Apr 19, 2019

Axios Markets

Dion Rabouin

I broke down yesterday's story about the gig economy with the big homie Dan Primack on the Pro Rata podcast yesterday (Listen here).

Today, I'll be joining the big homie Liz Claman on Fox Business for "Countdown to the Closing Bell" at 3:30 p.m. EDT and the big homie Kai Rysdal on "Marketplace" at 5 p.m. EDT (I don't think it airs live in New York for some reason).

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Situational awareness:

  • “The price is too high,’’ Zoom CEO Eric Yuan said in an interview with Bloomberg after the company's shares rose as much as 83% and closed 72% above their IPO price in the first day of trading. (Bloomberg)
  • The new USMCA would raise annual U.S. real GDP by 0.35%, or $68.5 billion, compared to NAFTA, and would add 176,000 U.S. jobs, while raising U.S. exports, a report from the U.S. International Trade Commission found. (Reuters)
  • There hasn't been a single U.S. bank failure since December 2017. "When not a single bank is failing over a long stretch of time, it is strong warning sign of major problems." (Brookings)
1 big thing: The $3.4-billion-as-soon-as-it's-legal marijuana merger

A mairjuana plant in Edmonton, Alberta, Canada. Photo by Artur Widak/NurPhoto via Getty Images

Canadian cannabis company Canopy Growth, which is 38% owned by beer and spirits company Constellation Brands, bought the right to acquire Acreage Holdings only if recreational marijuana is legalized in the U.S, Axios Courtenay Brown reports.

  • The tie-up between the U.S. company that grows and sells pot in a handful of states — former Speaker of the House John Boehner's is on the board — and the world’s most valuable pot company is essentially a bet on the future that’s valued at $3.4 billion dollars.

Between the lines: The non-deal deal is structured to avoid obstacles that would come with Canopy’s outright acquisition of Acreage before legalization. A deal now would get Canopy’s shares de-listed from the Toronto and New York Stock Exchange, which both forbid listing companies with U.S. cannabis operations since it’s federally illegal. (Canada made marijuana fully legal nationwide in October.)

  • “This is like a very large game of double dutch, as in ‘if the rules change we'll come play, but until then we'll keep spinning those ropes.’ It's a waiting match,” Brent Williams, founder of Highwater Financial, a cannabis-focused investment firm, tells Axios.
  • “It’s a great precedent to set for the Aurora Cannabis's of the world to come in for further expansion of Canadian companies into the U.S.”

How it works: The deal is terminated if cannabis is not legalized (or if exchanges don't change their rules) within 7.5 years, or 90 months. If the deal falls through, no word on what happens to the $300 million upfront cash Canopy agreed to pay Acreage shareholders.

  • But the heads of both companies and many analysts are optimistic legislation will pass within the next 2 or 3 years.
  • The companies said the deal value was a 41% premium over Acreage's share price.

What’s in it for the companies:

  • “Canopy has been at risk of missing out on the U.S. market as it grows. Now they have sort of secured a path towards that, while avoiding an outright acquisition today," Rob Wertheimer, a founding partner of Melius Research, tells Axios. “Acreage is attached to what has become an emerging North American leader and that’s well-positioned for growth.”

The bottom line: This just built a path for companies to buy into a budding U.S. marijuana market without breaking any laws and without facing the wrath of stock exchanges. Analysts say the deal structure could set off a wave of similar transactions.

2. The Fed's growing interest payments
Expand chart
Data: Deutsche Bank Securities, courtesy of Torsten Slok; Chart: Axios Visuals

Provided the Fed doesn't raise interest rates again this year, as expected, they will be paying $46 billion in interest payments on bank's reserve balances. The reserve payments are a major part of the way the Fed sets U.S. overnight interest rates, and the payments have grown as the Fed has started to raise interest rates above zero.

Go deeper: The New York Fed's "Federal Funds and Interest on Reserves"

3. Jobless claims are near a 50-year low and it's no fluke
Expand chart
Data: Federal Reserve Bank of St. Louis; Chart: Axios Visuals

U.S. employment numbers continue to get better. Data released yesterday showed the number of Americans filing for unemployment benefits fell to its lowest in almost 50 years last week.

Why it matters: More important than the single print was the direction of the trend. The 4-week moving average of initial claims fell to 201,250 last week, the lowest reading since November 1969.

  • That sustained trend, considered a more reliable indicator because it irons out week-to-week volatility, shows the labor market is consistently moving to historically low levels of unemployment, even if the metrics are a bit distorted.
4. Uber raises another $1 billion

Uber on Thursday night confirmed that it has raised $1 billion for its autonomous driving unit at a post-money valuation of $7.25 billion, Axios' Kia Kokalitcheva reports.

Why it matters: Uber is preparing to go public next month, and this deal could soothe some investor concerns about the cash-burn on self-driving R&D.

Existing Uber shareholders SoftBank Vision Fund and Toyota were joined by Japanese auto parts maker DENSO.

  • Toyota and DENSO will invest a combined $667 million, with SoftBank's Vision Fund putting in the rest.
  • Toyota also is committing up to an additional $300 million over the next three years to deploy autonomous vehicles into the Uber's network by 2021. SoftBank last year made a similar investment into General Motors' self-driving car unit, Cruise.

Go deeper: Uber files for its long-awaited IPO

5. Argentine President Mauricio Macri has the country in a "Macrisis"

Argentine President Mauricio Macri came to office as a pragmatic businessman who was going to save Argentina's government and economy from socialism. As this year's presidential election approaches socialism isn't looking so bad.

  • Argentina’s consumer price data showed that inflation rose last month to 54.7% year-over-year, the highest level on record. Consumer prices rose 55%.
  • Poverty in the country rose to 32% at the end of 2018, up from 25% the prior year.
  • Unemployment rose to 9.1% and the country's GDP fell 6.2% from a year ago.
  • The dollar recently traded at 44 pesos, almost triple the rate when Macri took over as president and its weakest rate ever.

The central bank has raised interest as high as 65% to cut down inflation, but has only choked off the country's growth, pushing it into recession. The central bank is now fixing the exchange-rate band, or instituting currency controls, while the government freezes prices on 60 food products until October.

What's next? Investors are beginning to fear the worst — that Macri will lose this year's election to former President Cristina Fernandex de Kircher, who defaulted on the country's sovereign debt in 2014, which was issued as partial compensation for the previous default in 2001.

  • "I truly believe that if Cristina wins, we're looking at defaults," said an investor who was not authorized to speak publicly about the issue. "Given the state of the economy, her election would just crash the market."

Catch up quick: Argentina was an investor darling when Macri came to office in 2015, reaching a settlement with the creditors and levering the country up with new debt, including a 100-year bond investors said was issued largely out of hubris.

  • Argentina's government expects to pay a total of $13.3 billion in bonds maturing in 2019, according to Reuters, including $5.9 billion in dollar-denominated bonds, which get more expensive as its currency depreciates.
  • A $56 billion loan from the IMF is helping pay off the current obligations, but that too will need to be paid back.

The bottom line: Fortune's Kenneth Rapoza writes that things are starting to look "terrible" for Macri.

  • "The 'Macrisis' will bring volatility, opportunities for the speculators and suffering for the real people," Fernando Pertini, chief investment officer for wealth management firm Millenia Costa Rica told Fortune. "I doubt this suffering population will keep voting for him."
  • A recent poll by polling firm Synopsis has Macri losing in all 3 likely election scenarios with the expected alternative candidates and at least 7 points behind.
Dion Rabouin