ECB's dilemma on the rise of Euro

The euro has been surging 10% against U.S. dollar in six months in part because investors think Europe is strongly performing economic rebound after the great lockdown due to  pandemic. The bet on European stocks rise has been increased and and investors have kept buying euros in the aspect of optimistic sign of euro-zone recovery. U.S dollar has been weakening in the announcement that Fed will remain its super dovish stance of maintaining federal fund rate near zero until average inflation target(AIT) overshoots over 2% moderately for some time. Please see my blog about it.

https://techongstudy.blogspot.com/2020/08/review-of-monetary-policy-strategy-fed.html

U.S. is still struggling with pandemic now; indicating countermeasures weren't very appropriate enough to flatten the curve. Moreover, uncertainty about new cold war between U.S-China, and anxiety about the presidential election in November makes investors unease. These factors make the dollar weaker than the counter-parties such as Japanese yen and euro. 

Eurozone's rapid recovery could be a good sign, however absolute growth alone could stimulate the euro's jump; that means it can hurt inflation target near 2% and European manufacturers from exporting. A strong euro contributes to the risk of deflation or dis-inflation because imported goods become cheaper for European buyers. Moreover, when it comes to export, goods will automatically become relatively more expensive for international customers who pay in other currencies. The price disadvantage will put them in worse condition to compete against foreign rivals. 

Even before the pandemic, exports from European started stagnating due to the global slowdown whether it is directly and indirectly affected by the trade tension between U.S. and China. The Trump administration has imposed tariffs to European commodities such as steel and aluminum. Also, spread of Chinese economic deterioration created less demand on European goods.  European based companies like Ferrari, Fiat-Chrysler, or Michellin will get profit hit with appreciation of their currency. 

“There is a cost to the euro rising, and it’s on earnings,” said Mathieu Savary, a strategist at BCA Research. “If you’re a European industrial company and you compete with Caterpillar, you’re likely to see your profits being hurt when the euro is going up.”  Other trading partners including U.S. and China can benefit from strong euro by taking advantage of their relatively weaker currency.

European Central Bank did not change their interest rate at -0.5% and would support €1.35 trillion, equivalent to $1.59 trillion, of eurozone debt under an emergency bond-buying program unveiled in March. The ECB now aims to keep inflation in average of 2%.

Stronger euro is problem to eurozone. It would not meet the target inflation rate and hurt their export industry. However, ECB does not have enough ammunition to lower the key interest rate nor provides fresh new stimulus program, which is already massive. The central bank does not directly target the exchange rate, but should concern about it in regarding to their economy.  

Source WSJ, NYT

https://www.wsj.com/articles/ecb-leaves-policy-mix-unchanged-as-it-monitors-covid-19s-impact-on-economy-11599738872

https://www.wsj.com/articles/companies-brace-for-profit-hit-from-euro-rally-11599473390?mod=searchresults&page=1&pos=7

https://www.nytimes.com/2020/09/10/business/ecb-euro.html

Do we need short-sellers in the market?

Short-selling

It's one of the way of investing in stocks. When considering about long position investing, investors expects the stock will rise in the future and secure the stocks until the price rise in the future. Mostly, they buy value-growth stocks for betting future rises. Short selling is an opposite concept with the usual method. Investors predict the price of a stock will fall and bet against it, earning gains with inverse direction to the long. 

Process

Investors borrow shares in current price, sell them in the market, and return them back in the future. That is why they hope the market to be transacted in lower price so they can pocket the difference. For example,

1) If a person A is deciding whether to buy the shares of a specific company. By analyzing the firm's fundamental, A expects the sales of the company will fall down which will lead to the fall.

2) The person A borrows the company stock from lenders or brokerage firms, and sells in the price of $100 (which is market current price).

3) As expected, the share drops about half which makes $100 into $50. Then investors buy the share again in $50.

4) The investors returns the stock back to the broker. Then the investors gain the gains of $50.

Success stories in short-selling

During the financial recession in 2008, Michael Bury (movie Big Short) was betting against housing market rise, predicting the bubble would collapse resulting to sharp drop of securities. He made great wealth by a huge amount of short selling (buying CDS) which later made into massive returns. It is about 489% return ($2.69 billion in total). Other than that, George Soros made substantial profit betting against the rise of British Pounds and Italian Lira. 

Do we need short-sellers in the market?

Yes, absolutely. Those forces take essential part in the stock market. They can stabilize the capital market being overpriced or over-heated (bubble). They also can provide liquidity to function the market smoothly. Moreover, short-selling companies scrutinize meticulously whether the company honestly reports their earnings or not, which leads on positive effect on corporate's transparency on their financial statement. For example in the beginning of this year, Muddy Waters started shorting Luckin Coffee, one of the biggest coffee chain firm in China. They found out the possibility of accounting fraud in the company, which later let the world know about the scandal.

Lets be careful

Short-selling can be effective to earn gains only if the investors have strong conviction to the market's direction. Timing is also most important basis that short-sellers need. I read the article related to it in Wall Street Journal. I want to share part of the story: 

Mr. Kullamägi, who has been speculatively investing about a decade has been enjoying himself on volatile stocks for betting against the rise. One day, he captured the prey for his bets on Eastman Kodak's fall in July. When the government announced to grant $765 million loan for Kodak for supporting to make vaccine against Covid-19. The stock had threefold rise, and Mr. Kullamägi thought that the Robinhoods (mom-and-pop investors) will push the shares of Kodak higher, but would not last long. He tried to short 45,000 stocks partially until July 29th, but accidentally clicked the wrong button to double the short amount all of 90,000 shares at once which lead more cost. The shares rose seven times more and he was "stuck for the ride". He has made $1.5 million in his expenses for the trade cost.

Investors like to gain their profits by any method. It is not only individuals but also applies to the big firms like Softbank and Berkshire Hathaway. The method can be differed since there are various types of betting, however lets be careful before we put into the movements.

Source: Short Selling Stocks Proves Costly for Some Investors

https://www.wsj.com/articles/short-selling-stocks-proves-costly-for-some-investors-11599645600?mod=mhp

Zoom and Slack, how are they winners of COVID-19?

It has been almost nine months of living in new normal life after the world was hit by COVID-19, another pandemic disease originated from Wuhan. Wearing a mask is required whether it is indoors or outdoors. Social distancing by staying meter apart from each other seems likely to be granted. "We are living in post COVID-19 era. Life has changed from the past and will change continuously. It is just a matter that the pandemic has triggered it." 

During the pandemic rise in Europe and U.S., people were staying at home isolated. At first, it was not very easy to stay at home without any contacts from their acquaintances. As the pandemic lasts longer than expected, people started to enjoy themselves at home. Eating at home, shopping through e-commerce, in-house workouts, etc became new normal. The most noticeable change after COVID-19 was working from home. 

Zoom Video Communications and Slack Technologies were one of the companies that attracted most attention during pandemic. They both are the software companies for the companies. Zoom is more of video conference service, Slack is more of communication service through chatting. The common thing was that they are both in favor of contactless business. They both were listed in 2019 in U.S. stock exchange which made their debut to the investors. (Slack had direct listing after Spotify)

Then how were their performances after the rise of COVID-19?

Zoom 

The revenue was $663.5 million in the July quarter, which is up from $145.8 million last year, positing a profit of $185.7 million. Shares have risen about 400% from January due to the benefits of remote works. Small and medium companies contributed about 36% of sales of total revenue. Since furloughs from the companies were massive, so people started to work at home as a freelancer which also benefited platforms like Shiftpixy and Fiverr International. They had to use video conference for the business or job interviews. Zoom once had trouble with securities which later made them acquire Keybase to support its cyber safety. 

Slack

Revenue for quarterly sales of Slack was $215.90 million which has beat estimates of $209.10 million. This is about 48.92% incline over sales of $144.97 million the same period last year. However, shares has not significantly increased for the worries of competitors of Microsoft, Facebook, and Cisco. Slack is very useful when there are many staffs in the company since the software is very convenient for chatting and sharing the files and document. However, as unemployment started to rise, companies were less inclined to adopt new technologies like Slack services and started spending less during the economic downturn.

 

Zoom and Slack are both specialized to the business whether it is at work or at home. But Zoom is more convenient to individuals who are remote workers, while Slack is mostly B2B business. If a company cuts off their staff, then there is no reason to use chatting software like Slack which has high technology. However, when the economy recovers and remote working becomes more adopted, then Zoom and Slack can be good for investment in the future.

Source: WSJ

https://www.wsj.com/articles/slack-boosts-outlook-as-pandemic-fuels-boom-in-remote-work-tools-11599596354?mod=tech_lead_pos2

https://www.wsj.com/articles/zoom-again-lifts-full-year-outlook-as-sales-surge-during-pandemic-11598906550

International trade tips for individual resellers (How global trade works)

World trade is becoming more simple and easy.

Trading globally does not mean full 40’ standard high cube container volume transaction between two conglomerates. Until 2000s, trade had been a very high entry barrier. Massive budget was essential to win a contract from other party by arranging an international business trip or attending an international fair. However, as the internet develops, more information was shared globally. Upgrades on finance technology has helped to reduce the burden of traditional global payments such as telegraphic transfer by banks, letter of credit, or collection basis (D/A, D/P). The development of logistics services of e-commerce platforms has made small volume trade easier. Anyone can participate in global trade field without substantial expenses. To know more about the process please check the factors below.

 

Trade documents

The papers contains payment and shipping-related documents issued directly or indirectly by importers and exporters, mostly in the course of paying to exporters and delivering goods to importers under a trade contract.

Trade documents are mainly composed of Bill of Lading (B/L) when the products are about to be shipped, commercial Invoice (C/I), and packing list (P/L) from consignor’s side. purchase order (P/O) or letter of intention (LOI) is issued by buyers when ordering, proforma invoice (P/I) is written by exporters when presenting the quotation. Sometimes certificates of origin (C/O), material safety data sheet (MSDS), etc. are needed during the process of custom clearance and quarantine sanitation. When the products are delivered by air, then the shipping company issues airway bill (AWB).

 

Payment

There are various payment methods. The payment can be through bank using telegraphic transfer (T/T) service, or letter of credit (L/C) when exporters are not reliable enough to pass the goods safely door to door, and collection base such as document against payment or acceptance. As fintech improves, paying through online became one of the means for global trade. Paypal, Payoneer, Union Pay, etc are the example of finance technology.

Then what method should buyers choose to do the payment? Well it depends, if small orders, then I prefer Paypal, but if the order increase, then telegraphic transfer is another method. When selecting payment as Paypal, then 100% payment in advance is recommended since the commission fee is high (approximately 3%) and the orders are small. If order starts to get bigger, then I recommend doing telegraphic transfer. Buyers can pay 30%-50% of down payment for safety, and when the products are ready to be shipped, the rest can be paid afterwards. Remained balance payment can be decided depending on the situation such as an issue of check B/L or other materials that can prove the safety of shipment.

If the seller is extremely unreliable, then I recommend L/C usance or D/A. In cases of most frontier countries, advising bank can be untrustworthy as well, T/T after 00 days of invoice might be the safest method during international trade. Payment method should be negotiated carefully.

 

Shipment

Delivery of goods varies on gross weight and volume of the product.

1) Air: couriers such as Fedex (TNT), DHL, UPS, EMS

Shipping cost is calculated on the volume and gross weight. Larger amount the consignee import, more charges it would cost. It is recommended to small amount orders since the cost can be extremely high that buyers cannot afford and the delivery lead time can be shortened. (It takes about 3-5 days in most of the countries) Most of the packings are in cartons or boxes.

2) Ocean: logistic (shipping) companies

Shipping cost depends on cubic meter (CBM) and gross weight. CBM is the size of the volume (length x width x height). If it is over 1 CBM, then the shipping cost will be cheaper. Most the transaction goods are packed in pallet when buyer prefers less than container load (LCL), or full container load (FCL) when total amount is over 10 pallets. Lead time can take from 2 weeks to more than a month depending on the distance.

Incoterms 2020

The terms are used to specify who is in charge of the shipping cost and custom clearance fee. It also includes who is applying for the insurance during the shipment. There are total of 11 terms, three terms are used widely during global trade.

EXW (Air)

It refers to the sellers (or also regarded as shippers) handing over contracted product from their factory or warehouse to the buyer (or also considered as consignee). The seller has minimum obligation, on the other hand, buyer covers all costs and organizes transport. (Buyer takes responsibility from seller's factory) Convenient condition for exporters who are not familiar with trade transactions since buyers takes own risk and cost for carrying out all the trade process. EXW is proceeded when seller is in A's position and buyer is in B's position.

FOB (Ocean)

It is the most commonly used condition with CIF in practice. The divergence of risk and cost ends when the seller puts the goods on board of the buyer's nominated ship. Subsequent risks and additional costs are all up to the buyers. They have the right to sign the nomination of vessel (frieght forwarder) and the contract of carriage, and at the same time bear all costs such as freight and insurance to the destination (port).

CIF (Ocean)

Seller's Cost: CFR + Sea Insurance Fee

Under the CIF terms, if there is no agreement for insurance between each other. The seller must pay for insurance. When signing an insurance contract, the policyholder and the insured are the sellers, but after the transaction begins and the goods are shipped, the insured becomes the buyer. The rules dealing with the rights and obligations of the parties under the CIF are the Warsaw-Oxford Rule-Waluso-Oxford Rules. If CIF is changed to a combined transport method, it becomes CIP.

To see more Incoterms 2020, please check my blog.

https://techongstudy.blogspot.com/2020/08/incoterms-2020-by-icc.html?m=1

Custom Clearance

It depends on the countries, since they have different laws and regulation. There are several reasons for it; to protect their manufacture industry or to screen the products’ safety when their nation use it. To say in common, cosmetics, foods, medical cares, electronics with electromagnetic waves are the subject to be examined during custom clearance. Small quantities of samples are not the problem to import or export. On the other hand, mass amounts of products may encounter problem when entering custom regulations. Even though the products are extremely safe in manufacturing countries, consignees still need to acquire foods and drugs administration (FDA).

To proceed FDA, exporters can help by sending ingredient list or MSDS. If importers want to reduce tariffs, then C/O is required. If buyers do not like to involve in complicated process, or manufacturing companies do not want to reveal their ingredient, there is method of shipping separately by dividing partially in different consecutive days. Using countries which has less custom regulation is another methods, such as Hongkong, Singapore, and Dubai.

Call option and Softbank's aggressive bets.

Softbank, which is one of the world’s leading venture capitalists which manages about $100 billion Vision Fund, has been making considerable bets on major tech companies. The report from Wall Street Journal (WSJ), indicates that the Softbank Group is probably behind the rise of the stock market of IT companies in U.S. Reportedly, SoftBank bought about $4 billion worth of stocks and ‘call options’ of tech companies such as Amazon, Microsoft, Netflix, and Tesla this spring.

See the blog: https://techongstudy.blogspot.com/2020/09/bigger-correction-of-market-after.html
One of the three most essential derivatives (Plain Vanilla; futures, swaps, options). An option is a contract conferring the right (not obligation) to buy and sell an underlying asset at specified strike price at maturity. The right to buy is called a call option, and the right to sell is called a put option. Here is example from Investopedia. If Apple is trading at $110 at expiry, the strike price is $100, and the options cost the buyer $2, the profit is $110 - ($100 +$2) = $8. If the buyer bought one contract that equates to $800 ($8 x 100 shares), or $1,600 if they bought two contracts ($8 x 200). If at expiry Apple is below $100, then the option buyer loses $200 ($2 x 100 shares) for each contract they bought.

Traders can strike deals of derivatives contracts to make directional bets on assets (mostly stocks) or hedge their portfolio. Option holders can make big win if market skyrockets, but can lose a sizable premium and down payment if stock market drops.
In case of Softbank, the stock rises above the strike price. Brokerages or banks who arranged options get themselves to the exposure of risk. To offset the risk, option dealers buy more stock and derivatives, which leads another jumps to stock market. When shares soar, brokerages need to add fuel to the fire to hedge more. Buying more of stocks will reduce the loss a little more than doing nothing. That is why Softbank is said to be behind the surge in technology stocks.

U.S. stocks overall has increased since March as the gambling market closed due to pandemic and the number of individual investors trading stocks options through online brokerages such as Robinhood increased. Softbank generated an exposure of around $50 billion for its bet this year by using growing optimistic sentiments of investors backed by massive liquidity under Fed and U.S. Treasury. However, stocks fall for the fast few days after the news, rising concerns of Softbank’s dangerous attempt of unfamiliar area according to Bloomberg. Also, the Financial Times (FT) raised worries that investing in options that rely too much on the market could be risky. If the U.S. stock market falls in the future, Softbank’s earnings may decrease,
Source:
https://edition.cnn.com/2020/09/07/investing/softbank-stock-options-intl-hnk/index.html
https://www.investopedia.com/terms/c/calloption.asp
https://www.wsj.com/articles/softbanks-bet-on-tech-giants-fueled-powerful-market-rally-11599232205

Bigger correction of the market after fierce rally? Watch out for the market overhang.

Stock splits have let Apple and Tesla perform high right after the announcement. Apple has split 4-for-1 and Tesla 5-for-1 last week. Please see my blog about stock split down below link.

https://techongstudy.blogspot.com/2020/08/stock-split-and-your-portfolio.html?m=1

However, stocks of Apple and Tesla each fell more than 17% and 23% which could be a sign for bigger correction as investor fears of great leap will be adjusted. Some of the investors worry about double dip since the market is rallying fiercely from March whereas the real economy is now on slow pace of recovery. Quick response on monetary and fiscal policy has eased the financial market by purchasing corporate bonds, ETFs, and so on. With the announcement effect from Fed, investors were full of greet to purchase the assets hoping financial market would be rebounded with the back of abundant liquidity and bank lending programs. Howard Marks concerned money printing will lead to investor’s FOMO syndrome which will drive risky market melt-ups. See my blog about FOMO.

https://techongstudy.blogspot.com/2020/08/fomo-fear-of-missing-out.html?m=1

James Mackintosh points out three areas about dangerous signs of the market rallies: “overly optimistic sentiment, the impact of options trading, and the speed and scale of the rise of leviathan technology stocks. It is not only mom-and-pop investors but also Softbank, one of the leading investment companies on IT sectors, has rushed $4billion on option trading to participate the market rally.

Perhaps, pessimists say that whereabouts now are similar to the dot-com bubble in early 2000s which Nasdaq has experienced sharp price crush. The lesson from the great burst has “rediscovered the value of caution, and put option (act of selling) became popular again” for the past 3 days’ market movements. Still, optimists say the mega tech companies are prospering with high profits in their balance sheet. The danger isn’t as prominent as so many dot-coms in the past. Still, investors should be cautious to estimate the value of the stocks since S&P 500 Shiller CAPE Ratio (way of measuring price earning ratio) now is over 30. Of course, it is not easy to measure the value of each stocks, since there are many variables to measure, however, let’s put in to Warren Buffett’s shoes pondering “Will he buy that stocks?"

'Tenet' experiments on the global bets of theater industry revival

'Tenet' is now starting to test the appetite for movie-going despite pandemic. The thriller is hoping for reviving theater industry after the great lock-down has left indoor theaters closed for a few months, and movie-goers are not very reluctant to see the movies outside of their home. Potential ticket buyers have to consider about the safety before urging back to the screen.

Movie called "The New Mutants" from Disney generated fairly $7 million in box-office sales in the North America just a week ago. Nowadays, wearing a mask is required while viewing a movie. This makes movie goers not inclined to go to the theater. Additionally, theater has to adopt buffer-zone seating, the capacity of movie attendants declines about more than a half. There is no way for movie makers to profit. 

Reported about $200 million budget of making a film from Warner Bros., Tenet is betting against the pandemic and shutdowns hoping for revitalizing the theater industry, which took almost half-a-year to release the movie. The plot of movie is about the fate of humanity pivots on characters moving back and forth through time. It is an epic, brain-bending exploration of ideas the filmmaker has spent decades examining. The film is quite difficult to understand by watching at once. Since the movie might be confusing, there are lots of reviews about it; more of spoiling. However, Christopher Nolan, the director of the movie jokes, "It’s not a time to be precious about anything, 'Tenet' is so narratively complex. It’s not the kind of film you can spoil.”

Theater giant firms such as AMC, Cinemark, Cineworld and IMAX have all been betting heavily on “Tenet” to bring moviegoers back, so the strong international results were an encouraging sign ahead of the movie’s U.S. opening. Hollywood sighed of relief that $53.6 million were grossed from Europe and other markets (41 countries), which is a good sign that audiences are craving for new content even though social distancing and masks are required in theater. IMAX reported that $20,000 were generated per screen even though the capacity of attendance were limited to about a half or less. In fact, 'Tenet' had less competition as now since numbers of movie makers are delaying to open and most of movie theaters are re-releasing back-in-a day films.

"The long wait has elevated this film to the status of being very important symbolically, culturally and financially. It represents a turning point for the theatrical business which has been sidelined for five months," said Paul Dergarabedian, senior media analyst at Comscore.

I have watched 'Tenet' twice despite Covid-19. It is very difficult to understand the plot since the story is quite complicated. I have watched the spoilers and interpretation of the movie through YouTube, which made myself more confused with it. However, the factors that I thought was very intriguing was the time twist between past and present. It is definitely a harsh endeavor to express the time lashes. The first time viewing was more of understanding; the second time was more of feeling the movie. The movie was great, I gave generous score in the review of IMDb. It is pity that this great movie could have attracted more audiences which is now overlapped with pandemic.

Source: NYT
https://www.nytimes.com/reuters/2020/09/03/arts/03reuters-film-tenet.html

Source: WSJ
https://www.wsj.com/articles/tenet-suspense-builds-for-theater-chains-11598981394

https://www.wsj.com/articles/christopher-nolans-tenet-makes-a-global-bet-on-the-film-industry-11598640209