Death and Stock Picks

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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Time and chance happeneth to them all.

Bill Gross's Janus Investment Outlook came out Monday morning and here's the outlook:

What I fear most is the dying – the “Tuesdays with Morrie” that for Morrie became unbearable each and every day in our modern world of medicine and extended living; the suffering that accompanied him and will accompany most of us along that downward sloping glide path filled with cancer, stroke, and associated surgeries which make life less bearable than it was a day, a month, a decade before.

Of course this is a metaphor for the coming death of the secular bull market for bonds, but it's also literally true, right? Like here are two things you could fear:

  • A slow agonizing death.
  • Rising interest rates.

It is an astonishing miracle of modern civilization that anyone might think of equating them. Gross's advice is to focus on "defensive choices that can be mildly levered to exceed cash returns, if only by 300 to 400 basis points," which is surely more pleasant than focusing on the grave that awaits us all.

Or wait was the whole thing a metaphor for the fact that Gross's former bond fund, the Pimco Total Return Fund, is no longer the world's biggest bond fund? The new champ is the Vanguard Total Bond Market Index Fund, since in this fallen world the one certainty is that death will come for even the wisest and noblest bond fund managers, so you might as well index.

Some stock picks.

The Ira Sohn conference was yesterday and some people spoke about their stock picks to raise money for charity, as one does. Josh Brown recaps it here, here and here; the Wall Street Journal live-blogged it here; and Tracy Alloway covers the market reactions here. Highlights include:

  • David Einhorn: Short fracking generally and Pioneer Natural Resources, which he calls the "mother fracker," specifically.
  • Barry Rosenstein: Long and active on Walgreens and Qualcomm.
  • Larry Robbins: Long AbbVie.
  • Bill Ackman: Did not talk about CSX, which was somehow news for CSX; he likes Valeant and Jarden.

Ackman also talked to Bloomberg Television about the importance of activism, and about how annoying it is to short stocks. In lighter news, Magnus Carlsen won three simultaneous blindfolded chess matches and I guess this should have been obvious but I didn't know that in blindfolded chess matches "the judge read out the moves his opponents were making." I figured he just had to guess. Still impressive. Also a guy talked about how drones and bioweapons will team up to kill us all.

Who can remember how to vote?

Are activists an important check on shareholder complacency? Left to their own devices, would big institutional shareholders be insufficiently protective of their own interests? Well I don't know but here is a story about how T. Rowe Price consistently opposed the 2013 leveraged buyout of Dell, of which it was a big shareholder, but somehow voted for the deal. Like, as far as I can tell, by accident. Like the guy in charge of telling everyone what a bad deal it was never talked to the guy in charge of hitting the vote button. "We are aware of a discrepancy in the communication of our voting instruction on the Dell buyout," says T. Rowe. What?

This is immediately relevant because T. Rowe is a plaintiff in an appraisal lawsuit, and the appraisal statute requires that you "neither voted in favor of the merger or consolidation nor consented thereto in writing." So T. Rowe would seem to be out of luck in its appraisal demand, though it has a pretty amusing reading of the statute to mean the opposite of what it says, which happens to be supported by case law. But the broader issue is: How do you vote the wrong way on a merger? What does this story say about the need for activist investors? About T. Rowe's concerns about high-frequency trading? About the efficiency of our public equity markets?

Elsewhere in corporate governance news:

We exploit the variation in religious piety across U.S. counties and investigate the effect of religious piety on anti-takeover provisions. Our results show that religious piety substitutes for corporate governance in alleviating the agency conflict. Effective governance is less necessary for firm with strong religious piety. As a result, religious piety leads to weaker governance, as indicated by more anti-takeover defenses. 

And Bank of America, after ignoring a shareholder vote requiring it to separate the jobs of chairman and chief executive officer, has decided to let its shareholders vote on it again in 2016. "We appreciate the candor with which stockholders have shared their insights," says Bank of America, improbably.

Goldman Sachs is getting into retail lending.

I don't know, what should I make of this? Goldman Sachs hired a former Discover executive " to help develop an online lending effort for individuals and small businesses":

Goldman Sachs, which has largely steered clear of retail businesses, is seeking to join startups such as LendingClub Corp. in using technology to disrupt traditional banks. Rather than apply a peer-to-peer model that others have used, the investment bank will boost loans at its Goldman Sachs Bank USA subsidiary.

So, I mean, why not, right? Investing in pseudo-peer-to-peer loans is all the rage these days for institutional investors and even banks, so why shouldn't Goldman be putting its money there? And if you're putting money into online loans, and you're good at making computers do things, why not set up your own front end to actually make the loans? I guess because a loan from Goldman Club is less obviously appealing than one from Lending Club, but they'll probably figure out the branding. One question is, will other big banks get more into online lending, or will the ones with lots of branches be too worried about cannibalizing their branch businesses? Disclosure: I worked at Goldman, back before it went all retail.

Elsewhere in investment bank news, "China’s Haitong Securities plans to hire hundreds of bankers across Europe and the Americas" in a bid to become "a world leading investment bank." And should UBS and Credit Suisse combine their investment banks?

WKSI waivers.

The Securities and Exchange Commission lets big seasoned public companies issue securities quickly without extended SEC review; this is called "well-known seasoned issuer" status. If you're convicted of a felony, you lose your WKSI status, unless the SEC gives you a waiver. You see where this is going. Deutsche Bank, which manipulated Libor in exactly the way that every other big bank manipulated Libor, but was fined much more for doing it, also had a subsidiary plead guilty to a felony. The SEC waived its WKSI ineligibility, because no conceivable investor-protection purpose could be served by arbitrarily banning one bank from issuing securities quickly just for doing the thing that all the banks did. And of course Commissioner Kara Stein dissented, in bracing tones:

Deutsche Bank’s illegal conduct involved nearly a decade of lying, cheating, and stealing. This criminal conduct was pervasive and widespread, involving dozens of employees from Deutsche Bank offices including New York, Frankfurt, Tokyo, and London. Deutsche Bank’s traders engaged in a brazen scheme to defraud Deutsche Bank’s counterparties and the worldwide financial marketplace by secretly manipulating LIBOR. The conduct is appalling. It was a complete criminal fraud upon the worldwide marketplace.

I mean, super, and Stein criticizes "an unofficial Commission policy to overlook widespread and serious criminal conduct," but does she mean it? Would cutting off all the big banks from efficient capital-markets access actually protect investors and the financial system? This feels like the sort of rhetoric that works best in a dissent.

Who needs a lender of last resort anyway?

Jon Hilsenrath thinks that it was probably a good thing that the Fed was able to rescue the financial system in 2008, and that new restrictions on the Fed's ability to do that again are probably not a great idea. I don't disagree but here we are.

Things happen.

People are worried about bond market liquidity. Poking holes in the bond ETF meltdown scenario. Grexit fatigue. Private equity looks for life beyond the leveraged buyout. Fortress Revs Mortgage Machine as Its Buyout Funds Stall. Why Facebook should buy Twitter. How Selerity reported Twitter’s earnings—before Twitter did. Legal conflicts and Mylan. "A long-short portfolio that buys stocks after confirming the end of a sequence of insider (top executive) purchases, and shorts stocks after confirming the end of a sequence of insider (top executive) sales earns month alphas of 1.71% (2.37%), or 22.6% (32.5%) annualized." Executive Compensation: A Modern Primer. Here's why an NFL Pro Bowler is suing Bank of America. Waterloo euros. North Carolina dog blamed for crashing pickup into pool. The fittest CEOs in America? Space espresso

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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:
James Greiff at jgreiff@bloomberg.net