What You Need To Know This Week — July 11th, 2020
What You Need To Know This Week
A weekly recap to keep you informed on the most important events this week impacting markets, business, tech and the global economy.
WARREN BUFFETT FINALLY MAKES A MOVE AS BERKSHIRE STRIKES $10 BILLION DEAL
After sitting out the entire bear market, Warren Buffett finally struck a deal as Berkshire Hathaway announced the acquisition of Dominion Energy’s natural gas assets for $10 billion. The conglomerate will pay $4 billion cash and assume roughly $6 billion of debt to buy over 7,700 miles of pipelines, 900 billion cubic feet of storage and other natural gas infrastructure. The deal represents Berkshire’s largest acquisition since it acquired Precision Castparts for $37 billion in 2016. Nonetheless, this was not the elephant-sized deal that Buffett had been searching for and barely makes a dent in Berkshire’s $133 billion cash pile.
CHINESE STOCKS ENTER INTO BUBBLE TERRITORY AFTER STATE-DIRECTED SPECULATIVE RALLY
Chinese equities, buoyed by bullish commentary from the country’s state-run media, have staged an epic rally, as the CSI 300 benchmark stock market index surged 10% this week. Its currency, the renminbi, rose to its highest level since March. The stock rally comes amidst the Chinese government’s desire to project an image of economic strength and the coronavirus tanked the global economy into recession. Margin loans used by investors to finance stock purchases have hit a 5-year high, an indication of speculative trading activity. The current state-led bull run draws parallels to a similar government-encouraged stock rally in 2015, which ended in tears when the stock market index tanked more than -40%. History doesn’t repeat, but it often rhymes.
RIVAL INVESTOR GROUP EMERGES WITH HIGHER BID FOR TORSTAR
Canada continues to be an excellent market for arbitrageurs. Earlier this year, there was the ferocious bidding war for TSX-listed Guyana Goldfields. Now, another potential bidding war may be emerging as an investor group, led by brothers Matthew and Tyler Proud, has submitted a $0.72 cash per share offer for newspaper company Torstar. The offer, which the Torstar board deemed “reasonably be expected to constitute or lead to a Superior Proposal,” represents a 14% premium to NordStar Capital’s friendly $0.63 per share cash bid. A bidding war for the company wouldn’t be shocking given the initial deal implied a negative enterprise value for Torstar, as NordStar transaction was less than the company’s net cash on its balance sheet (they were getting the company for less than free). However, NordStar previously indicated they would not participate in an auction process.
Notable Insights, Articles, Podcasts, and Tweets
Listen to AQR’s Cliff Asness discuss systematic value investing, the current stock market bubble and whether economic fundamentals matter anymore for security selection on The Acquirers Podcast.
Riding the ESG trend, in which investors trade stocks based on subjective assessments of environmental, social and governance issues, hedge fund firm Marshall Wace is launching a new long-short ESG equity hedge fund that will buy stocks with strong ESG characteristics and bet against stocks with poor ratings. Aside from marketing, this strategy has worked well lately, given its propensity to be long technology and short energy.
Year-to-date, the small cap and value anomalies have worked completely opposite of how they have historically. The largest and most expensive stocks (having the lowest earnings yields) have performed the best while the smallest and cheapest stocks (having the highest earnings yields) have done the worst. Historically, small cap value stocks have outperformed the market substantially while highly-valued large caps have historically underperformed.
National Bank increased its stake in roboadvisor Nest Wealth. Meanwhile, the roboadvisor business has been challenged as asset allocation ETFs have disrupted the business model, offering cheaper and easier investment solutions.
Another electric car company is in talks to go public via a special purpose acquisition company. SPAC Spartan Energy Acquisition Corp is leading a bidding war among blank check companies to take Fisker public.
Who would have thought free stock trading would become a menace to society? At free-trading app Robinhood’s headquarters, they had to install bulletproof glass to protect employees from disgruntled unsophisticated traders who had lost all of their money on the app.
Cryptocurrency exchange Coinbase has begun the process to go public. It plans on bypassing a traditional IPO and using a direct listing, which is not underwritten by investment banks. The startup was last valued at $8 billion in its previous equity financing in 2018.
With respect to antitrust probes of Google’s acquisition of Fitbit, the tech giant could allay EU antitrust worries by offering a binding pledge not to use Fitbit ’s health and wellness data for Google ads. It is a unique case for antitrust enforcers given that Google does not directly compete with Fitbit in the smartwatch segment.
The gold bull market continues, as the precious metal rallies above $1,800 per ounce for the first time since 2011. The current environment of record monetary stimulus is positive for the so-called “barbarous relic”, as the price of gold has done well in negative real interest rate regimes. The VanEck Vectors Gold Miners ETF is up over 33% year-to-date, dramatically outperforming investor favourite NASDAQ.
