Obviously I let the thread die since it was just me highlighting, making notes.. but recently there has been some great notes to make.. so please allow me to re-introduce Matt, at least for now:
2018-02-23
https://www.bloomberg.com/view/articles ... -on-tweets
Kardashian MNPI.
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> Shares of the Snapchat parent company sank 6.1 percent on Thursday, wiping out $1.3 billion in market value, on the heels of a tweet on Wednesday from Kylie Jenner, who said she doesn’t open the app anymore.
Yes well right, when you lose one of your biggest ... customers? suppliers? products? ... you should expect that to hurt your business. The result of that tweet -- "sooo does anyone else not open Snapchat anymore," asked Jenner, "Or is it just me" -- strikes me as entirely reasonable and predictable.
Hmm ... predictable. Reader Jianchi Chen emailed to ask a great question: "Would it be insider trading for Kylie Jenner to buy short term out of money put options on Snap and tweet out that she's no longer using Snap?" Insider trading, as I am constantly saying around here, is not about fairness; it is about theft. It is not illegal to trade on your own nonpublic knowledge of your own intentions. Warren Buffett can buy stocks before he announces that he's bought them, even though that announcement will predictably make the stocks go up. Activist short sellers can, and normally do, short a stock and then go public with their objections -- which can drive down the price of the stock.
So I am inclined to allow it, though I am of course neither your nor Kylie Jenner's lawyer. But as a way to profit from celebrity, shorting a company's stock and then being mean about its products on social media seems pretty easy, and the markets would be more amusing if someone tried it. Social media companies profit because their users provide content for free; I like the idea of the users profiting by deciding to stop.
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Nice! Would be interesting to see how effective this tactic might be against other "users are the product" companies.
2018-02-26
https://www.bloomberg.com/view/articles ... ed-his-bet
People are worried about non-GAAP pay parity.
So the average woman at JPMorgan makes just 1 percent less than the average man at JPMorgan? Hahaha no, quite the opposite, quite the opposite:
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they have clustered around 99 percent parity, after adjusting for factors such as job role, seniority and locale." It is a suspicious number. Really if you are doing the adjusting, you should get to 100 percent. If JPMorgan decided, based on her role and seniority, to pay a woman $500,000, and also decided, based on his role and seniority, to pay a man $800,000, then surely it also decided that she is getting paid 100 percent of what is justified by her role and seniority and that he is getting paid 100 percent of what is justified by his role and seniority. Therefore she gets paid 100 percent as much as him, as adjusted. No? Obviously if some third-party validator was doing the adjusting, you might expect its adjustments for role and seniority not to coincide with how JPMorgan pays for role and seniority. But JPMorgan is doing the paying, and it is also doing the adjusting. Why did it conclude that its own pay decisions were wrong? By 1 percent? Why did every other bank conclude the same thing?
One suspects that the answer is that if the banks all said "our women are getting paid 100 percent as much as men" then everyone would think they were lying. Especially when they also have to announce the much larger unadjusted pay gaps: so far 33 percent for Lloyds Banking Group Plc, 37 percent for Royal Bank of Scotland Group Plc and about 50 percent at Barclays. But 99 percent is as close as you can get to 100 percent while still quietly confessing that you pay women less. This way JPMorgan's head of human resources can say "We know we can always do more, and we will," and sound like she's being contrite about that 1 percent gap. (And not the much larger actual gap that takes into account the smaller number of women in senior positions.) If the adjusted number was 100 percent then how would they know they had to do more?
Really some bank should announce that the number is like 103 percent -- that its women, adjusting for seniority and role and so forth, are slightly overpaid relative to its men. The fact that they don't do this -- that the numbers are always slightly under, never slightly over, 100 percent -- is a good indication of how embarrassed they are about the whole adjusting process.
How cheesy.
2018-02-28
https://www.bloomberg.com/view/articles ... ig-secrets
Materiality.
How much money does YouTube make? It is a secret: Alphabet Inc., which owns YouTube, does not break out revenue for it separately. Alphabet's Form 10-K gets as granular as "Google properties revenue," meaning advertising revenue from Google search, Gmail, Google Maps, YouTube and other Google properties
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Alphabet views it that way: YouTube is just an undifferentiated bit of the great firehose of money coming out of its Google unit. Google views it differently: Sundar Pichai, the CEO of Google, "receives weekly and quarterly reports," says Alphabet, which "include disaggregated financial information for Google product areas, including YouTube." But Google is not a public company; Alphabet is, and "the financial information included in the weekly reports provided to Larry Page is limited to operating results for Google as a whole." And since Alphabet doesn't break out its YouTube results for Page, it doesn't have to break them out for investors.
This is partly a -- perhaps intended -- result of Google's restructuring into Alphabet, in which Google became just one operating unit (albeit the one that makes most of the money) in a broader company whose other units -- called "Other Bets" in its financial reports -- try to build driverless cars or end death or whatever. By making Google its own division with its own CEO, Google/Alphabet insulated Page from knowing too much about the details of Google's advertising business. No doubt this had mostly to do with his own enjoyment -- he'd rather spend his time thinking about human immortality than about preroll video ad targeting algorithms -- but it also has the effect of making Alphabet's financial statements less revealing.
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Here is a paper by George Georgiev of Emory called "Too Big to Disclose: Firm Size and Materiality Blindspots in Securities Regulation":
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Georgiev argues that this is bad for investors: "Materiality blindspots may undermine investor protection and corporate governance, including by diminishing the accuracy of security prices and by making inside and outside monitoring for fraud or suboptimal management practices more difficult."
He also argues that it can "in effect serve as a regulatory subsidy for bigness." If YouTube were a public company it would need to spend money on lawyers to draft hundred-page disclosure documents describing its business in detail; now it does not. If YouTube were a public company its competitors could read those disclosure documents and get useful information about its competitive positioning; now they cannot. It is one more factor pushing companies to get bigger by acquisition: YouTube is more regulatorily efficient as part of Alphabet than on its own.
Of course that is just one of many incentives for bigness, and most large tech companies that sell out to gigantic tech companies aren't doing it to avoid disclosing their revenue. But it does have the effect that they can stop disclosing their revenue, or at least that they can stop disclosing lots of things that would be material to them individually but are not material to the giant conglomerates that they join.
And so a market dominated by fewer larger more profitable companies will be a market with less information than one with more smaller more variable companies. Corporate disclosure becomes less interesting and revealing, and you can learn less from it, and so analyzing companies becomes less valuable. And so why not index?
Though I guess it's always been known that many groups in larger companies can be essentially startups, or get spun off. It's interesting to see reasons for different ways of structuring.
Expert networks.
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These statements sound pretty straightforward and normal, but what is strange about them is the distinction they draw between talking to an expert, on the one hand, and "work" or "due diligence" or "analysis," on the other. You see this sort of thing a lot in discussions of insider trading, particularly when prosecutors are doing the discussing. The idea is that there is some sort of quiet virtuous manual labor -- digging holes and filling them up again, or reading and highlighting 10-Ks -- that securities analysts are supposed to perform, and that makes markets more efficient, but that those analysts are somehow cheating and shortcutting the process when they just call someone up and ask him to tell them the answer.
This, it seems to me, is mostly the wrong way to think about securities analysis. You can never add information to the market just by reading 10-Ks; the information is already in the 10-K. The way to add information is to find things out that someone knows -- perhaps an insider, or perhaps just a guy who knows a lot about sausages -- but that no investors know yet. The work, the due diligence, the analysis, regularly consists of calling people up and talking to them. If you assume that those phone calls are cheating then you will have a distorted view of how markets work.
This reminds me of how I sometimes think of some.. investing?.. models ("straw that broke the camel's back" or rather "each piece of straw played a role in breaking that camel's back"; and that attribution fallacy is rampant, everywhere, all the time, such that attribution is essentially a misnomer). Sometimes it's useful/lucky to have tunnel vision.
Matt's musings could probably be a dedicated course of study for MBA students or CEOs.
2018-03-08
https://www.bloomberg.com/view/articles ... ly-grow-up
The crypto.
In the beginning, people assumed that if you called something a "cryptocurrency" and did an "initial coin offering," then it was not a "security" and didn't need to be registered with the Securities and Exchange Commission...
And so there was a second wave, of ICOs that confessed they were securities offerings, but that were offered only to accredited investors (or only outside of the U.S.) in order to avoid SEC registration...
And so you'd expect one day for ICOs to be done as registered securities offerings, where they file registration statements with the SEC and deliver prospectuses and generally behave like public stock offerings. And that day seems to be here:...
> To the maximum extent permitted by the applicable laws, regulations and rules the Company and/or the Distributor shall not be liable for any indirect, special, incidental, consequential, or other losses of any kind, in tort, contract, tax or otherwise (including but not limited to loss of revenue, income or profits, and loss of use or data), arising out of or in connection with any acceptance of or reliance on this Prospectus or any part thereof by you.
Nope nope nope nope nope nope nope! That is not how a prospectus works! The way a prospectus works is, you write it, and your lawyers read it and make sure it's right, and then you deliver it to investors so that they can rely on it. That's the whole point. You don't just hand the investors some random scribblings and say "here's some stuff but definitely don't rely on it." Come on.
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But the SEC quickly saw through that and declared that ICO tokens were securities. But they're also money transmitters. They're probably commodities and insurance and cigarettes and nuclear waste too. They're not less regulated than stocks; they're more regulated than stocks: They didn't fit in any existing regulatory category, so they can be claimed by all of them.
Guns.
A strange thing that has happened in modern American financial capitalism is that most gun companies are owned mostly by people who do not like guns. That is: The gun companies' biggest shareholders are mostly big index funds and quasi-indexed institutional investors, whose ultimate owners -- the people whose money the funds are managing -- have no special interest in guns, and whose managers -- the financial-industry professionals in New York and Boston and California and Philadelphia -- are probably less fond of guns than the average American. On the other hand the companies' customers are, by definition, more fond of guns than the average American.
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And to assuage their consciences, and their investors, they promise to sit down with the gun companies and ... you know ... talk about it? There are a lot of listening tours planned. BlackRock Inc. has "reached out to the major publicly traded civilian firearms manufacturers and retailers to engage in a discussion of their business practices." Capital Group is "engaging with gun manufacturers to understand their plans to ensure the safe use of these products." Wells Fargo & Co. -- not a gun-company owner, but the biggest lender to those companies and to the National Rifle Association -- "is reaching out to customers that legally manufacture firearms to discuss what they can do to 'promote better gun safety.'" (Vanguard Group, on the other hand, is an outlier, saying "We believe mutual funds are not optimal agents of social change.")
I kind of wonder what those meetings are like. I assume there's a line of mutual-fund managers at the door, and each one dutifully troops into the gun-company executive's office and asks "so, um, what are you going to do about gun violence?" And the gun executive says "literally nothing," perhaps while stroking a gun. And the index-fund manager shrugs helplessly and slinks out and sends in the next one.
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Reminds of how great something like motifinvesting.com (i.e. build your own fund/index) would be if not for the fees.
Peyton Manning "sold his stake in 31 Denver-area Papa John’s locations two days before the NFL and the pizza chain ended their sponsorship agreement late last month," and people tweeted at me like "isn't that insider trading?" First of all, I have no earthly idea why Peyton Manning would be privy to inside information about NFL sponsorship agreements. If he did have advance notice of the changes, though, I still think it would be a bit silly to analyze it as insider trading. This was a negotiated sale of a stake in a business, presumably with a sale agreement, representations and warranties, etc. The question is roughly, did the buyer ask about the sponsorship stuff, and did Manning make any misrepresentations? Most of the time when you sell something -- certainly when you sell a business that you own -- you know more about the thing than the buyer does, and that is expected, and the buyer's protections tend to involve representations and warranties and due diligence, not insider-trading-type notions of a level playing field. Securities law is the outlier in this respect, not the norm.
Cliff Asness and Aaron Brown released a paper on pulling the goalie in hockey, and its implications for investing. The simplest implication may be that pulling the goalie is always a negative-expectation move in terms of goals (if you pull your goalie then the other team's chances of scoring go up more than yours do), but can be positive in terms of wins (if you pull your goalie when down by a goal you increase your chances both of tying, which is good, and of losing by two, which is no worse than losing by one). Adding variance in the number of goals -- even with negative expectation for goals -- can improve your expectations for wins (or ties). Distressed-debt investors and options traders, of course, already knew that. "The most basic lesson," write Asness and Brown, "is to make sure you are thinking about the right risk."
Very cool to see it put explicitly! Would be great for this thinking to be more prevalent and incorporated into tooling, etc.
2018-03-09
https://www.bloomberg.com/view/articles ... den-orders
People are worried about bond market liquidity.
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One possible response here is that bonds aren't dice and no one said they were fair: If reality does not correspond to your model, then the problem is probably with your model, not with reality.
But there is a tempting other possibility, in that bond index levels aren't exactly reality. You could imagine a situation in which a bond trades at 100, and then the world gets worse, and people try to offload it at 80 but no one is willing to buy it for more than 70. So it doesn't trade, and the last trade on the tape is still at 100. Viewed in a certain light, its price has fallen by 30 percent. Viewed in another light -- the light of the tape -- its price has moved by zero percent. This could be a story about a kind of bond market illiquidity: Perhaps when bond prices should move a lot, they instead stop trading, and so the move in value never shows up in prices.
2018-03-16
https://www.bloomberg.com/view/articles ... essentials
Insider guessing.
We talked yesterday about what I called "insider guessing": The Securities and Exchange Commission and federal prosecutors brought charges against an Equifax Inc. executive who was allegedly able to figure out that his company had been hacked, and who sold a bunch of Equifax stock, but who had never explicitly been told about the hack. The SEC and Justice Department think that this would be insider trading, and I think I more or less agree; in any case, I said that "it's not gonna look great to a jury."
But perhaps that was wrong? A reader pointed me to this amazing 2010 case, in which the Securities and Exchange Commission accused a couple of railroad workers and their family members of insider trading on merger news. No one had told the railroad workers about the merger, but they made a good guess: "as part of the due diligence process, there were an unusual number of daytime tours of FECR’s Hialeah Yard involving a tour bus and people dressed in business attire," and they figured that if that many people in suits were touring their rail yard it was probably for sale. So they bought call options, and the SEC accused them of insider trading.
But the SEC lost at trial: In 2014, a federal jury sided with the railroad workers (though some defendants had settled before that). Juries don't issue written decisions so it's a hard to know what their reasoning was, but you can sort of guess at it. If you are confronted with workers in a rail yard who saw tourists in suits and concluded from that that they should buy call options on their parent company's stock, it is hard not to admire them a little. That's clever! I would be inclined to attribute their profits mostly to cleverness, and only secondarily to inside information. You could imagine a spectrum of insider trading, where if your boss just tells you "we are being acquired" and you trade, then that is cheating and illegal, while if you pick up only subtle clues about an acquisition and use bold leaps of deductive logic to decide to trade, then that is just good old capitalism and perfectly legal. That is certainly not legal advice, and I don't think it exactly captures how the law thinks about materiality and inside information -- though arguably it is reflected in the "mosaic theory" of insider trading -- but perhaps it is how juries feel about insider trading.
AI anecdotes.
Here is a glorious paper (and helpful Twitter thread of the highlights) about "The Surprising Creativity of Digital Evolution: A Collection of Anecdotes from the Evolutionary Computation and Artificial Life Research Communities." That's a mouthful of a title, but for our purposes, it's basically a list of times that artificial intelligence programs figured out ways to cheat on the tests their creators set for them. They're clever little devils!
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"You get what you measure," I once wrote, "but only exactly what you measure." I was talking about measuring and compensating humans' job performance, but if you incentivize AI programs they'll also give you what you measure.
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Saw this on twitter originally. Very cool, it's like breaking the Matrix; could humans think of a few similar ways to break our own reality?
Spurious correlations.
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Discovering correlation but failing to search for causation occurs rather frequently in most areas of human endeavor, as you can tell by casually glancing at the internet.
There is a tendency to attribute to artificial intelligence flaws that are categorically different from the flaws of human intelligence. Data mining is "'the kryptonite of our industry,' according to Gary Chropuvka, a partner at Goldman Sachs Asset Management’s Quantitative Investment Strategies," that sort of thing. But it seems to me that humans like spurious correlations at least as much as computers do; it's just that humans can't find as many of them as quickly as the computers do.
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This is a case of a more general thing I think, which is that the problems of computers in investing are mostly just the problems of humans in investing, but bigger and faster. Bigger and faster versions of old problems can feel like -- can be -- qualitatively new problems; things that are cute foibles when practiced by individual humans can be systemic catastrophes when scaled up by machines. Still it often seems to me a little unfair to blame the computers. If artificial intelligence is always going around finding meaning where there is no meaning, we shouldn't feel too superior; that's definitely something that it learned from us.
Increasingly likely the next major financial crash will be thanks to automation in financial markets?
2018-03-20
https://www.bloomberg.com/view/articles ... doing-them
Whistle-blowing.
I have found the best trade. Back in 2016, Bank of America Corp. paid $415 million to settle with the Securities and Exchange Commission over charges that its Merrill Lynch unit "misused customer cash to generate profits for the firm."
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"Two recipients together were awarded roughly $50 million and another about $33 million."
Now the SEC and the whistle-blowers' lawyer do not say who they were. But they had to have been fairly closely involved in these trades. After all, the SEC already knew about the trades and didn't have a problem with them. Whoever blew the whistle needed to be familiar with the design of the trades at a deep level: They needed to know not only the mechanics of what Merrill was up to, but also its economic purpose, and the difference between the purpose that Merrill was pursuing and the purpose that the SEC understood it to be pursuing.
It is all suggestive of this, which is the best trade:
- Cook up something that regulators shouldn't let you do but that you might be able to confuse them into letting you do.
- Confuse them into letting you do it.
- Do it.
- Get a big bonus.
- Go to the regulators and explain it again, but clearly this time.
- Have the regulators put a stop to it and impose a big fine.
- Get a big whistle-blower award.
I don't think that is exactly what happened here, but I don't think it's exactly not what happened here. To be clear this isn't an easy trade, and the hardest steps are 2 and 5: You have to accurately describe what you're doing both times, but once in a way that makes it sound good, and then later in a way that makes it sound bad. It is a challenge, but a lovely and exciting challenge, and one that is perfectly suited to a derivatives structurer. If you're just building the trades and not later blowing the whistle on them, you are not making things as interesting as you could. And you are leaving money on the table.
The used-car-salesman defense.
We have talked any number of times here about Jesse Litvak, the former Jefferies LLC bond trader who lied to his customers about how much he had paid for bonds. He would buy bonds for, say, 60, and tell the customer he'd paid 65, and sell them to the customer for 65.25, or whatever.
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in his appeal he argued that lying to customers about the price he paid for bonds was not a crime, because his lies were not material. For one thing, he argued, what mattered to the transaction was not the price that Litvak had paid but the price that the customer was willing to pay.
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Was that fair to used-car salespeople? I don't know, but here is a story about a used-car dealer who is being accused by a customer of Litvaking him. I mean, fine, he's a "classic" car dealer, but those are used cars too you know:
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Man, making up fictitious sellers in order to jack up the price on goods that you have in inventory yourself: It is just like bond trading.
There are some industries where it is obvious that you are dealing with a counterparty. If you go into the supermarket to buy milk, you don't think the supermarket is your agent with a fiduciary duty to get you milk at the lowest price it can find; you understand that the supermarket owns the milk and wants to sell it to you at the highest price it can get. There are other industries where it is obvious that you are dealing with a fiduciary. If you go to a lawyer to write a will, and she writes the will to leave all of your money to herself, and she defends herself by saying "what, I was just an arm's-length counterparty trying to maximize my revenue," she will not persuade anyone.
The financial industry is constantly causing itself and its customers angst because it always seems to be walking a fine line between being a counterparty and being an agent; banks are always trying to get customers to think of them as trusted agents, while reserving the right to act as rapacious counterparties. But the financial industry is not alone in this. Lots of sales industries work the same way. It's not like bond traders invented it. Used-car dealers do it too.