People are worried about dividendsActually they're not. We have talked before about the theory that a company can never cut its dividend, because it sends a fatal signal that the company is in financial distress and undermines the market's confidence in the company. Whether or not that theory is normally true, it's not true now, because everyone is in the same basic distress and there is safety in numbers: More companies have suspended or canceled their dividends so far this year than in the previous 10 years combined, with companies scrambling to preserve cash as the coronavirus pandemic saps revenue. Through Tuesday, 83 U.S. companies and public investment funds, like real-estate investment trusts, have suspended or canceled their dividends, the highest number in data going back to 2001, according to S&P Global Market Intelligence. In the previous 10 years, 55 companies eliminated their dividends—payouts that companies make to shareholders as a reward for standing by them. "You would be hard-pressed to find a better time to cut dividends and get forgiveness from investors," said David Lafferty, chief market strategist at Natixis Investment Managers.
I have thought a lot recently about the adage that "only when the tide goes out do you discover who's been swimming naked." I am not sure it's true? The "nice" thing about a giant exogenous crisis is that—much like an enthusiastic bull market—it flattens the distinctions between good and bad companies. If you made prudent business decisions to build a stable company over the last decade, and then all your revenue stopped because the world shut down, you are in trouble; if you made dumb risky decisions over the last decade, and then all your revenue stopped because the world shut down, you are in roughly the same sort of trouble. In ordinary times, if you cut your dividend it means that you did something bad. Now, if you cut your dividend, it doesn't mean that you did something bad. It doesn't mean that you didn't! It doesn't mean anything. Good smart prudent companies are cutting their dividends now, everyone is cutting their dividends, which means that if you are a dumb bad company it's a great time to cut your dividend. "Everyone is cutting their dividends" is of course an exaggeration. Actually this is kind of weird: Overall, dividend payouts will fall about 10% this year, Bank of America predicts, with the biggest cuts coming from companies in the energy and consumer discretionary sectors. Last year set a record for dividend payouts at $491 billion.
Ten percent! Dividends will be down something like $50 billion! In a crisis that will shrink the U.S. economy by trillions of dollars! You might think that equity dividends are the residual claims on the economy's cash flows, and that when the economy shrinks dividends would shrink faster, but that is mostly wrong. Even in the best time ever to cut dividends, the dividends are pretty stable. Trade at settlementYesterday, in talking about how oil prices went negative for a while last Monday, I wrote that this was more of a market anomaly than a reflection of real negative value for oil. "It was a relatively small number of investors stuck in the contract after everyone else got out," I wrote. This was mostly true. Volume in the West Texas Intermediate oil futures contract for May delivery wasn't that high on Monday, Apr. 20—many investors had rolled out of the contract by the previous week—and most of the actual market trades, even that day, were for positive prices. When people came to the market to sell oil, and other people came to the market to buy oil, for most of the day, most of them were transacting at positive prices. For a brief period, some of them transacted at (very) negative prices. But actually a lot of oil changed hands at those negative prices. Not because a bunch of investors came to the market all at once looking to sell, and no one would buy from them at negative prices, but for a more technical reason. Some oil traders use "trade-at-settlement" contracts: Instead of buying (or selling) oil futures at the market price at the time of your trade, you agree in advance to buy (or sell) them at whatever the official 2:30 p.m. settlement price is that day.[1] This is a good trade, for you, if your job is to obtain the day's settlement price: For instance, if you run an index fund or exchange-traded fund that is benchmarked to that price, using TAS futures guarantees you the benchmark price. If you invest in oil futures and your boss fires you if you miss the benchmark, you might use TAS futures, that sort of thing. If you are a savvy oil trader attuned to minute-by-minute changes in supply and demand and trying to capture as much value as possible from your skills, you'll probably just trade the futures at their current prices, selling if the price is too high and buying if it's too low. But a lot of oil traders are doing something else, something a bit more passive, and for them the ability to guarantee the settlement price is useful. The problem, last Monday, is that they all ended up guaranteeing themselves a price of negative $37.63, oops. There were a fair number of them; Bloomberg shows volume of 78,452 contracts (78 million barrels of oil, worth almost negative $3 billion at the settlement price) in TAS on Apr. 20.[2] As Bloomberg News reported: Investment products –- including Bank of China's –- typically seek to achieve the settlement price. That often involves so called trading-at-settlement contracts, which allow oil traders to buy or sell contracts ahead of time for whatever the settlement price happens to be. On that afternoon, with trading volumes thin and sellers outnumbering buyers, the trading-at-settlement contracts quickly moved to the maximum discount allowed, of 10 cents per barrel. For a period of around an hour, from 1:12 p.m. until 2:17 p.m., trading in these contracts all but dried up. There were no buyers. The result was the carnage of that afternoon. At 2:08 p.m., WTI turned negative. And then, minutes later, sank to as low as minus $40.32 before rebounding slightly at the close. "The trading at settlement mechanism failed," said David Greenberg, president of Sterling Commodities and a former member of the board at Nymex. "It shows the fragility of the WTI market, which is not as big as people think."
If you combine these two facts—a lot of TAS contracts and not much volume around the settlement time—you get a well-known theoretical problem. Let's say that, earlier in the day, you agreed to buy 3,000 contracts (3 million barrels of oil) using TAS contracts. As settlement time rolls around, the price of oil is dropping, no one wants to buy your TAS contracts from you, and you are going to end up owning 3,000 May futures contracts at 2:30. You might decide to hedge your exposure by selling the underlying futures as the settlement time approaches. You're going to be long 3,000 contracts at the settlement price; might as well get short some contracts to reduce your risk. So you start selling oil futures. This has two effects. One, it reduces your net exposure: You are on the hook to buy oil at 2:30, so you're selling oil now. Two, though, it tends to reduce the settlement price: You're about to buy oil at 2:30, at the market price at 2:30; if you dump oil into the market at 2:25, that will reduce the market price.[3] Let's say you bought 3,000 contracts using TAS when the futures were trading at about $10. Then, as settlement approached, futures started dropping precipitously in a thin, weird, panicky market. You might reasonably say: Look, I'm about to take possession of 3,000 crude oil contracts that I am pretty sure are worth about $10. I will be buying them at whatever the 2:30 p.m. settlement price is. The lower that price is, the better I'll do. Why don't I, uh, hedge my exposure by dumping contracts into this thin, weird, panicky market and see how low the price goes? If you sell 500 contracts and push the price down to negative $37.63, and then buy 3,000 contracts at negative $37.63, on net you have bought 2,500 contracts for negative $37.63—you got paid to take them—and, after the settlement weirdness resolves and things go back to normal, you can sell them for about $10 each.[4] (They did recover to $10 the next day.) The basic pattern—agree in advance to buy (sell) stuff at the official settlement price at some fixed future time, and then sell (buy) a bunch of that stuff in the minutes leading up to the official settlement time with the effect of pushing down (up) the price at which you are buying (selling)—is incredibly common, and the gradation from "sensibly pre-hedging the exposure you will get at settlement" to "sloppily pre-hedging the exposure you will get at settlement" to "manipulating the market to push down the price you will get at settlement" is blurry. If you type in a chat room "lol I'm gonna pound out 500 contracts to push down the settlement price and make fortune on my TAS trades, i am really ripping those muppets' faces off, hope I don't go to prison bro, hashtag fraud hashtag crime hashtag manipulation," you will get in trouble. But if you don't type that, and quietly sell the 500 contracts and the price goes down, then as far as anyone knows that was just pre-hedging.[5] Who controls a company?An occasional theme of this newsletter is that there are complex and disputed legal rules and internal governance documents that determine who has the final authority over corporate decisions, but if you are able to get into the company's office or factory or whatever and lock the door from the inside, you can probably ignore those rules for a while. "The night watchman controls the company, sort of," I once wrote, "if he can change the locks overnight and not let the managers and directors and shareholders in the door the next morning." If you've got the keys, or the passwords for the press-release and corporate-filing websites, that is sometimes better than having the law on your side. Or the seals, having the seals seems to help. Here's a fun story out of China: Chinese e-commerce company Dangdang has accused one of its co-founders of an illegitimate power grab through unauthorized activities. In a statement Sunday, the company said Li Guoqing and several others had stolen dozens of official seals in an attempt to take over operations. The statement added that the seals were invalid, effective immediately, and that all contracts and agreements stamped with them were nullified. In February of last year, Li announced he was no longer involved in Dangdang's operations or holding any positions on the company's board, according to multiple media reports. Months later, Li and his wife Yu Yu, the company's other co-founder, had a spat over shares during their divorce settlement. According to domestic media reports, Li posted a printed notice in Dangdang's office on Sunday announcing that he had been elected Dangdang's chairman and general manager, and was therefore responsible for the company's management following a shareholders' meeting on April 24. The notice also accused Yu of creating losses and having a "negative impact" on the company, adding that she would no longer serve as Dangdang's executive director, legal representative, or general manager. However, Kan Min, Dangdang's vice president, said Yu is still in charge of the company with a 52.23% stake, and Li currently doesn't hold any positions at Dangdang, according to The Beijing News. Kan said Li's takeover claim is illegal, and that none of the company's board members were notified, nor had they attended the meeting in question. According to Kan, Li broke into the company's office with his four bodyguards and secretary, who knew where the official seals were stored.
As far as I can tell there is a factual dispute about who controls a majority of the company's shares; Li believes he does (and that he elected himself chairman and general manager at a shareholders' meeting), while Yu believes she does (and that there was no valid shareholders' meeting). Those are potentially interesting questions of legal ownership and divorce law and corporate formalities and so forth, but if you want to be in charge, the thing to do is not argue over theory but bust into the company's office and take the seals. Who controls Facebook?Mark Zuckerberg, is the answer to that one; that one's an easy one: Within months, Facebook announced the departure of two directors, and added a longtime friend of Mr. Zuckerberg's to the board. The moves were the culmination of the chief executive's campaign over the past two years to consolidate decision-making at the company he co-founded 16 years ago. The 35-year-old tycoon also jumped into action steering Facebook into a high-profile campaign in the coronavirus response, while putting himself in the spotlight interviewing prominent health officials and politicians. The result is a Facebook CEO and chairman more actively and visibly in charge than he has been in years.
I mean, right, he founded the company, and is the CEO, and, crucially, owns it. (That is, he controls 53.1% of the shareholder votes, through his ownership of super-voting stock.) In ordinary public companies the board is the boss of the CEO, with ultimate responsibility to steer the company on behalf of investors; at Facebook the CEO is the boss of the board and if he doesn't like them he can get rid of them. Byrne Hobart writes: While this isn't Corporate Governance 101, it is what investors signed up for, and FB has never had an especially board-centric governance model. A CEO with super-voting stock is expressing the view that sometimes, the board will be wrong, and that disagreements should be decided in favor of that CEO. A decent model is that super-voting stock raises the short-term variance of returns (someone who can't be fired is more tolerant of a bad quarter) and the long-term variance (a bad CEO uses stacked boards to loot the company; a good CEO uses the same tactics to remain contrarian as the company grows).
Fake masksA popular form of securities fraud is pretending to get into some newly high-profile industry. You have a small public company that trades on the pink sheets and doesn't really do much. People are getting really into, say, marijuana stocks, or blockchain. You put out a press release saying "we have built a big blockchain for marijuana and we're talking to a lot of potential customers." Your stock goes up. You sell some stock, at the new high price, to the people who are really excited about marijuana blockchains. The only high-profile industry these days is Covid-19, and so you would of course expect some microcap pivots to the virus. The Securities and Exchange Commission brought a case against one of them on Tuesday: The Securities and Exchange Commission today announced charges against Praxsyn Corp. and its CEO for allegedly issuing false and misleading press releases claiming the company was able to acquire and supply large quantities of N95 or similar masks to protect wearers from the COVID-19 virus. The SEC previously issued an order on March 26 temporarily suspending trading in the securities of Praxsyn. According to the SEC's complaint, Praxsyn, which is purportedly based in West Palm Beach, Florida, issued a press release on Feb. 27 stating that it was negotiating the sale of millions of N95 masks and "evaluating multiple orders and vetting various suppliers in order to guarantee a supply chain that can deliver millions of masks on a timely schedule." On March 4, Praxsyn issued another press release claiming it had a large number of N95 masks on hand and had created a "direct pipeline from manufacturers and suppliers to buyers" of the masks. Praxsyn's CEO Frank J. Brady was quoted in the release as telling any interested buyers that the company was accepting orders of a minimum of 100,000 masks. Despite these claims, according to the complaint, Praxsyn never had any masks in its possession, any orders for masks, or a single contract with any manufacturer or supplier to obtain masks.
Sure, right, of course. "Praxsyn claims to be a 'specialty finance company focused on providing cash flow solutions and medical receivables financing to healthcare providers in the US that focus on personal injury and workers compensation,'" says the SEC's complaint. Its latest financial statements are from a year ago and show zero revenue. It trades over the counter; Bloomberg tells me that it had a market capitalization of $2.5 million, and a stock price of $0.0039 per share, as of yesterday. That February masks announcement pushed the stock above a penny; it closed on Feb. 27 at a 12-month high price of $0.0106. This is the textbook bad stuff. There is however one element of this story that I have never seen before. As the SEC puts it: "After regulatory inquiries, Praxsyn issued a third press release on March 31 admitting that it never had any masks available to sell." From that third press release: While we had stated in our second press release that we were evaluating multiple orders and vetting various suppliers in order to guarantee a supply chain that can deliver millions of masks on a timely schedule, our initial press release could give the reader the impression that we had millions of masks on hand. This is not the case. Rather we had been offered millions of masks and were attempting to vet that supply for quality and consistency while simultaneously vetting corresponding orders. It was never our intention to leave any reader with the impression that we had masks on hand, but rather we were ready to take orders and stand as an intermediary in closing sales to provide masks for sale abroad. Regrettably, our third-party inspectors in Mexico inspected masks that were available for purchase but were determined to be substandard. We have been unsuccessful in obtaining any safe and functional substitute masks. We therefore retract our prior press releases in their entirety and will henceforth cease any and all attempts to source or sell any masks.
You don't see a lot of microcap-pivot securities frauds that get retracted. I suppose putting out a press release explaining that it was all an unfortunate misunderstanding, and that you never expected anyone to read your press release about having millions of masks to mean that you had millions of masks, could … help? Like the SEC would read it and say "ah right there's an innocent explanation, carry on"? I don't really think that's how it works. It didn't work here anyway. Bank of NookI am apparently the only person in the coronavirus era who has not played Animal Crossing, but here is some financial news from Animal Crossing: The estimated 12m players of Nintendo's cartoon fantasy Animal Crossing: New Horizons were informed last week about the move, in which the Bank of Nook slashed the interest paid on savings from around 0.5 per cent to just 0.05 per cent. … The abrupt policy shift, imposed by an obligatory software update on April 23, provoked fury that a once-solid stream of income had been reduced to a trickle with the stroke of a raccoon banker's pen. "I'm never going to financially recover from this," one player wrote on a Reddit online forum. "Island recession incoming," said another. The shock Bank of Nook rate cut mirrors efforts by monetary authorities around the world to ease the effects of coronavirus by cutting rates and lowering longer-term borrowing costs through vast bond-buying programmes.
I would not have guessed that there would be a recession in Animal Crossing; in fact, I would have guessed that the Animal Crossing economy would have become a lot more robust as millions of people were stuck at home playing video games. Animal Crossing is not enforcing social distancing or shutting down non-essential animals, as far as I know, which is not very far. I guess I would have predicted inflation. Anyway here's some more stuff about the cartoon animal economy: As many users pointed out online, the much lower interest rate means that the most effective way of making money is now to gamble on the game's internal "stalk" market — a bourse in which the only commodity is turnips, sold to investors during a single session on Sundays. The root vegetables rot and their value drops to zero after a week. Players can also make money by catching and selling tarantulas, which fetch 8,000 bells apiece. However, the spiders are hard to find, appear only after 7pm local time and are dangerous, as a bite causes players to faint.
A single weekly trading session for turnips! I keep saying that would be a good idea for stocks. (I mean, I usually say a single half-hour daily session, but whatever.) I suppose the cartoon raccoons have things to learn from us, economically, and we have things to learn from the raccoons. Things happenU.S. Economy Shrinks at 4.8% Pace, Signaling Start of Recession. Icahn's 'Beautiful Trade' Pays Off Early With Malls Forced Shut. SEC abandons key plank of proposal to curb proxy advisers. Junk Bonds Bounce Back, Raising Hopes—and Concern. The NCAA will allow college athletes to make money off their names and images. Tyson Foods Helped Create the Meat Crisis It Now Warns Against. 'A Bargain With the Devil'—Bill Comes Due for Overextended Airbnb Hosts. Legal Jargon on Cruise Tickets May Foil Virus Class-Action Suits. Gary Cohn: "For the past five weeks I have not touched a single coin or banknote." Treasury Plans to Reclaim Stimulus Payments Sent to Deceased. CDC extends coronavirus social-distancing guidelines to pets. A reporter went on air wearing a suit coat and no pants, not realizing everyone could see his legs. Kentucky governor apologizes to Tupac Shakur for unemployment mix-up. 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] Plus or minus some small premium or discount, capped at $0.10 in either direction. So if the settlement price ends up being $23.45 and you agreed to a -$0.03 price on your TAS contract, you pay $23.42. [2] That's for YGK0 Cmdty, the ticker for the NYMEX trade-at-settlement contract on May 2020 WTI futures (ticker CLK0 Cmdty). [3] Of course these are two-sided markets, and the people who agreed to sell using TAS contracts might be buying as settlement approaches, cancelling out the effect of your trades. In theory. In practice, as the May contract neared expiration, you might assume that there'd be a lot of "natural" TAS sellers, sellers like ETFs and Bank of China's Crude Oil Treasure product, who really wanted to get out of the contract and sold TAS to reduce their exposure. On the other side the buyers would be arbitrageurs and dealers, buyers who bought TAS to facilitate the natural sellers' trades, and who would hedge by trading the underlying. [4] You have done less well on the 500 contracts that you sold leading up to the settlement, though even there your average selling price should be above the price ($37.63) at which you are buying. If you're successfully pushing the market down, it is going down sort of monotonically; most of your sales will be at prices below the previous sale, which means that your last sale—the settlement price—will be below your average selling price. "Monotonic" does not exactly describe last Monday's price action, but it's not like there were a lot of sales at negative $70 either; the lowest price that the May futures touched was negative $40.32. [5] This describes, precisely, the foreign exchange fixing scandal from a few years ago, which had elements of both innocent pre-hedging and bad chat-room-recorded manipulation; the definitive explanation is this Medium post from Dan Davies. But it is not a pattern invented by FX traders in 2014; every contract that settles based on the market price of something else is susceptible to the exact same problem. | 
Post a Comment