- Nick Burgess
This Week In The Market - July 16, 2020
Welcome back to "This Week In The Market," where we break down all of the latest market news in easy to read, easy to understand ways. Let's go!
Tax Havens Are In Tax Hell
The BFD: The Biden administration gained a foothold this week in one of their major policy initiatives: the acceptance of a global minimum corporate tax rate of 15%. World leaders met in Venice this week to hammer out the finer details around the agreement, but several countries are standing as holdouts. The most notable detractor to the plan is Ireland, which is a popular tax haven for American companies such as Apple and Amazon.
In Plain Speak: Companies headquartered in higher tax nations, like the U.S and China, will frequently offshore critical pieces of the company to other countries in order to take advantage of lower corporate tax rates around the world. G-20 leaders (heads of state or proxies from the twenty largest economies in the world) aligned on the proposal, but the European Union in particular is experiencing push back from a few member states like Ireland, Hungary and Estonia. Ireland is a hub of corporate activity from Google and Amazon, who shelter things like keystone computer code and systems activity on the island in order to take advantage of their 12.5% tax rate.
However, the Irish Finance Minister, Paschal Donohoe, did support a change to the way that companies are taxed, a plan that was presented by U.S Treasury Secretary Janet Yellen proposed earlier this week at a meeting in Brussels. The plan entails taxing companies based on where and how they sell their products and services, rather than where their physical headquarters is located.
How Can This Make Me Rich?: This change is unlikely to materially affect your portfolio too much. This change will likely eventually lead to companies paying higher corporate taxes, which will either cut into the total revenue of the company, or be passed along to the consumer. Yay for inflation in every part of our lives!
Big Story of the Week
It's the kickoff to earning's season this week, which means we'll be covering the biggest stories coming out of earnings! This week, it was the big banks' turn in the spotlight, and man did they deliver. Banks typically disappoint in low interest rate environments due to the revenue model they employ: net-interest income. Essentially, banks make money on the spread of how much it costs to borrow money vs how much they loan it out for. In 2020, borrowing slowed down and savings rates increased, slashing deeper into the already weak NII revenue. What saved the banks in 2020 was a combination of dramatically increased mortgage activity along with skyrocketing revenue from the bond trading and equities desks due to stock and bond market volatility. With that volatility slowing down, numbers were projected to slow down along with it.
JPMorgan Chase ($JPM) and Goldman Sachs ($GS) were the first ones on the docket, and they provided a tough act to follow. JPM showed the predicted slowdown in bond trading revenue, but the equities revenue actually exceeded expectations. They reported $30.5 billion in revenue for the quarter, beating the analyst expectations of $29.7 billion, and reported an earnings per share (EPS) of $3.78 (vs $3.18 expected). GS results were similar in nearly every regard, and they largely set the tone of performance for the week, even trickling down to the super-regional's.
So where did this revenue come from? Mainly, it came from what banks call "loan loss reserves." Due to the pandemic and initiatives like the Paycheck Protection Program and Mortgage Forbearance, banks were required to reserve more cash than usual in the event that a large percentage of those loans could not be paid back. What resulted was a lot of those loans were actually paid back, coupled with more businesses reopening and people getting back to work. This allowed the banks to release those loan loss reserves back into their revenue streams of loans and investments. This caused a surprising leap in revenue across the board at these banks.
Shares were flat despite the good news and the announcement from several banks that they were looking to increase their dividends and share buybacks after getting the green light from the federal government following positive stress test results. This is because investors and analysts alike are worried about future growth for banks as interest rates and inflation rates begin to tick up. This should be a sector to watch, either way it goes.
Stock of the Week
One of Warren Buffett's famous adages when looking for his next investment is to look for companies "with a moat," a.k.a a competitive advantage that gives the company pricing power. The moat that Disney has spent the last decade building is one even the saltiest King of England would feel proud of.
The newest Marvel movie adventure "Black Widow" hit theaters last week and immediately stole the "pandemic movie championship belt" away from Vin Diesel and his F9 family. After blatantly cheating and including Thursday in its opening day numbers, Black Widow clocked in at $40 million domestic box office. The story doesn't stop there, though. For the first time, Disney reported co-opening numbers between the movie theater box office, as well as their premium tier of Disney+. Those numbers came in at $60 million on opening day, beating the box office numbers and putting Black Widow over $100 million on day one. As of the time of this writing, the box office numbers have grown to $158 million, meaning this one is likely headed to become another member of the Marvel Billions Club.
Disney is a company I want to take a deeper dive into to scan through their myriad business tentacles, but I'm ready to make this call even before doing that: Kevin Feige is the most important corporate hire of the 21st century. When Disney bought Marvel for $4 billion back in 2009, the comic-book maker was struggling. They were on the verge of bankruptcy and shotgunning intellectual property rights to anyone that would take them, just to stay afloat. This led to a fractured Marvel distribution ecosystem, indirectly leading to Disney's other massive acquisition of Fox in 2019. But back when the Marvel Cinematic Universe was but a twinkle in Bob Iger's eye, up stepped Feige, the comics nerd with a vision for a cohesive universe. And what he did is nothing short of a miracle. Disney has since turned that $4 billion acquisition into over $22 billion in box office receipts. Couple that with the Disney+ streaming account sign-ups to watch the Marvel television shows, merchandise, and now a dedicated theme park that's the newest addition to Disneyland. The aforementioned Fox merger should also be another pathway to many more billions of dollars since The House Of Mouse now owns the rights to The Fantastic Four and the X-Men. Disney even handed the reigns over to Feige to help put out the dumpster fire that is the Star Wars/Lucasfilm debacle. I hope you're not sick of these yet, because they sure as hell aren't.
I hope you enjoyed this week's market news recap! Don't forget to sign up for my email list so you can get these in your inbox as soon as they publish. Have a great weekend!