Odd Lots - Episode 8: These Were Our Favorite Stories of 2015

Episode Date: December 28, 2015

(Bloomberg) -- Gather ‘round the Odd Lots fire. Co-hosts Joe Weisenthal and Tracy Alloway have assembled a collection of Bloomberg News reporters and editors to spread holiday cheer by sharing their favorite market stories and happenings of 2015. We discuss the stock market sell-off of Aug. 24, the fall of Silk Road, drama in the pharmaceuticals industry, how we all survived the first U.S. interest rate increase in almost a decade, China’s movie-goers, and the many, many people worried about bond market liquidity. Featuring: Max Abelson, Matt Boesler, Ed Hammond, Matt Levine, Dan Moss, and Chris Nagi.See omnystudio.com/listener for privacy information.

Thanks for listening to Oddlots. Follow the show on Amazon Music for more future episodes or just ask Alexa play the podcast, Odd Lots on Amazon Music. So we were, it was the same job. We were still just in charge of the U.S. stock market at the time. He was the team leader for stocks. All right. All right. Everyone. We're here to record the look back at our favorite stories of 20. 15 episode of Odd Lots. I'm Jill Wisenthal, managing editor at Bloomberg Markets. And I'm Tracy Allaway, executive editor of Bloomberg Markets. And we've assembled a fantastic team of Bloomberg News people, reporters, and editors to talk about what were the great market stories of 2015. Could you all just introduce yourselves real quickly?

I'm Chris Nache, the managing editor for stocks at Bloomberg News. I'm Matthew Bowsley. I cover the Federal Reserve. I am Max Abelson, I'm Bloomberg News reporter. I'm at Hammond, I cover deals for Bloomberg. I'm Matt Levine. I'm a columnist for Bloomberg View. Let's get going. We'll start with you.

Chris Nagee, you cover stocks. What do you have for us? Speaking as the managing editor for stocks at Bloomberg and as sort of a connoisseur of Armageddon scenarios, I sort of have to say that the August 24th, the late August so often the stock market is my favorite story. It had everything. It had everything from this is the big one in the bond market to this is the big one in the volatility market. It had sort of a flash crash.

It had humans or the problem. Humans on the floor of the nicer are the problem. It had China. It had the dollar. It had pretty much everything that could be pulled into a thesis that this is the end of the world or this is 2008. And as a connoisseur of these things, one thing that you notice over the last five years is general. they haven't come true. So I just thought, you know, everyone who was hoping for the end of the world let all of their guns fly on roughly August 24th. There was quite a sell-off. It was painful.

It was not pleasant for anyone in the market. And then two or three months later, we're merrily on our way and it's just looking like, you know, just another one of these ripples. I mean, not, this is clearly the biggest of them all, but it's pretty much repaired at this point. I just think it's the story of the market since 2008. Don't you love how. healthy corrections are always the corrections that have stopped. Right. There's that. Right. As long as they don't turn into 2008, everyone's happy to have them. I mean, I think there's something to be specific. The difference, what's normalcy in the market? I mean, you go two, two and a half years with the VIX at like 15. That very sound arguments could be made that that's the weird thing. And things like the end of August,

that that's kind of what's supposed to happen. I think people are aware of this fact. I mean, again, right. you're absolutely right. As long as it starts around 12% or so, they're willing to say that's what's supposed to happen. I remember, like, that morning, the Dow opened down like about 1,000 points, was it? And then it was like a really, like, within 20 minutes, it was like, at one point it was like down 1%. And then, like, it started selling. But that was just like an absolutely unbelievable morning.

Yeah, there's no doubt. That ranks in the top couple of days. Was that, like, what's your favorite day of all time, not just this year? Did you have another day that you've loved? That would be the flash crash. No question about it. in May of 2010. I mean, that was the weirdest thing.

And, you know, that was the first one of these things. That was the first really machine fermented, just freak out in the stock market. Nobody knew anything, had any idea of what was going on. Now, now we've seen flash crashes. And I think that's part of the problem that we see any decline, any rapid decline. We say, that's a flash crash. That's definitely something broken. It very easily might not be something broken.

And actually I have to say, in retrospect, that, again, it looks like sort of what's supposed to happen in the market every once in a while. Maybe a little faster, but. Thanks, Chris. All right, we're here at the great Max Abelson. Max, what was your favorite story of 2015? Go on, Max. I chose my favorite story of the year was an actual written story, and I decided not to pick one from Bloomberg,

just so no one could accuse me of sucking up to my wonderful colleagues. You know, 2015 was a long year, and way back in May of 2015, it seems like a long time ago. Ross Ulbricht was sentenced to prison, sentence to life. And wired story, the rise and fall of Silk Road. A lot of stories pretend to be rise and fall. This one was so vast that the rise was part one and the fall was part two. What made the story so great?

Well, for one thing, it was excited. Who wrote it? Do you remember? Yeah, I do. It was Josh Berman and Tomer Hanukkah. And incidentally, I think it also had additional reporting from a New York Times reporter. I don't know how that worked. But have you guys ever read the Elvis Presley biography by Peter Goralnik? The first book is The Rise and the second book is The Fall. I highly recommend that's one of my favorite books of all time.

Beautiful book. But Elvis's rise was so dramatic and his fall was so sad. And the same thing goes for Silk Road. All right. We're going to move to another area of the market where there's been lots of activity this year, which is in mergers and acquisitions. Ed? Yes, M&A has been crazy this year.

Actually, the busiest year ever. I think if you run our numbers, it's like 4.1 or 4.3 trillion, depending on which deals you include and excluded, which either way is a record high. So it's kept everyone very busy, us included. So I suppose I have to say my favorite story. Was there one deal? There is kind of one deal, but I suppose I would say more it's like one company. So I know we as M&A reports are supposed to be kind of cheerleaders for all activity and all particularly or good M&A.

But my favorite deal story of the year is valiant. I knew I had a feeling that when you said it was not a deal but a company, I was like, it's got to be valiant. Right. So everything they've touched this year has provided just glorious. opportunity to kind of write fun stories. So, you know, from them buying a female Viagra drug for a billion dollars, which was like way more than anyone thought it was worth. God's gift to headline writers. Right. Exactly. And then they bought some gastrointestinal stuff, which they also seem to screw up because they overpaid because they cornered themselves on the debt. And then just the best

bit of the whole thing was when the wheels came off a couple of months ago, when obviously the Citron research piece came out, the short sending research shares just got demolished. Can you, for the people that don't pay as much attention to this as we do. Can you give like a 30 second description of what valiant is and why its strategy is so controversial? Yeah, so valiant essentially is a sort of classic roll-up play. It does deal after deal after deal to kind of grow its earnings and has made a huge amount of money for its shareholders. The problem is, and the reason it's so detested in the pharmaceutical world, is it relies on buying companies that have quite a lot research and development and just removing that completely.

So it will get rid of all of the R&D kind of day one and then just run off the existing portfolio of drugs that that company had and sort of almost create like an annuity type business. Now in pharma, this is seen as an appalling thing to do because obviously people need to be investing all the time in R&D to actually keep new drugs coming through the system and to treat the diseases and to improve treatments for existing diseases. So Valiant is sort of the bad boy of pharma. Wait a second.

I know, I was just thinking they've been replaced slightly by cheering recently. But they were bigger and in some ways bad a bad boy. And it was just great. The wheels came off, the shares were destroyed. You had Mike Pearson, who's the chief exec of Valiant and very sort of, you know, had been very upbeat the whole time. He sort of was being wheeled out. He looked kind of like a penguin that had been put down in the desert, sort of sweating profusely and bulging in his suits. And then he had Bill Ackman, believe it or not, as his kind of...

Did you ever get that into a story or a headline? No. Kingwin. No, I think that would have been, I think the conversations with the PRs would have been too brutal afterwards. Coming from like a stock perspective, Valiant was also a huge story and there was this whole issue of like these independent tweeters and researchers and bloggers sort of driving the story. Right. I think it's the best example yet of that kind of a, I don't want to say raid, but it's certainly all of the tools that are available to people who wanted stocks to go down were in full display during that whole thing. adding to the, I mean, clearly adding to the volatility.

It was also interesting the amount of purchase those things got this time. I mean, that's going on all of the time in the stock market. Crazed and less crazed people are saying bad things about stocks of the time. With Valiant, they just found their timing. I mean, they just nailed it. So I know I said I wasn't going to choose a favorite story, but since we're on the topic of Valiant, one of the stories I really liked this year was by Bloomberg News,

and it was about how all the analysts had buy ratings on Valiant for years and years and years. and we're completely caught offside. I want to bring in Matt Bosler into it. One of the aspects of the valiant story, arguably, that enabled them to do this huge roll-up strategy, has been cheap money. And Matt, you cover the Fed, or low interest rates, lots of interest in buying debt, you cover the Fed. And so obviously, that was a huge story.

But what was your favorite story this year? Yeah, well, actually, along those lines, it's sort of how money has been becoming tighter this year that I found the most interesting. So to like sort of bring it back to the August 24th stock market sell off and kind of put the Fed angle on it, it's interesting. That was actually my favorite story too, because that was a assessment date for one of these big new post-crisis banking regulations that is just being phased in now, even though these things have been in the works in Basel, Switzerland for years. And so August 24th, July 31st, September 30th, quarter end, which we also saw like some stock market turmoil. And then, of course, this month we're seeing

all of these regulations coming in, forcing banks to sort of shrink their balance sheets and, you know, just liquidity sort of being sucked out of the system this year. And we've been sort of waiting for this, but these regulations haven't really come into effect until the second half of this year. So I found it very interesting that these certain dates, like August 24th, you know, seems to be a coincidence that there was this G-Sib capital surcharge. We had the biggest stock market sell off. It was the low in the dollar you want exchange rate. And all of this stuff just sort of points to less liquidity in not only money markets, which we've all been paying attention to very closely, right, from a Fed beat, but also

in risk assets and even the stock market. So do you think that sort of volatility and low levels of liquidity is the new normal in markets? It does kind of seem that way. Yeah. I mean, it's only been getting worse and worse this year. And there's no real sign from, you know, the Fed or the regulators that they would like to step in and help out. Because this was kind of the whole point all along, right? Was to make the markets less risky. And now we're sort of seeing the side effects of that. Has it?

Has it made the market less risky? Definitely like the banks, you know, are not doing as much intermediation. And so I guess they, you know, they can't get hurt. But, you know, with less intermediation comes less liquidity in markets. And it's kind of becoming almost these mini shocks that are emanating to the real economy once a quarter. And that's something the Fed has had to deal with. We saw them take a pass on tightening in September, and it was kind of largely because of that market volatility we'd seen just before in August.

I have also remembered another one of my favorite stories, which was the Third Avenue of fund closure, which seems to be the tradeoff, right, of having a bunch of risk moved out of banks and onto the buy side, which means when things go pear-shaped, investors get the short end of the stick, right? Yeah, exactly. And, you know, we're not to the look ahead to 2016 yet, but, you know, that's one of these. things that's been interesting on the Fed beat. Now we're all talking about, okay, the next Fed move is going to be contingent upon actual progress on inflation and not just confidence in their inflation forecast, but if the high-yield credit markets keep blowing up, then none of that's really going to matter anyway, probably. Matt Levine, you write a lot about finance and markets and all sorts of things. What

was your favorite story of 2015? Tracy, I think you know what my favorite story of 2015 was. I write a lot about finance, but I write a lot about bond market liquidity. Oh, yes. I think my favorite story might be the story of bond market liquidity. You coined an acronym, right? Well, it's not really pronounceable. I sometimes think pohobamol, but yes,

people are worried about bond market liquidity has appeared in my morning newsletter for, you know, 150 times in a row, give or take. So what is bond market liquidity, and why did you like this story so much? So bond market liquidity is just like the ability to buy or sell bonds. And so the story goes that it used to be that bonds traded by calling up dealers. You call up a bank and if you want to buy a bond, you buy the bond from a bank. You want to sell a bond, you sell it to the bank. The bank kind of stood in the way in between everything and they kept big inventories of bonds.

And the worry in the last like couple of years, I would say, is that with the Volker rule, with capital regulation, banks are no longer as much in that business as they used to be. And so it's become harder to buy and sell bonds. that's a thing, a thing that people worry about. But when it becomes more interesting and more worrying, is that you combine that with a lot more bonds are held by mutual funds than used to be. And there's this worry that mutual funds,

because they let investors take their money out anytime they want, investors might take a lot of money out. The mutual funds that own bonds have to sell all these bonds to meet those redemptions. They can't do it. It's become harder to sell bonds. And that's going to lead to a big downward spiral. on a disaster. So this has been predicted for a year or two. So if I may, the weirdest thing about

this story, which is also one of my favorite stories, obviously, but the weirdest thing is that people have been talking about it for years. And it's like this major worry that's hung over the market. And it seems to be the things that people don't think about that usually turn out to be problematic, right? Yeah. I mean, that's one of the reasons my favorite story is it's a media predicted or a widely predicted media endorsed potential future crisis, right? And you don't see a lot of that. And, you know, my bias is sort of similar to yours that, like, the odds of the thing that everyone predicts being a crisis, actually being a crisis, are very low. And so you have, like, you know, the bond market liquidity

story has gone through a couple of tests, right? Like there's just like two weeks ago, the Third Avenue Focus Credit Fund did the thing everyone predicted, right? It had a lot of redemptions. It couldn't sell bonds fast enough. It had to close down. It was a big disaster. faster for them. And it didn't, you know, like people worried about it, but it doesn't seem to have had a huge kind of, you know, contagion on the rest of the market, although it's, you know, it's probably a little early to tell. Yeah, all right. It's a little early to tell you. I just want to jump in here. I didn't really have anything prepared for my favorite story of the year. But I, you know, I do feel a little twinge of sadness that I think we may have, at least for this foreseeable period, buried the whole Grexit story. put that behind us for a while because I've been covering the drama of whether Greece was going to the Eurozone basically. You just like going to Athens, Joe. I do like trips to Athens, but I remember very vividly November 2009, no, sorry, Thanksgiving 2009 was the day that the Dubai World bankruptcy announced and everyone was like, who's next on the sovereign debt space? And I read an article

and it was talking about Greece. That was like the first day that I really like paid attention to the Greece story. And I really think like it may come back at some point, but, but I read an article and But it felt like this was the year that that was kind of put behind us. And so I'm a little mixed emotion. Where are the Grexit odds right now, especially cities? Cities? Yeah. Oh, right, because City was the one.

Yeah. City, for those who don't know, has basically, frankly, been on the wrong side of this call several times throughout. Because Villem Bauder, City's chief economist, thought Gregsett was very likely early on. Then it got a wrong. Then that obviously didn't happen. Then they called it again, basically, this year when they had the referendum. Just like a few days before. Yeah.

And so, yeah, I don't know. I don't know where they have it these days. I wouldn't be surprised, you know, if they were, you know, they still have like 10, 20, 30% on. It could be. But obviously, we recently had the Spanish election. So there's no end of political turmoil in Europe, but in terms of like an acute risk of a country leaving. It seems to have 20. 15 was the year that seems to have passed.

So your favorite story is essentially the end of a story. Yeah, I think so. It's the end of a story. And I think between that and with the Fed finally raising rates, with these new regulations coming into place, it does feel like this year was kind of a, at least the end of one big chapter for, or if it was a multi-volume novel,

then at least one book was closed this year, I would say. Look who's here. It's Dan Moss. Hey, Dan. Hi. Dan, who are you? I am the executive editor for Global Economics. So what was your favorite story this year?

My favorite story was about China and a movie, and it's not Star Wars, which actually is not showing in China yet. It's to do with quotas imposed on distribution of foreign movies. No. My favorite story was a story about Furious Seven, and it's box office smash in China, April 14 by our colleague Malcolm Scott, who's responsible for economics coverage of greater China. And the headline is, Furious Seven China box office record shows consumers rising role. And I thought this just encapsulated the big shift we've seen in the past 18 months. But it's really crystallized

this year. Consumption now accounting for more than 50% of China's gross domestic product. This is a huge debate in the global economy, right? Whether or not China can make the transition from a sort of manufacturing-based economy to a services one, right? It's a huge shift that's prompting a huge debate. Now, the great irony is for years and years and years, no G7, no IMF, no G20 communique, was complete without a reference to China needing to shift away from exports toward consumption and services. Well, it's happening. The problem is it's happening. not the way people envisaged.

So while a lot of the headlines are focused on commodities dive as China exports do X or China manufacturing does Y, people also ask themselves, well, how come movies can do really well and how come a company like Alibaba can do very well, despite the China slowdown? Well, the answer is China's economy, it's not the same thing that Deng Xiaoping opened up in the late 70s. It is now about consumption and services. Consumption and services.

This is sort of unrelated, but if they're not showing Star Wars yet, are they using the great firewall to keep out spoilers from the entire country? You'd think they would make an exception for this one movie. Are you going to move to China just so you can avoid spoilers? No, I don't really care one way or another. I just think like there's so much obsession with avoiding spoilers. It seems like a problem. Like, how long are they delaying it for?

I don't know. I think it's not far away. Okay. And I'm certainly not an expert on the structure of media. But this story about Furious Seven really did strike me as encapsulating this shift that we're seeing in China, which is little understood. Were the box office numbers in China much bigger than they were in the US and everywhere else in the world? That's a great question. But it was the biggest one-day box office hall took in 63.2 million,

surpassing the previous record holder, Transformers 4. Thank you, Dan, and I should take this opportunity to mention that Dan is also a co-host on the Benchmark podcast, which is another one of Bloomberg's suite of multiplying podcasts. Well, Tracy, that was a fun conversation, a really fun year, I would say. Definitely an interesting year in markets. I feel like next year might be even more interesting and a good thing that will be recording another show on that topic very soon. I agree. I do think next year it will be really interesting. I was just writing about this fact, which is that it feels to me like there's in markets are always pretty uncertain. But it feels to me like there's an unusual amount of uncertainty going on this year. No one really knows what Fed liftoff is going to be like. There's a lot of debate about the state of the economy. People don't know if the emerging market growth model is broken. So I think it'll be a very interesting year. And I'm looking forward to our predictions episode. Excellent. I'm Joe Wisenthal. You can follow me on Twitter. at the store. And I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. We'll see you next week. Joe and I are very proud of our new podcast, Oddlots, but we are also very proud of Bloomberg's

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