Trouble in Deutschland

MARKETS

• Agriculture: The USDA said it will hand out $14.5 billion in direct payments to farmers hit by retaliatory tariffs. The first checks will arrive in August.
• U.S. economy: Q2 GDP data drops this morning. If the economy grew 1.8% on an annualized basis as economists project, it would be the slowest pace of growth since 2017.

AUTO

California and Automakers Try to Clear the Air

California, as anyone who’s seen Big Little Lies will tell you, is car country.

And when you love something, you try to stop it from contributing to climate change. Yesterday, four large automakers (Ford, Honda, Volkswagen, and BMW) came to an agreement with the California Air Resources Board to improve fuel efficiency in their fleets, bucking the Trump administration’s attempts to roll back emissions standards.

• Like a kid who puts himself in time-out, these companies are signing up to be regulated more than is required.

And while those four automakers account for 30% of U.S. new vehicle sales, others are reportedly thinking about signing on to the agreement.

California vs. President Trump, part...we lost count

In a few weeks, Trump’s EPA is expected to roll out a plan that would undo Obama-era mileage targets—about 51 miles per gallon (mpg) for 2025 models—by freezing that target at about 37 mpg from 2020–2026. The California agreement is a rebuke to that rebuke. It proposes a slightly looser version of the Obama rule, requiring just under 50 mpg for 2026 models.

That California's making its own rules is ticking off the White House. “The federal government, not a single state, should set this standard,” White House spokesman Judd Deere said.

Let's run through the different perspectives

The White House’s argument: Because emissions standards may drive up prices, consumers will end up buying fewer new cars with the latest safety features.

California’s view: Climate change is a pressing issue and the Trump plan doesn’t do enough to slow it down.

The industry’s perspective: Companies are caught in a regulatory tug-of-war between progressive states like California and a federal government that’s less concerned about vehicle emissions. With the agreement, these automakers are hoping to pressure Trump into making a deal with California.

Bottom line: Transportation is the single largest source of greenhouse gas emissions in the U.S., but reducing emissions will depend on resolving conflicting regulations.

TECH

Apple Declares Independence

When in the course of tech events, it becomes necessary for one company to sell a business unit to another for $1 billion…

Apple (-0.79%) is acquiring the majority of Intel’s smartphone-modem chip unit so it can eventually free itself from the tyrannical rule of buying someone else’s modem chips.

These are the components that go into your smartphone, connect to the mobile internet, and make life worth living.

• The deal also means Apple will onboard 2,200 ex-Intel employees and have 17,000 wireless technology patents at its disposal.

Zoom out: Intel’s (+5.06% after hours) smartphone operation was losing about $1 billion annually. The death blow came in April, when Apple made up with longtime foe Qualcomm and started buying modems from the chipmaker. Apple had been Intel’s only major customer for that technology, so it was time to pack up.

Bottom line: Apple’s strategy can be traced to 2009, when Tim Cook channeled his inner Thomas Paine with some common sense wisdom: “We believe that we need to own and control the primary technologies behind the products that we make.”

INTERNATIONAL

What's an ECB to Do?

A Frenchman crashing into the English Channel while crossing via hoverboard is the perfect metaphor for the European economy this week.

Although European Central Bank (ECB) President Mario Draghi thinks chances of a recession are “pretty low,” yesterday the ECB laid the groundwork for potential stimulus measures in its September meeting. These include an interest rate cut and buying corporate and government bonds (called “quantitative easing”).

• What’s wrong: After a strong performance from 2015–2018, the eurozone’s economy is struggling. Export-dependent companies turned their focus to Asia, but that backfired when the U.S. and China started a trade war. Inflation is stuck below the target 2%. And don’t forget about Brexit.

Schwierigkeiten im Vaterland

Germany is Europe’s biggest economy and exporter. Trouble in Deutschland = trouble for companies (and countries) feeding into its supply chain. In manufacturing, Germany’s business climate index is "in freefall” and hit its lowest point in more than nine years, according to the Ifo Institute.

+ Crazy stat: With a quarter the headcount, Germany produces nearly the same share of total world exports as the U.S., per the WSJ.

TECH

Internet Giants, They're Just Like Us

dominating multiple industries at a time?

Amazon brought in revenue of $63.4 billion last quarter, up 20% and beating forecasts. But shares dropped 1.6% after hours because it couldn’t keep its four-quarter streak of record profits going.

• We think we found the culprits: Amazon got hit with compensation-related expenses, and it spent over $800 million in Q2 on investments in one-day free shipping for Prime members.

As for Alphabet, shares jumped nearly 9% after hours after Google's parent company beat revenue and earnings expectations. Also helping: announcing a stock buyback of $25 billion.

Plus, traffic acquisition costs were less than analysts predicted.

• Don’t speak Silicon Valley? Traffic acquisition costs = what Google pays hardware companies like Apple for Google to be the default search engine on their browsers.

Still, with Google’s roughly 90% market share in U.S. internet search, Alphabet’s very much in U.S. and foreign antitrust cops’ sights.

QUIZ

You Have GOT to Be Quizzing Me

Hotter than Europe. Always adjusts for inflation. Extern of the Year. It’s the Brew’s weekly news quiz.

1. On Monday, 25 companies starting trading on a new stock venue in China, the country’s answer to the Nasdaq. What is the name of the exchange?

2. Who agreed to pay the bigger fine this week, Equifax or Facebook?

3. Until last harvest season, what apple had been the most-grown variety in the U.S. for 50 straight years? For 23 points of extra credit, name the apple variety that dethroned the king.

4. Rank the following sports teams by valuation:

• New England Patriots
• New York Knicks
• Dallas Cowboys
• Golden State Warriors

5. The U.K. has a new prime minister. What’s his name?

Answers: 1) The STAR Market 2) Facebook, $5 billion versus up to $700 million 3) Red Delicious, extra credit answer is Gala 4) In descending order: Cowboys, Knicks, Patriots, Warriors 5) Boris Johnson

WHAT ELSE IS BREWING

• Juul's co-founder defended the company’s role in the “youth nicotine epidemic” at a Congressional hearing yesterday.
• Southwest Airlines (+0.35%) has bad news for those of us who fly out of Newark: It’s pulling out of the airport this November because of bad financial results.
• American Airlines (-8.44%) blamed the grounded Boeing 737 Max for a pretax earnings hit of about $400 million in 2019.
• Nissan is in crisis mode. It will cut 12,500 jobs, almost a tenth of its global workforce, after operating profits fell 99% last
• Woodstock 50 couldn’t make its big music festival happen in upstate New York, so now it’s trying a venue in Columbia, MD. Give them some time to figure it out before you unleash the Fyre Fest comparisons.

BREAKROOM

Friday Puzzle
Take the word "IMPASSIVE." Use the individual letters to complete the three words below. You can use each letter from IMPASSIVE only once.

1. _E_T_G_
2. _R_S_
3. _P_

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Breakroom Answers


Friday Puzzle
1. Vestige
2. Prism
3. Spa