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