Wednesday, 12 December 2018

Shock treatment

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Seismic events are taking place around the globe and not only in the Iran/Iraq border areas but also in the US where GE has slashed its dividend by half and is talking of a complete restructuring. 

Venezuela is formally in default on its bonds following its inability to meet coupon payments after the grace period expired on its 7.75% October 2019 notes. And of course in Italy, the failure of its football team to reach the World Cup finals in Russia next year is shaking a nation, already short of self-esteem, to the very roots. 

The order of importance varies depending on where you are but as England missed the finals in 1974, 1978 as well as 1994 and has still not sunk into the sea, methinks we should set that particular issue aside and counsel the Italians on just how much more fun it is to watch the game without all the hype and national neurosis attached to penalty shoot-outs against Germany or games of handball against Argentina.


Latin jazz 

The Venezuela default has been stalking markets for quite a while and its ultimate failure to meet its obligations in the international financial markets comes as no great surprise. The Maduro government has spent a lot of time chittering about the US-led conspiracy to destroy its economy and had also already indicated that it would not honour its obligations in a conventional way. On November 2 Maduro said that the country would be restructuring its debt and on Monday a meeting was held in Caracas with creditors. So far no meaningful results have been achieved. 

The default has been in the offing for years now so it is a little surprising that the treasury has held out so long. The problem appears to be that the national oil company PDVSA, for all intents and purposes the only real source of foreign earnings, holds a string of major assets overseas and a default would immediately put these at risk of being seized by creditors. Losing control of part of the value chain would render the government’s position even weaker than it is already and with bubbling discontent among the population, maintaining a facade of normality is a political necessity. As US President Abraham Lincoln is alleged to have said, you can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time. 

US sanctions have not helped as historically nearly 40% of all Venezuela’s oil has headed for the country and losing that important export market has in fact pushed the value of Venezuelan oil, already highly sulphuric and not of the finest quality, lower still. With its large debt-funded social programmes having strained government finances when crude was generically trading above US$100 per barrel, the low prices of recent years have devastated the country’s economy. Venezuela has been a very, very slow train crash and mainstream banks and investment funds are all out of its bonds. What they do own will already be written down and provided against. Distressed debt hedge funds and other vulture investors now own most of what’s out there and it’s obvious that Caracas didn’t want to get into the same cat fight in the US courts that Argentina did in the aftermath of its own default. Thus, in a strange way and on an international stage, the declaration of default is something of a non-event for the global financial system although Maduro and his populist movement will have to go the way of Cristina Fernandez de Kirchner and hers before his benighted country becomes an international story again. I’m not sure whether it is good or bad that a country the size of Venezuela with the world’s largest proven oil reserves can go into default in the first place and beyond that nobody really cares.



GE, one of the original components of the Dow Jones Industrial Average and founded by Thomas Edison, is in trouble. Well, the trouble is relative and I’m sure that there are lots of other shops that would give their eye teeth to be as troubled as GE. Nevertheless, in 2000 when the legendary Jack Welch was in charge the stock peaked at just over US$60. By March 2003, with Jeff Immelt in the driving seat, it was down to US$23. Already regarded as a finance company with some manufacturing side-lines, it took a pounding during the financial crisis, bouncing off US$5.75 only to revert back to the US$30 area at the beginning of this year. Opening the year at around US$32, by the time Immelt retired in October after 17 years in charge the stock price had fallen into the low US$20s. After the new boss, John Flannery, announced the halving of the dividend yesterday to US$0.12 it had fallen another US$1.47 to close at US$19.02. 

GE is an old-style conglomerate with cyclical and non-cyclical businesses with long and short cycles. This is supposed to give the shareholder a stable investment platform but often results in a lack of focus and a dissipation of talent and vision. Through the Welch and Immelt years this was supposed to have been the case although it would appear that there was more wishful thinking that actual investor protection. Flannery, himself a life-long staffer, obviously wants to tighten up things although the inference is that he wants to dump the lighting business upon which Edison built the company. That’s like Ford announcing its exit from car making or Hilton pulling out of hotels. Next he’ll be changing the name. 

GE is what it is because of what it is. Has it been struggling because it is badly structured or because it is poorly managed? Sadly, career development is no longer part of strategic planning and enforced specialization does more long-term damage than good. If talent is not moved around and shown all aspects of the business, how can there ever be anyone who can competently manage it? If GE is to be shrunk to a more manageable size then there will be lots of disposals and a large part of that cash will have to be distributed to shareholders. Forgetting the headline share price, there might be some fun to be had with GE in the future. 


Last orders

Finally for Trump’s Asia trip. He has proudly announced that he has brought large export deals home with him. In fact we’re looking at US$300bn of deals having been signed. Of those US$250bn were in China, US$17bn in South Korea and a miserable US$1.6bn in Japan. A large chunk of these are aircraft orders for Boeing that will have been in negotiation before the president was in the White House and in some cases maybe even before he was elected. Most of them will be no more than part of regular Sino-US trade and will not, as the headline would infer, suddenly offset the US$347bn trade deficit that the US racked up last year. Total US exports to China in 2016 amounted to US$116bn while imports were US$463bn, a ratio of around four to one. 

I might be stupid but I can’t see how President Trump can purport to have wiped that out in one fell swoop. What was that about lies, damned lies and statistics?

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