The Wall Street Journal - 07.09.2019 - 08.09.2019

B12| Saturday/Sunday, September 7 - 8, 2019 ** THE WALL STREET JOURNAL.**

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FINANCIAL ANALYSIS & COMMENTARY

over its YouTube operation, for

which the company made changes

such as disabling comments on

children’s videos.

The problem is one of expecta-

tions. Online consumers on estab-

lished platforms reasonably ex-

pect to find goods and services

that are both safe and as adver-

tised—much as they would at big-

box retailers. And they don’t just

expect it of the largest companies.

Consumers believe they’re enti-

tled to the same at smaller, more

specialized players focused on

categories such as dating, travel

and childcare.

The “we are just a tech plat-

form” excuse is no longer cutting

it. Facebook has been investing ag-

gressively this year to bolster

safety on its platform, including

on its Marketplace, where last

month The Wall Street Journal

found disguised gun sales, despite

a ban. The company has spent the

better part of the last two years

getting lashed by regulators, law-

makers and the press over dis-

putes that can mostly be boiled

down to the legitimacy of content

postedonitssite.

Now it is Amazon’s turn. A

Journal investigation last month

found thousands of unsafe items

listed on Amazon.com , mostly

from third-party merchants. Ama-

zon says it has tools that have

worked to block three billion list-

ings last year alone. But the com-

pany will likely have to do more,

given the increased scrutiny.

Smaller platforms are paying,

too. Another Journal investigation

earlier this year revealed several

instances of tragic outcomes for

Don’t Worry About

The Job Market—Yet

Investors should keep an eye on some risks

The job market is cooling, and
that is probably no cause for alarm.
Probably, but not definitely.
The economy added 130,000 jobs
last month—fewer than the 150,000
economists expected. And that pay-
roll figure was inflated by more
government hiring of workers for
the 2020 census than most econo-
mists expected. The private sector
added 96,000 jobs in August, versus
131,000 in July.
So far this year, private-sector job
gains have averaged 145,000 jobs a
month, which compares with 215,000
last year and marks the slowest pace
of hiring since 2010. With an unem-
ployment rate of just 3.7%, that isn’t
so surprising—filling jobs isn’t as
easy as it was when there were more
workers available. And even at its
current rate, job growth is outstrip-
ping population growth.
But at a time of rising trade ten-
sions, slowing global growth and
shrinking profit margins, there is a
possibility that the decline in jobs
growth is about to become more
precipitous, putting the economy at
risk. The manufacturing sector,
which is more exposed to trade and
global growth risks than other
parts of the economy, is one of the
areas where the hiring slowdown
has been most pronounced. Factory
jobs represent only a small seg-
ment of the labor force, but their
sensitivity to shifts in the economy
shouldn’t be discounted.
Pressure on corporate profits

An employee at the CR Laine manufacturing facility in Hickory, N.C.

Clouds Loom Over

The Disaster Industry

Dorian could have been much worse for

reinsurers, but other challenges persist

PartyTime

Amazon’sthird-partysalesasashare

oftotalpaidunitssoldperquarter

Source: the company

60

0

10

20

30

40

50

%

2014 ’15 ’16 ’17 ’18 ’19

Internet giants for years have
had their cake and eaten it too.
Now a bittersweet tab is
coming. The question
is, who pays?
Companies like Ama-
zon and Facebook have
made world-changing fortunes
by creating virtually ubiquitous
online platforms used for shop-
ping, services and information. But
the bulk of the content and prod-
ucts supplied for those platforms
doesn’t come from the companies
themselves. This has historically
provided a nice defense when
things go awry. After all, if the
owner of a flea market isn’t re-
sponsible for that fake Rolex you
bought at one of its stalls, why
should Amazon be responsible for
the stuff its customers choose to
buy from independent merchants
through its site?
Except Amazon is no flea mar-
ket. It is currently the third most
highly valued company in the
world, behind only Microsoft and
Apple. It is also on track to be-
come the third-largest company by
annual revenue on the S&P 500
roster by the end of this year,
likely surpassing both Apple and
ExxonMobil. Add in Facebook and
Google parent Alphabet Inc., and
you have platforms generating
more than $460 billion in com-
bined annual revenue.
Over the years, these growing
companies have successfully skirted
legal recourse for bad actors on
their sites. They have had the law
on their side: Section 230 of the
Communications Decency Act of
1996 shields internet platforms
from liability for what others post.
Now, as global behemoths, it
seems that with greater power
comes greater legal responsibility.
The U.S. Court of Appeals for the
Third Circuit earlier this year held
that a customer in Pennsylvania
could sue Amazon over a product
that was allegedly unsafe. Mean-
while, Facebook was recently fined
$5 billion over privacy violations—
the largest privacy-related fine in
the history of the Federal Trade
Commission. Google was also just
hit with a $170 million FTC fine

parents who used Care.com to

source childcare. Months after the

Journal’s initial article, the com-

pany’s chief executive

said she would step

down as CEO once a

successor is found, and

an activist investor is now

calling for a possible sale of the

company. The company said in

May it would add in-depth back-

ground checks and other screening

procedures for caregivers.

Improving the safety of online

platforms is paramount. Care.com

is now down 57% since the Jour-

nal published the results of its in-

vestigation in March. The com-

pany said last month the news

contributed to a slowing in paid

member growth. Revelations of

bad actors and harmful products

could chip away at consumer con-

fidence in the platform model it-

self, threatening growth for all

these companies.

Thus far, investments in added

security have been largely borne

by the platform companies.

And while much of that ex-

pense will likely come from inves-

tors’ pockets, customers could get

stuck with some of the bill. In

Amazon’s case, the e-tailing busi-

ness offers much thinner profits

than that of online advertising,

leaving less cushion to absorb

higher costs. Amazon’s operating

margin of 6% over the last four

quarters pales next to 34% for

Facebook and 26% for the core

Google business. More stringent

quality control could deprive cus-

tomers of some apparent bar-

gains, driving them back into the

arms of traditional retailers.

Prepare for a margin squeeze at

tech platform companies.

—Laura Forman

and Dan Gallagher

Tech’s Hands-Off Era Is Over

The ‘we are just a platform’ excuse is no longer cutting it. Amazon, Google

and Facebook now have to be much more proactive. But it will be costly.

Revelations of bad actors

and products could hurt

confidence in the

platform model itself.

ALICIA TATONE

JOB: LOGAN CYRUS/BLOOMBERG NEWS; TRUCK: ANDREAS SUTTER/EMINING AG; DORIAN: JULIA WALL/TNS/ZUMA PRESS

lion of capital is tied up in this way.

Had interest rates continued to rise,

some of that might have been de-

ployed elsewhere. But with the

search for yield intensifying, it may

be more likely to be reinvested.

Reinsurers stood to bear signifi-

cant losses in Florida, where the

primary property market is domi-

nated by regional and state-backed

players that depend on them. As the

storm veered away, though, prelimi-

nary analyst estimates of insured

losses in the range of $30 billion to

$40 billion have given way to talk of

closer to $10 billion. Damage being

concentrated in the Bahamas would

reduce possible losses for catastro-

phe bondholders, whose exposure to

that market is minimal, according to

figures from Aon Securities.

Reinsurers’ shares have made

huge gains this year. Arch Capital

Group Ltd. and RenaissanceRe Hold-

ings Ltd. are up 54% and 41%, re-

spectively. Arch Capital is priced at

about 1.7 times book value, and Re-

naissanceRe is at 1.6 times. The latter

is close to its highest level since

2007 on that measure.

Hurricane season isn’t over, and

Dorian’s near hit of Florida may only

heighten perceptions of risk. What-

ever the outlook, further gains for re-

insurers now would be premature.

—Telis Demos

North Carolinians survey damage

from Hurricane Dorian.

OVERHEARD

Move over Tesla...way, way

over.

The internet is abuzz over

an electric vehicle weighing

58 metric tons. The reason

for the excitement isn’t the

size but the headlines: “This

Huge Electric Dump Truck

Never Needs to Plug In,”

says one. “World’s largest

electric vehicle never needs

plugging in,” claims another.

Those who recall the first

law of thermodynamics will

rightly balk, and articles deal-

ing with the Swiss-made be-

hemoth eventually point out

that it works through regen-

erative braking by hauling a

load downhill and returning

empty. Once there is nothing

left to carry, its seemingly

free energy ends.

Tesla, on the other hand,

attracted buzz this year by

attempting to violate an-

other law—this one in the

dismal science. Elon Musk

claimed that one of its

Model 3 cars, once equipped

with a full self-driving pack-

age, would appreciate in

value from less than

$50,000 to “$100k to

$200k.” There is no law that

says cars must depreciate

but, just like there is no such

thing as free energy, there

are no free lunches either.

If he were right, Tesla

would warehouse the cars

rather than sell them.

The eDumper

electric dump truck.

Hurricane Dorian’s shifting path

away from Florida will be a relief to

reinsurers, but the man-made phe-

nomenon of ultralow interest rates

still looms.

For years, a huge supply of capital

willing to absorb insurance risks in

exchange for yield has been a double-

edged sword for the industry. Capital

has poured into alternative instru-

ments, such as catastrophe bonds

that pay interest to holders but face

losses when disasters hit.

This funding has increased the re-

insurance industry’s capacity for

losses. Yet the massive supply of such

capital has also come at the expense

of pricing power for reinsurers, even

after a series of devastating events in

2017 and 2018, namely hurricanes,

wildfires and other disasters. Those

two years combined were the worst

on record for insured catastrophe

losses, according to Barclays PLC.

Earlier this year, however, that dy-

namic finally began to change, as

growth in alternative capital halted.

Investors in instruments like catas-

trophe bonds were smarting after

two years of negative returns and

unexpected complexity in figuring

out when exactly they were on the

hook for losses.

This scenario helped set the stage

for some positive pricing trends this

year. Rates rose by as much as 35% in

some places, according to Willis Re.

S&P Global anticipates a mid-single

digit rise in global aggregate rates

over the next year.

The year hasn’t

marked a total reversal.

The pricing improve-

ment is notable rel-

ative to the nadir

in 2017. But global

reinsurance rates

are still 38% below

their 2006 highs,

according to Guy

Carpenter’s global

property catastrophe

rate-on-line index.

The flow of alternative

capital may rebound, too,

once questions around

how losses will flow

through to investments ex-

posed to prior catastrophes are

resolved. S&P estimates that $15 bil-

could become a more pernicious

problem for the job market. Earn-

ings for companies in the S&P 500

were below year-earlier levels in

the first two quarters of this year,

according to FactSet, and analysts

project a further decline in the

third quarter. Moreover, recent

Commerce Department revisions

show that economywide, before-tax

profit margins have narrowed over

the past two years rather than wid-

ening, as the data initially showed.

The danger, notes JPMorgan

Chase economist Michael Feroli, is

that, as profits come under pressure,

businesses become more wary of po-

tential shocks to the economy and

less likely to hire. That would lead to

slower consumer spending, slower

economic growth and a height-

ened risk of recession. Profit

margins have regularly

declined ahead of

economic down-

turns.

The slowdown

in the job market

hasn’t been pronounced

enough to conclude that

such a slide is at hand

or for the Federal Re-

serve to cut rates this

month by more than

the quarter point it

has signaled. Early in-

dicators suggest that

investors should watch

the trend carefully.

—Justin Lahart