Happy Wednesday! 🐪

📝 Focus

• $9 billion for Baby Powder ($JNJ)

📊 In the Markets

• TikTok fined £9 per kid under 13

• Commercial Real Estate going “through the windshield"?

📖 MoneyFitt Explains

🎓️ REITs

📝 Focus

Johnson & Johnson: $9 billion settlement for Baby Powder

Having had its sneaky Texas Two-Step bankruptcy filing rejected in January, consumer healthcare giant Johnson & Johnson has finally settled its decade-long battle with almost 70,000 claimants who allege that its talcum powder caused their cancers. Law firms representing the claimants have agreed to support an $8.9bn settlement which, if agreed by over 75% of claimants in the bankruptcy courts, would become the largest product liability settlement in bankruptcy history by far. (75% is a high bar as it's an asbestos case, so it may not yet be a done deal.) Next largest is the $4.9bn settlement by Merck in 2007 for its painkiller Vioxx, which was linked to heart attacks and strokes.

..... ► J&J had created a $2bn fund to compensate victims under its previous legal strategy. The Texas Two-Step involves a solvent parent company spinning off liabilities into a new company in a Texas divisive merger, which allows companies to split off their liabilities from their assets. In the second step, the newly created spin-off declares a Chapter 11 bankruptcy. In J&J's case, the Appeals court ruled that its spinoff had no legitimate claim to bankruptcy because it was not in financial distress.

..... ► As expected, J&J will, under the draft agreement, say that it continues to believe the claims are “specious and lack scientific merit”. But is coughing up $8.9bn anyway, which is the main thing. In fact, it will do so in the same spun-off company, but now backed by more money and supported by many of the claimants. Plaintiffs diagnosed with cancer before April 1 would be paid out within one year of a judge approving the Chapter 11 plan, and those diagnosed later will have access for the next 25 years.

📊 In the Markets

Showing that traders are now probably more concerned about an impending recession than inflation, US equities dropped as the Labor Department's JOLTS report on job openings in February showed a steep decline. (This follows the cooling effect of the weekend spike in oil prices on the global economy.) The number of available positions dropped under 10 million for the first time in almost two years, with commentators saying it's a sign with falling demand for workers, the red-hot labour market is finally starting to cool down. A month ago, any cooling would have been seen as a bullish sign that inflation was easing.

..... ► Slower (maybe much slower) growth means --in theory-- less inflation and less upward pressure on interest rates, so US Treasury bond prices rose (as they move in the opposite direction.) A greater likelihood of falling interest rates also means the US Dollar may be relatively less attractive, so the US Dollar fell and the gold price rose to its highest in more than two and a half years (as gold often moves in the opposite direction to the USD), dragging gold stocks like Newmont Corporation and Barrick Gold up with it.

The SPDR gold trust (GLD). A falling dollar increases the value of other countries’ currencies, which increases the potential demand for commodities priced in US$, including gold.

..... ► But though US job openings fell to their lowest in almost two years, relative to unemployment, there are still many job openings compared to historical levels. There were 9.9mn vacancies in February, down from 10.5mn in January and lower than the 10.4mn forecast by economists polled by Reuters. All eyes turn to Friday's non-farm payroll new job numbers for March. The expectation is 240,000, but it's a ¯\_ (ツ)_/¯ based on the recent track record of forecasts.

15-year chart starting Feb-08. Markets get excited at the slightest little move. Here the number of unemployed people (adults without a job but looking for one) per job opening has risen from 0.5 to 0.6 in Feb-23. In Jul-09 there were 6.5 unemployed people per job opening.

Commercial Real Estate going “through the windshield"?

As we noted last Tuesday, commercial real estate is an increasingly worrying issue (OK, only briefly regarding the spillover effect of stress at the major lenders, regional banks.) Last week, the CEO of JPMorgan Asset Management warned that commercial real estate was one of the critical risk areas GLOBALLY due to the aggressive monetary tightening by central banks. Commercial property values have already slid as rising borrowing costs hit investors.

..... ► Now, the ​​European Central Bank is calling for a clampdown on commercial property funds to limit the fallout in case investors rush to withdraw their money. The danger is that open-ended funds will be forced to sell illiquid properties at "fire sale" prices to meet redemptions (a "liquidity mismatch") and thereby push the sector into a full-blown crisis. It notes that in the past decade, real estate investment trusts, or REITs 🎓have become major players in the EU, with the value of such funds more than trebling. Hence they need to be subject to a policy framework to reduce the structural liquidity mismatch and risks to overall financial stability, suggesting things like charging fees on investor redemptions and imposing “gates” to limit further outflows. The ECB also said the use of debt in the funds would magnify losses and increase contagion risks for the banking system. Of course, the American elephant in the European room is private equity firm Blackstone’s Blackstone Real Estate Income Trust, or Breit, the most high-profile example of property funds limiting withdrawals as investors head for the exits.

..... ► Breit is a non-traded, private REIT for the super-rich that permits investors’ inflows and outflows monthly. Terms say ​​investors can only withdraw up to 2% of the REIT's net asset value in any given month, and max 5% in any quarter (and even that can be halted) to “prevent a liquidity mismatch and maximise long-term shareholder value”, which makes sense given the illiquid nature of property. If withdrawals come to more than that, individual investors get scaled back, as happened for the fifth straight month in March as clients tried (and failed) to pull out $4.5bn. This is despite the company holding meetings for investors, saying there were many great buying opportunities in the sector! A bit odd as they don't revalue their own fund's assets for exactly those weaker prices (compared to publicly traded REITs with similar assets --like Sun Belt apartments and warehouses-- having declined 25-30%.)

TikTok news: Fined £9 per kid, Huge revenues, Lemon8 and PinDuoDuo

Last thing TikTok needs right now (see MFM from 2.5 weeks ago) is to be censured for misusing children’s data. The UK Information Commissioner said TikTok failed to gain parental consent to use children’s data, violating UK data protection laws. (TikTok’s rules forbid children younger than 13 from creating accounts.) But being fined just £12.7mn for breaking the law on protecting children’s data by the UK’s data watchdog is a pretty good outcome! A fine of £9 per child under 13 using the app? OK!

..... ► Meanwhile, TikTok's unlisted parent company ByteDance grew its revenue by more than 30% to $80bn in 2022, thanks mainly to growth in its Douyin video app, the China version of TikTok, according to The Information. Simple extrapolation would soon take it past Chinese Big Tech gaming, messaging and payments colossus Tencent! In 2022, revenues were $84bn, a drop of 1%, its first-ever decline since going public in 2004. (According to Caplight, ByteDance trades at a market value of up to $245bn in the secondary market for private tech shares, about half Tencent's value on the HKSE.)

..... ► Also meanwhile, ByteDance seems to be hedging its TikTok bets with a push planned for creators and users of its Singapore-based Lemon8 app. It's reportedly a mashup of Pinterest and Instagram, initially focussing on fashion, healthy food and wellness. It was originally launched in 2020 as Sharee (similar to Xiaohongshu) globally, but it was only recently officially available in the US. It's already among the top 10 most downloaded apps and uses “the same recommendation engine that helps TikTok succeed” but leaning more toward influencer marketing.

..... ► Elsewhere in China app spying news, CNN has found that the app from Chinese e-commerce giant Pinduoduo ($PDD on Nasdaq) “has taken violations of privacy and data security to the next level.” It can bypass users’ cell phone security to monitor activity on other apps, check notifications, read private messages and change settings by exploiting vulnerabilities in the Android OS, though for "commercial reasons" and with no indication any data went to the Chinese government. Pinduoduo’s international sister app Temu has been topping download charts in the US and other Western markets. Nothing to do with TikTok, but not helping its case at all.

📖 MoneyFitt Explains

🎓️ REITs (Real Estate Investment Trusts)

A REIT is an investment vehicle that lets investors buy into a portfolio of income-generating real estate assets, such as commercial or residential properties. This makes real estate investing more accessible and diversified, helping individuals reduce the risk associated with investing in a single property.

The portfolio is run by a separate REIT manager which acquires, manages and develops properties that generate rental income paid out to unit holders as dividends. The manager also decides on the level of debt the trust takes on, up to a legal maximum, to juice the returns to REIT holders.

REITs are required to distribute a significant, minimum portion of revenues directly to unit holders, making them a popular investment option for income-seeking investors. This can sometimes subject REITs to bond-like pricing in the market, meaning that as interest rates rise, REIT prices can fall. (REIT dividends are often distributed without withholding tax, so holders must check their tax laws.)

REITs also have the potential for capital appreciation if the value of the underlying properties increase.