20/09 – September Market Commentary
Oh, Argentina! See our previous posts here. Earlier this month, after arduous negotiations, Argentina reached a breakthrough in debt negotiations when greater than 90% of bondholders agreed to tender their defaulted bonds for new, non-defaulted bonds. By the end of the month bond prices were signaling trouble anew. Well that was fast.
One of the new bonds pays 1/8% coupon and matures in 2035. Par is 100. The price fell from more than $46 to around $38 by month end. Chart of the new bond described above:
Here is another fun one that is rarely seen. Currency markets are considered some of the last efficient markets with numerous forces determining clearing level – of course some currencies are pegged and therefore heavily manipulated, but generally in favor to local needs. Chart: Argentinian Peso
Chart: Argentinian Peso 20-year
It has not been a good new millenia for Argentina. For reference, the beginning of the latest chart showing ARS/USD starts when the Peso was parity to USD, or 1-for-1. It’s now almost 77. That’s substantial devaluation and it continues each day.
Countries around the world might take note and get their policies in order.
While bankruptcies in energy continue to mount the remaining strong and semi-strong companies are looking for ways to move forward. Devon and WPX are merging in a no-premium all-stock deal. This is the type of maneuver you see in an industry in distress. Normally one company takes over another and there is a clear premium with some cash paid and rationale for consolidation et cetera. Here, there is a merger of equally poorly positioned companies looking to diversify oil assets, realize synergies through cost cutting. As with most merger strategies this does not seem like a strong one, but is viewed as a template for others in a seemingly rudderless energy market.
Elsewhere in the shale patch, Occidental announced it would pay its current preferred dividend to Berkshire in the form of cash. The previous dividend was in the form of common stock, which Berkshire promptly sold. Paying in cash now does not seem like a great use of liquidity for a highly leveraged company in a struggling sector. Occidental also just announced it is selling Colombia assets at a big discount. Selling assets to pay debt is generally not a good position to be in. Seems like, without meaningfully higher oil prices, this enterprise may be under water.
What a month for Nikola, a would-be electric vehicle rival to Tesla. A research report was published September 10th that leveled powerful allegations among others: a couple of the trucks used as demos either at shows or in commercials were never operational – they were just used as props. The company managed to raise billions of dollars and complete a public listing in June, achieving a whopping market capitalization of $28.7 billion before falling – it is now around $9.3 billion. The critical research piece has led to the resignation of founder, CEO, and chairman, Trevor Milton. There is some question as to whether there is a path forward for Nikola, which also managed to ink a big deal with General Motors during the month. To be determined.
RV manufacturers are performing well as sales exceed production. With the pandemic shutdowns, social distancing, et cetera people are buying recreational vehicles and camper trailers to work remotely, to see the country, to get out of the city. And why not. It is creating an economic windfall for RV manufacturers that no one could have anticipated at the beginning of the year.
One of the biggest mall investors, Brookfield, has called time as several of its properties are struggling. The mall operators will dispose of several properties and cut its workforce by 20%. Curiously, Brookfield is simultaneously attempting to rescue one of its bigger tenants, JCPenney…
Macro – China/US
The US and Taiwan are pursuing arms deal. This will surely rattle relations with China. Recall that China views Taiwan as a territory of China, akin to Hong Kong prior to 2020. Hong Kong is now explicitly part of China. Some have speculated that China may seek similar action in Taiwan to completely pull Taiwan under China’s direct influence.
Macro – China/India
We had previously raised the specter of conflict between the two nuclear powers (see Kashmir). September brought the first fire exchanged between troops in 45 years. News has been quiet since, but the escalation is there with neither side seemingly prepared to back down.