Questions and Answers

(Jamie Perriam) #1

When we go through the (always useful, occasionally zany) feedback we get from you loyal Finimize fans, there’s one thing that crops up fairly regularly: requests for an archive of the Q&As from our daily email.

Given that we answer a fair few common conundrums in this section of the email, and that we often get a lot of similar queries, the thinking seems to be that it would make a lot of sense to have a readily accessible reference library wherein users can draw upon the accumulated wisdom of months, nay, years of Finimize content.

Having floated the idea of dredging up a back catalogue – or even producing a Finimize book! – we decided that the best approach (for now) was to simply start saving all our Q&As in a high-visibility location where as many Finimizers as possible would be able to check them out: namely, the Finimize Community!

So here you are: by popular request, welcome to the Finimize Questions and Answers thread. We’ll be posting each day’s Q&A here. Let us know what you think!

(Jamie Perriam) #2

RE: Writing On The Wall For Adland

Casey: “What’s the future for advertising agencies? Will platforms like Facebook and Google wipe them out completely?”

Finimize: “While it’s difficult to say whether ‘disintermediation’ will spell the end of the ad agency as we know it – especially as consumers continue, believe it or not, to encounter brands outside of their mobile phone screens – the industry is certainly rattled. One marked response to the trade’s increasing focus on tech has been the ongoing blurring of the line between ad agencies and management consultancies. The big consultants have all been snapping up ‘creatives’ in recent years in order to better offer big globalised clients an all-encompassing approach to communication with those brands’ audiences.”

(Jamie Perriam) #3

RE: I Declare A Trade War

Chance: “Why can’t US companies that need steel and aluminum just buy from domestic producers once the tariffs on imports from overseas take effect? Wouldn’t that be cheaper and easier?”

Finimize: “The idea behind the tariffs is indeed to incentivize US companies to ‘buy local’ – and American metal producers welcomed the plans. As several have pointed out, however, present domestic supply isn’t sufficient to meet demand for the metals, and it’s unlikely to be able to increase enough to close the gap. US companies will therefore be forced to pay the higher price for imports, even as domestic prices will themselves likely rise (the cost of producing metal in the US is also higher than overseas) – with the greater costs involved potentially placing American firms at a disadvantage to foreign competitors who enjoy cheaper access to steel and aluminum.”

(Jamie Perriam) #4

RE: I Declare A Trade War

Kanuj: “How did the US dollar and US bond yields react to fears of a trade war?”

Finimize: “The prices of US government bonds initially rose (and yields therefore fell) as investors flocked to the security of their guaranteed income. Meanwhile, the value of the US dollar fell against most other currencies on the news, hitting a two-year low versus the Japanese yen. Generally speaking, investors like to invest in growing economies – which involves buying that economy’s currency. Since less trade is typically viewed as bad for the US economy, investors are more wary of owning the US dollar as ‘trade war’ rhetoric ramps up (and the US administration loses its chief economic adviser).”

(Jamie Perriam) #5

RE: I Declare A Trade War (you guys just love this)

Randi: “How much of the steel used by US companies is produced domestically, and how much is imported?”

Finimize: “The US is the world’s largest steel importer, with $29 billion worth entering the country in 2017. That represents about a third of the 100 million tons of steel American businesses use annually, with the rest produced domestically. China only accounts for 2% of US steel imports, although its massive industry expansion has helped produce a global glut of steel, driving down prices. Aluminum imports, meanwhile, account for 90% of the US annual national demand of 5.5 million tons – so the potential impact of tariffs on that metal’s price are even bigger.”

(Jamie Perriam) #6

RE: Zeitgeist Zeppelin Blowing Up Slowly

Ajan: “It’s commonly believed that if a country hikes its interest rates, foreigners will invest more in that country’s bonds (essentially chasing the higher returns on offer). But how do higher interest rates affect foreigners’ interest in a country’s stocks?”

Finimize: “The effect isn’t as straightforward, but generally speaking interest rates go up when an economy is doing well – which is also good for companies’ profits and, therefore, stock prices. So while higher interest rates can indeed make stocks less attractive (by, say, increasing companies’ borrowing costs), the negative impact can be outweighed by the positive economic environment – which would attract foreign investors.”

(Jamie Perriam) #7

RE: Cheap Money’s Days Are Numbered

Karin: “If the European Central Bank (ECB) stops its bond-buying program this September, what might some of the immediate market impacts be?”

Finimize: “Well, it’s very unlikely that it would come as a surprise if the ECB did indeed stop its bond buying then. It would probably give the market months of hints, so that the final announcement wouldn’t come as a shock. That would mean no ‘immediate’ impact, but rather a gradual process whereby bonds in the eurozone would, presumably (although not necessarily) sell off as a big buyer exits the market. As bond prices go down, interest rates go up (click here for more on that) – meaning borrowing would get more expensive for European people and companies, as it has in the US in recent years.”

(Jamie Perriam) #8

RE: Job Boom Propels Stocks

Mark: “What’s this ‘Goldilocks’ spot investors keep talking about?”

Finimize: “The US Federal Reserve and other central banks have helped fuel the stock market rally of the past nine years with exceptionally supportive policies (like low interest rates and quantitative easing). A ‘Goldilocks’ scenario, at least in its current incarnation, refers to an economic environment in which things are good (e.g. jobs are being created) but not so booming and hot that central banks feel compelled to quickly and drastically remove their support. Investors are getting the best of both worlds – at least for now.”

(Jamie Perriam) #9

RE: An Electrifying Deal In German Utilities

Oliver: “Does the E.ON/RWE/Innogy deal not amount to restriction on competition through cartel behaviour?”

Finimize: "Possibly. The deal will be scrutinized by the relevant competition authorities (there could even be a fight between the EU and Germany’s competition authorities over which one gets to rule on it). And the final structure of the new companies may change: for example, there’s speculation that UK competition authorities may now block a planned merger between Npower (currently owned by Innogy, but now due to go to E.ON) and SSE, two British utilities.”

(Jamie Perriam) #10

RE: Trump Ends Chip Chat

Jon: “With President Trump getting involved in proposed mergers and acquisitions, is he setting a precedent for blocking deals? Can we expect to see events like this affect other industries and markets going forward?”

Finimize: “The President’s decision to block Broadcom’s proposed acquisition of Qualcomm was unusual (although, it’s worth noting, done on the recommendation of the Congressional committee charged with reviewing the national security implications of foreign takeovers of US companies). But it seems clear that the Trump administration is preparing to put greater limits on Chinese involvement in the US economy in a whole host of areas. While such measures may indeed be good for national security, they’re likely to cause some consternation among investors, who have historically preferred market forces to drive decisions.”

(Jamie Perriam) #11

RE: Toys R Bust

Romanus: “How did Toys R Us end up with so much debt? Did it issue lots of corporate bonds?”

Finimize: “Like many companies owned by private equity firms, Toys R Us had a lot of debt. By the end, it was spending $400 million every year just paying interest on its more than $5 billion of borrowings. Most of that debt was in the form of bank loans (although the banks likely sold those loans on – meaning it’s mainly those new investors that won’t get repaid). Toys R Us also borrowed some money via bonds. At first, it repaid these by issuing new bonds. But eventually, instead of getting paid back, bondholders were just asked to take more bonds in return…”

(Jamie Perriam) #12

RE: Unilever Tilts At Windmills

Tinaz: “How would Kraft Heinz attempt to take over Unilever in such a way that Unilever would be forced to agree to the deal? What makes it easier for Unilever to resist such approaches now it’s based solely in the Netherlands?”

Finimize: “In most major jurisdictions, like the US and the UK, a company’s board of directors must act primarily in the interests of its shareholders – which usually involves allowing the company to be sold if the price is right. If a board resists a takeover, the would-be acquirer can appeal directly to the target’s shareholders, who could elect a new board. Under Dutch law, however, boards must consider the interests of all stakeholders – namely shareholders, employees and customers – when making decisions, and thus they’re less compelled to sell the company when a bidder comes along (if, for example, that bidder plans to cut jobs).”

(Jamie Perriam) #13

Arturo keeping us on our toes…

RE: Less Breakfast At Tiffany’s

Arturo: “Are you going to report on the rollback of the Dodd-Frank regulations? Isn’t that something important in the world of finance?”

Finimize: “Good point! The proposed rollback of some of the Dodd-Frank banking regulations, put in place following the financial crisis, is indeed interesting – particularly for the mid-sized US banks to whom they will apply most directly. The stock prices of smaller, regional lenders have gone up as they’re seen as likely to benefit more than larger banks from the proposed loosening of regulations. It’s worth noting, however, that so far only the US Senate has passed a bill, and the measure is still working its way through the House; it’s not a done deal yet.”

(Jamie Perriam) #14

We got a couple of queries along these lines – and we’re happy to clear things up!

RE: The Overly Social Network

Marcus: “Why didn’t you also mention the Obama election campaigns’ use of Facebook data?”

Finimize: “We take pains to keep our stories politically neutral, but are compelled to mention political factors when they have a market impact. In this case, the link between the firm at the heart of this particular alleged data breach, Cambridge Analytica, and the current Trump administration is important because it significantly raises the stakes – and the subsequent spotlight on Facebook’s stewardship of its users’ data has had a major negative impact on Facebook’s stock price. If the current furor concerned another political campaign, rest assured it too would have been mentioned.”

(Jamie Perriam) #15

Just back from holiday, so forgive the triple post!

RE: Cost Of Debt Jets Higher

Juan: “With interest rates going up, is it likely that both bond and stock prices go down? What are the best options for investors in this environment of rising interest rates?”

Finimize: “While falling interest rates act like a tide that lifts all boats (virtually every investment becomes more attractive as returns on the safest investments fall), a rising interest rate environment certainly makes life trickier for investors. Bond prices almost always go down, as has been happening over the past six months or so. The impact on stocks is less obvious. While higher interest rates create a headwind (partly by increasing companies’ borrowing costs, thus denting profits) the improving economic outlook that usually accompanies higher interest rates means companies’ profits should increase overall – at least until economic growth reverses.”

(Jamie Perriam) #16

RE: Cost Of Debt Jets Higher

Ron: “How do the interest rate changes affect investments that offer a relatively high yield, like ‘junk’ bonds or investments linked to the value of loans made to small businesses?”

Finimize: “Investments like a bond or loan from a relatively risky company typically offer a higher interest rate than government bonds (in order to compensate the investor for the risk that the borrower might not pay back the bond/loan). When interest rates on government bonds go up, riskier investments usually become relatively less attractive compared to safe ole’ government bonds. However, if interest rates are going up because the economy is strengthening, riskier companies may be considered less risky (perhaps their profits are increasing), which can make the riskier investments more attractive. In short, it really depends on a variety of factors, not just the path of interest rates generally.”

(Jamie Perriam) #17

RE: Stock Markets Are Not Happy

Manas: “What is likely to be the impact of the US tariffs or trade war on the currencies of US and China?”

Finimize: “Typically, the value of a currency is tied to the health of its economy. So, assuming tariffs and/or trade wars are indeed negative for an economy (as most economists say they are), then the US dollar should be expected to decline relative to other currencies. But a wide ranging trade war would also affect other economies, like those of Japan and the eurozone (since they might also be subject to tariffs and/or create their own tariffs) – and so it’s not totally cut-and-dried that the current state of affairs is negative for the US dollar. The Chinese yuan is a different story because it is not freely traded; its value is explicitly controlled by the Chinese government – and so isn’t really determined by market forces.”

(Jamie Perriam) #18

And a fourth! I’m away next week, too… look forward to another stack of QAs upon my return.

RE: We’ve Got Bad News, Europe

Nicolò: “Where does the ECB get money to buy bonds? It seems they have an endless stream of money at their disposal!”

Finimize: “Well, it essentially does have an ‘endless stream of money’ at its disposal because it has the ability to electronically create money. When it wants to spend billions of euros each month buying government and other types of bonds, it simply credits itself with electronic money and then pays that money to the owner of the bond(s). In this way, more money is pumped into the wider economic system, encouraging banks to lend more of it out and businesses and people to spend more of it – which, in theory at least, gives the economy a boost.”

(Jamie Perriam) #19

Got this one from a few readers!

RE: Stock Markets Are Not Happy

Wayne: “How does the economy of the larger exporter in a trade relationship (e.g. China) benefit ‘more’?”

Finimize: “When calculating the size of an economy, exports are added to the equation and imports are subtracted. This reflects the fact that money is leaving a country that does more importing (and going, in this case, to China). Eventually, that money could end up being re-invested in the US, which would help boost its economy; and the US economy can also benefit from cheaper imports if, for example, they help provide low-cost inputs for American manufacturing. But those things are harder to quantify; strictly speaking, a trade deficit has a negative impact on the size of the economy.”

(Jamie Perriam) #20

RE: Cheap Deal Casts A Pall Over Malls

Carlos: “You write that ‘commercial real estate companies haven’t performed too well this year’ – but how is residential real estate doing?”

Finimize: “It depends on what you mean by ‘residential real estate’. Home prices are still rising significantly (up 6% over the past year in the US, according to widely followed data released earlier this week). While there are some signs that higher mortgage rates – pushed up by higher interest rates in general – are slowing demand for homes, that hasn’t yet noticeably fed through to prices (in the US, at least). Meanwhile, home-building companies are having a rough 2018 after a very strong run in recent years – likely due in part to concerns over higher mortgage rates. On the whole, it’s fair to say that residential real estate has performed better than many types of commercial real estate, especially real estate with retail tenants.”