this article is funny
dunno, maybe one day the described happens to a gold-affiliated ETF
bloomberg.com
Oil Prices Were a Beautiful Mystery
Also ETF rebalancing, brothers-in-law, negative rates, lunch value investing and Bitcoin hacking.
Matt Levine8 May 2020, 18:07 GMT+2
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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Negative oil prices
On one level, I feel like I can explain why the price of West Texas Intermediate crude oil futures for May delivery was negative $37.63 on April 20. The most basic explanation, which I offered shortly before the price actually went negative, is that most people who buy oil futures do not actually want to take delivery of 1,000 barrels of smelly toxic explosive goo, and if you are long May futures at the end of April 21, you are going to get a delivery of oil. There is not much demand for oil right now, what with the collapse of the global economy due to a pandemic, and oil storage tanks near Cushing, Oklahoma—which is were you’re getting the oil, if you own those futures—are pretty full. So everyone who was long abstract oil via futures on April 20 tried to get out before it turned into real oil, nobody wanted to buy, and prices collapsed. Oil storage isn’t free, and oil isn’t that valuable if no one is driving or flying, so if you had oil and wanted to get rid of it, you had to pay someone to take it off your hands.
That’s fine as far as it goes, but it’s not wholly satisfying. We are talking about one day. On April 17, the trading day before April 20’s collapse, the May futures settled at $18.27. On April 21, the final day of the contract, they settled at $10.01. Not all that much changed over that period; it’s not like the demand for oil was robust, or lots of storage was available, on April 17 and 21 but not on April 20. If you wanted to get out of the May contract before taking delivery, you could have done it before the last possible minute, to avoid a rush to the overcrowded exits, and in fact most big financial oil investors (exchange-traded funds, etc.) did get out of the May contract by April 17, at normal positive prices. But if you insisted on waiting for the last minute, you were also fine; the contract settled at a positive price on its last day. A huge rush of panic selling on the second-to-last day, preceded and followed by relatively orderly trading at normal prices, is … possible, but unsatisfying.
So it would be nice to find more technical explanations, glitches, manipulations, cascades of oddities. We talked about trade-at-settlement futures last week; you could spin an entirely hypothetical story about how hedging or manipulation by traders of those futures could have driven down the settlement price to uneconomic levels. I have heard other speculative hypotheses about futures brokers liquidating margined positions (if you’re not selling for your own account, you might not care about selling at a negative price), about physical oil traders who owned oil in storage and hedged with short futures that they’d ordinarily roll (and that they might wait to roll to take advantage of price dislocations), about “whether the storage capacity data posted by the U.S. Energy Information Administration accurately reflected the actual availability of space.” It would be satisfying if there was a villain, or a brilliant trader implementing a big short bet, or a dumb trader making a fat-finger error, or a reporting error confusing the market, or something. Some mechanical thing you could point to and then fix. As opposed to just “supply and demand, whaddarya gonna do?”
Anyway at Institutional Investor, Leah McGrath Goodman has a look “ Inside the Biggest Oil Meltdown in History.” It doesn’t quite provide the elusive neat explanation that I want for how it happened, but it’s a terrific story of what happened on April 20 and how weird it was:
In the minute between 2:08 p.m. and 2:09 p.m., 83 futures contracts for West Texas Intermediate light, sweet crude oil, scheduled for May delivery to the oil hub of Cushing, Oklahoma, rapidly exchanged hands at $0 a barrel. With each contract consisting of 1,000 barrels, this meant that, at least on paper, 83,000 barrels — or 3.5 million gallons of oil — effectively went off the market for free. That same minute, oil prices, encountering little resistance, jackknifed lower to trade at minus 1 cent a barrel, touching off an unprecedented freefall into negative territory. …
Andy Hall, the legendary oil trader who retired in 2017 from Astenbeck Capital Management, his multibillion-dollar hedge fund, was looking over prices that day, as is his wont.
“I do still watch it every day,” he says. “I suppose old habits die hard. What I saw was very chaotic. I saw a lot of buying and selling toward the end. I am sure a lot of people thought, ‘If I buy at zero, what can I lose from that?’ Well, it turns out you can lose over $40 a barrel.”
The story also features this all-time classic financial-markets quote from Tom Kloza, the “global head of energy analysis at oil price service OPIS”:
At 2:29 p.m. on April 20, one minute before settlement that Monday, a single May crude futures contract traded at the jaw-dropping price of negative $40.32 a barrel, marking the lowest handle ever witnessed in the most liquid crude oil contract in the world — a previously unimaginable nadir. “Between 2:25 p.m. and 2:30 p.m. it was like watching a Fellini movie,” says Kloza. “You’re able to appreciate it, but no one really knows what’s going on. The screen was just going nuts.”
One, that is just a hilarious assessment of Fellini. But, two, it is a wonderful description of the aesthetic experience of financial markets. There you are, making or losing millions of dollars on an unprecedented event reflecting chaos and disaster in the real economy. Numbers are moving fast, fortunes are being made and lost, everyone is screaming at you, no one knows what is going on, and you are sitting there thinking “this is like a movie, this is amazing, I don’t even understand it but I am moved deep in my soul by this progression of numbers across my screen, this is art.”
Tracking error Ahahahahahahahahahaha oops, oops, oops:
[Invesco Ltd.] recently discovered and has corrected an error with respect to two funds: the Invesco Equally-Weighted S&P 500 Fund and Invesco V.I. Equally-Weighted S&P 500 Fund (the “Funds”). The Funds are passive funds that are managed to track the S&P 500 Equal Weight Index (the “Index”). In March 2020, due to volatility in the equity markets, S&P Dow Jones Indices communicated the decision to delay, and ultimately to separate, the rebalancing dates for its indices and noted some indices would be rebalanced in April and others in June. The Company noted this delay but not the separation of rebalance dates and omitted rebalancing the Funds on April 24, 2020 when S&P rebalanced the Index. The Company discovered this omission and rebalanced the Funds on April 29, 2020. The Company will make a contribution to the Funds of approximately $105 million to compensate them for the performance difference that arose from market movements between April 24 and April 29.
Invesco’s equal-weight funds are meant to track the S&P 500 Equal Weight Index. That index contains all the stocks in the S&P 500, but instead of weighting them by market capitalization—putting more money into bigger stocks—it weights them all equally, putting the same amount of money into each stock. Of course some stocks go up and others go down, so after a day of this you’ll have more money in some stocks than others, taking you away from equal weighting. S&P deals with this by rebalancing the funds each quarter: At the end of each quarter, you sell some of the stocks that have gone up and buy some of the stocks that have gone down to get back to equal weight.
The quarterly rebalancing was supposed to happen on March 23 this year. Things were pretty nuts in March! In order to, essentially, avoid making them more nuts, S&P Dow Jones Indices put off its index rebalances for the month. “S&P DJI made this decision following thorough consideration of how best to support our clients and govern our indices during this period of extreme global market volatility, market wide circuit breaker events and exchange closures,” it said. If your goal was to have an equal-weighted basket of stocks rebalanced every quarter, I suppose you could have done the rebalance anyway. But if your goal was to track the relevant index, as Invesco’s was, then you would want to rebalance your fund when S&P rebalanced its index, not before or after. So when S&P announced the postponement, Invesco dutifully postponed its rebalancing.
While S&P postponed a lot of index rebalances until June, it only postponed this one until April. (If you have a normal market-cap-weighted index, rebalancing doesn’t matter that much, and you can skip a quarterly rebalancing if you have to. If you have an equal-weighted index, rebalancing is sort of the point of the index, so S&P only delayed it by a month.) But Invesco didn’t notice. It apparently skimmed the notice from S&P, said “gotcha, no rebalances in March, see you in June,” put a little calendar reminder to check back in June, and missed the April 24 rebalance date.
At some point between April 24 and April 29, it noticed, and when I say “it” here I mean that some specific human at Invesco noticed, either because she was idly reading S&P notices or tracking competitors’ rebalancing activities, or because she got a panicked phone call from a client. Some inkling came to her: Hey, this fund was supposed to rebalance on April 24. And then she checked to see if it had, and it hadn’t. Presumably she then thought, ah, I must be wrong (or: our competitors must be wrong, my client must be wrong), we haven’t rebalanced, so we must not have had to rebalance. We wouldn’t mess up a silly thing like that. But down in her stomach a knot of worry grew. She did a quick double-check, I’m sure it’s fine, obviously we know what we’re doing, but let’s be sure. And: nope! We just forgot!
I figure it’s like 50/50 whether the Invesco employee who noticed and spotted the error in April is also the employee who made the error in March. If it was, the knot of worry would be considerably worse. It’s one thing to notice an error that costs your employer $105 million; it’s another thing to notice that you made the error.
Anyway yeah delaying the rebalance by 5 days apparently cost the funds $105 million of performance, so Invesco gave them the $105 million back. (I am not sure it was exactly obligated to do that—the funds try to track the index, but they don’t guarantee success—but if you just forget to rebalance and get sued, you don’t have a great defense, and anyway it is bad customer service, so the ordinary move here is for the fund company to make up the difference if it can. Presumably if the error had gone the other way—if the delayed rebalancing had helped performance—the funds would have kept the money.) Sure I like reading about wild market swings and high-stakes M&A gone wrong, but the financial story that I most want to read is a minute-by-minute oral history of how Invesco misread S&P’s alert, forgot to put a reminder in its calendar, and then discovered that it had missed a rebalancing.
Also: What happened to the person who missed it? Will they take the $105 million out of her salary in monthly installments? Does she have to buy everyone a round of drinks at the next department happy hour? Will she acquire a new, rebalancing-related nickname? After the initial panic subsides will they all have a good laugh about it? Ah, high finance, these things happen.
For he today that trades some stocks with me shall be my brotherAnthropologists find that in many cultures the uncle relationship is special and profound, freighted with tradition. It is sometimes the responsibility of the uncle to educate his nephew in the society’s values, or to conduct his initiation rites. In modern American society, on the other hand, the brother-in-law relationship seems to be particularly special. The brother-in-law’s role is to insider trade on his brother-in-law’s information. The other day I wrote about corporate executives whose family members insider trade, and I just automatically focused, as I often do, on brothers-in-law. “Prosecutors and regulators will put in a lot of effort establishing not just that you told your brother-in-law your merger news,” I wrote, “but also the details of your relationship.” There are as many different brother-in-law relationships as there are brothers-in-law, each with its own special characteristics, but they all traditionally involve insider trading.
Anyway:
Sen. Richard Burr was not the only member of his family to sell off a significant portion of his stock holdings in February, ahead of the market crash spurred by coronavirus fears. On the same day Burr sold, his brother-in-law also dumped tens of thousands of dollars worth of shares. The market fell by more than 30% in the subsequent month.
Burr’s brother-in-law, Gerald Fauth, who has a post on the National Mediation Board, sold between $97,000 and $280,000 worth of shares in six companies — including several that have been hit particularly hard in the market swoon and economic downturn. ...
Burr came under scrutiny after ProPublica reported that he sold off a significant percentage of his stocks shortly before the market tanked, unloading between $628,000 and $1.72 million of his holdings on Feb. 13 in 33 separate transactions. As chairman of the Senate Intelligence Committee and a member of the health committee, Burr had access to the government’s most highly classified information about threats to America’s security and public health concerns. …
Alice Fisher, Burr’s attorney, told ProPublica that “Sen. Burr participated in the stock market based on public information and he did not coordinate his decision to trade on Feb. 13 with Mr. Fauth.”
To be fair Burr’s defense has always been that he traded, not based on inside information from Senate briefings, but based on what he saw on television. Maybe they just watched the same shows?
Negative rate holiday
In this economic crisis, there has been a widespread push to delay payments to give hard-hit people some breathing room. There have been rent strikes, mortgage forbearance, interest payments skipped or paid in stock. All sorts of payments have been postponed or canceled because people don’t have enough money to make them.
Similarly if you have to pay your bank cash because you have deposited money with your bank and interest rates are negative, I guess you should get a break? I don’t know, macroeconomics is so weird:
UBS Group AG is offering some of its wealthiest clients in Switzerland a temporary break from negative interest rates in a bid to attract assets as the coronavirus crisis wreaks havoc on markets.
The world’s largest wealth manager is offering a payment holiday of several months to clients that plan to eventually invest some of their cash holdings, according to people familiar with the matter who asked for anonymity to discuss internal information.
I feel like if you told a 20th-century banker that banks were temporarily suspending interest payments on deposits, he would say “wow that sounds like a bad financial crisis but I guess the banks need to conserve cash however they can.” And then if you said “no they’re suspending the interest that the depositors have to pay” he’d be so confused.
Lunch value investing
A basic investing advantage that Warren Buffett has is that he can afford to be opportunistic. He can sit on cash and wait until companies are cheap before buying them. And he has permanent capital, so he can never be forced to sell them if the market is bad. A lot of investors are less patient and disciplined and value-oriented than Buffett, but a lot of other investors are just as patient and disciplined and value-oriented but have to answer to impatient limited partners. When markets are hot they feel compelled to buy stuff at valuations they don’t like, and when prices are crashing and there are opportunities everywhere, they are hit with withdrawals and have to sell instead of buying. Buffett has escaped those pressures; he can buy and sell when he likes.
One thing that we do around here occasionally, roughly twice a year really, is talk about the pricing for annual charity auctions of lunches with Warren Buffett and Bill Ackman. (“Lunch valuation analyst,” it says in my Twitter bio.) I sometimes try to come up with fanciful valuation metrics for these lunches, but in a financial crisis those metrics kind of go out the window. The key point now is that lunch with Buffett went for $4,567,888 in June of 2019, but it would probably go for less than that in May of 2020. Markets are volatile, the economy is stalled, valuations are down; also if you had lunch with him now it would probably have to be over Zoom or something. But Buffett is patient:
Warren Buffett’s annual charity auction will be delayed because of the pandemic.
The auction, which normally takes place in May or June, will be held later this year, according to an emailed statement Thursday from Glide, the San Francisco charity that benefits from the fundraiser. The event has raised nearly $35 million over 20 years.
Makes sense. Ideally he would opportunistically buy the lunch back during a pandemic but I guess that timing doesn’t quite work. After a series of delays, he ended up doing the 2019 lunch—with, horrifyingly, five cryptocurrency advocates—in February 2020. If he had put it off for just a few more weeks I bet he could have bought it back for $2 million, and it would have been worth it.
Blockchain blockchain evil genius
Sure:
An adviser to blockchain companies is claiming a 15-year-old and his crew of “evil computer geniuses” stole $24 million in cryptocurrency from him by hacking into his phone.
Michael Terpin sued Ellis Pinsky in New York Thursday, accusing the teenager of masterminding a “sophisticated cybercrime spree” that targeted him in 2018. Terpin is the founder and chief executive officer of Transform Group, a San Juan, Puerto Rico-based company that advises blockchain businesses on public relations and communications.
“Pinsky and his other cohorts are in fact evil computer geniuses with sociopathic traits who heartlessly ruin their innocent victims’ lives and gleefully boast of their multi-million-dollar heists,” Terpin said in his complaint.
Now my public relations advice for blockchain businesses would be “don’t get all your Bitcoins stolen by a 15-year-old,” but perhaps that is why I am not a professional public relations adviser to blockchain businesses. In fact “get all your Bitcoins stolen” does seem to be a common approach for many blockchain businesses, and (allegedly) getting them stolen by a 15-year-old who is also an evil computer genius is at least novel and entertaining. At least it makes you stand out from all the other blockchain professionals whose Bitcoins are constantly being stolen. Honestly I can see this being good for Terpin’s business. The number one public relations problem for blockchain companies still seems to be “all of our Bitcoins were stolen,” and if that’s your PR problem, who better to call than a blockchain PR person who got all his Bitcoins stolen by a 15-year-old?
Things happen
U.S. Jobless Rate Triples to 14.7% in Sharpest Labor Downturn. French Banks’ Love for Complex Products Blows Up in Virus Mayhem. Neiman Marcus’ Luxury Dreams Were Shaken by Debt and Disease. Obsession With Fraud Sabotages U.S. Aid to Millions Without Jobs. Mortgage Lenders Tighten Screws on U.S. Credit in Echo of 2008. United Airlines Slaps 11% Yield on Struggling Junk Bond Sale. SoftBank’s legal spat with Adam Neumann doubles down on the tech investor’s tarnished brand and shows it has largely given up hope of saving its Silicon Valley reputation. Louis Bacon’s Moore Capital makes big gains after going it alone. The Return of Poison Pills: A First Look at “ Crisis Pills.” Bitcoin Tops $10,000 for First Time Since February, Before Halving. Stablecoins as a collateral sinkhole. Coronavirus Came From Bats, Can Infect Cats, Ferrets, WHO Says. Why Clorox Wipes Are Still So Hard to Find. Denim CEO Says Dress Pants Aren’t Coming Back After Covid-19. “The county OK’d the mermaid entertainment as long as only one mermaid was in the pool at a time.” Mystery swirls after toilet flush heard on Supreme Court conference call. Congratulations Mathdaniel Squirrel.
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