A Gold Watch and a Departing Bank CEO
Here's a new watch.
Imagine you invented a device that satisfies every human need. It provides food and shelter and transportation. It finds you a mate and raises your children. It fits in your pocket. It tells you the weather, organizes your calendar, and curates your social media presence. It even makes phone calls. You can sell it for $500, at a 50 percent profit margin. So you'd do that for a while, but eventually you'd have sold a device to everyone, or at least to everyone with $500. Then what? One possibility would be to go back and sell more devices to the same people. This might seem difficult -- the first device, after all, satisfied every human need, so why would anyone need a second? -- but it's worth a shot. You could sell a slightly bigger device for more money. Sell a slightly smaller device for less money. Make one in gold and sell it for $10,000. The trick is to cater to the needs that no device can fully satisfy: for novelty, and for infinitely differentiated status.
So Apple has a new watch! It seems ... big? Here's Freddie deBoer on its commercial necessity. While it may not be that useful, it is part of Apple's "effort to transform itself into the next great luxury brand," "a new Apple that is just as much about fashion as it is about function." If you can break the link between usefulness and price, then, um, that's good for margins on your whole product line. (Matt Yglesias: "Apple could take its existing really good mobile phone and really good laptop computer and make special 'Edition' versions of them that replace aluminum with gold and sell for absurd sums of money. But why would they bother?" For money?) Here is Kevin Roose on the Apple Watch as a cause and symptom of class anxiety, though on the other hand here is a claim that "the new watch from Cupertino will help reduce income inequality in the way that really matters." (This claim seems wrong!) Here are Bloomberg News and BuzzFeed on the question of whether Apple's retail experience is snobby enough to sell a watch for five figures.
Elsewhere in Apple Watch, the Bureau of Labor Statistics is prepared for its inclusion in the Consumer Price Index, and Apple's 18-karat gold might contain less gold than everyone else's 18-karat gold. But does the watch signal "a pingy, buzzy, always visible, always on future that I’ll have to enter begrudgingly"? (Yes, obviously.) Here are Paul Ford and Anil Dash mocking the Apple event ("Wow, it really tells time. They didn’t budge at all on that. Which is impressive because the iPhone still can’t make phone calls."), and here's some Twitter mockery. Here is a story about a man who bought a cheap smartphone. Here is a famous McSweeney's article.
Who should run a bank?
Credit Suisse's long-time chief executive officer, Brady Dougan, will be stepping down, to be replaced by Prudential Plc CEO Tidjane Thiam. Besides running Prudential, Thiam's résumé includes working as a consultant to banks and insurance companies at McKinsey & Co., serving as minister of planning and development in the government of the Ivory Coast, serving as an executive at Aviva Plc, and turning "down an offer to become head of the World Bank’s private investment arm, despite a personal request from U.S. President Barack Obama’s then-chief of staff, Jacob Lew." That's pretty good, right? Government experience, and a good relationship with the U.S. Treasury, can't hurt in running a modern global bank. Consulting experience has to be helpful with, you know, firing people, which seems to be a lot of what investors want from their bank CEOs. And I guess running Prudential gave Thiam "extensive international experience, including in wealth and asset management and in the successful development of new markets," or so Credit Suisse's statement said. All that's missing is experience in banking, and these days banking experience is arguably a negative:
“Thiam will bring some fresh air to Credit Suisse, albeit without the banking background,” said Andreas Venditti, a banking analyst at Vontobel in Zurich. “Maybe cutting the investment bank will become easier.”
Dougan, of course, used to run Credit Suisse's investment bank, and his critics worry that Credit Suisse has not done enough to trim its investment banking ambitions the way UBS has. It's easier to trim those ambitions when you never wanted to be an investment banker in the first place. The stock jumped on the news.
It is a weird time to be alive and in the European bond markets. The European Central Bank's quantitative easing program involves national central banks buying government bonds, including bonds with negative yields, but no one has quite figured out who will bear the predictable losses on those negative-yield bonds. And here is a somewhat perplexing story about U.S. investors who bought European bonds "to ride this wave of European central bank stimulus" and then lost money on currency swings. Like, one, European yields are way lower than U.S. ones (negative, even!), and, two, "European central bank stimulus" is meant to push up bond prices, yes, but it's equally meant to push down the euro, right? This really can't have come as that much of a surprise.
Meanwhile, there is a continuing and delightful discussion on the Internet about the actual lower bound for interest rates, determined more or less by how much of a pain it is to hold physical cash. Here is Evan Soltas on the points of agreement. Even more delightfully: Can credit default swap prices go negative? Most people quoted in this article are like "hahaha what no," which is basically my reaction, but: "One senior bank trader, who asked not to be named, said he could imagine hedge funds paying to sell CDS so they can exploit arbitrage opportunities." The arbitrage opportunity is, I suppose, that you get short, say, German credit by selling German government bonds at a negative interest rate, and long German credit by "selling" credit default swaps at a less negative rate, and clip the difference. But surely the negative rate on the bonds is an issue of rates, not credit? Like, the chance of losing money on your short bond trade because Germany's government credit gets tighter seems remote. Or I guess, put another way, you could imagine the yields on actual German bonds getting more negative than they are already (that's the point of QE!), but the chance of finding a greater fool to "sell" you CDS at an even more negative rate than you "sold" it for seems more remote.
A mall takeover battle!
One of the formative experiences of my career -- of my life, really -- was working on the long-running contested sale of The Mills Corporation, a fancy shopping mall real estate investment trust that had fallen on hard times. It was eventually sold to a group led by Simon Property Group, another mall REIT, and Farallon Capital Management, who topped a previously signed agreement with Brookfield Asset Management. There were bids and counterbids, sharp reversals in fortune, even a proxy fight for some reason. A good time was had by all. So I look with some nostalgia on this news:
Simon Property Group Inc., the largest mall owner in the U.S., launched a $16 billion unsolicited bid for one of its biggest rivals, Macerich Co., as it seeks to gain scale amid an oversupply of retail space and changing habits of U.S. shoppers.
Have so much fun with that, everyone! Hostile REIT takeovers are challenging, as Maryland law (which governs Macerich and many other REITs) is very management-friendly ("REITs can stagger their boards in the middle of a fight without shareholder approval") and REIT charter provisions limit outside shareholders. And Simon has failed before:
A decade ago, Simon made a $1.68 billion hostile bid for rival Taubman Centers Inc., and starting in 2009 Simon made at least four buyout bids for General Growth. Simon ultimately dropped both bids after they were complicated by legal issues.
Simon has owned a toehold in Macerich since November, so this offer was not a surprise, and investors seem to expect this deal to end up at a higher price than Simon's initial $91-per-share offer, which I guess is the point of those defensive measures.
Here's a sort of horrifying prosecutorial reaction to recent judicial limits on insider trading prosecutions: Charge people with wire fraud instead! Because everything is wire fraud. Here a guy is charged with telling stock researchers facts about a company that he didn't work for or (apparently) have any duty of confidentiality toward, so there was no insider trading. But he allegedly got paid for the tip, and prosecutors argue that he owed a duty to his own company not to get paid for such extracurricular activities, so this is what is called "honest services wire fraud." Peter Henning seems a little skeptical of that argument, and I am as skeptical of it as skeptical can be, but like I said, everything is wire fraud. My typing those words -- which are not strictly true! -- was probably wire fraud. So I wouldn't necessarily bet against this effort to open up new avenues for semi-arbitrary imprisonment of some, but not most, people who deal in financial information.
Not financial advice.
Here's a paragraph all right:
Mr. Naylor said when he explains his ideal portfolio performance to advisers, he doesn’t get much support. “They don’t think I’m completely insane, but I can also tell the older, or more logic-based, financial advisers kind of look at me funny,” he said.
Well my ideal portfolio performance is that it performs like a portfolio of Mega Millions tickets, only they're all winners? I don't know. The problem is that equities have had a good run over the last few years, and so investors expect that to continue indefinitely -- especially if they're young and have never seen a bear market. (Also, if you're young and rich, presumably you made your money even faster than the S&P has compounded recently, so your expectations are even higher.) This may be worth keeping in mind as you read all the "hedge funds are scams" articles that the New York Times has been publishing recently; here's a particularly strange one from yesterday. Yes, the stock market has had a good run recently, but that doesn't mean it will continue indefinitely, and the time to rotate into uncorrelated strategies is when stocks are high, not low. Here is a defense of hedge funds -- also in the Times -- sort of along those lines.
Elsewhere, of course the market for illogic-based financial advice is robust. Here's a Finra news release about the indirect effects of financial fraud, "which found that nearly two thirds of self-reported financial fraud victims experienced at least one non-financial cost of fraud to a serious degree -- including severe stress, anxiety, difficulty sleeping and depression." The Finra report also covers indirect financial costs, ranging from "late fees/interest" and "fees for bounced checks" to costs of prescription medications and "fees for a private detective." Apparently 13 percent of financial fraud victims hire private detectives.
HSBC keeps getting yelled at by parliament. The Janus fund run by Bill Gross that manages a lot of his personal money had outflows in February. Private equity can do what banks can't, says private equity guy. Wachtell Lipton on appraisal arbitrage. "Donald Trump reached an agreement Monday with billionaire investor Carl Icahn to allow his name to remain on the Trump Taj Mahal Casino." Pershing Square bought a lot of Valeant stock. Starboard Value still isn't happy with Yahoo. Basel IV. "The most popular private jet route in the world is a flight from Moscow to Nice/Cote d’Azur in France." Understanding the Business School Obsession With Ice Hockey. "Why I decided to go on a cowork vacation in Bali for a month." Engels's pause. Now More Than Ever, London Needs a 'Death Pyramid.'
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