Trillion Dollar Baby

Plus: Goldman Sachs had a really bad, seriously crummy quarter. ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌

July 20, 2023

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TOGETHER WITH

Good morning.

One is a comedy about the world’s favorite doll, and the other is a three-hour character study on the father of the atomic bomb.

Christopher Nolan’s “Oppenheimer” and Great Gerwig’s “Barbie” are hitting theaters this weekend, and waves of moviegoers have already bought tickets to both. The unofficial double feature audiences are calling “Barbenheimer”’ could result in a combined $200 million at the box office opening weekend, a much-needed jolt for the uneven year Hollywood has been on so far. If all goes well, maybe we’ll eventually get a crossover film starring nuclear physicist Barbie.

Morning Brief

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Goldman Sachs missed it by that much.

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It’s war in the fast-fashion world.

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Blackstone hits a new high.

Banking

Goldman Sachs’ Profit Plunge Confirms a Woeful Consumer Strategy

(Photo by Connor Lin/The Daily Upside)

How did Goldman Sachs go from being a giant vampire squid to supermarket sashimi so fast? The bank posted one of its worst quarters in years and was the only one of the six US megabanks to disappoint Wall Street.

Goldman said Wednesday that its second-quarter profit plunged 60% from a year ago to $1.22 billion, much of that due to pain in its consumer banking and asset management divisions. For the moment, CEO and part-time DJ David Solomon’s day job seems safe, but it’s not a good look for the firm.

What Could Go Wrong?

In the mid-2010s, the 154-year-old Wall Street investment-bank stalwart decided to diversify into the consumer banking space. Its executional know-how in the area hasn’t seemed to live up to the promise.

In 2019, Goldman thought it had a big success with its Apple Card partnership, but it soon became a money pit. Other than interest, the credit card doesn’t charge traditional costs like annual, over-the-limit, foreign transaction, or late fees. Plus, Goldman approved the card for seemingly anybody who applied, which ultimately led to a plethora of missed payments. In 2020, Solomon merged Goldman’s retail division with its wealth management arm, where staffers didn’t have expertise in dealing with more than a few wealthy customers. With these moves contributing to more than $3 billion in overall losses since 2020, the bank has seen a handful of Goldman’s top executives depart.

CEO Solomon has begun a pullback from the consumer business, but the damage still lingers:

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Goldman acquired GreenSky, a fintech business that facilitates home improvement loans, in 2021. On Wednesday, the bank said it was writing down $504 million in goodwill in its consumer business — essentially, the GreenSky division, which Goldman said last April it will consider selling. In addition to the consumer banking doldrums, Goldman also wrote down $485 million in real estate investments.

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Even its bread-and-butter investment banking arm saw revenue drop 20% in Q2, with the uncertain economy and higher interest rates wrecking the dealmaking business that also contributed to the bank starting to lay off 3,200 employees in January.

Not Going Anywhere: While many CEOs would start sweating from the increased investor — and employee — doubt, Solomon seems relatively cool. For now, the board has his back: Reuters reported that Goldman Sachs’ directors are thoroughly behind Solomon’s plans to revive the bank’s stock, which has underperformed the S&P 500 this year, by focusing on asset management and its core Wall Street business.

– Griffin Kelly

Clothing

Chinese Fast-Fashion Rivals Take Their US Market Fight to Court

China’s fast fashion titans are clashing on American soil.

Insurgent Temu is taking Chinese rival Shein to court, alleging Wednesday that the fast-fashion giant is employing “unlawful exclusionary tactics” to intentionally kneecap Temu’s production capabilities — and keep its $8 sundresses out of American wardrobes.

AnT-Trust

Shein remains fast fashion’s top dog, with its pioneering emphasis on direct-to-consumer sales via its flagship mobile app. Its $30 billion in revenue last year easily lapped both Gap and H&M. But Temu, launched a year ago by Chinese e-commerce player Pinduoduo, has quickly emerged as a player — still far behind Shein, but growing nearly as fast as it can churn out cheap T-shirts and jackets.

Temu’s app rose to the top of Apple’s App Store in the US during the last few months of 2022. Its gross merchandise volume exploded to $192 million in January this year, according to YipIt Data — and will likely hit $1 billion a month by the end of the year, according to Business of Apps. Now, in an antitrust lawsuit filed in a Massachusetts court, the company alleges it’s being unfairly stymied:

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Temu is alleging that Shein has “engaged in a campaign of threats, intimidation, false assertions of infringement, and attempts to impose baseless punitive fines” on manufacturers and suppliers thought to be working with Temu, essentially using its market dominance to coerce over 8,300 China-based independent apparel manufacturers into exclusive relationships.

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Temu argues Shein’s hold over suppliers has denied the US market “access to direct price competition” and suppressed Temu’s sales volume by up to 400%.

This isn’t the first time the two brands have come to legal loggerheads. In a separate case filed this spring, Shein alleged that Temu is paying influencers to disparage Shein on social media.

Double Trouble: Temu’s antitrust lawsuit isn’t the only legal threat Shein has faced in recent days. Last week, a group of independent clothing designers filed a lawsuit in California federal court accusing the fast-fashion titan of essentially stealing their designs and creative work using a “secretive algorithm” to identify burgeoning fashion trends. But notably, the case is based on RICO law — a.k.a. the Racketeer Influenced and Corrupt Organizations Act originally designed to combat the mob — alleging Shein’s “confusing corporate structure” of “de-facto association of entities” is designed to help the company “avoid liability.” Now we can’t stop thinking about Tony Soprano wearing a $6 Bode knockoff.

– Brian Boyle

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Private Equity

Blackstone Races Toward $1 Trillion Milestone

Blackstone better stock up on bubbly… and it can surely afford the top-shelf stuff.

The private equity super-goliath reported its Q2 earnings on Thursday, which revealed it now holds over $1 trillion in assets under management — making it the first private equity firm to ever crack the big ‘T’.

Trillion Dollar Triumph

So how’d we get here? At the end of 2009, the firm managed around $100 billion. But as the decade rolled on, Blackstone became a major private capital player as it seized on the vacuum created by post-08 banking regulations that required banks to hold larger loan loss reserves (and thus hampering lending activities). By 2018, the firm reported managing just under $500 billion in assets. Then came the ultra-low interest rate era of the 2010s latter years, and Blackstone seized on cheap debt to finance major deals. By the end of 2022, it managed $975 billion, which inched up to $991 billion in its Q1 earnings report.

Now it exists at the top of the alternative investing world for both individuals and traditional institutional investors such as pensions; in the decade between 2012 and 2022, Blackstone earned $1 trillion in investor inflows. It’s difficult to find a corner of the economy in which Blackstone isn’t a major presence:

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Its $68 billion Blackstone Real Estate Income Trust makes it the country’s top commercial real estate player, and the sector represents its fastest-growing pillar.

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In the private capital world, Blackstone claims to have $291 billion in credit and insurance assets under management, while financing over 3,100 individual businesses. This spring’s banking crisis has only fueled its private capital ambitions.

Too Big to Fail? Some inside the firm worry its increased size will hinder its entrepreneurial spirit, sources tell Bloomberg. It will almost certainly invite more watchdog scrutiny. “Private equity firms are no longer private equity firms,” economist Josh Lerner told Bloomberg. “They are complex assemblages. It means more scrutiny from investors and regulators.”

– Brian Boyle

Extra Upside

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In this heat? NBCUniversal allegedly pruned shady trees to disrupt SAG-AFTRA protests.

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Always watching, always: Footage inside Amazon delivery trucks meant for company use surfaces online.

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A haunting ghost story: Somewhere out there is a person who could’ve invested in Amazon back in 1996…but missed the opportunity. The Motley Fool has a stock recommendation that ARK Investments CEO Cathie Wood said could be worth $17 trillion in market cap – or about 13 Amazons. This company is poised to be at the forefront of an AI revolution whose impact Bezos himself called “hard to overstate.” Don’t miss the boat: Get The Motley Fool’s recommendation here.*

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Just For Fun

Ground control to Major Tom.

Not quite a walk.

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