Circuit Breakers, Gangsters and Blockchains
Happy New Year!
It came down to the wire, but the S&P 500 index ended 2015 down about 0.7 percent for the year (though total return with dividends was 1.4 percent). Just over four hours into 2016, though, the Chinese stock market had lost 10 times as much, and was sent home to think about what it had done:
Trading was halted at about 1:34 p.m. local time on Monday after the CSI 300 Index dropped 7 percent. An earlier 15-minute suspension at the 5 percent level failed to stop the retreat, with shares extending losses as soon as the market re-opened.
"This is a pretty dramatic start of trading for the year," says a guy. The Chinese circuit-breaker rules -- 15-minute halt after a 5 percent move, closing for the day after a 7-percent move -- were only finalized in December, and their impact is ambiguous: "Individual investors in China, who drive more than 80 percent of trading, may have rushed to sell after the first circuit breaker took effect to avoid getting stuck in positions by the 7 percent suspension." It took just seven minutes after the reopening to hit the 7 percent threshold and close for the day. All circuit breakers are necessarily a little arbitrary, and Chinese officials may "fine tune" their circuit breakers after today's test, but it is fun to imagine even bigger circuit breakers, like, if the market is down 20 percent, you just close it for the year. We could be done by this week.
Meanwhile in U.S. equities, John Authers worries about the breadth of 2015's ... umm ... mediocre performance, which would have been outright terrible but for the "Fang" (Facebook, Amazon, Netflix, Google/Alphabet) companies and a few other strong performers. "Technically this feels very bearish," says a guy, but the truly original technical analysis in the article comes from another guy who says that "Fang likely ends with a Dang!" The best technical analysis is in rhyme.
In other 2015 news, it was a big year for mergers and acquisitions, both by size ($4.7 trillion in announced deals) and complexity (tax inversions, tracking stocks, contingent value rights, mergers-with-breakups, etc.). It was not a great year for hedge funds, though, which "lost more than 3%, on average, according to early estimates from hedge-fund-research firm HFR Inc."
I think my new favorite reading material might be corporate announcements from the Hong Kong stock exchange. There's the Incident that befell China Animal Healthcare Ltd., of course, whose deathless narration we discussed last week. But China Shanshui Cement Group Ltd. also knows how to tell a story, specifically this story:
The Company received a report from Shandong Shanshui Cement Group Co., Ltd. (“Shandong Shanshui”) (a wholly owned subsidiary of the Company in the People’s Republic of China) that a violent incident had occurred on 27 December 2015 at the headquarters of Shandong Shanshui in Jinan City, Shandong Province (the “Headquarters”).
Despite the cooperation and assistance of the Jinan Municipal People’s Government (the “Jinan Government”), it was reported by Shandong Shanshui that CHEN XueShi, a former director of Shandong Shanshui, together with a group of gangsters, barged into the Headquarters by force on 27 December 2015, destroyed the properties in the offices therein and assaulted the employees of Shandong Shanshui.
Sadly there's no defined term for the "Violent Incident." The issue seems to be that China Shanshui is in a custody fight for its Shandong Shanshui subsidiary with the subsidiary's former directors, and the outcome remains in doubt:
The former directors of Shandong Shanshui, namely Zhang Caikui, Zhang Bin and Huang Kehua, still illegally occupy the head office and five factories of Shandong Shanshui, and illegally retain the important documents, including but not limited to, seals, chops and books (the “Company Documents”). As the Company Documents are illegally retained, Jinan Administration for Industry & Commerce refuses to proceed with the application for change of directors of Shandong Shanshui.
It really puts American boardroom power struggles -- even creepy ones like SunEdison's -- in perspective. Our corporate battles tend not to be fought with groups of gangsters.
Last week Nasdaq announced "that an issuer was able to use its Nasdaq Linq blockchain ledger technology to successfully complete and record a private securities transaction – the first of its kind using blockchain technology." The issuer was, needless to say, a "blockchain developer" named Chain.com, and yes, Chain used Linq to issue stock, how adorable. Nasdaq talked up the benefits of the blockchain-based system for "significantly reducing settlement time and eliminating the need for paper stock certificates":
“We believe this successful transaction marks a major advance in the global financial sector and represents a seminal moment in the application of blockchain technology,” said Bob Greifeld, CEO, Nasdaq. “Through this initial application of blockchain technology, we begin a process that could revolutionize the core of capital markets infrastructure systems. The implications for settlement and outdated administrative functions are profound.”
But ... wait ... paper stock certificates? I mean, I have some relevant experience to offer here, in that I have bought and sold stocks occasionally in my life, and exactly zero times did I ever have to send or receive a paper stock certificate. The problem of paper stock certificates was absolutely solved long before the blockchain was a glimmer in Satoshi Nakamoto's eye. Sure, some private companies still use paper stock certificates, and Nasdaq's blockchain is aimed at them, but they don't have to as a technological matter; computer databases of stock ownership exist. Not even Chain's chief executive officer, Adam Ludwin, will stick to the "paper stock certificates" story. He talked to MoneyBeat:
The difference is that issuing the equity took minutes (the transaction itself settled in seconds), rather than days. Chain’s capitalization table, a firm’s record of its ownership, is now on Linq, Mr. Ludwin pointed out.
“We don’t have an Excel spreadsheet managing our cap table,” he said. “The official record is now on Nasdaq’s blockchain network.”
Once again I have relevant experience to offer here, in that I have actually used Excel, and it doesn't take days to update a cap table in Excel. It takes, you know, seconds. Because Excel is a perfectly functional way to keep a simple computer database. As is the blockchain! Either way. But the revolutionary implications continue to seem a bit overblown.
I submit to you that no one understands the concept of "materiality" in securities disclosure. Certainly I don't. The question is, how important does a thing have to be before it is "material" and needs to be disclosed to investors? Investors tend to want companies to tell them everything and let the investors decide what's important and what isn't. Companies find that exhausting and constraining. Anyway the legal standard for materiality seems to be a bit higher than the accounting standard for what needs to go into financial statements; the Financial Accounting Standards Board wants to raise the accounting standard to match the legal standard, but that is predictably controversial:
Amy Borrus, interim executive director at the Council of Institutional Investors, said the new disclosure rule would directly harm investors. “This is not a simple matter of clarification,” Ms. Borrus said. “FASB’s proposal would be a sweeping change that would make financial statements much less valuable as a source of information for investors.”
So you might think this would be a bond-market liquidity story:
A record amount flowed into global exchange-traded funds for a second straight year, BlackRock Inc. said, as investors increasingly are drawn to the products as a replacement for futures and swaps positions.
And I guess it is, a little, but it's mostly an equities story: "The phenomenon of replacing futures and swaps with ETFs began in 2014 and is mostly concentrated in equities," as "tighter regulations and higher capital requirements in the wake of the global financial crisis have made it more expensive for banks to do business" in derivatives. "A large pension fund in the U.K. recently bought over $300 million of equity ETFs to replace future positions," and it is not totally clear to me why large pension funds would ever have needed to use derivatives to get long equity index exposure. (They can just buy stocks!) One possibility is that derivatives were an underpriced way to get long equity exposure under earlier regulatory regimes. Meanwhile exchange-traded products on the VIX volatility index don't seem to work that well:
The big story is that in 2015, not one of those VIX ETPs was profitable. In fact, the mean VIX ETP lost over 21% for the year. This means that in those instances where there are long and inverse pairs – notably VXX and XIV as well as VXZ and ZIV – both the long and short version of the same volatility trading idea lost money.
If you try not to think about the fact that Donald Trump is a leading candidate to be the next president of the United States, this Wall Street Journal story about his business dealings is a mad delight. All of it is wonderful, though my favorite part may be this:
Mr. Trump bought a class of shares that gave him just a slice of Resorts’ equity, but voting control. From that perch, he pushed through a service contract that would have the company pay him $108 million over five years. He told casino regulators the company could raise the cash needed to finish its casino only by assuring lenders Mr. Trump would remain involved, which this contract did.
Upon news that funding was uncertain, Resorts’ stock plunged. Mr. Trump then told investors the only way to finish the Taj Mahal was for him to buy Resorts at just above its reduced share price. Construction lenders, he said, were put off in part by the high cost of his service contract.
This is of course a core tension in any management buyout -- are you getting the company cheap because you have done things to make it cheap? -- but with a particularly Trumpy spin on it. Also there is the story of a Citibank executive who crossed Trump in the mid-90s:
Mr. Trump says, “I would see her at functions at various ballrooms throughout the city and I would say such things that some people were shocked.”
Ms. Goldstein died last year in a bicycle accident.
“I didn’t send flowers,” Mr. Trump says.
Somehow he kept charming lenders into favorable restructurings, though.
Mark Zuckerberg likes to keep himself amused by doing a new project each year -- reading books, learning Mandarin, killing and eating animals -- and yesterday he announced his 2016 project: "to build a simple AI to run my home and help me with my work." You know, home automation, voice-controlled lighting, baby monitor, that sort of thing. Sounds fun. But the Financial Times headline is "Mark Zuckerberg rejects fears of rogue artificial intelligence," and while that is true (he did respond to a comment on his Facebook post about rogue AI), it is an odd thing to emphasize. What does the FT know that we don't? Will we look back ruefully on that headline in 2017 from the caves where we are hiding from Mark Zuckerberg's murderous baby monitor? Will Zuck himself be leading the embattled remnant of humanity in an uprising against his voice-controlled lighting system? "Follow me, everyone! I created it, so I know its only weakness, plus I can kill goats for food." Obviously I have started on the screenplay.
People are worried about unicorns.
Here's some classic unicorn worrying about how tech companies don't really do initial public offerings any more: "Tech companies raised less than $10bn through IPOs in the US in 2015, according to Dealogic, compared with $41bn the year before" (or $16 billion ex-Alibaba). And:
If the fourth quarter matches the year before, the amount of private investment would have exceeded $60bn, or more than six times as much as tech companies raised on Wall Street during the year — twice the differential that existed at the height of the dotcom boom.
But the dotcom boom of the late '90s was in large part a boom in public tech companies, because going public was how you raised large amounts of money from institutional investors. (How could Pets.com have raised $82.5 million except through an IPO?) Now that private tech companies can raise billion-dollar rounds from mutual funds who can then trade their shares in private secondary markets, it does kind of make sense that the balance would shift more toward private fundraising. In other startup news, there was a kind of bad Simpsons episode about startups last night. And here is an essay about inequality from Paul Graham of Y Combinator.
People are worried about bond market liquidity.
I feel like the ETF thing above partly counts. Meanwhile in bond-market supply and demand:
The value of bills, notes and bonds coming due for the Group-of-Seven nations plus Brazil, China, India and Russia will total $7.1 trillion, compared with $7 trillion in 2015 and down from $7.6 trillion in 2012. Japan, Germany, Italy and Canada will all see redemptions fall, while the U.S., China and the U.K. face increases, data compiled by Bloomberg show.
Big Banks Start to Embrace Startups. Tom Hayes's prison letters. The contrarian American taking on the British banks. Fiat Shares Fall by Third After Ferrari Spinoff. Putin Sparks Russia Pork Boom as Import Ban Expands Hog Breeding. Two Cheers for Fannie and Freddie Synthetic CDOs. The case for contingent convertible debt for sovereigns. Russia initiates legal proceedings against Ukraine over $3bn debt. Raine Group Finds Deals for Clients, and Itself. Ackman's Pershing Square Trims Valeant Position for Tax Savings. Door revolves. Russian man wakes up in morgue after too much drinking, goes back to party.
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