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FAA set to sign off on Boeing 737 software fix in 10 days, source says



Shares of Boeing rebounded Friday after a report that the plane manufacturer plans to roll out a software upgrade for its 737 Max aircraft in 10 days.

The Federal Aviation Administration is expected to sign off on Boeing’s planned changes to its anti-stall software on March 25, a person familiar with the matter told CNBC. Lawmakers have been informed of the timeline, the person said.

The approval of the software change does not necessarily mean that the FAA’s order to ground the planes will be lifted, added the person.

French news agency Agence France-Presse, citing sources, earlier reported the time-frame for the fix. Boeing told CNBC the overall timeline has not changed.

The FAA on Wednesday followed dozens of other countries in grounding Boeing 737 Max planes, citing possible links between two fatal crashes in the past nine months. On Sunday, an Ethiopian Airlines Boeing 737 Max 8 crashed shortly after takeoff, killing all 157 people on board. That came less than five months after the crash of a Lion Air Boeing 737 Max 8 flight from Jakarta, Indonesia, which killed all 189 people on board. Both planes were new, delivered from Boeing just months before those flights.

Boeing’s stock fell more 10 percent this week in the aftermath of the Ethiopia crash.

The plane manufacturer’s shares rose roughly 3 percent Friday afternoon following the AFP report, and closed up 1.5 percent at $378.99.

Investigators have indicated that the Lion Air pilots battled an automatic anti-stall system that comes with the 737 Max planes that wasn’t included in older models.

Before it grounded the Boeing 737 Max planes, the FAA had said it would mandate a software fix by April and said Boeing was developing other updates to pilot training and manuals.

A weeks-long turnaround for Boeing would come much sooner than some on Wall Street had estimated. Bank of America predicted this week that it would take the aircraft manufacturer three to six months to “certify the fix.”

Of the more than 350 Boeing 737 Max jets in global fleets, 72 are flown by U.S. airlines United Airlines, American Airlines and Southwest Airlines.

— CNBC’s Meghan Reeder and
J.R. Reed
contributed reporting.

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Deutsche Bank shares hit record low as UBS downgrades stock to ‘sell’




Shares of Deutsche Bank hit a record low Monday, down nearly 3%, after UBS downgraded the German lender’s stock to a “sell” rating from “neutral.”

Pointing to tough external events and the low interest rate environment, UBS slashed its price target for Deutsche from 7.80 euros ($7.45) to 5.70 euros.

“We downgrade to sell because we don’t expect operating conditions to improve anytime soon. Deutsche remains a levered market play vulnerable to external events and rising rates are currently a distant hope,” UBS analysts said in a research note on Monday.

Rising rates are good for banks since they are able to lend out money with a profitable rate of interest. Lower interest rates can restrict a bank’s ability to make profits, adding pressure on margins.

The German bank saw its stock hit to a record low of 6.673 euros on Monday morning, just days before its annual general meeting.

A shareholder revolt?

Earlier this month, the shareholder advisory group Institutional Shareholder Services (ISS) called for stakeholders to issue a vote of no confidence in the management.

Deutsche also faces pressure from investors to trim its investment banking division, especially after the collapse of merger talks with Commerzbank. Investment banking (IB) is a specific division of banking related to the creation of capital for other companies, governments and other entities.

“With the share price at close to all time lows, spreads and CDS (credit default swaps) stubbornly high and profitability depressed, the urgency to act is high we think,” UBS said in its note that was published before the share price fall on Monday.

“DB’s IB would have been a key beneficiary of a deal with Commerzbank, as it could have helped to drive down funding costs and spreads and balance the overall profile.”

Deutsche Bank has been in the news for a variety of negative reasons in the past few years — from settlements with the U.S. Department of Justice, to management reshuffles, weak earnings, constant restructuring, merger speculation and steep stock price falls.

Shares of Deutsche Bank are down nearly 5% since the start of this year. The stock is down nearly 40% over a 12-month period and about 75% over a five-year period.

Deutsche and Trump

Shares were also impacted by a report in the New York Times on Sunday that said Deutsche Bank ignored employees’ calls to report Donald Trump transactions to a federal watchdog.

Transactions in 2016 and 2017 triggered automated controls at Deutsche Bank meant to catch illicit activity, and compliance workers then prepared what’s known as suspicious activity reports that they believed should be sent to the Treasury, according to the Times, which cited five current and former bank employees. But the reports were never filed with the government, the article states.

Deutsche Bank denied these reports in a statement on Monday. “At no time was an investigator prevented from escalating activity identified as potentially suspicious. Furthermore, suggestion that anyone was reassigned or fired in an effort to quash concerns relating to any client is categorically false.”

Trump’s relationship with Deutsche Bank has drawn scrutiny in Congress and elsewhere. Trump sued the bank last month to prevent it from complying with congressional subpoenas seeking information about potential suspicious payments.

CNBC’s Hugh Son contributed to this report.

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Without student debt, Morehouse graduates will have more options




Nearly 400 young men at Morehouse College learned that their commencement speaker — billionaire Robert F. Smith — will pay off their student loans.

It will take years, potentially decades, to obtain a full picture of how graduating debt-free shaped the lives of these students at the historically black college in Atlanta.

In the meantime, a slew of studies documenting how student loans block people from significant purchases and opportunities suggest these graduates’ paths to adulthood will be much smoother.

Around 80% of students at Morehouse College have loans, and the average debt of graduates in 2017 was $31,833. Three years after leaving the college, less than a third of Morehouse students have begun to repay the principal on their debt, or the amount they borrowed before interest accumulated.

The gift could cost Smith $10 million to $40 million, according to estimations by Mark Kantrowitz, an expert on student debt.

Billionaire Robert F. Smith announced that he would be paying off the student debt of the entire 2019 graduating class at Morehouse University.

Marcus Ingram | Getty Images Entertainment | Getty Images

More than 90 percent of the college’s students are black. Research shows that African-Americans struggle with student debt more than their white counterparts. Fifteen years after leaving college, black adults have an average balance 185% higher than white adults.

“Forgiving their student loans will free Morehouse College graduates to pursue their goals,” Kantrowitz said.

In a 2010 study, Kantrowitz found that male students who graduate with no debt are twice as likely to enroll in graduate school than male students who graduate with some debt.

Student loans can also have a perverse effect, in which the very debt that’s taken on to allow one to pursue their dreams can morph into a burden that requires them to ditch those plans and grab a job just to pay the bills. An additional $2,500 in student debt decreases an individual’s likelihood of being employed in a job related to their major by almost 5 percentage points, according to a recent study by economists Martin Gervais and Nicolas L. Ziebarth at the University of Iowa.

Major financial decisions can also be stalled.

The Federal Reserve has found that a 10% increase in student debt decreases a person’s likelihood of owning a house by 1 to 2 percentage points. And college graduates without debt will have double the amount saved for retirement by the time they reach 30 as those who have debt, according to a recent analysis by the The Center for Retirement Research at Boston College.

A person with $30,000 in student loans is 11% less likely to start a business than a person who graduated debt-free, according to calculations by Karthik Krishnan, an associate professor of finance at Northeastern University who researches student debt.

“Instead of devoting thousands of dollars a month to student loan payments or being in an income-driven repayment plan for decades, they will now be able to invest in themselves,” Kantrowitz said.

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Biotech IPO performance pokes holes in Silicon Valley’s theory for waiting so long to go public




Start-ups’ fears of being strong-armed to focus on short-term profits is one reason some are opting to stay private. But those fears may be overblown, if the historical performance of money-losing biotechs is any indication.

Much like consumer tech companies going public in 2019 — biotech companies rarely make money going into their stock-market debuts. Public-market investors have historically embraced them anyway.

Between 2001 and 2017, only 6% of biotech companies were profitable at the time of their initial public offering, according to analysis by Jay Ritter, finance professor at the Warrington College of Business at the University of Florida. Yet, during the same time frame the average three-year buy-and-hold return for more than 350 biotech companies that went public was 36.3% — beating the market by 14.0%.

“We’ve had hundreds of biotech companies going public in recent years where everybody knows that they’re not going to have any revenue from product sales for years,” Ritter told CNBC. “And there’s no pressure for them to cut their short term losses — as long as they’ve got viable scientific research.”

For the biotech firms that went public between 1980 and 2017, on average, they rose 12.1% on the first trading day, according to Ritter’s analysis. Over the next three years, they then returned an average of 25.7%. While biotech IPOs still under-performed the broader market by 6%, they fared better than the average IPO. Public offerings in general under-performed broader markets by 19% in the 3 years after listing.

“I think a lot of it is talk rather than actual evidence that if a company doesn’t achieve short-term profitability quickly, corporate raiders and activist investors swoop in and boot out management,” Ritter said. “I just don’t see a lot of evidence of that occurring.”

The nation’s top tech investors have voiced frustration about the public market’s focus on near-term profits. A new Silicon Valley stock exchange, backed venture capitalist Marc Andreessen among others, was approved earlier in May. According to its website, the mission is to provide a “market that reduces short-term pressures and encourages a steady cycle of innovation and investment in long-term value creation would benefit companies and their investors alike.”

Firms listed on the so-called LTSE may be required to abide by certain rules, like a potential ban on tying executive pay to the short-term financial performance.

The rise of money-losers

Last year, more than 85 percent of tech companies that went public had negative earnings per share, according to Ritter’s analysis. This year, Uber and Lyft were the poster children for that money-losing business model.

Uber, the biggest IPO since Alibaba, reported an operating loss of $3 billion in 2018 after losing more than $4 billion the previous year. Its ride-hailing rival Lyft reported a net loss of about $1 billion last year. Its adjusted loss per share was $9.02 for the first-quarter. Shares of Uber have been under pressure since listing in May but have recovered most of those losses. The stock is down about 2% since listing in May, while Lyft has dropped by 25% since its IPO.

Billionaire investor Mark Cuban, and owner of the NBA’s Dallas Mavericks, told CNBC last week that Uber’s disappointing debut was “not a surprise” because the ride-hailing company waited too long to go public.

“I just think we’re seeing a reflection of the Silicon Valley ethos in the public market. The whole attitude was wait, wait, wait, wait, wait,” Cuban said.

Cuban said by waiting, they lost the momentum early companies typically have. Cuban invested $1 million in Uber’s main competitor Lyft, which Cuban said also stayed private too long.

“They just waited too long,” Cuban said. “I don’t think you could have expected anything different … the reality is you’re nine years in and you’re still having to buy your revenue. That’s not a good sign.”

Plenty of private funding

There are a few reasons these companies are staying private longer. A decade-long, low-interest rate environment has forced investors to look for returns elsewhere. And in 2012, the JOBS Act raised the threshold of private shareholders from 500 to 2,000, allowing companies to stay private until they reach that limit.

But the key reason they’re able to stay private is because of a seemingly endless honey pot of venture capital and private equity money. Softbank — Uber’s biggest investor —has flooded private markets with billions in funding. Its $100 billion Vision Fund has deployed about $80 billion in capital. That in turn has pushed valuations to record highs.

“SoftBank’s size is unprecedented and it surely contributes to visibility and validation of high-valuation late-stage private financing,” said Yale School of Management Associate Dean Kyle Jensen. “Because of the enormous amount of private capital available, most companies can stay private longer.”

However, Jensen said these start-ups will continue to face pressure to go public from employees who see the bulk of their net worth locked up in stock and options that would be easier to liquidate if the company were public.

As demand increases, prices for these private companies are steadily rising. The average valuation for venture-capital backed companies is up to $260 million in 2019, according to data from PitchBook. That’s more than double the value from 2011, and more than 8 times what these companies were valued in 2002. The total deal count also jumped to 3,718 last year — a 370% rise from 2002, according to PitchBook’s data.

Source: PitchBook

Price to sales ratios, which are calculated by taking a company’s market capitalization and dividing it by the company’s total sales or revenue over the past year, are also on the rise. By that metric, prices have more than doubled for these companies since 1980, according to Ritter’s analysis.

To be sure, biotech’s business model is starkly different from ride-hailing, social networks, or software companies. The reason they’re unprofitable often has to do with regulatory approvals. They can’t make money on new drugs until they’re approved by the U.S. government agencies.

They often feel the heat to go public for different reasons — like needing to raise money for those expensive clinical drug trials. Historically, the biotech sector has also been a gamble. Investors bid up the Nasdaq Biotechnology Index in the late 1990s, only to see it lose half of its value in 2000.

Regardless of the industry, Ritter said investors are still eager to pay for future profits.

“I think it is pretty clear that both private market investors and public market investors are willing to to fund growth in companies and have them focus on growth rather than short-term profitability — provided there’s a story there that continues to make sense,” he said.

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