Murray's Week in Review.
The week's business and financial news, all in one place.
What follows was written by Matt Murray, former editor-in-chief of The Wall Street Journal. It’s a review of the week’s top stories in business and finance. It arrives in your in-box most every Friday at ~noon.
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1. With inflation stubbornly sticking around, dampening hopes of a Fed rate cut soon, earnings are the last pillar for a resilient stock market that has been wobbly of late. Wall Street strategists are optimistic about another bumper earnings season as global economic growth picks up. Even pricey technology stocks — the primary profit engine in the previous quarter — are again expected to be supported by solid results. So while the S&P 500 Index is struggling in April after its best first quarter in five years, few experts are eager to bet against the market. That said, the top 10 stocks in the S&P 500--primarily those known as the Magnificent Seven--will pull the rest along, and there's reason to worry that estimates aren't higher in an economy this strong. And there are signs consumers have pulled back in some areas.
Early returns: JPMorgan beat earnings expectations, with credit costs and trading revenue better than expected. Trading revenue also helped Citigroup top estimates as it wraps up its overhaul.
2. Will a Paramount Global-Skydance deal actually happen? Blowback grows over the decision taken by Paramount's board and its special advisory committee to enter a 30-day exclusive negotiating window to discuss a merger between National Amusements, the controlling stakeholder run by Shari Redstone, and Skydance, which is run by David Ellison (son of Larry, who would put up some funding and could be post-merger chairman) and backed by RedBird Capital and KKR. Redstone's company would get over $2 billion, then Paramount would acquire Skydance for stock valued at around $5 billion. I.e., the Redstones would cash out, and non-voting Paramount shareholders would get diluted shares in the new company. The board reportedly spurned a larger, all-cash $26 billion (including debt) offer from Apollo Management for all of Paramount. For Paramount to reject that while pursuing the reported deal with Skydance "borders on the insane," says Bill Cohan. Through the past week, big investors kept weighing in to the board, accusing Redstone of enriching herself at the expense of shareholders and hinting at lawsuits. The chief investment officer of Matrix Assets Advisors, says "they're basically stealing the company." Justin Evans of Blackwood Capital Management wrote to the board: “The last thing the company shareholders need is yet another silver-spooned movie enthusiast to run our entertainment company into the ground.”
In things that make you go hmmmmm, four Paramount directors are reportedly due to step down in coming weeks. Three of them are on the special committee exploring a merger, which sure seems like they disagree with the direction things are going. One is said to have expressed concern about the Skydance talks. One of the remaining directors is close to Larry Ellison. Meanwhile, Skydance is proceeding with due diligence and scheduled to meet with Paramount execs next week.
David Ellison, too, should be careful, says Martin Peers. The company that Redstone is selling--which included shrunken entities called CBS, MTV and Nickelodeon, as well as the film studio--is a shadow of its former self, thanks largely to cord cutting. Even the $2 billion tag for Redstone's stake is only about half what it was worth in 1995, a year after Sumner Redstone beat Barry Diller to take over Paramount. Asked whether in hindsight he is glad to have lost, Diller, who has built a broad portfolio of Internet companies, told Peers: “in a word, YES,” noting that “If I’d gotten Paramount…I’d never have gotten the chance to play in the internet revolution.”
3. Election-year politics in a key swing state increasingly threaten the proposed $14 billion takeover of US Steel by Japan's Nippon Steel. As previously noted, both Biden and Donald Trump have opposed the deal, as they court union votes. One analyst says it now is on "life support." David McCall, head of the United Steelworkers union, has essentially shut down discussions, even when Nippon Steel CEO Takahiro Mori personally assured McCall that the company would offer commitments to invest more than $1 billion in the company and promised no idling of plants and no immediate layoffs. Central to union complaints is anger that current management has underinvested while closing plants and cutting workers for years, and concern a sale will only exacerbate that. At a Rose Garden press conference with Japanese Prime Minister Fumio Kishida this past week, Biden reiterated his opposition, diplomatically, while Kishida pointedly stressed the importance of ties between the two countries. The union bashed Nippon in a statement timed to Kishida's visit, shortly before Biden welcomed McCall to the state dinner for the Japanese prime minister. CFIUS is reviewing the deal, and Politico reports the DOJ has opened a probe as well.
4. Following its plan to award Taiwan Semiconductor Manufacturing Co. $6.6 billion in grants and as much as $5 billion in loans to build factories in Arizona, the Biden administration is poised next week to award Samsung another grant of more than $6 billion to expand chip production in Texas. All is part of President Biden’s push to boost the US semiconductor industry with the 2022 Chips and Science Act. As a reminder, the program set aside $39 billion in direct grants — plus loans and guarantees worth $75 billion — to persuade semiconductor companies to build factories in America after decades of shifting production abroad. Intel has already inked a preliminary agreement for nearly $20 billion in grants and loans. The Commerce Department has also handed three awards to companies that manufacture older-generation chips and is expected to announce a multibillion dollar package for Micron Technology Inc. in coming weeks. Companies have announced more than $200 billion in US investments since Biden took office, with the biggest clusters emerging in Arizona, Texas and New York.
5. The TikTok ban passed the House amid much fanfare a month ago, but so far it's crickets in the Senate. With the bill stalled amid opposition in both parties, Senate Majority Leader Chuck Schumer met this past week with Commerce Committee Chair Maria Cantwell, who said she isn't sure the House bill can withstand a court challenge and doesn’t want to rush legislation that would force Chinese parent ByteDance to divest itself of the video-sharing app used by 170 million people in the US. She also said she likes the idea of extending to one year the deadline for divestment to a year from six months. Mitch McConnell tried to kickstart the bill, but it has yet to find a Republican co-sponsor. ByteDance, meanwhile, saw profit surge 60%. It is taking a hands-off approach to the US fight, leaving local officials to focus on lobbying efforts, unlike an earlier effort four years ago, a sign it isn't too worried.
6. JPMorgan Chase CEO Jamie Dimon crammed a lot into his long annual shareholders' letter, making it hard for media outlets to know what to highlight. He warned about AI, US power, the debt and 8% interest rates and defended DEI. Dimon's manifesto is in the spirit of Warren Buffet and Jeff Bezos, who have set an annual letter benchmark for any aspiring "thought leader." After two decades in the job of running the nation's largest bank, Dimon is really more like a politician, says Felix Salmon, who sums up Dimonism as "Pugnacious Hegemonic Neoliberalism: Pro-America, pro-military, pro-trade, pro-capitalism, pro-DEI, anti-China." Many of Dimon's stated policy preferences were directional but vague. He did say he favors supporting Ukraine, joining the TPP, taking a tough stance with China but engaging with it and boosting strategic areas like chips and rare earths but otherwise limiting the role of government. He bashed the White House pause on new liquefied natural gas export licenses and whacked a perennial hobbyhorse, bank regulation, writing, "It would probably be an understatement to say that some are duplicative, inconsistent, procyclical, contradictory, extremely costly, and unnecessarily painful for both banks and regulators," and that many smaller banks "may not have the resources to handle all of these regulatory requirements."
Two comments that stood out: A warning that geopolitical events "may very well be creating risks that could eclipse anything since World War II," and a banner quote about AI, which Dimon said JPMorgan deploys in more than 400 ways. Echoing others, he wrote, "...we are completely convinced the consequences will be extraordinary and possibly as transformational as some of the major technological inventions of the past several hundred years: Think the printing press, the steam engine, electricity, computing and the Internet, among others." Note: The Journal has reported that Donald Trump's team has discussed Dimon as one of many possible Treasury secretaries.
7. Meanwhile, JPMorgan said in a filing that it really, truly is moving forward on succession planning for the "medium" term for its 68-year-old CEO, who said last May he could leave by the end of 2026. Contenders for the top job include Jennifer Piepszak and Troy Rohrbaugh, recently appointed co-CEOs of JPMorgan's expanded commercial and investment bank; Marianne Lake, CEO of consumer and community banking; and Mary Erdoes, CEO of asset and wealth management. All have big roles after a management shuffle earlier this year. There has long been skepticism about succession at JP Morgan given Dimon's Igeresque staying power.
8. Boeing shares dropped further on a report that the FAA is investigating claims made by a Boeing engineer/whistleblower who says that sections of the fuselage of the 787 Dreamliner are improperly fastened together and could break apart mid-flight after thousands of trips. The engineer, Sam Salehpour, said the problems with fastening the sections came about as a result of changes in how the enormous sections were fitted and fastened together in the manufacturing assembly line. Boeing concedes those manufacturing changes were made, but says there is “no impact on durability or safe longevity of the airframe.” Not surprisingly, Boeing deliveries in the first quarter fell to their lowest level since mid-2021. This is a good place to mention this Fortune cover story by Shawn Tully, posted in February but on newsstands this past week, which gives the best backdrop to the chasm that has grown up between engineers and management at Boeing over two decades and four CEOs as increasingly remote leadership has focused on cost-cutting and outsourcing. Boeing also was forced to acknowledge that executives took personal trips on company jets.
9. Elsewhere in aviation, a summer squeeze looms as high travel demand meets a lack of planes. Spirit Airlines, whose merger with JetBlue fell apart in the face of federal opposition earlier this year, is furloughing pilots and delaying delivery of new Airbus planes to boost its liquidity. A constrained United Airlines delayed two new routes amid regulatory scrutiny. And Delta had a strong first quarter as corporate travel bounces back.
10. Multiple federal regulators are probing Morgan Stanley over how it vets clients who are at risk of laundering money through the bank’s wealth-management division. The Securities and Exchange Commission, the Office of the Comptroller of the Currency and other Treasury Department offices are involved, in addition to the Federal Reserve, according to people familiar with the matter. The Fed has told the bank that supervisory action is under consideration. The main issues regulators are looking at boil down to whether Morgan Stanley has been sufficiently investigating the identities of prospective clients and where their wealth comes from, as well as how it monitors its clients’ financial activity. Some of the probes are focused on the bank’s international clients.
11. A former Morgan Stanley banker who was punished in the block-trading probe that rattled Wall Street joined one of the firms that was the recipient of confidential information he leaked. Pawan Passi was hired by Frank Fu’s CaaS Capital Management, according to people familiar with the matter. CaaS made its name partnering with banks as they sought buyers for block trades, becoming one of the biggest US funds dedicated to buying big chunks of stocks. A yearslong investigation into block trading that reverberated across the industry culminated in January after Morgan Stanley agreed to pay $249 million to the Justice Department and the Securities and Exchange Commission. Passi also agreed to a monetary fine and a one-year ban from the industry as part of his pact with the SEC. He’s able to work at CaaS because three weeks ago the firm terminated its registration with the SEC, according to a regulatory filing.
12. Despite multiple stumbles in generative AI that have threatened its dominant position, Google may be poised for a more concerted response. Gemini, despite the launch glitches, has been well received in AI circles, and the company is working on a tier of paid generative AI services for its search engine. Still, it struggles with big-company inertia; the lack of a coherent, company-wide strategy for generative AI, internal factions, the challenge of incumbency as the dominant search engine and a fragmented organizational structure. There is particular pressure on CEO Sundar Pichai to be more aggressive. He conceded at Stanford last week that the demand and trajectory of AI surprised him. In line with all this, Google rolled out a new chip, called Axion, that can handle everything from YouTube advertising to big data analysis as the company tries to combat rising artificial-intelligence costs.
13. Off to a rough start this year, Apple is in search of its next big thing. A year ago, its pipeline of future products looked chock-full. The Vision Pro had yet to be introduced. Smart home devices were in the works. And the Apple electric car finally felt like it was starting to get real. Now it's clear that VisionPro isn't a mainstream hit. The car has been cancelled. The company is a laggard in the home products market and in AI. It faces a big DOJ antitrust suit, among other legal and regulatory challenges. But Apple has more bandwidth now to focus on the home, and recent news that it is exploring robotic home devices driven by AI, as previously noted in News Items. Apple is planning to overhaul its entire line of Macs with new in-house processors to facilitate AI. It also could find new uses for new models of iPads. Another bright note: Apple is making progress pivoting its iPhone assembly supply chain to India.
14. Alibaba founder Jack Ma, who seemed muzzled after clashes with Beijing, popped up for the second time in a few months with a lengthy and upbeat memo to employees praising the company's split into six parts, hailing new leaders Joseph Tsai and Eddie Wu and owning up to mistakes in the past, writing, "We hacked away at the big-company disease." Ma didn’t drill down into specifics, or directly address some of the more fundamental questions surrounding the internet company he built into China’s most valuable corporation. It’s still bleeding market share to rivals such as PDD Holdings and ByteDance, while Baidu and others push forward into AI.
15. An unusual new closed-end fund that invests in Elon Musk’s SpaceX, Fortnite maker Epic Games, OpenAI, fintech giants Stripe and Chime and other hot privately held unicorns has gone absolutely bonkers since it started trading in late March. The Destiny Tech100 fund currently lists 23 companies as holdings. The largest weighting in the fund by far is in Elon Musk's SpaceX, which makes up 34.6% of the portfolio. Another 4% is from Epic Games, and around the same amount is OpenAI shares. Other holdings include Stripe, Chime, Impossible Foods, Discord, and Klarna. Its creator says it’s all part of a “discovery process” among investors trying to figure out what its yet-to-list technology companies are worth.
16. Remember the early days of the Covid-19 pandemic, when everyone freaked out about personal protective equipment, and learned that much of the US supply chain had been sent overseas? Kimberly-Clark said it will sell its PPE business to Australia's Ansell for $640 million in cash. U.S. hospitals and healthcare buyers are pivoting back toward foreign-based buyers of PPE after sales got a big boost from the pandemic. Domestic mask producers, which had bulked up production over recent years, have been left with plants sitting idle, unfinished or operating below capacity. Labs and medical facilities, meanwhile, have built up huge stockpiles.
Columns: Bill Cohan: Leon Black, Back from the Ashes, Part 2. Julia Alexander: Assessing Max a year after HBO was folded in. Stephen Mihm: Sorry, the 6% realtors' commission isn't going anywhere. Brian Sozzi: Now Iger must deliver for retail investors. Greg Ip: America's chip renaissance needs workers. Terrific column in The Washington Post by News Items’ own Mary Williams Walsh: Is 777 Re is an aberration or a harbinger of more trouble to come for annuities?
Footnotes: Warner Bros. Discovery dogged with questions two years after deal...Amazon is committed to cost-cutting and boosting AI, Andy Jassy writes in his shareholder letter...Binance CEO says the crypto company has "moved past" cultural issues after paying a $4.3 billion settlement to DOJ...Norfolk Southern reaches $600 million settlement in Ohio train derailment...Meta unveils a new AI chip...Synchron, a Neuralink rival backed by Bill Gates and Jeff Bezos, seeks dozens of people for neural implants a it prepares for a big clinical trial....Costco is cleaning up since it started selling gold bars...Macy's settles with activist Arkhouse, adds two board members, raising odds of a sale that could take it private...Starlink is burning through cash, sources say...Blackstone pays $10 billion for Apartment Income REIT, its latest housing bet...J.M. Smucker's fifth-generation family CEO on earning his spot at the top...L'Occitane looks to go private after 14 years on the Hong Kong Stock Exchange...Two OpenAI researchers fired for alleged leaking...McKinsey to cut hundreds of jobs...Tesla settles a long-running suit stemming from the death of an Apple engineer.
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