Trading at homeThe traditional view of retail investors is that they buy stocks when prices are high and sell them when they are low. This is mostly a bad approach; the traditional view is that retail investors are bad at investing. I frequently express versions of this traditional view. For instance I regularly say that a good service, for a retail broker, would be to stop answering the phone during a market crash: Retail investors, the traditional view goes, tend to want to sell after market crashes, which is bad (the time to sell is before market crashes), and so a broker who stops them from doing that is saving them money. Or there is the common theory that, when a lot of retail investors get into the market, that is a sign of the top: Retail investors buy stocks when they are high, so if retail investors are all enthusiastically buying stocks then that means stock prices are too high. The famous story is that Joe Kennedy "knew it was time to get out of the market when he received stock tips from a shoe-shine boy." Or we talked in February about a Bloomberg Businessweek cover story about the influence of Reddit day traders on the stock and options markets. On the traditional view, you'd expect a cover story about retail investors day-trading options online to mark the top of the market, and in fact it basically did: The all-time high for the S&P 500 came a week before that story, and the market crashed soon after it was published. There is presumably some psychology embedded in this traditional view. The theory is something like: Retail investors are not trading because they have an informational advantage and a reasonable expectation of profit. They are trading because it is fun, or because it looks fun. They see people making money in the stock market, it looks fun and easy to make money in the stock market, they start trading stocks. As long as it is fun—as long as stocks going up—they increase their investments. When it stops being fun—when stocks go down—they get out. The weird thing about the coronavirus crisis is that it simultaneously (1) caused a stock market crash and (2) eliminated most forms of fun. If you like eating at restaurants or bowling or going to movies or going out dancing, now you can't. If you like watching sports, there are no sports. If you like casinos, they are closed. You're pretty much stuck inside with your phone. You can trade stocks for free on your phone. That might be fun? It isn't that fun, compared to either (1) what you'd normally do for fun or (2) trading stocks not in the middle of a recessionary crisis, but those are not the available competition. The available competition is "Animal Crossing" and "Tiger King." Is trading stocks on your phone more fun than playing "Animal Crossing" or watching "Tiger King"? I have no idea, I have never done any of those things, but I gather that for some people the answer is yes. Nicole Kelleher seems to be having an acceptable amount of fun: The romance novel writer and administrative aide at George Mason University spread $5,000 across Peloton Interactive Inc., Fitbit Inc., Trivago and Dropbox Inc., among others, on the Robinhood Financial app. Her husband, a restaurant executive, told her she needed some real estate. So Kelleher bought shares of MFA Financial Inc. Five weeks later, the portfolio is up almost 12%. ... "I'm a complete noob when it comes to stocks," the mother of high school senior twin boys said while sheltering at home. "It's not thousands and thousands of dollars that I invested, but it's a start. We'll see what happens. I hate to say it, but it's like gambling, isn't it?" There may be something to that. "When the casinos/sport betting closed down, some of that action went to stock markets," speculated Nicholas Colas, cofounder of DataTrek Research, in a note Wednesday. "Google Trends data supports that idea."
That is from a story by Bloomberg's Sarah Ponczek about, among other things, how small investors actually did a great job of timing the bottom in stocks: On their own, Kelleher's purchases don't amount to much. But combined with similar decisions by tiny investors around the country, the buying represents a formidable force that has helped the market claw back more than half the ground lost in its fastest bear-market drop. A trio of giant retail brokerages, E*Trade Financial Corp., TD Ameritrade Holding Corp., and Charles Schwab Corp., each saw record sign-ups in the three months ending in March, with much of it coming at the depths of the swoon. ... "Retail investors -- with more time on their hands -- were watching and stepped in early, which considering the rally we have seen so far appears to be right on time," Yousef Abbasi, global market strategist at INTL FCStone, said by phone.
It is convenient that retail stock trading commissions universally went to zero late last year, making stock trading a more accessible hobby, but it does seem to have become a much more attractive hobby as other entertainment options were closed.[1] Also it has worked out well so far: The stock market is up 30% since its March lows. Retail investors have enjoyed, and helped cause, a huge rally. Still the traditional view remains popular: Confidence that President Donald Trump will quickly solve the pandemic crisis may prove unfounded, and as fast as these investors entered the market, they may flee, says Chris Gaffney, president of world markets at TIAA. "It's a question of how they react to the market sell-off," Gaffney said. "If they don't have the staying power that some of the institutional investors typically have that are more accustomed to these swings, it can create even more volatility." Steven Quirk, the executive vice president of trading and education at TD Ameritrade, says that's an antiquated assumption, though. Historically, the brokerage's clients have in aggregate bought and sold shares at opportune times, he said. They're also accessing educational tools in record numbers.
If you believe the boredom thesis of the current retail rally, that is good news, because that thesis is basically countercyclical: The worse the economy is, the more bored investors will be. If stocks sell off because the coronavirus crisis is longer and worse than expected, there will be even fewer entertainment options and more people will turn, in desperation, to buying stocks on their phones. If someone finds a magic cure for the virus tomorrow, stocks will rally and all the new retail investors will happily sell into the rally at the top and go back to their other, more entertaining, entertainments. Trading at banksMy basic view is that if you run a bank, a crisis that shuts down the economy is bad because people stop paying back their loans, but if you run a securities trading business, a crisis that shuts down the economy might be good for you, since you are in the business of supplying liquidity to investors in securities, and liquidity is in high demand in a crisis so you can charge a lot for it. This means that having a big securities trading business can make a universal bank safer: A big bank that is just a bank will do poorly in an economic crisis, while a big bank that also does a lot of trading will have some trading profits to offset its banking losses. That is obviously a little oversimplified. In a big financial crisis there is a lot of money to be made, and banks' trading desks are, for a variety of reasons, in a good position to make it. But in a big financial crisis there is also, obviously, a lot of money to be lost—more money to be lost, really—and banks' trading desks are not not in a position to lose it. I mean, you shouldn't. If you run a trading desk at a bank, you should have been making a lot of money over the past couple of months. That's what they're paying you for. But the nature of a financial crisis is that you are paid more to provide liquidity because providing liquidity is riskier, and if you get the risks wrong, well, you know. And so we have talked in recent weeks—bank earnings season—about how well a lot of banks did in trading last quarter, and how their trading profits cushioned their loan provisions, and also how their gung-ho traders pushed each other to come into the office despite the coronavirus and stay-at-home orders because there was just so much exciting money to be made. "This is the best run I've ever had," one trader said in March. "You'll have to drag me out of there." And this week trading more or less bailed out Barclays: Barclays PLC said the trading unit in its investment bank generated record quarterly revenue, helping to stabilize the U.K. lender as the coronavirus pandemic caused profit to fall and provisions for bad loans to rise. The strong trading performance buttresses Barclays Chief Executive Jes Staley's universal banking strategy. He has been under pressure from activist investor Edward Bramson, whose firm Sherborne Investors has said it wants Barclays to shrink its investment bank and become a more narrowly focused consumer bank. Mr. Staley said the results demonstrate the value of diversification. "We want to make sure this bank is positioned to allow for the recovery and to be a firewall as we face the economic challenges brought on by the pandemic," he said.
But while the trading business can be a hedge to the banking business, in that its risks are somewhat uncorrelated to the risks of banking, it still has lots of risks. There are going to be some losers too: Société Générale slumped to an unexpected loss in the first quarter as its traders were left wrongfooted by market turmoil that benefited most rivals, reigniting questions about the future of the lender's underperforming investment bank. SocGen, which on Thursday published its quarterly results almost a week early, said it had been "penalised heavily" by volatile swings in stocks and the price of oil as coronavirus forced major economies into lockdown. It pledged hundreds of millions in additional cost cuts and warned loan impairments could hit €5bn this year. … The French bank blamed "extraordinary dislocations" in equity markets in late March and a rash of companies cancelling their dividends, which resulted in big losses on equity derivatives linked to potential future shareholder payouts. It also said it was hit by €55m in "counterparty default" linked to hedge fund clients.
I mean, if one of your business lines is writing insurance on companies' dividend payments, an economic crisis in which companies all cut their dividends is going to be bad for that business, yes. Crowdsourced short sellingThe basic idea of short selling is that the market thinks some company is worth a lot, you think it is worth much less, and so you bet against it and hope you are right. It is a thesis of market inefficiency, a constant search for situations where the market is missing something essential. The basic idea of noisy, or activist, short selling is that the market thinks some company is worth a lot, you think it is worth much less, you bet against it, you tell everyone the problems with the company, they realize you are right, and you make money. You are combining fundamental analysis—a belief in your ability to see things that the market missed—with persuasion; you are both betting on and influencing reality. You are betting that the market is inefficient but you can make it more efficient. Here's a story about the troubles of B.R. Shetty, the founder of Abu Dhabi-based (and London-listed) NMC Health, which features this delightful anecdote about noisy short seller Carson Block of Muddy Waters: On August 6, 2019, Muddy Waters teased on Twitter a report on a UK-based investment firm it was going to release the following day: "Muddy Waters is now in a blackout period until tomorrow 8 am London time when we will announce a new short position on an accounting fiasco that's potentially insolvent and possibly facing a liquidity crunch. Investors are bulled up about this company, we are not." … But on that day in August, when Muddy Waters tweeted that it would release a report about an accounting fiasco at a London-listed firm, Block noticed an interesting development: the stock of NMC Health dropped. "We had tweeted in advance an innocuous comment about our intention to initiate a campaign the next day on an unnamed London listed firm. NMC happened to drop significantly on the tweet. That's a pretty strong indication that the market knows something isn't right at the company, so we took a look ..." Block told ET Magazine in an emailed response.
Muddy Waters hadn't been talking about NMC, but once the stock dropped they looked into it. Four months later they released a short report on NMC that "set off a chain of events that has stunned UAE"; trading in NMC was suspended in February, and this week it announced that it had found a lot of fraud. Muddy Waters' short bet looks pretty good. Doesn't it feel like this approach should be generalizable? If you have a reputation for being good at spotting corporate frauds, you could just announce "hey we have spotted a big fraud, can you guess what it is?" See what people guess. If people keep naming one company, maybe it's a fraud and you might as well short it. (And, ideally, check to see if it's a fraud). It's a lovely story of short selling that relies on market efficiency, a short seller using market prices to tell him which stocks to short. Fannie and FreddieThroughout my career at Bloomberg, there have been periodic news articles and opinion columns and proclamations by politicians that giant mortgage enterprises Fannie Mae and Freddie Mac have to be taken out of government conservatorship and returned to private ownership, and that that will happen any day now. And I have always replied, ha ha ha sure, people have been saying that for over a decade now, in Republican and Democratic administrations, in crises and in booms, and it has never gotten any closer to happening. "If you've spent the last 10 years betting that Fannie and Freddie will not be returned to private ownership," I wrote in 2018, "you've been right every time." That bet did not get any worse in the last two years. What's new? Fannie Mae and Freddie Mac face strong headwinds from the mayhem coronavirus has spread through the mortgage market, complicating the Trump administration's plans to free them from U.S. control anytime soon. The companies, which backstop roughly $5 trillion of mortgages, might have to set aside huge amounts of money to cover the risk of souring home loans. They may also take a hit from the pain being inflicted on nonbank mortgage servicers as millions of borrowers delay making their monthly loan payments. Meanwhile, the outlook for the U.S. housing market -- the engine that powers Fannie and Freddie's profits -- looks bleak. ... "This crisis is dashing hopes for a quick exit from conservatorship," said Jaret Seiberg, an analyst at Cowen & Co. "If there's not a lot of clarity on their losses or capital it's hard to envision the market providing the $100 billion of fresh capital they would need to raise down the road."
Imagine having had hopes for a quick exit from conservatorship! Even before this, I mean. After 12 years of conservatorship they were so close to escaping, and then the virus hit, oh well. Look the thing is the main bearer of credit risk in the U.S. mortgage market is, effectively, the U.S. Treasury, through its conservatorship of Fannie and Freddie. (Leaving aside a market for credit-risk-transfer securities, in which investors buy some of that risk from the government, and which was very important to the conservatorship escape plans before the virus hit.) A year ago you could have said things like "that is bad" or "that is abnormal." But here in April 2020, the U.S. Treasury and the Federal Reserve have jumped in to bear all sorts of credit risk in all sorts of U.S. markets, because the economy has shut and the government has decided that the best way to mitigate the effects of the shutdown is by giving people money from the government. So there is a small-business loan/grant program and a medium-sized-business loan program and a big-business loan/bond program and a municipal-bond buying program and a commercial-paper buying program and basically any credit market you can think of, the government is stepping in to support it. In the mortgage market, the government has basically decreed that nobody has to pay their mortgage for six months, and if nobody pays their mortgage for six months then someone is going to lose money, and the mechanics of that are a little complicated (mortgage servicers are in a tough place), but conceptually the someone who ought to lose money when people don't pay their mortgages is the guarantor of those mortgages, i.e. Fannie and Freddie, i.e. the U.S. Treasury, and that's fine. That is what Fannie, and Freddie, and the Treasury conservatorship, are there for. The government-bearing-credit-risk infrastructure, in mortgages, was already in place. Speaking very generally, over the past two months the U.S. government has basically said "hey if anyone can't pay their debts that's on us." That's nothing new for mortgages! The government has been on the hook for mortgage payments for 12 years, and everyone has gone around talking about how unnatural and bad that was and how it had to stop, but instead the rest of the credit market has become more like the mortgage market, with the government as the last-resort bearer of risk. Mortgages were just ahead of everyone else. I mean eventually corporate and muni and small-business credit markets will go back to normal, and maybe mortgages will too, but the point is that it's convenient, in this crisis, that mortgages were already a government business. Imagine if they had privatized Fannie and Freddie last year and had to bail them out again now! Yeesh. Converts are goodIn my past life I was a marketer and underwriter of convertible bonds, and whenever convertible bonds are in the news—vanishingly rarely!—I can't resist marketing them a little more. Here they are, in the news: Struggling companies desperate for cash during the coronavirus crisis are raising money in a way that hasn't been this widely used since the 2008 recession: selling bonds that can convert into stocks. Nearly 60% of all money raised in equity capital markets in April through Tuesday—totaling more than $12.5 billion—has been through convertible-bond sales, according to Dealogic. … For companies struggling today, selling convertible debt could be one of few options to raise money. "We've had a bit of a phenomenon where lots of other sources of capital are unavailable or unattractive for many issuers," said Santosh Sreenivasan, head of equity-linked capital markets in the Americas at JPMorgan Chase & Co. … Meanwhile, the rest of the equity capital markets have dried up. Only a handful of small companies have launched initial public offerings since mid-March, and public companies are avoiding selling more stock if they can afford to after share prices tanked. "The convertible market in the last 20 years has proven to be resilient. Historically, it's been the last to close and the first to open," said Michael Voris, global head of convertible-bond financing at Goldman Sachs Group Inc.
(Disclosure, I worked with Voris at Goldman.) One part of this story is that an economic crisis tends to be bad for credit, which makes it hard to issue bonds, and it tends to be bad for stock prices, which makes it hard to issue stock. But a crisis also tends to increase the volatility of stock prices. Convertible bonds are bonds with an option to buy stock, and stock options become more valuable as volatility increases. Issuing a convertible now, for a lot of companies, will be less attractive than it was last year: Your credit is worse and your stock price is lower, and both of those things go into the price of the convertible. But at least your volatility will be higher, and people will pay you more for that, partly offsetting the other problems. Your other financing choices—straight bonds, stock—don't have that advantage; they just got straightforwardly worse. A roughly equivalent way of putting it is that if you are an investor, buying stock now feels bad because the crisis might get worse and stocks might go to zero, but buying bonds now feels bad because the crisis might get better and then stocks might rally a lot while you just get your money back with interest. The pitch for convertibles is always that they give you stock-like upside but protect you on the downside, and in a crisis full of uncertainty that pitch is particularly appealing. Elsewhere here's a story about how private equity firms, which are usually in the business of taking public companies private, are spending some of this crisis buying privately negotiated convertibles in public companies: Since late March, companies have raised about $8 billion from buyout shops in negotiated deals known as a PIPE -- private
investment in public equity. While buyout shops are typically in business to buy companies outright, these deals instead get them fat dividends and eventually an equity stake. For struggling companies, PIPE financing still isn't cheap. But with their stocks depressed, they may have little choice
other than to turn to private money. And at the very least, the competition among buyout shops affords them an opportunity to negotiate terms more favorable than existed before the Covid-19 crisis.
Things happenThe Humbling of Exxon. Royal Dutch Shell Cuts Dividend for First Time Since World War Two. WeWork Troubles Take Deeper Bite Out of SoftBank. China faces wave of calls for debt relief on 'Belt and Road' projects. Developing Countries Draw Down Reserves to Shield Currencies. BlackRock's growing clout carries risks for asset manager. SEC Investigates China's Luckin Coffee Over Accounting Scandal. PG&E Ordered by Judge to Overhaul Tree Trimming, Line Inspections. After One Tweet To President Trump, This Man Got $69 Million From New York For Ventilators. Manhattan Homebuyers Rewriting the Rules on Deals in Virus Era. Pegu Club, One of the Best Bars Ever, Will Close for Good. Thousands of People Are Building a 1:1 Recreation of Earth in 'Minecraft.' If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] You could tell a non-entertainment version of this story. Today's Wall Street Journal also has a story about the retail trading boom, which quotes Thomas Peterffy, the chairman of Interactive Brokers Group Inc.: "'Many people have been promising to themselves that one day they would learn about how to invest and manage their own finances,' Mr. Peterffy said. 'Now that they must stay at home, they have the time to do that.'" See, it's learning, not gambling. Edutainment, maybe. | 
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