CEO Daily: Friday, 3rd February
President Trump meets this morning with the CEOs of major U.S. corporations who have agreed to sit on his Strategic and Policy Forum—a group led by Blackstone CEO Stephen Schwarzman that includes GM’s Mary Barra, J.P. Morgan’s Jamie Dimon, Disney’s Bob Iger, Pepsi’s Indra Nooyi, IBM’s Ginni Rometty, Walmart’s Doug McMillon and more.
Two weeks into his administration, they all must be feeling the cognitive dissonance of battered children.
On the one hand, Trump has shown them more love and attention in two weeks than his predecessor did in eight years. He has put members of their ranks in top jobs—something the Obama team found nearly impossible to do—installing former Exxon CEO Rex Tillerson at State (Tillerson wooed his new department with humility and humor yesterday) and former Goldman Sachs CEO-in-waiting Gary Cohn as head of the National Economic Council. He has promised lush cuts in corporate taxes, which could among other things enable companies to repatriate the $2 trillion in profits they have locked overseas. And he has promised to slash a regulatory burden that has risen significantly over the last eight years. He will begin to follow through on the regulatory promise today, by issuing an order that guts some of the Dodd-Frank rules that banks find most onerous.
Yet on the other hand, the President has bullied many of the CEOs with unprecedented threats of unilateral tariffs on their products. He is axing trade agreements that threaten to disrupt their carefully constructed global supply chains. And in a business world where competition for talent has become increasingly intense, he has created a revolt among many of their most talented employees with a poorly executed immigration ban. It was that last move that caused Uber CEO Travis Kalanick to drop off the advisory council yesterday. Meanwhile, Tesla CEO Elon Musk says he will stay on in order to give the new President his views on the matter.
The potential gains from this convoluted dance—reduced regulation and tax reform—still far outweigh the pain—humiliation, bullying, potential trade battles, unsettled workers, etc. But all are watching warily. The wild ride of the first two weeks has made the downside look more frightening, and the upside—at least on the tax front—harder to achieve.
More news below.
• Snap Aims High
Snapchat owner Snap Inc. said it’s aiming for a valuation of up to $25 billion at its IPO. Investors are rehearsing their pursed lips and lines about how expensive it is for a non-voting stock (60 times 2016 revenues, on which it made a handsome loss of $500 million). The thought of it diving into a wearable hardware market that Google couldn’t crack will also give pause for thought (GoPro’s disastrous results yesterday gave a salutary reminder of how hard that business is). It boils down to whether, in the key issue of combining growth with monetization, you think it more closely resembles Facebook, or Twitter (which had a similar growth profile at its IPO). One other interesting snippet from the prospectus—it’s contracted to pay Google an eye-popping $400 million a year through 2020 for Cloud services. Fortune
• Same Old Amazon, For Better and Worse
Amazon continues to grow like a weed, but its shares fell 3.5% in after-hours trading after it forecast a sharp drop in operating profit due to heavy investment in what it expects to be future profit drivers. There’s concern that it’s getting progressively more expensive for the company to stay ahead of the game (witness increasing competition for its increasingly important Cloud hosting business Amazon Web Services and a massive investment in a new logistics hub in Kentucky). Revenue at AWS rose an impressive 47% but still fell short of the stellar expectations it has created for itself. Revenue from the more mature e-commerce business did likewise, rising a ‘mere’ 22% to $43.7 billion. Fortune
• Cohn Signals Assault on Dodd-Frank
President Donald Trump will soon issue executive orders severely pruning back regulations imposed on the financial sector in the wake of the financial crisis. Gary Cohn, who left Goldman Sachs to become head of Trump’s National Economic Council, told The Wall Street Journal that Trump also wants to scrap the fiduciary rule for pension advisers that aimed to eliminate conflicts of interest, as it has adversely affected consumer choice. Cohn said the aim was not to “go back to the good old days” but to scrap rules that weren’t doing what they were supposed to do, especially in the key area of resolving the failure of major institutions. WSJ, subscription required
• China Manipulates Its Currency Upwards Again
China’s central bank raised short-term interest rates by a modest 0.1%, a move aimed at controlling a real estate bubble and limiting the capital outflows that have been weakening the renminbi for months. The facility in question doesn’t have the same overall significance as it would elsewhere, given that the PBoC uses plenty of other policy tools, but the general principle of the last year—that China is manipulating its currency up rather than down against the dollar—still holds. By contrast, Russia’s central bank said it would increase intervention to stop any further rise in a ruble lifted by rising expectations for the (oil-based) economy, and by hopes that the U.S. will soon start to lift sanctions. Reuters
Around the Water Cooler
• A Trump Dump for MetLife
If you wondered who was on the other side of all those trades that made the blue-chip banks money in the post-election "Trump Bump" rally, you got part of the answer yesterday. MetLife took a $3.2 billion hit to its derivatives portfolio, driving it to a $2.1 billion quarterly loss, its biggest in over a decade. Under CEO and chairman Steven Kandarian, the U.S.’s biggest insurer by assets had bet on long-term rates staying low well into the future. Those bets lost value as Trump’s victory appeared to usher in an age of fiscal stimulus and higher growth and inflation. The impact on MetLife’s P&L arguably looks worse than it really is: U.S. accounting rules force it to mark the value of its derivatives to market, but don’t allow it to reflect the fact that higher interest rates depress the value of an insurer’s liabilities. FT, metered access
• Don’t Argue With the Guy Whose Name Is on the Building
Ralph Lauren’s Swedish CEO Stefan Larsson is to leave the company in May after falling out with its namesake founder over future strategy. Larsson has only been in the job 15 months and had enjoyed, at best, limited success in turning the company around with a program of aggressive cost-cutting and quality improvements. Falling department store sales and the rise of fast-fashion rivals like H&M (Larsson’s old employer) contributed to a 12% year-on-year drop in revenue in the key holiday quarter last year. The company’s shares fell 12% to a six-year low on the news. Fortune
• Chipotle Gets Off Its Sickbed
There was more evidence that Chipotle's fortunes are turning up after a debilitating attack of e.coli. The company said same-store sales rose 15% on the year in December (vs -20% in October and -1.4% in November) and predicted they would rise by just under 10% in 2017. The company is betting heavily on its largest-ever ad campaign (starting in April) to restore its once-pristine image. Whether that will be enough to overcome sector-wide problems with rising labor costs and declining footfall due to the ravages of e-commerce is another question. Fortune
• A Victory For Coal
The coal industry rejoiced as the Senate repealed a rule limiting companies from dumping mining waste in rivers. The industry had argued that the rule, which was issued by the Interior Department in December to protect drinking water quality, made 60% of existing coal mines uneconomic and could destroy 30% of mining jobs. The industry is hoping for further roll-back of Obama-era regulation that drove companies like Peabody Energy and Arch Coal into bankruptcy. However, all the deregulation in the world won’t protect an essentially 18th century technology, in the long run, from natural gas prices now falling back towards historic lows and ongoing improvements in renewable technologies. The Stone Age, as the saying has it, didn’t end because they ran out of stones. Fortune
Summaries by Geoffrey Smith Geoffrey.firstname.lastname@example.org;