Last month, the Trump administration implemented sanctions on Venezuela’s state-owned oil company, Petroleos de Venezuela (PDVSA), in an attempt to support the opposition in toppling President Maduro’s government. The sanctions prohibit U.S. companies from engaging in further business with PDVSA, which provides approximately 90% of Venezuela’s hard currency. Additionally, the sanctions freeze all PDVSA assets located within the United States. Citgo Petroleum, the U.S. based refining arm of PDVSA, is currently undergoing a change of control and its future, along with that of the broader Venezuelan economy, remains unclear.

At a macro level, the sanctions directly impact existing pricing dynamics across global oil markets. Heavier sour crude, the kind of oil that Venezuela sells to U.S. refineries for the production of gasoline, typically trades at a lower price than that of lighter grades due to the additional costs undertaken by its purchasers to refine it. Given these sanctions and other restrictions in supply, heavy oil is now trading at a higher price than its lighter grade counterparts and U.S. refineries are paying a premium. As a result, U.S. oil prices are up approximately 5% and the global benchmark for oil is up 8%. Despite these identifiable increases, most industry analysts do not see the sanctions as the direct cause. Instead, they point to the culmination of decreasing output in Mexico and Canada, instability in Libya, and the OPEC-plus cuts.

While some media focus has been on the sanctions themselves, the more pressing issue is the humanitarian crisis occurring within Venezuela’s borders. Since Maduro came into power in 2013, the Venezuelan economy has halved and the supply of basic necessities – such as medicine and food – has severely diminished. Although the U.S. implemented these sanctions with the intention of helping Venezuelan people by halting Maduro’s plundering of the country, the PDVSA sanctions could cut oil exports by two-thirds and lead to a further 26% contraction in Venezuela’s economy. With Maduro still in power, and the sanctions in place, the Venezuelan people can only brace themselves for further economic weakening until a new administration is established and the sanctions are lifted.

U.S. Oil Sanctions on Venezuela – Helping or Hurting

Last October, amidst many rumors, ride-sharing firm Lyft finally selected its underwriters and began the process of filing for an IPO. JPMorgan Chase & Co., Credit Suisse Group AG, and Jefferies Group LLC will lead the offering. Valued at $15.1 billion earlier this year, Lyft’s valuation is projected to surpass that number. Investors will be better able to gauge whether Lyft is worth the $25 billion valuation it is seeking after the company makes its IPO filing public.

In contrast, Lyft’s top competitor, Uber, has also considered an early 2019 listing, receiving proposals valuing the company up to as much as $120 billion. Unlike Uber, which has a global presence, Lyft is “squarely focused on the booming American ridesharing market.” While Uber has dipped into new areas such as delivery (Uber Eats) and shipping (Uber Freights), Lyft has shied from such untested markets. This “presents a much clearer growth story to investors.”

Based on their S1 form filed to the SEC, Lyft had an annual revenue of $2.16 billion and $911 million loss in 2018. Compared to the previous year, Lyft has shown steady growth in numbers, up from a $1.06 billion revenue and $688.3 million net loss in 2017.

Despite this upward trend, there are concerns of numbers manipulation to upsell the IPO. The Wall Street Journal has noted that “when Lyft launches certain promotions for riders, it books the ride’s full price as revenue, not the discounted price,” instead recording the difference as a “sales and marketing expense.” Furthermore, Lyft’s largest investor Rakuten calculated the company’s market share numbers to be 30% higher than what market research firm Second Measure stated.

Apart from Uber, technology companies Airbnb, Slack, Palantir, and Pinterest also aim to make a showing this year. Lyft plans to pitch to investors by mid-March and allow public trading until the end of the month. If all goes well, this first major technology company IPO of the year could lay the groundwork for many successful IPOs to follow. Given the Federal Reserve Chairman Jerome Powell’s suggestion that the Fed does not intend to raise interest rates any time soon, coupled with the current bull market, now is a prime time to IPO. However, if the first one to break the ice fails, the pack of technology companies following Lyft may yet hold back and wait for calmer markets.

Lyft IPO – Leading the Wolfpack

Silicon Valley has unequivocally changed the landscape of the auto industry. In 2010, asking a stranger to give you a ride home was nobody’s favorite transportation option. Yet, in 2019, ride-hailing services like Uber and Lyft are a leading transportation choice. Even more disruption is inevitable as Google, Uber, Lyft, and others race to become the first driverless car operator.

This disruption has forced traditional car manufacturers to adapt to keep up with Uber and other innovators. Rivals Daimler (Mercedes-Benz) and BMW have agreed to a $1 billion joint venture. The companies believe the project will be a “global gamechanger” that “maximize[s] [their] chances in a growing market.” Daimler and BMW hope to fend off companies like Uber by focusing on five areas: “car-sharing, ride-hailing, parking, charging, and multimodal transport.”

Interestingly, Daimler and BMW are not alone. Collaboration among global automakers has increased as Google and Uber have pressed them to be on the forefront of auto technology like autonomous driving systems and electric vehicle platforms. For example, Ford and Volkswagen have not only agreed to build vehicles together, but also jointly “investigate” the development of next generation vehicles. General Motors, SoftBank, and Honda announced a similar joint effort.

Ultimately, cooperation among these rival car makers is an encouraging sign. After nearly 150 years of combustion engines, market forces are compelling car manufacturers to commit significant capital to innovation.

Rival Auto Makers BMW and Daimler Forced to Cooperate

CBRE, a worldwide leader in real estate services, launched a new business called Hana, eager to cut a piece of the coworking business pie. It aims to distinguish itself from companies like WeWork and its smaller peers like Knotel and Industrious by offering landlords an opportunity to maintain relationships with their tenants.

Coworking companies, such as WeWork, make their money through rental arbitrage by purchasing or renting commercial spaces from property owners, transforming them, by adding features such as cafés, communal spaces, and offices, then renting the space to clients at higher prices on a short-term basis. Their target markets typically include startups, work-at-home professionals, independent contractors, and remote freelancers seeking to avoid working in isolation. Landlords take companies like WeWork as tenants because they attract startup culture, facilitate short term leasing with multiple tenants, and can add to property value by making traditional 9-to-5 office buildings more vibrant.

However, coworking company profits stem also from larger company clientele, generating disconnect between landlords and the companies they usually court. CBRE’s Hana takes advantage of this disconnect through partnerships with landlords that enable them to maintain their relationship with tenants. Therefore, owners wanting to share in the profits of the flexible office market can partner with Hana, effectively cutting out intermediary companies like WeWork. Under this alternative model, owners will co-invest with Hana in building the workspaces; Hana will manage them for a fee; and they both would share in the profits.

Indeed, the transition from arms-length leases to partnerships in the coworking sphere is not entirely new. WeWork and Industrious have begun using co-management agreements, a staple in the hotel industry, where landlords might pay for renovations and then split the profits equally. Still, however, lenders feel more comfortable issuing debt on a property with a long term lease, a reason why management agreements have not gotten much grip in the U.S., according to Granit Gjonbalaj, WeWork’s real estate development officer. It is exactly this mismatch of long term commitments supported by short-term rentals that gives WeWork a going concern issue, the same exposure that pushed IWG’s Regus into bankruptcy in 2003. It’s possible that some landlords have refused to rent to WeWork because of concerns about its long-term viability.

CBRE’s Hana is betting that its partnership business model coupled with its deep relationships derived from its commercial real estate services, investment management services, and development services will give it a competitive edge in obtaining landlord business. While lenders still might prefer a long-term lease before issuing debt on a property, this may change as underwriting standards begin to better understand coworking income streams.

CBRE Takes on WeWork

Markets reached their highest peak this week since November of last as President Trump postponed a planned tariff hike against Chinese imports, a signal to some that a trade-deal between the two economic powers is close at hand. The President himself announced his optimism regarding the prospects of reaching a deal, though warned that an agreement may still not be possible. Many credit the long trade-spat between the two countries with slowing global economic growth since its inception, and some fear that its effect on U.S. GDP or inflation could expedite or worsen a possible near-recession. Contributing to this market rally has been the Federal Reserve’s recently dovish stance on interest rates and the weakening of the U.S. dollar to certain emerging market currencies, the latter of which is positive sign for global trade prospects; a higher relative dollar value makes debt in those countries, which is held in U.S. dollars, more expensive to service.

Still, whether a deal happens and whether that deal accomplishes the goals set out by the Trump administration is another matter. The purpose of any such deal, according to the administration, is to provide more rigid protections against intellectual property theft and curb technology transfers that threaten U.S. national security interests and industrial, technological leadership.  However, with recent signs that China is pushing for market growth, rather than deleverage to reduce the risk of its current debt position, the extent to which China will concede to any such regulations that run contrary to the goals of its Made in China 2025 initiative may be dubious. If they do, will that trade-deal framework be sufficiently rigid or realistically enforceable enough to be practically effective?

Moreover, questions emerge concerning the President’s intent underlying this delay announcement, especially coming off of President Trump’s inability to secure funding for a National Border Wall and Emergency Declaration. Is the President posturing – using the inevitable market boost that accompanies the announcement to boost support?  Whatever the case, how trade-talks proceed in the coming months could have a profound effect on global markets and international trade-regimes in the near-future.

Stocks Rally Following Tariff Delay, but a Trade Deal is No Sure Thing

Last week Microsoft employees published an open letter calling on the company to cancel its $480 million HoloLens contract with the U.S. Army. The employees claim that Microsoft is failing to inform engineers “on the intent of the software they are building” and demand greater transparency. In the letter, Microsoft employees call on the company to cease working on “any and all weapons technologies,” to create a public “acceptable use policy,” and to create an “independent, external ethics review board” to enforce compliance with such a policy.

Chief Legal Officer Brad Smith previously defended Microsoft’s work with the military in an October blog post, stating that “the people who defend our country need and deserve our support” and that withdrawing from the weapons technology market would reduce Microsoft’s ability to shape how technology is used.

The Microsoft protest follows the trend of tech employees speaking out against contracts with the U.S. government. Last year, Google announced it would not renew a contract with the military after thousands of employees protested the company’s involvement in a Pentagon program that used artificial intelligence as weaponry. A few weeks later, employees from Google, Salesforce, Amazon, and Microsoft demanded that their companies end contracts with Immigration and Customs Enforcement (ICE) and other government agencies in response to evidence of family separation at the border.

As employee activism becomes the norm in Silicon Valley, tech companies are grappling with how to respond. On one hand, yielding to the open letter’s demands could lead to a slippery slope where Microsoft is overly beholden to its employees’ political views. On the other hand, more transparency from Microsoft might attract and retain top tech talent, especially as views of the industry turn negative and the public is more cognizant of the “double-edged sword” of technology. Microsoft’s response to the letter will set an important precedent for how far the company is willing to be pushed by its employees.

“We did not sign up to develop weapons” – Microsoft Workers Protest Army Contract

The retail apocalypse saga seems to be continuing as some of America’s biggest and most historic retailers file for bankruptcy and close up shops. On February 18th, long-time discount shoe retailer, Payless ShoeSource, filed for Chapter 11 Bankruptcy, less than two years after it filed for its first one.

The reasons for Payless’s downturn are many, including a computer malfunction during a critical 2018 back-to-school sale period, general inventory overstock, and more. However, per usual, many are quick – perhaps too quick – to conclude that Payless’s story, like other retail failure stories, is due simply to the boom in e-commerce giants like Amazon that has replaced traditional shopping in brick and mortar retail stores.

But this e-commerce narrative seems to be far from a complete explanation. TJX, operator of TJ Maxx and Marshalls is absolutely booming – it hopes to open up more than 1,000 additional stores throughout the US and Canada. Nordstrom and Home Depot also showed robust earnings in 2018, thanks in large part to their brick and mortar locations. There are numerous other retailers across industries that are faring extremely well in the physical space.

The younger generations of consumers, particularly Generation Z (“Gen Z”), warrant examination, as they have largely been deemed responsible for the downturn in retail shopping in physical stores. Gen Z is the first generation that essentially has not lived without cellular phones. Gen Z’s purchasing power is also substantial. It will almost definitively be the largest generation of consumers by 2020 and already accounts from $29 billion to $143 billion in direct spending annually. Its members have been defined by the infamous “instant gratification” label. And, contrary to expectations, “when it comes to shopping, Gen Z consumers are far more traditional – and substantially more patient – than many thought.”

A survey released by Euclid shocked many when it showed that Gen Z actually prefers to shop in and purchase from brick-and-mortar stores than online. For example, when asked if Gen Zers would prefer to purchase makeup straight from their smartphone or in a store, a resounding 72% signified that they would still prefer to purchase in a store despite the fact that 94% of millennials purchased makeup straight from their phone. So what can retailers like Payless do to feed this preference?

There’s no single answer, but a key will be understanding the distinct facets and preferences of the generation in the shopping context. Studies repeatedly find that Generation Zers deem personal relationships – which extend to brands – extremely important in informing their purchasing habits, along with transparency, convenience, and more.

The lesson that should be learned is that brick-and-mortar stores are not dead. Gen Zers actually want a physical shopping experience. Accordingly, retailers like Payless need not abandon the brick-and-mortar model, but they need to supplement their models by integrating elements like the convenience or experiential shopping that these young shoppers seek. If retailers like Payless can find avenues to translate these shopping preferences, they may be able to tap into the tremendous purchasing power of the young generation.

Brick-and-Mortar Retailers’ Unlikely Hero – Generation Z

In today’s modern age of technology, there is an increasing use of online websites for everyday shopping needs by average consumers. In the midst of this online shopping, many consumers have begun to notice advertisements for recently browsed electronics or clothing items. This is no coincidence; rather, these personalized ads are a part of a larger internet practice actively used by online businesses called “internet-based advertising.” This form of advertising is beginning to be used by larger companies, such as Amazon, and has become an additional pillar of its business, worth a total of $125 billion.

Many of Amazon’s internet-based advertising features are similar to those of Google and Facebook and has largely become successful by offering ways to target users based on their interests, searches and demographics. This targeting is done by directly working with Amazon’s staff, who placed the orders themselves. Additionally, Amazon provides advertisers and their agencies access to the self-serve system to run their own campaigns on and off Amazon’s websites. The advertising is useful to consumers given that the service consolidates advertisements based upon one’s interest and may provide additional information to a shopper regarding a product they would not normally have access to. For advertisers, the service allows for larger access to their products and the ability to target consumers that have an interest in their product. This interrelationship has proven to be successful as businesses have seen an increase in “clicks” on their websites and a reciprocal increase in the amount of orders for their products.

Although internet-based advertising represents a mutual relationship between consumers and businesses by delivering both convenience and a broader customer base, to what extent is there a boundary for the sake of consumer privacy? The tracking of customers’ online activities is typically invisible to consumers. Therefore, the average consumer does not know that due to their shopping on Amazon, an additional business knows where they live simply because they provided a delivery address. They likely do not know that Amazon knows how old their children are from access to their baby registries and even knows who has a cold, from cough syrup ordered with two-hour delivery. Although Amazon does not provide advertisers the name of the customers, it does provide additional information that the average consumer may not want others to have access to. Therefore, there must be additional regulations in place to ensure that there is opportunity for the protection of privacy while also allowing for business advertisements. Many websites have already taken theses additional steps by providing real time warnings on webpages that notify visitors that “you are giving implied consent to the use of tracking cookies on this website.” These types of “warnings” allow consumers to know their behavior is being tracked and allows the opportunity to gauge their future use of the respective website accordingly. This initiative, along with further regulations regarding businesses’ use of consumer information, could allow for an effective relationship between shoppers and corporations such as Amazon.

Consumer Convenience and the Invasion of Privacy

Navient Corp, the second largest student loan services provider, rejected the takeover bid of $12.5 a share with total worth of about $3.2 billion from Canyon Capital and Platinum Equity in a board vote on February 18.

The takeover offer was a 6.6% premium over Navient’s closing price on Friday of $11.73 a share. This price, however, was substantially lower than the $14-$15 informal price Canyon had given Navient in the past. Navient also said the offer “substantially undervalue[d] the company” and did not take into account the bidders’ approach to pending litigations against Navient or the financing information of the proposed acquisition. Particularly, upon a change of control, Navient’s $10 billion debt would become due but the bidders did not seem to “have a plan.”

The pending litigations facing Navient were brought by Federal Consumer Financial Protection Bureau and five states including Illinois, Washington, California, Pennsylvania, and Mississippi over its services of student loans.

CFPB initiated the lawsuit against Navient just two days before President Trump’s inauguration, alleging that the company harmed the interests of borrowers by “failing to steer them toward the loan repayment options” more affordable for them. As a result of Navient’s tactics, almost $4 billion additional interest charges were incurred to borrowers.

The five states filed similar lawsuits against Navient for alleged misallocation of payments and misleading borrowers into more expensive repayment plans. These pending litigations may take years to go through discovery, trial and possible appeals, which may mean a huge burden of legal fees and media pressure on Navient.

After Navient’s turndown of the takeover bid, Canyon Capital “has withdrawn its expression of interest” to acquire Navient according to the Schedule 13D/A filed by Canyon Capital on February 20 as an update of the acquisition. Instead, it plans to nominate four candidates for the election of independent board directors at the 2019 annual meeting.

Navient Turns Down $3.2 Billion Takeover Bid

Everyone loves rewards. With every swipe, dip, and tap, consumers are converting everyday purchases into points for travel, fine dining, and entertainment. From the solid metal Chase Sapphire Reserve to the Rose Gold American Express, rewards credit cards promise consumers a desirable lifestyle.

However, no one likes fees. When a consumer makes a purchase at a store using their credit card, the store is charged an interchange fee, which is a percentage of the total sale. The store pays the bank that issued the credit card the interchange fee. These interchange fees are set by payment card networks like Visa and MasterCard and are roughly 1-2.5% of the total sale.

Recently, Visa and MasterCard have been preparing to increase their cards’ interchange fees. One reason could be the increasing risk of transactions due to data breaches like Equifax, affecting 143 million Americans, and the increase in fraud in online transactions. Another reason for the fee increase could be costly rewards programs due to savvy consumers strategically maximizing rewards. For example, in Q2 2018, rewards cost Chase $330 million because credit card users were redeeming points faster than anticipated.

Merchants strongly dislike the power that card networks have in setting interchange fees. In 2005, merchants filed an antitrust lawsuit against Visa and MasterCard that settled for a record $6.2 billion. In 2018, merchants sued American Express (Ohio v. American Express) for restricting merchants from encouraging customers to use other cards with lower fees. On the other hand, in Europe, interchange fees are capped, and card networks fear similar regulation in the U.S.

Most recently, major retailers, such as Amazon, Target, and Home Depot, have been pushing to stop accepting some rewards cards, pushing to end card network’s “honor all cards” rule. At the same time, to counteract higher fees, like from increased rewards card usage, merchants have historically passed those costs to consumers by raising prices. Therefore, although some reap the benefit of rewards cards, everyone, including those who use cash and debit or do not have access to credit, bears the costs of paying for those rewards.

At the end of the day, rewards cards are here to stay. Customers love rewards, the cards generate significant revenue for issuing banks, and they grow payment volume for card networks. However, nothing is free, and someone, whether it be merchants, customers, or banks, will have to pay for the rewards.

Everyone loves rewards. No one likes fees