Morning Brew Daily - Wall Street Brings Back Bigger Bonuses & Trouble in Mega-City Neom Paradise?

Episode Date: November 13, 2024

Episode 452: Neal and Toby chat about the return of Wall Street’s big bonus-time after its 2 year drought of shrinking payouts. Then, Activist investor Elliott Management has taken a massive stake in Honeywell and is calling the company to break itself apart. Plus, the CEO of Saudi Arabia’s Neom has suddenly left, which marks another setback for the anticipated ‘city of the future’. Meanwhile, Amazon is also getting into the smart glasses game, this time looking to supply its delivery drivers to maximize drop-off efficiency. Lastly, the biggest headlines to close out your day.  Visit https://www.sage.com/morningbrew for more! Subscribe to Morning Brew Daily for more of the news you need to start your day. Share the show with a friend, and leave us a review on your favorite podcast app. Get your Morning Brew Book of Crosswords HERE: https://shop.morningbrew.com/ Listen to Morning Brew Daily Here: https://link.chtbl.com/MBD Watch Morning Brew Daily Here: https://www.youtube.com/@MorningBrewDailyShow 00:00 - Morning Brew Crossword 03:20 - Wall Street Bonuses  09:00 - Honeywell Breakup 13:20 - Neom CEO Steps Down 17:00 - Amazon smart glasses 21:45 - Headlines  Learn more about your ad choices. Visit megaphone.fm/adchoices

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Good Morning Brew Daily Show. I'm Neil Fryman. And I'm Toby Howell. Today, now's a good time to get back in touch with your friends in finance. They're about to be rolling in end-of-year bonuses. Then Saudi Arabia's mega city in the desert Neum just lost its CEO and could be in trouble. It's Wednesday, November 13th. Let's ride. I've got some really exciting news to share.

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second half 2025, four two lines and a limit and welcome and auto pay. See Verizon.com for details. Like a beautiful sourdough loaf in the proving drawer, bonuses on Wall Street are set to rise across the industry for the first time since 2021. Investment bankers, traders and wealth managers, basically anyone who might rock a roly in a Patagonia vest to work, all had above average years, thanks to an increase in corporate dealmaking and a stock market run-up. According to an analysis by Johnson Associates, every single business area is expected to see pay jumps this year, except for real estate investing in retail and commercial banking.

Now, bonuses are still not back to the frenzied heights of 2021 when deal volume exploded. Spacks became a thing and companies were going public left and right, but it's clear that Wall Street is emerging from the muted spell over the past two years where activity and bonuses actually fell. The start of this year's show is debt underwriters, the bankers who work on those deals where corporations need to refinance or raise new debt. It may not be the sexiest role on Wall Street, but this year it will be the most lucrative. Debt underwriters are expected to collect bonuses that are anywhere from 25% to 35% higher than last year. Big picture, 24 bonuses are set to rise for nearly every subset of the finance industry, making it the second biggest end of year

windfall for bankers in the last five years and easing interest rates and the thawing M&A market mean that 2025 could be even bigger. Yeah, we were coming off of a weird time for investment bankers. The last two years were kind of muted. There wasn't a lot of things going on. The IPO market got very clogged up. We weren't seeing any of these big M&A deals. But as the interest rates have started to thaw, you have started to see more of these mergers popping up. I mean, some that we've talked about in the show are the pending merger between Kellenova, snack business, and its sale to Mars, which is a $36 billion deal. We've talked about the private credit market as well. Boeing just raised a huge amount of debt to try to pull itself out of its nose dive.

That is something that Bank of America, Citigroup, J.P. Morgan, Wells Fargo, all these big investment banks are getting in on and taking fees from. So we are starting to see a thawing. We're starting to see more of these companies being more active, really. really, across M&A, across IPO market, and across just the corporate private credit market as well. So that is why you're seeing some of these increase in bonuses after two years of it not increasing and actually going down. No, I mean, but if that Mars deal comes to pass, that's so much money for banks. Goldman Sachs is said to make $90 million on that deal if it should happen.

So that's how much the M&A market means to these banks. Let's talk about just the amount of bonuses that these Wall Street. get because it is a large chunk of their pay. The average bonus last year on Wall Street was $176,500. And the average Wall Street salary total was $471,370. That's nearly five times the average of the annual of the New Yorker's average salary. But you can see that's like a pretty big chunk. So it is a big deal when these end of year bonuses come through. And a lot of what happens on Wall Street drives the larger New York economy as well. Right. Let's talk about that because I can hear some people rolling their eyes right now saying like, oh, the world's tiniest violins, bonuses were down the last

two years, but it does impact New York City and New York State's economy as a whole. The industry accounted for around $28 billion in state tax revenue, which is over a quarter of the state's entire collections last year. And then if you zoom in on the city level, it accounted for $5.5.4 billion in city tax revenue. So as bonuses go, if they go down, that's less tax revenue for the city, which they, less tax revenue for them to spend on public works and the transportation authority and all sorts of things. It does filter down through the economy. So even though no one is that sad if bonuses are going from the, you know, six figure range to the lower six figure range, it still does have broader impacts. And going forward, I think there's a lot of optimism

around the banking sector at the end of this year and next year as well. We've talked about interest rates going down. Anytime their stock market volatility is also good for their trading divisions, it looks like the IPO market, which has been frozen over for the past two years, is starting to get going again. We talked about M&A as well, and that's been reflected in the stock prices at these banks. I mean, there's five big Wall Street banks, JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley. All of those share prices have increased by 35% or more over the last year, and they've only skyrocketed since the election last Tuesday and optimism that there could be more deregulation around the financial sector.

The only ugly stepchild that we should mention. I mentioned it in the intro to this story, but retail and commercial bankers are expected to see smaller end-of-year bonuses. That's because in the higher rate atmosphere of the last couple of years, loan demand has just really been weaker, and then commercial real estate has just been an absolute disaster recently. the office sector has just been continuing to slub. People haven't returned to office in the same amount since pre-COVID day. So that's why bonuses are flat on the year.

So there are still some weak points, but they are kind of what you'd expect. Commercial office, real estate has been just a tough business to be in. The manufacturing conglomerate Honeywell is like LeBron James on the Lakers, an aging superstar who represents the last holdout of a bygone era. But its time may be running out, and it won't be JJ Reddick putting it. out to pasture. Yesterday, activist investor Elliott Management said it has built a giant $5 billion stake in Honeywell and is urging the sprawling company to split up into two distinct businesses. It's the biggest single bet ever by Elliott, which is also taken on corporate giants like Southwest

Airlines and Starbucks by acquiring a boatload of shares and pushing for changes. Honeywell might be the biggest company you interact with on a daily basis, but never really think about valued at $150 billion. It makes everything from airplane cockpits to tools for warehouses to home thermostats. And that might be the problem. Elliot thinks this mashup of disparate businesses, the hallmark of the conglomerate model, is inefficient and weighing down the share price. So it wants to split it into two separate companies, the aerospace division and automation.

If it succeeds in forcing a breakup of Honeywell, it could mean the end of one of the few American conglomerates left standing. Yeah, the writing has been on the wall for conglomerates for years now. I mean, one of the most famous ones, GE, which was one of the biggest companies in the world in the 80s and 90s, is now broken up into two separate businesses. Three separate businesses. The thinking behind these splits is that the belief is that bloat drags down performance. It used to be conglomerates could combine back offices and just increase efficiencies that way. But now investors are increasingly wanting you to shave off these businesses,

become a little bit more focused, and they think that's the pathway to better return. So G.E. has split up. Johnson and Johnson has split up. Calogs. Calogs. You can go down the line. What used to be the era of conglomerates is now becoming the era of specialized companies. Right. And let's talk a little about what's happening at Honeywell, specifically. Elliott says that their share price has lagged. It's risen 12% since the start of the year compared to the S&P's 26% growth. It has this aerospace business, which drives 4%. of the revenue. That's growing really fast. And then it has this automation business where they provide tools to warehouses and buildings. And that has been lagging. So it thinks that that section has

been a drag on the overall share price. So it says, why don't we follow the path of the other conglomerates that have broken up? GE has unlocked $200 billion in shareholder value since it's split up. Let's get more focused. Let's get more streamlined. And that's its argument. And it's saying that there's a lot of examples of conglomerates that have broken up in the last five years to point to in saying this is a good idea. I also found a conglomerate that does work, though. Eaton is an industrial conglomerate that does compete on a lot of the same industries that Honeywell does. It has done very well since 2016. It's up 400% compared to Honeywell's more muted 78% growth. And the way that it did that is via planting and pruning, as as Bloomberg article described it.

They sold businesses that valued at $5 billion that had annual sales growth of 2.5%, profit margins of 12%. They replaced those businesses with acquisitions worth $7 billion, annual sales growth of 7% and 27% margins. That's the planting. The other part was the pruning. So you do have to be very cognizant of the companies you're bringing into your portfolio and the companies that maybe you're offloading as well. So they kind of do work, but you need to treat them like a garden.

You can't let one business kind of sprawl over and sysm other businesses, but you also can't let the underperforming businesses kind of take away nutrients and oxygen from the good businesses. So I do think there is a world where conglomerates can work, but there are plenty of examples of instances where breaking them up does lead to better shareholder growth. Would you say Amazon is a conglomerate? I mean, I don't know. Because they don't do a ton of M&A. They do everything from AWS, you know, cloud services to automated drive. and e-commerce. There's very disparate businesses. It kind of has the hall, and it does, it has a movie division and a TV division. It's very much the hallmark of a modern-day conglomerate.

I guess they just don't, they're not as active in an M&A space. Like they don't buy that many companies. Most of it, yeah, like AWS is homegrown. Maybe someone who works at Amazon tell us, if you think that you self-identify as a conglomerate. There is trouble in paradise. If your version of paradise is a megacity in the desert, Neum, the future. The futuristic project currently under construction in the middle of the Saudi Arabian desert lost its CEO Nodmia al-Nasur yesterday in a surprise exit, according to a report from the Wall Street Journal. While the report didn't cite a specific reason for his departure, Neom has been running into delays and cost overruns for years now. It turns out that it is really freaking hard to build a giant futuristic city in the desert. Saudi crown pince Mohammed bin Salman is the brainchild behind turning barren sand into the world.

world's largest construction project. Niam was meant to be anchored by two mirrored skyscrapers, dubbed the line, stretching 106 miles, complete with hidden trains, mountain ski resorts, and 9 million residents. But the project has repeatedly been downside from that 100-mile vision, first to 10 miles and later to just one and a half miles in length, which is still the biggest building in the world. But Nassar is now out in the future of the project is looking a little shaky, Neil. Yeah, there has been a lot of warning signs that this project.

was running into many delays, engineering challenges, and I guess that's what comes with trying to build a megacity on a piece of land, the size of Massachusetts. These guys have bragged about how big their construction project. One recently, an official said that they currently are using one-fifth of all of the steel produced in the world. So something of this size, it's hard to actually pull off as we're seeing. There's been a bunch of executive departures recently, as well as, you know, capped off by the CEO leaving yesterday. But clearly all is not well in Niam. And it comes out a very critical time because Saudi Arabia is spending over a trillion

dollars, not just on Niam, but on all these other initiatives to transform its economy away from fossil fuels and oil and natural gas into a modern economy that relies on things like entertainment and tech and other forms of innovation. And this is the centerpiece of the plan. So if this doesn't go well, then the entire transformation, is certainly on rocky footing. Part of that issue is exactly what you said. The price tag has just gone exponential.

In 2017, when this project was first announced, they slapped a $500 billion price tag on it. The cost of the line alone, which is just one part of the project, is probably going to be well over $2 trillion based on estimates. And Saudi Arabia thought that they could fund most of this on their own, but they also expected foreign money to come in and help out with some of the costs.

that foreign money has really not showing up very well because it is extremely risky to put money into a development that is literally being constructed in the desert. And so that is the issue that Saudi Arabia is looking at kind of their checkbook and saying, wait a second, even we can't afford this right now. So maybe that is one of the reason, too, why some of the project is facing these headwinds. Up next, let's talk Amazon smart classes. It's time to refresh your yard during spring backyard days at the Home Depot. Get low prices guaranteed on propane grills starting at $179, like the next grill three-burner gas grill. Or get $50 off a select Weber Spirit grill and bring big flavor to your backyard.

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Find Ollie Sleep Solutions for the Whole Family at Ollie.com. That's OLLL-L-Y.com. Amazon might have figured out a way to get you your packages even faster. According to Reuters, the company is working on a project that would equip its delivery drivers with smart glasses that more easily guide them right to your door. The glasses would contain a small embedded screen that provide drivers with turn-by-turn navigation,

helping them determine things like which direction to go after getting off an elevator and even avoiding the belligerent dog in your neighborhood. Amazon hopes that the high-tech eyewear could shave seconds off delivery times. But when you're doing as much volume as Amazon, drivers visit more than 100 customers per shift, those seconds can add up quickly.

And Amazon doesn't need any glasses to see the, competition. Its biggest rival, Walmart, has been beefing up its delivery arm, cutting prices and offering more incentives to delivery drivers ahead of the holiday shopping season. Toby, these glasses appear to be years out still, if they get used at all. But it's another interesting use case for what appears to be a rapidly growing category. You can roll your eyes a little bit about Amazon equipping their delivery drivers with like these Jarvis-esque glasses that are giving you turn-by-turn navigation. But I read some articles written by former delivery drivers, and they said, one of the worst parts of the job is you walk into a complex. You can't find the elevator.

It's like a labyrinth in front of you. So having those turn-by-turn navigation would be very helpful. That being said, there are a lot of issues and challenges with doing that. Mapping the internal hallways or the streets in front of residences is very difficult. It's not like Google maps where you can just drive a car down and get street view. You have to know the internal intricacies of actual building complexes. So that is one aspect that has been challenging. Plus, they're just running into the same issues that a lot of these glasses manufacturers run into. One is battery life. Trying to get glasses to last an entire eight-hour shift is an issue. Then also, they could just be heavy and ugly, which is something drivers don't want to deal with either. And what Amazon is trying to solve is what's

known is this last mile of delivery. Even though it's the last mile, it accounts for half of all the costs associated with delivery. Just sending something on a truck across a highway to a warehouse, super easy, super cheap. But getting it from that warehouse to someone's door, extremely expensive, extremely time incentive. So if they can solve that and really shave off seconds, then that can really boost their business and they're facing definitely intense competition from Walmart. But let's talk about the glasses segment in general, because Amazon, you said there's a lot of technical challenges involved in this, but seems like pretty much every big tech. company is throwing their hat in the ring with this. Probably the most successful one is

meta with their meta rayband. They sell it for about $300. And that is they, you know, every single earnings call, Zuck is talking about how much they're selling. That has been hugely successful. Amazon does have smart glasses, which you wouldn't know about because they don't sell. They sold, they called Echo Frames. And I guess this is what these glasses would be based on, those particular frames. But they sell less than 10,000 of them. Apple is apparently going to try to introduce smart glasses as well. Snap also has some. I would say Snap and Meta are the leaders and these other ones are all playing catch up. But Amazon's an interesting place because it's doing it in the enterprise market for its workers and not necessarily for its consumers because consumers

don't want it at the point at this moment. I had no idea that Amazon Echo Frames were a thing at all. But I do think it is interesting to see the different explorations, the different use cases for smart glasses. Meta clearly sees it as one, a tool for capturing content. It has a camera that you can them what you're seeing in front of you. But also, they have tools to interact with the world around you. They embedded it with their AI so you can ask meta, like, what am I looking at right now? But that enterprise use case, you haven't seen from a ton of companies. So I do think Amazon's solving, they just want to solve that last mile of delivery. Like, it's everyone is trying it. They've thrown drones at it. They've thrown autonomous vehicles at it. What you need is just

a quicker way to do it. So I do think that they will invest a decent amount of resources into trying to bring this to reality because the upside is just so much. Well, I'll tell you where you've seen these enterprise use cases before, and it's where smart glasses go to die. Because when they don't work for the consumer market, all these companies pivot them to enterprise and trying to sell them to companies. I mean, if you think of things like Google Glass, Magic Leaf, Microsoft HoloLens, all of those tried to be consumer-facing products. And when that didn't work out, they said, okay, we'll sell them to companies. And so those things you don't hear about anymore because they are not viable businesses. So Amazon's starting with Enterprise. They always do that, though. That's their bread and

butter. So we'll see if Amazon can do it, but maybe in a few years, you'll see your delivery driver being all bespeckled and, you know, looking like a cyborg a little bit. All right, let's spread to the finish with some final headlines. First, it was a meme, then it was a cryptocurrency. Now it's an unofficial government program. Yesterday, President-elect Trump announced the creation of Doge, the Department of Government Efficiency, which will be led by Elon Musk and biotech entrepreneur Vivek Ramoswamy. The goal of Doge, according to Trump, is to dismantle government bureaucracy slash excess regulations, cut wasteful expenditures, and restructure federal agencies.

Just to be clear, this is not an official government department, and Trump said Doge would operate and provide advice from outside of the government. Toby, this has been a project pushed by Musk for months, especially the name. It points to his influence with the new administration. It really does. Dogecoin, which has nothing to do with. this Department of Government Efficiency other than sharing the same acronym name. Surge 20 to 30% after the news.

As of this morning, Dochecoin has a market cap of $55 billion. Ford has a market cap of $44 billion. So, yes, not yet clear if this will exist. Within the federal government or outside, an official government agency can only be created with an act of Congress, so it does look like it will be outside. But just a funny timeline that we live in that a cryptocurrency named after a dog is surging because a organization was named a similar name. 23 and me is more like 14 in me after the struggling DNA testing company laid off roughly 40% of its staff.

As CEO Ann Wichitsky works to write the ship on her money losing business. As part of the restructuring, the company is closing its drug development arm, which was supposed to be the very thing that was going to save the business. But this business is not in good shape right now. Last quarter, revenue declined at 12% to 44 million. while net losses hit 59 million. Neil, is this the last we see of 23 and me? There certainly has been shrinking across the board. They used to have 800 employees.

Now they have 300. They used to have a share market value of $5.8 billion. Now that's down to $150 million. They did warn that they could go out of business if they don't raise cash. So that will be key to see if 23 and me doesn't become, in your terms, zero and me. But it has been a big downfall for this company that was,

Once very high-flying, endorsed by celebrities, seen as the toast of Silicon Valley, and now we're here. Remember the hyped luncheables experiment in schools? Yeah, it didn't work. Kraft Heinz said it would suspend its program offering luncheables to schools this year, pausing a controversial initiative that faced pushback from child nutrition advocates and consumer watchdogs. The concept, which was introduced last year, was simple enough. By putting luncheables in front of hungry kids, the billion-dollar brand would gain massive exposure to a younger generation. which could drive out-of-school sales too.

But the demand just wasn't there for the bet to pay off, Kraft-Hine said. Telly, what went wrong here? I mean, it was always a little unpopular because there was some opposition from parents, from child nutrition advocates who said, do we really want our kids eating this process meat and cheese? But the company did make some changes to its luncheables. They reduced saturated fat. They added some proteins.

They added some whole grains as well to try to make these luncheables healthier. It just never quite caught on in the way that it seemed like. I think this was very much lauded in the beginning. Like you were getting your luncheables in front of this new crop of customers introducing them to schoolchildren around the country. But for whatever reason, it just didn't work. Also, we have to mention the looming presence of Lunchley, which is Mr. Beast, Logan Paul and KSI's brands, this influencer launch. Lunchables, Lunchable's competitor, Lunchley. Any bad news for Lunchables is technically good news for Lunchley.

I don't see them sliding in as a like-for-like replacement, but anytime you see your main legacy competitor struggling, it probably does mean that market share could be sending your way. So bad news for Lunchables is good news for Lunchley. Finally, South Korean President Yun Suk Yol is dusting off his old set of golf clubs in the back of his garage, not to get his handicap down, but to sharpen up his game ahead of Donald Trump's presidency. Trump is obviously a huge golfer, and Yun-Suk believes that the best way to align himself with the USA's interest is to strike one 300 yards down the middle of the fairway.

For our countries to continue our conversations, our president also needs to hit the ball properly. An anonymous official said about their president's golf practice, and to that I say, me flipping too. This is not a joke because there's been a really tight relationship during Trump's last presidency, with Shenzhou Abe, who was the Prime Minister of Japan, who was assassinated. Abe and Trump developed a very, very close relationship because they both loved golf. Abe gave him gold-plated golf clubs on his first visit to the White House. So this is a big deal. This is golf diplomacy.

I mean, we talked about golf, you know, being a big part of business and making business deals. Maybe not anymore, but it used to you. But at least for the Trump presidency, knowing your way around a golf course, knowing how to fix your divot is really important. to getting in good graces with him, and only global diplomacy is at stake. I like that the aides are saying, we just needed our president to hit the ball squarely, just properly, not embarrass himself.

And, I mean, I think a lot of us can empathize with us. Even though we don't have global diplomacy on the ride, everyone just wants to make good contact. That is all the time we have. Thanks for starting your day with us and have a wonderful Wednesday. Toby, you're out for the next two days, so safe travels.

We will miss you. For any questions, comments, or feedback, send an email to Morningbrewdaily at Morningbrew.com. And if you find yourself learning a lot from this podcast, share it with a friend, family member, or colleague who could use a hit of business news in the morning? Toby, who should our listeners spread the word to today? This one is an easy one, Neil.

I want you to share this pod with the crossworder in your life. I know you have one. We all have one. So share this pod so they can check out the brew book of crosswords. At shop.mortmorgroom.com, which is on pre-order for the first time yesterday. So snag your copy now. You're guaranteed to get it before the holidays.

Let's roll the credits. Emily Milliron is our executive producer. Raymond Lue is our producer. Olivia Graham is our associate producer. Yucenoa Ogu is our technical director. Billy Minino is on audio. Hair and makeup has been hitting the range. Devin Emery is our chief content officer

and our show is the production of Morning Brew. Great show today, Neil. Let's run it back tomorrow. Yamava Resort and Casino at San Manuel is California's number one entertainment destination for today's superstars. Catch the Jonas Brothers return to the Yamava Theater stage

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