Few things make sense so why should stocks?
+ Intuit's M&A roadblock + TikTok's the tip of the iceberg
As the pandemic rages on, a persistent topic in financial circles has been the “decoupling” of stock prices from the economy. The logic here is pretty simple: Unemployment is high, GDP is down and whole industries are shuttered, yet major stock indices are performing exceptionally well. What gives?
On the one hand, this narrative misses the mark, in the sense that most stock moves have reasonable explanations. Companies that thrived during the pandemic (say Amazon and Zoom) have seen their stocks rise, while companies that fared poorly (say United Airlines and Carnival Cruise Line) have seen their stocks fall. Plus, a few technology bluechips and the structure of stock indices help make sense of the April-to-August bull run.
On the other hand, the sheer size of the gap between stock market growth and economic contraction demands discussion. The Nasdaq exchange just hit an all-time record, the S&P 500 is soon to follow, and that’s despite there being 13 million fewer jobs than in pre-Covid times. There’s something baffling and disconcerting about the dissonance between capital and labor in America’s economy, especially during the pandemic.
This picture’s peculiarity is magnified (and even further distorted) in the stories of a few individual companies. After rental car company Hertz declared bankruptcy in May, its stock price soared by 500%, despite the company’s $1.8 billion in obligations. In response to an absurd situation, Hertz attempted an equally absurd (albeit fiscally sensible) maneuver: the issuance of $500 million in new shares amid bankruptcy proceedings, an effective would-be cash transfer from retail investors to Hertz’s creditors. (The SEC squashed this last-ditch ploy).
Then came Kodak, the camera company that is no stranger to capital market shenanigans. (At the height of 2018 crypto mania, Kodak launched KodakCoin and its stock soared by +200%; the gamble predictably failed and the company’s shares returned to earth). Sensing another opportunity in the pandemic, Kodak leveraged the Defense Production Act and (mainly) Trump’s ego to finagle a $765 million government loan for pharmaceutical production, sending its stock on a short-lived 3,000% journey and gifting Trump a heartland-company-comes-good news moment. The SEC (truly a bastion of normalcy in 2020) is now investigating the situation.
Here, it is important to differentiate between two things:
THE FACT that stock market performance is downstream of policymaking; fiscal stimulus (the CARES Act) and monetary policy (zero interest rates) shape the economy and, ultimately, the success or failures of businesses.
THE CONJECTURE that there’s a correlative relationship between stock market activity and a shift in the socio-psychological composition of Americans during the Trump presidency.
Whichever way you look, there’s no denying that stock market mayhem jibes with a defining element of Trump’s presidency: The suspension of fact-based reality. Trump has inured constituents to misinformation with his endless parade of falsehoods. His administration’s response to the pandemic – chaotic in implementation, incoherent in design, Social Darwinian in spirit – has heightened a national sense of directionless free for all. To combat Covid-19, the body polity has regressed to a kind of Articles of Confederation situation, where state and local governments take the lead in fending for the well being of their residents.
That thousands of people would engage in wildly speculative activity seems reasonable in an economy whose government is rudderless and unpredictable. That a bankrupt Hertz would try to issue new stock seems reasonable under a President whose private business in actively under investigation for bank and insurance fraud. That Kodak executives would attempt to use the pandemic for self-enrichment is not just reasonable, but a perfect microcosm of how Trump has leveraged the presidency to enrich himself and his family.
An exchange during Trump’s recent sit-down with Axios nicely encapsulates these themes. When the excellent Jonathan Swan challenges Trump on America’s death count, Trump invoked his preferred metric: deaths as a percentage of confirmed cases. When Swan says he is actually referring to about deaths per capita, Trump instinctively says, “You can’t do that.”
In a system where facts are malleable, any stock could be a winner.
A professionally rendered illustration of America’s economic prognosis.
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“Together with the Credit Karma team, we’re going to bring together consumers and financial institutions in innovative ways that lower costs for all those involved and level the playing field for consumers regardless of their economic status.”
Those rosy words – belonging to Intuit’s CEO, from the company’s February announcement of a $7 billion acquisition of Credit Karma – must’ve not landed on the desk at The Department of Justice.
ProPublica recently obtained an internal memo from Intuit that reveals the merging companies’ legal strategy in the face of a mounting DOJ investigation. Key takeaways include:
The DOJ is focused on “the influence that Intuit’s purchase of Credit Karma will have on consumer tax preparation platforms and [the] software market,” per the memo.
The DOJ is also investigating Intuit’s participation (or lack thereof) in the Free File program, under which tax prep companies (like Intuit-owned TurboTax) are supposed to offer free tax filing options.
Intuit is mulling the possibility of spinning off Credit Karma’s tax preparation product to appease the DOJ.
For context, Intuit already has a 67% market share of online tax prep. Integrating (or destroying) Credit Karma’s free suite of financial services, including its tax service, would further erode choice for America’s growing cohort of digital-first tax filers.
Reminder: Fintech remains a red hot dealmaking sector, with the ongoing digitization of financial services leaving considerable runway for further M&A and consolidation. Look for more fintech antitrust battles in the months and years ahead.
“So it [TikTok] will close down on September 15th, unless Microsoft or somebody else is able to buy it, and work out a deal, an appropriate deal, so the Treasury… gets a lot of money.”
Earlier this week, President Trump expressed a vague desire for the U.S. government to “get a cut” from any deal involving a U.S. company and TikTok, the popular video app that Trump is threatening to ban for (somewhat dubious) national security reasons.
Trump often manipulates the private sector for his own political and/or financial benefit, and while his blatant attempt to shake down a U.S. company may be jarring, the situation also reminds us of the Trump administration’s broader initiative to halt cross-border investment with China.
Under Trump, The CFIUS (Committee on Foreign Investment in the U.S.) has more heavily policed U.S.-China M&A activity, resulting in “a precipitous drop in FDI [foreign direct investment] from China in 2018 compared to 2016,” according to China Law Blog.
In other words, despite its high-profile stature, TikTok is more symptom than cause in an increasingly fraught U.S.-China relationship, where private sector activity and national security interests are intertwined.
Private Equity
SEC director calls for private markets to open up for retail investors: “A top US investment industry regulator has called for pension savers to be granted greater access to private markets in a push that would ease the path for ordinary investors to increase their exposure to riskier strategies.” (FT)
Private-Equity Firms Discuss Bid for Kansas City Southern: “A group of big buyout investors is considering a takeover bid for railroad operator Kansas City Southern that could be worth more than $21 billion and mark a big bet on U.S.-Mexico trade.” (WSJ)
Blackstone Reaches $4.7 Billion Deal to Buy Ancestry.com: "Blackstone Group Inc. acquired a majority stake in Ancestry.com Inc., the business known for family history research and DNA testing. The deal is valued at $4.7 billion, Blackstone said in a statement Wednesday.” (Bloomberg)
LONG FORM: Life and Debt at a Private Equity Hospital: “A decade ago, a buyout giant took over a group of Catholic medical centers and made some clever financial moves. The pandemic highlights the strategy’s success—and its cost.” (Bloomberg Businessweek)
SoftBank-Backed Grab Snags $200 Million From Private Equity Firm: “Southeast Asian ride-hailing leader Grab Holdings Inc. is raising $200 million from South Korean private equity firm Stic Investments Inc., according to people familiar with the matter.” (Bloomberg)
Blackstone Hires Former Amazon Executive: Blackstone is now scaling up its operations on the tech side—Monday’s announcement that Blackstone has lured former Amazon executive Christine Feng to the firm goes hand-in-hand with this new emphasis.” (Fortune)
Venture Capital
India app ShareChat in talks with Sequoia, others to raise up to $200 million: “Indian content-sharing platform ShareChat is in early-stage talks with U.S.-based Sequoia Capital and some other investors to raise up to $200 million, which could value the company at over $1 billion, three sources aware of the matter told Reuters.” (Reuters)
M&A
The Deal Hasn’t Closed, But Schwab Is Already Dissecting TD Ameritrade: “Charles Schwab’s acquisition of rival brokerage TD Ameritrade has not closed. But since the Department of Justice approved the deal in June, changes have been underway.” (RIA Intel)
Tencent in Talks to Create $10 Billion Streaming Giant: “Tencent Holdings Ltd. is driving discussions to merge China’s biggest game-streaming platforms Huya Inc. and DouYu International Holdings Ltd., people familiar with the matter said, in a deal that would allow it to dominate the $3.4 billion arena.” (Bloomberg)
NYSE Owner Buys Mortgage-Software Firm Ellie Mae From Thoma Bravo for $11 Billion: “Intercontinental Exchange, the owner of the New York Stock Exchange, has agreed to buy mortgage-services provider Ellie Mae, from private-equity firm Thoma Bravo for $11 billion, including debt.” (Barron’s)
How the merger of two companies in the hottest part of healthcare could leapfrog Amazon: “Teladoc, a telehealth giant, and Livongo, a chronic care company, could actually deliver on that promise, David Larsen, an analyst at Verity Research, told investors in a note.” (Business Insider)
Sampo, RMI scoop up UK insurer Hastings in $2.2 billion cash deal: “British motor insurer Hastings has agreed to be bought by Finland’s Sampo and South Africa’s Rand Merchant Investment in a cash deal valuing it at $2.2 billion.” (Reuters)
IPOs
Quicken Loans raises $1.8 billion in IPO: “The IPO pricing and deal size suggest Rocket struggled to convince investors its mortgage platform business justified a valuation conferred to a technology company rather than a financial services firm.” (CNBC)
[SPACs] are the new buyout barons: “Private equity and strategic acquirers have long battled over which offers the greatest advantages to target companies when pricing is effectively equal. SPACs are now a sufficiently capitalized alternative to both, representing a combo platter.” (Axios)
John Hyatt, author of What’s the Deal, is a financial writer and a Marjorie Deane fellow at NYU’s Arthur L. Carter Journalism Institute. Follow him on Twitter, connect with him on LinkedIn, email him your feedback at johngilberthyatt@gmail.com – and don’t forget to share + subscribe!