Levine on Wall Street: The Oil Plunge and the Community Banker
Markets are scary.
Brent crude fell below $50 a barrel for the first time since 2009, and the stock market has been down every day so far this year, such as it is. This is perhaps an unexpected correlation, since low oil prices tend to be good for consumers, but Bank of America points out that low oil prices might be hurting the market because of expectations of a drop in capital expenditures. A Goldman research report in December pointed out that one-third of capex by S&P 500 companies is in the energy sector: Basically, to the extent that we build things in this country, it's mostly oil pipelines. And now, not so much. Here's a roundup of winners (Hong Kong, consumers) and losers (Vladimir Putin, Venezuelan ice cream makers) from the oil plunge, which also contains this delight:
If the price falls past $39 a barrel, we could see it go as low as $30 a barrel, said Walter Zimmerman, chief technical strategist for United-ICAP in Jersey City, New Jersey, who projected the 2014 drop.
Cool, cool. Elsewhere, "Treasury bonds are rallying fiercely," perhaps not a good sign for growth expectations.
The Fed has its community banker.
It was important for the Fed to have a community banker, and now it has one, Allan Landon, whom President Obama nominated to the Fed board yesterday. Landon ran Bank of Hawaii from 2004 to 2010 -- "America's Best Bank" in 2010 -- just after it was run by Michael O'Neill, who is now the chairman of Citigroup. Here he is sporting a Hawaiian shirt, a bachelor's degree in accounting, and AOL e-mail address. After Bank of Hawaii, Landon was involved in some unpleasantness at the Federal Home Loan Bank of Seattle, and was a partner at an investment firm named "BanCapital" for some reason; if I ran an investment firm I would not be too keen on banning capital. Before Bank of Hawaii, Landon was an auditor at Ernst & Young for 28 years, where he "was the lead audit partner for several major national and international financial institutions," which is actually sort of cool experience for a banking regulator, though less obviously relevant for setting monetary policy, but here we are. On the other hand, the "Federal Reserve named staff economist Thomas Laubach to the powerful role of director of its monetary affairs division," and his Ph.D. is from Princeton. Elsewhere, Alexis Goldstein is skeptical about the American Banker's Association's claim to be "America's hometown bankers," arguing that the ABA mostly represents the interests of big banks like JPMorgan and Citigroup, though to be fair I live in New York and all the evidence is that those are my hometown banks. Every bank is someone's hometown bank, really.
Bill Gross has long been known for writing monthly Investment Outlooks that begin with lightly eroticized musings on cats or weight loss or nursery rhymes, meandering for a few paragraphs before a jarring transition to bond markets. But his Outlook this month for Janus reads like, you know, an investment outlook? It's about bond markets? Sure he says that "the king has no clothes, or at least that he is down to his Fruit of the Loom briefs," in the second paragraph, but basically the whole thing, from the very beginning, is about the economy and asset class returns. Perhaps his New Year's resolution was to get an editor. Anyway he's not especially bullish on the economy or the markets, saying that "the good times are over" and that an inflection point will come in the next 12 months. So far so good on that prediction, I guess. Elsewhere in Bill-Gross-related editorial judgment, Pimco "has removed from its website the quarterly investment reports of two large mutual funds that were managed by William H. Gross before he was forced to leave the firm last year."
Cliff Asness on shareholder value.
There's a pretty common intuition that public markets make companies too focused on short-term earnings maximization rather than on building long-term value. This intuition leads to things like startups with 11-digit valuations that don't go public to avoid the short-term whims of the market, or criticism of activist investors who supposedly seek only a short-term stock-price pop rather than long-term improvement in company operations. The problem with this intuition is that it is inconsistent with the efficient markets hypothesis: If you think that stock prices incorporate expectations of future returns, then there should be no such thing as an action that destroys long-term value but causes a short-term price pop. Here Cliff Asness makes that point, and goes through the evidence. He's pretty fair, but he comes down clearly on the efficient-markets side.
Some market structure.
People are pretty worked up about the regulation of electronic trading in stocks, but electronic trading in bonds gets rather less attention. I guess that will change, as the Financial Industry Regulatory Authority will "begin examining the bond market, including the operations of electronic debt trading platforms." Finra's chairman says: "Any time you see a change in the market there’s a question as to whether there’s transparency and whether retail investors are being treated fairly," which is everything that annoys me about financial market regulation. It is almost inconceivable that "whether retail investors are being treated fairly" could be a good priority for bond market regulation. What retail investors even buy bonds, come on. Bond markets are institutional; they are also important. Here is a story about low bond-market liquidity creating excessive volatility. And remember the regulatory worries about whether BlackRock and Pimco were too big to fail? You don't want systemically important institutions unable to trade out of their positions in unnaturally volatile assets. Here is what bond market structure should do: Allow big concentrated institutional investors to trade bonds efficiently in a way that minimizes liquidity risks and that limits opportunities for undeserved rent extraction by middlemen. But regulators always have to talk about market structure as though protecting retail investors was the main goal of financial markets. I guess it's related to the need for a community banker at the Fed.
Elsewhere in market structure, here's an open letter from BATS ("Dear industry participant ...") about equity markets. BATS opposes an end to maker-taker pricing, but calls for tiered market access fees beginning at 5 cents per 100 shares for the most liquid stocks, rising to higher levels to allow rebates that "provide a meaningful incentive for liquidity providers to display quotes and narrow spreads" for less liquid stocks. It also opposes the "trade-at" rule, but wants exchanges that trade less than 1 percent of a stock not to be protected under Regulation NMS, with the goal of defragmenting the market a bit.
Despite its big year, Pershing Square saw some outflows in December. Brevan Howard had its first down year ever. The Morgan Stanley client data leak remains somewhat mysterious. Yields and exchange rates. The craft beer revolution is leaving Sam Adams behind. Manhattan apartments are expensive. Steve Randy Waldman on surge pricing. Here's a check for "Nine Hundred Seventy Four Million Seven Hundred Ninety Thousand Three Hundred Seventeen and 77/100" dollars.
Joke stolen from Rob Majteles on Twitter.
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