Levine on Wall Street: Oil, Bonuses and Penny Stocks
Oil is down.
Brent crude broke back below $50, trading with a $48 handle, while West Texas Intermediate traded a $47 handle and Goldman Sachs cut its 2015 Brent forecast to $50.40, from $83.75, which is kind of a big cut all at once. I guess you probably weren't relying on the $83.75 forecast last week. Goldman adds that "the search for a new equilibrium in oil markets continues," with a low-$40s price necessary to curb shale investment; it has WTI at $41 a barrel in three months, and then recovering a bit from there. So yeah not a great time to be exposed to oil. Which means I guess that it is a good time to do a roundup of people and places that are exposed to oil. There is Greenland, with 56,000 people and potentially "trillions of dollars of oil," which was understandably psyched about that until recently. Now they've scaled back their ambitions re: being commodities trillionaires. There are banks who finance energy companies, which will probably see less capital-markets fee revenue and whose loans are now riskier than they looked a few months ago (“At $50 a barrel, things can get a bit testy."). And there is the S&P 500: Overall earnings forecasts are down due to the drag from energy companies and the companies that service them, with "low oil prices are good for consumers!" still not a particularly exciting thesis for anyone. Other commodities are also hurting, with stockpiles mounting for coal in Poland and sugar in Iraq and copper in Chile and wheat in China and iron, and iron-related nightclubs, in Arctic Sweden. And some oil stockpiles will probably soon be sitting in tankers at sea to take advantage of contango; "Floating storage gives traders an opportunity to lock in an almost risk-free profit," says a guy, somewhat optimistically.
Your bonus will be down.
Big bank earnings will come out this week, and with them year-end compensation numbers, and here is some pointillistic pessimism: down 5 to 10 percent for Citi traders, down for Bank of America investment bankers and traders, down 15 percent for JPMorgan traders (especially rates and FX) though up "a few percentage points" for investment bankers, flat for Goldman fixed-income traders, etc. Here is more pessimism -- Deutsche Bank and Barclays down in unspecified amounts for unspecified groups -- as well as this interesting point:
One finance officer at a large Wall Street bank said it had been difficult to satisfy the warring parties: mergers and acquisitions and equity underwriting enjoyed a good year but these advisory bankers never suffered the same bonus cuts as traders so they should not expect a big rebound in payouts.
On the one hand, you'd think banks would want to reward the advisory bankers for their better Sharpe ratio. On the other hand the more stable bonuses might be that reward. Anyway you, again, are a special snowflake, and these predictions mean nothing for your bonus. Elsewhere in banking, were debt capital markets revenues up or down in 2014? The answer may surprise you, insofar as Thomson Reuters has fees up 3 percent and Dealogic has them down 2 percent.
Meredith Whitney's hedge fund was a strange hedge fund. Sorry, is, I guess, though barely: Its main investor, BlueCrest, is suing to get its money out. The fund looks sort of like an extended book tour: Whitney wrote a book about how the heartland will outperform the coasts, and also about how her "brain works instinctively to connect the dots in life," and then launched a hedge fund dedicated to those two theses and pretty much nothing else. She didn't, for instance, employ analysts; she just picked investments herself. The fund was down 11 percent in 11 months last year, and BlueCrest asked for its money back, but Whitney said no because she has a two-year lockup and would prefer to keep their money. There is a certain purity to starting a hedge fund on the basis of your fame, charging (one assumes) management fees, employing no analysts, never making any money for investors, and keeping their money for the full lockup period. It feels like a straightforward machine to turn reputation into cash, though it's a small enough fund that it's probably not that much cash?
Elsewhere in reputations, John Paulson's Advantage Plus fund is an event-driven hedge fund, and events drove it down 36 percent last year. Shire Plc's terminated merger with AbbVie was, as events go, a bad one, and then there are Fannie Mae and Freddie Mac, whose associated events included shareholders losing a lawsuit demanding that the government give them their company back. I feel like there's a very particular ideology associated with investing in gold, Fannie Mae, and Freddie Mac, and if there's a very particular ideology associated with your investments that often doesn't go well.
And then there is the news that equity hedge funds are cutting back on leverage and on equities exposure generally. "The average stock-picking hedge fund gained just 2% in 2014 after fees," well behind the S&P, so their cutback feels like the first bullish news for equities that I've seen this year.
Speaking of Shire
After nixing its AbbVie deal last year, Shire Plc is buying NPS Pharmaceuticals for $46 a share in cash. So happy Merger Monday! We'll take what we can get. Elsewhere in Irish M&A, Aer Lingus has said no to a takeover by the ominous-sounding International Consolidated Airlines Group.
"Expensive stocks are risky," says a Chinese housewife who is part of China's new boom in retail investment in "low-priced equities," which are not quite penny stocks but close enough. Welcome to financial capitalism, China! You'll love it. In a broad macro way it is a delightful and efficient engine for prosperity, but up close it's mostly scams. Good quotes here include: "Some Chinese investors 'tend to ignore important fundamentals,'" and "The market would need more institutionals and less leveraging on the retail side." Meanwhile in the United States, somehow hilarious boiler room John Thomas Financial and its chief executive officer Tommy Belesis were "expelled" from the securities industry and fined about a million dollars for "trading ahead of customers' orders, recordkeeping violations, violating just and equitable principles of trade, and for providing false testimony." You might remember John Thomas Financial for being barred from the industry about a year ago, but I guess it never hurts to do it again.
On the other hand.
Venture capital fundraising was almost $33 billion in 2014, the highest total since 2007, "as investors seek to take advantage of a hot market for startup funding and initial public offerings," and that's a good phrasing. Let's stipulate that IPO markets are hot. You shouldn't be a buyer in a hot market; "hot" is pretty much just a metaphor for "overpriced." You should be a seller into a hot market, and being a VC investor lets you (eventually) sell into that hot IPO market. Private markets are the new public markets, the way companies fund themselves is via private money, IPOs are mostly for VCs to cash out, etc., you get the idea. On the other hand the "market for startup funding" is also hot, to the extent that IPOs are now sometimes a down round, so you can't entirely win.
People are still worried about corporate bond liquidity. Banks are still (again?) preparing for a Greek exit from the Eurozone, and European banks are under a lot of capital pressure. Nasdaq wants to run dark pools for banks. Dubai World has agreed on a debt restructuring. Can sunspots save social security? How much does it cost to overthrow the government of Gambia? "Joseph Gibbons, 61, a filmmaker and 'visual artist’' who taught for a decade at one of the world’s most prestigious universities, has gone rogue, robbing banks as part of his latest 'art' project."
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