Levine on Wall Street: Greek Results and Credit Card Receipts
Alexis Tsipras's anti-austerity Syriza party won Greece's election on Sunday and formed a coalition government this morning, with a program "for Greece and its people to regain their lost dignity." What next? Will Tsipras "turn out to be a Lula or a Chavez?" Dan Davies argues that three years ago Greece could have bluffed euro bureaucrats with a strategy of "present them with a fait accompli on the debt default, and gamble that they will not have the nerve to take measures which might have the effect of forcing Greece out of the Euro," because of the risk of contagion and the collapse of the euro project, but that now it's too late for Tsipras: "The ECB and the Eurosystem structure don’t think that he’s got a credible threat of being able to cause the kind of chaos that could lead to the Euro entirely breaking up," and "the risk in Greece is much more quarantined than people necessarily realise." This sounds ... bullish for Europe and bearish for Greece? Right now I see most European stock markets up a bit, and the EURUSD as well; Greek bonds are down, with the three-year yield getting above 11 percent this morning.
Elsewhere, here is an argument that Grexit and debt haircuts are unlikely, but financial assistance and maturity extension are more plausible. (Eurozone officials' reactions seem to bear that out.) Here are further skeptical reactions from bank analysts. Here is a group of economists -- led by Joseph Stiglitz and Chris Pissarides -- arguing for debt reduction and a grace period "so that Greece does not have to service any debt, for example for the next five years and then only if Greece is growing at 3 per cent or more, and until Greece has recovered at least 50 per cent of the gross domestic product it has lost since 2008." Paul Krugman points out that Greek "austerity has been far more intense" than originally proposed in May 2010, with counterproductive results as GDP has grown much more slowly than expected. Here is a view from further left.
Elsewhere in Europe.
"Owners of Negative-Yield Sovereign Debt Say They're No Fools," but I guess they would say that. Still, good for them, getting it out there. Nobody quite explains why they think paying governments to borrow money is a good investment, though. I mean there's this: "'It still makes sense to hold the bonds' when the alternative is the ECB’s deposit rate of minus 0.2 percent," and that is true, everything is about opportunity costs. Which leads to my favorite explanation: "'We are not an absolute-return investor,' said Nagata, who tries to beat his benchmark index by 1 percentage point." Seems right!
I assume that lots of negative-yield debt is held in pretty yield-insensitive places (you'd hope?), like bank liquidity buffers and such. And I assume that some of it is held by people who expect to make capital gains when yields go even more negative? Also there are currency effects; your negative yielding Swiss franc account looked pretty smart the other week when it shot up in value against the euro. Elsewhere, "it’s not the euro that’s getting cheaper; it’s the dollar that’s getting more expensive," though recently it is both.
On Capital One.
After I wrote on Friday about the Capital One fraud analysts who allegedly used Capital One's transaction database to predict corporate earnings, several people pointed out that MasterCard openly sells transaction data to people who want to predict corporate earnings. It's called SpendingPulse, and here's its website:
MasterCard SpendingPulse draws from MasterCard’s near-real-time purchase data and processes it through a rigorously proven model that predicts total spend including cash and check payments, delivering a holistic picture of the economy. This accurate sales information is available days, weeks or months ahead of other sources.
The data is aggregated by industry, so it doesn't give you a direct picture of how individual companies performed; it's not like MasterCard is selling the exact data that those analysts allegedly stole. Still! My point on Friday was that a lot of professionals have a lot of data sets -- SpendingPulse, standing at a Chipotle and watching the line -- that they can use to predict revenues at Chipotle, and it's weird and impressive that those two guys did so well with just the addition of Capital One spending data. Insider traders or not, they are certainly impressive traders.
Also, a SpendingPulse hypothetical. Let's say I subscribe to SpendingPulse and pay whatever MasterCard charges. (I assume it's not cheap.) You don't want to subscribe, but you want the data, so you steal my password when I'm not looking. (Alternate hypothetical: You convince me to share my password, and buy me a steak dinner to say thanks.) Then you log into my account, get the aggregated data, analyze it, trade on it, and make money. You have clearly violated MasterCard's terms of service. The question is: Have you committed insider trading?
What is the TIA?
Gretchen Morgenson wrote this weekend about two cases -- Caesars Entertainment and Education Management -- in which judges questioned out-of-court restructurings because they might have violated the Trust Indenture Act of 1939. Caesars and Education Management stripped their bonds of parent guarantees through collective action of a majority of bondholders; minority bondholders sued. Here's the question, as put by the Education Management judge:
“Is it a broad protection against nonconsensual debt restructurings, or a narrow protection against majority amendment of certain ‘core terms’?” she asked. Her answer: The former interpretation is more persuasive, and “plaintiffs have demonstrated a likelihood of success on the merits.”
I ... would have guessed the other way? I am very much an amateur in distressed debt, but my impression was always that companies could do a whole lot in the way of stripping guarantees with exit consents and so forth. Apparently not! Morgenson writes that the TIA is meant "to ensure that changes to debt issues’ terms were made in the light of day," meaning under the watchful eye of a bankruptcy judge, though there are some disadvantages to bankruptcy too, and some reasons to favor consensual debt restructurings that avoid bankruptcy. Just not restructurings that are too bankruptcy-like: Apparently stripping guarantees is a step too far for majority rule.
Elsewhere here is a story about how Elliott Management owns a lot of credit default swaps on Caesars and pushed to exempt Caesars from ISDA's changes to CDS contracts in September, because those changes "could allow sellers of Caesars CDS to cut the payments they would owe if the company defaulted," though the article doesn't explain how.
Bloomberg View on market structure.
In case you missed it, here is John Arnold on spoofing; his argument is that spoofing mostly tricks people who are trying to front-run legitimate orders, and is therefore a good deterrent to that front-running and should be allowed. And here is Mark Buchanan suggesting that "the optimal trading interval that would make markets work best for investors" is around 0.2 to 0.9 seconds. That is not to be taken too seriously, perhaps; Buchanan's more detailed discussion points out that it's based purely on a theoretical model, and a model of a market that doesn't really exist:
This is just a model of batch execution market. Real markets don’t currently work this way. As the researchers pointed out to me by email, real markets effectively carry supply and demand forward between periods, and so may well be optimal at somewhat faster speeds. For this reason, and others, they suggest that the optimal speed for real market may well differ from that of a batch execution market by a factor of ten. Which means, perhaps, that the optimal delay in trading might be as short as, say, 0.01 or 1/100th of a second.
Still, I keep seeing calls for batch auctions, and now you know how often the auctions should be run. Elsewhere, human investors are doomed.
It's going to snow. Planet Money looks into the first short sale ever. Synthetic CDO volumes double amid hunt for yield. Prosecutors are seeking a rehearing, or an en banc, in the Newman insider trading case. "The hypothesis very loosely speaking is that the Internet revolution was founded on an extremely precarious and highly politicised social equilibrium which may not be as robust as we like to think it is," and "can we use the Internet in a way that benefits middlemen less and front-line workers more?" This year's most bizarre Super Bowl prop bets. Harvard Has Secretly Become One of Southern California’s Biggest Grape Growers, and here is a fun story about a guy who allegedly stole wine grapes. You can hire a bridesmaid. A-Hed on fleek.
I'm leaving it as an exercise for the reader, but it seems reasonably obvious that the data has been misappropriated? Is it material? Is it non-public? Is Foster Winans the right analogy?
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