Nobody Enjoys Earnings Season

(Bloomberg Opinion) -- Semiannual earnings.

Instead of releasing financial results four times a year, as they do now, should U.S. public companies only release results twice a year? It’s something Donald Trump vaguely mused about on Twitter this month, and there was an immediate voluminous debate about the dangers of short-termism, the value of public information, etc. I tend to think that more information is good and that short-termism is an overblown problem, so I guess my bias is for quarterly earnings, but mostly I find it hard to get that excited either way. If the debate was between advocates of daily reporting and advocates of never reporting, then there’d be a deep philosophical difference between them. But two times a year versus four times a year? Ehhh. Either is probably fine.

On the other hand I bet it would matter to Mike Mayo:

Four times a year, forget about everything else. The kids? Find a babysitter. Gym? Try 4:30 a.m. During the 30-day crush, adrenaline runs so high that sometimes Mayo neglects to eat. He jumps and yells and doubles up on phones. He marked his 100th earnings season this year with a catch-your-breath cup of hot chocolate.

“Tennis has four Grand Slam tournaments,” says Mayo, a bank analyst at Wells Fargo. “Wall Street has its four quarterly earnings seasons.”

That’s from a Bloomberg article titled “Wall Street’s 30 Days of Hell: No Sleep, No Meals, No Family,” and it sounds unpleasant! One thing to consider about a move to semiannual earnings is that pretty much everyone involved with public companies would benefit, from a lifestyle perspective. Companies would only have to prepare earnings releases and do earnings calls twice a year. Analysts and investors would only have to read and react to earnings twice a year. Journalists would only have to cover earnings twice a year. 

But now, four times a year, everyone with any connection to a company has to do a little flurry of busyness around earnings. It seems virtually certain that a lot of that effort is wasted. Even if you assume—as I think I do—that quarterly earnings add information that makes markets more efficient and investors more informed, what do you think about the, like, 10 news articles about each earnings release? The 20 analyst notes saying “good quarter” or whatever? The potentially hundreds of investment firms that have more or less long-term buy-and-hold investments in the company, but that have an analyst write up a little recap of the quarter for the portfolio manager just to make sure that their thesis hasn’t changed? I suppose it all matters, in its way, but it is tiring to think about. If you read an article by a journalist about how semiannual reporting might be better, and it quotes a bunch of analysts and corporate executives saying that semiannual reporting might be better, keep in mind this bias: All of them will get more sleep if reporting switches from quarterly to semiannual.

Meanwhile, how much deep thought do you think analysts are doing when they are jumping and yelling and doubling up on phones? How much value does each analyst’s analysis of an earnings report add? Not none; there is value in seeing what nuances a person deeply immersed in the company finds in its financial results. But much of the time, the key piece of news in earnings season is the earnings; the analysis is somewhat secondary. If you freed analysts (sell-side and also buy-side) up from having to react to earnings four times a year, how would they fill the extra time? Sleep, meals, family, yes, but you only need so much of all that.

A lot of their time would be devoted to more differentiated information-gathering and analysis: Not knee-jerk quick reactions to the public information that companies give everyone, but trying to find proprietary information (novel data sets, private meetings with corporate managers, etc.) and analyze it deeply to give themselves an edge over the competition. The more information companies disclose publicly, and the more frequently they do it, the more the markets will be driven by reactions to that information, and the harder it will be for investors with special skills or data to gain an advantage. If they disclose less information less often, then investors can differentiate themselves more: If you can predict a company’s earnings, and no one else can, and the company doesn’t tell you its earnings very often, then you have more opportunities to be right when everyone else is wrong. 

Of course, if everyone professionally connected to the stock market would be better off under semiannual reporting, the obvious question is: Who would be worse off?

Don’t eat the dinners.

How much does a typical bank spend on buying dinner for a typical junior banker who works late all the time? Generously assume a $25 allowance, 6 days a week, 50 weeks a year, and you get about $7,500. That is probably too high, though I don’t doubt that there are people who go over. 

Here’s a question: Why not just pay junior bankers the extra money? Gross it up for taxes, call it an even $10,000, add it to their salary, and then make them buy their own food. The downside is it probably costs more. The upside is, sometimes I think that every bad aspect of investment banking is recapitulated in miniature in the dinner allowances. Here:

  1. Paying for junior bankers’ dinners if they work late gives them an incentive to work too hard. Even “too hard” is wrong: Really it gives them an incentive to mess around all day and then work all night, unbalancing their lives without even getting more work done, and turning banking into a weird all-hours frat hazing rather than a regular office job. Maybe if bankers had to pay for their own dinners, they’d try to get more done during the day and leave before 8.
  2. Paying more salary might cost more, but that’s mostly because you have to gross up for taxes, and I have always thought it a little bit aggressive to think that having your bank buy you dinner every night is not taxable income. Arguably the employee-provided meal allowance is the first exposure many junior bankers get to tax optimization of transactions.
  3. More generally, it is an early exposure to non-transparent transactions, to structuring, to an economy of gift exchanges rather than explicit pricing. One day the bank is buying you $25 worth of Seamless to get you to work late, the next day you’re buying a client’s chief financial officer $200 worth of steak while you pitch her on a bond deal, and pretty soon you find yourself hiring a state official’s nephew in order to win a privatization mandate. 
  4. And of course it creates incentives to do some light fraud on your employer: If they’re giving you $25 for dinner every night, you’ll be tempted to spend their $25 on dinner every night, even if you don’t exactly meet all the formal requirements to get the $25. 

Wells Fargo & Co. has fired or suspended more than a dozen employees in its investment bank and is investigating dozens of others over alleged violations of the company’s expense policy regarding after-hours meals, according to people familiar with the matter. …

In recent months, however, executives within the investment-bank division, which is known as Wells Fargo Securities, learned that some employees regularly placed dinner orders through delivery services like Grubhub Inc.’s Seamless or Square Inc.’s Caviar earlier than the policy allowed, the people said. Later, employees allegedly altered the time stamps on emailed receipts to make their meals eligible for reimbursement, these people added.

Honestly it’s the worst financial scandal I’ve ever heard of. If you get fired from a bank for a compliance violation, at least make it a good one, you know? “I did billions of dollars of rogue trading and eventually got caught and fired”: Yes, fine, high five. “I got fired for ordering a burrito at 6:15”: Come on, man! The horror here is not just that these bankers forged documents in order to illicitly enrich themselves, but that they forged documents in order to illicitly enrich themselves by like twenty bucks. The financial industry always holds out the possibility of redemption for people who are bold and stupid, but meek and stupid is fatal.

Tesla Funding Watch 2018.

Since Elon Musk gave up on his short-lived dream of taking Tesla Inc. private, there has been a lot of speculation about how Tesla will raise money. Here is “Tesla’s Crown Jewels Might Help It Land the Next Round of Cash,” speculating that Tesla could mortgage its logo for new secured bonds, which, huh, okay. Here is “Tesla's U-turn puts it back at square one on cash,” speculating that Tesla might do more convertible bonds or lease securitizations. 

I kind of don’t get these articles. I mean, at some level, I get them: People expect Tesla to raise money, and they expect it to do so by selling some sort of debt, and they’re wondering how Tesla can do that. But here is the thing. It’s just a couple of weeks ago that Musk went out and marketed a Tesla equity deal and apparently got commitments for thirty billion dollars of investments at $420 per share, while the stock was trading in the low $300s. Yes, selling equity is dilutive, and Musk has said “we’ll not be raising equity at any point,” but selling equity at a 30 percent premium to your stock price is … I dunno, it is pretty good. If you can do that, you should probably do that, especially if the alternative is not just selling some clean investment-grade debt but instead messing around with logo-backed bonds or whatever. (If you’re worried about dilution, just sell $14 billion of stock at $420 per share and buy back $11 billion of stock at $320 per share! It’s the rare accretive equity-financed share repurchase!) Elon Musk and his advisers found people who wanted to buy $30 billion of Tesla stock at $420 per share. It should take them up on their offer.

Or, what, you don’t believe that’s what happened?

Elsewhere in Tesla news, here’s a paragraph about a time Tesla’s factory robots stopped working:

Made aware of the stoppage, Mr. Musk went to the factory and worked into the night. The problem was resolved, but Tesla reached a troubling conclusion: The robots had been infected with malware in an act of industrial sabotage. And though they could not prove it, executives suspected they knew the culprit: a rogue employee, working at the behest of short-sellers.

Did … they … really? Like, they went around the room, and a series of executives all unanimously said “yes the most likely cause of this factory breakdown is that short sellers betting against our stock have compromised an employee and bribed him to sabotage our production, because that is how stock markets work”? Okay! I certainly can’t prove they didn’t think that! Maybe they’re even right! But, boy, it’d be weird. Imagine being like the fourth executive to state your opinion in that meeting. “Short-seller sabotage.” “Looks like short-seller sabotage.” “Definitely short-seller sabotage.” And then you’re like “what if our excessive and over-hasty reliance on automation and our insistence on everyone functioning without sleep has made our manufacturing processes less robust than they ought to be?” You’d get laughed out of the room! What a ridiculous thing to say! Maybe you’re the saboteur!

Meanwhile here are some paragraphs from a different story about the robots stopping:

During a tour this spring at Tesla Inc.’s electric-car factory in Fremont, Calif., Elon Musk asked why the assembly line had stopped. Managers said automatic safety sensors halted the line whenever people got in the way.

Mr. Musk became angry, according to people familiar with what happened. His high-profile gamble on mass-producing electric cars had lagged behind since production began, and here was one more frustration. The billionaire entrepreneur began head-butting the front end of a car on the assembly line.

“I don’t see how this could hurt me,” he said of vehicles on the slow-speed line. “I want the cars to just keep moving.”

Man, it is the whole Tesla story right there, in those two competing anecdotes. Tesla’s problems are caused either by:

  1. Shadowy forces in the short-termist public market pushing a negative narrative to destroy Tesla for their own greedy purposes; or
  2. Elon Musk bashing into things and demanding that everything move as quickly as possible no matter how ill-thought-out and dangerous it is.

Also: “Elon Musk Appears To Be Calling The Thai Cave Rescue Diver A Pedo Again.” What if Tesla short sellers trapped those boys in that cave?

Sovereign debt.

A major problem in sovereign debt restructuring is that there is no binding reorganization regime. If a company can’t pay its debts, it files for bankruptcy, and a court restructures its debts to maximize the total recovery for creditors. The court’s decisions are binding on all the creditors, eliminating the risk of holdouts and making possible an efficient restructuring. But there’s no bankruptcy court for countries, and often no way to bind all creditors to a restructuring, and so a restructuring that might maximize value for creditors as a whole can be blocked by holdouts who want more money for themselves. (This is changing with collective-action clauses, but slowly.) But here are Lee Buchheit and Mitu Gulati with a fairly radical proposal:

The Executive Branch of the U.S. Government has very broad authority to settle claims of U.S. nationals against foreign sovereigns. Such claims may be settled without the consent of the U.S. citizens involved and sometimes even in the absence of consultation with those citizens. … We believe that it would be within the President’s power to issue an Executive Order --

• declaring the situation in a post-Maduro Venezuela to be a national emergency and amatter of concern for the national security and foreign policy of the United States,

• encouraging Venezuela and its creditors to reach a consensual settlement of all Chavez/Maduro-era monetary claims against the sovereign and public sector entities,

• immunizing Venezuelan assets in the United States from judicial restraint,

• allowing all U.S. creditors to vote on a negotiated restructuring proposal as a single class, with an affirmative vote of a specified supermajority of those creditors binding the entire class to the terms of the restructuring, and

• suspending access to U.S. courts for litigants -- including non-U.S. parties -- seeking a recovery inconsistent with the restructuring terms accepted by the supermajority of creditors. 

It’s an ad hoc sovereign bankruptcy regime created by U.S. executive order! Don’t hold your breath for the Trump Administration to actually do it for Venezuela. One obvious problem with imposing a bankruptcy regime on Venezuelan bonds—now, long after the bonds were issued—is that it might upset market expectations, unsettle the market for sovereign debt generally, and reduce the appeal of issuing bonds under U.S. law. If the president did want to do this, he might want to make it clear that it’s a one-off solution to a diplomatic problem rather than a general approach to sovereign debt restructuring. (The precedent that Buchheit and Gulati cite is a Reagan executive order cutting off U.S. claims on Iranian assets as part of hostage negotiations.) 

Or he might not! Maybe creating a sovereign bankruptcy regime would just be good, and would make sovereign debt markets more robust and U.S. law more attractive, and the U.S. should (by executive order!) embrace it. Buchheit and Gulati write:

A proposal to suspend creditor legal remedies against a foreign sovereign would not normally be met with a glad cry from the investor community. But the overwhelming majority of creditors never attempt to pursue legal remedies; they understand that sovereign debt problems require negotiated, consensual resolutions. On second look, therefore, the ability of the U.S. Executive Branch to require a foreign sovereign to seek a negotiated outcome with its lenders, and to shield both the sovereign debtor and the vast majority of creditors who join such a debt restructuring from opportunistic behavior by holdouts, might be seen as a major benefit.

Dad!

Imagine being a hard-working young analyst at Goldman Sachs Group Inc. who has managed not to get staffed on anything too busy over Labor Day weekend, and who takes the opportunity to escape to the Hamptons. One day you leave your share house and go to Gurney’s in Montauk for a chill party on the beach with your buddies. And then this happens:

Facing a dozen king-size day beds filled with millennials on a beach in Montauk, the incoming chief executive of Goldman Sachs got behind the DJ booth.

David Solomon’s gig -- or rather, DJ D-Sol’s, to use his chosen moniker -- was barely publicized, with a scribble on a chalk board in a hotel lobby. No one introduced him as he slipped into his set on Sunday afternoon, clad in pink shorts, a T-shirt from the surfing and kiteboarding outpost REAL in Cape Hatteras, North Carolina, and a black baseball cap.

Oh nooooo. I would just walk into the ocean forever. But apparently the current generation of junior bankers has different thresholds of embarrassment, because they were into it:

"He’s like my role model," said Ilya Svintsitski, 30, who works in mergers and acquisitions at a boutique investment bank and does some DJing on the side. 

Well, yes, I can see how Solomon would be a role model to the investment-banker-slash-DJ crowd, which is … apparently … larger … than I would have guessed. 

One millennial banker was a fan of Solomon’s picks. "I liked the throwback disco funk," Drew Regan said. “I’m a big trance guy, but it’s disco funk that’s coming up now." When the 28-year-old found out that the DJ was Solomon, his jaw dropped.

One admirer who approached the DJ was Kellan Carter, a 2009 college grad and venture capitalist, who was wearing a T-shirt printed with the dubious honorific "Lehman Brothers Trader of the Year 2008." He asked to pose for a photo and Solomon obliged.

There are pictures.

Things happen.

BlackRock’s Decade: How the Crash Forged a $6.3 Trillion Giant. Deutsche Bank to drop out of Euro Stoxx 50 index. Einhorn’s Greenlight off 25% for year; Ackman up double-digits. “Everyone has their own definition of ESG, so what we’ve done is come up with our own definition of ESG for our products.” SocGen Edges Closer to Settling U.S. Sanctions Investigation. JPMorgan Will Pay $24 Million to End Lawsuit From Black Advisers. Scandal-hit Danske branch handled $30bn of Russian money. Why Has the Stock Market Risen So Much Since the US Presidential Election? It looks like Kweku Adoboli will be deported. The Bitcoin Boom Reaches a Canadian Ghost Town.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Matt Levine is a Bloomberg Opinion columnist covering finance. 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 3rd Circuit.

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