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2020.04.05 Penn Wealth Report Vol 8 Issue 02

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18 penn wealth Report volume 8 issue 02 05 apr 2020 Penn Wealth Report Copyright 2020. All Rights Reserved. investment intelligence weekly Business Report china dealt another political Blow as taiwan votes for democracy Several months ago, the Hong Kong electorate overwhelmingly voted for pro-de- mocracy candidates to fill seats in the island's legislature, sending shock waves through the Communist Party of China (CPC). is past weekend, voters in Taiwan sent a similar message to Beijing. A staunch defender of Taiwan's freedom from the CPC, President Tsai Ing-wen won re-election in a historic landslide, badly set- ting back China's aims to gain more control over the island. 8.2 million voters, almost precisely one-third of the island's total pop- ulation, voted for Ms. Tsai, the largest vote ever recorded in Taiwan. China had embarked on a stealthy cam- paign to unseat Tsai, using tactics such as military drills in the waters around the island, and stronger control of travel between the mainland and Taiwan. It appears these tactics backfired badly, with increased sympathy from the Taiwanese people to the plight of pro-democracy dem- onstrators in Hong Kong. It also didn't help that Beijing reiterated its claim that Taiwan is part of its terri- tory. China has pushed for its so-called "one country, two systems" framework to be adopted by Taiwan, but the citizens are getting a first-hand look at the illusion of that promise through what is going on in Hong Kong. In a speech following her land- slide win, Tsai commented on the special relationship Taiwan has with the United States—comments that probably enraged many in the CPC. e Communist Chinese Party had already internalized what its own highly-political press corps was spewing, backed up by the dupes in the American press corps: that China's rise to the leading economic power in the world was already set in stone. Reports of that rise, as the old joke goes, have been highly exaggerated. as earninGs soar at BiG us Banks, it is a different story in developed europe We have to be careful not to play the main- stream media game of shaping the facts to fit our narrative, but recent reports coming from the big European banks certainly fit well with our rather dour economic outlook for developed Europe. Shares of the $46 billion Swiss bank UBS Group AG (UBS $10-$13-$14) were trading off around 4% at Tuesday's open following news that it had missed nearly all of its key 2019 targets. Net profit from the investment banking unit fell Y/Y from $1.67B to $1.06B, while net interest income fell from $5.05B in 2018 to $4.5B last year. is led to a series of management downgrades for the year ahead—on profit, assets under management, and dividend growth. e bank is trying to staunch the bleeding after losing nearly $5 billion in assets in Q4 alone. What's worse (for Europe) is the fact that UBS's downgrades come on the heels of both Credit Suisse (CS) and Deutsche Bank (DB) lowering their own expectations for the year ahead. e European banks' woes are juxtaposed by record profits rolling in for their major US counterparts. As we wrote in our 2020 Outlook issue of e Penn Wealth Report, we are under- weighting developed Europe but see the emerging markets as one of the year's major success stories. BomBardier, with its shares sittinG Below $1, looks to team up with french rival alstom on rail Business Just a few short years ago, Canadian aircraft and transport manufacturer Bombardier ($1-$1-$2) had a market cap of $10 billion, a potentially lucrative market for its new A220/C-Series narrow-body commercial jets, and a strong rail division. It has been a straight downhill ride ever since. e first misstep was teaming up with Europe's Airbus (EADSY), which essentially usurped the A220, taking a 50.01% stake in the line and rebranding the aircraft as the Airbus A220. en, due to a mountain of debt stemming from its development of the A220, Bombardier was forced to sell its regional jet series (known as the CRJ) to Mitsubishi for $550 million. Now, with short-term liabilities greater than its current assets, and long-term lia- bilities greater than its long-term assets, the firm is looking to team up with yet another rival—France's Alstom SA (AOMFF)—on its rail business. We expect Alstom to take control of the rail unit the way Airbus did with the C-Series program. With increased competition in the rail industry coming from China, Bombardier had first tried to team up with Germany's Siemens AG (SMAWF), but that company ultimately rebuffed the firm to pursue its own deal with Alstom (a deal which the EU ultimately shot down). And the bad news continues: not only is the rail deal facing antitrust scrutiny, Bombardier just shook investors by warning of disappointing Q4 sales and saying it may exit the Airbus joint venture altogether— taking a huge writedown in the process. While the rail division accounts for over half of the company's revenues, that unit faced a humiliation several weeks ago when New York City was forced to pull 300 Bombardier subway cars from service due to malfunctioning door mechanisms. e transit agency paid $600 million for the cars. When it rains it pours. We have traded Bombardier in the past with good success, but we wouldn't touch the company right now, even with its $0.91 share price (on the B shares, the A shares are trad- ing at $1.02). We can't imagine the Canadian government letting the company fail, but that is a weak rationale for buying in right now. Weekly Business Report GloBal strateGy: east/se asia GloBal BankinG e content of this report reflects the personal views, opinions, and research of Penn Wealth Publishing. While measures are taken to help assure the accuracy of data, no guarantees can be made and the firm is not liable for any losses incurred by subscribers. is is not a solicitation to buy. Always consult your investment professional before investing any money. aerospace & defense

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