fortune--2020-06-08--Coffee startup BLK & Bold’s cofounders on incorporating social impact into the business model

This is an installment of Startup Year One, a special series of interviews with startup founders about the major lessons they have learned in the immediate aftermath of their businesses’ first year of operation.
BLK & Bold was founded by childhood friends Pernell Cezar and Rod Johnson, who grew up on the same block in Gary, Ind. They launched their independent coffee and tea brand from their headquarters in Des Moines after stepping back from from established careers in higher education fundraising and retail merchandising.
BLK & Bold, the first black-owned, nationally distributed coffee brand, is celebrating its second anniversary in June, and the cofounders spoke with Fortune this week about their business model and future trajectory, why social impact is at the core of their business, and how they are navigating a pandemic while combating racism.
This interview has been lightly edited and condensed for clarity.
BLK & Bold cofounders Rod Johnson (left) and Pernell Cezar Courtesy of BLK & Bold
Fortune: What inspired the launch of BLK & Bold?
Cezar: I began my career at Target Corp. in Minneapolis, in August of 2010. Much of my background is in retail merchandising. I was initially drawn into retail via my interest in Target and its high responsibility, high-speed culture. Yet I quickly became fascinated with the art of influencing and building brands at scale, whether startups or multinational brands. I oversaw national retail accounts sales and business development as senior director of sales for Sundial Brands, the makers of Shea Moisture and Nubian Heritage. This included launching the brand at Ulta, developing and managing the sales partnerships for Sally, Walmart, Target, Kroger, regional grocery chains, and specialty beauty chains.
Johnson: Since July 2010, I’ve been a professional fundraiser for academic and health care institutions nationwide. From working behind the scenes as a strategist to a frontline fundraiser, I’ve been fortunate to help raise millions of dollars for academic scholarships and health care research.
Cezar: Like many people, coffee has fueled myself and my adult career. After learning of what better coffee could be as a consumer, I became continuously curious about the product I was spending so much money consuming and didn’t really know much about. That curiosity created more love for the product but also personal disconnect with the lack of representation and non-community-focused values reflected within the industry.
Johnson: Real change comes when common people can unite over common things to make uncommon progress. Our focus is to normalize how everyday people contribute to the benefit of their communities via connecting common purchases back to relevant impact. Coffee is the second-highest-consumed beverage in the U.S. (after water), and millions of people partake in daily consumption, all that fall short of making a positive impact back to their communities. We want to ensure that our communities and consumers are being supported and respected via the coffee businesses and retailers that market to us and are located on corners of our communities across the U.S.
Our vision is “local impact, at scale,” which is why we did not want to take an independent coffee-shop business model approach. As manufacturers and suppliers, we are empowered to help businesses and consumers across the U.S. extend their social impact footprint without changing their competitive business economics or their consumer behavior.
The landscape for culinary and beverage businesses has seemingly exploded over the past couple of years. Why do you think that is so? How does BLK & Bold stand apart?
Johnson: As people from all parts of the world share pictures of their food, coffee, and dining experiences, the shared knowledge and palate is growing the culinary and beverage industry. Much of the [coffee] industry is becoming as much a part of pop culture and entertainment as movies and music. This newfound knowledge also grows the purchasing habits of the consumer. But beyond, well-plated food and Instagrammable “#morningcoffee,” consumers care about what the brands are doing beyond that.
As consumers become more savvy in their purchasing habits, it opens the door for brands like ours to be considered. The idea of conscious consumerism is one that more people are adopting at scale as they expect the goods they purchase from today’s companies to embody what’s important to them—whether that be sourcing, community impact, and/or nuanced flavors. BLK & Bold is very deliberate about the decisions it makes across the spectrum, which ultimately appeals to today’s consumers. One of the biggest drivers of our business is the social impact model embedded at the core of why we exist. By making it easy for people to support their local and domestic communities by way of checking something off their grocery lists, we stand apart from others in the industry.
BLK & Bold was founded by childhood friends Rod Johnson (left) and Pernell Cezar. Courtesy of Blk & Bold
What were some of the biggest hurdles you faced in the past year? What surprised you the most?
Cezar: The biggest hurdle was preparing our small business to accommodate national distribution via our retail partnership with Target, which included scaling operations, securing inventory, and reimagining workflow and work/life balance.
The pandemic has impacted us both negatively and positively. The pendulum has swung from the two extremes in a matter of 90 days: The business did not look like it would survive initially, only to recover tremendously due to increased online foot traffic. Considering we are location agnostic, in addition to having committed retail partners like Target and Whole Foods, our business ultimately was well positioned to embrace this new normal.
The biggest surprise has been our resilience and innovation in ensuring the business exists now and in perpetuity.
What kind of feedback have you received from your customers, and have you (or will you) apply that feedback to how you sell your products in the future?
Johnson: The feedback we receive from customers has been overwhelmingly positive considering they were introduced, through our company, to higher-quality products. As a specialty beverages brand, our products live up to what’s implied by the word “specialty.” We intentionally source coffees and teas that rate higher on the spectrum.
In addition, many consumers ask questions about how and if they can use BLK & Bold coffee with their existing appliances, i.e. Keurig, asking about pods; and Nespresso machines. This further showcases how everyday consumers are continually choosing convenience. From this, we want to further showcase and market how BLK & Bold can fit into their already existing routines.
Obviously, amid the coronavirus pandemic, consumers’ purchasing habits and practices are going to change. At the same time, fortunately, coffee is a recession-proof product. Does BLK & Bold plan to adjust its business plan for the immediate future?
Johnson: If anything, we are pacing toward introducing more coffee- and tea-based beverages now that we feel comfortable with where we are with our dry-goods products. As we move into a larger commercial space next month, we will be in a better position to accommodate demand and service our retailer partners appropriately.
BLK & Bold has received an outpouring of support in the past few weeks, with the brand experiencing a 1,400% sales surge within the past month alone. Courtesy of Blk & Bold
At the same time, how has the economic shutdown affected the future of the business, from product development to raising capital?
Cezar: Raising capital has been a challenge considering we’ve bootstrapped to this point. Our mindset in the pandemic hasn’t shifted much as we will continue to be scrappy in building our brand. Product development has slowed, but we have the opportunity to double down on product innovation that we already have in the market, i.e., Steeped Coffee. While we are delaying a timeline on bringing new ideas to the forefront, we will spend time educating our consumer base on this single-serve product form.
One benefit that will help in that regard is we have relationships with key retailers who believe in us, so we don’t have to worry about finding new partners to help us disseminate that info and bring it to market at scale. Considering there’s so much upside with the retail partners we already have, through both brick-and-mortar and dotcom, we are increasingly optimistic.
Over the past several days, there has been a concerted effort on social media to push consumers to support black-owned businesses. At the same time, there is the worry that while this might offer a much-needed sales bump during an economic downturn, nonblack consumers will not commit to this effort in the long term. What can other members of the business community—from owners to investors to marketing agencies—do to amplify and sustain support for black-owned businesses?
Johnson: It’s been an incredible outpouring of support for sure; we saw a jump in sales directly from Twitter, upwards of 4,000%. Instagram followers doubled to nearly 20K over the course of a few days.
Luckily, coffee is an everyday product, and with this, we are able to leverage that this isn’t a one-off purchase. A lot of our social media comments have mentioned that they have purchased an ongoing coffee/tea subscription and are referring to us as their “new go-to brand.”
Coffee [or tea] is one of those products where, if you enjoy it, you’ll buy it again when you see it, and BLK & Bold also benefits from being found in retail (Target, Whole Foods, and Amazon). Consumers don’t necessarily have to come back to our site to purchase, this increase in engagement and sales really equals more brand recognition that will continue to boost sales even after the initial excitement to support black-owned business. In order to amplify and sustain, we really want to lean toward more company collaborations, once that makes sense and resonates with our core values.
The brand is now available at Target and Whole Foods and recently reached bestseller status on Amazon. Courtesy of Blk & Bold
Social impact is at the core of your business model. Could you describe what that means, how that is structured, what groups you have supported and are looking to work with, and how other businesses could follow suit?
Cezar: We hope to inspire businesses to support and reinvest in the communities of their consumers, especially domestically. There are voids that exist in our own backyards that are often overlooked despite how loyal that consumer base is in patronizing said businesses. It’s time to reciprocate the efforts and commitment of consumers so they understand the relationship is more than transactional.
Looking beyond the post-pandemic era, which could be anywhere from a year to a few years from now, how do you plan to grow BLK & Bold, and what do you want the business to look like five years from now?
Cezar: Continue to lean in on our social impact model. Making that a normalized dynamic for consumers. This was at one point only done by shopping local, but we are trying to do local at scale. Continue to be good stewards of conscious consumerism in the packaged goods arena in an industry that we already love as consumers.


fortune--2020-06-08--It’s official: The U.S. entered a recession in February, ending the longest expansion in American hi

It’s official: The U.S. entered a recession in February, ending the longest expansion in American history

Why are stock prices going up when the economy is in ruins ?
Here ’ s some helpful context

The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) has made it official: On Monday the NBER concluded the economy peaked in February and entered into recession.
That marks the end of the longest economic expansion in American history, which started in June 2009 following the end of the Great Recession. That 128 month expansion tops the previous record of 120 months between March 1991 to March 2001.
“The committee recognizes that the pandemic and the public health response have resulted in a downturn with different characteristics and dynamics than prior recessions. Nonetheless, it concluded that the unprecedented magnitude of the decline in employment and production, and its broad reach across the entire economy, warrants the designation of this episode as a recession, even if it turns out to be briefer than earlier contractions,” the NBER wrote in its release.
But even as the NBER officially rules this a recession, some economists think we’ve already moved from the COVID-19 recession back to expansion. Moody’s Analytics chief economist Mark Zandi told Fortune last week that based on the decline in Americans on unemployment benefits and other positive data points, the recession ended in May. Indeed, jobs report released on Friday showed the unemployment rate dropped from 14.7% in April to 13.3% in May.
The rule of thumb to merit the designation of a recession is two quarters of decline. Even if this recession ended in May, it will easily meet that definition. First quarter GDP declined 4.8%, and the decline in the second quarter is expected to be well over 20%.


fortune--2020-06-08--‘Not an easy decision.’ How Alexis Ohanian justified his departure from the Reddit board

Tech entrepreneur and investor Alexis Ohanian said in an Instagram Live video broadcast this weekend that he didn’t expect to garner as much public attention as he did last week upon announcing his resignation from the board of Reddit, the online community platform he cofounded 15 years ago.
Amid more than a week of global Black Lives Matter protests and collective action following the death of George Floyd in Minneapolis, Ohanian announced on Friday he would resign from Reddit’s board, calling for his replacement to be black. Ohanian has had varying degrees of control over the company since selling it to publishing company Condé Nast in 2006, but he hasn’t been involved in day-to-day operations since 2018.
This weekend, Ohanian’s wife, professional tennis player Serena Williams, hosted a discussion with Ohanian as part of her “Serena Saturday” Instagram Live series. She described her husband’s announcement as “shocking to everyone,” including herself, and asked him to explain what motivated him.
“This was not an easy decision at all,” Ohanian said in the live stream. “Upon reflecting on the state of where our country is right now, I thought about what I could do beyond a social media post, beyond a donation, but really lead… We need diversity at the highest levels of business, now more than ever. And I say that because it will be in the best interests of Reddit for that to happen. It’s in the best interests of every company for that to happen.”
When Williams asked Ohanian why it was important to him that a black candidate fill his vacated seat, he made the distinction between a board seat and an executive position. Appointing a board member is not the same thing as hiring an employee, he explained, and the board’s role doesn’t extend to operations—but members do hold the executive team accountable for their own and thereby the company’s actions, he said.
“That board role, in this case it’s one out of five board seats, comes with a vote,” Ohanian said. “That one vote is a chance to stand up for customers who aren’t in that room, to stand up for investors who aren’t in that room.”
In 2018 just 16.1% of board seats in the Fortune 500 were held by nonwhite individuals, according to the Alliance for Board Diversity.
Ohanian, who is also a venture capitalist, went on to explain that his decision wasn’t just about the impact it would have on Reddit and its stakeholders. He hopes to set an example for the broader tech industry and inspire other companies to realize they need to step up and make changes to diversify representation too.
“Resignation can be an act of leadership,” Ohanian said.
Ohanian also shared how he is motivated by his own legacy in the eyes of his and Williams’ 2-year-old black daughter, Alexis Olympia. On Friday, he also announced he would donate gains on his Reddit stock “to serve the black community, chiefly to curb racial hate,” beginning with $1 million to Colin Kaepernick’s Know Your Rights Campaign.
“I wanted to be able to answer that question from her with the clearest conscience,” Ohanian said. “I wanted to be able to say something and do something that had weight to it.”
While Ohanian’s resignation is a prominent gesture that may help alter the course of Reddit and other companies that prioritize black representation, it has been described as insufficient or too little, too late, by some. Alexis Sobel Fitts writes on Jezebel that Reddit, which Ohanian made “his name and a large amount of money from,” has long been a hotbed for hate speech and racism, among other harmful and abusive content. Former Reddit CEO Ellen Pao (best known for her sexual discrimination lawsuit against VC firm Kleiner Perkins) resigned when various Reddit leaders failed to align with her approach to curbing such content, which continues to thrive on the platform.


fortune--2020-06-08--It’s no fluke how BTS fans raised $1 million in 24 hours

Never underestimate the stans.
In about a day, fans of the South Korean music group BTS, known as Army, have matched the group’s donation of $1 million to various charities supporting racial justice.
On Saturday night, BTS revealed their donation to Variety, which appears to be one of the largest celebrity checks written thus far to the U.S. Black Lives Matter movement. On Sunday night, Army (which stylizes its name in all caps) followed up by pitching in more than $1 million. At the time of this article’s publication, the total reads $1.2 million—and it’s still rising.
Using hashtags #MatchAMillion and #MatchTheMillion, the fan-led fundraiser was spontaneously organized through social media after Army learned of BTS’s donation, with no direction from the music group itself. One in an Army, a charity program within the community with a history of running fundraising campaigns, served as central command.
“We’ve run big projects before, but the amount of support for this project is overwhelming,” a program spokesperson stated in a press release. “We’re so proud that Army have once again channeled their power for good and are making a real impact in the fight against anti-black racism.”
Their success may come as a surprise to some, but to those familiar with BTS’s fan organizations, it’s anything but—the groups were able to move quickly because the structures and practices for this scale of collective action have long been in place. Army has been known to rally to trend hashtags to promote new work from the group and stream music videos in concentrated sessions to rack up views. A foundation of dedicated Twitter accounts announce hashtags, monitor and report statistics, and disseminate information.
A 24-hour deadline carries unusual distinction among BTS fans as a benchmark for achievement. It has proved effective: The group’s hit single “Boy With Luv” holds the world record for the most viewed YouTube video in 24 hours, the fandom holds the record for the most tweets under a single hashtag in 24 hours, and the group itself holds the record for most No. 1 chart spots held by a Korean album in 24 hours.
So the BTS fandom is used to mobilizing with hairpin agility. Consider the following example from last night: Less than an hour away from reaching $1 million, fans were discussing the hashtag they should use to celebrate their success. At first, they circulated #ArmyMatchedAMillion. But then a few fans suggested #2MforBLM “to make it not about us and show priority for the cause,” as one wrote. Within minutes (and thanks to myriad retweets) most of the community knew of the change of plans—and minutes later, when the $1 million goal was hit, #2MforBLM began trending worldwide.
A charitable ethos has been in place, too. A week before BTS’s donation was revealed, One in an Army had set up a channel for fans to split donations between organizations for racial justice—the group’s donation only galvanized its use. Over the past few years, fans have donated toward causes around the world, addressing such problems as environmental degradation, homelessness, and pediatric cancer; they have also adopted a zoo of animals such as whales, koalas, and Hoseok the deer, a creature in Germany christened after group member J-Hope.
The #MatchAMillion campaign now has a permanent page on One in an Army’s website. “Black Lives Matter isn’t something that has a time limit,” said the One in an Army spokesperson. A powerful grass-roots organization doesn’t, either.


fortune--2020-06-08--The Coronavirus Economy: It’s tough, but the pet-sitting business hasn’t totally gone to the dogs

Before COVID-19 upended New York City, Jen Tserng, a pet-sitter and part-time fitness instructor, worked seven days a week, walking dogs and caring for pets in New York City’s Chelsea neighborhood. Her pet-sitting business, which she’s been building since 2012—and since 2016 in New York—is so reliable that she doesn’t even have an apartment: she simply moves house-sitting gig to house-sitting gig.
“My goal was to just not pay rent and house-sit,” says Tserng about coming to the city four years ago. “I didn’t really think it would work out, but it has.”
When the pandemic struck, she and her fitness colleagues were out of jobs. Her pet-sitting and dog-walking business, which is considered an essential service in New York, has taken a significant hit too, though Tserng has continued to work through the pandemic and in some ways, even enjoy it.
Fortune spoke with Tserng for a new series, The Coronavirus Economy, about how the pandemic has affected her income, her thoughts on the future, and how she has been handling work.
This interview has been lightly edited for brevity and clarity.
Jen Tserng, a pet-sitter and part-time fitness instructor, has worked so consistently since 2016 that she hasn’t felt the need for a fixed address: She simply moves house-sitting gig to house-sitting gig. Renee Choi Photography
Fortune: What was your job like before COVID-19?
Tserng: Pre-pandemic, I was working seven days a week. I pretty much had work whenever I wanted it. I’d have to actively schedule time off if I wanted it. A typical day, I would probably have about 10 to 15 appointments. Some dog walkers only do the vacation stuff like cats and then some people only do the Monday through Friday. Some of us do all of it. My workload was probably about 60% Monday through Friday, daily walks, and then about 40% vacation visits.
What I like about the vacation stuff is that your major holidays are going to be pretty much the busiest time of year. So Memorial Day, Fourth of July, Christmas, Thanksgiving—those are going to be the busiest times of the year. If people do more of them Monday through Friday, dog-walking grind, that’s going to be more consistent and similar to a regular work schedule. So I like both the consistency and the variability in doing both of those.
When did the virus start affecting things for you?
COVID first started to impact the business around mid or late February because more companies were sending clients home to work, and they didn’t need as much of the Monday through Friday stuff. I would lose maybe one client a week. They’d say, “Oh, I’m working from home now so you don’t need to come.” And then, of course, once New York’s stay-at-home order and the worldwide orders started happening, all the vacation visits were canceled.
That must have been scary since you don’t have a permanent home. Did you have a place to go?
Thankfully, I have a boyfriend, and he’s been very accommodating as far as staying with him. I have thought about what would have happened if I hadn’t been dating him. Some of the work that we pet-sitters in New York have right now is watching cats in particular for people who’ve fled the city. I think a lot of the dog people who left the city took their dogs with them. But there’s a few cats around that still need care. And I feel like if I didn’t have some place to go, then probably one of my regular clients hopefully would let me stay at their place. Or I could have gone home to stay with my family in Ohio or something like that.
Are there precautions you’re taking because of the virus?
I’ve been mostly going off what the buildings are recommending, which honestly hasn’t been a lot. I still do face-to-face handoffs with some clients, I just wear a mask. And I wash my hands more frequently. I don’t use gloves. I have always used my own leashes.
For me, I’m thinking if a dog were to have the virus on it that would mean my client was sick and they were shedding COVID onto the coat of the dog. I just think that whole chain of events, while hypothetically possible, is unlikely. There are definitely dog walkers who are afraid of that. For example, people who take dogs into their homes, some of them are giving the dogs baths and taking other precautions. I think I’m a little more laid-back about it.
When New York issued its stay-at-home order, what did that mean for your business? Was dog walking allowed?
There was a little bit of confusion as to whether we were essential workers. Now, dog walkers are officially included in the list of essential workers. Some of us have clients who work in health care who are still working. I have a client that I picked up who works in bonds, so she’s actually busier than she was pre-COVID, and she likes to have someone come and take the dogs out so she can finish her work. So we have always been essential. I know a lot of dog walkers who have decided to close down anyway, maybe because they live with someone who is high-risk or they’re scared or they commute on the subway. I can walk to my service area so I never shut down, but some people have.
The first two weeks after the order went into effect, because people didn’t really know what to expect, it was a little unnerving being out there. I’ve been going out every day, so I feel more comfortable with it now that it’s been two months in and realizing that people in the streets are not really coughing and are wearing masks. I think it’s relatively easy to stay six feet from other people. All the stores and buildings have certain things in place: I don’t really have to talk to the doorman, they have elevator capacity rules, things like that. So I feel okay about it now that I’ve been doing it for a while.
How much was your business down?
I would say I was down to about 20% to 25% of my normal volume, maybe even like 15%. I’m trying to do an average of two visits a day, sometimes more, sometimes less.
Most of my daily clients either left the city or they’re working from home so I haven’t seen them. I also work through Wag, which is on-demand walking, so I don’t know those clients well. A lot of them are home, and I don’t ask.
Your clients who left the city or are working from home—did they continue to pay you?
They offered, but I didn’t accept.
How worrisome is the drop in business for you? With 20% to 25% of your normal revenue, will your business be able to survive?
For me, that’s enough to pay my bills because I’m very frugal. When business was good, I had a relatively high savings rate. Of course not paying rent helps with that. That’s part of the reason why I haven’t applied for assistance, because I have been making enough to cover my expenses. As long as I’m not dipping into my savings, that’s the level that I’m trying to stay at right now. So for me, I’ll have no problems reopening whenever we get to that.
But I believe that a lot of people, especially if they were working in the arts or if they’re students and they walk dogs part-time, I imagine some of those people won’t be coming back to the city.
I started a Facebook group for New York pet-sitters and dog walkers about 18 months ago. It seems like the people who are more established, they’re still working. Most of us have gone down to about 20% to 30% of bookings. I think it’s the people who weren’t established, who basically lost all their clients and all their sources of income, who are struggling more.
Has the city’s dog culture changed in this time of the coronavirus?
It is a little different. New Yorkers love dogs, maybe everyone just loves dogs. A lot of times you just get people just coming up to the dog and petting them and not asking or anything like that. I remember specifically, it must have been in early March, one woman reached out to pet the dog, and she’s like, “Oh, don’t worry, I just washed my hands.” I thought it was really strange to say. Like, I just don’t want you to touch the dog in general. Now people are not as likely to do that, but also if you have two dogs on a leash, and three feet of leash on each side, that’s six feet.
The people who want to be sociable with dogs, they’re still making it happen. Around Madison Square Park, now that they have closed the dog parks, people are taking the dogs into the lawn areas, and they’re just having their own little dog parks there. So people are still socializing their dogs, maybe not as much as before, but they’re still doing it.
Are conversations with dog people different now?
I feel like you can only talk about the coronavirus. There’s not really anything else that is relevant, especially when we live in the city. And pretty much everything that we do is based on that, even if it’s something like, “Is Starbucks open today?” This is so different.
Even with my boyfriend, we talk about the coronavirus every day. You’d think we’d be sick of it by now.
Have you had any strange dog-walking encounters during this time?
I’m Asian, so it’s not a great time to be Asian. I haven’t experienced that as much as one of my girlfriends who is also Chinese. She ended up leaving the city, but she said daily in her service area of SoHo she was getting comments. I’ve only gotten comments from a couple crazy people. It’s not by any means a regular occurrence. I also am not out after dark, because I feel that safety in numbers is no longer there. But people are starting to come out again. The first four weeks after everything closed, it was a little empty around, but people are starting to come back out; businesses are starting to open back up.
How’s the pandemic been for you personally?
I’m actually very introverted, and I don’t necessarily like working. I’ll do it because I like what I do. So I actually kind of enjoyed having these pretty empty streets, not having to wait in lines, I mean, global pandemic aside. So I’ve kind of enjoyed the breather, but I am looking forward to life getting back. Little Italy on the corner just opened up, so we were like, “It’s 10:30 a.m. I think we need to have pizza to celebrate.”
Do you think this will change the dog-walking and pet-sitting businesses for good, or will it go back to what it was before the pandemic?
That’s a really great question. I feel like as dog walkers in this city, a lot of our clients have the ability to work from home, they have a lot of flexibility with their schedules, and they have the opportunity to not be in the city if they don’t want to be. So I think things will eventually shake out between the clients who no longer need care and also the people who have adopted an animal during lockdown and then potential dog walkers leaving the city. I think there’ll be some reshuffling of the service areas, but I think it’ll all work out. I hear that after 2008, things were a lot different, probably not this different. But I feel like a lot of things changed in 2008 as far as people using a luxury service. I think the higher earners will come back, and it’s still going to be worth it for them to pay someone to walk their dogs.
I haven’t seen any requests yet from people who adopted pets during the pandemic. Generally, December is a popular time to get a puppy. So we had a little bit of a puppy boom in January and February. The nice thing about it now is if I wanted to network, those dog owners are out with their dogs, so you can kind of have a socially distanced conversation with them and see what their needs might be after this.


fortune--2020-06-08--‘Avatar’ sequel filming begins in New Zealand: Report

Hollywood has begun to reopen—and it’s starting on an island nation 6,500 miles away from Los Angeles.
The filmmakers behind the sequel to the popular science-fiction movie Avatar have reportedly begun filming in New Zealand thanks to special permission from the South Pacific nation’s government.
According to a report in the South China Morning Post, Academy Award–winning director James Cameron and producer Jon Landau were among the 55 crew members spotted in Wellington, the country’s capital. New Zealand’s borders are closed to foreigners, but the crew arrived on an approved chartered plane.
New Zealand, which has a population of 5 million and is a popular spot for Hollywood (look no further than the Lord of the Rings trilogy), had 1,154 confirmed coronavirus cases and 22 deaths. It hasn’t reported a new case since Feb. 28 and will end social distancing measures on June 9.
The first Avatar film, released in 2009 and earning an astounding $2.79 billion, is one of the highest-grossing films of all time. Cameron said before the film’s release that he’d make sequels if it were successful; two big-budget followup films were announced in 2010. The first of the sequels—starring Sam Worthington, Zoe Saldana, Stephen Lang, Giovanni Ribisi, and others—is now slated for release on Dec. 17, 2021; another three films are planned for 2023, 2025, and 2027.


fortune--2020-06-08--White female founders face a reckoning over racism

“I’ve failed.”
“An apology.”
“Change.”
White female founders spent the weekend apologizing for their behavior—some of it racist—as the social movements that have taken over American streets extended to Instagram.
The highest-profile reckoning came at Reformation, the popular women’s clothing brand known for its commitment to environmental sustainability. A former general manager according to her LinkedIn profile, Elle Santiago, posted about being “overlooked and undervalued as a woman of color,” quickly prompting others to share more specific allegations about the behavior of Reformation’s founder, Yael Aflalo. Aflalo, who is still CEO of the brand but took what the company calls a “step back” in 2018, responded with an Instagram post that she had “failed” in “treating people equally…especially the black community.”
In an unusual statement for a CEO, Aflalo admitted that she “was not a very good leader,” but that any perceived racism was “not about the color of your skin,” but about her “shortcomings as a person.”
The next domino to fall came at the popular stationery brand Ban.do, founded by Jen Gotch. After former employees accused Gotch of racist behavior, the founder responded with this: “Yesterday I was called out on social media by multiple current and former employees for being racist, for creating and helping to propagate a racist company culture, and for building a brand that espouses inclusivity but doesn’t consistently reflect that. I am guilty, and not only am I guilty, I have been so ignorant and so insulated by the ease and comfort of my white privilege, that up until just a few days ago, I would have passionately and sincerely denied negatively impacting others.” Gotch said that she would resign as the company’s chief creative officer.
Reformation declined to comment further. Ban.do did not respond to a request for comment.
On Monday morning, the women’s news and lifestyle website Refinery29 announced that editor-in-chief Christene Barberich, a cofounder of the site, would step down. Former journalists for the publication—mostly women of color—shared their experiences with a “toxic” culture at the company over the weekend. Journalist Andrea González-Ramírez, now a senior writer at the Medium publication Gen, wrote on Twitter that women of color who worked for the website faced “being tone-policed, seeing others take credit for their work, being underpaid [and] not promoted” and more.
“What’s clear from these experiences, is that R29 has to change. We have to do better, and that starts with making room,” Barberich said in a post announcing her resignation. Refinery29 was acquired by Vice Media, led by CEO Nancy Dubuc, in 2019; Dubuc wrote in a memo to staff that the company would commit to an “inclusive hiring process with a diverse slate of candidates” for the site’s next editor. Refinery29 declined to comment further on the record.
The common thread among these upheavals—reminiscent in their speed and quantity of the early days of the #MeToo movement—is not just the allegations of racism but outrage over a sense of hypocrisy felt by former employees. Most of these founders have engaged with the language and online discourse of feminism, from Refinery29’s coverage of the political movement (often written by the same journalists now coming forward about their own experiences with their employer) to Ban.do’s notebooks emblazoned with encouraging slogans like “Make it all happen” and “Set some new goals.”
When those same brands started posting more directly in support of the Black Lives Matter movement over the past two weeks, their engagement with the cause led many who had had experiences that didn’t align with that stated commitment to come forward.
Other, smaller brands founded by white women faced similar allegations on social media. The criticism was especially strong in the fashion and beauty industries, where Uoma Beauty founder Sharon Chuter started the Pull Up for Change campaign, asking beauty brands to share the percentages of black employees in their workforces and on their leadership teams. Brands from Ulta Beauty to Kylie Cosmetics have participated so far.
“Over the last few days we’ve seen something that’s never happened before, with brands and corporations publicly showing support for the Black Lives Matter movement, including making huge donations,” Chuter said in a video announcing her campaign. “However, to at this point still be absolving yourself from the role that you have played and continue to play in the marginalization and oppression of black people shows that a lot of these efforts may just be PR stunts.”


fortune--2020-06-08--Airbnb sees a surge in demand from cooped up urbanites

Antsy city dwellers seeking to escape their COVID-19 refuges are road-tripping to nearby vacation rentals in surprisingly strong numbers, showing the first signs of life for an industry that essentially ground to a halt in March.
“People, after having been stuck in their homes for a few months, do want to get out of their houses; that’s really, really clear,” Airbnb Inc. Chief Executive Officer Brian Chesky said in an interview. “But they don’t necessarily want to get on an airplane and are not yet comfortable leaving their countries.”
Airbnb saw more nights booked for U.S. listings between May 17 and June 3 than the same period in 2019, and a similar boost in domestic travel globally. The San Francisco-based home-share company is seeing an increase in demand for domestic bookings in countries from Germany to Portugal, South Korea, New Zealand and more. Other companies, including Expedia Group Inc.’s Vrbo and Booking Holdings Inc. are also seeing a jump in domestic vacation-rental reservations.
U.S. searches for Vrbo are now up compared to this time last year, according to a note by Cowen & Co. analyst Kevin Kopelman on Monday, and Airbnb queries are down only around 10%. However, hotels and the wider Expedia brand have yet to get any summer relief with searches still down more than 60%.
International sojourns usually planned months in advance are being replaced with impulsive road trips booked a day before and weekend getaways are turning into weeks-long respites, Chesky said. Previously, a New Yorker might have headed to Paris for a week in June. Now they are going to the Catskills for a month. “Work from home is becoming working from any home,” he said.
Still, any rebound is coming from a very low base. The travel sector was gutted by the COVID-19 pandemic. Online travel agencies struggled to withstand unprecedented cancellations and air travel passenger traffic that fell 95%. Airbnb and Tripadvisor Inc. cut a quarter of their workforces and Chesky said last month that he expects revenue this year to be half of 2019’s level. Booking was forced to apply for government aid. In an annual shareholder report last week, Booking CEO Glenn Fogel said the pandemic would impact global travel more than the 9/11 terrorist attacks, the SARS epidemic and the 2008 financial crisis combined.
But months of pent-up demand is leading to a rush of summer reservations. Airbnb has more listings today than it did before the crisis, according to Chesky. The top destinations in the U.S. on Airbnb are almost exclusively traditional vacation rental markets such as Big Bear Lake in southern California, the Smoky Mountains, along the Tennessee-North Carolina border, and Port Aransas in Texas, according to the company.
The unexpected speed of the comeback has kept Airbnb’s plans for a 2020 public market debut afloat. Chesky had originally planned to file paperwork for an offering March 31, but was waylaid by the pandemic-related market turmoil that led to speculation the listing would be shelved until next year. However, Chesky says it’s still an option. “We’re not ruling out going public this year and we’re not committing to it,” he said. Airbnb was valued at $31 billion in its most recent private fund-raising round, though recent debt issuance to shore up its finances have significantly reduced that valuation.
Since the pandemic began, the percentage of bookings on Airbnb within 200 miles (322 kilometers—a round trip travelers can typically complete on one tank of gas—has grown from a third in February to more than 50% in May. Travel in a post-COVID world is shifting “from airplane to car, big city to small location, hotel to home,” Chesky said.
Vrbo is seeing similar trends as popular tourist states like Florida and Maine reopen. There’s an “immediate pop” as soon as a destination opens, said Jeff Hurst, president of Vrbo, which accounts for about 20% of Expedia’s total revenue. “If you draw a 250- mile circle around any major metro—every place where you see water in there or mountains or national parks, the homes around it are what’s starting to get booked up,” Hurst said.
Hotels aren’t as prevalent in more rural locations. And even where they are, travelers are preferring to stay in vacation homes so they can cook in their own kitchens, control who comes and goes and avoid crowded common areas like lobbies, Hurst said. To help salvage the summer season, Airbnb and Vrbo have enforced confidence-boosting policies that include flexible cancellations and new standards for cleaning.
“We have seen a faster recovery within alternative accommodations than in hotels,” Morgan Stanley analyst Brain Nowak wrote in a note last week. Shares in hotel companies such as Marriott International Inc., Hyatt Hotels Corp. and Hilton Worldwide Holdings Inc. have dropped by more than 20% this year, compared with Expedia and Booking, which have fallen as much as 14%.
People are eager for open spaces like beach towns or mountain villages, which is sparking the vacation rental rebound, said Naved Khan, an analyst at Suntrust Robinson Humphrey Inc. “Little by little we are seeing it unfold before us as people are feeling bold enough to venture out and stay at another place for a couple of nights and most of the time these places are homes and villas.”
Searches for vacation rentals on Google are about at the same level as last year, while hotel searches are down, said Booking Holdings Chief Marketing Officer Arjan Dijk. Consumer appetite has completely changed from a year ago, he said. Significantly more users are signing on to the company’s wish list function and indicating interest in domestic homes over international ones. In fact, the company has seen its business shift to more than 70% domestic travel from 45% the same period last year, he said.
Demand for air travel is also showing some early signs of life after all but collapsing. Daily passenger numbers in the U.S. climbed to 391,882 on June 4, the highest since March 22, according to the Transportation Security Administration. But the average daily total over the past seven days was still 87% less than during the same period a year ago. American Airlines Group Inc. said it would boost July flights 74% compared with this month, though the number of flights in July will be about 40% of capacity a year earlier, compared with 30% in June, the airline said Thursday.
“It’s going to be awhile before people start crossing borders, getting into planes or traveling for business,” Chesky said. The big question on his mind now, as he weighs taking his startup public, is whether the spike in recent bookings turns into a sustainable trend. “The long-term question is what does it look like in a year or five years and that’s really anyone’s guess,” he said. Chesky won’t be celebrating until the market stabilizes. “I had a rule that even in our darkest of hours I wouldn’t get too low because that’s just a moment in time,” he said. “And if I can’t get too low, then I can’t get too up.”


fortune--2020-06-08--Shocking rally in U.S. stocks claims another bear: Stan Druckenmiller admits he was ‘far too cautiou

Shocking rally in U.S. stocks claims another bear: Stan Druckenmiller admits he was ‘far too cautious’

Stan Druckenmiller, the legendary investor who last month warned about owning stocks, said on Monday that he now thinks he was “far too cautious” during current market gains.
“I was up 2% the day of the bottom, and I’ve made all of 3% in the 40% rally,” Druckenmiller said in a CNBC interview. “I missed a great opportunity here. Won’t be the last time.”
The March decline in stocks ended the bull market and the spread of the coronavirus pandemic pummeled the economy and put millions of Americans out of work. While many observers were predicting unprecedented gloom just weeks ago, the S&P 500 Index has defied expectations.
In May, Druckenmiller said the risk-reward calculation for equities was the worst he’s seen in his career, and that the government stimulus programs wouldn’t be enough to overcome real world economic problems.
But as cases of the coronavirus decline in the U.S., many parts of the country are coming out of lockdowns, adding to optimism in the markets. Adding further fuel to the S&P 500 was a surprise positive jobs report on Friday, which sent the benchmark up 2.6%.
“What is clearly happening is the excitement of pre-opening is allowing a lot of these companies that have been casualties of Covid to come back” in part due to intervention by the Federal Reserve and positive news on the prospect of a vaccine that would halt the virus, he said.
In terms of his market stance, Druckenmiller said that Amazon.com Inc. and Microsoft Corp. are among his largest holdings. “But I have the least growth rating in my portfolio I’ve had for six or seven years,” he said. “I could change my mind in a week or two. This is very binary how this comes out on the health front.”
Druckenmiller, 66, the former chief strategist for George Soros, converted his hedge fund into Duquesne Family Office in 2010. He has an estimated net worth of $5.8 billion, according to the Bloomberg Billionaires Index.
Druckenmiller also discussed the Harlem Children’s Zone, a nonprofit that aims to end generational poverty in New York City’s Central Harlem neighborhood. He’s the chairman of its board and said it’s the best investment he’s ever made.
“It’s been a huge success, I’ve gotten great satisfaction in it,” he said. “I encourage others to experience the joy I’ve experienced by investing in the Harlem Children’s Zone and other communities where economic mobility needs to move and change our nation.”
(Updates with Harlem Children’s Zone comments in last paragraph.)


fortune--2020-06-08--Facebook and Google preach racial equality. But they lack it on their leadership teams

Amid the ongoing protests, Google and Facebook stood up last week for racial equality and promised millions of dollars to groups trying to make that goal a reality. But inside the companies, the racial inequity is stark: Few black people are among their top executives.
Last year, black people made up 3% of Facebook’s senior leadership, an increase of one percentage point over 2018. During the same year, they represented 2.6% of Google’s leadership, unchanged from the year prior.
In terms of its board, at Facebook, two of its nine members are black. And at Alphabet, Google’s parent, two of its 11 members are black.
“Their data speaks for itself,” said Leslie Miley, a former Google engineering leader who is black. “The numbers are fairly consistent with where they were in 2016…and if that’s not a failure, I don’t know what is.”
Google and Facebook are two of the largest global tech companies, collectively employing more than 160,000 people worldwide. And the lack of black people and people of color within their leadership and lower ranks mirrors the disparity across the entire tech industry. For the past several years, Google and Facebook have become more transparent about how many people of color and women it employs, and every year, they have promised to do better. But any improvements have been minor.
Last year at both companies, white men and women filled a majority of leadership and board positions. They accounted for 65% of senior leaders at Facebook and 66% at Google.
Asked about the lack of diversity of its leadership team, Facebook said in a statement, “We remain committed to building a more diverse workforce to help us build better products, make better decisions, and create a better culture.”
Google declined to comment on the matter, but in a note to employees on Wednesday, Alphabet CEO Sundar Pichai said, “The events of the past few weeks reflect deep structural challenges. We’ll work closely with our Black community to develop initiatives and product ideas that support long-term solutions—and we’ll keep you updated.”
Former employees have publicly called out Google and Facebook for how they have treated black employees, describing incidents when they were not only marginalized but directly discriminated against by their managers or other employees.
Following protests fueled by the death of George Floyd, a black Minneapolis resident who died after a white police officer kneeled on his neck, Google committed $12 million to organizations working to improve racial equity while Facebook promised $10 million. Both CEOs also publicly stated that they stand with the black community.
Before the recent demonstrations, Facebook had created a number of partnerships and programs aimed at improving diversity. And last year, the company committed to shift hiring so that within the next five years, half of its workers are women, people of color, people with disabilities, and veterans.
Meanwhile, Google has tried to eliminate bias in its job postings, expanded programs aimed at retaining workers from underrepresented groups, and deepened partnerships with organizations that serve underrepresented communities.
But critics say the efforts by Google and Facebook aren’t enough. They want the companies to do more to promote and hire blacks and other people of color. They also want Google and Facebook to change policies that unfairly discriminate against people of color like performance reviews that often scrutinize black individuals more harshly than white counterparts. The companies can do better to create an environment in which all people feel valued and included, critics said, and they should increase funding for internal diversity leaders and efforts. The efforts would result in not only more black leaders but a better environment for black employees, and top executives should be held accountable for change or the lack thereof, critics urge.
“The fact of the matter is if it’s not doing better, you’re not doing your job,” Miley said, referring to CEOs. “Maybe it’s time for you to move on.”
Kellie McElhaney, founding director of the Center for Equity, Gender, and Leadership at the University of California at Berkeley, said it’s no longer acceptable for the two companies to address their lack of diversity solely by offering long-term strategies, especially when Facebook and Google already employ potential black leaders. Instead, the companies should take swift action to remedy years of inequity under their own roofs, she said.
“We’ve given a long enough period for companies to collect the data, to say they have a problem, to say they have solutions,” McElhaney said. “The grace period is up.”
Employees at both companies have long criticized the lack of diversity. Mark Luckie, a former Facebook engineer, aired his grievances in a memo to colleagues two years ago about Facebook’s failures that he later shared in a public post.
In the memo, he said inside some of Facebook’s buildings “there are more Black Lives Matter posters than there are actual black people.” He also described racial discrimination at the company.
“Too many black employees can recount stories of being aggressively accosted by campus security beyond what was necessary,” he wrote. “At least two or three times a day, every day, a colleague at MPK [Facebook headquarters in Menlo Park] will look directly at me and tap or hold their wallet or shove their hands down their pocket to clutch it tightly until I pass.”
Miley said he was assaulted twice within six months while working at Google. He said both times other Google employees, who didn’t see his employee badge, tried to keep him from entering the campus. “That someone felt they could physically restrain me at work…that’s the same type of attitude that caused those three men to hunt down Ahmaud Arbery and murder him,” he said, referring to black Georgia jogger who died after three white men ambushed and shot him. “Google is microcosm of what’s happening in society.”
The lack of black people in leadership was particularly apparent during Facebook’s internal all-hands meeting on Wednesday. An employee asked CEO Mark Zuckerberg how many black leaders he consulted before making the controversial decision to leave President Trump’s recent inflammatory comments about the Minneapolis protests on the service. Zuckerberg said he consulted with a small circle of advisers, and of those he listed only one was black, according to Vox’s transcript of the meeting. He said he also relied on information from Facebook’s policy team, some of whose members are black.
“If the only [black] person in that room was the chief diversity officer, that is highly troublesome,” McElhaney said, suggesting that chief diversity officers often provide an essential voice but rarely get the amount of executive support they need.
Both companies’ shareholders, whose voting power is controlled by the companies’ founders, also recently rejected several proposals meant to improve diversity and increase accountability, citing policies and people already in place to address the matters. Among failed proposals at Alphabet’s shareholder meeting on Wednesday was a request that the company report data on how it’s improving diversity within its leadership ranks and how executive compensation is tied to those measures. At Facebook, shareholders rejected a proposal to report on civil and human rights risks.
Miley said companies have an opportunity to make real change in response to the current movement. But he says far too many times companies’ focus on racial equity and justice has waned once public outrage dies down.
“This time will pass, this story will pass, and we as people of color will be left,” he said. “I just want to see something different.”


fortune--2020-06-08--BP to cut 10,000 jobs as the coronavirus pandemic continues to squeeze Big Oil

BP Plc plans to cut 10,000 jobs as the coronavirus pandemic accelerates the company’s move to slim down for the energy transition.
The public health crisis has hit company earnings and forced many to change the way they operate. European competitor Royal Dutch Shell Plc is said to be offering voluntary redundancies in a bid to become leaner, and U.S. rivals Chevron Corp. and Marathon Oil Corp. are among others laying off employees.
BP will let go of 14% of its workforce, Chief Executive Officer Bernard Looney said in an internal note. The move will mostly affect staff in office-based jobs and those holding senior roles, with the top 400 positions expected to be cut by one-third.
Senior management will also not receive pay increases this year, while junior and mid-ranking staff will only get them from October. Employees at filling stations won’t be included in the reorganization as they’re considered front-line workers. Their wages rose in April and will climb again in August.
Looney, 49, told staff that the job cuts were in line with plans set out in February to prepare BP for deep reductions in carbon emissions. The pandemic and crude’s subsequent collapse have however accelerated the process, leading the company to “go deeper at this stage than we originally intended,” he said.
“We are spending much, much more than we make — I am talking millions of dollars, every day,” Looney wrote. “It currently costs around $22 billion a year to run the company — of which around $8 billion is people costs.” BP’s net debt rose by $6 billion in the first quarter of this year.
The company had committed to a three-month freeze on job cuts during the peak of the pandemic, starting in early March. Promotions were also frozen but will resume in July “in a measured way,” the CEO said. Cash bonuses for the year will be “very unlikely,” he said, without clarifying whether that extends to BP’s trading division. Staff will be able to apply for voluntary redundancy starting June 15.
In February, newly appointed Looney announced that BP’s upstream and downstream businesses would be replaced by 11 teams that would be more focused and integrated. He also pledged to make the company largely carbon-neutral by 2050.


fortune--2020-06-08--Sycamore wants to take a bite of J.C. Penney

As the coronavirus razed brick-and-mortar retailers, private equity firm Sycamore Partners walked away from a $525 million pre-pandemic deal to buy a majority stake in the lingerie business of Victoria’s Secret.
Now Sycamore Partners is in early talks to acquire J.C. Penney out of bankruptcy if the department store’s negotiations with creditors fail, per Reuters. The department store chain said it plans to close 154 stores permanently and perhaps more after filing for bankruptcy protection in May.
As with Victoria’s Secret, the pandemic has only compounded the multitude of issues bogging down the retailer: J.C. Penney struggled for years with dwindling sales, massive debt, and customer defections. Now with poorly developed e-commerce operations, the coronavirus is dumping more salt on the wound. Certainly Sycamore has its work cut out—and no doubt much of its portfolio, which focuses on retail and consumer, is feeling the same pain.
It’s unclear exactly how much Sycamore would pay for a J.C. Penney deal, though the department store is also in talks with its landlords, including Brookfield Asset Management and Simon Property Group, about a deal which could include a collaboration between the three, per the report.
The news comes after Sycamore made headlines for its interesting break up with Victoria’s Secret. The buyout firm struck a deal in February, just as markets were reaching new highs, to acquire a majority of the lingerie brand from struggling retailer L Brands. But as the coronavirus worsened in late April, Sycamore sought to break the deal. L Brands filed a counter lawsuit, but eventually agreed to terminate the tie-up to avoid “costly and distracting litigation to force a partnership with Sycamore.”
A date to watch: July 15. Should J.C. Penney fail to convince enough lenders of its reorganization plans by then, the retailer will have to pursue a sale.
In case you missed it: Reddit founder and former CEO Alexis Ohanian said on Friday that he would step down from the company’s board Friday to make way for a black replacement. “It’s long overdue to do the right thing,” he said.
VENTURE DEALS
- Zuoyebang, a Chinese online tutoring startup, is in talks to raise between $600 million to $800 million at a $6.5 billion valuation, per Reuters. Existing investors include Goldman Sachs, Sequoia Capital China, Coatue Management, and GGV Capital. Read more.
- Tiki, a Vietnamese online marketplace, raised $130 million in funding led by Northstar Group. Read more.
- Fivetran, a Oakland, Calif.-based data integration startup, is in advanced talks to raise funding at a valuation above $1 billion from investors including General Catalyst and Andreessen Horowitz, per Bloomberg. Read more.
- Quaise, a Cambridge, Mass.-based energy company using millimeter wave drilling to access deep geothermal energy, raised $6 million in seed. The Engine led the round, and was joined by investors including Vinod Khosla and Collaborative Fund.
- TaxProper, a Chicago-based property tax tech company, raised $2 million in funding. Khosla Ventures led the round and was joined by investors including Global Founders Capital, and Clocktower Ventures.
- Play One Up, a Cleveland, Oh.-based e-gaming app allowing users to compete for cash, raised $3.1 million in seed funding. Three Curve Capital led the round. Read more.
PRIVATE EQUITY
- Blackstone lowered its takeover bid for NIBC, Dutch bank, by around 25% after saying the coronavirus could derail the deal. Blackstone offered 7 euros per share to just above 1 billion euros. Reggeborgh and JC Flowers back NIBC. Read more.
- A group led by Silver Lake Partners agreed to invest another 45.5 billion rupees ($602 million) in Jio Platforms, the digital and telecom arm of India’s Reliance Jio. Reliance Jio. Platforms also sold a 1.16% stake for $750 million to the Abu Dhabi Investment Authority.
- Guala Closures, an Italian bottle cap maker, rebuffed a bid to acquire a minority stake by Investindustrial. Read more.
- Groundworks Companies, backed by Cortec Group, acquired AFS Foundation & Waterproofing Specialists foundation and waterproofing contractor, an Alabama-based
- KSM Consulting, a portfolio company of Renovus Capital Partners, acquired Advocate Solutions, a Columbus, Oh.-based IT services firm. Financial terms weren't disclosed.
- Fralock, backed by Arsenal Capital Partners, acquired Career Technologies USA, a Los Angeles-based provider of engineering and manufacturing solutions. Financial terms weren't disclosed.
- Ardian invested in ProduceShop, a Swiss e-commerce platform specialized in the production and sale of indoor and outdoor furniture in Europe. Financial terms weren't disclosed.
OTHERS
- Just Eat Takeaway and Delivery Hero are both reportedly courting GrubHub, the U.S. food delivery company, per CNBC. Uber is already in talks with GrubHub over a tie-up. Read more.
- AstraZeneca (LON:AZN) has approached Gilead Sciences (NASDAQ: GILD), a U.S. biopharmaceutical rival, about a merger, per Bloomberg. Read more.
BREAKUPS, HANGUPS, AND BANKRUPTCIES
- Yatra Online, an Indian travel company, is terminating a pending merger agreement Ebix Inc., a with U.S. software firm. Ebix agreed acquire Yatra for a valuation of $337.8 million. Read more.
- LVMH is not asking to renegotiate its $16.2-billion acquisition of Tiffany & Co, the jewelry chain, per Reuters citing sources. Read more.
IPOs
- Burning Rock Biotech, a Chinese precision oncology and early cancer detection company, plans to raise $196 million in an offering 13.5 million ADSs priced between $13.50 to $15.50. Insiders also plan to purchase $79 million worth of ADSs. Northern Light Venture Capital (13.7% pre-offering), Sequoia Capital China (9.1%), and CMB International (8.8%) back the firm. It plans to list on the Nasdaq as “BNR.” Read more.
- Akouos, a Boston, Mass.-based biotech developing gene therapies for inner ear disorders, filed to raise $100 million in an IPO. 5AM Ventures (21.6% pre-offering), New Enterprise Associates(18.6%), and Pivotal bioVenture Partners (7.5%) back the firm. It plans to list on the Nasdaq as “AKUS.” Read more.
- Agora, a Shanghai and Santa Clara, Calif.-based tech company offering a platform for API development, filed for an $100 million IPO. The company posted revenue of $64.4 million and loss of $67.2 million in 2019. Morningside Venture (15.7% pre-offering), Heights Capital Management (12.8%), and Coatue (9%) back the company. It plans to list on the Nasdaq as “API.” Read more.
- ArcherDX, a Boulder, Colo.-based provider of genomic testing products for cancer, filed for an $100 million IPO. The firm posted revenue of $50.6 million and a loss of $41 million in 2019. Investors include PBM Capital’s Enzymatics, Perceptive Life Sciences, QIAGEN, and Redmile back the firm. It plans to list on the Nasdaq as “RCHR.” Read more.
- Fusion Pharmaceuticals, a Canadian biotech developing medicines for solid tumors, filed for an $100 million IPO. HealthCap (12.6% pre-offering), Adams Street Partners (12.3%), and Varian Medical Systems (11.3%) back the firm. It plans to list on the Nasdaq as “FUSN.” Read more.
- PolyPid, an Israel based maker of drugs that prevent surgical site infections, refiled for a $57.5 million IPO. The firm previously planned to raise $75 million in an IPO of 3.3 million shares priced between $21 to $24. Morris Kahn (13.8% pre-offering) backs the firm. It plans to list on the Nasdaq as “PYPD.” Read more.
- Asana, the corporate software maker, raised about $200 million in convertible debt ahead of its planned U.S. direct listing later this year, per Bloomberg. Read more.
F+FS
- Atlas Venture closed its twelfth fund at $400 million in commitments.
- Pitango Venture Capital raised $175 million for Pitango Venture 8.
PEOPLE
- L Catterton hired former TPG Capital Asia partner Scott Chen.
- TSG Consumer Partners promoted Erik Johnson and Ed Wong to managing director.
- Z Capital Group hired of Timothy Chiodo as managing director.


fortune--2020-06-08--How the world agreed on a 14-day coronavirus quarantine—and the (risky) ways to shorten it

All passengers arriving in the United Kingdom must self-isolate for 14 days according to a new regulation that came into effect on Monday.
The U.K.’s aviation industry strongly opposed the new regulation, saying it would financially deliver another blow to crippled airlines by further discouraging travel and tourism.
The U.K.’s British Airways and Easyjet and Ireland’s Ryanair sent a letter to the British government on Friday, criticizing the quarantine as “disproportionate” and “devastating” for the country’s tourism industry, and urged the government not to go through with the measure. Their pleas didn’t stop the U.K. from enacting the measures on Monday.
The U.K. joins several other countries, including Canada, China, and South Korea, in mandating a 14-day quarantine period for arrivals to curb the spread of the coronavirus. The U.S. Centers for Disease Control and Prevention recommends that Americans returning from abroad stay home and avoid social contact for 14 days, too.
For infectious disease specialists worldwide, 14 days is a practical estimate of coronavirus infection risk so there’s near-universal agreement that quarantining for that period can help minimize the spread of the disease. Airlines and other travel industry companies, meanwhile, argue that it disincentivizes travel and thus threatens their business and the larger economy. But so far few reliable alternatives to the two-week quarantine have been found.
Incubation period
In late February, when China was still the epicenter of the coronavirus outbreak, the World Health Organization (WHO) and China conducted a joint mission to learn more about the characteristics of the coronavirus and come up with containment strategies that could be internationally implemented.
Passengers wearing personal protective equipment queue up to board a China bound flight at Terminal 2 of London’s Heathrow airport May 22, 2020. Arrivals to the airport will be subject to a 14-day quarantine as of Monday. TOLGA AKMEN—AFP/Getty Images
The WHO-China report concluded that the mean incubation period for COVID-19 was five to six days, but the full range was one to 14 days, meaning as many as 14 days could pass between when a person was exposed to the virus and the onset of symptoms.
The 14-day figure has been adopted globally; all the countries that mandate quarantine upon entry require it for 14 days.
Self-isolation was and remains a recommended tactic for people who may have the disease but haven’t been tested for it. Worldwide shortages of testing kits and issues with reliability mean quarantining is the safest bet for people who might’ve been infected but can’t get a test.
Since most infected people start showing symptoms in less than a week, the 14-day quarantine period is playing it safe, ensuring that statistical outliers don’t slip through the cracks. There are also asymptomatic people who never exhibit symptoms of the disease; the isolation period decreases their chances of passing the virus onto others who could get sick.
A May 5 study by Johns Hopkins University researchers found that 97.5% of people who develop COVID-19 symptoms will do so within 11.5 days after they are exposed to the virus. This means developing symptoms at 14 days is relatively rare, but not impossible.
“If you want to ensure virus containment, you need a quarantine the length of the maximum incubation period,” said Merle Böhmer, an infectious disease researcher at the Bavarian Health and Food Safety Authority, part of the public health department of Bavaria, Germany.
The shorter the quarantine period, the higher the chance of “virus import,” said Jantien Backer, a researcher in infectious disease modeling at the Centre for Infectious Disease Control at the National Institute for Public Health and the Environment in the Netherlands.
Backer co-authored a study looking at the incubation period of the virus for travelers leaving Wuhan, China—where the first coronavirus outbreak occurred—in one week in January. They found that 5% of the 88 cases included in the study had incubation periods longer than 11 days.
“Quarantining is a very important tool to be able to control COVID-19,” Backer said. “The 14-day quarantine period is a prudent choice to capture most of the infections in this time period.”
Industry reaction
There is a broad scientific consensus that 14 days is an acceptable estimate of incubation time, but the travel and aviation industries—hard hit by the economic fallout of the pandemic—are not convinced that two weeks of isolation is necessary.
“We are urging governments to find alternatives to arrival quarantine,” said Albert Tjoeng, Asia-Pacific assistant director of corporate communications for the International Air Transport Association (IATA), a trade group representing 290 airlines.
An April IATA survey of travelers found that 69% of people would not consider traveling if it involved a 14-day quarantine period, and 86% were “somewhat or very concerned” about being quarantined while traveling.
“Few businesses will be willing to have staff travel if it means 14 days of quarantine on both ends of the trip, and staff may be unwilling to make that same sacrifice,” said Todd Handcock, Asia-Pacific president for Collinson Group, a customer benefits and loyalty firm that works globally with airlines, airports, and travel companies.
IATA’s alternative suggestions include temperature screening to find symptomatic passengers and stop them from flying, and health declarations and contact tracing on arrival to reduce the risk of imported cases.
Tjoeng said with these guidelines, “quarantine measures can be eliminated,” and said the guidelines are a “temporary” approach to be used “until a vaccine, immunity passports, or nearly instant COVID-19 testing is available at scale.”
In a bid to attract much-needed tourism revenue, Iceland is offering visitors the option to skip the mandatory 14-day quarantine if they pay $115 for a coronavirus test.
And since early May, the Vienna International Airport has offered coronavirus tests too, for people who reside in Austria. They pay $208 and get results in three to six hours; if they test negative, they can bypass the otherwise mandatory 14-day quarantine. Non-residents can skip quarantine if they present a medical certificate proving they’ve tested negative for coronavirus in the last four days.
“If [Vienna’s] approach could be more broadly adopted [and] supported by regulated guidelines, this could be a way to remove the need for prolonged implementation of quarantine periods,” Handcock said.
Other places are being even more cautious. Passengers arriving in Hong Kong pass a temperature check before they reach immigration, and then take a bus to a facility to take a coronavirus test and await the result. Even if they test negative, they are required to self-isolate for 14 days, and all arrivals are fitted with an electronic location-tracking bracelet to ensure they don’t break quarantine. The measures seem to be paying off—Hong Kong has kept new local cases low and only four people have from coronavirus died there.
Testing also helps detect asymptomatic cases, which a quarantine with no test would not. But coronavirus testing for all arrivals isn’t foolproof. If a person has low concentrations of the virus in their body—concentration is low at the beginning of infection—then a polymerase chain reaction (PCR), the standard coronavirus test, might not be able to detect it.
For this reason, exchanging a longer quarantine period for a PCR test and a shortened quarantine might be ill-advised.
“In my opinion, testing on arrival combined with a shorter quarantine period will not help in decreasing the risk of virus import,” Backer said.
Correction: This story has been updated to correct the spelling of Todd Handcock’s name.


fortune--2020-06-08--Zoom makes a small bet on hardware that could have a big payoff

This is the web version of Data Sheet, Fortune’s daily newsletter on the top tech news. To get it delivered daily to your in-box, sign up here.
One of the most interesting aspects of the ongoing narrative around the pandemic-friendly success of Zoom Video is its David-versus-Goliath vanquishing of the WebEx unit of Cisco Systems. Zoom CEO Eric Yuan and much of his management team hail from WebEx. At Zoom, they created an easy-to-use business product that has become a consumer cultural sensation.
Zoom flexed its muscles last week with a boffo earnings report. Revenues more than doubled, and the company reported impressive gains (to 769) in its big-ticket customers, those who pay $100,000 or more per year, and, importantly, companies with at least 10 employees, the types of companies that pay to use Zoom, to more than 765,000.
Critical to Zoom’s success is that it’s a software company. Whereas WebEx is part of a network-equipment-making giant and sells devices of its own, Zoom put all its energy into the visual experience of video conferencing.
Little noticed is that Zoom might not be content to refer its customers to other hardware vendors. Last year it invested in a Norwegian company called Neat, which says it “was created with Zoom to provide the ultimate Zoom Room experience.” Though Zoom didn’t comment on it in its earnings call with investors, the company disclosed a few days later that it has increased its investment, though it doesn’t name Neat in its filing. “In the third quarter of fiscal year 2020, we made a $3.0 million strategic investment in a private company in the business of designing and developing video communications hardware,” Zoom said. “In the first quarter of fiscal year 2021, we made an additional $8.0 million strategic investment in this company.” (Zoom’s fiscal 2020 ended Jan. 31, 2020.)
It’s a small investment in a small company. Then again, that’s how Zoom started—when Yuan left Cisco-owned WebEx.
Adam Lashinsky
@adamlashinsky
adam.lashinsky@fortune.com
This edition of Data Sheet was curated by Aaron Pressman.
NEWSWORTHY
Be the change. Reddit co-founder Alexis Ohanian stepped down from the company’s board of directors on Friday and said he should be replaced with a black candidate. The company said it agreed. “I believe resignation can actually be an act of leadership from people in power right now,” Ohanian wrote on Twitter. “To everyone fighting to fix our broken nation: do not stop.” After Facebook was deluged with criticism for its handling of recent posts by President Trump, CEO Mark Zuckerberg said on Friday that the company would review its policies governing "discussion or threats of state use of force when a country is in this state.”
The truth is out there. Counter to the White House narrative on the Black Lives Matter protests, Facebook says it has seen no evidence of foreign actors trying to influence the situation. Rather, Facebook said it removed numerous posts from two banned white supremacy groups which were planning to interfere with the protests.
I'll take one of your finest PCs please. You've long been able to buy iPhones on a monthly installment plan. Now the same type of deferred payment scheme is coming to most other Apple products. Macs, iPads, and some more expensive peripherals will be available on 12-month no-interest loan plans and cheaper items like AirPods, Apple TV, and the HomePod will be sold on 6-month plans, Bloomberg reports.
Watch out for that tree! Amazon's Prime Air drone delivery program is struggling amid leadership turnover and regulatory and technical hurdles, according to an investigation by Business Insider. Still, the company want to formally launch the service on August 31. Meanwhile, several warehouse workers are suing in federal court in New York, charging that the company did not follow CDC and local guidelines in handling the pandemic. The plaintiffs are not seeking monetary damages but rather a court order for Amazon to follow government standards.
Not-quite-staycation. Some data on the new normal from Airbnb, which says bookings for the past two weeks in the U.S. and a few European countries are higher than for the same period last year. But a much higher proportion are for stays within 200 miles of the customer's home address.
FOOD FOR THOUGHT
Technology sometimes interacts with politics and social movements in surprising ways. The current protests against racism and police brutality are relying on an unexpected online collaboration tool, MIT Technology Review reporter Tanya Basu discovered: Google Docs.
Another viral Google Doc that emerged in the wake of George Floyd’s murder, listing resources for protestors and organizations accepting donations, was created by an activist known as Indigo, who identifies as nonbinary and uses a pseudonym so as not to be outed to family members. Indigo said accessibility and live editing were the primary advantages of a Google Doc over social media: “It’s important to me that the people on the ground can access these materials, especially those seeking legal counsel, jail support, and bail support. This is a medium that everyone I’ve organized with uses and many others use.”
Like Johnson, Indigo had been collecting resources after Floyd’s murder—“bookmarking and emailing myself tons of links” —and found that “I just couldn’t keep up with it. It seemed like no one else could either.” Indigo was frustrated with Twitter, though: “On the off-chance you find something phenomenal, you have to retweet, like, or share it in that moment or else it’s gone forever.” Google Docs was the answer.
IN CASE YOU MISSED IT
Escaping ‘Zoom fatigue’ is surprisingly complicated By Lydia Belanger
How do you move a technology conference with 30,000 attendees online? By Jeremy Kahn
Lego pauses all digital ads after reports it stopped marketing police-themed products By Rey Mashayekhi
From beekeepers to giant pension funds, activist shareholders are being silenced by the coronavirus By Bernhard Warner and Katherine Dunn
What shape will the recovery take? U-shape, check mark, square root symbol, and swoosh are all on the table, say economists By Anne Sraders
(Some of these stories require a subscription to access. There is a 50% discount for our loyal readers if you use this link to sign up. Thank you for supporting our journalism.)
BEFORE YOU GO
We did not use a Google Doc, but Fortune staff have also been gathering and circulating resources to help people undo and unlearn racism. To quote Angela Davis: “It is not enough to be non-racist, we must be antiracist.” Our list includes books, articles, movies, social media accounts to follow, and much more.
Aaron Pressman
@ampressman
aaron.pressman@fortune.com


fortune--2020-06-08--The economy is starting to recover, but it’s leaving black women behind

Good morning, Broadsheet readers! UOMA Beauty’s founder pressures brands to share their diversity numbers, D.C. Mayor Muriel Bowser makes an artistic gesture, and economic recovery is leaving black women behind. Have a mindful Monday.
– The real jobs report. The May jobs report showed a surprising recovery for the economy, with unemployment down for nearly every group. But the unemployment rate increased last month for one category of workers: black women.
Black women’s unemployment, according to an analysis by the National Women’s Law Center, went up slightly to 16.5% in May from 16.4% in April, one of the only groups to see an uptick during a month when the overall unemployment rate declined to 13.3% from 14.7%.
The economy gained 2.5 million jobs in May—and it seems those jobs are not going to black women.
The data, of course, arrives against the backdrop of nationwide protests against racism and police brutality. Longtime economic disparities like these are one of the many underlying reasons the protests have taken hold with such fervor across the country. The data follows the same trends the U.S. saw during the last recession, says Jasmine Tucker, lead researcher for the NWLC. While the 2008 crisis hit industries like construction that are largely occupied by men, white men recovered from the downturn more quickly than black women, who didn’t dip below double-digit unemployment until 2014. (White men’s unemployment never rose above 10%).
You can read my full story on what the May jobs report tells us about black women’s employment here.
Before we go, I’d also encourage you to spend some time with these pieces published Friday in honor of what would have been Breonna Taylor’s 27th birthday. Taylor was shot eight times and killed by police officers while she was sleeping in her bed in Louisville, Kentucky in March; those officers have not been charged.
The Cut spoke to Taylor’s mother, Tamika Palmer, about her daughter. “It’s hard to think without her. She was so much like me it’s unreal. But she was a much better version,” Palmer said in a moving tribute.
NPR talked to family and friends about Taylor, an EMT who found her job in healthcare “so rewarding.” “She always said that she would be a legend,” Taylor’s friend Erinicka Hunter said. “I just never imagined it would be like this.”
Emma Hinchliffe
emma.hinchliffe@fortune.com
@_emmahinchliffe
ALSO IN THE HEADLINES
- Two Americas. In this piece about how "corporate America has failed black America," we hear from former Xerox CEO Ursula Burns—the only black woman to ever lead a Fortune 500 company on a permanent basis—and Ariel Investments co-CEO Mellody Hobson. Burns offered this reflection on life as a successful black executive: "I dress like the one percent. I drive like the one percent. I wear watches and jewelry like the one percent," a decision related to the fact that "I worry every day if a policeman is near me. They look at me as first and foremost a threat to their place in society." New York Times
- #PullUpOrShutUp. Sharon Chuter is the CEO and founder of UOMA Beauty. Last week, she launched a campaign asking beauty brands—especially those that have expressed support for the Black Lives Matter movement—to share the numbers of black employees in their workforces and leadership teams. Brands including Ulta Beauty and Huda Beauty have participated in the Pull Up for Change campaign, which also encourages consumers to stop shopping until companies offer transparency on this question. Glamour
- Leading by example. Serena Williams offered her support for her husband Alexis Ohanian after he decided to resign his position on Reddit's board of directors and ask the company to replace him with a black director. Ohanian is one of vanishingly few business executives to acknowledge the reality that, to truly make room for more diverse leadership, white leaders will to some degree have to step aside; Williams told him that their daughter will be proud. Elle
- Muriel's mural. Washington, D.C. Mayor Muriel Bowser had her city paint "Black Lives Matter" along 16th Street—a road that leads straight to the White House. Bowser also renamed that section of the street "Black Lives Matter Plaza." Some activists have criticized the artistic effort, however, as an empty gesture and call on Bowser to remove funding for D.C. Police from her city's budget. CNN
MOVERS AND SHAKERS: Lawyer and former federal prosecutor Fabiana Pierre-Louis is set to be New Jersey Gov. Phil Murphy's nominee to the state's Supreme Court; she would be the first black woman to serve on the court. Katie Kingsbury will be acting editorial page editor for the New York Times after the resignation of James Bennet following the paper's controversial publication of an op-ed by Sen. Tom Cotton. Variety editor-in-chief Claudia Eller was placed on administrative leave after arguing with a critic on Twitter over a piece she wrote about the lack of diversity in her newsroom.
IN CASE YOU MISSED IT
- Smells like success. The perfume maker Puig will acquire a majority stake in the makeup brand Charlotte Tilbury, valuing the business at about $1.5 billion. The deal makes Tilbury herself one of the U.K.'s richest female entrepreneurs. Bloomberg
- Dangerous substance. As police have used tear gas at protests against racism and police brutality over the past two weeks, activists have brought up an under-covered concern: the substance is known to be an abortifacent, causing miscarriages. This 2014 piece asks why the anti-abortion movement hasn't opposed its use: The Nation
- Centennial celebration. Amid everything else going on, you may have forgotten that 2020 is also the 100th anniversary of the 19th Amendment. In honor of the constitutional amendment that gave white women the right to vote, the images of leaders from the suffrage and civil rights movements will be projected on Mount Rushmore later this summer. Washington Post
- Horror killing. A brutal killing of a 14-year-old girl named Romina in Iran has set off a reckoning over the rights of women and children and a form of the #MeToo movement. Romina's father Reza Ashrafi beheaded her while she was sleeping after he found out she was planning to run off with her 29-year-old boyfriend. "There are thousands of Rominas who have no protection in this country," one woman named Kimia Abodlahzadeh tweeted. New York Times
ON MY RADAR
I May Destroy You confirms Michaela Coel’s stunning talent Vulture
Judge in Jeffrey Epstein grand jury case has ties to those with a stake in outcome Miami Herald
Summertime Sadness: Haim returns Vulture
75% of millennial women now believe President Trump is racist Cosmopolitan
PARTING WORDS
"Not enough black women had a seat at the table, so I had to go and chop down that wood and build my own table."
-Beyoncé, in her address to the class of 2020 on Sunday


fortune--2020-06-08--The 2.5 million jobs the economy gained in May went to almost everyone except black women

During the month of May, unemployment decreased for nearly every group of workers—except for black women.
As protests rage across the country against racism and police brutality amid the backdrop of a global pandemic that has decimated the American economy, unemployment for black women increased slightly, to 16.5%, in May from 16.4% in April, according to an analysis by the National Women’s Law Center. The overall black unemployment rate also increased, to 16.8%, from 16.7%. The nationwide unemployment rate, meanwhile, dropped to 13.3% from 14.7% as the economy gained 2.5 million jobs.
Those 2.5 million jobs returned as some businesses that had been closed as a result of the coronavirus crisis began to reopen in May—and they seem to be going to nearly everyone except black women. “Everyone else made gains, but black women didn’t move at all,” says Jasmine Tucker, director of research for the NWLC. “That is going to be a problem for a long time.”
Tucker compares the situation to the unequal economic recovery from the Great Recession a decade ago. During the depths of that crisis, white male unemployment never reached double digits. Unemployment for black women, however, was over 10% by February 2009 and didn’t dip below that threshold until 2014. In that same year, four years after the official July 2010 end of the recession, white men reached an unemployment rate below 5%. It took until August of 2019, months before the current economic crisis began, for black women to reach the same short-lived milestone.
Industries that employed mostly white men, like construction, which collapsed alongside the housing bubble, were hit hard during the 2008 crisis. This time around, it’s clear that black women, employed in industries like hospitality and retail that closed for months because of the pandemic, will be the worst affected. However, Tucker doesn’t expect those workers to have as smooth a recovery as white men did last decade. “I don’t see women—black women in particular—coming back from this recession like men came back from the last recession,” Tucker says. “Their jobs are in industries that are going to be in low demand for a long time.”
Economic disparities like these are one of the underlying reasons protesters have taken to the streets over the past two weeks. “I can’t call it anything other than racial discrimination in the labor market,” Valerie Wilson, director of the Economic Policy Institute’s Program on Race, Ethnicity, and the Economy, told CNBC of the employment gap.
The May jobs data may have a rosier outlook than the reality on the ground; the Bureau of Labor Statistics has reported that a “misclassification error” caused the monthly report to peg the national unemployment rate at 13.3%, when the rate is likely about three points higher. The bureau has yet to officially correct the data, and the racial and gender discrepancies will likely persist with higher overall unemployment.
According to the May data, one in six black women are now unemployed. Latinas still face the highest unemployment rate nationwide, at 19%, but that rate decreased last month from 20.2% in April. Women in total gained 1.1 million of the 2.5 million jobs returned to the economy in May.


fortune--2020-06-09--Morgan Stanley says these four factors could clip the wings on the S&P 500 rally

To bail out or not : Governments decide whether to aid Asia ’ s embattled airlines

The market’s rebound in the past week has proved investors are certainly optimistic about the pace of the recovery thus far, but Morgan Stanley has a blunt warning for bulls: The new heights for stocks may be more range-bound than they would care to admit.
The Wall Street firm is cautioning investors not to chase the ever-rising S&P 500 index right now—and instead sees promise in sector rotation toward cyclicals. Morgan Stanley Wealth Management’s chief investment officer Lisa Shalett wrote in a note Monday, “Our view is that the index will be rangebound for the next three to six months,” pointing to head winds from “shifting dynamics,” as “inflation expectations are rising, yield curves are steepening, and the U.S. dollar is weakening.” A mix of those factors, Morgan Stanley estimates, will cap the S&P 500 at around 3,250 while still keeping the index above the 2,650 range due to the unprecedented monetary and fiscal support. It closed Monday at 3,232.
Make no mistake, the firm says we’re firmly in a new bull market. The S&P 500 has been on a massive surge, gaining roughly 8% in the past two weeks. Remarkably, the benchmark index is only about 4.5% off from its all-time high in February. And unemployment, while still staggering at 13.3%, surprised to the upside, ticking down from 14.7% in April, and signaling that recovery is underway as reopenings thus far have been relatively smooth. In fact, Morgan Stanley cautiously believes a V-shaped recovery is possible. But even with that run-up, investors would be right to ask: Was it a blip, or is the rebound sustainable?
There are four factors to consider at present that “might inhibit the broad tech-dominated index while flattering cyclical and value-oriented sectors and stocks,” writes Shalett. One is the rise in inflation expectations as the Fed pumps liquidity into the system. Indeed, the inflation rate (measured by the 10-year breakeven rate) increased to over 1.22% from 0.5% since mid-March, the firm notes. Plus, the Treasury yield curve is steepening between the two-year and both the 10-year and 30-year yields, and Shalett believes this kind of yield curve usually doesn’t support the kind of growth stocks that power the S&P 500, but instead presents a “tail wind” for cyclicals.
Weak dollar, expensive stocks
Meanwhile, unlike previous rounds of quantitative easing, the firm notes, the U.S. dollar appears to be weakening. (In fact, the firm points out that since the March 23 bottom, the U.S. Broad Trade-Weighted Dollar Index declined nearly 5%.) A weaker U.S. dollar is good news for emerging markets and global growth, but it spells potential issues for companies with big global supply chains and those “importing intermediate components,” as lots of big tech companies do, driving inflationary pressures, Shalett writes.
Also in the spotlight is the massive run-up in valuations in recent months. The index is currently trading at around 25 times the next 12 months’ earnings, according to S&P Global data, and many of the biggest names leading the rally have seen price/earnings ratios skyrocket, hitting new highs amid the crisis. In addition, 2020 earnings are going to be a muddled picture, as many companies have withdrawn guidance and anticipate poor earnings for the year. With current valuations so high, Charles Schwab’s Liz Ann Sonders recently told Fortune, “We’re set up for some risks here.”
Right now, Morgan Stanley says valuations relative to real economic activity are “extreme” when comparing U.S. market capitalization with nominal U.S. GDP. Shalett notes that “based on the latest revision of first-quarter GDP and the Fed’s calculation as of the end of May, that ratio is now 156.3%, the second-highest reading since 1951 when the data series began,” and close to the peak hit in 2000. On the other hand, some cyclical sectors (like financials) are trading at a much lower valuation, even with “modest expectations for a reflationary rebound,” Shalett writes.
In fact, according to a UBS note on Monday, the strongest rally in the past week was in value stocks and cyclical sectors, as the MSCI World Value Index rose 7.9% over the week and pushed some airlines (like American Airlines) up over 50%. UBS is telling investors to expect cyclicals and midcaps to outperform, the firm said in a note Monday, while there is potential for value stocks to “catch up.”
The bottom line for Morgan Stanley’s Shalett is that while the Fed’s unprecedented support is a “powerful propellant,” its “biggest impact” likely won’t be to support valuations of growth stocks in the S&P 500 but, alongside fiscal policy and pent-up demand from consumers as the reopenings begin, serve to give the biggest boost to a cyclical rebound for investors in the next three to six months.
Although the “argument for simply playing the index is powerful and supported by the past decade’s dynamics and playbook—in essence, the ‘don’t fight the Fed’ adage,” Shalett writes, at present she sees promise outside the S&P 500 and suggests stock picking among “quality, cash-flow leaders in small- and midcaps, cyclicals, value, and non-U.S. stocks” where she sees structural stability, while cutting a bit of exposure to the index.