Wall Street Breakfast: Chaos In Brazil

Chaos in Brazil

Thousands of supporters of former Brazilian President Jair Bolsonaro stormed the country’s government buildings on Sunday, including the Supreme Court, Congress and the presidential palace. Many of the rioters called for military intervention to remove Luiz Inacio Lula da Silva, who took power a week ago in one of Brazil’s closest elections on record. Windows were smashed, art works were destroyed, and computers and desks were overturned, leaving the monumental buildings’ interiors in a state of ruin.

Snapshot: The attack is reminiscent of the storming of the U.S. Capitol on Jan. 6, 2021, with some notable differences. In the leadup to the riots, both former President Trump and Bolsonaro cast doubt on the validity of election voting systems and refused to say they would unconditionally accept the results. However, while January 6th was intended to block President Biden’s certification and happened while Congress was in session, no one was in any of the government buildings in Brazil’s capital at the time of the attack, and Lula wasn’t even in Brasilia.

Riot police began to restore order within hours, arresting about 300 people, but questions remain as to how public security forces in the capital were so unprepared (rioters announced their plans for weeks on social media). Brasilia’s head of public security, Anderson Torres, has since been fired, while da Silva decreed a state of federal intervention in the city. “Peaceful demonstrations, in the form of the law, are part of democracy,” Bolsonaro tweeted from Florida in response to the attack. “However, depredations and invasions of public buildings as occurred today, as well as those practiced by the left in 2013 and 2017, escape the rule.”

To invest? Brazil, Russia, India and China, collectively known as the BRIC nations, were all the rage in the early 2000s, when emerging market investors hoped to capitalize on their growth and population expectations, as well as their sources of raw materials. Barring China (and possibly India), things haven’t quite materialized, and Lula will have a long way to go in dealing with a politically divided nation and a weakening economic outlook. The recent commodities boom could benefit the country, and Lula even leveraged the supercycle in his first two terms to finance social welfare programs and reforms, while driving Brazil’s GDP to the highest in its history. (28 comments)


Survey Monday

Expectations have gotten gloomier as the fourth-quarter earnings season kicks off this Friday. In aggregate, S&P 500 companies are forecast to report their first losing quarter since 2020, according to FactSet, with earnings dropping by 4.1% Y/Y (compared to 2.5% growth in Q3, 5.8% in Q2 and 9.4% in Q1). Do you agree?

· Yes (margins have already peaked for this cycle)
· No (recent economic data has been better than expected)

Take the survey and see the results here

Equipment repairs

The “right-to-repair” movement is making its way through the agriculture sector, with Deere and Co. (NYSE:DE) giving its U.S. customers the right to fix their own equipment. The company is one of the world’s largest makers of farming equipment, which has increasingly been relying on software and sensors in machinery to boost harvests and planting. Up until now, Deere had required customers to use its parts and service divisions, and only recently allowed authorized dealers rather than cheaper independent repair options.

Fine print: The memorandum of understanding signed with the American Farm Bureau Federation states that owners and independent technicians cannot risk any safety controls or protocols on the equipment. Deere’s intellectual property, like copyrighted software, will also be protected from infringement, while federal and state emissions requirements cannot be compromised because of modifications or changes made to the machinery.

“This will enable you and your independent mechanics to identify and fix problems,” Farm Bureau President Zippy Duvall declared. “You will have access to the diagnostic tools and information you need. And you’ll get it at a fair and reasonable price.”

Outlook: Many industries have gone through some “right-to-repair” backlash, especially those with highly complex computerized systems. Apple (AAPL) even agreed to let customers fix their own iPhones and Macs in 2021 after the Biden administration ordered the FTC to address “unfair anti-competitive restrictions on third-party repair or self-repair of items.” Companies may be keen to avoid regulation or legislation with their newfound commitments, but only time will tell if that will become a reality. (3 comments)

Giving up control

Shares of Alibaba (BABA) are up 5% premarket after founder Jack Ma eliminated his effective majority control over sister company Ant Group. The affiliate’s effort to go public fell apart back in 2020 when Ma’s criticism of Chinese regulators got both companies in hot water, scuttling what would have been the world’s largest IPO. At the time, Ant was planning a dual listing on the Shanghai and Hong Kong stock exchanges that would have raised a record $34.5B (Alibaba owns 33% of Ant).

Backdrop: The 58-year-old Ma, whose estimated $34B fortune makes him one of China’s richest people, long served as a poster child for the Asian nation’s market economy. He co-founded Alibaba – essentially China’s version of Amazon (AMZN) – in his apartment in 1999 and grew it into one of the world’s largest companies. Alibaba’s mobile-payments platform Alipay is China’s answer to PayPal (PYPL), and it grew so big that Ma eventually set it and other Alibaba fintech units up as a separate company known as Ant Group.

Ma’s fortunes came crashing down days before the Ant IPO after he publicly criticized Communist China’s banking regulators during a speech. Regulators quickly canceled the Ant IPO’s Shanghai leg – reportedly on Chinese President Xi’s personal orders – and the company quickly nixed the Hong Kong IPO as well. China went on to implement a broader crackdown on tech companies, and ended up fining Alibaba a record $2.8B for alleged anti-competitive business practices.

On an upswing? Ma’s relinquishment of Ant Group control could now pave the way for regulators to lessen scrutiny of the company and other Chinese tech firms like Alibaba. It could also open the door for Ant to try to revive its IPO, which would presumably serve as a positive catalyst for BABA. Take a look at a new article from Seeking Alpha contributor Jonathan Weber, who looked at why Alibaba has already rallied more than 75% from its lows in just two months. (22 comments)

Banning noncompetes?

Arguing that the tactics are used to suppress wages and hamper innovation, the Federal Trade Commission last week proposed a rule that will ban employers from imposing noncompete clauses on their workers. The motion could increase wages by nearly $300B a year, according to the regulator, and expand career opportunities for about 30M Americans. It would also impact employers from various industries and job levels, including hairstylists and warehouse workers to doctors and business executives, who are currently using noncompete clauses.

Quote: “The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” FTC Chair Lina Khan said in a statement. “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”

Independent contractors and anyone who works for an employer, whether paid or unpaid, would be included under the proposed framework. It would also require employers to rescind existing noncompetes and actively inform workers that they are no longer in effect. The FTC is asking for public comment, which will be due 60 days after the agency publishes the proposed rule.

Go deeper: The FTC, under Khan’s leadership, has been more aggressive on the antitrust and pro-competition front, filing a lawsuit last month to block Microsoft’s (MSFT) $69B takeover of game maker Activision (ATVI). However, not everyone is happy with the latest proposal, with some calling it “blatantly unlawful.” “Attempting to ban noncompete clauses in all employment circumstances overturns well-established state laws which have long governed their use and ignores the fact that, when appropriately used, noncompete agreements are an important tool in fostering innovation and preserving competition,” the U.S. Chamber of Commerce said in a statement. (85 comments)