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CEO Daily: Wednesday, May 25

President Obama told a group of Vietnamese entrepreneurs this morning that he hopes to see the Trans-Pacific Partnership ratified this year, in a post-election session. But that seems like an increasingly faint hope. A lame-duck Congress isn’t going to be eager to pass an agreement that’s been battered so badly by all three remaining presidential candidates.


Meanwhile, Apple CEO Tim Cook’s visit to India does not seem to have done much for him, as the Indian government has decided the computer company can’t open its own stores unless it meets local sourcing rules. Those rules would require it to procure 30 percent of its components locally. The decision by India’s finance minister could still be overturned by Prime Minister Modi. But you have to wonder why India would feel compelled to commit to free trade, given the protectionist rhetoric dominating the U.S. campaign.


Also this morning, Hewlett Packard continues its disintegration. Read more below.


Alan Murray






Top News


Home Sales Surge Raises Rate Hike Chance

Sales of new single-family homes hit their highest level in more than eight years in April, way ahead of expectations, while prices hit a record high (the median price was up 9.7% from a year ago at an all-time high of $321,000). Even allowing for the usual volatility in monthly data points, it’s a strong figure that raises the likelihood of an interest rate hike by the Federal Reserve sooner rather than later. Minutes from the last Fed meeting said a rate hike in June would be considered if economic data continued to strengthen. With that in mind, the dollar has surged to a two-month high against the euro and a three-month high against China’s renminbi overnight.  Fortune

•  A Changing Shareholder Climate for Big Oil

The management of ExxonMobil and Chevron face some tough questions from shareholders at their annual meetings today. A growing number of large institutional investors have started to get cold feet about the risks of Climate Change to the business model of Big Oil. Specifically, they want detailed information of how specific assets (say, a tar sands extraction project in Canada) may lose value if more stringent policies are adopted to reduce global emissions. Chevron CEO John Watson has an interview in The Wall Street Journal today repeating his position that the commitments given by 195 governments last December in Paris to contain global warming still lack concrete detail, so it would be futile to try to put a number on such a vague risk. Exxon, of course, faces formal allegations (which it disputes) of having misled investors about its own assessment of Climate Change risks. By the by, the two companies may also announce a massive investment in one of their biggest overseas oil ventures today, the 500,000 b/d Tengizchevroil project in Kazakhstan. Big investment commitments have been out of fashion for a while, but may be coming back now that crude prices are back at a seven-month high.  Fortune

Will Pizza Franchises Be the First Domino to Fall?

Chasing ExxonMobil over alleged Climate sins isn’t enough to keep New York’s attorney-general Eric Schneiderman occupied. He filed a new lawsuit yesterday that accuses Domino’s Pizza of actively colluding with its franchisees to underpay employees. The suit alleges that workers in 10 of its stores missed out on at least $565,000 as a result of a faulty payroll system. It’s four months since the Labor Department followed the National Labor Relations Board in adopting fresh guidance that businesses should be classified as joint employers of workers whose employment conditions they control. How this one pans out will have big implications for other companies with wide franchises such as McDonald’s (which is already disputing the joint employer classification.   WSJ, subscription required

•  HP Cuts Another Chunk off Itself

Hewlett Packard Enterprise said it would spin off and merge its struggling IT services business with Computer Sciences, allowing the company to focus on its faster growing businesses. The deal is structured as a merger of equals, with HPE shareholders getting half of the new company. It’ll be headed by Computer Sciences’ CEO Mike Lawrie. The slimmed-down HPE will concentrate in future on making servers, routers and switches. It’s the latest step in CEO Meg Whitman’s long restructuring of the company, and was warmly received by the stock market: HPE’s shares rose 10.5% in after-hours trading, while Computer Science’s were up 20%. The news came as HPE beat analysts’ expectations for its first-quarter revenue by a whisker, and added $3 billion to its share buyback program.  Fortune


Around the Water Cooler

•  Google Searched

Google’s tax headaches in Europe took a turn for the worse with a massive raid by law enforcement on its headquarters in France (five magistrates, 25 computer specialists and over 70 others). The French authorities suspect the company of having illegally shifted revenue and profits to its subsidiary in Ireland, where it pays a corporate income tax of 12.5%, from France, where it pays 33%. The authorities in Paris think Google owes 1.6 billion euros ($1.8 billion) in back taxes. Google says it complies with existing law. If the French make their claims stick, it could unravel a very favorable deal Google struck with the U.K. over back taxes earlier this year, as U.K. tax authorities (under pressure to squeeze more out of a company that dominates the local ad and search industry) have reserved the right to review the deal if more information comes to light. Italy’s revenue collectors are also seeking $395 million in back taxes from the company.  Fortune

Baby, You Can Drive My Mobility Device

The day when carmakers refer to themselves as ‘mobility providers’ on their homepages is coming faster than we think. First Lyft partnered with GM. Then Apple invested in Chinese ride-hailing company Didi Chuxing. Now, Toyota is partnering with Uber, while Volkswagen, playing catch-up, is investing $300 million euros in Gett, an Israeli startup that offers ride-hailing and delivery services. Gett, which competes with Uber, partners mainly with licensed taxis (as in NYC and London) and with black car services. Toyota is investing an unspecified amount in Uber through two separate arms, but the deal focuses mainly on new leasing offers, in which car buyers can lease their vehicles from Toyota’s financing arm and cover their payments through earnings generated as Uber drivers. As for VW, it says it wants to generate “a substantial share of sales revenue from such business models by 2025.”   Fortune

• Greece Gets Money, but No Debt Relief Yet

The Eurozone released 10.3 billion euros ($11.4) of bailout loans to Greece after an all-night session of talks, something that should allow it to avoid default this summer. Importantly, the creditors agreed a mechanism for lightening Greece’s debt load in the future, if need be, although that wouldn’t kick in until 2018. It’s the barest minimum that the German-led bloc of creditors could do to keep the International Monetary Fund on board in the Greek bailout, basically forcing Greece to keep to the path of austerity for another two years before cutting it any real slack. The good news is that financing conditions in the Greek economy should improve markedly, now that relations with the creditors are back on a more even keel. Ten-year government bond yields are back below 7% for the first time since the fall of 2014, while bank stocks are up some 250% from their lows earlier this year. The bad news from last night is that Greece remains committed to a degree of budget austerity that will continue to suck resources out of the economy to pay down debt. That will make it harder for the unpopular reforms enacted by Alexis Tsipras to gain real acceptance among the population.   Fortune

Monsanto Says ‘Nein, Danke”

Monsanto’s management rejected Bayer’s $62 billion bid for it as too low but said it would remain open to further talks. Monsanto has announced $10 billion in share buybacks since last July, but it still hasn’t convinced the market that it’s worth anywhere near $122 a share.  Bayer’s CEO Werner Baumann has so far dodged the question of whether he’s willing to take the offer hostile. Shareholders in the German company are caught between the fear that it will be sucked into overpaying, and the hope that it may look for a tie up that doesn’t involve quite as much new debt and equity.  WSJ, subscription required