🐂 Bets are off

Markets

Stocks experienced a decline yesterday, marking the end of a challenging week for both the S&P 500 and the Nasdaq, with their poorest performance since March. Investors are closely monitoring the situation to determine whether lawmakers can avert a government shutdown. Meanwhile, Klaviyo, Instacart, and Arm, the three recent IPOs that initially saw significant surges on their first days of trading, continued to see declines.

The Hedge Fund Meltdown That Rescued Your Stock Portfolio

This marks the first part of a series in Heard on the Street, commemorating the 25th anniversary of the Long-Term Capital Management (LTCM) collapse.

Before the emergence of Silicon Valley Bank, Lehman Brothers, or the housing market crisis, Long-Term Capital Management laid the groundwork for subsequent financial crises. This hedge fund, featuring a star-studded team of financial experts, including Nobel Prize laureates, believed they had discovered a way to generate substantial profits with seemingly minimal risk. The banks that extended tens of billions of dollars in loans to LTCM shared in this belief. However, when the fund's strategy unraveled, Federal Reserve officials orchestrated an unprecedented rescue mission and lowered interest rates in an effort to stabilize a plummeting stock market. Even a quarter-century later, the repercussions of these events persist. If there was ever a moment that gave birth to the concept of the "Fed put," it was during the LTCM crisis.

In essence, the core concept revolved around the Fed's strategy of reducing interest rates in response to stock market declines. This action effectively provided investors with a mechanism akin to a put option, a tool used by traders to safeguard against losses. Furthermore, since the Fed hesitated to raise rates promptly despite stock market rebounds, it was as if this put option continued to be revalued upward, granting investors the leeway to undertake risks they might otherwise shy away from.

Finance

Regulators say ‘no’ to election bidding

If your financial independence and early retirement (FIRE) plan involves staking your entire savings on your preferred political party winning Congress in 2024, it's time to reconsider your strategy. The Commodity Futures Trading Commission (CFTC) has recently rejected a proposal by the online financial exchange Kalshi to offer cash bets on the outcomes of US House or Senate elections.

The CFTC's decision has thwarted Kalshi's ambition to become the first US exchange to enable institutional investors to wager as much as $100 million on the results of congressional elections. Kalshi is part of a group of companies that sell futures contracts based on binary events, such as whether the actors' strike will end before Halloween or if SBF will obtain Adderall in jail by September 30.

CFTC Chair Rostin Behnam has asserted that betting on elections is both illegal and not in the public's best interest. Behnam argued that election betting reduces fundamental aspects of the democratic process to a means of profit for some and a form of entertainment for others. He cautioned that permitting Kalshi to proceed would transform the CFTC into an "election cop," responsible for monitoring efforts to manipulate election outcomes, a task for which it lacks a mandate.

Kalshi's CEO, Tarek Mansour, has compared election betting to financial products like insurance and ETFs, which also initially raised concerns among regulators when they were introduced. The company contends that it aims to assist businesses in hedging against risks associated with specific political outcomes, such as a scenario where a company like Build-A-Bear makes a profitable bet contingent on the Senate being controlled by a party with a grudge against teddy bears. Supporters of election betting also argue that the data derived from such betting holds significant value for political researchers.

For those still interested in betting on elections, a New Zealand-based prediction market called PredictIt permits US election wagers of up to $850. Originally, it was granted permission as a small, nonprofit experimental research project to facilitate such bets, but the CFTC later revoked that permission. PredictIt filed a lawsuit challenging this reversal, and an appeals court ruled that PredictIt can continue with these bets, at least for the time being.

Politics

US Governor accused of taking gold bars as bribes

Here's another reason to tease your friend from New Jersey: Democratic Senator Bob Menendez, who also serves as the chairman of the Senate Foreign Relations Committee, is now facing federal charges related to alleged corrupt foreign dealings.

Menendez and his wife, Nadine, stand accused of using his political influence to favor three New Jersey businessmen and advocating for the United States to provide hundreds of millions of dollars in military aid to Egypt in exchange for bribes. They were both indicted by prosecutors yesterday on charges of conspiracy to commit bribery, honest services fraud, and extortion.

Both vehemently deny any wrongdoing, but according to federal prosecutors:

1. A search of the Menendez residence and a safe-deposit box uncovered over $550,000 in hidden cash, 81.5 ounces of gold bars, and a Mercedes-Benz convertible, all suspected to be bribes.

2. Nadine sent a text message to an Egyptian official, saying, "Anytime you need anything, you have my number, and we will make everything happen."

3. Following a trip to Egypt in October 2021, Menendez searched the internet for information on "how much is one kilo of gold worth."

To provide some context, Menendez had previously faced different corruption charges in 2015. Remarkably, he is now the first sitting senator to be indicted twice on separate criminal charges. He is also up for re-election in 2024 and has agreed to temporarily step down from his position as the head of the Foreign Relations Committee. New Jersey's governor, who is also a Democrat, has called for his resignation from the Senate.

Streaming

Amazon is adding commercials for you to binge watch

Fortunately, most of us have already eagerly devoured the second season of "The Summer I Turned Pretty." However, Amazon made an announcement yesterday that they intend to insert advertisements amidst the intense, piercing blue-eyed gazes and other teenage drama in their streaming content.

Beginning early next year, viewers will have the option to pay an additional $2.99 per month on top of their existing $14.99 per month or $139 per year Prime membership to enjoy an ad-free TV and movie experience. Alternatively, those who don't choose this premium option will be automatically enrolled in a new ad-supported tier at no extra cost. It's important to note that live sports content will continue to include ads, regardless of the plan chosen.

In the broader context, Amazon was one of the last major streaming platforms to embrace advertising. Both Disney+ and Netflix introduced more affordable, ad-supported subscription tiers within the past year, with Netflix doing so after years of insisting it wouldn't. Currently, the only major streaming platform that remains entirely ad-free is Apple TV+, though the extent of its ad avoidance may be subject to debate, given the significant placement of Apple products in shows like "Ted Lasso."

Looking ahead, streaming services are aggressively seeking ways to generate revenue after disrupting the traditional linear TV model. Amazon claims that the additional income from ads will be reinvested in content creation, with hopes of avoiding further failures like their Elven-themed series.

Health

CDC panel backs Pfizer’s maternal RSV vaccine.

An advisory committee from the Centers for Disease Control and Prevention (CDC) made a recommendation yesterday endorsing the administration of a vaccine to pregnant individuals during their third trimester. This recommendation aims to reduce the risk of infants contracting the virus. Notably, the vaccine is already accessible, and there's another RSV vaccine, developed by AstraZeneca and Sanofi, which is administered directly to babies and has also received recent approval.

RSV (Respiratory Syncytial Virus) is responsible for sending approximately 80,000 children under the age of five to hospitals in the United States each year, according to the CDC. Furthermore, it stands as the second leading cause of death among infants under one year old on a global scale.