The Finance 202: Elizabeth Warren is escalating attacks on private equity. The industry is ready to fight back.

THE TICKER

Elizabeth Warren is running for president as a Wall Street scourge, but she is devoting special energy to distinguishing herself as private equity’s worst enemy.

Investors in the sector have taken notice, discounting industry stocks when Warren was riding high. And industry analysts say they expect the top firms in her crosshairs to mount a more vigorous defense as the presidential campaign heats up next year.

The latest: The Massachusetts Democrat launched another attack on the Blackstone Group, the largest private equity firm in the world, accusing it of profiting off the destruction of the Amazon rainforest by investing in Hidrovias do Brasil, an infrastructure firm reportedly implicated in deforestation there. 

In a letter to Blackstone CEO Stephen Schwarzman, Warren called it “deeply troubling that U.S.-based private equity firms like Blackstone have taken advantage of the weakening of Brazil’s environmental safeguards through your investments in the logistics and resource extraction industries to boost short-term profits, at the expense of our global climate and Indigenous communities.” The letter, signed by six other Democratic lawmakers, asks for more information about Blackstone’s structure and its portfolio companies.

A Blackstone spokesman said reports Warren cited that the Brazilian company funded the construction of a highway through the Amazon are a “total fabrication,” per Politico’s Kate O’Donnell.

In an interview with CNBC’s John Harwood, Warren also went after Bain Capital, the firm that until recently employed her former home-state governor, Deval Patrick, now a 2020 rival. “When they’re trying to tweak up corporate actions that are already aiming only toward increasing profitability … if they could save a nickel by moving a job to a foreign country, would do it in a heartbeat — that is a problem in our economy,” she said.

Blackstone, for one, intends to go on a public offensive next year. Blackstone president Jon Gray said at a recent lunch that the firm’s management “will be actively telling its side of the story around some of the misperceptions it believes exists,” according to a note by JMP Securities’ Managing Director Devin Ryan. And the firm’s brass intends to enlist public pension fund managers in the cause, to make the point that the industry’s success helps secure the retirements of government workers. 

Of the static facing the industry from Warren and others on the left, Ryan tells me, “I wouldn’t be completely dismissive, and I think over the next year the rhetoric will continue to pick up. Investors are paying attention to the headlines, but they realize a lot will have to line up in a certain direction for there to be more meat behind the threats.”

Warren’s most recent broadsides join a list of pointed critiques she has launched against the industry broadly and the practices of some of its biggest firms individually. They are crystallized in her “Stop Wall Street Looting Act,” which she rolled out in July, calling the firms “vampires” and proposing to fundamentally remake their business model.

Warren’s assault has helped distinguish the candidate from her more moderate rivals. After a recent back-and-forth with Pete Buttigieg over transparency in their respective campaigns, for example, the South Bend, Ind., mayor disclosed an updated list of his bundlers, revealing a roster that includes Blackstone Group Vice Chairman Tony James.

The offensive has also spooked investors. Blackstone’s stock shed nearly 15 percent from an all-time high in mid-September over a three-week stretch that saw Warren’s poll numbers rising. Chris Kotowski, a senior analyst at Oppenheimer, tells me the developments were linked. In a recent note to clients, Kotowski wrote it would be foolish “to discount her very real possibility of becoming the next President. It is of course far from [a] certainty, but equally far from impossible. Moreover, she is clearly portraying private equity managers as the axis of evil in the American economy, never mind the fact that they employ millions of people, that most private equity investments are relatively successful and that some of the biggest beneficiaries of their outstanding performance over time have been public pension funds and charitable endowments … investors in the segment should at a minimum be prepared for 13 months of anti-[private equity] hectoring from the candidate.”

Blackstone’s stock has rallied as Warren’s poll standing has faded in recent weeks, regaining what it lost and then some. And it has climbed percent on the year. Other top publicly-trade firms have mirrored that performance: the Carlyle Group’s shares are up 83 percent; Ares Management Group’s are up 82 percent; Apollo Global Management, 76 percent; KKR, 43 percent. By comparison, the S&P 500, which just notched a new all-time high, has gained 25 percent this year. 

The gains are the result of a few happy circumstances including the change in firms’ corporate structures and the industry’s boom,” Bloomberg News reported recently. “After years of lamenting that their companies were being unfairly undervalued by the market, some of the biggest players converted to corporations from partnerships. That allowed them to be added to major stock indexes and helped investors better understand once byzantine balance sheets.”

MARKET MOVERS

Global economy gains traction. WSJ’s Eric Morath and Paul Hannon: “The global economy is regaining some of its footing, with recent economic and trade developments in the U.S. and China offering some comfort that the slowdown is easing. U.S. business activity improved to a five-month high in December, a new survey showed Monday, and China’s industrial output and consumer spending accelerated in November… 

“The result of the U.K.’s election also eased some uncertainty about how and when the country would leave the European Union. Meanwhile, the U.S. Federal Reserve said it would pause interest-rate cuts, suggesting the economy has found stability. ‘We’re looking at moderate economic growth in 2020,’ said Scott Brown, chief economist at investment firm Raymond James. ‘The downside risks look much less severe than they did back in August.'” 

Stocks notch record highs. Reuters’s April Joyner: “Wall Street stocks notched record closing highs on Monday as cooling trade tensions between Washington and Beijing and upbeat economic data from China boosted investor sentiment. The Dow surpassed its November closing high, while the S&P 500 and Nasdaq marked record closes for the third straight session.

“Friday’s announcement of an interim trade deal between the world’s two biggest economies has lifted prospects for the global economy, several analysts said. Although growth in China is expected to continue moderating, the trade developments brightened the country’s economic outlook.”

Homebuilder sentiment hits 20-year high. Bloomberg News’s Reade Pickert: “U.S. homebuilder sentiment advanced in December to the highest level since 1999 amid stronger sales and a surge in prospective buyer foot traffic.

“The National Association of Home Builders/Wells Fargo Housing Market Index jumped 5 points to 76, the biggest monthly increase since the end of 2017, and the November figure was revised higher, according to data released Monday. The reading topped all estimates in a Bloomberg survey of economists that had called for 70.”

The reading joined other encouraging domestic reports:A Federal Reserve Bank of New York survey showed manufacturers in the state are growing more upbeat, with the gauge of the orders outlook rising to the strongest since February. Elsewhere, two surveys of U.S. factories and service companies suggested economic growth is holding up at a modest pace.”

Pound slides on revived hard Brexit threat. Bloomberg News’s Charlotte Ryan: “The pound erased all of its gains since an exit poll that predicted a Conservative majority in last week’s election, and U.K.-focused stocks fell by over 1%, as the threat of no deal Brexit was revived. The pound dropped by the most since July after Prime Minister Boris Johnson said he would fix a hard deadline of December 2020 to reach a trade deal with the European Union. The currency’s one-year implied volatility was headed for the biggest jump since May.”

TRUMP TRACKER

TRADE FLY-AROUND:

— Mexico backs down from USMCA concerns: “The United States and Mexico resolved a last-minute dispute over labor rights that briefly threatened to derail plans for the House of Representatives to approve a new North American trade deal this week,” my colleagues David J. Lynch, Seung Min Kim and Kevin Sieff report.

“Jesus Seade, Mexico’s deputy foreign minister for North America, said he was ‘very satisfied’ with Trump administration assurances about limits on new labor attachés at the U.S. Embassy in Mexico City. Seade had complained in recent days that the attachés represented a bid to circumvent Mexico’s refusal to permit unilateral American inspections of factories in Mexico. Under the trade deal, only an independent panel chosen by both countries can visit factories to investigate alleged mistreatment of workers.”

Two Peterson Institute analysts weigh in on the revised pact in a new analysis, calling it a “net negative” for all three countries. “Its regulatory mandates, especially in autos, will restrict trade and hurt US industry, confirming the assessment by the US International Trade Commission earlier this year that the pact will cause US growth to decline by 0.12 percent,” Mary Lovely and Jeffrey Schott write. 

— Xi buys time with phase 1 deal: “For Chinese President Xi Jinping, the phase-one trade deal with [President Trump] isn’t exactly a reason to pop open the champagne,” Bloomberg News reports.

“After months of arduous negotiations, false starts and dashed hopes, the agreement announced on Friday night helps steady a relationship in free-fall. While that’s important for Xi, who has faced rumblings of discontent as the economy grows at the slowest pace in almost three decades and protests in Hong Kong rage with no end in sight, it’s at best a temporary respite.”

TRUMP WATCH:

— Swing state economies drag: “The American economy has found its footing after a summer recession scare. But much of the Midwest is still stumbling,” the New York Times’s Ben Casselman and Karl Russell report.

“Trump campaigned in 2016 on a pledge to restore jobs — manufacturing jobs, specifically — to long-struggling Midwestern communities, and he has made the economy a centerpiece of his re-election campaign. But job growth has slowed sharply this year in Michigan, Pennsylvania and other states that were critical to Mr. Trump’s victory in 2016, as well as in states like Minnesota that he narrowly lost.”

IMPEACHMENT MINUTE: A speed read on the latest from the congressional impeachment process.

“Centrist Democrats line up behind impeachment.” By The Post’s Seung Min Kim, Felicia Sonmez and Philip Rucker 

“Democrats accuse Trump of criminal bribery, wire fraud in report that explains articles of impeachment.” By The Post’s Felicia Sonmez, John Wagner and Brittany Shammas 

“More than 700 scholars pen letter urging House to impeach Trump.” By The Post’s Felicia Sonmez 

“The Ukrainian prosecutor behind Trump’s impeachment.” By the New Yorker’s Adam Entous

 

MONEY ON THE HILL

— Congress finalizes $1.3 trillion spending deal to avert shutdown: “Congressional negotiators cemented a $1.3 trillion federal spending deal with a pay raise for federal workers, money for federal gun violence research and the repeal of several taxes associated with the 2010 health care law,” my colleague Mike DeBonis reports.

“Congress is expected to pass the legislation this week ahead of Friday’s shutdown deadline and send it to Trump for his signature. Negotiators released the 2,313-page bill late Monday. A high-profile conflict over border wall spending — the issue that sparked a record 35-day partial government shutdown a year ago — was resolved with a retreat to the status quo: Funding remains unchanged from 2019 levels at $1.375 billion, short of the $8.6 billion Trump requested from Congress.”

  • What the GOP will like: The Trump administration retains the ability to move around funding for the wall, though the bill does not replenish accounts it already tapped for the project; the Pentagon will receive another $22 billion; and a program to privatize some of the Veteran Affairs Department’s health care delivery is also included.
  • What’s in it for Democrats: $25 million for federal gun violence research, $425 million in election security grants and a $208 million boost in funding for the Environmental Protection Agency
  • Ex-Im Bank renewal hitches a ride. Other riders include: A bill raising the national age for tobacco sales to 21; a permanent repeal of several Affordable Care Act taxes that have faced bipartisan opposition and have been repeatedly delayed since the ACA’s 2010 passage; a 3.1 percent pay raise for civilian federal employees; $7.6 billion in funding for the 2020 Census; and record funding for education programs including Head Start.

Lawmakers are also including a tax extenders package. WSJ’s Richard Rubin has the details on that late-breaking agreement: “The extended breaks included incentives for biodiesel producers, which expired at the end of 2017 but would last through 2022 if enacted. A more generous medical-expense deduction for individuals that lapsed at the end of 2018 would run through 2020. A tax credit for short-line railroad maintenance would last through 2022. Breaks for brewers and distillers set to lapse this year would continue through 2020.”

— DNC hopes labor dispute will be cleared up before debate: “The Democratic National Committee said … that it expects parties involved in a labor dispute threatening to upend this week’s Democratic primary debate to ‘promptly’ return to the negotiating table,” Politico’s Caitlin Oprysko reports.

“Xochitl Hinojosa, the committee’s communications director, cited Chairman Tom Perez’s experience as Labor secretary under former president Barack Obama, writing that he’d handled ‘several labor disputes’ in that role and ‘understands how much of a priority it is to get people back at the table.’ Throughout the day Friday, all seven White House hopefuls who’d qualified for Thursday’s PBS NewsHour/Politico debate threatened to skip the event, pledging they would not cross the picket line of campus workers locked in a labor dispute.”

POCKET CHANGE

— Boeing will suspend 737 Max production in January: “Chicago-based aerospace manufacturer Boeing will halt production of its new 737 Max commercial jetliner in January,” my colleague Aaron Gregg reports.

“There are no layoffs associated with the production cut, a person familiar with the decision said. The company’s announcement did not say how long the production halt would last. Although no furloughs of Boeing’s workers were announced, hundreds of companies supply parts for the Max and would be affected by the decision. Some White House officials had hoped that there would be a bump in economic growth if Boeing was able to quickly solve its problems. Boeing’s stock dropped $14.67 to $327 by the end of trading Monday, following reports that the company was expected to suspend production of the Max. Shares of Boeing Co. stock are down 10 percent over the past three months.”

400 of the biggest American corporations paid 11 percent in federal taxes last year. The Post’s Jeff Stein and Christopher Ingraham report that meant they paid “roughly half the official rate established under [Trump’s] 2017 tax law, according to a report released Monday. The 2017 tax law lowered the U.S. corporate tax rate from 35 percent to 21 percent, but in practice large companies often pay far less than that because of deductions, tax breaks and other loopholes.

“In the first year of the law, the amount corporations paid in federal taxes on their incomes — their ‘effective rate’ — was 11.3 percent on average, possibly its lowest level in more than three decades, according to a report by the Institute on Taxation and Economic Policy, a left-leaning think tank.”

Many paid no taxes: “The report also found that 91 corporations in the Fortune 500, many worth billions of dollars, paid no federal taxes last year.”

— Amazon strikes at FedEx: “Amazon.com Inc. says third-party merchants can no longer use FedEx Corp.’s ground delivery network this holiday season because it’s too slow — highlighting the e-commerce giant’s growing power over how products get to shoppers,” Bloomberg News’s Spencer Soper and Thomas Black report.

“Amazon sent a message to sellers Sunday night instructing them of the change, according to notifications reviewed by Bloomberg. Some Amazon sellers complained about receiving the change less than two weeks before Christmas when holiday spending is peaking. Their alternatives include United Parcel Service Inc.’s ground service.” (Amazon CEO Jeff Bezos owns The Washington Post.)

CHART TOPPER

A decade of economists getting it wrong, via Charles Schwab & Co. chief investment strategist Liz Ann Sonders: 

DAYBOOK

Today:

  • FedEx Corp., Pier 1 Imports and Cintas Corp are among the notable companies reporting their earnings, per Yahoo Finance.

Wednesday:

  • General Mills and Toro Co. are among the notable companies reporting their earnings. 

Thursday:

  • Rite Aid, Conagra Brands and Accenture PLC are among the notable companies reporting their earnings. 
  • The American Enterprise Institute holds an event about the USMCA with Sen. Pat Toomey (R-Pa.)

Friday:

  • Nike, Carnival Corp. and Carmax are among the notable companies reporting their earnings. 

THE FUNNIES

BULL SESSION

Recommended Posts

Share this post with your friends

Share on facebook
Share on google
Share on twitter
Share on linkedin

© Foundation for Truth in Journalism, a not for profit corp estb. 2010 ~ Non Partisan Pursuit of Truth®

Privacy Policy | Terms of Service