The Capital Note: Stocks Slide
Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: the market selloff, Nikola, and a look at the space economy.
Mondays…
With all the ominous news it is not surprising that the markets are off. As I write (11.10 a.m.), the Dow is down about 2.7 percent, the S&P 500 about 2.2 percent. In London, the FTSE 100 is off over 3 percent, while the more domestically oriented FTSE 250 has fallen 4 percent, and Frankfurt’s DAX is down slightly more than that.
The main worry appears to be the “return” of COVID-19, with cases rising sharply in a number of European countries.
France reported 10,569 new cases Sunday (down from more than 13,000 new cases reported the day before), Reuters reported, while the U.K., reported almost 4,000 new cases on Sunday. Italy saw close to 1,000 new infections and Germany reported 1,345 new cases Sunday, and a further 922 cases Monday. Spain has yet to post its weekend case tallies, but reported almost 4,700 new cases Friday.
On Monday, German Health Minister Jens Spahn said rising coronavirus infection numbers in countries like France, Austria and the Netherlands were “worrying” and that Germany would sooner or later import cases from there, Reuters reported. He added that countries like Spain had infection dynamics “that are likely out of control.”
“Expect lots more restrictions over the days and weeks ahead, especially in Europe,” Deutsche Bank analysts said in a note Monday. “The fact that the virus is already spreading quite rapidly is a big worry.”
Coronavirus cases are rising so rapidly in Europe that the World Health Organization warned last week that there was a “very serious situation” unfolding in the region, calling the resurgence in infections a “wake up call.”
The sell-off is “mainly down to what’s happening in terms of Covid-19 and potential second lockdowns”, said Artur Baluszynski, head of research at investment manager Henderson Rowe.
It is worth noting the second half of that sentence. Investors are naturally worried about the progress of the disease, but they are also concerned how governments are going to handle its ‘resurgence’. Not well, if precedent is any guide.
Not for the first time in its existence, CNN misses the point:
After successfully tamping down the first surge of infection and death, Europe is now in the middle of a second coronavirus wave as it moves into winter — raising questions over what went so wrong.
Nothing went ‘wrong’, at least in one sense: While the initial short-term lockdowns were easy enough to justify, the more prolonged and draconian lockdowns that we have seen since were never very like to pave the way for a viable solution—and, no, waiting for a vaccine is not a viable solution. No proper, intelligent attempt was made to ‘live with’ the virus. Instead, much of what was done was no more, as I noted last week, than an attempt to kick the can down the road—and at enormous cost. Now, all too predictably, the virus may be roaring back, and just as we begin flu season, for good measure.
Here and there I have compared the efforts by some governments to combat the coronavirus with those of First World War generals on the Western Front. One of the more notorious of those was Blackadder’s (fictional) General Melchett. For some reason, this comment by Melchett comes to mind: “If nothing else works, a total pig-headed unwillingness to look facts in the face will see us through.”
As if COVID-19 were not enough, markets have also had to digest the resignation of Nikola founder and executive chairman Trevor Milton in, as the Wall Street Journal reports, “the wake of allegations from a short seller that he and the company had made false statements to investors.”
With tech stocks already under the knout, the knock to sentiment will not have been confined to Nikola.
Then there were the banks.
Shares of major banks dropped Monday morning following a report alleging those including JPMorgan, HSBC, Standard Chartered Bank, Deutsche Bank and Bank of New York Mellon continued to profit from illicit dealings with disreputable people and criminal networks despite being previously fined for similar actions.
Markets look ahead. Their concern won’t be just on the heavy fines that may be coming the banks’ way, but on further legal restrictions being imposed upon them, particularly, so far as the U.S. is concerned, if Biden wins.
And then the sad death of Ruth Bader Ginsburg has taken the political temperature in the US up quite a few points more, triggering (literally) incendiary rhetoric and, I suspect, ending much chance of a compromise over a stimulus package. Additionally, the rise in tension is likely to increase unease in the markets over how the election process itself is going to go.
Rough times ahead if I had to guess.
— A.S.
Nikola
Just two weeks ago, Trevor Milton, the founder of electric-truck maker Nikola, received the imprimatur of an automotive giant when General Motors took a $2 billion equity stake in his company. It seemed a vindication of Nikola, whose market capitalization at one point surpassed $30 billion despite a total absence of operating revenue.
Two days after the GM investment, short-seller Hindenburg Research released a report describing the company as an elaborate fraud. The firm accused Milton of playing up proprietary battery and fuel-cell technology that never existed. It also said that the electric-truck maker had released doctored demonstration videos of its vehicles, an allegation which Milton did not exactly deny. Shares in the company have since tumbled.
Today, Milton resigned as chairman of Nikola, sending the stock down another 20 percent.
Nikola’s tumultuous two-week stretch underscores the difficulty of distinguishing between grandiose ambition and outright fraud in the tech industry. Tesla, an obvious inspiration of Nikola’s, has long been a target of short sellers who say the company sets unrealistic sales targets and exaggerates the power of its technologies. Some short sellers have gone as far as to call Tesla a fraud. After years of controversy, however, there is now no doubt that the company is the leader in electric vehicles.
Nikola’s challenges will also raise more concerns about the recent wave of special-purpose acquisition companies (SPACs), an alternative to the IPO process that has gained popularity this year. SPACs avoid the scrutiny that comes with a typical IPO, which, while convenient for founders, also increases the potential for dubious companies to tap the capital markets.
For its part, GM appears committed to making the partnership work, despite Hindenburg’s warning that the automaker “should carefully evaluate the potential long-term damage to its 112-year brand.”
— D.T.
Around the Web
Meanwhile, in Sweden.
One of Denmark’s most prominent epidemiology researchers has said that the coronavirus pandemic in Sweden “may be finished” due to immunity in the population, even though the country remains far from the classic 60 percent threshold.
“There are indications that the Swedes have gained an element of immunity to the disease, which, together with everything else they are doing to prevent the infection from spreading, is enough to keep the disease down,” Kim Sneppen, professor of biocomplexity at the Niels Bohr Institute in Copenhagen, told the Politiken newspaper.
According to figures collated by OurWorldinData, Sweden on Friday had registered a daily average of 23 cases per million people over the preceding seven days, compared to 61 cases in Denmark and 20 in Norway.
About that V.
What might extinguish a significant chunk of America’s struggling small businesses in the coming months? Their inability to pay rent. Or really, their inability to get landlords to negotiate on rent. The situation has been under the radar for the general public for since day one of the pandemic but remains an “enormous problem” for local business owners, says Mary Alice Scott, executive director of the Portland Independent Business and Community Alliance in Maine. When businesses closed temporarily, the fell behind on paying rent—most by at least three or four months, says Rolando Gonzalez, a senior staff attorney at the Legal Aid Society’s Community Development Project in New York. “The problem is, even after they opened back up, their revenues are down.” The rent problem is “only going to get worse,” he says.
A survey released in August by advocacy group Small Business Majority of more than 900 businesses in its network indicated 62% are struggling to make commercial rent or mortgage payments—up 6% from a previous poll released earlier in the month. The group warned a wave of commercial evictions and foreclosures could be on the horizon.
The blight of the (Business) Roundtable (continued).
Not content with switching its support away from shareholder capitalism (the idea that a company should put the interests of its owners first) in favor of the sleazy and deeply anti-democratic notion of ‘stakeholder capitalism’, the BRT is increasing the attention it pays to climate change.
Its ideas will come as no surprise to anyone familiar with this increasingly disreputable body.
In a statement on its website, the Business Roundtable warned of the threats that climate change posed to the United States, and said although significant progress had been made to reduce greenhouse gas emissions, the uncertainty caused by the patchwork of state and federal efforts was hurting companies.
“It is time for a new approach,” the statement said.
The group also backed the goals of the 2015 Paris agreement of limiting average global temperature increases to 2 degrees Celsius — a sharp break from President Donald Trump, who is planning to make the U.S. the only country in the world to pull out of the pact.
“The United States and the international community must aggressively reduce GHG emissions and create incentives for developing new technologies to achieve this goal. Business Roundtable supports a goal of reducing net U.S. GHG emissions by at least 80 percent from 2005 levels by 2050,” it said.
In unrelated news:
The Financial Times (from June):
China is approving plans for new coal power plant capacity at the fastest rate since 2015, in a sign that pressure to stimulate the economy is undermining a transition towards cleaner energy sources.
New coal plant projects proposed this year in China would add more than 40GW to the country’s power supply, according to new data — comparable to the entire existing fleet of South Africa…
Survey data from the Global Energy Monitor and the Centre for Research on Energy and Clean Air also show that China approved the construction of more coal power plant capacity in the period to mid-June than in all of 2018 and 2019 combined.
Random Walk
In light of the news of potential life on Venus, let’s take a look at the economics of space exploration.
A 2017 Morgan Stanley report estimated that the global space industry will reach a size of $2.7 trillion by 2045, with the lion’s share of value coming from satellite services. We already interact with satellites an average of 36 times a day, according to Seraphim Capital, and that number is poised to grow as SpaceX develops its Starlink project, which aims to put nearly 12,000 satellites into low-earth orbit in the next few years.
Over 75 percent of space activity now comes from the private sector, thanks primarily to the dramatic reduction in launch costs engineered by SpaceX, whose reusable rockets are now used by governments and satellite companies around the world.
Morgan Stanley:
We believe that we are entering an exciting era in Space where we expect more advances in the next few decades than throughout human history. The original 20th century Space Race was all about the Cold War superpowers, and military/defense interests (US DoD) will remain a key driving force of the new Space Race. However, we see a raft of new drivers including private company innovation (SpaceX reusable launch), commercial activity (3/4 of the Space industry), the involvement of new countries (80+ countries with satellites in orbit), and falling launch costs (Rocket Lab – US$5mn). Stakeholder support remains strong (7/10 Americans rate NASA favourably) as does the regulatory backdrop (SPACE Act 2015, Trump administration)…
— D.T.
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