US large-cap S&P 500 closed 0.39% DOWN 🔻 Tech-heavy Nasdaq Composite closed 1.09% DOWN 🔻 Pan European STOXX Europe 600 closed 0.06% DOWN 🔻 HK’s Hang Seng Index closed 1.87% DOWN 🔻 Japan’s Nikkei 225 closed 0.16% UP ▲
Mickey Wields the Axe on Disney’s CEOCrypto Exchanges aren’t just ExchangesGBTC Bitcoin Fund price WAY below what it (supposedly) holds
📖 MoneyFitt EXPLAINS
🎓 VIEs: You DON’T own those Chinese Companies you think you own!
📊 IN THE MARKETS
In HK/China, markets broke a three-week rally with a sharp drop after China reported the first Covid-related deaths in six months amid a fast-spreading flare-up of cases. The trade (we don’t trade, of course) would have been to start selling the market once news stories like the ones below started appearing.
It’s not that “fund titans” are always wrong (not always, though the majority of their funds underperform their benchmarks.) But when stuff like this is in the media, they’re either “talking their books”, meaning they have already bought and want others to jump in too to push it up, or they are just sharing their opinion on what is already known, so many others will have already bought.
Of course, the specific triggers of Monday’s selling, like the covid-related deaths and HK’s Chief Executive testing positive, were not knowable last week. (Though the outbreaks and confusion in Beijing, Chongqing and Guangzhou were.) But the potential selling when everyone is so bullish can be sharp, especially with foreign investors in China 🎓 having been in capitulation mode –“China is uninvestable!”– just a few months earlier. To be fair, Monday’s selldown could have been a lot worse.
Mickey Wields the Axe on Disney’s CEO
The Disney Board of Directors just fired its CEO, Bob Chapek, and replaced him with his predecessor, the legendary Bob Iger, after a major rebellion among senior managers as well as to fix a couple of things that were not really Chapek’s fault. First is that its streaming business (built by Iger) was losing huge amounts of money despite reaching 200 million subscribers (close to Netflix’s 223 million.) The second is the impact of surging sports programming (bidding) costs on its broadcast and cable networks, which include ABC-TV and sports channel ESPN. These led to weaker-than-expected results for the company overall (despite decent earnings from the parks division that Chapek had led.)
Bob Iger was CEO from 2005 to 2020 and transformed Disney by buying Pixar, Marvel, Lucasfilm (Star Wars) and 21st Century Fox, making the company a content giant while also loading up some debt. The company’s market value (share price times shares in issue) increased by five times under Iger’s first stint, and the Board is clearly hoping he can do his magic once again. Depressingly for Bob Chapek, shares in the 99-year-old, US$180 billion market value company traded up 6% on the news, though it’s still down 38% since the start of the year.
So he may be a super successful “boomerang boss” like Apple’s Steve Jobs or Starbucks’ Howard Schultz, both of whom did wonders on their return. Or not. A 2020 study by MIT Sloan found that companies bringing back a former CEO have “significantly lower” stock performance than ones bringing in someone new.
Crypto Exchanges aren’t just Exchanges
Unlike “normal” regulated exchanges, crypto exchanges are often not only a venue where buyers and sellers can trade, but also a whole bunch of other things, like lending, clearing and custody of assets, which are “normally” done by separate businesses. This mushing together of functions is among the factors leading to excessive risks in the essentially still unregulated system, as flagged by the deputy governor of the Bank of England.
And referring (obviously) to FTX and Alameda, he added that a “firm accepting its own unbacked crypto asset as collateral for loans and margin payments… creates extreme ‘wrong way’ risk.”
While there, it seems FTX owes more than US$3 billion to its 50 biggest creditors, all of them customers. Two are owed more than US$200 million each, with another eight at over $100 million each. (In total, FTX owes over US$10 billion to more than a million creditors.) These customers were large financial companies like hedge funds that traded crypto with FTX and, apparently, also used FTX as custodians.
– A principal trader is a trader which uses he company’s own money to trade, taking risks and potentially making (or losing) a lot of money.– A market maker is a type of principal trader who offers other investors a buying and a selling price at the same time and profits from the difference between them.– Agency trading, as done with most brokerages, is where trading is on behalf of an investor in return for a commission. – An exchange is a marketplace where trading happens, with each trade generating a small fee for the exchange. – A clearing house is a middleman that helps execute trades between buyers and sellers AT an exchange.– A custodian is a financial institution that holds a customer’s assets for safekeeping and is a separate entity from a broker or exchange.
In crypto, the line between exchange, broker, lender and custodian is rather blurry, particularly when leveraged exposure or borrowing is involved.
GBTC Bitcoin Fund won’t show you what is in there
And for everyone who thought that instead of buying Bitcoin and stashing it in your own cold wallet (like a thumb drive to keep your coins in) it would be less risky to participate through a Bitcoin fund… the asset manager running the Grayscale Bitcoin Trust (GBTC), the world’s largest, is refusing to share its proof-of-reserves (like a map of customers’ funds), citing vague “security concerns.” This is stirring up speculation about the financial health of the company. As the Bitcoin saying goes, “Don’t Trust, Verify.”
Basically, unlike most peers and exchanges, they’re refusing to let users verify that their funds were properly audited by a third party. Grayscale is a sister company, under Digital Currency Group, of crypto investment bank Genesis, which last week suspended redemptions in its lending arm (causing Gemini, among others, to pause withdrawals on their customer accounts.) Sister companies in different but related businesses couldn’t possibly use customer funds to bail out each other, could they? Surely not!
As of Friday, GBTC was trading at a record 45% discount to the value of the underlying assets in the fund. Bitcoin is down a beastly 66.6% since the start of the year, while GBTC is down 77%.
Thank you for spending a few minutes of your time with us. Remember to take time for yourself and be thankful for what you have.
📖 MoneyFitt EXPLAINS
🎓 VIEs: You DON’T own those Chinese Companies you think you own!
Under Chinese law, foreigners are not allowed shares in companies in certain Chinese industries (actually, most of them.)So a Chinese company wanting to raise money by selling shares to foreigners will set up an offshore vehicle (a shell company in the Cayman Islands) called a Variable Interest Entity, or VIEThe VIE enters into a contract with the Chinese company where the VIE gets certain economic interests and rights (profits, control of assets)… but NOT any actual ownership.The VIE (not the “underlying” Chinese company) is then listed in the US or HK or wherever and foreigners can happily buy and sell those shares as if they were actually pieces of the ownership of those companies.The structure was originally designed to circumvent Chinese laws and was technically illegal, but now gets passed by the China Securities Regulatory Commission before listing.But it still isn’t the same thing as actually owning shares in the underlying company, and the assets can get transferred out with no recourse. VIE shareholders have tried to enforce the contracts in Chinese law and failed (like when Alibaba transferred Alipay to a company owned by Alibaba boss Jack Ma.)(Little known fact: Accounting scandal poster boy Enron Corp. used VIE structures to get away with its fraudulent practices decades ago.)Most well-known Chinese Internet companies like Tencent, Alibaba, Pinduoduo, Baidu, JD.com and NetEase operate under VIE structures.
Please do your own research – we create educational and entertaining content so you can start the day understanding the financial and business worlds a little better. However, this is NOT financial advice.
MoneyFitt (Spendolater Pte Ltd) is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information. The information contained is not intended to be a source of advice or credit analysis with respect to the material presented. Any ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial, tax or legal professional and independently researching and verifying information. Content is intended to be used and must be used for informational purposes only.
MoneyFit Morning Archive (to 07-Nov-22)
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