27 Aug 2018

Juan Palenzuela

27 Aug 2018

Good morning, 

Tesla is used to grabbing headlines, and this weekend was no exception.

The company announced on Friday that it will relinquish its quest to go private. “Given the feedback I’ve received, it’s apparent that most of Tesla’s existing shareholders believe we are better off as a public company” commented Elon Musk on Tesla’s website.

Musk cited four main reasons that changed his mind: some existing investors would not be able to own shares; existing institutional shareholders believe that Tesla is better off as a public company; individual investors would’ve likely not taken part in a deal; and the entire process could distract the company from production of the model 3, its first mass-market vehicle, which is crucial for the company’s financial health.

The going private episode shows an unusual degree of naivety for a 55-billion-dollar company CEO, as it has unnecessarily exposed Tesla to the risk of a penalty from regulators. The US Securities and Exchange Commission launched an investigation after Musk’s going-private tweets earlier this month raised concerns about the legality of the announcement. In the company’s communiqué on Friday, Musk didn’t waste the opportunity to reiterate that the company had enough funding to continue with the process if it had to. Backing off from his private plans, however, will not alleviate the exposure of Tesla to a potential penalty.

Costlier than any potential penalty from the SEC is the price Tesla will have to pay for its damaged image. Shareholders are growing increasingly concerned about Musk’s ability to direct the company, and some of them have been pushing to recruit a Chief Operating Officer to help with production goals.

News

Donald Trump will receive his Kenyan counterpart, Uhuru Kenyatta, in the White House today for what will be the second one-on-one meeting the US president has held with an African leader since he took office. The US is looking for stronger relations with Kenya as it is slowly sidles towards China, which invests heavily in the country. Trade and security are on the agenda.

The European Commission is reportedly drafting an amendment to existing party funding rules that would ban political groups from profiting from data collection of the sort alleged against Cambridge Analytica. Although the policies are still being drafted, the sanctions are expected to amount to around 5 per cent of the annual budget of a political party.
 

On Saturday, Pope Francis visited Ireland in what was the first official papal visit to Ireland in almost 40 years. He vowed to do more against sexual misconduct within the church in a wave of scandals that has greatly affected the image of the institution.

Business & Economy 

Uber announced its intention to shift its focus from cars to its electric scooter and bicycle business, despite the fact it could hurt profits. Dara Khosrowshahi, Uber’s CEO, said that individual modes of transport were better suited to inner city travel. Earlier this year, the company added e-bikes to its app, it acquired the bike-sharing company Jump for about $200m, and also struck deals with Lime, an electric scooter company.

On Tuesday, Best Buy will report second-quarter earnings. The electronics retailer managed to stabilise the business by aggressively cutting costs and is likely to benefit from an increase in consumer spending. Investors will watch for more detail on its largest acquisition to date in the healthcare space, as well as plans to launch new products and investment in its online business.

Workers at South Korea’s Hyundai Heavy Industries will begin a partial strike today. The workers are protesting the restructuring plans that the company has recently been forced to adopt. Stiff competition, especially from low-cost rivals such as Singapore and China has left Hyundai Heavy with no new orders for drill ships and related facilities for nearly four years, as low oil prices have eroded demand from big energy companies.

Markets 

The week ahead

China’s four biggest commercial banks will post second-quarter earnings this week. The Agricultural Bank of China and China Construction Bank both report tomorrow, while the Industrial and Commercial Bank of China and Bank of China will follow on Thursday. Analysts expect the AgBank to report slower profit growth and a rise in non-performing loans.

Hewlett Packard will release third-quarter figures on Tuesday. The company is expected to report a rise in profit, mainly a result of higher demand for its servers, storage and networking equipment.

American prosecutors have until Wednesday to decide whether to retry Paul Manafort, Trump’s former campaign chairman, on the remaining 10 counts or to let them pass. Last week he was found guilty on eight of the 18 charges brought against him, including bank and campaign finance fraud. Manafort’s conviction was a win for Robert Mueller, the special prosecutor leading the probe into alleged collusion between the Trump campaign and Russia.

America’s Bureau of Economic Analysis will release its second estimation for GDP growth in the second quarter also on Wednesday. The rate is expected to be reduced from its previous estimate of 4.1% to 4%. Nonetheless, that level of growth would be the highest the US has seen in four years, and it is a consequence of strong consumer spending and business investment over the quarter.

International Economic Announcements
(09:00) IFO Business Climate (GER)
(09:00) IFO Current Assessment (GER)
(09:00) IFO Expectations (GER)

Interims
Bank of Cyprus Holdings Plc
Starcom

Columns of Note 

Writing for the Financial Times, Nick Butler says that the postponement of Aramco’s IPO opens questions about Saudi Arabia’s economic diversification plans. The Saudi’s intention to sell a 5% stake, worth $100bn, was intended to fund the country’s plans to diversify from oil into other industries. The plan, which Butler argues lacked a concrete delivery mechanism, is now missing the funds it requires. To balance its budget, Saudi Arabia needs to cut some of its Vision 2030 plans, and it needs to push for a higher oil barrel prices. This way, it will acquire the resources necessary for diversification. Unfortunately for Saudi Arabia, the days of living off easy oil rent are over.

In the Times, James Kirkup argues for the regulation of tech giants. He begins by making the case for free market policies, before stressing the lack of competition in the market where tech giants operate. Without adequate competition, slow wage and productivity growth will follow, as well as a rising sense of inequality. When a group of small companies grow so big that they don’t face any real competition, the lack of competitive pressure allows them to earn large profit margins; which ultimately goes to shareholders and executives instead of being reinvested in productivity and shared with workers. This is something that must be debated, Kirkup says. Whereas in the US a discussion is taking place, Britain is lagging behind.

Did you know? 

From the continental point of view, Japan is in the direction of the sunrise. This is why the Japanese began calling their country Nippon, which literally translates to “source of the sun” and often translated into English as “land of the rising sun”.

Parliamentary highlights

House of Commons
In recess until 4 September 2018
 
House of Lords
In recess until 4 September 2018
 
Scottish Parliament
In recess until 4 September 2018