United States

In this briefing:

1. Sprint/T-Mobile: Markets Building in a 60% Probability Deal Is Rejected

1. Sprint/T-Mobile: Markets Building in a 60% Probability Deal Is Rejected

Sprint shares now trade at a 43% discount to the implied value based on the original merger terms, down from <10% last July when the DoJ approved the deal and from 27% when we last wrote about this in November. Based on our range of outcomes, that appears to imply a 60%+ probability that the TMUS merger will not pass muster in the courts. That ruling should be out in February and whilst we do not have any special insight (nor does anyone which is why deal odds are priced like this) we did think it worthwhile to look at the state of play. TMUS should trade steadily no matter the result whilst Sprint is almost assuredly mis-priced as markets give meaningful weight to both sides of a binary outcome.

In this briefing:

1. Sprint/T-Mobile: Markets Building in a 60% Probability Deal Is Rejected
2. Weekly Oil Views: Devoid of Fear or Cheer Premium, Brent Balances Around $65

1. Sprint/T-Mobile: Markets Building in a 60% Probability Deal Is Rejected

Sprint shares now trade at a 43% discount to the implied value based on the original merger terms, down from <10% last July when the DoJ approved the deal and from 27% when we last wrote about this in November. Based on our range of outcomes, that appears to imply a 60%+ probability that the TMUS merger will not pass muster in the courts. That ruling should be out in February and whilst we do not have any special insight (nor does anyone which is why deal odds are priced like this) we did think it worthwhile to look at the state of play. TMUS should trade steadily no matter the result whilst Sprint is almost assuredly mis-priced as markets give meaningful weight to both sides of a binary outcome.

2. Weekly Oil Views: Devoid of Fear or Cheer Premium, Brent Balances Around $65

The US and China signed their phase-one trade deal on January 15 but it barely boosted crude beyond a mild bump. Our readers will not have been surprised – because this was exactly the anticipation we had been conveying for some time.

It remains to be seen if the deal – which leaves majority of US tariffs on Chinese goods intact – will move the needle on global economic momentum. As for the oil market, it will need time to decide if the prospects for demand growth need recalibrating. 

In the absence of a “cheer premium” from the trade deal and a firm retreat of the fear premium that the escalating US-Iran tensions had introduced at the start of this month, crude prices are now in a holding pattern.

In the meantime, China’s commitment to boost purchases of US energy commodities may mean increased competition among Asian countries that had stepped up their imports of US crude over the past 18 to 24 months.

Plus: The danger of long-term destabilisation that has reared its head in at least two major oil producers amid an uneasy calm in the Middle East. 

In this briefing:

1. WeWork: Softbank Details Imply Slowing Top Line Growth and $1bn+ in Losses
2. Apple and Big Tech Fade and Fresh Buy Levels in March
3. The Guerrilla War Against The PBOC
4. Vontier Corp IPO Preview
5. L Brands: Sale of Victoria’s Secret Helps Draw Attention to Bath & Body’s Success

1. WeWork: Softbank Details Imply Slowing Top Line Growth and $1bn+ in Losses

According to Softbank (indirectly), WeWork revenue growth continues to slow and losses to expand. We did not get any detailed financial data this quarter but its announcement of financial targets and a breakdown of WeWork’s impact on Softbank Q3 numbers give us enough to get a rough idea. The magnitude of near-term losses does explain why conversions for most recent investments/contribution of joint venture stakes and the tender offer for the minority shareholders don’t kick until April when (presumably) the situation has stabilised. Meanwhile, it also The appears the fair value for equity has declined from $7.8bn at Q2 (Sep) to $7.3bn as of December.

2. Apple and Big Tech Fade and Fresh Buy Levels in March

Focus is on Apple Inc (AAPL US) and the rising wedge as well as big tech upside fade levels and pullback targets for March. We cover cycles levels in Amazon.com Inc (AMZN US)Alphabet Inc Cl C (GOOG US)Facebook Inc A (FB US)Microsoft Corp (MSFT US) .

Apples’ exhaustive rising wedge stands out as a peak set up with uptick resistance within yesterdays’ gap zone.

As breadth narrows, it comes down to top tech holding the market together. If big tech rolls over then so does the NDX and SPX and the global cycle.

Note that recent tech strength has been on diminishing buy volumes from early February (x Microsoft) for this group which often precedes pullbacks from current overbought readings. Pullback levels and fresh buy zones in March hinge on price congestion and trendline supports holding. Apple and Facebook display the weaker underlying structures. Google and Microsoft show extended rises with pullback risk but remain macro bullish. Amazon exhibits the more bullish underlying technical posture.

3. The Guerrilla War Against The PBOC

In the wake of the news of the coronavirus infection, the Chinese leadership went into overdrive and made it a Draghi-like “whatever it takes” moment to prevent panic and stabilize markets. When the stock markets opened after the Lunar New Year break, the authorities prohibited short sales, directed large shareholders not to sell their holdings and the PBOC turned on their firehose of liquidity to support the stock market. Those steps largely succeeded. China’s stock markets stabilized and recovered, and so too did the markets of China’s Asian trading partners.

However, there were signs that the market is unimpressed by the steps taken by Beijing to control the outbreak and limit its economic impact. Market participants were conducting a guerrilla campaign against the PBOC.

While stock markets have been strong, commodity markets have been weak. Foreign exchange markets are also taking a definite risk-off tone, contrary to the PBOC’s efforts to support risk appetite. Even Chinese market internals are exhibiting skepticism, as financial stocks have lagged the market rally.

This argues for a contrarian position of long EM, commodities, and commodity producers and short U.S. equities. Aggressive traders could enter into a long and short pairs trade, while more risk-controlled accounts could just overweight and underweight.

If the bulls are right, and the coronavirus outbreak recedes and comes under control, U.S. equities should begin to underperform as the demand for safe havens, while cyclically sensitive EM and commodities would rally. On the other hand, if the outbreak were to spiral out of control and global growth collapses, U.S. equities would correct, but there is likely less downside risk in EM and commodity exposure because they have already fallen substantially.

4. Vontier Corp IPO Preview

• Vontier Corp (VNT US) is a carve-out of Fortive Corp (FTV US)‘s mobility infrastructure business. Vontier Corp is getting ready for an IPO in the next few weeks. Goldman Sachs is the sole underwriter in this deal. So far, no pricing terms have been disclosed but it is estimated that the company could raise as much as $1 billion.
• Vontier Corp provides numerous equipment, software, and services that aim to service the mobility infrastructure industry worldwide. The company supplies numerous solutions including advanced environmental sensors, fueling equipment, field payment hardware, remote management and workflow software, vehicle tracking and fleet management software solutions. 
• The company generated sales of $2.8 billion in 2019, up 4% YoY. From 2015 to 2019, its sales increased by 5.4% CAGR. From 2015 to 2019, the company generated a stable and relatively high average operating margin of 19.2%. 

5. L Brands: Sale of Victoria’s Secret Helps Draw Attention to Bath & Body’s Success

It was reported by several news media outlets that the private equity firm Sycamore Partners Management LP has been in talks with L Brands Inc (LB US) regarding the purchase of the latter’s iconic lingerie brand Victoria’s Secret (VS). Media reports suggest that it is almost a done deal and an announcement can be expected as early as tomorrow, 18^th February 2020. In addition to acquiring VS, Sycamore Partners Management LP is also weighing a private investment in public equity deal (PIPE) to help L Brands reduce its debt burden.

In this briefing:

1. Apple and Big Tech Fade and Fresh Buy Levels in March
2. The Guerrilla War Against The PBOC
3. Vontier Corp IPO Preview
4. L Brands: Sale of Victoria’s Secret Helps Draw Attention to Bath & Body’s Success
5. The US and Developed Countries: Bump in the Road or Cliff Edge?

1. Apple and Big Tech Fade and Fresh Buy Levels in March

Focus is on Apple Inc (AAPL US) and the rising wedge as well as big tech upside fade levels and pullback targets for March. We cover cycles levels in Amazon.com Inc (AMZN US)Alphabet Inc Cl C (GOOG US)Facebook Inc A (FB US)Microsoft Corp (MSFT US) .

Apples’ exhaustive rising wedge stands out as a peak set up with uptick resistance within yesterdays’ gap zone.

As breadth narrows, it comes down to top tech holding the market together. If big tech rolls over then so does the NDX and SPX and the global cycle.

Note that recent tech strength has been on diminishing buy volumes from early February (x Microsoft) for this group which often precedes pullbacks from current overbought readings. Pullback levels and fresh buy zones in March hinge on price congestion and trendline supports holding. Apple and Facebook display the weaker underlying structures. Google and Microsoft show extended rises with pullback risk but remain macro bullish. Amazon exhibits the more bullish underlying technical posture.

2. The Guerrilla War Against The PBOC

In the wake of the news of the coronavirus infection, the Chinese leadership went into overdrive and made it a Draghi-like “whatever it takes” moment to prevent panic and stabilize markets. When the stock markets opened after the Lunar New Year break, the authorities prohibited short sales, directed large shareholders not to sell their holdings and the PBOC turned on their firehose of liquidity to support the stock market. Those steps largely succeeded. China’s stock markets stabilized and recovered, and so too did the markets of China’s Asian trading partners.

However, there were signs that the market is unimpressed by the steps taken by Beijing to control the outbreak and limit its economic impact. Market participants were conducting a guerrilla campaign against the PBOC.

While stock markets have been strong, commodity markets have been weak. Foreign exchange markets are also taking a definite risk-off tone, contrary to the PBOC’s efforts to support risk appetite. Even Chinese market internals are exhibiting skepticism, as financial stocks have lagged the market rally.

This argues for a contrarian position of long EM, commodities, and commodity producers and short U.S. equities. Aggressive traders could enter into a long and short pairs trade, while more risk-controlled accounts could just overweight and underweight.

If the bulls are right, and the coronavirus outbreak recedes and comes under control, U.S. equities should begin to underperform as the demand for safe havens, while cyclically sensitive EM and commodities would rally. On the other hand, if the outbreak were to spiral out of control and global growth collapses, U.S. equities would correct, but there is likely less downside risk in EM and commodity exposure because they have already fallen substantially.

3. Vontier Corp IPO Preview

• Vontier Corp (VNT US) is a carve-out of Fortive Corp (FTV US)‘s mobility infrastructure business. Vontier Corp is getting ready for an IPO in the next few weeks. Goldman Sachs is the sole underwriter in this deal. So far, no pricing terms have been disclosed but it is estimated that the company could raise as much as $1 billion.
• Vontier Corp provides numerous equipment, software, and services that aim to service the mobility infrastructure industry worldwide. The company supplies numerous solutions including advanced environmental sensors, fueling equipment, field payment hardware, remote management and workflow software, vehicle tracking and fleet management software solutions. 
• The company generated sales of $2.8 billion in 2019, up 4% YoY. From 2015 to 2019, its sales increased by 5.4% CAGR. From 2015 to 2019, the company generated a stable and relatively high average operating margin of 19.2%. 

4. L Brands: Sale of Victoria’s Secret Helps Draw Attention to Bath & Body’s Success

It was reported by several news media outlets that the private equity firm Sycamore Partners Management LP has been in talks with L Brands Inc (LB US) regarding the purchase of the latter’s iconic lingerie brand Victoria’s Secret (VS). Media reports suggest that it is almost a done deal and an announcement can be expected as early as tomorrow, 18^th February 2020. In addition to acquiring VS, Sycamore Partners Management LP is also weighing a private investment in public equity deal (PIPE) to help L Brands reduce its debt burden.

5. The US and Developed Countries: Bump in the Road or Cliff Edge?

We are in the camp that believes the US economy will hit a recessionary speed-bump in 2020. This isn’t because of the coronavirus fallout but because of signals that emerged through 2019. Over the years we have relied on a series of indicators which have a good track record in forecasting US downturns, regardless of elections or public health.

In this briefing:

1. Weekly Oil Views: Devoid of Fear or Cheer Premium, Brent Balances Around $65

1. Weekly Oil Views: Devoid of Fear or Cheer Premium, Brent Balances Around $65

The US and China signed their phase-one trade deal on January 15 but it barely boosted crude beyond a mild bump. Our readers will not have been surprised – because this was exactly the anticipation we had been conveying for some time.

It remains to be seen if the deal – which leaves majority of US tariffs on Chinese goods intact – will move the needle on global economic momentum. As for the oil market, it will need time to decide if the prospects for demand growth need recalibrating. 

In the absence of a “cheer premium” from the trade deal and a firm retreat of the fear premium that the escalating US-Iran tensions had introduced at the start of this month, crude prices are now in a holding pattern.

In the meantime, China’s commitment to boost purchases of US energy commodities may mean increased competition among Asian countries that had stepped up their imports of US crude over the past 18 to 24 months.

Plus: The danger of long-term destabilisation that has reared its head in at least two major oil producers amid an uneasy calm in the Middle East. 

In this briefing:

1. The Guerrilla War Against The PBOC
2. Vontier Corp IPO Preview
3. L Brands: Sale of Victoria’s Secret Helps Draw Attention to Bath & Body’s Success
4. The US and Developed Countries: Bump in the Road or Cliff Edge?
5. Covid-19/Economic Impact/Huawei/Hong Kong/Mastercard

1. The Guerrilla War Against The PBOC

In the wake of the news of the coronavirus infection, the Chinese leadership went into overdrive and made it a Draghi-like “whatever it takes” moment to prevent panic and stabilize markets. When the stock markets opened after the Lunar New Year break, the authorities prohibited short sales, directed large shareholders not to sell their holdings and the PBOC turned on their firehose of liquidity to support the stock market. Those steps largely succeeded. China’s stock markets stabilized and recovered, and so too did the markets of China’s Asian trading partners.

However, there were signs that the market is unimpressed by the steps taken by Beijing to control the outbreak and limit its economic impact. Market participants were conducting a guerrilla campaign against the PBOC.

While stock markets have been strong, commodity markets have been weak. Foreign exchange markets are also taking a definite risk-off tone, contrary to the PBOC’s efforts to support risk appetite. Even Chinese market internals are exhibiting skepticism, as financial stocks have lagged the market rally.

This argues for a contrarian position of long EM, commodities, and commodity producers and short U.S. equities. Aggressive traders could enter into a long and short pairs trade, while more risk-controlled accounts could just overweight and underweight.

If the bulls are right, and the coronavirus outbreak recedes and comes under control, U.S. equities should begin to underperform as the demand for safe havens, while cyclically sensitive EM and commodities would rally. On the other hand, if the outbreak were to spiral out of control and global growth collapses, U.S. equities would correct, but there is likely less downside risk in EM and commodity exposure because they have already fallen substantially.

2. Vontier Corp IPO Preview

• Vontier Corp (VNT US) is a carve-out of Fortive Corp (FTV US)‘s mobility infrastructure business. Vontier Corp is getting ready for an IPO in the next few weeks. Goldman Sachs is the sole underwriter in this deal. So far, no pricing terms have been disclosed but it is estimated that the company could raise as much as $1 billion.
• Vontier Corp provides numerous equipment, software, and services that aim to service the mobility infrastructure industry worldwide. The company supplies numerous solutions including advanced environmental sensors, fueling equipment, field payment hardware, remote management and workflow software, vehicle tracking and fleet management software solutions. 
• The company generated sales of $2.8 billion in 2019, up 4% YoY. From 2015 to 2019, its sales increased by 5.4% CAGR. From 2015 to 2019, the company generated a stable and relatively high average operating margin of 19.2%. 

3. L Brands: Sale of Victoria’s Secret Helps Draw Attention to Bath & Body’s Success

It was reported by several news media outlets that the private equity firm Sycamore Partners Management LP has been in talks with L Brands Inc (LB US) regarding the purchase of the latter’s iconic lingerie brand Victoria’s Secret (VS). Media reports suggest that it is almost a done deal and an announcement can be expected as early as tomorrow, 18^th February 2020. In addition to acquiring VS, Sycamore Partners Management LP is also weighing a private investment in public equity deal (PIPE) to help L Brands reduce its debt burden.

4. The US and Developed Countries: Bump in the Road or Cliff Edge?

We are in the camp that believes the US economy will hit a recessionary speed-bump in 2020. This isn’t because of the coronavirus fallout but because of signals that emerged through 2019. Over the years we have relied on a series of indicators which have a good track record in forecasting US downturns, regardless of elections or public health.

5. Covid-19/Economic Impact/Huawei/Hong Kong/Mastercard

China News That Matters

• New name, leaders and a spike in cases 
• Getting back to business
• Huawei: new indictments, old fears
• Beijing appoints better enforcers for Hong Kong 
• For everything else there’s…

In this briefing:

1. Energy: Value Opportunity, or Value Trap?
2. Trade Deal/ Tech War/ Financial Services/ Taiwan/ Scams
3. China Phase 1 – Dumb Deal

1. Energy: Value Opportunity, or Value Trap?

Callum Thomas recently highlighted an observation from BAML that the market cap of Apple (AAPL) is now larger than the entire energy sector.

Is this an inflection point for the energy sector? Do energy stocks represent a value opportunity that should be bought, or a value trap to be avoided?

We would like to propose a long-term bullish factor that has been ignored by the market. This factor has the potential to be the catalyst that digs these stocks out of their pariah status.

The Sun is about to undergo a period of low sunspot activity, which has shown to have a cooling effect on the Earth’s climate. The climate data that emerges over the next decade should show that the effects of human-induced warming to be partially or fully offset by the effects of the solar cycle. Public concerns about climate change, and policy surrounding a global climate emergency, are likely to abate, but that process will take time.

We believe that while the sector is acquiring a value characteristic, sentiment is not yet a wash-out and price momentum is still a headwind for these stocks. To be sure, there is a long-term bullish catalyst waiting in the wings, but the effects of this catalyst may not be evident for several years. For now, the bull call on energy is only a trade set-up. We are inclined to wait for signs of a technical turn before turning significantly bullish on the sector.

2. Trade Deal/ Tech War/ Financial Services/ Taiwan/ Scams

China News That Matters

• Signed, sealed but how to deliver? 
• Risky business
• Foreign financial services firms rush in
• The dangers of democracy
• State-owned scams and scammers

3. China Phase 1 – Dumb Deal

• Not So Fast:  Mainland China is NOT reducing tariffs on USD 138 bn of existing US imports at rates of 5%-25%, and will only suspend new tariffs. The exchange rate of CNY/USD remains at 7 and is weakening and more than offsets the existing tariffs on mainland Chinese goods.
• Pie In the Sky:Under Phase 2, the US is demanding mainland China address SOE subsidies, cyber attacks, cross-border data flows, et al.   
• Sentiment Positive:As for the markets, the draft agreement is a positive for sentiment to the extent this convinces businesses to invest. 

In this briefing:

1. Vontier Corp IPO Preview
2. L Brands: Sale of Victoria’s Secret Helps Draw Attention to Bath & Body’s Success
3. The US and Developed Countries: Bump in the Road or Cliff Edge?
4. Covid-19/Economic Impact/Huawei/Hong Kong/Mastercard
5. Sanders-Buttigieg Are Co-Front-Runners, but Bloomberg Is Racing to the Nomination

1. Vontier Corp IPO Preview

• Vontier Corp (VNT US) is a carve-out of Fortive Corp (FTV US)‘s mobility infrastructure business. Vontier Corp is getting ready for an IPO in the next few weeks. Goldman Sachs is the sole underwriter in this deal. So far, no pricing terms have been disclosed but it is estimated that the company could raise as much as $1 billion.
• Vontier Corp provides numerous equipment, software, and services that aim to service the mobility infrastructure industry worldwide. The company supplies numerous solutions including advanced environmental sensors, fueling equipment, field payment hardware, remote management and workflow software, vehicle tracking and fleet management software solutions. 
• The company generated sales of $2.8 billion in 2019, up 4% YoY. From 2015 to 2019, its sales increased by 5.4% CAGR. From 2015 to 2019, the company generated a stable and relatively high average operating margin of 19.2%. 

2. L Brands: Sale of Victoria’s Secret Helps Draw Attention to Bath & Body’s Success

It was reported by several news media outlets that the private equity firm Sycamore Partners Management LP has been in talks with L Brands Inc (LB US) regarding the purchase of the latter’s iconic lingerie brand Victoria’s Secret (VS). Media reports suggest that it is almost a done deal and an announcement can be expected as early as tomorrow, 18^th February 2020. In addition to acquiring VS, Sycamore Partners Management LP is also weighing a private investment in public equity deal (PIPE) to help L Brands reduce its debt burden.

3. The US and Developed Countries: Bump in the Road or Cliff Edge?

We are in the camp that believes the US economy will hit a recessionary speed-bump in 2020. This isn’t because of the coronavirus fallout but because of signals that emerged through 2019. Over the years we have relied on a series of indicators which have a good track record in forecasting US downturns, regardless of elections or public health.

4. Covid-19/Economic Impact/Huawei/Hong Kong/Mastercard

China News That Matters

• New name, leaders and a spike in cases 
• Getting back to business
• Huawei: new indictments, old fears
• Beijing appoints better enforcers for Hong Kong 
• For everything else there’s…

5. Sanders-Buttigieg Are Co-Front-Runners, but Bloomberg Is Racing to the Nomination

Mike Bloomberg, a self-made billionaire in the technology & financial sector and 3-term mayor of New York, is quietly surging in the polls, helped by the chaos of Iowa and the muddle of New Hampshire. His Super Bowl ads, focused on gun control and climate change, have shown the voting public that he is passionate about serious issues (and core Democratic ones). He is neither a great debater nor a public speaker, but he has well-thought-through positions on the issues, a record of accomplishment that makes Trump look like a fake business/political dwarf, and a massive gusher of money that he is willing to use liberally. A conservative on national security, centrist on most social issues, but a radical on climate change and gun control, Bloomberg has what it takes to win the presidency, and the Democrats are likely to come around to that view by mid-March.    

Buttigieg leads the delegate race, with 22 (just ahead of the 21 that Sanders has) after the first two contests of the long US presidential marathon. The counting fiasco in Iowa robbed Buttigieg of the momentum that normally accompanies a surprise winner in Iowa — which propelled both Jimmy Carter and Barack Obama all the way to the presidency. Sanders won New Hampshire, but his 1.3pp margin of victory was infinitesimal compared to his 22pp victory over Hillary Clinton in 2016, in what is practically his home state (since he has been in elective office from neighbouring Vermont for 39 years). Sanders now leads the Democratic polls nationwide, but he will lose South Carolina (29 February) to Biden, and narrowly leads in Nevada (22 February). In his 3 runs for president (1988, 2008, 2020), Biden has yet to win a primary or caucus; until he does that, he is being written off. Winning Nevada would help him, South Carolina will be too late. 

After Super Tuesday, the Democratic contest will likely become a two-horse race between a couple of Jewish septuagenarians (Bloomberg turned 78 on Valentine’s Day, Sanders will be 79 in September); their GOP rival will turn 74 on 14th June. The succeeding primaries will become a contest for the vice-presidential nomination between Buttigieg and Klobuchar (both from Midwestern swing states, Indiana and Minnesota; the former won by Trump in a landslide in 2016, the latter a Democratic stronghold where Hillary Clinton held on narrowly). Currently, Bloomberg has taken a lead in Arkansas (a Super Tuesday state) and Florida (March 17th primary). He also looks very strong in Virginia, where Bloomberg played a big role in ensuring a Democratic victory in the 2018 Congressional election, and is drawing a lot of endorsements in return. Biden remains strong in several Super Tuesday states (Texas, North Carolina) and later voting states (Georgia, primary on 24 March). Crucial to Bloomberg is to inherit the majority of Biden’s primary voters if and when the former VP’s campaign fades. Currently, it looks credibly like a two-horse contest after Super Tuesday. If Sanders remains ahead of Bloomberg at the end of March, he will likely win the nomination; if Bloomberg gains enough ground to win 4-6 Super Tuesday states, he will become the moderate standard-bearer. Nationwide polls show Bloomberg beating Trump by a larger margin than any other Democratic candidate. If it is Bloomberg vs Trump after the party conventions, markets will be relieved, and should rally. (If Sanders wins the nomination, Trump’s chances of re-election would rise, but we think Sanders is unlikely to win the nomination; if he does, markets will remain very nervous until Election Day in November). 

In this briefing:

1. Trade Deal/ Tech War/ Financial Services/ Taiwan/ Scams
2. China Phase 1 – Dumb Deal

1. Trade Deal/ Tech War/ Financial Services/ Taiwan/ Scams

China News That Matters

• Signed, sealed but how to deliver? 
• Risky business
• Foreign financial services firms rush in
• The dangers of democracy
• State-owned scams and scammers

2. China Phase 1 – Dumb Deal

• Not So Fast:  Mainland China is NOT reducing tariffs on USD 138 bn of existing US imports at rates of 5%-25%, and will only suspend new tariffs. The exchange rate of CNY/USD remains at 7 and is weakening and more than offsets the existing tariffs on mainland Chinese goods.
• Pie In the Sky:Under Phase 2, the US is demanding mainland China address SOE subsidies, cyber attacks, cross-border data flows, et al.   
• Sentiment Positive:As for the markets, the draft agreement is a positive for sentiment to the extent this convinces businesses to invest. 

In this briefing:

1. L Brands: Sale of Victoria’s Secret Helps Draw Attention to Bath & Body’s Success
2. The US and Developed Countries: Bump in the Road or Cliff Edge?
3. Covid-19/Economic Impact/Huawei/Hong Kong/Mastercard
4. Sanders-Buttigieg Are Co-Front-Runners, but Bloomberg Is Racing to the Nomination
5. Factories Outside of China Now Halting Production as Virus Impact Expands

1. L Brands: Sale of Victoria’s Secret Helps Draw Attention to Bath & Body’s Success

It was reported by several news media outlets that the private equity firm Sycamore Partners Management LP has been in talks with L Brands Inc (LB US) regarding the purchase of the latter’s iconic lingerie brand Victoria’s Secret (VS). Media reports suggest that it is almost a done deal and an announcement can be expected as early as tomorrow, 18^th February 2020. In addition to acquiring VS, Sycamore Partners Management LP is also weighing a private investment in public equity deal (PIPE) to help L Brands reduce its debt burden.

2. The US and Developed Countries: Bump in the Road or Cliff Edge?

We are in the camp that believes the US economy will hit a recessionary speed-bump in 2020. This isn’t because of the coronavirus fallout but because of signals that emerged through 2019. Over the years we have relied on a series of indicators which have a good track record in forecasting US downturns, regardless of elections or public health.

3. Covid-19/Economic Impact/Huawei/Hong Kong/Mastercard

China News That Matters

• New name, leaders and a spike in cases 
• Getting back to business
• Huawei: new indictments, old fears
• Beijing appoints better enforcers for Hong Kong 
• For everything else there’s…

4. Sanders-Buttigieg Are Co-Front-Runners, but Bloomberg Is Racing to the Nomination

Mike Bloomberg, a self-made billionaire in the technology & financial sector and 3-term mayor of New York, is quietly surging in the polls, helped by the chaos of Iowa and the muddle of New Hampshire. His Super Bowl ads, focused on gun control and climate change, have shown the voting public that he is passionate about serious issues (and core Democratic ones). He is neither a great debater nor a public speaker, but he has well-thought-through positions on the issues, a record of accomplishment that makes Trump look like a fake business/political dwarf, and a massive gusher of money that he is willing to use liberally. A conservative on national security, centrist on most social issues, but a radical on climate change and gun control, Bloomberg has what it takes to win the presidency, and the Democrats are likely to come around to that view by mid-March.    

Buttigieg leads the delegate race, with 22 (just ahead of the 21 that Sanders has) after the first two contests of the long US presidential marathon. The counting fiasco in Iowa robbed Buttigieg of the momentum that normally accompanies a surprise winner in Iowa — which propelled both Jimmy Carter and Barack Obama all the way to the presidency. Sanders won New Hampshire, but his 1.3pp margin of victory was infinitesimal compared to his 22pp victory over Hillary Clinton in 2016, in what is practically his home state (since he has been in elective office from neighbouring Vermont for 39 years). Sanders now leads the Democratic polls nationwide, but he will lose South Carolina (29 February) to Biden, and narrowly leads in Nevada (22 February). In his 3 runs for president (1988, 2008, 2020), Biden has yet to win a primary or caucus; until he does that, he is being written off. Winning Nevada would help him, South Carolina will be too late. 

After Super Tuesday, the Democratic contest will likely become a two-horse race between a couple of Jewish septuagenarians (Bloomberg turned 78 on Valentine’s Day, Sanders will be 79 in September); their GOP rival will turn 74 on 14th June. The succeeding primaries will become a contest for the vice-presidential nomination between Buttigieg and Klobuchar (both from Midwestern swing states, Indiana and Minnesota; the former won by Trump in a landslide in 2016, the latter a Democratic stronghold where Hillary Clinton held on narrowly). Currently, Bloomberg has taken a lead in Arkansas (a Super Tuesday state) and Florida (March 17th primary). He also looks very strong in Virginia, where Bloomberg played a big role in ensuring a Democratic victory in the 2018 Congressional election, and is drawing a lot of endorsements in return. Biden remains strong in several Super Tuesday states (Texas, North Carolina) and later voting states (Georgia, primary on 24 March). Crucial to Bloomberg is to inherit the majority of Biden’s primary voters if and when the former VP’s campaign fades. Currently, it looks credibly like a two-horse contest after Super Tuesday. If Sanders remains ahead of Bloomberg at the end of March, he will likely win the nomination; if Bloomberg gains enough ground to win 4-6 Super Tuesday states, he will become the moderate standard-bearer. Nationwide polls show Bloomberg beating Trump by a larger margin than any other Democratic candidate. If it is Bloomberg vs Trump after the party conventions, markets will be relieved, and should rally. (If Sanders wins the nomination, Trump’s chances of re-election would rise, but we think Sanders is unlikely to win the nomination; if he does, markets will remain very nervous until Election Day in November). 

5. Factories Outside of China Now Halting Production as Virus Impact Expands

As a follow up to our note Evidence of Global Slowdown Accumulates as Stores Remain Closed and Supply Chains Are Crippled, reports that business impacts have increased are starting to take a more regional or even global flavor.

Despite some factories in China resuming operation on 10th February, several regions have extended shutdowns and labor supply remains restricted due to quarantines. This has caused many factories to delay resuming operations with the few facilities that have resumed operations remaining severely under capacity. We are now seeing a follow-on impact with reports of non-China based factories reporting production halts.