January 16, 2017
What We’re Reading This Week
Do you know what a bond covenant is (not you Jeff, I know you do)? If you do, honestly, I’m a little disappointed. You have better things to do. Apparently, for the first time in history (for bonds and covenants), someone read a bond contract and did something about it! In most bond contracts, the investor doesn’t have a lot of input. For example, last October companies started to remove language from their debt contracts that would allow buyers to receive a premium if the company defaulted. Most people either didn’t read these changes or felt that they would miss out on an opportunity if they tried to negotiate with the underwriter (I’m going to go ahead and assume the vast majority didn’t read it). Fast forward to Broadcom’s decision to remove the clause that disallowed investors to be made whole in the event of a default (confusing no?). This change was in direct response to bond buyers’ concerns and resulted in orders in excess of $25 billion for a $13.55 billion offering! Viva la revolucion! Honestly, I’m just happy that people read the documents. Admittedly, it seems as though the change was prompted by people reading a report from a covenant review service. But hey, that service (mostly attorneys) read the documents. They wrote something and people read that thing! So…you know, not bad.
Once, (maybe several times) I wrote about the ridiculous idea that index funds are a violation of US antitrust laws. I’ve enjoyed reading those silly articles but was amazed when the Department of Justice took them seriously and started to investigate airlines. Well, it turns out the Department of Justice was just “goofing around” and will not be pursuing action related to conspiracies stemming from mutual funds! But how is collusion among airlines related to mutual funds you ask? Don’t worry, I’ll tell you. In 2015, it became public that airlines were increasing seating capacity despite investors calling to have seating reduced. See, investors wanted airlines to make more money and one way to do that is to reduce the number of seats on a plane. It’s simple supply and demand. Investors could vote with their shares (not by actually voting but by selling) to make the airline do that. That’s harder when most of the stock is in a fund. An investor that has an opinion on seating capacity, even a large one, may find their holding diluted by a mutual fund, which is subsequently owned by a bunch of people that may not even know they own stock in said airline. Granted, the fund company could vote on behalf of the shareholders to get what they want but that is a separate issue. Essentially, the problem is that the industry is insulated in some ways to make decisions that may not be in the best interest of shareholders. But don’t worry about that, the Department of Justice says everything is OK.
Congratulations! Last month the Dow Jones Industrial Average crossed the 20,000 mark…“theoretically.” You can theoretically celebrate and theoretically invest however you would invest theoretical dollars in a theoretical investment. Personally, I agree with Matt Levine at Bloomberg: “Calculating a price-weighted average of a small arbitrary group of stocks is no way to go through life, son.” For the uninitiated, the Dow Theoretical high is real, it’s not some story your parents made up get you to eat your vegetables. It’s calculated by measuring the intraday highs of each of the index’s component stocks and then adding them together…by hand. I mean, there is probably a computer that can do it, but why would you want it to? In fact, I have to admit a computer publishes that information here. But there’s probably some people that think it’s more fun if you do it on graph paper by hand, right? Artisanal investing? Granted, I’m biased, but I have to assume you might be theoretically high if you care about the Dow’s price using a measure abandoned in the 90’s. Even so, some people are thrilled, which is super fun for me. You can measure a stock index any way you want, that doesn’t make the reality of the market any different.
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