Stocks went nowhere while the price of crude oil slid to start the week.
The decline in oil prices came after news out this weekend that Saudi Arabia would replace its oil minister after 20 years on the job.
First, the scoreboard:
- Dow: 17,699, -41, (-0.2%)
- S&P 500: 2,058, +1.2, (+0.1%)
- Nasdaq: 4,750, +15, (+0.3%)
- WTI crude oil: $43.40, -2.8%
JAB Holdings is creating a coffee and doughnut empire.
On Monday, the European investment company announced a deal to acquire Krispy Kreme for $1.35 billion, or $21 per share. Shares of Krispy Kreme gained about 24% on the news.
In December, JAB spent $13.9 billion to buy home-brewing coffee company Keurig Green Mountain. The company also owns Caribou Coffee and a controlling stake in Peet’s Coffee & Tea.
“This transaction puts us in the best possible position to continue to spread that joy to a growing number of people around the world while delivering significant value to Krispy Kreme shareholders,” Krispy Kreme chairman Jim Morgan said in a statement on Monday.
The only thing I can definitely say on this deal is that Krispy Kreme has good doughnuts and good K-cup flavours.
Fintech leader Lending Club announced Monday that its CEO will be stepping down following an internal review that involved a $22 million loan sale.
In a statement Monday morning, Lending Club said CEO Renaud Laplanche would step down after, “an internal review of sales of $22 million in near-prime loans to a single investor, in contravention of the investor’s express instructions as to a noncredit and nonpricing element, in March and April 2016.”
Basically, the company lined up a buyer for a pool of loans but then didn’t deliver loans of the credit quality desired by the buyer of the loan pool. According to Bloomberg, Jefferies was the buyer of this particular pool.
Kadhim Shubber at FT Alphaville writes: “A key selling point of online lending has been that the digitisation of the loan process means that data is easier to analyse and, critically, more trustworthy. But as we’ve argued before, it’s wrong to assume that greater transparency and detail equals greater accuracy, particularly when the key issue in lending has always related to incentives rather than information.”
Basically, fintech needs borrower but it also needs purchasers of those loans just as much and getting those two folks to line up is not a particularly easy process. In fact, in this case it didn’t seem to work at all!
Elsewhere, the company reported earnings that missed on the bottom line though revenue came in better than expected.
Bond Market Liquidity
Or, specifically, about the use of bond ETFs as a source of liquidity when the price of the bonds underlying the ETFs are probably stale.
But as this chart from Deutsche Bank shows, there is basically a period in which bonds exist, in terms of being legitimate market instruments for which an investors can get up-to-date pricing information, and then the bonds just sort of sit. Like, say, in the pool of bonds that compose an ETF, the price of which is guesstimated and used a source of daily liquidity for those bond investors who can’t this liquidity elsewhere.
And so on.
Here’s Deutsche Bank:
So there you have it: roughly one-third of all names in HY and IG barely ever trade. They could go for months without a real price print, meaning that all those indexes tracking thousands of ISINs on a daily basis are routinely guessing values for 25-40% of their constituents.
It is what it is, whether we like it or not, the reality of the situation, and at least to this point, the industry has not come up with a better solution to this problem than guesstimating values for a large number of bonds. But it nevertheless provides an important lesson to all those using indexes to measure their volatility, sharpe ratios and other useful risk/return characteristics. Because a large portion of this indexes is marked at stale prices, all these otherwise useful measures are routinely underestimating true volatility in credit.
Citi, meanwhile, thinks the 10-year could be headed to 1.5% this year an possible back to its all-time low of 1.38%.
Bill Ackman sent some really great emails during the whole Valeant blow-up back in the fall.
Among them was a lengthy email to Charlie Munger imploring him to reconsider his comparison of the company to ITT, one of the most famous conglomerate roll-ups from the 1960s.
Rather than compare Valeant to ITT, Ackman pitched Munger on a more familiar idea: Berkshire Hathaway.
“Valeant shares a lot of similarity to Berkshire in its decentralization, its approach to capital allocation, and its shareholder orientation,” Ackman wrote.
“Pearson’s management approach is similar to 3G’s in the company’s extremely cost-disciplined and rational approach to operations. While Valeant has made a large number of acquisitions of varying size in an extremely strategic and disciplined fashion since Pearson has been CEO, nearly all have been purchased for cash.
“Valeant is not a roll up which has used a high-value currency to buy lower-multiple unrelated businesses. In fact, Valeant stock has been and continues to remain perennially undervalued, and Pearson has been extremely reluctant to issue equity (in fact, the company repurchased a substantial amount of stock in the first few years of his tenure).”
Elsewhere in Ackman’s emails we get to see his clear panic during the worst of Valeant’s PR nightmare and share plunge, and he also dropped some clues about what he’d like to see the company do with its Bausch & Lomb unit (spoiler: IPO it).
I argued that technical innovation has basically done what it’s going to do. (People didn’t like this argument.)
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