| | | | | | | Presented By ProEdge, a PwC Product | | | | Axios Markets | | By Sam Ro ·Jul 12, 2021 | | Today's newsletter is 1,243 words, 4.7 minutes. 🚀of the day: "I was once a child with a dream looking up to the stars. Now I'm an adult in a spaceship looking down to our beautiful Earth." - Richard Branson | | | | | | 1 big thing: What to watch for during earnings season |  | | | Illustration: Brendan Lynch/Axios | | | | Earnings season kicks off this week, and corporate America is expected to report a jump in profits. The results will provide important color on what's going on behind the scenes. Why it matters: The rapid reopening of the economy has come with its complications including supply chain bottlenecks and inflationary pressures that have made operating a business anything but smooth. "This quarter will be a key inflection point as it will shed light on the true earnings power of companies in the midst of the economic recovery," NYSE senior market strategist Michael Reinking tells Axios. - "It will also be a make or break moment for management teams to share how they are positioning their businesses to stave off margin compression in this challenging operating environment."
What to watch: Companies will spend a lot of time discussing matters very unique to their own operations, but there are some specific issues they will address that will help us better understand the health of business across the economy. - Demand: Most companies are expected to see big jumps in revenue, but it's unclear how much of the gains have been driven by pent-up demand or stimulus. Some companies will have gained or lost business due to changes in preferences.
- Capacity and backlogs: Supply chain issues and labor shortages have limited business activity. Some of that business will be delayed, and some of it will just be lost opportunities.
- Costs: Wages are rising and raw material costs are up, which are bad for profit margins.
- Productivity: Many companies have integrated technology while scaling back on office space. Such moves should be good for profit margins.
- Taxes: The Biden administration has tax hikes on the agenda. More broadly, tighter regulation could make doing business harder and more costly.
The bottom line: All of these details are ultimately about the prospect for earnings growth. And so while each of these questions will yield interesting answers, they should be taken as a whole in order to get the most complete picture of the state of business in America. |     | | | | | | 2. Catch up quick | | TikTok owner ByteDance shelved its IPO intentions after Chinese regulators asked it to address data-security risks. (WSJ) ECB president Christine Lagarde said to prepare for new monetary stimulus guidance from its July 22 policy meeting. (Bloomberg) Richard Branson flew on a suborbital mission to the edge of space with his company Virgin Galactic. (Axios) | | | | | | | | 3. Biden's war on moats |  | | | Illustration: Annelise Capossela/Axios | | | | Three weeks after naming Lina Khan to FTC chair, President Joe Biden has made her pro-competition philosophy the centerpiece of a sweeping executive order, Axios chief financial correspondent Felix Salmon writes. Why it matters: Biden is promulgating Khan's vision of anticompetitive behavior across "more than a dozen" different agencies. The order does not have the force of law; instead, it has the force of narrative. - The aim is to entrench the idea that an anticompetitive "moat," as frequently extolled by the likes of Warren Buffett, is just a polite euphemism for ripping off consumers.
The big picture: Some legislators have already embraced this vision, at least when it comes to big technology companies, although few if any of their bills seem likely to pass. - The larger project, however, is to move the culture and solidify the new narrative more broadly. Where popular opinion goes, lawmakers and jurists will ultimately follow.
Context: A moat, in the eyes of Buffett, is a company's built-in competitive advantage; the best kind of moat is when a company has no competition at all. - Flashback: "Competition is for losers," Peter Thiel has said.
- Between the lines: Thiel says that "capitalism and competition are opposites," since competition makes it much harder for capitalists to accumulate a fortune. Biden, by contrast, says that "capitalism without competition isn't capitalism. It's exploitation."
How it works: Biden's executive order is not aimed at all big business. Common targets of the left such as Walmart, ExxonMobil and Goldman Sachs are almost entirely untouched by it. - Instead, Biden is taking aim at companies engaged in anticompetitive behavior — firms that actively stifle competition by, say, insisting on having a monopoly on tractor repair, or by forcing consumers to go to a specialist before they can procure a hearing aid.
The bottom line: The success or failure of that project will ultimately be decided by judges, who tend to move extremely slowly. But jurists do tend to follow broader social trends. - If Khan's view of anticompetitive behavior becomes received opinion across the government broadly, that will inevitably show up in both legislation and jurisprudence eventually.
| | | | | | | | A message from ProEdge, a PwC Product | | Align skills and culture with the changing nature of work | | |  | | | | Readying the enterprise for the future typically includes investment in new technologies. But it also requires ensuring your organization has the right skills to make the most of these technologies. Read the guide from ProEdge, a PwC Product. | | | | | | 4. America's depressed oil production |  Data: Baker Hughes; Chart: Axios Visuals The demand for oil has been rising as consumers emerge from their homes, and businesses rev up to serve them. However, oil companies are dragging their feet on ramping up production, new data from Baker Hughes showed Friday. Why it matters: When production doesn't keep up with demand, it drives prices higher. Oil companies used to respond enthusiastically to rising prices by drilling more, in an attempt to cash in. - But that resulted in supply gluts that lowered prices, sending many companies into bankruptcy.
- Now, they're more disciplined, increasing production very slowly in response to demand.
By the numbers: Each week, Baker Hughes provides a tally of all the active oil rigs in the U.S. - As of July 9, there were just 378 active rigs, up only slightly from 376 the week before — but down from over 600 pre-pandemic.
- A barrel of WTI crude is about $73, up from about $40 a year ago.
Meanwhile, crude inventories have fallen to their lowest level since February 2020. The inventory drawdowns confirm supplies are getting tighter. Our thought bubble, via Axios' Ben Geman: "Producers are exercising caution despite the demand revival and price rise. We're a long ways off from seeing the pre-pandemic output peak, if ever." What to watch: Rising crude prices are visible to consumers in the form of what we pay for gasoline at the pump. - The Consumer Price Index report to be released on Tuesday will show how much energy prices are inflating.
- And throughout earnings season listen for what companies say about energy costs they absorb versus the costs they pass on to customers through higher prices.
| | | | | | | | 5. Next retail bump: America's great resizing |  | | | Jeffrey Greenberg/Getty Images | | | | Pandemic lifestyles caused a slew of Americans to gain — or lose — weight. That resizing is helping drive retail sales up, as consumers adjust their wardrobes, Axios' Hope King writes. Driving the news: Levi Strauss' revenue last quarter grew 156% from a year ago, to $1.3 billion, the company reported Friday. - Levi CEO Chip Bergh cited the size-change phenomenon as an earnings factor in an interview with CNBC on Friday. "That obviously gives a good reason to go out and update a wardrobe," he said.
Why it matters: The pandemic has reshaped retail and apparel trends. We're only beginning to understand how some of those changes will impact businesses this year — but we'll know more after this earnings season. By the numbers: In a March survey by consumer data provider NPD, 40% of women and 30% of men said they no longer fit into the sizes they wore last year. - Among those that reported a change, more went up in size than down.
This was driven by pandemic habits that tended toward either more snacking or more exercising, NPD says. What to watch: With the economy expected to be completely reopened by fall, overall retail growth will slow from its recent clip. Keep reading on plus-size brand Torrid's IPO | | | | | | | | A message from ProEdge, a PwC Product | | Align skills and culture with the changing nature of work | | | | | | | | Readying the enterprise for the future typically includes investment in new technologies. But it also requires ensuring your organization has the right skills to make the most of these technologies. Read the guide from ProEdge, a PwC Product. | | |  | | It'll help you deliver employee communications more effectively. | | | | | | Axios thanks our partners for supporting our newsletters. If you're interested in advertising, learn more here.
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