue as to what Matt Williams wants to do next, after 12 years running Topps, but he says in the statement that “It has been a really tough decision to leave Topps but I feel now is the right time for me to pursue a new challenge”.
• News Flow This Week: Tomorrow brings the much-awaited Marks & Spencer interims and the Intu Properties Q3 update. Then a busy Thursday brings the Sainsbury interims, the Halfords interims, the Inchcape Q3 update, the Superdry pre-close, the Howden update and The Works’ pre-close update.