🎙️ Billionaire Summer Camp

Over the last couple of years, the U.S. dollar & stocks have basically moved in opposite directions.

🐻 During 2022’s bear market, the dollar rose (as measured against other major currencies) while stocks fell. And since the market bottom last October, the dollar has fallen.

Our Chart of the Day shows the inverse relationship between the dollar and the S&P 500. With the dollar near 15-month lows, will stocks return to all-time highs?

Goldman Sachs thinks so.

— Matthew & Shawn

Here’s the rundown:

Today, we'll discuss the three biggest stories in markets:

• Disney’s Bob Iger on restructuring, streaming, and TV

• Saudi Aramco’s big ESG loophole

• The sharp decline in Chinese exports

All this, and more, in just 5 minutes to read.

CHART OF THE DAY

IN THE NEWS

🏰 Disney’s Bob Iger on Extension, TV, and Streaming (WSJ)

Bob Iger isn’t going anywhere. The 72-year-old Disney CEO signed a contract extension to stay with the company through 2026.

Rewind: Since replacing Bob Chapek in November, Iger’s second tenure at Disney has been defined by restructuring. He spearheaded 7,000 layoffs across Disney and high-profile brands such as ESPN.

Speaking with CNBC at Sun Valley – the “summer camp for billionaires” – Iger left open the door to selling the company’s TV assets as the business struggles amid cord-cutting and the transition to streaming. In other words, Iger said Disney is open to selling an equity stake in ESPN and could spin off its legacy cable businesses such as ABC, FX, and National Geographic.

• He admitted that he didn’t anticipate the degree to which legacy cable channels would struggle, saying the TV properties “may not be core” to the company’s priorities.
  

• “The disruption of the traditional TV business is most notable,” Iger said. “If anything, the disruption of that business has happened to a greater extent than even I was aware.”
  

• “We just have to be open minded,” Iger added, saying the distribution and business model that underpins traditional TV “is definitely broken and we have to call it like it is.”

  

Why it matters

Disney has struggled. The stock price is down nearly 20% over the past five years vs. a roughly 60% rise for the S&P 500. Iger has been forced to cut costs and reshape parts of the company.

• In its most recent earnings report, Disney’s traditional TV networks operating income fell by 35%, indicating the TV business is falling much faster than expected.
  

• The company’s “linear” TV business, or traditional cable model, formed the foundation for a thriving entertainment empire for years. Profits boomed thanks to carriage fees and advertising revenues. Disney then reinvested those profits in other businesses, such as streaming.

Cord-cutting: Last fall, Iger said cable TV would be “pushed off” and go “away,” though he didn’t pinpoint a date. About 60 million U.S. households have TV packages this year, down 40% from 2013. Iger knows the competition in streaming is heating up, too, with Apple, Alphabet, and Amazon all joining the likes of Netflix for eyeballs.

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🛢️ ESG Loophole Helps Drive Billions to Fossil Fuel Giants (Bloomberg)

ESG is the controversial acronym for Environmental, Social, and Governance corporate reforms by shareholders and stakeholders, such as target carbon emissions.

It has increasingly dominated the investment world, incentivizing corporations to decarbonize their operations and investment firms to favor companies with higher ESG ratings.

• But Saudi Aramco, the largest oil company in the world, has proven an unlikely beneficiary of ESG loopholes.

It’s a complicated picture: In a nutshell, Saudi Aramco used a complex web of shell companies and financial ties to separate its operations from the capital it raises, sidestepping and actually leveraging efforts to discourage investment in carbon-heavy industries to its advantage.

As Bloomberg’s Matt Levine writes, “If you are…an ESG (investment) fund manager, and your mandate is to buy bonds of companies that don’t do a lot of carbon emissions and to avoid bonds of companies that do do a lot of carbon emissions,” you might have a simple checklist.

• “Oil companies: bad…don’t buy their bonds. Investment firms: fine…not a problem” because they just own financial investments (securities).
  

• Investment firms don’t operate oil pipelines, and their carbon emissions are generally negligible, with only some desks, computers, and electricity necessary to run those businesses. Said differently: Investment firms = ESG-friendly companies

How it works: For an oil company to bypass ESG investment constraints, what it could do, says Levine, is “take a bunch of real assets — pipelines, oil wells, whatever — and put them into a company, and then that company can issue securities to another company, and that second company doesn’t (directly) own any pipelines or oil wells…that company just owns securities. It’s just an investment firm!”

Why it matters

Saudi Aramco has done this with $28 billion worth of funds.

• The oil giant started by creating two subsidiaries for some of its oil and gas pipelines. Then it sold ownership stakes in those businesses to large investment firms like BlackRock, which investors financed with short-term loans.
  

• To repay those loans made to invest in Saudi Aramco’s pipelines, the investment firms created special-purpose vehicles (SPVs) — pretty similar to the idea of subsidiary companies — that sold bonds.
  

• And because those SPVs are tied to investment firms not directly operating in the fossil fuel industry, their bonds received above-average ESG scores.

That enables the bonds to be included in ESG indexes tracked by about $40 billion worth of investments, indirectly supporting Saudi Aramco’s funding with money meant to be reserved for more eco-friendly options.

• Said one leader of an environmental nonprofit: “It’s a real problem that entities are included in [ESG indexes] that have close links to Saudi Aramco.”

Other unintended consequences: Levine adds that ESG pressure on public companies pushes them to “get rid of most of their carbon-emitting assets” by selling them to private companies that don’t face the same ESG goals.

• That essentially pushes the dirtiest fossil fuel projects into the hands of private operators held less accountable to regulators and shareholders. One man has become a billionaire doing just this.

MORE HEADLINES

💡 Exxon inks $4.9 billion deal to boost energy transition plans

💊 FDA approves the first over-the-counter birth control pill in the U.S.

 ✈️ Delta says travel boom drove record revenue

📉 Producer price index (PPI), an inflation indicator, falls for 12th consecutive month

👎 China's Exports Fall Most In Three Years (Reuters)

China continues to face challenges both geopolitically and economically (topics we’ve covered recently.)

New data: Slowing factory activity has coincided with consumer prices hovering close to deflation in June.

• The country’s service sector saw its slowest expansion in May, and producer prices experienced their most significant decline in over seven years, a concerning trend.

Last month, the country also had its most significant export decline since the beginning of the COVID-19 pandemic three years ago.

• One Chinese official blamed “a weak global economic recovery, slowing global trade and investment, and rising unilateralism, protectionism and geopolitics.”
  

• This has intensified pressure on Chinese policymakers to implement new stimulus measures in an economy used to decades of rapid growth.

By the numbers: Exports from the second-largest global economy suffered a more severe decline than anticipated, plunging by 12.4% year-on-year in June after a 7.5% drop in May.

• Imports also experienced a sharper contraction than expected, declining by 6.8%, surpassing the predicted 4.0% decline and 4.5% fall in the previous month.

Notably, China's exports to the U.S. saw the sharpest decline among its top trading partners, down almost 24%, while exports to Russia and Africa have seen the most significant increases. The data highlights the political direction of Chinese cooperation and complicated efforts to revive turbulent relations with the U.S.

• Economists anticipate that exports will continue to decline before reaching their lowest point toward year-end.
  

  

Why it matters

China's economic prospects for a rapid recovery have diminished substantially, considering that exports contribute to approximately one-fifth of the economy.

• Heading into the country’s “reopening” earlier this year from harsh Covid restrictions, investors dove head first into Chinese stocks expecting a big economic rebound.
  

• That rebound has since stalled, and so have Chinese stocks.

The bottom line: China's slowing economy, driven largely by declining demand for its goods and efforts by Western companies to “reshore” supply chains given mounting geopolitical tensions in the region, namely around Taiwan, have contributed to a gradual decline in China’s global position.

• The Wall Street Journal reports that political tensions have underpinned a decline in foreign investment in China from $100 billion in the first quarter a year ago to $20 billion this year.

To counter weaker exports and foreign investment, some economists are calling for the country to run larger deficits and boost government stimulus to support household spending. But Chinese officials have moved slowly, frustrating investors.

• Pinpoint Asset Management’s chief economist commented: “The big question in the next few months is whether domestic demand can rebound without much stimulus.”

See you next time!

That's it for today on We Study Markets!

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