Good Wednesday. Here’s what we’re watching:
• Tesla pushes back its Model 3 production targets again.
• Manafort’s lawsuit faces a tough road.
• Researchers discover two major flaws in the world’s computers.
• Spotify filed confidentially to go public.
• The death of Ant Financial’s bid to buy MoneyGram raises questions about how useful close ties to President Trump are.
• Dominion Energy and Scana are combining.
• Underwriting for free.
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Guess what? Tesla pushed back its Model 3 production targets again.
The electric carmaker said it delivered 1,550 Model 3s in the fourth quarter and would likely build about 2,500 Model 3s per week by the end of the first quarter.
Continue reading the main storyThose numbers were well below analyst expectations and Tesla’s past forecasts.
In September, analysts predicted that Telsa would deliver 15,900 Model 3s in the fourth quarter. That number had come down since then. Prior to Wednesday’s announcement, the consensus among analysts was 4,100, or more than double what Tesla actually delivered.
Meanwhile, the forecast of 2,500 Model 3s per week by the end of the first quarter is half the number it had earlier promised. The company now says it will produce 5,000 Model 3s a week by the end of the second quarter.
Critics corner: “The premise of the stock’s sky-high valuation has long been of Tesla eventually dominating the auto industry. That notion has hardly ever seemed more fanciful,” writes Heard on the Street’s Charley Grant.
The news hasn’t spooked investors much. Shares are down just 2 percent after the close.
Manafort’s lawsuit faces a tough road.
Lawyers know that there are many paths to getting a good result. When one is blocked, then look for another one.
The lawsuit filed by Paul J. Manafort Jr., the former campaign chairman for President Trump, against the Justice Department, deputy attorney general Rod J. Rosenstein, and special counsel Robert S. Mueller III is an effort to find a backdoor way to block the criminal charges filed against him last October.
The Supreme Court has made it abundantly clear, most recently in 2014 in Kaley v. United States, that defendants cannot attack a grand jury indictment by claiming that they are innocent. That’s what a trial is for, so once indicted the only alternative is to go to trial.
But that’s a risky path, especially for Mr. Manafort who will face a jury from Washington, D.C., a venue that is not very hospitable to Republicans.
To avoid a trial, Mr. Manafort asked the court to stop the case because it is unrelated to any Russian interference with the 2016 election. The lawsuit claims that Mr. Mueller exceeded the limits of his appointment as special counsel, comparing the indictment to the discredited independent counsel law that led to drawn out investigations of President Bill Clinton and others in the 1990s.
Can it work? Federal judges have a strong aversion to interfering with prosecutors, routinely refusing to second guess decisions about who to prosecute and what to charge. So Mr. Manafort faces a tough road if he wants to find a means to block Mr. Mueller from dragging him into court.
Deciding whether one is guilty is usually left to the jury, not a judge saying who should and shouldn’t be prosecuted.
— Peter J. Henning
Meet Meltdown and Spectre
Those are the names of two major security flaws found in the microprocessors inside nearly all of the world’s computers.
The Meltdown flaw affects virtually every Intel microprocessor, which are used in more than 90 percent of computer servers. Spectre affects most other processors now in use, though the researchers believe this flaw is more difficult to exploit.
From Cade Metz and Nicole Perloth of the NYT:
“The two problems could allow hackers to steal the entire memory contents of a computer. There is no easy fix for Spectre, which could require redesigning the processors, according to researchers. As for Meltdown, the software patch needed to fix the issue could slow down computers by as much as 30 percent — an ugly situation for people used to fast downloads from their favorite online services.”
The business implications are unclear for chip makers, who may have to eventually swap out all affected hardware to eradicate the threats.
The researchers notified the affected companies but had tried to keep the news from the public so hackers could not take advantage of the flaws before they were fixed.
The Register, a British science and technology website, reported news of the Meltdown flaw, spurring the researchers to release papers describing the flaws much earlier than they had planned.
Intel’s shares fell 3.4 percent Wednesday. Rivals Advance Micro Devices and Nvidia jumped 5.2 percent and 6.6 percent respectively.
Here’s the good news for corporate America:
The tax overhaul signed into law last month should boost corporate bottom lines.
The bad news? The gains could be shortlived.
Bank of America Merrill Lynch raised its 2018 earnings forecast for the Standard & Poor’s 500 index to $153 from $139.
“The biggest impact on earnings from tax reform comes from the lowering of the federal tax rate from 35% to 21%, making up roughly $10 of the $14 increase. Buybacks representanother $3 of the increase, with some modest offsets from the minimum foreign tax rate and the cap on interest deductions.”
But tax reform may weigh on corporate profits in 2019.The bank forecasts earnings of $161 in 2019.
“While tax reform should provide a big boost to 2018 earnings growth, there are several reasons to expect it to be a headwind to growth in subsequent years. First, economic theory suggests that higher returns should incentivize additional competition, which should have a negative impact on margins over time, especially with many traditional industries already facing increasing disruption. Second, stronger growth could result in more aggressive Fed tightening, which could eventually weigh on overall economic growth.”
Which sectors stand to get biggest earnings boost this year from the cut to the corporate tax rate? consumer discretionary and telecom. Why? The two sectors generate more of their revenue domestically and have a higher average tax rate.
Who needs underwriters?
Not Spotify it seems.
The music streaming service filed confidentially to go public through a direct listing on the New York Stock Exchange, according to reports.
The NYT reported in May that the company was leaning toward such a listing.
A direct listing is exceedingly rare and bypasses the traditional initial public offering process that virtually every other company uses to begin trading on the markets.
Direct listings essentially move trading in a company’s stock from private markets to public ones, with new investors buying shares on the open market. Instead of a prospectus many weeks before the market debut, the company files a registration statement soon before a direct listing.
By eschewing an I.P.O., Spotify is not seeking to raise additional money.
Wall Street and Silicon Valley will watch Spotify’s listing closely. If it goes well, it could spur other high profile start-ups to pursue a direct listing. Wall Street is unlikely to cheer such a development. Direct listings generate lower fees than the typical I.P.O.
Underwriting for free.
That’s essentially what is happening in Asia. The Wall Street Journal reports that three state-owned Indian companies paid a dollar in underwriting fees to seven banks, including Barclays and Standard Chartered, for their work selling a total of $1.3 billion in dollar-denominated bonds.
While those fees may be unusually low, they highlight a trend in the region: “Underwriting revenue, while also up from a year ago, isn’t keeping up with the accelerating pace of Asian corporate bond issuance.
That is raising concerns that underwriting “could become largely unprofitable” in Asia.
In the United States, companies, on average, pay fees of 0.7 percentage point for an investment-grade corporate bond issue and 1.2 percentage points for underwriting a junk bond offering.
When courting the White House doesn’t help deal-making.
So much for the charm offensive last year by Jack Ma: U.S. officials have effectively killed a $1.2 billion takeover bid by one of his companies for MoneyGram.
The failure of Ant Financial, an electronic payments company controlled by Mr. Ma, to win approval from an American national security watchdog raises questions of how much being friendly to President Trump ultimately helps.
If it’s true that White House officials are clashing over how hard a negotiating stance to take with countries like China over trade, this development suggests that the hawks might have the upper hand right now.
Who should be worried
• Foreign companies, particularly Chinese ones, seeking to buy American counterparts. (Think also of Broadcom, which is legally headquartered in Singapore and which is pursuing Qualcomm — and has assiduously courted Mr. Trump.)
• Domestic companies looking to merge in contested situations, despite having unofficial support from the president. (Think Disney and Fox, whose proposed transaction raised antitrust concerns but garnered praise from Mr. Trump.)
• American companies looking to do business in China, who may now face retaliatory blowback.
Critics’ corner
• Lex writes, “With the demise of this payments merger, any Chinese company wanting to buy anything of significance in the U.S. should give up.” (Lex)
• Richard Beales writes, “If it’s a rebuke, it’s one that’s conveniently unlikely to provoke great resentment.” (Breakingviews)
Dominion Energy and Scana are combining.
Dominion Energy has agreed to buy Scana Corporation in an all-stock deal valued at $14.6 billion, including debt.
Scana shareholders will receive 0.669 shares of Dominion Energy for each share held. That’s about $53.71 a share based on Dominion’s stock price at Tuesday’s close and a 28 percent premium.
Shares of Scana jumped 22 percent on the news, while Dominion slipped 4 percent.
Scana has struggled since this summer when it abandoned two unfinished nuclear reactors in South Carolina. The project was once expected to showcase advanced nuclear technology but was plagued by delays and cost overruns.
Scana’s shares are down more than 40 percent since midsummer.
Height Securities via Axios warns that the deal has ways to go before it closes.
“In this case especially, Dominion will have to pull out all the stops to demonstrate that their offer is the best deal for customers, particularly given the uncertainty facing [SCANA’s] rates over the coming months. We’re looking for a reaction from the Governor as well as House Speaker Jay Lucas and the PSC commissioners for early signs of whether Dominion’s proposal will fall flat.”
Peter Thiel’s boost to Bitcoin.
Where Bitcoin traded early yesterday: $13,833
Where Bitcoin is trading this morning: $15,202
What happened: It was probably the revelation that the venture capitalist Peter Thiel has made a big bet on the digital currency.
From Rob Copeland of the WSJ:
Founders Fund, the venture-capital firm co-founded by Peter Thiel, has amassed hundreds of millions of dollars of the volatile cryptocurrency, people familiar with the matter said. The bet has been spread across several of the firm’s most recent funds, the people said, including one that began investing in mid-2017 and made bitcoin one of its first investments.
Has Founders Fund made money? The WSJ reports, citing unidentified sources, that the firm bought about $15 million in Bitcoin and that its stake is now worth hundreds of millions of dollars.
The Bitcoin flyaround
• John O’Rourke, the head of Riot Blockchain, a small biotech-turned-digital currency company, has made at least $712,000 on price increase of more than 60 percent after the company added blockchain to its name. (CNBC)
• The penny-stock company TGI Solar Power Group enjoyed a surge in its stock price (though not quite what Long Blockchain, nee Long Island Iced Tea, experienced last month) after it announced a move into digital currencies. Its stock went as high as 0.2 cent. (Bloomberg)
• Speaking of Long Blockchain, the company has added two new board members as part of its pivot from cold beverages to cryptocurrency. (WSJ)
• Criminals are turning to a new breed of virtual currency, because Bitcoin’s underlying technology can work against them. (Bloomberg)
The problem that Orrin Hatch’s retirement poses for Trump.
It isn’t just the fact that Mitt Romney, a sometimes vociferous critic of the president, is expected to run for Mr. Hatch’s Senate seat. It’s that another Republican lawmaker who has been relatively friendly to Mr. Trump is stepping down before the 2018 midterm elections — which could whittle down the G.O.P.’s control of Congress.
More from Jonathan Martin of the NYT:
Mr. Romney’s potential ascent is particularly alarming to the White House because the former presidential candidate has an extensive political network and could use the Senate seat as a platform to again seek the nomination. Even if he were not to run again for president, a Senator Romney could prove a pivotal swing vote, impervious to the entreaties of a president he has scorned and able to rally other Trump skeptics in the chamber.
He’s running, probably: While Mr. Romney didn’t issue a statement on his potential candidacy, he did change his location on Twitter from “Massachusetts” to “Holladay, Utah.”
Also worth noting
The Washington flyaround
• Republican and Democratic lawmakers will meet today with White House officials to try and reach a spending deal before Jan. 19 — or face a government shutdown. (NYT)
• The founders of the research firm Fusion GPS, which has been at the heart of the investigations into Russian interference in the 2016 elections, criticized Republican attacks on those inquiries in an NYT Op-Ed. (NYT)
• American Airlines and Southwest Airlines joined the tide of companies offering employees $1,000 bonuses. (Bloomberg)
• BP said it would take a roughly $1.5 billion accounting charge for its latest quarter because of the tax overhaul. (WSJ)
• Jack Lew, the former Treasury secretary, described the tax overhaul as a “ticking time bomb” and asserted that it could leave the U.S. broke. (Bloomberg)
• Michele Bachmann, the former Minnesota congresswoman and 2012 Republican presidential candidate, said she was considering running for Al Franken’s Senate seat. (Axios)
The latest in workplace misconduct news.
• Vice Media placed its president, Andrew Creighton, and its chief digital officer, Mike Germano, on leave after the NYT reported on sexual harassment allegations against them. (NYT)
• The Showtime political documentary series “The Circus” will return in April without its most recognizable star, Mark Halperin, whose career was felled by allegations of sexual harassment and assault. He will be replaced by the CBS News anchor Alex Wagner and the political analyst Mark McKinnon. (NYT)
• Pete Wells asks who can clean up the restaurant industry and wonders when prominent restaurant figures will admit that the way the industry treats women has damaged careers and lives. (NYT)
Can oil prices continue their quiet ascent?
Oil is at its highest level since 2015, edging up this morning toward $67 a barrel. Geopolitical risks, like protests in Iran, have prompted buying, while production curbs by OPEC members have tightened supply.
That rise is expected to continue.
More from David Sheppard of the FT:
While global oil demand is forecast to rise by about 1.4m barrels a day next year, growing US shale output combined with new projects in Brazil and Canada are broadly expected to see non-OPEC supply rise by a similar amount.
Hedge funds are, however, betting that prices are likely to head higher, with some arguing that geopolitical unrest — including in OPEC member Venezuela, where oil output has been falling — should keep prices well supported.
Blackstone’s Byron Wien reckons that “populism, tribalism and anarchy” could push oil above $80 a barrel this year.
Elliott proves activists still have strength in 2018.
The hedge fund’s latest victory: Alexion Pharmaceuticals said that it would work with the activist investor on finding a new director for its board.
From a statement by David Brennan, Alexion’s chairman:
We have been actively working to expand and diversify our board, and we welcome input from Elliott to identify a strong director candidate to further strengthen Alexion’s board.
The context: Michael broke the news last month that Elliott had built up a stake in the drug maker and was weighing a proxy fight if the company didn’t change elements of its business strategy.
The broader landscape: For companies under pressure from activists, resistance requires deft maneuvering, according to Breakingviews. Procter & Gamble’s expensive, hard-line defense against Nelson Peltz failed, but both G.M. and Automatic Data Processing have shown that fending off hedge funds is possible.
Quote of the Day
“It’s like your neighbor having a suitcase stuffed with $1 million in cash, but you’ll only pay him $500,000 for it because you think he’ll lose the rest on the way to your house.”
— Bloomberg, describing how SoftBank’s relatively modest market value reflects continued skepticism of Masayoshi Son.
The Speed Read
• Amazon could buy Target this year, the tech analyst Gene Munster predicted. (Loup Ventures)
• Wixen Music Publishing, which manages songs by Tom Petty and Stevie Nicks, is suing Spotify for $1.6 billion, saying the streaming service used thousands of songs without a proper license. (Variety)
• A young man with life-threatening cancer was granted a wish to go anywhere or meet anyone. He chose to meet JPMorgan’s Jamie Dimon. (Business Insider)
• Big deals are poised to return in 2018, but they may not fit so neatly into industry or sector categories. (Bloomberg)
• In the final weeks of 2017, business loan growth fell to its lowest levels since the aftermath of the financial crisis, a change that could weigh on bank earnings this month. (WSJ)
• Snapchat’s New Year’s Eve party was meant to be an “offline” experience, so the company blocked snaps coming from the venue. Employees took to Instagram instead. (The Daily Beast)
• Airbnb defeated a lawsuit brought by Apartment Investment & Management, which accused the home-renting marketplace of enabling tenants to break their lease agreements through unauthorized sublets. (Bloomberg)
• Lyft has teamed up with the self-driving software company Apriv and will be showing off a fully-automated ride-hailing service at the Consumer Electronics Show in Las Vegas this month. (Bloomberg)
• Michael Gelband, the former head of credit at Millennium Management, plans to start his own hedge fund in the next six months, after resolving a hiring dispute with Millennium’s founder, Izzy Englander. (Bloomberg)
• China is suspending the production of more than 500 car models that do not meet its fuel economy standards as part of efforts to reduce emissions in the world’s largest auto market. (NYT)
• The practice of putting nursing homes and related businesses in separate limited liability corporations and partnerships has gained popularity as the industry has consolidated, making it harder to hold owners personally responsible if something goes wrong. (NYT)
• The pharmaceutical industry may be under attack over drug prices, but the problem has splintered and made it difficult to identify who is responsible. Meanwhile, Scott Gottlieb, the F.D.A. commissioner, has been following through on the president’s fiery rhetoric about rising drug prices. (WaPo, Bloomberg)
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