Jun 14, 2019

Axios Markets

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Situational awareness:

  • Businesses in Hong Kong are preparing for mass rallies this weekend against the proposed extradition bill with mainland China. (CNBC)
  • Facebook has signed up more than a dozen companies including Visa, Mastercard, PayPal and Uber to back its Libra cryptocurrency that will launch next year. (WSJ)
  • KPMG is preparing to pay $50 million to settle SEC lawsuits over the actions of former partners at the firm. (WSJ)
  • 23% of Americans say their financial situation is "worse" now than before the Great Recession. (Fox Business)
1 big thing: The stock market is desperate for a hero

Photo: Drew Angerer/Getty Images

In the absence of strong balance sheets or strong profits, the U.S. stock market is lavishing dollars on any new company that can put together a plausible theory of future success.

What's happening: The 2019 FOMO market may not have been willing to look past Uber or Lyft's $1 billion a year in losses — at least on IPO day — but the unbridled enthusiasm for companies like Beyond Meat, Shockwave Medical and Zoom show investors are desperately seeking a winner and they're willing to pay top dollar to find one.

  • Beyond Meat, up 465% from its May IPO price, lost nearly $30 million in 2018 with $88 million in revenue and noted in its S-1 filing, "We may be unable to achieve or sustain profitability."
  • Shockwave Medical, up nearly 250% from its March IPO price, lost $12.8 million in 2018, on revenues of just $7.3 million.
  • Zoom, up 180% from its April IPO price, is "profitable" but has a net income loss of $7.5 million for the period ending January 2019.

Driving the news: Gig economy marketplace Fiverr became the latest IPO to catch fire. Despite being in business for nearly a decade, the company is not profitable, manages to lose more money the more revenue it earns (-$36 million on $75 million in revenue last year) and has no real plan for turning a profit in the near future. Nevertheless, it rose 90% on its opening day.

  • "If you've got extremely fast growth and a market opportunity, investors are comfortable knowing that profits will come later," Matt Kennedy, who analyzes IPOs for Renaissance Capital told CNBC.
  • The Renaissance Capital IPO ETF, which tracks the latest big IPOs, is up 34% this year, more than twice the performance of the S&P 500.

Watch this space: Even when companies came to market with a plan to make money, things didn't often work out that way. University of Florida professor Jay Ritter's data shows more than 60% of the over 7,000 IPOs from 1975 to 2011 had negative absolute returns in the 5 years following their first day of trading and "only a handful produced extreme positive returns."

  • From 2000 to 2016, the data shows the 6-month absolute and excess return for new companies have both been negative.
2. Merck, Comcast join world's most owned stocks
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Reproduced from eVestment; Chart: Axios Visuals

Comcast and Merck entered the ranks of the most owned stocks in the world, data firm eVestment found in its first quarter report.

  • Among U.S. investors, Disney moved onto the top 20, and has risen 13 spots on that list since the first quarter of last year. It's Disney's first time on the list since eVestment began issuing the report.

Methodology: The report utilizes long-only active equity strategies' portfolio holdings data reported directly to eVestment by asset managers. The firm said 6,053 active equity strategies submitted Q1 2019 portfolio data as of the publication date.

3. Major retailers join anti-tariff effort
A screenshot of the letter from Tariffs Hurt the Heartland.

More than 600 U.S. companies and industry trade associations — including Walmart, Costco, Target and Foot Locker — wrote to President Trump, CC'ing senior members of his cabinet, urging them to relent on the trade war tariff battle with China.

"Broadly applied tariffs are not an effective tool to change China’s unfair trade practices," the group said in the letter, which was backed by the National Retail Federation's anti-tariff lobbying campaign Tariffs Hurt the Heartland. "Tariffs are taxes paid directly by U.S. companies, including those listed below—not China."

4. S&P ESG drops Facebook over privacy issues
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Adapted from S&P Dow Jones' Indexology blog; Chart: Axios Visuals

The annual rebalance of the S&P 500 ESG (Environmental, Social, and Governance) Index removed a number of big companies, including Wells Fargo, Oracle and IBM, but the largest component dropped was Facebook — pulled for its low rating on social factors and abysmal rating on governance.

  • Facebook held a weight of 2.5% of the ESG index and was the fourth-largest company in the overall S&P 500, holding a 1.9% weight.

What happened: Facebook's overall S&P DJI ESG Score fell to 21 in April's review on a scale of 0-100, with 100 being best.

  • Facebook scored an 82 on environmental factors
  • 22 on social factors
  • and a 6 (out of 100) on governance factors

Of note: Governance carries 52% of the ESG score weighting. The 3 largest S&P 500 ESG ETFs together have about $575 billion in assets, according to Quartz.

What they're saying:

  • "Facebook had experienced many privacy issues over the past 24 months, including allowing more than 150 companies access to more users' personal data than it had disclosed, misuse of personal information (e.g., Cambridge Analytica) and hacking of almost 50 million accounts," Reid Steadman, the company's managing director, and global Head of ESG said in a blog post.
  • "These events have created uncertainty about Facebook's diligence regarding privacy protection, and the effectiveness of the company risk management processes and how the company enforces them."
5. Acorns CEO challenges Goldman's Solomon to DJ battle

Acorns CEO Noah Kerner has no respect for Goldman Sachs CEO David Solomon's skills on the 1s and 2s.

  • Kerner tells Axios that Solomon is "not even a real DJ; he's a music player," noting that Solomon, in his engagements as the notorious DJ D-Sol, does not use vinyl and does not scratch.

Driving the news: Onstage at the CB Insights "Future of Fintech" event in Manhattan Thursday, the $860 million digital wealth management startup's chief executive said he would challenge Solomon to a DJ Battle.

Behind the scenes: Inside the green room, Kerner gave Axios the exclusive details of his terms.

  • An on-stage, one-on-one battle where both men have "2 turntables and a mixer" for "2–3 minutes," he said with a laugh.
  • The audience cheering sound effect would be banned and the crowd would be the judge of who is the superior turntableist.

Kerner says his skills are ample, asserting that he's a better DJ "when it comes to scratching" than childhood friend Mark Ronson, a DJ and recording artist best known for his 2014 hit "Uptown Funk."

  • Requests for comment from DJ D-Sol on Twitter were not immediately returned.