Latest News

The BAN Report 2/4/21

The BAN Report: Gamestop Madness / Bezos Steps Down / Death of Cities Exaggerated / Lack of Bargains for Debt Funds / Weed Legalization? / The 9MM Brooklyn Multi-Family Relationship-2/5/21

Gamestop Madness

The most unlikely big story of the financial markets continues to grow as Treasury Secretary Janet Yellen announced today that she is going to examine that matter. Gamestop reached as high as 483 in the past week and is now trading in the low 80s.  

“We really need to make sure that our financial markets are functioning properly, efficiently and that investors are protected,” Yellen said in an interview Thursday on ABC television’s “Good Morning America” before she leads a snap meeting of top regulators later in the day. “We’re going to discuss these recent events and discuss whether or not the recent events warrant further action.”

Thursday’s meeting puts the newly installed Treasury chief in the spotlight after populist politicians from both sides of the aisle called for investigation of recent events. While the Securities and Exchange Commission is investigating for signs of fraud behind sudden surges in stocks including GameStop Corp., others have drawn attention to trading curbs that some platforms imposed for smaller, retail investors.

The session will give the administration the chance to demonstrate that it’s attuned to the complaints about potential manipulation after two congressional committees moved to hold hearings, yet it’s unclear what action – if any – will result.

The gathering will include the heads of the Federal Reserve – formerly led by Yellen – as well as the Securities and Exchange Commission, Commodity Futures Trading Commission and Federal Reserve Bank of New York, which serves as the central bank’s main monitor of Wall Street.

“This is the first test for the Biden administration in the reorientation of consumer and investor protections,” said Christopher Campbell, a former assistant secretary of the Treasury for financial institutions from 2017 to 2018. The meeting telegraphs to the market that the administration “will play an active role in maintaining or upgrading consumer protections,” he said.

One thing we can rule-out is the post-truth, twitter-led conspiracy that Robinhood was secretly doing the bidding of the Wall Street elite by shutting down the purchasing of a collection of Reddit-promoted stocks. As evidenced by a $3.4 billion capital raise in the past week, Robinhood was in over their heads with too many leveraged long bets on these stocks.

The reality is more prosaic. Robinhood and other brokers were deluged by traders looking to invest in GameStop and other shares, often with options contracts that can increase leverage and trading risk. A clearinghouse that processes and settles trades watched the volatile trading and demanded more collateral to cope with potential losses.

A margin call is not a conspiracy. A clearinghouse is an intermediary between buyers and sellers in a financial market. It “clears,” or finalizes, trades and makes sure the parties fulfill the contract and assets are delivered. It also mitigates risk by requiring that trades be backed by enough capital to reduce the chances that one of the trading parties goes bankrupt. This protects investors as well as brokers.

But, it does show the investment public that doing business with unproven firms like Robinhood carries a different set of risks than an account with E-Trade, which is owned by Morgan Stanley. But, few were prepared for this, and trader Peter Borish described last week as a “plumbing issue.”

“If I’m short options. I’m short a call, and the price starts to go up, I have to buy GameStop as it goes up to hedge the position, the more it goes up, the more I have to buy,” Borish explained. It’s a key reason behind why Robinhood was forced to restrict trades, a controversial move that unleased lawsuits and a torrent of criticism.

Borish added: “The protection of the system is Robinhood has to get money from the customer and then put it up at the clearinghouse. If [the customer] doesn’t have it, Robinhood has to put the money up at the clearinghouse.”

Dozens of lawsuits have already been filed against Robinhood and others. Clearly, by limiting purchases of Gamestop and others but allowing liquidations, the brokerage houses essentially tipped the scales to the bears. If the brokerage houses had better risk parameters, then this scenario would not have unfolded. No one wants to see the retail investors take it on the chin, so expect more heads to roll.

Bezos Steps Down

This week, Amazon CEO and the richest man in the world Jeff Bezos announced that he was stepping down as CEO, and becoming executive chairman. In recent years, Jeff has been less involved in the day-to-day decisions.

Mr. Bezos would quip that the only time he really knew all that was going on at Amazon was in its annual budget meetings.

“He’s not super involved in the day-to-day operations,” Matt Garman, a veteran of Amazon’s cloud-computing division and top lieutenant to Mr. Jassy, said of Mr. Bezos in a 2019 interview. “I met with him more in the first 18 months than I probably have since.”

In an interview on stage at the Economic Club of Washington, D.C., in 2018, Mr. Bezos emphasized his hands-off approach, saying he rarely took meetings before 10 a.m. or after 5 p.m., and focused on strategy over detail. “If I make, like, three good decisions a day, that’s enough,” he said.

He had long championed innovation and reinvention, exhorting his employees to treat Amazon as a startup long after it had become a colossus.

In that spirit of reinvention, he increasingly became fixated on projects and goals beyond Amazon. He purchased the Washington Post in 2013, and had started rocket company Blue Origin in 2000.

Founders of the tech giants have shown a penchant for taking on ambitious new projects. Bill Gates stepped aside as Microsoft CEO after 25 years and devoted himself to reinventing philanthropy. Google co-founder Larry Page, even before stepping back from his management role in 2019, had devoted his time and wealth to side projects developing flying cars.

Mr. Bezos has taken particular interest in Blue Origin, which competes with Space Exploration Technologies Corp., or SpaceX, run by Elon Musk —Mr. Bezos’s rival for the title of world’s wealthiest person.

Losing Bill Gates or Steve Jobs didn’t seem to slow down Microsoft or Apple, so Amazon is unlikely to have major difficulties, especially since Jeff will continue to be involved. And, it appears he’s found someone like him in Andy Jassy.

Tech founders are often succeeded by their opposites, typically older executives with greater managerial experience. Mr. Bezos wanted someone more like him.

Andy Jassy, whom Mr. Bezos promoted five years ago to CEO of Amazon’s cloud business and who will take over as CEO of the company later this year, fit the bill. He started his career at Amazon in 1997, acted as Mr. Bezos’s technical assistant early on, and drove the creation of Amazon Web Services, which dominates cloud computing and accounts for the bulk of Amazon’s operating income.

Death of Cities Exaggerated

As Mark Twain famously said, “The reports of my death are greatly exaggerated.” COVID-19 has certainly battered large cities, but predicting their demise seems premature. According to an analysis today by Zillow, US housing prices rose at the same rate in both urban and suburban areas.

U.S. housing prices rose at essentially the same rate in urban and suburban areas last year, jumping 8.8% and 8.7% respectively, according to an analysis by Zillow released on Thursday.

The data complicates the narrative that workers are fleeing urban areas for the suburbs or even “Zoom towns” out West near ski resorts and national parks.

“The for-sale housing market is experiencing a pandemic-fueled surge in both urban and suburban areas,” Zillow economist Alexandra Lee said in a statement. “Homes have become more important than ever, and buyers are eager to hit the market to find their next place to live.”

In some more affordable metro areas — including Kansas City, Cleveland and Cincinnati — urban home values accelerated faster than suburban ones, according to Zillow.

The fact that home prices are increasing faster in urban areas of smaller cities makes intuitive sense.   If someone is leaving New York or Chicago for Kansas City, the suburbs may be too much of a lifestyle change, so downtowns make more sense. Another survey by the Harris Poll and the Chicago Council on Global Affairs on the six largest metro areas showed similar appeal to urban living.

Notably, big city residents are especially eager to stay in cities. Seven in 10 of the people we surveyed in metro New York, Los Angeles, Chicago, Houston, Phoenix and Philadelphia say they prefer to live in a big city; only 8% say they would prefer to live in the suburbs. By contrast, fewer suburbanites (61%) prefer suburban living, and three in 10 would choose a city — big or small — instead.  

When asked specifically how their pandemic experience has affected their preferences, half of city residents say it has not changed where they prefer to live. Another 25% say the pandemic actually makes them more likely to move to another urban area. 

A better answer is this question will be answered at a later date. Many people have left the largest cities because their isn’t a whole lot to do in Manhattan right now during a pandemic. Six months from now, they may come roaring back. And, it doesn’t hurt when housing costs drop as well. 

Lack of Bargains for Debt Funds

While distressed-debt hedge funds had a strong 2020, returning 13% on average, they are finding a limited amount of distressed credit available to purchase today.

In March, the amount of bonds and loans trading at distressed levels in the U.S. quadrupled in less than a week to almost $1 trillion, just about reaching the 2008 peak. This week, a report from S&P Global Ratings found that the U.S. distress ratio — the proportion of speculative-grade securities that yield at least 10 percentage points above Treasuries — fell to just 5% in December, the lowest since 2014.

Junk-rated U.S. companies issued about $52 billion of debt in January, the third-busiest month ever. According to Bloomberg’s Caleb Mutua, triple-C borrowers accounted for about 21% of those sales; energy represented almost one-third of the total. In a telling quote, David Knutson, head of credit research for the Americas at Schroder Investment Management, told Mutua: “The demand is driven by a desperate need for yield combined with hope.”

Howard Marks, the co-founder of Oaktree Capital Group and a legendary distressed-debt buyer, put it this way in a recent memo: “In the past, bargains could be available for the picking, based on readily observable data and basic analysis. Today it seems foolish to think that such things could be found with any level of frequency.” Effectively, the world is more efficient now, he says. “The investment industry is wildly competitive, with tens of thousands of funds managing trillions of dollars … not only is information broadly available and easily accessed, but billions of dollars are spent annually on specialized data and computer systems designed to suss out and act on any discernible dislocation in the marketplace.”

Of course, this is a function of massive stimulus and federal intervention which cannot last forever. As we are seeing in our portfolio sales, there is a favorable seller-buyer dynamic for the sellers. But, as we noted last week, if AMC can raise debt and equity, than few can argue that there isn’t plenty of liquidity in the system. 

Weed Legalization?

Earlier this week, Senate Majority Leader Chuck Schumer and other Senators spoke out in favor of ending the federal prohibition on marijuana, thus ending the conflicts between federal and state law, and possibly opening up the banking industry services to the cannabis industry.

Senate Majority Leader Chuck Schumer and two other Democratic senators said Monday that they will push to pass this year sweeping legislation that would end the federal prohibition on marijuana, which has been legalized to some degree by many states.

That reform also would provide so-called restorative justice for people who have been convicted of pot-related crimes, the senators said in a joint statement.

“The War on Drugs has been a war on people — particularly people of color,” said a statement issued by Schumer, of New York, and Sens. Cory Booker, of New Jersey, and Ron Wyden, of Oregon.

“Ending the federal marijuana prohibition is necessary to right the wrongs of this failed war and end decades of harm inflicted on communities of color across the country,” they said.

“But that alone is not enough. As states continue to legalize marijuana, we must also enact measures that will lift up people who were unfairly targeted in the War on Drugs.”

The senators said they will release “a unified discussion draft on comprehensive reform” early this year and that passing the legislation will be a priority for the Senate.

The trio also said that in addition to ending the federal pot ban and ensuring restorative justice, the legislation would “protect public health and implement responsible taxes and regulations.”

Since the federal government as not intervened as many states have legalized marijuana in both recreational and medicinal forms, ending this inconsistency seems like a logical step. For the record, our firm does have an investment in one of the cannabis stocks, so we are obviously high on the industry (pun intended). A cyclical with the growth rate of cannabis is unprecedented as people are drinking less, smoking less, but using more cannabis.  

The 9MM Brooklyn Multi-Family Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The 9MM Brooklyn Multi-Family Relationship.” This exclusively offered relationship is offered for sale by one institution (“Seller”). Highlights Include:

Timeline:

Please click here for more information on the portfolio. You will be able to execute the confidentiality agreement electronically. 

BAN Report Sign-up