Index Makers and Ether Profits
(Bloomberg View) -- Indexing.
Honestly it's a little weird that there's no Fortune 500 index. Now there will be:
Time Inc said Monday it would license its Fortune brand for stock indexes based on the Fortune 500 in a new partnership with Barclays PLC in an effort to diversify Time's revenue into the growing index-investing business.
The Barclays Fortune 500 Equal Weighted Index will launch in July, tracking about 450 publicly traded companies with a combined revenue of more than $11 trillion, Dupe Adeyemo, a director at Barclays, told Reuters.
Yes, it's a good brand, but also you know that there will be people who are like "I know I am supposed to index by buying that 500-stock thing, what's it called," and they'll think of the Fortune 500, and now they'll have a place to put their money. This index only has 450 stocks (there are private companies in the Fortune 500), but close enough. Also: equal weighted! It's a good brand and it's smart beta!
Honestly it would not be especially weird if there were no Quincy Jones index. He is a musical legend, sure, but not as far as I know famous for his stock-picking. But here is the prospectus for the Quincy Jones Streaming Music, Media & Entertainment ETF, an exchange-traded fund based on the Quincy Jones Streaming Music, Media & Entertainment Index, which ... exists. An image of Quincy Jones will be added to the prospectus in a future amendment, which raises important questions like (1) why, and (2) why couldn't it be included in the original filing? Best of all may be this description of how the firm that constructed the QJSMM&E Index goes about its business:
The Index Provider is BEANS Markets, Inc. (“BEAN”). BEAN is an index origination, licensing and research company. BEAN licenses proprietary indices for index linked financial instruments globally. BEAN’s indices are built in collaboration with industry leaders using transparent rules-based methodologies. Indices are originated using BEAN’s IconicBeta™ three-step approach: (1) Identify disruptive consumer centric investment themes; (2) Determine global investor awareness and relatability; and (3) Identify an accomplished, respected and recognized figure to humanize the investment theme.
IconicBeta: It's like smart beta, only instead of being smart, it's marketable. I should launch an index. It's ... just ... [gestures listlessly] ... some companies. Quick, give me your money.
We really live in an amazing era of investing. The old way of investing was that star mutual-fund managers would do a lot of research to pick stocks that they thought would go up, and you would give them your money because you trusted their skill. That trust has eroded, and now the new way of investing is that star music producers lend their names to lists of stocks, and you give them your money because you are like "oh, Quincy Jones, that's cool." Passive investing is the triumph of rationality and science over superstition and charisma, and yet somehow it has given us the Quincy Jones ETF.
Elsewhere, here is my Bloomberg View colleague Mark Gilbert on Norway's sovereign wealth fund's efforts to get index providers to kick out companies with nonvoting shares. He writes:
Two important decisions loom for those who compile the indexes that effectively decide which companies investors have to buy (or risk under-performing versus their benchmarks). Snap Inc., which sells a photo app, did a $3.4 billion initial public offering in March comprised solely of non-voting stock. If it wins equity-index status, fund managers will be forced to buy shares that don't carry any clout.
I don't know, doesn't this seem like a market opportunity? Like why shouldn't I launch the Money Stuff 500 index, which is a lot like the S&P 500 except that it excludes companies with nonvoting stock? If you think that nonvoting stock is bad for shareholders, then you should buy an MS 500 index fund instead of an S&P 500 index fund: Sure you "risk under-performing" versus the S&P, but you also risk outperforming, and if nonvoting stock is actually bad then the MS 500 should outperform. But also, the MS 500 would be an "index," so you could just use it as a benchmark. If you are a giant institutional investor that likes to talk a lot about voting rights, you can compare your performance to the MS 500 index rather than the S&P 500, because it is a better reflection of the market that you are interested in. Alphabet Inc. and Facebook Inc. will be off doing their nonvoting thing, sure, but they won't be relevant to the huge class of investors who benchmark to the MS 500 index, all of whom will pay me a modest licensing fee.
Why not just do this? Why lobby the index firms? Once we have all agreed that indexes are not objective reflections of the market, but are instead subjective human constructs designed to achieve governance goals, what gives the incumbent index providers their authority? Why not cut out the middleman, set up your own index with the criteria you like, and then measure yourself against it? Surely it makes at least as much sense as the Quincy Jones index.
Meanwhile: "In Response to CalPERS Lawsuit, IAC Abandons Plan to Issue Non-Voting Stock." No index lobbying required! (But: a lawsuit.) And here is an ETF that "buys stocks deemed overly short in anticipation of a squeeze higher," and makes money on the stock-borrow income while it waits. It is down 0.6 percent since March, since I guess the stocks that everyone hates are hated for a reason.
Blockchain blockchain blockchain.
Bitcoin and ether and ripple and most of the other big cryptocurrencies plunged yesterday, and the Wall Street Journal attributed the drop to "profit taking," which is surely a sign that the cryptocurrency market has matured. Also, this is good patter; if you saw someone say this on TV you'd almost think he was talking about the stock market:
“Market was a bit overbought,” said Joseph Lubin, a co-founder of Ethereum and CEO of startup Consensys. “Fear and greed cycle. Once it starts to move, sheep pile on.”
What you want, when you are creating a whole new economic paradigm from scratch, is to one day reach the point where people talk about it with reporters by saying things like "fear and greed cycle" and "sheep pile on." That's how you know you've made it.
Meanwhile, the GDAX exchange is giving some customers their money back if they lost it during last week's ether flash crash. That is nice of them! I must say that, for all the talk from blockchain enthusiasts about immutable code and irreversible transactions, they sure spend a lot of time reversing transactions. And here is Zack Korman with some blockchain skepticism:
Blockchain attempts to solve a problem that you didn't know you had: the problem of the trusted intermediary. As a programmer, I've never gone on Stack Overflow and asked, "I need to design a system that works like a database but guarantees no one can control it, including myself." I've never seen that question asked, either. And as an individual consumer, I've never thought, "What I don't like about this product/service is that it has a trusted intermediary." These things just don't come up.
I actually do sometimes think that about Twitter, honestly, but point taken.
And here is David Adlerstein on smart contracts, asking: "Are smart contracts contracts? Are smart contracts smart? And are smart contracts legally recognizable?" One point he makes is that the "smart" portion of a smart contract may not be the whole "contract": "While some relatively simple agreements could have essentially all of their performance automated (including by blockchain), for more sophisticated agreements only discrete elements are likely to be automated in the foreseeable future; thus, 'smart contractual provisions' might be a more appropriate term."
How's Martin Shkreli doing?
Really great actually:
"I think he's a very evil man," said one young woman in Brooklyn, New York, federal court as she was questioned by Judge Kiyo Matsumoto out of Shkreli's earshot about her bias toward him, as prosecutors and defense lawyers listened in.
"I don't think I can be fair. My opinion is pretty well formed," the woman said, according to a pool reporter who was listening in on her and other sidebar interviews of would-be jurors. "I wouldn't want to serve on this jury."
A male prospective juror said, "I have total disdain for the man."
A second man said, "This is the price gouger of drugs. My kids are on some of these drugs."
A third man said, "He kind of looks like a d---."
"By the end of Monday, more than 130 prospective jurors had been dismissed for one reason or another," and they'll try again today. Here is another article that is also just people saying mean things about Shkreli. ("The defendant is the face of corporate greed in America," says a guy. Really?) It is a shame that only people called for jury duty get to participate; really they should open up the public Shkreli-bashing session to everyone. There'd be a line around the block.
But maybe it's a brilliant strategy! If you make everyone hate you, then the government won't be able to find an impartial jury to hear your criminal trial, so I guess they'll just have to let you go? That is especially not legal advice, but I don't know, there are movies about people getting away with murder because of weird technicalities of the law, like double jeopardy or spousal privilege. Someone should make a movie about a guy who makes everyone in America hate him, and then gets away with murder because there's no impartial jury to hear his case. "I think he's a very evil man," a potential juror will say, and he'll high-five his lawyer.
Elsewhere, maybe don't name your trading firm "Wall Street Pirate Management, LLC." They tend to notice that sort of thing.
Here are a blog post and related paper from Mustafa Dah and Melissa Frye asking a fun question: Is it good to pay your board of directors a lot of money, or is it not good? The argument that it's good is that you will attract better directors who will work hard for their money. ("Directors may feel beholden to shareholders to work hard and retain their high pay," hypothesize Dah and Frye.) The argument that it is bad is that the directors will be like, hmm, it is pleasant to be here on this well-paid board, I'd better not do anything to annoy the chief executive officer and risk my seat. ("Directors may be hesitant to destabilize the status quo and jeopardize their positions and compensation.")
The bad argument sure sounds more convincing, but perhaps I am just a cynic? No, it turns out that it's bad:
Our results are consistent with excess director compensation exacerbating agency problems. Given that over- and undercompensated directors may have significantly different monitoring incentives, we divide our sample based on whether director excess compensation is positive or negative. For the firms that overcompensate their directors, we find that CEO turnover-performance sensitivity is lower. Thus, the overpayment of board members provides the CEO with additional immunity and job security.
Fannie and Freddie.
Senator Bob Corker said in a statement that "there continues to be strong, bipartisan consensus in Congress that we must act to reform our nation’s housing finance system and protect taxpayers from future economic downturns," which is sort of a funny way to put it? There has been a continuing consensus for like nine years that Congress has to act to reform the housing finance system, and yet Congress hasn't acted. Maybe if the consensus continues for another decade they'll do something. Anyway the latest news on Fannie Mae and Freddie Mac is that Corker and Senator Mark Warner "are seriously considering a plan that would break up the mortgage-finance giants" and that "would attempt to foster competition in the secondary mortgage market."
Here is a story about how Unilever Plc outsources its hiring decisions to robots:
To determine which candidates are most likely to be successful at Unilever, the AI uses data points such as how quickly they respond to questions, their facial expressions and vocabulary.
"It was definitely a weird feeling to know that robots are judging you," says an intern, but over time I bet that will change. Eventually it will just be normal to adapt your speech and behavior and clothes and facial expressions to please the robots. Teens will dress to impress robots, and by the time they enter the workforce it will seem totally natural to be judged constantly by robots. A generation optimized to please college admissions officers will be replaced by a generation optimized to please robots.
People are worried that people aren't worried enough.
"Markets Have Nothing Left to Fear But Fearlessness Itself," it says here, quoting a guy who says "I’m uncomfortable that people are so comfortable with this," and one thing that I am not worried about is that we will run out of synonyms for "people are worried that people aren't worried enough."
Meanwhile here is I guess a quantitative measure of how worried people are about how worried they aren't?
A measure that shows expectations there will be a big move in Wall Street’s fear gauge, the CBOE Volatility index or VIX, rose to an all-time high this month. The VIX—which offers a reading on investor expectations for turbulence—this month has been hovering near an all-time low.
What? That measure seems to be the ratio of the VVIX (forward volatility of the VIX index) to the VIX (forward volatility of the S&P 500 index). The worry index is near an all-time low, but the worrying-about-the-worry-index-index is at an all-time high, at least relative to the worry index. I will not be satisfied until the VIX and VVIX are both at all-time lows, but the VVVIX is spiking. "People aren't worried," I'll explain, "and they're not worried that they're not worried, but they are worried that they're not worried that they're not worried."
People are worried about non-GAAP accounting.
They're not, but yesterday I tweeted a dumb joke about how the sequel to the Ben Affleck movie "The Accountant" should be subtitled "The Restatement," and it got a lot of dumb funny accounting-joke responses, if you're into that sort of thing. "Subsequent Developments" is my favorite, though "2 Entry 2 Bookkeeping" is also good, and "Pro Forma" will probably be accurate. I am sorry about this.
People are worried about bond market liquidity.
What if you just ... paid for the liquidity?
Bond market veteran Howard Lutnick is offering $20,000 per month to market makers willing to support his new trading platform for US Treasuries.
Traders say the move is an unusual attempt to promote activity and help the platform grow in the early stages after it launches later this year.
Alexandra Scaggs went to the "ZeroHedge Live Fight Club and Symposium" in Marfa, Texas. Google Gets Record $2.7 Billion EU Fine for Skewing Searches. American Airlines, Qatar, and the NOL Poison Pill. For Sale: Puerto Rico. CoCo Bond Market Pulls Through Recent Setbacks. Credit Suisse Denies Charging Excessive Fees in Mozambique Loan Scandal. How BNP Paribas Took Investment-Banking Market Share in Three Charts. With Crowding in U.S. Market, Activist Investors Look to Europe. Robert Soros is stepping down from his father's legendary fund to start his own venture. Former Pine River Partner Kuhn Fighting Fund Over Exit Payout. Investor Suit Deadlines Tightened by Supreme Court in Lehman Case. "AML Officers Breaking Bad." Auto-Safety Monitors Urge Congress to Go Slow on Driverless Cars. "The better pretentious alternative to the Landmark edition is to read Thucydides — properly pronounced with a hard c, by the way — in the original Greek." There's not enough mescal. Major League Quidditch. Uber for toilets. $185 paper clip.
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Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
For more columns from Bloomberg View, visit http://www.bloomberg.com/view.