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Chinese currency on track for its worst month since it moved to a managed float in 2005


Asian shares sank on Monday as the latest salvos in the Sino-U.S. trade war shook confidence in the world economy and sent investors steaming to the safe harbor of sovereign bonds and gold, while slugging emerging market currencies.


Hedge fund limits withdrawal window to once every two years for some clients


Nissan Motor Co's premium brand Infiniti said it has named Taisuke Nakamura as its new design chief, replacing Karim Habib who resigned from the post.


Japan's top government spokesman denied on Monday that Tokyo made too many concessions in trade talks with the United States, saying the fact the two countries were able to reach a broad agreement was "very valuable."


European labour shortages lure young people in search of higher wages


Criticised for being slow, consumer goods groups are using new technologies to fend off challengers


China is willing to resolve its trade dispute with the United States through "calm" negotiations and resolutely opposes the escalation of the conflict, Vice Premier Liu He, who has been leading the talks with Washington, said on Monday.


Chinese Vice Premier Liu He said on Monday that China is willing to resolve its trade dispute with the United States through calm negotiations and resolutely opposes the escalation of the conflict, a state-backed newspaper reported.


Fate of Laundroid robot is a sobering lesson in how not to back entrepreneurs


Firm that manages fortune of billionaire Reimann family wants to expand in pet care


Using workers as a prop to promote company interests is bound to backfire


Idea of prohibiting the passing on of costs has been gaining political traction in Berlin


By Aislinn Laing, Marina Lammertyn, Marcelo Rochabrun and Nelson Bocanegra


Owners say platforms such as Zomato are demanding unsustainably low prices


Oil prices fell on Monday, pushing U.S. crude to its lowest in more than two weeks, as an intensifying U.S.-China trade war knocked confidence in the global economy.


Singapore-based ride-hailing firm Grab is set to invest "several hundred million dollars" in Vietnam where the company sees its next major growth market, just weeks after it unveiled a $2 billion plan in Indonesia.


The United States and Japan agreed in principle on Sunday to core elements of a trade deal that U.S. President Donald Trump and Prime Minister Shinzo Abe said they hoped to sign in New York next month.


Shareholders will press Virgin Australia Holdings' new CEO Paul Scurrah to present a robust strategic plan on Wednesday, when the airline is expected to report its seventh consecutive annual loss, on top of $1.2 billion worth of red ink over the previous six years.


New Zealand dairy giant saddled with huge debts after expanding into overseas markets


U.S. stock index futures dropped when electronic trading resumed on Sunday, with trade relations between the United States and China appearing to reach a new low on Friday, sending Wall Street into a selling frenzy.


Walt Disney Co and Target Corp announced a collaboration on Sunday that will open 25 Disney stores inside select Target locations nationwide on Oct. 4, with plans for 40 additional sites by October next year.


Companies face pressure to repay borrowings on structured finance products


Third Point LLC, the U.S. hedge fund that has pushed for changes at companies ranging from Nestle SA to Campbell Soup Co , has amassed a stake in Ray-Ban maker EssilorLuxottica SA , people familiar with the matter said on Sunday.


Officials look to ease burden on struggling members by softening debt reduction goals


Thomas Piketty

  • Our Better Capitalism series focuses on why inequality has been hurting economic growth, and why new approaches to business and policy can be a course correction.
  • We've chosen books from writers like the economist Joseph Stiglitz and the futurist Amy Webb that make sense of where we are, how we got here, and where we should be headed.
  • This article is part of Business Insider's ongoing series on Better Capitalism.
  • Visit Business Insider's homepage for more stories.

In August, nearly 200 CEOs of America's largest companies declared their companies exist for the "benefit of all stakeholders — customers, employees, suppliers, communities and shareholders." This collection of CEOs, the lobbying group the Business Roundtable, rejected the idea that maximizing shareholder value at all costs will take care of everything else.

Their statement was not legally binding, but even if it ends up merely symbolic, it marks a significant shift in the conversation. Since the beginning of last year, Business Insider has been exploring the momentum behind this shift — why we need "Better Capitalism," as we call it, and how we can achieve it.

Our series started with the rejection of the shareholder primacy theory that grew in popularity in the late 1970s and became the norm beginning in the '80s. That theory led to a short-term focus on profits above all else, and we're arguing that this has come at the expense of other stakeholders, and has been a significant factor in the country's out-of-control wage-and-wealth inequality.

We've found that there is an increasingly loud call to tie profits to purpose, and it's not just a moral argument.

To make sense of where we are today and where we should be headed, we've gathered some of our favorite books on the economy and the role of business in society.

This is an updated version of a story that ran on March 16, 2019.

SEE ALSO: Ray Dalio says anyone who wants to understand today's world should read a 32-year-old book about empires

'Transaction Man' by Nicholas Lemann

The shift in the conversation Americans are having about capitalism has direct ties to the financial crisis and the ensuing populist movements, but its roots are in the American economy's rise to dominance following World War II.

Nicholas Lemann, a New Yorker staff writer and professor and dean emeritus at the Columbia University Graduate School of Journalism, takes a look at how the US economy got to where it is right now. [Full disclosure, I attended the school of journalism when Lemann was the dean.]

He explores how the theories of shareholder primacy and trickle-down economics led to, as the subtitle of the book captures, "the rise of the deal and the decline of the American Dream." And it's not simply theoretical. Lemann makes his narrative resonate through the stories of both those who have thrived and those who have suffered through the past several decades in America.

Find it here »



'The Enlightened Capitalists' by James O'Toole

O'Toole, the founding director of the University of Southern California's Neely Center for Ethical Leadership and Decision-Making, chronicles the ways business leaders tried to align their profits with social good, sometimes with poor results.

Using case studies of entrepreneurs behind brands like J.C. Penney and Levi Strauss & Co., O'Toole examines what works and what doesn't when it comes to building sustainable, socially-conscious companies.

Find it here »



'The Shareholder Value Myth' by Lynn Stout

The late Cornell Law professor Lynn Stout rose to prominence challenging the ideas that have dominated the past 40 years. In 2012, she took on the theory of shareholder primacy, which is the idea that public companies exist above all else to serve the needs of shareholders, and that if they make decisions with this approach, customers and employees will naturally benefit.

There's an argument to be made that this approach may have made sense in the 1980s, after the stagflation of the '70s, but Stout shows that it was inherently flawed and achieving the opposite result. Shareholder primacy can benefit investors in the short term, but it's an approach considering all stakeholders that creates lasting long-term value for investors, as well.

Find it here »



'Rewriting the Rules of the American Economy' by Joseph Sitglitz

Joseph Stiglitz is a Nobel Prize-winning economist based at Columbia University, and his 2015 book looks at how shareholder primacy has been one of many policies that he believes have been hurting the American economy.

Stiglitz dismisses the argument that implementing policies that would decrease inequality would hinder growth. Instead, he explains, the wealthiest Americans have increasingly captured the benefits of the growth seen in the past few decades, which handicaps the economy from performing at its best.

Find it here »



'Conscious Capitalism' by John Mackey and Raj Sisodia

Whole Foods founder John Mackey and Babson College professor Raj Sisodia kicked off a movement with their 2013 book, "Conscious Capitalism."

Stout and Stiglitz used their books to show that prevailing business theories were not only detrimental to workers and communities, but to shareholders and the economy as a whole; Mackey and Sisodia use theirs to show that businesses were already in a position to link their profits to purpose, and that investing in all stakeholders also increased the bottom line. 

Find it here »



'Winners Take All' by Anand Giridharadas

Anand Giridharadas is a journalist and former McKinsey consultant who was fully enmeshed in the world of the elite. As an Aspen Institute Fellow, he was a true believer in "doing well by doing good." But by 2015, he felt like everything was built on a charade.

In his book, Giridharadas gives a scathing critique of how countries like the United States have essentially handed over societal problems to corporations and billionaires, without addressing the roots of the issues.

We're using our list to highlight ways that those in power can better use that power, but Giridharadas' book is an important wake-up call that will ensure you are always conscious of the bigger picture.

Find it here »



'Janesville' by Amy Goldstein

We're in the early stages of another major shift in industry, where advances in technology will be both replacing and creating millions of new jobs. New solutions around job retraining and skills-based education will play a vital role in ensuring the changes benefit as many people as possible, but "Janesville" also shows there are no quick fixes.

Washington Post reporter Amy Goldstein reported extensively in Janesville, Wisconsin, from 2011 to 2017, tracking the struggles of a town after its General Motors plant closed. Her findings included the insight that when we talk about "closing the skills gap," we must be very deliberate about the path from training to job. It will require the cooperation of educators, politicians, corporations, and labor.

Find it here »



'This Changes Everything' by Naomi Klein

We've been focusing on how the neoliberal policies of the past 40 years have negatively impacted people, but reporter and activist Naomi Klein's 2014 book focuses on how those same policies of growth at all costs have also ravaged the planet.

The literature on the harmful effects of climate change is extensive, but "This Changes Everything" specifically focuses on the role business has played, and why citizens must demand that significant moves toward sustainability are enforced. 

Find it here »



'Crashed: How a Decade of Financial Crises Changed the World' by Adam Tooze

The debate over the role of public companies, the wealthy, and policy in America has been waged for decades, but it's begun a new phase as the generation that entered the workforce during the financial crisis has come of age.

Columbia historian Adam Tooze offers perhaps the most extensive explanation of the crisis itself, its causes, and ramifications, and how what happened in the American financial system was closely linked to the crisis that shook Europe.

Find it here »



'Capital in the 21st Century' by Thomas Piketty

French economist Thomas Piketty had an unexpected best-seller when his 800-page economics book was published in English in 2013.

It's still the gold standard on understanding how we've come to a new Gilded Age.

Find it here »



'The Curse of Bigness' by Tim Wu

Massachusetts Sen. Elizabeth Warren has breaking up big tech in her presidential campaign platform, and it's based on a growing movement of economists and lawyers pushing for enhanced antitrust law.

Columbia law professor and former Federal Trade Commission adviser Tim Wu has provided  the most succinct and persuasive case for why we should revitalize antitrust, to weaken the effects increased market concentration is having on workers, politics, and customers.

Find it here »



'The Big Nine' by Amy Webb

"Artificial intelligence" is a ubiquitous but often misunderstood buzzword when we discuss the future of business.

New York University professor Amy Webb is here to help. She breaks down how "The Big Nine" developers of AI are shaping our futures, but that nothing they create has inevitable ramifications.

She uses data and history to show what's actually happening in the world of AI, dispelling both excessive fear and optimism, and proposes ways that countries and corporations will have to work together to create regulations and expectations around increasingly powerful technology.

Find it here »



'The Third Wave' by Steve Case

There are different ways of categorizing the industrial shift we're in — there's a debate over whether it qualifies as "the Fourth Industrial Revolution" — but it's undeniable that technological changes are transforming the way we work.

AOL founder and venture capitalist Steve Case sees this period as the beginning of "The Third Wave of the Internet," following the first wave of foundational internet companies like AOL and second wave companies like Facebook.

We're headed into a world where "the internet of things" will become the internet of everything, and Case believes that this is going to more evenly distribute the power concentrated in Silicon Valley and Wall Street. It's why he's investing in rising startup scenes throughout the country, which he thinks will be critical to the future success of the American economy. 

Find it here »





Pacific Investment Management Co is one of the investors embracing Danish mortgage-backed covered bonds, even as negative interest rates mean investors face built-in losses on some bonds, Bloomberg reported on Sunday.


President Donald Trump wishes he had raised tariffs on Chinese goods even higher last week, the White House said on Sunday, even as Trump signaled he did not plan to follow through with a demand that U.S. firms find ways to close operations in China.


There may be little relief on the horizon for investors in U.S. energy companies, whose shares moved from darlings to dismal performers during Wall Street's record bull run and now face a shaky global economy, doubts about fossil fuel investments and general market skepticism.


Electric carmaker Tesla is scouting out locations for a possible factory in the German state of North Rhine-Westphalia (NRW), Germany's most populous state, daily Rheinische Post reported on Sunday, citing people familiar with the matter.


The president meant he regretted not raising tariffs on Chinese goods higher, a spokeswoman says.


President has ‘second thoughts’ about trade war, then White House restates commitment to tariffs


White House economic adviser Larry Kudlow said on Sunday that he does not expect China to retaliate against additional tariffs on Chinese goods that U.S. President Donald Trump announced Friday.


16:00 Europe’s refugee policy is adrift (Financial Times)
Financial incentives are needed to convince countries to share the migrant burden


trader point screen chart

  • Strategists at the Bank of America Merrill Lynch argue that the slope at the front end of the yield curve is the most important area to watch.
  • They say this is because it does a solid job of indicating future GDP growth.
  • The strategists' key measure is the spread between the three-month Treasury rate one year forward and the spot three-month rate, which has been inverted since March.
  • If the Fed continues to ease, this could push this part of the yield curve back into positive territory, Bank of America said. 
  • Read more on Markets Insider. 

A frequently overlooked part of the yield curve — the spread between the three-month Treasury rate one year forward and the spot three-month rate — is the most important, a team of strategists at Bank of America Merrill Lynch said on Friday.

This part of the curve, which has been inverted since March, dominates all other curves in its power to predict future growth in the US, they argue.

"The intuition behind why this particular slope works so well is simple: it purely reflects the market's outlook for Fed policy and is impacted by very little else," the strategists said in a client note.

They added: "Just as studies have shown that orange juice futures help predict Florida weather, the market's pricing of Fed policy is a relatively good predictor of the year-ahead GDP growth."

A number of yield curve inversions over the last few weeks and months have sparked a debate over which part of the curve is the best predictor of a recession. For context, the New York Federal Reserve watches the spread between 3-month and 10-year Treasurys for its recession probability tracker, which has been at levels not seen since the financial crisis since the spread inverted in March.

In the last two weeks, the spread between two- and 10-year Treasurys has inverted multiple times. This is generally thought to be the most important part of the curve as it has a 100% success rate of predicting future recessions since 1950.

Markets Insider is looking for a panel of millennial investors. If you're active in the markets, CLICK HERE to sign up.

But for the team at Bank of America, "what's more telling, in our view, is the extent to which a curve slope has any power to predict future growth," not which inversions precede recessions. This is why they look at the three-month rate — if the market thinks the Fed should ease right away, there must be cause for concern, they say. 

If the Fed continues to cut rates — which Bank of America economists predict they will — it could lead this curve back into positive territory again. But that depends on how the market reacts to potential cuts.

In July, the strategists wrote, their favorite part of the yield curve inverted more, following the rest of the market's negative reaction. 

To be sure, the team wrote, "the predictive power of any yield curve for future growth is limited."

Still, they view the inversion of the one-year three-month over three-month curve as indicating downside risks going forward. Further, if it continues to go down, that would require the market to price in a deeper cutting cycle, adding more pressure.

Join the conversation about this story »

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Tension returns to the financial centre after a lull in violent clashes


Prime minister wants America to open up its market to UK companies


Chinese stock trader

  • Investors who are buying the stock market's biggest winners and selling the losers are seeing this strategy pay off significantly. 
  • However, quantitative strategists at Nomura have observed that so-called momentum factor investing is moving in lockstep with widespread risk aversion. 
  • This concurrent move is rare and connected to past periods of turmoil in markets, they observed.  
  • Click here for more BI Prime stories.

A trading tactic that profits from the stock market's biggest winners has been on fire lately.

But after quantitative strategists at Nomura peeked beneath its surface, they concluded that investor fears about risks — not their bullishness — explains the outperformance. 

The strategy in question is none other than momentum factor investing, which involves buying stocks that have recently outperformed and selling the stragglers. The sector-neutral momentum factor with Russell 1000 stocks has returned nearly 23% since May 1 versus 4.5% for the index, according to Joseph Mezrich, the head of quant strategy at Nomura.

What is unusual about this is that investors' anxieties about the future have not historically driven high-momentum stocks. For a sense of how significant this trend is, Mezrich pointed out its two prior instances took place amid the technology crisis in September 2002 and the financial crisis in 2008. 

To understand how risk aversion is driving momentum's success, Mezrich distinguished between the basket of stocks that investors are buying (the high-momentum side) and the basket they're betting against (the low-momentum faction). He found that the excess returns of both baskets were similar until May.

Since then, there's been a definitive split: the high-momentum basket with the winning stocks is surging and the low-momentum basket with the losing stocks is rolling over. The gulf between both is almost mathematically symmetrical as they've returned 6.5% and -7.4% respectively. 

Read more: GOLDMAN SACHS: Recession fever has put hedge funds' most beloved stock trades in the crosshairs of disaster. Here's how to safeguard yourself from big losses.

The real driver of high momentum is risk

This is where the split gets even more interesting. Mezrich didn't stop at observing the departure between these two baskets, but showed how both sides of momentum are moving with investors' perceptions of risk.

When markets are going haywire and investors have a laundry list of reasons to be worried — like they do now — low-volatility stocks become even more alluring. Mezrich found that this cohort is outperforming almost in lockstep with the high-momentum stocks that investors have come to love.

"While there has been a consistent connection between high-volatility stocks and past losers (i.e., low-momentum stocks), it's relatively rare to see the connection between low-volatility stocks and past winners (i.e., high-momentum stocks)," Mezrich said in a recent note.

In other words, the desire for high-momentum stocks has become synonymous with a disdain for risky stocks, in Mezrich's view. And when investors previously traded on these two sentiments at the same time, the markets were in the thick of crises. 

These days, the trade war is slowing growth in the world's largest economies and the bond market is flashing trusted warning signs of a recession. Whether these risks and others lead to another full-blown crisis is still up in the air. For now, investors are finding shelter wherever they can, be it in recent stock-market winners, low-volatility equities, or over in the bond market.

Mezrich also noted that the market's performance after past instances of the high-momentum/low-volatility pair trade has been mixed but decisive: stocks bottomed shortly after September 2002, but crashed after June 2008.

For investors worried about yet another awry outcome, Goldman Sachs recommends its basket of stocks most that hedge funds love the most.

According to Ben Snider, an equity strategist at the firm, hedge funds that have piled into the momentum trade face the risk of crowding into similar names. 

Goldman's basket, which only includes fundamentally driven funds and screens out quant funds, exhibits a lower beta to the S&P 500 during rallies than it does during sell-offs, Snider said in a recent note. That means it could help investors hedge against the ongoing rush for strong performers.

The newest constituents of the so-called VIP basket include Allergan, Micron Technology, Zillow, and S&P Global.

SEE ALSO: An equity chief explains why an unexpected Fed decision could soon burst 'the biggest bubble ever' and send bank stocks skyrocketing

Join the conversation about this story »

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British shale gas company Cuadrilla Resources said a tremor measuring 2.1 ML on the Richter scale was recorded at the company's shale gas exploration site late on Saturday.


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Donald Trump Xi Jinping

  • Market strategists across asset classes are warning investors the turbulence that's proliferated in recent weeks will rage on as President Donald Trump's trade war with China enters new territory.
  • Referring to the US dollar's strength, one foreign-exchange strategist told clients: "More losses are likely in the coming week as investors and central banks grow more concerned about recessions."
  • The escalation comes as stock investors are dealing with the fallout from an inverted yield curve, a signal from the Treasury market often associated with economic recession. 
  • Visit Business Insider's homepage for more stories.

Stock-market investors were dealt another blow late in the week as the US' and China's trade tit-for-tat entered new territory, ushering in wild market swings.

As both nations inflict fresh rounds of tariffs and rock an already vulnerable market, strategists are warning the turbulence may be far from over.

Here's what happened: 

  • After the financial markets closed on Friday, President Donald Trump tweeted that his administration would hike tariffs on Chinese goods.
  • That was a response to China unveiling a fresh round of tariffs on $75 billion worth of US goods.
  • Trump said the US is set to hike tariffs on some $250 billion in Chinese imports to 30% from 25%, starting on October 1, and increase tariffs on $300 billion dollars in Chinese goods to 15% from 10% starting September 1.
  • During the trading session, US stocks plunged on separate trade-related tweets Trump fired off, urging US companies to "start looking for an alternative" to doing business with China.
  • US indices all fell by more than 2%, with the Dow Jones Industrial Average plunging by more than 600 points.

That all pushed the trade war between the world's two largest economies to "new heights" on Friday, said Kathy Lien, a foreign-exchange strategist at BK Asset Management in New York. While stocks sold off, the US dollar was hit particularly hard of all the major currencies, she said.

"More losses are likely in the coming week as investors and central banks grow more concerned about recessions," Lien said in a note to clients late Friday, adding she'd observed "full-blown" risk avoidance in the currency markets.

Politics pose a market risk.

The Dow Jones Industrial Average closed on a low note this week.

The latest trade escalation comes at a fraught time for economic growth in the US and around the world. The most closely watched segment of the Treasury yield curve inverted earlier this month for the first time since 2007, just before the financial crisis, and the US manufacturing sector has weakened substantially

"With the ongoing US-China trade conflict, we do not regard the current environment as conducive to taking on outsized risk," Mark Haefele, the chief investment officer at UBS Global Wealth Management, the largest wealth manager in the world, wrote in a note to clients on Thursday just prior to the latest tariff escalation.

Weighing on investor sentiment is the concern that the global manufacturing downturn will "broaden and deepen," Haefele said, along with the worry that "President Trump is willing to push the US economy into a recession to fulfill his trade objectives." 

The "main risk to the market is politics," not monetary policy, said Putri Pascualy, a managing director at the investment firm PAAMCO Prisma. 

Read more: BMW, Daimler, and other auto stocks are crashing after China announced a 25% tariff on cars made in the US

Still, many market analysts are encouraged by some economic indicators they say will cushion the blow and propel stocks.

Vito Racanelli, a senior editor and market intelligence analyst at Fundstrat Global Advisors, pointed to modest strength in New York's manufacturing index, along with retail sales and second-quarter non-farm productivity advancing further than expected.

"With all the bad news we've seen, I still think this looks like market resilience," he said.

Investors are playing defense.

But an unpredictable US leader coming to blows with the Federal Reserve (in an unprecedented fashion) during an economic slowdown has placed many on edge.

Investors around the world pulled $14.5 billion from equity funds for the week ending August 23, according to a Deutsche Bank analysis. Bond funds and money-market funds, typically seen as more stable investments in uncertain times, saw continued inflows of $15 billion and $33 billion, respectively.

BK Asset Management's Lien put it more pointedly in her client note: "China and the US have made it clear that they won't back down easily and the rest of the world will be victims of this intensifying trade war."

Join the conversation about this story »

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Uber driver

  • We asked Uber and Lyft drivers the hardest parts about working for the ride-hailing platforms. 
  • As you might expect, sitting for long hours, and not having any coworkers for juicy office gossip can get old. 
  • Drivers also have a unique vantage point to the city that other workers might miss. Here's what they said. 
  • Visit Business Insider's homepage for more stories.

On the surface, driving for Uber and Lyft is relatively simple: just pick someone up and take them to their destination.

But for full-time drivers on the ride-hailing platforms, there's plenty more work that goes into making sure they keep a top-notch rating — and that they can entice as many tips as possible.

We asked drivers for the most difficult part of their job. Despite the flexibility that working for Uber and Lyft can offer, many said sitting for long hours can get uncomfortable, as well as a lack of coworkers to socialize with. On top of that, the most lucrative times to drive aren't always the most convenient.

Here's what they said (last names have been removed for privacy):

SEE ALSO: Uber's lax ID requirements in Brazil led to people playing 'Uber roulette' and sticking up drivers — leading to 16 murders

There's no one to talk to

"The hardest part for me would be the lack of camaraderie with other drivers," Michael, a driver in Las Vegas, told Business Insider in an email. "I see them as my competition. I wish them well, but just not at my expense."

"So due to my lack of communication with other drivers it does get lonely while on the road; as a result, since I'm driving in Las Vegas, there will be days that I'm not in a good mood and since my passengers are tourists, on vacation having a good time, it can get hard to drive."



Having no insight into fares makes calculating earnings hard

"The hardest part is when I try to do research into how much of fares we're actually getting paid and see that it's a tiny percentage," Kevin, a driver in Chicago, told Business Insider in an interview.

"For example, I asked a passenger last week how much she was getting charged and she said roughly $12. When the ride was over, I received $6.50. It's almost better to not know what the passenger is paying."

 

 



Long hours away from home

"The hardest part in my opinion is dealing with weather and holidays, when I'd rather be warm at home with my family," Steven, a driver in Kansas City, said in an email.

"But since I know these are good days to work, when there might be a surge or just a lot of people needing rides in general, I like to work."



Keeping the car clean can get old

"I want to make passengers feel good, because when they're feeling good, I get more tips," Ray, a driver in Boston, told Business Insider in an interview.

"But I'm not a young man anymore and cleaning out my car, vacuuming, dusting off the seats, and everything has started to hurt my back recently. I'm considering getting an SUV so it's a little higher up off of the ground."



The never-ending ratings game

"Dealing with fraudsters is the hardest, and not just the ones that give a 1 star rating for a one mile ride," Stephen, a driver in Portland, told Business Insider in an email.

"About six weeks ago I was contacted by Uber asking if I was alright, that I had been in an incident. Turns out one of my fares claimed I ran over their foot while picking them up. I was totally exonerated, because they made the whole thing up.

 



Sad street scenes

"Mentally, the toughest part for me is seeing all the strung out junkies in San Francisco," a driver named Austin told Business Insider in an interview.

"I grew up here and drug-use has always been bad, but I have never seen it this bad. SF decriminalized drugs and the shit is everywhere. It is so heartbreaking to see young kids on the block with needles in their arms. I know this has nothing to do with Uber, but as a driver, we see more of the streets than anyone."





Adam Neumann, co-founder and chief executive officer of WeWork, speaks during a signing ceremony at WeWork Weihai Road flagship on April 12, 2018 in Shanghai, China. World's leading co-working space company WeWork will acquire China-based rival naked Hub for 400 million U.S. dollars. (Photo by )

  • Analysts and potential investors have had some big questions about WeWork. They now have some answers.
  • In its public offering paperwork that it released last week, WeWork addressed many of those questions.
  • One of the sections in the document was entitled "Expected Resilience in a Downturn."
  • But the company's answers didn't necessarily provide a lot of reassurance to its skeptics; many analysts instead found reasons in WeWork's IPO paperwork to be even more skeptical of the company than before.
  • "Their list of risks [in the document] for the company going forward were kind of a greatest hits of what everyone has been thinking about it," according to Walter Johnston, who focuses on the real-estate market as a vice president of credit ratings at the research firm Morningstar.
  • Click here for more BI Prime stories.

Analysts and potential investors have had some big questions about WeWork. They now have some answers.

The coworking giant has faced scrutiny over everything from its basic business model, to its valuation, to its CEO Adam Neumann. In its public offering paperwork that it released last week, it addressed many of those questions. The filing even attempted to answer one of the biggest head-on — one of the sections in the document was entitled "Expected Resilience in a Downturn."

But the company's answers didn't necessarily provide a lot of reassurance to its skeptics. Although the filing attempted to play down or paper over the weaknesses in WeWork's business model and dubiousness of its $47 billion valuation, many analysts instead found reasons in WeWork's IPO paperwork to be even more skeptical of the company than before.

Read this: Here are the 5 biggest questions facing WeWork as it prepares for its IPO

There had been plenty of "rumors and whispers" prior to the paperwork that the company was losing copious amounts of money and its growth was unsustainable, said Walter Johnston, who focuses on the real-estate market as a vice president of credit ratings at the research firm Morningstar. The filing basically confirmed those suspicions, he said.

"Their list of risks [in the document] for the company going forward were kind of a greatest hits of what everyone has been thinking about it," Johnston said.

Here's how WeWork answered some of the biggest questions about its business and offering — and what analysts made of its answers:

SEE ALSO: Why WeWork's $47 billion private valuation could be a key stumbling block for its IPO — and might even derail it completely

Just what is WeWork?

Prior to the release of WeWork's IPO filing, many wondered whether the company was more like a tech firm or a real estate one. The difference isn't just semantic; investors tend to pay a much steeper premium for tech companies than for real-estate firms. They also tend to be more tolerant of losses for tech companies, especially if they're growing quickly and can promise a big payoff down the road.



WeWork wants to be classified as a tech company.

As you might expect, WeWork attempted to pitch itself as being square in the middle of the tech industry. It mentioned the word "technology" 93 times in its IPO document, including in the very first paragraph of the very first real page of the document, right after the table of contents.

"We provide our members with flexible access to beautiful spaces, a culture of inclusivity and the energy of an inspired community, all connected by our extensive technology infrastructure," it said.

But that wasn't all. Latching on to one of the industry's buzzwords, WeWork described its service as a "platform," mentioning that word 170 times. Seemingly riffing off another industry catchphrase — software as a service, used to describe services offered on a subscription basis over the web or through apps — WeWork described its business as "space-as-a-service."

"We offer a space-as-a-service model that we operationalize by using a global-local playbook powered by technology," it said in the part of its IPO filing where it describes its business.

WeWork isn't a staid old real-estate company, it assured potential investors. Instead it's using it's using its technological savvy to revamp the workplace.

"We are reinventing the way people work and transforming the way individuals and organizations relate to the workplace," it said.

"We imagined," it continued, "the future of work: dynamic, well-designed workspaces for less, a suite of value-added products and services, all powered by data, analytics and deeply integrated technology that helped our members unlock creativity and productivity." 



Analysts think that's ridiculous.

Regardless of what WeWork said in its IPO paperwork, its numbers make clear that it's not a tech company, analysts said. All you have have to do is look in the document at where it's spending its money, said Robert Siegel, a lecturer in management at Stanford Graduate School of Business.

In the first six months of this year, it spent $1.2 billion on "location operating expenses," which includes such things as the rent it pays its landlords, its utility bills at the properties it rents out to its clients, and its costs for repairing and maintaining those properties. Those expenses consumed 80% of its revenue in the period, according to its IPO filing.

By contrast, the company spent $370 million, or 24% of its revenue, on "growth and new market development" costs. That's a grab-bag term the company uses to describe a wide range of expenses, from finding, designing, and developing new office spaces to technology research and development.

Even if you assume that half of the money WeWork is spending on growth is going toward technology, it would represent a small fraction of the amount it devotes to its real-estate costs, said Siegel.

"I don't think there's any way you can look at this company today and say it's a tech company," he said.

WeWork does offer an app that helps tenants report problems, book conference rooms, and find and attend events. But lots of companies theses days — including in the real estate sector — offer apps or rely heavily on technology, said Daniel Morgan, a longtime tech investor and a senior portfolio manager at Synovus Trust.

Sure, it has lots of tech companies as tenants. And its revenue growth rate (100% in the last six months), soaring losses ($690 million in the same period), and heady private valuation (nearly 16 times this year's expected sales), resemble that of a tech company.

But it doesn't depend on technology for its revenue, and its technology doesn't distinguish or protect it from competitors.

WeWork's effort to try to pitch itself as a tech company is akin to an illusionist's trick or like the idea that if you repeat something enough times, people will believe it, said Scott Galloway, a professor of marketing at New York University and former startup founder.

"It feels like there's a total lack of respect for the intelligence of investors," Galloway said.



What happens in a recession?

Long before WeWork released its IPO paperwork, analysts and potential investors worried about how it might fare if the economy goes south.

Its business model would seem to leave it vulnerable in a recession — it signs long-term, traditional leases and turns around and sublets space on short-term, flexible deals, often to small startups. The company runs the risk that its clients will close shop, downsize, or demand better deals even while it's stuck in much longer leases.

WeWork hasn't ever experienced a broad economic downturn; it was formed after the Great Recession. But Regus, which pioneered the coworking market, offers a cautionary tale. After thriving during the dot-com boom of the late 1990s and early 2000s, its US operations went into bankruptcy after that boom went bust.

This isn't all just theoretical. Investors, economists, and politicians are growing increasingly worried that the US economy may soon go into recession.



WeWork says it will be fine and could even thrive.

WeWork attempted to address head-on the fears about how its business will fare in a recession.

Its paperwork included in the boilerplate risk section warnings that its business may be adversely affected in a downturn. But the filing also included an unusual section entitled, "Expected Resilience in a Downturn." In that area, the company argued that — standard risks aside — its business will do well no matter what the economy is doing, because of the value it offers clients.

But business could even pick up in a recession, WeWork said in the filing. In a downturn, companies will likely want to avoid signing long-term leases and will be attracted to the short-term office deals WeWork offers, it said. Not only are they less costly that what companies would have to pay for traditional leased space, but because of their short-term nature, companies don't have to show them as long-term obligations on their balance sheets, it said.

WeWork said it would also be buoyed by its growing number of enterprise customers, which now represent some 40% of its client base, and by its $4 billion in revenue backlog from longer-term deals its customers have signed.

And the company disputed the notion that it hadn't weathered any downturns. During the economic uncertainty in Great Britain that followed the Brexit vote, its operations in London saw increased occupancy rates, it said. After the monetary crisis and subsequent economic downturn in Argentina that began in 2017, it was able to keep its occupancy levels there above breakeven levels, it said.

"Going forward, we believe that we are well positioned to navigate through further economic downturns," the company said in its IPO paperwork.

"Not only do we believe our business model mitigates the pressures of an economic recession," it continued, "we also believe that our model could position us well in a downturn."

The company has also taken steps to protect itself in a recession. Most of its leases are held by specially created subsidiaries that are legally separate from WeWork. If it had trouble paying leases on particular buildings in a downturn, it could send the subsidiaries that signed those leases into bankruptcy, protecting the parent corporation. Of WeWork's the $47.2 billion in outstanding lease commitments, $41.1 billion is essentially unguaranteed by the parent company.



Analysts aren't convinced.

Analysts generally don't buy WeWork's arguments that it would do fine in a recession. The nature of the deals it offers its clients makes those deals relatively easy to break — much easier than traditional leases.

In a downturn, analysts say, many of its startup and solo entrepreneur customers could close shop or just go back to working out of their houses. Even its enterprise customers are at risk. If they decide to scale back their operations, their much more likely to shut down their coworking spaces than try to get out of their traditional leases, especially if they only have a handful of people working out of them.

In downturn, when companies are looking to scale back their office space, "you do the quick discretionary ones first," said Tom Smith, a cofounder of Truss, an online commercial real-estate marketplace.

WeWork's plan to lure companies away from traditional leases to its spaces in a downturn could have an unintended consequence, Smith said. It likely will be touting low prices. But its existing clients will likely see those promotions and badger it for lower rates, he said. And, because they're not locked into long-term deals, but could bolt at basically anytime, they could have a relatively easy time getting better rates.

This isn't just a theoretical danger, Smith said.

Renegotiation "happens in commercial real estate all the time," he said.

And he and other analysts aren't impressed that WeWork's business held up in Argentina and in London after the economic problems in the two places. Neither was a global or even a regional downturn, they noted. London's problems had little to do with and didn't seem to much affect the real estate market and the company had little exposure to Argentina at the time of that country's downturn, analysts said.

"Brexit and Argentina were not the Great Recession," Morningstar's Johnston said.



How much can and should investors trust Adam Neumann?

Even before WeWork made its IPO paperwork public, people were raising questions about Neumann.

The Wall Street Journal reported earlier this year that Neumann had made "millions of dollars" buying personal stakes in buildings and then turning around and leasing them to WeWork. The Journal reported last month that he'd cash out to the tune of $700 million by selling or borrowing against his shares in the company.

Then the Financial Times reported earlier this month that Neumann and WeWork had created a new corporate structure for the company right before its expected IPO that would decrease the tax liabilities of Neumann and other insiders for any profits the company made while increasing the tax liabilities of outside investors. Neumann already had majority control of WeWork, and the arrangement looked like it would further cement that.

Analysts and potential investors worried what such moves said about Neumann's management of the company and WeWork's overall corporate governance.



WeWork says he's a 'visionary' and 'critical to our operations.'

In its document, WeWork portrayed Neumann in glowing terms and central to its success.

One indication of the importance the company places on Neumann was just the sheer number of times it mentioned his name in the filing — 169 times. By contrast, Uber's IPO filing mentioned "Dara" — the first name of its CEO — just 29 times, Galloway noted in a blog post.

But there was more. In one of the risk factors, the company warned that it didn't have an employment agreement with Neumann, but said that "our future success depends in large part on [his] continued service," calling him "critical to our operations."

In the section where it described the various transactions Neumann and his family members have engaged in with the company, WeWork explained that they were a function of "his deep involvement in all aspects of the growth of our company" and prefaced its descriptions of them by talking about how crucial he is to WeWork.

"From the day he co-founded WeWork, Adam has set the Company's vision, strategic direction and execution priorities," WeWork said in the filing. "Adam is a unique leader who has proven he can simultaneously wear the hats of visionary, operator and innovator, while thriving as a community and culture creator." 

The document acknowledged that Neumann had sold shares of WeWork in the past, but said he hadn't sold any since 2017, wouldn't sell any in the IPO, and had committed to not transfer any of his shares or options for a year after the offering.

In terms of his real estate purchases, the company said he did them with its interests at heart.

"In the early days of our business, at a time when landlords were reluctant to recognize the benefits of WeWork as a tenant, Adam bought four buildings in order to help prove WeWork as a viable tenant to landlords," the company said in the filing. "In December 2017, Adam expanded his participation in purchasing real estate by buying a majority interest in downtown San Jose development projects, a first step in pursuing the Company's vision for the future of cities."

Neumann has since agreed not to purchase any additional properties with the intent to lease them to WeWork, the company said. Wanting to address any conflicts of interest with the past transactions, he and the company set up a real estate fund primarily owned by WeWork that will manage his interests in 10 properties, including four leased by the company. The fund has an option to buy the properties for a year.

On the governance front, the company said it adopted its new corporate structure to allow it to more easily expand into new areas, acquire new businesses, or enter into partnerships. It also said the structure would help insulate each one of those business lines from each other so the failing of any one of them wouldn't necessarily bring down the whole company. 

While acknowledging that Neumann would retain majority control of WeWork after the offering, the company said that was good, because it is "a founder led company." It also said that Neumann had committed to giving up majority control if the number of shares he owns dips below 5% of the outstanding number.



Analysts say Neumann is surrounded by red flags, and one said he clearly shouldn't be trusted.

WeWork's document did little to reassure those worried about Neumann's management and its governance. In fact, it added to the worries of many.

Among the new information that the company disclosed in the document was that Neumann had gotten a trademark on the word "We" and then sold the rights to it WeWork when the later — under his direction — decided to rebrand itself as The We Company. WeWork gave Neumann $5.9 million in additional ownership interest for the trademarks.

But the document also revealed a whole collection of loans, related party transactions, and other eyebrow raising deals and agreements. The company hired two of Neumann's immediate family members, the filing reported. It gave him a massive grant of 42 million stock options, then gave him a $362 million to exercise those options early and take possession of the shares, then handed him profit interests in the newly restructured company in exchange for those shares, cancelling the loan in the process. It also revealed that he will maintain majority control in WeWork by holding stock that gives him an unusual 20 votes per share.

That last bit was the biggest red flag for Jeff Langbaum, a real estate analyst with Bloomberg Intelligence.

Having that kind of control will allow "him to effectively do what he wants," Langbaum said.

WeWork under Neumann has already made some questionable moves, ones that "make me wonder if every decision is made with bottom line of shareholders in mind," he continued. "If shareholders don't have a say, that could be worrisome."

Galloway thinks the situation is worse than that. The document makes clear that Neumann shouldn't be trusted, he said.

"How can you claim to be a good fiduciary for someone when you've been selling as if you're about to flee the country," he said, referencing Neumann's $700 million cash-out.

Not only is Neumann untrustworthy, Galloway said, WeWork's board of directors, whose nominal job it is to oversee him in the interests of shareholders, is "incompetent" and "flaccid."

"Does this board lack all backbone or domain expertise in business," he said. "I think the answer is yes."



Will this be another Uber?

One of the big worries about WeWork is that its IPO will have a similar fate as Uber's.

Late last year, bankers for the app-based taxi company were hyping the notion that the company could see a valuation of as much as $120 billion when it went public. It ended up being valued at much less than that. It priced near the low end of even its far less ambitious range, which gave it an initial market capitalization of $75.5 billion, only about $3 billion higher than its peak private valuation.

Things got worse from there. The company's stock slipped in the days following its IPO and have fallen farther since. It now has a market capitalization of $57 billion, a valuation it surpassed in the private markets three years ago.

To appease nervous investors worried about mounting losses, the company's been slashing jobs and looking for other ways to cut costs

And it's not the only giant startup that's struggled after going public. Slack and Lyft are also trading below their initial prices.

The worry has been that WeWork will perform similarly. It's the most highly valued company to attempt to go public since Uber, has similarly massive losses and cash burn, and similar questions about its business model.



WeWork dodged the question.

At least in its initial paperwork, WeWork give any indication of the value it's seeking in its IPO. It didn't set a price for its shares and didn't say how many it would be selling.

The company did offer some boilerplate warnings about things that could make its stock price decline after it goes public, including fluctuating quarterly results, not effectively using the money raised in the offering, future sales of stock by the company or employees, its multi-class stock structure. And it said that it and its management are focused on building long-term shareholder value.

But other than that, it said little about how it expects its shares to perform and nothing about why it won't be the next Uber. In fact, it didn't mention Uber at all.



But analysts are worried its IPO could be as bad — or even worse.

WeWork's $47 billion valuation is out of sync with its business — and setting it up for a big fall, analysts said.

The company is valued at nearly 16 times its expected revenue this year. By contrast IWG, which owns Regus and is WeWork's closest competitor, is profitable and trades at only 10 times its earnings. It's valued at around $3 billion — or less than 1/15th the value of WeWork.

WeWork may well be a better company than IWG, but that doesn't mean it's necessarily worth 15 times as much, analysts said.

It's not just that the company is posting big and mounting losses. It's that the company is being valued like a tech company even though business model shows it isn't like one at all. On top of that, its valuation — in terms of price-to-sales — is even higher than that of Uber or Lyft when they went public, Morgan said.

"That's going to be a hurdle for them to try get through on the roadshow" when WeWork officials meet with potential investors, he said. "Because a lot of guys are kind of burned out right now on these unicorn IPOs."

Indeed, Galloway thinks there's a chance there will be so much pushback on that valuation that WeWork either doesn't go public at all or sees its stock drop by as much as 90% after it goes out.

"You could see this thing lose $40 billion" in valuation, he said.



How is competition affecting the market?

WeWork isn't the only coworking provider out there. Regus pioneered the space thirty years ago. More recently, a growing number of both startups and traditional landlords have been getting into the market.

According to Smith, last year 69 different coworking companies listed space on Truss. This year, that number has jumped past 256.

Growing competition could affect WeWork in several different ways. It could struggle to find new places for its offices or have to pay more for its leases than it would otherwise. It could lose clients to competitors or be forced to offer them lower rates to get them to stay. It could also lose key employees to rivals.

Regardless, the company could see its business take a hit from competition — either from decreased revenue or increased costs.



WeWork largely dismissed the threat.

WeWork said little about competition in its filing. In fact, it only mentions the word seven times and "competitors" just 14 times.

It includes dangers of competition in its list of risk factors, but it portrays them more as theoretical than actual threats. It could lose clients or employees to competitors in the future and that could hurt its business, it acknowledged. 

But the company generally argues that it has a leg up on its rivals. 

"Our investments in our global platform, coupled with purpose-built technology and operational expertise, provide what we believe is a significant first-mover advantage over our competitors as the pioneer of the space-as-a-service model," the company said in the filing.



It's too soon to know, analysts say, but some see warning signs for WeWork.

WeWork's done a great job of establishing its brand and becoming something like the Kleenex of the coworking business, analysts said. It's become kind of the default option when people are looking for a coworking space.

But its basic business model — renting space longterm and subletting it to other companies on a short term business — is easily replicable, as dozens of rivals have already shown.

WeWork didn't offer investors "a ton of comfort there in terms of what their competition can do," Johnston said.

There's not enough information in WeWork's IPO document to know how it's being affected by competition so far, analysts said. Any kind of effects it might be seeing in terms of rising lease costs or pressure on the rates it charges tenants are basically overwhelmed by the sheer number of new facilities it's opened — 314 in the last two years — and all of the new customers those are attracting.

"It's very difficult to be able to know the impact that competitors are having on them, because they just keep going out in front of them into new markets," Smith said.

Still there are some potential red flags. The company acknowledged in its filing that its average revenue per client has declined and it expects that figure to continue to drop, although it attributed that fall to its expansion into lower-priced markets.

Additionally, its sales and marketing expenses have ballooned at a rate even faster than its revenue growth. While its revenue in 2018 was about four times larger than it was two years earlier, WeWork's marketing expenses were nearly nine times higher.

The basic problem for WeWork is that "nothing's stopping anybody from trying get into that business," Langbaum said.

Got a tip about WeWork or another company? Contact this reporter via email at twolverton@businessinsider.com, message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop.





 

Hi, readers.

I'll keep things short this week, since we're reaching peak vacation season and finance news is probably not top of mind right now.

This week we had a really fun wealth-management story, in which we asked a handful of top wealth advisers about the most out-there requests they've gotten from their rich clients. Answers ranged from assisting in a personal-butler search to difficult situations like figuring out how to manage risks after an accident.

Why does this matter? The pool of high- and ultra-high-net-worth assets in the US has been pegged at more than $20 trillion. But competition is fierce, so advisers have to go above and beyond to fulfill their clients' requests.

If you aren't yet a subscriber to Wall Street Insider, you can sign up here.

To that end, our new wealth-management reporter, Rebecca Ungarino, had a story this week about how UBS has formed a group to help its wealth advisers provide a "family office"-like experience for billionaire families. It comes as the bank works to make good on raking in $70 billion in new US assets over three years.

We'll be writing a lot more about the wealth-management industry going forward, so please reach out if you have any tips we should be digging into.

Have a great weekend!

Olivia


KKR has quietly started hiring college seniors. We have the details — and what it says about how private equity is battling banks to fill six-figure jobs.

For the first time, private-equity giant KKR is rolling out a formal analyst program that it hopes to fill with college graduates.

Many private-equity firms traditionally hired people only after they spent a couple of years honing their skills at investment banks. Hiring out of college puts PE head to head with banking.

PE has been pushing to recruit earlier and earlier to battle fierce competition for young talent, both within the financial sector and from hot areas like tech.

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Using leaked internal memos and conversations with insiders, Business Insider has charted the new organizational power structure within the firm's corporate and investment-banking operations.

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Investors have questioned the hedge-fund industry's high fees and recent lackluster performance — which has helped make the case for new ideas more compelling.

Here are eight people making their mark with fresh twists on fees, data, ESG investing, and more.

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Private-equity firms used to send junior staff off for an MBA. Now they're keeping some around to help spend all the money they've raised.

Private-equity firms often send associates on their way after two or three years. But with firms raising record capital and megafunds north of $10 billion becoming more common, top associates are being asked to stick around to help put that money to use, industry recruiters say.

That's a departure from what typically happens after associates enter into two- to three-year programs at PE firms. Once that time is up, firms nudge many associates out the door, either asking them to leave or writing them a recommendation to business school, sometimes with the promise of a vice-president-level job after graduation.

With big investors piling into alternatives like private equity in a hunt for yield, a new path appears to be opening for people to rise in the PE ranks.

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Barclays has lost a quintet of FIG bankers over the past month — and it shows how Jes Staley's bonus cuts may be affecting morale

Barclays has lost five investment bankers from its Americas financial-institutions group in the past month or so.

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Wall Street move of the week:

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pivotal ceo rob mee IPO

  • VMware confirmed the speculation that it was buying its sister company Pivotal — and surprised Wall Street street by announcing a second multi-billion acquisition of Carbon Black, as well. 
  • The Pivotal deal is valued at $2.7 billion, and the Carbon Black deal is valued at $2.1 billion.
  • Often when a billionaire has total control over multiple companies and one of his companies buys another when it hits a rough patch, it's not a good sign. In this case, there are some good reasons for VMware to have bought Pivotal.
  • And Carbon Black speaks to a growth area for VMware: End-user computing. 
  • Unfortunately, the deals won't help some troubling signs in VMware's main business, Nomura Instinet analyst Christopher Eberle says, who rates the stock a "sell."
  • Click here for more BI Prime stories.

On Thursday, VMware shocked no one by confirming that it was re-acquiring Pivotal, the software company it spun out in 2012, not long after it confirmed that it was in acquisition talks. It agreed to pay roughly $2.7 billion for the company, which, like VMware, is a Dell subsidiary. 

VMware did shock everyone by announcing a second multi-billion acquisition the same day — specifically, endpoint security company Carbon Black, in a deal valued at $2.1 billion. That's $4.8 billion total for both companies.

Pat GelsingerAll of this was on the tail of reporting a respectable Q2, 2020, in which VMware beat expectations slightly on profits and handily on revenue: It reported quarterly revenues of $2.44 billion when $2.43 billion were expected (up 12%); it reported non-GAAP EPS of $1.60 per share, when $1.55 was expected, up about 4% from the year-ago quarter.

For the most part, Wall Street did not seem thrilled with the acquisitions. While many analysts reiterated their buy ratings, RBC, Citigroup, and Merrill Lynch also lowered their share price target.

The stock dropped almost 10% on Friday, the day after VMware reported earnings. That could have come from a few different factors: It's true that VMware executives offered a tad softer-than expected Q3 guidance on the earnings call ($2.4 billion, versus $2.45 billion expected) — but it could have also been a part of the broader market sell-off on Friday, after tweets from President Trump apparently spooked investors.

But one of VMware's few steadfast bears, Nomura/Instinet's Christopher Eberle, pointed out in his research note the elephant in the room. Often when a company announces a spectacular acquisition during its earnings call, it's an attempt at slight-of-hand: look at this shiny new object we bought, and don't look at these other, less pleasant areas.

Eberle points out that both of the new companies have less-than-spectacular growth, and that some of VMware's own business units are also experiencing a slowdown in growth. 

"Deal or no deal(s), we still have concerns," Eberle writes. "VMW announced not one, but two acquisitions in conjunction with 2Q earnings, both of which are among the largest in company history ... however, a concerning aspect that both deals have in common is steadily decelerating top-line revenue coupled with uncertain product strategies."

Eberle reiterated his "sell' rating and lowered his target price from $130 to $114. That's extremely low, mind you. The average target price for VMware is $188, as determined from the 26 analysts tracked on Yahoo Finance.

Tepid growth = slowing growth = bearish outlook

Pivotal offers software for developers to build, test and deploy their apps on a variety of cloud platforms. It's also known for its services business, where companies can hire its consultants to help them build their cloud apps. 

The modern incarnation of Pivotal was born in 2012, when it spun out of VMware and EMC. It landed in Michael Dell's possession when he bought EMC, which, in turn, owned most of VMware. It went public in April 2018, about 16 months ago, opening at $15 per share. 

VMware offered $15 a share to buy it back on Thursday. While a premium over Pivotal's $13.70 closing price on Thursday, it was basically a Hail Mary break-even price for the institutional investors who bought in at the IPO.

Michael S. DellThis, even though in June, Pivotal's shares crashed 40% to under $11 when it reported an okay quarter but then cut its full-year revenue outlook to 15% growth, year over year.

That's the kind of tiny growth expected of mature companies in aging industries, not newly public cloud players with less than $1 billion in revenue. Pivotal expected to end the year at about $760 million in revenue.

Meanwhile, Carbon Black's outlook was to hit just under $250 million in annual revenue for its current fiscal year and its expected growth at about 17%. 

To give a comparison, Salesforce, which also announced earnings this week, hit quarterly revenue of $4 billion and is growing at 23% in constant currency, it says.

And that's the bear-case that Eberle sees. He believes that VMware is itself seeing slowing growth in some of its most promising areas, including its networking product NSX and its storage product vSAN.

And he thinks the VMware just spent over $4 billion to buy two startups with tepid growth.

"The financial impact of both deals combined is likely to weigh on operating margins over the next few years," he dourly predicts.

So why buy Pivotal?

Michael Dell may have wanted VMware to take this struggling public company off his hands and work it into its bigger cousin. 

Interestingly, Pivotal's last proxy statement filed in June doesn't even pretend that Michael Dell, his company, Dell Technologies, and VMware are separate entities.

Pivotal's most recent proxy statement says that because Dell Technologies controls these companies, and Michael Dell controls Dell Technologies, "Mr. Dell may be deemed to be the beneficial owner of all of the shares of our common stock beneficially owned by Dell Technologies."

Often when a billionaire wants one company he owns to pay a premium to buy another one he owns it's not a good sign for anyone but the billionaire.

Read: Oracle is suing Larry Ellison and Safra Catz over the $9 billion NetSuite deal, thanks to letter written by 3 Oracle board members

But this deal doesn't really shift power between VMware and its overlord Dell, nor does it shift cash into Dell's hands (as much as he needs it with $54 billion in debt on Dell's books).

VMware is paying just over half a share of itself for each Class B share that Dell owns. That will increase Dell's stake in VMware a smidge, from just under 30% to just over. But Dell already owns all of VMware's super-voting right class of shares, with 10 votes of shares, controlling 97% of VMware votes anyway.

Now, one could argue — as VMware's executives are doing — that what VMware really needs is at least some of Pivotal's technology, especially a product called Kubernetes. This is a mega-popular method of managing cloud software "containers." Containers are the preferred method for running software in the cloud.

Containers are viewed as the technology that will make VMware's 20-year-old, bread-and-butter software management tech, known as virtualization, obsolete. So VMware is sort of looking at Kubernetes like a Motorola flip phone might look at an iPhone.

VMware needs to be seen as a major containers/Kubernetes player if it's to have a future in the cloud.

"Kubernetes is driving the biggest shift in enterprise architecture since Java virtualization and cloud, and Pivotal has begun a major shift to Kubernetes," VMware Pat Gelsinger told analysts on Thursday.

On the other hand, VMware and Pivotal had collaborated to create VMware's current Kubernetes offering and they were sister companies. So one could also argue that VMware had no real compelling business to buy Pivotal instead of to continue to partner with it, if it were free to escape Dell's will.

Why buy Carbon Black?

As for Carbon Black: It makes security software that helps software run securely on any device. It has all the buzzwords: cloud, AI, advanced threat detection. VMware has been increasingly running secure software on devices, not just computer servers, ever since it bought a major mobile device security vendor called Airwatch some years back. 

Just like VMware needs the next-new thing Kubernets to stay relevant in software, it needs the next new thing in cloud-based security to stay relevant in device management.

This deal was likely the brainchild of VMware's resident dealmaker Sanjay Poonen, who made his marks with the Airwatch deal and has since worked his way up to COO. 

Even the bear Eberle notes that Poonen's area of VMware, known as end-user computing, has been "a bright spot" for growth at VMware. 

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target store shopper

  • Earnings season is coming to a close, and Markets Insider took a look at some of the biggest winners and losers from the most recent reporting cycle. 
  • Corporate earnings have been in focus over the last few weeks as investors have been presented with mounting signs of slowing global growth. 
  • Analysts were also looking to measure the impact of the US-China trade war on sales, corporate investment, and margins. 
  • Here are the 5 of the biggest winners and losers from second-quarter earnings season.
  • Visit the Markets Insider homepage for more stories

Earnings season is wrapping up as public companies finish reporting financial results for the most recent quarter.

Second-quarter results were closely watched by investors looking for signs of a slowing economy as corporate profits often take a hit when growth begins to wane.

Throughout the past several weeks, as companies have continued reporting sales and profit numbers and hosting earnings calls, economic data has shown powerhouse economies like Germany and China could be headed for a recession. 

Markets Insider is looking for a panel of millennial investors. If you're active in the markets, CLICK HERE to sign up.

Many analysts and investors were also trying to assess the impact of the US-China trade war. Companies across industries including semiconductors, industrials, and technology referenced the trade standoff as a looming uncertainty in the macro environment. 

Markets Insider put together a list of companies that posted strong single-day share gains following their earning's releases, in addition to stocks that plummeted after weak results. 

Here are five of the biggest winners and losers from the second-quarter earnings season. Each group is listed in increasing order of single-day stock move:

Winner #5: Lyft

Ticker: LYFT

Single-day stock move: 8% 

Key numbers from Lyft's second-quarter earnings report: 

  • Revenue: $867 million, compared to $809 million expected by analysts
  • Earnings per share: (-0.68%), compared to (-$1.74) predicted by analysts
  • Guidance: $3.47 billion in revenue for 2019 



Winner #4: Lowe's

Ticker: LOW

Single-day stock move: 13% 

Key numbers from Lowe's second-quarter earnings report: 

  • Revenue: $20.99 billion versus $20.96 billion expected by analysts
  • Earnings per share: $2.15 compared to $2.013 predicted by analysts
  • Net income: $1.70 billion versus $1.58 billion estimated by analysts
  • Same-store sales: Increased 2.3% from the same period last year



Winner #3: Target

Ticker: TGT

Single-day stock move: 18% 

Key numbers from Target's second-quarter earnings:

  • Revenue: $18.42 billion versus $18.25 billion expected by analysts.
  • Earnings per share: $1.82 compared with $1.62 estimated by analysts.
  • Profit: $1.32 billion, up 17% from the same period last year.
  • Same-store sales: up 3.4% from last year.



Winner #2: Match Group

Ticker: MTCH

Single-day stock move: 20% 

Key numbers from Match Group's second-quarter earnings:

  • Revenue: $498.0 million, versus the $489.2 million estimate
  • Earnings per share: $0.430, versus the $0.405 estimate
  • Average Tinder subscribers: 5.2 million, up 37% year-over-year 
  • Average revenue per user: $0.58, up 1.8% year-over-year



Winner #1: Roku

Ticker: ROKU

Single-day stock move: 22% 

Key numbers from Roku's second-quarter earnings:

  • Revenue: $250.1 million, compared to $224.46 million expected by analysts
  • Earnings per share: -$0.08, compared to -$0.21 expected by analysts
  • Average revenue per user: $21.06, up $2.00 from the first quarter
  • Net income: -$9.33 million, compared to -$23.6 million expected by analysts



Loser #5: Uber

Ticker: UBER

Single-day stock move: (-12%) 

Key numbers from Uber's second-quarter earnings report: 

  • Revenue: $2.87 billion versus $3.05 billion expected
  • Earnings per share (GAAP): $-4.72 versus $-3.23 expected
  • Net loss: $5.24 billion, in-line with estimates
  • Gross bookings: $15.76 billion



Loser #4: Square

Ticker: SQ

Single-day stock move: (-15%) 

Key numbers from Square's second-quarter earnings report: 

  • Earnings: $0.210 versus the $0.163 estimate
  • Revenue: $562.8 million, versus the $557.8 million estimate
  • Gross payment volume: $26.8 million, versus the $26.9 million estimate
  • 3Q revenue forecast: $590 million to $600 million, versus the $599.5 million estimate



Loser #3: Beyond Meat

Ticker: BYND

Single-day stock move: (-17%) 

Key numbers from Beyond Meat's second-quarter earnings report: 

  • Earnings per share: loss of $0.24 per share reported versus loss of $0.08 per share (expected)
  • Revenue: $67.3 million reported versus $50.7 million (expected)



Loser #2: Macy's

Ticker: M

Single-day stock move: (-18%) 

Key numbers from Macy's second-quarter earnings report: 

  • Adjusted earnings per share: $0.28, versus the $0.45 estimate
  • Revenue: $5.55 billion, versus the $5.56 billion estimate
  • 2019 adjusted earnings per share guidance: $2.85 to $3.05, versus the previous expectation of $3.05 to $3.25



Loser #1: Fitbit

Ticker: FIT

Single-day stock move: (-20%) 

Key numbers from Fitbit's second-quarter earnings report: 

  • Revenue: $314 million, compared to $312 million expected by analysts
  • Earnings per share: (-$0.14), versus (-$0.18) predicted by analysts
  • Revenue guidance: Lowered midpoint of 2019 revenue outlook to $1.455 billion from $1.55 billion





FILE PHOTO: Small toy figurines are seen on representations of the Bitcoin virtual currency displayed in front of an image of China's flag in this illustration picture, April 9, 2019. REUTERS/Dado Ruvic/Illustration

  • Many investors have bought gold, a conventional haven asset, as the US-China trade war continues to weigh on global growth and market sentiment.
  • People also plowed money into bitcoin during key moments in the trade war, according to eToro data.
  • Trading of bitcoin surged 140% during these key moments.
  • However, the cryptocurrency remains much more volatile than gold. 
  • View Markets Insider's homepage for more stories. 

Investors appear to be treating bitcoin as a haven asset similar to gold, given the volume of cryptocurrency trading has increased during the conflict.

There was a 284% surge in bitcoin trades between 19 May 2019 and 19 August 2019, compared to the period between 22 March and 22 June 2018 just prior to the trade war, according to data from eToro, an online trading platform.

Gold — a popular asset to hold during times of uncertainty — rose by a less dramatic 73% over the same period.

Trading of bitcoin more than doubled during certain key moments of the trade war, the data showed —usually after tensions calmed.

Three examples from this year, highlighted by eToro to Markets Insider in an email, were:

    • May 13 – After China retaliated against the US by announcing a tariff hike on $60 billion worth of American goods, the number of new gold positions on eToro's platform surged 108% from the previous day. The number of new bitcoin positions soared 139% as well.
    • June 25 – Reports that the US was preparing to delay extra tariffs on Chinese goods at the meeting between Donald Trump and Xi Jinping had a similar effect. Gold positions jumped 26% versus the previous day, while bitcoin positions rose 40%.
    • August 13 – After the US delayed imposing tariffs on various Chinese goods — citing health and safety, national security, and other concerns — new bitcoin positions soared 123%, more than double the 60% rise in gold positions.

etoro  bitcoin v gold trade war

The number of open positions in both bitcoin and gold have increased as the US-China trade war has escalated and the world's two largest economies have slapped tariffs on each others' goods, Simon Peters, analyst at eToro, told Markets Insider.

Gold's scarcity, utility, and intrinsic value aren't affected by central banks' interest rate decisions. As a result, the metal has historically served as a haven for investors during times of economic and political turmoil, Peters added.

"Bitcoin, by comparison, shares similar characteristics to gold in that there will only ever be a finite amount in existence (21 million), it's decentralized, its price is not affected by inflation, and it has the added benefit over gold of lower storage costs."

Bitcoin remains a more volatile asset than gold and faces additional risks, Peters said. However, investors appear to warming up to the cryptocurrency as a haven.

"Extreme price volatility, hacks and allegations of price manipulation still weigh on its reputation," Peters said. "However, the correlation with gold on eToro's platform could be a sign that the overall perception of bitcoin is gradually shifting from speculative towards a lower-risk store of value."

SEE ALSO: Investors are pulling billions out of Chinese stocks and the bleeding is unlikely to stop anytime soon

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trader arm outstretched nyse

  • Cam Harvey — partner and senior advisor at Research Affiliates — ran an analysis averaging stock-market returns for the three years preceding the past seven yield curve inversions. He also did the same for the three-year periods afterwards.
  • An inversion of the two- and 10-year yield curve has preceded every recession since 1950.
  • Harvey advocates for an allocation to value stocks after such an inversion, and backs up his call with hard data.
  • Click here for more BI Prime stories.

It's a scary time for investors.

Trade wars, political turmoil, and slowing global growth have all suppressed optimism across the market. And now the bond market has thrown investors yet another hurdle to clear: a yield-curve inversion

Two-year US Treasurys have yielded more than their 10-year counterparts on multiple occasions over the past several days, breaking an important threshold that many investors use as a barometer for growth prospects within the US.

Investors know such an inversion has preceded every single economic recession since 1950, and major indices have responded negatively to each instance.

Even if the curve uninverts, many think the damage has already been done — and the analysis they've brought forth spells bad news for equities going forward.

"One thing that's clear is that since the 1960's we've had seven recessions," Cam Harvey, partner and senior advisor at Research Affiliates, said in a recent Conversations episode posted to the firm's website. "And we've had seven yield-curve inversions before each of those recessions, so this is a pretty reliable leading indicator."

Bank of America currently has the odds pegged at about a 1-and-3 chance over the next 12 months, saying "we are worried."

But what does this mean for stocks? How bad can things get?

Well, Harvey has crunched the numbers — and the results aren't pretty.

Below is the cumulative market excess return for the average of the past seven yield curve inversions since 1960.

Research Affiliates

In his analysis, Harvey looks at the three years before the inversion, and the three years after. But before doing so, he waits for 3-month Treasurys to trade above the 10-year for a full quarter — a phenomenon that just took place in real-time — and calls that time zero in his analysis. 

On average, the first year's returns are -8.7%, followed by -7% after year two, and -8.1% following the third.

You read that correctly: three full years of negative returns. If you calculate the total loss, it comes to more than 20% — the threshold historically used to define a bear market.

What investors can do about it

But not all hope is lost — and Harvey has identified the perfect out-of-favor strategy for investors to exploit during this downtrodden period: the value factor.

For the uninitiated, investing in value stocks is a strategy aimed at finding shares trading low relative to their fundamental value. Investors can use a plethora of different measurements including, but not limited to price-to-earnings ratio, price-to-book ratio, and dividend yield to determine whether a stock is potentially undervalued and worth a purchase.

"Three years before a yield curve inversion, value does very poorly. Then, after the yield curve inversion, on average, value does well," he said. "So it's really a nice historical hedge."

What's interesting about his call is that a portfolio of value stocks has widely underperformed over the last decade, as investors have shed the exposure in light of momentum, and high-flying growth factors. So his strategy seems to be playing out as expected thus far.

Harvey leverages data to back it up.

Below he's mapped out the cumulative average return of the value factor after the last seven yield curve inversions.

Research Affiliates After the first year, the value factor returns an average of 9.9%, 12.4% after the second, and 19.0% after the third.

In theory, this makes perfect sense. In times of heightened volatility, investors eschew high-flying issuance to adopt a more subdued, less-volatile strategy. Rotating into value early on may prove worthwhile.

For those looking to follow Harvey's advice, these are two of the most popular value exchange-traded funds:

  • iShares Russell 2000 Value ETF (IWN)
  • Vanguard Value ETF (VTV)

"Now is the time — as the risk of recession is dramatically increased — when asset managers earn their keep and when investors and advisors should re-examine the positioning of their portfolios, asking 'do I have the right mix of assets and investments so that I'm as protected as I can be?'" he said.

Harvey concluded: "Factor investing is an obvious tool available to mitigate some of the downside risk."

SEE ALSO: A $60 billion investing firm unveils 7-year forecasts for a wide range of assets — and explains why emerging markets are a trader's best bet

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donald trump

  • President Donald Trump said he was joshing when he abruptly looked at the sky and uttered the phrase "I am the chosen one" earlier this week.
  • "It was sarcasm," Trump told reporters and he headed to Joint Base Andrews for his trip to the G-7 summit in France.
  • Earlier on Wednesday, Trump discussed the tenuous trade war with China and bemoaned to reporters that it wasn't "my trade war."
  • Visit Business Insider's homepage for more stories.

President Donald Trump on Friday evening said he was joshing when he abruptly looked at the sky and uttered the phrase "I am the chosen one" earlier this week.

"You know exactly what I meant," Trump told reporters as he headed to Joint Base Andrews for his trip to the G-7 summit in France. "It was sarcasm. It was joking. We were all smiling."

Asked by a reporter if he meant the comment "in a biblical sense," Trump shut the question down.

"A question like that is just fake news," Trump said. "You're just a faker."

Earlier on Wednesday, Trump discussed the tenuous trade war with China and bemoaned to reporters that it wasn't "my trade war."

"This is a trade war that should have taken place a long time ago," Trump said at the White House at the time.

"Someone had to do it," Trump added, before quickly pivoting his head towards the sky. "I am the chosen one. Somebody had to do it. So I'm taking on China. I'm taking on China on trade. And you know what? We're winning."

Read more: Trump looked up at the sky and said 'I am the chosen one' while talking about his trade war with China

By Friday evening, it was still unclear whether the US had gained the upper hand in the ongoing trade war. The Dow Jones Industrial Average closed down 600 points, or 2.4% — which happened shortly after Trump lashed out against China and the Federal Reserve in a series of fiery tweets.

Friday evening, the White House announced that tariffs on $250 billion worth of imports would be raised from 25% to 30% on October 1, and $300 billion worth of imports that are scheduled to be taxed would also be increased by 5%.

Additionally, Trump ordered US companies "to immediately start looking for an alternative to China," and called for them to conduct their businesses "HOME and [make] your products in the USA."

China also amped up its trade war against the US on Friday by slapping a retaliatory round of tariffs on $75 billion worth of US products. China's finance ministry said it planned on implementing the tariffs in two tranches beginning in September and December.

SEE ALSO: Trump looked up at the sky and said 'I am the chosen one' while talking about his trade war with China

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Toys r us

  • The bankruptcy of Toys R Us and closure of hundreds of its stores dealt a heavy blow to the nation's biggest toymakers.
  • Losing one of their biggest customers weighed on sales and profits, shrunk their distribution, and saddled them with unpaid orders.
  • Watch Hasbro, Mattel, Spin Master, and Jakks Pacific trade live.

The bankruptcy of Toys R Us in September 2017 and closure of hundreds of the toy retailer's stores dealt a heavy blow to the nation's biggest toymakers.

Hasbro, Mattel, Spin Master, and Jakks Pacific suffered lower sales and profits, lost distribution, and stomached unpaid debts. Those impacts are detailed below.

SEE ALSO: Here's how a tiny toymaker dodged the Toys R Us disaster that whacked Hasbro and Mattel (FNKO)

Toymakers' sales suffered from the loss of a huge customer

The bankruptcy of Toys R Us meant the nation's toymakers lost one of their biggest customers.

Hasbro's sales plunged 12% last year as it lost out on "hundreds of millions of dollars in revenue from Toys R Us," CEO Brian Goldner said on the group's fourth-quarter earnings call.

The maker of Transformers, Nerf, and My Little Pony isn't expected to restore its revenue to pre-Toys R Us levels until next year. However, its pending takeover of Entertainment One — the TV-and-movie studio and distributor behind Peppa Pig — could accelerate its recovery.

Similarly, Mattel's revenue dropped 11% in 2017 and a further 8% in 2018. Sales at the maker of Barbie, Hot Wheels, and Fisher-Price aren't expected to fully recover until 2022.

Spin Master, which makes Hatchimals and Paw Patrol toys, suffered an especially sharp slowdown. After surging more than 30% in 2016 and 2017, its sales slowed to just 5% in 2018, and are set to rise just 1% this year.

Jakks Pacific — which makes Harry Potter, Incredibles 2, and Nintendo toys — has also suffered. Its revenue shrunk 13% in 2017, and fell a further 7% in 2018.



The Toys R Us bankruptcy weighed on profits

Toymakers' profits took a hit from the Toys R Us bankruptcy.

After jumping 19% in 2016, Hasbro's adjusted operating profits slid 1% in 2017 then plunged 26% in 2018.

Similarly, Mattel swung from $561 million in profits in 2016 to losses of more than $100 million in 2017 and 2018.

Jakks Pacific swung from aan adjusted operating profit of $17 million in 2016 to a loss of $19 million in 2017. Meanwhile, Spin Master's profits dropped 10% in 2018, after climbing 37% in 2017.

Toys R Us' brand power, nationwide presence, and vast range allowed it to price some toys at a premium. Other toy retailers charge less, Spin Master said, which ate into its profit margins last year.



Toymakers' distribution plunged

Toymakers were able to put their products in front of customers across America while Toys R Us was in business. Its closure dramatically shrunk their distribution footprint.

Spin Master pointed to its products being less widely available as a factor in its underperformance last year. It shipped just $8 million worth of products to Toys R Us globally in the final quarter of 2018, down from about $53 million in the same period of 2017.

Similarly, without Toys R Us to stock its products, Hasbro suffered a 24% drop in its retail inventories last year.



Toy companies were shortchanged by the bankruptcy

Manufacturers and wholesalers often fill orders from retailers and grant them a few months to sell the items and pay them back. The sudden bankruptcy and liquidation of Toys R Us meant it didn't pay back suppliers, meaning toymakers didn't recoup the costs of making and shipping toys to fill its orders.

Hasbro stomached more than $60 million in bad-debt expenses and other after-tax charges — including unpaid bills and inventory becoming obsolete — related to Toys R Us in the first half of last year.

Mattel, Spin Master, and Jakks Pacific incurred about $50 million, $15 million, and $13 million in bad-debt costs respectively over the same period.





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