Bloomberg Review: Matt Levine's Money Stuff

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bryan
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Re: Bloomberg Review: Matt Levine's Money Stuff

Post by bryan »

2017-05-25
https://www.bloomberg.com/view/articles ... ld-calling
Quants quants quants quants.
There are two massive areas of job opportunity for data scientists: They can build models that help hedge funds trade stocks and bonds, or they can build models that help internet companies sell advertisements on web pages. Oh or they can build models that help cure cancer or whatever, but compared to financial trading and internet advertising that is a small and unprofitable niche. One of the most incredible feats of marketing of our century is that the internet companies have convinced a lot of people that selling advertisements on web pages is basically the same as curing cancer, while buying stocks and bonds is evil.
Truth!

But Matt doesn't really take this anywhere..
People are worried about unicorns.
Elsewhere, here's a 40-minute video of a man taking apart a Juicero machine, if that's of interest to you. "I ain't much of one for having a robot masticate my produce for me," he says, before tearing it apart.
I wonder how much money AvE is making? 500k subscribers but I don't think he has ads enabled. Certainly worth the sub; funny as fuck.


2017-05-26
https://www.bloomberg.com/view/articles ... ege-sports
Blockchain blockchain blockchain.
Here is Kin, the cryptocurrency for Kik, the chat app. I don't really understand why a chat app would need a cryptocurrency
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And Joe Weisenthal argues (on Twitter, and in the Bloomberg Markets newsletter) for a Facebook Inc. currency:
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Maybe social media companies and chat apps have replaced nation-states as the centers of power in the modern world; maybe they should be minting currencies.
One has to wonder what the point of AppCoins or CorpCoins would really be. I can imagine a few obvious things: 1) get into unregulated space and make some speculations 2) customize your coin transfer protocols to suit your needs 3) inflation and control of minting/seniorage 4) may attract speculators giving the corp some cash for some time that the corp otherwise would not get (i.e. float?) 5) like #2, the coin could be optimized for the use-case but still be compatible with other coins (sidechain of a standard coin, cross-chain exchanges, or worst case traditional exchanges) 6) or a big screw you to nation-states.

bryan
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Re: Bloomberg Review: Matt Levine's Money Stuff

Post by bryan »

2017-05-30
https://www.bloomberg.com/view/articles ... and-voting
No-vote shares.
Here is a speech urging the Securities and Exchange Committee and the U.S. stock exchanges to prevent companies from going public with non-voting stock, arguing that "the core concern here is corporate governance 101: Separation of ownership and control over time can lead to a lack of accountability, and accountability to owners is necessary for course corrections that are critical in our capitalist system." This is a popular view and fair enough.
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But that's not exactly what they want: They don't want to choose not to buy non-voting stock; they want someone else to prevent them from buying non-voting stock. They know that, if left with the choice, they'll keep buying non-voting stock, even though they think it is bad. They want a ban to protect them from themselves.

You can guess one reason: As institutional investors, they benchmark themselves against indexes of public stocks, and if they refuse to buy some big stocks, they will have a harder time matching or outperforming the index.
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"CII and a group of our members are approaching index providers to explore exclusion from core indexes, on a prospective basis, of share classes with no voting rights." If companies go public with non-voting shares, but those companies aren't included in the indexes, then for institutional investors' purposes it's almost like they aren't public at all.
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This is the sort of debate that gets intermediated by the market, and it was, and Snap won. The market is clearly willing to give Snap the terms that it wants. But the institutional investors want the regulators to reverse the verdict of the market and give them the opportunity to invest in Snap on their preferred terms, not its. Maybe that will work? But then of course the next Snap could just stay private longer. Snap went public because it could get the terms it wanted -- because investors were happy to give it those terms. Or sad to give it those terms, I guess, but gave them anyway.
And elsewhere Spotify was talking about skipping the IPO process and just getting listed on an exchange. I imagine in a decade we will have more numerous and complex types of "shares" that companies will issue.
People are worried about unicorns.
Here is a proposed "Tradeable Automated Term Sheet" for private-company seed fundraising, which would "explicitly state that the investors' shares can't be subject to restrictions on transfer (with minor exceptions) after the earlier of five years or a $100 million valuation." Private markets are the new public markets, but in private markets even quite big companies with diversified institutional investors sometimes put transfer restrictions on their stocks. But people really want private markets to be the new public markets, complete with free transferability and exchange-like platforms to create liquidity, and so the norms are shifting.
Private markets are the new public markets.


2017-05-31
https://www.bloomberg.com/view/articles ... d-revivals

not much


2017-06-01
https://www.bloomberg.com/view/articles ... nd-writing
I blame the index funds.
But the people voting for this particular proposal weren't traditional activists:
a source familiar with the vote said that major financial advisory firm BlackRock had cast its shares in opposition to Exxon management and that Vanguard and State Street had likely done the same.
The negative spin on that is that the diversified investors can create antitrust problems: They disfavor competition and favor fat-margined oligopolies; they promote shareholder interests at the expense of workers and customers.

But there are positive spins too. If you're an indexer, you internalize the externalities! If you just own Exxon Mobil, you might want it to sell a lot of oil and make a lot of money. If you also own, I don't know, coastal real-estate companies, you might care more about the environmental effects of your Exxon investment. Fund companies that own the whole economy might be better stewards of that economy than concentrated investors are.
Interesting!

bryan
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Re: Bloomberg Review: Matt Levine's Money Stuff

Post by bryan »

2017-06-02
https://www.bloomberg.com/view/articles ... oking-ipos
Cat beta.
For science, Bloomberg's Dani Burger built an index of companies with "cat" in their names, found that it was up 849,751 percent in a backtest, and shopped the idea to various quants, who gamely made fun of it. Cliff Asness
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One real lesson here is that a lot of factor outperformance comes from equal-weighting of teeny stocks. The cat index got most of its outperformance from "the basically untradeable Catskill Litigation Trust, which gained 79,000 percent this year (to trade at one penny)." We talked recently about a paper finding that most efficient-market-hypothesis anomalies seem not to replicate: Many anomalies come from equal-weighting microcap stocks, which allow researchers to find anomalies in data but do not allow actual investors to find actual profits in actual stock trading.
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AlphaGo's programmers taught it Go intuition, but then it developed its own Go intuition that surpassed their own, and it went and found moves for which there was no (human) Go intuition -- and it won.
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The first stage in investing was that people had economic intuitions and acted on them: "This company seems good, so I'll buy it." Later still, they had economic intuitions, and programmed computers to act on them: "Companies with low valuations are cheap, so I'll have a computer look for them and buy them." The next phase is for the computers to have the intuitions, and act on them, in ways that the humans can understand: "The computer has found a parakeet factor that predicts outperformance, and I can sort of understand the neoclassical and behavioral foundations for the parakeet factor, so I'm letting the computer run with it." But one can imagine a final phase in which the computers have intuitions that are not explicable in human-intuitive ways: "The computer is buying cat stocks. I don't get it. But the computer has a pretty good track record so whatever."
The former point is something I am interested in: the capability for a "typical person" to act on some (investment) strategy.

Something works in theory, but is not really possible in practice. The theory/model is not taking into account appropriate factors.

The later point is quite interesting and I would love to own some shares of a machine learning hedge fund.
Blue Apron IPO.
Blue Apron Holdings, Inc., filed to go public yesterday, with net losses of about $55 million in 2016 and $52 million in the first quarter of 2017. I have a general mental model of the modern financial ecosystem in which companies basically fund their development and expansion with the limitless money available in private markets and then, once they are mature businesses, they go public to make it easier to return money to shareholders. But that model is not universally applicable, and some of the big recent initial public offerings -- Blue Apron, and Snap Inc. before it -- seem to have the more traditional purpose of actually raising money. Blue Apron, at least, seems like it could use the cash.

Also like Snap, Blue Apron is going public with a class of nonvoting stock, though unlike Snap it's selling voting stock in the IPO:
So private markets are the new public markets, mostly. I guess ICOs will be the new private, er public, er whatever, markets; until they get beat down by the SEC or completely escape regulation enforcement.
Bitcoin swaps.
basically a summary of: http://www.coindesk.com/shapeshift-brea ... o-product/
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They don't require any action in the real world, just exchanges of cash flows (or cryptocurrency flows), so the whole thing can just happen on the blockchain. On the other hand they are not exactly the most inspiring or world-changing use case. If the upshot of blockchain-based smart contracting platforms is that you can ... buy bitcoins synthetically? ... then that's not that impressive. You could just buy bitcoins directly, on their own blockchain.
Haven't heard of this! Pretty cool and much easier than having to download an entire blockchain per coin you want to hold, personally. May be tempted to try it out.

Previously, ShapeShift is a service/mechanism you can use to do cross-blockchain swaps, as I understand it. It works but there is a cost 1-10% afaik (mostly hidden). The major selling point of this service, as you hear it from users, is that it increases anonymity of the coins you hold/swap. Instead of having a central exchange that is regulated, requires KYC, keeps logs of your trades, you have an API and optional website from ShapeShift that does it. I'm not sure of the specifics and how reliant it is on ShapeShift servers to work. I fully expect the SEC or someone else to try to kill ShapeShift..
People are worried about bond market liquidity.
Nah, actually, people are very excited about the bond indexing business:
Indexes are increasingly important in the debt market, where there’s less trading than in stocks or futures. Getting into a benchmark often means a company’s bonds are far easier to buy and sell. Given that investors are shifting away from active strategies in favor of just buying whatever’s in an index, these metrics are more attractive to exchanges, which can create new sources of income by introducing futures contracts or ETFs linked to the indexes they own.
Bond market are even less likely to be efficient? I mean, obviously yes if liquidity has anything to say about that. Kind of makes you want to sell off all your bond index funds.


2017-06-05
https://www.bloomberg.com/view/articles ... niche-etfs
Venezuela.
But one thing that we talk about a lot around here is the human construction of investment indexes. The central idea of indexing, of passive investing, is that you own the entire universe of assets rather than making choices about what to buy. But in practice it's never that simple. Most actual indexes aren't really "the entire universe of assets"; they're a particular subset of that universe, U.S. large-cap stocks or emerging-market bonds or whatever. And even within that subset, the membership criteria have to be defined by a human, with some room for judgment calls. And increasingly judgments by index constructors are overtaking judgments by investors in importance: If investors give up their agency to index providers -- if the index providers are the only people actually making decisions about governance or profitability or morality -- then the index providers had better make good decisions.
The future of passive.
The central idea of indexing, of passive investing, is that you own the entire universe of assets rather than making choices about what to buy, and also it's cheap. I mean: You just buy all the stocks on the list, and then you stop. There's no need to hire brilliant analysts and portfolio managers and pay them millions of dollars to pick stocks. There are some pretty significant economies of scale: One person can pick all the stocks for a $40 billion index fund as easily as for a $40 million index fund, and doesn't need to be paid 1,000 times as much. So it is not that surprising that BlackRock Inc., Vanguard Group and State Street Corp. combine for 83 percent of the U.S. market for exchange-traded funds. ETFs are mostly passive vehicles, passive investors want low fees, and scale is how you get low fees.
83%! Hot damn!
Blockchain blockchain blockchain.
Scorer thinks that the main benefit of using a blockchain "is the high level of operational resilience it might offer by avoiding a single point of failure":
This resilience comes at a cost: you only get the full resilience benefits if you’re willing to allow multiple parties (i.e. transaction validators) to manage transactional data; which raises significant privacy challenges.
The main solutions are "to not include sensitive data on the shared ledger," which "may limit the extent of any resiliency benefits" (if the shared ledger doesn't include actual transaction details, it's not really usefully shared), or to include the data but fully encrypt it, which "presents a significant challenge in asking a group of participants to agree on the validity of transactions, without allowing them to see the full details."
So something like Zcash.

bryan
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Re: Bloomberg Review: Matt Levine's Money Stuff

Post by bryan »

2017-06-06
https://www.bloomberg.com/view/articles ... -bathrooms
Spoofing, etc.
For instance, if the author discusses his time as a trader at an investment bank and says that he was "uncomfortable with some of the things I witnessed/experienced," an alert regulator might call him up and ask: Well, what, specifically? Was it mortgage fraud? Insider trading? Spoofing?
"Soon" we will have programs doing most of the SEC/FBI's work.. In this instance it seems it is spoofing, which I had no idea was explicitly illegal as part of Dodd-Frank. Weird..
People are worried about bond market liquidity.
ETFs that include large amounts of those particular bonds might suddenly plunge in price. Investors now buying up ETF shares might not realize that danger, thus leading to general overpricing.
One note to self I don't think I'll ever get to is looking into some strategies hedge/active funds have employed the last few years which have been performing poorly (and jumping in, hoping to catch the knife or add to the bounce).


2017-06-07
https://www.bloomberg.com/view/articles ... erty-taxes
Banco Popular.
he lender will acquire Popular for 1 euro after its stock and shares resulting from the conversion of its riskiest debt and Tier 2 instruments were wiped out, imposing losses of about 3.3 billion euros on the bank’s securities holders.
If you had 100 more bank resolutions, you wouldn't want them all to go like this. You'd want some discrimination. You'd want a bank to fail while keeping its Tier 2 securities intact: Otherwise, why would investors pay more for Tier 2 securities than for Additional Tier 1s? You'd want a bank to fail with a haircut on its senior debt: Otherwise, investors will treat bank senior debt as risk-free. But these are all advanced moves; first the Single Resolution Board needs to get the basics right.
Yay.
Is property theft?
If anyone's ownership of anything is a monopoly problem, then index funds' cross-ownership of multiple stocks in the same industry is, trivially, a monopoly problem. But in that case, the problem cannot be solved by banning index funds; the only solution is banning property. So!
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We propose a remedy in the form of a tax on property, based on the value self-assessed by its owner at intervals, along with a requirement that the owner sell the property to any third party willing to pay a price equal to the self-assessed value. The tax rate would reflect a tradeoff between gains from allocative efficiency and losses to investment efficiency, and would increase in line with expected developments in information technology.
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There is self-evident ickiness there. Like your house? Great, you have to sell it if a higher bidder comes along. Or you can just put a really high price on it, to keep it in the family, but then you have to pay much higher taxes.
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This seems like an overwhelming problem with the system: Humans would spend essentially all of their time filling out frequent valuation self-assessments for all of their possessions. It seems like I am kidding but no that is literally the proposal. But Posner and Weyl have a solution, and it is one of the most amazing paragraphs I have ever read, something that Borges would be proud to have written:
Current owners would have to report values with some frequency for all of their possessions, presenting a tradeoff between convenience and accuracy. If they must report self-assessed valuations frequently, they must undergo the trouble of thinking about how much they value something and of recording the valuation, but if they report infrequently, then valuations will become inaccurate as tastes and budgets change. One approach would be for taxes to accrue in continuous time based on an annualized tax rate, with individuals having the right to change their valuations at any point in time. This system could be managed through a web interface accessible, for example, by a smartphone application or a web browser. A well-designed interface would likely automatically retrieve information from tracking devices of the sort associated with the “Internet of Things,” to help the owner keep track of her possessions. It would be linked to her methods of electronic payment, so that her purchases would automatically be added to the cadaster, at which point she would be asked to assign a value to them. While some individuals would want to carefully weigh each valuation, a sensible system would allow for plug-ins from third parties, that would offer advice to participants about valuing goods, or default valuations, in an automated way using collaborative filtering and other techniques that form the basis of the ubiquitous recommendation engines. When an owner began to tire of a piece of property, rather than undertaking large expenses to market and sell the property, she could just begin to lower its price on the cadaster, and eventually someone would take the property from her. Indeed, she could use a program that gradually reduced the price until a sale took place, in effect, conducting a Dutch auction, with the rate of reduction reflecting the owner’s reservation price, liquidity needs, and the prices of other comparable goods in the market.
Is that not gorgeous? We often think of abolition of private property rights as a form of socialism, but this is the abolition of private property rights as a form of hypercapitalism: Property is abolished in favor of pure markets; you don't own anything permanently because you are constantly buying and selling everything. Your pen is on the Internet of Things, and if you tire of your pen you just implement a third-party algorithm to slowly lower its valuation until someone comes along and buys it from you. (Couldn't be simpler!) Property rights would be limited with the result of turning all of life into constant commercial calculation, infusing all of our actions with prices. On the blockchain. Through a web browser.

Ha, isn't that our future? With or without Posner and Weyl's "Harberger tax" approach, the "sharing economy" -- where everything is rented rather than owned -- and the blockchain -- where everything's price is available to everyone in a shared public record -- could land us in much the same place. You don't have to be a socialist to embrace this future; it's the cutting edge of capitalism.
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Here is Steve Randy Waldman arguing for a similar approach to patents and urban real estate, noting that "the social cost of excluding alternative uses varies dramatically between resources." One tech company's ability to prevent another from using rounded corners may be socially harmful, and we might want to rethink how we administer that right. My ability to prevent you from taking my pen, though, seems really socially useful! It's kind of how we have a society.
Again, not sure if the future will be cool as hell or depressing as hell.. Definitely interesting as hell!

bryan
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Re: Bloomberg Review: Matt Levine's Money Stuff

Post by bryan »

2017-06-08
https://www.bloomberg.com/view/articles ... s-and-cows
Banco Popular.
Oh, about that 1 euro. "I assume the Tier 2 holders won't, like, actually split that one euro amongst themselves," I said yesterday. I was right!
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The sale price of the entity shall be distributed in the following order and form:

To pay all reasonable expenses that have been incurred by the SRB and the FROB in relation to the preparation of the disposition of this resolution and the transfer of shares, in conformance with article 20.6 of EU Regulation No. 806/2014 and Article 25.4 of Law 11/2015.
To the holders of Tier 2 capital instruments ...
I assume that the regulators will submit an itemized list of expenses incurred in winding up Popular, and that list will come to more than 1 euro, and the 1 euro will be paid to the regulators, and the Tier 2 holders won't get any of it. It would be funny if the expenses list came to, like, 95 cents (some photocopying?), and the Tier 2 holders got to split the remaining 5 cents. But I would not hold my breath.
Heh.
Paul Singer.
I tend to take a fairly efficient-markets-ish view of finance, and one tenet of that view is that if you want higher returns, you have to take higher risks. But I am not dogmatic about putting that in quantitative terms
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Much more generally, behavioral economics suggests that there are some ways to obtain higher returns with lower volatility, but that people do not choose those ways because they find them psychologically unpleasant. If you are willing to take the psychological risks, then you should be able to obtain higher returns with lower volatility. These higher returns will not be arbitraged away, because the psychological risks are sufficiently daunting to deter most arbitrageurs. A basic trick in financial markets -- in life -- is to find something that everyone else finds unpleasant and that you don't mind, and then press your advantage.
This is really true of ERE-minded folks, I think.
Structured Operations.
I have always been fond of financial uses of the word "structured." It always feels somehow euphemistic. Everything is structured, really; the things that are called "structured" are just a bit more structured than everything else. Why are they so structured? Oh, you know, for reasons.
:lol: :lol: :lol:


2017-06-09
https://www.bloomberg.com/view/articles ... -arbitrage
Skin in the game.
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but do they? The most important lesson is probably that you should invest with a hedge-fund manager who doesn't want your money, but that is hard to do.
Preach.
Aramco and indexing.
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"Concern has grown that a UK listing would mean the state oil company becoming a member of the FTSE 100 index, making an arm of the Saudi state an automatic holding for millions of pension funds," but that concern seems to have been averted. But imagine if Saudi Arabian Oil Co. does go public in the U.K. at some of the numbers that have been batted around, like a $2 trillion valuation and a 5 percent ($100 billion) free float. The combined market capitalization of the FTSE 100 is about 2 trillion pounds. If you are an investor who wants passive exposure to large-cap U.K.-listed companies -- if you just want to own "the market" -- it has to feel a little weird to exclude a U.K.-listed company that is as big as the rest of the market combined.

Oh of course there are good reasons to keep Aramco out of the FTSE! (Such as the FTSE requirement that index companies have at least 25 percent free float.) But those reasons are choices; they are distinct from the classic passive-investor desire to avoid complexity and underperformance by just owning the whole market.
Index things.
Blockchain blockchain blockchain.
The kids these days, they go to the business schools, and they say "blockchain!", and the business schools say "blockchain?", and the kids say "blockchain!", and the business schools say "block ... chain?", and this happens:
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I think if I were a business school professor I would teach a course called Fintech 101, and people would show up on the first day and I'd be like "it's called Microsoft Excel, ever hear of it?" Actually no I am kidding, if I were a business school professor I would teach a course called "Cool Finance Stuff." There'd probably still be a blockchain unit, I'm sorry.
:D

bryan
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Re: Bloomberg Review: Matt Levine's Money Stuff

Post by bryan »

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:
...
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
...
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.

...
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.

...
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.
...
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.
:lol:
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.
...
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.
...
:lol:

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.
...
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!
...
"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.
...
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.

...
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.
...
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."
...
"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:
  1. Cook up something that regulators shouldn't let you do but that you might be able to confuse them into letting you do.
  2. Confuse them into letting you do it.
  3. Do it.
  4. Get a big bonus.
  5. Go to the regulators and explain it again, but clearly this time.
  6. Have the regulators put a stop to it and impose a big fine.
  7. 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.
...
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.
...
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:
...
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.

suomalainen
Posts: 979
Joined: Sat Oct 18, 2014 12:49 pm

Re: Bloomberg Review: Matt Levine's Money Stuff

Post by suomalainen »

I can't remember when exactly I started reading Matt, but it was when he was at Dealbreaker. He used to write these extraordinarily in-depth articles about very complex finance topics. One of my favorites was about the derivative that was too beautiful to live. I think it was a derivative written by Credit Suisse for its own bankers (as a bonus) because it was full of crap that no one else would buy. ha ha ha. Good stuff. Now at Bloomberg View in "money stuff", the first entry or two tends to get into more depth, but I miss the crazy long articles with a dozen footnotes, etc. They must've gotten fewer clicks per [unit of time] writing or something. Anyway, I agree that he's well worth following. He's incredibly smart, but cuts through the hocus-pocus and the bullshit mysticism that many investors and writers seem drawn to.

bryan
Posts: 1061
Joined: Sat Nov 29, 2014 2:01 am
Location: mostly Bay Area

Re: Bloomberg Review: Matt Levine's Money Stuff

Post by bryan »

2018-03-28
https://www.bloomberg.com/view/articles ... rgin-loans
Corporate equity derivatives.
...
Anyway the point is that if someone says to you "huh a bunch of banks did a derivatives trade that lost them a billion dollars? Isn't the Volcker Rule supposed to stop that?" you should laugh and pat them on the head and say no, of course not, of course not, the Volcker Rule is about proprietary trading, and this is not that at all. This is just about the banks having a billion dollars of exposure with their own money to the stock of Steinhoff, but it's totally different.
SEC vs. investors.

A well-known oddity about securities fraud lawsuits is that they tend to consist of investors suing themselves. If you are a shareholder of a public company, and you think that company lied to you to trick you into buying the shares, you can sue, and if you win then the company will pay you money. But you are a shareholder, which means that you are a part-owner of the company, which means that the money the company pays you will be your money. You'll just have to give a big chunk of it to your lawyers. It seems a little pointless. Of course there are mitigating factors: The class of aggrieved shareholders may not perfectly overlap with the current shareholders, and they may be able to recover some money from the company's insurers, or from its directors and officers personally. Still it is an uncomfortable system.

But it could be worse! For instance, the Securities and Exchange Commission sometimes sues a company for securities fraud, and wins (or settles), and takes a bunch of money from the company as a penalty. In a sense this is fine: The company did a bad thing, and the SEC is in charge of punishing it, and the monetary penalty is the punishment. But in another sense it is frustrating for shareholders: The specific bad thing that the company did was defraud shareholders, and the SEC's punishment is to take more money away from the shareholders. As a vindication of the public policy against securities fraud it is okay I guess; as a vindication of the rights of shareholders not to be defrauded it is kind of backwards.
...

bryan
Posts: 1061
Joined: Sat Nov 29, 2014 2:01 am
Location: mostly Bay Area

Re: Bloomberg Review: Matt Levine's Money Stuff

Post by bryan »

2018-04-25
https://www.bloomberg.com/view/articles ... een-hacked
Yahoo!?

Here is some pretty disclosurey disclosure:
...
from the risk factors in Yahoo! Inc.’s Form 10-K for 2014, filed a few months after Yahoo discovered that it had suffered a massive security breach, and a few years before Yahoo publicly disclosed that breach. Imagine if we got hacked, said Yahoo, after it had been hacked. That would be really bad for our stock price, it said, about the hack, which had happened, and which turned out to be bad for its stock price. It is a perfect example of a certain kind of lawyerly thinking: If a bad thing has happened, and you don’t want to disclose it, but you do want to be able to say that you had disclosed it, why not disclose that the bad thing is hypothetically possible, so that people are theoretically on hypothetical notice about it? It is … not a great approach.
...
That last quote is from the Securities and Exchange Commission, which yesterday fined Yahoo — well, actually, Altaba Inc., the entity formerly known as Yahoo — $35 million for sitting on knowledge of the data breach for almost two years. Not only did it not disclose this material event, but Yahoo's filings, as the SEC put it, “misleadingly suggested that a significant data breach had not yet occurred, and that therefore the company only faced the risk of data breaches and any negative effects that might flow from future breaches.” If they just hadn’t mentioned data breaches
...
:twisted: :shock: :roll: :lol: But really, could be a cool project to download some public info like 10-Ks and track changes (e.g. with git). You could try to decipher signals from the deltas.

2018-04-27
https://www.bloomberg.com/view/articles ... sciousness
WeWork.

...
And second, rather than being valued like a real-estate company, it gets valued like a hot tech startup — “the sharing economy,” ping-pong tables, etc. — so it can raise gobs of money from SoftBank Group Corp. at a $20 billion valuation without ever getting particularly close to profitability. And look at all these words:

> Indeed, to assess WeWork by conventional metrics is to miss the point, according to [Chief Executive Officer Adam] Neumann. WeWork isn’t really a real estate company. It’s a state of consciousness, he argues, a generation of interconnected emotionally intelligent entrepreneurs.

Really, what sort of multiple would you put on a state of consciousness?
...
But the second innovation is great. For one thing, it is great for the obvious reason: If you can get into a traditional mature highly competitive business, call yourself a tech startup, and get a multibillion-dollar valuation based on potential rather than cash flow, then you have achieved a profound arbitrage and really ought to be rewarded for it. But it also helps solve the first problem: WeWork’s tenants don’t have to pay two profit margins, because WeWork’s investors give it tons of money which it can then spend on giving tenants free rent. In a loose sense, WeWork’s business model is getting SoftBank to buy beer for software workers. Which is fine!
...
The particular catalyst for much of the outrage is that the bond offering documents included a financial metric called “community adjusted Ebitda.”
> from the Wall Street Journal:
>It called the fully adjusted number “community adjusted Ebitda,” by which it subtracted not only interest, taxes, depreciation and amortization, but also basic expenses like marketing, general and administrative, and development and design costs. Those earnings were $233 million, WeWork said.
> “I’ve never seen the phrase ‘community adjusted Ebitda’ in my life,” said Adam Cohen, founder of Covenant Review, a bond research company.

Well, sure, Mr. Covenant Review, but I bet you’ve never reviewed the covenants of a state of consciousness either.
:lol: :lol: :lol:
No one reads 10-Ks.

...
This trope annoys me a little, given my efficient-market sympathies. If something is in the 10-K, that means it is (1) backwards-looking and (2) public. Markets are forward-looking. The way to beat the market is to have information and analysis that no one else has. The point of the market is to add information to prices. It is nice that everyone has access to the same basic shared set of information in the 10-K, but don’t pat yourself on the back too hard just for reading it, you know?

So I have mixed feelings about this paper by Lauren Cohen, Christopher Malloy and Quoc Nguyen with the delightful title “Lazy Prices,” which finds that when companies make significant changes to what they say in their quarterly and annual filings with the Securities and Exchange Commission, those changes have predictive value, usually bad:

> Changes to the language and construction of financial reports also have strong implications for firms’ future returns: a portfolio that shorts “changers” and buys “non-changers” earns up to 188 basis points in monthly alphas (over 22% per year) in the future.

On the one hand, the virtuous 10-K readers are right, and I am wrong, about the value of reading the 10-K: It apparently contains information that will allow you to beat the market! On the other hand, the virtuous 10-K readers are either less numerous, or less careful readers, than you’d think:
...
The paper mentions the example of a medical-products company that in 2010 suffered a recall of a key device; its annual report for 2009, filed a few months before that recall, showed significant changes in the wording about that device. But those changes weren’t, like, “it’s gonna be recalled.” Nor, to be fair, were they just nondisclosures like Yahoo’s. They were changes that look helpful in retrospect: changing “additional charges … may be required” to “substantial additional charges, including significant asset impairments … may be required”; adding a sentence about how various regulators “have each increased their enforcement efforts” relating to the device. If you focused on those changes, you might have thought, “huh, something is up, there's more risk relating to this device than I had thought.” But you might just as reasonably have thought “ugh, lawyers, always adding more words to be more cautious.” If annual reports are filled with enough hypothetical warnings, it is easy to miss the real ones.
Dang, I guess my idea from yesterday is already being done? :D

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