Internal | August 15th, 2024

GOOD MORNING

Here's everything you need to know today: Bill Ackman is embracing the “Just Do It” ethos. No, not IPO’ing another closed-end fund (that would be hilarious), he’s loading up on Nike. According to a 13F filing on Wednesday, Ackman’s Pershing Square Capital snapped up over 2.7 million shares, worth around $289 million. And it looks like a classic Ackman move; Nike’s stock is down about 10% year-to-date, feeling the heat from slower consumer spending and supply chain snarls. But it still has a market cap around $150 billion and the brand power of, well, Nike. Clearly, someone just screened “Air” for Bill in his house out East.

Ackman’s got a history of making big bets on turnarounds, but he announced two years ago that he’s done being a “vocal” activist investor, so he’s hoping the swoosh can make a comeback all by itself as the global economy starts to settle. But Bill might want to at least whisper—after all, his record is not perfect (looking at you, Herbalife and Valeant). Ackman might want to lace up a pair of AirMax1’s like every other dad out there and start being a little active again.

Let’s dive into more detail below.

BREAKING NEWS
Someone should check in on Bob the Builder because Home Depot lowered its estimates on Tuesday following the release of its Q2 2024 earnings report. The retailer announced that its second-quarter U.S. comparable sales declined by 3.6% versus the expected 2.63% drop of Wall Street. It now anticipates comp sales to fall 3% to 4% for the year, compared to the previous expectation of a 1% decline.

Home Depot cited customers spending less on home improvement projects, pressured by higher interest rates and growing concerns about the economy's outlook.

While this statement may not be groundbreaking, it accurately reflects the current market, even as mortgage rates decline. Many potential buyers still face unaffordable prices, a tight market, and fears of a recession fueled by ongoing media coverage.

"The higher interest rates started to impact the housing market, particularly housing turnover, down some 40%. Last quarter, last month, we saw numbers that on an annualized basis, we're approaching 40-year lows… impacting customers' interest in financing larger projects," Home Depot CEO Edward Decker said during the company's second-quarter earnings call on Tuesday. "Everyone's expecting rates will fall, so we're deferring those projects."

WHAT HAPPENED
Despite Home Depot's inability to remodel its earnings this year, the company remains confident in its overall business outlook. So much so that it made its largest acquisition in the company's history, acquiring SRS Distribution for $18.3 billion.

With its extensive network of 760 warehouses and over 4,000 delivery trucks, SRS will operate independently. This aligns with Home Depot's strategy to increase its sales to housing professionals, who currently account for about half its revenue and tend to spend more than DIY customers. The acquisition is expected to help Home Depot tap into more complex renovation and remodeling projects, furthering its recent efforts to cater to professionals in simple and complex housing projects.

However, some critics suggest the acquisition might have been too aggressive, considering Home Depot's sub-par profit report. Sales increased to $43 billion, up only 0.6% from last year's quarter, including $1.3 billion from SRS. Yet, comparable sales decreased by 3.3%, reflecting overall weaker consumer demand, as noted by Mr. Decker.

This was one of many concerning figures in Home Depot's financial landscape. Operating income dipped 0.8% to $6.5 billion, and net earnings slid 2.1% to $4.6 billion in Q2 2024 compared to the previous year. These declines, coupled with a significant reduction in cash reserves from $2.8 billion to $1.6 billion, depict a company grappling with profitability challenges, tightening liquidity, and a consumer base that can't afford to upgrade.

Their outlook remains cautious yet optimistic (though, realistically, what else could it be?), as evidenced by Home Depot's updated guidance projecting a 3-4% decline in comparable sales and a 2-4% decrease in diluted earnings per share for fiscal 2024. This suggests that the home improvement giant is bracing for continued headwinds in the near term.

The overall lukewarm report from Home Depot could look better and feel like a symptom of a much larger, ongoing issue in the United States: keeping buyers from owning a home in the first place.

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BREAKING NEWS
The economy isn’t technically in a recession, but try telling that to most Americans. Consumer sentiment just took a nosedive, and it doesn’t take a genius to figure out why. Inflation is still biting, wages are barely budging, and those recession-like vibes are spreading faster than the latest viral TikTok dance.

According to the latest data, consumer sentiment tanked in August, dropping sharply from the previous month. Why? Because even if economists are telling us we’re in the clear, try saying that to someone whose grocery bill and rent are going up while their paycheck stays stuck in neutral.

WHAT HAPPENED
The University of Michigan’s Consumer Sentiment Index plunged from 71.6 in July to 67.7 in August, reflecting a growing sense of unease among Americans. Sure, the official numbers say we’re not in a recession, but inflation, still hanging around at 3.2%, is doing enough to keep folks awake at night. Your paycheck? It’s probably not stretching as far as it used to. While the numbers on your pay stub might have inched up, so have the prices at the grocery store, the gas pump, and, like, everywhere. The result? Any wage gains are getting swallowed almost whole by the inflation monster. So, while economists love to point to wage growth as a sign of a healthy economy, the reality on the ground is a lot less rosy. People are working harder just to stay in the same place, and that’s starting to wear thin.

Then there’s the job market, the supposed golden child of this economy. Sure, unemployment is still pretty low at 3.5%, but the cracks are starting to show. Job openings have dropped from a peak of 11.9 million in March 2022 to around 9.6 million in June 2024, and layoffs are creeping up, like 25% higher year-over-year creeping, according to the latest Challenger Report. The post-pandemic job boom’s sense of security is evaporating, leaving everyone waiting for the other shoe to drop. And when people start worrying about their jobs, they tend to tighten their belts. It's not great for consumer confidence.

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BREAKING NEWS
Google, once the tech world’s golden child, seems to be losing its shine. Their struggles in the AI space are hard to ignore, with missteps like a failed live demo of Gemini AI struggling to link an itinerary to a personal calendar and competitors like ChatGPT and Claude AI gaining ground.

Adding to the woes is the controversy over Google’s involvement in the Harris campaign, where search ads allegedly edited headlines to imply major publishers’ support for Harris. Google blamed a technical glitch in their Ad Library, but the issue has drawn significant media attention, especially given Harris’s financial backing from Google executives.

And if that wasn’t enough, Google’s recent legal defeat—Judge Amit Mehta’s August 5th ruling on the company’s anticompetitive practices—has sparked speculation that this could be the start of a broader push to break up the tech giant that once proudly declared, “Don’t be evil.”

WHAT HAPPENED
Judge Mehta’s ruling delivered a serious blow to Google, finding the tech giant guilty of violating the Sherman Act as a monopolist. But it's a massive victory for the DOJ and nearly 50 states that have been pursuing this case since 2020. Attorney General Merrick Garland didn’t hold back, calling it a “historic win for the American people” and emphasizing that no company, no matter how large, is above the law.

However, the ruling notably omits specific remedies, leaving open the question of how to dismantle Google’s anticompetitive practices. This approach suggests a desire to go beyond just handing out a fine, which would barely scratch Google’s $1.5 trillion market cap. Instead, more impactful measures are on the table, such as forcing Google to open its APIs and data—reducing barriers to entry for competitors—or even breaking up the company into separate entities focused on search, advertising, cloud services, and more.

The most drastic option being floated by Bloomberg and Reuters? A complete breakup of Google, splitting it into multiple independent companies, each handling a specific area of its business. If this happens, it could mark the end of Google as we know it, setting a powerful precedent for how big tech giants like Apple, Meta, and Microsoft could be regulated in the future.tart of a broader push to break up the tech giant that once proudly declared, “Don’t be evil.”

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1. Southwest Airlines faces boardroom battle as Elliott launches proxy fight

Elliott Investment Management has initiated a proxy battle with Southwest Airlines by nominating 10 candidates for the airline’s 15-member board. The hedge fund, which has a significant stake in the company, is seeking to improve the airline's performance, citing dissatisfaction with current leadership amid operational challenges.

2. Mars acquires Pringles-maker Kellanova in $36 billion deal

Mars, the maker of M&M’s and Snickers, has agreed to acquire Kellanova, the company behind Pringles and Cheez-It, for $36 billion. The acquisition creates one of the largest players in the snack food industry, expanding Mars' portfolio with popular consumer brands.

3. UBS posts $1.14 billion profit, surpassing estimates amid client inflows

UBS reported second-quarter profits of $1.14 billion, exceeding market expectations, driven by $27 billion in client inflows. The strong performance reflects the successful integration of Credit Suisse and enhances UBS's ability to return capital to shareholders.

4. US inflation data supports likelihood of September rate cuts

US consumer prices rose 0.2% in July, in line with expectations, reinforcing predictions that the Federal Reserve will cut interest rates in September. This marks a significant step toward easing monetary policy after months of tightening.

5. Norway’s sovereign wealth fund gains $138 billion in first half of 2024

Norway’s sovereign wealth fund posted a $138 billion profit in the first half of 2024, driven by strong demand for tech stocks, particularly in the AI sector. The world’s largest sovereign fund benefited from increased investments in technology firms.

6. Texas sues General Motors over sale of driver data

Texas has filed a lawsuit against General Motors, accusing the automaker of illegally collecting and selling detailed driver data to insurance companies. The lawsuit alleges that GM deceived customers into providing their driving records without proper consent.

7. Chipotle’s Brian Niccol to lead Starbucks as new CEO

Starbucks announced that Brian Niccol, the current CEO of Chipotle, will take over as its new chief executive. Niccol’s leadership has been credited with turning around Chipotle, and Starbucks hopes he can replicate the same success at the coffee chain.

8. Tencent reports 82% profit surge in Q2 as gaming rebounds

Tencent's second-quarter profit soared 82%, boosted by a strong performance in its gaming division. The release of a blockbuster mobile game in May helped drive the growth, signaling a recovery for the Chinese tech giant's key gaming business.

9. Cisco to cut 7% of workforce as it shifts focus to AI and cybersecurity

Cisco Systems is set to lay off 7% of its employees, marking its second round of job cuts this year. The company is refocusing on high-growth areas like artificial intelligence and cybersecurity as it navigates changes in the technology landscape.

10. DraftKings reverses surcharge plan after backlash from users

DraftKings has scrapped its controversial plan to impose a surcharge on customers in high-tax states after receiving strong backlash. The move followed rival FanDuel’s decision not to implement a similar fee, which DraftKings had previously deemed necessary to offset tax costs.

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