The Weekly Truffle Report: Anbang Insurance and other cockroaches
Week in Review
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It’s been another surprisingly quiet week in the US, but a much more dramatic one in Israel, where the killing of Palestinian protesters in the Gaza Strip threatens another flare-up the interminable Arab-Israeli conflict. Viktor Orban’s re-election in Hungary also poses a powerful challenge to Europe’s inclusive narratives; how will the federation cope with the rise of a strongman in its fold? As of going to press, this week’s latest development is without a doubt the chemical weapons attack in Syria; brace yourself for the response from the West.
Market Review
Markets took a roller coaster ride, with a massive decline on Friday, and many tech stocks down for the week. Fears about an escalating trade war with China has caused jitters around the world and selling pressure could continue into next week if there are no signs of toning down the political saber-rattling. We at the Truffle have been closely following our short positions in tech stocks, and are also keeping an eye on Spotify’s public market debut on Tuesday.
Tesla Sales Numbers
Tesla reported the highly anticipated sales numbers for the Model 3. It delivered a total of 8,180 in the first quarter of 2018, up from 1,550 cars delivered in the last quarter of 2017. These are roughly 2000 cars a week, still below the targeted 2500, but better than market experts anticipated. The share price — one of the most heavily shorted stocks — shot up like a rocket with over 20% within two days, settling down at $299 on Friday.
Surprisingly, very few people asked what the profitability is behind those sales numbers, and what the cash burn rate remains. In the final days of March, you could have seen the entire Tesla family desperately assembling Model 3 cars (mainly by hand) to boost sales numbers.
Not really sure whether that is sustainable – but don’t worry, because Elon Musk has apparently set up a tent in the desert [again] to make Model 3 an executive priority. Just don’t mention Solar City to him while he is burning marshmallows with his flamethrower.
Bottom line: Tesla’s furious price swings are not for the faint of heart, and only hardened 80/20 Investors should trade the stocks while establishing long-term short position.
Spotify – one more company to tap eager investors
Spotify, the famous music streaming service, made its highly anticipated debut on the public markets on Tuesday last week. It used a so-called “direct listing” process instead of a traditional initial public offering, which gave it a valuation of $26bn on the first day of trading.
At the first day of trading on Tuesday it reached a price of $165.90 a share, but ended at $146 on Friday, down along with many other tech stocks. Interesting to note is that investors value Spotify higher than the world’s largest record label, Universal Music, and the largest online radio service, Pandora, combined. All these valuations for a business that is still yet to make a profit.
As a result, investors are asked to be patient by Spotify founder Daniel Ek (35). In a rare interview on Tuesday, he emphasized the revitalizing boost that Spotify gave to an archaic industry, and the millions of new paying customers it added at a rapid pace.
Some more optimistic promoters argue that Spotify’s valuation was “clearly at a discount to Netflix”, suggesting that prices should go higher if you put a FAANG valuation matrix on the company.
The only question is, what happens if rosy FAANG valuations are out of style? How should investors adjust their valuation models then? Tough questions that might be answered soon. In the meantime, happy listening. Just don’t defect to YouTube or Apple.
Anbang Insurance and other cockroaches?
For those not familiar with Anbang, it’san obscure Chinese Insurance company, and is currently the owner of Waldorf Astoria in New York and Strategic Hotels & Resorts, a luxury properties portfolio. Anbang’s story strongly reminds me of the Japanese shopping spree in the late 80s when Japanese conglomerates gobbled up the Rockefeller Plaza among many highly priced assets. We all know how this ended.
Anbang’s comet-like rise to deal-making fame came from selling high-yielding investment products known as “universal insurance”, supported and financed by the Chinese government. The company used the proceeds to expand aggressively at home and overseas.
All was well as long as the numbers rose with Anbang’s ambitious expansion plan. But the first sign of financial strain, the house of cards had to collapse and it finally did.
In late February, China’s insurance regulator formally seized control of Anbang, and this week the company announced it would receive a Rmb61bn ($9.7bn) bailout from an industry rescue fund.
The equity injection by the China Insurance Security Fund is “based on the needs of risk disposal” and will be “temporary”, lasting only until they find private investors according to Anbang’s press release.
The question is whether some private investors are so daring to make the leap forward not knowing about a whole army of skeletons waiting in the closet. At the very least, Anbang’s temporary new management should hurry to find eager investors, before they lose their appetite for dumb risks.
We at the Truffle can only speculate how many other Chinese companies have acted and operated as Anbang did in recent years. As Warren Buffett once said, “there is never only one cockroach in the kitchen.” What this means for the rest of China’s finance industry, only time will tell.
The Week Ahead
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The chief story for the week is surely the escalating trade war between China and the US. Beginning with President Trump slapping imports tariffs on a whole swathe of Chinese products, China has now responded in kind – and both sides are threatening to escalate further. The Chinese maintain that the actions would shave no more than one-tenth of a percentage point off their economic growth, while Trump argues that with the US ‘$500 billion down’, they ‘can’t lose’. The consequences are already spreading through markets in the East.
Markets in the week ahead will still be under pressure as investors desperately search for any signs of easing in the tension. We recommend you closely watch two big events in the week ahead.
1. Continued NAFTA negotiations
2. An expected speech by Chinese President Xi Jinping
Also, this week marks the beginning of the first quarter earnings season in the US, with major companies such as BlackRock, Delta, JPMorgan and other banks reporting earnings on Thursday and Friday.
Wall Street experts expect strong earnings, but more important will be their earnings guidance for the months ahead.
Plenty of material to process for investors this week with hefty volatility going forward. Happy trading, but don’t forget to put some money aside.
David Schneider
Founder of 8020investors.com
