Financial Tidbits From This Week (Pt. II)

7/06/2025

Jul 07, 2025

There is a lot that I could cover this week — especially the Big Beautiful Bill that passed and all of the impact it will have on American society and industry. But I don’t think I am qualified enough to talk about it; instead, I recommend checking out the WSJ, the NYT, or any other qualified newspaper for analysis on the BBB.

With that said, I do have a positive to share. Last week I said that I will try not to focus on China too much, and I think I’ve managed to achieve that goal. My goal for next week is to cover financial news happening in South America.

Replacing Yourself: Accenture’s Consultancy Problem

Accenture stock has declined a lot — pull up the YTD chart and see for yourself. It has lost around $60 billion or so. Such a loss of value in the stock reflects Accenture’s decline of new bookings; more specifically, Accenture’s managed services and one-off consulting contracts declined, along with a slight drop in large clients — those doing over $100 million in business annually.

The problem? Gen-AI agents. Increasingly Accenture’s customers are integrating gen-AI and keeping them upgraded as improved models come to market causing a lack of need for Accenture’s consultancy services. Rather, companies like Palantir are gaining ground with Accenture’s customers who seek to employ Palantir’s advanced ML based business solutions. Yet, the bigger problem is that Accenture is forced to hurt its own business. Right now, Accenture is helping its clients integrate gen-AI to their own businesses, replacing the need for Accenture’s services. On top of that, Accenture’s Gen-AI contracts are slowing — down to $100 million the past three months from $200 million a quarter last year.

Accenture’s Gen-AI troubles reflect a deeper failure: instead of reinvesting past profits in cutting-edge tech, it spent heavily acquiring smaller consulting firms — like ad and marketing agencies. But advances in AI video generation may soon make those firms obsolete.

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Climate Change and the Next Financial Meltdown

Risky lending practices, CDOs, and imperfect models were some of the factors that led to the financial meltdown in 2008. But many experts now point towards the increasing natural disasters due to climate change as the harbinger of the next financial meltdown. These disasters are already putting an increasing pressure on insurers and other financial institution causing problems in the system. Here is how the cycle plays out: 1) the increasing frequency of natural disasters causes insurers of homes to pull out of certain regions, 2) Banks that give out mortgages in these regions slowly stop handing out mortgages as insurers pull out, and 3) The property value of homes in regions without insurers fall as they are in more “risky” areas.

Don’t think that this is only a theory. Jay Powell, chair of the US Federal Reserve, warned that the central bank is noticing a pattern of insurers and banks pulling out of risky areas. Mr. Powell went as far as to tell Congress, “If you fast forward 10 or 15 years, there are going to be regions of the country where you can’t get a mortgage. There won’t be ATM…[and] banks won’t have branches”. Even Buffett has joined in warning against this incoming danger, “Someday, any day, a truly staggering insurance loss will occur [because of increasing violent storms] – and there is no guarantee that there will be only one per annum.”

Yet, some believe otherwise. Fed stress tests that assume a decline of 25% in US real estate prices have concluded that not only would the largest banks be able to survive around a 100 billion dollars worth of loss on loans backed up by real estate, but they’d also be able to loose an additional 500 billion. It's not right to think of this as one big catastrophe but rather a cycle by which a problem will unravel.

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Environmental Roll Back & California’s Housing Situation

California’s Governor, Gavin Newsom, signed two bills that roll back some, not all, aspects of the California Environmental Quality Act (CEQA)– an act signed by Ronald Regan into law. This act was created to protect the environment, but it also put developers through a long environmental review adding to the cost of developing housing and giving power to the NIMBY movement. What the new legislation does is it exempts new housing projects in urban centers from the environmental review of the CEQA

Using CEQA, in 2020, 48K housing units were blocked from construction - half of what the state was projected to build that year. That's not all — Burton, a housing developer, typically set aside two to five million dollars for the environmental reviews on a project. Camden property trust, another real-estate developer, had its plan to build a 350 unit multifamily building in LA paused for three years before they quit due to environmental appeals that used the CEQA.

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Ferrari v Hermes, A Tale of Prices

Ferrari is one of the most valuable car brands out there with a staggering market cap of $87 Billion dollars while only having made 14K cars last year. That fact is more surprising given that Ford has a market cap of $48 billion while making over a million cars last year alone. Ferrari valuation is shaped by the exclusivity that it was founded on. Enzo Ferrari is often quoted as saying, “Ferrari will always deliver one less car than the market demands.” Nowadays, Benedetto Vigna, the CEO of Ferrari, sees Ferrari not just as another luxury-goods brand, but one that can compete with Hermes, the most valuable luxury-brands.

Mr. Viga is not without reason. Over its history, Ferrari has created a customer who are devoted to the brand — 80% of them already own a Ferrari. Their devotion manifests in many ways like acting as ambassadors of the brand by showing up to shows set up by Ferrari at their own expense to increase their chance of buying a Ferrari. Or, to prove their loyalty, they might buy a less popular model. The craziest part? Even when denied for popular models, these fans don’t act disgruntled knowing that that could hurt their chances in the future.

Ferrari does not just have a strong fanbase willing to put up with 30% increases in prices — a far cry compared to the modest 3-5% prices increase of the past — like seen with the 12Cilindri that replaces the 812 Superfast. No, in its attempt to get as big as Hermes, it has economics on its side. China accounts for 20% of Hermes’ sales, but it only accounts for 8% of Ferrari’s sales. That becomes a powerful advantage when you look at recent trends that show the disillusionment of Chinese customers with western brands. Additionally, Hermes gets a good sized amount of its revenue from cheaper goods like its perfumes, scarves, and more that it sells to upper class customers who are rich but not outrageously rich like Ferrari; thus, Ferrari does not have to worry about tariffs while Hermes most likely has to.

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London’s Dismal IPO Market

IPO fundraising in London has fallen to a 30 year low when looking at historical data marking the unattractiveness of UK’s equity markets for investors. Among many things, Wall Street’s deep liquid reserves and the allure of US markets is causing many companies to list in American markets. One big piece of news for UK markets is that London’s biggest listed company, AstraZeneca, has been rumored to be thinking of listing in New York.

Even though the UK markets have seen companies choosing to list in American markets or getting bought out by private equity, research has shown that European firms that list on the US markets often don’t see raised valuations. One important concern is that the reduced interest in the UK markets might cause UK companies that are small cap to not reach their full potential and compete globally. The Labor government has listed some reforms efforts to boost London’s markets like simplifying listing requirements and a new way to buy or sell ownership in private companies, but it remains to be seen if they will focus a bit more on public markets.

Besides that, UK stocks command much lower valuations compared to American stocks. London listings have a lower valuation compared to Wall Street; for example, the PE ratio of the FTSE 100 index, UK 100 highest capitalized blue chip stocks listed on the London Stock Exchange, is around 16.6 while the S&P 500 is close to 27.2. Lower liquidity and valuations has led to some worrying that it might be harder or more expensive for companies in the UK to raise capital compared to the US.

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