Levine on Wall Street: Buy What You Know

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Buy only stocks you can see.

Everyone knows how gyms work, right? You want everyone to sign up to use your gym, and pay you fees, but you don't want any of them to come and crowd the gym. But you can't just, like, change the locks: It has to be their unforced decision not to come. So the trick is to build a gym that looks really appealing to people who'll get nothing out of it. (Here's a good Planet Money episode about this.) 

If you run a retail brokerage, you want clients who constantly churn their accounts making dumb trades, because that generates the most revenue for you. But you can't just advise them to churn their accounts, because that is frowned upon by ethical standards. So the trick is to build a retail brokerage that looks really appealing to hair-trigger people who'll make lots of dumb decisions and lose a lot of money.

In unrelated news, Fidelity Labs, the division of Fidelity Investments that previously brought you the ability to visualize your stocks as an imaginary city, issued this amazing press release yesterday:

"As the investing maxim goes, buy what you know," said Velia M. Carboni, senior vice president, mobile channel at Fidelity. "The Fidelity Stocks Nearby tool enables investors to immediately research businesses that show promise – on the go. Imagine an investor coming upon a store that is packed with customers – with Stocks Nearby they can easily begin to answer the question if it's a good investing opportunity."

Many businesses are owned by lesser-known parent companies, but in many cases Fidelity's iPhone app will display the ticker symbol so investors can conduct additional research and make smarter investing decisions. The app lets investors trade stocks, options, mutual funds and ETFs. This means if they if they have an idea inspired by a nearby business they can buy, sell and even execute option trades to take advantage of the idea.

All of Fidelity's mobile apps now support single- and multi-leg option trades and trading of specific shares. "These are complex trades, but we have designed intelligent trade tickets so that a customer's experience on that small screen is streamlined and expedient," said Carboni.

When I got to "even execute options trades," I was like, whoah, whoah, slow down there Fidelity, it's not enough that I'm walking around buying the stock of every store I see, I have to execute multi-leg option trades on them too? But of course the ideal retail brokerage customer, the guy that retail brokerage marketing officers dream about at night, is exactly the guy who wanders through the world saying "hey you know what's a good idea for an iron condor? Whatever I just looked at." So you might as well just come right out and advertise to that guy explicitly.

Disclosure: I am a Fidelity client, as is Josh Barro, who "fired up Stocks Nearby to see what a hyperlocal investing strategy might mean for me," and found that it recommended Scores Holding Company, a penny-stock company that licenses its name to the strip club across the street from him, but not AvalonBay, the multi-billion dollar real estate investment trust that owns his apartment. "We're not in any way saying this is the be-all and end-all to get to the next trade," an embarrassed Fidelity spokesperson told him, and, for Barro, it's not.

Poor Antonio Weiss.

I mean, not literally, he's fine, but I feel a little bad for him that he's the poster child of Wall Street greed? He's just a guy, who does international mergers and acquisitions at Lazard, while publishing the Paris Review. Why shouldn't he be the Treasury undersecretary for domestic policy, in charge of managing the national debt portfolio and working on budgeting? But yesterday he withdrew his name from consideration because a lot of people don't like that he has international financial experience, thinking that that sort of experience might, I don't know, taint his management of the debt. No of course they don't think that; they think that anyone who worked on tax inversions shouldn't even be allowed to work in the same building as people who work on setting taxes. (He will, though; he "will still join the administration in the position of counselor to Treasury Secretary Jack Lew, which does not require Senate confirmation.") Not that his Treasury job would be about tax policy or financial regulation, not that Lazard is a particularly egregious advocate of deregulation (though it is an egregious inverter), just, you know "Wall Street," "Main Street," blah blah blah blah blah. We've talked before about how the recent congressional fights over financial regulation -- swaps push-out, Volcker Rule CLO delays -- are pure theater with no connection to principled financial regulation, and this feels like more of the same. You get a banker who worked on inversions -- and who reads poetry! -- and he's an irresistible populist target, even if no one can make a real case for why he'd be bad for the job.

Elsewhere on that theme, here is an article about how "the two parties are expected to again skirmish over the issue" of, I don't know, it's not even an "issue," just like someone's scoreboard of financial-regulatory-symbolic-toughness wins and losses. So far Team Toughness has two points (Volcker CLOs, and Weiss counts for some reason even though he's not really a financial regulator), while Team Wall Street Wish List has only one (swaps push-out), so get to work Team WSWL!

Banks banks banks banks.

What else is on the Wall Street Wish List? Probably "stop paying so many fines" would be high on the list, and "stop doing bad stuff!" you reply, but let us here be reasonable. It's possible that the tide is turning and that my model of the banks -- well, Bank of America anyway -- as mostly random number generators for paying legal settlements will no longer be useful. "We’ve finally moved into the eighth or ninth inning of legal costs," says a bank analyst, and meanwhile the top six banks are expecting near-record revenues, so there's some chance of getting back to fundamentals. On the other hand, volatility is back, and that's not entirely a good thing. And here is sort of a gloomy column from Tom Braithwaite arguing that increased regulation has trimmed the right side of the distribution -- making huge returns to bank shareholders unlikely -- while not doing all that much for the left side. Because, one, banks are inherently leveraged, so they will always be risky, and, two, "you’ve substituted credit risk and trading risk with regulatory and legal risk": When banks aren't losing money in the markets, they're paying gobs of money in fines. And here is John Carney arguing for a four-way break-up of Citigroup, and while I am generally strongly opposed to the "A Tale of Two Whatevers" cliché, I could have lived with this one being called "A Tale of Four Citis."

Speaking of big fines.

I don't know, if you were Standard & Poor's, would you settle the government's lawsuit over inflated pre-crisis ratings for "more than $1 billion"? Apparently S&P is thinking about it. I think the case against S&P -- not the case that it did a bad job (it did!), but the case that it knew it was doing a bad job (meh!) -- is pretty weak. On the other hand S&P is certainly a convenient financial-crisis villain, and if you're going to blame S&P for the financial crisis then, I mean, that's a pretty big bill. But the $1 billion number seems to be more plucked from the recent range of big-bank penalties than actually connected to S&P's culpability.

Some insider trading.

The Securities and Exchange Commission's civil insider trading case against former Wells Fargo trader Joseph Ruggieri and former analyst Gregory Bolan (which we've discussed) is being watched closely for signs of how broadly courts will interpret last month's landmark Newman insider trading ruling. But never mind that, look at this nonsense: e-mails from Bolan to Ruggieri saying "Many props bro -- it's all good in the hood," and from Ruggieri to Bolan saying "Together, we can lift this sector team and crush it."  It's like they're bots programmed with a list of bro clichés. 

Elsewhere Peter Henning writes about an American Bar Association proposal to reform white-collar sentencing to make it less of a random-number generator based on dollar amounts, and more about culpability and guilt and harm and intention and all that good stuff. We will see.

Some mergers and acquisitions.

Did you know that the Dollar Tree/Family Dollar/Dollar General thing is still going on? I'd sort of forgotten about all those Dollars. And it's in the same place as it was when we last checked in: Family Dollar is waiting to hold its shareholder vote on its merger with Dollar Tree, and Dollar General's riskier but higher offer remains outstanding. If you wait long enough on the shareholder vote, then maybe Dollar General will raise its bid, or agree to a "hell or high water" antitrust clause, or just, most conveniently of all (though unlikely), maybe the antitrust authorities will approve the Dollar General deal and de-risk it entirely. On the other hand, if you wait too long, maybe Family Dollar's business will deteriorate and/or Dollar Tree will get pretty annoyed. The latter, in any case, seems to be happening, with Dollar Tree and Family Dollar executives begging Family Dollar shareholders to actually vote for the bird in the hand on January 22.

Elsewhere, the premium for Shire's acquisition of NPS "is covered almost entirely by compensation from the collapse of Shire's sale to larger American rival AbbVie last year," which is a nice use of a break-up fee. And here is MergerMarket's 2014 M&A review, with lots of league tables for you to cut and paste into pitch books, if you did well in them.

Things happen.

A guy blogged about getting rejected from every business school. MetLife still doesn't want to be systemically important. In an activist win, DuPont is selling its theater. Rajat Gupta won't be directing or officering a public company any time soon, or ever. The SEC is skeptical about structured notes, and about transfer agents. Dan McCrum is skeptical about hedge fund fees. Andrew Ross Sorkin on pot investing. Ukraine is confident that it can repay the $3 billion bond it owes to Russia if Russia puts it early. Investors are less confident that shale drillers can repay their debts if oil stays below $50. This chart (ABX 2007-2008) looks like that chart (oil 2014-2015). The broker-dealer leverage factor. CES 2067. "The worst thing is knowing what everyone thinks about anything." 

  1. Down here, can we just talk about this, from Senator Elizabeth Warren last month:

    "Third, and maybe you can help me understand this argument, people say opposition to Weiss is unreasonable because, wait for it, he likes poetry," Warren said. "I'm actually not kidding on this one. Supposedly because he helps publish a literary magazine called the Paris Review we should trust that he will zealously pursue financial reform. Now I confess, I don't read many literary magazines but, really?"

    Okay but no. I get it, I do, you can't admit that you read literary magazines if you ever want to run for president. But this is some pretty overdone populism. "I'm just a simple Harvard Law professor, I don't read no poetry." Come on.

    On the other hand, I literally think that opposition to Weiss is unreasonable because he likes poetry, so she has me there.

  2. Plus some words that shouldn't appear in a family newspaper, or in your work e-mail, though they're cleverly misspelled to avoid triggering e-mail filters.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net