The haves and the have-nots

QUOTE OF THE DAY

On behalf of everyone at Uber globally, I apologize for the mistakes we’ve made.”

Uber CEO Dara Khosrowshahi in response to its London troubles. Hold on a sec…Uber? Showing remorse? Pinch us, we might be dreaming.

Market Snapshot

  • U.S. indexes fell, dragged down by a bad day in tech.
  • Facebook shares dropped 4.5%, AMD dropped 5.2%, and Nvidia dropped 4.5%.
  • Gold jumped after North Korea suggested the U.S. declared war.
  • Oil surged to its highest price in two years.


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The Haves and the Have-nots

When professional thinkers think, we listen. And thanks to the Economic Innovation Group (EIG), a high-profile D.C. think tank, we have brand new economic insights to chew on.

Its worrying conclusion: the economic gap between U.S. regions is wide…and growing.

Our takeaways

EIG pored over Census data from ~26,000 zip codes to show how each performed economically between 2011 and 2015. The zips were then ranked on a scale from “distressed” to “prosperous” according to metrics like poverty level, educational attainment, and median income.

Here’s the upshot:

  • 52 million Americans (16% of the population) live in distressed zip codes. 85 million live in prosperous ones.
  • Since 2000, most distressed communities saw no net gains in job creation or business establishment, and more than half of these areas experienced losses in both.
  • Mortality rates in distressed communities are 25% higher than in prosperous ones.
  • The most prosperous zips can be found in the Western tech hubs (SF, Seattle, Austin), while the Southern U.S. and Rust Belt comprise the most distressed areas.
What it means

The signs are clear: we’re in a “winner-take-all” economy. EIG notes that wealthy places have achieved “a spectacular degree of growth and prosperity” while in the distressed communities, “what little economic stability exists is quickly eroding beneath their feet.”

And the tech industry is a main culprit. Seventy-five percent of VC funding flows to just three states: California, New York, and Massachusetts. So, if you’re an aspiring software engineer in South Dakota, you’re probably going to be booking a flight to Silicon Valley or Cambridge, MA (and good luck finding a reasonably-priced apartment).

There may be hope

JPMorgan CEO Jamie Dimon is rallying the corporate community to invest in more distressed areas like the Rust Belt.

And Amazon could help turn a troubled city around with its HQ2 decision. $5 billion is a game-changing amount of cash. But, then again, we can’t fault it for choosing a tech hub with all the best talent, either.

So, Bezos, what’s it gonna be?

GE Deindustrialized

GE (+0.97%) continued its weight-loss regimen, selling its industrial-solutions business to Swiss industrial tech firm ABB (-0.32%) for $2.6 billion.

The unit (generating $2.7 billion in revenue in 2016) includes electrical components like circuit breakers, power supplies, and transformers for power grids and other facilities. Sexy? Maybe not. But important? You bet.

ABB wants to use the acquisition to gain a foothold in the U.S., a country where “we have not been as strong as we wish to be,” according to CEO Ulrich Spiesshofer. But with a market cap of $52 billion, it’s confident the deal will solidify a #2 position in global electrification (behind Schneider Electric).

As for GE, the deal is the latest sign that new CEO John Flannery is committed to shedding extra baggage. In March, it sold its water business for $3.4 billion, and it’ll also say goodbye to the fleet of private jets.

We’ll take ’em if we must.

Unilever Makeover

Unilever’s (-0.19%) rejuvenating from a Kraft-Heinz takeover attempt with its $2.7 billion purchase of Carver Korea—South Korea’s fastest growing skincare company (shingles cream not included).

The acquisition marks Unilever’s latest push into higher-margin personal care products and away from lower-margin food offerings. In 2015 alone, it scooped up four companies and then Dollar Shave Club (for $1 billion) last year.

With Carver’s cabinet of skin-aging and nourishment medications, and its strong influence over the consumer trends of its Far East brethren, Unilever is well-positioned to tackle South Korea’s $13 billion beauty market. But, as they say, beauty comes at a price.

Its biggest hurdle is marketing Carver’s products directly to consumers. We live in a day and age where YouTube reviewers and Instagram influencers pack a bigger punch than a 30-second TV ad.

If Unilever can learn to out-influence the influencers, Carver’s $383 million in revenue should come without a hitch. And if it can’t? Well…at least it’ll look good trying.

Target Locked: Minimum Wage

Target (-0.75%) is raising its minimum wage from $10/hour to $11 and up to $15 over the next three years.

Both old staff and new (Target’s padding its front lines for the holiday season) will reap the benefits, but the change comes at a vital crossroads for the retailer.

On one hand: Target is doing the industry-popular “retail shuffle,” remodeling stores, cutting costs, and revamping e-commerce. So now may not be the opportune time to raise wages.

On the other: Unemployment is at an all-time low (4.4%), while retail job openings are blowing up a LinkedIn feed near you (~625,000 openings). Basically, competition for talent is tight.

In order for Target to secure low-wage workers and offload that pile-up of red collared shirts, it’ll need to one-up the likes of Walmart, which just cranked its minimum wage up to $10/hour.

What Else Is Happening…

  • AIG (+0.49%) announced it will restructure into three business units.
  • Deloitte is doing its worst Equifax impression. It suffered a cyberattack that affected a small amount of clients.
  • Data center firm Switch’s public offering would make it the third-largest tech IPO of the year.
  • PE firm Hellman & Friedman placed a $5.3 billion bid for payments company Nets.
  • India’s Prime Minister Narendra Modi launched his $2.5 billion project to electrify all Indian households.
Economic Calendar

  • Monday     Earnings: No Events
  •                     Economic Events: Chicago Fed National Activity Index (-), Dallas Fed Mfg Survey (+)

  • Tuesday    Earnings: No Events
  •                   Economic Events: Case Shiller HPI, New Home Sales, Consumer Confidence, Richmond Fed Mfg Index

  • Wednesday    Earnings: No Events
  •                         Economic Events: Durable Goods Orders, Pending Home Sales, Petroleum Status

  • Thursday   Earnings: Accenture, McCormick, Rite Aid
  •                    Economic Events: GDP, International Trade in Goods, Jobless Claims

  • Friday       Earnings: No Events
  •                  Economic Events: Personal Income and Outlays, Chicago PMI, Consumer Sentiment

By the Numbers (China Steel Production)

Last week, we briefly touched on how China’s steel production surplus has been hurting the industry globally. Now, China is looking to cut annual output by 7.5% to stabilize prices and minimize environmental impact. Here’s the low-down before China’s big mow-down:

  • 808 million—metric tons of steel China produced in 2016. Japan comes in at #2 with 104 million metric tons.
  • 39%—how much China’s steel glut forced U.S. steel prices to drop in Q4 of 2015.
  • 36.5 million metric tons—YoY steel output growth in 2016, despite China closing factories capable of producing 85 million tons.
  • $700 million—value of steel China exports to the U.S., although Canada is the U.S.’ largest supplier at $4.2 billion.
  • 80%—the YoY increase in pollution levels from steel output.
The Breakroom
Question of the Day

By selling an article at 80% of its marked price, a merchant makes a loss of 12%. What % profit will the merchant make if the article is sold at 95% of its marked price? (Answers now located at the bottom of the newsletter)

Currencies Around the World

Guess the official currency: India, South Africa, Hong Kong, Sweden. (Answers now located at the bottom of the newsletter)

Stat of the Day

$4.7 billion–The revenue generated by the tiny country of Cyprus (GDP $19.8 billion) by selling E.U. citizenship to wealthy investors since 2013. In return, Cyprus requires investments in the country through properties or government bonds.

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Breakroom Answers

Question of the Day: 4.5% profit
Currencies Around the World: Rupee (India), Rand (South Africa), Dollar (Hong Kong), Krona (Sweden)

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