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How the markets started to love Biden
The S&P 500 is back near a record high, rising in four of the past five sessions. Analysts say that a “blue wave” election, in which Democrats win the presidency and control of Congress, could be good for the stock market. They didn’t always have that view.
First, they fretted about taxes. When Joe Biden emerged as the likely Democratic presidential nominee, Wall Street focused on the leftward lean of his platform — including a $700 billion infrastructure plan, $775 billion child-care plan and $2 trillion climate plan — and, especially, his plan to raise taxes.
• The potential rollback of Trump tax breaks was “top of mind of equity market investors,” Morgan Stanley analysts noted in June. They warned that “deficit spending and redistribution” under a Democrat sweep might dampen corporate confidence, investment and employment.
Then, stimulus talks failed — and coronavirus cases rose. When Congress passed the CARES Act in March, D.C. insiders dubbed it “triage,” assuming there would soon be a second bill. But talks on a second stimulus package have stalled, with Democrats pushing for an omnibus plan and Republicans favoring stand-alone measures to limit deficit spending. As the economic recovery began to sputter and coronavirus cases rose across the country, analysts began to discuss the possibility of Democratic control in a different way.
• “All else equal, such a blue wave would likely prompt us to upgrade our forecasts,” Goldman Sachs analysts wrote this month, pointing to the likelihood of a giant stimulus package shortly after the inauguration in January and longer-term spending increases after that. The effect of such measures would “at least match” the drag from tax increases, they wrote.
And President Trump refused to commit to a peaceful transfer of power. Mr. Trump has repeatedly been unwilling to guarantee that he will accept the results of the election. That has made a bigger lead for Mr. Biden in the polls more appealing to investors, for the certainty of a result if nothing else.
• “Investors may have initially feared a blue wave, but a delayed or contested election outcome is even more unsettling,” UBS analysts wrote this week.
The enthusiasm may not last. If there is a Democratic sweep, Mr. Biden could face a listless economy, a second wave of the virus and pressure from the left of his party to impose the sorts of regulations and taxes that made analysts worry about his policies. And, of course, there are other ways the vote could go on Nov. 3.
Today’s DealBook Briefing was written by Andrew Ross Sorkin and Lauren Hirsch in New York, Ephrat Livni in Washington and Michael J. de la Merced and Jason Karaian in London.
Here’s what’s happening
Johnson & Johnson halts its Covid-19 vaccine trials. The drug maker paused the late-stage clinical study because of an “unexplained illness” in a participant. Other vaccine trials have been stopped over similar issues: AstraZeneca has yet to resume the U.S. portion of its studies.
SoftBank plans to join the SPAC craze. The head of the tech conglomerate’s investment arm, Rajeev Misra, said that the company may start its own blank-check fund. It would reportedly include money from SoftBank’s second Vision Fund and outside investors — and isn’t aimed at buying SoftBank portfolio companies like WeWork.
A global pact on taxing tech giants is on hold. The O.E.C.D. said that it hadn’t been able to reach an agreement on how to tax U.S. companies like Google and Facebook that generate significant revenue abroad. That makes the prospect of individual countries imposing their own taxes — and a flare-up in trade tensions — more likely.
Britain orders new pandemic lockdowns. Prime Minister Boris Johnson introduced a system of tiered restrictions for areas with widespread outbreaks, as he ordered the closure of pubs, bars and gyms in Liverpool. Critics said the measures may damage local economies — and fail to halt outbreaks.
Shareholders back uniting Unilever. Investors in the consumer goods giant overwhelmingly approved a plan to end a 90-year-old dual structure and combine its British and Dutch arms. It says it will be able to strike acquisitions and sell divisions more quickly as a fully British company.
Disney embraces a streaming future
The entertainment giant introduced a reorganization that will put Disney+ and other streaming services at the forefront of its business, as the company adapts to shifts in consumption.
Disney officially made streaming services its “primary focus.” A corporate overhaul will create three divisions focused on making movies, general entertainment and sports programs, while another group will oversee distribution to streaming services, TV networks and theaters.
• “There is a seismic shift happening in the marketplace, and you can either lead or follow and we chose to lead,” said Bob Chapek, Disney’s C.E.O.
The move puts Disney more squarely in competition with Netflix, and follows similar moves by competitors like Comcast’s NBCUniversal and AT&T’s WarnerMedia. The shake-up comes as the pandemic has decimated the movie-theater and theme park businesses.
The activist investor Dan Loeb applauded the move. Mr. Loeb’s Third Point, which last week urged Disney to permanently cut its dividend to focus on Disney+, said the move showed the company was “focused on the same opportunity that makes us such enthusiastic shareholders.” (It’s unlikely that Disney did this because of the pressure: The company said on its earnings call in August that it would soon share more aggressive streaming strategy.)
Deal Professor: In defense of SPACs
Steven Davidoff Solomon, a.k.a. the Deal Professor, is a professor at the U.C. Berkeley School of Law and the faculty co-director at the Berkeley Center for Law, Business and the Economy.
As ever-larger blank-check companies hit the market, critics of SPACs grow louder, too.
There have been SPAC disasters, and I’ve criticized them over the years. But SPACs undeniably offer a quick path to liquidity for private companies and a workaround for the often expensive and arduous I.P.O. process.
And if SPACs are a rip-off, consider who loses.
It’s not those who invest in the SPAC’s I.P.O. These investors, often hedge funds, can take back their shares (with interest) if they don’t like an acquisition target. I.P.O. investors also receive warrants to protect them from dilution and share in any acquisition upside.
It’s not the promoters. Although they risk losing money in a liquidation or a bad acquisition, the promoters get enough in return to make the risk worth it. The upside can be hefty, at up to a 25 percent ownership interest in a SPAC, and the regulators are rumored to be considering more disclosures about SPAC fees. But private equity firms also charge high fees, and investors seem OK with it.
It’s not the company acquired by a SPAC. It could negotiate a bad price, and the SPAC often gets a discount for providing rapid liquidity to the target’s shareholders. But no company is forced to sell, so this is a willing trade-off. Besides, discounts on SPAC acquisitions are likely to shrink as competition grows for acquisition targets.
The most likely losers are investors who come in at the time of the acquisition. It’s common for an acquisition to be accompanied by outside investments (a private investment in public equity, or PIPE). This helps validate the acquisition, and PIPE investors tend to be sophisticated professionals who know the risks. Retail investors who buy at this stage may lose money, but it’s hard to see them as sheep being led to slaughter: The risks are similar to small-cap investments with high volatility. We need more study of returns to account for differences in SPAC transaction structures and other measures of risk.
There will no doubt be future SPAC disasters, but if we’re going to criticize these companies we need to define who exactly is being unduly harmed or taken advantage of. Perhaps it’s no one.
Leon Black rushes to reassure Apollo investors
After The Times reported on the deeper-than-known links between the billionaire Apollo chief and Jeffrey Epstein, Mr. Black sought to reassure his firm’s limited investors that the $414 billion investment giant “never did any business with Mr. Epstein, at any point in time.” In a letter to the firm’s limited partners, Mr. Black said that Mr. Epstein provided “professional services” only to his family businesses.
• Mr. Black conceded that he paid millions to Mr. Epstein between 2012 and 2017 — The Times reported that it may have been as much as $75 million — but added that the advice “was vetted by leading auditors, law firms and other professional advisers.”
• He acknowledged, as The Times reported, that he accompanied Mr. Epstein to meetings with several Harvard professors and took his family to Mr. Epstein’s private island in the Caribbean while on vacation nearby.
• He confirmed that the Virgin Islands’ attorney general wanted documents as part of a civil investigation into Mr. Epstein’s businesses, but added that he — and others, like Citigroup and JPMorgan Chase — were third-party witnesses.
Why Mr. Black is speaking out: Investors have questioned how forthcoming he has been about his ties to the late Mr. Epstein, who pleaded guilty in Florida to a state prostitution charge in 2008 and was arrested last year in New York on federal sex trafficking charges. Apollo shares fell nearly 6 percent yesterday after The Times’s report.
• “With the benefit of hindsight — and knowing everything that has come to light about Mr. Epstein’s despicable conduct more than 15 years ago — I deeply regret having any involvement with him,” Mr. Black wrote.
Whispering to business at the Supreme Court confirmation hearings
Judge Amy Coney Barrett faces questions from senators today in a Supreme Court confirmation fight whose outcome is likely to steer the court to the right for years. Expect a focus on the fate of the Affordable Care Act and Roe v. Wade, but for clues on how a Justice Barrett might rule on business matters, listen for slightly more obscure keywords:
“Lochner”: Lochner v. New York, a 1905 case that struck down a law limiting bakers’ weekly working hours, was emblematic of the era’s rulings and became shorthand for a series of deregulation cases. Some say a new “Lochner era” may be upon us, especially if the theories that prevailed at the time come up this week.
• Should the court go this way, it wouldn’t be an accident, the “Kochland” author Christopher Leonard argues in a Times Opinion piece, pointing to the billionaire businessman Charles Koch’s decades-long investment in his conservative judicial project.
“Chevron”: As we’ve noted before, Judge Barrett follows the philosophy of the late Justice Antonin Scalia, hero to conservatives and a staunch ally of corporations. If confirmed, she’d most likely follow in his footsteps, which, in broad strokes, means giving less deference to regulatory agencies and more to businesses, challenging the doctrine established by a 1984 case involving the oil company and the E.P.A.
• The Roberts court is sympathetic to business, but it’s not completely laissez-faire, Adam Feldman, legal statistician for Empirical SCOTUS, told DealBook. Another conservative would naturally nudge the court rightward, but, statistically speaking, justices don’t show loyalty to presidents who appointed them. A Justice Barrett could surprise.
The speed read
• The consumer lender Finance of America Equity Capital, which is owned by Blackstone, reportedly plans to go public by merging with a SPAC, Replace Acquisitions Corp. (WSJ)
• Roblox, the video game platform popular with tweens, said it had filed confidentially for an I.P.O. (Reuters)
Politics and policy
• Wisconsin officials denied $3 billion in subsidies to Foxconn, saying the Taiwan-based company had failed to create enough jobs at a new touch-screen factory. (WSJ)
• Federal and state financial regulators are poised to battle over special banking licenses to fintech companies. (FT)
• Prime Minister Jacinda Ardern of New Zealand is expected comfortably win re-election, bolstered by a decisive pandemic response. (WaPo)
• Facebook banned content denying the Holocaust from its platforms. YouTube declined to ban content promoting the QAnon conspiracy theory, which Facebook did last week. (NYT, CNN)
• Mark Zuckerberg has spent nearly $11 million to overhaul a California law capping real estate taxes. (Recode)
Best of the rest
• The first coronavirus vaccine will not make life normal again. (NYT)
• Thais are questioning the king’s control of a $40 billion portfolio. (FT)
• Meet the Excel warriors saving the world from spreadsheet disaster. (Wired)
Thanks for reading! We’ll see you tomorrow.
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