The Year of the Monkey is off to a bad start, with the Hang Seng sinking 3.9% in Hong Kong today. Investors are worried that China’s economic problems may be deeper than previously thought. Mainland markets remained closed for the holiday.
Adding to monkey business concerns, Kyle Bass penned a letter to investors saying he thinks China’s banks may face losses four times greater than those suffered by U.S. banks during the 2008 financial crisis. He thinks China eventually may have to print up to the equivalent of $10 trillion in yuan to recapitalize its banks, causing the Chinese currency to plunge more than 30 percent against the dollar. “What we are witnessing is the resetting of the largest macro imbalance the world has ever seen,” Bass wrote. “Credit in China has reached its near-term limit, and the Chinese banking system will experience a loss cycle that will have profound implications for the rest of the world.”
Bass has cred with investors because he correctly bet against the U.S. mortgage market in 2007. But not all his calls are so prescient. He wagered on a collapse in Japan’s government bond market in 2010 – a bet that other bond investors later nicknamed “the widow maker.” So take his warning with a splash of soy sauce.
For her part, Fed Chair Janet Yellen told Congress yesterday that there are good reasons to believe the U.S. economy will stay on a path of moderate growth that will allow the Fed to implement its plan for gradual increases in interest rates. But Yellen acknowledged that problems in China could impede economic growth.
More news below, including the latest on blood testing company Theranos’s deepening troubles. This unicorn is rapidly reaching the end of its rainbow.
• Dorsey’s vision for Twitter
Twitter CEO Jack Dorsey’s comments on the company’s fourth quarter earnings call were clearer than ever before about how he and his executive team define the social media company. “Twitter is live,” he said. “Live commentary, live conversations, and live connections.” His plan? Tweak the algorithm so that it doesn’t diminish the speed of the platform but is better for readers. He must act soon for the turnaround, because the financial results for the latest quarter weren’t great: Twitter didn’t add users and it missed revenue forecasts.
• Christie, Fiorina drop presidential bids
New Jersey Governor Chris Christie and former business executive Carly Fiorina are officially ending their campaigns for the 2016 Republican nomination, further narrowing a field for the right to compete in the Nov. 8 presidential election. Both announcements came a day after the New Hampshire primary, where Christie placed sixth and Fiorina – a former Hewlett–Packard CEO – finished seventh. The “establishment” wing of the contest, which includes former Florida Governor Jeb Bush and U.S. Senator Marco Rubio, will likely benefit from their decision to exit the race.
• Walgreens threatens to end Theranos pact
Theranos Inc.’s main retail partner, drugstore chain Walgreens, has threatened to terminate its relationship with the blood-testing company unless it quickly fixes the problems found by federal inspectors at a laboratory in California. The warning, reported by The Wall Street Journal which cites people familiar with the matter, was issued in a letter to Theranos late last month and gives Theranos a 30-day deadline that expires near the end of February. This is a critical moment for Theranos: the 40 “wellness centers” it set up at Walgreens stores are the primary source of revenue for the company, and the parties had been in negotiations about the future of their partnership since shortly before WSJ raised questions in October about the startup’s technology.
The Wall Street Journal (subscription required)
• Yellen: Fed won’t abandon rate hike plans
Federal Reserve Chair Janet Yellen suggested that the central bank could delay planned interest rate increases in response to the recent financial markets turmoil, though it wouldn’t completely abandon such moves. She made it clear that the policy-setting Federal Open Market Committee remained committed to gradually raising rates, after increasing them in December for the first time in nine years. “I do not expect the FOMC is going to be soon in a situation where it’s necessary to cut rates,” she added.
• Tesla’s Model X production lags
The electric car maker on Wednesday admitted it had been struggling to ramp up production of its new electric SUV, the Model X, but it is still on track to significantly grow the amount of cars it will make this year. After delivering only 206 Model X cars in the final quarter of 2015, the company limited production in January to make production of the car more efficient and maintain quality standards. Following those moves, Tesla is now promising it has been able to increase production and hopes to get close to making 1,000 Model X cars per week by the second quarter of the year.
• Mylan finally scores Meda deal
Mylan, the biggest U.S. generic drug maker, agreed to pay about $7.2 billion to buy Sweden’s Meda in a bid that represents a 92% premium over the takeover target’s closing share price. This deal was long in the making: Mylan had been courting Meda for years and was rejected by the rival drugmaker for a second time in April 2014 with an offer of about $6.7 billion. Holding out ultimately paid off for Meda’s investors. Meda, with a range of dermatology and respiratory products, had sales of $2.34 billion in 2014 compared to Mylan’s $9.45 billion in sales last year.
Around the Water Cooler
• Investors still nervous about TV’s future
While firms like Disney and Time Warner this week reported better-than-expected results this week, investors are still punishing their shares. Why? The fear that these media and entertainment giants are losing control over the future of broadcasting. “Cord cutting” – or even worse, the trend of younger audiences opting to never sign up for cable in the first place – is growing and alternative sources like Netflix and YouTube are gaining media clout. While executives have claimed they believe that the “cable bundle” will remain a dominant force, investors seem worried they are being overly optimistic.
• What’s next for Whole Foods
High-end grocer Whole Foods reported a drop in comparable sales for the latest quarter and outlined guidance that suggested another decline was likely for the upcoming year, figures that highlight the pressure the company has faced as rivals court the same shoppers that crave healthier foods. So what’s the plan to turn things around? Whole Foods says the future is the company’s new 365 line of lower-priced stores. The first opens in Los Angeles in May with a total of 13 leases already signed. There is also a plan to roll out a national loyalty program this year, which is currently in test mode.
• Sanders raises millions after win
The campaign for Vermont Sen. Bernie Sanders says the candidate brought in $5.2 million in 18 hours after asking supporters for contributions during his victory speech after being deemed the winner of the New Hampshire primary. That money would have been nearly enough to pay wages for Sanders’ entire campaign staff in 2015, highlighting the success of his fundraising operation. Sanders has relied almost exclusively on small-dollar contributions from donors who can give repeatedly without maxing out.