Yellen drops the mic

Quote of the Day

I’m betting Jeff Bezos knows exactly where he wants to put his second headquarters and he’s getting all the cities to compete on who can write the biggest check. I think that’s a money-losing investment for tax payers.”

Market Snapshot

• U.S. indexes plunged 2% or more.
• Energy and technology stocks were the biggest losers.
• Most major global equity markets finished down.
• Bitcoin briefly dropped below $8,000.

Yellen Drops an Anvil on Wells Fargo Before Leaving Office

If Janet Yellen ever owned a mic, she officially dropped it as she issued an unprecedented punishment on Wells Fargo her last day in office.

The punishment? In response to 2016’s “widespread consumer abuses,” the country’s third largest bank by market cap will no longer be permitted to grow its $2 trillion in assets (until further notice). It’s the first time the Fed has fully capped a financial institution’s AUM.

In all, the Yellen-induced coma could leave Wells Fargo with a $300 million hit to 2018 after-tax profit, keep it from growing alongside other banks, and will give it 60 days to present the Fed with an internal cleanup plan.

But first, how did Wells Fargo get here?

Greed, for one. Pressure from top management to meet new bank account targets left low-level sales associates with a catch-22: issue unnecessary accounts for customers or frustrate the boss. They chose the former, opening up as many as 3.5 million fake accounts in addition to selling unneeded auto insurance to 570,000 customers.

Some might say the company has paid its dues, paying a $185 million fine, receiving a $142 million class-action lawsuit, and saying farewell to CEO John Stumpf (among other consequences).

But after continuous pressure from regulators—including one fiery Elizabeth Warren—it was only a matter of time before a second third fourth hammer came down.

And now Wells Fargo will have until September 30 to clean up shop

That’ll include replacing four board members in addition to undergoing a third-party review of its risk compliance plan—aka the plan that ensures these abuses never happen again.

In the meantime, Warren Buffett’s favorite bank can process consumer deposits and loans, so you can still raise money to start that Puppies & Bagels shop you’ve always dreamed of.

And while Yellen throws on her lei and buys her one-way ticket to Cabo, her cautionary words in favor of regulation resonate in a time of intense deregulation—“We cannot tolerate pervasive and persistent misconduct at any bank and the consumers harmed by Wells Fargo expect that robust and comprehensive reforms will be put in place to make certain that the abuses do not occur again.”

Friday Was a Historically Bad Day for the Market

666.

The ominous number of points the Dow lost on Friday, capping off its worst week in two years. Coincidence? We’ll leave that up to you...

The other major indexes also limped into the weekend. All 11 S&P sectors finished down, and the Nasdaq dropped 2%. Bond prices fell, sending yields higher once again.

An autopsy of a Wall Street nosedive

Cause of sell-off: fears of inflation and rising interest rates.

Friday’s job numbers for January showed that hourly wages are growing at a healthy pace—up 2.9% YoY.

But because we can’t have nice things, rising wages will eventually lead to higher prices (i.e. inflation). And investors fear the Fed will raise interest rates even more than expected to keep inflation at reasonable levels.

Bottom line: Most analysts welcomed the sell-off as a “healthy correction.” But the period of rampant economic expansion may be nearing its end.

Ready Player Two: Sony Announces a New CEO Amid Record Profits

Sony posted its highest-ever Q3 profit ($3.2 billion), up from $839 million a year ago, and raised its full-year profit forecast to $6.5 billion. With high scores like that—unseen in the company’s 72-year history—president Kazuo Hirai will hand over the CEO controller to current CFO Kenichiro “The Enforcer” Yoshida on April 1. Hirai will stay on as chairman.

Hirai and Yoshida’s one-two punch has turned around Sony—once known for The Walkman and its Vaio computers—by holding all units accountable, focusing on profits over growth, and cutting less-than-competitive businesses (RIP Walkman and Vaio). Hirai’s (obviously successful) “One Sony” rebuilding plan focused on the PlayStation and image sensors to the tune of 63% stock growth over the past year.

How will Yoshida continue the super-combo? “We are going to play both offense and defense. The top companies by market value in the world are technology companies, and as a tech company Sony feels a sense of urgency.”

Unboxing a Possible Walmart-Blue Apron Deal

Despite already having a cook in the meal kit kitchen with its own service, Walmart might be primed to add another: Blue Apron. At least that’s Matthew Trusz’s truth. The Gabelli & Company analyst named Walmart the “logical buyer” for the struggling subscription service.

Trusz thinks Blue Apron is finally “turning the corner on well-publicized operational issues” (see: its profit-dragging new fulfillment center in Linden, NJ). The company has the potential to mature into a profitable business and an acquisition target.

Enter: Walmart. The retail giant can stand to pad its online meal kit sales and Blue Apron’s $8 billion available market (~8.25 million households) looks pretty appetizing.

In a world of online grocery ordering and Amazon’s ownership of Whole Foods, grocers have to think outside the box—by thinking inside the box. And with Albertsons’ acquisition of meal kit startup Plated in September, Walmart stocking Blue Apron’s offerings could connect it to a new generation of shoppers.

What Else Is Happening…

• SpaceX’s Falcon Heavy is ready for launch.
• Watch out Spotify, Apple Music is set to pass you in U.S. paying subscribers this summer.
• Telecom giant Charter is raising employees’ minimum wage to $15/hour.
• Broadcom could be raising its bid for Qualcomm to $120 billion from $105 billion.

Economic Calendar

• Friday (Feb. 2nd)       Earnings: Charter (+), Exxon (-), Merck (+), Sony (+), Sprint (+)

                 Economic Events: Consumer Sentiment (+), Factory Orders (+/-)

• Monday     Earnings: Booz Allen, Sysco

                    Economic Events: ISM Non-Mfg Index

• Tuesday    Earnings: Allergan, BP, Chipotle, Dunkin’ Brands, GM, Snap, Walt Disney

                  Economic Events: International Trade

• Wednesday    Earnings: Hasbro, Tesla, 21st Century Fox, Yelp

                        Economic Events: Consumer Credit

• Thursday   Earnings: Activision Blizzard, CVS, Expedia, GrubHub, Twitter, Yum!

                   Economic Events: Chain Store Sales

• Friday       Earnings: No Events

                 Economic Events: Wholesale Trade

The Breakroom

Question of the Day

Justin takes the underground train to work and uses an escalator at the railway station. If Justin runs up 7 steps of the escalator, then it takes him 30.0 seconds to reach the top of the escalator. If he runs up 13 steps of the escalator, then it takes him only 21.0 seconds to reach the top.

How many seconds would it take Justin to reach the top if he did not run up any steps of the escalator at all?

(Answer located at the bottom of newsletter)

Business Trivia

We mentioned Wells Fargo is the third largest U.S. bank by market cap. Can you list the top five?

(Answer located at the bottom of newsletter)

Stat of the Day

1.35 billion—The estimated number of chicken wings eaten during this year’s Super Bowl. That’s a whole lot of poultry.

Breakroom Answers

Question of the Day: 40.5 seconds (Explannation)

Business Trivia: JPMorgan, Bank of America, Wells Fargo, Citigroup, Morgan Stanle