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Banks may not be profitable until 2025 even as major economies recover, new IMF report says

Fri, 05/22/2020 - 10:42am

  • Bank profitability will be challenged until at least 2025 as past obstacles and pandemic risks stifle earnings, the International Monetary Fund said Friday.
  • Major US firms diverted tens of billions of dollars to their loan-loss provisions in the first quarter, trading profits for default protections as the economy plunged into a recession.
  • Banks had already used cost-cutting and fee increases to make up for slowly declining earnings, but those tools aren't as effective anymore and could prompt companies to take new risks to lift earnings, the IMF said.
  • The organization called on financial sector authorities to prepare for industry-wide risk-taking, whether through stricter stress testing or supervisory capital planning.
  • Visit the Business Insider homepage for more stories.

Banks will struggle to protect profits for the next five years as the coronavirus fuels loan losses and keeps interest rates at historic lows, the International Monetary Fund said Friday.

Profitability hurdles plagued banks well before the coronavirus pandemic, the IMF wrote in a report. Fee income trended lower from 2013 to 2018, and new competition from robo-advisers and other tech players sapped client capital.

Firms were forced to hike fees and slash operating expenses to keep profits intact, but their earnings boosters face new tests from the pandemic and resulting recession.

"Banks' earnings challenges emerged prior to the recent COVID-19 episode and will extend to at least 2025, well beyond the immediate effects of the current situation," the IMF said.

Read more: 'It works for anything I look at': BlackRock's bond chief who oversees $2.3 trillion shares the 'really simple' 3-part framework that guides every investment decision he makes — and outlines 2 factors he looks for in a company

Most major US banks reported major profit slumps in the first quarter as a greater share of revenue was diverted to loan-loss provisions. The $2 trillion CARES Act opened the door for a wave of emergency lending, and banks taking on debt stashed tens of billions of dollars for potential defaults. Yet once the virus threat fades, a combination of low interest rates and heightened loan risk will slow their return to past earnings strength, the IMF said.

"Underlying profitability pressures are likely to persist over the medium- and longer-term even once the global economy begins to recover from the current shock," the organization added.

The IMF also warned banks against taking on greater risk to accelerate profit growth. Medium-term earnings pressures could lead firms to boost credit, liquidity, or trading risks to outperform their peers.

Financial sector authorities should prepare for such actions and adjust stress testing accordingly, the IMF said, as a broad shift toward risky bank behavior could create systemic problems just as economies recover.

Now read more markets coverage from Markets Insider and Business Insider:

Billionaire investor Marc Lasry says the market isn't pricing in a recession that will last 'for a while'

JPMORGAN: These 5 stock- and bond-market risks could resurface as the government continues blockbuster stimulus efforts

Multiple readings of the stock market's future are near their worst levels ever. UBS says that's set up a 'significant recovery' — and lays out a 2-part playbook to profit from it.

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US billionaires got $434 billion richer during the pandemic, according to report

Fri, 05/22/2020 - 2:42am

  • US billionaires saw a major boost in net worth in the first two months of the coronavirus pandemic, according to a new report published on Thursday by the left-leaning think tanks Americans for Tax Fairness and the Institute for Policy Studies. 
  • According to the report, the total net worth of all US billionaires got a $434 billion boost since March 19, when many US states were placed on lockdown.
  • In total, the roughly 600 US billionaires saw their wealth grow from $2.948 trillion to $3.382 trillion within the past two months. 
  • The report comes as the number of Americans who filed for unemployment benefits continues to grow.
  • Visit Business Insider's homepage for more stories.

While many Americans are facing financial hardship due to the coronavirus outbreak, US billionaires saw a boost in net worth in the first two months of the pandemic, according to a new report.

According to the report, published on Thursday by the left-leaning think tanks Americans for Tax Fairness and the Institute for Policy Studies, the total net worth of all US billionaires got a $434 billion boost since March 19, when many US states were placed on lockdown.

According to Forbes, 623 billionaires live in the US, including Amazon CEO Jeff Bezos, Microsoft co-founder Bill Gates, Facebook co-founder Mark Zuckerberg, investor Warren Buffett, and Oracle founder Larry Ellison. The report indicates that just those top five billionaires saw their wealth increase by a total of $75.5 billion, or 19%. 

In total, the roughly 600 US billionaires saw their wealth grow from $2.948 trillion to $3.382 trillion within the past two months. 

"The pandemic has revealed the deadly consequences of America's yawning wealth gap, and billionaires are the glaring symbol of that economic inequality," Americans for Tax Fairness executive director Frank Clemente said in the report, which advocates for closing tax loopholes for the wealthy.

"Post-pandemic, the rich and corporations must begin to pay their fair share of taxes so we can build a society that works for everyone, not just billionaires and others at the top," Clemente added. 

The report comes as the number of Americans who filed for unemployment benefits continues to grow. On Wednesday, the US weekly jobless claims hit 2.4 million, bringing the nine-week total to nearly 39 million. 

Markets Insider reporter Saloni Sardana previously noted that research by Forbes indicated that US billionaires' wealth declined slightly from $3.1 trillion in 2019 to $2.9 trillion in 2020 as of March 18, though new reports indicate their wealth has since rebounded.

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NOW WATCH: Inside London during COVID-19 lockdown

Facebook is eyeing offices in cities like Dallas, Atlanta, and Denver to serve as 'hubs' to support 50% of its workforce staying remote — and it's a move that could upend Silicon Valley and NYC real estate

Thu, 05/21/2020 - 5:21pm

  • Mark Zuckerberg said Facebook plans to allow half of its employees to work remotely within the next 5-10 years.
  • The announcement is a major departure from the firm's growth strategy in recent years, which has focused on establishing big offices in major cities to attract talent. 
  • Zuckerberg envisioned the covid crisis stretching on, preventing any more than 25% of Facebook's workers from returning to the office for the foreseeable future and raising questions how much of its workers will ever return full time. 
  • As part of the company's new strategy, Zuckerberg said, it would seek to establish new "hubs" in secondary and tertiary cities to tap talent in those markets and surrounding areas.
  • The news is a blow to big cities such as New York and San Francisco, which have become hotspots for tech companies.  
  • Visit Business Insider's homepage for more stories.

Facebook's chief executive Mark Zuckerberg said on Thursday that the social-media giant would pivot away from sprawling offices in major cities and allow up to half of its employees to work remotely in the wake of the coronavirus crisis.

The announcement is a major departure from the $660 billion technology firm's growth strategy in recent years, which has focused on expanding it physical footprint in large urban centers, such as New York City and San Francisco, with pools of talent, clusters of major competitors, and important educational and research institutions.

"Over the next five to 10 years, about 50% of our people could be working remotely would be my guess," Zuckerberg said in a live public presentation that was broadcast Thursday afternoon on his Facebook page.

The announcement is sure to intensify questions around the future of the office workplace in a post-Covid world as well as the relevance of major cities, which have been hotspots for the virus.

Zuckerberg sought to distance the company from its attachment to big metropolitan areas, stating that remote work could allow it to hire across a wider geography and attract and retain more talent.

"Right now we're doing pretty well recruiting in a small number of hubs in big cities, but being able to recruit more broadly across the U.S. and Canada to start is going to open up a lot of new talent that previously wouldn't have considered moving to a big city," Zuckerberg said. "One of the top reasons that some good people give us when they leave the company is that they're moving to a place where we currently don't have an office and don't support work and being able to keep those key people at the company is going to be very valuable."

Tech companies such as Facebook had been among the chief drivers of demand for offices in New York City in recent years and a retreat by major players in the industry could have a big impact on demand and pricing for office space throughout the city. 

Office 'hubs' in secondary and tertiary markets

As part of the company's new strategy, Zuckerberg said it would seek to establish new "hubs" in secondary and tertiary cities to tap talent in those markets and surrounding areas. He said that Dallas, Atlanta, and Denver would be the initial focus of that effort. The hubs, he suggested, could serve as facilities where staff can gather for periodic meetings or rotating work shifts.

"They're not necessarily offices," Zuckerberg said. "Over time we'll likely create some kind of physical space for the communities to come together." 

Facebook had been contemplating significant big-city leasing transactions before the coronavirus crises, and Zuckerberg's new vision appears to run contrary to that approach.

The company, for instance, began negotiating to take an over 700,000 square foot block of space at the Farley Building on Manhattan's West Side last year. Sources earlier this month had suggested the blockbuster deal will get done.

Zuckerberg's new approach aligns with a vision that real-estate experts had shared with Business Insider in March. They predicted that the pandemic would prompt companies to take a diffused approach, allowing employees to work from home and replacing city-center offices with a wider distribution of smaller satellite locations. 

In December, real-estate experts had told Business Insider that financial firms were expressing interest in smaller cities such as Provo, Utah; Boise, Idaho; Raleigh Durham; and Indianapolis – a trend these experts expected to accelerate in the coming decade.

No timeline for return 

Zuckerberg said on Thursday that about 95% of Facebook's nearly 50,000 employees are presently working remotely as the pandemic has shuttered office spaces across the country.

Facebook has previously stated that it expects most of its employees to continue working from home through the end of the year. Zuckerberg suggested that timeline could stretch longer for the majority of its workforce, raising questions whether a substantial portion of its workforce will ever return to the office full time.

Only about a quarter of Facebook workers will be able to come back to its offices while social distancing protocols are in place in order to minimize the dangers of spreading the pathogen, Zuckerberg said.

"I just think Covid is going to be with us for awhile to come," Zuckerberg said. "The reality is that I don't think it's going to be that we wake up one day on January 1 and no one has any more concerns about this."

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SEE ALSO: A quarter of NYC office leases went to tech firms in 2019. Now, the fate of a blockbuster Facebook deal is make-or-break for the city — and a case study for the future of commercial real estate.

SEE ALSO: The office as we knew it is dead

SEE ALSO: Real-estate services giant JLL explains how the coronavirus could usher in a permanent 'paradigm shift' towards more remote work

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'Make yourselves essential': Read the full memo that LionTree's founder sent to staff on returning to the office and the roles they should aspire to play

Thu, 05/21/2020 - 5:19pm

  • Aryeh Bourkoff, a tech, media, and telecom banker who founded LionTree Advisors, wrote to staff on Wednesday with his views on reopening and the post-pandemic world.
  • He urged employees to aspire to be essential during this "suspension of normal."
  • Bourkoff said that while shutting down was data-driven, the coming stage, reopening, "is a complex art" guided by science.
  • Companies will need to be loyal and nimble, he wrote. 
  • For more BI Prime stories, click here.

Aryeh Bourkoff, a tech, media, and telecom banker who founded LionTree Advisors, wrote to staff on Wednesday with his views on reopening and the post-pandemic world.

He wrote that the work requires "strategy for the long game" because reopening "is a complex art." Right now, companies across industries are rethinking their approach to offices, with tech giants like Facebook poised to move a significant portion of their workforce remote permanently. Financial institutions, meanwhile, are scouting real estate for suburban offices and making plans for chunks of teams to come into headquarters at different times. 

Bourkoff urged staff to think about their purpose.

"As we celebrate our essential workers, we realize that 'the essential' is a fluid category to which we must continually aspire. I tell our team at LionTree, 'we are not essential workers so make yourselves essential.'" 

In the letter, Bourkoff also highlighted the need for companies to be nimble and loyal in the crisis. 

"People over profits is the new governing principle," he wrote, echoing language from leaders including BlackRock CEO Larry Fink, who in recent years has said companies have a responsibility to the communities they serve, not just to their bottom line. 

LionTree's recent work includes advising KKR-backed AppLovin on its acquisition of Machine Zone, in a deal announced last week.

In a deal announced earlier this month that could reshape British telecomms, LionTree advised Liberty Global on combining its British cable network with Telefonica's O2. Much of the due diligence for that deal occurred over videoconference between the US and Europe, though deal talks started before the pandemic, the Financial Times reported.

Read Bourkoff's full letter here: DV.load("https://www.documentcloud.org/documents/6922289-Aryeh-Bourkoff-COVID19-Letter-May-20-2020.js", { responsive: true, container: "#DV-viewer-6922289-Aryeh-Bourkoff-COVID19-Letter-May-20-2020" }); Aryeh Bourkoff COVID19 Letter May 20 2020 (PDF)
Aryeh Bourkoff COVID19 Letter May 20 2020 (Text)

 

SEE ALSO: 13 books and 7 podcasts that one of tech and media's most influential bankers is recommending to his staff

DON'T MISS: One of tech and media's most influential investment bankers thinks 2020 could see a shakeout in the streaming wars — read the full memo he sent to staff

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US stocks decline amid renewed US-China tensions, historic jobless claims

Thu, 05/21/2020 - 4:03pm

  • US stocks dipped on Thursday amid renewed tensions with China. The nation responded to recent accusations from President Trump by saying it could take countermeasures.
  • The losses also came amid data that showed jobless claims reached 2.4 million for the week that ended on Saturday.
  • The Labor Department's latest data brought the metric's nine-week total to nearly 39 million, topping the 37 million claims during the 18-month financial crisis.
  • Oil continued its recent rally, with West Texas Intermediate crude rising as much as 3.5%, to $34.66 per barrel.
  • Watch major indexes update live here.

US equities closed slightly lower on Thursday amid renewed tensions with China. The nation responded to recent accusations from President Trump by saying it could take countermeasures.

The losses also came amid data that showed jobless claims totaled 2.4 million for the week that ended on Saturday. The latest data pushed the figure's nine-week total to nearly 39 million, surpassing the 37 million Americans who filed for unemployment insurance during the 18-month Great Recession.

The Labor Department's Thursday release matched economists' median estimate of 2.4 million claims and marked the seventh-straight decline for weekly filings.

Here's where US indexes stood at the 4 p.m. ET market close on Thursday:

Read more: These 11 stocks loved by hedge funds have beaten the market during both the coronavirus collapse and its subsequent recovery, RBC says

Stocks declined early following a tepid opening after the Senate passed a bill aiming to delist Chinese companies from American exchanges. Lawmakers and the White House have repeatedly raised concerns about US-listed firms that may be under Chinese government control or receiving capital from state funds.

Meanwhile, the oil prices continued a recent rally. West Texas Intermediate crude gained as much as 3.5%, to $34.66 per barrel. Brent crude, oil's international benchmark, rose 3.4%, to $36.98, at intraday highs.

Jobless claims weren't the only metric dragging on sentiment through Thursday trading. US home loan delinquencies jumped a record 1.6 million in April, according to Black Knight data. The surge is roughly three-times the last one-month record set during the financial crisis.

Read more: Multiple readings of the stock market's future are near their worst levels ever. UBS explains why that's set up a 'significant recovery' — and lays out a 2-part playbook to profit from it.

A separate release from credit-reporting firm TransUnion revealed major stresses in other credit markets. Nearly 15 million credit-card accounts, or 3.2% of US accounts, entered "financial hardship" programs through April, the firm found. The proportion surged from just 0.01% in March. Auto loans posted a similar fall into hardship status, with 3.5%, or nearly three million accounts, missing payments last month.

Despite the day's weak performance for equities, Bank of America strategists said Thursday that stocks are the most attractive they've been relative to bonds in more than 70 years. The firm highlighted a major divergence in performance between the two assets over the next year and advised clients to prepare for a flood of cash to return to the stock market when economic recovery accelerates.

Now read more markets coverage from Markets Insider and Business Insider:

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How Oracle-rival startup Couchbase raised $105 million during a pandemic by being brutally honest with investors

Thu, 05/21/2020 - 3:39pm

  • Database startup Couchbase, an upstart rival to giants like Oracle and Microsoft, closed a $105 million round of venture funding, it said on Wednesday.
  • CEO Matt Cain described a wild couple of months to land this funding in the middle of a pandemic, filled with 20-hour days on the phone and twice-a-day, hour-long exercise workouts to relieve stress.
  • Cain is a first-time CEO, so not only was this his first time on the venture capital pitch circuit, it was all done while in lockdown, during an economic crises with business conditions changing daily.
  • He tells Business Insider how he convinced investors to open their wallets.
  • The secret came down to this: honesty with investors about the company's short-term, mid-term, and long-term prospects — backed up by customers willing to speak privately to the investors.
  • Visit Business Insider's homepage for more stories.

Database startup Couchbase closed on a $105 million round of venture funding in a round led by GPI Capital, it said on Wednesday. Getting that deal done took a wild three months of long days and non-stop hustle, CEO Matt Cain tells Business Insider.

"Unlike firms who recently announced funding, we did not have a term sheet before the pandemic," Cain said.

This deal marks several milestones for Couchbase: It's the first outside funding the startup has obtained since 2016, which also means that it's the first time that Cain himself — who joined in 2017 as a first-time CEO — closed this kind of deal.  So far the company has raised about $234 million from venture capital, plus another $50 million in debt, according to PitchBook's estimates.

While Cain wouldn't comment on Couchbase's new valuation, he did tell Business Insider it was "an up round," meaning investors bought in at a higher price per share than in any of its previous investment rounds. 

That means this funding is also a comeback story of sorts.

When Couchbase raised that funding in 2016, it was a dramatic down round; shares sold at nearly half the price of its previous round, according to Pitchbook's estimates. With that round, Couchbase had sold about 70% of its equity to investors for $129 million and investors valued the company at a relatively meager $300 million, PitchBook says. Even less promising, that funding came during a time of record VC spending, when many startups were achieving $1 billion-plus valuations, or so-called unicorn status.

The following year, Couchbase changed CEOs. Cain was brought in, and quickly set about beefing up the company's enterprise sales efforts. Couchbase charged in to take on giants Oracle and Microsoft, as well as MongoDB, the $12 billion company that is its most direct competitor in its niche of noSQL databases. 

A new kind of database

The traditional database, pioneered by Oracle, is powered by a programming language called "structured query language," or SQL (commonly pronounced "sequel"). These databases want the information they store to be neat and organized.

The cloud computing era gave rise to the noSQL database, which can handle messy, unorganized kinds of data – photos, videos, social media posts — that don't fit nicely into a SQL database. But noSQL databases have now matured to the point where they can do much of what a more traditional database can do and are increasingly used for things like tracking financial transactions or customer info.

Couchbase, like MongoDB and other open source-based software companies, offers a free version of its database. But Cain's plan over the last three years was to make Couchbase more appealing to larger, deep-pocketed enterprises.

And his efforts had been paying off, the company says, with 2019 marking a record year.

It grew to 500 enterprise customers, including names like GE, Comcast, Wells Fargo, United and Marriott. Customers were signing bigger contracts and it had nearly $100 million in annual recurring revenue under contract, it says.

The pandemic impact

When 2019 ended, Cain was ready to shop for investors. But life had other plans. 

"We went from high-fiving and celebrating at our sales kickoff the first week in February, to literally a pandemic three weeks later," Cain remembers.

Cain sent his entire workforce home in mid-March, where they remain today. The company went remote overnight, he said.

"We did it before any mandate in any cities globally," he says proudly. It worked out pretty well, and today he can say that his workforce handled the change with "zero dip in productivity whatsoever." But back in March, when it all first began, he had no idea how this would impact business.

In fact, all the business projections he planned to share with investors were out the window. Some industries have been devastated like airlines, hospitality, oil. But IT budgets in 2020 are being slashed across the board as companies manage their cash flow through the economic turmoil, market researchers like Gartner say.

The entire software industry is, for the first time, under pressure to reduce and renegotiate their subscription contracts. Revenue that software companies thought was locked in for years, is now being cut.

Getting less money, or possibly no money at all, from big customers is not good under any circumstances, but especially so when trying to woo investors. 

Cain spent between 15 and 20 hours a day on the phone with his team, he says, creating every possible financial model based on ever-changing conditions.

"You are thinking of down scenarios...running every possible variation...at rates so far below what could even been within the imagination a week earlier," he said. "You do have this moment of, how did the world change so fast?"

On a personal level, he turned to exercise to cope. As a self-described fitness fanatic, he decided that one workout per day was no longer enough.

"I'm a two-a-day guy now. I don't know when that's going to change. It's been good for calorie loss," he laughed.

How he convinced investors to buy in

It turned out that all those various business projections became the key to raising money during a pandemic.

He had to be brutally honest with investors — a nerve-wracking concept, under normal circumstances.

Rather than pitching them just the rosiest of all possible futures, he showed investors the not-so-great short-term projections to set their expectations, but also the reasonably high likelihood of a bounce back before too long, plus many reasons to be confident about a healthy long-term outlook.

Still, it wasn't his projections on a pitch deck that secured the deal.

Investors couldn't visit the offices as part of their due diligence, and they never met with Cain and team in person. So they doubled up on talking to customers to validate his numbers.

That was another scary moment for him, as he couldn't possibly know what the customers would say about their own IT budgets and what that would imply for their business with Couchbase.

"We have over 500 enterprise customers and as you can imagine, we have some that are challenged by this environment and others that are thriving," he said.

It worked out well, though: The customers said exactly what Couchbase had projected that they would. For a first-time CEO, that validation felt good.

The final thing Cain did to convince investors to open their wallets and make a good offer, was to show a path to future growth.

Cain told investors that the bull case for the company is that, while its customers are hurting now, Couchbase's technology is key to their survival, the foundation for their own business-critical applications. Even if they can't pay as much today, they'll likely end up ramping up their spending after things stabilize. 

After all, even before the pandemic, companies were looking for alternatives to pricey database products from likes of Oracle and Microsoft — which, incidentally, is why Amazon Web Services has had so much success with its own line of database products. 

The trend of more affordable databases will almost certainly accelerate because of the economic crises, Cain believes, which will only drive more companies to Couchbase. "People are moving workloads off legacy solutions from Oracle and Microsoft," he said. 

Another opportunity comes from a new shift in strategy. Couchbase is one of the only popular database vendors that hasn't yet launched its own cloud service. Right now, its customers run its database on clouds from vendors like Amazon, Google, Microsoft, or on their own data centers, but they have to manage it themselves.

That will change this summer, when Couchbase finally launches its own cloud service, helping take some of the burden of maintaining database services away from its customers.

That won over new investor GPI Capital, who led the round. Cain says that it was an "oversubscribed round," meaning investors wanted more shares than the company was offering. Existing investors also bought-in including Accel, Sorenson Capital, North Bridge Venture Partners, Glynn Capital, Adams Street Partners, and Mayfield.

Are you an Oracle or enterprise software insider with insight to share? Contact Julie Bort via email at jbort@businessinsider.com or on encrypted chat app Signal at (970) 430-6112 (no PR inquiries, please). Open DMs on Twitter @Julie188.  

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Treasury Secretary Mnuchin sees 'strong likelihood' that further stimulus is needed as Senate spars over new bill

Thu, 05/21/2020 - 3:03pm

  • "There is a strong likelihood we will need another bill" to keep the economy afloat through the coronavirus pandemic, Treasury Secretary Steven Mnuchin told The Hill on Thursday.
  • Mnuchin's comments arrive as House Democrats' $3 trillion relief package sits stuck in the Senate, where Senate Majority Leader Mitch McConnell refuses to consider the legislation.
  • Senate Republicans have balked at extending a $600-per-week expansion to unemployment insurance, and President Trump has indicated the government should monitor how current aid measures play out before issuing new relief.
  • Mnuchin expects second-quarter figures to be "dreadful" before the economy recovers in the second half of 2020.
  • Visit Business Insider's homepage for more stories.

Treasury Secretary Steven Mnuchin said Thursday that another coronavirus relief bill from Congress is likely needed to keep the economy intact before a nationwide reopening.

The House passed a $3 trillion relief measure last week, but the bill has since been stuck in the Senate, where Senate Majority Leader Mitch McConnell has refused to push it forward. President Donald Trump has indicated he would rather mull the effects of already issued aid from the Federal Reserve and Congress before pushing for a new package.

Mnuchin said the White House was weighing the need for another stimulus measure and where such funds should be put to use. 

"I think there is a strong likelihood we will need another bill, but we just have $3 trillion we're pumping into the economy," Mnuchin said in a video interview with The Hill. "We're going to step back for a few weeks and think very clearly how we need to spend more money and if we need to do that."

Read more: Multiple readings of the stock market's future are near their worst levels ever. UBS explains why that's set up a 'significant recovery' — and lays out a 2-part playbook to profit from it.

The comments follow similar remarks from Fed officials in recent weeks. Fed Chair Jerome Powell said on May 13 that "additional fiscal relief could be costly but worth it if it helps avoid long-term economic damage." Dallas Fed President Robert Kaplan echoed the sentiments on Wednesday, telling CNBC that more easing from the central bank and Congress is likely necessary to bolster the ailing economy.

One pain point in Senate negotiations is a second bill's language around unemployment insurance. House Democrats want to expand a $600-per-month provision to the program with its latest act. McConnell on Wednesday indicated such a measure would not pass, saying the "crazy policy" would incentivize some workers to remain unemployed.

Mnuchin called the House Democrats' measure a "partisan bill," adding that "we need to fix the quirk" of unemployment insurance paying Americans more to stay out of work.

Though the Treasury secretary said it was "too premature" to make any projections for when the economy may turn around, he expects "dreadful" second-quarter figures before a rebound through the second half of the year.

"As the president has said and I have said, with the great advancement in medical progress and killing this virus, we expect our economy will be great again next year," Mnuchin said.

Read more: These 11 stocks loved by hedge funds have beaten the market during both the coronavirus collapse and its subsequent recovery, RBC says

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These 11 stocks loved by hedge funds have beaten the market during both the coronavirus collapse and its subsequent recovery, RBC says

Thu, 05/21/2020 - 2:53pm

  • RBC's Lori Calvasina tracked the top holdings of hedge funds at the end of the first quarter and found that many were playing defense with investments in megacap growth stocks.
  • Those hedge-fund favorites have held up better than the rest of the market this year, and some have been outperformers since stocks began to rally in late March. 
  • Here is a group of 11 tech, communication, and healthcare stocks that are popular with hedge funds and outperforming over both of those time periods.
  • Visit Business Insider's homepage for more stories.

Wall Street terms like "growth stocks" and "defensive stocks" are thrown around so much that it's easy to assume they have static meanings everyone agrees on.

RBC Capital Markets has some evidence that the most successful growth stocks in recent history have become the defensive stocks of today. It's a shift driven by some of the biggest investors, and it's one reason a number of megacap internet and tech companies performed well when the market plunged in February and March.

Many of those companies are represented in a group that Lori Calvasina — the head of US equity strategy at RBC — calls the "hedge fund hot dogs." They're the companies that had the most money invested in them at the end of the first quarter by the 342 hedge funds whose holdings RBC has examined.

"The 2020 resilience of the Hot Dogs is a testament to the transition of (technology, internet, media, and telecom) into a defensive trading vehicle in the US equity market and the strong faith that many US equity investors continue to have in the secular growth theme," she wrote in a note to clients.

Those stocks struggled compared with the rest of the market as recently as 2018, but this year the group has held up well during both the downturn and the recovery. The largest hedge-fund holdings have outperformed the benchmark S&P 500 by 10%, which puts them on pace for their best relative result since 2013.

"They recently hit a new all time high vs. the S&P 500, and have outperformed in both the February-March drawdown and the March-May rebound," Calvasina wrote.

These are 11 stocks drawn from that group of favorites. Each is owned by a large percentage of the funds Calvasina surveyed. They have all beaten the market in 2020 and outperformed since March 23, the day the stock market hit its recent low.

They're ranked from lowest to highest based on how much they've outperformed the S&P 500 from that date through May 18.

SEE ALSO: The investment chief of a $12 billion wealth-management firm breaks down how to build the perfect portfolio using just 7 ETFs — one designed to sidestep a dramatically 'overvalued' stock market

11. Fidelity National Information Services

Ticker: FIS

Sector: Information technology

Funds owning: 22%

2020 relative return: 6.6%

Relative return since market low: 1.1%

Source: RBC Capital Markets



10. Johnson & Johnson

Ticker: JNJ

Sector: Healthcare

Funds owning: 15%

2020 relative return: 11.8%

Relative return since market low: 3.4%

Source: RBC Capital Markets



9. Charter Communications

Ticker: CHTR

Sector: Communication services

Funds owning: 18%

2020 relative return: 15.3%

Relative return since market low: 3.6%

Source: RBC Capital Markets



8. Microsoft

Ticker: MSFT

Sector: Information technology

Funds owning: 42%

2020 relative return: 39.9%

Relative return since market low: 4%

Source: RBC Capital Markets



7. Bristol-Myers Squibb

Ticker: BMY

Sector: Healthcare

Funds owning: 12%

2020 relative return: 7.7%

Relative return since market low: 5%

Source: RBC Capital Markets



6. Apple

Ticker: AAPL

Sector: Information technology

Funds owning: 19%

2020 relative return: 3.3%

Relative return since market low: 8.4%

Source: RBC Capital Markets



5. Visa

Ticker: V

Sector: Information technology

Funds owning: 25%

2020 relative return: 10.4%

Relative return since market low: 9%

Source: RBC Capital Markets



4. AbbVie

Ticker: ABBV

Sector: Healthcare

Funds owning: 13%

2020 relative return: 11.9%

Relative return since market low: 9.8%

Source: RBC Capital Markets



3. Mastercard

Ticker: MA

Sector: Information technology

Funds owning: 20%

2020 relative return: 5.7%

Relative turn since market low: 10.6%

Source: RBC Capital Markets



2. Facebook

Ticker: FB

Sector: Communication services

Funds owning: 33%

2020 relative return: 12%

Relative return since market low: 11.9%

Source: RBC Capital Markets



1. UnitedHealth Group

Ticker: UNH

Sector: Healthcare

Funds owning: 18%

2020 relative return: 8.4%

Relative return since market low: 18.5%

Source: RBC Capital Markets



Bank of America lays out a bullish scenario where US stocks surge 14% over the next year

Thu, 05/21/2020 - 2:44pm

  • Bank of America's sell-side indicator suggests an optimistic scenario could push the S&P 500 back to February peaks within one year.
  • Though it's not the bank's base case, a return to 2019 fund allocation could drive $1 trillion back into stocks and help lift the index by 14%, a Thursday note said.
  • When the indicator previously flashed such a strong "buy" signal, positive 12-month returns followed 94% of the time, the bank's analysts wrote.
  • The index's earnings per share could even rise to new highs if GDP returns to last year's levels in 2021, the bank said.
  • Visit Business Insider homepage for more stories.

The S&P 500 could leap by 14% over the next year if the US economic rebound hits every note right, Bank of America said on Thursday.

Though it's not the firm's base case, its sell-side indicator is sending a historically strong signal to buy US stocks. Cash levels in funds are at a highly bearish level, leaving plenty of fuel for a market run-up if sentiment improves.

Whether a second wave of virus cases is avoided, a reliable vaccine emerges, or consumer spending poses a sharp bounce-back, a return to 2019 market positioning could drive $1 trillion into stocks and send prices soaring, Bank of America said.

"With the Fed spending close to 40% of GDP and fiscal stimulus adding another 35% to plug the 2020 COVID-19 hole, and with multinationals re-shoring and investing in the US, we could get a big economic pickup next year," the team led by Savita Subramanian wrote in a note to clients.

Read more: Multiple readings of the stock market's future are near their worst levels ever. UBS explains why that's set up a 'significant recovery' — and lays out a 2-part playbook to profit from it.

When the indicator previously flashed such a strong "buy" signal, positive 12-month returns followed 94% of the time, the analysts added. Should the sell-side signal prove right yet again, the benchmark index could close in on its February 19 peak of 3,393.

The optimistic scenario also sees S&P 500 earnings per share surging to a record $180 if GDP recovers to 2019 levels, the team wrote. The metric last peaked at roughly $140 per share at the end of last year, leading Bank of America's forecast to suggest a massive jump in corporate profits arriving as soon as next year.

Arriving at a 14% rally amid the coronavirus pandemic won't come easy, the strategists said. China's rebound suggests consumer spending might not return to normal as quickly as hoped, and early state reopenings increase the likelihood of a second wave of infections.

Read more: RBC handpicks 8 tech stocks that could continue to grow revenues during the crisis and are built like 'rocket ships' for the next boom

The back-to-back economic downturns experienced by millennials could lead the demographic to hold back on spending and save more. Uncertainty about the US presidential election and future tax regimes could chip away at market sentiment, the team added.

Bank of America reiterated its preference for stocks over bonds against the current market backdrop, calling the choice "a no-brainer." Both asset classes have enjoyed strong rallies from their March lows, but on a free-cash-flow basis, the S&P 500 is still inexpensive and stands to breach records within one year, the bank said.

Now read more markets coverage from Markets Insider and Business Insider:

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A value-investing expert explains why beaten-down stocks are the most appealing since the dot-com bubble — and shares 3 stocks he bought as the coronavirus crash created 'rare' opportunities

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TJX spikes 9% after reporting 'pent-up demand' from consumers as it begins to reopen its stores (TJX)

Thu, 05/21/2020 - 2:10pm

  • TJX Companies — owner of the TJMaxx, HomeGoods, and Marshalls brands — reported first-quarter earnings on Thursday that showed it's seeing "pent-up demand" from consumers as it begins to reopen its stores.
  • The off-price merchandiser reported its fiscal first-quarter earnings, which missed analyst estimates on both the top and bottom line.
  • Despite reporting revenues down more than 50% year-over-year in the quarter, investors bid up TJX as much as 9% on Thursday after digesting the results.
  • Visit the Business Insider homepage for more stories.

TJX Companies reported dismal earnings on Thursday morning, but its stock spiked as much as 9% after investors showed enthusiasm about the company's early results with reopening its stores. 

TJX Companies owns brands like TJMaxx, HomeGoods, and Marshalls.

The company closed all of its stores, distribution centers, and its ecommerce operations in mid-March amid the coronavirus pandemic, which resulted in a more than 50% decline in revenue year-over-year for the quarter.

Here are the key numbers:

Revenue: $4.41 billion, versus the $5.13 billion estimate
Adjusted earnings per share:
-$0.74, versus the -$0.12 estimate

The company has started to reopen its stores earlier this month, and to date has reopened more than 1,600 of its stores worldwide. 

Of those stores that have reopened, TJX is seeing an increase in sales, according to the company's earnings release.

Read more: Multiple readings of the stock market's future are near their worst levels ever. UBS explains why that's set up a 'significant recovery' — and lays out a 2-part playbook to profit from it.

"Initial sales overall have been above last year's sales across all states and countries for the over 1,100 stores that have been reopened for at least a week," the company said.

TJX CEO Ernie Herrman said the company is seeing pent-up demand from consumers after it was temporarily shut down for 6 weeks.

"We believe this very strong start speaks to our compelling value proposition and the appeal of our treasure-hunt shopping experience, as well as pent-up demand," Herrman said.

Anecdotal evidence backs up what Herrman said in TJX's earnings release.

David Schawel, CIO of Family Management Corporation and Twitter handle @DavidSchawel, tweeted on May 17: "I've never seen so many people line up to shop at TJ Maxx. The American consumer twitches when they're away from Home Depot/TJ Maxx for too long."

The company also said it is seeing plenty of off-price buying opportunities as retailers look to offload merchandise in bulk due to surging inventories caused by the drop in consumer shopping over the past few months.

"We are currently seeing plentiful off-price buying opportunities, which, as we look to the remainder of the year, gives us confidence in having excellent brands and quality merchandise available to us. With our flexible business model and ability to adapt quickly to changing market conditions and customer preferences, we will be pursuing these buying opportunities," Herrman added.

Shares of TJX surged as much as 8.7% to $55.29 in Thursday trading.

Read more: RBC pinpoints 11 stocks loved by hedge funds that have beaten the market during both the coronavirus collapse and its subsequent recovery

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$85 billion e-commerce giant Shopify is trying to make banks irrelevant for small businesses. Its chief product officer lays out why.

Thu, 05/21/2020 - 2:02pm

  • Shopify has been on a product-launching spree, looking for new ways to grow its customer base and reach consumers.
  • Shopify is launching a business bank account called Shopify Balance, and a buy now, pay later product called Shop Pay Installments.
  • It's also working on new features for local merchants, like delivery services.
  • The e-commerce enabling tech company typically serves online retailers, but is now looking to new segments like restaurants.
  • Click here for more BI Prime stories.

Shopify has long been known as the e-commerce platform where merchants can sign up and start selling online.

But over the past few months, as brick-and-mortar businesses closed amid the coronavirus pandemic, Shopify has seen a new wave of retailers moving online. And as its merchant base grows, Shopify has been launching several new products to meet retailers' new needs.

At its virtual Reunite conference for its merchant and developer community Wednesday, Shopify announced its new business banking offering, Shopify Balance, which will be available later this year in the US (which accounts for over 50% of Shopify's customer base). It also announced plans for a buy now, pay later product that merchants can integrate into their online stores.

Shopify also launched a new point of sale and a consumer shopping app in early May

"We're definitely on a product launching spree," Craig Miller, chief product officer at Shopify, told Business Insider.

These new products have been in the works before the coronavirus pandemic, which has accelerated many of the digitization trends Shopify was seeing, Miller said.

"Shopify has been working on a lot of these projects and products over a number of years," Miller said. "COVID really just accelerated the transition to everything moving online, and e-commerce becoming much more of the norm."

Brick-and-mortar retailers, for one, whose shops have been shut down have been quickly pivoting to online stores to continue selling.

In-store retail purchases through Shopify's point of sale (PoS) declined by 71% between March 13th and April 24th. But those brick-and-mortar retailers were able to make up 94% of those lost in-person sales with online transactions, according to Shopify's first quarter earnings.

E-commerce has been steadily growing, and has continued to do so amid the coronavirus pandemic as total retail growth slows. In 2019, online sales accounted for over 10% of all retail sales in the US.

And the shift to digital is likely to have a lasting impact on retail. As shops reopen, connecting in-store with online shopping will be key.

Here's a look at some of the products Shopify is rolling out to cater to existing e-commerce customers, new industries, and consumers.

Shopify is launching a business bank account for its merchants

For small businesses, banking can be a major pain point. Large banks are often catered toward the larger end of the small business segment, and often business owners end up using their personal bank account to get started.

And this problem isn't new. A crop of fintechs like BlueVine and Rho have been founded on this exact premise. 

Now, Shopify is hoping to do the same with the launch of Shopify Balance, it's business banking product. 

"Traditional banks are built for traditional businesses," Miller said. "This is 2020, the world has changed. Merchants have very different needs and consumers have very different needs than in the past."

Balance will include a checking account, digital and physical debit cards, and real-time access to cash earned on sales through Shopify's platform.

The account, which has no monthly fees or minimum balance requirements, can be used through Shopify's existing merchant portal, where business owners can monitor their cash flow, pay bills, and track expenses.

Like many fintechs, Shopify is working with a partner bank, which provides the core banking infrastructure. Shopify is not disclosing which bank it's partnered with.

Early access to Shopify Balance will begin later this year for US merchants.

With a new focus on local businesses, Shopify introduces delivery services

Helping e-commerce businesses get up and running has been Shopify's bread and butter since its founding in 2004. But now, it's seeing interest in new industries that typically wouldn't have run on Shopify, Miller said.

Shopify's e-commerce retailers, untethered to a brick-and-mortar footprint, typically have ambitions to sell globally. But for local sellers currently unable to operate out of their brick-and-mortar locations, e-commerce has become a new channel for sales.

"We saw a huge uptick in businesses that wanted to sell much more in their local area," said Miller, "versus e-commerce, which is traditionally about selling everywhere in the world."

And local merchants' needs are a bit different to that of a global e-commerce retailer. Delivery, for one, is a necessity these days. And Shopify has been rolling out a platform where merchants can define their local delivery zone and take orders through their Shopify-powered online store or PoS.

And it's catching on quick. As of April 24th, 26% of Shopify's brick-and-mortar retailers in regions like the US and UK were using some form of local pick-up or delivery, compared to just 2% in February.  

Shopify is building new templates and features for restaurants

Restaurants, too, have been turning to Shopify looking for new ways to sell food online, Miller said.

"It's something that Shopify wasn't designed for," said Miller, "but what we saw is these types of businesses increasingly going on Shopify."

While Shopify has built new store templates catered toward restaurants, they can be run like any other website, where consumers go online, purchase their products, and pick up in-store, Miller said. 

"I think part of it is that a lot of them want to sell direct," Miller said, "and selling directly has always been the premise of Shopify."

Selling directly to consumers, as opposed to reaching them through marketplaces like Doordash or Uber Eats, has its advantages.

"We are not a marketplace," said Miller. "Shopify allows a business to establish a relationship with a customer and because of that, there's no worry about competing with others parties."

"There are no crazy high fees like some of the food ordering apps, and I think a lot of them are really starting to like that," Miller added.

In addition to building out new templates, Shopify rolled out a tipping feature that any of its merchants can use.

Shopify is appealing to consumers, too

In addition to building out new products for merchants, Shopify is also looking for ways to reach consumers. 

This year, it's planning to roll out a buy now, pay later feature on it's platform, giving Shopify merchants the ability to offer shoppers installment payments at checkout.

Buy now, pay later has been surging during the pandemic, and it's a crowded space with players like Affirm, Afterpay, and Klarna all competing for merchant partnerships. They're often marketed as a way for merchants to boost sales and convert browsers to buyers.

Shopify's product, called Shop Pay Installments, will be launched later this year with an undisclosed partner, and will be available to all US merchants using Shopify Payments.

In early May, Shopify also launched its consumer-facing shopping app, Shop. The brand discovery platform was launched sooner than Shopify had planned in response to the coronavirus, Business Insider has reported.

"Shop wasn't initially planned to launch this early, but we saw this huge need from consumers that were looking to buy from local merchants," Miller said. "We decided that that made sense for us to get that out into the hands of millions of consumers faster than initially planned."

SEE ALSO: The way we shop and pay is transforming — here's a look at the hottest trends and biggest players

SEE ALSO: Shopify's general manager reveals its last-minute sprint to include a tool for a new app to help small merchants take on Amazon and Walmart during COVID-19

SEE ALSO: E-commerce giant Shopify just launched a way for retailers to transform stores into fulfillment centers by quickly adding curbside pickups

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America's largest mall is reportedly 2 months behind on a $1.4 billion loan

Thu, 05/21/2020 - 1:56pm

  • The Mall of America, the biggest mall in the US, has missed two months of payments on a $1.4 billion commercial mortgage-backed security, Bloomberg reported Thursday, citing a filing by Wells Fargo, the loan's master servicer. 
  • The filing states that the loan is currently due for April and May payments, according to the report. In addition, the borrower has notified Wells Fargo of COVID-19-related hardships. 
  • The Mall of America closed March 17 amid sweeping lockdowns to curb Covid-19. It plans to reopen some retail shops June 1. 
  • Read more on Business Insider.

The biggest mall in the US is experiencing financial hardship as the coronavirus pandemic slams the retail industry. 

The Mall of America, based in Bloomington, Minnesota, has missed two months of payments on a $1.4 billion commercial mortgage-backed security, Bloomberg reported Thursday. The report cited a filing by Wells Fargo, the trustee of the debt and a master servicer of the loan.

The filing states that the loan is currently due for April and May payments, according to the report. In addition, the borrower has notified Wells Fargo of COVID-19-related hardships. 

It's the latest mall to show signs of struggle amid the coronavirus pandemic, which shutdown non-essential businesses across the country in mid-March to contain the disease. Many retailers and their landlords are struggling to pay their rent and mortgages as physical stores are shut down and consumers shift to shopping online. 

Read more: Multiple readings of the stock market's future are near their worst levels ever. UBS explains why that's set up a 'significant recovery' — and lays out a 2-part playbook to profit from it.

In April, many mall owners reported low rent-collections for the month, Bloomberg reported. The same month, 75% of tenants in the Manhattan Hudson Yards development withheld rent payments, the FT reported. 

Even as states begin to slowly reopen, there are many retailers that won't make it through the shutdown unscathed — J.Crew and JCPenney both filed for bankruptcy, among others. 

The Mall of America, a behemoth center that spans 5.6 million square feet and includes more than 500 shops, 50 restaurants, an aquarium, movie theater, and indoor theme park, was closed March 17. 

It plans to begin reopening June 1, beginning with some retail stores. Food services and the other attractions at the mall will follow after. 

"Throughout the past eight weeks, we have been working with state and national organizations to help identify and establish industry-wide reopening safety protocols," the mall said in a statement posted to its website. It will continue to update its reopening plan as necessary, it said. 

The owners of Mall of America, the Ghermezian family, also own the American Dream Mall in New Jersey. The retail wing of the American Dream Mall was scheduled to open in March but had to be postponed due to the coronavirus pandemic. It's since turned part of the facility into a Covid-19 testing center.

Read more: A value-investing expert explains why beaten-down stocks are the most appealing since the dot-com bubble — and shares 3 stocks he bought as the coronavirus crash created 'rare' opportunities

Join the conversation about this story »

NOW WATCH: Here's what it's like to travel during the coronavirus outbreak

Multiple readings of the stock market's future are near their worst levels ever. UBS says that's set up a 'significant recovery' — and lays out a 2-part playbook to profit from it.

Thu, 05/21/2020 - 1:41pm

  • A large share of retail investors are bearish on the stock market, even as it makes its way back to precrisis highs. 
  • Francois Trahan, the head of US equity strategy at UBS, has identified a gap between expectations and various green shoots he is seeing across markets. 
  • He said this gap set the market up for a strong recovery and offered two recommendations for profiting from the upswing.
  • Click here for more BI Prime stories

The stock market's feverish rally since late March does not paint the full picture of how investors feel about the future. 

According to UBS, there remains a significant gap between expectations for recovery from the coronavirus crisis and the prospects on the table. 

Francois Trahan, the bank's head of US equity strategy, is gleaning historically weak sentiment from multiple readings, firstly from the American Association of Individual Investors survey. The widely followed sentiment gauge showed bearish retail investors were recently more than 50% of the entire sample, which was near a decade high and at a level usually seen only in the depths of crises. 

Trahan also said the share of S&P 500 companies raising their estimates for profits compared with those lowering forecasts has never been lower in the history of so-called earnings revisions breadth. 

And one gauge of raw economic data that he watches closely as a leading indicator is the ISM New Orders Index. It has nosedived into the low 20s, a level seen only twice in the past 70 years, during the 1980 bear market and the 2008 financial crisis.

Trahan's conclusion from all of these dire indicators is not that more weakness is coming but that the stage is set for a snapback. Moreover, various parts of the market that would confirm his view show the seeds of a recovery are sprouting.

His research was focused around the groupings of stocks that display the highest sensitivity to the ebb and flow of the business cycle. After all, these stocks tend to show the earliest signs of life as a recovery takes shape. 

"In our view, the large gap between future prospects for cyclical sectors and current expectations sets up this segment for a significant recovery in the months ahead if the stimulus revives economic prospects and makes way for a sustainable recovery," Trahan said in a recent note.

High-beta stocks, named for their heightened sensitivity to movements in the broader market, are among those closely linked to the ebb and flow of the business cycle, Trahan said. They have already been outperforming their low-beta counterparts across sectors of the market with other characteristics like defensiveness and high earnings growth.

Another cohort of economically sensitive stocks that is already performing relatively better is small caps.

In tumultuous times, these lesser-valued companies are shunned by investors in favor of those with stronger balance sheets and revenue streams around the globe. But similar to high-beta stocks, small caps have turned the corner and are outperforming their larger peers within many sectors of the S&P 500. 

Trahan is seeing green shoots outside the stock market as well. 

The commodities asset class is another classic indicator of where the business cycle is, given how many parts of the global economy depend on its products to function. 

Oil has been the most consequential commodity this year because its price collapse coincided with the global escalation of the coronavirus crisis. And while its price recovery — by 45% for Brent crude since April 21 — has been from historically low levels, Trahan is taking it as a sign of improving conditions ahead. 

Lumber is yet another commodity that equity investors can peek at for an indication of what's in store. Trahan called it a reliable proxy for S&P 500 earnings and considers its 42% rebound since April a strong signal that profits will soon trough as well. 

All the above indicators point to a textbook recovery in the stock market and subsequently in the economy. Trahan expects this time to be no different and sees opportunities to profit from the rebound in two ways: 

1. Cyclical stocks, which can be acquired through the Direxion MSCI USA Cyclicals Over Defensives exchange-traded fund. An option for a sector-specific play on improving economic growth is the Consumer Discretionary Select Sector SPDR ETF

2. Improving expectations for the economy should help value stocks outperform their growth counterparts going forward, Trahan said. The Vanguard Value Index Fund ETF is one flavor of this theme.

SEE ALSO: RBC handpicks 8 tech stocks that could continue to grow revenues during the crisis and are built like 'rocket ships' for the next boom

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The founder of a $1 billion energy fund shares why buying on the dip is the wrong investment strategy in this oil price downturn

Thu, 05/21/2020 - 1:40pm

  • In the past, private-equity firms focused on energy have used a simple approach to investing: "Buy on the dip."
  • But after the last downturn, starting around 2014, many of those investors got burned, according to Adam Waterous, the founder of a $1 billion energy investment firm. 
  • Today, when oil has fallen by about 50%, private investors may again see this an opportunity to buy on the dip.
  • But Waterous cautions that this approach will likely lead to poor returns.
  • Visit Markets Insider to view the latest on oil prices.

It doesn't take a skilled investor to understand the theoretical value of investing in the energy industry when oil prices are low. Like the broader stock market, oil prices are cyclical — they tend to rise after they fall.

In fact, most major analysts now say oil markets are poised for a recovery that could yield pre-pandemic prices sometime next year. So why not invest in cheap energy companies now, which have profits that are directly tied to an oil price bounce-back? 

As appealing as that approach may be, it can get investors "killed," said Adam Waterous, the founder of a $1 billion energy fund based in Calgary. 

"There can be a real simple desire by investors to so-called buy on the dip," said Waterous, the former head of investment banking and North American energy and power at Scotiabank. 

But during the last downturn, buying on the dip, "led to a lot of investors losing a lot of money," he said. And this one isn't very different.

Click here to subscribe to Power Line, Business Insider's weekly clean-energy newsletter.

Lessons from oil crashes of the past

It may be hard to imagine today, but the period from 1970 to around 2009 was considered an "age of scarcity" for oil, Waterous said. During that time, the dominant view among energy investors was that oil would become increasingly precious.

With that mentality, oil companies reinvested profits into expanding production, and, aside from some of the majors, they did not offer dividends. Instead, private investors — who were behind much of the industry's capital — sought returns through mergers and acquisitions. 

For a while, this strategy worked.

Starting around 2009, in the aftermath of the financial crisis when oil was cheap, loads of private investors saw an opportunity to buy on the dip. They poured billions of dollars into the industry and, leading up to 2014, saw big returns on capital that averaged around 8% to 10% as the industry recovered, Waterous said.

Then around 2014, the price of oil started crashing again. Driven by both an oversupply and drop in demand, US crude fell from over $100 a barrel in 2014 to less than a third of that at some points in 2016.

To many investors, it seemed like another good opportunity to buy on the dip, Waterous said. So they did, backing the industry with $20 billion to $30 billion a year from 2014 to 2016.

But this time, the returns never materialized. 

When buying on the dip doesn't work

By funneling money into the US shale industry after 2009, private investors, in some ways, spelled their own demise.

All of that money fueled the growth of a technology known as hydraulic fracturing. Using horizontal drilling, a perforating gun, and pressurized liquids, fracking allows drillers to extract oil and gas trapped inside shale rock.

"Overnight, the industry went from being drilling-location poor to drilling-location rich," he said. 

The fracking revolution made America the largest crude oil producer in the world. But at the same time, it also made finding and extracting oil easier and less risky, Waterous said.

As a result, companies focused on that task — the very companies backed by private equity firms — were much harder to sell, especially if they were producing lower-quality oil, he said. 

Without M&A, investors had no way of getting returns. Instead, they had to hold onto companies, many of which weren't profitable. Making matters worse, the price of oil never fully recovered, even before the pandemic took hold. 

"The industry was just vaporizing capital," Waterous said. "Many people who bought on the dip and said 'Hey, I've seen this before' got killed."

A shrinking shale industry

The structure of the industry hasn't changed much since then, he said. And now, there may be even fewer buyers. 

"Just because prices have come down, you have to be very careful about where you're investing, just like you need to be careful in 2014 and 2015 when a lot of money got lost," Waterous said. 

Of the 500 or so oil and gas companies backed by private equity firms in North America, Waterous said he thinks an astonishing 80% of them won't be able to find a buyer. Without access to more cash, they'll be forced to stop spending on their oil assets, causing production to decline.

"This is going to be a smaller industry going forward," he said.

Waterous said he has no doubt that oil demand will return. In fact, he thinks US crude oil prices will rise higher than they were at the start of the year, in the wake of North American production declines that are limiting supply. 

"But getting from here to there, a lot of companies are going to cease to exist," he said. "It's tricky investing in a shrinking industry." 

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BANK OF AMERICA: Stocks haven't been this attractive relative to bonds in 70 years, suggesting further gains are coming

Thu, 05/21/2020 - 1:12pm

  • Stocks haven't been this attractive relative to bonds in over 70 years, Bank of America said in a note published on Thursday.
  • The dividend yield of the S&P 500 is nearly triple that of the 10-year Treasury yield, something that historically has been followed by stocks outperforming bonds over the next 12 months, the firm said.
  • Still, despite the relative attractiveness of stocks over bonds, the highly anticipated "Great Rotation" of investors moving from bonds into stocks has yet to occur, according to fund flows.
  • Visit Business Insider's homepage for more stories.

Stocks haven't been this attractive relative to bonds in over 70 years — and if history is any guide, that could signal further gains ahead for stocks, Bank of America said in a note published on Thursday.

The S&P 500's dividend yield of about 2% is triple that of the 10-year US Treasury, which yielded 0.66% as of Thursday morning.

In the current cycle, in the previous three times stock yields have outpaced their 10-year Treasury counterpart, equities have outperformed bonds by 31 percentage points on average over the next 12 months, according to Bank of America.

But the firm argued that the divergence in performance between the two assets over the next year could be even greater this time around.

Since 1951, when the ratio of S&P dividend yield to the 10-year Treasury rate was this high, stocks have gone on to return 19 times as much as their fixed-income counterpart over the next 12 months, the bank said.

Read more: RBC pinpoints 11 stocks loved by hedge funds that have beaten the market during both the coronavirus collapse and its subsequent recovery

Still, despite the drastic difference in the S&P 500 yield and the 10-year rate, investors have not rotated into stocks from bonds, according to cumulative fund flows cited by the bank. That suggests the potential for further upside.

Bullish investors have pointed to cash on the sidelines and high bond allocations as potential catalysts for higher stock prices.

For some investors, there is no alternative, commonly abbreviated as TINA.

The thinking goes that since the Federal Reserve has lowered interest rates to near zero, bond investors will ditch their low-yielding notes for stocks and in turn create demand for stocks.

Read more: The investment chief of a $12 billion wealth-management firm breaks down how to build the perfect portfolio using just 7 ETFs — one designed to sidestep a dramatically 'overvalued' stock market

Bank of America is in the camp that thinks flows out of bonds and into stocks are imminent.

"The extreme attractiveness of stocks over bonds, particularly as rates have plummeted back to near zero, can be the catalyst for the rotation into stocks, driving the market higher," the firm said.

Despite the attractiveness of stocks over bonds, Bank of America remains cautious on stocks and isn't calling for higher equity returns just yet.

The bank thinks the risk of a second wave of a COVID-19 outbreak in the US remains elevated.

Additionally, the bank said, "borrowing from the future to fund today's growth not only results in a failure to rationalize excess capacity and clear the slate for a real recovery, but also indicates that at some point, we will pay."

In the note, Bank of America laid out one bullish scenario in which US stocks surge 14% over the next year.

The S&P 500 is down about 8% year-to-date.

Read more: A value-investing expert explains why beaten-down stocks are the most appealing since the dot-com bubble — and shares 3 stocks he bought as the coronavirus crash created 'rare' opportunities

Join the conversation about this story »

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We'll never see another $100 billion technology Vision Fund — from SoftBank or anyone else (UBER)

Wed, 05/20/2020 - 8:41pm

  • SoftBank's Vision Fund may be the first — and last — $100 billion investment vehicle.
  • SoftBank CEO Masayoshi Son planned for it to be the first of a succession of gigantic funds, but it performance to date has been poor; it lost $10 billion in value in the March quarter of this year alone and is now worth less than what backers invested in it.
  • The fund's poor performance has highlighted the flaws inherent in trying to invest $100 billion in startup companies in little more than three years.
  • No other company — particularly no other venture firm — has tried to raise anything close to a $100 billion venture-focused fund, and after the Vision Fund's experience, none are likely to.
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Less than a year ago, SoftBank's $100 billion Vision Fund looked like it would be the first of many.

The Japanese conglomerate was already starting to raise a second Vision Fund and CEO Masayoshi Son was talking about creating successor funds every two to three years.

Now, though, with the first fund reporting massive losses, it looks doubtful that SoftBank will close the second fund, much less the third or fourth. At a press conference on Monday, Son acknowledged that, thanks to the poor performance of the first Vision Fund, SoftBank has been unable to line up investors for a follow-up and hinted that his whole vision may be on ice for now.

I'd go further. I think SoftBank's killed the whole concept — not just for itself, but for any other firm that might be crazy enough to consider it. That's because the fund's recent multi-billion dollars losses have only highlighted what should have been clear all along — the Vision Fund never made much sense in theory or in practice.

Perhaps the best evidence of that is that while some traditional venture capital firms have been raising bigger-than-normal funds — most notably Sequoia with its Global Growth Capital Fund III — and some private equity managers have also been raising some jumbo-sized vehicles, none has even attempted to put together a fund anywhere close to the size of the Vision Fund. Sequoia's fund, for example, only has $8 billion in committed funding. Firms like Sequoia or Benchmark, with a track record of success, could easily have raised gargantuan, Vision Fund-like vehicles if they wanted to, said Dan Malven, a managing director 4490 Ventures.

"There are some incredible venture managers out in the world," Malven said. "If it made sense to manage a $100B fund, they probably would have done it."

Son initially looked set to disrupt the venture industry

Of course, hindsight is 20-20. If you believed the often breathless early press reports, SoftBank's megafund looked set to reshape the hidebound venture capital industry. With so much money at its disposal, the Japanese conglomerate could jump start whole new sectors and technologies. Companies could become the dominant players in their industries not because of their superior technology or products, but simply because they had access to SoftBank's huge pools of cash.

And Son seemed to be just the guy to lead the charge. After all, he was the visionary behind Yahoo Japan, had shown his prescience with an early bet on Alibaba and its founder Jack Ma, and had helped bring the iPhone to his home country, even building out a mobile network to convince Apple to let him do it.

But those early reports generally elided over some of the less flattering details of Son's record. He had a penchant for making investments on a hunch. He'd made a host of bad bets during the 1990s boom, and when they went sour with the dot-com bust, he lost his shirt. Indeed, his personal net worth plummeted by a reported $75 billion and SoftBank nearly went bankrupt.

The reports also didn't seem to spend a lot of time examining exactly how the Vision Fund would work in practice. It's one thing to have $100 billion at your disposal. It's another thing to figure out how to invest that much money.

SoftBank said it planned to invest in cutting-edge technologies, particularly in things like artificial intelligence and robotics, genome sequencing, semiconductors, and virtual reality. And its plan was to make investments of at least $100 million each — and often much bigger.

The reality has been somewhat different. While the Vision Fund has invested in some startups that are on technology's vanguard, many of its biggest investments are in companies that are a bit more pedestrian. WeWork, Uber, and DoorDash all use technology in their operations, but they're really just updated versions of commercial real estate, taxi, and food delivery services whose core differentiation was not their intellectual property but their ability to undersell or grow faster than competitors — thanks in large part to all the money they'd raised.

The Vision Fund's size and structure influenced its strategy

Something else that wasn't appreciated at first was the extent to which the Vision Fund's size and funding structure dictated how quickly it would deploy its capital and the size of its investments. If you're running a small fund, you can afford to make small bets. Not so if you're running the biggest fund ever.

"Trying to deploy $100B means you have to write billion-dollar checks or else you'll never make a dent," said Scott Baker, an associate professor of finance at Northwestern University's Kellogg School of Management.

But SoftBank's strategy was also influenced by the terms under which it got some of the money for the fund. The Vision Fund promised to pay a 7% annual cash dividend to investors who provided $40 billion of the fund's capital. That commitment — which translates into coming up with about $3 billion in cash every year — seems to have been a big inducement to invest the money as quickly as possible and as much as feasible into companies that would either go public or be acquired soon.

"There were a lot of convoluted things that were set up in the fund itself that actually forced him to deploy money so quickly," said Jai Das, president and managing director of Sapphire Ventures.

As if to prove that point, SoftBank had invested some $45 billion of the Vision Fund's capital by early last year — little more than two years into its life. Through March of this year — barely a year later — it had invested a remarkable $81 billion total. Since its inception, the Vision Fund has backed some 90 companies.

To put those numbers in perspective, the average venture fund might invest in 10 or maybe 20 companies in a year. Meanwhile the entire global traditional venture industry — which excludes SoftBank — raised just $75 billion in new funds last year, according to the National Venture Capital Association and PitchBook. And the entire amount invested in venture-backed startups in the US last year — including by SoftBank — was $133 billion.

Investing $100 billion quickly is problematic

There are lots of problems with trying to deploy that much capital in that many companies that quickly. One is that it can be hard to thoroughly vet investments. In at least some cases, Son and his team don't seem to have tried all that hard. He committed to making what turned out to be the Vision Fund's most notorious investment — into WeWork — after reportedly spending less than half an hour with the company's founder, Adam Neumann, and getting a whirlwind tour of the real-estate giant's headquarters.

The pressure to deploy money quickly helped "set up a culture within the Vision Fund team that they are more focused on getting the deals done and deploying the capital rather than focused on making the capital work and making the investments work," Das said.

Another problem is that it turns out that there are few companies that actually need that kind of capital all at once and can use it efficiently.

Startups typically have a natural rate of development, said Matt Murphy, a partner with Menlo Ventures. Companies like robot pizza maker Zume or car-sharing company Getaround that are pioneering new concepts need time to develop their business models, to match their product to the available market, and to show that there's real demand for what they're offering. Flooding those companies with lots of money doesn't help that evolutionary process, he said.

Likewise, with enterprise software companies, adoption of their software usually takes time, Murphy said. Companies adopt new software at their own pace, and potential customers often need to see their peers using new applications before they will buy into them. A massive funding round might allow a company to hire a huge sales team or to pour millions of dollars into marketing, but it can't really speed up that initial adoption rate, he said.

"All those things in some ways need to take their time to organically evolve, and when you try to come in and throw a bunch of dollars at it to accelerate it, it often won't work," Murphy said.

Few companies need the amounts of cash SoftBank was investing

Arguably, the ideal company in which to invest the kinds of sums SoftBank was throwing around is one that's already a large-scale enterprise, is losing lots of money — otherwise it wouldn't need the Vision Fund's cash — and still has a huge opportunity ahead of it so it can deliver a worthwhile return on all that invested capital, said Robert Hendershott, an associate finance professor at Santa Clara University's Leavey School of Business. But there just aren't that many companies out there like that, Hendershott said.

Among today's tech giants, Google and Facebook didn't need that much cash before becoming self-sustaining. Amazon did, but it raised the sums on the public markets after it had shown it could get its finances under control.

A massively successful company with still big prospects that's also bleeding huge amounts of red ink "isn't a complete oxymoron" Hendershott said, "but it is kind of an oxymoron."

The other big shortcoming of SoftBank's strategy was that the companies it invested in got addicted to the massive amounts of cash it gave them. Son and his team encouraged them to use the money to pursue hypergrowth while giving little thought to sustainability. That left many unprepared for the moment when SoftBank cut them off or outside pressures forced them to reckon with their huge outflows of cash.

More than a year after it went public, Uber is still trying to turn its finances around. WeWork's initial public offering failed after public investors blanched at its huge losses, and the company would have gone bankrupt if SoftBank hadn't bailed it out.

"When you pile that much cash and have those high of burn rates, the music's going to stop eventually," said Blair Garrou, a managing director at Mercury Fund.

The Vision Fund's many problems are becoming apparent

All those problems seem to finally be catching up to SoftBank. Several Vision Fund-backed companies, including Brandless and OneWeb, have shut down or filed for bankruptcy. Numerous others, including Zume, Oyo, Rappi, Uber, and WeWork have laid off thousands of workers combined. While the coronavirus crisis hasn't helped matters, many of the company's troubles predate it. WeWork, for example, first saw its valuation collapse last fall in the wake of its aborted public offering.

But the coronavirus seems to be bringing matters to a head. SoftBank reported this week that the Vision Fund lost nearly $18 billion in its fiscal year, which ended in March, including $10.2 billion in the March quarter alone. It now values WeWork at $2.9 billion, which is less than a third of what SoftBank alone has invested in the company. Son himself warned last month that 15 Vision Fund companies are likely to go bankrupt and the fund overall is now underwater, i.e, its total holdings are worth less than what SoftBank paid for them, collectively.

"It's a disaster," said David Erickson, a senior fellow in finance at the University of Pennsylvania's Wharton School of Business. "There's no real other way to think about it."

While acknowledging the carnage of unicorns in the Vision Fund, Son insists that some of the companies the fund bet on will grow wings and magically emerge from the current downturn, as illustrated in SoftBank's latest earnings presentations.

But there's a good chance that things could actually get worse from here. While the stock market recovered some in April, buoying the value of the fund's publicly held companies, the economy is still reeling from the coronavirus-related shutdowns. Companies — including Uber — continue to lay off workers, and consumer and business spending is still depressed. Many economists are forecasting a long recovery, which could prove daunting or disastrous to many of the Vision Fund's money-losing startups.

The original Vision Fund's poor performance is already dissuading its investors from backing a second one. It's almost certain to do more than that — discouraging anyone from trying anything like it again, at least in the foreseeable future. And with valuations of startups coming down nearly across the board, there's likely going to be little demand or need for the huge amounts of capital that a megafund offers.

It's possible that someday, someone will raise another $100 billion fund. After all, it's not unthinkable that sometime in the future there will again be the kinds of huge amounts of idle capital that enabled the creation of the Vision Fund. But it's unlikely that it will be raised by SoftBank or will operate anything like the Vision Fund.

It's much more likely it will be managed by a private equity fund with a proven record of managing huge sums. The fund likely won't focus solely or even primarily on venture investing. And it almost certainly won't try to disburse all its funds within three or so years.

"Trying to deploy $100B into private companies in a 3- to 4-year span ... it's inherently flawed," Malven said.

And while it's not impossible that certain Vision Fund companies survive the crisis and fly out of the ditch, as prophesized in SoftBank's slide, the exotic and oversized breed of startup funds that Masayoshi Son brought to the world is destined for the abyss. 

Got a tip about SoftBank or the venture industry? Contact Troy Wolverton 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.

SEE ALSO: SoftBank's $100 billion Vision Fund had a no good, very bad year in 2019, but was still in the black overall. Here's why experts are still struggling to make sense of it.

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A survey of thousands of SF Bay Area techies found that 2 out of 3 would consider leaving if they could permanently work remotely (FB, GOOG, TWTR)

Wed, 05/20/2020 - 7:25pm

  • A survey of thousands of San Francisco Bay Area tech workers found that two-thirds would consider leaving the region if they had the option to work remotely permanently.
  • The survey was conducted on Blind, a social network that allows employees of companies to participate anonymously.
  • The data highlights how coronavirus and new work-from-home policies may radically reshape the home of America's tech industry.
  • Respondents also overwhelmingly said they don't expect to be going back into offices every day after the end of the pandemic.
  • Click here to get BI Prime's weekly 'Trending' tech newsletter in your email inbox.

A survey of thousands of San Francisco Bay Area tech workers found that two-thirds of them would consider leaving the region if they were given the option to work from home permanently.

Anonymous work-focused social network Blind asked 4,400 workers — around 2,800 in the Bay Area, and 1,600 elsewhere — for their thoughts on working remotely and how it would affect their choice of where to live.  

The results, which Blind shared with Business Insider, offer a glimpse into how extensively the coronavirus pandemic has affected attitudes among workers in America's tech capital in just a few months, and could signal sweeping changes that reshape the region.

The coronavirus has forced companies around the world to transition abruptly to an entirely remote workforce, and some San Francisco-headquartered tech companies, notably social network Twitter and bitcoin startup Coinbase, have since announced they will allow most employees to work remotely after the lockdowns end.

The tech industry has long had a troubled relationship with the Bay Area. The region is beset with issues — many of them contributed to by the industry — from high costs of living to a major housing crisis and terrible traffic. Now its offices, shops, bars, and other amenities are off-limits due to coronavirus, some tech workers say they have no reason to stay and are considering leaving the region, and some real estate professionals in rival regions have said they've seen an uptick in interest.

Blind's survey attempts to quantify the depths of this desire to leave.

Asked if they would "consider relocating" if given the option to work from home as much as possible, just 34% of Bay Area respondents said no. Around 18% said they'd consider out of the metro area but in California, 35.7% said elsewhere in the US, and just under 16% said they'd consider out of the country.

Blind found similar results for Seattle and New York, two other high-cost metro areas that national hubs of the tech industry — 69.5% and 62.3% of respondents said they'd consider leaving the cities respectively.

Blind's data also illustrates a deep skepticism amongst respondents that offices will ever go back to "normal" after the pandemic ends. Asked how often they anticipate going into the office "post COVID-19," only 15.1% of respondents across all regions said every day. Most — 44.1% — said only 1-2 days a week, 26.4% said 3-4 days a week, and 14.5% said never.

There are limits to Blind's data that are important to note. It can only survey users of its app, and the people who take the survey have to choose to do so. This means it's sample isn't reflective of the population at large, and may not even be truly reflective of the entire technology industry.

But at the very least, it indicates a desire among thousands of tech workers to leave traditional metro areas and consider alternatives to traditional corporate offices — preferences that will influence the policies of their employers and the development of cities for years to come.

How is COVID-19 affecting your work? Contact Business Insider reporter Rob Price via encrypted messaging app Signal (+1 650-636-6268), encrypted email (robaeprice@protonmail.com), standard email (rprice@businessinsider.com), Telegram/Wickr/WeChat (robaeprice), or Twitter DM (@robaeprice). We can keep sources anonymous. Use a non-work device to reach out. PR pitches by standard email only, please.

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These are the winning strategies for AI in banking

Wed, 05/20/2020 - 6:00pm

Artificial intelligence (AI) applications are estimated to save banks $447 billion by 2023, and front- and middle-office AI improvements could represent more than 90% of these savings.

Leveraging AI tools like chatbots, voice assistants, and personalized insights can transform the customer experience by enabling frictionless, 24/7 interactions. Additionally, in middle-office banking, AI can be used to improve anti-money laundering efficiency and payments fraud prevention.

A recent OpenText survey found that 80% of banks are highly aware of the potential benefits presented by AI, but much fewer have taken the dive into implementation. When mindfully executed, AI can enable cost cuts, risk mitigation, and a better user experience, but what does winning execution look like?

In the Winning Strategies for AI in Banking report, Business Insider Intelligence looks at several effective strategies used to capture AI's potential in banking, and details how financial institutions like Citi and US Bank have successfully implemented some of these strategies.

This exclusive report can be yours for FREE today.

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Dow gains 369 points as investors consider economic-reopening prospects

Wed, 05/20/2020 - 4:04pm

  • US stocks rose on Wednesday as investors looked to positive signs of economic reopenings from coronavirus shutdowns.
  • Retailers continued to release earnings, with Lowe's gaining and Target declining after premarket reports.
  • Oil rose ahead of a key report from the US Energy Information Administration.
  • Read more on Business Insider.

US stocks rose on Wednesday as investors looked to positive signs of economic reopenings from coronavirus shutdowns.

The gains reversed Tuesday's losses, driven by reports that questioned the progress of a COVID-19 vaccine candidate from Moderna, snapping a three-day win streak for stocks.

All 11 sectors of the S&P 500 gained on Wednesday, led by financial, industrial, and energy groups.

Stocks pared gains slightly in the afternoon, falling from session highs, after the Senate passed a bill that could prohibit some Chinese companies from listing on American exchanges.

Here's where US indexes stood at the 4 p.m. ET market close on Wednesday:

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Investors watched a round of retail earnings before the bell on Wednesday that indicated that people had taken to home improvement and shifted to shopping online during sweeping lockdowns.

Lowe's popped 5% after reporting better-than-expected sales and profits but later pared most of those gains. Target slid 1% amid concerns over worsening margins.

Tech stocks also gained, leading the market higher. Facebook gained more than 6%, reaching an all-time high during intraday trading. Shortly after the market open, Amazon also briefly hit an all-time intraday high, rising as much as 2.1%.

Airlines also gained, with Delta, United, and Southwest all rising more than 4%. In the last hour of trading, Disney surged as much as 6% on reports that theme parks would begin making reopening presentations on Thursday. The parks' plans must be approved by Florida Gov. Ron DeSantis before they are allowed to reopen.

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States are slowly reopening their economies following sweeping lockdowns that began in mid-March to curb the spread of COVID-19. So far, 46 states have eased lockdown measures and restarted some activities, according to a Wednesday note from Bank of America.

Oil rose as traders saw signs of demand stabilizing following a hit from the coronavirus pandemic. West Texas Intermediate crude gained 3%, to $33.54 per barrel. Brent crude, the international benchmark, gained 5.2%, to $36.46 per barrel, at intraday highs.

Crude prices absorbed a US Energy Information Administration report that said inventories declined for the second week in a row.

The Federal Reserve's April 28 and 29 meeting minutes, released Wednesday afternoon, showed that US central bankers considered the coronavirus pandemic an extreme threat to the economy and were concerned about high levels of unemployment and potential bankruptcies.

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The Fed's April meeting minutes detailed a potential 2nd-wave virus scenario that could drag on the economy into 2021

Wed, 05/20/2020 - 3:45pm

  • Minutes from the Federal Reserve's April meeting detailed key risks facing the economy as coronavirus lockdowns dragged on.
  • Members of the Federal Open Market Committee found that a "more pessimistic projection was no less plausible" than a base case that featured economic growth re-emerging in the second half of the year.
  • Such a scenario would arrive on the back of a second wave of COVID-19 cases and feature a decrease in GDP, surging unemployment, and weak inflation lasting into 2021, the participants warned.
  • Members also noted the FOMC might need to provide greater detail around its asset purchases, as the unwinding of such relief programs could fuel market turmoil.
  • Visit Business Insider's homepage for more stories.

Minutes from the Federal Reserve's April meeting released Wednesday highlighted key risks emerging throughout the US as lockdowns pushed forward.

Members of the Federal Open Market Committee noted that "extremely elevated" uncertainty surrounding the outbreak rendered previous downturns far less helpful in modeling for the future. The central bank judged that a "more pessimistic projection was no less plausible" than a base case that featured a recovery taking place through the second half of 2020.

"In this scenario, a second wave of the coronavirus outbreak, with another round of strict restrictions on social interactions and business operations, was assumed to begin around year-end, inducing a decrease in real GDP, a jump in the unemployment rate, and renewed downward pressure on inflation next year," the central bank said.

Read more: The world's biggest hedge funds like Bridgewater are blending quantitative and fundamental trading. Here's why it's gaining hype on Wall Street.

All US states have since begun partial reopenings as the outbreak drags into its third month. While some states warn that hasty returns to normal threaten a resurgence in COVID-19 infections, others have expedited their reopenings to aid struggling economies.

The meeting ended with Fed officials leaving interest rates near zero and continuing the purchase of Treasurys and mortgage-backed securities. Several committee members "were concerned that banks could come under greater stress," the minutes showed.

Chair Jerome Powell followed the meeting with a bleak press conference in which he warned of permanent economic fallout sourced from the pandemic. The central bank chief has since announced that all nine of the Fed's lending programs will be operational by June, and reiterated that the authority would use all of its tools to bridge the virus recession.

The Fed's meeting arrived before a dismal April jobs report revealed 20.5 million payrolls erased and the unemployment rate skyrocketed to 14.7%. Meeting participants said weekly jobless claims pointed to "an extreme decline in employment" and feared that temporary layoffs would turn permanent against the weakened backdrop. More than 18.1 million Americans classified their job loss as temporary in the April report.

The central bank's staff addressed fears of uncertainty around the Fed's policy actions as well. Several participants noted that the FOMC might need to provide greater detail around its asset purchases. Several market experts have more recently warned that the Fed's unwinding of key relief programs could fuel fresh market volatility

Read more: The investment chief of a $12 billion wealth-management firm breaks down how to build the perfect portfolio using just 7 ETFs — one designed to sidestep a dramatically 'overvalued' stock market

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