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The BAN Report: Why is the Job Market So Strong? / Bed Bath & Beyond Rescued / Pandemic Cash Dries Up / Credit Tightens / Shari Redstone-2/8/23

Why is the Job Market So Strong?

The Wall Street Journal tried to explain the conundrum of a strong job market in the midst of a consensus of a forthcoming recession.

The U.S. added 1.1 million jobs over the past three months and ramped up hiring in January. That appears puzzling, given last year’s economic cool down, signs that consumers are pulling back on spending as their savings dwindle, and a stream of corporate layoff announcements, particularly in technology.

Driving the jobs boom are large but often overlooked sectors of the economy. Restaurants, hospitals, nursing homes and child-care centers are finally staffing up as they enter the last stage of the pandemic recovery. Those new jobs are more than offsetting cuts announced by huge employers such as Inc. and Microsoft Corp.

Employers in healthcare, education, leisure and hospitality and other services such as dry cleaning and automotive repair account for about 36% of all private-sector payrolls. Together, those service industries added 1.19 million jobs over the past six months, accounting for 63% of all private-sector job gains during that time, up from 47% in the preceding year and a half.

By comparison, the tech-heavy information sector, which shed jobs for two straight months, makes up 2% of all private-sector jobs.

The hiring spree in everyday services shows that the sectors hardest hit in the pandemic’s first months, when 22 million jobs were lost, are continuing to recover. Those gains may prop up the broader economy enough to avoid a recession.

The sectors driving job growth include hotels, hospitals and restaurants, which laid off workers amid pandemic shutdowns and social distancing in 2020. After demand surged during reopenings, they started hiring again. But they struggled to land enough new employees and retain existing ones.

Burned out workers quit, finding ample opportunities elsewhere. Job seekers chose other positions that were less physically demanding or allowed them to work from home. Many Americans remained out of the labor force, some worried about illness, some supported by federal benefits and others opting to retire early.

Now, with the effects of the pandemic diminishing, many executives and business owners in services industries say they are finding it easier to recruit and fill jobs.

Of course, hiring may slow in these industries if there is a spending slowdown, but many service companies were operating at skeleton staffs for so long that this should continue for some time, and offset layoffs in other areas. Companies are also realizing how difficult it is to lay off workers and try to bring them back. 

Bed Bath & Beyond Rescued


Back in the summer 2020 while in the midst of Chapter 11, Hertz attempted to raise common stock before the SEC shut it down. Raising common stock for an insolvent company had never been seriously contemplated. Now, severely distressed companies are successfully raising stock. The latest company is Bed Bath and Beyond, which was headed for Chapter 11 before a rescue earlier this week.

Bed Bath & Beyond Inc. has secured investor backing for a more than $1 billion capital raise to stave off bankruptcy and try to turn around its flagging business, people familiar with the matter said.

The offering of convertible stock and warrants, coupled with a $100 million additional credit line from one of its lenders, is expected to save the troubled retailer from the near-term chapter 11 filing it has warned about for weeks. Bed Bath & Beyond has received investor commitments to raise $225 million of equity capital initially and the rest of the more than $1 billion offering over time, according to people familiar with the matter.

The company, which has seen its share price rally in recent weeks despite its dire outlook, warned Monday that if it fails to complete the planned fundraising, it would likely file for bankruptcy and its assets would be liquidated. 

A company representative didn’t immediately respond to a request for further comment Monday.

Bed Bath & Beyond isn’t the first distressed company to seek to sell equity with its back against the ropes. In 2020, movie-theater chain AMC Entertainment Holdings Inc. began selling shares to individual investors even while it prepared for a potential bankruptcy, which it avoided after selling more than $2 billion in stock.

But Bed Bath & Beyond is teetering even closer to bankruptcy than AMC was at the height of the pandemic. The retailer’s revenue has plunged in recent quarters and it has racked up losses after a turnaround plan failed to revive its business performance. Earlier this year, Bed Bath & Beyond said it might not be able to continue operating as a going concern.

The equity securities being offered for sale by bookrunner B. Riley Securities, as well as Bed Bath & Beyond’s existing common stock, would rank below the company’s debt and would likely be wiped out if the company later restructures.

Bed Bath & Beyond expects to raise $225 million by selling convertible preferred shares and an additional $800 million by issuing warrants that will require holders to purchase more preferred shares in the future. Convertible stock can help investors limit losses by offering a guaranteed return and a chance for an upside once they are converted into regular stock. The issuance of the new securities would also dilute Bed Bath & Beyond’s existing shareholders.

Of course, one could argue that this is a sign of a speculative bubble, and may lead to some very unhappy equity holders. During 2008, Washington Mutual raised $7 billion in capital just months before it failed, thus wiping out all equity investors.  


Pandemic Cash Dries Up

While we may be headed towards a recession according to the consensus viewpoint, we are entering one in which there is still a lot of cash to absorb higher inflation and higher rates. According to Goldman Sachs, consumers are starting to use up their excess cash.  

Americans have spent down about 35% of the extra savings they accumulated during the pandemic as of mid-January, according to an estimate from Goldman Sachs. By the end of the year, the company forecasts that they will have exhausted roughly 65% of that money.

In 2020 and into 2021, a combination of government pandemic stimulus and reduced spending, for example on restaurants and travel, fattened Americans’ wallets. Households amassed $2.7 trillion in extra savings by the end of 2021, according to Moody’s Analytics.

This cash helped Americans make it through a period of high inflation last year, but the forces that had acted to boost savings reversed direction as pandemic relief unwound and prices soared.

Today, some people are having to cut back on their spending or add to their credit-card balances. Many have had to tap their savings to stay afloat, say economists.

“At the exact same moment you lost the government transfer payments, you got hit with very high inflation, which made your real spending power lower,” said David Mericle, Goldman Sachs’s chief U.S. economist.

Early in the pandemic, Americans were socking away money at unprecedented rates. In 2020, they collectively saved 16.8% of their disposable income, well above the 8.8% they saved in 2019. But in 2022, the saving rate fell to 3.3%.

Many households are struggling financially after draining their savings last year, but Mr. Mericle said that the circumstances that pushed them to do so—surging inflation and the end of government transfer payments—are unlikely to repeat.

“You shouldn’t need to tap your wealth as much, hopefully, in 2023 as you needed to in 2022 in order to avoid a big decline in your real consumption level,” he said. His team at Goldman Sachs estimates that the monthly saving rate will rise modestly by the end of the year, to about 4.5%.

After the unprecedented stimulus of 2020-2022, the end of these programs is effectively a negative stimulus. And, certainly some consumers may have acted as if these programs were indefinite. With 65% of this cash still available, many consumers will have the means to stay current on their obligations, but this will not last forever. To date, delinquencies on consumer debt have remained low, but are beginning to trend slightly upward.

Credit Tightens

According to the Federal Reserve Senior Loan Officer Survey on Bank Lending Practices, banks are tightening credit while demand from borrowers is dropping as well. The outlook for 2023 was downbeat.

The January SLOOS survey also included a set of special questions inquiring about banks' expectations for changes in lending standards, borrower demand, and asset quality over 2023, assuming that economic activity evolves in line with consensus forecasts. On balance, banks reported expecting lending standards to tighten and loan demand to weaken. Meanwhile, banks reported expectations of a broad deterioration in loan quality during 2023.

Regarding lending standards, major net shares of banks expected to tighten standards for C&I loans to firms of all sizes and for all types of CRE loans over 2023. Meanwhile, significant net shares of banks also reported expecting to tighten standards for nonconforming jumbo mortgage loans, credit card loans, and auto loans. A moderate net share of banks also reported expecting to tighten standards on GSE-eligible residential mortgage loans. The most frequently cited reasons for expecting to tighten standards over 2023, reported by major net shares of banks, included an expected deterioration in collateral values, a reduction in risk tolerance, and a deterioration in credit quality of the bank's loan portfolio.

Meanwhile, major net shares of banks reported expecting loan demand to weaken across CRE and RRE loan categories over 2023, while significant net shares of banks reported expecting loan demand to weaken for C&I loans to firms of all sizes and auto loans. A moderate net share of banks expected demand for credit cards to weaken. The most frequently cited reasons for weaker loan demand over 2023, reported by major net shares of banks, included an expected increase in interest rates, expected lower spending or investment needs, an expected deterioration in terms other than interest rates, an expected easing in supply chain disruptions, and an expected decrease in precautionary demand for cash and liquidity.

Regarding expectations for credit quality—as measured by delinquencies and charge-offs—major or significant net shares of banks reported expecting a deterioration in credit quality across all loan types over 2023. Specifically, major net shares of banks reported expecting credit quality to deteriorate for C&I loans to small firms, syndicated leveraged and non-syndicated C&I loans to large and middle-market firms, nonfarm nonresidential and construction and land development CRE loans, consumer loans to nonprime borrowers, and RRE loans. Additionally, significant net shares of banks reported expecting loan quality to deteriorate for consumer loans to prime borrowers, syndicated nonleveraged C&I loans to large and middle-market firms, and CRE loans secured by multifamily properties.

Regarding foreign banks, significant net shares of such banks reported expecting tighter standards for all C&I and CRE loans over 2023. In addition, foreign banks also reported expecting weaker or basically unchanged demand and a broad deterioration in the quality of C&I and CRE loans during 2023.

What’s interesting is the breadth of the concerns regarding asset quality. Banks are expecting credit quality to decline in all years. However, this decline is inevitable, as asset quality has never been better for many banks. Moreover, it won’t take much for asset quality to get worse. In fact, doubling or tripling the loans in workout won’t take much at these levels.  


Shari Redstone

Shari Redstone, chairwoman of Paramount Global, has emerged as one of the most powerful executives in the entertainment industry, overcoming criticism from her late father and an aborted boardroom coup by Les Moonves. A new book from James Stewart and Rachel Abrams seems like a fascinating tale of corporate maneuvering and backstabbing.  

After Mr. Redstone divided his empire into two publicly traded but Redstone-controlled companies — CBS and Viacom — in 2006, Mr. Moonves had led CBS out of last place in the ratings and made it the most consistently watched broadcast network. But now Ms. Redstone wanted to merge the much healthier CBS with a floundering Viacom, and was consulting with Mr. Moonves — meddling, in his view — on a regular basis.

As Mr. Moonves had implored one board director: “Help me here. Shari is driving me crazy.”

He showed no sign of this to Ms. Redstone, with whom he continued to discuss the merger. But while she thought he was open to her ideas, Mr. Moonves and his supporters on the CBS board had secretly plotted a board vote to strip the Redstones of their voting control and block the merger. Then CBS would immediately sue in Delaware to prevent Ms. Redstone, her father and the family trust that controlled their assets from replacing CBS board members or otherwise nullifying the board’s action. This was the “nuclear” option — a legal gambit with profound implications for every public company with a controlling shareholder, which includes many of the biggest media and tech companies.

“After filing there can’t be a deal,” Mr. Moonves continued in his message to Mr. Gordon. Referring to Ms. Redstone: “She won’t be manageable.”

“She’s not manageable now,” Mr. Gordon responded.

Today Shari Redstone ranks among the most powerful executives in Hollywood. As nonexecutive chair she oversees Paramount Global, the company that emerged from the combination of CBS and Viacom, home to such hits as last summer’s “Top Gun: Maverick” and the current streaming series “Yellowstone.”

Mr. Moonves, by contrast, was fired from CBS after more than a dozen women, including his own doctor, accused him of sexual misconduct; was denied $120 million in severance payments; and retreated in disgrace to his homes in Beverly Hills and Malibu, Calif. Initially a reluctant participant in her father’s business empire, intimidated by the big names attending the annual media conference in Sun Valley, Idaho, Ms. Redstone not only survived the “nuclear” option but emerged on top.

A trove of documents and testimony helps explain how she did it — in part through her own “mettle,” as her father might have put it, and in part thanks to some startling revelations that Mr. Moonves did his best to conceal from a board of directors who showed little interest in thoroughly investigating his past.

Had it not been for the disgraceful conduct by Les Moonves, this may have ended differently. It’s fascinating why Moonves went for the jugular at a time in which these allegations were simmering.  

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