July 22, 2021
Today's newsletter is 1,264 words, 5 minutes.
📣 of the day: 40%, the percentage of those working from home at least one day a week who'd look for another job if their bosses required a full return to the office.
1 big thing: Analyst teams are still shrinking
Wall Street's equity research isn't what it used to be, Axios Closer author Courtenay Brown writes.
- There are signs the longtime cutback in sell-side attention is getting worse. In the last five years, the number of ratings on S&P 500 companies shrank by nearly 800, or 6.5%, according to FactSet data provided to Axios.
Why it matters: The research desks haven't traditionally been direct money-makers for banks. But as they shrink, the information they provide to investors goes with it (though exactly how much value they add is a point of debate).
Details: Roughly 19% of companies in the Nasdaq Composite (stripping out SPACs) have no coverage at all, per FactSet.
- Some of those sell-side orphans are smaller companies, like modeling agency Wilhelmina, which has a market cap of just $24 million. But others are surprisingly large, including Icahn Enterprises, valued at $14 billion.
The intrigue: Loews, a conglomerate that owns the namesake hotel chain and an insurer, has long been underfollowed and is the lone S&P 500 company with no sell-side coverage.
Where it stands: Analyst headcount across the 12 biggest investment banks — including Bank of America, BNP Paribas and Credit Suisse — shriveled from 4,400 in 2012 to 3,100 last year, per the latest data available from Coalition Greenwich.
Catch up quick: A recent European regulation banned banks from doling out free research as a client perk. After it took effect, buyers were sparse and banks now had to justify the cost.
- Hundreds of sell-side analysts lost jobs. One recent paper found there's been some effect on the stock market, while another said the opposite.
Before that, the rise of passive investing had already started to work against analysts.
But, but, but: Companies like Walmart are getting more sell-side attention than ever.
- "The investor side is a big reason for adding coverage or dropping coverage: Do they want information about a company or not?," says Rachel Flam of Texas A&M University, who's researched sell-side analysts.
B. Riley Financial is among the firms bulking up its research division.
- It now has twice as many analysts on staff (40) and companies in its coverage (400) than in 2015.
- Like others, the firm is beefing up coverage in at least one hot area of the moment: cryptocurrency.
Of note: B. Riley Financial itself (valued at $2 billion) has no analysts covering its stock.
2. Catch up quick
Texas Instruments' forecast for third-quarter revenue fell short of expectations, stoking concerns about chip supply. (Reuters)
Unilever warned that the cost for raw materials that go into consumer goods is rising at the fastest pace since the financial crisis. (Bloomberg)
The ECB is expected to provide new guidance on how it will achieve its new 2% inflation goal. (CNBC)
3. Time is money
One of the more reliable predictors of inflation is the amount of time it takes for suppliers to deliver goods to businesses. And those wait times have been getting longer.
- Suppliers’ delivery times have a particularly strong correlation to inflation because a longer wait time is a sign of a shortage.
Flashback: Suppliers’ delivery times were one of Alan Greenspan’s favorite leading indicators of inflation.
State of play: When delivery times lengthen we typically see price growth accelerate, IHS Markit chief business economist Chris Williamson observed in a research note on Wednesday.
Between the lines: Businesses selling a lot of goods will order more from their suppliers. If suppliers can't deliver in a timely manner, businesses will have fewer goods to sell to demanding customers.
- This gives businesses leverage to raise prices. Also, if they don’t have much excess inventory to offload, then customers won’t find many deals in the discount bins.
Zoom out: Longer supplier delivery times in recent months can be tied to the COVID-19 pandemic, which led to factories idling and workers staying home. The pandemic triggered other far-reaching disruptions like the global chip shortage.
What to watch: The recent spike in delivery times is unsettling. We'll see if that corrects soon or continues to spill into the inflation data.
4. The 81 countries exploring central bank digital currencies
Central bank digital currency (CBDC) is probably not top of mind for most global consumers. But we may soon have no choice but to think about it — since 81 countries, representing over 90% of global GDP, are now exploring the development of one, Axios' Kate Marino writes.
Driving the news: The Atlantic Council, a think tank that will testify at a July 27 Congressional hearing on CBDCs, gave Axios a first look at its new interactive map showing just how many world governments are now considering it.
Why it matters: The U.S. lags much of the world. It could miss out on the opportunity to take a leadership role in an increasingly likely global transition to some form of digital currencies.
- "If the U.S. doesn't help standard-set and provide guidance on issues like privacy and cybersecurity, we could be headed into a fractured digital currency ecosystem that threatens the smooth operation of international finance," Josh Lipsky, director of the Atlantic Council's GeoEconomics Center, tells Axios.
The backstory: CBDCs are digital versions of existing currencies — legal tender issued, governed and backed by a central bank.
State of play: China is furthest along among major global powers, having launched its pilot digital yuan in April.
- A total of 16 other countries are in the pilot phase or have launched, and another 15 countries have CBDCs in development.
- The U.S. is one of 33 countries still in the research phase.
What's next: Fed chair Jerome Powell has said that the U.S. central bank won't issue a CBDC without Congressional approval.
- In response, Congressional committees have stepped up their inquiries. Tuesday's hearing is before the House Financial Services Committee and will focus on national security implications.
The bottom line: The U.S. doesn't need to create a digital dollar immediately in order to have an impact on the development of digital currencies, Lipsky says.
- But it should engage with groups like the G7 and G20 nations to set standards for security and privacy, he adds.
5. Inequality Index: Watch for volatility
The gap between the way people in different income groups experienced the U.S. economy got smaller in July, compared to the Morning Consult/Axios Inequality Index's June reading, Kate writes.
Why it matters: The economy may be at a turning point as expanded government fiscal support tails off — so signs of increasing inequality could start to pop up in the coming months, Morning Consult chief economist John Leer tells Axios.
How it works: The index compares the sentiment of three income groups — $50,000/year or lower; $50,000-$100,000/year; and $100,000/year-plus.
- It measures the distance between the higher-income and lower-income groups' sentiment from each other and from the middle — as opposed to providing a snapshot of the distribution of income or wealth. A higher reading means more inequality.
The overall index is made up of four components. The one that most drove July's overall reading was the "employment expectations" sentiment.
- Nudging the income groups closer together — i.e. driving inequality down — was increased fears of job loss among employed middle-income individuals, bringing them more in line with the high-income group's sentiment.
- About 9.6% of those in the middle-income group said they feared job loss in the coming four weeks, up from 6.7% a month ago. That more closely matched the high-income group, which was at around 10% in both June and July.