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Earnings Drag Down Stocks: DealBook Briefing

• Despite a 73 percent jump in Alphabet’s net profit, shares fell more than 4 percent as Wall Street analysts raised concerns that a jump in capital spending could crimp profitability

• 3M’s earnings met Wall Street expectation, but the stock is down 8.5 percent, its worst post-earnings selloff in more than a decade. The reason? The company lowered the high end of its guidance.

• Caterpillar jumped 3 percent after its top and bottom lines easily beat expectations. But it shares gave up all their gains and then some during its conference call when executives said the first quarter would be the “high-water mark” for earnings per share. The stock is now off 6.5 percent.

• Shares of Apple are off 1.5 percent Tuesday and more than 7 percent since Thursday’s close amid worries that demand for iPhones will be much weaker than expected this year.

• Travelers is off 4 percent after its earnings missed expectations.

In all, Apple, 3M, Travelers and Caterpillar have accounted for 260 points of the Dow’s decline.


As of Friday, with 17 percent of companies in the S.&P. 500 having reported, profits were on pace to rise more than 18 percent, the high quarterly rate in seven years. So far, 80 percent of companies in the indexes have reported have beaten expectation.

Peter Eavis’s take

Despite all the bullish talk about earnings and the economy, stocks looked vulnerable going into the first-quarter earnings season. Analysts are expecting earnings for companies in the S.&P. 500 to grow 25 percent this year, an unusually large increase. At the 2018 forecast, the S.&P. 500 looks temperately valued at 17 times earnings. But looking back, stocks appear expensive, at 21 times the S.&P. 500’s earnings for 2017. This large gap between future and historical valuations creates a chasm that stocks can fall into if profits disappoint. If companies, like 3M did on Tuesday, provide underwhelming earnings outlooks, investors will stop believing that stocks are cheap, based on 2018 earnings.

Time to worry?

The yield on the 10-year Treasury note broke through 3 percent early Tuesday, the first time since 2014 that the benchmark borrowing rate has carried a “three handle.” Big picture, there’s not much news here. Rates are rising on the back of solid global growth and a Federal Reserve that continues to gradually raise rates this year.

No news, however, doesn’t mean no worries. Nearly a decade after the worst of the Great Recession, no one knows exactly how reliant the American economy has become on rock-bottom interest rates. With average 30-year fixed mortgage rates now topping 4.4 percent, housing data has been persistently soft in recent months. And residential real estate is expected to be a drag on first quarter G.D.P. numbers when they’re published on Friday, suggesting that if rising rates are no reason to panic, they shouldn’t merely be shrugged off either.

A number of prominent bond investors have long eyed the 3 percent level. Jeffrey Gundlach, chief executive of DoubleLine Capital and manager of one of the largest U.S. bond funds, warned that hitting 3 percent would trigger bear market for bonds.

A similar move higher in February caused stocks to tumble. So far, though, equities have taken Tuesday’s climb above 3 percent in stride. The Dow Jones industrial average and the S.&P. 500 are essentially flat in early trading.


Daniel Leal-Olivas/Agence France-Presse — Getty Images

There may not be a pay gap between female and male C.E.O.s

That stunning conclusion, from a new study, could shake up discussions in boardrooms and C-suites everywhere. (The study tracked compensation at 2,282 companies from 1996 to 2014.)

More from Andrew’s column:

One of the most interesting theories about why women may have bridged the pay divide at the highest levels has been offered by previous studies and experts: that a premium has been applied because there is such a limited supply of women in the chief executive role. Some readers may find that an offensive idea on its face — that women in effect are being overpaid because of their scarcity — but it’s one that has gained currency among some academics.

Important caveat: The new study isn’t a sign that the overall gender pay gap in corporate America has improved, or that there’s been a rush of women appointed as C.E.O.s. “There is still discrimination against women getting to the top,” Sandra Mortal, one of the study’s authors, told Andrew.

Takeda has made another bid for Shire

In a statement, Shire said that its board was considering the new offer, the terms of which it didn’t disclose. Takeda’s bid came ahead of a deadline Wednesday on whether to continue pursuing Shire.

Shares in Shire jumped in Tuesday trading, reaching 3,977.20 pence by late trading London time.

— Michael de la Merced

China’s Didi is in talks to go public

The Wall Street Journal reports that China’s Didi Chuxing Technology Co. is holding discussions about a multibillion-dollar initial public offering that could happen as soon as this year.

Didi, China’s largest ride-sharing platform, is hoping to fetch a valuation of more than $70 billion, the WSJ reports citing people familiar with the matter. In December, Didi raised $4 billion from a group of investors including Softbank that valued Didi at more than $50 billion.

What does this mean for Uber?

• Uber sold its business in China to Didi in 2016. As part of the deal, Uber and investors in its UberChina took a 20 percent stake in Didi and Didi invested $1 billion in Uber.

• But the two are also increasingly competitors. Didi acquired full control Uber’s main rival in Brazil in January, and this week it expanded its service to Mexico, a move that puts it in direct competition with Uber.

Uber is planning to go public, but Dara Khosrowshahi, Uber’s chief executive, has said the offering is unlikely to take place this year.


Eddie Lampert

Peter Morgan/Reuters

Behind Eddie Lampert’s latest move at Sears

What Mr. Lampert’s ESL has proposed doing: buying the beleaguered retail chain’s Kenmore brand, home-services and appliance-parts units and more of its real estate.

ESL’s argument: Buyers offering “acceptable” prices for the businesses haven’t emerged, and Sears needs the cash for its self-help plan. Mr. Lampert, chairman and C.E.O. of Sears, would recuse himself from any board discussions over the bids, and a majority of Sears’s non-ESL shareholders would have to approve any plan.

Critics’ argument: Mr. Lampert is trying to keep Sears’s best assets for himself if the company files for bankruptcy protection, a fate most of the retail world think is a given. “He has been taking productive assets out of the company since Day 1,” Mark Cohen, a former Sears executive, told the NYT.

Sears is burning through more than $1 billion of cash a year and its sales continue to decline.

The deals flyaround

• Newell Brands finally settled with Starboard Value by changing out three of its directors. (Newell)

• Elliott Management has raised its stake in the software company MicroFocus to 5.1 percent as it presses for a shake-up. (Bloomberg)

• CenterPoint Energy plans to buy another electric utility, Vectren, for about $6 billion. (WSJ)

• Humana, TPG Capital and Welsh, Carson, Anderson & Stowe agreed to buy the hospice operator Curo Health Services for about $1.4 billion. (WSJ)

• Henry Schein plans to sell off its animal health business to Vets First Choice through Michael’s favorite tax-free deal maneuver, the Reverse Morris Trust. (CNBC)


Lucas Jackson/Reuters

How much would a wage rise hit Amazon’s profits?

What might happen to Amazon’s bottom line if it paid its workers (median compensation: $28,466) more? If labor markets continue to tighten, the question soon won’t be hypothetical.

Since Amazon doesn’t disclose its total compensation expense, Peter Eavis did some math. Multiplying that median pay number by the total number of employees gives a (hypothetical!) comp expense of $16.1 billion. Two more sums:

• Bumping up median pay by 10 percent would have reduced 2017 pretax income by 42 percent, to $2.2 billion.

• A 20 percent increase would have reduced pretax income by 85 percent.

By comparison, a 10 percent raise at Walmart would have cut annual pretax profit by 28 percent, and a 20 percent raise is a 56 percent hit.

The political flyaround

• The Treasury Department suggested that it might ease sanctions on Rusal if Oleg Deripaska sold his stake. Robert Mueller took Paul Manafort’s testimony about Mr. Deripaska during a raid on the former Trump campaign official’s house last summer.

• Some lawmakers say they will resist any move by the Trump administration to withdraw from Nafta if Congress doesn’t approve a renegotiated version. (WSJ)

• Worsening deficits may force Greenwich, Conn., to raise taxes on its friendly local hedge funds. (FT)

• A quiet federal excise cut has led to a boom in self-investment by craft distilleries. (NYT)

• How Conduent, which runs food stamp networks in 25 states, is blocking Propel, a start-up that lets users check what’s left in their accounts. (NYT)

• Finland is ending its basic-income experiment. (Guardian)


Mike Segar/Reuters

How Sean Hannity quietly became a real estate mini-mogul

When the Fox News host said that he spoke with Michael Cohen because the lawyer knows “real estate,” it turns out that Mr. Hannity had a reason to ask. He has been linked to shell companies that spent at least $90 million on homes in seven states — and benefited from financial programs run by the Department of Housing and Urban Development, according to The Guardian. (Mr. Hannity hasn’t mentioned that when H.U.D. Secretary Ben Carson has been on his show.)

Mr. Hannity’s response: The article was “fake news,” and he didn’t pick the properties the shell companies invested in. (The Guardian reported that Mr. Hannity had signed documents related to the H.U.D. agreements.) Mr. Hannitty also said: “I have never discussed with anybody at H.U.D. the original loans that were obtained in the Obama years, nor the subsequent refinance of such loans, as they are a private matter.”


Mike Blake/Reuters

Alphabet is preparing for life after advertising

Sure, Google is the most powerful force in digital advertising. But its parent company’s latest financial results suggest that it’s plowing headlong into potential new businesses. Capital expenditures tripled year-over-year, to $7.7 billion.

Alphabet is currently sitting on some $11 billion worth of start-up investments. (What may be its latest: a $2 billion investment alongside SoftBank in the Chinese truck-hailing company Manbang.)

Privacy corner: Google’s C.E.O., Sundar Pichai, played down the potential impact of forthcoming European data privacy regulations. He may be right to, since incumbents like Google and Facebook already enjoy consumer trust and can better afford compliance with new rules.

Critics’ corner: Alphabet is following Amazon and asking investors to trust in the billions that it’s spending on potential new businesses — and deserves the benefit of the doubt for now, Shia Ovide of Gadfly writes. Investors are getting squishy performance metrics, not concrete ones, Robert Cyran of Breakingviews writes.


Dado Ruvic/Reuters

The tech flyaround

• Facebook has published its 25-page guide for community standards, which it uses to determine which content to remove. YouTube said that machines flagged most of the videos it removed.

• The European Commission has opened an investigation into Apple’s $400 million bid for Shazam, citing concerns about access to data from competitors like Spotify. (NYT)

• Andreessen Horowitz plans to create a cryptocurrency fund. Energy-guzzling Bitcoin mining is falling out of favor in northern New York.

• The U.S. is reportedly considering sanctioning Kaspersky Lab, the Russian cybersecurity company. (CyberScoop)

• Amazon is reportedly working on a domestic robot, code-named Vesta. (Bloomberg)

• Ferrari has been quietly working on — gasp! — a hybrid car. (Bloomberg)


Jeffrey Gundlach

Brendan Mcdermid/Reuters

Your Sohn Investment Conference roundup

Andrew was on hand to introduce some investors, including Bill Gurley of Benchmark and Chamath Palihapitiya of Social Capital. Here were the top picks:

• Jeff Gundlach of DoubleLine: Bet on commodities and against Facebook.

• Mr. Gurley: Bet on Amazon and Tesla’s bonds, not its stock. Bet against Hertz (thanks, Uber) and SoFi.

• Mr. Palihapitiya: Bet on Box.

• Larry Robbins of Glenview Capital Management: Bet on McKesson and CVS, because Amazon isn’t coming for pharmacy benefits.

• Li Ran of Half Sky Capital: Bet on GrubHub, because millennials (except for us) can’t cook.


Robert Milton

Shaun Best/Reuters

Revolving door

• United Continental is looking for a new chairman after Robert Milton decided to step down. (Its C.E.O., Oscar Munoz, will also see his pay cut after a very bad 2017, P.R.-wise.) (WSJ)

• Goldman Sachs has hired Justin Schmidt, a cryptocurrency trader from Seven Eight Capital, as its head of digital market assets, even if it isn’t setting up a cryptocurrency trading desk (yet). It has also moved Mazen Makarem from Dubai to New York to cover private equity firms and sovereign wealth funds.

• Evercore has hired Wilco Faessen from Barclays as a senior managing director and co-head of its global consumer and retail group. The investment bank has also hired Bill Thompson from Greenhill & Company as a senior managing director and co-C.E.O. of its private capital advisory team.

• Dangote Cement, which is owned by Africa’s richest man, Aliko Dangote, has named two new directors: Mick Davis, the former C.E.O. of Xstrata, and Cherie Blair. It also made Joseph Makoju permanent C.E.O. (Bloomberg)

• ComScore has named Bryan Wiener, one of its directors, as C.E.O. (WSJ)

The speed read

• Richard Jenrette, who helped found what became the investment bank D.L.J., died on Sunday at 89. (NYT)

• Deutsche Bank is reportedly considering extensive cuts to its U.S. cash equities business. (Bloomberg)

• Clean energy is becoming mainstream with the help of windmills the size of jumbo jets. (NYT)

• Halliburton has written off its remaining $312 million investment in Venezuela as oil production continues to plummet. (NYT)

• Vanguard is laying groundwork for expansion in China. (Bloomberg)

• Shares in WPP fell after Ford said it might move some of its advertising accounts elsewhere. (CNBC)

• Wells Fargo and G.E. are facing calls to end their decades-old audit relationships with KPMG. (FT)

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