Junk-Bond Rally Unravels, One Bad Earnings Report at a Time

The run-up in junk bonds is showing signs of returning to earth.

After a spate of bad news triggered sell-offs of a few big speculative-grade borrowers, the pain has spread and even led NRG Energy Inc. to pull a $870 million bond offering on Thursday. Exchange-traded funds that buy high-yield debt have plunged the most since August, with $563 million of retail outflows since the start of this week alone. Three of the biggest junk-rated borrowers, IHeartMedia Inc., CenturyLink Inc. and Community Health Systems Inc., posted disappointing earnings that sent their bonds plunging.

It’s hard to say whether the sell-off will accelerate. Others like it have largely been treated as buying opportunities for yield-starved asset managers. But with more supply to come, investors may be less willing to take a chance on shaky companies, especially with yields at historical lows. Matt Eagan, a debt-fund manager at Loomis Sayles & Co., said he’s not going to start buying until the market sells off by another 3 percent to 5 percent.

“It seems like buyers have simply stepped away from the market,” Eagan said in an interview with Bloomberg Radio Thursday. “I wouldn’t be buying the market.”

The telecom sell-off that was exacerbated by failed merger talks between Sprint Corp. and T-Mobile US Inc. has slowly crept into health-care bonds and the broader high-yield market as investors try to cash out before it’s too late.

“It’s only the beginning,” said Jack Flaherty, a portfolio manager at GAM Holding AG who’s been buying better-graded bonds to hedge high-yield risk. “We’re starting to see a welcome correction,” he said in an interview.

Investors are increasingly scrutinizing specific companies and rejecting their bonds when they see a problem. Alongside the earnings-driven sell-offs at Community Health and IHeartMedia, mega-deals from Staples Inc., Tesla Inc. and Netflix Inc. have traded below their face value. Tesla’s benchmark bond fell to a new low of 93.5 cents on the dollar Thursday, according to data from Trace.

“It feels like it’s spreading,” Mike Collins, senior investment officer at PGIM Fixed Income, said in an interview. PGIM has been cutting its exposure to high-yield debt since the beginning of the year, especially BB rated companies. 

“It’s starting to reverberate through the credit markets more,” Collins said. “If you have more dispersion, you’re going to have more losers.”

Easy Money

It’s hard to overstate the easy-money conditions that allowed U.S. high-yield bond markets to thrive the past eight years. The debt has returned more than 14 percent on average every year since 2009 as the Federal Reserve dropped overnight rates to near zero and bought billions of dollars of bonds. Junk-bond yields are still three percentage points below the two-decade average, but the Fed is raising rates at a faster pace and other central banks are hinting they may reduce stimulus in the near future. 

Meanwhile, the much-anticipated Republican tax plan is coming into focus. 

The Senate version would delay the corporate rate cut until 2019, Bill Cassidy, a Louisiana Republican, said Thursday. And House Republicans have proposed reducing interest deductibility, a key benefit for the junkiest of borrowers. About 40 percent of the high-yield market could feel the pinch, Bank of America Corp. strategist Oleg Melentyev said in a Nov. 3 report.  

But not everyone is ready to bail just yet.

“There’s stress in significant pieces of the markets, like health care and telecom, and I am not ignoring them,” Ken Monaghan, director of global high yield at Amundi Pioneer, said in an interview. “But we aren’t seeing some sort of cataclysmic event on the horizon, and I am not expecting many sleepless nights anytime soon.”

Still, even if the sell-off doesn’t devolve into a rout, many investors are holding back and watching the action a little more closely.

“In size and scale it’s not gargantuan, it’s a drop in the bucket,” Henry Peabody, a money manager at Eaton Vance Corp., said in an interview. “But that’s how corrections start.”

    Read more: http://www.bloomberg.com/news/articles/2017-11-09/junk-bond-rally-unravels-one-bad-earnings-report-at-a-time

    How the Humble Hospital Scrub Became a $10 Billion Business

    The line between symbiosis and mortal combat is a fine one, both in the C-suite and at the cellular level. Michael Singer and Ben Favret thought they had the former when they began making plans for a better, safer line of medical apparel—a super scrub, if you will.

    Singer is chief executive officer of Strategic Partners, a manufacturer that controls an estimated 40 percent of the U.S. market for scrubs. Favret, a former pharmaceutical executive, is founder of Vestagen Protective Technologies, a startup launched in 2009 with the goal of making a bacteria-proof medical uniform.

    “He just seemed interesting, infectious in his enthusiasm,” Singer said of meeting Favret. “And he helped convince me antimicrobial was going to be something in the future.”

    Last month, the men and their respective companies faced each other across a federal courtroom in Los Angeles—each having sued the other. Their fleeting partnership had turned toxic as both accused the other of tearing their respective company apart. Vestagen was making false and illegal promises about its product, Singer alleged. Singer had poached one of Vestagen’s key employees and stole trade secrets, Favret claimed. As the Swift anthem goes, we got bad blood.

    The humble hospital scrub, ever saggy and often scratchy, is never in style—or out of it, for that matter. Rather, it’s beyond sartorial judgment. Instantly recognizable, it’s simply a given for most of America’s 19 million health-care workers, as essential as latex gloves and bitter cantina coffee. At the moment, almost one in seven U.S. workers falls into the scrub-set, a metric that’s expanding quickly as baby boomers fade into their hip-replacement years.

    Make no mistake, apparel seldom seems this easy. In other parts of the clothing business, fortunes are won and lost trying to forecast the fickle fashion trajectories of skinny jeans, retro sneakers, jumpsuits, and leggings. Abercrombie & Fitch is ripping off its logos and rushing to remake the kind of rugged adventure-wear that built its brand 50 years ago, and J. Crew Group has drifted to the brink of solvency as it struggles to find the right mix of rugby shirts and shift dresses. The sturdy scrub, meanwhile, has emerged as one of the safest spots in retail. Like the work-shirts and pants Americans wore back when the country was an industrial behemoth, health-care-wear is very much in demand in the modern service economy.

    If medical apparel were a standalone business, it would be solidly among the world’s top retailers, bigger than EBay, Foot Locker, and Tiffany & Co. Much of those spoils, at the moment, go to Strategic Partners, a business Singer started in 1995 when he bought the scrubs business out of bankruptcy from Cherokee. “The joke at the time was the three bestselling colors were white, white, and white,” he said. He took control of 40 workers posting about $17 million in annual sales.

    Over the years, the company added colors and patterns, moved production to Mexico and later to Asia while gradually building out a closet of brands. It added a studio where it created designs and cut licensing deals so it could put cartoon characters on pediatric scrubs to cheer up sick kids.

    In the early 2000s, Strategic began building web stores for its retail partners, taking the orders and shipping the product directly. Most of the retailers weren’t putting much focus on the internet at the time, and it was a crafty way to box out competing brands. By 2005, the company had almost 500 employees and a deep bench of captive manufacturing partners. Five years later, it acquired the license to make a line of “Dickies” scrubs and added another 30 employees. 

    Around that time, Singer started talking to Vestagen and other startups about antimicrobial treatments. Vestagen, which declined to be interviewed for this story, citing the ongoing legal battle, had developed an “active barrier” to repel fluid from fabric and kill bacteria via an electrical charge.

    Vestagen’s timing was propitious. As it was looking for manufacturing partners, bacterial infections were running rampant in America’s hospitals and clinics. In 2011, patients at acute-care facilities came down with almost 722,000 so-called health-care-associated infections, pneumonia being the most common. Almost one in 10 of those patients died, or about 70,000, according to the Centers for Disease Control & Prevention. Not surprisingly, insurance companies began adding clauses to their coverage so they wouldn’t have to pay hospitals for bacterial outbreaks.

    The simple scrub, meanwhile, was starting to look like a disease vector. The CDC estimates that one in 25 patients currently hospitalized has contracted some kind of infection just by being there. 

    Most of the folks who wear scrubs have to buy their own, despite the fact the job typically requires them, be it a hospital, doctor’s, dentist’s, or veterinarian’s office. Apparel makers can line up discounts and distribution deals, but ultimately the consumer can buy whatever uniform he or she wants, provided it’s the specified color. This little wrinkle in the market, it turns out, presented an opportunity. While lawyers for Singer and Favret fight, a host of startups have discovered there’s a lot of money to be made in this sleepy-yet-lucrative segment. Moving on from mattresses, eyeglasses, razors, and booze delivery, the world’s direct-to-consumer disrupters have discovered scrubs.

    FIGS was launched in 2013, offering antimicrobial, wrinkle-free uniforms in a range of flattering designs, solely through its own web store. Founder Trina Spear said she warmed to the idea at investment firm Blackstone Group, where she said she worked on a financing deal for Strategic Partners. In the financial reports, Spear said she noticed a staid company with margins around 40 percent. 

    FIGS co-founder Trina Spear says her company is the first to take a fashion approach to scrubs.
    Source: FIGS

    “It’s a massive industry that no one knows about and no one talks about,” she said. “It’s been around for about 100 years with zero change and zero innovation.” Her company sold out of its first batch in 23 days and has struggled to keep up with demand. Now FIGS has spread into lab coats, “underscrubs” (read: T-shirts), and hoodies. 

    About a year later, Jaanuu hit the market with a similar approach, launched by Shaan Sethi, a private-equity investor, and his pediatrician sister, Dr. Neela Sethi Young. Sethi said he was most encouraged by what he called a broken retail channel. Hundreds of different stores were selling scrubs, each store packed with a motley jumble of competing brands. 

    “You’d go to a hospital and see 50 or 60 nurses in 50 or 60 different brands,” he explained. “I had this idea in the back of my mind around this concept of trading up.” Spear, at FIGS, is less diplomatic. “Honestly, it’s hard for me to call them brands,” she said. “Everyone is getting thrown a hodge-podge of crap.”

    Naturally, all this rankles Singer at Strategic, which is now owned by New Mountain Capital, a private-equity firm. The U.S. scrubs market is far smaller than his new rivals let on, he warned, and his designers have decades of experience developing more fashionable treatments. “I bristle a little when I hear Jaanuu and FIGS say these are just commodity products,” he said.

    A post shared by FIGS (@wearfigs) on

    It’s hard, however, to find a brand evangelist in American hospitals—the field remains wide open. No label seems to have captured the kind of devotion Nike has among athletes or Lululemon enjoys with yogis. In just two years as a technologist measuring brain activity at the University of Iowa hospital, Mandie Wagner has purchased a closet full of scrubs. She said the Dickies are kind of itchy, the Cherokee brand doesn’t fit very well, and the Grey’s Anatomy scrubs collect pet hair. Her go-to, at the moment, is Cherokee’s Infinity, a higher-end brand made by Strategic, although she is keen to try FIGS and Jaanuu. 

    So far, the best feature Wagner has found isn’t having to think about what to wear: “It makes my morning easier,” she said. Wagner’s colleague Wendy Sebetka hasn’t settled on a brand, either. “Even though I buy the same styles, they all seem to fit a little differently,” she said. “And everything I have purchased online I have had to return, which is a pain.”

    It still isn’t clear how much of the segment has been swiped by FIGS, Jaanuu, and other new entrants. Both companies declined to detail revenue. FIGS now has 35 employees and increased sales 17-fold in the past two years. It has raised $10 million from investors in two different rounds. Of the customers it’s won, more than half are ordering apparel from the company every month. “We believe we can take over the whole industry,” Spear proclaimed. “That’s our goal.”

    Jaanuu, meanwhile, has 50 employees and $7.6 million in venture funding. The company expects to triple revenue this year, thanks in part to a new line of plus-size scrubs and footwear. Its average order is $120—and when orders come, they come in clusters. When a customer buys in a small town in, say, North Dakota, a flurry of other orders pop up in the same location.

    “You have to remember, this isn’t Nasty Gal going after Forever 21,” Sethi said. “We’re going after a really, really sleepy market.”

    Jaanuu’s plus-size line has quickly accounted for 10 percent of its business.
    Source: Jaanuu

    In the long run, Singer likes his odds of staying on top. His company now has almost 600 employees and last year sold $300 million worth of scrubs in the U.S. Working with Dow Chemical, it began selling an antimicrobial scrub in 2014 and a version with a fluid barrier a year later.

    And despite the simplicity of the product, a scrubs empire requires a complex supply chain. At any given time, Strategic has about 85,000 items, across a range of brands, colors, and prints, and in a spectrum of sizes for both women and men.

    “There aren’t necessarily high barriers to entry, but there are high barriers to scale,” Singer said. “There’s styling complexities. There’s sourcing complexities. There’s long, long lead times and you have to manage all of this inventory as you go.”

    Back in the courtroom in Los Angeles, Vestagen’s allegations of stolen trade secrets were rejected. The jury, however, dismissed Strategic’s assertion that Vestagen had made false advertising claims. Vestagen promptly declared victory and announced another $9.5 million in financing. “We always believed that this lawsuit brought by SPI, a company many times the size of Vestagen, was being pursued in an attempt to stifle an emerging competitor,” Chief Executive Officer Bill Bold said in a statement. Strategic, meanwhile, asked the judge to set aside the jury’s findings.

    While keeping an eye on the litigation, Singer is still pushing to expand Strategic’s already big footprint. The company is seeing brisk demand for Careisma, a brand it launched last year with actress Sofia Vergara. In 27 years of business, Strategic has seen sales decline only once, in the aftermath of the financial crisis. Singer said he doesn’t expect 2017 to be a second.

    (Corrects spelling of Sofia Vergara’s name in last paragraph.)

      Read more: http://www.bloomberg.com/news/articles/2017-10-26/there-s-a-10-billion-fight-to-keep-you-from-dying-in-the-hospital

      GE Investors Aren’t Impressed by the New CEO’s Sweeping Revamp

      Even before John Flannery began talking, Monday looked like another bad day for General Electric Co.

      It began around 6:30 a.m., with news that GE, once one of the most celebrated U.S. companies, was cutting its quarterly stock dividend for only the second time since the Great Depression.

      Then things got worse. In front of hundreds of investors in Midtown Manhattan, the new CEO delivered his long-awaited plan to shrink the beleaguered company back into Wall Street’s good graces. GE, he said, would now focus on just three businesses — power, aviation and health-care equipment — and exit others that have helped define the quintessential American conglomerate for decades.

      The reaction in the stock market was swift and brutal. GE’s stock price, already down 35 percent this year and the worst performer in the Dow industrials, tumbled on Monday by the most in two years. While Flannery’s plans were generally in line with recent speculation, his presentation left some investors wondering whether his revamp would be enough to right the 125-year-old company.

      “There is no doubt that the plan outlined today marks a new era for GE,” Deane Dray, an analyst at RBC Capital Markets, said in a note to clients. “That said, does it go far enough?”

      GE plunged 7.7 percent to $18.91 at 2:24 p.m. in New York after sliding as much as 8.2 percent for the biggest intraday drop since August 2015.

      “John Flannery’s strategic road map reflects a rigorous portfolio review, but suggests a tough slog ahead,” Gautam Khanna, an analyst at Cowen & Co., said in a note to clients.

      ‘Reset Year’

      In a sober presentation on a chilly morning, Flannery said 2018 would be a “reset year.” He cautioned that the power-equipment unit would take time to rebound.

      GE will explore options to exit its locomotives unit and its majority stake in Baker Hughes, a provider of oil-field equipment and services. The company is also reviewing options for its lighting operations, a business that traces its origins to the company’s formation by Thomas Edison.

      “The GE of the future is going to be a more focused industrial company,” said Flannery, who took over in August from Jeffrey Immelt. “Soon we’re going to be proud of the performance.”

      Flannery already has made changes to top management, sought deep cost cuts and welcomed a representative of activist investor Trian Fund Management to GE’s board. Flannery, who previously ran GE’s unit manufacturing medical scanners and other health equipment, said last month that the company would divest at least $20 billion of businesses.

      Lowered Forecast

      The moves follow a broad portfolio reshaping in recent years as Immelt sold most of GE’s finance and consumer operations. Still, the latest steps will keep most of the current company intact and stop short of the full-scale breakup some analysts have recently called for.

      Earnings next year will be $1 to $1.07 a share, GE said. That represents a significant decline from the $2 target that management has been discussing for several years. The new outlook is closer to analysts’ expectations, which were $1.18 on average before Monday’s announcement, according to estimates compiled by Bloomberg.

      The forecast became a point of contention this year as Immelt suggested in May that $2 a share would be tough to reach, a month after Trian, which has been one of GE’s largest shareholders since 2015, said it believed GE could exceed the target.

      GE will shrink the size of its board to 12 from 18 directors amid criticism from some investors and analysts over the size. Of the remaining members, three will be new to the board, GE said.

      The quarterly payout will drop 50 percent to 12 cents a share, the Boston-based company said in a statement, in a move that will save about $4.2 billion a year. GE last reduced the dividend in 2009 as it struggled with fallout from the financial crisis.

      “We understand the importance of this decision to our shareowners and we have not made it lightly,” Flannery said in the statement. “We are focused on driving total shareholder return and believe this is the right decision to align our dividend payout to cash flow generation.”

      GE in October slashed its expectations for 2017 profit and cash flow as Flannery called the company’s performance “completely unacceptable.”

      Investors have been bracing for a dividend cut as GE’s slide deepened in recent weeks. The payout had been recovering from a dramatic 68 percent cut in 2009, after Immelt for weeks had said the payout was safe. Immelt has called slashing the dividend “the worst day of my tenure as CEO.”

        Read more: http://www.bloomberg.com/news/articles/2017-11-13/ge-cuts-dividend-in-half-as-new-ceo-battles-deepening-slump

        CVS-Aetna Deal Could Mean End of Era in How Drugs Are Paid For

        If Aetna Inc. is eventually swallowed by CVS Health Corp., an important part of the health-care business will be changed — perhaps for good.

        For years, pharmacy benefits were largely carved out from the rest of a medical coverage plan. But increasingly the two services are being combined, a move that in theory will make it easier to verify whether expensive drugs are worth the cost. A merger of the third-biggest health insurer with the largest U.S. drugstore chain, which also operates a pharmacy-benefit management company, could speed the process.

        “You are hearing the warning for the end of the road for the classic standalone” pharmacy-benefit business, said Pratap Khedkar, managing principal at consulting firm ZS Associates.

        Drugmakers are producing more pricey treatments for cancer and rare diseases. Combining drug and medical benefits in the same place is “the only way” payers will figure out whether such expensive new drugs are actually making people better and saving money by keeping them out of the hospital, he said.

        A merger of CVS and Aetna would create a health-care behemoth and put huge pressure on standalone players such as Express Scripts Holding Co. and Walgreens Boots Alliance Inc. Express Scripts would become the last major standalone pharmacy-benefit manager not allied with a major insurer. 

        All Channels

        CVS and Aetna have held discussions about a potential deal, according to people familiar with the matter who asked not to be identified as the details aren’t public. A newly combined company would “own the entire chain, from prescribing and filling prescriptions to the health plans that pay for them,” said Michael Rea, of Rx Savings Solutions, which has an app that helps patients find lower cost drugs.

        Under a combined roof, the insurance arm of CVS-Aetna could help keep costs down by routing patients needing basic urgent care to CVS-owned walk-in clinics and keeping them out of expensive hospital emergency rooms, analyst Ann Hynes of Mizuho Securities said in a note to clients. The company would also become a formidable competitor to UnitedHealth Group Inc., the biggest health insurer and owner of its own PBM unit, OptumRx.

        But even with the new clout, a merger isn’t likely to be derailed by federal antitrust authorities, said John Briggs, an antitrust attorney at Axinn Veltrop & Harkrider in Washington.

        CVS and Aetna declined to comment.

        Walgreens, the No. 2 drugstore operator, could also feel the pressure. A CVS-Aetna marriage could cause the drugstore chain to look for its own acquisition targets, with Express Scripts being the most likely, Charles Rhyee, an analyst at Cowen & Co., wrote in a note to clients Friday.

        And then there’s Amazon.com Inc., which recently gained drug-wholesaler licenses in 14 states. The looming threat of the e-commerce behemoth entering the mail-order pharmacy business and pushing down profit margins for drug distributors, benefit managers and retail pharmacies intensifies the pressure on standalone players.

        For CVS, the move is “a natural defense against the potential threat of Amazon entering the retail pharmacy market,” Rhyee said.

        Another possibility is that Amazon could buy Express Scripts. That would give the internet retailer an instant and large foothold in both the PBM industry and the mail-order pharmacy business.

        ‘Strong’ Model

        Health insurer Anthem Inc., Express Scripts’ biggest current client, announced earlier this month that it would leave Express Scripts when its contract ends at the end of 2019 to form its own PBM unit. And Prime Therapeutics, another major player, manages drug benefits for nonprofit Blue Cross and Blue Shield plans in numerous states.

        “Our model is strong and thriving,” said Jennifer Luddy, a spokeswoman for Express Scripts. “We believe in the value that we provide to our customers as an independent PBM.”

        On an earnings call this week, Express Scripts Chief Executive Officer Tim Wentworth said he was open to a deal with Amazon to help serve cash-paying patients.

        Walgreens declined to comment.

        In terms of the CVS-Aetna deal, antitrust authorities will look closely at the competition between the companies in selling Medicare Part D plans for the elderly, said Briggs, the attorney.

        There could be fight between the Justice Department and the Federal Trade Commission, which share antitrust enforcement, over which agency will investigate the merger, according to Briggs. The Justice Department handles insurer mergers and successfully stopped the combination of Aetna and Humana Inc. this year. The FTC investigates retail pharmacy deals. In September, it cleared Walgreens’ acquisition of 1,900 Rite Aid Corp. stores after Walgreens shrank the size of the deal.

        Still, a CVS-Aetna deal would likely win approval because a number of other major players will remain in the Part D market, he said.

        “That’s an easy fix,” Briggs said. “The whole deal is not going to crater on account of Part D.”

          Read more: http://www.bloomberg.com/news/articles/2017-10-27/cvs-aetna-deal-could-mean-end-of-era-in-how-drugs-are-paid-for

          U.S. Growth at Above-Forecast 3% on Consumers and Businesses

          The U.S. economy expanded at a faster pace than forecast in the third quarter, indicating resilient demand from consumers and businesses even with the hit from hurricanes Harvey and Irma, Commerce Department data showed Friday.

          Key Takeaways

          While GDP grew more than anticipated, analysts look to another key measure to assess the true health of the economy. Final sales to domestic purchasers, which strip out trade and inventories — the two most volatile components of the GDP calculation — climbed 1.8 percent, the slowest since early 2016, after rising 2.7 percent in prior quarter.

          The fallout from the hurricanes was mixed, probably depressing some figures while lifting others. The storms inflicted extensive damage on parts of Texas and Florida, though the effect is likely to be transitory as economic activity is expected to rebound amid rebuilding efforts.

          Consumer spending, which accounts for about 70 percent of the economy, added 1.6 percentage point to growth last quarter. That was driven by motor vehicles, as Americans replaced cars damaged by the storms, while services spending slowed to the weakest pace since 2013. Even so, a steady job market, contained inflation and low borrowing costs are expected to provide the wherewithal for households to sustain their spending.

          The first reading of GDP, the value of all goods and services produced, also showed continued strength in business investment, indicating growth is broadening out to more sources beyond household consumption. Companies are upbeat about the outlook and overseas markets are improving, which may help boost exports and contain the trade deficit.

          At the same time, the details of business investment showed a mixed picture. The decline in investment in structures probably reflects the hit from Hurricane Harvey, especially on oil and gas drilling.

          Residential investment remained a weak spot. Builders are up against a shortage of qualified labor and ready-to-build lots at the same time sales are being held back by a shortage of available properties that’s driving up prices.

          Price data in the GDP report showed inflation picked up while still lagging behind the Federal Reserve’s 2 percent goal. Excluding food and energy, the Fed’s preferred price index — which is tied to personal spending — rose at a 1.3 percent annualized rate last quarter, following a 0.9 percent gain.

          Fed policy makers can point to evidence that growth is steady enough to allow them to keep raising interest rates, with investors expecting a quarter-point increase in December.

          While the economy is probably on solid footing in the ninth year of this expansion, the central bank and many economists expect GDP growth to slow beyond 2018, moving closer to 2 percent rather than the sustained 3 percent pace that the Trump administration says will happen if its tax plan is enacted.

          Economist Views

          “It’s hard to confidently discern the hurricane effects in this report, but the economy seems to be on pretty solid ground,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “The details are reasonably solid. Consumers stepped down a little from the second quarter but their spending still expanded at a decent pace.”

          The gain in equipment investment shows “businesses may be getting a little more confident about the expansion, both here in the U.S. and abroad,” he said. Overall, the report “probably gives a little more confidence to the Fed to hike rates before year-end, but I don’t think it’s a game-changer.”

          Other Details

          • Nonresidential investment — which includes spending on equipment, structures and intellectual property — increased 3.9 percent and added 0.49 percentage point to growth
          • Equipment investment jumped 8.6 percent for a fourth quarter of growth, longest streak since 2014
          • Residential investment fell at a 6 percent rate after 7.3 percent drop, worst two-quarter performance since 2010
          • Net exports added 0.41 percentage point to growth as exports rose, imports fell; inventories added 0.73 point, most since 2016
          • Government spending fell at a 0.1 percent rate; the figures reflected 1.1 percent in federal spending, driven by defense, while state and local outlays dropped 0.9 percent
          • After-tax incomes adjusted for inflation increased at a 0.6 percent annual pace, down from the previous quarter’s 3.3 percent; saving rate fell to 3.4 percent from 3.8 percent
          • GDP report is the first of three estimates for the quarter; the other two are due in November and December as more data become available

            Highlights of Third-Quarter GDP (First Estimate)

            • Gross domestic product grew at a 3% annualized rate (est. 2.6%) following a 3.1% gain in 2Q, best back-to-back quarters since 2014
            • Consumer spending, biggest part of the economy, grew 2.4% (est. 2.1%) after 3.3% in 2Q
            • Business fixed investment rose 1.5%, adding 0.25 ppt to growth; spending on nonresidential structures fell, equipment and intellectual property gained, residential dropped
            • Trade, inventories added a combined 1.14 ppt to growth
            • Commerce Dept. said it can’t estimate hurricanes’ impact on GDP; disaster losses on fixed assets, private and public, totaled about $131.4b

            Read more: http://www.bloomberg.com/news/articles/2017-10-27/u-s-growth-at-above-forecast-3-on-consumer-business-spending

            Chinas Central Bank Chief Warns of Sudden, Contagious and Hazardous Financial Risks

            China’s financial system is becoming significantly more vulnerable due to high leverage, according to central bank governor Zhou Xiaochuan, who has made a series of blunt warnings in recent weeks about debt levels in the world’s second-largest economy.

            Latent risks are accumulating, including some that are “hidden, complex, sudden, contagious and hazardous,” even as the overall health of the financial system remains good, Zhou wrote in a lengthy article published on the People’s Bank of China’s website late Saturday.

            The nation should toughen regulation and let markets serve the real economy better, according to Zhou. The government should also open up markets by relaxing capital controls and reducing restrictions on non-Chinese financial institutions that want to operate on the mainland, he wrote.

            “High leverage is the ultimate origin of macro financial vulnerability,” wrote Zhou, 69, who is widely expected to retire soon after a record 15-year tenure. “In sectors of the real economy, this is reflected as excessive debt, and in the financial system, this is reflected as credit that has been expanding too quickly.”

            The latest in a string of pro-deleveraging rhetoric from the PBOC, Zhou’s comments were speculated to have contributed to a rout in Hong Kong shares. They signal policy makers remain committed to the campaign to reduce borrowing levels across China’s economy. Concern that regulators may intensify this drive after last month’s twice-a-decade Communist Party congress helped push yields on 10-year sovereign bonds to a three-year high.

            Chinese bonds seemed to shrug off the essay early Monday, with 10-year yields down one basis point to 3.88 percent as of 11:14 a.m. in Shanghai, while the cost on five-year notes rose one basis point to 3.95 percent. Hong Kong’s Hang Seng Index slumped the most in two weeks and the Shanghai Composite Index fell for a third day in a row.

            “Investors are very sensitive to any negative news since the market is at a high level,” said Ben Kwong, executive director at KGI Asia Ltd. in Hong Kong, referring to the equity move. “Zhou’s comment about financial risks are hurting sentiment.”

            The PBOC chief’s essay reads more like an explanation of existing priorities than a sign they’re changing direction or pace, said Bloomberg Intelligence economists Tom Orlik and Fielding Chen. China may shift slightly toward a tighter stance, but macro-prudential rather than monetary policy will do the leg work to limit financial risks, they wrote in a note.

            Zhou may be set to retire after more than a decade at the helm, read more here.

            Despite the tough rhetoric around deleveraging in China, measures of credit continue to show expansion, with aggregate financing surging to a six-month high of 1.82 trillion yuan ($274 billion) in September. Corporate debt surged to 159 percent of the economy in 2016, compared with 104 percent 10 years ago, while overall borrowing climbed to 260 percent.

            Read a QuickTake Q&A about China’s efforts to tackle financial risks

            Zhou’s article was included in a book that was published recently to help the public and party members better comprehend the spirit of the 19th party congress, according to the official Xinhua news agency and information on the PBOC’s website.

            Here are some of the other points Zhou made:

            On risks and regulation

            • China’s financial system faces domestic and overseas pressures; structural imbalance is a serious problem and regulations are frequently violated
            • Some state-owned enterprises face severe debt risks, the problem of "zombie companies" is being solved slowly, and some local governments are adding leverage
            • Financial institutions are not competitive and pricing of risk is weak; the financial system cannot soothe herd behaviors, asset bubbles and risks by itself
            • Some high-risk activities are creating market bubbles under the cover of "financial innovation"
            • More companies have been defaulting on bonds, and issuance has been slowing; credit risks are impacting the public’s and even foreigners’ confidence in China’s financial health
            • Some Internet companies that claim to help people access finance are actually Ponzi schemes; and some regulators are too close to the firms and people they are supposed to oversee
            • China’s financial regulation lags behind international standards and focuses too much on fostering certain industries; there’s a lack of clarity in what central and regional government should be responsible for, so some activities are not well regulated
            • China should increase direct financing as well as expand the bond market; reduce intervention in the equity market and reform the initial public offering system; pursue yuan internationalization and capital account convertibility
            • China should let the market play a decisive role in the allocation of financial resources, and reduce the distortion effect of any intervention
            • China should improve coordination among financial regulators

              Read more: http://www.bloomberg.com/news/articles/2017-11-04/china-s-zhou-warns-on-mounting-financial-risk-in-rare-commentary

              Even Illinois’s CFO Doesn’t Know How Many Bills Are Unpaid

              How big is Illinois’s pile of unpaid bills? Even the state’s chief fiscal officer doesn’t know for sure.

              The state sold $4.5 billion of bonds on Wednesday to help pay down the estimated $16.6 billion it owes to contractors, health care providers and others who waited to get paid during Illinois’s record-long fight over the budget. But Comptroller Susana Mendoza, a Democrat, says her office doesn’t know the size of that backlog for sure, and she wants that to change.

              Under current law, state agencies only have to report to the comptroller once a year — on Oct. 1 – the amount of unpaid bills they had by the end of June, making the information already outdated by the time it’s submitted. According to the comptroller’s website, the backlog reached $16.6 billion as of Oct. 24, including an estimated $6.1 billion of unpaid bills with state agencies.

              To get a better picture of how deeply Illinois is in debt, Mendoza is urging lawmakers to override Republican Governor Bruce Rauner’s veto of a measure that will require state agencies to report bills on a monthly basis and include how old the bills are, whether funds have been appropriated to pay those bills and how much interest is owed. The Illinois House of Representatives voted to override the veto on Wednesday. The Senate must do the same for the bill to become law.

              “This is a first step in hopefully even giving the markets greater confidence that Illinois is moving in the right direction when it comes to full transparency on our finances,” Mendoza said in a telephone interview.

              The legislation is “definitely favorable from a credit perspective,” said Eric Friedland, Lord Abbett’s director of municipal research in Jersey City, New Jersey. He noted that the amount of unpaid bills isn’t a surprise to investors who monitor the state’s finances, but requiring monthly reporting may spur Illinois leaders to reduce the number of unpaid bills. 

              “In my opinion, if they have to report every month in a transparent way, then that will hopefully cause this practice to change for the better,” said Friedland, whose firm manages about $20 billion of municipal debt, including some Illinois bonds.

              In his veto message on Aug. 18, Rauner applauded the push for transparency but criticized Mendoza for trying to “micromanage” agencies, adding that they don’t have the technology to meet the requirements in the bill.

              Mendoza disagrees, saying that agencies are equipped to put those numbers together. The bill would help Mendoza keep track of how much interest the state is paying: She estimates that Illinois is already on the hook for $900 million in late-payment penalties.

                Read more: http://www.bloomberg.com/news/articles/2017-10-25/even-illinois-s-cfo-doesn-t-know-how-many-state-bills-are-unpaid

                These Suburbanites May Have No Fracking Choice

                When Bill Young peers out the window of his $700,000 home in Broomfield, Colo., he drinks in a panoramic view of the Rocky Mountains. Starting next year, he may also glimpse one of the 99 drilling rigs that Extraction Oil & Gas Inc. wants to use to get at the oil beneath his home.

                There’s little that Young and his neighbors can do about the horizontal drilling. Residents of the Wildgrass neighborhood own their patches of paradise, but they don’t control what’s under them. An obscure Colorado law allows whole neighborhoods to be forced into leasing the minerals beneath their properties as long as one person in the area consents. The practice, called forced pooling, has been instrumental in developing oil and gas resources in Denver’s rapidly growing suburbs. It’s law in other states, too, but Colorado’s is the most favorable to drilling.

                Now fracking is coming to an upscale suburb, and the prospect of the Wildgrass homeowners being made by state law to do something they don’t want to do has turned many of them into lawyered-up resisters. “It floors me that a private entity could take my property,” says Young, an information security director.

                Many states require 51 percent of owners in a drilling area to consent before the others have to join. Pennsylvania doesn’t allow forced pooling at all in the Marcellus, one of the most prolific shale gas regions in the country. Texas, the center of the nation’s oil production, has strict limits on the practice. Despite its founding cowboy ethos of rugged individualism, Colorado has one of the lowest thresholds. “There’s a tension in oil and gas law between allowing private property owners to develop their mineral estates on their own and the state’s desire to ensure that ultimate recovery of oil and gas is maximized,” says Bret Wells, a law professor at the University of Houston.

                The rise of horizontal drilling and hydraulic fracturing over the past decade has ushered in a modest oil boom on Colorado’s Front Range by enabling companies to wring crude more cheaply from the stubborn shale that runs beneath Denver’s northern suburbs. From 2010 to 2015, Colorado’s crude output almost quadrupled. This year the state is pumping more than 300,000 barrels a day, most of it from the Wattenberg oil field beneath Wildgrass and beyond.

                Colorado’s population is booming, too. As Denver’s suburbs bloom northward into oil and gas territory—Wildgrass is about 20 miles north of Denver, not far from Boulder—housing developments are erupting where once there were only drilling rigs and farmland. And because horizontal drilling can reach as far as 2 miles in all directions from a well, companies need underground access to more land to maximize production from each site. The Colorado Oil & Gas Conservation Commission issues hundreds of pooling orders every year. “It’s an entirely new issue,” says David Neslin, former director of the commission, now an attorney at Davis Graham & Stubbs in Denver. “That’s creating some understandable friction with local governments and local communities.”

                Denver-based Extraction Oil & Gas is at the epicenter of that friction. Although it has rural holdings, a substantial amount of its reserves are located in populated areas. So the company, like others in the region, has put a lot of energy—and cash—into making its operations more palatable to suburbanites who fear the prospect of a drilling rig sprouting up within sight of their kiddie pools. Extraction almost exclusively uses electric drills, which are quieter than diesel-powered, and a new generation of hydraulic fracturing equipment that cuts noise. “It’s incumbent upon us to learn to live with these communities,” says Extraction spokesman Brian Cain. “Where we can go the extra mile to minimize impacts, we wish to do so.”

                The company’s latest project involves drilling 99 horizontal wells in Broomfield. That means leasing mineral rights from Wildgrass residents. Letters went out to some of them last year offering a 15 percent royalty and a $500 signing bonus. Some signed, others demurred, and still others organized a campaign aimed at blocking the project. Extraction hasn’t applied for a forced pooling order, but Young and his neighbors have come to believe it’s inevitable.

                The suburb’s agitation prompted the city to create a special task force to evaluate Extraction’s proposal. The company responded by taking members of the task force on a tour of oil and gas country. It wanted to show how its operations are less disruptive than traditional drill sites.

                Ultimately, the company agreed to more stringent environmental standards than the state requires. It will move some wells 1,300 feet from neighborhoods, almost three times farther than the law mandates. It will reduce the number of wells per site, monitor air emissions as well as water and soil quality, and build pipelines to transport oil immediately off-site instead of storing it in the city. “I can see Broomfield turning out to be a new model for how large-scale development gets done,” says Matt Lepore, director of the state commission, which will rule on Extraction’s applications for siting the wells this month.

                Such concessions have smoothed the path for development in many communities. But for some Wildgrass residents, any leasing is unacceptable. They say they fear accidents, such as the April pipeline explosion that killed two people and destroyed a home in Firestone, 20 miles away. Some simply find the terms of the initial lease offer laughable.

                “The money is so negligible,” says Elizabeth Lario, a health coach who’s lived in Wildgrass since 2005. And then there are property values: Homes in Wildgrass range from $500,000 to more than $1 million. “The royalties won’t offset the drop in property value,” says Stephen Uhlhorn, an engineer who’s lived in Wildgrass for four years. Oil development “is now hitting affluent neighborhoods where people have assets and livelihoods that exceed the value of any royalty they’re offered.”

                The bedrock of Colorado’s oil and gas policy is a 1951 law that says responsible fossil fuel development is in the public interest. The state, the law says, must protect the public from “waste”—industry parlance for oil that’s left in the ground. While Colorado has some of the strictest environmental regulations of any oil-producing state, it gives companies latitude in choosing where to drill. The Colorado Supreme Court has repeatedly held that the state’s interest in developing mineral resources preempts any local law that would curb drilling.

                Efforts to change the statute have fizzled. State Representative Mike Foote, a Democrat whose district is adjacent to Broomfield’s, introduced a bill earlier this year to raise the pooling threshold to 51 percent. It passed the House by a slim margin but died in a Senate committee in a party-line vote, with Republicans opposed. “The oil and gas industry pretty much controls the capital, particularly in the Senate,” Foote says. “Operators can do whatever they want.” Lepore, the head of the state oil commission, concedes the pooling threshold is low compared with other states. “I have no philosophical objection to a 51 percent requirement,” he says. “There are intelligent changes that could be made to the forced pooling law.”

                Young, the Wildgrass resident, received a lease offer last year. Since then he’s been working with a lawyer to consider his options, and so far he doesn’t like them. “You couldn’t put a Walmart where they’re putting these wells—no one would approve that zoning,” he says. “But for some reason, the industry is completely exempt from everything.”

                  BOTTOM LINE – In Colorado, whole neighborhoods may have to lease the minerals under their land if just one homeowner agrees.

                  Read more: http://www.bloomberg.com/news/articles/2017-10-03/these-suburbanites-may-have-no-fracking-choice

                  Amazon Antitrust Concerns Emerge in Washington and Wall Street

                  Amazon.com Inc.’s expansion plans, including its agreement to buy Whole Foods Market Inc. for $13.7 billion, are raising hackles in Washington — and Wall Street is taking notice.

                  A U.S. lawmaker has called for hearings on the proposed deal to consider its ramifications for shoppers and workers. Hedge-fund manager Doug Kass has taken a short position on the fast-growing online retailer, saying government antitrust concerns will erode its value. In June, Goldman Sachs issued a note questioning whether tech stocks are overpriced and whether investors have overlooked the risks associated with potential government regulatory issues.

                  Still, Amazon’s shares have gained 34 percent this year, rising to $1,003.21 at 2:01 p.m. Friday in New York. Experts and analysts have largely dismissed antitrust threats for the world’s largest online retailer because the company doesn’t have large market concentration in any one product category and it has a track record of helping keep prices low for shoppers. A key legal question is whether Seattle-based Amazon has grown to the point of discouraging innovation from competitors.

                  “There’s a concern Amazon might be getting too big,” said Michael Carrier, antitrust expert at Rutgers University School of Law in New Jersey. “The odds are the Whole Foods acquisition will go through, but these political winds will create a bit of a fight.”

                  U.S. Representative David Cicilline, a Democrat from Rhode Island, on Thursday wrote a letter to the chairman of the House Judiciary Committee requesting hearings about Amazon’s Whole Foods acquisition, saying the deal was part of a wave of consolidation that has “decreased wages and resulted in gross inequality in the workplace.”

                  “Amazon’s proposed acquisition of Whole Foods raises important questions concerning competition policy, such as how the transaction will affect the future of retail grocery stores, whether platform dominance impedes innovation, and if the antitrust laws are working effectively to ensure economic opportunity, choice and low prices for American families,” Cicilline wrote.

                  CVS Health Corp. is based in Rhode Island and analysts have speculated that Amazon could use Whole Foods’ retail locations to launch a pharmacy business.

                  Also on Thursday, Kass, owner of Seabreeze Partners Management Inc., announced in a blog post that he was shorting Amazon due to risks of antitrust issues. “My understanding is that certain Democrats in the Senate have instituted the very recent and preliminary investigation of Amazon’s possible adverse impact on competition,” he wrote.

                  Amazon’s purchase of the grocery retailer is expected to be completed later this year. Whole Foods would be the biggest acquisition in the e-commerce giant’s history and represents a dramatic shift in its business model from selling items online to luring shoppers into stores.

                  Most analysts aren’t worried about the Whole Foods deal being derailed by antitrust probes, partly because the food-store chain had just 1.6 percent of the U.S. grocery market, according to Euromonitor, and is dwarfed by operators such as Wal-Mart Stores Inc., which has more than 26 percent of the market and Kroger Co. with 10 percent. Antitrust issues typically surface when a retailer controls 30 percent or more of a particular geographic market, said Michael Pachter, analyst at Wedbush Securities Inc.

                  “Kass is wrong,” Pachter said. “The Senate may look at Amazon, but they’re not going to find anything.”

                  Amazon and Whole Foods declined to comment.

                  For more on Amazon, check out the podcast:

                    Read more: http://www.bloomberg.com/news/articles/2017-07-14/u-s-congressman-calls-for-hearings-on-amazon-s-whole-foods-bid

                    Republicans Have No Margin for Defections in Senate Health Bill

                    Two Republican senators immediately rejected the party’s latest health-care bill Thursday, leaving the party no margin for additional defections as Majority Leader Mitch McConnell seeks a vote next week to replace Obamacare.

                    Several holdouts the bill was designed to win over, including Rob Portman of Ohio, remain undecided and say they’re waiting to see an analysis of the measure’s impact by the nonpartisan Congressional Budget office, due next week.

                    “I’ll review the text of this new legislation just like I did the last version, & I will review the CBO analysis,” Portman wrote on Twitter.

                    Because of the GOP’s narrow 52-48 majority, Republican leaders can lose no more than two votes in their party amid united Democratic opposition to efforts to repeal Obamacare.

                    [Read the full text of the revised plan here]

                    In the new version released Thursday, McConnell added $70 billion to stabilize insurance exchanges on top of $112 billion for the same purpose in an earlier measure. McConnell of Kentucky hopes the modified bill will revive prospects for the embattled Obamacare repeal effort, which stalled two weeks ago.

                    But Senators Susan Collins of Maine and Rand Paul of Kentucky already say they’ll vote no. Collins, a moderate, said she opposed the new measure because its cuts to Medicaid were too severe. Paul, a conservative who prefers a full repeal of Obamacare, announced his opposition on Wednesday and stood by his position after the bill was released.

                    Obamacare Taxes

                    The new measure discards earlier plans to repeal three Obamacare taxes on the wealthy, according to the summary. That move freed up about $230 billion in cash to bolster health expenditures.

                    The revised bill also would allow people for the first time to use health savings accounts to pay insurance premiums, according to the document.

                    John Thune of South Dakota, the No. 3 Senate Republican, said leaders plan to hold a key procedural vote in the middle of next week.

                    Separately, more than half a dozen Republican and Democratic senators have discussed alternatives to the GOP plan, which was developed without consulting Democrats.

                    Republican Senators Lindsey Graham of South Carolina and Bill Cassidy of Louisiana on Thursday morning released their own alternative health plan that would shift much of current federal funding for Obamacare insurance and future funding directly to states, according to a statement from Graham’s office. Cassidy said he wants to offer his plan as an amendment to McConnell’s bill.

                    But Graham also suggested he wouldn’t try to block the McConnell version.

                    "It’s definitely better. It was well-received," he told reporters after coming out of a closed-door GOP meeting.

                    Appeal to Moderates

                    The changes include provisions intended to appeal to moderates worried about premium spikes predicted by the CBO and others under the previous bill.

                    But while the bill omits a series of tax cuts for the wealthy in a nod to moderates, conservatives get major changes legalizing far skimpier plans that aren’t part of the Obamacare exchanges.

                    Republican Senator Ron Johnson of Wisconsin, who had opposed plans to advance an earlier version of the bill in late June, said Thursday that he will support debating the current bill, although he isn’t ready to give his full backing.

                    The new plan provides billions of dollars in subsidies to assuage moderates’ fears of higher premiums for poorer, older, sicker people. Many have been skeptical or opposed to the idea of creating bare-bones plans that could siphon off healthy, young people and therefore cause premiums to rise in the exchanges. But, overall, the bill still has far less money going into Medicaid and health subsidies than the Affordable Care Act.

                    The revised draft would keep the earlier bill’s language allowing people earning up to 350 percent of the poverty level to receive subsidies. And it would keep a skimpier benchmark for subsidies than the Affordable Care Act’s silver plan, which would result in higher out-of-pocket expenses.

                    The new plan would also allow people to purchase a high-deductible catastrophic-coverage plan with federal tax credits, and prohibit plans eligible for tax credits from providing abortion coverage except in cases of rape or incest or to save the life of the mother.

                    Covering the Sick

                    The revised bill includes a federal fund that would pay health insurers to cover costs of sicker people seeking individual coverage on the insurance exchanges.

                    To qualify for the funds, insurers would have to meet minimum coverage standards in the exchange, while also offering coverage off the exchange that meets state requirements. Those buying state-governed plans wouldn’t be allowed to use federal tax credits to buy their coverage but could tap tax-advantaged health savings accounts to cover the costs.

                    To appeal to lawmakers in high cost states like Alaska, 1 percent of expanded state innovation and stability grants would be reserved specifically to subsidize insurance in states where premiums are at least 75 percent higher than the national average.

                    Starting in 2022, states would have to share in the costs of those funds with their own money, with states having to shoulder 35 percent of the burden in 2026.

                    The bill changes the calculation for determining Medicaid payments to hospitals to assist with uncompensated care that is expected to more accurately allot the funds based on a state’s uninsured population instead of Medicaid enrollment as the original legislation did. Senator Marco Rubio, a Florida Republican, tweeted Wednesday that one of his priorities for changing the bill involved increasing those funds for hospitals in his state.

                    Basic Plans

                    Republican leaders included a version of an amendment proposed by Republican Senator Ted Cruz of Texas and GOP Senator Mike Lee of Utah.

                    Cruz and Lee want to allow insurers to offer cheap, bare-bones plans alongside those that meet the more comprehensive coverage requirements of Obamacare. Critics in both parties say the proposal would essentially put people with pre-existing conditions in the Obamacare insurance pool and allow young, healthy people to buy cheaper plans in a separate pool.

                    Cruz said he supports the new measure though that may change if his amendment is eliminated. He said he would have preferred a full repeal, but it wouldn’t have the votes.

                    "I think we’re making significant progress," Cruz said Thursday.

                    Plan ‘Unworkable’

                    But health insurers have said the plan backed by Cruz would destabilize the insurance market and undermine protections for sick people. The BlueCross BlueShield Association called the Cruz plan “unworkable.”

                    America’s Health Insurance Plans, the industry’s main lobbying group, said his proposal would hurt the market by dividing healthy and sick people into separate groups. The sick people, AHIP said, would face extraordinarily high premiums, or might not be able to find coverage.

                    ‘Like the Old Bill’

                    Paul, a Tea Party stalwart, said Wednesday, “The new bill looks a lot like the old bill except it spends more money, taxes more and does little to assuage the concerns of conservatives."

                    In an effort to gain support with more health funding, Republican leaders chose to retain several Obamacare tax increases, a reversal from the earlier measure. That includes Obamacare’s 3.8 percent tax on net investment income for people who earn more than $200,000 and couples with incomes over $250,000, as well as a 0.9 percent Medicare surtax on the same incomes.

                    The plan also scraps a tax break for health-insurance executives’ pay, keeping an Obamacare provision allowing health insurance companies to deduct from their taxes $500,000 of the pay of each top official. That’s a tougher restriction than the limit imposed on other companies, which is $1 million per executive. The three tax items produce a revenue stream of nearly $232 billion over a decade.

                      Read more: http://www.bloomberg.com/news/articles/2017-07-13/revised-health-care-measure-unveiled-by-senate-republicans