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The Threat of Rising Corporate Debt

Professor Mark Cohen discusses the threat of rising corporate debt, specifically in retail. 

Mark Cohen, Director of Retail Studies

February 24, 2020

More and more retailers are closing stores and going bankrupt. This trend can be attributed to decades of excessive expansion of square footage that have finally caught the industry in a deepening productivity crisis, too many undifferentiated stores (and malls), and creeping expense inflation concurrent with deflationary pressure on retail prices that have created a deadly margin squeeze. Additionally, e-commerce has siphoned off a substantial amount of brick and mortar sales rendering even more of a productivity problem for many, customer acquisition and fulfillment is increasingly expensive, and, e-commerce returns are much higher than returns from brick and mortar stores. Beyond these factors, apparel and accessories volume has stagnated in the face of a marked shift in consumer spending on all things “tech.”

 

Sears comes to mind as a prime example of retail’s debt crisis. Under Eddie Lampert’s control, Sears was never run as a legitimate enterprise. His modus operandi was and always has been to load the company up with as much debt as necessary to keep it solvent while he systematically stripped its assets for cash largely for his own benefit.

 

There is no question that low interest rates and QE has created an environment in which enormous sums of money have been easily and inexpensively deployed by private equity firms to acquire and load up retailers’ balance sheets with debt. The melt down already taking place for some highly leveraged retailers will only accelerate if interest rates begin to climb.

The US and France's Digital Tax Temporary Truce

Professor Robert Willens discusses the US and France's temporary tax truce following news of a potential agreement between the two countries 

Robert Willens, Adjunct Professor

January 22, 2020

The digital tax is a major threat and this temporary hiatus does not lessen the threat one iota. Our only hope here is that other countries that want to impose such a tax will be "persuaded" by the threat of retaliatory measures emanating from the U.S. to rethink their desire to impose such a tax. The tax would fall heavily, and disproportionately, on U.S. companies who, allegedly, have not been paying the "proper" amount of tax to the governments of countries in which they do business. That's debatable, but my sense is that these countries have brought the problem on themselves by providing these multinationals with tax incentives and "tax holidays" to encourage them to conduct business in the host country. At the end of the day, the notion of a digital tax will wind up in the hands of the politicians who will, hopefully, come up with an equitable solution to the problem.

Uber and WeWork’s Major Losses and WeWork’s IPO Announcement

Professor Len Sherman discusses Uber and WeWork's major losses and WeWork's IPO in the lead up to WeWork's major valuation cut

Len Sherman, Adjunct Professor of Business

September 8, 2019

I couldn't think of a worse day for We to go public with its S-1, as the stock market is strongly signaling a global recession on the horizon. It obviously should be deeply concerning to investors that We has been losing buckets of money during the longest bull market in US history. We's financials will undoubtedly get even uglier than they've been if/when the recession hits.

 

As for Uber, CEO Dara Khosrowshahi shows no sign of changing his tune on growth at all costs, despite his dismal Q2 earnings report, which exhibited decelerating growth and deepening operating losses. 

 

The common link between Uber and We is Softbank, who has invested over $20 billion into these two companies. Investing too much, too soon into startup ventures is often disastrous, as I documented in a recent story in Wired. This will not end well for either company or its investors.

New U.S. Tariffs on Chinese Goods

Professor Mark Cohen discusses the consequences of new U.S. tariffs on Chinese goods for consumers 

Mark Cohen, Director of Retail Studies

September 1, 2019

US importers moving their production away from China will invariably incur high transition and logistics costs which may very well rival the tariff burden they seek to avoid. And then of course they have no way of knowing whether Trump will wind up imposing tariffs on the so called “safe harbor” countries like Vietnam or Bangladesh where they may move production. 

 

There is no doubt that trade inequities and other egregious trade behaviors are long overdue for remedy with regard to China, the EU and the NAFTA countries: Mexico and Canada, but conducting a public "school yard" like fight against them all in the manner in which Trump has proceeded is completely unworkable.

 

Trump can’t afford to lose face in the eyes of his base in the same way that the Chinese leadership is unlikely to. They, in fact, may be willing to stone wall and play hardball with Trump betting that this depresses the US economy and causes Trump to be thrown out of office in 2020 in favor of a more reasonable and reliable Democratic candidate.

 

Trade wars have never succeeded. Never. Why? Because countries that are hit with tariffs retaliate with tariffs of their own. Always. China, quite clearly is capable of retaliating as they are now doing.

 

Tariffs often result in unintended consequences. The “tit for tat” Common Market imposed tariffs on US poultry products in the 1960’s (The Chicken Tariffs) resulted in the US retaliating by imposing tariffs on Common Market manufactured trucks. Now, 50 years later, the chicken tariffs are gone but the truck tariffs remain, resulting in unwarranted high prices that US Consumers continue to pay to this day.

 

Consumers always, always, bear the burden of tariffs in the form of higher prices and or lesser quality and/or less appealing merchandise.

 

Finally, there is no reality to large scale needle trade and metal bending industries returning to the US. Why? Because though the US has extraordinary technology and logistics resources available, the US is an extraordinarily expensive place to manufacture goods. Goods brought back to the US for US manufacturing will necessarily become far more expensive than they have been based upon offshore production.

China’s Plans for a State-sponsored Cryptocurrency

Professor R.A. Farrokhnia discusses China's state-sponsored crypto-currency in the wake of the news of Facebook's Libra Project 

R.A. Farrokhnia, Executive Career Coach

October 18, 2019

In a way, China already has already come quite close to having a "digital currency," given the widespread use of WeChat, Alipay and a few other similar services. Given the high-levels of consumer adoption when it comes to such forms of digital money, it is not much of a stretch for the Chinese government to begin nudging and moving usage toward a bonafide, state issued, digital currency (a PBOC-coin, our equivalent of a FedReserve coin). 

 

But such digital coin will not be anything like Bitcoin or even Libra, as it would be a sovereign currency highly-controlled by a central authority (more so than Libra), in line with Chinese government general policies and past practices. This would allow for better tracking of how money gets spent in the hands of consumers (a dream set of data for a macro economist!), with a lot of potential benefits that such tracking may entail (e.g. anti-money laundering or proper disbursement of social safety net funds so to ensure the equivalent of Chinese food stamps are used to buy nutritious food as opposed to junk food or alcohol). 

 

But at the same token and on the same spectrum of possibilities, tracking and surveillance will be an issue, and not just in China. In my view, how the consumer habits and cultural tolerance and views of such matters play out will be jurisdiction-specific to each country to some extent, which will have a downstream effect on global adoption and usage (if that's one of the goals). 

 

So overall, the matter is beautifully complex, with competing and opposing objectives driving development, launch and eventual adoption of a state-issue digital coin/currency. 

LVMH’s $14.5B Offer to Take Over Tiffany

Professor Mark Cohen discusses LVMH's bid to take over Tiffany

Mark Cohen, Director of Retail Studies

October 28, 2019

Tiffany should never have become a public company. Frankly, no luxury fashion business that is non-promotional can ever satisfy the demands that the public markets make for regular quarterly performance and growth. Tiffany has two options: One to go private which would entail taking on significant debt, or, two sell to a strategic buyer. 

 

LVMH would be a perfect strategic buyer, as a large and profitable luxury player that is essentially controlled by a single shareholder.

Boeing ex-CEO’s Congressional Testimony

Professor Bill Klepper discusses Boeing ex-CEO’s Congressional Testimony on 747 MAX planes

William Klepper, Adjunct Professor

October 28, 2019

Muilenburg should be prepared to take responsibility for the deaths due to the crashes and pledge Boeing's promise to live up to its stated safety standards in cooperation with US regulators. He should also have his Corporate Counsel with him at the hearing to advise him since Boeing's shareholders' interests are in play along with its other stakeholders. In my book, The CEO's Boss: Tough Love in the Boardroom, I call for a Social Contract between companies and their stakeholders. It is time for a renewal of that Social Contract at Boeing.

 

Their operational problems are systemic and bring into question the way they do things around Boeing—their culture. Knowing their new CEO who is arriving next week was the board chairman and has had as his fiduciary responsibility duty-of-care for over a decade, it’s probably time to reevaluate the membership in both the C-suite and on the board. The shareholders ought to be the deciding voice.

Saudi Aramco’s IPO Announcement

Professor Geoffrey M. Heal discusses Saudi Aramco's IPO announcement 

Geoffrey Heal, Bernstein Faculty Leader

February 13, 2020

What Saudi Aramco is worth depends more than anything on the current and expected future oil price. At $100 per barrel under ideal conditions it could be worth as much as $2 trillion, but at the current price - $62 - it's worth a lot less. Probably in the range of $1 to $1.3 trillion. 

 

They are only going to float a very small part of the company, and only on the Saudi market, where conditions are - I assume - quite controlled. They are trying to diversify the Saudi portfolio, out of oil and gas before this becomes a drag on the market because of climate change and electric vehicles. The Norwegian SWF did this recently too. No one wants to be too dependent on oil these days. 

 

Saudi Aramco is the lowest cost producer in the world, and can undercut anyone else. So they are likely to stay in business longer than any other major oil company. These days most of their production goes to Asia. 

Uber’s 2019 Q3 Earnings Report and the State of Venture Capital

Professor Len Sherman discusses Uber's third quarter earnings and the state of venture capital overall

Len Sherman, Adjunct Professor of Business

November 4, 2019

After reading notes from the Uber earnings call transcript, it’s clear that there’s an Alice in Wonderland disconnect between the rosy picture painted by Uber's CEO/CFO and the dismal reality of their actual results. For example, overall losses increased, expenses are growing faster than revenue, and cash flow is negative. Industry wide, ridesharing business growth continues to slow. UberEats has continued to be a money pit, giving Uber a Sophie's Choice to continue to lose more money or bail out and give up topline growth. 

 

Uber is predominantly in a lousy business category -- urban transportation. To see this, compare their gross margins:

 

  • Uber 22%

  • Amazon 39%

  • Google 57%

 

Dara Khowrowshahi's profitability forecasts are completely bogus. Note he talks only about "Adjusted EBITDA," not GAAP profitability, and then promises to eke out a profit in two years...maybe. If so, he'd still lose more than $1 billion on a GAAP basis. Khowrowshahi completely dismisses real and growing regulatory risks. 

 

Overall, I find it interesting that VC's continue to raise and spend big money on late-stage, money-losing ventures, even after the WeWork debacle. The track record of ventures that have raised over $1 billion in private capital has not been good. Is too much capital harming venture performance?

Shale Companies Reducing Fracking

Professor Geoffrey M. Heal discusses shale companies' choice to reduce fracking 

Geoffrey Heal, Bernstein Faculty Leader

November 11, 2019

Fracking in the US, which has led to a massive increase in the production of oil and gas, has not in fact been profitable for many of the operators. They have borrowed huge sums to remain in business, and many have gone out of business. This fact is not widely known even amongst the investing public, but is beginning to get recognition. The decrease in U.S. oil drilling is a response to this. 

 

The reason for the lack of profits in the industry is that the output of a fracked well falls off very rapidly - the "decline rate" is high. It can fall by as much as 50% or more in the first year. To keep production up the company needs to redrill and refrack, which is expensive.

Amazon’s Expanded New York City Office

Professor Rita Gunther McGrath discusses Amazon's plan to open a new office in New York City

Rita McGrath, Faculty of Executive Education

December 6, 2019

Amazon did a very thorough test of the waters and when they got the pushback from New York realized the limits of not creating a broad approach that takes all affected stakeholders into account. Their “2nd HQ” strategy was brilliant and it forced municipalities all over the country to spend countless hours of time and to provide huge amounts of potentially very valuable data to Amazon, with absolutely no guarantee of anything in return.  

 

In my circles, the smart money was always on Amazon opening a New York presence given Jeff Bezos’ purchase of real estate and a lavish apartment there. With this in mind, one can question the real motivation for their HQ2 campaign. Given that Bezos has made a personal commitment to New York, my guess is that he doesn’t want a lot of bad blood or noisy protesting going on in a place he wants to spend significant time. 

 

New York certainly didn’t need to offer subsidies to be attractive to Amazon – after Silicon Valley it is perhaps the richest location for tech talent in the country and Amazon really can’t afford to ignore it when rivals such as Google, Facebook and others are setting up in New York. In addition, it’s a cultural and media capital, and with Amazon going into the content business that has an allure as well.

 

So I think the bottom line is that Amazon doesn’t think they can do without New York!

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