The Longhorn Investment Team Weekly Insight: ACL Edition (10/7/2019)

ACL is a lot like the stock market. It’s surrounded by fraudsters, hyped up on cocaine (or low interest rates), and cost us all a lot of money last week. Luckily, our newest class of LIT Analysts are delivering you a digestible look at last week’s top market stories to provide you with S-tier water cooler talk.


WeWork was a startup that was supposedly worth $67 Billion. Wow. Private investors gave them Billions in cash at enormous valuations, and WeWork planned to raise even more capital via an IPO. What could go wrong?

WeWork canceled their IPO on October 3rd because investors weren’t buying into the company or the man behind it anymore. The best analysis on the epic rise and fall of WeWork has been chronicled by multiple publications, but we’ll summarize the key problems here:

Their CEO, Adam Neumann, was outed because of his horrible management style, corrupt decisions, and high level of control over the company. Couple a bad leader with a business that loses $2 billion a year in a looming recession, and people quickly realize you’re a giant fraud. That’s how you go from 67 to 0 real quick.

For some ridiculous Adam Neumann stories, click here.

China’s out…jk.. unless?

Two Friday’s ago, news that the US might delist Chinese companies from US stock exchanges came out and the Dow, S&P 500, and Nasdaq all plummeted. The White House wanted to reduce the number of ways that Chinese companies could access American capital. This would also harm American investors because it flared trade war tensions. Once President Trump announced that the US would not actually be delisting Chinese companies, markets recovered. 

Recession Fears Mounting

Since the beginning of the fourth quarter on Tuesday, the Dow has plunged more than 800 points or 3% after new data showed manufacturing hit its lowest level in a decade. Weaker consumer confidence only adds to economic concerns. Even further, the S&P 500 has fallen below its 50-day moving average, a key technical indicator watched by analysts.

While impeachment announcements by Nancy Pelosi added some volatility to the markets, losses were driven by the economic data. History (and an MIT study) suggests that non-economic events typically don’t have a significant effect on the stock market. Meanwhile, a recession is the primary fear of investors. Barclays claims that there is a 25% – 30% chance that a recession will hit the US in the next 12 months. 

Gold pushed higher into the $1,500s/ounce as investors ticked off the hours until the key monthly U.S. employment report, which ended up coming in below expectations. In the past two months, the amount of hirings has dropped each month by a total of about 60,000.  Nevertheless, the economy still added 136,000 jobs, so the news could’ve been worse. Shares also recouped some of their losses at the end of the week due to investor bets that the FED would cut rates (yet again).

The Other Trade War

On October 3rd, the discount broker Charles Schwab slashed commission price from $4.95 to zero in order to make investing easier and more affordable for everyone (they got disrupted). Since the inception of the Silicon-Valley startup Robinhood in 2013, it was only a matter of time as to when the other major brokerages would be forced to cut down to zero to maintain their clients. Schwab’s shares took a hit, falling about 10% immediately after the announcement, which was pale in comparison to their rivals TD Ameritrade and E-Trade who fell 26% and 19% respectively.

This price war was started last week when Interactive Brokers announced they were cutting commission prices in order that they don’t lose out on business to rising zero-commission companies like Robinhood. After taking a loss after that announcement, Schwab decided to be proactive and minimize their losses in the price war by following suit. A spokesperson for the firm has said the price will result in about a 3-4% decline of total annual revenue, a loss they anticipate will be offset by the future increase in client base now that their services are more affordable. Now that the brokerage tycoons are giving up fees one by one, the stock market will move towards a true zero-commission environment. Victor Jones, CEO of Dough, said this week, “In five years, paying commission fees for trading stocks will be as obsolete as paying for a landline.” 

Profit Fell Naturally

United Natural Inc. was supposed to have amazing sales of $21.5 billion for this year, but sadly, their dreams were spoiled. As the largest supplier of natural goods, United Natural Inc. expected profits similar to those of last year ($32.8 million). Its profits were cut in half – totaling $18.9 million. As more and more companies enter the organic food sector, consumers have more and more options to explore. United Natural’s stock plummeted 25.11% on Tuesday when this news broke out. This may be indicative of the recent nationwide decrease in manufacturing. More and more companies are being forced to cut down on expenses and this may foreshadow a contraction in the near future.