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CEO Daily: Tuesday, July 5

Good morning.


After a soggy July 4th celebration in Washington, which I spent with friends trying to name the five worst presidents in American history, I’m now on the train back to New York and desperately searching for news to write about other than Donald Trump’s shameless defense of his star-of-David tweet.


British Chancellor George Osborne deserves some credit this morning for attempting to counter rapidly slumping business confidence in Great Britain with a proposal to lower the corporate tax rate. That’s caused howls from his fellow EU ministers, who fear a post-Brexit round of competitive tax cuts. Meanwhile, a sign truck is trolling through London urging tech start-ups to “move to Berlin.”


But anyone who concludes the result of the Brexit vote is going to be competitive coddling of business is missing the message. The populist rebellion sweeping the U.S. and Europe has an unmistakable anti-business flavor, which is why prospects for TPP in the U.S. are disappearing, and prospects for needed corporate tax reform in the U.S. are nowhere in sight.


The only hope for a sensible pro-business agenda in Washington, as I’ve previously written, is a post-election “grand compromise” that ties trade, taxes and immigration reforms to enhanced training, support for displaced workers, and increased infrastructure spending. But cutting that sort of bipartisan bargain has become all but impossible in today’s Washington. The last great example was the tax reform bill of 1986, which Jeffrey Birnbaum and I chronicled in Showdown at Gucci Gulch. If the next president can pull something like that off, he or she will deserve a place in the history books.


Happy 5th. More news below.

Alan Murray

Top News

Tory Story

Conservative lawmakers are swapping their bloodied daggers for pencils as they vote on who they want to succeed David Cameron as party leader/U.K. Prime Minister and implement the referendum mandate to leave the EU. The 330 MPs have to whittle a list of five down to a choice of two for the party’s 150,000 members across the country to decide between. Right now, it looks like it will boil down to a choice between two women: Home Secretary Theresa May and Energy Minister and ex-fund manager Andrea Leadsom (to whom Boris Johnson is lending his support). The contest looks likely to run through September, with May (who backed Cameron’s ‘Remain’ campaign) unable to command the kind of overwhelming majority that would make a run-off unnecessary. Intriguingly, neither has a consistent record of supporting Brexit. Fortune

Brexit and the First Echoes of 2007

The consensus view that Brexit is a political and economic shock but not a financial one is about to be tested. Standard Life, one of the U.K.’s largest insurers, was forced to ‘gate’ one of its retail real estate funds Monday after a run by investors burned through its liquidity cushion. That came hours after the U.K.’s construction PMI hit its lowest level since 2009, showing that nerves had set in well before the Brexit vote. Financial stocks and housebuilders are in a funk again this morning as a result, and sterling has hit a new post-referendum (ie, 31-year) low against the dollar. Against this backdrop, the Bank of England released its semi-annual Financial Stability Review today, and has cut the cyclical buffers on bank capital requirements in order to support lending. BoE Governor Mark Carney has already indicated he’ll also loosen monetary policy soon. FT, metered access

U.S. Real Estate Sector in Good Health

There’s better news from the U.S. real estate sector, at least the commercial segment. The office vacancy rate across the U.S. fell to its lowest in seven years in the second quarter, according research firm Reis. The vacancy rate fell to 16.0% from 16.1% in the three months to June, the eighth successive quarterly decline, while rents rose some 0.6%. Reis estimates that rents will rise 3.5% this year, which will catch some eyes in a sector that is traditionally an alternative to bonds for income-focused investors. Bond yields, of course, have fallen sharply in response to the Brexit shock. The survey suggested that the market has cooled off a little in the wake of the economy’s first-quarter wobble. New construction fell to 6.9 million square feet from 7.7 million sq. ft three months earlier. Washington D.C. and New York remained the tightest markets with a vacancy rate of only 9.1%. Reuters

Italy’s Banks Are in Trouble

We’ve highlighted this before, but it has legs. Continuing the 2007 meme, those looking for the next shoe to drop are looking ever more closely at the Italian banking sector, which has relied for too long on the charitable interpretations of its supervisors to keep its capital ratios above the minimum required. The ECB yesterday ordered Banca Monte dei Paschi di Siena to sell a much bigger block of non-performing loans, a move that rippled through the whole sector. PM Matteo Renzi’s government is appealing the European Commission to let it inject €40 billion in new capital into the country’s banks, essentially ripping up 9 years of post-crisis regulation that tried to end taxpayer-funded bailouts. As noted, this is setting up a huge ideological conflict in the Eurozone, one that will test German tolerance of perceived Italian profligacy, and Italian endurance of perceived German arrogance and inflexibility.   WSJ, subscription required


Around the Water Cooler


NASA’s Jupiter Triumph

In more uplifting news, NASA pulled off the impressive feat of getting its Juno space probe into an orbit of Jupiter after a 370 million-mile journey lasting nearly five years. Juno will now begin 20 months of data-gathering on the solar system’s largest planet, assuming it can survive the intense radiation fields emitted by it. The mission, which looks set to end in an unprecedented technological achievement that will add significantly to our understanding of the solar system, cost an estimated $1.1 billion. In other words, less than it would cost you to buy a common-or-garden unicorn in the tech sector.  CBS

Chevron Declares Crisis Over

A Chevron-led consortium approved a $37 billion plan to expand production at one of the world’s biggest oilfields, the Tengiz field in western Kazakhstan. Under the plan, output will rise to some 850,000 barrels a day by 2022 from 540,000 b/d currently. It’s a milestone in the global oil cycle: majors have held off big investments like this until they were sure that a) the price of crude had stabilized and b) the cost base in producer countries had adjusted to a level that made such investments profitable. In Kazakhstan, the currency has fallen by nearly two-thirds against the dollar since 2008. Reuters

Forgetful Fish Beats Apeman, Giant

Pixar’s Finding Dory won the holiday weekend box office, pulling in an estimated $50.2 million over the four days, over 10% ahead of its nearest rival, Warner Bros. The Legend of Tarzan. Entertainment Weekly notes that Tarzan actually outscored Dory on some metrics, such as the average revenue per screening ($12,796 to $11,660). But the cheers at Disney are likely to be muted after its other big release, the Steven Spielberg-directed BFG, pulled in only $22.3 million. That, in turn, was just ahead of the critically-panned Independence Day: Resurgence, which took $20.2 million. In all, the numbers have been better than the movies themselves, to judge by the reviews and hearsay. Entertainment Weekly