Uber Jokes and Yahoo Taxes
Yesterday Uber Technologies Inc. announced that it is turning over a new leaf and adopting the recommendations of Eric Holder's investigation into discrimination, sexual harassment and a generally problematic culture at the company. Chief Executive Officer Travis Kalanick, who is at the center of many of the controversies, will be taking a leave of absence, and will have some of his duties reduced when he returns. The changes were announced at a company all-hands meeting, from which Kalanick was absent, and which went for almost seven minutes before board member David Bonderman interrupted fellow board member Arianna Huffington to make a sexist joke:
“There’s a lot of data that shows when there’s one woman on the board, it’s much more likely that there will be a second woman on the board,” Huffington said, according to a person who heard the exchange but was not authorized to discuss it.
“Actually, what it shows is that it’s much more likely to be more talking,” Bonderman said. Among the Uber employees in the room, there were audible gasps and blank stares, according to another person at the meeting.
Oh man! They were doing so good. The Days Without Sexist Incident counter had gotten all the way up to 0.0046. I realize that it is hard to change a corporate culture, and that many powerful men have long considered sexist jokes to be perfectly acceptable in the workplace, but surely you can put a lid on it for the duration of the Let's Stop Being So Sexist all-hands meeting? What if the public narrative is all wrong and Kalanick is the only person keeping Uber's outrageous culture in check? What if, in his absence, the board will run totally wild and turn Uber into a never-ending frat party? I guess not: Bonderman resigned a few hours later. "I need to hold myself to the same standards that we’re asking Uber to adopt," he said.
What else will change?
Several of Uber’s planned changes are symbolic. For example, a conference room known as the War Room will be renamed the Peace Room. The company also plans to scrap many of its cultural values, notably “Let Builders Build, Always Be Hustlin’, Meritocracy and Toe-Stepping, and Principled Confrontation,” which the Holder report described as being “used to justify poor behavior.”
We in the press created this monster by glorifying CEOs for being willing to buck convention, push the envelope, trust their guts and believe in themselves no matter what the doubters say. We put people like that on magazine covers. And then those same qualities land CEOs on magazine covers when the convention-bucking and envelope-pushing shifts from being an asset to a liability.
Yep! There is a widespread belief, in the tech industry, and in business in general, and in society as a whole, that if people disagree with you then you must be doing something right. This is an appealing thing to think when people disagree with you, and an appealing story for the press -- maverick contrarians are more interesting than consensus rule-followers -- but there is no particular warrant for it. Sometimes people disagree with you because you are wrong. Sometimes Toe-Stepping is just rude.
Yesterday Verizon Communications Inc. closed its acquisition of Yahoo! Inc.'s core internet business, building its collection of '90s internet nostalgia:
Yahoo, which once had a market value of $125 billion, will be combined with AOL, another faded web pioneer it bought in 2015, into a new division of Verizon called Oath.
Honestly these days I feel like you could make a lot of money selling a product that was "the internet, only in 1997." But I am not sure Verizon will be able to do it under the name "Oath." "I think of the Oath business almost like a shopping mall," says a Verizon executive vice president, which is true in the sense that malls were also popular in the 1990s, inspire nostalgia among people who were teens in that era, and now seem to be in terminal decline.
Meanwhile Yahoo! Inc. still exists, for now, but will soon be renamed "Altaba Inc." Its assets now consist mostly of stakes in Alibaba Group Holding Ltd. and Yahoo Japan Corp., which means that its trading price now serves as a handy proxy for the probability of corporate tax reform:
The full market value of Yahoo’s Alibaba stake is around $54 billion, while the Yahoo Japan holding is worth $9 billion. So investors seem to be factoring in a 35 percent tax hit. That exactly matches the rate currently in force, not Mr. Trump’s preferred figure or even the 25 percent that has been put forward by House Republicans. The implication is that shareholders are attaching a very low probability, and perhaps also a long wait, to any meaningful reduction in America’s corporate tax rate.
Of course Yahoo/Altaba is not a pure play on tax reform; it could also be worth closer to its full value if, for instance, Alibaba were to decide to acquire it for stock in a transaction that deferred taxes and gave most of the benefit to Altaba shareholders. Presumably Altaba's name and ticker (AABA to Alibaba's BABA) are meant to remind Alibaba of that possibility. But the fact that Yahoo/Altaba is trading very close to its fully-taxed value suggests that shareholders are not particularly optimistic about that outcome either.
That's kind of weird! There has been a lot of discussion about Marissa Mayer's five-year tenure as CEO of Yahoo, and her something like $239 million of total pay for that time, much of it focused on her efforts to make Yahoo's core internet business relevant again. Arguably she failed at that, but arguably it was impossible. But another part of her job -- economically, by far the most important part of the job -- was to find a tax-efficient way to extract value from the Alibaba shares. And that seems to have gone even worse: The Alibaba shares have been extracted, yes, but they're still worth 35 percent less to Yahoo/Altaba shareholders than they are in the market, suggesting that Yahoo's years of work on tax optimization have not yet had any payoff.
It seems like most published anomalies -- recurring patterns that make stock prices predictable -- are fake, and even the real ones are pretty tiny, but here for your consideration is what looks like a big and silly anomaly: If a company makes significant changes in the "risk factors" section of its annual report on Form 10-K, then its stock will probably go down.
Indeed, a strategy of buying shares of companies with no significant risk-factor changes and betting against companies with major changes would have returned more than 22 percentage points more than the overall market annually.
Here is the paper. "What is really striking, however, is that the stock market reaction to these risk-factor changes occur gradually," notes the Wall Street Journal. "These results suggest that changes to some sections may be quite subtle, and difficult for the market to detect, even though they may have large implications for future returns," the paper's authors write. I suppose an alternative explanation is that, if you believe in the stronger forms of market efficiency, then by the time a new risk factor has made it into the 10-K, it is unlikely to be news, so it's not worth trading on it, so it's not worth reading the 10-K in the first place. If there were really a $20 bill tucked into the 10-K, someone would already have found it. But, nope! It's news.
Elsewhere in market efficiency, here is a charming story about a Barclays PLC equities analyst who upgraded SemGroup Corp. to overweight based on valuation, and then hours later downgraded it back to equal weight when she realized it had more shares than she thought:
Turns out, the abrupt about-face came after the analysts discovered the firm’s new price target failed to tally an estimated 11 million shares when looking at the total stock issued. That led to an artificially inflated valuation.
“We are updating our model and rating due to a share count miscalculation,” she wrote, downgrading the shares back to equal weight and returning her price target to $32 from $36.
As someone whose investment banking career -- like so many others' -- was bedeviled by the difficulties of counting shares, I sympathize with her completely. But it is worth noting that she is a financial professional whose job is to think about how much SemGroup is worth, and she overestimated its value because she counted its shares wrong. Presumably she is not alone: It's not as easy as it looks to count shares! (There are options and whatnot.) The implications are somewhat dizzying: How many public companies trade at incorrect stock prices because investors have counted their shares incorrectly? To what extent is there a viable investing strategy of (1) actually reading corporate filings, (2) buying companies that have fewer shares than the market thinks they have, and (3) shorting companies that have more shares than the market thinks they have?
"This is not a plan to help banks," said the drafter of the U.S. Treasury report about reducing bank regulation to a room full of bankers, and presumably everyone winked in unison. I am not generally a believer in a quantity theory of bank regulation: I don't think that bank regulation is a dial that you can turn between "lax" and "strict," or that the main function of regulators is to find the appropriate setting of that dial. (I think that the main function of regulators is to pass good regulations and not bad ones.) Still it is clearly true that, if there is a dial, it has been turned a bit toward the strict side over the last eight years, and that the Trump administration is keen on turning it back to lax:
The report shows a desire by officials to take a lighter touch after years of new restrictions adopted in response to the 2008 financial crisis and the severe recession that followed.
Of course there are regulatory cycles that are overlaid on top of business cycles. A crash happens, people get upset, they pass new rules designed to prevent crashes from happening, crashes don't happen, people get a bit blasé, they loosen the rules that were designed to prevent crashes, another crash happens, and the cycle repeats. It is not obvious that this cycle is causal: The rules put into place after a crash tend to be aimed at preventing the causes of that crash, and are rarely well suited to preventing the next one. Still, it seems a little awkward to start turning the dial while memories of the last crisis are fairly fresh.
Elsewhere, many of the regulatory changes called for in the Treasury report can be implemented by executive agencies without waiting for Congress to act. And: "The U.S. Department of the Treasury formally recommended that Congress and the White House stop public access to a database that collects consumer complaints about financial companies, tracks responses, and records whether consumers end up satisfied." And: The Treasury report recommending changes to regulations has a certain resemblance to Jamie Dimon's shareholder letter criticizing those regulations.
A worthy goal.
There has been a lot written recently about how the business model of high-frequency trading isn't as lucrative as it used to be, but I must say that at its core it is a very appealing business model. Its two main features are:
- You automate the trading, so you don't have to do it; and
- You get in and out of positions very quickly, so you don't have to take much risk.
The two main stressors of most jobs, it seems to me, are work and risk; if you can program a computer to do the work and avoid the risk then you have yourself a nice little business. Anyway here is a profile of Flow Traders NV, the Dutch algorithmic trading firm, which is moving into currency trading even as its core exchange-traded funds business is facing competitive pressures:
“We do not like to take risk,” Dijkstra says. “When Flow Traders was formed,” adds Rietberg, “the idea was to have a good night’s sleep.” Dijkstra even admits the company name is misleading. “We are not traders,” he says. “We are operators.”
"To have a good night's sleep" is the best possible reason to found a financial firm.
Blockchain blockchain blockchain.
While banks around the world have been experimenting with blockchain technology and building proofs of concept for the past two years, they "haven't really been achieving blockchain nirvana, have they?" Santori said
On Aug. 1, if things go according to plan, he suggested, that state of bliss will be within reach—at least as far as the trading and settlement of private-company stock is concerned.
That's Cooley LLP partner Marco Santori on a new Delaware initiative to allow private companies to issue and trade shares on a distributed ledger. I suspect that blockchain nirvana, like most other forms of nirvana, will remain perpetually out of reach in this imperfect world, but hey you never know maybe this Delaware initiative will do the trick.
People are worried that people aren't worried enough.
Here's an elegant twofer: People are worried that people aren't worried enough about bond market liquidity.
Investor anxiety over the Federal Reserve’s likely decision to soon begin reducing its $4.5 trillion in assets stems in part from the unusual calm in the markets this year and a belief by many analysts the tranquility won’t last.
"Market Calm Unnerves Investors," the headline begins. And "a gauge of volatility in the U.S. Treasury market, Bank of America Merrill Lynch’s MOVE index, settled Monday at 52.32, its lowest level since early August 2014." It's the new complacency index!
In Money Stuff yesterday, I mused that it's a little strange that the CBOE VIX index has become the standard for retail volatility products, instead of variance swaps. I wrote:
A variance swap, as these things go, is pretty simple: We agree that if the volatility of (say) the S&P 500 Index over the next (say) year is more than (say) 10 percent, I'll pay you the difference, and if it's less then you'll pay me. The VIX, meanwhile, is a bit of a monstrosity: It uses the Black-Scholes formula to back out implied volatility from a bunch of S&P 500 options, then uses a complicated formula to average those implied volatilities, and it is based on very short-term options so it constantly needs to be rolled over. If you want to bet on stock-market volatility over the next year, a variance swap just lets you do that straightforwardly; the VIX does not quite.
As Emanuel Derman and others pointed out, that's not right; the VIX does not use the Black-Scholes formula to extract expectations about future volatility from options prices, but instead is a model-free formula based only on option prices. (It's now been corrected online.) There are also some good arguments that the VIX formula, for all its complexity, is actually a more sensible thing to trade than variance swaps. (VIX inventor Devesh Shah notes by email that "the graveyard of equity derivatives is full of short variance swap customers who didn’t realize the payoff was vol squared, and the higher the vol, the worse the hit.") One point is that, while VIX products are somewhat nebulous things -- forward-starting short-term volatility bets, roughly -- they might in fact be exactly the things you want. If the VIX is a "fear index," and you are using it to hedge against the possibility of market panic, you might be more interested in a product that reflects short-term expectations of future volatility than you are in a product that reflects actual volatility.
"Would You Pay $48 a Pound for Leafy Greens?" is the headline here, and my answer is, sigh, yes, that sounds a lot like something I'd do. But I especially like the chef who defends those prices by saying, well, sure you're paying a lot per pound, but it's okay because the greens don't weigh very much: "The prices seem insane, but actually most of the product is really light, so you get a lot." Elsewhere: "Wal-Mart Just Created a Designer Cantaloupe." It seems to go for about a dollar a pound.
Bob Dylan Stuff.
Bob Dylan would not be the first person to sit down with Spark Notes to hastily write a book report just before it was due, but if Andrea Pitzer is correct, he was probably the first person to hand that book report in as a Nobel Prize lecture in literature:
Across the 78 sentences in the lecture that Dylan spends describing Moby-Dick, even a cursory inspection reveals that more than a dozen of them appear to closely resemble lines from the SparkNotes site. And most of the key shared phrases in these passages (such as “Ahab’s lust for vengeance” in the above lines) do not appear in the novel Moby-Dick at all.
This has nothing to do with finance, but it is perhaps my favorite culture story ever so I feel compelled to point it out here. Do you ever feel like you are going through life kind of faking it? Do you constantly dread being revealed as a fraud? Do you look at the work of your idols and find it unimaginable that you could ever accomplish anything like that? Good news, the winner of the Nobel Prize in literature maybe lifted his prize lecture from Spark Notes!
Wall Street Veteran Leads Search for Next Fed Chief. In GE Shakeup, the Return of GE Capital. US online lender SoFi takes step towards becoming a bank. Is America Encouraging the Wrong Kind of Entrepreneurship? The Machine of Tomorrow Today: Quantum Computing on the Verge. Living Trusts for Banking. Ex-Traders in Britain to Face Currency-Rigging Charges in U.S. Cristiano Ronaldo Accused of $16.5 Million Tax Evasion. Trump’s Personal Lawyer Boasted That He Got Preet Bharara Fired. How to deal with a boot on your car. The Swarm of Bees Outside Vox Media, Explained. Bleisure. ‘Papal athleisure.’
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