Feb 1, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • Amazon's quarterly sales rose 20% year over year, to $72 billion, with profit rising to $6.04 a share, beating analysts' target of $5.56. Amazon Web Services saw a 45% year-over-year sales increase to $7.43 billion. (Axios)
  • President Trump said he will send two top administration officials to China next month for trade talks after China pledged to "substantially" expand purchases of U.S. goods. (Bloomberg)
  • Factory activity fell in January to its weakest level in years across much of Asia, signaling further growth worries for China and the region. (Reuters)
1 big thing: The other side of PG&E's bankruptcy

Photo: Justin Sullivan/Getty Images

PG&E employees say they are worried about what's at stake for pensions, the health of their 401(k)s and other unpaid obligations from the company as it enters the bankruptcy process, writes Axios' Courtenay Brown.

Details: Though PG&E said it will continue to pay employees' wages, health care and other benefits, many employees expressed major concerns that the company will renegotiate worker contracts in an effort to cut costs. The bankruptcy process is expected to be lengthy and complicated.

Background: PG&E filed for bankruptcy earlier this week, seeking protection on potentially billions of dollars in liability costs for its role in deadly wildfires across California.

Several union members are worried about receiving payments — uncashed paychecks, paid out vacation and severance agreements — owed by the company before it filed for bankruptcy.

  • Employees who received checks more than 180 days before the company filed for bankruptcy, or if they are owed more than $12,850, become creditors in the bankruptcy process — putting total payment of that money at risk since it's paid out after more senior debt holders, as is standard with Chapter 11 bankruptcy protection.

The volatility of PG&E's share price has hit employees' 401Ks. The stock has rallied in recent days, despite the bankruptcy filing, but has recently fallen as low as $7 from $48 in November, before the deadly Camp fire broke out.

  • "I myself have taken a pretty hefty hit. A significant part of my 401(k) was in PG&E stock," John Mader, who works as an engineer at a PG&E service center and heads the Engineers and Scientists of California (ESC) union, tells Axios. The ESC represents 3,700 of PG&E's 24,000 employees.
  • Analysts are less optimistic employees like Mader will recoup those losses in the near term — analysts' average price target for PG&E by the end of the. year is $14, according to FactSet.

Employees also say they're anxious about whether or not their pensions will be put into play by outside creditors during the bankruptcy process, potentially changing labor agreements, which could impact pension plans and other benefits.

  • IBEW, a union that represents 12,000 PG&E employees, says this prospect is unlikely.
  • In a statement, PG&E spokesperson Paul Doherty tells Axios: "There are no changes to the company's tax-qualified pension plan or life insurance benefits, and the company will continue to make regular pension contributions to that plan as normal."
1 bonus chart: GE's wild ride
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Data: FactSet; Chart: Chris Canipe/Axios

GE shares rose nearly 12% on Thursday, the stock's best one-day performance since March 2009, after reporting stronger-than-expected revenue in the fourth quarter backed by its aviation unit.

  • The stock gained as much as 18% during the day and closed above $10 a share for the first time since November.

The big picture: The company has been a shooting star since bottoming out on Dec. 11. GE has climbed more than 50% over the past month and change, helping lift the S&P to its best January since 1987.

2. Venezuela: An offer from Washington

The White House is making Venezuelan leader Nicolás Maduro and members of his inner circle an offer: accept amnesty from National Assembly President Juan Guaidó and move somewhere nice or dig in your heels and face the consequences, Dave Lawler reports in Thursday's Axios World.

  • "I hope this is the end. There's nothing we'd like more than for Maduro and those dozen people or so to pick up, leave the country" and allow for a democratic transition, a senior administration official told reporters today.
  • "Clearly the writing is on the wall," the official said, pointing to "desperate movements," including the arrival of Russian planes to "take out the last bits of gold and other commodities that Maduro and his cronies can get their hands on."

What to watch: The official said the administration is focused "100%" on preparing humanitarian aid to be delivered once Maduro is out of the way. Dave asked whether there were any discussions about sending troops to Colombia (based on John Bolton's notepad) and got a lengthy non-denial.

Dion's thought bubble: The opportunity for Maduro to take a king's ransom and live on "a nice beach somewhere" has been on the table for years. The Organization of American States would have gladly financed such a package prior to Donald Trump's election and Trump has been pushing for Maduro's ouster since he became president.

  • The problem is that Maduro does not live in reality where he is despised around the world and opposed by 80% of his own people. He sees only his still-attended pep rallies where he blames American imperialism for all the country's problems, his obsequious courtiers and well-paid political stooges.
  • He also continues to hold support from Cuban intelligence, Russian military, Chinese financiers, drug traffickers, and his recently created Constituent Assembly packed with family members and friends.
  • The military option is echoes Iraq in its thinking. Despite general disdain for Maduro, Chavismo and socialismo remain popular in Venezuela and Americans are unlikely to be greeted as liberators if they invade.

What's changed: With U.S. sanctions on oil, about half of Maduro's revenue will be cut and he will likely have to call on more support from Russia, Cuba and China.

Yes, but: Maduro's money supply has been draining for years as he lost the ability to issue new debt and oil production sank to historic lows, yet he's continued to find ways to cling to power.

3. Yelp's new economic indicator shows a slowdown
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Reproduced from a Yelp chart; Chart: Axios Visuals

Yelp launched an index that tracks consumer demand and the health of businesses on its platform and the company says the activity of its millions of users is raising red flags about the health of the economy, Courtenay writes.

The big picture: Yelp is the latest to leverage access to the users and businesses on its platform to glean trends about the national economy, following LinkedIn. It comes at a time when there is broad concern about a coming economic slowdown and key retail sales data was delayed in light of the government shutdown.

How it works: The Yelp Economic Average measures how much users are engaging with — i.e. reserving a table, joining a waiting list, or requesting a quote on the site— retail, restaurants and service companies on its site or mobile app.

  • The index averages the overall "scores" of engagement along with business survival, or the openings and closings of stores.
  • Yelp said it measured its chosen businesses against a basket of other predetermined categories — much like CPI — to adjust for seasonality, the presence of more businesses on its platform.

Inside the report:

  • The Yelp Economic Average, or YEA, dropped to 98.5 in the fourth quarter from 100.7 in the Q3. (All averages are relative to the fourth quarter of 2016, when the score was set to 100.)
  • Yelp said only one of the 30 business sectors — which include everything from grocery stores to personal injury law firms — saw its score rise from the third quarter: gas stations. (Perhaps a nod to lower gas pries seen in the fourth quarter).
  • The overall shopping category, which includes appliance shops, computer stores and sporting goods, fared the worst in the fourth quarter, though those brick-and-mortar retailers had already been in steady decline.
  • Other discretionary categories saw a pullback too: art galleries, antique shops and gardening stores saw quarter-over-quarter declines of 2% or more.

Yes, but: There's not much history to know whether or not a sharp moves in Yelp's index says more about Yelp itself rather than the broader economy.

  • Yelp's index declined in late 2017, but the economy actually grew at a faster pace than economists anticipated.
4. Markets yawn at Italy's recession

Italy fell into a technical recession in 2018, with quarter-over-quarter growth declining in both the third and fourth quarters of the year, national statistics bureau ISTAT reported on Thursday.

Of note: The country's GDP fell 0.2% in the fourth quarter, following a 0.1% decline in the third. However, Italian GDP rose 0.1% on an annual basis in Q4 and 0.7% in Q3. (The definition of recession is quite nuanced and hotly debated.)

Recession of any kind is generally worrisome, but markets were little moved by the news because Italy's stalled growth has been known for some time.

  • The spread between Italian 10-year bond yields and similarly dated German bonds remained near 240 basis points, and the country’s benchmark FTSE MIB closed just 0.21% lower on the day.

What they're saying: Italian Prime Minister Giuseppe Conte was also undisturbed by the (technical) recession announcement.

  • "I'm not at all worried ... Even the most naive analysts know that at this moment there is a trade war going on between the United States and China," he told reporters.
  • "Above all, Germany is holding us back ... it's a transitional phase, which depends on external factors."
  • "We are interested in focusing on the relaunch of our economy, which will certainly take place in 2019 ... This relaunch will hit full capacity in the second half."

More bad news for the EU: German retail sales fell by 4.3% in December, the biggest monthly drop in 11 years.

5. Another reason to root against the Patriots this Sunday
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Data: LPL Financial Research; Chart: Axios Visuals

The S&P 500 has gained only 2.2% on average in years when the New England Patriots play in the Super Bowl. And with Tom Brady as the team's quarterback, the S&P 500 has fallen 3% on average when the Patriots play, notes a research report from LPL Financial Research.

What they're saying: "Pats fans might be ecstatic that Tom Brady is starting in a record-breaking ninth Super Bowl, but market bulls don't want to see the Pats win. Stocks are up only 1.5% for the year on average after a victory versus up 2.9% if they lose," said LPL senior market strategist Ryan Detrick. "Tom might be terrific, but maybe not in all markets."

This is why the whole country roots against you: "Shouldn't this chart just be re-titled: S&P 500 Performance," resident Patriots fan Dan Primack chimed in on an email thread no one invited him to during the creation of this chart.

  • Like most Patriots fans Dan does not remember or acknowledge the years before 2002 or the fact that 2019 - 1986 ≠ 11 or the irrefutable fact that Tom Brady is a cheater (here) (here) and (here). (To be fair, Brady is also the GOAT.)
Dion Rabouin

History: Gaspar Yanga, an African who led a confederation of slaves to one of the first successful resistance efforts against European powers in the Americas in 1609. Previously, Yanga organized a band of former slaves and built a small colony that became an outpost for fugitive slaves that stood for more than 30 years.

Yanga helped set the stage for successful revolution efforts by formerly enslaved Africans like Toussaint L'Ouverture who separately battled the Spanish, French and British and led the revolution for Haitian independence.

H/t @RodCervantes