Levine on Wall Street: No News Is Bad News
Nothing is happening at Twitter
Two months ago Twitter sold some stock for $26 a share; last Thursday it closed at $73.31. So nice work everyone but I guess it's time to go home; the stock fell some 13 percent Friday on the back of nothing. Really nothing; the Wall Street Journal attributes the drop to "An analyst's downgrade and worries about the stock's valuation." The downgrade was from a Macquarie analyst, who two weeks ago initiated coverage on Twitter at Neutral with a $46 price target. A $46 price target with a $73 share price looks a bit more like a sell -- or, at Macquarie, Underperform -- than a Neutral, so he downgraded it to Sell on no news except the price. Literally the note says "nothing has changed" as the reason for the downgrade. The story here is that people bought Twitter until it got to $73 and then were like whoa whoa whoa $73 is a little rich don't you think? And then they sold it. I'm a pretty big believer in the efficient markets hypothesis but you've got to have a sense of humor about it or you'll go crazy.
European banks will eventually sell their bad loans
Here is a story about how U.S. distressed debt investors are starting to find opportunities in Europe. This is somewhat weird because it's practically 2014 and the relevant distress happened quite a while ago. The Financial Times quotes Viktor Khosla of Strategic Value Partners:
Normally five years after a crash like in 2008, pipelines of distressed deals keep shrinking. I’ve been doing this for 20-odd years and it’s the first time I find that, between year three and year five, our pipeline has so dramatically surged. It’s because European banks have been late selling.
The trick is that "until recently banks, under pressure to boost their regulatory capital, could not afford to crystallise the losses involved when selling impaired loans." So they carried distressed loans on their books at undistressed prices because recognizing the loss would have required them to raise more money in awkward circumstances. Now they've raised more money -- in part, y'know, by disguising their financial circumstances -- and are finally free to sell off the loans. It's important to recognize the possibility that this fact pattern can be both (1) pretty shady and (2) sort of the purpose of banking. Rather than a mark-to-market fire sale when things got bad, the banks held on to the loans, pretended everything was fine, and now, in a better capitalized world, can sell the loans to hedge funds in an orderly way.
Nothing is happening at Monte dei Paschi
Rickety ancient Banca Monte dei Paschi di Siena SpA was going to do a big rights offering to raise money to pay back its bailout from the Italian government, but then it didn't because some shareholders voted to delay the deal until May or so or never. Never if you believe Monte Paschi's fretting -- "management was pushing for a January stock sale to get ahead of other Italian banks that might need to raise capital" -- but the bank's main shareholder, Fondazione Monte dei Paschi di Siena, wanted the delay "to give the investor more time to repair its own finances." The foundation has put up its shares as collateral for bank loans, and doing the rights offering now would probably push the price down to the point where the banks would foreclose. And it doesn't want that, understandably enough. One occasionally interesting corporate governance question is, should managers care about their shareholders' personal situations? Like, management here decided that what's best for the bank was to sell shares in January, but that's apparently not what's best for the big shareholders. Of course here the shareholders could look out for themselves.
You can't do some things with soft dollars
The "soft dollar" rules basically formalize how brokers can legally pay investment advisers bribes for sending them business. So you're an investment adviser, you use a broker to trade in client accounts, the client accounts pay a commission to the broker, and the broker rebates a portion of that client's commission money to you, the adviser. The rules are that you can only use the rebate to pay for "such expenses as brokerage and research services that benefit clients," and not for, like, apartments in New York and payments to your ex-wife. Since money is fungible you'd think that this rule wouldn't be violated all that often -- use the soft dollars to pay for research and then use your other dollars to pay your ex-wife! -- but sometimes it is. And so last week the Securities and Exchange Commission fined Instinet, a brokerage, for paying $400,000 in soft dollars to J.S. Oliver, an investment adviser, most of which went to the ex-wife of J.S. Oliver president Ian Mausner "under the guise of employee compensation." Almost needless to say, "The payment was actually related to the Mausners’ divorce," and Instinet got in trouble for ignoring red flags including the fact that even the fake employment agreement that J.S. Oliver provided to Instinet "failed to indicate that Mausner's ex-wife had performed any work for J.S. Oliver after 2006."