Tesla appointed Robyn Denholm as new chairman to oversee Elon Musk. Ms. Denholm, the chief financial officer of Australian telecommunications company Telstra Corp., has served on Tesla’s board since 2014 but has fewer ties to Mr. Musk than most of the company’s directors. She takes over as chairman of Tesla effective immediately, Tesla said, and she will continue in her role at Telstra for her six-month notice period. She took responsibility as Telstra finance chief on Oct. 1. Tesla shares rose 0.9% to $351.30 in afternoon trading. Ms. Denholm’s career blossomed in the tech industry. During her years at Juniper, from 2007 to mid-2016, the company’s revenue more than doubled. She was a driving force in Juniper’s 2014 restructuring and turnaround, which led to a record profit in 2015.
WSJ – https://www.wsj.com/articles/tesla-names-robyn-denholm-as-chairman-to-replace-elon-musk-1541659771
Issuance of corporate debt CDOs has tripled this year to at least $3.8 billion, according to data from S&P Global Market Intelligence. Hedge funds like Fortress Investment Group and Brigade Capital Management are issuing the CDOs to generate annual returns exceeding 20%. Investment banks are competing to structure and sell the new CDOs to yield-hungry investors because they earn relatively high fees on the business. Managers of the CDOs issue bonds and equity to outside investors. Then, they use the proceeds, and equity themselves contribute to buy a portfolio of corporate bonds and loans. The CDO collects interest and principal payments from the debt it buys, then use the money to pay interest and principal on its own bonds; leftover cash goes to the equity holders. Equity holders receive the benefit of returns amplified by the use of borrowed money, or leverage. They can also gain if prices of the instruments purchased by the CDO rise. But they are first in line to absorb losses when those prices fall or loans and bonds in the pool default. CDO managers can currently only borrow at a 3-to-1 ratio, while CLO managers can borrow at a ratio of 9 to 1.
WSJ – https://www.wsj.com/articles/hedge-funds-revive-the-junk-bond-cdo-1541592000
At the Samsung Developer Conference held Wednesday, Samsung unveiled a prototype for the new type of smartphone that it has been working on, a flexible smartphone that unfolds into what looks like a mini-tablet. Although unique, Samsung is not the first company to do this as ZTE has a similar device, but ZTE’s is not flexible. The flexible device is appealing as it provides a larger display, but can also be folded back to a regular size so that it is not an inconvenience for pockets. It also elevates the smartphone industry to a new level where the display size is no longer limited to the size of the phone.
This type of creativity is much-needed, as the industry has been looking for ways to make their devices more interesting and appealing to consumers. Lately, consumers have not been as motivated to upgrade to newer models due to lack of excitement and higher prices for minor upgrades to cameras and battery life. This has resulted in smartphone sales falling more than 4% for the last year. Breakthroughs like this one should help improve sales and spark more innovation.
Despite the innovation, there are some concerns regarding pricing and durability. The flexible phones are rumored to exceed $1,000, which may be a turn off for some buyers. Some analysts are also unsure about how durable the flexible phones will be, wondering if the quality will deteriorate the more that the phones are folded.
Axios – https://www.axios.com/samsung-shows-off-portable-phone-prototype-e8699a50-b6bb-41d5-9223-f05736bf8d70.html
AP News – https://apnews.com/e3cb8474411c43aa83efa562febc89b3
Lowe’s, the home improvement giant, disclosed that it will be shutting down 51 underperforming stores in the U.S and Canada by February 2019. The company has been lagging behind the better performing Home Depot, as the latter’s stores generate almost double in revenue. The company is also aware that consumers are spending less on housing as house prices and demand have reached a peak after years of growth. When the new CEO, Marvin Ellison, joined in July 2018, he promised to remove products and stores that were not meeting standards, so this decision is not too much of a surprise. Ellison was a high-performing executive at Home Depot and was also the CEO of JCPenny, so he certainly has the experience needed to serve as the CEO of Lowe’s. Ellison’s plan to help Lowe’s catch up to Home Depot includes offering higher-quality tools, more discounts and improved customer service.
The closing of these stores will cost Lowe’s over 300 million in pre-tax expenses. This move comes after the company closed Orchard Supply Hardware, a chain it acquired in 2013, which ended up costing over 400 million in write-downs. Not all is bad though, as this decision will allow the company to focus on the more profitable stores.
CNBC – https://www.cnbc.com/2018/11/05/lowes-to-shut-underperforming-stores-in-the-us-and-canada.html
CNN – https://www.cnn.com/2018/11/05/business/lowes-closures/index.html
Amazon has been looking for its second headquarters for some time now and has finally made a decision, albeit a surprising one. The company has decided that instead of choosing one new city to call home, it will split its second headquarters into two cities – Long Island City in New York and Crystal City in Virginia. There was a plethora of competition, as becoming the location for the second headquarters brings economic opportunity. The company narrowed the list of competitors from 238 to 20 in January and the finalists did their best to sell Amazon on the idea that they were the best fit. There will be around 25,000 new high-paying jobs created in each city, as well as investments and the chance to attract other companies.
There are a few reasons Amazon decided that two is better than one. First, it allows the company to recruit top talent from two pools instead of one, which is highly beneficial when there is intense competition for workers, especially in the tech area. As it shifts to the east coast, Amazon won’t be competing with Microsoft for talent nearly as much as it does in Seattle. It also provides the company with two incentive packages, which include up to billions in tax breaks. On top of that, it reduces some of the issues associated with bringing tens of thousands of people to a city, such as congested housing and transit, as now there will be two cities handling the increased population instead of one.
WSJ – https://www.wsj.com/articles/amazon-plans-to-split-hq2-evenly-between-two-cities-1541446552?
NY Times – https://www.nytimes.com/2018/11/05/technology/amazon-second-headquarters-split.html?action=click&module=Top%20Stories&pgtype=Homepage
PBS – https://www.pbs.org/newshour/show/has-amazon-selected-its-next-headquarters
White House officials Mike Pompeo and Jim Mattis met Chinese Politburo member Yang Jiechi and Defense Minister Wei Fenghe on Friday in the annual U.S.-China Diplomatic and Security Dialogue to discuss the rocky relationship between the U.S. and China. The meeting was originally scheduled for October but was canceled in response to mounting trade tension. Secretary of State Mike Pompeo reported a productive meeting, having come to an agreement on the denuclearization of the Korean Peninsula, but failed to address trade tensions that have resulted in tariffs on nearly $400B of goods.
An overarching goal of Friday’s meeting was to ease tension between the two countries prior to the G20 meeting between U.S. President Trump and Chinese President Xi Jinping in November. While the meeting was constructive in reaching an agreement on the denuclearization of the North Korean Peninsula, disagreement remains regarding the militarization of the South China Sea. Chinese officials claimed the military islands are necessary for defense, but that they were committed to non-confrontation.
The U.S. and China remain optimistic about the prospects for an eased relationship between the two world powers. White House officials continue to consider the concessions that would be required of China, and Chinese officials viewed Friday’s meeting as an opportunity to gain insight into President Trump’s ultimate intentions. Both sides agree that a trade war would be harmful to not only the countries involved, but would continue to unsettle world financial markets as well.
WSJ – https://www.wsj.com/articles/top-u-s-china-officials-discuss-trade-north-korea-south-china-sea-1541790155
CNBC – https://www.cnbc.com/2018/11/10/us-presses-china-to-halt-militarization-of-south-china-sea.html
The Federal Open Market Committee meeting on Thursday reiterated the current strength of the economy, as well as the projections for future growth. The Fed again cited low unemployment and rising wages as a significant measure of consistent economic growth, with unemployment remaining at 3.7% in October and hourly wages climbing 3.1% YoY. Recent economic performance kept the target benchmark rate at 2-2.25% as agreed upon in September’s vote, and projections show the next hike is likely to be implemented in December.
The Fed’s plans for interest rate hikes over the next year will be dependent upon inflation. With an inflation target of 2%, the Fed will adjust the speed at which it implements its policy by increasing pace if the economy continues to grow rapidly and slowing if signs of an economic slowdown become evident. While the final interest rate hike for 2018 as was agreed upon in September remains likely, officials have yet to agree upon how many times to raise rates in 2019. A 3% interest rate appears to be a neutral rate at which economic growth will be unaffected and where interest rates can settle over a longer time horizon. Under current strategy of hiking rates, the 3% target is likely to be met by the middle of next year.
Tuesday’s midterm election results, which shifted the House of Representatives to Democrat-led, are expected to have little impact on monetary policy. Despite President Trump’s recent criticisms of the Fed’s policies, officials’ decisions remain independent of White House views and the Fed shows no sign of conceding to political pressures.
WSJ – https://www.wsj.com/articles/fed-holds-rates-steady-signals-more-rate-increases-ahead-1541703706
NYT – https://www.nytimes.com/2018/11/08/us/politics/fed-midterm-elections.html?rref=collection%2Ftimestopic%2FFederal%20Reserve%20System&action=click&contentCollection=timestopics®ion=stream&module=stream_unit&version=latest&contentPlacement=2&pgtype=collection