October surprise

MARKETS

• Econ: U.S. consumer sentiment slipped a bit in October, clocking in just below analysts' estimates. But the good news? The reading remains near a record high.
• Brazil elections: Far-right candidate Jair Bolsonaro will be Brazil's next president. He's known for his disparaging comments about women and marginalized groups, but in the economic arena, his election is seen as largely positive for Brazil's stock market.
• U.S. markets: So much has been going on that we just decided to write a whole story on it. Keep reading...

ECONOMY

Just How Healthy Is the Economy?

The U.S. economy paid a visit to the office of Dr. Morning S. Brew, M.D. this weekend. And after making it wait for 45 minutes in the company of only three Golf Digests from 1995, we finally called it in.

Here's what we found (sorry HIPAA): Despite strong growth, record low unemployment, favorable government policy, and—what had been—a surging stock market...we're starting to see just a few cracks in the armor.

The stock market is having its worst month in a long time

Like, since the financial crisis. The S&P is down 8.8% in October, which puts it on track for its worst month in nine years.

What's happening: Having spent 12+ years in med school, we know it's notoriously difficult to diagnose a case of "stock market downturn." But, many experts point to a combination of rising interest rates, a stronger dollar, geopolitical drama, and a protracted U.S.-China trade war as possible causes.

GDP numbers show warning signs

GDP grew at an annualized rate of 3.5% in Q3. That, coupled with last quarter's reading of 4.2% growth, is a six-month run to be proud of. But taking a closer look reveals a few data points that might concern investors...

• Business investment grew at only 0.8%. That may indicate the jet fuel of last year's tax cuts is running out, and that companies are hesitant to spend in the middle of an uncertain trade war.
• Defense spending was a major growth driver. Over the past six months, it grew at its fastest pace since 2009.

Big tech falls back to Earth

Just a few months ago, the Brew featured headlines of both Apple and Amazon hitting $1 trillion valuations, with the others not so far behind. But...

...we now live in a world where Amazon and Alphabet both disappointed on their Q3 earnings last week. Facebook and Apple? Everyone's looking at you this week.

+ Also important: Context.

TECH

IBM to Buy Red Hat

IBM just made IBM history, announcing its largest-ever acquisition—it'll buy Red Hat for $34 billion.

And if you were a scientist in a lab tasked with creating the most 2018-sounding company, you couldn't do much better than Red Hat. It makes and distributes open source software (aka Linux) for the enterprise crowd, and it's easily the biggest fish in that pond.

In the press release, IBM went full hype man:

• It's the "most significant tech acquisition of 2018."
• Per IBM's CEO Ginni Rometty, "The acquisition of Red Hat is a game-changer. It changes everything about the cloud market."

Fact check: Actually, pretty accurate. 107-year-old IBM is having a midlife crisis, desperate to remake itself as a major player in cloud computing and AI...instead of being known for traditional offerings—like those profoundly unsexy (and far less in-demand) mainframes.

Buying an established leader like Red Hat should help IBM with its makeover better than a new leather jacket.

SOCIAL MEDIA

Gab Puts Social Media Under the Microscope

On Saturday, gunman Robert Bowers allegedly killed 11 people at the Tree of Life Synagogue in Pittsburgh. Moments before, Bowers posted on social network Gab, "Screw your optics, I'm going in."

Zoom out before we zoom in: It's the latest tragedy to shine a light on social media's role in acts of terror and violence—especially since Bowers had a history of antisemitism on Gab.

What Gab is: It started in 2016 as a no-holds-barred alternative to Twitter. There are few restrictions (as opposed to Twitter), so that's earned Gab alt-right users including Milo Yiannopoulos and Richard Spencer.

Now companies are rethinking their relationships with Gab...

• PayPal banned Gab from its payments platform. "When a site is explicitly allowing the perpetuation of hate, violence, or discriminatory intolerance, we take immediate and decisive actions," PayPal told The Verge.
• And even before Saturday's tragedy, Apple refused to host Gab on its App Store, Google removed Gab from its Play Store, and Microsoft threatened to bar Gab from using its Azure cloud service.

VIDEO GAMES

Fortnite Creator’s Funding Royale

Epic Games—the creator of smash hit video game Fortnite—finally has a reason to get off the couch, wipe the Cheetos crumbs off its shirt, and take a shower. It announced investors have purchased $1.25 billion in stock, putting Epic's valuation at nearly $15 billion.

The deal specs: Per Digi-Capital, this was the second-largest games investment ever. Epic now calls well-respected firms KKR, Kleiner Perkins, and Lightspeed Venture Partners investors.

• There are others...Tencent forked over $330 million back in 2012 for a 48% stake, and Disney's also invested.

Wondering what makes the video game firm worth more than Dropbox or Shopify? Well, Fortnite (which had ~80 million players in August alone) is free to play, but Epic has made more than $1 billion in revenue over the past year from what it calls "microtransactions" (aka selling victory dance moves or virtual costumes for game characters).

Zoom out: The $100 billion gaming industry is a high-growth one, too. Annual investments in gaming startups exceeded $3 billion globally for the first time ever earlier this year.

CALENDAR

What’s on Tap

Halloween, first day of November, jobs report, Apple/Facebook earnings...yeah, it should be a fun week.

Monday: National Cat Day; inflation data

Tuesday: Consumer confidence; earnings (GE, Facebook, Coca-Cola, Under Armour, eBay, Pfizer)

Wednesday: Halloween; earnings (Fitbit, GM, ADP, Sprint, Yum! Brands, AIG, Molson Coors)

Thursday: Jobless claims; earnings (Teva, Apple, Spotify, Starbucks, GoPro, Shell, Wayfair)

Friday: Jobs report; international trade; earnings (Alibaba, Chevron, Exxon Mobil)

WHAT ELSE IS BREWING

• Vichai Srivaddhanaprabha, the owner of English soccer club Leicester City FC, was among the five dead after a helicopter crashed outside the team's stadium.
• Tesla is reportedly under FBI investigation to determine if it misstated production stats for its Model 3 to mislead investors, per the WSJ.
• Facebook has taken down 82 more pages tied to Iran that were posting politically-charged memes.
• Qualcomm said Apple is $7 billion behind in royalty payments...the latest development in the two firms' ongoing beef.
• Slasher film Halloween has kept its lead at the box office for a second weekend, with $32 million in ticket sales in North America.

BREAKROOM

Business Before & Afters
Each of the answers will be connected by a shared word.

Ex. Jeff Sessions's favorite automaker = Attorney General Motors

1. Two major U.S. banks
2. Jerome Powell's shipping
3. The macroeconomic measurement of a company's major rollout
4. What Qantas Airways's home base wears to work out

(Answer located at bottom of newsletter)

Breakroom Answers