The Markets Face a Rare Double Decline
The bears lead the way.Credit…Michael M. Santiago/Getty Images
The ties that bind
Technology stocks have long been seen as the market’s most rewarding but riskiest investments. Bonds have the opposite reputation. This year, both have ended up in the same place — deep in the red.
The tech-heavy Nasdaq index fell nearly 3 percent yesterday, and is now down nearly 30 percent for the year. Meanwhile bonds, spooked by inflation and the Federal Reserve’s promise to keep raising interest rates to fight rising prices, are facing their most devastating period since at least 1926.
It’s rare for bonds and tech stocks to tumble together. In 2000, when the dot-com bust cratered tech, bond prices rose nearly 12 percent. Same was true in 2008. Tech stocks fell 42 percent, while bond prices rose 5 percent.
The alignment might be more natural now. Tech companies are more vulnerable to higher interest rates than they used to be.
One reason is borrowing. Apple, for instance, had just $300 million in debt in 2000. The iPhone maker now has nearly $95 billion.
Another is their size. Microsoft’s sales are seven times as much as they were 20 years ago. And as technology companies have grown, they are more tied to the ups and downs of the economy in general.
But don’t expect the relationship to continue forever. Venture capital and private equity funds remain full of cash, and ready to invest in promising firms. What’s more, higher interest rates will send investors looking for higher returns, and that favors tech shares. For now, though, higher interest rates, and the threat of a recession, are pounding every investment, and that includes tech. “It’s a painful quicksand moment for the tech sector,” said Dan Ives, a tech analyst at Wedbush Securities.
Nasdaq futures this morning point to a mild rebound when markets open. But the macro data indicates more trouble ahead. Inflation is running red hot — this morning, eurozone price increases hit a record high — putting pressure on central banks to raise interest rates further to rein in consumer demand, placing the global economy at further risk of slowing. In such a climate, corporate profits could suffer, dealing another headache to investors whose portfolios hold a heavy mix of stocks and bonds.
HERE’S WHAT’S HAPPENING
Ian heads toward South Carolina. The storm, strengthened again to a hurricane, left about two million customers without power in Florida this morning. More than 2.5 million people near the ocean in multiple states were also under hurricane warnings early today.
The Senate passes an emergency funding bill. Legislation approved yesterday will keep the federal government running past today’s deadline and will send more aid to Ukraine. President Biden is expected to sign the bill into law by midnight.
The E.U. backs a power-reduction plan. Energy ministers agreed today to measures to reduce consumption and tame climbing gas prices. Steps will include windfall taxes on fossil-fuel companies and targets for lowering electricity use during peak hours.
Look to Nike for what ails multinationals. Shares in the company fell more than 10 percent in premarket trading after the company disclosed problems that reflected an array of economic ills: growing inventories tied to supply-chain disruptions, a need to hold more sales to liquidate them and weaker overseas sales because of a strong dollar.
What Happened to Elon Musk’s Twitter Deal
A blockbuster deal. In April, Elon Musk made an unsolicited bid worth more than $40 billion for the social network, saying he wanted to make Twitter a private company and allow people to speak more freely on the service.
The response. Twitter’s board countered Mr. Musk’s offer with a defense mechanism known as a “poison pill.” This well-worn corporate tactic makes a company less palatable to a potential acquirer by making it more expensive to buy shares above a certain threshold.
Securing financing. Though his original offer had scant details and was received skeptically by Wall Street, Mr. Musk, the world’s wealthiest man, moved swiftly to secure commitments to finance his bid, putting pressure on Twitter’s board to take his advances seriously.
Striking a deal. With the financing in place, Twitter’s board met with Mr. Musk in April to discuss his offer. The two sides soon reached a deal, with the company agreeing to sell itself for $54.20 a share.
Tensions arise. Not long after Mr. Musk and Twitter reached their agreement, problems began. Mr. Musk threatened to pull out of the deal if Twitter did not provide more information on how it calculates the number of fake accounts. On June 8, the company announced that it planned to give him access to a large swath of its data.
Musk backs out. In July, Mr. Musk announced that he was terminating the deal, citing the continuing disagreement over the number of spam accounts. Twitter then sued the billionaire to force him to go through with the deal. But Mr. Musk fired back in a legal filing, arguing that the company concealed the true number of fake accounts on its platform, accusing Twitter of fraud.
The upcoming trial. Lawyers for Twitter and Mr. Musk have issued more than 100 subpoenas ahead of the trial in October, mostly targeting tech VIPs. On Sept. 6, a judge ruled that Mr. Musk can amend his suit to include whistle-blower accusations from Peiter Zatko, a former Twitter security chief who claimed that the social network had misled the public about its security practices. The judge also rejected Mr. Musk’s request for a delay of the trial.
Shareholders give approval On Sept. 13, as the start of the trial approached, Twitter’s shareholders voted to approve the company’s deal with Mr. Musk, even as it remains uncertain whether the acquisition will be completed. The company said a preliminary tally of shareholder votes determined support for the deal, but it did not immediately release a vote count.
Meta prepares for layoffs. The tech giant’s C.E.O., Mark Zuckerberg, told employees this week that the company would freeze all hiring. Zuckerberg said a drop in the company’s revenue made the job cuts necessary.
Why Elon’s texts (and tweets) matter
Yesterday, a slew of text messages between Elon Musk, the Twitter board, Musk’s bankers at Morgan Stanley and a supportive cadre of Silicon Valley stalwarts were made public as part of the billionaire’s legal fight to get out of his $44 billion deal to buy the social network. The texts, revealed in a court filing, offer fresh insights into the rally of support for Musk’s bid. They also exposed how desperate Wall Street was to get Musk’s business, and shed new light on some fundamental issues about the case.
Musk believed bots were a big problem. In a text to Bret Taylor, Twitter’s chairman, the day he told the company he planned to take it private, Musk wrote that it would be hard to fix Twitter as a public company, because “fake users will make the numbers look terrible, so restructuring should be done as a private company.” Twitter cited this text in its lawsuit seeking to force Musk to acquire the company, and it goes to the heart of one of the main legal arguments in the case: Despite his concern about the spam count, Musk made his offer without any stipulations around the accuracy of its spam numbers.
And the spam data may not help Musk’s case, anyway. When Musk first sought to call off the deal, on July 8, he cited an analysis by his own advisers that concluded that the percentage of active Twitter users who are actually spam is “wildly higher than 5 percent.” (Musk has said that Twitter’s estimates that 5 percent of active users are spam is misleading.) But according to a court filing revealed yesterday, one outside firm put the percentage at 5.3. Could such a meager difference derail the deal?
Musk’s intent in buying Twitter could matter, too. Many of the texts between Musk and the Twitter board in the lead up to the deal — as well as those with his various supporters — center on Musk’s goal to rid the platform of spam and use it promote free speech. Expressing such noble aims could overshadow his complaints of bots and spam being part of some larger “material adverse effect” that’s eroding the value of a firm he once wanted to buy. “Courts talk about whether there have been sufficient changes to call the economics of the deal into question,” said Ann Lipton, a professor of corporate governance at Tulane Law School. “It’s unclear how that applies when the buyer” makes clear the economics don’t matter much to him.
Speaking of those text messages … Here’s a sample of the many that were released yesterday:
“Put me in the game coach! Twitter CEO is my dream job,” the investor Jason Calacanis wrote to Musk.
The venture capitalist Steve Jurvetson recommended Musk hire the former Uber executive Emil Michael as Twitter’s C.E.O. — and his own son as an engineer.
When Musk tried urgently to reach out to Oracle’s Larry Ellison, a former Tesla board member, Ellison brushed him off: “Sorry. Let’s talk tomorrow.”
“Maybe Oprah would be interested in joining the Twitter board if my bid succeeds,” Musk wrote to the journalist Gayle King, a noted friend of Oprah Winfrey’s. (King called Musk’s offer a “gangsta move.”)
Big banks face new climate resiliency tests
This week’s extreme weather in Florida heightened the debate in Washington — and beyond — about the financial risks that climate change poses to banks.
Yesterday, the Fed announced that six of the biggest U.S. banks — Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo — were expected to participate in a pilot program next year to test their resilience and risks under different climate hypotheticals.
The Fed said that the program was “exploratory in nature” and that it would not have capital consequences.
Environmentalists lauded the move. Adele Shraiman of the Sierra Club told DealBook the program was “long overdue.” She argued that there was “really broad consensus” among financial authorities around the world that climate risk is a reality, but that the banks and regulators were not addressing those risks fast enough. The storm in Florida has been a “prime example” of physical risk, she said, but the much less visible risks come from failing to transition to green energy, from continuing to invest in fossil fuel companies and from the possibility that those types of companies could fail.
Similarly, a report yesterday from Ceres, a sustainability advocacy group, said that banks were making progress on climate goals, but that important aspects of the business, like the $600 trillion derivatives market, remain a “black box in terms of climate risk.”
Climate requirements may be an overstep, some industry representatives counter. In response to the Fed’s announcement, the Bank Policy Institute, an advocacy group representing the nation’s leading banks, said that recent research suggested “that the near-term risks are entirely manageable for large banks” and that regulatory requirements “seem to be disproportionate to the risk.”
The conflicting stances are creating friction for banks. Whether climate change presents material financial risks has long been a fraught political question, so American banking officials have been slower to explore the answers than their counterparts in Europe. At the same time, Republican politicians are amping up their fight against environmental, social and governance investing, creating headaches for banks and making them wary of international climate commitments.
Remembering Sandy Gottesman
David Gottesman, a longtime friend of Warren Buffett and a billionaire financier, died on Wednesday at age 96. Known as Sandy to his intimates, he quietly became a force in money management, as well as a major donor to charity.
Gottesman became one of Buffett’s close associates early on, after the two met in 1963 and bonded over investing discussions. Gottesman went on to found First Manhattan, an investment firm that now manages some $20 billion. But Gottesman’s most profitable decision was betting on Buffett: Gottesman invested in Berkshire Hathaway, gaining a stake that made him a billionaire.
“There probably has never been a better return on any stock held for 44 years in the history of Wall Street,” Gottesman wrote a decade ago.
Buffett regarded him as a close friend and adviser. He credited Gottesman with helping prevent an investment in a department store from becoming a financial disaster, and put Gottesman on Berkshire’s board. (Gottesman reportedly inadvertently inspired Buffett to invest in Apple when he lost his iPhone in a cab.)
“Absent Sandy doing anything financially for me, we would have been the best of friends,” Buffett told The Times yesterday.
THE SPEED READ
Banks tasked with helping finance Apollo’s leveraged buyout of telecom assets reportedly called off a $3.9 billion debt offering after struggling to find investors. (Bloomberg)
SoftBank is expected to lay off at least 30 percent of employees at its Vision Fund unit. (Bloomberg)
Members of the band Genesis, including Phil Collins, agreed to sell rights to their music for over $300 million to Concord Music Group. (WSJ)
The U.S. is still drawing oil from the Strategic Petroleum Reserve, despite gasoline prices falling. (NYT)
U.S. prosecutors charged the Russian oligarch Oleg Deripaska and two of his associates with conspiring to evade sanctions. (NYT)
Best of the rest
The F.D.A. approved an experimental treatment for A.L.S., despite questions about its effectiveness. (NYT)
Methane emissions from oil and gas wells are far greater than previously thought, a new study found. (WSJ)
NASA may work with Elon Musk’s SpaceX and the billionaire Jared Isaacman to give the Hubble Space Telescope a lift. (NYT)
Tech billionaires have collectively lost $315 billion this year, but they’re still richer than they were before the pandemic. (Recode)
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