DD Digest: Q-Tightening & Uncertain Acquisitions

A quick fix of the latest financial happenings.

Jun 10, 2022

Good morning, investors!

After a warm reception last week, we’re back with another issue of DD Digest.

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Without further ado…

One Straightforward Explanation of the Fed’s Dilemma

We’re in a weird state of flux.

There’s a horrible war in Ukraine with drastic economic implications, most notably surging energy prices.

Global supply chains still face a bevy of obstacles even if we exclude the ripple effects of Russia’s invasion, including labor and material shortages.

Oh yeah, and inflation is running rampant amidst a resiliently tight labor market that’s underpinning the problem — a feedback loop of rising salaries (and consumer spending) driving more demand and limiting supply (and, thus, increasing prices).

Rinse. Repeat.

Jerome Powell and the rest of the Federal Reserve’s board members are not in an envious position. They must decide which economic levers to pull and how hard to pull them.

Earlier this week, Barron’s reporter Nicholas Jasinski shared an articulate, well-explained article on the Fed’s dilemma and the potential repercussions of their quantitative tightening pursuits. I’ve shared a couple of snippets below:

The Fed can’t fix supply problems, so it will have to use its tools to hit demand. By raising interest rates, it decreases the affordability of personal and business loans, home mortgages, and other borrowing. It also increases the returns on the least-risky places to park cash, such as Treasury bonds or consumer savings accounts, rather than funding free-spending start-ups or other riskier ventures. Credit spreads could widen as benchmark interest rates rise, making it more expensive for corporations to issue debt to fund investments or other spending.
All else being equal, tougher borrowing conditions will mean less demand from companies and individuals. If all goes well, balance in the economy would be restored and inflation would subside, all without driving the economy into a recession, or at least not a deep one.

In sum, the Fed could curtail inflation via the wealth effect — the idea that indirectly reducing asset prices (i.e., wealth) limits consumer spending — without severely wounding the economy.

Of course, as Nicholas points out, that’s “the rosiest scenario.”

The bigger risk is that the Fed overshoots and clamps down on demand and financial conditions so much as to push the U.S. economy into a recession. That could solve the inflation problem, while creating a host of new ones instead. Still, officials might be making the calculus that a recession is worth it to get the U.S. economy out of its current inflationary morass. That’s particularly true if the war in Ukraine were to escalate, forcing food, oil, and other commodity prices still higher, a risk that probably doesn’t get enough attention. But a recession would mean higher unemployment, lower corporate earnings, and an even more severe decline in stock prices.

Next week’s fed meeting should be telling.

Two Industry-Shaking Acquisitions (That Might Not Happen)

The world’s preeminent streaming platform, Netflix, seemed to hit a wall in Q1. Subscriber numbers fell for the first time in at least a decade. Plus, toward the end of the quarter, the company raised prices again — which rarely resonates with viewers.

But could the streaming giant be exploring some inorganic growth?

According to Insider, there have been internal rumblings at Roku about a potential acquisition by Netflix.

Employees at Roku have been discussing the possibility of a Netflix acquisition in recent weeks, according to people familiar with the matter. The chatter comes as Roku's stock has dropped about 80% since late July on weaker demand for video and lower set-top-box sales.

What’s going on with Roku you ask?

Roku competes with Apple, Amazon, Google, and Samsung in the market for streaming devices, and some of those industry titans are battling with the smaller company for lucrative video-ad dollars. The collapse in Roku's stock made it hard to compete with its larger tech rivals on pay in a tight labor market. The result has been a staggering increase in equity grants to employees, leaving Roku well underwater on stock-based compensation.

Netflix has dominated the SVOD marketplace, now it wants to enter the AVOD market. On the other side, Roku’s share price is much more “acquirable” at the moment ($92.37 versus a 52-week high of $490.76). So, it’s not impossible to see how Roku could be a good fit. But only time will tell if this rumor has legs.

While far more substantiated, Elon Musk’s attempt to privatize Twitter has also been in doubt — Musk threatened to kill the deal unless he gained access to the social media platform’s bot data (i.e., fake users that inflate the platform’s perceived size).

Well, Twitter finally relented. According to the Washington Post:

After a weeks-long impasse, Twitter’s board plans to comply with Elon Musk’s demands for internal data by offering access to its full “firehose,” the massive stream of data comprising more than 500 million tweets posted each day, according to a person familiar with the company’s thinking, who spoke on the condition of anonymity to describe the state of negotiations.

Investors are still skeptical, as TWTR shares closed at $39.53 on Thursday — well below Musk’s acquisition offer of $54.20.

Three Eye-Opening Tweets

Speaking of Twitter, here are three eye-opening tweets, including an absolute DOOZY of a thread that promises to expose scandals and corruption in the crypto space (see tweet #3 below).