fortune--2020-01-27--The global markets catch a chill as the Wuhan coronavirus outbreak spreads

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You know it’s going to be a rough day when markets reporters look to infectious disease specialists for their take on the big story of the moment. That’s precisely what’s happening today.
Get used to it.
The Wuhan coronavirus outbreak is accelerating this morning, and that’s knocking markets from Tokyo to the U.S. futures. The European markets were headed for their worst one-day fall since October. Meanwhile, the Chinese markets are closed for the Lunar New Year festivities today, and may remain shuttered the entire week, an unnerving development unto itself.
The public health numbers are worrying. Chinese officials report that more than 2,700 have been infected by this powerful virus. Of that, 461 are in critical condition and 80 have died. This interactive map shows the disease vector moving well beyond the epicenter in recent days, with reported cases in Australia, France, Canada and the United States (to name a few).
Last week, the markets (particularly outside Asia) remained fairly resilient in the face of the outbreak. As the chart below shows, Europe and the U.S. more or less have shaken off the threat—in the first week at least. The same cannot be said of China-focused shares, and, even worse, Brent crude.
***
At the open for the European markets today, energy stocks were one of the big losers.
What can we expect going forward? As I pointed out last week, the 2003 SARS outbreak may be the best indicator. Seventeen years ago, the MSCI China hit its outbreak-low about six weeks after the disease was (belatedly) first made public by Chinese authorities. From disclosure to bottom, there was an 11.5% drop back then. MSCI China is down about 6% so far.
It’s still way too early to get a feel for how coronavirus may ultimately impact the markets. But if history is a judge, it could be a rough Q1 for sectors and economies closely tied to China.
Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com
Today's reads
The Red Wall holds. As I mentioned on Friday, there was a big regional election in Italy's Emilia-Romagna over the weekend in which the incumbent left was trying to hold off the far right wave of Matteo Salvini's League party. Things usually don't go to script in Italian politics, and this time was no different. Salvini lost, and the Italian bonds had something of a relief rally this morning. But analysts are already predicting more trouble ahead for the weak coalition Italian government. If it were to crash out, that could bring further trouble to Europe's already fractious power structure.
Biggest Tax Heist Ever. A few years back, traders in Europe found a loophole that was so tedious and complicated they figured nobody would catch them if they exploited it. Over and over again. It became known as the cum-ex trading swindle, and it cost European governments, particularly Germany, $60 billion in losses. Many of the traders eventually were caught, and now they stand trial for what Le Monde calls the "robbery of the century." The New York Times has a fascinating read on how it all went down, and what's to come.
A million bucks won't cut it. That's the message from retirement planners who now calculate you'll need more than that princely sum in order to retire comfortably. “The new rule of thumb is $3 million,” financial planner Thomas Balcom told Fortune. And even that may not be enough.
Market candy
La stella Kobe. News of Kobe Bryant's death has been a real jolt for sports fans, including me. One of the things that always struck me about him was his enduring connection to Italy. If you know the story of Bryant, you probably recall he spent his grammar school years in the bel paese. Kobe returned to the states at 13, but he would come back every now and then to his old stomping grounds in Italy. And then there were the times when the Italian press would catch up with him on the road. Bryant was always game to conduct the interviews in Italian. And, damn, was he a smooth talker. As my Italian wife would often chide me, "He speaks better than you!" Yeah, that and dunk, and drive, and win championships. For those of you who care to follow what the Italians feel about this tragedy here's a lovely little tribute from the local newspaper in Reggio Emilia, where piccolo Kobe, or little Kobe, grew up.
One last thing
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Correction
In Friday's Bull Sheet the headline of the top chart referred to the economies of China, Europe and the United States as shrinking. That's not the case. They are still growing, but that growth is slowing. Apols for the confusion.


fortune--2020-01-27--Stakeholder capitalism and technological transformation are connected

The Grammys go on , despite Kobe Bryant tragedy and Recording Academy trouble

This is the web version of CEO Daily. To get it delivered to your inbox, sign up here.
Good morning.
The World Economic Forum in Davos is an easy target for cynics (see this and this for examples). But it is also an unmatched opportunity to take the pulse of global business leaders. And what emerged last week was a clear sense that the focus on technological transformation, which obsessed the Davos crowd for the last half decade, has been replaced by a discussion of stakeholder capitalism.
The two are related. On the flight home, I (belatedly) read Colin Mayer’s book Prosperity, which Microsoft CEO Satya Nadella touted during his comments at Fortune’s CEO dinner. Mayer provides a useful framework for thinking about the connection.
A corporation, he argues, is made up of different types of capital—financial, material, human, intellectual, social, natural. In the 19th and 20th century, financial and material capital were in short supply, and thus were the locus of power. All our systems of corporate control were built to measure and allocate those forms of capital.
But today, material capital is far less significant, and financial capital is abundant. A salient fact from the book:
“Forty years ago, 80 per cent of the market value of US corporations was attributable to tangible assets—plant, machinery, and buildings—as against intangibles—licenses, patents, and research and development. Today, intangibles account for 85 per cent of the market value of US corporations.”
Today, it’s human capital and intellectual capital, as well as social capital and natural capital, that are in short supply. And that means they hold the power. The shift toward stakeholder capitalism is recognition of that fact. Our accounting and management practices need to adjust to give them greater priority. That’s no small task, and one the Davos crowd deserves credit for starting to tackle.
*****************
By the way, there are two topics that CEOs generally don’t like to discuss in these conversations about business and society. One is CEO pay; the other is their proclivity for using tax havens. Fortune last week published a ProPublica investigation into a Microsoft tax dodge. You should read it here.
I asked Nadella about the two forbidden topics in our Thursday night conversation. On CEO pay, he answered somewhat cryptically:
“CEO pay is something that absolutely should be discussed. Steve Ballmer said to me when I took over: ‘You’re labor, I’m capital.’ And someone should think about the return to capital versus the return to labor.”
On tax, he came out in favor of a global minimum tax:
“I would rather have everyone pay 21% tax everywhere and not have all this nonsense.”
Sounds right to me. More news below.
Alan Murray
@alansmurray
alan.murray@fortune.com
TOP NEWS
Google antitrust
State attorneys general and the Justice Department will reportedly compare notes next week on their various probes into Google's online ad business and the firm's Android-related tactics. The unprecedented meeting could presage more formal cooperation. Wall Street Journal
China shutdown
The death toll from the Wuhan coronavirus now stands above 80, and almost 3,000 are confirmed ill. The national new year holiday has been extended through the end of this week—in order to stop half a billion people travelling as they otherwise would—and most companies in Shanghai are banned from returning to work until Feb. 9. Meanwhile, the crisis is hitting stock markets in Asia and Europe. Bloomberg
Huawei U.K.
The British government will reportedly allow Huawei to participate in the country's 5G network, albeit with a cap on its market share that's intended to stop the network becoming over-reliant on the contentious Chinese giant. If the U.K. does give Huawei the green light, the move will annoy the Americans, who have been lobbying hard for an outright rejection. Financial Times
Air India
The Indian government wants to sell its entire stake—that is, 100%—of flag carrier Air India. A couple years ago, the government tried to sell 76% of the debt-laden airline, but potential bidders shied away. The government wants control of Air India to remain with an Indian entity. Reuters
AROUND THE WATER COOLER
Investor opinions
How do investors feel about the Business Roundtable's new statement of purpose, which marks a shift from shareholder to stakeholder capitalism? Fortune and Civis Analytics polled more than 1,300 investors to find out, and the results suggest they are open to throwing out business as usual. Fortune
Boeing test
Boeing has successfully completed a test flight of its 777X, the world's largest twin-engined plane. The four-hour flight was the craft's first—it was due to launch this year but technical difficulties got in the way. Boeing has already sold 309 of the plane, which rivals Airbus's A350-1000. BBC
Payment software
Visa and Sapphire Ventures have joined in an $80 million funding round for a British startup called Currencycloud, which powers cross-border payments for the likes of Monzo and Revolut. Google and the World Bank's investment arm also participated in the round. CNBC
Kobe Bryant
The retired basketball legend Kobe Bryant and his daughter Gianna—along with seven others—died in a helicopter crash in California yesterday. Due to the location of the crash site, it may take days to recover the bodies. Fortune
This edition of CEO Daily was edited by David Meyer.
Correction: an earlier version of the 'payment software' blurb did not take account of the fact that Sapphire Ventures was spun out of SAP in 2011 and now operates entirely independently.


fortune--2020-01-27--As China’s deadly coronavirus spreads, the world’s financial markets reel

Intensifying concern about the economic and human impact of the deadly coronavirus sent stocks, oil and China’s yuan tumbling Monday while spurring haven assets. Treasuries gained and Italian bonds jumped after regional elections.
Contracts on the main U.S. equity benchmarks fell, signaling a weak open on Wall Street following Friday’s losses. The Stoxx Europe 600 Index headed for its worst decline since October, with the mining group dropping by 4%. Ten-year Treasury yields and West Texas crude futures fell to three- and five-month lows, respectively. A key measure of risk for the debt of Europe’s most fragile companies jumped to the highest in nearly two months.
Major Asian markets were closed for holidays with the exception of those in India and Japan, where stocks slumped and the yen climbed. A London-listed iShares China ETF dropped more than 7%. The offshore yuan erased this month’s trade-deal-driven gains in the wake of news that the virus continues to spread, with no peak in sight.
Fears around the virus, whose death toll has risen to at least 80, is spurring caution at the start of a week jam-packed with earnings and other events. Tech giants Apple, Facebook and Samsung are among those due to report this week. Investors will also have a Federal Reserve policy meeting and Mark Carney’s last monetary policy decision as the Bank of England’s governor to monitor.
“Any economic shock to China’s colossal industrial and consumption engines will spread rapidly to other countries through the increased trade and financial linkages associated with globalization,” Stephen Innes, chief Asia market strategist at Axitrader, wrote in a note Monday. “I’m starting to think cash is the right place to be for the next few weeks.”
China announced an extension of its Lunar New Year holiday through Feb. 2 to help battle the spread of the disease. Beijing also suspended sales of package tours, hitting firms around the world that rely on Chinese travelers’ spending. Air transport providers were the worst performers in Japan’s session, while Thailand’s stocks slid the most since 2016.
Elsewhere, copper, aluminum, nickel and iron ore all dropped.
Here are some events to watch out for this week:
Tech giants Apple, SAP, Facebook, Samsung and South Korean chip maker SK Hynix announce earnings, as do Boeing, International Paper, GE, United Technologies, Lockheed Martin, Caterpillar, Lockheed Martin, Unilever, Exxon Mobil, Shell and Chevron.
The Senate impeachment trial of President Donald Trump continues in Washington Monday.
Fed policy makers are expected to open 2020 the same way they closed 2019 — by holding interest rates steady Wednesday.
The BOE meeting is highly anticipated Thursday after a series of dovish comments raised speculation policy makers could lower interest rates.
The U.S. reports fourth-quarter GDP Thursday.
The U.K. is scheduled to leave the European Union Friday.
These are the main moves in markets:
Stocks
Futures on the S&P 500 Index sank 1.4% as of 6:39 a.m. New York time.
Nasdaq 100 Index futures declined 1.8%.
The Stoxx Europe 600 Index fell 1.9%.
Japan’s Topix index dropped 1.6%.
Currencies
The Bloomberg Dollar Spot Index gained 0.1%.
The British pound increased 0.1%.
The euro was little changed at $1.1024.
The Japanese yen strengthened 0.3% to 108.91 per dollar.
The offshore yuan weakened 0.8% to 6.983 per dollar.
Bonds
The yield on 10-year Treasuries declined seven basis points to 1.62%.
Germany’s 10-year yield decreased three basis points to -0.37%.
Italy’s 10-year yield decreased 18 basis points to 1.051%.
Commodities
The Bloomberg Commodity Index dipped 1.1% to 76.46.
Gold strengthened 0.8% to $1,584.07 an ounce.
Iron ore sank 6.4% to $85.21 per metric ton.
West Texas Intermediate crude fell 3.1% to $52.53 a barrel.
Editor’s note: This story has been updated.
More must-read stories from Fortune:
—What the alleged Saudi hack of Jeff Bezos says about encryption
—A.I. in China: TikTok is just the beginning
—The long ocean voyage that helped find the flaws in GPS
—Mysterious GPS outages are wracking the shipping industry
—Into the ‘crucible’: How the government responds when GPS goes down
Catch up with Data Sheet, Fortune’s daily digest on the business of tech.
As China's deadly coronavirus spreads, world financial markets reel


fortune--2020-01-27--Fortune poll: Investors want corporations to focus on more than just shareholders

FORTUNE Analytics brings readers business insights from proprietary data and exclusive surveys. It will launch as a premium newsletter in the coming weeks. Sign up for the debut below:
In August, nearly 200 CEOs of American titans signed on to the Business Roundtable’s redefined statement of purpose for corporations. This new mission statement pushes firms to look out for more than just shareholders, factoring in the interests of stakeholders like local communities, customers, suppliers, and employees in their decision making. This move away from shareholder primacy comes at a time when companies are being pressured to take a more active role in addressing issues like climate change, economic inequality, and distrust of business.
But how do investors feel about this? They are after all being told that the companies in which they invest will no longer put their own financial interests first. Fortune/Civis Analytics surveyed more than 1,300 investors* and asked them to weigh in on the Business Roundtable move, as well as their views on socially responsible investing.
The big numbers you should know:
49%
… of investors support the Business Roundtable’s decision to redefine the purpose of a corporation, compared to 10% who are opposed and 41% who say they’re undecided about the move.
51%
… of investors say they take social responsibility into account when investing. Meanwhile, 29% say they do not weigh social responsibility when investing, and 19% say they are not sure if they do.
Big picture takeaway:
It appears investors are open to throwing out business as usual: Investors supporting the redefined statement on the purpose of a corporation outnumber those opposed by almost 5-to-1. But that support isn’t bulletproof, with 41% of investors saying they’re undecided about the change. So as investors start to see what this new mission looks like in practice, the tide of opinion could change quickly.
One more interesting number:
51%
… of non-retired investors plan to increase their stock holdings in 2020, while 25% plan to decrease their stock holdings. Here’s the Fortune Analytics article breaking down how investors plan to approach 2020.
*Methodology: The Fortune/Civis Analytics survey was conducted among a national sample of 1,315 investors in the U.S. between December 19-20. The findings have been weighted for age, race, sex, education, and geography.


fortune--2020-01-27--More than 350 Amazon employees risk their jobs to speak about climate crisis

NFL and teams hacked on Twitter , just days before the Super Bowl

Amazon workers who have criticized their employer for its response to climate change released a video about their campaign on Monday, defying a corporate policy requiring them to request permission before publicly speaking about the issue.
The video was released one day after 357 Amazon employees contributed to a Medium post about their belief that Amazon is contributing to the climate crisis, isn’t doing enough to stop it, and is attempting to stifle their right to speak out about it. The employees added full names and job titles to the post.
“The science on climate change is clear. It is unconscionable for Amazon to continue helping the oil and gas industry extract fossil fuels while trying to silence employees who speak out,” said Amelia Graham-McCann, a senior business analyst and one of the Amazon employees who spoke out.
Earlier this month, some employees told Fortune that Amazon warned them that they would be terminated if they continued to speak out without first getting approval. An Amazon spokesperson said that process was communicated to workers last year, however the employees said it’s time consuming and involves too much red tape for such an urgent topic.
In the video, Amazon employees show their faces and hold signs saying they won’t be silenced. A narrator alleges that the employees are speaking out after the company disciplined some of them for giving a quote to the Washington Post last year that Amazon should not help oil and gas companies find and extract natural resources.
“Corporations can not own conversations that affect our very existence,” said the narrator of the video.
1/ Hundreds of us decided to stand up to our employer, Amazon. We are scared. But we decided we couldn’t live with ourselves if we let a policy silence us in the face of an issue of such moral gravity like the climate crisis. #AMZNSpeakOut pic.twitter.com/zWIKku4LF6 — Amazon Employees For Climate Justice (@AMZNforClimate) January 27, 2020
An Amazon spokesperson told Fortune that the company is committed to reducing the affects of climate change and said it has clearly stated its position online.
“While all employees are welcome to engage constructively with any of the many teams inside Amazon that work on sustainability and other topics, we do enforce our external communications policy and will not allow employees to publicly disparage or misrepresent the company or the hard work of their colleagues who are developing solutions to these hard problems,” the company said in a statement.
An Amazon spokesperson also pointed to several of the company’s efforts, including a commitment to net zero carbon emissions by 2040. To help achieve this goal, Amazon has ordered 100,000 electric delivery vehicles and plans to use 100% renewable energy by 2030, the spokesperson said.
A representative for the Amazon workers said the group hasn’t yet received any communication from Amazon human resources or legal teams about whether workers would be disciplined or terminated for speaking out. Employees can speak about their personal work experiences at Amazon, as long as they make it clear they aren’t speaking on behalf of Amazon, according to the company.
Amazon requires external communication about its business, products, services, technology, and customers to be approved in advance before an Amazon employee speaks in a public forum. This includes social media posts.
On Monday, the 357 employees received a high-profile vote of support from Democratic presidential candidate Sen. Bernie Sanders, a frequent critic of large corporations, who tweeted his solidarity.
“I stand with these Amazon employees who are courageously speaking out. They are telling Jeff Bezos to end his hypocrisy: You cannot call your corporation a ‘leader’ on climate change while partnering with ExxonMobil and BP to extract more fossil fuels,” Sanders wrote.
On Monday, the Amazon Workers For Climate Justice Twitter account continued to share quotes from employees about why they want to see Amazon do more. For Mark Hiew, a senior marketing manager for Amazon in Seattle, the urgency of the topic is hitting especially close to home.
“As someone who grew up in Australia, the devastating reality of our climate crisis has become all too clear as I watch my homeland burn and millions of native animals being killed. This is not the time for silencing voices,” he said. “We need policies that welcome more open discourse, more problem-solving, and more urgent and concerted action about climate change and its causes.”
More must-read stories from Fortune:
—The long ocean voyage that helped find the flaws in GPS
—Atari-themed hotel deal punctuates the gaming pioneer’s turnaround
—Into the ‘crucible’: How the government responds when GPS goes down
—This tech giant says A.I. has already helped it save $1 billion
—What is tech doing to protect the whistleblower’s identity? Not much
Catch up with Data Sheet, Fortune’s daily digest on the business of tech.


fortune--2020-01-27--‘Pharma bro’ Martin Shkreli sued for alleged violation of antitrust law

More than 350 Amazon employees risk their jobs to speak about climate crisis

Convicted “Pharma Bro” Martin Shkreli was sued by federal officials and the state of New York for allegedly violating antitrust law when he jacked up the price of a crucial drug by 4,000% overnight in 2015.
The lawsuit was filed Monday in federal court in Manhattan by the Federal Trade Commission and New York Attorney General Letitia James. The complaint names Vyera Pharmaceuticals, formerly known as Turing Pharmaceuticals, along with co-owners Shkreli and Kevin Mulleady.
The allegations are separate from what landed Shkreli behind bars, though the drug at the center of the case is the same. He’s in prison serving a seven-year sentence for defrauding investors in hedge funds he ran by lying to them about his track record and performance as well as a fraudscheme involving Retrophin Inc., a company he founded in 2011.
Shkreli, who was ousted from Retrophin in 2014, started Turing Pharmaceuticals the following year. While operating the biopharmaceutical business Shkreli acquired a drug called Daraprim, a once-affordable anti-infective for a sometimes-deadly parasitic infection. The FTC and New York claim he then raised the price and used a complex web of contractual restrictions to block generic versions.
The defendants “acquired the U.S. rights to Daraprim from the only existing supplier and immediately raised the price from $17.50 to $750 per tablet,” according to the complaint. “This massive price hike delivered immediate benefits to defendants.”
Daraprim is the gold standard treatment for a rare, potentially fatal parasitic infection known as toxoplasmosis. In most people, toxoplasmosis is easily contained by the immune system and causes no symptoms, according to the complaint. — FTC (@FTC) January 27, 2020
“We won’t allow ‘Pharma Bros’ to manipulate the market and line their pockets at the expense of vulnerable patients,” James said in a statement.
Shkreli, who taught himself biology, and his company Turing Pharmaceuticals were among those included in a 2016 U.S. Senate committee report that called for the government to stop a “monopoly business model” used by some drugmakers to raise prices on certain medications.
In Washington, the infamously sarcastic Shkreli has remained the face of increasingly high drug costs. President Donald Trump has called the former hedge-fund-manager-turned-drug-executive a “spoiled brat,” while the presidential campaign of Vermont Senator Bernie Sanders has called him a “poster boy for drug company greed.”
Shkreli is scheduled to be released from prison in September 2023, according to the U.S. Bureau of Prisons. He’s being held in a facility in Allenwood, Penn.


fortune--2020-01-27--John Bolton Bombshell Roils Impeachment Trial

News of former National Security Adviser John Bolton’s unpublished manuscript scrambled Senate Republicans’ efforts to defend President Donald Trump in his impeachment trial and raised the possibility that additional witnesses could be called, should a majority of the Senate vote to do so.
On Sunday night, the New York Times reported that Bolton wrote in his upcoming book that Trump told him directly that he wanted to continue freezing security assistance to Ukraine until the country’s president announced an investigation into the Bidens, contradicting the Trump’s legal defense that the President himself did not link the assistance to the demand for investigations.
Two Republican senators said Monday that Bolton’s forthcoming book supported their case for allowing witnesses to be called in the trial.
“I think it’s increasingly likely that other Republicans will join those of us who think we should hear from John Bolton,” Sen. Mitt Romney (R-Utah) told reporters. “I think it’s important for us to hear from John Bolton for us to be able to make an impartial judgment.”
“The reports about John Bolton’s book strengthen the case for witnesses and have prompted a number of conversations among my colleagues,” said Sen. Susan Collins (R-Maine) in a statement.
Bolton has said that he would comply with a subpoena from the Senate to testify, and, according to the Times, wants to testify before his book comes out on March 17 to avoid being accused of holding back relevant information to increase sales.
A third Republican senator, Lisa Murkowski of Alaska, tweeted that she was “curious as to what John Bolton might have to say.”
However, there was no indication yet that Romney’s prediction would come true; the outcome of a vote expected later this week on whether to allow additional witnesses remained uncertain. The Senate was expected to acquit Trump as soon as the end of this week should no witnesses be called.
Lamar Alexander of Tennessee, a possible vote tipping the call for witnesses to a majority of the Senate, did not say Monday whether or not he would vote for additional witnesses but left the door open to doing so after the conclusion of the Trump team’s arguments and questions from senators.
“Keep cool”
Senate Majority Leader Mitch McConnell (R-Ky.) has controlled the process of the Senate impeachment trial, and has shown a willingness to alter the process when the mood of his caucus shifts, as when he altered the rules of the trial to allow for three days of arguments per side from two. Should four or more Republicans come out in favor of witnesses, McConnell may move to maintain control over the process.
McConnell’s message to his caucus at a Monday closed-door lunch before arguments was to “keep cool,” according to Indiana Sen. Mike Braun. “Take a deep breath, and let’s take it one step at a time,” he added.
Still, the news upended Republicans’ message of unity in the impeachment trial. Many senators arriving to the Capitol sought to downplay Bolton’s revelation, others said he was credible, and some portrayed him as a disgruntled former employee fired by Trump.
“My guess is that John Bolton tells the truth,” Sen. Ron Johnson (R-Wisc.) told reporters, but also opined that the timing of the news was “rather exquisite.”
Sen. Jim Inhofe (R-Okla.), who said he was opposed to calling additional witnesses, agreed that Bolton had integrity, but added, “You got to keep in mind, for the first time in his life, he was fired, that does have an effect on him.”
Sen. John Barrasso (R-Wy.), the No. 3 Republican in the Senate, dismissed the news.
“Really there’s nothing new here. It does seem to be an effort to sell books,” he told reporters. “Every day there’s going to be something new—and today is just one more day.”
Another Republican senator, Lindsey Graham of South Carolina, lumped Bolton into calling for probing the Bidens, despite the fact that there is no evidence that former Vice President Joe Biden did anything improper while his son worked for a Ukrainian gas company, Burisma.
“He may be a relevant witness,” he told reporters, “But I’ve also said, I want to know is there a reason to believe by the President that the Bidens were involved in corrupt behavior, is there a reason believe that Ukraine knew they were involved in both sides or the Democratic party. All that stuff can be looked at.”
The newest Republican senator, Kelly Loeffler of Georgia, took a shot at her fellow Republican colleague, Mitt Romney.
“Sadly, my colleague @SenatorRomney wants to appease the left by calling witnesses who will slander the @realDonaldTrump during their 15 minutes of fame. The circus is over. It’s time to move on!” she tweeted.
“We do not deal with speculation”
One of Trump’s lawyers, Jay Sekulow, appeared to address the Bolton allegations at the outset of the second day of presenting the Trump team’s arguments.
“We deal with transcript evidence. We deal with publicly available information. We do not deal with speculation, allegations that are not based on evidentiary evidence at all,” he said.
Still, the question of whether the Senate would vote to allow additional witnesses remained unresolved.
Sen. John Kennedy (R-La.) was waiting to hear the arguments.
“We’re about halfway through the trial,” he said. “I think everybody ought to pop a Zoloft, take their meds, and let’s wait and finish up.”
More must-read stories from Fortune:
—What is tech doing to protect the whistleblower’s identity? Not much
—5 surprising consequences from a decade of Citizens United
—Understanding the 2020 election as brand marketing
—As the USPS faces privatization, here’s what it can learn from Canada
—Millions have been purged from voter rolls—and may not even realize it
Get up to speed on your morning commute with Fortune’s CEO Daily newsletter.


fortune--2020-01-27--NFL and teams hacked on Twitter, just days before the Super Bowl

The official Twitter accounts for more than a dozen National Football League teams have been hacked, less than a week before the Super Bowl.
Official verified Twitter accounts for a number of teams, including the Super Bowl-bound San Francisco 49ers and Kansas City Chiefs, no longer have profile photos on the social media service. A tweet sent by the official Green Bay Packers Twitter account reads, “We are here to Show people that everything is hackable,” and attributes the breach to a group called OurMine. Screen shots on Twitter show similar tweets were sent from other official team accounts, but have since been deleted.
A screenshot of the OurMine’s tweet on the Green Bay Packer’s Twitter account, captured Jan. 27 at 4:20 p.m. Eastern Time.
OurMine has previously been linked to other Twitter hacks, including on the account of Chief Executive Officer Jack Dorsey. In June 2016, OurMine claimed credit for breaking into Facebook CEO Mark Zuckerberg’s Twitter and Pinterest accounts. OurMine’s Twitter account was subsequently suspended. Another account mentioned in some of the tweets from Monday, @OurM1ne, is still up.
In December 2016, hacking team OurMine accessed Netflix and Marvel Entertainment’s Twitter accounts and posted the message, “Hey, it’s OurMine, Don’t worry we are just testing your security, contact us to help you with your security.”
A Twitter spokeswoman confirmed the NFL accounts were hacked, and said the company has locked the accounts and is investigating further. The NFL, whose account was also hacked, didn’t immediately respond to a request for comment.
It’s the second straight day that NFL teams were targeted on the site — notable in part because the league’s championship game is set for Feb. 2 in Miami. On Sunday, the day of the annual Pro Bowl, hackers trolled some fans of the Chicago Bears after taking over the team’s official Twitter account. The hackers tweeted that the team had been sold, and also that it had traded away its best player.
“Yes, our official team Twitter account was compromised yesterday,” a spokesman for the team said. “We worked directly with Twitter to rectify it in about an hour or so.”
More must-read stories from Fortune:
—The long ocean voyage that helped find the flaws in GPS
—Mysterious GPS outages are wracking the shipping industry
—Into the ‘crucible’: How the government responds when GPS goes down
—Google CEO Sundar Pichai on managing a tech giant’s growing pains
—5G is supposed to be the future. But here’s what it’s like today
Catch up with Data Sheet, Fortune’s daily digest on the business of tech.


fortune--2020-01-27--Michael Avenatti Googled ‘insider trading’ before Nike meeting

Celebrity attorney Michael Avenatti did internet research on put options and insider trading before trying to extort millions of dollars from Nike Inc., federal prosecutors told a judge.
Lawyers for the government on Monday told U.S. District Judge Paul Gardephe in Manhattan that they intend to show Avenatti’s search history to jurors at a two-week trial getting underway this week, calling it evidence of the California attorney’s state of mind during the alleged crime. At the time, Avenatti was representing a youth basketball coach with claims against Nike.
Gardephe barred prosecutors from mentioning the search terms in their opening statement and said he’d rule later on whether and how the evidence can be used in the trial. Avenatti’s lawyers called the search terms irrelevant and said the evidence would improperly sway the jury in a case that doesn’t include insider trading allegations.
Avenatti gained a national profile while representing an adult-film actress in a lawsuit against President Donald Trump. The attorney was charged in March for allegedly demanding that Nike pay him and a colleague as much as $25 million in exchange for canceling a scheduled press conference that would damage the company’s finances and reputation. The press conference would have been used to go public with claims by his client, Gary Franklin, that the athletic apparel company made illegal payments top high school basketball players.
Arrested again two weeks ago for allegedly violating his bail conditions, Avenatti appeared in court Monday wearing a suit instead of the jail-issued garb he wore to a recent pre-trial hearing. He stood with his legal team to face dozens of potential jurors who entered a large courtroom to fill out a questionnaire and be considered for the jury. Opening statements could start Tuesday or Wednesday.
Gardephe said Monday the trial “will not involve an exploration” of whether Nike sought to corrupt youth basketball. Avenatti may, however, tell the jury about Nike’s alleged motive for going to prosecutors with its claim of extortion against him, the judge said. Avenatti argues Nike was trying to curry favor with prosecutors by offering up Avenatti “on a silver platter,” as the judge put it.
Nike argued in court filings that Avenatti was trying to “put the government’s and Nike’s conduct on trial” because he can’t dodge the video and audio evidence of his demands on the company.
“He intends to misdirect the jury—pointing their attention anywhere but on his own conduct—in the hope that at least one of them will be confused by evidence that is legally irrelevant and factually inaccurate,” Nike said.
Avenatti’s lawyers, for their part, described the government’s focus on their client’s internet research as a red herring.
“The obvious implication is that Mr. Avenatti illegally traded in Nike stock based upon information obtained from Coach Franklin,” the defense lawyers said in a Jan. 24 court filing. “That did not happen, the government has no evidence that it did, and Mr. Avenatti is not charged with insider trading.”
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fortune--2020-01-27--Apple’s new golden child— services—is in the earnings spotlight. Here’s why

Apple executives talk a lot about the growth of the company’s services business, which includes Apple Music, Apple TV Plus, and iCloud. Taken alone, the unit’s $46.3 billion in annual revenue would place it in the top 70 of the Fortune 500 list of biggest public companies.
But Apple’s services business is complicated—more so than merely selling subscriptions and collecting easy profits. The division is critical for getting people to buy Apple devices, and some of the unit’s elements, in fact, lose money, according to analysts.
“They all have different earning potentials,” Creative Strategies analyst Tim Bajarin says about Apple’s many services.
Services will undoubtedly be a big focus when Apple reports first fiscal-quarter earnings on Jan. 28. Investors will be looking at whether the unit’s revenue growth is accelerating—last year it increased 16%—and whether new services are catching on with subscribers.
Analysts generally agree that it is. Bajarin, for example, estimates the company will report $14 billion in fiscal first-quarter services revenue compared with $10.9 billion during the same period in 2018.
Last year, as part of a major strategy shift under CEO Tim Cook, Apple doubled down on services. The company premiered its Apple TV Plus video-streaming service to compete against Netflix and debuted the Arcade video-game streaming service to challenge similar ones from Google and Microsoft.
At the same time, some of Apple’s existing services showed huge growth, at least in terms of users. Apple Music, for instance, doubled its paid subscribers to 60 million in 2019 from 30 million in 2017. Meanwhile, the company’s four-year-old News service surpassed 100 million active users at the end up 2019, up from 50 million in March.
That growth, along with strong sales of AirPods and Apple Watch, has helped to propel Apple’s shares to stratospheric levels. Over the past six months, its shares have gained 53%.
A deeper dive
Apple doesn’t disclose profits for its services division, but analysts suspect it’s quite high.
Gross profit margin—the difference between sales and the cost of generating those sales—was about 64% for services last quarter, double the 32% gross profit margin for Apple devices, Apple reported last year.
Loup Ventures analyst Gene Munster says Apple’s App Store, to use just one services business as an example, has a 90% gross profit margin on the revenue it collects from apps and in-app purchases. It keeps costs low by merely taking a cut of the revenue generated from those apps, usually 30%.
But the picture is quite different for services that Apple directly manages. For instance, Munster said that Apple has spent $2 billion on programming for Apple TV Plus, which debuted in November. Over the next several years, the total amount spent could rise to $5 billion, he said.
Because of the high cost, turning a profit on Apple TV Plus will be impossible for at least a few years, said Ed Barton, chief entertainment analyst at Ovum.
It’s unclear how many people are paying $5 monthly for an Apple TV Plus subscription. Complicating the financial calculation is the fact that Apple has given an undisclosed number of free subscriptions to customers who have bought its devices.
Simon Dyson, an analyst who focuses on music at Ovum, thinks Apple Music faces even bigger financial challenges. The streaming music service has a large number of subscribers—60 million—but it also has high costs.
Apple keeps just 40% of the $10 per month it charges subscribers while the remaining 60% goes to music rights holders.
“[Apple Music] is unlikely to have registered much of a profit if at all,” said Dyson.
It’s a similar story with Apple’s Podcasts, Arcade, and other streaming content, which Dyson says haven’t generated much revenue. Ultimately, analysts said Apple’s App Store, its iCloud storage, and its mobile payment service Apple Pay, generate much of the services division’s profit.
Focusing on hardware
But there is more to services than profits. Apple uses its services business to get people to buy its hardware, analysts pointed out. Customers who are loyal to Apple’s iCloud, for instance, often stick with iPhones or Macs so they can easily move their content to new Apple hardware and sync data across devices.
“Everything is designed to drive and retain hardware purchasers, and the ecosystem of Services and content is a critical part of that,” Barton says.
Looking ahead
Services should continue to grow in 2020 and beyond, according to Barton. At the end of 2019, Apple had 450 million subscribers to all of its services, and he believes that will increase to more than 500 million by the end of this year.
Currently, Apple’s services business accounts for nearly 18% of overall revenue, but should jump to 20% or more at the end of 2020, Munster says. More importantly, it will represent 35% of Apple’s profit, up from about 30% last year, according to Apple.
With hardware sales, and especially iPhone sales, slowing, Apple has needed another division to pick up the slack. The rise of Apple’s services business comes just in time.
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fortune--2020-01-27--What Kobe Bryant meant

What Kobe Bryant meant

This is the web version of raceAhead, Fortune’s daily newsletter on race, culture, and inclusive leadership. To get it delivered daily to your inbox, sign up here.
Today is a day of complex grief for many, many people.
Five-time NBA champion and four-time All-Star MVP Kobe Bryant, 41, and his 13-year-old-daughter Gianna, were among nine people who died when the helicopter they were traveling in crashed in the hills near Calabasas, Calif., on Sunday morning.
He leaves behind his wife Vanessa, and their three daughters.
At press time, six victims had been identified. Orange Coast College confirmed that their baseball coach, John Altobelli, his wife Keri, and their daughter Alyssa, were on board. Also on board was Christina Mauser, a girls assistant basketball coach who leaves behind a husband and three young children.
Gianna, known as Gigi, was a rising basketball star, poised to follow her father’s example and determined to play for the UConn Huskies one day. (Here’s a wonderful tribute to her from Slate, if you can handle it.) Bryant may have been a thrilling athlete and a mogul well in the making, but he died a devoted father, taking his kid and her friends to a basketball event.
And because it was Kobe, it feels like a personal loss.
The outpouring of grief spilled into the Grammy coverage and Sunday’s NBA games. The Spurs and Raptors used the language of basketball for their tribute; each team took a voluntary 24-second shot clock violation—a slow dribbled count-down to highlight the number 24, which Bryant wore on his Laker jersey until he retired in 2016.
Twitter became an instant and ongoing funeral, an outpouring of love and support.
Grief for a public figure is particularly complicated. It’s losing a stranger we feel like we know, our friend not only in our heads, but in our hearts, too.
When they die, we miss them because they’ve become part of our lives and identities. It’s normal to grieve. “Fans mourn not only the loss of the celebrity, but other aspects of their personal life which have become bound-up with the celebrity,” says Michael Brennan, a sociologist at Liverpool Hope University, and quoted by Quartz, in this helpful piece. Athletes, in particular, give us a reason to feel proud of our cities, exhilarating memories of victory, friendship, and fun, and a metaphor for hard work and excellence.
They vanquish. They dominate. They dig deep. They WIN. And through them, so do we.
And Kobe had super fans, even among people who didn’t follow basketball. He was poised for an astonishing second act as a designer-collaborator, venture capitalist, storyteller and producer, philanthropist, and advocate. He had become a role model of a different type, a symbol of outsized Black achievement at a time when it still feels necessary to claim credentials like his for the community.
But for some, his legacy is more painful. Like many male celebrities who have been credibly accused of sexual assault, he’d become emblematic of a culture that values male success above all else. It’s difficult to find ways to talk about this part of Bryant’s history without considering the overlapping universes of wealth, fame, entertainment, sports, media, capitalism, sex, and all the things that inspire us to ride or die for strangers we feel like we know.
It’s reasonable to expect that in real life and online, lots of different kinds (and perhaps conflicting) grief will be present, held by people filled with shock, sadness, anger, and a bunch of other emotions that may be hard to name.
So, my best advice, which I lean on often, comes from my dear friend David Kyuman Kim, an author and professor of religion, race, and American studies. He has become a raceAhead treasure.
Being able to survive an encounter with someone else’s grief—or anything else about their lived experiences—requires being willing to make room for them, even if you don’t fully understand. It’s a basic building block of an inclusive culture, whether inside a corporation or simply in your life. “What does it mean to be in solidarity?” asks Kim. “It means I’m standing with you because I care about you in abstraction. I care about your well-being, including the threats to your humanity.”
The specific conversations that come next are the really scary part, of course.
“Start with the language of love and mercy,” he says. “That’s where you’ll find courage.”
Ellen McGirt
@ellmcgirt
Ellen.McGirt@fortune.com
On Point
Today is International Holocaust Remembrance Day It’s a poignant and necessary reminder, made more so by the alarming uptick in anti-Semitic rhetoric and attacks. “Now is the first time that I have truly felt, in my (admittedly few) 23 years of life, such an overwhelming fear of impending doom,” writes Jordan Salama in an opinion piece. “If war won’t destroy the world, climate change will. And now to add to it, the wave of anti-Semitic attacks over the past year are instilling the seeds of fear into many millennial American Jews for perhaps the first time.” More ways to remember and connect below.
U.S. Holocaust Memorial Museum
Despite grief and controversy, the Grammys went on Our colleague Eric R. Danton does a beautiful job assessing an awards show, which nobly performed under pressure but made the point of its longtime critics. “Genre lines grow ever blurrier as artists decline to stay put within categories that have come to look too narrow and confining, and the Grammys haven’t figured out how to keep pace,” he says. Case in point, Tyler the Creator, who won for best rap album for Igor. Except, it’s not a rap album. “It sucks that whenever we, and I mean guys that look like me, do anything that’s genre-bending, they always put it in a ‘rap’ or ‘urban’ category,” Tyler said backstage. “I don’t like that ‘urban’ word. It’s just a politically correct way to say the N-word. When I hear that, I’m just like why can’t we just be in pop?” Click through for the rest of the news.
Fortune
China’s biggest film weekend curtailed by threat of coronavirus infection The annual week-long new year holiday is typically big business for China’s film industry, but this year, new releases and special events were cancelled out of caution. While it was the right thing to do, it is a setback for a country that had been aiming to carve out a bigger piece of international box office figures. “The swathe of cancellations has meant that plans to release overseas also have to be scrapped, as regulations state that Chinese-produced films must be released in the home market first,” reports The Guardian.
The Guardian
A Ugandan youth climate activist was cropped out of a photo, igniting outrage Vanessa Nakate was part of a group of young activists, including Greta Thunberg, who gave a press conference in Davos last Friday. But for some reason, Nakate was cropped out of the picture published by the Associated Press (AP). She expertly raised the issue on Twitter in comments and a video which went viral. “Why did you remove me from the photo? I was part of the group,” she tweeted. Then, in a video, she said, “We don’t deserve this. Africa is the least emitter of carbons, but we are the most affected by the climate crisis,” she said. “You erasing our voices won’t change anything. You erasing our stories won’t change anything.” The AP said the photo was cropped for compositional purposes; other agencies, including Reuters, misidentified Nakate as Zambian activist Natasha Mwansa.
The Guardian
On Background
A newly discovered Auschwitz survivor’s diary Sheindi Ehrenwald was 14 when she arrived at Auschwitz on June 14, 1944. Now 90, and called Sheindi Miller, she is sharing the diary she kept in secret, documenting the horrors she and others endured. Miller survived the war and emigrated to Israel, where the documents were stored in a kitchen cupboard for 70 years. She was unable to talk about her experiences with her family, but is now publishing the diary out of fear of rising anti-Semitic sentiment in Europe. “When I was writing the diary, my greatest fear was that a German would read it,” Miller said this week. “Today, 76 years later, my greatest joy is that Germans are reading it.” The diary is being exhibited this week at the German History Museum in Berlin.
Wall Street Journal
An estimated one-third of Holocaust survivors in the U.S. are living in poverty The stories pop-up on Remembrance Day—like this one from San Diego—but there seems to be little progress. There are about 100,000 Holocaust survivors currently living in the U.S., and according to The Blue Card, a non-profit that offers financial assistance to the survivor population, one third are living at or below the federal guidelines for poverty. Survivors who relocated after the former Soviet Union fell are in particularly dire financial condition and have little access pensions or other safety nets. The number is in stark contrast to the 10% of Americans over age 65 who are living in poverty.
The Blue Card
More Americans went to the library in 2019 than to the movies Of course, we’re all still watching movies, but a recent Gallup poll, visiting the local library is the most common “cultural activity” American adults enjoy—and by far, with 10.5 trips on average last year. “Americans attend live music or theatrical events and visit national or historic parks roughly four times a year on average and visit museums and gambling casinos 2.5 times annually. Trips to amusement or theme parks (1.5) and zoos (.9) are the least common activities among this list.”
Lithub
Quote
“He was everything to my generation. There’s a whole generation of L.A. kids, global obviously, but that was our childhood. The lesson of hard work and, as cliche as it may sound, the Mamba mentality, that’s part of the reason I am who I am today. He was everything to a lot of kids, and I was one of them.”
—Spencer Dinwiddie, Brooklyn Nets point guard, speaking after the Nets-Knicks game after Kobe Bryant's death on Jan. 26, 2020.


fortune--2020-01-27--Trump administration can enforce policy that could limit green cards for immigrants using public ben

Trump administration can enforce policy that could limit green cards for immigrants using public benefits: Supreme Court

A divided Supreme Court on Monday allowed the Trump administration to put in place a policy connecting the use of public benefits with whether immigrants could become permanent residents.
The new policy can be used to deny green cards to immigrants over their use of public benefits including Medicaid, food stamps and housing vouchers, as well as other factors.
The justices’ order came by a 5-4 vote and reversed a ruling from the 2nd U.S. Circuit Court of Appeals in New York that had kept in a place a nationwide hold on the policy following lawsuits that have been filed against it.
The court’s four liberal justices, Stephen Breyer, Ruth Bader Ginsburg, Elena Kagan and Sonia Sotomayor, would have prevented the policy from taking effect.
Federal appeals courts in San Francisco and Richmond, Virginia, had previously overturned trial court rulings against the policy. An injunction in Illinois remains in effect, but applies only to that state.
The lawsuits will continue, but immigrants applying for permanent residency must now show they wouldn’t be public charges, or burdens to the country.
The new policy significantly expands what factors would be considered to make that determination, and if it is decided that immigrants could potentially become public charges at any point in the future, that legal residency could be denied.
Roughly 544,000 people apply for green cards annually. According to the government, 382,000 are in categories that would make them subject to the new review.
Immigrants make up a small portion of those getting public benefits, since many are ineligible to get them because of their immigration status.
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fortune--2020-01-27--First NAFTA. Then China. Europe may be next in Trump’s trade war offensive

In the first three years of his presidency, Donald Trump’s abrasive trade diplomacy has yielded a tweaking of NAFTA and halted, apparently, the remorseless widening of the U.S.’s deficit with China.
He now has to decide whether to stick or twist by going after the European Union too. Will he hit the tariff button again to energize his electorate, risking an economic slowdown during the election campaign? Or will he soft-pedal, trusting to the warm afterglow of deals that still have to live up to their hyperbolic billing?
Anyone who tried to process the giddying flurry of press conferences and soundbites from the World Economic Forum last week could be confused for not knowing what to think. The week started with signs of détente, as French President Emmanuel Macron said he wouldn’t levy a planned tax on digital services—which would hit mainly the big U.S. tech platforms such as Google and Facebook—until next year.
Finance Minister Bruno Le Maire said he was optimistic that a deal on how to tax digital companies could be hammered out soon.
The Organization for Economic Cooperation and Development, which is coordinating global work on the issue with a mandate from the G20, is due to present a solution to world leaders at this year’s G20 summit in Riyadh in November.
European officials are concerned the U.S. will withdraw from the process, having signaled its opposition to the mandatory framework proposed last year by the OECD’s experts.
Trump, for his part, quickly shot down suggestions that the U.S. had agreed to hold off on more import tariffs on EU products in return.
After a “great” meeting with the new European Commission President, Ursula von der Leyen, Trump threatened “a very high tariff on their cars and other things that come into our country,” unless a new trade agreement was forthcoming, without providing any further details. And just in case anyone doubted him, Treasury Secretary Steven Mnuchin repeated the tariff threat—this time toward the U.K.—two days later, saying that it, too, would face tariffs if it went ahead with plans to introduce a Digital Services Tax of its own in April.
Trump also claimed the EU wanted to arrange an “emergency meeting.” No-one in Brussels confirmed anything of the sort, although Von der Leyen did signal that she was “expecting in a few weeks to have an agreement that we can sign together” with the U.S.—one that would have chapters on trade, technology and energy. However, she too was light on details.
Trade war temptation
The EU certainly makes a tantalizing target: its trade surplus with the U.S. has nearly doubled over the last decade to a record $163 billion last year. While that’s only half of its deficit with China, the U.S. actually imported around 10% more goods from the EU last year than from its big Asian rival at $473 billion.
“I think an escalation of trade tensions between the U.S. and EU is likely this year,” Megan Greene, a senior fellow at the Harvard Kennedy School of Business, told Fortune. “Trump has repeatedly threatened to impose tariffs on imported autos and may follow through. The President—erroneously—cares about bilateral trade deficits and Germany has a large trade surplus with the U.S.”
Germany’s surplus with the U.S. on vehicles and components actually peaked in 2015 at nearly $37 billion, according to U.S. customs data, but has fallen by nearly a quarter since then due to the Dieselgate scandal and German producers’ increasing use of local manufacturing. Even so, for an administration hyper-sensitized to bilateral balances, it stands out like a sore thumb.
Steven Mnuchin, U.S. Treasury secretary, was part of the U.S. delegation at the World Economic Forum in Davos, Switzerland that hardened its trade stance against Europe. Jason Alden—Bloomberg via Getty Images
Germans are long accustomed to seeing their surpluses as a sign of economic strength, but now there is a growing sense of concern that depending so much on the global consumer at a time when globalization is in retreat is actually, at the same time, a vulnerability.
The Deutsche Bundesbank, Germany’s central bank, wrote in its monthly report for January that a 25% tariff on European auto imports (akin to the 25% tariffs levied on many Chinese goods) could take 0.25% off eurozone gross domestic product growth. A 25% tariff on all EU exports to the U.S. could slice a full 1% off GDP in the bloc, in a year when the Commission only expects 1.2% growth even without a new trade war.
Nor are autos the only bone of contention for the Trump administration. It’s already levying tariffs on EU steel and aluminum, as well as another $7.5 billion in goods in response to unfair ‘launch aid’ given to Airbus. The latter even has the blessing of the World Trade Organization.
Carbon border tax broadside
And the potential for an even bigger bust-up is on the horizon in the form of von der Leyen’s plan for a ‘Carbon Border Tax’ that may end up being levied on any trading partner deemed to have more lax environmental standards than the EU. Commerce Secretary Wilbur Ross already sees the risk that the carbon tax will damage U.S. interests.
“Depending on what form the carbon tax takes, we will react to it—but if it is in its essence protectionist, like the digital taxes, we will react,” Ross told the Financial Times last week.
Economists—including the Bundesbank’s—argue that the risks of slapping tariffs on EU imports are much higher for the U.S. economy, given that it’s much more closely entwined with the EU than with China. U.S. exports to the EU are three times as high as they are to China, giving the EU an abundance of potential targets for retaliatory measures. The more developed trade links also make the risk of negative knock-on effects more likely.
“We are far from being able to rule out that the U.S. will levy additional tariffs on a wide range of European goods,” the Bundesbank said. “But such a conflict would be expensive for both sides.”
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fortune--2020-01-27--Taliban says it shot down U.S. aircraft in Afghanistan

The Taliban has claimed responsibility for the downing of a “special American aircraft” flying over Afghanistan on what it described as an intelligence mission.
The crash happened on Monday in the Taliban-controlled Sado Khel area of the Deh Yak district in Ghazni province, the militant group’s spokesman Zabihullah Mujahed said in a message via WhatsApp.
“A special American aircraft which was flying over Afghanistan for an intelligence mission was tactically shot down by the Taliban,” Mujahed said. “All on board including high-ranking CIA officers were killed.”
There have been wildly conflicting claims on the crash since the news broke hours earlier — first it was reported to have been a passenger plane en-route from Dubai, then a military flight and now a U.S. aircraft. There has been no confirmation so far from the U.S. military.
“U.S. Central Command is aware of the reports of a U.S. aircraft crash in Afghanistan,” said Major Beth Riordan, a U.S. Central Command spokeswoman. “We are currently monitoring the situation and will provide additional information when possible.”
Earlier on Monday, Afghanistan’s Civil Aviation Authority provided some details.
“The plane was apparently dispatched for military operations and it took off from Afghanistan territory,” said Ghulam Masoom Massumi, the director of air traffic management at the authority, by phone. “The military plane was not a cargo plane.” Massumi added.
He gave no details of the size and make of plane or the number of people on board.
Conflicting Accounts
Earlier in the day, Afghanistan’s second Vice President, Sarwar Danish, had said that a passenger plane owned by the country’s national carrier, Ariana Afghan Airlines, crashed in the Deh Yak district of Ghazni province. However Ariana denied reports one of its planes was involved and said it was operating as normal.
No other details were immediately available.
The incident follows reports last week the U.S. and the Taliban were moving toward a peace deal that would see the eventual withdrawal of foreign troops from Afghanistan and an end to the 18-year long conflict.
It’s the second time in recent months the two sides have appeared close to announcing an agreement. In September President Donald Trump abruptly called off talks in response to a suicide bombing in Kabul that killed an American soldier.
The militant group controls or contests half of the country, more territory than any time since they were toppled in 2001. The U.S. currently has 13,000 of the 22,673 foreign troops in Afghanistan, down from a peak of 100,000 in 2011.
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fortune--2020-01-27--The Grammys remain more of the same even amid calls for change

In the end, it was the same as always Sunday night at the 62nd annual Grammy Awards.
At a ceremony overshadowed by tragedy and scandal, pop dominated music’s self-declared biggest night, while hip-hop and R&B artists came away without winning any of the four major categories. All of those went to Billie Eilish, the 18-year-old Los Angeles singer, who won Album of the Year, Song of the Year, Record of the Year, and Best New Artist, along with Best Pop Vocal Album for her muted, moody 2019 debut When We Fall Asleep, Where Do We Go? Eilish became the first woman to sweep all four major categories, and the second artist overall: Christopher Cross did it in 1981.
Yet Eilish’s ascendance—and her disarmingly startled, half-wary reaction—came as part of an annual ritual that feels increasingly rigid, even as the music it purports to celebrate becomes more malleable. Genre lines grow ever blurrier as artists decline to stay put within categories that have come to look too narrow and confining, and the Grammys haven’t figured out how to keep pace. For example, Tyler, the Creator won Best Rap Album for his 2019 release Igor, which blends elements of hip-hop with pop, soul, and funk for a sound that doesn’t fit neatly into any genre. Competing in the rap album category felt to him like an outdated placement.
Tyler, the Creator, winner of Best Rap Album for “Igor”, speaks onstage during the 62nd Annual Grammy Awards at the Staples Center on Jan. 26 in Los Angeles. Backstage, he said it was unfortunate that genre-bending albums like his own often ended up in the rap category. Kevin Mazur—Getty Images for The Recording Academy
“It sucks that whenever we, and I mean guys that look like me, do anything that’s genre-bending, they always put it in a ‘rap’ or ‘urban’ category,” Tyler said backstage, according to the Associated Press. “I don’t like that ‘urban’ word. It’s just a politically correct way to say the N-word. When I hear that, I’m just like why can’t we just be in pop?”
Though rap and R&B artists are frequently featured as performers during the Grammys telecast, they are often also-rans in the major categories. Since 1999, just five non-white artists—and two hip-hop albums—have won album of the year. When Childish Gambino’s “This Is America” won song of the year and record of the year in 2019, it was the first time a rap song had taken either award.
“Truth be told, hip-hop has never been respected by the Grammys. Black music has never been respected by the Grammys to the point that it should be,” Sean “Diddy” Combs said the night before the ceremony at Clive Davis’s pre-Grammy gala in Los Angeles.
This year, at least, R&B and rap acts were well represented among the nominees in the biggest categories. Singer and rapper Lizzo came into the ceremony leading the pack with eight nominations, including nods in all four major categories. In the end, she won three Grammys, all in genre fields. Rapper and singer Lil Nas X had six nominations, including three in major categories (he won two genre awards, both for his is-it-country? song “Old Town Road”), while three of R&B singer H.E.R.’s five nominations came in the big categories (she went home empty-handed).
The Grammys began on a heartbreaking note, just a few hours after basketball legend Kobe Bryant and his 13-year-old daughter, Gianna, died in a helicopter crash that also killed seven others. The awards ceremony took place at the Staples Center, home of the Los Angeles Lakers, where Bryant played home games for his entire 20-year career, and where his jerseys hang in the rafters. “We’re literally standing here heartbroken in the house that Kobe Bryant built,” host Alicia Keys said near the start of the show, which Lizzo opened with a medley of her songs “Cuz I Love You” and “Truth Hurts.”
“Tonight is for Kobe,” Lizzo said.
If the show directly addressed the tragedy of Bryant’s death, it skirted the swirl of scandal that has recently overtaken the Recording Academy. Though Keys mentioned early on that “it’s been a hell of a week,” there was no direct mention of Deborah Dugan, who was removed Jan. 16 as the academy’s chief executive after just five and a half months on the job. She subsequently filed a complaint with the Equal Employment Opportunity Commission that included allegations of gender-based discrimination, sexual harassment and sexual assault, and corruption in the Grammy nomination process that sidesteps the votes of 21,000 eligible members of the academy.
Dugan’s appointment last August had seemed to indicate the academy was getting serious about addressing a lack of diversity. Even with her ouster, Tyler, the Creator’s comments, and Combs’s speech, seem to make clear that there is a growing appetite for change. “So I say this with love to the Grammys, because you really need to know this, every year y’all be killing us man. Man, I’m talking about the pain. I’m speaking for all these artists here, the producers, the executives,” said Combs, himself a three-time Grammy winner, prior to the awards. “The amount of time it takes to make these records, to pour your heart into it, and you just want an even playing field.”
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fortune--2020-01-27--Silicon Valley pays tribute to Kobe Bryant the basketball legend—and investor

Kobe Bryant, the 18-time NBA All-Star who had a 20-year career with the Los Angeles Lakers, died in a helicopter crash Sunday. His 13-year-old daughter Gianna and seven others also died in the crash.
Following his retirement from the NBA, Bryant chose venture capital as his second act. He and business partner Jeff Stibel formed venture firm Bryant Stibel in 2013 and raised $100 million for their debut venture capital fund three years later. Their investments included sports media website The Players Tribune (which was recently acquired by Minute Media), video game designer Scopely, and legal-services company LegalZoom.
Bryant was known for his obsessive pursuit of precision and excellence, which he dubbed “the Mamba Mentality.” In his bio section on the Bryant Stibel website, Bryant wrote:
“To lead others, you have to constantly learn. I wouldn’t say my leadership style changed over the years. I like challenging people and making them uncomfortable. That’s what leads to introspection and that’s what leads to improvement. You could say I dare people to be their best selves.
“That approach has never wavered – from basketball to business. What I did adjust, though, was how I varied my approach from player to player, business to business. I still challenge everyone and make them uncomfortable; I just do it in a way that is tailored to them. To learn what would work and for who, I do homework and watch how they behave. I learn their histories and listen to what their goals are. I learn what makes them feel secure and where their greatest doubts lay. Once I understand them, I can help bring the best out of them by touching the right nerve at the right time.”
Following the news of Bryant’s passing, venture capitalists and tech executives shared tributes to honor the legendary player whose VC life was only beginning.
“‘My brain … it cannot process failure. It will not process failure. Because if I sit there and have to face myself and tell myself, ‘You’re a failure’ … I think that’s almost worse than death.’ — Kobe Bryant, basketball legend, RIP” — Marc Andreessen, co-founder of Andreessen Horowitz
“Many of us were teenagers when Tupac, Selena, Biggie, & Cobain died within a 3-year period. We are resilient. It’s hard to think very clearly (I can’t get passed Gigi tbh), so these are just thoughts and hymns to help me and others get through another hour. Hope they make sense.” — Arlan Hamilton, founder of Backstage Capital
“Oh my god 💔💔💔 … I can’t believe it… 🙏🏽 this is so devastating.” — Jessica Alba, co-founder of The Honest Company
“Last conversation I had with @kobebryant was about how excited he was to be doing tech investing and about the legacy he wanted to build off the court. He still believed he had work to do. Wish I’d had more time to work with him. What a tragedy. Hugging my daughter extra today.” — Alexis Ohanian, co-founder of Initialized Capital
“Kobe. Fuck. There will be a lot of takes. But, not sure I will ever know anyone else with his work ethic. Legend. #RIPMamba” — Chris Sacca, founder of Lowercase Capital
“Kobe just loved being a dad. And when it comes to his legacy, I really hope we’re able to take the time to remember that as an essential part of it.” — Derek Jeter, founder of The Players’ Tribune
REMEMBERING LEILA JANAH: It’s been a tough week. The startup community is also mourning the loss of Samasource founder and CEO Leila Janah, a serial entrepreneur with a career that spanned both the for-profit and nonprofit worlds. Her company aims to be a trusted platform for ethical training data. She died at the age of 37 of complications from Epithelioid Sarcoma, a form of cancer.
Fortune named Janah to the annual “40 under 40” list in 2017 for her mission of setting up workers in Kenya, Uganda, India, and other underprivileged parts of the world as remote freelancers for the tech sector and boosting their average wages. You can watch Janah’s full interview at Fortune’s Global Forum in 2016 in which she explains her company’s long-term solution to solving global poverty.
Polina Marinova
Twitter: @polina_marinova
Email: polina.marinova@fortune.com
VENTURE DEALS
- Catalant Technologies, a Boston-based provider of technology platform and programs for skills matching and resource allocation, raised $35 million in Series E funding. Goldfinch Partners led the round, and was joined by investors including Anheuser-Busch InBev's ZX Ventures, Salesforce Ventures, SJF Ventures, General Catalyst, Highland Capital, GE Ventures, Bob Doris of Accanto Partners, former Bain Capital Managing Director Mark Nunnelly, and Mark Cuban.
- Bizongo, an India-based online B2B marketplace for packaging, raised $30 million in Series C funding. Schroder Adveq led the round, and was joined by investors including B Capital, Accel, Chiratae Ventures and IFC.
- Iguazio, an Israel-based data science platform for real time machine learning applications, raised $24 million in funding. INCapital Ventures led the round, and was joined by investors including Samsung SDS, Kensington Capital Partners, Plaza Ventures and Silverton Capital Ventures.
- MURAL, a San Francisco-based digital workspace for visual collaboration in the enterprise, raised $23 million in Series A funding. Radian Capital led the round, and was joined by investors including Gradient Ventures, Google’s AI-focused venture group, and Endeavor Catalyst.
- Neocova, a St. Louis, Mo.-based banking technology platform built for community financial institutions, raised $9.5 million in Series A funding. Investors include Bank of St. Elizabeth, Coastal Community Bank, First Financial Bank, Kearny Bank, Provident Bancorp, Inc. and Sunwest Bank.
- Yogi, a New York-based customer feedback analytics platform, raised $2.3 million in seed funding. RTP Ventures led the round, and was joined by investors including Felton Group and Entrepreneurs Roundtable Accelerator.
PRIVATE EQUITY DEALS
- The PromptCare Companies acquired Premier Specialty Infusion, a New Providence, N.J.-based provider of complex respiratory and specialty home infusion services. Financial terms weren't disclosed.
OTHER DEALS
- Minute Media acquired FanSided, a Chicago-based network of fandom-focused sports and lifestyle site, from Meredith Corporation. Financial terms weren't disclosed.
IPOs
- PPD Inc., a Wilmington, N.C.-based drug development and laboratory management service for biopharmaceuticals, plans to raise $1.5 billion in an IPO of 60 million shares priced between $24 to $27 apiece. It previously filed confidentially in November. The firm posted revenue of $3.8 billion and income of $96.3 million in 2018. Hellman & Friedman Capital Partners (56.7% pre-offering), Carlyle (23.8%), the Abu Dhabi Investment Authority (9.2%), and the Government of Singapore (9.2%) back the firm. It plans to list on the NYSE as “PPD.” “Read more.”
- Casper Sleep, a New York-based mattress maker, says it plans to raise $150 million in an IPO of 8.35 million shares priced between $17 to $19 apiece. The firm posted net revenue of $357.9 million and loss of $93.2 million in 2018. NEA (15.9% pre-offering), Red Cart Ventures (9%), Timothy Sherwin (6.4%), Norwest Ventures (6.2%), and IVP (6.2%) back the firm. It plans to list on the NYSE as “CSPR.” “Read more.”
- Schrodinger Inc., a New York-based predictive molecule-discovery software platform maker for biopharmaceuticals, plans to raise $150 million in an IPO of 10 million shares priced at a range between $14 to $16. The firm posted revenue of $66.7 million and loss of $28.4 million in 2018. The Bill & Melinda Gates Foundation and David E. Shaw back the firm. It plans to list on the Nasdaq as “SDGR.” “Read more.”
- OneWater Marine, a Buford, Ga.-based recreational boat retailer, revived its postponed IPO with a filing to raise $59.8 million in an IPO of 4.6 million shares priced between $12 to $14 apiece. The firm posted revenue of $603 million in the year ending Sept. 2018 and income of $29.3 million. LMI Holdings, and Goldman Sachs back the firm. It previously planned to list on the Nasdaq under “ONEW.” Read more.
EXITS
- K12 Inc. (NYSE: LRN) agreed to acquire Galvanize Inc, a Denver-based provider of technology workforce education, workspace, and networking services, for $165 million in an all-cash transaction. Galvanize had raised approximately $167 million in venture funding from investors including Catalyst Investors, Aspen Grove Capital, The Colorado Impact Fund, ABS Capital Partners, University Ventures, and University Venture Fund.
- TELEO Capital acquired Industrial Defender, a Foxborough, Mass.-based provides cybersecurity and compliance software solutions for critical infrastructure providers, from Capgemini America, Inc. Financial terms weren't disclosed.
- Palladium Equity Partners sold the parent company of DolEx Dollar Express, Inc, an Arlington, Texas-based provider of electronic money transfer solutions, to a group of investors including management. Financial terms weren't disclosed.
FIRMS + FUNDS
- GLS Capital, a Chicago-based private investment firm, raised more than $345 million for its fund GLS Capital Partners Fund I, LP.
PEOPLE
- Aimée Leifer and Dan Murray joined Calibrate Ventures as venture partners.


fortune--2020-01-27--Chasing returns: 12 lessons for real estate investors

This article is part of Fortune’s quarterly investment guide for Q1 2020. Welcome to “Chasing Returns.” Each quarter we’ll bring you expert analysis on a particular investment class that’s yielding big returns—as long as you know where to look. The first stop: real estate.
Rock-bottom interest rates won’t be the only thing to keep most global real estate markets buoyant in 2020. New technologies and market innovations—ranging from smart buildings to a boom in data centers and the warehouses needed to keep pace with e-commerce growth—will be a key driver of the commercial property market in the year ahead.
But with real estate it’s never quite that simple. Shrewd investments and big returns can be found around the world, sometimes in the very markets where danger signs persist.
Rather than let you navigate the markets from Hong Kong to Austin alone, we’ve asked the experts to give us their forecast for the year ahead and share their tips. This is what they say the global property hunter should look out for.
1. Why rising prices matter
For those seeking big returns, the threat of a global economic downturn still looms. But with many economic outlooks predicting growth to pick up in the second half of 2020, investors continue to be bullish on real estate. And that’s true in markets around the world.
One reason is demand is still so strong. According to Richard Barkham, global chief economist at real estate services firm CBRE, investment in commercial real estate weakened in 2019, by perhaps 5% in value terms. But that was more than offset by rising prices, particularly for high-quality assets such as prime offices in continental Europe and warehouses and suburban apartment buildings in the United States.
While a soft patch in the economy may persist through early 2020, interest rates were set to remain very low.
“As long as you don’t get an outright recession, that represents quite good conditions for commercial real estate. So I think pricing will remain reasonably strong. Leasing demand may ease slightly but not very much, and I could see investor demand coming back quite strongly,” Barkham told Fortune.
2. A new buyers’ market emerges
William Matthews, head of commercial research at real estate consultancy Knight Frank, said he expected global commercial real estate deal volumes to rise in the year ahead. And that’s because of who’s jumping into the market.
“We think that we could certainly…get back to a trillion dollars’ worth of commercial real estate transactions,” he told Fortune. “But actually it has the potential to go further because what we are seeing now is pension funds and insurance companies reallocating greater amounts of their portfolios toward property.”
3. WeWork’s fall hasn’t dented the market for flexible working space
After WeWork pulled its IPO last year and scaled back its ambitions, CBRE revised its forecasts for growth in U.S. flexible working space, but it still expects that market to remain hot, growing by 13% in 2020.
London-based real estate services firm Savills said that despite the negative publicity following WeWork’s aborted IPO and crash in valuation, the trend toward flexible working space is “irreversible and spreading across sectors.”
4. Don’t underestimate the tech effect…
The technology industry, which accounted for 22% of leasing in the first half of 2019, should continue to dominate office demand in the U.S. in 2020, according to the CBRE U.S. market outlook. The tech industry is driving construction activity in the country’s hot tech hubs. Austin, San Jose, Salt Lake City, San Francisco, and Nashville will see the highest rates of completions due to increased demand in 2020, CBRE said.
Real estate trends also reflect the larger societal switch by consumers to buying online.
The market for warehouses in the United States is as strong as that of multifamily residential dwellings. Barkham describes both as running “blisteringly strong.” Demand for smaller warehouses, meanwhile, in the United States will gather pace as e-commerce companies race to offer same-day delivery, according to CBRE.
There is a downside to e-commerce, however. It’s putting brick-and-mortar retailers under pressure in many countries. In Britain, where a number of well-known store chains have gone out of business in recent years, the retail sector faced “a perfect storm of structural, cyclical, and temporary factors, of which e-commerce is just one,” CBRE said in a separate report, forecasting a 1.8% fall in rental values for all retail in the U.K. in 2020, along with an 8.2% fall in capital values.
5. …or the cloud-computing effect
Another booming sector around the world is data centers, fueled by growth in the capacity needs of cloud service providers and to prepare for high-performance computing and 5G.
The scarcity of available land that has reliable access to fiber access points and to large quantities of high-voltage power is driving up prices here too, with one site in London selling for more than $8 million an acre, CBRE said.
6. Props to proptech
A buzzword in the industry right now is proptech, short for “property technology.” The term covers everything from Internet real estate portals to 3D printing to the sensors used in buildings to drive more efficiency from the space. The systems save energy by, for example, turning off lights when rooms are empty or turning on heating only when required.
“The building itself is a source of big data, and once you get your analysts working on it, you can reconfigure space quite quickly to optimize usage,” Barkham said.
Venture capital investment in real estate tech companies hit a record $14 billion globally in the first half of 2019, according to proptech specialists at CREtech. Netherlands-based GeoPhy is one such startup crunching a vast range of data including satellite images and crime rates to devise what it calls the most accurate valuations of commercial property.
7. An Olympic feat in Paris
A huge new transit network, the Grand Paris Express, is being built in Paris, and associated development is fueling great excitement in the real estate world. The automated network, with 68 new stations and 200 kilometers (125 miles) of track, consists of a ring route around Paris and lines connecting suburbs; it is scheduled to enter operation over the next decade.
According to Savills, some 2.6 million square meters of residential and commercial real estate are planned close to the project. Paris is due to host the 2024 Olympics, which could also spur investment.
8. Don’t judge Asia-Pac by Hong Kong
Commercial real estate transaction volume in the Asia-Pacific region totaled $34 billion in the third quarter of 2019, up 17% from the previous quarter, CBRE said in a recent report.
Sentiment remained positive with the exception of Greater China, where market sentiment had turned more cautious, (and that was even before the coronavirus outbreak this month). Foreign buyers had become more selective because of the weaker leasing market there, it said.
In Hong Kong, the U.S.-China trade conflict and months of pro-democracy protests weighed on investment during the third quarter, CBRE said. There was strong appetite among foreign investors for real estate in Japan and Singapore, the report said. British billionaire inventor James Dyson, meanwhile, spent $55 million this year on the priciest apartment in Singapore, according to Singapore’s Business Times.
9. Where to expect softness in the housing market
That’s not to say housing will be a sure thing everywhere in the year to come. As far as the global housing market is concerned, Fitch Ratings forecasts subdued home price growth in 2020–2021 due to stretched affordability, more challenging economic growth prospects, and tighter restrictions on mortgage eligibility.
“This is despite falling or very low mortgage rates, insufficient supply in major cities, and stable or improved employment levels in most countries,” Fitch said in a report in December.
U.S. home prices are expected to grow by about 3% on a nominal basis in both 2020 and 2021, or by about 0.5%–0.7% a year in inflation-adjusted terms, the ratings agency said.
One reason for the soft outlook is the recently installed $10,000 cap on state and local property taxes that Americans can deduct from their federal income tax. The penalty, a feature of the Trump tax plan that went into effect in 2018, was still weighing on higher-priced markets such as New York, New Jersey, and California.
10. A place in the sun could cost you
In selected European markets, Fitch expects the strongest housing performance in 2020 in Portugal (+6.5%) and Greece (+6%), followed by Germany, the Netherlands, and Spain, as the chart below shows.
Fitch Ratings expects house prices in Australia to rise by 5% a year in both 2020 and 2021, reversing a decline of 8.4% recorded from November 2017 to June 2019. It expects prices to flatline in major Chinese cities for the next two years because of purchasing restrictions from authorities seeking to rein in speculation. In the U.K., where confidence has been dented by wrangling over Brexit, Fitch forecast a 1% house price rise in 2020.
Fitch expects house prices to fall in nominal terms in 2020 only in Italy, due to its sluggish economy, and in Japan, where it sees a “hangover” after this summer’s Tokyo Olympics.
11. Luxury regains its luster in London
Knight Frank’s forecast for prime, or high-value, homes in 2020 sees Paris leading the way with nominal price growth of 7%, followed by Berlin and Miami at 5%. Prime real estate prices in New York are seen dropping by 3% and in Vancouver by 5%, as the table below shows.
In markets such as Dubai and New York, lots of new inventory from developers had also put downward pressure on pricing, said Liam Bailey, global head of research at Knight Frank.
House prices in parts of London have fallen by as much as 25% in the past four years as the market was hit by Brexit uncertainty and rises in property taxes, but Bailey said he detected signs of a turning point after Prime Minister Boris Johnson’s Conservatives won a big majority in the December election, clearing away doubts over whether the U.K. would actually leave the European Union.
“No other market has fallen as far or as fast as the London market, and it’s created a real opportunity,” Bailey said. “We’ve actually got a majority government for the first time in a long time with a decent mandate. That is giving confidence to the market, and we are already seeing an uptick in activity in terms of sales volumes.”
12. REITs: where to invest in the hot real estate markets
Apart from buying houses to rent out, or stockpiling shares in home-builders, private investors can gain exposure to real estate by investing in real estate investment trusts (REITs), which trade on stock exchanges and pay dividends. REITs may invest in either property or mortgages (or a mixture of both), and they often specialize in particular types of real estate, such as hotels or malls.
Real estate exchange-traded funds and real estate mutual funds usually hold a basket of REITs.
In 2019, the U.S. REIT market delivered double-digit returns across nearly all sectors and raised a record $109.4 billion in equity and debt, nearly double the $55.6 billion raised in 2018. Meanwhile, the FTSE Nareit All Equity REITs Index delivered a total return of 28.7% for 2019, compared with the S&P 500’s total return of 31.5%.
According to National Association of Real Estate Investment Trusts (Nareit), the REITs sector in 2019 posted its best investment performance in five years. As the chart below shows, the returns for REITS—if you knew where to look—in 2019 were impressive.
“The outlook for REITs in 2020 remains favorable. We expect modest economic growth and see few signs of recession on the horizon. Real estate markets enjoy low vacancy rates and a balance of new supply and growing demand, supporting rent growth and REIT earnings in the year ahead. Watch out, however, for rising vacancies or slowing rent growth,” said Nareit in a recent report.
In its 2020 real estate outlook, Fidelity concurs. One of the world’s biggest asset managers, Fidelity says that traditional REIT segments such as retail, apartments, and offices are giving way to new categories, including single-family home rentals and data centers. It also singled out self-storage and healthcare REITs as promising sectors.
More from Fortune’s investment guide:
—Start a donor advised fund for your charitable giving
—The health of the economy in nine charts
—Goldman Sachs Asset Management’s Sheila Patel on her 2020 outlook
—5 pressing questions to hone your investment strategy this quarter
—Investors are uneasy over the surge of near-junk corporate bonds
—10 stocks that are poised for a stellar 2020
Subscribe to Fortune’s Bull Sheet newsletter for no-nonsense finance news and analysis daily.


fortune--2020-01-27--The killer BBBs: Some investors are uneasy over the surge of near-junk corporate bonds

This article is part of Fortune‘s quarterly investment guide for Q1 2020.
Teetering on the edge of the abyss of a junk bond rating is no place that a company wants to be. But that’s where food producer Kraft Heinz finds itself.
The company is known, unkindly, as “Buffett’s Folly” because the sure touch of über-investor Warren Buffett seemed to falter with Heinz’s purchase of Kraft, which he engineered with the aid of private equity fund 3G Capital. Known for famous brands like Oscar Meyer lunch meats, Miracle Whip, Jell-O, plus the namesake ketchup and cheese, Kraft Heinz has a hard road in an era when fresh food is prized. Buffett, whose Berkshire Hathaway holds a big stake in the merged business, told CNBC that Heinz “paid too much” for Kraft.
Kraft Heinz is pushing to lower its debt, whittling $4 billion of the total from the merger. That includes its most recent round of debt reductions, some $2.3 billion, courtesy of “solid cash generation and divestiture proceeds,” noted spokesman Michael Mullen. Indeed, its free cash flow has increased, and Kraft Heinz recently sold its Indian beverage and Canadian cheese subsidiaries.
But like many other companies that took on more than it could handle, Kraft Heinz now occupies the final credit rating stratum before junk status. Kraft Heinz is rated BBB- by Standard & Poor’s, with a negative outlook. And it’s one of a host of U.S. companies in that position, clinging to investment grade.
With the economy still doing well, downgrades to junk aren’t rife. Still, there are hints about what might lie ahead. Recently, one iconic corporate name has gotten shoved from its BBB perch into the junk pit, Ford Motor.
In September, Moody’s Investors Service labeled the automaker below investment grade. S&P hasn’t followed suit, yet. But the continued enlargement of the BBB debt tier, amid the overall swelling of corporate bond issues, has provoked unease among some investors. Once a recession appears, that could be the catalyst for a lot more downgrades to high-yield from BBB.
There are several forces at play that investors need to pay attention to. First, when an investment-grade company becomes junk-rated, its borrowing costs escalate. Plus, numerous pension plans, insurers, and other institutional investors are forbidden by their rules from owning a high-yield issuer, hence its stock gets dumped.
The “BBB cliff is primarily a problem if the U.S. economy were to fall into recession,” J.P. Morgan wrote in a recent research note. And “vulnerabilities to recession are ample, if not glaring.”
Downgrade dilemma
BBBs have ballooned to more than half of the investment grade universe in the U.S., by the reckoning of S&P Dow Jones Indices, touching 55%. That’s way up from 38% a decade ago, and 17% in 2001. The reason for the change is that companies have taken advantage of low interest rates, especially since the Great Recession, and packed on debt to fund expansions, stock buybacks, and other management goals.
The peak year of U.S. corporate bond issuance was 2017, when $1.6 trillion was floated, by the count of the Securities Industry and Financial Markets Association. Last year was also robust, at $1.4 trillion.
Right now, some 30% of companies with debt rated BBB have the potential of being thrust into junk land, based upon their financial weaknesses, said Edward Altman, professor emeritus at New York University’s Stern School of Business and director of the Credit and Fixed Income Research Program at the NYU Salomon Center.
And critics like DoubleLine CEO Jeffrey Gundlach argue that there would be a lot more downgrades from BBB if the rating agencies weren’t so lenient. The agencies listen “with sympathetic ears” to corporate assurances that they are working to shrink their engorged debt, he said on a webcast. “The companies get a lot of leeway,” said Lon Erickson, a portfolio manager at Thornburg Investment Management.
The agencies argue that many factors go into a ratings decision, and they weigh each ruling carefully.
While the higher borrowing costs of a junk designation won’t be comfortable, some fallen angels can live with them. When Moody’s downgraded Ford, the agency cited substandard cash flow and profit margins. The carmaker does have towering long-term debt, but the company also has some advantages that may help it return to investment grade at some point. Ford has one of the largest levels of cash and short-term assets in corporate America, which gives it flexibility as it sets out on an ambitious restructuring plan that includes a lineup overhaul and cost cutting.
“We are making significant progress on a comprehensive global redesign—reinvigorating our product lineup and aggressively restructuring our businesses around the world,” Ford said in a statement after the Moody’s action.
The BBBs’ potential peril isn’t what’s going on today. It’s what may go wrong tomorrow. Carol Levenson, research director at fixed-income research firm Gimme Credit, believes that the risk hasn’t been priced into the spreads. That’s the gap between BBB yields and those of risk-free Treasury bonds, which has narrowed to 1.25 percentage points, from 3.03 in February 2016. Many BBBs “may have overreached on the acquisition front and plans for paying down debt and improving the credit profile,” she said. And they “may run into obstacles when things don’t go as well as planned.”
Given Kraft Heinz’s $28.1 billion in long-term debt as of the third quarter, the company could end up in the junk pile, S&P cautioned, if the food giant fails to improve its high leverage ratio to 4.0 by mid-2021. That means it needs the long-term debt to be four times Ebitda. Currently, the ratio is 4.6. Gimme Credit has listed Kraft among the bottom 10 companies for investment grade, in terms of market performance.
More from Fortune’s investment guide:
—Start a donor advised fund for your charitable giving
—The health of the economy in nine charts
—Goldman Sachs Asset Management’s Sheila Patel on her 2020 outlook
—5 pressing questions to hone your investment strategy this quarter
—Chasing returns: 12 lessons for real estate investors
—10 stocks that are poised for a stellar 2020
Subscribe to Fortune’s Bull Sheet newsletter for no-nonsense finance news and analysis daily.