The Universe of Discourse

Thu, 06 Aug 2020

Lately my favorite read has been Matt Levine’s Money Stuff articles from Bloomberg News. Bloomberg's web site requires a subscription but you can also get the Money Stuff articles as an occasional email. It arrives at most once per day.

Almost every issue teaches me something interesting I didn't know, and almost every issue makes me laugh.

Example of something interesting: a while back it was all over the news that oil prices were negative. Levine was there to explain what was really going on and why. Some people manage index funds. They are not trying to beat the market, they are trying to match the index. So they buy derivatives that give them the right to buy oil futures contracts at whatever the day's closing price is. But say they already own a bunch of oil contracts. If they can get the close-of-day price to dip, then their buy-at-the-end-of-the-day contracts will all be worth more because the counterparties have contracted to buy at the dip price. How can you get the price to dip by the end of the day? Easy, unload 20% of your contracts at a bizarre low price, to make the value of the other 80% spike… it makes my head swim.

But there are weird second- and third-order effects too. Normally if you invest fifty million dollars in oil futures speculation, there is a worst-case: the price of oil goes to zero and you lose your fifty million dollars. But for these derivative futures, the price could in theory become negative, and for short time in April, it did:

If the ETF’s oil futures go to -$37.63 a barrel, as some futures did recently, the ETF investors lose $20—their entire investment—and, uh, oops? The ETF runs out of money when the futures hit zero; someone else has to come up with the other $37.63 per barrel.

One article I particularly remember discussed the kerfuffle a while back concerning whether Kelly Loeffler improperly traded stocks on classified coronavirus-related intelligence that she received in her capacity as a U.S. senator. I found Levine's argument persuasive:

“I didn’t dump stocks, I am a well-advised rich person, someone else manages my stocks, and they dumped stocks without any input from me” … is a good defense! It’s not insider trading if you don’t trade; if your investment manager sold your stocks without input from you then you’re fine. Of course they could be lying, but in context the defense seems pretty plausible. (Kelly Loeffler, for instance, controversially dumped about 0.6% of her portfolio at around the same time, which sure seems like the sort of thing an investment adviser would do without any input from her? You could call your adviser and say “a disaster is coming, sell everything!,” but calling them to say “a disaster is coming, sell a tiny bit!” seems pointless.)

He contrasted this case with that of Richard Burr, who, unlike Loeffler, remains under investigation. The discussion was factual and informative, unlike what you would get from, say, Twitter, or even Metafilter, where the response was mostly limited to variations on “string them up” and “eat the rich”.

Money Stuff is also very funny. Today’s letter discusses a disclosure filed recently by Nikola Corporation:

More impressive is that Nikola’s revenue for the second quarter was very small, just $36,000. Most impressive, though, is how they earned that revenue:

During the three months ended June 30, 2020 and 2019 the Company recorded solar revenues of $0.03 million and $0.04 million, respectively, for the provision of solar installation services to the Executive Chairman, which are billed on time and materials basis. …

“Solar installation projects are not related to our primary operations and are expected to be discontinued,” says Nikola, but I guess they are doing one last job, specifically installing solar panels at founder and executive chairman Trevor Milton’s house? It is a $13 billion company whose only business so far is doing odd jobs around its founder’s house.

A couple of recent articles that cracked me up discussed clueless day-traders pushing up the price of Hertz stock after Hertz had declared bankruptcy, and how Hertz diffidently attempted to get the SEC to approve a new stock issue to cater to these idiots. (The SEC said no.)

One recurring theme in the newsletter is “Everything is Securities Fraud”. This week, Levine asks:

Is it securities fraud for a public company to pay bribes to public officials in exchange for lucrative public benefits?

Of course you'd expect that the executives would be criminally charged, as they have been. But is there a cause for the company’s shareholders to sue? If you follow the newsletter, you know what the answer will be:

Oh absolutely…

because Everything is Securities Fraud.

Still it is a little weird. Paying bribes to get public benefits is, you might think, the sort of activity that benefits shareholders. Sure they were deceived, and sure the stock price was too high because investors thought the company’s good performance was more legitimate and sustainable than it was, etc., but the shareholders are strange victims. In effect, executives broke the law in order to steal money for the shareholders, and when the shareholders found out they sued? It seems a little ungrateful?

I recommend it.

Levine also has a Twitter account but it is mostly just links to his newsletter articles.

[ Addendum 20200821: Unfortunately, just a few days after I posted this, Matt Levine announced that his newletter would be on hiatus for a few months, as he would be on paternity leave. Sorry! ]

[ Addendum 20210207: Money Stuff is back. ]

[ Addendum 20221204: This article about the balance sheet circulated by FTX in the hours before its bankruptcy may be my favorite of all time. ]

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