Sep 23, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • An early measure of eurozone manufacturing shows output falling to the lowest level since December 2012, with Germany's manufacturing sector slumping to its lowest reading in more than a decade. (MarketWatch)
  • SoftBank’s Masayoshi Son is said to be in favor of removing Adam Neumann as WeWork’s CEO, following a tumultuous lead up to the company's expected IPO and other calls for his resignation. (CNBC)
  • British travel group Thomas Cook said it has gone into administration, leaving 150,000 travelers stranded abroad as it halted trading and operations. (Axios)
  • Indonesia will fault design flaws and lax U.S. oversight in its first formal statement on the Boeing 737 MAX jet that crashed in October killing 189 people, according to people familiar with the draft. (WSJ)
1 big thing: A whole new world for Netflix

Photo illustration from Getty Images

Maybe $500 million for "Seinfeld" was a bit too much. Or maybe too little, too late.

  • Since announcing it had shelled out half a billion dollars for rights to stream the popular '90s sitcom starting in 2021, Netflix's stock has been careening downward, highlighted by Friday's 5.5% drop.

What's happening: The stock has been challenged for much of the year, but suffered mightily after what initially looked like a reprieve in July until it released disappointing Q2 earnings showing it lost more than 100,000 subscribers in the U.S. (It was expected to gain over 300,000.)

  • Since touching $380.55 a share on July 1, a shade below its 2019 high, Netflix's stock has lost nearly a third of its value.
  • After Friday's selloff, shares had fallen to $270.75, nearly 10% below where they were on Sept. 17, the day after announcing the "Seinfeld" deal.

The big picture: Investors soured on the company as the streaming wars heated up in recent months with other companies preparing to unveil new, lower-cost streaming options.

  • Netflix CEO Reed Hastings warned that production costs, which have already been significant, are going to climb even higher with the increased competition.
  • He pointed to the likes of Disney+ and AppleTV+, which will be available for $6.99 and $4.99 a month respectively, undercutting Netflix's $8.99 price point.

What they're saying: "While we've been competing with many people in the last decade, it's a whole new world starting in November," Hastings said in a Friday interview with Variety.

  • "It'll be tough competition. Direct-to-consumer [customers] will have a lot of choice."

Short sellers have been swarming. Data from S3 Partners shows Netflix has become the 4th most shorted stock in the U.S., with a little over $6 billion of short interest and 20 million shares shorted.

Yes, but: Investors are far from abandoning the stock. Netflix remains one of the most held stocks in the world, and was fourth among top holdings of hedge funds, according to recent data from Goldman Sachs.

  • Increased competition may not be that harmful to Netflix. In an August survey from data analysis company Civic Science, only 2% of respondents said they would ditch their Netflix subscription for Disney+, Hulu or ESPN+, while 33% said they would keep Netflix and not subscribe to the others.
Bonus: Netflix's in-house international trouble
Expand chart
Data: Investing.com; Chart: Axios Visuals

Netflix also is facing some challenges of its own, as its international growth may have hit a wall, analysts from Evercore ISI said in a note Friday.

International downloads of the Netflix app have been slowing since July. The app’s international downloads in the Apple App Store and Google Play Store this month have grown about 5% from the same period last year, compared to 21% growth in July and August.

  • “We believe the risk of the data pointing to a 3Q international subscriber miss is real at this point if our checks do not meaningfully improve into the end of the month,” the analysts said in the note.
  • Netflix has been spending significant cash overseas, dropping $500 million on a U.K. studio last year with expectations to increase that number this year.
2. There's nothing new about Fed disagreement
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Reproduced from Federal Reserve Bank of St. Louis; Chart: Axios Visuals

Dissent has been growing at the Fed this year and has only increased since chair Jerome Powell decided to cut U.S. overnight interest rates in July.

  • While there are signs the Fed's rate setting committee is a very divided body, the 6 dissenting votes against official FOMC decisions this year are hardly out of the ordinary.

Between the lines: Kansas City Fed president Esther George and Boston Fed president Eric Rosengren, who both dissented at the September meeting, have a history of opposing the committee.

  • Since joining the Fed in October 2011, George has dissented 12 times (every time in favor of rate hikes), far more than any other member of the FOMC during that time.
  • Rosengren has dissented 4 times since joining the Fed in 2007, and 3 have come since 2013.

The intrigue: The only Fed chair to never face a dissent was Thomas McCabe, who served in the role for 3 years following World War II.

Fun fact: McCabe helped craft the Treasury-Fed Accord, which removed the obligation that the Fed monetize the debt of the U.S. Treasury at a fixed rate.

  • This accord "laid the foundations for the monetary policy the Fed pursues today," according to a Fed biography of McCabe.

What to watch: Members of the Fed will be out in full force this week.

  • Monday: New York Fed president John Williams (voter) and San Francisco Fed president Mary Daly (non-voter) will speak today, as will St. Louis Fed president James Bullard (voter), who dissented in favor of a 50 basis point cut at the September meeting.
  • Wednesday: Chicago Fed president Charles Evans (voter), George (voter), and Dallas Fed president Steven Kaplan (non-voter) will speak.
  • Thursday: Kaplan, Bullard, Fed vice chair Richard Clarida (voter), Daly, Minneapolis Fed president Neel Kashkari (non-voter), and Richmond Fed president Thomas Barkin (non-voter) are scheduled.
  • Friday: Fed governor Randal Quarles (voter) and Philadelphia Fed president Patrick Harker (non-voter) will be up.
3. What's for dinner? Not beef

Chicken is starting to become Americans' favorite meat and beef looks to be be paying the price.

What's happening: Wholesale-beef prices, a proxy for short-term demand, have fallen 10% from a peak in August, and an indicator for burgers has tumbled about 35%, Bloomberg's Lydia Mulvany and Michael Hirtzer write.

Why it matters: "While there’s often a dip at this time of year because of the end of the U.S. summer grilling season, the declines are far more pronounced than usual," they write.

  • "The U.S. Department of Agriculture this month cut its outlook for 2019 per-capita beef consumption and now forecasts that demand will stay stagnant from last year."
  • "The earlier rise in prices means that there will like be 'tempered interest' in promoting beef to consumers in the coming months, analysts wrote in the Maloni Report, a food-industry publication."
  • "Darden Restaurants Inc., the operator of Olive Garden and Longhorn Steakhouse chains, this week blamed beef inflation for cutting into profit margins for its fiscal first quarter."
4. Americans are saving too much

The U.S. personal savings rate rose to an average 8.2% in the first 7 months of 2019, data shows, higher than the average for any full year since 2012. That's not a great trend for economic growth in an economy driven by consumer spending like the United States.

Why it matters: Typically in times of expansion savings rates fall as consumers feel confident about the economy and spend more, but that pattern has generally been moving in reverse since the financial crisis.

  • "Saving, which is the slice of paychecks, dividends and other earnings that Americans sock away, was up 17% in 2018 from the previous year, according to recently revised figures from the Commerce Department, beating consumer spending’s 5.2% and business investment’s 7.8%," the Wall Street Journal reports.

What they're saying: “That is evidence to suggest that something structural has changed, and it’s made the saving rate kind of sticky at higher levels,” Tiffany Wilding, a U.S. economist at PIMCO, told WSJ.

  • “The timing is no coincidence,” Paul Ashworth, chief North American economist at Capital Economics, tells WSJ. “The tax cuts seem to have been saved.”
  • Ashworth added that the saving rate increased by a full percentage point in January 2018, the month after President Trump signed the Tax Cuts and Jobs Act.

The bottom line: "Economists point to other factors as well, including greater caution among consumers scarred by the 2007-09 recession, aging baby boomers preparing for retirement and a widening gap between the rich (who save a lot) and the poor (who save little)," per WSJ.

Dion Rabouin