(ZH) One Of The Biggest At-Home DNA Testing Companies Is Secretly Sharing Data W

Just one week ago, we warned that the government — helped by Congress (which adopted legislation allowing police to collect and test DNA immediately following arrests), President Trump (who signed the Rapid DNA Act into law), the courts (which have ruled that police can routinely take DNA samples from people who are arrested but not yet convicted of a crime), and local police agencies (which are chomping at the bit to acquire this new crime-fighting gadget) — was embarking on a diabolical campaign to create a nation of suspects predicated on a massive national DNA database.

As it turns out we were right, but we forgot one key spoke of the government's campaign to collect genetic information from as many individuals as possible: "innocent", commercial companies, who not only collect DNA from willing clients, but are also paid for it.
FamilyTreeDNA, one of the pioneers of the growing market for "at home", consumer genetic testing, confirmed a report from BuzzFeed that it has quietly granted the Federal Bureau of Investigation access to its vast trove of nearly 2 million genetic profiles.
While concerns about unrestricted access to genetic information gathered by testing companies had swelled since April, when police used a genealogy website to ensnare a suspect in the decades-old case of the Golden State Killer, that site, GEDmatch, was open-source, meaning police were able to upload crime-scene DNA data to the site without permission. However, the latest arrangement marks the first time a commercial testing company has voluntarily given law enforcement access to user data.
Worse, it did so secretly, without obtaining prior permission from its users.
The move is of significant concern to much more than just privacy-minded FamilyTreeDNA customers. As Bloomberg notes, one person sharing genetic information also exposes those to whom they are closely related. That’s how police caught the alleged Golden State Killer. And here is a stunning statistics - according to a 2018 study, only 2% of the population needs to have done a DNA test for virtually everyone’s genetic information to be represented in that data.
Thanks to its millions of customers, FamilyTreeDNA’s "cooperation" with the FBI more than doubles the amount of genetic data law enforcement already had access to through GEDmatch. According to BuzzFeed, and as confirmed by the company, on a case-by-case basis the company has agreed to test DNA samples for the FBI and upload profiles to its database, allowing law enforcement to see familial matches to crime-scene samples.
There is one caveat: FamilyTreeDNA said law enforcement may not freely browse genetic data but rather has access only to the same information any user might. Which of course, is ridiculous when the FBI has the same access as every single user.
Having been caught abusing client privacy, the company decided to make the best of it and despite the (coming) outrage over privacy abuse, Family Tree officials touted their work with the FBI to BuzzFeed.
“Without realizing it [Family Tree DNA founder and CEO Bennett Greenspan] had inadvertently created a platform that, nearly two decades later, would help law enforcement agencies solve violent crimes faster than ever,” the company said in a statement.
Also without realizing it, the company is advertently about to go bankrupt, because its "justification" sounds frankly ridiculous:
Officials at Family Tree said customers could decide to opt out of any familial matching, which would prevent their profiles from being searchable by the FBI. But by doing so, customers would also be unable to use one of the key features of the service: finding possible relatives through DNA testing.
One wonders how many paying clients would have "opted in" had they known they were also sharing their DNA with the FBI.
* * *
Needless to say, the genealogy community has expressed dismay, and for people who used the service not knowing the FBI had access to it - which would be all of them - the news was concerning.
“All in all, I feel violated, I feel they have violated my trust as a customer,” Leah Larkin, a genetic genealogist based in Livermore, California, told BuzzFeed News. “I’ve got to decide whether I want to opt out of matching or delete my kits.”
Larkin, one of the administrators of a Facebook genealogy group with about 50,000 members, predicted that enthusiasts will be split, from those who will be fine with law enforcement gaining access to their DNA profiles to others who will be outraged by the invasion of privacy. “I think it’s going to cause a lot of uproar,” she said. “We’re going to get the full spectrum.”
He may be right, but the split will be 1 "fine" with giving the FBI access to their DNA, to 999,999 "not fine."
“We are nearing a de-facto national DNA database,” Natalie Ram, an assistant law professor at the University of Baltimore who specializes in bioethics and criminal justice, told BuzzFeed News. “We don’t choose our genetic relatives, and I cannot sever my genetic relation to them. There’s nothing voluntary about that.”
Others aired similar concerns.
“I would be very against Family Tree DNA allowing law enforcement to have open access to their DNA database,” Debbie Kennett, a British genealogy enthusiast and honorary research associate at University College London said. “I don’t think it’s right for law enforcement to use a database without the informed consent of the consumer.”
Last summer, FamilyTree DNA was among a list of consumer genetic testing companies that agreed to a suite of voluntary privacy guidelines, but as of Friday morning, it had been crossed off the list after it was revealed that the company had been lying all along.
“The deal between FamilyTreeDNA and the FBI is deeply flawed,” said John Verdi, vice president of policy at the Future of Privacy Forum, which maintains the list. “It’s out of line with industry best practices, it’s out of line with what leaders in the space do and it’s out of line with consumer expectations.”
Some in the field have begun arguing that a universal, government-controlled database may be better for privacy than allowing law enforcement to gain access to consumer information: after all what's the difference if the companies will simply hand over all the information secretly. At least this was the public will know that Uncle Sam - and who knows who else - will have access to one's genetic code.
FamilyTreeDNA said its lab has received “less than 10 samples” from the FBI. It also said it has worked with state and city police agencies in addition to the FBI to resolve cold cases.
“The genealogy community, their privacy and confidentiality has always been our top priority,” the company said - supposedly with a straight face - in an email response to questions submitted by Bloomberg.
And why would it tell the truth: just like search engines and social networks, where the user is the product, and all the information about the user is carefully collected, isolated and stored, then sold to the highest bidder, or quietly handed over to the government, consumer DNA testing has become a giant business: Ancestry.com and 23andMe Inc. alone have sold more than 15 million DNA kits. Concerns about an industry commitment to privacy could hamper the industry’s rapid growth.
To be sure, there are some fringe benefits - like authorities actually doing what they said they would do - since the arrest of the suspected Golden State Killer, more than a dozen other suspects have been apprehended using GEDmatch. By doubling the amount of data law enforcement have access to, those numbers are likely to rise. But at what cost?
“The real risk is not exposure of info but that an innocent person could be swept up in a criminal investigation because his or her cousin has taken a DNA test,’’ said Debbie Kennett, a British genealogist and author. “On the other hand, the more people in the databases and the closer the matches, the less chance there is that people will make mistakes.’’
And, of course, if every person's DNA is in one giant genetic database, there would be no mistakes. Now if only the risk of abuse of this information was also nil, then everything would be great. Alas, as Snowden revealed when he exposed the flagrant abuses at the NSA years ago, this will never be the case especially when the "objective and impartial" FBI is involved.

FT : Asia defies western trend as workers grab larger share of economic pie

Asia defies western trend as workers grab larger share of economic pie
China leads the way as Asia averts trends that have stoked rancour elsewhere

Workers in most major Asian countries have seen their slice of the economic pie rise in the decade since the global financial crisis, even as their peers in the west have seen their share of the spoils flatline or decline.

The figures, allied to solid economic growth in emerging Asia, suggest the region may be able to resist some of the political forces that emerged in the US and much of Europe.

In the US, labour’s share of national income fell from a peak of 63.8 per cent in 1970 to 60.2 per cent at the end of 2008, according to data from the OECD, with capital receiving the remainder.

It has continued to decline since, hitting just 56.4 per cent last year, a slump that has fed into the narrative of middle-income workers going backwards as the forces of globalisation and technological progress have reshaped the world economy, as the first chart shows.

The labour share has remained broadly flat in Japan and most major European countries since the crisis, but this is likely to have provided little succour given the sluggish pace of economic growth and, in some countries, a widening gulf between the wages of higher skilled and lower skilled workers.


Ben May, director of global macro research at Oxford Economics, said this was highly unusual, as the share of income accrued by labour has historically risen the longer economic expansions have run.

In contrast, labour has made strong gains in a number of Asian countries, led by China.

The Middle Kingdom had appeared to be following the lead of the US, with labour’s share of gross domestic product tumbling from a high of 60.6 per cent in 1997 to just 46 per cent on the eve of the global financial crisis in 2007, according to FT calculations based on data from the Asian Productivity Organization, an inter-governmental body.

However the labour share has since bounced back to 60.3 per cent as of 2016, the most recent year for which figures are available.


(While the individual country trends are informative, the absolute numbers for Asia and the west are not directly comparable as the OECD data omit income from self-employment; government benefits or transfers that are not employment contingent; and benefits paid by employers to employees’ dependants. Vikram Lopez, analyst at Renaissance Capital, estimated that the labour share would be around 5-6 percentage points higher than in the OECD data when these income sources are factored in).

Robert Horrocks, chief investment officer at Matthews Asia, a San Francisco-based fund house, said he believed the pro-labour trend in China, and elsewhere in Asia, was largely the result of deliberate government policy.

“One of the big criticisms of China is that it was growing on the back of cheap labour, that it was suppressing wages,” he said.

“[But] the Chinese government has been raising the minimum wage, in many cities by 10-15 per cent, all the way through to 20 per cent on an annual basis in some of the second and third-tier cities. This has not been unusual since the global financial crisis.

“There is underlying productivity growth and therefore wages have been growing, but on top of that there have been these minimum wage rises that have rippled through the wage structure so the worker has been winning out.”

Mr May said the data “fit with the idea that in China there is a social contract, which is not is some ways completely dissimilar to the postwar period in some advanced economies,” with the Communist party delivering rising living standards in exchange for maintaining power.

“You can argue that they have a strong incentive to ensure that everyone gains because it gives them their legitimacy,” Mr May said. “Preserving the one party system through prosperity for most is probably going to be the key driver of policy-induced labour share.”

A similar pattern has unfolded elsewhere in Asia. Since the financial crisis, the labour share of income has jumped by 9-10 percentage points in Vietnam, the Philippines and Indonesia, although the latter’s numbers are highly erratic. It has risen by more modest amounts in India, Malaysia and Pakistan.

In contrast, in the west “there have been big falls since the 1970s, since the decline in the power of the unions,” said Mr May, with this factor being augmented by “globalisation and the surge in the number of people in the global labour force with the collapse of the Eastern bloc and subsequently China becoming outward looking”.

Mr Horrocks argued the trends in Asia and the US could not continue to go in opposite directions, and that any reversal would have investment implications.

“Labour has been gaining over the past seven to eight years [in Asia]. The effect has been to depress corporate profit growth to the advantage of labour,” he said.

“Profit margins have been better in the US. Why? because capital has been doing better than labour. But labour will come back in the west. Either a tight labour market will push wage growth above productivity growth, or there will be a swing in the political spectrum.”

In contrast, Mr Horrocks argued that growth in wage income in Asia was unlikely to continue to outstrip GDP growth. As a result he said the income split between capital and labour “will be much more balanced in the future”, so profit margins are not squeezed as much by rising wages.

This in turn “does make me a little more positive about Asian industries that are labour intensive, such as fast-food chains,” he added,

WSJ : Two Sisters Bought DNA Kits. The Results Blew Apart Their Family.

Two Sisters Bought DNA Kits. The Results Blew Apart Their Family.
In an age of ubiquitous direct-to-consumer genetic testing, family secrets are almost impossible to keep.

Sonny and Brina Hurwitz raised a family in Boston. They both died with secrets.

In 2016, their oldest daughter, Julie Lawson, took a home DNA test. Later, she persuaded her sister, Fredda Hurwitz, to take one too.

In May, the sisters sat down at the dinner table in Ms. Hurwitz’s Falls Church, Va., home to share their results. A man’s name popped up as a close genetic match for Ms. Hurwitz. Neither had ever heard of him.

Ms. Lawson searched for the man on Facebook . When she saw his photos, she knew. He looked like their late father. Based on his age and the close physical resemblance, Ms. Lawson immediately told her sister, “He’s got to be our brother.” This was their father’s secret. He had a child they never knew about.

Then came a second shock. Ms. Lawson’s test showed she didn’t appear to have any genetic connection to this new man. This was their mother’s secret: Ms. Lawson was the product of a brief extramarital affair. The man who raised her wasn’t her biological father.

The revelations ricocheted through the family. They created new bonds with people who were once strangers. They caused tension with family they had known all their lives. And they sparked a fight between the sisters about the bonds of loyalty—and how much their parents should have told them.

Ms. Lawson, 65 years old, said she is still grappling with “the pain of knowing my life was a lie and having all these questions that can’t be fully answered because both my parents are gone.”

The hardest part, she said, came the moment she and Ms. Hurwitz, 52, realized they were half, not full, sisters.

“We held each other,” Ms. Lawson said, “and we sobbed.”

At a time of ubiquitous direct-to-consumer genetic testing, family confidences are almost impossible to keep. Companies sell their products for under $100, pitched through heartwarming ads. Millions of DNA kits have been sold in recent years that have handed over information both useful and shocking.

Sales of DNA tests are soaring as people seek to learn more about their roots. Ancestry, whose tests the sisters used, reported sales of 14 million DNA kits world-wide as of November, up from 3 million in 2016. A paper published in Genome Biology, a scientific journal, last year estimated more than 100 million people will have their DNA tested by 2021.

Ancestry provides customers who choose to do so with a way to connect online with others who are DNA matches. The company said it has “a small, dedicated group of highly experienced representatives who speak to customers with more sensitive queries.”

Genetic counselor Brianne Kirkpatrick, founder of Watershed DNA, which provides consultations to people with DNA questions, advises clients to consider how and whether to share certain information. “If you have a secret or think something might be uncovered through DNA testing, start preparing what you want to share ahead of time when you can be in control,” she said.

Ms. Kirkpatrick sometimes suggests clients write letters, explaining details behind their children’s genetic origins, which they can give if the secret is revealed. “I have become of the mind-set it is not a matter of if the secrets will come out,” she said. “It is a matter of when the secrets will come out.”

Given the rapid growth of consumer genetic testing, people can often be identified even if they don’t take a test themselves. Some people who take tests share family trees online. Amateur genealogists and researchers can identify additional connections through obituaries, wedding announcements, and other public information.

In a paper published in October in the journal Science, researchers estimated over 60% of individuals of European descent in the U.S. now have a third cousin or closer relative in a database. “DNA tests can reveal that there is something odd going on,” said Yaniv Erlich, one of the authors and chief science officer of DNA-testing company MyHeritage. “But they don’t tell you the story of what happened.”

In Falls Church, after the test results came back, the sisters sat together and kept staring at pictures of a stranger who looked like their Dad.

Ms. Hurwitz, exhausted and emotional, told her sister she was going to sleep. Ms. Lawson didn’t want to wait another moment. She messaged the man, Dana Dolvin, telling him an Ancestry test showed he was a relative, and suggested they talk. He responded right away. It turned out he lived near Falls Church.

He agreed to meet at Ms. Hurwitz’s home the next day. He assumed they might be cousins.

When they met, the sisters showed him picture after picture of their late father. The resemblance was uncanny, they all agreed; the eyes, the ears, the height, even down to the glasses and love of wearing hats.
Mr. Dolvin, 62, never met the man listed on his birth certificate as his father, who was his late mother’s husband. The couple, both African-American, divorced after his birth. Mr. Dolvin, who has seen pictures, said, “I didn’t look like him.”

When Mr. Dolvin received his own test results, they indicated his DNA was 47% European Jewish. “I kind of figured my Dad was a fair-skinned person,” he said.

He wasn’t sure he would ever identify his father, or even if the man was still alive. Relatives of the man might not want to share private information with a stranger or might not approve of the fact his parents weren’t the same race.

“People don’t want to rock the boat,” he said. “They also may have different feelings toward people of color.”

The sisters say they knew their parents had marital difficulties over the years so it wasn’t a shock to learn their father had an affair. Their parents had a wide circle of friends that included people of different religious and racial backgrounds so they say they weren’t surprised their father had an interracial relationship.


“My surprise was that a child existed,” said Ms. Hurwitz. “And he looked so much like Dad.”

Mr. Dolvin wasn’t certain the women’s assumptions about their father were correct. It was hard to believe, he said, “that I finally got an answer to the question haunting me for such a long time.” He went home and wondered, “Are they really my siblings?”

Siblings share around half their DNA. Half-siblings share a quarter, and first cousins, on average, share 12.5%. Mr. Dolvin checked his report and compared the shared DNA for him and Ms. Hurwitz: It indicated they were half-siblings.

That night, excited by Mr. Dolvin’s visit, Ms. Lawson couldn’t sleep. That is also when she began to wonder why his name hadn’t come up on her results. Why did he have a genetic relationship only with her sister?

Ms. Lawson asked for help answering that question from Larry Alssid, 64, a Long Island, N.Y., psychologist, who had contacted her after he took an Ancestry test a few years ago, showing they were related. They could never figure out their connection but had kept in touch.

After hearing her news, Dr. Alssid suspected Ms. Lawson might have a different biological parent than her sister. He didn’t want to be the one to tell her the potentially shattering information. “I slept on it,” he said.

He told her to check the amount of DNA she and her sister shared in common. Soon she understood: She and her sister didn’t have the same biological parents—or father, to be precise.

“I did regret I told her because she was in shock,” Dr. Alssid said. “We still didn’t know who her father was.”

Later, Dr. Alssid consulted a family tree and gave her names of four brothers—distant relatives he had never met—who he thought could be a match.

Based on their ages, the two youngest, Jack and Ira Greenberg, he said, were the likeliest candidates.

“Jack or Ira? My mother never mentioned those names,” Ms. Lawson recalled saying. She doubted she would find the answers she wanted.

Dr. Alssid told her that a nephew of Jack and Ira might know more. The nephew, whom she emailed, told her all the brothers went by nicknames. The youngest, Ira, was known as Hy.

“That is when I knew,” said Ms. Lawson. “My mother always told me that her first love was a boy named Hy.”


Hy Greenberg was the only brother still alive. An 89-year-old retired traveling salesman, he never married and was living in Florida. His nephew called him about Ms. Lawson’s quest. He agreed to a phone conversation.

She started slowly, telling him she was doing a family tree. Did he know a woman named Brina?

He immediately recognized the name. “Yes,” he said. “I dated her, my best friend introduced us.”

Later in the conversation, she asked the key question. “I have to get personal,” she said. “Would your relationship have included sex?”

Mr. Greenberg said yes.

“You are my father,” Ms. Lawson told him. “I am your daughter.”

“You’ve got to be kidding,” Mr. Greenberg said.

Mr. Greenberg had never done a DNA test. He wasn’t interested. And he struggled to understand how Ms. Lawson could use the DNA test results of other relatives of his to identify him as her father. Later, at Ms. Lawson’s request, he sent in his own kit. The results indicated they were parent and child.

During their first call, he shared details of his early dates with her mother after he got out of the Navy. She wanted to get serious, he said, but he told her he wasn’t interested in marrying. They briefly rekindled the connection years later, after her mother was married. Then they parted ways again.

He never imagined himself being a father, but found they shared a similar sense of humor and a love of storytelling; the conversation lasted hours. She suggested they meet. Mr. Greenberg hesitated, then said, “You want to come, come.”

In June, Ms. Lawson caught a flight to Florida and knocked on the door of her biological father. It was Father’s Day weekend. He called her darling and gave her a hug.
“Welcome home,” he said.

The visit led Ms. Lawson and her sister to have an intense fight. Ms. Lawson posted a picture of herself and Mr. Greenberg on Facebook, and added she was spending her first Father’s Day with her father.

“I was furious,” said her sister, Ms. Hurwitz. “I was in tears. I told her Dad is still Dad, and you have just negated his entire existence and everything he ever did for you with that one post.”

Ms. Lawson said she never meant any disrespect to their late father. “I felt misunderstood,” she said. “My brain was so caught up in what is going on.”

She says she feels a powerful emotional connection to her biological father. The next time she went to see him, she took her sister along.

Meeting him was difficult for Ms. Hurwitz. She kept wondering if he was the man whom her mother preferred over her father. “I didn’t know what to say or how to act.”

Getting to know her new half brother has been easier for her. And it has answered questions for him, too. “I finally got the answer that wasn’t supplied to me by people who loved me and who I loved,” he said.

Growing up, his cousins teased him about the light color of his skin, calling him “white boy,” he said. An only child, he frequently asked his mother about his origins. “Don’t worry about it,” he says she told him. He stopped asking when he was a teenager; his mother died decades ago.

“I was still curious, but no one would tell me,” he said. “Emotionally, you wish it could have been another way, but unfortunately, it isn’t.”

In the months since they met, the sisters and Mr. Dolvin, and members of their families, have met for dinners and outings. During a visit in Boston, Ms. Lawson took Mr. Dolvin around the neighborhood where she grew up, pointing out family landmarks. He refers to both women as his sisters, even though he shares a biological father with only one.

So far, the sisters’ other two siblings, both men, haven’t expressed interest in meeting Mr. Dolvin. Phil Hurwitz, 63, who was born six months before Mr. Dolvin, said he remains unsure “how I want to move forward.”

Ms. Lawson got upset with her brother Phil for not reaching out to Mr. Dolvin. She asked him when he might feel ready.

“I told her I am not putting a time frame on it,” he said. Their other brother didn’t respond to requests for comment.

Mr. Dolvin said he doesn’t think it is his place to contact the two brothers. He said he would let them decide “if they want to welcome me or say ‘hi’…” His voice trailed off for a moment.

“Maybe they don’t feel comfortable with it yet. It’s a lot to take in.”


Ms. Hurwitz said the news that both parents had children from extramarital affairs forced a kind of reckoning she wasn’t sure her brothers were ready to make.

“They have to reconsider completely who their parents were, the lessons they taught us, what they stood for,” she said. “Everyone deals with the emotions differently.”

She looked at her sister, who cried quietly at the table. “It is not up to me to judge the decisions Mom and Dad made,” Ms. Hurwitz said. “It was another world and another time.”

Ms. Lawson said, “I have a hard time when people say it’s the past, move on.”

Mr. Dolvin put his arm around her, comforting her. “I like that we are all together. I’m here. I’m sitting with you.”

There are many unresolved and hard-to-answer questions, such as whether their father was ever told Mr. Dolvin was his son. They don’t think their father knew. “I believe if he knew about Dana, he would have tried to reach out,” Ms. Hurwitz said.

Her father owned a popular kosher deli in a Boston neighborhood. Mr. Dolvin’s mother worked as a cosmetologist in a nearby predominantly African-American neighborhood. Both loved jazz; the siblings speculate the two might have met at one of Boston’s jazz clubs.

The sisters believe their mother knew Ms. Lawson was the product of her own affair. Ms. Lawson and her mother had a difficult relationship, and both sisters think the revelation explains why.

“Julie was a reminder of what Mom did,” Ms. Hurwitz says. “She had to deal with the consequences every day. How did she keep the secret from Dad?”

Both sisters acknowledge they also can’t be sure what either parent shared with the other.

When Ms. Lawson was 29 and Ms. Hurwitz was 16, their parents divorced—and then got remarried nine years later. They stayed together until he died in 2006. His wife died in 2016.
Ms. Lawson says she told her mother she got DNA test results back, but her mother wasn’t interested in talking about them. She died before the second sister took the test whose results revealed so much.

The sisters always return to how much their parents should have told them. Even now, hurt and tensions sometimes flare.

“I understand why you wouldn’t tell,” said Ms. Hurwitz. “The implications of revealing the secret have a domino effect on everyone else in the family.”

Her sister vehemently disagrees. “Every man has a right to know he has offspring,” said Ms. Lawson. “Every child has the right to know her origins. We missed 65 years together.”

Ms. Lawson wears a birthday present she received from Mr. Greenberg, a necklace of two open hearts connected by her birthstone. She is helping plan a party for his 90th birthday in March.

Since the sisters learned the truth, they said they are learning to live with the uncertainties. “I have my anger, my compassion, and my understanding, and I can separate all those emotions,” Ms. Lawson said.

Ms. Hurwitz leaned in closer to her sister. “Every family has secrets,” she said.

>>> US Close Dow +0,26% S&P +0,09% Nasdaq -0.25% Russell +0.18% VIX -2.6%

Closing Stock Market Summary

Wall Street finished mixed on Friday, as investors digested better-than-expected economic data while shares of Amazon (AMZN 1626.23, -92.50, -5.4%) fell on disappointing guidance. The S&P 500 added 0.1%, increasing its weekly gain to 1.6%.

The Dow Jones Industrial Average (+0.3%), the Nasdaq Composite (-0.3%), and the Russell 2000 (+0.2%) for their part finished with weekly gains of 1.3%, 1.4%, and 1.3%, respectively.

The S&P 500 energy (+1.8%), information technology (+0.6%), and financial (+0.5%) sectors outperformed the broader market. Conversely, the consumer discretionary (-1.8%) and real estate (-0.7%) sectors underperformed.

Stocks began the day modestly higher on the fact that the U.S. job market and the manufacturing sector did just fine in January despite the negativity surrounding market volatility, the partial government shutdown, and economic growth prospects.

Specifically, January nonfarm payrolls increased by 304,000 (Briefing.com consensus 160,000), and the January ISM Manufacturing Index improved to 56.6% (Briefing.com consensus 53.6%) from 54.3% in December.

The strong jobs data sparked selling interest in the bond market, driving yields higher, which were a drag on rate-sensitive real estate and utility stocks. The 2-yr yield rose four basis points to 2.50%, and the 10-yr yield rose six basis points to 2.69%.

Amazon, too, was a huge drag throughout the day after it disappointed investors with Q1 guidance below expectations. The company's cautious view was a reflection of growing worries about the pace of economic growth (and consumer spending) in the near future, which weighed on the consumer discretionary space. 

On the other hand, the energy sector's outsized gain was the result of higher oil prices ($55.28/bbl, +$1.51, +2.8%) and a positive reaction to earnings beats from Dow components Exxon Mobil (XOM 75.92, +2.64, +3.6%) and Chevron (CVX 118.37, +3.72, +3.2%).

Fellow Dow component Merck (MRK 76.45, +2.02) rose 2.7% after it also beat earnings expectations.

Reviewing Friday's batch of economic data, which included the Employment Situation Report for January, ISM Manufacturing Index for January, the final reading for the University of Michigan Index of Consumer Sentiment for January, Construction Spending for November, Wholesale Inventories for November:

  • There is a lot to take in with the January employment, including annual benchmark revisions, the effect of the partial government shutdown on the results for the Household Survey, and a rising labor force participation rate that speaks well of the growing confidence in finding a job.
    • The key takeaway from the January report is that, even with revisions that reduced total job gains in November and December by 70,000, job gains have averaged a solid 241,000 per month over the last three months, offering some data-based justification to think this economic expansion has more room to run with consumer spending providing support.
  • The ISM Manufacturing Index for January increased to 56.6% (consensus 53.6%) from a revised 54.3% (from 54.1%) in December.
    • The key takeaway from the report is that the January increase was driven by solid growth in New Orders and Production, which suggests the U.S. manufacturing sector is holding up well despite concerns about the pace of global growth.
  • The final University of Michigan Index of Consumer Sentiment for January increased to 91.2 (consensus 90.7) from 90.7 in the preliminary reading.
    • The key takeaway from the report is that while the final January reading rebounded from the preliminary reading, the Consumer Expectations Index remained at its lowest level since October 2016.
  • Total construction spending increased 0.8% in November (consensus 0.3%) on top of an upwardly revised 0.1% increase in October (from -0.1%).
    • The key takeaway from the report is that while the November increase was fueled by a rebound in residential construction, it was due to an increase in multifamily construction while construction of single family homes decreased.
  • Wholesale inventories increased 0.3% in November (consensus 0.4%) on top of an upwardly revised 0.9% increase (from 0.8%) in October. Wholesale sales were down 0.6% following a downwardly revised 0.6% decrease (from -0.2%) in October.
    • The key takeaway from the report is that inventory growth continued exceeding sales growth, which is likely to put pressure on prices.

Looking ahead, investors will receive Factory Orders for November and auto and truck sales on Monday.

  • Russell 2000 +11.4% YTD
  • Nasdaq Composite +9.5% YTD
  • S&P 500 +8.0% YTD
  • Dow Jones Industrial Average +7.4% YTD

>>> MAKOR 1ST VIEW: KPN / BROOKFIELD AM

 MAKOR 1ST VIEW: KPN / BROOKFIELD AM

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MAKOR DEAL PREVIEW

 

On 31 January, Brookfield confirmed that it was in talks with Dutch Pension funds (PGGM & APG Groep) regarding a potential bid for Dutch Telekom KPN. If at this stage there is no certainty that a formal offer will be made, we take a closer look at the situation that is clearly similar to the offer made by MacQuarie in 2017 on TDC.

 

Brookfield is an infrastructure fund managing over $330Bn and like MacQuarie in 2017 has approached 2 KPN’s Pension funds to get them on board in the SPV and therefore avoiding any potential political concerns. Mr C.Slim, through America Movil, launched an hostile offer on KPN in 2013 at EUR2.4 that was rebuffed by the Board of KPN and the Foundation threatening to exercise the right to issue new shares (50% more) to fend off this hostile offer.

 

If the situation has not change regarding this right, we believe that tabling a fair offer, teaming with Pension funds to guarantee employees right and also being committed to CAPEX levels required by the Dutch Authority  would definitely make sense for Brookfield to launch an offer.

 

MAKOR COMMENTS

 

Dutch telecom market has experienced consolidation in 2018 (DT acquiring Tele2 AB business in Netherland approved in Phase 1 by the EC) resulting in a 4 to 3 competitors market and therefore making the price stabilization a key theme on the market. When Macquarie acquired TDC in 2017, it moved TDC leverage from x2.2 EV/ EBITDA 18e to x5.9 with the purpose later on to split the company in 2 parts (infrastructure and client business).

 

We take the following assumptions based on our experience in TDC:

  • A 30/70 Debt to Equity Ratio
  • Debt is launched in USD & EUR with Interest rates at 3.75% and 5.75%
  • EBITDA Margin of 41%-42% over the next 5 years.
  • Exit multiple of x8.5 EV/EBITDA
  • IRR for Equity Holders of 20% with a bid price at EUR3.1
  • Please see below our Credit metrics and IRR Sensitivity :

 

 

Credit ratios

2019

2020

2021

2022

2023

2024

2025

Net debt/EBITDA (X)

5.5

5.2

4.8

4.4

4.1

                      3.81

            1.91

 

 

Net interest

488.1

468.8

443.9

408.7

373.6

338.5

169.2

EBITDA/net interest

4.8

5.0

5.2

5.8

6.5

7.2

14.6

 

 

EBIT/net interest

 

(EBITDA-CAPEX)/interest

2.5

2.6

2.9

3.0

3.4

3.8

7.6

IRR for equity holders

20%

Sources: Makor Securities

 

 

IRR SENSITIVITY

 

 

 

 

Bid Price

 

2.9

2.95

3

3.1

3.25

Equity/Debt

20/80

27%

27%

26%

25%

24%

30/70

22%

21%

21%

20%

19%

40/60

18%

18%

17%

17%

16%

50/50

15%

15%

15%

14%

13%

60/40

13%

13%

13%

12%

12%

70/30

12%

12%

11%

11%

10%

Sources: Makor Securities

 

 

 

 

 

 

MAKOR CONCLUSION                    

KPN is trading around EUR2.69/2.7 and an offer at EUR3.1 would represent a premium of 15% (23% from KPN’s last price before the announcement). This represent a nice risk/reward for investors taking also into account the EUR0.12 dividend announced on 30 January.

 

Full LBO model available upon request.

 

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Henri DUMENY

Senior Event Driven Analyst

 

Makor Securities London Ltd

7 Savile Row

London

W1S 3PE

United kingdom

 

Tel : +44.207.290.5795

 

hdumeny@makorsecurities.com

www.makorsecurities.com

 

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