A look at developments in the financial markets over the last week or so.

Companies

Crumbling Caesars empire files for bankruptcy but casinos to remain open
After years of losses, Caesars Entertainment was pushed into bankruptcy by a group of its junior creditors who were concerned that its proposed restructuring favoured senior creditors. The company reacted to this involuntary bankruptcy application with an application of its own in Chicago, which has since been stayed by the Delaware judge hearing the initial application. This is going to be quite a battle between the private equity firms that own the company, and those holding its debt.

Cracker Barrel rejects latest attempt to force a sale
The company’s management has rejected assertions that shareholders would benefit more from a sale of the company than their continued management. While the stock has rallied significantly over the last year, a large shareholder has called a special meeting to put forward his proposals for unlocking further shareholder value. It’s worth noting that shareholders have supported management against Biglari several times before. This battle is similar to that over Darden last year, although Starboard had a lot more success than Biglari has had here. His proposals include an outright sale of the company, an accelerated share repurchase using debt, or him purchasing the company (this is currently prohibited by a law he has asked Cracker Barrel to help him change).

How Lego became the Apple of toys
A look at how the company recovered from near bankruptcy a decade ago to become the largest toy company in the world.
In 2003, the company… was on the verge of bankruptcy, with problems lurking within like tree rot.” “Last year, fueled in part by The Lego Movie’s Pixar-size popularity, the privately held company briefly surged ahead of rival Mattel to become the biggest toy manufacturer in the world, reporting first-half profits of $273 million on revenue of $2.03 billion.”

Markets

Absolutely everything you need to understand what happened to the Swiss franc this week
On Thursday the Swiss National Bank (SNB) announced it had scrapped its three-year policy of capping the Swiss Franc against the Euro. With no prior warning, the move caught the markets by surprise. The value of the Franc against the Euro soared and Swiss stock prices plunged. Exporters raised concerns of a strong currency on exports, and retail forex traders around the world woke up to find they owed a lot of money at best, or that their forex broker was insolvent at worst. While many people cried foul of the SNB move, this served as a painful reminder of the dangers of leverage (some brokerages were offering 100 times leverage trades) and black swan events.

Here’s an illustration of what went wrong, assuming 100x leverage – meaning a trader is able to trade with 100x the cash they deposited in their account:

  • A trader deposits $1,000 and bets the dollar will rise against the Franc from $1.00 to $1.02 to 1 Franc.
  • Without leverage, the $0.02 gain = $20 profit ($1,000 x $0.02).
  • At 100 times leverage, the profit would be $2,000, based on a nominal investment of $100,000 ($1,000 x 100 leverage).
  • The problem is, the opposite is also true: a $0,02 decline from $1.00 to $0.98 to 1 Franc would mean a loss of $2,000. The trader’s account would reflect $1,000 (cash) – $2,000 (loss) = $1,000 owed to the broker.
  • In the above case, the trader suffered a 200% loss on a 2% currency move. The Franc moved ~40% on Thursday.
  • Because of the magnitude of the losses, brokerages had to settle trades before traders were able to deposit money to cover their losses. This meant many brokerages dipped below their required leverage and capital ratios, requiring them to either either secure emergency liquidity or declare insolvency.
  • As many brokerages declared insolvency, they closed out (sold off) all their clients positions, including trades not related to the Franc. This meant traders’ positions were sold even if they were sitting at a loss, causing more liquidity issues for traders and brokerages.

To finish off with, here are two interesting facts relating to retail forex trading:

Gundlach’s DoubleLine Plans Its First Infrastructure Fund
Investment firms continue to raise funds to invest in US infrastructure projects. The estimated cost of returning US infrastructure to a good state of repair is $3.6 trillion. As the government warms to the idea of employing private capital for public works, the likes of Oaktree Capital and DoubleLine are tapping investors for money in order to secure the highest yielding project financing deals.  

Related:
Raise the Gas Tax to Fix America’s Roads
With gas prices having fallen sharply and the acknowledgment that the US need to do something about its road infrastructure, the idea of raising the gas tax has received a lot of attention lately. The idea is politically sensitive, although a number of politicians from both major parties that have stated that it must be strongly considered

Long Reads

122 Things Everyone Should Know About Investing and the Economy
Morgan Housel’s 122 favourite quotes, stats and lessons about investing.
Here’s one from near the bottom: “No one on the Forbes 400 list of richest Americans can be described as a “perma-bear.” A natural sense of optimism not only healthy, but vital.

Silk Road Defense Says Ulbricht Was Framed by the ‘Real’ Dread Pirate Roberts
An interesting look into the investigation and upcoming trial relating to Silk Roadan online marketplace for contraband.
For the past year, the FBI and federal prosecutors have told and retold the story of how Ross Ulbricht created, owned and operated the massive, anonymous online drug empire known as the Silk Road.

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