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rasoulallahbinbadisassalacerhso  wefaqdev iktab
الأحد, 22 آذار/مارس 2020 18:25

Everyone Could Use a Little Break

كتبه  By Matt Levine
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Should markets be shut?

I dunno, probably not, but some people do think so. The basic argument for shutting markets is that stuff is real bad, but temporarily; if markets are open, everyone will be forced to reckon with the badness, sell their assets, call in their margin loans, and generally trigger further badness; if you just put everything on pause for a month, then the temporary badness can recede and everyone can come back, calmed and refreshed and ready to buy assets at their long-term fundamental values. Financial markets are in the business of propagating information; when information is really bad, why propagate it? Why not wait until there is better information to propagate? 

I should say that that is the financial argument; there is also a psychological argument along the lines of, aren’t you tired? Wouldn’t you like to stop thinking about the market for a few weeks?

Anyway I don’t really buy it as an argument for closing stock markets, but it’s worth noting that the basic form of the  argument has a much broader application. We talked yesterday about a mortgage real estate investment trust suing one of its banks to stop a margin call: The bank gets to seize and sell the REIT’s collateral if the price of that collateral drops, but the REIT argues that (1) that price drop is temporary and not a reflection of fundamental value and (2) seizing and selling the collateral will make the crisis worse. If you believe that line of argument—and it has a real appeal—then you are halfway to “ehh all the prices now are crazy and selling will make everything worse, just close the market.”

Or more broadly still, a lot of the Federal Reserve’s actions in the current crisis are of the form “everyone is selling everything so we will just buy everything and hold on to it for safekeeping until everyone comes to their senses.” It is not quite a market pause, but it has a little of the same effect; the effect is to sort of sedate the market and transport it quietly from today’s craziness to a hoped-for calmer future. You could very bluntly achieve a similar effect—in particular financial markets, mind you, not, like, in the world—by shutting down markets; if no one is allowed to sell anything, then the Fed wouldn’t have to buy it.

A lot of other financial-markets news these days has that form. Here is sort of a trivial one:

S&P Dow Jones Indices, FTSE Russell and ICE Data Services have all postponed updates to benchmarks, which would normally be rebalanced at the end of the month to reflect changing market prices.

Analysts said index providers are nervous about compelling index-tracking investors to buy or sell large quantities of bonds at a time when the creditworthiness of many borrowers was uncertain and prices were volatile.

“The securities moves this month have been so extreme that they are afraid a rebalancing will force trillions of indexed and passive money to adjust their portfolios,” said Jim Bianco of Bianco Research.

A small part of the mechanism by which financial markets propagate information is by index inclusion: Stock prices go up and down, companies whose stocks go down get booted out of large-cap indexes, large-cap index funds sell their stocks, the world moves toward a kind of truth, in its evaluation of which companies are actually big. In good times, this marginal move toward truth is good; it enhances efficiency, it makes your index fund more reflective of the market. In terrible times it seems at best superfluous, but also potentially destructive: If a company has crashed out of the index because of panic about its prospects, why add to that panic by making index funds sell? Well, because of truth and efficiency. Or not. The index providers seem to have opted for not.

Actually stock indexes are the least of it:

Peter Chatwell, head of multi-asset strategy at Mizuho, said it looked like index providers were aware that if institutions were forced to reshuffle their portfolios in illiquid markets, passive funds would have to sell the bonds which have just lost their “investment grade” rating.

I have semi-seriously suggested that the ratings agencies should just take a few months off, so that investors who are limited by mandate to buying investment-grade bonds (a group that now includes the Fed!) can continue buying formerly-investment-grade-but-now-in-limbo bonds. Part of the way that markets propagate information is by ratings: A company’s prospects decline, the ratings agencies cut its ratings, investors who are limited to buying highly-rated bonds sell its bonds, and they migrate out of risk-averse hands into risk-seeking ones. In good times, good! Let people know about their risks, put those risks on people who want to bear them. In bad times, you know, we’re all gonna bear some risks, let's not slice things too finely. The ratings agencies have not taken my advice, but the index providers—who decide what bonds investment-grade index funds can own—seem to be coming to a similar place.

Other things too. Should we ban short selling? No, of course not, it’s dumb, in part because short selling is a critical part of a lot of market plumbing, and banning short selling messes with people’s ability to buy things like options and convertible bonds and do margin loans and generally support the functioning of markets. But another argument against banning short selling is that short sellers help keep prices more accurate and informative, and I guess what I am saying here is, maybe accuracy is not the highest goal right now. Here is the chief executive officer of Euronext praising the government of France (and those of several other European countries) for temporarily banning short selling, and here is short seller Carson Block disagreeing

Or here is a proposal from three Oxford law professors for “COVID-19: A Global Moratorium for Corporate Bonds.” The moratorium would be on paying back the bonds: “We suggest that emergency legislation be introduced to extend the maturity of outstanding bond debt. The basic idea would be to buy time for bond issuers, reducing the risk of premature insolvency filings and fire sales.” Really the strongest argument against shutting financial markets is that you can’t pause every financial transaction; people will still have bills to pay and need money to pay them, and if they can’t sell stocks or bonds in the stock or bond market then their situation will just become more difficult. But of course if you could pause every bill for everyone then that objection would be less compelling. 

Or my favorite form of market pause these days is retail brokers’ and wealth managers’ computers crashing:

Morgan Stanley says it’s working on providing remedies for any clients stung by a technology problem in its wealth-management business, which lasted about four hours Wednesday.

The issue wasn’t related to trading-volume issues or the fact that about 90% of the bank’s staff is working from home amid the coronavirus outbreak, according to a Morgan Stanley spokesperson. Rather, the problem was from a bug related to an external software provider.

No! Wrong! Provide no remedies! Embrace it! “Dear valued clients, we have decided that the best thing to do in these difficult times is to shut the market. For you, anyway. We hope you appreciate the excellent service we are providing.”

That Ackman trade

Ahh it’s slightly less great than I thought. We talked yesterday about the following astonishing paragraph in Bill Ackman’s recent letter to Pershing Square Capital Management LP investors:

On March 23rd, we completed the exit of our hedges generating proceeds of $2.6 billion for the Pershing Square funds ($2.1 billion for PSH), compared with premiums paid and commissions totaling $27 million, which offset the mark-to-market losses in our equity portfolio. Our hedges were in the form of purchases of credit protection on various global investment grade and high yield credit indices. Because we were able to purchase these instruments at near-all-time tight levels of credit spreads, the risk of loss from this investment was minimal at the time of purchase.

He paid $27 million for a bet that paid off $2.6 billion, just an all-timer of a trade, and one that I struggled to explain. (Spreads had roughly doubled; how do you make a 100x return on that? Options?) But Ackman has now sent another investor letter explaining the trade and it’s a little more pedestrian. That $27 million is not the total cost of protection; it is the running cost of protection. Here’s his explanation:

In February, the Pershing Square funds purchased credit default swaps (CDS) on various investment grade and high yield credit default swap indices, namely the CDX IG, CDX HY, and ITRX EUR. At the time of purchase, the IG or investment grade indices were trading near all-time tight levels of about 50 basis points per annum. The high yield index, the CDX HY, was also trading near its lowest spread ever. When one adjusts for the fact that a number of companies in the high yield index were on the brink of default (and these near-default companies’ spreads were in the thousands of basis points), the spreads on the rest of the companies in the index were actually well below the 2006-2007 all-time
lows. …

This is best understood by a somewhat simplified example: assume you purchase $1 billion notional of CDS on the IG index for 50 basis points. In summary terms, you are committing to pay 50 bps times $1 billion, or $5 million of premium per annum for five years. Assuming you sell the CDS a month after purchase at a spread of 150 basis points, you would receive approximately the present value of the spread, in this case 100 basis points per annum, times the $1 billion notional amount of the contract for the remaining 4 years and 11 months of the contract’s life.

The present value of 100 bps for 4 years and 11 months is a number which is slightly less than the present value factor times 4.92 years times 100 basis points times $1 billion, or approximately $45 million. Since the contract in this example was only outstanding for one month, the total premium paid would be 1/12th of the annual payment of $5 million or approximately $417,000. Therefore, for a total outlay of $417,000, you would make $45 million. This understates your actual risk, however, because if spreads were to narrow during that month, you would lose substantially more than the premium. That said, if you were confident that spreads would either stay the same over the next month or widen, you would only be risking the premium of $417,000.

Oversimplifying somewhat, Ackman didn’t agree to pay $27 million for a huge hedge; he agreed to pay $27 million per month for five years for the hedge. 1  In the event, it moved so dramatically in his favor so quickly that he was able to terminate at a huge profit in less than a month. If it had taken another month, presumably he’d have kept the bet on and paid another $27 million and the trade would still look amazing, though not quite as amazing (50x return). If in fact we had moved into a new golden age of corporate credit, and spreads had tightened, he might have had to pay hundreds of millions of dollars to terminate the trade. 2  I take his point that, when he entered the trade, spreads were at all-time tights and that risk seemed low, so it was asymmetrically attractive, but, you know, those were the market rates; lots of people lost a lot of money over the last decade betting that rates couldn’t get any lower. In any case, though, the $27 million and $2.6 billion are sort of apples-to-oranges amounts; Ackman got into the trade with a small cash payment and a larger mark-to-market risk, though he got out of it with a much larger mark-to-market gain.

I should be clear that I say all of this as a criticism of my own naivety yesterday in interpreting the trade, not as a criticism of Ackman for doing it. It’s still a really good trade! But it’s not quite the pristine just-go-buy-a-winning-lottery-ticket trade that I’d thought it was. 

Speaking of pauses

One way that financial markets respond to information is by firing investment-bank employees. It is just a career path that is levered to financial markets: When markets go up, banks hire people; when they go down, banks lay people off. In general this seems like a trade that investment bankers willingly accept, and part of their high pay in the good years is to compensate them for the high career risk in the bad years. On the other hand, as a matter of people management you might think it is essential, in a global pandemic, to develop a sort of we’re-all-in-this-together camaraderie among your staff, and telling them that they won’t get laid off is a good way to do that. 

And so a lot of big banks are doing that, though in wildly varying ways. At Morgan Stanley, Jamie Gorman is pretty good:

“I am sure some, if not many, of you are worried about your jobs,” Gorman wrote. “While long term we can’t be sure how this will play out, we want to commit to you that there will not be a reduction in force at Morgan Stanley in 2020. Aside from a performance issue or a breach of the code of conduct, your jobs are secure.”

“Performance issue” is I suppose pretty elastic—it’s not as good as Facebook Inc.’s plan to give all employees the same performance review—but it’s basically straightforward: We’re not going to lay people off in 2020. Also it is communicated in human language, which is a plus.

This is less great:

“To avoid additional emotional distress in the current environment, we will defer new communications of individual restructuring actions to potentially affected employees,” Deutsche Bank said in a memo to staff seen by Bloomberg. “The pause will be in place until we see a return to greater stability in the world around us.”

The Morgan Stanley one sounds like “we’re not firing people for the rest of the year.” The Deutsche Bank one sounds more like “we are firing people in our secret hearts, but we’re not going to tell them until things get better.” Then there is this incomprehensible approach from Wells Fargo:

Wells Fargo & Co., the firm with the biggest workforce among U.S. banks, also suspended job cuts. “We have paused initiating new displacements,” Beth Richek, a spokeswoman for the San Francisco-based lender, said Thursday in a statement. “We will continue to evaluate during this fluid situation.”

Why say you are continuing to evaluate? Still could be worse:

“Because of the extraordinary impact of the Covid-19 pandemic, we have decided to pause, for the time being, the vast majority of redundancies associated with this program where notices have not already been issued,” HSBC CEO Noel Quinn told staff in a memo on Thursday.

That’s “a lot of you will be fired eventually, but most of the people who will eventually be fired and have not been fired already will not be fired for the time being.” Better than nothing, but not much better. 

How is the financial industry holding up?

I don’t know who this person is but he is my pick to be the next chief executive officer of Goldman Sachs Group Inc. 3 :

“What I love [on zoom calls] is looking at people’s book cases — the amount of John Grisham . . . they have on there. And these are educated people!” one senior banker said of the glimpse he has had into his colleagues’ personal space.

This is a man who, in the midst of a catastrophic public-health and financial-markets crisis, uses his time to examine and critique the literary tastes of his colleagues and clients. And he’s a senior investment banker. Like oh sure would go around doing this, absolutely, but I had only a brief and modest career as an investment banker. I sort of assumed that by the time you got to the C-suite it was impossible to, like, be a snob about John Grisham. “I didn’t even see their bookcases, I was too focused on negotiating the subtle points of the deal,” that sort of thing. But no, this guy has his priorities straight! 

Anyway that is from a story about how big-time bankers and lawyers and financial professionals are coping with working in their far-flung vacation homes during the coronavirus crisis. It seems … you know, fine? Better than working in my Brooklyn apartment probably, pretty nice really, though they do more conference calls. It’s a mixed bag:

Mr Schiele has brought his frenetic life with him. “It’s crazy. It’s one call after the other with boards and executives,” he said. “For exercising, I’ve sent pictures of the equipment I have access to down here to my personal trainer and he puts together a training plan for me each week, which is awesome.”

Elsewhere in coronavirus responses, what word do you think goes in this blank?

“It feels like strapping on a flak jacket and jumping on hand grenades going off every day,” said the head of one US _________. “And it feels like I’ve lost some body parts.”

If you answered “hospital,” or “infantry battalion” for that matter, you are wrong, the correct answer is, of course, “hedge fund.” I have had several occasions recently to quote former Goldman CEO Lloyd Blankfein, who, in the depths of the 2008 crisis, told a worried colleague: “You’re getting out of a Mercedes to go to the New York Federal Reserve. You’re not getting out of a Higgins boat on Omaha beach.” Still true! But at least in the early days of the financial crisis, the bankers were, to use the unavoidable military metaphor, on the front lines; that was a crisis that started in the financial system and spread elsewhere. The coronavirus is not! The coronavirus is primarily a health crisis; people are actually walking into work every day—at emergency rooms, not hedge funds—at significant risk to their lives. It is secondarily an economic crisis—the economy has shut down—and, at a further remove, a financial one. The financial crisis is real enough, and it is a stressful time to manage a hedge fund, but maybe lay off the risking-my-life metaphors for a while?

How’s your cortisol?

What if I told you that when people are stressed they tend to trade their stocks more? You would probably believe me! But here it is with science:

We examine the impact of testosterone and cortisol levels on several commonplace investment biases using realistic trading simulations. Cortisol, the biological marker of stress, is positively related to the disposition effect and portfolio turnover, which is consistent with the relation between judgment errors and stress in social settings. Testosterone, the male hormone, is also positively related to portfolio turnover, which is consistent with androgen-driven behaviors. Overall, the results show that the endocrine system plays a significant role during financial decision-making, that has important consequences for the financial industry.

That is from “On the Physiology of Investment Biases: The Role of Cortisol and Testosterone,” by John Nofsinger, Fernando Patterson and Corey Shank. 

Things happen

The Federal Reserve's Coronavirus Crisis Actions, Explained (Part 1Part 2). What central banks giveth they taketh away with margin calls. Investors, Fearing Defaults, Rush Out of Junk BondsZero-Coupon Bond Index Nears Zero Bonds. Boaz Weinstein had a good quarter. Regulators Try to Ease Financial-Reporting Burdens. ViacomCBS’s Free Fall Forces Parent to Give Up Borrowing Power. Who’s Betting on a Rebound in Stocks? Corporate Insiders. Venezuelan Leader Maduro Is Charged in the U.S. With Drug Trafficking. Nude woman ignores coronavirus warnings to straddle ‘Charging Bull.’ Survey: 12 percent of at-home workers skip video due to lack of clothes. 

Link : https://www.bloomberg.com/opinion/articles/2020-03-27/everyone-could-use-a-little-break

قراءة 1272 مرات آخر تعديل على الأحد, 29 آذار/مارس 2020 08:20

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