Rajeev Misra Built SoftBank’s Huge Tech Fund. Now He Has to Save It.
The eccentric former banker faces problems at the Vision Fund with WeWork and other big investments; spending $100 billion in a hurry
Flying over Europe in a private jet last year, Rajeev Misra took his shoes off and propped his bare feet on the knee of a top executive of FIFA, soccer’s governing body. The executive froze while Mr. Misra, head of SoftBank Group Corp. 9984 3.71% ’s $100 billion Vision Fund, chatted about ways to make more money off the streaming rights for the organization’s tournaments.
The Vision Fund had become, in the span of a year, the world’s most influential technology investor, making Mr. Misra a kingmaker in Silicon Valley. The meeting on the plane was part of his plan to make the Vision Fund a colossus, with up to half a trillion dollars in investments and a seat at the center of the new economy.
Today, the Vision Fund is in trouble. Its bets on onetime darlings such as Uber Technologies Inc. and WeWork have fallen in value. Last week, SoftBank had to step in to rescue WeWork in a $10 billion deal that values the office-sharing startup at 80% below its peak.
Having put the Vision Fund together, Mr. Misra is now the man in charge of keeping it from falling apart. A finance whiz who cut his teeth on Wall Street, he pads around the Vision Fund’s London headquarters barefoot, often chewing on betel nuts, a mild stimulant. He recently changed the layout of his office after consulting his astrologer.
The past month has taken him to New York, where he arranged the financing for the WeWork rescue, and to the Middle East, where he tried to allay the concerns of the fund’s two largest investors, the governments of Saudi Arabia and Abu Dhabi.
Mr. Misra and SoftBank’s founder, Japanese telecom magnate Masayoshi Son, snorkeled in the Red Sea with Saudi Arabia’s crown prince, Mohammed bin Salman. Two superyachts—the 439-foot royal Serene and a ship borrowed for the occasion from Las Vegas billionaire Sheldon Adelson —hosted discussions about Saudi Arabia investing in a second $100 billion Vision Fund that Messrs. Son and Misra are laboring to raise. Ping pong followed with the prince’s top financial deputy.
The Vision Fund, conceived by Mr. Son, was launched two years ago with wild ambitions: Raise $100 billion, far more than any private investment fund had ever gathered. Invest huge sums in Silicon Valley’s “unicorns,” startups worth more than $1 billion with the potential to disrupt whole industries. Then do it again.
Mr. Misra took care of the details. To get to $100 billion, he piled on debt. That is unusual for a fund investing in unproven companies and has cost the fund billions of dollars a year in interest payments. He hired hundreds of people, many who came up not in venture capital but on Wall Street. They have invested at a ferocious pace, sometimes supplying startup companies with far more money than they initially sought.
Inside the Vision Fund, investment decisions often are made in minutes, said people familiar with its operations. A consultant’s report last year quoted employees describing a “chaotic” and “personality driven” firm with few controls, where people are “incentivized to gamble to look good” and build their own personal brands.
The last time SoftBank told shareholders how the fund was doing—at the end of March—it was up 29%, on paper. Since then, however, there has been trouble at Uber and We Co., as the WeWork parent is known, and with some smaller investments. The Vision Fund’s stakes in an on-demand dog-walking service, a robot-powered pizza-delivery company and an indoor vertical-farming startup are all worth less than the money invested, people familiar with the matter said.
“Money in the right hands“ works, said Nikesh Arora, a former SoftBank executive, at an industry conference this week. “But it doesn’t work willy-nilly on every pet-walking and hotel-room-renting website.”
Mr. Misra, 57 years old, got the offer to join SoftBank in 2014 after a long career on Wall Street. The son of middle-class parents in New Delhi, he studied electrical engineering at the Massachusetts Institute of Technology and worked at the Los Alamos nuclear laboratory in New Mexico before making his way to Deutsche Bank AG . He spent his days selling complex credit instruments and chain-smoking Indian cigarillos in an empty office next door to his own.
He eventually oversaw a team of credit traders whose bet against the U.S. subprime mortgage market was chronicled in “The Big Short.” He left in 2009 and over the next four years had stints at London hedge fund TCI, Swiss bank UBS Group AG and Fortress Investment Group, a New York-based investment firm.
He had endeared himself to Mr. Son back in 2006, when he raised the $16 billion in debt SoftBank needed to close the acquisition of a large cellphone carrier. At the time, the transaction was criticized as dangerously overleveraged—SoftBank had put up just $2 billion of its own money—but it worked, helping to make Mr. Son, now 62, a billionaire many times over.
When the pair reconnected at a colleague’s wedding in 2014, Mr. Son persuaded his former banker to join SoftBank. His job was the same: Find money.
Mr. Misra proved his worth by salvaging Mr. Son’s most problematic investment, the U.S. cellular provider Sprint, which was locked in a draining price war and running out of cash. He borrowed against Sprint’s handset leases and airwaves, first-of-their-kind deals that kept the company afloat.
Around that time, Messrs. Son and Misra began planning what would become the Vision Fund, code-named Project Crystal Ball. Mr. Son saw it as the final step in transforming his Japanese telecom business into a holding company modeled after Warren Buffett’s Berkshire Hathaway Inc., stocked with technology companies that would power the new economy.
The fund launched in 2017 with just under $100 billion, including $25 billion from SoftBank itself and $60 billion from the governments of Saudi Arabia and Abu Dhabi. The two Middle Eastern investors didn’t just hand all that money to the fund. They lent much of it, at an annual interest rate of 7%. To cover the interest, which will be about $2 billion this year, the Vision Fund has been paying creditors back with some of the money they lent.
Messrs. Son and Misra moved quickly, spending an average of $1 billion a week. They plowed money into food-delivery startup DoorDash Inc., an automated driving venture led by General Motors, and Oyo Hotels and Homes, an Indian hotel-booking service. The $100 billion, which was meant to be invested over four years, is nearly gone after two.
The Vision Fund grew from 25 employees to more than 300, and tensions inside its London townhouse headquarters rose, too. Many of the newcomers had worked with Mr. Misra on Wall Street and shared his background in financial structuring and sales. Old-line SoftBank employees took to calling the newcomers the “Deutsche Bank mafia.”
At times, disorder reigned. On several occasions, separate investment teams discussed investing in the same company on different terms, according to current and former fund executives and entrepreneurs who have discussed or received an investment from the Vision Fund.
Executives figured out ways to wangle a quick yes from Mr. Son: If you could say a startup had the technology to do “demand pricing”—that is, charge some customers more than others—he would like it.
A spokesman said the Vision Fund has “an extensive due diligence process.” He said the fund has invested in only 3% of startups it has looked at.
Early last year, SoftBank hired a consultant to interview employees and prepare a report on the fund’s culture and investment style. The findings, reviewed by The Wall Street Journal, included a word cloud showing how often the firm’s employees said certain phrases. The most frequently used terms include “rule breaking,” “secrecy” and “lack of trust.” A few positives, “fun” and “good,” appeared about as often as “turf wars,” “hubris,” “politics” and “posturing.”
One executive told the consultants that entrepreneurs seeking investors were taking advantage of the fund’s disorganization and loose vetting, warning that “people are actively hiding deals from each other.” A second said: “We have an incredible opportunity to make [a] significant impact that we will squander if we don’t fix our culture.”
The firm has since established three cultural principles—teamwork, integrity and impact—that are assessed at quarterly off-site meetings and programmed into the touch screen on the SoftBank-manufactured robot, Pepper, that greets guests at the fund’s headquarters. An internal Slack channel labeled #Praise encourages employees to recognize positive actions by their colleagues.
“Like all fast-growing companies, we faced some challenges early on,” the Vision Fund spokesman said. He said words such as “improving” and “collaborative” are among the most common in more recent surveys.
The Vision Fund’s most pressing problem is WeWork, which recently canceled its planned IPO, pushed out its founder and CEO, and announced plans to fire thousands of employees. Last week, SoftBank took control of WeWork, agreeing to lend $5 billion to the company and installing Mr. Son’s second-in-command, Marcelo Claure, as chairman and head of the turnaround effort.
SoftBank’s history with WeWork highlights the unusual nature of the Vision Fund. Mr. Son was so taken with WeWork’s founder, Adam Neumann, when they met in 2016 that he offered to invest $5 billion, according to people familiar with the matter.
The Vision Fund’s biggest investors, Saudi Arabia and Abu Dhabi, wary of making such a big bet on a money-losing startup, threatened to block the deal, as is their right with any investment above $3 billion, the people familiar with the matter said. Mr. Son instead gave Mr. Neumann just under $3 billion and promised more funds in the future, telling associates he believed WeWork would be worth $1 trillion.
When Mr. Son last fall began planning another investment in the company of up to $15 billion, Mr. Misra and other top Vision Fund executives lobbied against it, according to current and former executives. WeWork was losing too much money and expanding into areas, like residential real estate and education, in which it had no expertise or edge, they argued.
The Vision Fund partner overseeing the WeWork investment, Vikas Parekh, last year began documenting his concerns about the company’s business model. He raised them last year with Mr. Neumann, who barred him from at least one WeWork meeting, said people familiar with the matter.
All in, the Vision Fund invested $4.4 billion in WeWork—a stake it now expects to write down by $3 billion, according to a person familiar with the plan. SoftBank, the fund’s Japanese-listed parent company, agreed to invest as much as $6 billion, some of it at a valuation of $47 billion—six times what the recent emergency financing deemed the company to be worth.
Mr. Son has talked publicly about having a series of Vision Funds, and in private conversations with potential investors, Mr. Misra has said his aim is to be bigger than Blackstone Group Inc., the largest alternative-asset manager in the world, with more than $550 billion under management.
The sliding investments imperil those plans. WeWork’s failed IPO has helped cool the once-hot IPO market, which the Vision Fund relies on to cash out of its investments. That, in turn, has endangered Vision Fund II.
In July, SoftBank announced it would put $38 billion into the second fund, and that it had $70 billion of commitments from outside investors. Those commitments weren’t binding. SoftBank signed letters that allowed the parties to walk away—and in the wake of the WeWork debacle, some have.
Those include Singapore’s GIC, which had signaled it would invest $2 billion in the second fund, and the investment arm of Koch Industries, the private conglomerate run by influential Republican donor Charles Koch and his late brother, David, which had been in talks for a $1 billion contribution, according to people familiar with the matter.
The $40 billion the Vision Fund had penciled in from Taiwanese pension funds and asset managers is unlikely to materialize. Its agreements weren’t with those investors themselves, but with Taiwanese brokers that serve them, people familiar with the matter said.
The Saudi Arabia and Abu Dhabi investment funds remain on the fence. During recent visits from Messrs. Son and Misra, they tentatively agreed to reinvest profits they receive from the first Vision Fund into a second one, according to people with knowledge of the discussions.
The Vision Fund’s employees are on the hook if the value of the fund declines substantially. Last year, the Vision Fund rolled out a compensation plan under which SoftBank will lend employees money to buy units in the fund. Borrowers must offer personal guarantees on the loans.
Mr. Son has signed up to borrow more than $3 billion, a person familiar with the matter said. Mr. Misra and other top SoftBank executives, including Mr. Claure and SoftBank’s head of investments, Ron Fisher, have borrowed a combined total of several hundred million dollars.
Mr. Misra is taking a more cautious approach going forward. The Vision Fund no longer will make giant bets on single companies, and Mr. Misra has promised investors the next fund will be spent over five years, rather than the two it took to run through the first. Executives will be held more accountable for the deals they champion.
It narrowly avoided a dud in e-cigarette maker Juul Labs, which once was valued at $40 billion but now is facing a public backlash over the health risks of vaping. Mr. Misra, who often travels with a Juul and a fully charged spare, nixed the investment on concerns about its marketing to teens.
He and Mr. Son remain optimistic. A recent presentation to investors about the Vision Fund’s stable of startups showed a chart with an arrow, surrounded by rainbow-colored unicorns, zooming up and to the right.
Fiat Chrysler-Peugeot Merger Faces a Rocky Road to Success
Auto makers are looking to add heft, but auto-sector deals have a checkered history
MILAN— Fiat Chrysler Automobiles FCAU 2.27% NV and Peugeot PUGOY -13.90% maker PSA Group unveiled their $50 billion merger on Thursday. Making it work in an industry littered with unsuccessful mergers will be the hard part.
The companies are betting that more heft will boost profitability, which has long been low in the industry. Auto makers often invest billions of dollars in their operations, only to achieve modest margins.
Many companies have tried the merger route only to have the deal blow up, with Daimler AG ’s unsuccessful purchase of Chrysler one of the more spectacular examples.
Under the deal announced Thursday, which confirmed a report by The Wall Street Journal, the shareholders of each company will own 50% of the new entity. Fiat Chrysler’s John Elkann will retain his role as chairman and Peugeot Chief Executive Carlos Tavares will be CEO.
To make the deal work, Mr. Tavares will have to solve a host of problems at Fiat Chrysler that include an aging model lineup, a lack of investment in new technologies and a dependence on one region, North America. Both companies have failed in efforts to build a successful business in China.
Mr. Tavares will face the challenge of delivering €3.7 billion ($4.1 billion) in annual savings. The companies said they would achieve them principally from a more efficient allocation of resources and improved purchasing agreements with suppliers.
“Great on a spreadsheet, but tricky to execute,” Jefferies analyst Philippe Houchois wrote about a potential Fiat Chrysler-Peugeot deal before the announcement. He nevertheless called the logic underpinning the deal “overwhelming.”
A major issue Mr. Tavares will confront is Fiat Chrysler’s excess production capacity in Europe, a problem the Italian-American company’s late former CEO, Sergio Marchionne, tried to address but never solved.
Fiat Chrysler’s Italian factories ran at 57% capacity last year, compared with 88% in the U.S., according to LMC Automotive.
In the face of fierce political opposition, Mr. Marchionne, who died last year, closed one relatively small Italian factory. Instead of further closures, he relied—as many large Italian companies do—on temporary layoff schemes largely paid for by the government.
While Italian labor unions have lost some clout over the years, including in their battles with Mr. Marchionne, they remain powerful. On Wednesday, a union leader said any deal must guarantee “full employment and full use of Italian factories.”
Fiat Chrysler and Peugeot, which together produced 8.7 million vehicles last year to put them in third place among the world’s auto makers, said the projected savings won’t result from any factory closings. They estimate 80% of those savings will be realized after four years and that there will be a one-time cost of €2.8 billion.
The auto makers didn’t say what they intended to name the new company.
Both car makers have significant market shares in Europe, which provides the opportunity for cost cutting, but also makes the capacity utilization issue more pressing. Together, Fiat Chrysler and Peugeot have a market share of about 23% in the region, just behind Volkswagen AG.
Fiat Chrysler rose 2.3% on Thursday, while Peugeot’s stock sank 13%, indicating investors in the Italian-American car maker were perceived to have gotten the better deal. Fiat Chrysler shares had already jumped 9.5% Wednesday, after the Journal first reported the companies were in talks. Peugeot shares had risen 4.5% Wednesday.
Fiat Chrysler shares were buoyed by a €5.5 billion special dividend that the company will pay to its shareholders before the deal. The arrival of Mr. Tavares, considered a turnaround specialist, may have also contributed to the rise.
“It’s not hard to understand this reaction when you consider the job done by Peugeot management over the last five years, while Fiat Chrysler management have overseen a tired product line and little in the way of innovation,” CMC Markets analyst Michael Hewson wrote.
Mediobanca and Morgan Stanley advised PSA on the deal, Goldman Sachs and d’Angelin advised Fiat Chrysler and Lazard advised Exor. Zaoui advised the Peugeot family and Perella Weinberg advised PSA’s board.
Altria Cuts Value of Juul Stake by $4.5 Billion
Marlboro maker, which paid $12.8 billion for a 35% stake in e-cigarette maker, cites proposed flavor bans for write-down
Altria Group Inc. MO -2.55% wrote down its investment in Juul Labs Inc. by more than a third and now holds it at a price that values the e-cigarette maker at about $24 billion.
The tobacco giant cited unexpected shifts in Juul’s market, including proposed U.S. bans on e-cigarette flavors and regulatory crackdowns abroad, for its decision to book a write-down of $4.5 billion.
Altria also disclosed Thursday that the Federal Trade Commission is investigating the company’s role in the resignation of Juul’s former chief executive officer and his replacement by an Altria executive, along with other hires from the tobacco company.
Facing an accelerating decline in cigarette sales, the Marlboro maker last year agreed to pay $12.8 billion for a 35% stake in Juul, making it one of Silicon Valley’s most valuable startups. Now, blamed for a rise in teenage vaping, Juul is bracing for a planned federal ban on e-cigarette flavors that represent more than 80% of its U.S. sales. The company plans to cut between 400 and 600 jobs by year end as part of a reorganization aimed at mending damaged relationships with regulators, The Wall Street Journal reported on Monday.
Juul’s former CEO, Kevin Burns, stepped down abruptly in September and was replaced by Altria executive K.C. Crosthwaite. Juul announced a week later that it had hired another Altria executive, Joe Murillo, to head its regulatory affairs.
Altria’s deal with Juul gave the tobacco giant seats on Juul’s board that are still pending an antitrust review.
“Juul is an independent company,” an Altria spokesman said Thursday. “They make their own decisions and they independently decided to offer K.C. the CEO position.”
Altria for years had a predictable cigarette business and steady profit growth. Acknowledging its shifting fortunes, the company on Thursday lowered its profit forecast for the next three years for growth in a range of 5% to 8%, instead of 7% to 9%.
“The industry is becoming increasingly dynamic and complex,” Altria Chief Executive Howard Willard said on a conference call Thursday. “Of course, we’re not pleased to have to take an impairment charge on the Juul investment. We did not anticipate this dramatic a change in the e-vapor category.”
Altria shares fell 2.5% to $44.82 in afternoon trading on Thursday.
Mr. Williard said Altria aims to broaden its menu of cigarette alternatives, including a tobacco-free nicotine pouch in which it recently invested. In September, the company also launched a heated tobacco device in the U.S. through a partnership with Philip Morris International Inc. The device, called IQOS, is currently available in Atlanta and will go on sale in Richmond, Va., next month, Altria said.
Altria executives said they now expect lower sales volumes for the e-cigarette industry and a longer period before Juul achieves a profit margin comparable to combustible cigarettes.
The number of adult e-cigarette users in the U.S. rose to 12.6 million in September, including six million who vaped exclusively, Mr. Willard said.
The company said it supports Juul’s planned staff cuts and its new leadership.
Hedge fund Darsana Capital Partners recently wrote down its investment in Juul by more than a third, valuing the company at $24 billion. Fidelity Investments took a similar step, referring to the “myriad regulatory challenges” confronting Juul.
Fidelity’s Blue Chip Growth Fund cited the Food and Drug Administration’s plan to remove from the market all e-cigarettes except those formulated to taste like tobacco, as well as a formal rebuke the agency sent Juul in September for making unauthorized claims that its products were safer than traditional cigarettes.
“One stock decision in particular hurt by far more than any other: electronic cigarette maker Juul Labs,” the fund said in its quarterly commentary. It cut the value of its Juul investment by nearly half to a price that valued the startup at about $20 billion.
The Journal calculated the valuation assuming the fund hadn’t bought or sold any Juul shares since the end of July. Bloomberg earlier reported Fidelity’s write-down.
Juul is the subject of several investigations, including a criminal probe by federal prosecutors in California. By May, the company must submit for FDA review any products it wants to remain on the U.S. market beyond that point.
Juul’s sales have fallen since the Centers for Disease Control and Prevention in September warned the public to stop using e-cigarettes as it investigated a mysterious vaping-related lung illness. The agency has since narrowed that warning, advising people not to vape THC, the psychoactive ingredient in cannabis. Juul’s products haven’t been linked to the illness.
Risk appetite takes a backward step to end the month
Global risk appetite retreated on Thursday as China delivered a couple of blows. A combination of disappointing economic data and doubts over a long-term trade deal with Washington tempered market sentiment that was aiming to end October with a flourish. Then again, it’s a day for a trick or a treat.
The news from China — led by its manufacturing sector shrinking for a sixth straight month and service activity at its lowest since February 2016 — were hardly surprising given Beijing's stimulus this year has been piecemeal as it focuses on deleveraging efforts. As for trade, a temporary truce is pretty much the best and most likely outcome, as Donald Trump searches for a venue to shake hands with Xi Jinping next month.
The upshot for Thursday's markets were lower sovereign bond yields, equity benchmarks in retreat, and a US dollar extending its post-Federal Reserve meeting weakness. The dollar index edged further below its 200-day moving average, lining up the reserve currency's biggest slide below this measure of momentum since June.
The edgy tone also comes ahead of a double dose of key US data within the next 24 hours: the October employment report and ISM manufacturing activity. Sluggish tidings are expected on both counts, with payrolls forecast to rise 85,000 after 136,000 jobs were added in September, although the report will be affected by the recent General Motors strike. Meanwhile, manufacturing activity is expected to remain in contraction territory, below a reading of 50, reinforcing Thursday's Chicago Purchasing Managers index, which arrived at 43.2 for October, its lowest reading since December 2015.
So there is scope for plenty of market noise to kick off the start of November as investors assess the Fed's recent policy statement and actions.
A further drop in market expectations of inflation on Thursday suggested Jay Powell's comments during Wednesday's press conference, in which he said it would take a “significant rise in inflation” for the Fed to consider raising interest rates, were leaving a mark (the 10-year Treasury slid as much as 10 basis points on Thursday to 1.69 per cent, well below 1.75 per cent, the ceiling for fed funds). Lower Treasury yields also effectively price in weak US data on Friday.
Mr Powell's admission implied the direction of interest rates and Treasury yields were capped, while the risk of further rate easing (driven by the tone of economic data in the coming months) remained on the table. Indeed, the latest US inflation data revealed a core rate at 1.7 per cent in September, marking the 12th consecutive month that this measure of the Personal Consumption Expenditures index had arrived below 2 per cent.
At a time of low unemployment, many in the market note how US core PCE inflation has only rarely exceeded the Fed's 2 per cent target in the past decade.
And as Nick Colas at DataTrek duly reminds us:
“Unlike the 1990s or even mid-2000s, inflation is not doing its usual late-cycle lift above 2 per cent.”
The private wages and salaries component within the US Employment Cost index for the third quarter arrived at an annual figure of 3 per cent and has been stuck at that pace all year, down from a decade high of 3.1 per cent recorded during the final quarter of 2018.
Oxford Economics says:
“The tame momentum in compensation growth, along with the moderation in other wage metrics in recent months, suggests that wage growth has likely reached a cycle peak.”
For risk appetite, restrained long-dated Treasury yields should represent good news, given how they have played an important role in pushing up equity valuations for much of this year as earnings growth has gone into reverse. The only quibble is how much of that trade has already passed. Equities also prosper when credit conditions remain tranquil and that's certainly the story at present, apart from the speculative areas of high-yield debt and loans.
Here's how things look among the lower rated tiers of US credit. Red flags are fluttering over the highly risky areas of the market such as triple C debt and the $1.15bn leveraged loan market. The need for yield has simply encouraged a rotation up one rung to single B away from triple C-rated paper.
The chart below shows the wider relationship between these two sectors of high yield. Meanwhile, the relationship between the bulge of triple B-rated investment-grade credit and the highest quality high-yield paper, double B, has narrowed to 2007 levels.
It is notable that a weaker tone in the more leveraged sectors of the credit universe pervades during a time of strong performance for other risk assets in general. Some argue this sets up a big buying opportunity should the Fed's view of moderate growth and an absence of further easing ensue during 2020.
Krishna Memani at Invesco writes:
“Lower-rated credits are significantly wider than higher-rated credits even after adjusting for their interest rate sensitivity. That typically happens at the troughing of the economy and the markets.”
He concludes:
“Therefore, if growth is indeed bottoming out, as I think it is, the tell-tale sign will come in the form of tightening spreads at the bottom rungs of the credit markets. I believe we will see that happen by the end of the year, and likely a quarter before an actual acceleration in global growth.”
The current policy mix has the power to nurture risk appetite into year end, particularly if money moves off the sidelines and investors become less defensive. But there are pitfalls: any data that shows cracks in the consumer will in turn spur additional easing from the Fed, although that may not arrive until next year.
Paul Shea at Miller Tabak & Co notes:
“Unless the economic situation fundamentally changes, we think the Fed is done until at least mid-2020. The Fed’s credibility has been damaged, however, by its recent underestimation of rate cuts and it isn’t surprising that markets are still pricing in about a 20 per cent chance of a December rate cut and a 45 per cent chance of one by June 2020 while entirely ruling out rate hikes.”
But don't expect market sentiment to wait that long before acting while the Fed assesses the situation.
In the case of further Fed easing, official US borrowing rates could head towards zero. That should worry credit investors, as it implies much weaker growth and, above all, little inflation pressure. The need for higher inflation that can help erode debt piles is rather pressing given that many companies have pumped up their borrowings over the past decade.
Even the best-case scenario, in which 2019 merely represents a mid-cycle slowdown, simply delays the inevitable pain of deleveraging for companies.
Happy Halloween and on that note this year marks the first time, Junior, aka iMac, has carved the pumpkins (he requested two) bought sweets with his pocket money to hand out to trick and treaters in our neighbourhood and, most importantly, pulled together a costume. They do grow up far too quickly.
Notable earnings/guidance movers
- Earnings/guidance gainers: CRC +11.8%, LOCO +10.2%, NPTN +10%, QRVO +7.9%, FTNT +7.5%, BRKR +6.4%, BLDR +5.9%, RMAX +4.6%, PMT +4.4%, X +4.3%, ACLS +4.2%, AYX +3.8%
- Earnings/guidance losers: ANET -23.5%, CASA -21.9%, PINS -18.8%, MOBL -16.3%, CAR -10.1%, GPOR -3.8%, NFG -3.7%, LYV -3.5%, BGS -2.8%
The “Save Barneys” campaign has fizzled.
Sam Ben-Avraham — a retail entrepreneur who tried to corral a team of high-profile investors to “save” Barneys New York from liquidation — notified the luxury chain’s advisors late Wednesday that he would not be submitting a final bid, sources told The Post.
Barneys management and some of its vendors had been rooting for Ben-Avraham, an investor in the Kith retail chain whose tentative backers had reportedly included billionaire Ron Burkle and Theory co-founder Andrew Rosen.
The “Save Barneys” game plan was to keep several stores open, including the Madison Avenue flagship. Ben-Avraham didn’t respond to requests for comment.
Now, Barneys looks poised to fall into the hands of Authentic Brands Group, the licensing firm that has a court-approved bid to purchase Barneys for $271.4 million.
On Thursday, Judge Cecelia Morris of US Bankruptcy Court in Poughkeepsie, NY approved the sale to ABG — owner of brands like Sports Illustrated, Aeropostale and Fredrick’s of Hollywood. ABG, which plans to open Barneys-branded boutiques inside Saks Fifth Avenue stores, said it plans to liquidate six of the seven remaining Barneys locations while it tries to negotiate more favorable lease terms.
Barneys employees at the Madison Avenue flagship learned the sale to ABG in a Thursday letter from Barneys Chief Executive Daniella Vitale.
“They are in panic mode” over the prospect of losing their jobs in the coming weeks, one staffer said.
A meeting was called for department heads on Thursday night while a meeting for the entire staff will take place on Friday, according to the staffer.
Judge Morris kept the door open until Friday morning for a rival bid north of $280 million from David Jackson, who in 2007 engineered a Barneys buyout by the Dubai-based fund Istithmar that valued the retailer at $942 million.
But Jackson, who is now teaming up with Arabian Oud, the largest perfume retailer in the Middle East, cautioned that he was unsure whether he had enough time.
“We are trying to get financing done by 10 a.m. Friday,” Jackson told The Post. “Time and time zones may be against us.”
The buyout exec, who blew a Thursday morning deadline for bids, said “the issue wasn’t the equity,” adding that “We didn’t have time to put in place the temporary debt” that Barneys needs for operating capital.
“Earlier today, the court approved the sale of Barneys New York to Authentic Brands Group, in partnership with Saks,” a Barneys spokeswoman said. “Importantly, the sale has not concluded and other bidders can still come forward before tomorrow’s closing. Over the past several months, we have worked diligently with the court, our lenders and creditors to maximize the value of Barneys in this sale process, and we continue to work with all relevant parties towards the best solution for Barneys’ employees, designers and vendors, and customers.”
Francesca Bacardi contributed reporting
Donald Trump brands Jeremy Corbyn ‘bad’ for Britain
US president’s intervention is unlikely to be seen as helpful to Boris Johnson
Donald Trump has waded into the UK’s general election by claiming Labour leader Jeremy Corbyn would be “so bad” for the country and heaping praise on Boris Johnson.
The intervention by the US president on behalf of the prime minister is unlikely to be seen in Downing Street as helpful, however; a YouGov poll confirmed that Mr Trump is highly unpopular in Britain, with more than two-thirds of Britons holding a negative opinion of him.
Mr Trump, appearing on the LBC radio show presented by his old friend Nigel Farage, the Brexit party leader, said: “I have great relationships with many of the leaders, including Boris who’s a fantastic man — I think he’s the exact right guy for the times.”
Turning to Mr Corbyn, he said: “Corbyn would be so bad for your country, he’d be so bad. He’d take you in such a bad way. He’d take you to such bad places. But your country has tremendous potential; it’s a great country.”
Mr Corbyn will be delighted by Mr Trump’s characteristically undiplomatic intervention in British politics, given that he is trying to present Mr Johnson as a poodle of the White House.
The Labour leader claims that Mr Johnson’s Brexit plans would involve striking a “toxic Trump trade deal”, in which Britain would open its doors to US corporations in a one-sided agreement.
The Labour leader claimed this week that Mr Johnson wanted to open up the National Health Service to American companies; he also claims that the prime minister would open up British markets to US agricultural products currently banned by the EU.
Mr Trump said a post-Brexit trade deal between the US and UK would lead to “many times the numbers” of current trade between the two countries, a view which is dismissed as ludicrous by many experts.
He also warned Mr Johnson not to stick too closely to Brussels rules in any future UK/EU trade deal, warning that it could make it impossible for Washington to strike its own deal with Britain.
Mr Trump’s glowing endorsement of Mr Johnson on Mr Farage’s radio show will be seen by some as an indication that the Brexit party leader may be about to do the prime minister a general election favour.
Mr Farage’s party is split over how many seats to fight at the general election; if the Brexit party stands aside in hundreds of seats it could help Mr Johnson scoop up the lion’s share of Leave voters. Mr Farage will announce his strategy on Friday.
Mr Johnson has repeatedly ruled out any electoral pact with Mr Farage, but Mr Trump said he was confident the two men would “end up doing something”, as he phoned in to the London-based UK national radio station.
“I know that you and him will end up doing something that could be terrific,” he said. “If you and he get together it’s an unstoppable force.”
Labour quickly seized on Mr Trump’s comments. “If you want a Trump-approved prime minister, vote Conservative,” said shadow justice minister Richard Burgon. “If you want a prime minister who stands up to Trump, vote Labour.”
Closing Stock Market SummaryThe S&P 500 lost 0.3% on this last day of October, as concerns about a comprehensive U.S.-China trade deal outweighed the positive earnings results from Apple (AAPL 248.76, +5.50, +2.3%) and Facebook (FB 191.65, +3.40, +1.8%).
The Dow Jones Industrial Average (-0.5%), Nasdaq Composite (-0.1%), and Russell 2000 (-0.7%) also finished lower, but an opportunistic mindset into the close helped stocks finish well off their session lows.
Many U.S. investors have already expressed skepticism that China would agree, and commit, to structural reforms in a complete trade deal, but it was discouraging to see a Bloomberg report indicating Chinese officials also have their own doubts. Economic data showing continued weakness in China's manufacturing sector didn't help sentiment, either.
Given the resiliency of the market, it was business as usual when the stock market opened the session relatively unchanged. This was short-lived, though, with the major indices quickly giving back Wednesday's post-FOMC gains. Coinciding with this decline was the release of the Chicago PMI for October, which fell deeper into contraction territory to 43.2 (Briefing.com consensus 48.2) from 47.1.
In turn, weakness primarily rested in the trade-and-growth sensitive areas of the market: The S&P 500 industrials (-1.1%), materials (-1.1%), financials (-0.6%), and energy (-0.5%) sectors. Conversely, the utilities (+0.5%) and communication services (+0.3%) sectors were the lone groups that finished in positive territory.
A risk-off mindset was also manifested in the rally in the U.S. Treasury market and the continued rotation out of growth stocks. Most notably, Twilio (TWLO 96.56, -11.14, -10.3%), Etsy (ETSY 44.49, -8.31, -15.7%), Wayfair (W 82.23, -18.85, -18.7%), and Lyft (LYFT 41.44, -2.67, -6.1%) posted sizable losses following their earnings reports.
The 2-yr yield dropped ten basis points to 1.52%, and the 10-yr yield dropped 11 basis points to 1.69%. The U.S. Dollar Index fell 0.4% to 97.30. WTI crude fell 1.6%, or $0.90%, to $54.18/bbl.
There were some encouraging developments for investors to consider, though. The S&P 500 found support at its previous closing high from July 26 (3025.86) three times today before closing above it. Some month-end rebalancing activity might have also exacerbated today's price action. The benchmark index rose 2.0% this month.
Reviewing Thursday's economic data:
- Initial claims for the week ending October 26 increased by 5,000 to 218,000 (consensus 216,000). Continuing claims for the week ending October 19 increased by 7,000 to 1.690 million.
- The key takeaway from the report is that there is nothing alarming in the initial claims trend, which continues to track close to historic lows.
- Personal income was up 0.3% in September, as expected and personal spending was up 0.2% (consensus +0.3%). The PCE Price Index was unchanged m/m (consensus +0.1%) and up 1.3% yr/yr; the core PCE Price Index was unchanged m/m (consensus +0.1%) and up 1.7% yr/yr.
- The key takeaway from the report is that the data fit reasonably well with the Fed's working view that the U.S. economy is growing at a moderate pace with muted inflation pressures.
- The Q3 Employment Cost Index increased 0.7%, as expected, seasonally adjusted, for the three-month period ending in September 2019 after increasing 0.6% for the three-month period ending in June 2019. Wages and salaries, which account for about 70% of compensation costs, rose 0.9%, while benefit costs, which make up the remainder of compensation costs, increased 0.6%.
- The key takeaway from the report is that it shows a continuation of moderate growth in compensation costs.
- Chicago PMI for October fell to 43.2 (Briefing.com consensus 48.2) from 47.1, sinking deeper into contraction territory.
Looking ahead, investors will receive the Employment Situation Report for October, the ISM Manufacturing Index for October, the Construction Spending report for September, and auto and truck sales throughout the day on Friday.
- Nasdaq Composite +25.0% YTD
- S&P 500 +21.2% YTD
- Dow Jones Industrial Average +15.9% YTD
- Russell 2000 +15.9% YTD