|By Matein Khalid|So Pearson PLC has sold the FT Group (with its flagship Financial Times newspaper) to Japan’s Nikkei Inc for $1.32 billion. Pearson will use the cash proceeds to increase its investment in education publishing businesses in the US and Canada, now 75% of revenues. This deal is a milestone in the history of newspaper publishing and my own life as an investor/financial journalist. I discovered the FT as a teenager in Dubai and began to learn about the world of money and markets from its salmon pink pages. Pearson has owned FT since decades before I was even born and built it into the most valuable print media brand in the world. But now Pearson has seen the future and decided to transform itself into a digital, content driven, social/mobile based franchise.
This deal does not include its dark blue glass FT head office on Southward Bridge or its 50% stake in the Economist Group. The FT, whose pedigree goes back to 1888 in Victorian London (the autumn of Jack the Ripper in Whitechapel), was defined by successive Pearson CEO’s as the commercial and strategic crown jewel of the publisher. Now, current CEO John Fallon has sold it to the Japanese.
Digital testing/teaching technologies and services is admittedly a higher growth, higher margin segment than newspaper publishing. The FT’s print/online circulation is 700,000 of the most affluent, educated readers on the planet. FT.com is the most successful online financial news site on the Internet with 20% annual growth in digital subscriptions. If ever there was a global media trophy asset, this is it. Will the Economist (circulation 1.6 million) be next to fall to Fallon’s axe? Yes, it will.
Since I speak only primitive, awful Japanese, I cannot read Nikkei’s flagship Nihon Keizai Shimbun, but I understand the economies of its 3 million circulation base all too well. How will the FT survive in Japanese media’s see no evil, hear no evil, kowtow to the shogun media culture? Yet John Fallon runs a business, not just a bastion of Anglo-Saxon political culture. As print content and advertising is in a secular slump, the FT had to go. My twins, members of the Playstation generation (born 1996) consume news online, even Daddy’s columns. In the next decade, media cognoscenti fear the newspaper destined to share the fate of the buggy whip, black and white TV and Brontosaurus. The first digital generation in human history simply does not consume news via print media.
Nikkei Inc. now joins Bloomberg and News Corp as one of the world’s top three financial news publishers. It does not surprise me that 70% of the FT’s subscribers are digital. Real time financial news has migrated to the Internet, even here in the Gulf, with its surreal media economics, content and corporate cultures. The FT was a magnet for high end advertisers because it targeted its actionable financial and investment content to a defined affluent segment “How to spend it” was a beauty. This is a winning formula for Gulf publishers, who operate in a $5 trillion Arab wealth market.
The FT only contributed £24 million or a mere 3% of Pearson operating profits. This means Nikkei Inc. is paying 35 times earnings for the FT, a stratospheric valuation for a print media asset. Newspapers in the US sell for 6 to 8 times earnings. The Washington Post cost Jeff Bezos one-fifth the price tag the FT commanded at its sale. This is a financial windfall for Pearson. This cash sale will boost Pearson’s credit rating and allow it to invest in education software. Expect a billion dollar deal frenzy in this niche.
I had recommended Fiat Chrysler Automobiles (FCA) back in 2012 and the shares doubled since that time. So Ferrari’s New IPO filing (FCA owns 90%) is another investing milestone for me. Dr. Enzo Ferrari’s company could well be worth $10 billion on the NYSE. Sergio Marchionne has hit a home run for his shareholders. Ferrari sold 7255 cars in 2014 but could well face headwinds in China, the Gulf, Russia and Europe. Marchionne plans to ramp up production. No more one year wait for a Spider, signore Marchionne? Molto bene, Capo di tutti Fiat capi!
Currencies – The epic fall of the Canadian dollar!
The collapse of the Canadian dollar in the past month (and year!) has been nothing short of spectacular. After all, when friends in Dubai asked me whether it was time to exit the trade in mid June 2015, I published a column recommending fresh shorts at 1.22. The loonie is at 1.3050 as I write. This strategy was vindicated with a vengeance after the Bank of Canada cut its policy rate to 0.5%, slashed its growth forecast (Ottawa admits Canada is in technical recession!). The credit rating agencies downgraded Ontario and the Parliamentary Budget watchdog dissed provincial debt loads as unsustainable.
The real reason for my loonie bearishness was my conviction that West Texas crude was a no-brainer short at $61 in mid June. As West Texas crude was slammed down to $48 now, its correlation with the loonie surged. Canada trades as a classic “petrocurrency” when oil tanks, China slows and the Fed whispers tight money sweet nothings to Wall Street. Governor Poloz has also made it clear that he is desperate to stimulate exports via a lower loonie even as oil/mining capex financial distress sweeps Alberta, Manitoba and Saskatchewan. Relative economies growth rates and government bond yield spreads suggest the Canadian dollar has more downside. West Texas could be trading at $38 when the Yellen Fed finally tightens and the world realizes that the Chinese Politburo’s 7% GDP growth target is the biggest global joke since Chairman Mao’s Little Red Book. The “surprise factor” in US economic data momentum is also loonie negative. Even though the Canadian dollar has fallen to 6 year lows and the Relative Strength Index (RSI) is at 75 above 1.30, this is not the bottom.
Provincial debt and a centre-left government in Alberta also suggest a higher risk premium on Canadian dollar assets while the Black Death in global commodities means no “merger mania” capital inflows from offshore strategic buyers (eg China) or reserve diversification demand from petrocurrency recycling central banks in the Arabian Gulf, Mexico, Russia or Norway. Money market rates forecast a 30% probability of another policy rate cut to 0.25% in the next year. This means the loonie is skating on thin ice in Planet Forex’s Cirque de Soleil. Countertrend rallies will be tested at a 10 day moving averages near 1.2840 but my strategic target for the loonie must now fall to 1.36 by year end 2015. Short term, yes, the RSI is overbought at 75 but remember loonie RSI was 86 back in January, when Poloz stunned the world with a shock rate cut. This was my biggest macro idea in summer 2014 and I am honoured to have shared this macro idea with my valued readers of the Arabian Post.
The spectacular fall of the Canadian dollar once again proves that the “trend is your friend” – until the trend comes to an end. The short Canadian dollar trend has not come to an end as I prepare to fly to Montreal via the Ville Lumiere to drop the Dauphin off at La Citadel.
This has been an “annus horribilis” for the world’s petrocurrencies, led by the Norwegian kroner, Russian rouble, Malaysian ringgit, Nigerian Naira and the Mexican Peso. Petrocurrencies are difficult to trade since their correlations to oil price fluctuations vary so much. The GCC currencies are pegged to the US dollar and are not petrocurrencies, though the burden of adjustment to an oil shock falls on the asset markets, a macro double whammy. The British pound is no longer a petrocurrency since North Sea oil output peaked in the 1990’s. The Russian rouble is leprosy due to the Kremlin’s wars in Crimea/Ukraine, energy and banking sanctions. The Norwegian kroner’s fate is influenced by the colossi sovereign wealth fund in Oslo. The Malaysian ringgit is influenced by oil, LNG, tin, rubber and palm oil.
The Canadian dollar’s correlation to West Texas is estimated by econometricians at Wharton as 0.48. So a $55 fall in crude last summer meant a 28 cent hit to the loonie. This made total macro sense to me since crude oil is 25% of Canadian exports, triple the ratio in the mid 1990’s. The short Canada trade was a guaranteed money spinner after Saudi Arabia abandoned the role of OPEC “swing producer” at the last conclave in November.
Market View – Ten reasons to sell gold even now!
Gold’s fall to $1085 an ounce should not surprise readers of this column. I have been bearish gold since the $1750 levels in 2011-12. In fact, I published a column a month ago, when gold was trading at $1165, predicting that gold will fall to $800 an ounce. The “yellow metal” is no longer a precious metal but investment leprosy in the world of mid 2015. Why?
One, rising interest rates are to gold what sunlight is to Count Dracula, a kiss (bite?) of death. After nine years of ZIRP, the Yellen Fed is on the verge of the first rise in the Fed Funds rate this autumn. With 17 million auto unit sales, 1.1 million housing starts, 12 million new jobs, record highs in the stock market, a 5.3% unemployment rate, the US economic supertanker is on a roll. I can easily envisage six to eight interest rate hikes in the next monetary cycle. As the opportunity cost of holding gold rises, its price falls. Elementary macro 101, my dear Watson.
Two, the Greek deal with the Troika, the Chinese stock market “bailout” and the Iran nuclear deal have all made the world a less dangerous place – for now. Gold cannot be a hedge against geopolitical risk if it moves to new lows while four civil wars and several terrorist insurgencies rage in the Middle East and North Africa. Gold once bottomed at $296 an ounce in 1982 when Israeli troops besieged the PLO in West Beirut. Is gold a geopolitical hedge? Poppycock.
Three, the commodities supercycle is as dead as Nineveh and Babylon. Commodities as diverse as crude oil, copper, iron ore, aluminium to nickle and zinc are in vicious bear markets as global growth slumps, Chinese demand fades and King Dollar goes on a rampage.
Four, the collapse of gold accelerated in mid 2014 when the US Dollar Index began its epic breakout at 78 and I began to plead with readers of this column to short the Euro at 1.3650. This accelerated the selling pressure in gold. The City grapevine argues that major hedge funds and Asian central banks are selling gold. John Paulson, who made a $4 billion killing shorting subprime mortgage debt in 2007, lost 90% in his gold fund. Any investor who ignored my warnings not to bottom fish in gold since 2011 is well, no longer an investor. How to make a small fortune in gold? Start with a large fortune.
Five, we saw liquidity shocks in the gold market, since a single sell order in Hong Kong sent bullion plummeting to $1090. This means the dealer banks are no longer risking their capital in this niche OTC market. Brace yourself for major price declines as gold volatility creeps higher this autumn. My call? $800 by mid 2016.
Six, Chinese gold reserves at the PBOC in Beijing are now 53 million troy ounces, up 60% since the failure of Lehman. I expect world’s biggest bullion buyer to turn into a seller this autumn. No brownie points for guessing what happens to the grassland when the biggie elephants begin their stampede. Joe Chow Mein (Chinese retail) has been savaged by the Shanghai/Shenzhen stock market crash.
Seven, in the age of Modinomics and punitive gold import taxes, Indian retail investors have also been savaged by the 40% bear market in bullion. There is also no credible investment case for jewellery as long as Dalal Street mints rupees.
Eight, CFTC data tells me that the smart money is positioning for the biggest short speculative assault on gold futures I have ever seen. This means my $800 target is far too vulnerable.
Nine, there is at least 20 – 25% downside in Dr. Copper and crude oil. Gold cannot rise when commodities tank. The last gold bear market (1980-1997) lasted 17 years. This one has barely begun.
Ten, hedge funds are net short gold for the first time ever. Gold exchange traded funds worldwide have sold $5 billion since 2013. Goldbugs are a cult in serious denial as they bleed and die on margin.
