Bond defaults mean almost total losses in new era of bankruptcies

Could this be the trigger for the Stockmarket's next crash?  Aivars Lode

Three cents. Two cents. Even a mere 0.125 cents on the dollar.

More and more, these are the kinds of scraps that bondholders are fighting over as companies go belly up.

Bankruptcy filings are surging due to the economic fallout from COVID-19, and many lenders are coming to the realization that their claims are almost completely worthless. Instead of recouping, say, 40 cents for every dollar owed, as has been the norm for years, unsecured creditors now face the unenviable prospect of walking away with just pennies — if that.

While few could have foreseen the pandemic’s toll on the economy, the depth of investors’ pain from corporate distress was all too predictable. Desperate to generate higher returns during a decade of rock-bottom interest rates, money managers bargained away legal protections, accepted ever-widening loopholes, and turned a blind eye to questionable earnings projections. Corporations, for their part, took full advantage and gorged on astronomical amounts of debt that many now cannot repay or refinance.

It’s a stark reminder of the long-lasting repercussions of the Federal Reserve’s unprecedented easy money policies. Ultra-low rates helped risky companies sell bonds with fewer safeguards, which creditors seeking higher returns were happy to accept. Now, amid a new bout of economic pain, the effects of those policies are coming to bear.

Debt issued by the owner of Men’s Wearhouse, which filed for court protection in August, traded this month for less than 2 cents on the dollar. When J.C. Penney Co. went bankrupt, an auction held for holders of default protection found the retailer’s lowest-priced debt was worth just 0.125 cents on the dollar. For Neiman Marcus Group Inc., that figure was 3 cents.

The loose lending terms that investors have agreed to mean that by the time corporations file for bankruptcy now, they’ve often exhausted their options for fixing their debt loads out of court. They’ve swapped their old notes for new ones, often borrowing against even more of their assets in the process. Some have taken brand names, trademarks and even whole businesses out of the reach of existing creditors and borrowed against those too. While creditors always do worse in economic downturns than in better times, in previous downturns, lenders had more power to press companies into bankruptcy sooner, stemming some of their losses.

The pandemic is upending industries like retail and energy, making it unclear how much assets like stores and oil wells will be worth in the future. The underlying problem for many companies, though, is that they have astronomical levels of debt after borrowing with abandon over the previous decade, then topping up with more to get them through the pandemic.

For bondholders, the kind of liabilities that companies have added makes the problem worse. Loans have been a particularly cheap form of debt for many companies over the last decade. Those borrowings are usually secured by assets, leaving many corporations with more secured debt than they’ve had historically. That means that unsecured bondholders end up with less when borrowers go broke.

“We’ll see companies gradually hitting the wall — it’s just a question of when and how fast,” said Dan Zwirn, founder of Arena Investors, a $1.7 billion investment firm with an emphasis on credit. “There’s just going to be way more downside.”

By Bloomberg Investment News

JPMorgan Paying $920 Million to Resolve Market Manipulation Probes

See Chapter 4 of my first book "This Time It's Different - Not!" that describes how commodities get manipulated. I wrote about this more than a decade ago... and it's still going on.   Aivars Lode

JP MORGAN Chase & Co. agreed to pay $920 million and admit misconduct tied to manipulation of precious-metals and Treasury markets, regulators said Tuesday.

The settlement resolves investigations by the Justice Department, Commodity Futures Trading Commission and the Securities and Exchange Commission. The fine is the largest the CFTC has ever imposed for spoofing, a type of market manipulation, the agency said.

“Spoofing is illegal—pure and simple,” CFTC Chairman Heath Tarbert said. “This record-setting enforcement action demonstrates the CFTC’s commitment to being tough on those who intentionally break our rules, no matter who they are.”

The settlement is just the latest move from prosecutors and regulators that began cracking down on spoofing in 2014. Since then, the Justice Department has charged 20 people with spoofing-related crimes, and banks and other financial institutions have collectively paid more than $1 billion in fines tied to civil and criminal spoofing probes.

The agreement announced Tuesday is particularly notable because it involved claims that traders spoofed to manipulate the price of Treasury securities, one of the largest and most liquid trading markets in the world.

Spoofers enter and quickly cancel large orders in an effort to deceive others about supply and demand. The tactic can move prices in a direction the spoofer favors.

Four former JPMorgan precious-metals traders were charged last year with crimes tied to spoofing, including racketeering, an offense more typically found in cases against organized crime entities. The traders have pleaded not guilty and are fighting the charges. Two other ex-JPMorgan traders pleaded guilty in 2018 and 2019 to crimes tied to spoofing of precious metals futures.

The unlawful trading in gold, silver and other precious metals involved a total of 10 traders, according to Justice Department documents made public Tuesday.

Two traders who formerly worked at Deutsche Bank AG were convicted last week in Chicago federal court of wire fraud tied to spoofing allegations. The traders were acquitted on one count of conspiracy.

Congress outlawed spoofing in the 2010 Dodd-Frank financial overhaul law, making it easier for regulators and prosecutors to punish conduct they believed was manipulative. The Justice Department’s Fraud Section, based in Washington, has been particularly active going after individual traders accused of spoofing. 

“Dodd Frank made it very clear, that this is against the law to do and there are now personal consequences—you can go to jail if you spoof,” said Travis Schwab, chief executive of Eventus Systems Inc., a trading surveillance and risk-management software provider. “That really ratchets up the bar who is involved in these cases—that goes to Justice being involved as opposed to just the regulator—and it ratchets up the consequences.” 

The agencies’ announcements confirm news of the fine that was first reported last week. The claims include allegations that JPMorgan traders manipulated Treasury securities from 2015 to 2016, the SEC said in a settlement order. 

The Justice Department said JPMorgan agreed to a deferred prosecution agreement through which the bank admitted wrongdoing on its precious-metals and Treasuries trading desks. The deal suspends a prosecution of the bank on two counts of wire fraud and requires JPMorgan to cooperate with related investigations and continue improving its compliance and oversight programs.

The SEC’s investigation involved spoofing in the $20 trillion market for Treasury bonds and notes and other securities. The Justice Department’s settlement also covered that conduct. 

“The conduct of the individuals referenced in today’s resolutions is unacceptable and they are no longer with the firm,” said Daniel Pinto, co-President of JPMorgan Chase and CEO of the Corporate & Investment Bank. “We appreciate that the considerable resources we’ve dedicated to internal controls was recognized by the DOJ, including enhancements to compliance policies, surveillance systems and training programs.”

The spoofing spanned at least eight years and involved hundreds of thousands of misleading orders in precious metals and U.S. Treasury futures contracts, the CFTC said. 

The total fine includes a penalty of $437 million, restitution of $311 million and disgorgement of $172 million, the CFTC said. Disgorgement is the requirement to pay back profits illegally earned.

Five former traders on the bank’s Treasurys desk were involved in spoofing from 2008 to 2016, according to Justice Department documents, which didn’t name the individuals. The traders knowingly entered orders on electronic trading platforms they didn’t intend to fill, hoping the prices would trick other traders into thinking supply or demand was changing.

The traders sometimes entered the misleading orders on one trading venue, hoping to ease the fulfillment of orders on another platform at a better price. Spoofing often tricks computer models that trade using algorithms and may not be able to judge whether orders look genuine or not, regulators say.

Traders sometimes bragged about spoofing Treasury prices in messages they sent to one another, according to prosecutors.

“A little razzle-dazzle to juke the algos,” one trader wrote in a message in 2012, according to prosecutors. 

The conduct caused losses of $106 million to others trading Treasury debt and Treasury futures, the Justice Department said. The misconduct in the futures market for precious-metals caused losses of $205 million, prosecutors said. 

The SEC said the conduct ended in January 2016, after “certain personnel changes” were made on the desk that traded Treasury securities.

By Dave Michaels - Wall Street Journal

The Nasdaq Is Partying Like It’s 1999. What To Do About It.

All I can say is "Amen"..... Aivars Lode

Are investors ready for another Housequake?

Depending on your age, your view of the Nasdaq is different. If you are a baby boomer or older, you remember the time when “Nasdaq” might have been a slang term for Nirvana (the concept or the band, or both).

If you are under 50 years old, the Nasdaq is where the big, stable companies sit. Amazon, Microsoft, Apple, Facebook, Google, etc. They are the big, ubiquitous stocks and business that run our lives.

Let’s Go Crazy!

However, back in 1990s and the first part of this century, the Nasdaq was the Wild West of the stock market. Brazen young upstart businesses took the markets by storm.

The gains were so amazing, they were considered “one-decision stocks: you buy them and don’t have to sell them.” 1999 was essentially a one-type market. It was all-Nasdaq, all the time.

Then, in March of the year 2000, the Nasdaq 100 (QQQ) fell by over 79% in just under 3 years. Oh, it fully recovered…by the year 2015! Enough said.

Delirious

Now, of course nothing like this could ever happen again. OK, of course it could. But you don’t need a garden-variety 80% selloff to see that the same type of “Nasdaq will save us” attitude has quietly crept back into the stock market. Now, much of today’s investor base did not experience 1999, 2000 and the 15 long years that followed for the Nasdaq Index. So, all of this history is lost on them.

Sign ‘O The Times

The average S&P 500 stock was down over 10% from June 8 – July 7. The Dow was down over 6%. But the Nasdaq 100? It was up 6%.

One of 2 things is happening here. A new paradigm, or something that will be remembered as the second-coming of the Dot-Com Bubble. Fool me once, shame on you. Fool me twice, shame on me.

Baby, I’m a Star

Better yet, as The Who said, we won’t get fooled again. So don’t. Know what you own and why you own it. And recognize that one of the most powerful axioms in investing is this: if it looks easy, that’s when the risk is highest.

By Rob Isbitts - Sungarden Investment Management

Legendary investor Jeremy Grantham says the stock market right now is in the 4th 'Real McCoy' bubble of his career

My previous blogs talk about the fact that we are following a course with a similar trajectory to 2001 and 2008. That means that this is a second peak and a long crash is about to come about..... Aivars Lode

A stock market legend, Jeremy Grantham, seems certain that the US stock market’s strong recovery from its historic lows in March will end up in pain for investors.

“My confidence is rising quite rapidly that this is, in fact, becoming the fourth real McCoy bubble of my investment career,” he said in a CNBC “Closing Bell” interview aired on Wednesday.

“The great bubbles can go on a long time and inflict a lot of pain but at least I think we know now that we’re in one.”

Grantham presented an alarming scenario in which uncontrolled day traders who are out of work and into heavy market speculation around bankrupt companies, including car-rental firm Hertz, may just be the most “crazy” market he’s seen in his career.

“It is a rally without precedence,” he told CNBC’s anchor Wilfred Frost, noting that the market rebound clashes with other harsh economic realities including a low point for health, unemployment numbers, and a rising growth of bankruptcies.

US stocks have been rallying in the past week despite investor fears over a second coronavirus wave and rising geopolitical tensions.

But a steady flow of government stimulus, that Grantham called a “favourable environment” for speculative investors, seems to have put a rocket under stocks and kept all major US stock markets climbing, with major US indexes up more than a third from their March lows.

On investor exposure to US equities, Grantham said: “I think a good number now is zero and less than zero might not be a bad idea if you can stand that.”

Grantham, a co-founder and chief investment strategist of Boston-based asset management firm GMO, is noteworthy for his accurate predictions related to three major prior market bubbles.

Grantham called Japan’s asset price bubble in 1989, the dot-com bubble in 2000, and the housing crisis of 2008.

In anticipation of those market downturns, he warned that stocks were overvalued both in 2000 and 2007, according to the Wall Street Journal.

Back then, he also mentioned how the relationship between home prices and income had become removed from reality, and that at least one large financial institution would fail.

The subsequent 2008 financial crisis proved his predictions right.

By SHALINI NAGARAJAN - Business Insider Australia

The Debt-Recession Is Everyone’s Business. How To Deal With It.

I have observed some crazy deals where companies are paying no principal and just interest, showing positive EBITDAs with no cash flow. Eventually that house of cards and the market will turn and refinancing will not be available therefore predatory rescues, buyouts and bankruptcy will follow.... Aivars Lode

2020 will be remembered for a lot of things. First and foremost is the human tragedy, strife and uncertainty that has consumed our daily lives.

From an investor’s point of view, 2020 has also been a continuation of a pattern that may be little more than a sound bite. But it should be more than that. I am talking about the accelerating pace of growth of corporate debt.

Corporate debt bubble – it’s here

Some U.S. households may actually be increasing their savings rates and lowering debt during the crisis, if they are not caught up in the forced unemployment that has stricken so many. Corporations, on the other hand, are ramping up their borrowings and have created a debt bubble among those businesses that operate in the public markets.

This is NOT a new issue. 2020 did not force this upon corporations. It is the latest cycle of corporate indebtedness that has reached a crescendo.

One way to make this clear is to look at total corporate debt as a percentage of U.S. Gross Domestic Product (GDP) at different points over the past 70 years. Here’s a quick look, based on year-end data from Ycharts.com:

In 1951, U.S. Corporate Debt as a percent of U.S. GDP was about 22%. Since that time, it has risen as high as 50, in March of 2008. After the financial crisis of that year, it ducked down below 40 briefly. As of the end of 2019, it stood at 46.6%, near its recent peak for this cycle.

High debt levels, in context

What does all of this mean? Well, to put it in context, past peaks in the level of corporate debt versus GDP occurred at these points in time:

1974, 1990, 2001, 2008. In other words, corporations raise more and more debt to try to grow (or just survive). Then, they reach a point where the economy can’t handle it, and a recession follows. As you might surmise, being at “peak debt” when the economy rolls over is not the greatest timing. That appears to be where we are now.

This is a long-term cycle, and it is a process. And, investors may be able to blow it off as long as the Fed continues to make it look like everything is going to be OK. They do that by essentially standing behind a lot of corporate debt that, if left to its own devices, would collapse like a 20th Century Boston Red Sox club in September (sorry, haven’t had my baseball season yet, so a little rusty with the sports analogies).

As this chart shows, corporations have been jacking up their balance sheets with debt at a rate far in excess of what the economy is growing at. This is just before the early 2020 recession started.

So, what’s the big deal?

Every investor, if not every citizen, should understand that this is not sustainable. And, it is one of those things that you might just hear in a movie years from now, about how this was going on, but no one cared. I think you should care.

How does this impact the way you look at your portfolio? Simply put:

Corporate bonds are full of landmines

High yield corporate bonds are even more treacherous

Despite this, bond holders outrank stock holders when the bubble bursts, so be careful owning stocks that look “cheap” but are just bouncing up from depressed recent lows. Many are cheap for a reason.

Know that there are ways to profit from the eventual implosion in corporate credit. But it requires a hedged investing mindset, and looking at how you generate investment returns in a very different way than you used to.

After all, this is “peak cycle” for corporate debt. That should ring the bell for all investors to double-check where the no-so-obvious risks are in their portfolios.

By Rob Isbitts - Sungarden Investment Management

CAI Software, LLC Acquires Robocom Corporation and Its Supply Chain and Warehouse Management System Software Suite

Farmingdale, New York and Smithfield, Rhode Island (June 8, 2020) – CAI Software, LLC, (“CAI” or “CAI Software”) a leader in the delivery of mission-critical enterprise resource planning (ERP) and manufacturing execution systems (MES) and services, today announced that it has acquired Robocom Corporation (“Robocom”), a leading developer of supply chain and warehouse management system (WMS) software solutions. 

The acquisition of Robocom and its next-generation software solutions complement and add significant value to CAI Software’s existing portfolio of products and services, and continues the company’s organic growth plans, through its current vertical markets and product lines, as well as via strategically sound acquisitions. 

Brian Rigney, Chief Executive Officer for CAI Software said, “Robocom’s proven business model and strong, loyal customer base offer tremendous opportunity for growth. This acquisition adds to and extends our platform of mission-critical, production-oriented software systems. We’re excited to partner with the entire Robocom team to expand their role in the warehouse and distribution industry and to build on the company’s position as a market innovator.” 

Kristi Kennedy, CEO of Robocom Corporation said, “We are absolutely thrilled to join the CAI Software family and are confident that the partnership will benefit all Robocom stakeholders. CAI Software shares our long-standing commitment to our employees and customers, and we’re excited to play a role in the next phase of the company’s expansion. Importantly, the additional resources that the merger brings to our business will enable us to continue delivering software and solutions that enable our customers to operate efficiently and profitably.” 

IT Capital invested in Robocom in 2005, originally through Avantce, and made five strategic acquisitions to expand the company’s customer base and product capabilities. Aivars Lode, managing director at IT Capital, said, “Robocom’s management consistently executed all of the strategic and tactical goals we collectively set forth. It has been incredibly satisfying to witness the company realize its full potential and to have the team’s efforts recognized through the success of this transaction.” 

Robocom will operate as a subsidiary of CAI Software and will maintain its sales and development facilities and offices in Farmingdale, New York, and other strategic locations in the U.S. and Canada. All current employees will continue in their roles. 

Today’s announcement follows CAI Software’s 2018 acquisitions of Casco Development, LLC, developers of the ShopVue™ manufacturing execution system (MES) software for leading manufacturers globally, as well as IMS Software, LLC, developers of the Food Connex™ ERP software for meat, seafood and poultry distributors and processors, providers of dry goods, provisions, specialty items and produce. 

The transaction closed on June 5, 2020. Financial terms of the transaction were not disclosed. 

About Robocom Corporation 

Robocom Corporation develops, licenses and supports supply chain execution software solutions, including warehouse management system (WMS), third-party logistics (3PL) billing, voice technology and labor management. The company also offers an enterprise resource planning (ERP) system that rounds out the supply chain execution offering. Robocom’s investment in research and development is keenly focused on the needs of the business leaders responsible for the day-to-day results in warehousing, distribution, third-party logistics, transportation and trucking operations. For more information visit www.robocom.com. 

About CAI Software, LLC 

CAI Software, LLC is a leader in the delivery of mission-critical, production-oriented enterprise resource planning (ERP) and manufacturing execution systems (MES) and services to leading companies in select vertical markets, including building materials, food processing, precious metals and discrete manufacturing. 

CAI Software’s ERP solutions automate key production, distribution and financial processes, help meet fluctuating customer requirements, increase productivity and maximize bottom-line profit. Our flagship MES solution — ShopVue — is a modular, operator-friendly system enabling mid-to-enterprise-sized discrete manufacturers to better manage their people, processes, orders, and machines. ShopVue customers achieve measurable improvements in quality, cost and delivery time. 

CAI Software is headquartered in Rhode Island, USA. For more information, please visit www.caisoft.com. 

The Investing Con Game

I originally posted this article in my blog on 21 July 2019.  My comment today is: Yup, as predicted, but we definitely did not know it would be a virus that pushed things over the precipice.... Aivars Lode

Read THE INVESTING CON GAME

Uber reimagines bet on scooters, leads $170M investment in Lime

Check out the valuation drop on Lime scooters. Now lets watch for all the other VC funded business valuation declines. This will not be the last revaluation downward.... Aivars Lode

Lime has raised $170 million in a round led by Uber, giving the electric scooter startup a much-needed breather to manage pandemic-fueled losses.

As part of the agreement, Lime also acquired the ridehailing giant's bikesharing division, Jump, and will continue to integrate its mobile app integration with Uber.
"This deal enables Uber to reduce operating costs associated with its Jump bikes business, which should help the company navigate the downturn in the near-term," said PitchBook emerging tech analyst Asad Hussain.
The new funding round would value Lime at $510 million, as first reported by The Information. That would be a 79% drop from the startup's $2.4 billion valuation after a funding round last August, according to PitchBook data. Lime did not disclose its current valuation.
Existing investors including Alphabet, GV and Bain Capital Ventures also participated in the funding round
News of the funding comes a day after Uber announced plans to lay off around 3,700 full-time employees with CEO Dara Khosrowshahi forgoing his base salary for the rest of the year.
A week ago, Lime laid off 13% of its global workforce, its second round of cuts this year. The company laid off 14% of its employees and ceased operations in 12 cities worldwide in January as it looked to achieve profitability in 2020. 
"Micromobility will be vital to the new world affected by COVID-19 and we are already seeing this as cities begin to move again," Ting said in the statement announcing the deal. Ting, who was Lime's head of global operations and strategy, served as Khosrowshahi's chief of staff prior to joining Lime in 2018.
However, VC deals for micromobility companies are likely to record a significant drop in the second quarter of 2020, according to a recent PitchBook report. The challenging funding environment will also result in sizable valuation haircuts to some companies, with deal terms increasingly in favor of investors.
Uber's stock closed up 11% Thursday in the wake of the announcement.

Hussain said the deal also provides Uber with a degree of upside optionality to buy Lime in the future—assuming the San Francisco-based company is able to successfully rebound coming out of this crisis. Lime's new CEO, Wayne Ting (pictured), appears to think it will.

By Priyamvada Mathur - Pitchbook

KKR still hunting for deals despite $1.3B loss during Q1

As per my recent comments on private equity (see blog from 5 May on Apollo), here are some more PE firms reporting losses... Aivars Lode


KKR became the latest publicly traded private equity shop to reveal the negative impact of the coronavirus outbreak on its portfolio Wednesday. But with $58 billion in dry powder, the famed investor known for opportunistic buying doesn't expect to stay sidelined.

KKR reported a net loss of $1.3 billion in the first quarter, a stark contrast to the $701 million in net income from last year's Q1. Much of that decline was due to markdowns of existing investments because of pandemic-fueled market turmoil. KKR's losses were of a similar scope to those of its publicly traded peers during the first three months of 2020: Blackstone lost roughly $1.1 billion, Apollo Global Management shed $2.3 billion and The Carlyle Group lost $612 million.

Apollo loses $2.3B, but credit unit provides hope

For the Private Equity guys this will not be the last fund that does not provide the expected returns. This is consistent with my commentary over the last 2 years. Also let's not sing their credit unit's praises just yet. Let's look at that in six months time.... Aivars Lode

Apollo Global Management offered more proof Friday that not even private equity is safe from the pandemic's economic assault, reporting a $2.3 billion net loss that makes it the worst hit of any publicly traded PE firm to post first-quarter earnings so far.

Apollo recorded unrealized mark-to-market losses of about $1.3 billion on its investment in Athene Holding, the Bermuda-based insurance conglomerate it helped create in 2009, while the firm's robust credit business helped buoy revenue numbers. Of the $5.2 billion in capital that Apollo deployed in the first quarter of 2020, some $3.4 billion was out of its credit arm. On an investor call, co-founder Josh Harris said he expects distressed opportunities to increase in the next two years
Additionally, total capital deployment accelerated at about double the pace of normal quarters, reaching about $40 billion in the first quarter, with an additional $10 billion in April. The firm is currently investing out of its ninth flagship fund, a $24.6 billion vehicle that has shifted from traditional private equity investments to a nearly all distressed-for-control credit strategy.

Rally Over? The Point Is ‘Smoot’. Why The 1930s Continues To Be A Bear Track To Follow.

Worth a read and to reflect where the market is likely to go. The comparison with today and the Depression is eerily similar.... Aivars Lode

The Dow’s movement is still mimicking 1931 very closely. Tariff talk doesn’t help

You have probably heard that “history doesn’t repeat, but it often rhymes.” Well, the further we travel through 2020 (even if we can’t travel much the way we are accustomed to), history is turning into quite a poet.

Recently I brought to your attention some economic similarities that occurred a long time ago, but which I truly believe have relevance today. Because at it’s core, human behavior doesn’t change radically. We are wired a certain way. And, since markets move based on decisions made by humans (and increasingly by human-inspired algorithms), we simply can’t ignore parallels to past periods in economic and market history.

Markets and Tariffs and Bears, oh my!

The table below simply says this: there is a remarkable similarity between how 1931 (2 years after the “Crash of 1929”) played out and the way this version of a recession/depression-era economy is developing. In fact, one thing I left out of my recent piece on the subject was a mention of the Smoot-Hawley Tariff Act, in which the United States slapped tariffs on about 20,000 imported goods. This occurred in 1930, one year before the market went from tenuous to, well, not so good. Sound familiar?

WeWork Troubles Take Deeper Bite Out of SoftBank

I know it seems like I am beating up on We Work, however it is they who are beating themselves up. Why do I highlight them? They are the canary in the coalmine the way that Enron was in 2001 and Lehman brothers was in 2008. Many stocks are still overvalued on a PE basis and we have not seen the full effect of the corona virus on earnings.... Aivars Lode

SoftBank Group Corp. said steeper-than-expected losses on office-share firm WeWork pushed its expected net loss for the latest fiscal year to around ¥900 billion ($8.4 billion)—$1.4 billion more than it announced just two weeks ago.

The Japanese tech conglomerate, best known for its $100 billion Vision Fund, revised the estimate as it scrambles to calculate the hit to its bottom line from souring investments before it releases earnings on May 18 for the year ended March 31. The deeper loss comes from SoftBank’s multibillion-dollar rescue of We Co., the parent of WeWork, whose value cratered last year after investors turned wary of the company’s highflying chief executive and heavy-spending business model. 

Part of that rescue involved credit support by SoftBank for a bank commitment to lend as much as $1.75 billion to WeWork as well as up to $2.2 billion in unsecured notes to be issued by WeWork. The value of that loan commitment and guarantee has fallen, forcing SoftBank to book further write-downs, the company said Thursday. 

Icahn Says Stocks Are Overvalued, Virus May Cause ‘Downdrafts’

I have been blogging this for over a year and Covid-19 just made it real ...Aivars Lode

Carl Icahn isn’t buying stocks right now. He’s hoarding cash, shorting commercial real estate and preparing for the coronavirus to wreak more havoc.

This is a time to be “extremely careful,” Icahn said in an interview Friday on Bloomberg Television.

From his home on Miami’s Biscayne Bay, the billionaire investor has surveyed the damage to stock prices -- and to his portfolio -- and reached out to medical experts for information and opinions on the Covid-19 pandemic. To Icahn, who at 84 has traded through all the stock-market crashes since the Great Depression, the future is just too unpredictable for the S&P 500 to be trading at 17 times 2021 earnings estimates.

“You cannot really justify that multiple,” Icahn said. “Short-term, you may have some big downdrafts.”

The market disagrees. Since the Federal Reserve on March 23 unveiled a series of unprecedented measures to support the U.S. economy, followed by even more in subsequent weeks, stocks have roared back 30% from their intraday low.

Pandemic Could End Shareholder Value Supremacy For Good

Now for some good news.  Here are a couple of great stories of corporations giving back to the community and employees. It also begs the question: What should be the focus of corporations post Virus?  ...Aivars Lode

Looking around for more it could do, Xerox began to focus on ventilators. It found a small company in California, Vortran Medical Technology, which makes a $120 ventilator that’s meant to be used by patients who don’t need a full-blown $20,000 intensive care ventilator. (Most Covid-19 patients fall into that category.)

Xerox and Vortran struck up a partnership. Xerox has since put together a supply chain, obtained the equipment it needs to create a small ventilator plant and is devoting a portion of its factory floor near Rochester to the venture. The floor is being configured so that the workers will be 6 feet apart, and other social-distancing measures are being taken. The hope is that  Vortran and Xerox will be able to produce 150,000 to 200,000 of these disposable ventilators a month.

Nobody asked Xerox to do this, which is part of the point. It saw a need — one that had nothing to do with its core business, and will never make much money — and decided to try to fill it. Hundreds of Xerox employees have been volunteering to join the project, which is another important aspect: Employees and management are aligned, something that hasn’t often been true in corporate America these past few decades.

My second example is Bank of America. As my Bloomberg Opinion colleague Brian Chappatta noted in a column on Wednesday, the bank’s first-quarter profits were down 45%. But CEO Brian Moynihan seemed unperturbed.

“Just as important as our financial results this quarter is what we are doing to take care of our teammates and to help our clients and our communities impacted by the virus,” he said at the opening of the bank’s quarterly conference call. Curious, I asked a bank spokeswoman for some more details. A half-hour later, she sent me a long list.

It was impressive. For employees, the list included no layoffs in 2020 because of the coronavirus crisis; expanded benefits including no-cost coronavirus testing and $100 a day for backup child care; and a $20 an hour minimum pay rate. For customers, the bank has stopped foreclosures and allowed them to request payment deferrals on everything from auto loans to credit card late fees. There was more, including $100 million for communities to buy medical supplies and help for small businesses.

When was the last time you heard a CEO tell a group of Wall Street analysts that its treatment of employees was as important as its financial results? Maybe never. How often have companies used their core resources to tackle societal challenges that will never accrue to the bottom line?

That this is taking place across corporate America gives me hope. There is something about disease — and the prospect of death — that causes people to think hard about what truly matters. This may turn out to be naïve, but I believe that is happening in the executive suites of America’s big companies.

Shareholder value has been an insidious force inside U.S. businesses, creating incentives that have led to selfish and callous behavior. If this crisis brings about a new set of C-suite values — or, more accurately, a return to an old set of values — then at least one good thing will have come of it.

By Joe Nocera - Bloomberg Opinion Columnist

Why a ‘return to normal’ could mean disaster for the stock market

I agree with this premise and I have described Rodrigue’s chart verbally through my own observations in my books. Caveat: I have not validated the current chart however I do agree wholeheartedly with the direction.... Aivars Lode

It’s hard to deny, although some do, that the stock market, pre-coronavirus, was pushing the limits of what it means to be in a bubble. Of course, bubbles come and go, but as Hofstra University’s Jean-Paul Rodrigue suggests, this one had a particularly fierce tailwind.

“Although manias and bubbles have taken place many times before in history...” he once wrote, “central banks appear to make matters worse by providing too much credit and being unable or unwilling to stop the process with things are getting out of control.”

Rodrigue explained that bubbles unfold in stages, an observation backed by 500 years of economic history. “Each mania is obviously different,” he said. “But there are always similarities.”

His concept of the bubble has been passed around finance circles for years. Most recently, John Hussman of Hussman Investment Trust used Rodrigue’s chart to warn investors of what’s to come:

Hussman, who’s been very vocal about getting burned by his bearish misfires in recent years — “Did it take too long for me to abandon my belief in a ‘limit’ to the stupidity of Wall Street? Yes it did” — said the current position of this market is reminiscent of Rodrigue’s “return to normal” stage. If that’s the case, “fear” and “capitulation,” followed by “despair,” are still to come. 

For comparison, here’s where we stand now:

“Having cleared the oversold condition that emerged on a few occasions in March,” Hussman wrote in a recent note, “we now observe the fairly unusual combination of overbought conditions, renewed valuation extremes, and still unfavorable market internals.”

He pointed to May 2001, December 2007 and May 2008 as similar points in other recent bubbles. “All three, in hindsight, had unfortunate consequences,” Hussman said.

No such unfortunate consequences as of yet in Wednesday’s trading session, with the Dow Jones Industrial Average up almost 500 points. The S&P 500 and tech-heavy Nasdaq Composite were also nicely higher. 

By Shawn Langlois - MarketWatch

Investors discover some weaknesses with private credit

I have previously commented on crazy debt financing that I have personally observed.  Here are two others who have observed the same... 

Doug Cruikshank, New York-based head of fund financing at Hark Capital, a business of Aberdeen Standard Investments, said: Loans based on so-called EBITDA add-ons, which is when actual EBITDA numbers are increased based on possible future earnings, and loans with few covenants to protect lenders will have a greater impact on credit returns than in the last recession.

Mark Attanasio, Los Angeles-based co-founder and managing partner of credit manager Crescent Capital Group LP, said: The reason is that in the years leading up to the current crisis there were a lot more loans issued by private credit managers with fewer covenants and earnings based on potential future cash flows. As a result, the damage to investors' portfolios is likely to be "worse this time.”  

It was sold as a defensive strategy, but coronavirus could capsize performance

Private credit investments were sold as lower risk than equity strategies, with some types of credit such as distressed debt considered defensive, but the COVID-19 crisis makes those performance expectations an open question, industry sources said.

Credit managers today are having to deal with investments predicated on the good times continuing in a growing economy awash in cash. Such firms had competed for deals by requiring fewer — if any — covenants, offering looser fund terms and lowering their own return expectations. Now, for the first time, they are talking with borrowers, many of which are private equity firms' portfolio companies, about forbearances, restructuring loans and covenant waivers, and making other accommodations to lessen the likelihood of defaults.

Read the full article by Arleen Jacobius from Pensions & Investments here

BlackRock’s Profit, Assets Under Management Fall

If you look back at my posts about pension funds over the last year or so you will see that I predicted that they will not be able to honor their commitments. I have been watching private equity firms overpaying for assets, which will result in a fall of value, and then pension funds will have to sell liquid assets like stocks. Well lets watch this over the next year as we have not seen the bottom of the stock market, not even close ...Aivars Lode

Plummeting markets from coronavirus pandemic dragged assets under management below $7 trillion

Money management giant BlackRock Inc.’s profits fell by 23% in the first quarter, as a global pandemic and waves of selling gripped the investment world. 

Investors added a net $35 billion in new money to the firm’s coffers, down by about half from the prior-year period. Most of the money coming into the firm went to cash, a sign heightened investor caution is driving money into less profitable businesses for the investment industry.

Flows into other investment products were negative for the quarter, an aberration for the firm. 

Asset managers are confronting the most acute pressures the industry has faced since 2008. Many customers—which include pensions, endowments and individuals—have turned to forced selling in a rush for cash as more businesses close and jobless claims rise. Money managers also had to grapple with seizing bond markets that had ripple-effects across fixed-income mutual funds and ETFs.

Measures of BlackRock performance, such as adjusted earnings, beat analyst expectations in a quarter expected to be more painful for smaller rivals. BlackRock’s shares rose 3.6%.

“The world is facing a challenge that is truly unprecedented in our lifetimes,” said BlackRock Chief Executive Laurence Fink in a call with Wall Street analysts.

Mr. Fink said the firm has had record calls and outreach to clients in recent weeks. He added that tough times give the firm a chance to differentiate itself.

Pandemic shows investment fund vulnerabilities, G20 watchdog says

For a while now I have been talking about the risk that pension funds faced from deals that they and other investment funds had been making that financially did not make sense. Now it appears these same funds are making excuses and looking for a bail out.... Aivars Lode

LONDON (Reuters) - Non-bank financial firms such as investment funds have exhibited vulnerabilities during the coronavirus crisis that may need fixing to help economies recover, a global regulatory watchdog said on Tuesday.

The Financial Stability Board (FSB), which coordinates financial rules for the Group of 20 (G20) economies, said that although an initial wave of volatility has ebbed, markets remain under great strain and in some cases illiquid. 

FSB Chair Randal Quarles said the impact of the coronavirus pandemic on credit markets and investment funds has highlighted potential vulnerabilities and the need to understand the risks and resulting policy implications. 

“It is more important than ever to ensure that we can reap the benefits of this dynamic part of the financial system without risking financial stability,” Quarles said in a letter to G20 finance ministers and central banks, who are holding a virtual meeting this week. 

SoftBank expects $24 billion in losses from Vision Fund, WeWork and OneWeb investments

Boy oh boy, every day more bad news. "Rooster to feather duster" comes into mind.... Aivars Lode

The Japanese technology conglomerate SoftBank Group said it would lose a staggering $24 billion on investments made through its Vision Fund and bets on the co-working real estate company WeWork and satellite telecommunications company OneWeb.

Ultimately, the company expects the losses to help generate a $7 billion total loss for the technology giant for the year as its ambitious bets on early-stage companies come up short.

Over the past two years SoftBank and its founder Masayoshi Son have staked billions of (other people’s) dollars and its own fortunes on a vision that investments in machine learning technologies, robotics and next-generation telecommunications would reap hundreds of billions in financial rewards.

While that was the vision that Son and his team sold, the reality was multiple billions of dollars invested into real estate investment plays like WeWork, OpenDoor and Compass, and companies with direct-to-consumer merchandising plays like Brandless, pet supply businesses like Wag and the food delivery business DoorDash. Add the hotel chain Oyo to the mix and the investment selection from the Vision Fund looks even less visionary.

JPMorgan warns of ‘fairly severe recession,’ increases credit reserves by $6.8 billion

I have been asking the question for a while now: What should JP Morgans share price actually be? They took in fees from WeWork (at minimum 250m) and others so what will their real revenue and earnings be? If their revenue and earning would be at 2016 levels this would mean that there is still nearly 50% of their value to be lost. That begs the next question: If the revenue is lower than 2016 then how far will the valuation fall?  ....Aivars Lode

JPMorgan Chase, the largest U.S. bank by assets, kicked off earnings season for the big banks on Tuesday by announcing that it set aside billions in anticipation of loan losses.

“In the first quarter, the underlying results of the company were extremely good, however given the likelihood of a fairly severe recession, it was necessary to build credit reserves of $6.8B, resulting in total credit costs of $8.3B for the quarter,” CEO Jamie Dimon said in his commentary.

Here were the key figures versus the expectations for the first quarter, according to analysts polled by Bloomberg.

• Revenue (adjusted): $29.07 billion vs $29.52 billion expected
• Earnings per share (adjusted): $0.78 vs $2.14 per share expected

The market isn’t putting much weight into how the actual results performed against analysts’ expectations as the impact of coronavirus pandemic has been extremely difficult to measure. To be sure, a key reason EPS was much lower than a year ago is because of the bank building its credit reserves.

The $6.8 billion in reserve builds “reflect deterioration in the macro-economic environment as a result of the impact of COVID-19 and continued pressure on oil prices,” the bank said in its release. Breaking that down further, the consumer reserve build was $4.4 billion, while the wholesale reserve build was $2.4 billion across multiple sectors, especially in oil and gas, real estate, and consumer and retail.

In its outlook, JPMorgan said to expect net reserve builds in the second quarter.