(Bloomberg) — In the equity market, fear of missing out seems to be overshadowing fear of all that’s wrong with the economy. Goldman Sachs Group Inc. says pessimism will soon get the upper hand and send the S&P 500 Index down almost 20% in the next three months.Fiscal and monetary support over the past few weeks of the coronavirus pandemic successfully warded off a financial crisis, but a return to economic normalcy is still a long ways away and investors have gotten ahead of themselves, the bank’s chief U.S. equity strategist, David Kostin, wrote in a report.Financial, economic and political risks darken the outlook for domestic equities, Goldman warns. The bank cites the lack of flattening in the U.S. infection curve outside of New York, what promises to be a lengthy re-start process, a 50% hit to buybacks in 2020 and the risk of higher corporate taxes and de facto consumption taxes if U.S.-China trade tensions bubble up again.“A single catalyst may not spark a pullback, but a number of concerns and risks exist that we believe, and our client discussions confirm, investors are downplaying,” Kostin wrote. Goldman says the S&P 500 will probably drop to 2,400 over the next three months before it rebounds to 3,000 by year end.The index slumped 0.5% Monday to 2,914 as of 9:45 a.m. in New York.Kostin notes that large swaths of the investor community have failed to cash in on the S&P 500’s 31% surge since its trough on March 23. He points out that most mutual funds have underperformed since the bear market low, with long/short and macro hedge funds posting single-digit returns as a group, and investors may face pressure to chase the rally.“The ‘fear of missing out’ best describes the thought process,” Kostin said.But he warns that it’s a risky move. Even with measures of the breadth of the recent rally improving in recent days — potentially signaling more buy-in on the idea the gains will last — Goldman Sachs’ sentiment indicator has barely improved since mid-March.“Skepticism abounds regarding the likelihood the rally will continue,” the strategist writes.Kostin is pessimistic on the outlook for corporate profits, citing frozen growth plans and capital expenditures will drop 27% this year. He points out that the only encouraging driver for earnings is the swelling federal deficit, which in effect acts as substantial support for demand.Caution on equities may also be warranted in the face of stretched valuations — to the extent that anything about 2021’s bottom-line outlook can be discerned.The benchmark U.S. stock gauge trades at 19.5 times the buy side’s estimate of next year’s earnings, Kostin concludes, the highest level since 2002.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
Welcome to Wall Street Insider, where we take you behind the scenes of the finance team’s biggest scoops and deep dives from the past week.
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Private-equity firms are racing to help portfolio companies in vulnerable industries, and as Casey Sullivan reports, LPs have seen a surge in capital calls. PE shops are also talking through alternative exit strategies and doing daily check-ins to examine financial performance in real time.
Read the full story here:
Private-equity firms are scrambling to save portfolio companies by calling in money from investors and rewriting worst-case scenarios
Bets on getting people out of the house and into places like theme parks and restaurants have been slammed by the coronavirus. Casey and Alex Morrell took a look at the Apollo-owned parent company of Chuck E. Cheese, which had gone on a spending spree to remodel restaurants before the pandemic took hold.
Meanwhile, Blackstone reported that the value of its PE funds plunged nearly 22% in the first quarter, with a big hit from energy investments. But CEO Stephen Schwarzman also noted that some investors are holding remote due-diligence meetings and forging on with capital commitments.
"We had one fund that was supposed to be having a big due-diligence meeting with, I think it was over 130 or 150 different attendees, and it was just done on Zoom," Schwarzman told analysts. "And much like the rest of the way we’re all working, everybody was pretty adjusted and cool about that."
Read on for a look at a surge in all-to-all bond trading, a deep dive on the future of flex-office companies, and to hear what VCs are saying about winners and losers in the payments space.
Thanks for tuning in,
Filet at $2 a pound
As volatility rocked credit markets in March and traditional dealers stepped away, electronic trading platforms saw record volumes. All-to-all, an anonymous form of trading in which trades are sent out to the entire market — not just dealers — in particular enjoyed a surge in activity.
As Dan DeFrancesco reports, investment firms with cash on hand were able to buy up high-quality bonds at far cheaper prices thanks to all-to-all trading. "I was getting filet at $2 a pound," Steve Chylinski, head of fixed-income trading at Eagle Asset Management, told Business Insider.
Read the full story here:
As credit liquidity evaporated, some investors pounced on a bond fire-sale with the help of electronic trading platforms. Insiders explain how a wild 2 weeks unfolded.
Some payments startups are set to thrive
Crystal Cox / Business Insider
Shannen Balogh asked top investors to share which payments players they think are best positioned to come out strong on the other side of the coronavirus crisis, which has upended customer spending behavior and sparked a surge in ecommerce.
Some are betting on B2B players that enable small businesses to compete with the likes of Amazon, while others think that companies with strong point-of-sale tech will see a wave of new customers as merchants shift digital.
Read the full story here:
4 top VCs from firms like Bain and Andreessen Horowitz lay out winners and losers as the coronavirus transforms how we shop and pay
A day of reckoning for flex space
As Meghan Morris and Alex Nicoll report, the flex-space industry is facing a short-term crunch as employees fear returning to dense floors and small businesses that relied on these spaces cut headcount.
But in the long term, 10 real-estate experts, from employers to landlords, said they expect flexible offices to be an even more critical component of real estate as companies hesitate to lock in long-term leases and rethink their real estate footprints – but warned that not every provider will survive.
Read the full story here:
The coronavirus is like a ‘nuclear bomb’ for companies like WeWork. 10 real-estate insiders lay out the future of flex-office, and how employers are preparing now.
Inside Hudson Yards as the coronavirus slams retail
Katie Warren/Business Insider
To persuade Neiman Marcus to anchor the 1-million-square-foot mega-mall at the heart of the $25 billion Hudson Yards development on Manhattan’s West Side, the project’s builders lavished tens of millions of dollars on the upscale department store and postponed reaping profits on the space for years.
Now, Neiman Marcus is eyeing filing for bankruptcy in the coming days, according to multiple media reports. Dan Geiger explains how Related and Oxford, two of the city’s most ambitious developers, are facing the prospect of a potential renegotiation where they may have little choice but to offer Neiman Marcus even more favorable terms.
Read the full story here:
A Neiman Marcus bankruptcy could mark a major blow to NYC’s glitzy Hudson Yards, one of the most expensive mega-malls in US history. Here’s why.
Bracing for the next round of PPP loans
Olivia Reaney / Business Insider
Alex Morrell, Dominick Reuter, Jennifer Ortakales, and Rebecca Ungarino teamed up to take a look at how big banks decided the futures of America’s small businesses.
Here’s the inside story of how $349 billion in government cash was doled out in just 12 days, leaving thousands of entrepreneurs without relief.
And for a glimpse at what’s to come next week, a leaked memo shows Bank of America’s talking points for staffers on how to handle the next round of PPP loans— and warns that funds likely won’t meet "extreme need and demand."
The CEO of Training The Street, which coaches 30,000 bankers each year, explains how Wall Street is gearing up for virtual summer internships
Goldman Sachs-backed fintech Even Financial just bought a life insurance startup. Here’s why that bet could pay off as policy applications soar.
Wells Fargo is eyeing even lower minimums for its robo-adviser as it looks to go head-to-head with Robinhood and Acorns
Digital-only banks like Chime are seeing record signups amid the coronavirus pandemic. Here’s how they drive revenue without lending or charging overdraft fees.
JPMorgan is backing a startup that solves cash-flow headaches for small businesses. Here’s how it works.
Nasdaq is starting to stream real-time market data to the public cloud as Wall Street demands more flexible access to critical information
Hedge funds and investing
Billionaire investor Leon Cooperman dumped millions of shares in newspaper conglomerate Gannett at a huge loss
A former Point72 portfolio manager just broke through the industry-wide chill on fund launches by kicking off a $250 million supply chain-focused hedge fund
Billionaire Paul Singer’s latest letter to Elliott investors lays out 5 doomsday scenarios for the global economy
What to expect when you’re back in the office: 7 real-estate experts break down what the transition will look like, and why the workplace may never be the same
SoftBank-backed Compass is cutting pay and offering equity in exchange — a month after it slashed 15% of staff
Some of WeWork’s outsourced cleaners just lost their jobs — even as the coworking giant keeps offices open and charges members for space they can’t use
NOW WATCH: Tax Day is now July 15 — this is what it’s like to do your own taxes for the very first time
A former Point72 portfolio manager just broke through the industry-wide chill on fund launches by kicking off a $250 million supply chain-focused hedge fundAs credit liquidity evaporated, some investors pounced on a bond fire-sale with the help of electronic trading platforms. Insiders explain how a wild 2 weeks unfolded.JPMorgan is backing a startup that solves cash-flow headaches for small businesses. Here’s how it works.
The Paycheck Protection Program was supposed to help struggling small businesses weather pandemic fallout, but many business owners claim they were sidelined by big banks instead.
Business Insider found that at least five separate class action lawsuits have been filed in federal court against banking giants including JPMorgan Chase, US Bank, Bank of America, and Wells Fargo. Another class-action suit omits US Bank and names CitiBank instead.
Five of the lawsuits usesimilar language, arguing that the banks "prioritized corporate greed" in how they allocated millions in government relief funds meant for small businesses. And the sixth alleges anticompetitive behavior by four major banks.
Business Insider looked at the court documents and the loan program’s data, and spoke to key players to find out how the lawsuit claims matched up with where the loans ended up.
A government lifeline was supposed to help struggling small businesses weather mandated closures, employee layoffs, and plummeting revenues. But several reports have emerged to suggest that the big chains and corporations have gobbled up too much of the available cash, leaving crumbs for the businesses that needed it most.
Now some small businesses are saying big banks limited access to these government funds — and they’re suing over it.
Business Insider has located five lawsuits seeking class-action status that were filed in federal court that allege banking giants including JPMorgan Chase, Bank of America, US Bank, and Wells Fargo "prioritized corporate greed" to allocate millions in government relief funds meant for small businesses to companies with more than 500 employees. A separate class-action suit brings antitrust claims, arguing that JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo "limit[ed] their applications under the PPP to existing customers in order to protect their market share and to limit competition with one another."
Representatives from JPMorgan Chase and Wells Fargo declined to comment on the case itself, and both said the banks are working as quickly as possible to help small business customers, given the timing and regulatory constraints.
"The vast majority of the PPP loans Chase secured went to our smaller business clients," the JPMorgan Chase representative told Business Insider in an email.
Wells Fargo cited an increased effort to smooth out the PPP process: "We have mobilized thousands of employees and launched new technology to better assist customers seeking assistance via the Paycheck Protection Program."
A Bank of America representative said the company disputes the allegations of the case made in California. For the case filed in Maryland, the bank filed an opposition to a temporary restraining order, and the judge rejected the plantiffs’ request for relief.
US Bank and CitiBank did not immediately respond to requests for comment.
BI looked at the data on where the loans went, and spoke to key players involved, to see how those claims match up with what happened.
Where did all the loans go?
The Small Business Administration released a report showing how the $349 billion in the first round of funding was allocated by state, industry, and lender. Of the 1.6 million loans allocated before funding ran out, the average dollar amount was $206,000.
Businesses in Texas received the highest number of individual loans, at 134,737 approved, while California received the most in total funding, at more than $33 billion.
Professional, scientific, and technical services received the highest number of individual loans, at 208,360 approved. The construction industry received the most in total funding at more than $44 billion.
JPMorgan Chase lent more than any other bank, allocating $14 billion in PPP loans.
Lending Tree surveyed 1,260 small business owners and found that while 60% applied for funding, just 5% of business owners received a PPP loan.
Big banks sought bigger loans and shut smaller applicants out
When the Paycheck Protection Program opened on April 3, Bank of America was one of the first lenders to begin accepting applications. But on day one, it wouldn’t accept applicants who weren’t already active borrowers at the bank. This special restriction contradicted the CARES Act, which stated that loans would be processed on a first come, first serve basis. On day two, the banking giant amended this restriction to include preexisting customers as long as they did not have a credit or lending relationship with another bank. But a restriction remained, still contrary to the CARES Act.
The lone class-action suit found by Business Insider that brings antitrust claims in this matter noted that the four major banks — Bank of America, JPMorgan Chase, CitiBank, and Wells Fargo — not only announced that applicants would have to be existing clients to quality, but that they timed their announcement "at or around the same time." The lawsuit further argues that the four banks agreed to limit their applications under the PPP to existing customers in order to protect their market share and to limit competition with one another with respect to the $349 billion PPP fund.
The law firm Rifkin Weiner Livingston filed one of the class-action lawsuits against Bank of America for denying qualified small businesses access to PPP loans. In the complaint, obtained by Business Insider, the firm stated that Bank of America "privileged discriminatory policies of corporate greed over the needs of America’s small businesses."
The firm’s managing partner, Alan Rifkin, told Business Insider that many customers who had long-standing relationships with Bank of America were "gated" out of the federal program. Rifkin said Bank of America’s defense in this case was that businesses could find another bank to approve their loans.
"The money was going and draining fast," Rifkin said. "And a small business owner was being told by its own bank, ‘Go pound the pavement, go find another bank. Good luck in the midst of a pandemic.’"
Lawsuits allege discrimination against the little guy
The lawsuits allege that lenders prioritized preexisting borrowers as well as applying companies with higher payrolls, which would lead to larger loans to maximize loan origination fees, or the processing fee lenders receive from the government. Whether this prioritization was intentional or unintentional is a point of contention.
JPMorgan told CBS that the bank processed loans on a first come, first serve basis as required by the CARES Act, but that some divisions of the bank processed PPP loans for their own clients. When Business Insider asked a representative from JPMorgan to elaborate on this comment, they referred us to an FAQ on its website that explains each division of its business: business banking funded around 18,000 loans; other divisions that serve different businesses, including commercial banking, dealer commercial services, and the private bank, all combined funded roughly 8,500 loans.
"Business banking, Chase’s bank for our smaller business customers, processed loan applications generally sequentially, understanding that a given loan may take more or less time to process," the page reads.
Some applicants say banks have used the program as a way to shore up their relationships with big companies, ignoring the clients who needed the funding most. An Associated Press investigation found at least 75 publicly traded companies received a combined $300 million in PPP loans. Eight of those companies received the maximum amount available, $10 million.
After the hotel and restaurant industries successfully lobbied to be included in the PPP program, at least six restaurant chains with more than 1,000 employees received more than $80 million in coronavirus relief loans. These chains were able to qualify because the bill said eligible businesses must have no more than 500 employees at any one location. After backlash, burger chain Shake Shack returned its $10 million PPP loan, while two subsidiaries of Ruth’s Hospitality Group, the owner of Ruth’s Chris Steak House, held onto $10 million each.
Critics say the program exacerbated racial bias
Apart from the legal claim that banks discriminated based on company size, other critics have claimed that there’s another layer of racial bias.
Minority business owners already have statistics to point to, showing they face a tougher time obtaining small business loans, including large disparities in access to capital and higher interest rates on the loans they do receive, according to a report by the Minority Business Development Agency.
One study showed that businesses owned by people of color were cut out of the last $349 billion stimulus because they are less likely to have existing relationships with banks or SBA lenders. A study by the Center for Responsible Lending said 95% of black-owned businesses and 91% of Latino-owned businesses had a lower change of receiving a PPP loan through a mainstream bank or credit union. The study also said that banks are lending to firms that have larger payrolls than most minority-owned businesses have.
Among these critics is Senate Minority Leader Chuck Schumer, who told CNN’s "State of the Union" in an interview Sunday that smaller businesses and those without a robust history of credit, or the "unbanked," had a harder time getting loans in the last round of PPP funding.
The government’s next round of relief funding will include $60 billion for small lenders, of which half is allocated to institutions dedicated to minorities and disadvantaged communities. But that $60 billion is a relatively small amount when compared to the $320 billion in that bill allocated for small businesses.
Precious funds went to essential businesses, public companies, and firms struggling before the pandemic
The PPP program doesn’t require applicants to prove financial impact directly from coronavirus, only asking the applicant to certify that current economic uncertainty makes their loan request necessary.
According to the AP investigation, several companies who received PPP loans were experiencing financial turmoil long before the coronavirus slammed the US economy. The AP found that 25% of the publicly traded companies who received PPP loans, such as Helius Medical Technologies and Enservco Corp., had warned investors of questionable viability months ago. And some companies’ stocks, such as Wave Life Sciences USA Inc., were already performing poorly before coronavirus caused a national crash.
Entrepreneur, investor, and Columbia University instructor Nathalie Molina Niño told Business Insider that original legislation for the PPP could have incentivized banks to prioritize businesses with the biggest need. Instead, she views banks’ cherry-picking of existing lending relationships as code for "no people of color," based on historical lending data.
"The majority of the PPP money went to a category of business that frankly shouldn’t have been included at all because the whole idea was to focus on people that were most severely impacted by COVID," Molina Niño said.
For example, construction companies have been deemed essential businesses, yet they received the most funding of any industry. "The fact that construction companies as a category are even in there is problematic and goes against the spirit of what they’re trying to do," she said.
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