How Wall Street is warming to bitcoin

Goldman says cryptos aren’t “viable”, but Wall Street piles in, followed by a legendary quant fund

Wall Street wolfs down BTC

One of the biggest surprises around bitcoin’s critical halving event in May was that full-blown FOMO wasn’t limited to the crypto community. It swept up significant Wall Street players too. And if that wasn’t already enough of an eye opener, the scale of establishment interest ought to have been. It’s no secret that Wall Street remains sceptical overall. Yet as silos separating decentralised and centralised finance begin to disintegrate, more and more Street traders are becoming cognisant of opportunities, like the halving, that look too hot to miss.

Futures turnover across the crypto asset class rocketed 314% to $2 trillion versus 2019’s four-quarter average, according to TokenInsight’s Q1 2020 exchange report. Note that bitcoin futures accounted for 78% of Q1 contract turnover. CME Group’s open interest data confirmed that institutional moves made up the lion’s share of activity. Contract value bounded 43% to $407m, or 8,399 contracts, around a week before halving, compared to the same period in 2019.

What’s more, there’s also evidence that mainstream interest preceded bitcoin’s policy change. Late May brought news of Grayscale Investments’ continued no-holds-barred buying spree. Blockchain researchers calculated that the scale of its purchases, since the halving on 11th May, amounted to all bitcoin mined since that date – and more. With 18,910 purchased by the last days of May, Grayscale buys outstripped the number of newly minted coins by 6,573. That means the asset manager was also probably hoovering up BTC on the open market.

Through an entity named Grayscale Bitcoin Trust, launched in 2013, Grayscale was the first listed financial group with an exclusive focus on BTC. And if Grayscale has accelerated BTC purchases of late, it’s doing so on behalf of clients: accredited investors only; some of whom may be ‘ordinary’ wealthy individuals, some that may be corporate. In other words, Grayscale’s investment campaign is one of the latest signs that bitcoin is becoming about as ‘mainstream’ as Wall Street can be.

Goldman vs. The Street

But the trend also lays bare a widening split in the financial establishment that mirrors divided global opinion, with newly enthusiastic crypto buyers on one side and die-hard sceptics on the other. Goldman Sachs, the quintessential ‘bulge-bracket’ bank, epitomises the risk-averse point of view right now. News site Decrypt reported that a Goldman presentation to investors decried bitcoin as “not an asset class”. The bank acknowledged that “hedge funds may find trading cryptocurrencies appealing because of their high volatility” but concluded that the “allure does not constitute a viable investment rationale”. That view pits Goldman against a rising tide of heavyweight Wall Street opinion to the contrary.

Enter the Renaissance man

Apart from Grayscale’s unabashed push, the buzz in the crypto sphere has also been cranked by signs that one of the most legendary quant funds in the market may be limbering up to go big on bitcoin. Renaissance Technologies was founded about 40 years ago and is still chaired by mathematician and former U.S. National Security Agency cryptologist Jim Simons. Commonly known as RenTech, the firm is arguably the most successful quantitative U.S. hedge fund ever. Its flagship Medallion vehicle has averaged annual gains of 39%, post-fees, since 1988, with a 66% pre-fee annual return that’s unmatched by any comparable institution. Medallion’s return for the year to mid-April was 24%, already trouncing the S&P 500’s negative 2020 performance.

Bitcoin trading “Permitted

Consequently, a late-March filing by the group was widely seen as a potential game changer. The form essentially gave notice that RenTech is now “permitted”, to deploy some of its $166bn in assets under management on bitcoin cash-settled futures traded on the CME. Noting that the “relatively new and highly speculative asset” carried several risks, Renaissance did not state whether it had already taken positions in BTC contracts, or whether it would do so in future. The notoriously secretive firm—its main fund has no external investors—hasn’t elaborated since.

All told, there were few concrete takeaways from the disclosure. On the other hand, a firm like Renaissance is unlikely to grant itself the freedom to trade a particular asset and then simply park that facility on a shelf. The group has accumulated a raft of quantitative data-driven strategies over decades of research. It deploys algorithmic systems, AI and machine learning, in a multilateral, multi-asset universe. For an attempted graphical depiction of RenTech’s key strategic pillars, see Figure 1. Note: I have no illusions about the high probability that my take is flawed in multiple ways. Still, I hope it at least serves as an adequate introduction for the uninitiated.

Figure 1. – Simplified graphical depiction of Medallion Fund strategy

Sources: Little Harbor Advisors LLC; Institutional Investor; Wilmott, P., Orrell, D.: ‘The Money Formula: Dodgy Finance, Pseudo Science, and How Mathematicians Took Over the Markets’, Wiley, 2017

In short, RenTech has maximum freedom to trade in what it wants, when it wants. So, if it says it can now trade bitcoin futures, it probably has already, or will imminently. As such, bitcoin may have just quietly received its weightiest validation as a speculative asset yet.

For sure, the significance of notable hedge fund operators like RenTech coming to the market needs careful clarification. Almost by definition, quant funds have no stance on the ‘viability’ of an asset class. To RenTech, Bitcoin could just as well be orange juice futures, gold, USD/JPY, or any other tradeable commodity or instrument. The new involvement of RenTech in the cryptocurrency market is therefore not an endorsement of bitcoin or blockchain technologies. However, as we argued in a recent article, such developments are vital milestones. Only time will tell whether Goldman was correct to eschew cryptocurrencies due to high volatility whilst neglecting to exclude other assets (for instance crude oil) for the same reason. In the meantime, Wall Street’s never-ending ‘search for yield’ is helping to authenticate a new currency.

Ken Odeluga, 5th June 2020

Why Futures are Key for Bitcoin’s Future

Exchanges in the spotlight after futures volumes surged ahead of halving

Waiting for bitcoin’s sky to fall

It’s a week after bitcoin’s momentous halving event and the sky has not metaphorically fallen on the crypto world, as some of the more colourful forecasts suggested would happen. Around 7:20 PM London time on Monday 11th May, the rate of bitcoins received as reward for mining was cut by 50% to 6.25 coins per block from 12.5 previously. The event passed without immediate incident. BTC/USD did soar in the weeks leading up to the cut. But it dropped about 19% from 2020 highs above $10,000 to as low as around $8,100, just eight days later. That swing belied some of the more bullish expectations of a rapid market adjustment to the slashed rate of supply.

Even so, over the last few days, BTC has recouped all of its recent loss, bouncing back to as high as $9,966. The supercharged rebound from the global market crash on 12th March (along with other major cryptos) was also glaring for another reason. It was very much like the pre-emptive run-ups seen ahead of the two previous halvings. The normalised chart below shows BTC/USD soared over 100% from the year’s low, erasing the loss from its rout on 12th March. With a 35% rise in the year to date, BTC/USD was also close to regaining 2020 highs at the time of writing.

Normalised chart: BTC/USD – 12/03/2020 to 18/05/2020, 23:21 BST

Bitcoin price chart rebased to 12th March 2020

Source: TradingView

This spectacular recovery serves to underline the obvious: that the long to medium term outcome for price post-halving is likely to fall somewhere between bullish and bearish extremes. More to the point, if there’s one thing the previous two halvings showed, it’s that the final verdict for prices probably won’t be clear for several months.

Futures flood

In the meantime, the market has longer to muse over one of the most intriguing aspects of the lead-in to halving: a flood of Wall Street cash into cryptos, particularly bitcoin futures. Establishment ’fast-money’ players were obviously anticipating significant moves; the only questions being ‘in which direction?’ and ‘how soon’? Well, there’s no shortage of opinions about what might happen next, though also no guarantees that ‘big money’ will turn out to be ‘smart money’. For one thing, the explosion of the bitcoin derivative market in the four years since the prior halving is one of the key differences between the crypto sphere of 2020 compared to 2016. Players now have tools to work with that they didn’t have in 2016. Potentially better prices in the future can now be locked in in the present to help offset the impact of lower block rewards. Such hedges can avoid the need some market participants (like miners) had before previous halvings to sell bitcoin. Back then, the effect appeared to ‘bring forward’ selling pressure that might otherwise have landed post-halving. This difference alone could mean that bitcoin’s tendency to trend higher in the medium-term after reward cuts won’t be seen this time.

Post-halving highs and hopes

The truth is, of course, nobody really knows whether or not lower block rewards, and consequently, a probable lower rate of supply, will sustainably boost price. 2020’s halving was only the third in bitcoin’s history so it’s impossible to extrapolate from it. Key details from Halvings One and Two, shown in the table below, look fairly inconsequential – apart from that in both cases, prices took flight several months later.

Bitcoin halvings: stats and dates

Sources: Kraken.com, Bitstamp, hackernoon.com

Naturally, the above figures don’t tell the whole story. True, after setting a new top of $994 in early-December 2013, a year after Halving One, BTC/USD went on to an eye-catching peak of $1,100 later that month, 100 times higher than before the reward cut. After that though, BTC slumped to $220 and remained stuck below $1,000 for years. And those moves were quite tame compared with the surge that followed Halving Number Two in the summer of 2016. Prices topped at $20,000 in late-2017 followed by a notorious nosedive to $3,200 a year later. As such, it’s fair to say that protracted volatility is one of the few clear takeaways from halvings past. Another is that any new price peaks may not last. Likewise, bitcoin notched a few daily moves of more than 10% in days ahead of Halving #3, showing the kind of parabolic momentum often seen before a subsequent derailment.

Speaking volumes

Volume data has been far less ambiguous than price trends this time around, with a significant volume rise among key exchanges in 2020’s first quarter. Venues vetted by research outfit The Block saw turnover accelerate 61% quarter-on-quarter to $154bn. That came off the back of bitcoin’s biggest ever one-day volume surge of $75.9bn, according to CryptoCompare. Unsurprisingly, that influx occurred on one of BTC’s most volatile days ever, Friday 13th March, when BTC/USD plummeted 30% in step with global market turmoil. April volumes were also elevated, with $66.2bn traded on the last day of the month, the second-highest daily turnover recorded.

Still, there was more to the volume boom than met the eye: derivatives trading was even more striking. Futures turnover across the crypto asset class rocketed 314% to $2 trillion versus 2019’s four-quarter average, according to TokenInsight’s Q1 2020 exchange report. Given that bitcoin futures accounted for 78% of Q1 contract turnover, the outcome of those flows will eventually hinge on how the halving pans out. CME’s open interest data confirmed that institutional moves made up the lion’s share of activity. Contract value bounded 43% to $407m, or 8,399 contracts, around a week before halving, compared to the same period in 2019.

Futures bright

As uncertainty about the crypto world abounds, the definitive growth of bitcoin futures is one certainty that can be grasped. For sure, deepening Wall Street interest may not be universally welcome among investors committed to bitcoin’s guiding economic and social ethos. Besides, there’s no way of knowing whether institutional interest will even last. On balance though, for the crypto asset class to mature, and indeed for the cultural shift towards blockchain technologies to accelerate, markets underpinning them must mature too.

With the wider world looking just as topsy-turvy as has been the norm in crypto for years, rising institutional interest— if sustained—will stand BTC in good stead in years to come. In the shorter run, deepening demand for bitcoin futures from the more ‘conservative side’ of the street should be a boon for the best-run exchanges. It goes without saying that institutions will run a mile from exchanges suspected of reporting fake volume, after as much as 95% of BTC volume traded last year was deemed to be fake, according to Bitwise Asset Management. Even among bona fide venues, those with the most transparent and comprehensive price methodologies and highest standards of governance, will come out on top. Such qualities tend to go hand in hand with the kind of solid reputation exchanges need in order to be deemed credible by the institutional establishment.

Ken Odeluga, 19-05-2020

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Anglo shares poised to keep outpacing FTSE rivals

Measured iron ore exposure and modest valuation are key

Anglo American, the £26bn mining group, continues to outpace FTSE 100 rivals after a volatile year for basic resource suppliers. Note that Anglo was also among only a handful of large-cap shares with a high-positive score in our recent technical analysis screen, that aimed to discover UK shares with the most, and least, promising medium-term outlooks. Broadly improved appetite for risk over the last couple of months or so has provided firmer ground for the sector, though not before a trade deal began to unravel in May, coinciding with a deepening downturn in China, the world’s biggest consumer of base metals. Now, Anglo trades 17% higher in 2019. That compares with an 8% year-to-date advance by the FTSE 350 mining index, but both price returns have been ravaged by 2019 challenges. Anglo pulled almost 30% higher for the year in mid-June. The FTSE 350 mining index saw its best levels around a couple of months earlier, rising about 23%.

After the slump, most UK-listed base metal shares have drifted higher, though it’s been a grind. For most, the main hope is that getting a ‘phase one’ deal over the line—eventually—will help put a floor under demand for copper, iron ore, aluminium and other heavy minerals. There’s little certainty in the demand outlook though. For Anglo, the fundamental horizon is just as ambivalent. The group pivoted back to metallurgical and coking coal as its main revenue generator in 2018, but has had to change track this year as production economics shifted again.

Anglo American Plc. minerals by revenue – FY 2018

Source: Bloomberg

The rise of precious metal prices this year, in the wake of gold, which also underpinned diamond prices, helped Anglo’s stock outperform shares of iron ore-focused giants like Rio and BHP. Ironically, Anglo has more recently been ramping iron ore production, with an exponential 94.9% year-on-year surge in 2019’s first half. Production stood at 21.6% of revenues by July vs. 11.7% a year before. And it is iron ore demand that looks best supported in coming months. Drivers include port inventories from China that began to turn lower at the beginning of Q4, according to Bloomberg data, together with a pick-up in infrastructure investment. Bloomberg also cites a 20 million metric ton deficit in 2019. However, an expected supply-side normalisation in China may weigh from Q2 2020. If seen, Anglo’s measured iron ore exposure would remain an advantage.

Readings aren’t so bright for Anglo’s current chief revenue generator met coal, with uncertainty over shipments to China into 2020 after quotas prevailed throughout October. South Africa, Anglo’s main coal producing country, saw flat volumes at the end of Q3. Diamond production fell 15.7% on the year, the fifth straight monthly fall. Platinum output also weakened.

A picture emerges of a better-diversified and nimbler miner than its FTSE 100 rivals, helping explain the stock’s outperformance. A huge gap in total return versus peers—37.4% over the last year against the FTSE All-Share Mining Index’s 11.3%—is another factor, though bear in mind it partly reflects an outsize $1bn buyback announced in July. At the same time, Anglo trades below counterparts on a number of valuation models. For example its 4.6x ratio of market value over underlying earnings (EV/EBITDA) trails the peer group average by 37%. Still, after the battering the industry received over the past year, most stocks trade below historical averages. Furthermore, after sharp stock price declines rivals’ higher multiples can deceive. Combined with a better optimised output focus, Anglo’s modest ratings should do no harm to the shares in the months ahead.

Chart points

An almost sparkling clean rising trend line since September 2016 continues to support the overall technical buying case. Since marking the high for the year at 2293.8p on 1st July though, AAL has struggled to extend the upside. Additional resistance was created at 2124.8p at the end of that month with a short-lived attempt to break the correction that ensued between July and August. Since then, with assistance from the long-term trend mentioned above, AAL has mapped out a rectangular channel, though the prospective bounds haven’t been tagged since October as the shares marked and recently broke below a shorter-term flag between September and early-November, corroborating 2124.8p resistance. A base has been evident since 11th November around 1994p and would be a precursor of an additional test of a shorter, more limited rising channel in place since the autumn. Below that, the main long-term rising line, would be in play. The overarching bull case would begin to face questions below these structures, with 1759p, 3rd October’s kickback support, a possible decider.

Anglo American Plc. CFD – Daily

Source: City Index

UK Stocks: Comeback Contenders

As European investors show the most buying interest in UK shares for years, here are the stocks with the best—and worst—chances of strong gains, according to technical indicators

Context

The skies may be brightening for UK shares. Or at least investors are beginning to think so. A Bank of America Merrill Lynch survey of fund managers from earlier this month showed a net 9% of EU investors intended to overweight British equities, the highest in 5 years. Likewise, Morgan Stanley called British stocks “potentially the best global equity opportunity for 2020”, based on a view that hard-Brexit risks are fading fast, though only after battering relative UK stock market valuations to 30-year lows. Reduced bearish sentiment on chronically unloved UK shares also reflects better prospects that Britain could unsnarl its convoluted Brexit process. Improved  global risk appetite on hopes for trade de-escalation helps as well.

Risks are hidden in plain sight, of course. See the recent stock market swings as prospects of a ‘phase one’ deal have waxed and waned. For the FTSE 100, a slide in dividend growth to a fraction of the global average in Q3 may not bode well for sustained net inflows either. Still, we assume investors will tend to seek the best opportunities, even in a limited window of improved sentiment. So we decided to create a ‘screen’ of technical chart indicators with the aim of sifting out stocks with the most and least  favourable near-term outlooks.

Methodology

Things to remember when looking at these results

  • Technical analysis is backward looking. Strictly speaking, it tells us nothing about future price action
  • We assume that as a snapshot of current conditions, technical indicators can offer clues about what might happen in the near future
  • Technical analysis is mostly a tool for interpreting current and recent price action
  • Technical indications may turn out to be misleading in practice. Note our methodology hasn’t been back tested

Key points from the results: Sectors

  • The general impression conveyed by the results was that so-called ‘value equity sectors’ (as opposed to ‘growth equity sectors’) were favoured. In other words, within the UK stock market, higher-yielding though relatively stable stocks are being favoured by investors over faster-growing less stable shares
  • The most frequent equities to emerge, even in our pared back selection were Investment Funds and similar vehicles. There are almost 190 such entities in the FTSE All-Share. The majority received a positive score in our screen. This gels with BofA Merrill’s finding of rising demand for exposure to UK stocks. But funds appeared among both positive and negative ranks. This denotes active selection within the UK market. Because of time constraints and limited space, we won’t go into further detail about funds. In any case, trends are easier to spot from single-stock sets than funds. On that basis, listed funds were removed from our finalised list, but distinct companies that operate funds were kept

Here is a breakdown of sectors/industries that were highlighted most frequently

Source:  Bloomberg

  • As hinted at earlier, careful attention needs to be paid to sector classifications. Some classifications may mask more specific trends. For instance, Barratt Developments obtusely is classified under Home & Office products under BICS, though is more usefully categorised as a property share.Similarly, online takeaway firm Just Eat manages to be classified as a media firm
  • Generally though, 5 separate Property shares point to a clearly defined appetite for the sector. Incidentally, property shares, which are thought to be amongst the most sensitive to Brexit fallout, have often reacted sharply to news linked to Britain’s EU departure. However, it’s worth stressing that residential property shares have continued their long-term outperformance since Britain voted to leave the European Union in 2016
  • The Oil & Gas sector is a stand out with negative pointers. Three exploration & production firms –  Petrofac, Shell and Tullow – and one oilfield services company– Hunting scored minus points
  • Retail/Discretionary is another prominent segment with unfavourable indications, including Marks & Spencer and Dixons Carphone
  • Asset Management was indicated for both upside and downside simultaneously. Again, this suggests purposeful selection, underscoring revived interest in UK equities
  • So-called ‘Gaming, Lodging & Restaurants’ shares appeared 3 times. On closer examination, the stocks comprise one online gambling operator888 Holdings Plc – and two pub/restaurant groupsWetherspoon and Restaurant Group
  • The main takeaway from sectors appearing with high frequency is that almost by definition, only a handful of stocks were pinpointed. For that reason we are inclined to see the positive indications as being stock-specific, or at least due to narrowly applicable reasons. Overall, we’re more confident to spotlight a preference for the investment style (‘value’) rather than preferences for specific sectors

Key points from the results: Individual shares

  • With consensus upside and downside provided in the complete tables below, it’s possible to spot some shares with positive technical indications that have been rank underperformers in the year to date, and vice versa
  • From a mean-reversion perspective, recent positive signals following underperformance may provide a basis for strong recovery. One example is specialist insurer, Just Group (formerly known as Just Retirement).  It has fallen 33% in 2019 but its consensus target price points to 61% upside. Note that consensus target prices do not always agree with the direction suggested by the technical screen
  • The obverse of the above may also apply: recent negative signals following outperformance may provide a basis for marked declines
  • Large-cap vs. small cap shares: only a minority of large-cap names were highlighted on the bullish or bearish side. Among the former, Anglo American, AstraZeneca, BAE and RBS were the highest-valued firms to receive positive scores. Big stocks with negative scores included, Shell, BHP and Unilever. At £8.5bn, Burberry is the smallest stock by market value that could be considered a ‘large cap’. Still, it’s among the highest-rated stocks in our screen, so warrants a close look. The luxury retailer beat expectations with a solid first-half, despite disruption in its key Hong Kong market
  • Generally, we have treated the precise score/rank accorded to any given stock as not very significant on an aggregate basis
  • However, the score is likely to be of interest on an individual stock basis
  • Perhaps, when more than one stock was highlighted in the same sector, the stock with the highest score, should be favoured most, and vice versa for negatively-scored shares
  • We intend to examine individual stocks with strong positive and negative scores in separate articles in coming days and weeks

Shares with positive scores (ranked) – 18th October 2019 to 18th November 2019

Source:  Bloomberg

Shares with negative scores (ranked) – 18th October 2019 to 18th November 2019

Source:  Bloomberg

Key takeaways/re-cap

  • The most compelling takeaway in our view, is that technical indicators strongly point to a ‘value investing’ style as more favoured than ‘growth’, ‘momentum’ or other investing styles
  • Investment funds and similar vehicles were the equities investors opted for the most to express both positive and negative views on the stock market outlook
  • Oil stocks, and specialised commercial services groups came out worst in the technical screen; a small cohort of retailers also received the thumbs down
  • Property was the sector with the most frequent bullish indications in our study
  • Mid-cap shares were highlighted more than stocks with the largest market value, though among the latter, Anglo America, Burberry and RBS were ranked highest

Vodafone returns to two-bar growth

Rebounding service revenues and some turnarounds in Europe justify a medium-term benefit of the doubt

Organic rebound in context

Vodafone’s return to organic service revenue growth is the biggest relief in H1 results. The 0.7% year-on-year rise in the second quarter compares with 0.2% expected and more than erases Q1’s 0.2% decline. A sequential rebound leaves +0.3% on a half-year basis, pointing to a turnaround in Vodafone’s most important measure of revenues following two quarters of shrinking sales. Strengthening key sales on the back of improvements in some of Vodafone’s most troubled regions—South Africa, Spain and Italy—together with the best ever quarter for new UK customers have enabled a mild outlook upgrade.

Guidance signal

Adjusted Ebitda is now seen at €14.8bn-€15bn in the 2020 financial year compared with €13.8bn-€14.2bn before. Though the new forecast includes an €800m one-off boost from the purchase of some Liberty Global assets and the disposal of New Zealand operations, the midpoint of the new range is still €100m higher excluding those benefits. In effect, guidance is tightened with a slight shift to the higher end. It’s the most confident signal on guidance from Vodafone in the current financial year. CEO Nick Read duly confirmed that revenue growth is expected to continue through the remainder of the year in both Europe and Africa.

Tweak tempers relief

Investor relief has been evident in the stock’s rise of as much as 3.2%. As outlined in our preview, stabilisation of trouble spots like Spain, Italy and South Africa was necessary to safeguard underlying earnings goals, which were already lower than the year before. In turn, cash flow generation is critical for the dividend outlook after investors were forced to swallow a ‘rebase’ with an eye to lower debt and striking a better balance on spectrum costs and investments. Free cash flow guidance has been tweaked to “around” €5.4bn from “at least” €5.4bn. Although Vodafone shares pared their initial jump to a 2.3% gain by late morning, investors appear to have given Nick Read the benefit of the doubt on free cash flow goals. Greater clarity on earnings guidance helps.

Vodafone Idea still messy

The earnings guidance signal may even have encouraged the market to overlook persisting value destruction from Vodafone’s burdensome business in India. A €1.9bn loss was recorded for jointly owned Vodafone Idea with fierce competition exacerbated by a Supreme Court ruling. The UK group has struck some proceeds from the venture out from guidance whilst “financial relief” is sought from the government there. The update from India wasn’t as dire as feared by some investors, who suggested a write down of some €1bn was possible. Still, overall relief for the region remains some way off, providing ample room for critics who suspect Indian assets may eventually become worthless.

Germany, UK also stuck

Vodafone’s weak ‘coverage’ areas closer to home also remain evident, with a 1.4% H1 contraction in Europe, albeit that was still an improvement. Low margin wholesale businesses and stagnation in the mature markets of Germany and UK respectively look as intractable as ever. As such, some of Tuesday’s share fade is likely tied to medium-term prospects that may only have improved moderately, despite a relatively successful first half.

Stock price outlook

VOD shares have bounced from a 20% slump into the middle of the year to trade 7% higher so far in 2019. Latest results imply reduced impediments for the stock to recoup further into the year end. Still, the odds are better for steady rather than spectacular upside progress as VOD extends a mild outperformance of the UK sector. With shares now better underpinned, VOD’s total return of around 18.3 times now looks far more palatable relative to FTSE ALL-Share telecom peers’ trading on 18.4 x. Closing of the gap implies improved VOD stability ahead, so long as revenue, earnings and cash prospects remain on track.

Normalised: Vodafone Group Plc. / FTSE All-Share Telecommunications Index – year to date


Source: Bloomberg/City Index

Apple buyers shrug off market retreat

iPhone sales keep falling but handsets remain key to a strengthening outlook

Reports that Beijing now doubts that a long-term trade deal can be reached with the U.S. anytime soon have brought the recent risk-seeking drive to a juddering halt. Yet Apple stock has remained aloft all session, returning to near-record levels hit last week. It was also the only gainer in the S&P 500 tech hardware sub-sector half way through Thursday’s U.S. session. In other words, investors are holding Apple, by and large, whilst retreating from most shares.

The $1.1 trillion-dollar group’s much awaited fourth-quarter report was certainly solid, in headline terms, crushing forecasts on the top and bottom line. Apple also paced expected revenues from services, the segment it sees as its chief growth driver. Yet Q4 details left quite a bit to be desired.

  • iPhones also showed a hefty shortfall on a year ago. Sales of $33.36bn were 10% below the same 2018 quarter
  • Critical Greater China region sales fell 2.4% on the year to $11.13bn
  • iPad revenues were ahead of estimates, but Macs missed badly, even accounting for a challenging comparison with Q4 2018

Yet Apple’s iPhone—still its top revenue earner—holds the key to renewed investor confidence. At a simple level, Q4 sales were comfortably above forecasts by about $1bn. Looking deeper, Wall Street is getting in gear with Apple’s dual strategy aimed at juicing a huge iPhone installed base and persuading owners to upgrade more quickly. Signs that this strategy is beginning to work include an overall sales rise and a raised top-line forecast for the key holiday period. The midpoint of new Apple guidance is $87.5bn. The Street’s Q1 view till last night $86.51bn.

Initiatives like an interest free monthly repayment programme over 24 months linked to Apple Card are set to be launched to reduce an upgrade cycle that has grown from about 20 months on average over the last three years to almost two and half years currently, according to UBS. Sales forecasts for new wearable technology products—chiefly, augmented reality glasses—are also compelling. So together with a stellar quarter in services, a more convincing overall top-line outlook is being bought. multiple investment bank upgrades were seen in the wake of Wednesday’s results.

The lack of a discernible base in the decline of iPhone sales should perhaps worry investors more. Continued declines will constrain profit growth. As well, the shares now discount a strong 2020 product cycle in a difficult to predict trade outlook, let alone an Apple-specific one. Apple upside risks have improved, but downside drags remain clear and present.

Staley wins again, then retreats

Jes Staley’s investment and trading business has remained a difficult-to-define work in progress for longer than shareholders have been comfortable with, but it’s getting a track record of beating the market.

Barclays Investment banking (IB) fees still caught flak in a volatile quarter for markets, geopolitics and the global economy. But the 1% fall on the year was shallower than the 11% plunge expected, looking at a consensus forecast compiled by Bloomberg.

The markets business, which Staley, a former trader, has become most synonymous with, also held its own against European and Wall Street rivals. Fixed income, commodities and currencies (FICC) particularly shone. A 3% income rise excluding Barclay’s share of Tradeweb IPO proceeds was better than many players on The Street. Equities tanked as hard as the competition though, down 17%.

That’s still further vindication of the CEO’s high-profile strategy to maintain exposure to volatile businesses that cost more than they make and which consequently, British and European peers have retreated from. The chief benefit of exposure for Barclays, which also has a sizeable UK deposit base, is shielded net interest income. NII slipped 3% in the UK to £2.9bn and rose 5.5% at group level.

Unsurprisingly though, as G10 rates trend lower, Barclays continues to describe the income environment as “challenging”, underlined by a 20 basis-point group net interest margin drop. As such, Barclays expects to make cost reductions in the second half and sees 2019’s total below £13.6bn, the low end of prior guidance.

Though underlying return on tangible equity was 9.4% in the six months to 30th June, it had tumbled from 11.6% in the year before. Pressures will almost certainly keep RoTE, a key profitability measure for banks, below the group’s >10% target for 2020. As such, the dividend rise announced on Thursday was just in-line. An announcement signalling a higher gradient of returns in the medium term seems unfeasible.

Chart thoughts

A declining line connects a high on 5th June, 23rd April and 23rd July. If extended it is pierced by subsequent highs in sessions that followed, though not permanently. This symbolises rejection of a ‘breakout’ above the bearish trend. As we can see, price subsequently followed through and continued to decline.

It’s not just the descending trend that is applying resistance to BARC.LN. Let’s plot a zone that is bound at its top by the 28th November 2018 high. It is significant due to the aggressive month-plus sell-off that followed. It was also tagged cleanly on 23rd May and on a number of other occasions. For the bottom side we can use a similarly important session high on 16th May. The pair creates a theoretical band of resistance.

So far, the zone has stymied attempted BARC.LN rallies on two occasions, 16th May being one. The latter is the cluster of attempted incursions between 22nd July and 29th July. After the last failure, the stock subsequently dropped and continued to fall throughout this week, including on 1st August, when Barclays released half-year earnings.

The shares closed on Friday almost exactly on the 61.8% Fibonacci interval of the 25th June-to-25th July up leg. The marker appears to be providing ‘classic’ support. Should the stock break below this level (and the Relative Strength Index) gives us a rough indication that it might, then the next probable downside objective ought to be a cycle low notched in July 2016.

If the Fib holds, further tests of the declining trend and then the band of resistance would be required before any upward trend change could be declared. Fundamentally, this stock has been unappealing for years. From the perspective of technical analysis, the probability of a strong recovery in the medium term looks low.

Barclays (UK) CFD – daily – source: City Index

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Testing, testing, please ignore

‘Lighting Magazine’ on Philips NV Splitting in Two

I share this as I’m quoted:

Philips splits business to create separate lighting company | News | Lighting.

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