Monday Apr.27, 2020

💵 Mo' Money Mo' Debt

_Trying to manage the national debt_

Hey Snackers,

An 89-year-old German man and an 85-year-old Danish woman are keeping their young romance alive after the border between their 2 countries shut. They set up chairs on the border each day to share coffee, schnapps, and laughs. __Love knows no (corona) boundaries. __

US markets posted their 1st weekly decline in 3 weeks, with the Dow, the S&P 500, and the Nasdaq all falling.

And our 15-minute Snacks Daily podcast is looking at Friday's surprise: A sports betting app went public... in a world without live sports.

Borrow

$321B in new PPP small biz loans adds to $3.7T estimated government deficit

Gone quicker than a 24-pack of TP... Remember that $349B in forgivable loans to small businesses from the $2T stimulus package? That ran out quickly — especially since not-so-small businesses got multi-million loans. Now Congress has approved an extra $321B for Paycheck Protection Program loans (PPP), which become "free money" for businesses if they keep their workers employed. All that free money though is adding up...

$3.7T: That's how much the government expects to add to the national debt this year, aka its budget deficit. The previous record deficit? $1.5T in 2010.
110%: That's America's current debt-to-GDP ratio (like your personal debt amount vs. your annual salary, but for the country). US Gross Domestic Product is around $21.7T — the national debt is almost $25T.

The US borrows $$$ by offering IOUs to investors... They're called "Treasury securities", aka US government bonds. Most of that debt is held by regular Americans through pension and mutual funds and a large part is owned by foreign governments (think China).

US debt is typically seen as a relatively safe investment — buyers are confident that America will pay them back, given the country's world-leading wealth, income, and economic resources. That low riskiness is reflected by the US' AA+ credit rating and helps explain why America pays barely any interest on its debt. But...
Higher debt usually means higher interest rates. If investors think they might not get paid back, they might start demanding higher interest (higher risk, higher demanded reward).
Tomorrow's generations will have to repay today's debts. But debt-financed government spending seems necessary to save the economy from the giant economic hole caused by the COVID-19 shutdown.

There are 2 ways to pay down national debt... and they both have consequences.

Cut Spending: The government can divert spending on social services to repay bond investors instead. The more debt there is, the less money is left to pay for things like healthcare, education, and national defense.
Raise Taxes: The government could tax businesses and citizens more in order to repay debt. But higher taxes can slow down economic growth, and potentially be counter-productive to debt repayment (if too-high taxes cause a recession).

Highs

Who's up...

Like your paranoid, can-hoarding neighbor... Netflix has been obsessively stocking its basement with movies and shows, aka "content-hoarding". No one's laughing now: Netflix added 15.8M paying (aka, non-moocher) subscribers last quarter — more than double the 7.2M expected. Video production across the industry has grinded to a halt, but Netflix has 2 years worth of already-produced shows/movies to release — a massive advantage over streamers and cable.
When the going gets tough, the pizza gets cheesier... Domino's is living in a rosier alternate reality. Sales at its US locations actually jumped 7% during the 4-week height of the economic lockdown in March/April. While others lay off employees, Domino's is hiring 10K more pizza whizzes. And forget ad-pocalypse — Dom's CEO said "we're not slowing down at all" re: advertising. As a delivery/takeout OG with a DIY attitude, Domino's is eating the corona-conomy.

Lows

...and who's down

Just call it the "Zoom Killer"... Zoom's got a new problem (and it's not privacy-related). Facebook just unveiled a video-conference service: Messenger Rooms. FB's Zoom bomb is free and allows meetings of up to 50 people with no time limit — Zoom's free version has a 40 min max. Oh, and Messenger Rooms also features AI-enabled 360-degree virtual backgrounds. Zoom stock has plunged nearly 12% since the announcement Friday.
So many Ts, so little time... AT&T has a lot going on: it's juggling CNN, HBO, TBS, Warner Bros, DirecTV, and AT&T wireless. It's also dealing with a triple corona-conomy whammy that soured its latest earnings (not pretty). AT&T's cable biz lost 1M customers just last quarter thanks to cord-cutting (cough, no live sports). It's also losing money on ad sales and cancelled TV/movie production. Oh, and its CEO just announced he's stepping down.

What else we’re Snackin’

Journey: How the 1st woman to row solo across the Atlantic and Pacific Ocean dealt with solitude and isolation (pro tip: ABBA music).
Visualize: The world's ultra-rich (over $30M net worth) mapped by country — the US has over half of the world's "ultra rich" population.
Work: 3 tips to avoid WFH burnout (it's all about the boundaries, baby).
Change: The psychology behind the quarantine makeover trend — that blue hair dye wasn't bought out of boredom (it's a coping mechanism).
Caffeinate: How to make Dalgona coffee, the TikTok-viral, South Korean creamy sensation.
Volunteer: 9 ways to help others and give back to your community during the pandemic — volunteering from your couch is a thing now.

This Week

Monday: Earnings expected from Keurig Dr Pepper
Tuesday: Earnings expected from Alphabet, Starbucks, Pepsico, Merck, Pfizer, 3M, Caterpillar, Ford, and JetBlue
Wednesday: Earnings expected from Microsoft, Facebook, Tesla, Mastercard, Boeing, General Electric, Northrup Grumman, Yum Brands, Teladoc and Hasbro
Thursday: Weekly jobless claims. Earnings expected from Amazon, Apple, Visa, Gilead, Comcast, Twitter, Shell, McDonald's, Altria, Kraft Heinz
Friday: Earnings expected from Berkshire Hathaway, Exxon Mobil, Chevron, AbbVie, Clorox, Estee Lauder, Colgate, and Honeywell

Disclosure: Authors of this Snacks own shares of Berkshire Hathaway and Amazon.

ID: 1166186

Latest Stories

TikTok versus the United States

Casey Newton

Senate Takes Up Foreign Aid Package Passed By House

William Coulman & David Crowther

49m

Not so Gucci

French luxury fashion conglomerate Kering has seen its shares fall ~10% in the last 24 hours after reporting that sales at its flagship brand Gucci had dropped 21% in its latest quarter.

Kering’s other brands, which include Yves Saint Laurent, Bottega Veneta, and Balenciaga, fared slightly better — but the only real bright spot was the company’s eyewear division, where sales rose 24% (9% on a comparable basis).

With Gucci responsible for roughly two-thirds of the company’s profit, the ongoing struggles of the brand are weighing heavily on the bottom line: the company expects recurring operating profit to drop 40-45% in the first six months of the year.

Gucci execs will be hoping that new designer Sabato de Sarno can turn the iconic brand’s fortunes around, particularly in China where demand has dropped precipitously. His designs only started hitting stores in February.

Kering Warns Profit to Tumble Following Gucci Woes in China

Good morning

What’s happening

Starbucks is challenging a labor watchdog’s power in a far-reaching Supreme Court case

Max Knoblauch

Read

What a US TikTok ban could mean for the rest of the market

Rebecca Moretti

Read

Goldman ditches its robo-advisory biz as it breaks up with consumer banking

Jamie Wilde

Read

Worse than expected

18h

Ugly numbers, but Tesla shares bounce

Rebecca Moretti, Rani Molla

19h

Just the start

Banning
TikTok

What it means for the rest of the market

Jack Raines

20h

The FTC vs. Big Handbag

The Federal Trade Commission has sued to block big tech, big grocery, big vacuum, and now, big… “affordable luxury handbag.”

Yesterday, the FTC sued to block Tapestry Inc’s $8.5B acquisition of Capri holdings. The agency is worried that a merger between Tapestry, which owns the Coach and Kate Spade brands, and Capri, which owns Michael Kors, would eliminate competition in the market.

The crux of the FTC's argument lies in the scope of the "accessible luxury" handbag market, where Tapestry competes with Michael Kors, with the FTC saying the following:

Where Tapestry and Capri most vigorously compete against one another – mainly between Tapestry’s Coach and Kate Spade brands against Capri’s Michael Kors brand – is in the “accessible luxury” handbag market. Today, Coach, Kate Spade and Michael Kors continuously monitor each other’s handbag brands to determine pricing and performance, and they each use that information to make strategic decisions, including whether to raise or lower handbag prices.
The deal would eliminate fierce head-to-head competition on many important attributes including on price, discounting, and design. Tens of millions of Americans that purchase Coach, Kade Spade, and Michael Kors products could face higher prices

While Capri and Tapestry are two of the largest players in this market, winning an antitrust case won't be so straightforward, as consumers have other options at similar price points, including Marc Jacobs (owned by competitor LVMH), Tory Burch, Cuyana, and Mansur.

FTC Moves to Block Tapestry’s Acquisition of Capri

The crux of the FTC's argument lies in the scope of the "accessible luxury" handbag market, where Tapestry competes with Michael Kors, with the FTC saying the following:

Where Tapestry and Capri most vigorously compete against one another – mainly between Tapestry’s Coach and Kate Spade brands against Capri’s Michael Kors brand – is in the “accessible luxury” handbag market. Today, Coach, Kate Spade and Michael Kors continuously monitor each other’s handbag brands to determine pricing and performance, and they each use that information to make strategic decisions, including whether to raise or lower handbag prices.
The deal would eliminate fierce head-to-head competition on many important attributes including on price, discounting, and design. Tens of millions of Americans that purchase Coach, Kade Spade, and Michael Kors products could face higher prices

Matt Phillips

23h

Tesla had a good ride, but the stock’s price destruction is historic

Few people have created as much value as Elon Musk. The iconoclastic entrepreneur took Tesla from a market capitalization of roughly $2 billion at the time of its IPO in 2010 to $1.2 trillion in early 2023. That’s a return of about 55,000%. Musk made a lot of people a lot of money.

On the other hand, Tesla shares are down nearly 60% since their all-time peak. The company has ceded ground in EVs, prompting a series of profit crushing price cuts to preserve market share. The cumulative loss in market value over that period is pushing $800 billion. Few corporate executives have presided over such a degree of value destruction.

And it could get worse, as people are bracing for an ugly update when Tesla reports after the close Tuesday.

Jack Raines

Opinion

4/23/24

Starbucks could use a CIO

Customers give Starbucks billions of dollars in prepaid credits each year. Should the coffee chain be investing it?

Starbucks American Coffee Chain Cafe In Amsterdam

Rani Molla

4/23/24

Smaller AI models are in

Tech companies that have long touted the enormity of their AI models are now saying size doesn’t always matter.

Microsoft is the latest tech company to introduce smaller AI models, as part of its Phi-3 tech family. Last week Meta released two smaller models of its AI Llama 3 and earlier this year Alphabet did the same. All are open sourcing these models to encourage wider adoption.

Microsoft says its smallest model, which can fit on a smartphone and wouldn’t need to be connected to the internet to work, is nearly as good as OpenAI’s GPT-3.5. A Microsoft exec suggested this less expensive model could be a good fit for online advertisers, if not doctors.

Microsoft Makes a New Push Into Smaller A.I. Systems

wake up!

4/23/24

Morning earnings report

$127

The average bitcoin-transaction fee hit an all-time high of $127 on Friday.

The temporary spike came as the halving cut miner rewards and traders forked over huge sums of BTC (skewing the average) to be included in the first post-halving block.

Adding fuel to the fee fire was the launch of Runes, a new protocol that lets developers create memecoins on top of the bitcoin blockchain. The debut was so popular that fees popped as traders fought for limited block space.

4/23/24