As we kick off the week with what looks like will be a weak opening in US stock and bond markets following weakness in Asian and European equity markets today, below are a few things you might want to focus on as we start the trading week.
Adani Group
I have not done (and will not do) a “deep dive” on the last week’s exchanges between New-York-based research firm Hindenburg Research and Indian-comglomerate Adani Group, controlled by the world’s (former) third richest man, Gautam Adani. Adani (website here) is a sprawling Indian-based conglomerate which controls seven publicly-listed companies involved in transportation, metals, logistics and energy, as you can see below (diagram from the company’s website):
Hindenburg Research, based in New York City, is a research firm which focuses on “forensic financial research” according to their website (here). They are perhaps best known for exposing Nikola in 2020, which as you might recall, is an emerging EV company that ran an advertisement of their truck moving, which the CEO eventually admitted (as Hindenburg attested) that it was just a vehicle without power being rolled down a hill (see BBC article here). I am not sure how Hindenburg decides on which companies to focus, but it does appear they put their money where their mouth is, going short on companies they believe are over-valued due to inadequate / improper disclosure or fraud.
During my banking career, I saw a myriad of family-controlled (and often sovereign related) businesses that had complex ownership structures, often with cross-ownerships and affiliate-to-affiliate dealings that were hard to “decipher”. More often than not, these companies were based in emerging markets, and specifically in countries where disclosure was generally much less rigorous than you might find in more developed markets. In many cases, these companies had direct or indirect connections with the government, making dealings across group companies even more opaque. I found the situations even more troublesome when local state-controlled (or state-owned) banks were lending to these entities on a “country club basis” – meaning with poor (if any) corporate due diligence and on a “no questions asked” basis, at pricing that was absurdly cheap. A herd mentality ensued across lenders and equity investors alike, so even foreign investors would often pile in without understanding the risks of what were often opaque corporate structures and complex affiliate transactions.
This is not accusatory, as I admitted up front I have not looked closely at this situation. Between what Hindenburg has written and Adani’s response, you should have all you need in terms of both sides of the argument. Adani has provided a nationalistic spin, which is not surprising I suppose but I find it rather unfair because I don’t believe for a second this has anything to do with the company being Indian.
If you believe investors are the best source of pricing the risk now that the story for going short the Group companies has been laid bare, the market capitalisation of the combined companies was around $230 bln (equivalent) prior to the Hindenburg report last week, and has declined around $70 bln since the report was published according to an article in the FT this morning (here). Let’s see where this goes next.
Central bank policy decisions this week
All eyes will be focused on rate decisions by the Federal Reserve on Wednesday, and the Bank of England and ECB on Thursday. Spanish inflation data this morning (higher than expected) probably baked in the expected 50bps increase in the three key Eurozone bank rates this week, but I continue to have doubts about how far the ECB will go before it pulls back, simply because it is operating with more constraints than the Fed and the BoE. The BoE will almost certainly increase the Bank Rate by50bps, and the Fed will increase the Fed Funds rate by 25bps. Here’s the schedule:
Federal Reserve – Jan 31st/Feb 1st [expect +25bps] and Mar 21st-22nd
Bank of England – Feb 2nd [expect +50bps] and Mar 23rd
ECB – Feb 2nd [expect +50bps] and Mar 23rd
Bank of Japan – Mar 9th-10th and Apr 27th-28th
Earnings galore!
An additional107 additional S&P 500 companies will report earnings this week, including:
Tues: AMD, Caterpillar, McDonalds, Exxon Mobile, Pfizer and GM
Weds: Meta Platforms (Facebook), Met, T-Mobile and Waste Management
Thurs: Amazon, Apple, Google, Bristol-Myers, Elli Lily, Estee Lauder, Merck, Ford, Qualcomm, Starbucks, Alibaba, Clorox, Harley Davidson and Hershey’s
META, AAPL, AMZN and GOOG will be key focal points following MSFT’s poor guidance last week, which was more or less dismissed by investors. However, this week is about much more, as there is a diverse slate of companies reporting this week. I would encourage investors to focus as much on the outlook / guidance – since this is forward-looking – as the retroactive 4Q22 results, to get a sense of how much risk is ahead as far as global economic growth.
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