May 27, 2021
Situational awareness: Joe Biden's budget is going to be one for the ages, coming in at $6 trillion, with most of the pay-fors not arriving until the 2030s.
- In this week's newsletter, I look at the power of shareholders, focusing on energy and media. It's bigger than you think — except, of course, at Amazon.
- Also: A big new survey on economic optimism; the coronavirus surge in Taiwan; the cost of keeping kids out of school; a very unusual property auction in Kentucky; and much more. All in 1,757 words, a 7-minute read.
1 big thing: Shareholders wield their power
Shareholders of public companies aren't nearly as passive as some stock market observers would have you believe. They're causing seismic shifts at household names like AT&T and Exxon.
Why it matters: In general, managers of big public companies have never had it so good. The inexorable rise of passive investing, along with an increasing number of companies going public with dual-class share structures, has generally entrenched the power of CEOs. But shareholders can still wield significant power.
The big picture: Historically, tensions between shareholders and managers have been caricatured as a fight between short-termists who care only about quarterly earnings pops, stymieing executives trying to invest in a long-term vision.
- The reality, as revealed over the past couple of weeks, is that shareholders have long-term visions, too — and those visions are often more clear-eyed than the ones found in the executive suite.
- What they're saying: "This is doubtless a day Exxon’s management would rather forget," writes Bloomberg's Liam Denning, "but it is a good day for the company."
- Of note: Chevron shareholders, too, voted against management and in favor of greater emissions reductions.
- Our thought bubble, from Axios' Ben Geman: The question of whether mainstream finance wants more climate action from oil majors has been definitively answered.
Context: Shareholders aren't just embracing the global green-investing thesis, they also have the world's governments at their backs. The Dutch government ordered Shell this week to get significantly more aggressive in terms of oil production cuts, in a move that presages further such rulings from other governments both inside and outside the EU.
The bottom line: The long-term vision here belongs to the shareholders who see both the necessity and the inevitability of the coming energy transition. That's worth remembering, the next time a CEO tries to paint activists as being interested only in short-term gains.
2. How shareholders shattered AT&T's media dreams
The embarrassing volte-face from AT&T last week, when it spun off a company it had recently spent $107 billion acquiring, was also due in large part to shareholder pressure.
What they're saying: When AT&T CEO John Stankey was asked why he was changing his mind about owning Time Warner, he talked about how "we need the equity to line up with the right shareholder base that wants to take that ride."
- Translated into English, he was saying that AT&T's shareholders know what they want from the company — and what they want isn't massive bets on content. Instead, it's a focus on the company's core connectivity and telecommunications businesses.
By the numbers: AT&T trades at a modest 9.4 times the coming year's earnings — in line with rival Verizon, trading at 11 times earnings. Streaming giants Disney and Netflix, by contrast, are trading at 42.9 and 43.6 times next year's earnings, respectively.
- Stankey likely knows that in order for Warner Media's streaming ambitions to be realized, it will need to execute a high-growth strategy culminating in hundreds of millions of subscribers.
- That kind of strategy is expensive, and worries shareholders who want to go back to the days of being able to cash regular and reliable dividend checks.
The big picture: AT&T's core connectivity business has enviable margins, but it has limited growth potential and requires enormous continued investment as America transitions to 5G.
- Shareholder returns are boosted in large part by financial engineering — borrowing against predictable future cash flows. Borrowing even further to support a risky media business doesn't sit well with either shareholders or lenders, especially when synergies are largely nonexistent.
The bottom line: Index funds notwithstanding, not all shareholders are equal. The biggest media companies — Netflix and Disney — attract investors seeking high risk and high return. The logic of the deal to spin off Warner Media to Discovery is that the spun-off company will be able to find a similar shareholder base.
3. Amazon: Too big to have to explain itself
Major media acquisitions almost never work out, and are therefore very hard to justify to shareholders. Amazon doesn't have that problem: It's so big that it doesn't need to justify any of its spending.
Why it matters: Amazon is one of the most valuable companies the world has ever seen, with a market value of $1.65 trillion and revenue over the past year of some $420 billion. It makes multi-billion-dollar decisions on a regular basis, many of which (the Fire phone, drone delivery) turn out to have been terrible ideas.
- So long as the company as a whole continues to grow at a torrid pace, its shareholders have learned not to second-guess its strategy.
Driving the news: Amazon is spending $8.5 billion on MGM studios — a very rich price that would raise eyebrows and drive investor skepticism were anybody else to do it. Amazon, by contrast, in its press release, doesn't see the need to justify the acquisition at all, beyond vaguely promising to "reimagine" some of the studio's intellectual property.
- By the numbers: $8.5 billion is well below the $10.3 billion that Amazon made in pretax income last quarter. It's also only about 12% of the company's $71 billion in cash, which has been sitting and waiting to be put to work somehow.
The big picture: Amazon doesn't pay a dividend and doesn't even do stock buybacks. Its "Day One" philosophy involves aggressively reinvesting its cash flow into new businesses and opportunities.
- So far, that's worked out spectacularly well for shareholders — even with a few inevitable missteps along the way.
The bottom line: There is potential upside here. But if this deal ends up being a bust, shareholders are unlikely to care — just so long as Amazon as a whole continues on its path to global domination.
4. Americans' economic outlook is divided
Americans' native optimism is hard to squelch. Even after more than a year of a brutal pandemic — with all its attendant ravages on health, employment, and life at home — we overall retain a positive economic sentiment, according to a major new survey from McKinsey and Ipsos, provided first to Axios.
Yes, but: Economic optimism isn't evenly distributed. Men are broadly optimistic, women aren't. Parents see a brighter future than the childless. And naturally the rich have a sunnier outlook than the poor.
- By far the biggest obstacle between Americans and economic optimism is their lack of access to health care and health insurance.
Women bore the brunt of the extra childcare burden during the pandemic, and also the brunt of the job losses. Both of those have significantly harmed their economic prospects.
- Among moms who have stopped looking for work during the pandemic, 14% said they did so in order to look after their family. For dads, the equivalent number is a mere 3%.
- Just 43% of moms see childcare as affordable, compared to 64% of dads.
By the numbers: Americans in general, and American women in particular, still see real hardship. Only 26% of women think the pay that most people receive allows for a good quality of life, for instance.
- 62% of workers in the gig economy would prefer to have permanent employment.
- 41% of Hispanic respondents agreed with the statement that “I have had to cut back spending on food or delay medical care over the past 12 months for financial reasons.” For white Americans, the equivalent number is 27%.
What they're saying: "Rural Americans are at risk of being left behind," notes the report. They are much less willing than their urban counterparts to relocate or to switch industries, and most have no plans to pursue future training or new credentials.
The bottom line: The pandemic decimated jobs for women and people of color, while creating massive gains for urban homeowners and the rich. The biggest opportunities in America are generally seen by those who have suffered the smallest losses.
5. The latest risk to global semiconductors
After relaxing quarantine rules on airline crews, Taiwan has seen a spike in coronavirus cases — without having any access to vaccines that might slow the spread of the disease.
Why it matters: The vaccine question in Taiwan is geopolitically fraught, and so far unresolved. So long as the country remains without access to a vaccine, pressure will increase on the government to implement a hard lockdown. That could shut down vital semiconductor production just when the world needs it most.
6. How to turn $75 billion into $1.2 trillion
Your kids didn't learn as much as they normally would have last year, if it weren't for the pandemic. That's uncontroversial — but it's also extremely expensive.
The partial solution: The 2021–22 school year should be extended by an additional month.
- That would cost about $75 billion, but would cut the GDP reduction to 3.1%.
- The net gain: $1.2 trillion, or about $16 for every $1 invested in extending the school year.
7. Coming up: More inflation data
The Fed's preferred measure of inflation, Personal Consumption Expenditures, comes out tomorrow with a reading for April, writes Axios' Hope King.
- The jump is due in part to base effects from 2020, when pandemic-induced layoffs and loss of income yielded the steepest decline in the core PCE since data began in 1959.
8. Building of the week: The Miller House
On an otherwise unremarkable suburban lot in Lexington, Kentucky, surrounded by McMansions, stands a true modernist gem — the Miller House, completed in 1992 by the great French architect Jose Oubrerie.
- Oubrerie, a student and colleague of Le Corbusier, was the dean of architecture at the University of Kentucky, and built the house for a local real estate developer and his children.
- Built around an extremely complex grid, the house is full of surprising internal vistas. It also encompasses three different wings, giving the parents privacy from their children, and vice versa.
- While the exterior is brutalist concrete, the interiors are full of color, warm oak, and sunlight.
- The unexpectedly high price has raised hopes that the house was bought by an architecture-loving preservationist, rather than someone looking for a tear-down.