Langton Capital – 2020-01-11 – PREMIUM – Irrational exuberance, discounts, property, rates, 888 & other:
Irrational exuberance, discounts, property, rates, 888 & other:
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A DAY IN THE LIFE:
So, with half an eye on how to be a decent global citizen, what are you meant to do with all the packaging that you get at Christmas?
Fair enough, the plastic and some of the paper can go for recycling but what about all those cardboard boxes?
Of course, you could flatten them & chuck them in the designated skip at the tip but it seems such a waste when they could ‘come in useful’ but, as the cupboard under the stairs, the loft, the shed and the garage are all full of similarly ‘potentially useful’ junk, there is a limit.
And they never stack like neat little Russian dolls, do they? Rather they’re all either slightly too long or slightly too wide meaning that each box needs a space of the same size just to be stored and, at some point, you just have to give up and pencil in that January bonfire and BBQ that you’ve been considering for some time.
Anyway, on to the news:
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BOOK REVIEW: IRRATIONAL EXUBERANCE: ROBERT SHILLER , 2000: A well-known book penned by a Nobel Prize winner examining how bubbles are started, how they grow and why they are rarely deflated by regulatory means. 14 Jan 2020:
Bubbles in context:
• Bubbles have been with us for centuries and, since Mr Shiller wrote this book, there have been at least two more.
• Although the book was written in 2000, there is a significant preface to the 3rd edition, which was written in 2014. There may have been more since
• FOMO (the fear of missing out) is a factor, as are complacent regulatory authorities although, as Mr Shiller says, what could they really do about it?
Stock markets, property markets:
• Alan Greenspan made his ‘irrational exuberance’ comment in December 1996. Markets carried on inflating for four more years
• Shiller suggests investors are dragged into a market because of envy of the success of others. The Dow trebled in 5yrs to end-1999 (from 1982). A lot of people did miss out.
• Shiller points to the Millennium Boom – 1982 to 2000 (the biggest in history), the Ownership Society Boom – 2003-2007 and the New Normal Boom – 2009 to present.
• The New Normal was a phrase coined by Bill Gross of Pimco in 2009.
Misunderstanding the extent of regulatory control:
• Looking at bond markets, Shiller says government can control short yield but not long yields. Ultimately, the market will go where it will go.
• Real yields are currently ‘around zero’ and this may, with hindsight, have created a bond bubble.
• Re the property bubble that led to the credit crunch, Shiller, a Nobel Laureate, says that the cause is unclear.
• Property rose by 85% in real terms 1997-2006. The cost of buying vs renting doubled. People tend not to ‘inflation-adjust’ house prices so, in times of inflation, they believe the housing market is strong.
• Until the 1940s, the real cost of housing in the US was falling. In Amsterdam, in the 345yrs between 1628 and 1973, house prices did not change in real terms.
The facilitators and the amplifiers:
• Government can facilitate bubbles. But it will often point the finger (or allow the finger to be pointed) at bankers.
• Shiller suggests bankers are as blind as the buyers. They can disregard risks. Washington Mutual had a motto ‘the power of yes’. RBS said it was ‘Making it Happen’.
• Ponzi schemes (which turn investors’ greed against themselves) can amplify booms.
• A ‘faster feedback loop’ can lead to higher asset prices. Everything happens more rapidly if technology changes.
• Complacency is both a facilitator and an amplifier. As are greed, slack governance, a loss of purpose etc.
Secular, longer term trends:
• Shiller says that the arrival of the Internet, which coincided with strong growth, could have represented a step change in growth
• There are other micro-reasons for change (cultural, legal, tax, societal etc.) but, overall, there is little new under the sun
• That phrase itself comes from the Book of Ecclesiastes, which was written around 1,000 BC.
The boom we may still be in:
• Shiller says there is talk of a ‘new normal’. That is sometimes true but usually worrying.
• Loose money and QE may mean that the ‘new normal’ is a fabrication. But they might not.
• Writing in 2014, Shiller said that the rise of nationalism & jingoism could have put upward pressure on asset prices.
• There’s more to this book so perhaps a conclusion tomorrow.
PUBS & RESTAURANTS:
• Offers from huge range of food & beverage operators. We’re comparing apples with oranges a little but, in descending order of the size of the offer off the total bill, we have: Pizza Express 33% off all food & drink till 30 Jan. Chiquito’s (Restaurant Group) 50% off vegan mains till 31 Jan. Prezzo 50% off mains till 2 Feb. Stonehouse Pizza 2-for-1 on pizza till 19 Jan. Vintage Inns (M&B) offering 33% off food. All of the following offering 40% off mains till various dates stretching out till 12 Feb – O’Neill’s, Toby & Harvester (all M&B). Also Café Rouge & Bella Italia (Casual Dining Group). Also Frankie & Benny’s and Chiquito’s on non-vegan mains (Restaurant Group).
• Property agent Fleurets has undertaken a major survey of UK pub prices and has concluded that many trends currently in place will continue to impact the sector this year. There may be a pickup in acquisition activity.
• Fleurets points out that ‘2019 pub transaction volumes were dominated by a handful of significant merger and acquisition deals.’ Some six deals, the Greene King and EI Group bids amongst them, accounted for c7,400 pub sales. Interestingly, the ‘next 12 largest deals involved a relatively modest 100 pubs’ in total.
• 2019 was H2 weighted. Concerns over Brexit and the anticipated and then realised General Election might have been expected to hold back activity. Stonegate was the most actively acquiring company of the year.
• Fleurets says ‘there are no signs that M&A activity will stop in 2020. We expect further rationalisation and consolidation of the managed pub market. Package disposals from the national branded operators will provide the next round of opportunities.’ However, with GNK, PUB and EIG changing hands in the last few years, there may simply be fewer chains to sell.
• There will be some settling down after the large deals seen last year. Fleurets says ‘packages of tenanted pubs are expected from Stonegate and Greene King in the second half of the year as both complete estate reviews and implement business plans.’
• Fleurets says that it expects that ‘the expansion of several significant value based brands will squeeze trading levels across the market.’ It says ‘pub numbers will continue to reduce as the supply of large new operations increases and smaller outdated units become unviable.’ However, the agent says ‘we anticipate that bottom end prices will continue to rise as asset quality improves and demand continues to exceed supply.’
• Re freehold properties, Fleurets says ‘there are encouraging signs that 2020 will see a return of acquisition focussed pub companies (managed and tenanted) seeking individual freehouse operations. This rise in demand is expected to drive activity in the freehouse mid-market which has been subdued for several years.’ It says ‘liquidity and pricing in the private market will continue to be aligned to the lenders’ appetite for the sector and the availability of funding to support acquisitions.’ The agent hedges its position by saying ‘any ongoing economic uncertainty will make any significant increase in transactions unlikely.’
• Analysis from the Centre for Retail Research suggests that there are around 50,000 fewer shops on our High Streets than just over a decade ago. There are suggestions that a ‘cycle of decline’ could set in.
• Business rates. Having a property from which to make sales simply aint what it used to be when it comes to selling goods and services. Company taxation – specifically business rates – along with rents have yet to catch up with trends that have been in place for perhaps two decades. Many businesses may take the plunge, exit the High Street, and take their businesses wholly on line.
• Mike Ashley has said that business rates are partly responsible for high street failures.
• City Pub Group’s shares fell by a little under 10% yesterday as the group warned that 2019 trading was behind earlier estimates.
• Popeyes Louisiana Kitchen in the US has said that it will be giving away one of its popular chicken sandwiches with every $20 order with the newly-signed-up delivery company DoorDash. Free works for us.
• Drinkaware partners with Nightlife Crew, a training company which will be actively identifying and supporting people who become vulnerable after excessive drinking.
• Sourdough pizza chain Three Joes opens its first site in the North of England and its third unit overall. The unit opened in Meadowhall shopping centre late last year.
• Pizza Pilgrims is due to open its 12th site, in London’s Victoria, this year.
• Greggs is preparing to roll out delivery across the UK following a trials in several cities last year. Both Just Eat and Deliveroo are thought to be in contention to host the bakery chain.
• Indonesia is clamping down on imports of European wine, spirits and dairy products in an escalating dispute over the Asian country’s palm oil.
• THIS, a British food-tech company, has raised £4.7m in a round led by London venture capital firm Backed. THIS will use the funding to boost the production of its vegan meat.
• Ecuadorian restaurant Miko’s and Lebanese eatery Bayroot have both signed contracts to open new premises at Elephant Park, the £2.3bn redevelopment by Lendlease and Southwark Council.
• Panera Bread in the US is to reduce the proportion of meat-based items on its menu by a third it says.
HOLIDAYS & LEISURE TRAVEL:
• Pragma consulting reports trips with a duration of 2-5 days now account for a third of holidays abroad, almost double compared to 20 years ago. The rise in short breaks has been driven by the ease of booking trips online – 80% of people booked their holiday online in 2018, and the rise of low-cost carriers, such as Ryanair and easyJet.
• Per STR, European hotels will see slower growth in 2020 but that mega events such as the FIFA Euros soccer championships, will head performance.
• Heathrow saw a record 80.9m passengers in 2019, with passenger numbers growing by 15m since 2010.
• Various commentators suggesting that FlyBe has little chance of attracting government support as it is only one tenth of the size of Thomas Cook, and no help was offered in the case of the latter. Talks are being held today between the Chancellor and two transport secretaries. The government has been urged to cut domestic APD as a part of any rescue.
• Games Workshop has reported H1 numbers to 1 December saying that revenues rose to £148.4m from £125.2m with PBT up from £40.8m to £58.6m.
• Basic EPS is 145.9p (2018: 101.3p) with a dividend for H1 of 100p vs 65p last year. CEO Kevin Rountree says ‘our business and the Warhammer Hobby continue to be in great shape. We are pleased to once again report record sales and profit levels in the period. The global team have worked their socks off to deliver these great results. My thanks go out to them all.’
• Re current trading, Games Workshop says ‘sales for the month of December are in line with our expectations.’ The company adds ‘we are also announcing that the Board has today declared a dividend of 45 pence per share, in line with the Company’s policy of distributing truly surplus cash.’
• 888 has announced that CFO Aviad Kobrine will step down from his role as Chief Financial Officer during 2020 after 15yrs with the company. It says ‘the Board of 888 will now commence a search for Aviad’s successor. Aviad will remain in his position until a successor is in place in order to enable a seamless transition of responsibilities at the appropriate time.’
• The Gambling Commission is preparing to ban bookmakers from taking credit card deposits for betting online, with sources close to the issue saying an announcement was imminent. It is expected that customers will be limited to using their debit cards to prevent them from overextending themselves.
• The film The Joker is leading the pack for Oscar nominations with 11 chances to lift a prize.
• Barcelona is now the highest-revenue-earning football club in the world. It generated some £741.1m in the 2018-19 season per Deloitte. Real Madrid generated £667.5m, with Manchester United third on £627.1m. Man Utd is said to be ‘at risk of losing the position as the Premier League’s highest revenue generating club for the first time.’
FINANCE & ECONOMICS:
• The UK economy grew by just 0.1% in the three months to November per the ONS. November (pre-election, pre-Brexit ‘being done’ etc.) showed a 0.3% decline.
• The NIESR says Q4 growth could be around zero. It says ‘the latest data confirm that economic growth in the United Kingdom had petered out at the end of last year. GDP was virtually flat in the three months to November and the latest surveys point to further stagnation in December. While there is some evidence of an improvement in business optimism following the general election, it is doubtful that this will do much to change the short-term economic outlook of further lacklustre growth.’
• The New Economics Foundation has suggested that pumping money into the green economy could help to stave off a possible recession in the UK.
• Some suggestions that the US could register a technical recession towards the middle of this year. Whilst still a minority opinion, that might derail President Donald Trump’s bid for re-election.
• Sterling lower at $1.2992 and €1.1664. Oil down at $64.35. UK 10yr gilt yield 0.75%, down some 3bps. World markets mixed yesterday with Far East also mixed in Tuesday trade.
START THE DAY WITH A SONG:
Yesterday’s song was Baggy Trousers by Madness. Today, who sang:
“The wild dogs cry out in the night
As they grow restless, longing for some solitary company
I know that I must do what’s right”
RETAIL WITH NICK BUBB:
• Boohoo: In the post-Black Friday trading update on Dec 3rd, mighty Boohoo said that it was trading “comfortably in line with market expectations”, so hopes were high for today’s update and Boohoo has not let its fans down, by announcing that the 4 months to Dec 31st saw sales up by as much as 44%. And it has raised its conservative full-year guidance on sales growth from 33%-38% to 40%-42%, with the EBITDA margin now expected to be 10%-10.2% rather than 10%. CEO John Lyttle highlights “continued strong growth across all brands in all regions”.
• Games Workshop: For a company now capitalised at over £2bn, the high-flying Games Workshop doesn’t exactly go out of its way to help investors, but at least it has a conservative forecasting record and today’s interims are ahead of the guidance in the brief update on Nov 8th, with sales up 19% to £148m and PBT up from £40.8m to £58.6m (for the six months to Dec 1st). And the CEO Kevin Rountree says that the key month of December was “in line with our expectations” and that “our business and the Warhammer hobby continue to be in great shape”.
• DFS Furniture: Today’s trading update (for the 26 weeks to Dec 29th) has the wordy heading “Full year profit before tax expected to be broadly in line with market expectations despite a challenging trading environment”, which does sum things up. Sales were down by 6% in the first half, but DFS expect “low single digit” growth in the second half and note that “order intake momentum has strengthened more recently, and the key Winter Sale trading period has started satisfactorily”.
• News Flow This Week: Tomorrow brings the QUIZ trading update and the Studio Retail EGM. Then Thursday brings The Works interims, the ABF (Primark) update, the Halfords Q3, the N Brown Q3 and the Signet (US) update. Friday brings the ONS Retail Sales for December.