The Big Dip

This is an audio transcript of the FT News Briefing podcast episode: The Big Dip

Marc Filippino
Good morning from the Financial Times. Today is Tuesday, January 25th, and this is your FT News Briefing.

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Stock markets yesterday, they swooned, they tumbled, they nosedived whatever word you wanna use, they were down. But then . . . 

Robert Armstrong
The dip was bought. I do not think, however, that the fun is probably over in markets.

Marc Filippino
We’ll talk about this market movement with Rob Armstrong. He writes our daily Unhedged newsletter. We’ll also look at the latest hurdle for connected fitness company Peloton. And we’ll go to the Persian Gulf to find out more about rebels in Yemen taking their fight into the United Arab Emirates. I’m Marc Filippino, and here’s the news you need to start your day.

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So US stocks ended yesterday higher, but it was after one hell of a ride. At one point, the Nasdaq was down as much as 4 per cent, and the S&P 500 was at one point down 10 per cent from its high. That’s technical correction territory. But it wasn’t just US stocks. All over the globe, from the FTSE to the Hang Seng, stocks took a beating. And this comes as the Federal Reserve is set to meet this week to talk about unwinding its pandemic stimulus that pumped up stock prices. So I’m joined now by Rob Armstrong, he’s our US financial commentator. Hey, Rob.

Robert Armstrong
Hey, how are you?

Marc Filippino
I’m doing well. So yesterday’s markets, how would you describe the activity that we saw?

Robert Armstrong
It was pretty wild. You know, we had a pretty rough week last week. And indeed, it’s been a pretty rough January, especially for what we call growth stocks, long shots, high-risk stuff, high volatility stuff has been selling off. And it looked like in the morning yesterday that that sell-off in as it were the dodgier edges of the market was really starting to spread into the core of the market into bigger, more staid kind of blue-chippy names. But then in the afternoon, we had a very strong rally. It was an extremely volatile day, but the dip was bought. I do not think, however, that the fun is probably over in markets.

Marc Filippino
Yeah, and that brings us to the why, you know, why did we see what we saw yesterday? I have a feeling that you’re going to say something about the Fed.

Robert Armstrong
Well, the Fed is is part of the background here, but I think it’s always important to remember, markets are creatures of momentum and emotion, and those two things are often very hard to tell apart. So there is especially on in very volatile or even panicked periods, there doesn’t have to be a why. That said, we have a very long bull market in the past. We have very high equity valuations. We are heading into a Federal Reserve policy tightening cycle. That means both probably higher rates and the shrinking of the Fed balance sheet. And growth and demand have been excellent, but are maybe now looking a shade worse. Those are the as it were contextual factors, but the tricky thing about markets is all of those things could be true and no sell-off and it would still make a good amount of sense.

Marc Filippino
So Rob, I know you were on the phone a lot yesterday talking to traders and investors and analysts to, you know, get a sense of what they were thinking. What did they tell you?

Robert Armstrong
A lot of people that I spoke to pointed out the relative calm elsewhere in larger markets. In other words, that credit markets were calmer, you know, or that sort of asset-backed securities. It’s like this is still a reasonably concentrated sell-off in equities rather than a general panicked flight from risk. They always say in a real crisis, everything correlates. If you look at any chart of any price in the world in 2001, you know they all collapsed at once synchronously as it were, and that’s not happening right now, which is a good thing.

Marc Filippino
Rob Armstrong is the FT’s US financial commentator. You can subscribe to his daily newsletter, Unhedged. We’ll have the link in the show notes. Thanks, Rob.

Robert Armstrong
My pleasure.

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Marc Filippino
The connected fitness company Peloton has watched its shares careen down a steep and bumpy trail. And now it’s crashed into an activist investor who wants to oust Peloton’s chief executive and explore selling the company. To talk more about this I’ve got our San Francisco correspondent Patrick McGee on the line. Hey, Patrick.

Patrick McGee
Hi, Marc.

Marc Filippino
So to remind listeners who aren’t, you know, spinning on their Peloton bikes, this was the company that exploded during the pandemic. Gyms closed, and it seemed like everyone wanted Peloton’s and other gear so they could work out from home. What has happened since then?

Patrick McGee
Yeah. For quarter after quarter, the likes of yours truly was writing that, you know, hey, Peloton really has to respond to this demand, you know, and really get bikes to people more quickly. And Peloton sort of had this lagged reaction where it took them a while and then when they finally made big moves to do it, essentially, they built up this big inventory and the market turned. The vaccine came out, more competition in its space emerged, and the result was that they ended up with all this inventory and less of a market to sell it to. And then CNBC reported that they had actually frozen production for several products in the coming months, and that caused its shares to fall another 25 per cent. Peloton actually pointed out, basically called the story erroneous. To be fair, Peloton’s in this quiet period where maybe they can’t tell us the full details, but it sounded like they’re absolutely freezing some production, but just maybe not to the extent that was that was mentioned in the article.

Marc Filippino
Sure. So if that wasn’t bad enough, now we have this activist investor on the scene, Blackwells Capital. It owns less than 5 per cent of the company, but it’s accusing Peloton’s co-founder John Foley of losing $40bn in shareholders’ wealth and accuses him of mismanagement and misleading investors and hiring his wife as an executive, you know. Is this all true, Patrick?

Patrick McGee
The one point I would point out is I don’t think the hiring his wife has any merit. John and his wife, Jill, basically came up with this company on their own right, back in like 2012 as an idea, and she’s been in charge of the apparel group within Peloton since 2014. But everything else, I mean look, Peloton was worth almost $50bn at the height, and the height was basically 12 months ago to the day. So it’s almost like stock market wise they’ve given away all the gains of a pandemic, and you think of what a pandemic did, it closed down all the gyms and sort of gave Peloton a sort of environment that they couldn’t have sort of authored better themselves.

Marc Filippino
I guess the question I have for you is how influential is Blackwells, you know, the activist investor making these claims and how likely that it’s going to get what it wants or is this just a lot of bluster?

Patrick McGee
I’m in the bluster camp for the key reason that Peloton is one of these tech companies that has a dual share structure. And so John Foley, the founder, and others actually have these Class B shares, and every one of them is worth 20 times that of an ordinary share, which means that shareholders basically have no say whatsoever.

Marc Filippino
Just to zoom out a little bit, you know, does Peloton’s decline tell us anything more widely about the survival of the connected fitness industry or is this an isolated scenario?

Patrick McGee
The growth that was seen during the worst time of Covid had some investors convinced that, oh my god, this company can really grow at these crazy rates. And John Foley, the CEO of Peloton, his main message was we’re not a Covid story, that this has just brought forward connected fitness. But we really think that this is the future. And I would say that’s the main question that’s really in flux. Was Peloton just a Covid story? Or did basically Covid serve as a sort of huge advertisement for connected fitness, and the growth rates that we saw during Covid are what we’re gonna see in the next few years. Investors have very much lost faith in that thesis, frankly. I don’t know that it’s wrong, but that’s what they’ve lost faith in.

Marc Filippino
Patrick McGee is our San Francisco correspondent. He also wrote a killer article about connected fitness in the FT Weekend. You should check it out, we’ll have a link to it in our show notes. Thank you, Patrick.

Patrick McGee
Thanks, Marc.

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Marc Filippino
The civil war in Yemen is rippling out. Yesterday, the United Arab Emirates said it had intercepted ballistic missiles fired by Houthi rebels from Yemen at the UAE capital of Abu Dhabi. This comes a week after another more deadly attack on the city. The FT’s Simeon Kerr describes this latest assault as unsettling but not a major concern.

Simeon Kerr
But at the same time, the authorities say, we’ll know that if this were to become a regular event, it would become a lot more problematic for businesses. People would potentially think twice about investing here in property, which is a big sector. And the big concern, especially in Dubai, would be what impact might it have on tourism and aviation if this were to become more regular.

Marc Filippino
Now the reason Houthi rebels are attacking the UAE is because it’s part of the Saudi-led coalition against the Houthi rebels. And the coalition has been making inroads against the rebel advances.

Simeon Kerr
Just in the last month or so, UAE-aligned forces joined the battle with the government against the Houthis and started to make progress. And it seems that the fact that their allies were proving decisive in moving against the Houthis that seems to have triggered the Houthi response to take the battle into the heartland of the UAE on to UAE soil.

Marc Filippino
So can the UAE defend itself against these attacks?

Simeon Kerr
The UAE has fantastic technology and weaponry, and that has proven to be successful so far in repelling most of this stuff. That’s gonna be the main strategy. The politics of Yemen and the actions that its allies take in the theatre in Yemen itself is also going to be important and not least relations with Iran, the Iranians are allied with the Houthis. Now, the UAE calculation would be one that they thought that if there were military gains on the ground, that would help persuade the Houthis to come to the negotiating table and try with international inaudible and support to hammer out a political settlement, which is absolutely vital to end what is a catastrophic humanitarian disaster. It’s hard to see what will persuade them to the negotiating table without perhaps some kind of Iranian cajoling.

Marc Filippino
Simeon Kerr is the FT’s Gulf business correspondent.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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