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Housing inventory fell last week, but it won’t derail the spring bump

Housing inventory is still growing over last year, but watch the price-cut percentage to find out where prices are going.

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Weekly housing inventory data — both active inventory and new listings  — are prone to one-week moves that deviate from a trend, especially if people are going Easter egg hunting. So, the fact that active inventory and new listings data fell last week isn’t a big deal. Although I expect some of the weekly data to rebound next week as a result, growth in active and new listings is still trending slower than I thought would happen in 2024.

But, despite the weekly moves, the one bright spot for housing is that housing inventory is growing on a year-over-year basis. Also, spreads between the 10-year yield and the 30-year mortgage got better last week, which is a big plus for the future if this trend continues.

Weekly housing inventory data

Active inventory still needs to be faster for my taste. My model has active inventory growing at least 11,000-17,000 every week with higher rates. This model was based on rates over 7.25%, but even when mortgage rates headed toward 8% last year, we didn’t see that kind of growth in inventory. This week, inventory fell week to week, but that’s the Easter bunny’s fault.

  • Weekly inventory change (March 29-April 5): Inventory fell from  517,355 to 512,930
  • The same week last year (March 30-April 7): Inventory rose from 410,734 to 411,577
  • The all-time inventory bottom was in 2022 at 240,194
  • The inventory peak for 2023 was 569,898
  • For some context, active listings for this week in 2015 were 1,021,567

New listings data

While the number of new listings isn’t growing as fast as I thought it would this year, it’s still growing, which means we have more sellers looking to buy a home once they sell. This variable can change when we experience a recession or job loss. However, for now, this is a plus for the U.S. housing market, and we should ignore the decline last week.

Number of new listings last week, by year:

  • 2024: 54,769 
  • 2023: 55,008
  • 2022: 63,374

Price-cut percentage

In an average year, one-third of all homes take a price cut; this is standard housing activity. When mortgage rates go higher and demand falls, the price-cut percentage grows; when rates drop, and demand gets better, the percentage falls.

It’s also critical to consider the year-over-year data with this line. Last year, when mortgage rates were heading toward 8%, the year-over-year price-cut percentage was continuously declining, which makes sense when you consider 2022 was a very abnormal year with the most significant home sales crash ever. As inventory is growing and demand isn’t booming on the mortgage side of things, the price-cut percentage is increasing year over year.

It’s critical to keep track of this data line as it shows price growth cooling down. That’s always what the doctor ordered because we have had massive housing inflation post-COVID-19. Having accurate weekly data gives us a big advantage to see what’s coming next.

Here’s the price-cut percentage for last week over the last several years:

  • 2024: 32%
  • 2023: 29.9%
  • 2022: 17.6%

10-year yield and mortgage rates

We had some good and bad news last week with mortgage rates.

First, the bad news” The 10-year yield broke a critical support level on Friday, and if we get more bond market selling, that will pressure mortgage rates higher.



But the good news is that the spread between the 10-year yield and mortgage rates is getting much better, sooner than I thought it would this year. We didn’t see much reaction on Friday with mortgage rates because the spreads were good. This is a huge plus because if and when the 10-year yield falls and if the spreads get even better, this means we could quickly get sub-6% mortgage rates with the 10-year yield at 3.37% — without it even breaking my “Gandalf line in the sand.”

I wrote a detailed article on Friday analyzing the jobs report, and showing how the latest labor data gives the Federal Reserve a pathway to land the plane if they want. See here for more details and charts.

As you can see below, even though the growth rate of inflation has fallen a lot, CPI inflation has gone from over 9% year over year to 3.2%; the 10-year yield is still elevated. As always, the labor data is more important than inflation data for now.

Purchase application data

Purchase application data didn’t move much last week, making it back-to-back weeks with flat weekly data. It was flat on a week-to-week basis and down 13% year over year. Since November 2023, after making holiday adjustments, we have had 10 positive and six negative purchase application prints and two flat prints. Year to date, we have had four positive prints, six negative prints and two flat prints.

The data tells me that since late 2022, many people have been waiting for lower mortgage rates, and even though rates are elevated compared to the last decard, people still jumped back into the market. Imagine if mortgage rates stayed near 6% for a year — mortgage demand would grow and we wouldn’t need tax credits to boost demand for existing homes.

Week ahead: Inflation week!

We are jumping right from jobs week into inflation week with the upcoming CPI and PPI inflation data. These will be important reports as many market players have used the seasonal base pricing variable as a reason why the last two months’ inflation data was a bit hotter than usual. This week will be critical to watch because if the inflation data comes in cooler than anticipated, the 10-year yield should fall, and with spreads getting better, that will be a plus for mortgage rates.

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Combating “Hate”: The Trojan Horse For Precrime

Combating "Hate": The Trojan Horse For Precrime

Authored by Conor Gallagher via Naked Capitalism,

Philip K. Dick’s 1956 novella The Minority…

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Combating "Hate": The Trojan Horse For Precrime

Authored by Conor Gallagher via Naked Capitalism,

Philip K. Dick’s 1956 novella The Minority Report created “precrime,” the clairvoyant foreknowledge of criminal activity as forecast by mutant “precogs.” The book was a dystopian nightmare, but a 2015 Fox television series transforms the story into one in which a precog works with a cop and shows that data is actually effective at predicting future crime.

Canada is trying to enact a precrime law along the lines of the 2015 show, but it is being panned about as much as the television series. Ottawa’s online harms bill includes a provision to impose house arrest on someone who is feared to commit a hate crime in the future. From The Globe and Mail:

The person could be made to wear an electronic tag, if the attorney-general requests it, or ordered by a judge to remain at home, the bill says. Mr. Virani, who is Attorney-General as well as Justice Minister, said it is important that any peace bond be “calibrated carefully,” saying it would have to meet a high threshold to apply.

But he said the new power, which would require the attorney-general’s approval as well as a judge’s, could prove “very, very important” to restrain the behaviour of someone with a track record of hateful behaviour who may be targeting certain people or groups…

People found guilty of posting hate speech could have to pay victims up to $20,000 in compensation. But experts including internet law professor Michael Geist have said even a threat of a civil complaint – with a lower burden of proof than a court of law – and a fine could have a chilling effect on freedom of expression.

While this is a dangerous step in Canada, I also wonder if this is where burgeoning “anti-hate” programs across the US are headed. The Canadian bill would also allow “people to file complaints to the Canadian Human Rights Commission over what they perceive as hate speech online – including, for example, off-colour jokes by comedians.”

There are now programs in multiple US states to do just that –  encourage people to snitch on anyone doing anything perceived as “hateful.”

The 2021 federal COVID-19 Hate Crimes Act began to dole out money to states to help them respond to hate incidents. Oregon now has its Bias Response Hotline to track “bias incidents.”

In December of 2022, New York launched its Hate and Bias Prevention Unit. Maryland, too, has its system – its hate incidents examples include “offensive jokes” and “malicious complaints of smell or noise.”

Maryland also has its Emmett Till Alert System that sends out three levels of alerts for specific acts of hate. For now, they only go to black lawmakers, civil rights activists, the media and other approved outlets, but expansion to the general populace is under consideration.

California vs. Hate, a multilingual statewide hotline and website that encourages people to report all acts of “hate,” is coming up on its one-year anniversary, reportedly receiving a mere 823 calls from 79% of California’s 58 counties during its first nine months of operation. It looks like the program is rolling out even more social media graphics in a bid to get more reports:

A key question is why states like California are rushing to expand the definition of hate. Officials in the Golden State like Governor Gavin Newsom claimed it was because of a rise in reported hate crimes – up 33 percent from 2020 to 2021. A deeper look at the data, however, shows that Newsom is guilty of cherry picking. From Public:

But convictions of hate crimes have been flat. In 2012 there were 107 hate crime convictions in California. In 2021, there were 109, according to the same data. It’s possible that hate crimes really did rise by 80%, and juries decided not to give prosecutors convictions. …But it’s also possible that convictions stayed the same because there was no increase in prosecutable hate crimes. And it may be that Californian prosecutors simply labeled more crimes as “hate” crimes because they were primed to do so by the media’s 700% – 1,000% increased focus on racism between 2011 and 2020.

I’m likely omitting other states with similar programs, but it’s clear that there is a push across the country. No doubt, these efforts to eliminate hate also have other benefits for the ruling class.

In a state like California or New York, there is the added bonus that the program ends up being a massive giveaway to a key part of the Democratic base – the nonprofit industrial complex that is helping to bring this system into existence.

These programs also help spread fear that hate is around every corner, which could allow for an erosion of rights under the guise of eradicating “hate.”

There’s also the issue of who is providing the definitions for hate that go beyond the laws already on the books for hate crimes. The California Senate Public Safety Committee analysis stated the following about the CA vs. Hate program:

A hate incident is an action or behavior motivated by hate but legally protected by the First Amendment right to freedom of expression.

That leads to the question of why the state is encouraging people to report and is collecting information on legally protected “behavior.” And where does the expanded definition come from? The committee stated the following:

Define hate incidents with language provided by the Anti-Defamation League.

The Anti-Defamation League (ADL) is a non-governmental organization based in the US, whose stated mission is “to stop the defamation of the Jewish people, and to secure justice and fair treatment to all.”

But there’s a little more to it than that. In May 2022, Jonathan Greenblatt, CEO of the ADL, announced that, “Anti-Zionism is anti-Semitism.” He also labeled groups that want equal rights for Palestinians in Israel as “extremists” and likened Israel critics to white supremacists. More from Boston Review:

…the ADL has consistently sought to undermine the left, leveling a charge akin to dual loyalty: that the American left’s calls for redistribution of power, its solidarity with global movements, and its prioritization of people over states threaten the very concept of the state. Indeed the ADL, in addition to its stated mission of shoring up U.S. support for Israel, is deeply loyal to the U.S. state. The second is that the ADL has waged a long, vigorous, and successful campaign, alongside AIPAC, specifically to characterize Arab American political organizing as dual loyalty.

Maybe this isn’t an organization that should be defining hate for US governments. We have the International Holocaust Remembrance Association (IHRA) for that.

In March South Dakota became the 35th state to codify the IHRA’s working definition of antisemitism. The law requires the consideration of the definition of antisemitism when investigating unfair or discriminatory practices.That definition includes the traditional elements of antisemitism but also inserts elements that could move the state of Israel under antisemitic protections. Consider the following from the IHRA’s definition:

  • Denying the Jewish people their right to self-determination, e.g., by claiming that the existence of a State of Israel is a racist endeavor.

  • Applying double standards by requiring of it a behavior not expected or demanded of any other democratic nation.

  • Drawing comparisons of contemporary Israeli policy to that of the Nazis.

A 2022 UK study published in Springer Nature found the following about the IHRA’s definition:

…pro-Israel activists can and have mobilised the IHRA document for political goals unrelated to tackling antisemitism, notably to stigmatise and silence critics of the Israeli government. This causes widespread self-censorship, has an adverse impact on freedom of speech, and impedes action against the unjust treatment of Palestinians. We also identify intrinsic problems in the way the definition refers to criticism of Israel similar ‘to that leveled against any other country’, ambiguous wording about ‘the power of Jews as a collective’, lack of clarity as to the Jewish people’s ‘right to self-determination’, and its denial of obvious racism.

Despite that effect, and despite the 2021 Hate Crimes Act, which provided more money and more programs to collect data on all “hate incidents,” there are still complaints that it all still isn’t enough because they don’t prevent “hate” but only address what takes place afterwards. To fix that, a precrime system will be necessary.

***

Predictive policing – which uses computer systems to help direct the deployment of police to crime hotspots – has been widely discredited as biased and worthless.

The Markup found that predictive policing does not work – at all. It took a look at efforts by Geolitica, known as PredPol until a 2021 rebrand, and its software that ingests data from crime incident reports and produces daily predictions on where and when crimes are most likely to occur. From The Markup:

We examined 23,631 predictions generated by Geolitica between Feb. 25 to Dec. 18, 2018 for the Plainfield Police Department (PD). Each prediction we analyzed from the company’s algorithm indicated that one type of crime was likely to occur in a location not patrolled by Plainfield PD. In the end, the success rate was less than half a percent.

It is also biased, despite efforts to make it less so. MIT Technology Review points out:

…many developers of predictive policing tools say that they have started using victim reports to get a more accurate picture of crime rates in different neighborhoods. In theory, victim reports should be less biased because they aren’t affected by police prejudice or feedback loops.

But a University of Texas study found this method still led to significant errors:

 For example, in a district where few crimes were reported, the tool predicted around 20% of the actual hot spots—locations with a high rate of crime. On the other hand, in a district with a high number of reports, the tool predicted 20% more hot spots than there really were.

While these predictive policing spatial models prove biased, what if to counter those criticisms you begin to roll out programs to “protect” minorities by preventing hate crimes? Could an approach that treats each individual as a collection of data points (including any “hate incidents”) be predictive of a future hate crime?

Efforts to do just that date back to at least the early 1970s. When UCLA tried to set up a center for the study of violence.The Center for the Long-Term Study of Life-Threatening Behavior was intended to re-think human functioning itself in terms of data and was going to compile behavioral data to understand crimes that were “in formation.”

The center never officially opened its doors, however, as it got caught in the backlash against psychosurgery when groups like the Black Panthers and Nader’s Raiders protested against it.

But the rethink of humans as a collection of data points that can predict crimes in formation never really went away, and is now inching closer to becoming a reality. What is Canada’s proposed law other than a method to use data to measure “dangerousness” and preemptively punish suspects?

As MIT Technology Review pointed out above, there are efforts underway to use victim reports to counteract bias, but the University of Texas study was still trying to use them to predict where a crime might occur and not who might commit the crime.

I should point out that it’s unclear what states are doing with all the info collected from reported hate incidents, particularly the details on the alleged perpetrators. I reached out to the California Civil Rights Division weeks ago to get an answer but have yet to receive a response.

There is a clear line of thinking that these hate incidents can be predictive of future crime, however. That’s what the Canadian bill claims. Back in 2019 NYU researchers claimed to use AI to show that “online hate” could be predictive of offline violence. Could all these efforts to gather data on hate “incidents” be laying the groundwork for precrime detention along the lines of what Canada is attempting?

For those who would like to see the adoption of a precrime system, one of the benefits of focusing on individuals and hate crimes is that it could help diffuse the bias criticism of predictive policing from groups typically suspicious of increased law enforcement powers. Indeed, many of the groups helping to implement the hate incident hotlines in US states are nonprofits focused on minority groups.

As the state efforts above show, the definition of what constitutes a bias or hate “incident” are slippery and many interested parties would like to shape that definition. Again, there are already hate crime laws on the books, and I have yet to encounter an explanation for why these laws are so ineffective that it’s necessary to encourage people to rat on one another in order to gather data on hate incidents.

Placed alongside burgeoning censorship efforts, it begins to make more sense. If we look at Canada’s effort to establish official pre-hate-crime law enforcement, it’s one that would mark the official end of free speech and lead to a dystopian society revolving around the fear of being targeted – either by an individual or AI.

Even without official precrime laws on the books, there are already ways that these efforts to combat “hate” are attempting to stifle speech. Naked Capitalism readers don’t have to look far for errors (or intentional targeting) in this system as Google’s AI targeted this site for “hateful content” among other alleged sins.

And there’s the issue with “hate.” It could mean a racist comment or action; it could also now refer to criticism of Israeli policy or a thought crime against the ruling class. It apparently does not refer to elite policy in California, for example, where the gap in life expectancy between the richest and poorest percentiles increased to 15.51 years in 2021 (which seems like the hateful result of hateful policies if you ask me). What happens if Californians begin to make hateful comments about that fact?

We don’t have to only look to fiction like Minority Report for answers. California’s own history provides a great example of the real use of these burgeoning programs to purportedly combat “hate.”

The California Criminal Syndicalism Act of 1919 prohibited speech that suggested the use of violence for political aims. It came at a time when workers were winning important battles in the class war raging across the state. California started locking up Wobblies en masse. As Malcolm Harris describes in his book Palo Alto:

Wobblies filled San Quentin, the Bay Area’s only prison, on bullshit charges that could hold them for up to 14 years. In Southern California, the police teamed with a resurgent KKK to bust the waterfront union, and the IWW was lucky if the cops decided to merely stand by and watch. …By the end of the decade, the state organization was jailed and beaten into submission.

Tyler Durden Sat, 04/06/2024 - 11:40

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The 5 most startling Chapter 11 retailer bankruptcies since 2020

The pandemic sent waves through the economy, and since its onset, many businesses have filed for Chapter 11 bankruptcy. These are five of the most surprising…

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When a business files Chapter 11 bankruptcy, that doesn’t mean it has declared itself kaput — far from it. 

Filing Chapter 11 is like sending out a SOS signal: It allows the business to keep operating while attempting to restructure operations and pay down its debts (unlike a Chapter 7 bankruptcy filing, which closes the company and liquidates its assets). The recovery rate of a business filing Chapter 11 is said to be anywhere between 10% and 40%.

But no two Chapter 11 bankruptcies are alike. You might be surprised to hear that some of the world’s largest companies — such as American Airlines, Marvel Entertainment, and General Motors — have filed Chapter 11 at one point, but through mergers, new revenue streams, or simply by operating smarter, all managed to crawl back to profitability. 

Other big names weren’t as fortunate: Funeral rites were observed for Lehman Brothers and WorldCom, for example, because they had been operating fraudulently — even though some argued, in the case of Lehman, that they were “too big to fail.”

How many businesses have filed Chapter 11 since the COVID-19 pandemic?

The COVID-19 pandemic, caused by the SARS-CoV-2 virus, not only made millions of people very sick; it also had a profound impact on the way we live, work, and shop. At the onset of 2020's stay-at-home-orders, hundreds of restaurants shuttered, including household names like Ruby Tuesday, California Pizza Kitchen, and Sizzler. 

According to U.S. Federal Courts, business Chapter 11 filings spiked in 2020 while Chapter 7 filings actually decreased. But as vaccines were developed and people returned to work and school, they also resumed their former shopping habits — in fact, mall traffic in 2023 was down only 5.8% compared to 2019, which is much better than it was in 2021, when it was off 15%. 

Yet more turbulence was felt in the years following the pandemic, as government stimulus from the CARES Act, which had helped many businesses make payroll and meet other operating expenses, expired in 2021.

Bankruptcy filings by chapter 2019–2023

Source: U.S. Courts

YearChapter 7Chapter 11

2023

261,277

7,456

2022

225,455

4,918

2021

288,327

4,836

2019

480,201

7,020

Through such choppy waters, we examine a few of the biggest-name retailers that went belly up  — and which ones have risen from the ashes under new management.

5 big-name Chapter 11 bankruptcies in retail

Rite Aid plans to close roughly 10% of its 2,300 locations in 2024.

FREDERIC J. BROWN/AFP via Getty Images

Rite Aid

It was the country’s third-largest drugstore chain — only Walgreens and CVS were bigger — but thanks to sluggish sales, mounting debt, and federal investigations into whether it illegally filled prescriptions during the opioid crisis, Rite Aid filed Chapter 11 in October 2023. 

Earlier in the year, the chain had reported a $241 million quarterly loss due in part to a reduction in revenue from COVID-19 vaccines and rapid tests. Rite Aid simply couldn’t keep up with the convenience of shopping at the pharmacies at big-box stores like Walmart, Target, and Costco. 

As part of its Chapter 11 agreement, the company secured $3.5 billion in financing and appointed a new chief executive, Jeff Stein, to lead its corporate reorganization. Rite Aid also planned to close 200 stores in 2024 but not before transferring customer prescriptions to nearby pharmacies. In addition, it gave its 45,000 employees the option to transfer to other stores “when possible.” 

Who would have thought that Bed Bath & Beyond would get scooped up by one of its biggest competitors?

Bed Bath & Beyond

Many people thought Bed Bath & Beyond’s days were numbered when it filed Chapter 11 in April 2023 — after all, it closed all 376 stores across the U.S., and its stock was terminated from the over-the-counter trading market. This came after reporting a quarterly loss of $393 million and on the heels of several years of declining sales, competition from online home goods retailers like Wayfair, and a snarled COVID-19-related supply chain

Plus, who could forget BBBY’s meme stock trading frenzy in January 2021, when Reddit contributors drove up prices 99%, only to come crashing back down? When the dust settled, Overstock bought the business for a blue-light special of $21.5 million in June 2023, then took its name and merged businesses. 

Bed, Bath & Beyond now sells kitchen, bath, and furniture completely online and has added more than 600,000 new products to its inventory.

J. Crew is using big discounts to lure back customers.

J. Crew

The first big retailer to capsize during the pandemic, J. Crew filed Chapter 11 in May 2020. But it wasn’t only the fact that retail sales in general withered at the start of COVID-19 — the Commerce Department reported a 50% decline in sales in March 2020 alone — J. Crew had also been saddled with $1.7 billion (that’s with a b) in long-term debt, which weighed heavily on its balance sheet even while its operations were profitable. 

The upscale lifestyle apparel seller received a $400 million line of credit from hedge fund Anchorage Capital Management, which became majority owner and, combined with additional loans from Davidson Kempner Capital Management LP and Bank of America, managed to convert its debt into equity, exiting bankruptcy proceedings that August. 

But J. Crew is not out of the woods. Ever since creative director Jenna Lyons left in 2017, it has yet to come out with a line of clothing consumers want to pay full price for, and Standard & Poor’s downgrade of parent company Chinos Intermediate 2 LLC from “stable” to “negative” in the third quarter of 2023 raised alarm bells. 

However, the preppy chain posted a 9% sales increase for its fiscal year ending February 1, 2024,  due in part to holiday sales, which slashed apparel prices by as much as 75%. Paradoxically, J. Crew just might now be one of the best stores to shop at for discounts.

The beleaguered clothing stalwart has ambitious plans for 2024.

Justin Sullivan/Getty Images

JCPenney

You’d think a company that survived two World Wars and made a cameo in "Back to the Future" could stand the test of time — and it just well might. Founded in 1902 by James Cash Penney as a dry goods store in Kemmerer, Wyoming, the chain expanded throughout the American West before introducing clothing to its lineup in the 1960s. 

Wisely venturing into the pharmacy business, launching a mail order catalog, and offering customers the option to make their purchases through credit paid off in spades, Penney’s peaked in the 1970s with more than 2,000 stores worldwide. But after decades of declining sales, accumulating a boatload of debt during the 2007-2008 financial crisis, and losing customers in droves to Target and Walmart (a familiar refrain), the COVID-19-related closure of Penney’s 800 remaining stores in early 2020 seemed like the final nail in the aging retailer's coffin. 

JCPenney filed Chapter 11 that May, only to emerge, phoenix-like, eight months later. The brand permanently closed 200 stores, restructured its $4 billion debt, and took on two new owners — they just happened to be the country’s largest shopping mall owners, Simon Properties and Brookfield Asset Management, thus ensconcing Penney’s place as a retail “anchor.” 

In 2021, Mark Rosen, formerly of Levi Strauss & Co., became CEO, and in 2023, he announced $1 billion worth of upgrades to the JCPenney website and app, as well as renovations of its brick-and-mortar stores. Here’s the cincher: Doing so wouldn’t require taking on any more debt. “We’re in a really strong financial position right now,” Rosen said.

The COVID-19 pandemic boosted Guitar Center's online sales but couldn't replace losses from its store closures.

AaronP/Bauer-Griffin/GC Images

Guitar Center

It’s hard to believe this mecca for rock n’ roll musicians was originally called Organ Center and sold church organs and small appliances. That all changed in 1964, shortly after The Beatles came to America, when one of owner Wayne Mitchell's vendors told him that he needed to buy Vox amplifiers in order to continue purchasing organs. 

Mitchell figured that if he was selling amps, why not stock a few guitars, too? They quickly sold out; Mitchell changed his store’s name, and the rest was history. Riding the hair metal craze of the 1980s that glorified guitar virtuosos like Eddie Van Halen, Guitar Center expanded into 30 locations by the 1990s. It also diversified its portfolio with acquisitions of Musician’s Friend, a mail-order musical instrument company; Music & Arts, which provided in-store music lessons; and in the early 2000s, partnered with Activision, the video gaming giant, on its smash hit “Guitar Hero.” 

But the good times and rock & roll didn’t last forever. Over the next decade, Guitar Center underwent a series of leveraged buyouts from private equity firms, each time saddling it with more debt. It tried cutting costs by stocking fewer name brands and laying off staff — many of whom had decades of experience that justified their salaries. 

Customers noticed the changes and simply stopped coming, shopping online instead. But right before the pandemic, Guitar Center staged a comeback, posting 10 straight months of sales growth, but while new audiences were found for guitars and online lessons during the COVID-19 lockdown, Guitar Center faced the double whammy of seeing $1 billion in debt come due and the closure of its brick-and-mortar stores. 

It entered Chapter 11 in November 2020, although its management team already had a strategy in place. It invested $165 million in the company while eliminating most of its debt. Guitar Center also issued $375 million in senior secured bonds and exited Chapter 11 that December.

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HKUMed’s innovative platforms rapidly track SARS-CoV-2 mutational impact on disease severity and identify effective therapeutic inhibitors

A multidisciplinary research team from the LKS Faculty of Medicine (HKUMed) and the Faculty of Engineering of the University of Hong Kong (HKU) has successfully…

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A multidisciplinary research team from the LKS Faculty of Medicine (HKUMed) and the Faculty of Engineering of the University of Hong Kong (HKU) has successfully developed an innovative screening platform to rapidly assess the impact of SARS-CoV-2 mutations on disease severity. Compared to traditional methods, this platform has achieved a speed improvement of up to 39 times. Additionally, the researchers focused on understanding how mutations affect syncytium formation, a process known as cell fusion in which infected cells fuse with uninfected cells. This research helps identify emerging viral variants that could pose a significant risk to public health. The team has also identified two FDA-approved drugs that can ease disease severity. The findings were published in Nature Biomedical Engineering [link to publication], and a patent application has been filed based on the research.

Credit: The University of Hong Kong

A multidisciplinary research team from the LKS Faculty of Medicine (HKUMed) and the Faculty of Engineering of the University of Hong Kong (HKU) has successfully developed an innovative screening platform to rapidly assess the impact of SARS-CoV-2 mutations on disease severity. Compared to traditional methods, this platform has achieved a speed improvement of up to 39 times. Additionally, the researchers focused on understanding how mutations affect syncytium formation, a process known as cell fusion in which infected cells fuse with uninfected cells. This research helps identify emerging viral variants that could pose a significant risk to public health. The team has also identified two FDA-approved drugs that can ease disease severity. The findings were published in Nature Biomedical Engineering [link to publication], and a patent application has been filed based on the research.

Background
The SARS-CoV-2 virus, which caused the worldwide COVID-19 pandemic, has been continuously evolving since its emergence. Spike protein mutations can lead to different degrees of infectivity and lethality. The spike protein plays a crucial role in viral infection by binding to human ACE2 receptors and merging with neighbouring uninfected cells to form syncytia, which contribute to virus spread and disease severity. Scientists have discovered that severe COVID-19 cases often exhibit syncytium cells in the lungs, providing evidence of the connection between spike-driven cell fusion and infection severity.

Large-scale screening to assess cell-cell fusion is challenging, as it requires a rapid way to measure the fusion process. Previous studies individually constructed and monitored spike variants to assess their potential to form syncytia, which was both technically demanding and costly. To address this, the research team used innovative screening methods and advanced genetic techniques to identify the specific genetic and cellular factors responsible for promoting syncytia formation. This research is crucial for developing effective interventions and treatments to block the fusion and potentially restrict virus spread.

Research findings
The team used a special system involving split green fluorescent protein (GFP), which produces detectable signals when cells fuse together. They combined it with a microfluidics-based system and large-scale mutagenesis to create a new platform for rapid screening and analysis of a wide range of spike protein variants and their fusion capabilities.

By studying the spike protein and its mutations, researchers have found that certain variants, such as the Delta strain, form larger syncytia than the original strain of the virus. They discovered that a single K854H mutation can transform the Omicron variant into a strain that forms fusions from a low rate to a high rate. Furthermore, some mutations found in the study were predicted to be as mutable as those seen in the previous variants, such as Omicron and Delta, revealing that these new mutations should be kept under surveillance as they could emerge in future viral evolution.

To enhance the efficiency of the screening process, the team developed a new strategy using size-exclusion selection to sort fused and unfused cells on a large scale, which enabled speedy screening. This method achieved over 80% in accuracy rate, comparing with the traditional approach.

Employing the size-exclusion selection strategy, the team conducted a genome-wide CRISPR screen and identified two cellular factors, AP2M1 and FCHO2, involved in cellular uptake mechanism, which contributes to syncytium formation. The researchers then tested two FDA-approved drugs, chlorpromazine and fluvoxamine, currently used for antipsychotic purposes, to inhibit cellular uptake. Experiments on hamster models showed that these drugs could inhibit syncytium formation induced by the spike protein and potentially alleviate disease severity.

Significance of the study
The significance of this study lies in its interdisciplinary approach, combining high-throughput CRISPR screening, large-scale mutagenesis, droplet microfluidics, and virology. The droplet microfluidics system enabled the study of cell-cell interactions in a high-throughput manner and provided high-resolution data. The paired-cell system has the potential to systematically profile the fusogenicity of various viruses, including HIV, RSV, Herpesviridae, SARS-CoV-2 and other coronaviridae that induce syncytium formation. The combination of high-throughput profiling systems and CRISPR screening led to the discovery of a potential therapeutic target to combat syncytium formation and reduce the severity of SARS-CoV-2 infections.

Professor Alan Wong Siu-lun, Associate Professor in the School of Biomedical Sciences, HKUMed, who led the research, stated, ‘These innovative systems enable us to rapidly track SARS-CoV-2 mutations on a larger scale and identify treatment options; they can also be broadly applied in the study of various pathological and physiological cell fusion conditions relevant to biomedical research, including cancer immunotherapy.’

Looking forward, he added, ‘The methods and knowledge gained from this study have the potential to contribute to public health efforts and provide insights into the development of therapeutic interventions for COVID-19 and other diseases involving cell fusion.’

About the research team
The HKU collaborative research team was led by Professor Alan Wong Siu-lun and Dr Gigi Choi Ching-gee from the School of Biomedical Sciences, and Professor Chu Hin from the Department of Microbiology, School of Clinical Medicine, HKUMed; together with Professor Anderson Shum Ho-cheung, Department of Mechanical Engineering, Faculty of Engineering. The collaborative research team also includes Charles Chan Wai-fong, Wang Bei and Dr Chu Hoi-yee from the School of Biomedical Sciences, and Dr Huang Xiner and Luo Cuiting from the Department of Microbiology, School of Clinical Medicine, HKUMed; and Dr Lang Nan and Mao Tianjiao from the Department of Mechanical Engineering, Faculty of Engineering.

Acknowledgements
This research was supported by the National Natural Science Foundation of China (Excellent Young Scientists Fund); the Centre for Oncology and Immunology, and the Advanced Biomedical Instrumentation Centre, under the Health@InnoHK Initiative funded by the Innovation and Technology Commission, the Government of Hong Kong SAR; and the Collaborative Research Fund under the Hong Kong Research Grants Council.

Media enquiries
Please contact LKS Faculty of Medicine of The University of Hong Kong by email (medmedia@hku.hk).


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