Mar 26, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • The House of Commons voted to strip U.K. Prime Minister Theresa May of control of the Brexit process, potentially setting up a second referendum. (Bloomberg)
  • McDonald's made its largest acquisition in 20 years, buying technology company Dynamic Yield for $300 million to better personalize menus in its digital push. (Bloomberg)
  • As Boeing battles to get its fleet airborne again, European rival Airbus said it signed a $35 billion jet deal with China. (Airbus)
  • Uber confirmed its long-rumored acquisition of Middle East ride-hailing company Careem for $3.1 billion. (Axios)
  • Samsung warned its first quarter earnings would be below Wall Street expectations, thanks to weak demand for its products. (CNBC)
1 big thing: It really is different this time

Illustration: Aïda Amer/Axios

Yields on 10-year U.S. Treasury notes fell below 3-month Treasury bills on Friday for the first time since 2007, triggering a major recession indicator.

But market analysts have tripped over one another telling us not to worry. This time is different, they insist. And while strategists with high S&P 500 targets are notorious for balking at clear and longstanding recession indicators, they do have a point. Things are different now.

What's happening: Since Friday's yield curve inversion, the market further positioned for a recession or at least something much worse than the slowdown to 2.1% growth the Fed is predicting.

  • "A lot of investors are spooked and really putting on the recession trade, so to speak," Gennadiy Goldberg, interest rates strategist at TD Securities, tells Axios. "The extent to which we're pricing in rate cuts suggests we're pricing something more sinister than just rate cuts."

The big picture: While investors have implored anxious Americans to look to the strong U.S. labor market and solid 2018 GDP numbers, what's really changed is the impact of central banks.

  • "In the past when yield curves inverted it was entirely the result of the perceptions of investors in the financial markets," Bernard Baumohl, chief global economist at The Economic Outlook Group, tells Axios. "Now we have seen central banks become heavily involved in the bond market."

Background: After the financial crisis, the Fed's quantitative easing program saw the central bank tack around $4.5 trillion worth of bonds onto its balance sheet — much of it longer-dated U.S. Treasuries — in an effort to depress yields and support financial institutions.

Fed Chair Jay Powell announced earlier this month that the Fed would stop reducing those holdings once the balance sheet gets to around $3.5 trillion.

  • "There’s still that stock effect of all those assets they purchased that is holding down longer-term yields as a result," Steve Johnson, senior portfolio manager at Silicon Valley Bank, tells Axios.

And it's not just the Fed. The ECB and BOJ both have negative interest rates for some deposits. German and Japanese 10-year government bonds now have negative yields. That's driving a flurry of investors to U.S. Treasuries, which pay significantly more.

Don't forget: There's also the $1 trillion annual U.S. deficit and unprecedented $22 trillion national debt. The deficit is being funded by issuing more short-dated Treasury bills than longer-dated notes, helping invert the curve, Baumohl says.

The bottom line: The yield curve has inverted before the last 7 U.S. recessions, making it impossible to ignore. But the Fed's quantitative easing programs and subsequent stimulus efforts by governments and central banks around the world have distorted markets. It's hard to rely on historical correlations, positive or negative, because we've never seen this before.

2. Apple's future is credit cards and "services"
Expand chart
Reproduced from Bespoke Investment Group; Chart: Axios Visuals

Apple looks to be at a crossroads. Axios' Scott Rosenberg writes, "Apple's reputation for launching products that transform entire markets could become a casualty of its transition from selling gadgets to peddling 'services' — the company's catch-all label for the grab-bag of TV, news media and gaming bundles it announced Monday."

Why it matters: "Apple's genius under Steve Jobs lay in focusing on a very small number of unique products, but its new offerings are scattershot additions to already crowded media marketplaces," Scott writes. "Some may prove hits, others may flounder — but none of them looks poised to 'change the world,' no matter how many times Apple and its partners repeat that phrase."

  • Enter the titanium Apple Card, which was announced on Monday at the company's big media push.

It's "a gorgeous minimalist card — so minimalist, in fact, that it comes without normally-standard features like a card number or an expiration date. Instead, you can generate one-off numbers on your phone," Axios' Felix Salmon writes.

Why it matters: "This is an ambitious attempt by both Goldman and Apple to break into the world of consumer finance, Felix writes. But gaining significant market share from the giants in the space will not be easy."

Timing: "The card won't be available till summer. Apple didn't announce interest rates and other key details."

3. Stock buybacks shattered records in 2018
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Data: S&P Dow Jones Indices; Chart: Naema Ahmed/Axios

Over the past few years the fire beneath Apple's red-hot stock price has largely been stock buybacks. The company has dwarfed other companies in terms of the number and amount of buybacks last year and for the past decade.

Driving the news: S&P Dow Jones Indices announced Monday that companies bought back $806.4 billion worth of their own shares, including $223 billion in just the fourth quarter in 2018. It was short of the $1 trillion Goldman Sachs predicted in August, but still an all-time record.

Of that record total, Apple bought back $10.1 billion worth of its own stock in Q4 and $74.2 billion for the year, more than a third of the entire S&P 500 total. The closest company to that total was Oracle, which spent $29.3 billion.

  • Over the past decade, Apple has bought back more than $260.4 billion of its own shares. The No. 2 company on the buybacks list is Microsoft, which has bought back less than half that amount, $118.5 billion.

Between the lines: Companies have shown a very clear preference for buybacks over dividends so far this decade, with a major uptick in this trend in 2018 after the passage of the Tax Cut and Jobs Act.

  • Dividend spending was $27 billion below buybacks in the fourth quarter of 2017. In Q4 2018, companies spent $103 billion more on buybacks than dividends.

Further buyback numbers announced by S&P Dow Jones on Monday:

  • Q4 is the fourth consecutive quarterly record for stock buybacks, which is the longest streak in the 20 years SPDJI has been tracking buybacks.
  • The record $806.4 billion spent on buybacks in 2018 shatters the previous record of $589.1 billion set in 2007.
4. WeWork doubled revenue and loss in 2018
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Data: WeWork; Chart: Axios Visuals

WeWork doubled its revenue, net loss and membership between 2017 and 2018, Axios' Dan Primack reports, citing an investor presentation provided by the company.

Why it matters: The co-working space operator continues to push toward an IPO, but has plenty of cash if it wants to wait longer.

Financials

Revenue: 2018 revenue was $1.82 billion, up 105% from 2017. Of that, 88% is considered membership revenue — down from 93% in 2017.

  • "We have a global membership network that sits on top of this global physical platform that we have the opportunity to further monetize," WeWork Vice Chairman Michael Gross tells Axios.
  • Gross adds that WeWork's compound annual growth rate (CAGR) has been over 100% for each of the past 8 years.

Losses: Net loss was $1.9 billion for 2018, larger than the revenue figure and up 103% from 2017.

  • Included was $372 million for sales and marketing (+162% from 2017) and $237 million of interest related to 2018 bond issues.
  • WeWork President and CFO Artie Minson says to expect both revenue and net loss figures to continue growing, as the latter relates largely to upfront construction and long-term rental contract costs. "I was previously at [Time Warner Cable] and it took decades for cable companies to show profits, but that doesn't mean they weren't creating lots of value."

Alt measure: WeWork prefers investors focus on a novel metric called "community-adjusted EBITDA," which more than doubled to $467.1 million in 2018.

Membership

Total memberships climbed 116% in 2018 to 401,000. It now has a presence in 425 facilities in 100 cities in 27 countries.

  • 32% of members come via enterprise customers, while total occupancy climbed to 90%.
  • WeWork reports a $2.2 billion "committed backlog" of new membership contracts.
  • It also says that one out of every 8 first-time entrepreneurs in major U.S. cities are WeWork members.
  • The company now has a presence in 425 facilities in 100 cities in 27 countries.
  • When asked about the impact of slowed economic growth, Gross said: "We've lived through some level of economic pullback in regions like Latin America and China, but have only seen our growth accelerate."
Balance Sheet

WeWork had $2.2 billion of cash on hand at year-end, which is the same amount it had at the time of its public bond offering last April. This does not include $400 million of committed capital from SoftBank, nor $4 billion of convertible note warrants from SoftBank ($1.5 billion of which was received in January).

Dion Rabouin