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Trump’s amoral stance on Saudi, Sears’ potential liquidation and a bearish fund manager survey

By Edward Harrison

1 – Saudi

It looks as if US President Trump is trying to support the narrative that the Khashoggi assassination was a rogue interrogation gone wrong, allowing the Saudi government to escape sanction. But condemnation is so widespread, it’s unclear if this ploy will work.

As I have said before, Trump is an amoral person who tends to do what is expedient rather than following a moral compass. So, his fecklessness here is not unexpected. But, Trump’s tack makes the likelihood of an escalation much lower. The black swan of $200 oil is unlikely to happen. And for Trump, this is critical, as he needs the Saudis because of the sanctions he has already put onto Iran.

Trump joins Saudi Arabia’s Khashoggi coverup

On Monday morning, Trump held a 20-minute phone call with the Saudi king and then parroted Riyadh’s denials to reporters. “I don’t want to get into his mind, but it sounded to me like maybe these could have been rogue killers,” Trump said. “Who knows? We’re going to try getting to the bottom of it very soon, but his was a flat denial.”…

But news broke later in the evening that made the king’s “flat denial” all the more unbelievable. CNN reported that the Saudis were readying to acknowledge that Khashoggi died while in their custody. Citing two sources, the network reported that the journalist’s death “was the result of an interrogation that went wrong, one that was intended to lead to his abduction from Turkey.”

The Post’s Shane Harris reported last week that U.S. intelligence interceptssuggested Crown Prince Mohammed bin Salman had approved a scheme to lure Khashoggi out of de facto exile in the United States and detain him. Khashoggi, 59, a former Riyadh insider with a colorful career in politics and journalism, had moved overseas to express his disquiet with the kingdom’s leadership, particularly the youthful Mohammed…

“This never would have happened without MBS’s approval. Never, never, never,” a former senior U.S. diplomat with long experience in Saudi Arabia told my colleagues, referring to Mohammed.

Even if Khashoggi’s death was an “accident,” it will stir outrage in Washington. Outside the White House, there is growing bipartisan distaste for Riyadh on a number of fronts. “Been hearing the ridiculous ‘rogue killers’ theory was where the Saudis would go with this,” Sen. Chris Murphy (D-Conn.), a member of the Foreign Relations Committee, said in a tweet. “Absolutely extraordinary they were able to enlist the President of the United States as their PR agent to float it.”

When Business Executives Become Reluctant Statesmen

Without a strong stance from Washington to give them cover, top executives have been on their own dealing with Saudi Arabia, a country that has shown itself capable of holding a grudge…

Over the past two years, executives have found themselves in the uncomfortable position of having to speak out on matters of right and wrong. After Charlottesville, they rebuked the president’s weak response to white supremacy. After the United States pulled out of the Paris climate accord, they expressed their disappointment. And on immigration, many businesses have denounced the administration’s hard-line approach.

And on Saudi Arabia, they have heard the president give credence to the kingdom’s denial of responsibility and float the idea that “rogue killers” could have been to blame for Mr. Khashoggi’s disappearance.

2 – Sears

Sears faces tough foe: an unforgiving bankruptcy code

Over the last dozen or so years, bankrupt retailers have had less time to make major strategic decisions for their survival and landlords and lenders have had more leverage in the process.

The change stems from a 2005 legislative overhaul of the bankruptcy code that forced companies to find an agreement within seven months on its real-estate leases, or allow landlords to walk away from the agreement. Previously, companies would spend a year or two working out a viable survival plan.

Restructuring specialists blame the shorter timeframe for the rapid liquidations of chains such as Circuit City, Linens ‘n Things, the Borders book store chain and Toys ‘R’ Us.

The law intensifies the pressure on Sears and Chairman Eddie Lampert to restructure the company and turn it into a relevant, viable business.

“They have less money and a shorter period of time to make decisions,” said Ted Gavin of the Gavin/Solmonese restructuring advisory firm. “There’s more transactional risk.”

3 – Italy

Juncker hints Brussels will reject Italian budget

“There is a gap between what was promised and what is being presented today”, said Mr Juncker. “We are going to have a virtuous debate with our Italian friends who know that their level of public debt is too high and that the draft budget does not fully respect the recommendations of the eurozone ministers”.

Brussels has one week to assess whether Rome’s draft budget for 2019 — which projects a deficit that is three times higher than an EU-mandated target — is at risk of breaching the rules. Any requests for a re-write would need to be sent to Italy within two weeks.

Mr Juncker insisted the assessment would be made without any “prejudice” against Italy’s Eurosceptic coalition government, made up of the rightwing League and anti-establishment Five Star parties.

4 – Brexit

UK PM May risks no-confidence vote on Brexit, eurosceptics warn: Telegraph

“If the cabinet does not chuck Chequers I think we will have a vote of no confidence … by this week, next week. We are completely on the brink now,” an unnamed source from the European Research Group of anti-EU lawmakers in May’s ruling Conservative party told the Telegraph.

5 – Markets

You have to click through on these to the tweets because the charts are important.

On the second tweet above and the US dollar, note that EM currencies have rallied. I talked a lot about EM being oversold and potentially rallying. Now we see why.

Morgan Stanley outshines investment banking rivals

James Gorman, chief executive of Morgan Stanley, expressed consternation at the share declines this year given the bank’s operational performance. “Return on equity is up 40 per cent year to date, revenue is up 12 per cent . . . [the stock’s performance] is a little bewildering against the backdrop of a strong US economy, when we are overweight the US,” he said…

He committed to continuing to return capital to shareholders in the form of dividends and buybacks, barring a dramatic change in market conditions. “Our capital distribution should go up,” he said. “Frankly, we are making too much money to leave it [inside the bank].”

BofA Pays Price for Being Cautious on Leveraged Loans

Bank of America Corp. blames some of its investment bank’s earnings miss on avoidance of riskier loan deals as shadow banks get tougher. But since leveraged lending traffic cops stopped handing out tickets for infringing their own guidance months back, this seems like a self-imposed limit.

The Trump administration has long been telegraphing a loosening of rules on how banks arrange and syndicate leveraged finance debt. The U.S. Comptroller of the Currency Joseph Otting said in February that banks could do leveraged lending however they wanted, as long as it didn’t affect their soundness…

Continuing to heed a regulatory regime that is no longer being enforced while competitors don’t may be prudent long-term risk management. But it’s probably not going to help BofA boost profit, or win share of the high-fee U.S. leveraged finance business.

My view: The BofA example is everything that’s wrong with Trump’s anti-regulatory approach. It’s criminal. At least BofA has had the discipline to resist.

6 – US politics

Turnout surges among young voters in battleground states’ primaries

In the state-by-state analysis, the Democratic data firm TargetSmart said young people 18-29 have the potential to decide control of Congress and affect competitive races for governor in key states on Nov. 6…

  • In North Dakota, where Sen. Heidi Heitkamp is one of the most vulnerable Democrats seeking re-election, turnout jumped to 11.7% of registered youth voters, from 4.8% previously.
  • California, a crucial state with a number of Republican-held “toss-up” seats this cycle, had a 9.3% increase.
  • Oklahoma turnout surged by almost 18%.
  • Montana turnout jumped 6%.

My view: another datapoint that should make one doubt the post-Kavanaugh narrative about Republican engagement.

7 – China

My view: A lot of jitters are due to mounting fears about a slowdown in China.

Chinese stocks hit fresh four-year low on lingering economy and trade fears

“No one is taking a long-term view at this point. People will stay on the sidelines until the US midterm elections, which will make it clear if Trump’s hardline trade stance will materialise or not,” said Leung.

Macau casino shares down 40 per cent since June as trade war deters Chinese high rollers

China’s crackdown on corruption and investors’ fears over the impact of the trade war on the economy have sent the stock prices of Macau’s top six casinos tumbling an average of 40 per cent since June, bringing their valuations back down to reasonable levels.

But investors are not convinced the cheaper stocks are a sign that a reversal is on the cards, given expectations that many wealthy Chinese high rollers will continue to give Macau a miss as economic growth and the value of the yuan exchange rate weakens.

 

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Edward Harrison 7783 posts 575 comments

Edward Harrison is a senior Editor at Bloomberg. He is also the founder of Credit Writedowns newsletter, a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.

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