Luckin Coffee was an up-and-coming business that attempting to overtake Starbucks as China's java king with its pick-up stores and smart vending machines. It has more than 3,600 locations in the world's second-largest economy, generating $454 million over the last 12 months. It filed an initial public offering (IPO) in May 2019 at $17 a share – its first trade was $25. The stock climbed as high as $50 before cratering 80% in a single trading session. It turned out that the company was so desperate to overtake Starbucks as China's premier coffee location that its chief operating officer and corporate director sipped on a good old cup of financial misconduct.
Out of Luck
The firm established a special committee of three independent directors to probe into allegations of "fabricating certain transactions" that took place in the second, third, and fourth quarters of 2019. The early estimates show fraudulent transactions totaling roughly $310 million.
COO Jian Liu, a director of the company, and other personnel implicated in the misconduct have been suspended. The firm also suspended and fired other parties involved in the incident. Luckin has hired attorneys and forensic accountants to help with the investigation, suggesting that it could soon take legal action.
Analysts have proceeded to downgrade the stock to "sell." But one group saw the writing on the wall earlier this year. Muddy Waters Research shorted the stock after it described Luckin as a "fundamentally broken business," proving that the short-sellers have a knack for discovering shaky business models. It tweeted in January that a "number of items per store per day was inflated by at least 69% in 2019 3Q and 88% in 2019 4Q."
Muddy Waters founder Carson Block said in a statement to CNBC:
"Luckin shows exactly why we need short sellers in the market. We believed this report was credible when we read it, and that's why we took a position. This is again a wake-up call for U.S. policymakers, regulators, and investors about the extreme fraud risk China-based companies pose to our markets."
Long live the shorts!
Juicing the Markets
Orange juice is back on the table in American households. In recent years, the classic breakfast staple had been shunned due to health concerns over the beverage's sugar content. Consumer demand slumped, decimating growers who were already reeling from citrus greening. The Coronavirus pandemic is making orange juice great again.
In the first quarter of 2020, orange juice surprised financial markets and was an outperformer next to wheat. During the January-to-March period, futures for May delivery surged 25% to $1.20 per pound – it has since pared those gains by 5%. The futures market plays an important role in the economy since it indicates what people anticipate the future price of a commodity will be.
What happened? Two things: Coronavirus and Brazil. Since vitamin C can boost your immune system, consumers believe that imbibing enough orange juice will shield them from the Coronavirus. The science has not supported this idea, but many Americans ramp up their OJ consumption whenever there is a significant health scare. This happened during the winter of 2018 when there was an uptick in influenza cases, and OJ sales had its best three-month period in several years. Plus, since more people are home from work, they are less likely to skip breakfast and more likely to drink a glass of orange juice in the morning.
Brazil, meanwhile, is warning about a less-than-expected harvest in the 2020-2021 marketing season. Farmers say poor weather conditions are impacting crops, and potential disruptions might affect production levels. This might threaten the global supply chain, which also lifted prices.
In the end, it shows how the commodity market is cyclical. Whether it is supply and demand or panic and peace, there is always something that could trigger a bull or bear market for commodities. You are witnessing this in crude.
Rest-a-Sheared
Have you adopted the quarantine look yet? This is a new style that makes you look like Grigori Rasputin. Unless someone in your household knows how to cut hair, you will appear as if you have been away on a deserted island for the last couple of years. Wait. Is there a family of birds forming a nest in your hair?
In cities under lockdown, there is a black market for haircuts. Barbers have emerged and are selling their services to consumers desperate for a trim. You may need connections, or you could even browse on Craigslist to find hairdressers willing to drive 100 miles to give you that mullet you have always wanted. Nail stylists, massage therapists, and personal trainers are also participating in black markets. Is this a smart move or something that will exacerbate the health crisis? That may be hard to answer.
Of course, black markets are perfectly acceptable since they aim to facilitate free-market transactions when the authoritarians are in charge and prohibiting you from taking part in voluntary exchanges. If there is a demand for a good or service, entrepreneurs will always find a way to satisfy it – with or without a pandemic lingering in the background.
Either way, it is fascinating to see something as innocuous as a haircut forced underground.
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Read more from Andrew Moran.
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