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Credit Suisse says now's the time to sell Zoom following its coronavirus-driven 135% spike (ZM)

Thu, 04/09/2020 - 6:05pm

  • Zoom has gained 135% through March 23 as the coronavirus pandemic brought millions of users to its platform. 
  • On Monday, Credit Suisse downgraded Zoom to "underperform," the equivalent of a sell rating. 
  • Shares of Zoom fell as much as 9% Monday morning. 
  • "While implied new customer growth may seem undemanding compared to recently disclosed 20x participant growth, we expect much of the recent surge to be ephemeral, and/or comes from free users or education, which are very difficult to monetize," Credit Suisse said. 
  • Watch Zoom trade live on Markets Insider. 
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Zoom has been on a wild ride amid the coronavirus pandemic that's forced millions to work from home to curb the spread of disease. According to Credit Suisse, now is the time to offload the stock to capitalize on the company's gains. 

Credit Suisse on Monday lowered its rating on Zoom to "underperform," the equivalent of sell, citing increased competition and the company's sky-high valuation. Shares of the company slipped as much as 9% Monday morning while the broader market gained. 

"We commend Zoom for being a superhero of the current health crisis," a group of analysts led by Brad Zelnick wrote Monday, "though our responsibility as equity analysts compels us to distinguish great companies from great stocks." 

Zoom surged 135% to an all-time high close of $159.56 on March 23, boosted by the coronavirus pandemic and increased calls for social-distancing measures — the company said its paid and free usership has boomed to 200 million now from 10 million last year.

It's not been without trials however — the stock has fallen about 29% amid concerns over cyber-security and harassment on the platform. 

The downgrade centers on Zoom's "ultra-premium valuation," which is the richest in software, trading at roughly 40 times its enterprise value, according to the note. 

Read more: 'The whole world's f---ed': A former Goldman Sachs hedge fund chief says coronavirus fallout will cause the 'largest insolvency event in all history' — and warns of another 20% plunge in stocks

"While implied new customer growth may seem undemanding compared to recently disclosed 20x participant growth, we expect much of the recent surge to be ephemeral, and/or comes from free users or education, which are very difficult to monetize," Zelnick said. 

In addition, while Zoom is definitely benefiting from having the "the best product at the right time," the bank says that the overall video-conferencing sector remains competitive. Longer term, Credit Suisse thinks that Microsoft Teams, a competing video conference product, will be the most significant threat. 

Credit Suisse also sees that Zoom's security problems have led some high profile users to leave the platform, signaling low switching costs. The bank raised its target price for Zoom to $150 from $95, driven by a discounted cash flow analysis giving a higher probability to its upside scenario for the platform. 

Zoom is up 88% year-to-date through Friday's close.

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US consumer sentiment plunged the most on record in early April as the coronavirus froze the economy

Thu, 04/09/2020 - 5:30pm

  • The University of Michigan's consumer-sentiment index plunged by 18.1 points, to 71, in early April, according to preliminary data released Thursday.
  • The slide was led by the current-conditions index, which plummeted by 31.3 points, nearly double the record decline of 16.6 points set in October 2008.
  • "The free-fall in confidence would have been worse were it not for the expectation that the infection and death rates from covid-19 would soon peak and allow the economy to restart," Richard Curtin, the chief economist for the Surveys of Consumers, said in a statement.
  • Visit Business Insider's homepage for more stories.

A key measure of US consumer sentiment posted its largest-ever monthly drop in early April as the coronavirus pandemic hurtled the economy into a deep freeze.

The University of Michigan's consumer-sentiment index plunged by 18.1 points, to 71, in early April, according to preliminary data released Thursday. Over the past two months, the index has slumped 30 points, roughly 50% larger than the record.

The slide was led by the current-conditions index, which plummeted by 31.3 points, nearly double the record fall of 16.6 points set in October 2008. The other component of overall consumer sentiment, the expectations index, fell by 9.7 points; while the decline was still substantial, it was not near the record drop of 16.5 in December 1980.

"This suggests that the free-fall in confidence would have been worse were it not for the expectation that the infection and death rates from covid-19 would soon peak and allow the economy to restart," Richard Curtin, the chief economist for the Surveys of Consumers, said in a statement.

President Donald Trump has extended federal social-distancing measures through the end of April but is reportedly aiming to open as much of the economy as possible by that deadline.

Read more: 'The great unwind': A hedge fund chief overseeing $2 billion explains how a ripple effect could take down the housing market — and warns 'we're just at the beginning'

Still, data suggests it might be too optimistic to expect the US economy to quickly rebound after the coronavirus outbreak subsidies, as there has been a wealth of damage. In just three weeks, nearly 17 million Americans have filed for unemployment insurance as layoffs persist.

The situation already has consumers looking for relief. Recent data showed that requests to suspend or reduce mortgage payments skyrocketed last month.

"Anticipating a quick and sustained economic expansion is likely to be a failed expectation, resulting in a renewed and deeper slump in confidence," Curtin wrote.

Going forward, consumers should be prepared for a "longer and deeper recession rather than the now discredited message that pent-up demand will spark a quick, robust, and sustained economic recovery," Curtin said.

He added: "Sharp additional declines may occur when consumers adjust their views to a slower expected pace of the economic recovery."

Read more: C.T. Fitzpatrick has beaten 99% of his peers since the financial crisis. He shares his 4-part strategy for dominating a coronavirus-hit market — and names 6 companies that will benefit from the fallout.

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A fund nicknamed '50 Cent' made $2.6 billion hedging the coronavirus sell-off

Thu, 04/09/2020 - 5:30pm

  • A London fund nicknamed "50 Cent" made $2.6 billion hedging the market meltdown, the Financial Times reported.
  • Ruffer invested $22 million in VIX derivatives that surged to more than $800 million during the coronavirus sell-off.
  • Ruffer also made $1.3 billion from credit derivatives, $350 million from S&P 500 and Euro Stoxx put options, and $145 million from gold hedges.
  • "We have performed in a lackluster way for years, and part of the reason for that is because we were worried about a sell-off like this," Ruffer boss Henry Maxey said.
  • Visit Business Insider's homepage for more stories.

A London investment fund nicknamed "50 Cent" made $2.6 billion hedging the coronavirus sell-off, according to the Financial Times.

Ruffer, which manages roughly $23 billion in assets, invested $22 million in derivatives tracking the VIX volatility index, commonly known as Wall Street's "fear gauge." When coronavirus fears tanked stock markets, the VIX spiked to decade highs, netting the fund more than $800 million, the Financial Times reported on Thursday.

Ruffer gained another $1.3 billion by investing in credit derivatives that surged in value after corporate bond prices slumped, the newspaper said. It also netted $350 million from S&P 500 and Euro Stoxx put options and $145 million from gold hedges.

The gains offset Ruffer's losses elsewhere, limiting the decline in its flagship fund to 0.8% last quarter.

Read more: 'The great unwind': A hedge fund chief overseeing $2 billion explains how a ripple effect could take down the housing market — and warns 'we're just at the beginning'

"The essence of this was protection," Ruffer's investing chief, Henry Maxey, told the Financial Times.

"We have performed in a lackluster way for years, and part of the reason for that is because we were worried about a sell-off like this," he added.

Ruffer is nicknamed after the "In Da Club" and "Candy Shop" rapper because it snapped up VIX derivatives for 50 cents each in February 2018, the Financial Times said.

Other investors made similar gains during the sell-off. Universa Investments, a hedge fund advised by the "Black Swan" author Nassim Taleb and led by his protégé Mark Spitznagel, reportedly made a massive 4,144% return last quarter.

The billionaire Bill Ackman's Pershing Square spent $27 million on credit hedges that ballooned to $2.6 billion, offsetting losses in its equity portfolio and allowing it to cheaply boost its stakes in Berkshire Hathaway and other companies.

Read more: Bank of America explains why financial stocks have become the best source of rich dividend payments — and pinpoints 9 to buy right now

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Bank of America explains why financial stocks have become the best source of rich dividend payments — and pinpoints 9 to buy right now

Thu, 04/09/2020 - 5:30pm

  • Financial stocks contribute the most among S&P 500 sectors to dividends, according to Bank of America. 
  • Dividends and other forms of yield are more crucial for investors now that the economy is contracting.
  • Bank of America strategists identified nine stocks that will consistently pay dividends to long-term investors.  
  • Click here for more BI Prime stories

If you've been worrying lately about which stocks in your portfolio will continue paying out dividends, you're not alone. 

Data compiled by Bank of America shows that 46% of all actively managed money in the US resides in funds that are focused on yield. That share is up from just 17% in 2010.

Regular income from dividends — on top of returns that accrue from stock-price appreciation — is as crucial as ever now that economic activity is plummeting and companies are focusing on preserving cash.

In a recent note addressing clients' concerns about dividends, Bank of America strategists highlighted why the broader hunt for yield is particularly strenuous now. 

For starters, look back on the last 5,000 years of history: interest rates from bonds — the most reliable asset for steady income payments — are near their lowest levels. 

But you do not need to go that far into history in order to understand why yield generation has become more important during this crisis.

Back in 2008, more than 80 S&P 500 companies slashed their dividends as overall earnings per share halved. The biggest cuts came from the financial sector, which had contributed a quarter of the benchmark index's dividend payments. 

Fast-forward to a decade later, and companies at the heart of the Great Recession are playing a vastly different role. 

"Today, the biggest contributors to index dividends are tech and financials — both of which have lower EPS variability than the S&P 500, well below average payouts and clean balance sheets," said Savita Subramanian, the head of US equity and quantitative strategy.

What makes the financials sector stand out even more distinctly than tech stocks today is their dividend yield, calculated as annual dividend per share divided by stock price. Banks, insurers, and the like offer an attractive 3% dividend yield.

Additionally, the sector has the lowest payout ratio on the S&P 500, which bodes well for the sustainability of payments over time. 

Subramanian included a word of caution about taking dividend yield at face value. So-called yield traps are formed when stock prices fall faster than dividends, thereby changing the math more than the fundamentals. 

"Yield traps can often reside in the highest dividend-yielding quintile of the market," she said. "Quintile 2 by dividend yield is a simple screen to avoid yield traps, and has offered the best reward-to-risk ratio over time."

She pinpointed stocks on the Russell 1000 within the second quintile (60th to 80th percentile) as sources of sustainable dividends. 

The nine financial stocks on the list were:

  1. MetLife
  2. Progressive
  3. Fifth Third Bancorp
  4. Truist Financial
  5. Synchrony Financial
  6. Bank of New York Mellon
  7. Northern Trust
  8. AIG
  9. Zions Bancorp 

SEE ALSO: Morgan Stanley handpicks the 18 best US stocks to buy now while they're cheap to enjoy profits for years to come

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Oil tumbles, erasing earlier gains, as Saudi Arabia and Russia's production-cut agreement disappoints investors

Thu, 04/09/2020 - 5:29pm

  • Saudi Arabia, Russia, and key OPEC allies agreed on Thursday to slash crude oil production, a move that's expected to boost prices.
  • The agreement put an end to an oil-price war that's raged for weeks as the Saudis and Russians signaled production increases, diluting the resource's price per barrel.
  • US West Texas Intermediate crude rose as much as 12% on the news, while Brent crude gained 11% at intraday highs.
  • Oil erased gains and tumbled into negative territory during afternoon trading in New York as investors expressed disappointment in the degree of the production cuts.
  • Watch oil trade live on Markets Insider.

Oil tumbled on Thursday — erasing earlier gains of as much as 12% — as investors expressed disappointment in the degree of the production cuts agreed upon by Russia, Saudi Arabia, and OPEC+.

US West Texas Intermediate crude slid 6% to $23.39 a barrel. Brent crude, the international benchmark, fell 2.7% to $31.95 a barrel. Both saw double-digit gains wiped out as details of the accord emerged.

The agreement emerged from a virtual meeting on Thursday in which OPEC+ outlined a deal to slash production by 10 million barrels a day. That falls far short of the 35 million barrel-per-day demand decline expected in the wake of the coronavirus epidemic.

OPEC+ is also expected to seek an output reduction of 5 million barrels a day for G20 nations, Bloomberg reported. Thursday's discussions will set the pace for a Friday meeting with G20 countries including the US, another key oil-market player.

Read more: 'The great unwind': A hedge fund chief overseeing $2 billion explains how a ripple effect could take down the housing market — and warns 'we're just at the beginning'

The commodity has plummeted during the coronavirus pandemic, which has cratered global demand as flights were canceled and consumers were told to stay home. Meanwhile, OPEC+ was unable to agree on further production cuts after April 1, prompting Saudi Arabia and Russia to prepare to boost production to record levels.

That sent prices down further, with analysts and industry watchers forecasting even more pain ahead. The US Energy Information Administration this week slashed its 2020 outlook and said it would be a net importer of crude oil and petroleum for the first time since 2019 in an effort to aid talks.

Still, analysts worry that the production cuts won't be enough to significantly lift low oil prices. If it isn't, oil could fall below $20 per barrel again, RBC said.

Read more: Bank of America explains why financial stocks have become the best source of rich dividend payments — and pinpoints 9 to buy right now

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What UBS's US wealth business is learning from serving ultra-rich clients from home: 'If we wanted to have more people work remotely in the future, we could support that' (UBS)

Thu, 04/09/2020 - 5:10pm

  • Jason Chandler, the head of UBS's US wealth management operation, said this week that the business could support more people working from home following the coronavirus crisis. 
  • The bank has already learned lessons during the process of shifting global staff to socially distant working conditions, including how to serve clients remotely and lean on multiple communication channels.
  • Chandler said remote work has underlined how important digital tools are for the firm's army of some 10,000 financial advisers.
  • Visit BI Prime for more stories.

At UBS, the Swiss bank known as one of the world's largest wealth managers catering primarily to the rich, executives have been forced to navigate the novel coronavirus with a network of offices around the world.

And they're already considering more permanent changes to the way employees are operating.

Jason Chandler, the head of UBS's US wealth management operation, said that the unit is thinking about warming to more employees working from home since shifting to an unprecedented all-remote work arrangement in recent weeks.

"It gives us the confidence that if we wanted to have more people work remotely in the future, we could support that," Chandler said Wednesday on a call with reporters.

The bank, headquartered in Zurich, has some 68,600 employees around the world, with around a third of that workforce in global wealth management. The lion's share of its 10,000 financial advisers work in the Americas. 

The whole process has highlighted the many ways clients want to connect with advisers, whether that's through video-conferencing, email, phone calls, or texting, Chandler said. In an effort to connect to clients in different ways, the bank could look to invest in additional channels of communication. 

Communication between financial advisers and clients is often heavily monitored at big banks for compliance, so securing safe, efficient ways of getting in touch with social-distancing measures in place is critical for wealth managers.

Business Insider previously reported UBS's wealth management business recently completely overhauled its iPhone app, a sign that the most high-brow firms are trying to better utilize technology to cater to the world's richest clients.

Skype for Business is the firm's preferred video-conferencing software, Chandler said on Wednesday, because it's secure and that's what matters to clients.

"Our high-net-worth to ultra-high-net-worth clients want to make sure their data is secure," he said. "There's been some other reporting on some of the other video platforms where the security may not be as strong, so we're very pleased with that."

While he didn't mention it by name, the video-conferencing software Zoom is having a moment during the remote work wave the coronavirus pandemic has created. But industry experts have scrutinized its security, and this week Zoom — whose shares have soared this year — said it was forming a chief information security officer advisory board to better engage on matters of security.

Remote work highlights the need for strong digital infrastructure in wealth management

UBS has tried to strike a balance between offering clients digital tools and offering them a full-service financial adviser, whose entire value proposition versus some do-it-yourself investment options rests on the human touch. 

Some tweaks UBS has made have been meaningful for clients, Chandler said.

For instance, the daily mobile check deposit limit for high-net-worth and ultra-high-net-worth clients was raised from $1 million after hearing feedback from clients. A UBS spokesperson decline to specify the new limit, citing security concerns. 

He's also heard positive feedback on UBS's Asset Wizard, a tool that tracks clients' assets across banks. Aggregation tools can benefit banks who can see where clients are holding assets away from the bank.

"The interest in that in this work-from-home period has gone up incredibly," Chandler said, adding that he is increasingly looking at technology that advisers can use to assist them with clients. 

More broadly, UBS has "successfully managed very high volumes across our businesses, particularly in our trading operations," according to a separate Thursday presentation featuring a firm-wide overview. 

UBS said in the investor presentation that staff is working remotely wherever possible, and that in other regions it's incorporated "early lessons" firm-wide from implementing split-operations procedures in Asia.

Business Insider reported in early February that UBS had restricted employees' travel in China, and had implemented split-team policies in Switzerland in early March as precautions. 

SEE ALSO: UBS's Americas private-wealth head says he thinks losing a 'few hundred' advisers would not be a bad thing, and is looking at how robos can help keep the bank's richest clients

SEE ALSO: UBS is overhauling its iPhone app for wealth management clients — and it shows how the biggest wealth players are playing catch-up with Netflix-like personalization

SEE ALSO: Morgan Stanley, UBS, and Merrill Lynch execs explain how to nab a spot in their next-gen adviser programs and make it through the ultra-competitive, years-long training process

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Airbnb's losses swelled to $674 million last year, even before the coronavirus crisis crushed its business

Thu, 04/09/2020 - 4:10pm

  • Airbnb lost $674 million last year, which was hundreds of millions of dollars more than it lost in 2018, The Wall Street Journal reported.
  • The online travel company's revenue jumped 32% year-over-year, but its costs rose even faster, climbing to $5.3 billion.
  • The deterioration in Airbnb's bottom line came in advance of the coronavirus, which has throttled its business.
  • Airbnb had been seen as a model startup; now, some investors are calling for CEO Brian Chesky's head and for cost reductions, according to the report.
  • Visit Business Insider's homepage for more stories.

Even before the coronavirus crisis hit, Airbnb's bottom line had already dipped far into the red.

The online travel company lost $674 million in 2019, The Wall Street Journal reported Wednesday. It's unclear how much the company lost in 2018 — The Journal didn't report an exact figure — but a chart accompanying its article indicates it was less than $100 million. The Information had previously reported the company posted an $18.7 million operating profit in 2018, but that excluded interest costs and tax payments.

An Airbnb representative did not respond to an email seeking comment.

The widening losses came despite the fact that Airbnb's revenue in 2019 jumped 32% to $4.8 billion, as Business Insider previously reported. The company saw its expenses soar to $5.3 billion last year, The Journal reported. Again, The Journal didn't report Airbnb's 2018 expenses, but its chart indicated they were more than $3 billion.

Over the last two years, Airbnb's administrative, product development, and operations and support costs have all ballooned, according to The Journal's report. Its administrative expenses alone grew 113% between 2017 and 2018, The Journal reported.

The sharp decline in Airbnb's bottom line even before the epidemic hit could raise questions about its direction and business model. Previously, it was viewed as a model startup with an attractive business. But more recently, some investors have already pushed for the company to replace CEO Brian Chesky and to slash costs, The Journal reported.

Like other travel companies, Airbnb has been slammed by the coronavirus pandemic and the decision by many governments around the world to limit their citizens' movement. The company has seen cancellation rates on reservations in recent weeks of as high as 90%, market research firm AirDNA has reported.

Earlier this week, Airbnb announced it had raised $1 billion in new funding, but that came in the form of high-interest debt, The Journal has reported. Airbnb is reportedly looking to raise another $1 billion to help see it through the present crisis. Without additional funds, the company could run out of cash within the next year, according to a Business Insider analysis.

Got a tip about Airbnb? 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: Airbnb is paying hosts $250 million after they criticized the company for leaving them on the hook for coronavirus cancellations

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Meet Bill Ackman, the controversial hedge-fund manager who made $2.6 billion off the coronavirus market crash in March

Thu, 04/09/2020 - 3:22pm

While most of the world saw their nest eggs decimated as the stock market went into a free-fall over coronavirus fears last month, one hedge-fund manager was raking in billions.

Bill Ackman, the chief executive of Pershing Square Capital, made $2.6 billion for the hedge fund off a $27 million bet after the pandemic tanked the stock market. Ackman has a history of controversial bets that earned him a $1.6 billion fortune and an investigation by the New York District Attorney's Office, although no charges were ever filed.

A representative of Ackman at Pershing Square Capital declined Business Insider's request for comment on Ackman's career, net worth, property holdings, or family life.

Keep reading to learn more about Bill Ackman.

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William Ackman, 53, was born and raised in a wealthy suburb outside of New York City.

Ackman was raised in Chappaqua, the wealthy New York suburb of north of New York City, according to The Daily Mail. Chappaqua is also home to Bill and Hillary Clinton, Ben Stiller, and Vanessa Williams, according to The Daily Mail.

Ackman's father, Lawrence Ackman, owned a commercial real-estate financing firm, according to The Minneapolis Star Tribune. His mother, Ronnie Posner Ackman, serves on the board of New York's Lincoln Center, according to The New York Times.

Ackman earned an undergraduate degree and MBA from Harvard, according to Forbes. Shortly after graduating in 1992, Ackman founded a successful investment firm with a former classmate called Gotham Partners at age 26, The Minneapolis Star Tribune reported. The firm was successful but Ackman decided to wind it down in 2002, citing a series of lawsuits.



In 2003, Ackman was investigated by the New York State Attorney General over Gotham's trading practices but no charges were filed.

Gotham wrote and published an overwhelmingly positive article about one of its portfolio companies, Pre-Paid Legal Services, and subsequently sold its stock, according to The Minneapolis Star Tribune. Although no charges were ever filed, Ackman said the highly publicized investigation was difficult on his family.

"People look at you funny," Ackman told The Minneapolis Star Tribune of the incident in 2008. "I learned that it takes a lifetime to build a reputation, and someone can destroy it in a few days."



Ackman went on to found Pershing Square Capital Management with $54 million in 2004.

The money was a combination of funds from his personal fortune and a loan from Leucadia National, according to The Minneapolis Star Tribune. The firm was a near-instant success. In one of its best years, 2014, Perishing Square posted 40% returns compared to the S&P 500's 13% gain the same year, according to Investopedia.

Pershing Square has large stakes in Chipotle Mexican Grill, Starbucks, and Burger King owner Restaurant Brands International Inc., Bloomberg reported. The value of its total assets tops $6.5 billion, according to Forbes.



In a 2014 interview with Bloomberg, Ackman said his rules for investing are to be bold, do the opposite of what everyone else is doing, and do lots of research.

Ackman's hedge fund made most of its money by purchasing stakes in large corporations, lobbying management to make changes to drive up its stock price, and later offloading their shares at a profit, The Minneapolis Star Tribune reported in 2008. For example, Pershing Square bought a large stake in fast-food burger chain The Wendy's Company in 2004, pressed it to sell off its successful Canadian subsidiary Tim Hortons, and went on to cash out its investment at a profit, according to Investopedia.

"His game is to drive up the stock and get out — fast," Howard Davidowitz, then-chairman of a New York investment banking and consulting firm, told The Minneapolis Star Tribune of Ackman in 2008.



But Ackman is widely considered to be an activist investor, according to Markets Insider.

"What we do for a living, buying stakes in companies and working to make them more valuable, more efficient, more effective, I think it's great for the shareholders, I think it's great for the employees," Ackman told Bloomberg. "I think I can do some good with that, and it's also very profitable. So I like my day job."

Pershing Square's success made Ackman a billionaire. He first appeared on Forbes' billionaire's list in 2013.

Source: Markets Insider



Ackman's bold bets have made Pershing Square a lot of money — but they have also cost the hedge fund billions too.

Ackman's 2012 short against multilevel marketing supplement maker Herbalife was one of the most high-profile missteps of his career, according to Investopedia. Ackman bet $1 billion that the company would fail, while fellow billionaire investor Carl Icahn made a long-term investment in the company, Business Insider previously reported. Ackman publicly accused Herbalife of being a pyramid scheme whose stock price was bound to hit zero, according to The Wall Street Journal.

Icahn and Ackman got into a public fight over the company's prospects that was called "the hedge fund equivalent of Stalingrad" by The Journal, with Icahn eventually emerging victorious. Ackman lost hundreds of millions of dollars on Herbalife, Business Insider reported.

Ackman also made a controversial investment in near-bankrupt drugmaker Valeant Pharmaceuticals that resulted in a contentious Senate hearing over Valeant's practice of buying existing drugs and selling them at inflated prices in 2016, Business Insider reported at the time. Valeant has since been renamed Bausch Health.

Pershing Square also lost money on bets on now-defunct bookseller Border's Group and big-box retailer Target Corporation, according to Investopedia. The losses put the hedge fund into what Bloomberg called a "three-year losing streak" in 2019.



Ackman's hedge fund made billions of dollars when coronavirus fears sunk the stock market in March.

The stock market dropped 30% in March, the fastest drop of that size in a century, according to Forbes.

Pershing Square invested $27 million in credit protection on investment-grade and high-yield bond indexes earlier in 2020, when the market was widely perceived to be healthy, according to Markets Insider. The hedge fund made $2.6 billion selling them off as the market crashed in March, Markets Insider reported.

Ackman has since used the profits to bolster Pershing Square's investments in Berkshire HathawayHiltonLowe'sRestaurant Brands International, Starbucks and Agilent, Markets Insider reported.



Ackman was accused of purposefully sinking the market to boost his profits.

Ackman made an appearance on CNBC on March 18, proclaiming that "hell is coming" because of the outbreak, after tweeting similar sentiments earlier in the day. Ackman's comments sent the already volatile market down, prompting accusations from various news outlets and on social media that Ackman went on television with the intent of making his bet against the market more profitable, Forbes reported.

Markets plunged so sharply that the market hit a so-called circuit breaker, halting trading for 15 minutes, Markets Insider reported.

The billionaire defended himself in a statement to Pershing Square investors, writing that "By Wednesday, March 18th at 12:30 p.m., when I appeared on CNBC, we had already sold slightly more than half of the notional amount of our CDS, realizing a gain of more than $1.3 billion, with the unrealized portion of our hedge having a market value at that time of $1.3 billion for a total of $2.6 billion," Ackman wrote in a press release. "Importantly, our hedge had already paid off prior to my going on CNBC."



Ackman also ruffled feathers by defending a fellow hedge-fund manager who has been linked to Bernie Madoff.

Ezra Merkin secretly invested his client's money with Bernie Madoff, losing billions after the Ponzi scheme was exposed, according to Bloomberg. Merkin was investigated by the New York Attorney General as a potential coconspirator of Madoff's but settled his case in 2012.

"I've known him for 15 years," Ackman said. "I think he's an honest person, an intelligent person, an interesting person, a smart investor. People don't want to hear that because if you invested with Ascot you lost all your money."

Fellow hedge fund manager Michael Steinhardt of Steinhardt, Fine, Berkowitz & Co. also publicly defended Merkin, according to The Street.



Ackman credited his new family for inspiring his profits.

"Maybe it has something to do with being loved and getting married?" Ackman said of his successes at an investor conference in April 2019, Bloomberg reported.

Ackman and his wife, retired Israeli Air Force lieutenant and MIT professor Neri Oxman (who is also known for being a rumored ex-girlfriend of Brad Pitt), welcomed a daughter in the spring of 2019, according to Bloomberg.

The couple got together in 2017, after being introduced by both Ackman's former professor and a college friend following a contentious divorce from his first wife, landscape architect Karen Ann Herskovitz, according to Page Six.

Ackman and Herskovitz have a "civil, but not warm, relationship," an unnamed source told Page Six in 2017. The former couple share three daughters, according to Page Six.



Ackman pledged to give at least half of his fortune to charity.

Ackman signed The Giving Pledge with his former wife in 2012, writing in a letter to Pledge founder Warren Buffett that he was "quite sure that I have earned financial returns from giving money away," because of all he learned while doing charitable work.

Ackman has given more than $400 million in grants to organizations focusing on cancer research, education, economic development, and social justice, according to his foundation's website.

Ackman and his former wife also gave $26 million to Harvard in 2014, according to Philanthropy News Digest.



He spent a large chunk of the rest of his money on an expansive portfolio of luxury real estate.

Ackman bought a $22.5 million penthouse in the neighborhood, The Wall Street Journal reported in 2018. Ackman also owns two other units in another luxury pre-war building on Manhattan's Upper West Side that cost nearly $22.1 million combined, The Journal reported.



They also own a six-acre estate in the Hamptons.

Ackman purchased the properties, which are located in the town of Bridgehampton, for $23.5 million in August 2015, according to The Real Deal.

The combined value of Ackman's real-estate portfolio is more than $165 million, according to The Daily Mail.



In his free time, Ackman is an avid tennis player.

Ackman has been playing since childhood, according to Forbes.



Ackman also has an interest in politics.

The billionaire hedge-fund manager made remarks supportive President Trump just days after the 2016 election, according to Vanity Fair. "The US is the greatest business in the world," Ackman said during an appearance at The New York Times' Dealbook conference in November 2016. "It's been undermanaged for a very long period of time. We now have a businessman as president," Vanity Fair reported Ackman said.

Ackman hasn't always been a supporter of Trump, however. In 2016, Ackman penned an essay in The Financial Times asking Bloomberg LP CEO and former NYC mayor Mike Bloomberg to run for president. "America is burning," Ackman wrote for The FT. "Yet there is hope. The key is finding the right leader. And that leader is Mr. Bloomberg."

Ackman supported President Obama in the 2008 election, and but donated to Sen. Mitt Romney in 2012, The New York Times reported. Ackman has donated money to members of both political parties, but favors Democrats, according to The Times.



Dow climbs 300 points as new Fed stimulus offsets historic unemployment filings

Thu, 04/09/2020 - 2:31pm

  • US stocks climbed on Thursday, continuing gains from Wednesday, as the Federal Reserve announced an additional $2.3 trillion in aid to businesses and governments.
  • Data released on Thursday morning showed that weekly unemployment claims soared for a third week in a row, hitting 6.6 million for the period ended April 4.
  • Oil rallied on expectations that OPEC and its allies will soon agree on production cuts — a virtual meeting between the group starts Thursday.
  • Read more on Business Insider.

US stocks climbed on Thursday, continuing Wednesday's gains, as the Federal Reserve announced an additional $2.3 trillion in aid to businesses and governments.

The new Fed measures include an array of new programs to help boost the economy hit by the coronavirus pandemic. The central bank will also buy investment-grade and junk bonds. 

"Main Street should be feeling a slight sense of relief today," Seema Shah, chief strategist at Principal Global Investors, told Business Insider. "The latest measures emphasize how committed the Fed is to providing relief and economic support where they can, stretching outside the typical toolkit in order to deliver assistance."

Here's where major US indexes stood at 2:30 p.m. ET on Thursday:

Read more: 'The great unwind': A hedge fund chief overseeing $2 billion explains how a ripple effect could take down the housing market — and warns 'we're just at the beginning'

The Labor Department also reported on Thursday morning that weekly jobless claims hit 6.6 million in the week that ended April 4. The number was slightly lower than last week's record, which was revised up to 6.7 million.

Still, nearly 17 million filings for unemployment insurance in three weeks is unprecedented, as the coronavirus outbreak continues to wreak havoc on the US economy.

"The catastrophic scale of the COVID-19 crisis is even more apparent," Ron Temple, head of US equities at Lazard Asset Management, told Business Insider. "While the Fed has acted quickly, it is critical that the fiscal stimulus in the CARES Act be delivered immediately and be of sufficient size to support the economy."

Stocks gave up some of their gains later in the day when Democrats in Congress moved to block an $250 billion in aid for small businesses. The plan had been unanimously put forward by Senate Republicans. 

Oil spiked as much as 12% before paring some of those gains after Saudi Arabia, Russia, and the OPEC+ coalition agreed to slash crude oil production. The agreement puts an end to a weeks-long battle that's depleted the resource's price.

Read more: Bank of America explains why financial stocks have become the best source of rich dividend payments — and pinpoints 9 to buy right now

Investors also watched the news about the coronavirus pandemic. US deaths from COVID-19, the illness caused by the coronavirus, were at more than 14,700 on Thursday, with about 430,000 cases. Globally, there were 1.5 million cases and more than 88,000 deaths. Some countries in Asia have seen a resurgence in cases after lifting protective lockdowns, sparking fear that the same could happen elsewhere.

Further, Consumer sentiment slumped by the most on record in early April, according to a preliminary reading from the University of Michigan Surveys of Consumers released Thursday. 

"Consumers need to be prepared for a longer and deeper recession rather than the now discredited message that pent-up demand will spark a quick, robust, and sustained economic recovery," said Richard Curtin, chief economist of Surveys of Consumers, in a statement. 

Markets will be closed Friday in observance of Good Friday in the US.

Read more: C.T. Fitzpatrick has beaten 99% of his peers since the financial crisis. He shares his 4-part strategy for dominating a coronavirus-hit market — and names 6 companies that will benefit from the fallout.

Join the conversation about this story »

NOW WATCH: How waste is dealt with on the world's largest cruise ship

Activist defense attorneys are blasting investors for scooping up shares during the coronavirus crisis, setting off a war of words involving top law firms and Wall Street titans like Carl Icahn

Thu, 04/09/2020 - 1:42pm

  • Over the past month, as the coronavirus spread throughout the globe, some activist investors increased their stakes in public companies on the cheap.
  • The activity prompted law firms, including influential activism defense firm Wachtell Lipton, to issue memos, calling out what they perceived to be "aggressive" behavior. 
  • Now, a longstanding debate surfaces yet again about the role of the activist, a name that at least some in the profession wish to change, given its connotation of pushing for change at a company for profit. 
  • Business Insider documented the spat between these investors and attorneys who are paid to defend their targets. Reach out to us with any tips or comments about the latest activism activity. 
  • Click here for more BI Prime stories.

On the last day of March, two partners at the law firm of Wachtell Lipton polished off a memo to their clients, lawyers, and Wall Street at large, and touched a nerve in the tight-knit community of activist investors and their advisors. 

The memo, titled "Activists Will Show Their True Colors in COVID-19 Pandemic," struck at the heart of a long-running tension between investors who mount stakes in public companies, sometimes to overhaul management, and the people who defend the boards of directors of the businesses they target.

This time around, the defense side was zeroing in on whether activist investors were taking advantage of the depressed market by aggressively pushing forward campaigns while businesses were at their most vulnerable, during the spread of the novel coronavirus. 

The disease, which scaled up in late February, now has killed more than 80,000 people worldwide and wrought chaos at shuttered hotels, airlines, and amusement parks, some of which have had to seek emergency loans to keep themselves afloat as government officials order U.S. citizens to stay indoors.

While that's meant consumers have kept money in their wallets the past month, the same cannot be said for activist investors.

"A number of activist investors continue to over-reach in their private (and public) demands of companies and are seizing the opportunity from reduced valuations to increase their positions in existing targets and build new positions," wrote Wachtell partners David Katz and Sabastian Niles.

Disclosures to the US Securities and Exchange Commission of building more than 5 percent stake in companies — otherwise known as 13D filings — accumulated in March as stock markets plunged, and many activists are fundraising to have additional firepower, they wrote. 

Meanwhile, some activists are continuing to make "aggressive buyback demands" and "ill-advised attempts to remove key board members and board leaders with the experience and judgment to help the company navigate the current crisis," the firm wrote.

Comments like those, of course, may make companies want to hire Wachtell as a top activism defense firm, making it far from an unbiased observer. 

The firm, founded in 1965, has made its name — and hefty fees — for defending companies against hostile takeovers and has cultivated a warchest of legal and strategic maneuvers that boards of directors can use to protect themselves from being unseated in activist campaigns.

The comments show how the defense side is gearing up and leaning on painting some activists as opportunists amid a crisis. So far, it appears that companies are listening.

A review of 13D filings and sources familiar with them turned up multiple instances of activists mounting stakes in public companies — so much that they have triggered management to enact poison pills, a defense strategy designed to protect against a hostile takeover.

These companies include natural gas pipeline operator Williams Companies, budget airline Spirit, oil and gas exploration and production company Occidental Petroleum, and Chefs' Warehouse, which sells upscale food to restaurants. 

Although Wachtell gave some activist investors credit, saying that they gave management "breathing space" during the emergency, that was not the main takeaway for activists and their advisers who read the memo and spoke with Business Insider in the subsequent days.

Some of them grumbled privately about how the law firm was trying to market their services to prospective clients and that the depressed market didn't mean activists should be laying down their weapons — to the contrary, it meant companies needed good management more than ever and activists should be fighting for it.

Others were not so private with their response.

"It's reprehensible, yet unsurprising, that Wachtell is twisting this crisis and unprecedentedly difficult economic environment into an opportunity to bash activist investors," said Andrew Freedman, an attorney who has represented activists in some of their biggest campaigns, including Starboard Value's stake in Papa John's and AECOM, as well as Elliott Management's stake in eBay.

No 'get out of jail free' card

Freedman said activists understand as well as anyone what public companies are facing in this pandemic and are, by and large, acting thoughtfully and considerately in their board engagements.

"Wachtell would like people to believe that this coronavirus crisis should be a 'get out of jail free' card for boards and management teams that were performing terribly well before this pandemic came along," he said. 

He also said that there have been a bevy of settlement pacts reached over the past month, showing that activists are willing to work through issues behind the scenes.

"The situations that have not settled are more reflective of boards behaving badly by refusing to embrace the changes that are required and where they are being advised that activists should just walk away," he said. "Why should investors trust a board and management team that failed to perform on a 'clear day' to manage through this crisis where the stakes are even higher?"

Business Insider reached out to Katz and Niles, who did not offer a response to Freedman's comments. We'll update this article if they do. 

'Like any investor'

The activists, for their part, are not apologizing for buying what they deem as a valuable security at a low price.

"We're price sensitive like any investor," said Ted White, managing director of Legion Partners, the firm that increased its holdings in Chefs' Warehouse. Legion had previously been invested with the company and still likes the long-term growth potential, White said. 

The drop in global markets made the stock "ridiculously cheap," White explained, as Chefs' Warehouse's stock fell from nearly $40 a share at the start of the year, to a low of under $4 on March 18. The stock has since risen to more than $8 a share.

"As bad as all this is, it has reduced valuations in the marketplace."

Others feel the same way — that opportunity is opportunity and investors are simply doing what they do best: creating value for shareholders and making money of their own along the way. 

At tea-and-coffee distributor Farmer Brothers, the same day hedge fund Trigran Investments filed its increased stake, March 30, the company announced it had "eliminated" positions across the business and furloughed half of its employees.

"The Company is working to evaluate any relief available through the CARES Act, including through industry associations, as well as any other efforts to support the food industry as a pillar of critical infrastructure," the firm said in a release. 

There's no indication that Trigran pressed for the layoffs or furloughs. Trigran bought in after a sharp selloff — the company's stock price began the year trading at more than $14 a share, but has since fallen to roughly $7 a share.

Trigran and Farmer Brothers did not respond to requests for comment.

Lawyer takes aim at Icahn

Wachtell isn't alone in its rhetoric and, while its own memo did not name names, another firm called out billionaire Carl Icahn.

"While there are a few socially responsible activists, there are many activists who don't see a humanitarian disaster of epic proportions, they see an opportunity to generate profits," Kai Liekefett, a Sidley Austin lawyer who defended AT&T in Elliott Management's activism campaign last year.

Liekefett pointed Business Insider to a memo from Sidley Austin that highlighted Icahn's CVR Energy acquiring almost 15 percent of Delek US Holdings in mid-March, which quadrupled his stake.

The Sidley memo said that "most activists" are abandoning their campaigns for the 2020 season, as many funds "are struggling to survive after suffering millions or billions of losses," but that some, like Icahn, were not.

The memo recommended that boards of public companies should, at a minimum, make sure they have an "up-to-date poison pill on the shelf and consider whether to adopt one."

"These activists exploit the low stock prices and high trading volumes in order to covertly and rapidly accumulate large stakes in target companies," he said.

"They count on boards and management teams being distracted by the crisis. And they attempt to force quick settlements knowing that companies strongly prefer not to be distracted by proxy contests in these times."

When reached for comment about the memo, Icahn's general counsel Jesse Lynn noted that Sidley Austin is representing Delek.

"It's interesting that Sidley Austin has decided to become so sanctimonious about the pandemic since they are the ones profiting from the crisis by charging egregious fees, at the expense of Delek shareholders, by scaring the board and management into believing that the company should need protection from accountability to its own shareholders," Lynn told Business Insider.

Lynn also pointed out that Delek has a poison pill agreement that doesn't let Icahn take a stake higher than 15%, and the company's next annual meeting is more than a year away.

"But most importantly, CVR started buying the stock well before the pandemic, at a much higher price, and simply averaged down, thereby helping Delek shareholders by holding up the price of the stock."

No going back to 'normal'

In recent weeks, Icahn settled with Occidental Petroleum, and Elliott Management has made nice with Twitter and French conglomerate Capgemini.

Starboard Value, the activist fund led by Jeffrey Smith, settled with Box recently, but has ramped up pressure on eBay to change its board and oust the current CEO.

Wei Jiang, a professor who teaches activism at Columbia Business School, said that businesses should not expect to go "back to normal" if normal means "the protocols of the past, even after the pandemic is over."

"Certain elements of business operations will fundamentally change as people get more comfortable with business and life online, and (hopefully) change their life habits as they take a probabilistic view about recurring pandemics," she said.

"These are both challenges and opportunities to most businesses. Shareholders have the right to demand that firms adopt such a forward-looking view, beyond dealing with the crisis."

Some activists, though, say they want their businesses to focus, in the short-term, on getting through the pandemic. 

According to White, the Legion managing director, his firm isn't looking to change much with Chefs' Warehouse, "where there's a lot of things we like." 

"This is a time to hunker down, take care of your employees and your customers," he said.

The investor has yet to speak with management, he said. 

Contact us: Please feel free to reach out to Casey Sullivan, at csullivan@businessinsider or on Signal at 1-646-376-6017, and Bradley Saacks, at bsaacks@businessinsider.com or on Signal at 1-919-816-5537, for news on corporate activism. 

SEE ALSO: Meet Jesse Cohn, the hedge fund wunderkind looking to oust Twitter CEO Jack Dorsey

SEE ALSO: Private-equity execs are calling lawyers to ask about activist strategies after KKR's splashy stake in Dave & Buster's

SEE ALSO: We talked to 14 private-equity insiders about how they're planning to play the coronavirus turmoil. They identified 2 huge opportunities.

Join the conversation about this story »

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

'There's every reason to think' the economy can recover quickly if the government continues issuing aid, Fed chair Jerome Powell says

Thu, 04/09/2020 - 12:18pm

  • A combination of ample fiscal aid, monetary stimulus, and public health planning can place the ailing US economy "back on the road to recovery fairly quickly," Federal Reserve chair Jerome Powell said in a webinar with the Brookings Institution on Thursday.
  • The economy's stable position before the coronavirus outbreak will aid in ensuring a swift rebound once the virus is contained, he added. 
  • Powell's remarks arrived hours after the central bank announced an additional $2.3 trillion in monetary aid aimed at businesses and state and local governments.
  • Visit Business Insider's homepage for more stories.

As economists forecast a deep US recession driven by the coronavirus pandemic, Federal Reserve chair Jerome Powell is optimistic toward the economy's long-term trend.

The central bank chief appeared in a webinar with the Brookings Institution Thursday morning soon after the Fed announced an additional $2.3 trillion in monetary aid. Powell assured the bank would use its monetary policy tools "forcefully, pro-actively, and aggressively" until the economy is on track for a recovery, adding that the programs implemented were made possible through emergency authority.

"Many of the programs we are undertaking to support the flow of credit rely on emergency lending powers that are available only in very unusual circumstances," he said.

The new monetary relief arrives on the back of a $2 trillion stimulus measure that issued critical aid to individual Americans, businesses, and struggling corporations. Legislators have since mulled a new fiscal package as unemployment skyrockets and the outbreak worsens around the country.

Read more: 'The great unwind': A hedge fund chief overseeing $2 billion explains how a ripple effect could take down the housing market — and warns 'we're just at the beginning'

Though the Fed chair avoided passing judgment on how Congress should allocate fiscal relief, he noted that cooperation between the central bank, lawmakers, and healthcare officials should keep the economy intact and on track for a bounce-back once the coronavirus is contained.

"There's every reason to think we can be back on the road to recovery fairly quickly and that can be a robust recovery," Powell said.

Much of the government's aid has been geared toward supporting payrolls and keeping Americans hired despite widespread business closures. Jobless claims released Thursday morning showed 6.6 million Americans filing for unemployment benefits in the week ended April 4, bringing the three-week total past 16 million filings. 

Despite the sudden spike in joblessness, Powell contended the economy was healthy before the outbreak. The stability seen at the start of the year will drive a swift rebound, and the Fed plans to use all policies available to ensure a smooth transition into another bout of steady growth, he added.

"We entered this turbulent period on a strong economic footing, and that should help support the recovery," Powell said. "In the meantime, we are using our tools to help build a bridge from the solid economic foundation on which we entered this crisis to a position of regained economic strength on the other side."

Read more: Bank of America explains why financial stocks have become the best source of rich dividend payments — and pinpoints 9 to buy right now

Join the conversation about this story »

NOW WATCH: How waste is dealt with on the world's largest cruise ship

11 tax deductions you won't want to forget about this year

Thu, 04/09/2020 - 11:54am

  • Tax deductions like medical expenses, mortgage interest, and, in some cases, college tuition can help reduce your overall tax bill.
  • Note that these types of tax deductions apply only if you're itemizing your taxes instead of taking the standard deduction, which increased as part of 2017 tax reform.
  • If you have questions about your personal tax situation, consult a licensed tax attorney or accountant.
  • This post has been reviewed for accuracy by Thomas C. Corley, CPA.
  • See Business Insider's picks for the best tax software.

You may have seen or heard people you know talking about how the new tax law made their refunds smaller than expected last year, or even increased the amount they owed to the IRS.

Several common deductions were eliminated by the Tax Cuts and Jobs Act of 2017 and other congressional actions, including moving expenses, nonreimbursed employee business expenses, theft losses, tax-preparation fees, and safe deposit boxes.

Though things have changed, here are a few deductions and credits you'll want to remember to keep your tax bill as low as possible.

Reminder: If you have tax questions, talk to an accountant or an attorney.

1. Medical expenses

If you paid out of pocket for medical expenses, you might be able to deduct them on your taxes. What qualifies as a medical expense is broadly defined and includes the obvious doctor's visits, tests, and prescription drugs, as well as health-insurance payments, dental and vision costs, medical devices, transportation to and from medical appointments, lodging if you need to travel for medical reasons, and accessibility-related home renovations. However, you can deduct those expenses only if they exceed 7.5% of your adjusted gross income.

2. Home-mortgage interest

If you own a home, you probably already know about this one — it's one of the most significant tax deductions available to most families. You can deduct the interest you paid on a home mortgage valued up to $750,000 (up to $1 million if your mortgage was issued before December 15, 2017). If you have a home-equity loan, the interest on that may no longer be deductible.

3. State and local (SALT) taxes 

This one got a lot of attention because it was one of the most significant changes to the tax code. If you pay state or local income taxes (you probably do), property taxes, or other taxes to a state or local government, you can deduct those from your federal tax return — up to $10,000, regardless of whether you're single or married filing jointly. Separate married filers get $5,000 each. This deduction was previously uncapped, so the limit is a big hit to people who pay a lot of local taxes.

4. Charitable contributions

Charitable donations are still deductible. Make sure to keep evidence of your contributions — bank or credit-card records for all donations and an acknowledgment letter from the nonprofit if the donation was more than $250 will suffice. If you donate money to a college or university and receive sports tickets in exchange, you'll need to exclude the value of those tickets from the deductible amount.

As part of the CARES act, the $2 trillion measure for coronavirus relief, the US government has included an above-the-line deduction for charitable donations up to $300, beginning with 2020 taxes — the next tax filing cycle. "Taxpayers will be able to claim up to $300 in cash contributions made to a nonprofit charity this year as a deduction from their gross income if they take the standard deduction on their 2020 tax return," reports Business Insider's Tanza Loudenback. "This deduction will ultimately reduce the amount of your income that's taxable." 

5. Losses from natural disasters

"Casualty losses" — damage or destruction of property because of a sudden event — are deductible if they occur in a federally designated disaster area. You can look up federal disasters on the Federal Emergency Management Agency website — there are more than you might think.

6. Gambling losses

If you're a gambler, you can deduct money that you spent on gambling up to your total winnings for the year. So if you spent $5,000 at Las Vegas casinos and won a $1,000 jackpot, you could deduct only $1,000 of your gambling losses.

7. Childcare expenses

If you pay for childcare so that you or your spouse can work or attend school, you may be able to get a tax credit for some of the money you spend on childcare expenses. You can claim up to $3,000 in expenses per child, and the credit (the amount deducted from your tax bill) is worth 20 to 35% of your expenses depending on your income.

8. Expenses related to a small business, freelancing, or independent contract work

If you have a small business, or you work as an independent contractor in the "gig economy" (ride-share drivers, scooter chargers, food deliverers, personal shoppers, etc.), you'll want to make sure you're deducting all the expenses related to your business.

This includes mileage if you drive your own vehicle, commissions and fees paid for using apps to find work, equipment (including your phone and computer — you can deduct a percentage that corresponds to what percentage of the time it's used for business purposes), relevant software or subscription services, and your health-insurance premiums.

If you have a home office or other part of your home that's specifically dedicated to your business, you can deduct the percentage of your household expenses (rent, utilities, etc.) that apply to that space.

All these expenses are calculated separately from personal deductions on Schedule C, so you don't have to rely on itemizing your taxes to take these deductions. And keep in mind that you're paying both income tax and self-employment tax on your small-business income — so you've got an added incentive to make sure you're taking all the deductions you're entitled to.

9. New  'qualified-business-income' (QBI) deduction

If you have income from a small business, you may qualify for a new "qualified-business-income" (QBI) deduction of 20% of your business' net income. This is calculated separately from both the personal deductions and your business expenses, and additional restrictions apply above certain income levels. Your tax software or tax preparer should calculate this automatically if it applies to you. And let's face it: If your taxes are this complicated, it is probably worth paying someone to make sure they're done correctly.

10. Higher-education expenses

Two tax credits apply to education expenses — depending on which one you qualify for, you can likely claim some of the cost of tuition and required fees and may also be able to deduct the cost of books and materials. Education credits can be complicated, so you'll want to rely on your tax software or accountant to figure out which one is best for you.

If you have student loans — or made payments toward loans in someone else's name, like a partner or child —  you can deduct the interest you paid during 2018. If it's someone else's loan, make sure to ask them for Form 1098-E, which they received from their lender.

The tuition-and-fees deduction was extended for 2019. This deduction is capped at $4,000 for people with adjusted gross income up to $65,000 ($130,000 for married filers) and begins to phase out as your adjusted gross income exceeds $65,000 (or $130,000 for married filers).

These credits and deductions apply even if you take the standard deduction.

11. Rental expenses

If you rent out a room or apartment through a service like Airbnb or Vrbo, you need to report the income you receive from that rental — but you can also deduct any related expenses, including a proportional share of your mortgage or rent and utilities, cleaning costs, advertising, and decor or furnishings.

If you own the property, you can also take a depreciation deduction on the rental-use percentage of your home or apartment. Make sure to deduct any fees paid to the platform you rent through. If you rent property, you can deduct related expenses even if you take the standard deduction.

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Read the full memo Goldman Sachs just sent naming 4 execs to lead its private-equity investments across the merchant-banking division

Thu, 04/09/2020 - 11:50am

  • Goldman Sachs has chosen Bradley Gross, Stephanie Hui, Adrian Jones, and Scott Lebovitz to lead a newly formed decision-making body responsible for overseeing the firm's investments in private equity.
  • They replace Sumit Rajpal and Andrew Wolff, two execs who left in February after losing a power struggle with Julian Salisbury for control of the entire merchant-banking division.
  • In addition to private equity, Goldman also has teams doing private-credit, infrastructure, real-estate, and growth-equity investing.
  • Click here for more BI Prime stories.

Goldman Sachs has tapped four executives for a new leadership body that will oversee private-equity stakes taken on behalf of itself and clients, in effect naming the leaders of the private-equity part of its newly reconfigured alternative-investing unit. 

Bradley Gross, Stephanie Hui, Adrian Jones, and Scott Lebovitz will make up a newly formed global equity leadership group, according to memo to employees sent on Thursday and signed by Julian Salisbury, the merchant-banking chief. The new group will meet weekly to oversee overall investment processes, new investment-sourcing activities, and leadership development for other employees in the division. 

The merchant-banking division also has teams doing private-credit, infrastructure, real-estate, and growth-equity investing.

CEO David Solomon last year announced plans to merge five investing teams into a single alternative-investing unit and pivot from a strategy of investing its own money to one investing on behalf of pensions and sovereign-wealth funds.

The early months of the strategy were beset by doubts and internal rivalries, leading to the February exit of Sumit Rajpal and Andrew Wolff, who shared oversight of the division with Salisbury and were coheads of the corporate-equity business.

The four execs named today effectively replace those two in running corporate equity.

They have already been serving on the MBD Corporate Equity Investment Committee, which is chaired by Rich Friedman and makes the final decisions on which equity investments should be made and which should be skipped.

Hui is also a cohead of the global growth-equity business and coleads the merchant-banking division in Asia. Lebovitz helps run Goldman's infrastructure-investment activities.

In a separate memo, Goldman said Nishi Somaiya would join Hui and Darren Cohen as a cohead of the growth-equity business. Jim Garman, a cohead of the real-estate-investing business in Europe, will now run the region for the merchant bank, taking on many of the responsibilities previously handled by Wolff.

Here's the full text of the first memo:

We are pleased to announce the formation of the Global Equity Leadership Group for the Merchant Banking Division.  Focusing on our significant opportunities in corporate private equity, this leadership group will be responsible for driving our investment processes, enhancing our sourcing and value creation capabilities, and developing our investment teams around the world.

This new group will comprise of Bradley Gross, Stephanie Hui, Adrian Jones and Scott Lebovitz. They will add this important operational responsibility to their roles on various MBD investment committees, including the MBD Corporate Equity Investment Committee, which continues to oversee all investment decisions in corporate private equity, chaired by Rich Friedman.

  • Within the Global Equity Leadership Group, Brad will now lead our corporate private equity investment activities in the Americas and EMEA, extending his existing leadership roles in driving our Digital Edge transformation program and broader value enhancement initiatives across our portfolios.  He will continue to serve on the MBD Corporate Equity Investment Committee and MBD Growth Equity Investment Committee.
  • Stephanie will lead our corporate private equity investment activities in Asia, and will continue to serve as global co-head of our Growth Equity Business, and co-head of MBD in the region.  She will continue to serve on the MBD Corporate Equity Investment Committee and the MBD Growth Equity Investment Committee.
  • Adrian will extend his investment responsibilities as a member of the MBD Corporate Equity Investment Committee, by now joining the MBD Infrastructure Investment Committee and MBD Growth Equity Investment Committee.  He will also serve as chairman of the global equity business, with a special focus on driving deal sourcing across Goldman Sachs, fundraising, board leadership, mentoring deal teams, sustainability initiatives and identifying and leveraging synergies across our global equity portfolio.
  • Scott will continue to serve as global co-head of our MBD infrastructure investment programs, and as global head of our energy practice, in addition to his new operational responsibilities in corporate private equity.  He will continue to serve on the MBD Corporate Equity Investment Committee and the MBD Infrastructure Investment Committee.

The new Global Equity Leadership Group will meet weekly, and will work with all of you to help enhance our decision-making and continually improve our investment processes.  We are excited about this new leadership opportunity for Brad, Stephanie, Adrian and Scott, and wish them the very best as they work with all of you in delivering superior investment performance for our investors.

Julian Salisbury

SEE ALSO: How a massive New York hospital secured 130,000 N95 masks from China with help from a senior partner at Goldman Sachs, private jets, and a call to Warren Buffett

DON'T MISS: Read the full memo Goldman Sachs' top brass just sent to staff announcing 2 heads of the bank's private-investing arm are out as it's gearing up to raise billions

UP NEXT: Read the memo Goldman's new tech chief sent to 9,000-plus engineers explaining why they should ditch PowerPoint in favor of Amazon's famous narrative memos

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Oil prices could tumble back below $20 as 'land mines lurking right below the surface' endanger a crucial OPEC deal, RBC strategist says

Thu, 04/09/2020 - 11:25am

  • The price of oil could slide below $20 for the first time since 2002 if an OPEC production cut agreement can't be reached, RBC Capital Markets strategist Helima Croft said Thursday.
  • A Thursday meeting between the world's biggest producers has "several land mines lurking right below the surface" that could tank negotiations, she said in an interview with CNBC, including the US's shaky participation and Russia's hopes for a large cut from Saudi Arabia.
  • Even if the meeting yields a cut to pumping activity, oil prices won't fully rebound until the coronavirus pandemic subsides and demand recovers, Croft said.
  • Watch Brent crude oil trade live here.

The price of oil hinges on fragile negotiations between the world's biggest producers — and failure to ink a deal could pull the commodity below $20 per barrel, a strategist at RBC Capital Markets said Thursday.

OPEC, Russia, and other producers are slated to begin talks in a Thursday webinar, teeing up the first opportunity for a major de-escalation in the oil-price war.

Cooperation stands to pad the market against further losses, but several factors can throw talks off the rails and further escalate the global tit-for-tat, Helima Croft, head of global commodity strategy at RBC, said.

"We caution that the situation remains extremely fluid and there are several land mines lurking right below the surface that could still blow up the negotiations at the 11th hour," Croft wrote in a Thursday research note.

President Donald Trump has suggested the coalition cut production by 10 million to 15 million barrels, though the White House hasn't promised it would join other nations in slashing oil production. Russia may demand an unreasonably large cut from Saudi Arabia, the strategist added.

Read more: 'The great unwind': A hedge fund chief overseeing $2 billion explains how a ripple effect could take down the housing market — and warns 'we're just at the beginning'

Even logistical issues surrounding the meeting's format could endanger a deal. Iran's oil minister took issue with the 35-country webinar format in a Wednesday letter to OPEC's secretary general. The coalition's decisions require consensus, and while the country likely wants to avoid tanking an agreement, it still represents uncertainty heading into negotiations, Croft said.

The world's most-traded commodity has rebounded from its late-March lows, but historically weak demand amid global coronavirus lockdowns continues to pull on its price. Failed talks could place even greater pressure on oil and push prices below $20 per barrel for the first time in 18 years, Croft told CNBC in a Thursday interview.

Even in the event of an agreed-upon production cut, oil is poised to stay at decade-low prices until the coronavirus pandemic wanes, Croft added.

Read more: Bank of America explains why financial stocks have become the best source of rich dividend payments — and pinpoints 9 to buy right now

"I think this agreement's important to turning off the taps and allowing potential recovery to happen," she said. "But we're not going to get a quick rebound in prices in any event, because of the real demand destruction that we're seeing because of the coronavirus."

The price conflict kicked off in early March when Russia refused to slow production at a previous OPEC+ meeting. Saudi Arabia retaliated by slashing its official oil selling price and lifting production in an attempt to steal market share from its rival. Continued escalation in the commodity fight cut oil's price by more than 50% and dragged on other risk markets around the world.

Brent crude traded 1.7% higher at $33.41 per barrel at 11:13 a.m. ET, while West Texas Intermediate traded about 2.3% higher at $25.67.

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

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The Dow surges 780 points on COVID-19 recovery efforts as oil prices spike

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Here's which fintechs will soar and which will flop as funding dries up, according to 6 investors and dealmakers

Thu, 04/09/2020 - 11:13am

  • As fintechs cope with a tightened funding environment, it's likely the industry will see some startups fail while others will excel. 
  • Business Insider spoke to six investors and dealmakers about the types of startups that are in the best, or worst, positions. 
  • Most warned that lenders and those in the payment space might be the most susceptible to the market downturn.
  • Meanwhile, trading-related startups have opportunities to grow their business thanks to market volatility. 
  • Click here for more BI Prime stories.

The coronavirus crisis is providing the first big test for many young fintechs, which benefitted from rising stock markets and ample funding for years. 

Now, the spread of the coronavirus is taking a huge economic toll worldwide, and fintech startups are being forced to reckon with a new reality. Still, while this could hurt some startups that bet on transforming the world of finance, it could also be a boost to newer players. 

To put it more bluntly: There will be winners and losers. 

While many lending and payments businesses aren't well-positioned to weather the financial storm, startups focused on trading and market structure are in good shape to benefit from the increased volatility. 

Wall Street execs have already told us how the coronavirus is in many ways a watershed moment for the adoption of tech, as people's behaviors change to adapt to things like social distancing and remote work. 

Business Insider spoke to investors and dealmakers about the startups best positioned to succeed, and those that will likely struggle, in the new environment. 

Some of these answers came as part of a broader survey of 11 backers, who laid out how fintechs should be looking to conserve capital, weighing opportunities against risks, and keeping the human toll of the coronavirus crisis in mind when making decisions.

Retail trading platforms and financial software were mentioned as among the possible winners. 

On the losers side, the backers and bankers identified point-of-sale systems — which are a feature of the retail and hospitality industries that have been forced to temporarily shutter physical locations — as well as fintech services for small businesses and freelancers, as areas that could hurt. 

SEE ALSO: 11 fintech investors share advice they are giving startups to help them get through a market downturn and funding drought. 'This isn't measure 10 times and cut once. This is just make the cut.'

SEE ALSO: Here's how 44 insiders at powerful banks, buzzy startups, and big investors are thinking about financial innovation — and why the term 'fintech' may be on its last legs

SEE ALSO: The CEO of a cloud-based trading tech startup that saw a 30% surge in business last month says the coronavirus is a catalyst for overhauling how Wall Street works

Merritt Hummer, partner at Bain Capital Ventures

Notable investments: Ribbon, Finix, SmartRent

Winners and losers: So far, we are seeing COVID-19 beneficiaries emerge in areas including mobile banking, accounts payable and accounts receivable automation, fraud detection, and online brokerages.

Mobile banking: COVID-19 is a catalyst for the already rapid migration from offline to online banking. Even before coronavirus hit, retail bank branches were disappearing at a rapid clip; from June 2018 to June 2019, the number of total branches in the US fell by 7%, the biggest yearly decline on record. And that was before coronavirus shut down the retail sector.  

Digital payments: Over the past several years, there has been a gradual transition from checks to digital forms of payment in B2B commerce. Few would have predicted a global pandemic to disrupt this inexorable march, yet for the first time, we may see a step change increase in the digital penetration of B2B payments.  

Fraud detection: For many who have been distracted by other headlines, it may have been easy to miss that the FBI released a public service announcement a couple of weeks ago notifying the public about a surge in fraudulent online schemes during the pandemic.

Online brokerages: Volatility is a brokerage's best friend. Digital brokerages can advantage of unprecedented market volatility to acquire (and likely retain) new customers during this period.   

Fintech companies that are likely to face headwinds in this environment include pay day advance apps, POS systems for retail businesses, home/mortgage financing platforms, fintech services for freelancers and SMBs, and lending businesses in general, particularly those serving consumers and SMBs

There are obvious segments that will produce winners and losers in this environment. I think we are all tired of hearing about Zoom as the Nasdaq golden child. The more interesting question is how businesses will fare that have both positive and negative exposure to the current environment.

For example, a company like Affirm should benefit from rising e-commerce penetration and the fact that consumers are probably more inclined to "buy now, pay later" in this economic environment. At the same time, Affirm may extend credit to consumers who have less ability to pay back their loans than they did a month ago.

How forces like these offset each other, and how companies like Affirm adapt and respond to rapidly changing economic parameters, will be fascinating to watch.



Kim Trautmann, head of DRW Venture Capital

Notable investments: Digital Asset, ErisX, OpenFin

Winners and losers:

Retail trading platforms and trading tools (e.g, charts, data and analytics) that provide transparency to the markets will benefit in this period of uncertainty as consumers look for answers.

These platforms will likely see record volumes and record account sign ups, and successfully navigating their busiest days will be their greatest challenge.

Conversely, fintech companies offering a "nice to have" product in this environment are likely to struggle as consumers and businesses make decisions about where to curtail their spending.  For companies with strong balance sheets, this will create some opportunities for M&A, and I expect we'll see consolidation in the space.



Jennifer Lee, principal at Edison Partners

Notable investments: MoneyLion, Yieldstreet, Clearpool

Winners: There's a lot of companies, for example, talking about financial inclusion and their job is to actually cater to these underserved financial communities, which comes into play now more than ever.

Where a lot of different segments of the consumer side is getting hit, that could actually be a perfect opportunity for all of us in that community to help each other out and continues to provide solutions that are now more important for them.



Peter Johnson, principal and head of fintech investing at Jump Capital

Notable investments: M1 Finance, Personal Capital, TradingView

Winners and losers: Winners in today's environment seem to be the trading-related companies. Someone told me — "with sports shut down, financial markets are the new sports," as in that is what everyone is paying attention to now.

Surprisingly, the fintech wealth management companies seem to be winner ... Assets took a big whack, but lot of customer signups.

Losers have to be payments companies and lenders. Although there does seem to be some bright spots within lending — we're investors in an auto loan refinancing company, and their volumes are through the roof due to low rates and people looking to save money. So for lending it probably depends on who you are lending to, and if you are holding the risk of the loans.



Jason Gurandiano, global head of financial technology investment banking at RBC

Notable deals advised on: $1.5 billion sale of Intralinks to SS&C, £3 billion sale of Paysafe to CVC and Blackstone, Francisco Partners $3.4 billion take private of Verifone

Winners and losers: I think the ones that are going to have the toughest time are the lenders. I think you're going to see very large increases in default rates, which are going to call into question the profitability and sustainability of those models. So I think the lenders are probably the ones that are going to face the roughest ride.

I think next on the list would be the digital banks. The one question/issue I always had with digital banks was it's all well and good to have your money in "pick your digital bank." However, in times of crisis, people all of a sudden want the comfort of a JPMorgan, BofA or RBC or whatever the big brand is in their respective geographies. So I'll be interested to see whether there are outflows from those types of models.

I think traditional payments, depending upon the focus area, is going to go through some pain, obviously, because a large portion of what's happening with a large portion of their customer portfolio — bars, restaurants, various SMBs. So I think that's challenging.

I think one of the strongest areas in fintech will be the financial software space. I think there's a perception that in a reduced-revenue environment people will continue to leverage software and technology as a means to drive better efficiency. So I feel quite bullish about financial software.

I think B2B payments is also an area where it may be a little more insulated from the economic downturn.

Then I guess the one thing that doesn't get talked a lot about in fintech is market structure. If you look at the names that are levered to volatility (exchanges or the high-frequency guys) those firms are just minting money right now. They don't care what direction the market goes. If there's vol then that is the way they make money. It's a perfect storm for those guys.



Vikas Shah, managing director for investment banking at Rosenblatt Securities

Notable deals advised on: Exablaze on its sale to Cisco, Euronext on its acquisition of Fastmatch, Visible Alpha's Series B round led by Goldman Sachs

Winners and losers:

Challenger Banks: Declining consumer activity, a weakening economy, and tight funding conditions will hurt Challenger banks. With the Fed reducing the benchmark interest rate to zero, Net Interest Margins (NIM) for challenger banks will get more compressed than traditional banks as they rely heavily on transaction revenues, which will decline amidst the COVID-19 lockdown.

Making matters worse, the cost of funding for challenger banks may not reduce proportionately to lower Fed rates, and less than that for incumbent banks, weakening their competitive position. The only positive trend for Challenger banks in the current climate will be a higher demand for digital interactions as customers have restricted mobility and can't access traditional bank branches.

The question remains whether additional transaction volumes from the new account sign-ups offset the secular volume declines.

Online Lending: Digital lenders could be entering into a perfect storm of lower net interest margins, falling loan growth in a bid to avoid adverse customer selection, rising delinquencies, and defaults.

The algorithms of digital lenders using alternative data to underwrite risk and make loans will be severely tested for the first time.  Plans of newer online lenders like LendInvest and Zopa, who were hoping to exit via an IPO, will be delayed indefinitely while the first generation of fintech lenders (Lending Club, OnDeck) come under pressure once more, especially as they see quick downgrades from the rating agencies of the securitizations that they have undertaken over the past few years and the corresponding equity losses from the first loss tranches.

However, if digital lenders can persuade the SBA to let them disburse at least part of the over $350 billion of loans that the federal government has approved via the Cares Act, it may provide the much-needed boost to the otherwise distressed sector.

Robo advisors/digital wealth managers: Severe volatility and the lack of recovery in public stocks may scare away all investors, especially millennials, who are the biggest customer segment for robo advisors.

Self-directed investors using robo advisors and online trading platforms may gravitate away towards established wealth management shops (Charles Schwab, Fidelity Investments, Morgan Stanley) who have matched the "zero commission" model of e-brokers and also offer the comfort of human advice.

Over time, robo advisors have shifted business models from earning revenue from transactions to AUM-based fee models that will suffer as markets remain volatile in the short term. Robinhood's technical problems last month have dented investor confidence at the most ill-opportune time and will shake the trust of customers in all robo advisors.

Payments/transaction processing: Payment and transaction processing fintechs will face a mixed picture, with B2B payments faring better than B2C and C2C, and the subsector doing better than other fintech subsectors.

A paralyzed global economy with consumers and corporations curtailing travel and entertainment will have a profound impact on consumption in the short term. This will result in a fall-off in transactions, which are the lifeblood for payment fintechs.

Visa and MasterCard's warning that sales will fall short of expectations in the current quarter by 2-4% and a sharp contraction in cross-border flows will hit money transfer fintechs and other payment providers, especially hard.‍

Institutional capital markets: Traditional capital markets firms (institutional brokers, exchanges, clearing firms) are benefiting from the current elevated volatility, though runaway volatility for an extended period could have the opposite effect of freezing up trading.

Fintechs providing trading infrastructure may benefit from this short-term volatility-driven euphoria, but their future depends on how their institutional clients fare as the market downturn continues.

RegTech and compliance fintechs will remain popular as a market dislocation doesn't impact demand for their services. Investors may double down on these investments boosting their valuations. They may be one of the few bright spots in an otherwise tough fintech market

InsurTechs: Usually, massive calamities spell bad news for insurance carriers. But we don't expect large claims from COVID-19 as most insurers most often exclude pandemics or infectious diseases from their coverage.

But the virus could boost demand for certain types of insurance by increasing awareness and demand for a greater life, health, and business disruption coverage. The P&C sector insurtechs should not see much difference as an event like COVID-19 doesn't impact that sector.

In other insurance segments that address unconventional risks (cybersecurity, climate change, social disruption), investors have been keenly funding InsurTechs, so the demand for startups in these segments will continue to attract investor interest.



Morgan Stanley CEO reveals in video to employees that he had the coronavirus and has recovered (MS)

Thu, 04/09/2020 - 10:56am

  • Morgan Stanley CEO James Gorman tested positive for the coronavirus, he told employees in a video on Thursday. 
  • Gorman got a test after experiencing symptoms in mid-March, and has since been self-isolating at home, a spokesman confirmed to Business Insider. 
  • His symptoms weren't severe and he told the board after he tested positive. 
  • Gorman is no longer experiencing symptoms. 
  • Visit Business Insider's homepage for more stories.

Morgan Stanley CEO James Gorman tested positive for the coronavirus in March and has since recovered, he told employees in a video on Thursday. 

Gorman got a test after experiencing symptoms in mid-March, and has since been self-isolating. He continued to work from home, as he said his symptoms were not severe, and he informed the board after he tested positive. 

Gorman is no longer symptomatic, a spokesman told Business Insider. 

The company is not planning to issue an 8-K, as he was able to work while he was experiencing symptoms. 

Gorman, who lives in Manhattan, has led operating committee meetings every day remotely, and has attended board meetings remotely during the period he was ill, the spokesman confirmed. 

Join the conversation about this story »

A work-from-home ETF is in progress amid spiking demand for stocks benefiting from coronavirus quarantines

Thu, 04/09/2020 - 10:53am

  • Direxion is planning to start a new "work-from-home" exchange traded fund, according to a Tuesday filing to the Securities and Exchange Commission.
  • The fund will trade under the ticker "WFH."
  • WFH will track an index with exposure to technological infrastructure that enable remote work, such as cyber security, cloud technologies, online documentation and project management, and remote communication. 
  • Read more on Business Insider. 

The coronavirus pandemic has sent workers around the world home to do their jobs remotely to curb the spread of disease. One fund just launched an exchange-traded fund for investors to get in on the trend. 

Direxion is planning to start a new "work-from-home" ETF under the ticker WFH, according to a Tuesday filing to the Securities and Exchange Commission. The fund will track an index that provides exposure to technological infrastructure that enable remote work, such as cyber security, cloud technologies, online documentation and project management, and remote communication. 

Technology companies have benefited from the coronavirus pandemic even as markets have whiplashed. Last week, Microsoft said that it saw usership of its cloud services spike 775%.The stock has gained about 11% in the week since. 

Read more: Morgan Stanley handpicks the 18 best US stocks to buy now while they're cheap to enjoy profits for years to come

Zoom stock, while recently roiled by cyber security controversy, has also benefited from the coronavirus crisis and was up about 73% year to date through Wednesday's close. 

The ETF is not intended to outperform the index it tracks, according to a filing. It's also non-leveraged, unlike many other Direxion ETFs. What that means is that it does not aim to amplify the returns of the underlying index. 

The offering is in line with Direxion's focus to broaden its thematic offerings to "buy-and-hold" investors, Bloomberg reported, citing David Mazza, head of ETF product.

Read more: 'The great unwind': A hedge fund chief overseeing $2 billion explains how a ripple effect could take down the housing market — and warns 'we're just at the beginning'

Join the conversation about this story »

NOW WATCH: 6 creative strategies to deal with student loan debt

Silicon Valley startups may get to tap into the $350 billion coronavirus small-business loan program after all, thanks to late rule changes by regulators

Wed, 04/08/2020 - 6:46pm

  • Some startups may get loans from the $350 billion Small Business Administration program created by the new stimulus package. 
  • Late last week and over the weekend, the SBA and Treasury Department issued some rules and guidance that seem to make it easier for startups to apply and qualify for the aid.
  • The vast majority of startups have fewer than 500 employees and so would be considered small businesses, but the SBA's rules concerning the ties companies have to their investors and their investors' portfolio companies seemed to disqualify most venture-backed companies from applying for the new loans.
  • Even with the new rules and guidance, there's still a good deal of uncertainty about whether startups will qualify for the loans and some investors are being cautious about the program, a representative of the National Venture Capital Association told Business Insider.
  • Click here for more BI Prime stories.

Startups may get access to a key piece of the new $2 trillion stimulus package after all.

One of the central components of the law, meant to stabilize a US economy that's been throttled by the response to the coronavirus epidemic, is a $350 billion loan program for small businesses. Immediately after Congress passed the act, venture capitalists and startup advocates raised concerns that startups would be excluded from the program, due to rules that would seem to bar certain companies.

But late last week and over the weekend, the Treasury Department and the Small Business Administration, which will oversee the loan effort, issued rules and guidance for the program that could make it easier for startups to apply for and receive the aid, advocates for Silicon Valley said.

"There were a couple things that moved last week that did matter," said Justin Field, senior vice president of government affairs at the National Venture Capital Association, an industry trade group. He continued: "It's messy, but we think that ... there's a path forward for a certain number of these companies to apply."

The new guidance and draft rules set aside or relax some of the SBA's regulations around so-called affiliations, which were the biggest collective obstacle facing startups from participating in the stimulus package's loan program. Under the SBA's affiliation rules, many startups could be deemed too big to qualify for the loans.

Most startups are small in size, but may have lots of affiliates

The loan program in question, dubbed the Paycheck Protection Program, offers a pool of money for small business — defined as those with 500 or fewer employees — to use to pay workers, mortgages and rent, utilities, and interest payments on debt. The federal government is promising to forgive the loans if companies maintain their workforces and their employees' salaries.

At first glance, the vast majority of startups would seem to qualify as small businesses and be eligible for loans. Some 97% of venture-backed startups for which employment information was available had 500 or fewer employees, according to data from the NVCA and PitchBook.

But in determining how many employees companies have, the SBA looks not just at their own workforces but also those of any entities with which they are affiliated. So, if a company is majority-owned by another company, the parent company would be considered an affiliate of the first company, and the parent company's employee base would be counted toward that of the first company.

And the SBA can consider a company or person to be an affiliate of another even if one doesn't have majority control over the other. If a company has one large shareholder or several shareholders with large and relatively equal amounts of control, it could be considered affiliated with those investors — and with every other company over which those investors exercised similar control.

Those affiliation rules are problematic for venture-backed startups. Many of them have investors that have large, effectively controlling stakes. And many of those investors have similar power over lots of other startups. Instead of having just 50 employees, say, a startup under the SBA rule could be considered to have hundreds, once all of the employees at its affiliated startups and investors are combined.

Lenders don't have to check on affiliations

The NVCA and other Silicon Valley advocates had been hoping Congress or the Treasury Department and the SBA would set aside those affiliation rules for the new loan program and clarify that startups are eligible for the it. Thus far, neither Congress nor the Treasury Department or the SBA have done so. 

But the Treasury Department and the SBA did take four important steps that should open the program to at least some startups, Silicon Valley advocates said.

The biggest step is that the draft rules for the loan program — officially called an interim-final rule — remove from lenders the obligation of having to determine whether the affiliation rules apply to particular loan applicants, Field said. Without that move, the lenders could be held liable by the government if they handed out a loan to a company that didn't actually qualify because of the affiliation rules. Now, the lenders can simply rely on the certification of the company's CEO or owners that it qualifies.

The change means that more startups will likely be able to get loans than they otherwise would and in more timely fashion. Checking into startups' affiliation likely would have been a painstaking, time-consuming task. And in questionable or marginal cases, the lenders would have had an incentive to deny the loans.

"We do think that did get rid of a major gating factor, in that now banks can process these applications," Field said.

The SBA has at least two sets of rules regarding determining a company's affiliations. In its draft rules for the lending program, the agency made clear that it will rely on the set of rules that appear to offer more leeway for venture-backed startups. That was another important step for Silicon Valley, Field said.

The disregarded rules spell out in some detail situations where an investor would be considered to have control of a company and therefore be an affiliate of it. The rules the SBA will use are a bit more vague — and open to interpretation — on when minority investors would be deemed to have enough control to be considered affiliates.

Only the company has to certify that it qualifies

A third step taken by the SBA and the Treasury Department that was helpful for Silicon Valley was to eliminate a requirement that investors who owned as little as 20% of a company certify that any loan funds the company received would be used for payroll and other purposes specified by the program, Field said. Under the draft rules, only the company itself has to make that certification.

That was important to the venture community, because otherwise startup backers may have been placed in a situation where they had to guarantee the funds would be used for legitimate purposes but have no control or ability to ensure that they were, Field said. Without that change, minority investors could have been held criminally liable if founders they backed embezzled the funds or used them go on a big party, he said.

"That's not really a fair place to be," Field said. "But they fixed that."

The last helpful step the SBA took was that it clarified it won't use its so-called "totality of circumstances" principle to determine whether a company has affiliates, he said. That principle works as a kind of catch-all in the agency's affiliation rules that allows it to determine that certain companies or investors are linked, even if one doesn't have substantial ownership or control over the other. With the SBA setting aside that principle, fewer startups are likely to get tripped up by the affiliation rules, Field said. 

"They have gotten rid of some of the uncertainty around the rules," he said.

There's still a lot of uncertainty

Still it's not clear how many startups will be able to apply for the loans or how many actually will. Even if lenders won't be checking whether startups are ineligible due to their affiliations, the SBA likely will do some kind of assessment after the fact, Field said. It could retroactively find that certain startups weren't qualified for the loans and force those companies to repay them and potentially hold their representatives criminally liable.

Many startups are looking into the loan program, Field said. But many of their venture backers are being more cautious about it — precisely because there's still uncertainty about whether their startups really qualify, he said.

For now, the NVCA is willing to wait and see if and how well the program works for venture-backed companies rather than continuing to press for changes that would make clear that they can participate, Field said. 

"This is where we just got to give policy makers some breathing room. Let them do what they're going to do, let the process play out and understand what's really happening on the ground," he said. "If it's messy but workable for a large percentage," he continued, "we're in a crisis, that's good enough."

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

SEE ALSO: The coronavirus stimulus package will be doomed to fail if it can't pass this simple 3-question test

Join the conversation about this story »

NOW WATCH: Inside the US government's top-secret bioweapons lab

The woman who alleged her NASA astronaut ex-wife broke into her bank account from space has been charged with making false statements

Wed, 04/08/2020 - 6:08pm

  • The former wife of Anne McClain, a NASA astronaut, was charged with making false statements to federal authorities, the Justice Department said.
  • In her initial complaint, Summer Worden claimed that McClain, whom she married in 2014 and later filed for divorced, had improperly accessed her bank account.
  • Authorities say that the dates of Worden's initial allegations did not add up.
  • Worden reportedly said she was surprised by the charges and that she mistakenly provided investigators with the wrong dates.
  • Visit Business Insider's homepage for more stories.

The former wife of US Army Lt. Col. Anne McClain, a NASA astronaut, was charged with two counts of making false statements to federal authorities, the Justice Department announced Monday.

Former Air Force intelligence officer Summer Worden was charged with filing a false complaint with the Federal Trade Commission (FTC) and making false statements during an interview with NASA's Office of Inspector General (OIG) in 2019.

In her initial complaint, Worden claimed that McClain, whom she married in 2014 and later filed for divorced in 2018, had improperly accessed her bank account.

Worden, who previously shared her online bank accounts with McClain, claimed that she opened a new bank account and reset her account's information to prevent others from accessing it in September 2018.

Worden alleged that McClain had accessed her bank account until January 2019, while she was on a six-month mission aboard the International Space Station. If the allegations are true, it would mark the first time a crime was committed in space.

In a previous complaint, Worden's parents reportedly alleged McClain accessed the account as part of a "highly calculated and manipulated campaign" for the custody of Worden's then-6-year-old son, who was born before they married.

But authorities say that Worden opened her new account five months prior to her claimed date, and that she "did not change her login credentials until January 2019."

Worden told The New York Times that she was surprised by the charges. She added that she mistakenly provided investigators with the wrong dates and had later corrected herself.

"I didn't misrepresent anything," she reportedly said.

McClain's attorney said that their client did use the account amid the ongoing divorce procedures, with Worden's knowledge, in order to keep their finances in order, according to The Times. McClain added that Worden had never told her the bank account was not to be accessed, and that she had used the same password she was using during their relationship.

In a tweet in 2019, McClain said "there's unequivocally no truth to these claims."

"We've been going through a painful, personal separation that's now unfortunately in the media," McClain said. "I appreciate the outpouring of support and will reserve comment until after the investigation."

Worden could face up to five years in prison for each charge and a possible $250,000 maximum fine if convicted, the Justice Department said.

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Wed, 04/08/2020 - 5:48pm

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