March 26, 2020 / 8:49 PM / 13 days ago

Breakingviews - Corona Capital: Ackman’s hedge, Oil stockpiles

HONG KONG/LONDON/NEW YORK (Reuters Breakingviews) - Breakingviews has launched a daily column covering pandemic-related insights that you might have missed. Throughout the day, we’ll bring you shorter-than-usual views from columnists around the world with the same financial savvy on companies, economies and capital markets during this important unfolding story.

Bill Ackman, chief executive officer and portfolio manager at Pershing Square Capital Management, speaks during the SALT conference in Las Vegas, Nevada, U.S. May 18, 2017. REUTERS/Richard Brian

LATEST

- Ackman’s hedge

- Oil stockpiles

ACKMAN TALKS BOOK. Pershing Square Capital Management’s Bill Ackman has turned a $27 million hedge against a coronavirus downturn into proceeds of $2.6 billion. That will go down as a genius trade, offsetting his hedge-fund firm’s losses. As usual he has been talking his own book, though. Last week in an emotional interview with CNBC he said hotelier Hilton Worldwide’s stock “is going to zero along with every hotel company in the world” if the U.S. continues to react only patchily to Covid-19. One of the stocks he is now buying with his hedging windfall? Hilton.

The day of that interview, March 18, was a fearful one for U.S. stocks, with circuit breakers triggered due to falling prices. Hence perhaps the focus on the words “going to zero” rather than Ackman’s more nuanced overall message. The hedgie has had his winners, like General Growth Properties, and losers, like Valeant Pharmaceuticals, but he has always publicly backed his own bets. On any kind of day in the market, that’s not going to change. (By Robert Cyran)

OIL RESCUE IS MORE FAIL THAN BAIL. A U.S. plan to stockpile oil isn’t going to happen any time soon. While President Donald Trump said earlier this month that a global price war had created an opportunity to help out struggling shale producers by filling the Strategic Petroleum Reserve “to the top”, Congress didn’t cough up the required funds. That was probably the right move.

Why? Because prices might actually fall further. G20 leaders’ “virtual summit” on Thursday was chaired by Saudi Arabia, chief aggressor in the energy market’s ruinous pump-a-thon. And oil wasn’t even mentioned. That suggests there’s scant hope of Saudi cutting production in such a way that reduces the current, epic supply glut. If the kingdom shows no signs of relenting, Brent futures could dip even lower than their bombed-out $27 a barrel. Maybe Trump can try again later, for an even better deal. (By George Hay)

CLEAR-UP TIME. Banks have kept pretty schtum over the hit to their markets-linked businesses from the recent chaos. Dutch $8 billion lender ABN Amro on Thursday broke ranks, revealing that it would book a $200 million loss in its clearing unit. An unidentified client, trading U.S. futures and options, ran into trouble amid the extreme volatility and failed to meet a margin call on a credit line extended by the Amsterdam-based group.  

It’s material, in corporate-speak, at about 10% of the expected earnings analysts expect ABN to generate this year. But a bigger surprise would be if the state-backed Dutch bank was alone in mixing it with overexposed clients amid the recent avalanche of volatility. Investors will be keeping their eyes peeled for the clear-up when other lenders’ first-quarter results come around. (By Liam Proud) 

ECUADOR HITS THE ROCK AND THE HARD PLACE. Ecuador hits the rock and the hard place. Fitch Ratings downgraded the beleaguered country’s rating for the second time in days to CC on Tuesday after government officials said the nation would hold off on making around $200 million in interest payments and might renegotiate some of its debt. Its bond coming due in 2022 was trading above par in January. Now it’s worth only around 25% of its face value.

Ecuador, which has a history of debt defaults, will probably struggle long after the crisis ends. It’s dependent on oil revenue, it has already received International Monetary Fund loans and struggled to push through reforms, and stimulating its weak economy while running a deficit will be a slog. Also, it uses the U.S. dollar, so it can’t use its currency as a shock absorber. Its options to finance an uncertain post-Covid-19 future look lousy. (By Anna Szymanski)

CHINA BULL TURNS BEAR. China International Capital Corporation, ordinarily inclined to see the economic bright side, has donned dark shades. The $7 billion investment bank slashed its forecast for the country’s economic growth this year to a feeble 2.6%, from 6.1%. That may seem logical given the damage wrought by the coronavirus. But President Xi Jinping’s administration is so far sticking to its official target for a 6% increase in gross domestic product. CICC’s prediction is also gloomier than revised forecasts by foreign rivals like Goldman Sachs (3%), HSBC (5.3%), and Moody’s (4.8%).

Chinese financial institutions like looser policy, so CICC’s pessimism may betray some self-interest. Moreover, the National Bureau of Statistics, which is ordinarily inclined to sugar-coat data, just posted record-low economic readings. It’s a good sign some local analysts are choosing credibility over cheerleading. (By Pete Sweeney)

LIQUID HEINEKEN. The Dutch brewer on Wednesday became the latest big company to issue public debt, after central banks flooded the market with cash. It raised a total of 1.4 billion euros, but at a price. Its five-year and 10-year bonds priced at yields of 1.678% and 2.304%, respectively, according to a banker involved in the deal. A few months ago, yields were close to zero.

Still, at least the market is open. Under its new emergency 750 billion euro bond-buying scheme, the European Central Bank can buy commercial paper as well as corporate debt worth up to 70% of a particular issue. European companies including Philips and Nestlé completed successful bond offerings this week. The market’s not perfect, though, with wide gaps between bid and ask prices reflecting widespread uncertainty. Like Heineken’s brew, liquidity commands a premium. (By Dasha Afanasieva)

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