Generous Portion: FTC, CMG, ETF

Summary

Money Stuff: The Podcast - Episode Summary Title: Generous Portion: FTC, CMG, ETF
Release Date: November 15, 2024
Hosts: Matt Levine and Katie Greifeld

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1. Impact of FTC Actions on Merger Arbitrageurs

Discussion Overview:
Matt Levine and Katie Greifeld kick off the episode by delving into the recent challenges faced by merger arbitrageurs due to the heightened scrutiny and regulatory hurdles imposed by the Federal Trade Commission (FTC). They use the thwarted merger between Tapestry and Capri as a case study to illustrate the broader implications for the merger arbitrage market.

Key Points:

• Tapestry-Capri Merger Collapse: The FTC's intervention led to the blocking of the merger between Tapestry and Capri, resulting in a nearly 49% drop in Capri's stock price. This event has significant repercussions for merger arbitrageurs who had heavily invested in Capri's stock, leading to substantial losses and job cuts within the sector.

  Katie Greifeld (04:07): "I didn't look at anything, so I don't know if I did that."
  Matt Levine (03:45): "Affordable luxury."

• Broader FTC Vigilance: Over recent years, the FTC has increasingly been proactive in blocking mergers, a trend that poses ongoing risks for merger arbitrageurs. The hosts highlight a Wall Street Journal article noting job losses in the merger arb industry due to these regulatory challenges.

  Matt Levine (04:23): "The FTC has been gung ho on suing to block deals."
  Katie Greifeld (04:30): "Armageddon potentially is over."

• Political Influences: The conversation touches upon the anticipation that a new administration, potentially influenced by figures like Donald Trump, might unleash "animal spirits" in the merger market. However, Levine expresses skepticism about the efficacy of such changes, citing Lina Khan's strong stance against big mergers.

  Matt Levine (07:19): "JD Vance has praised Lina Khan, the head of the FTC."
  Katie Greifeld (07:43): "How much of a say JD Vance is going to have."

Insights:

• Market Volatility: The increased FTC activity introduces greater volatility and unpredictability in merger outcomes, directly impacting the profitability and stability of merger arbitrage strategies.
• Regulatory Uncertainty: The potential for administrative changes adds another layer of uncertainty, making it challenging for market participants to forecast and strategize effectively.

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2. Securities Fraud and Chipotle's Burrito Portion Sizes

Discussion Overview:
The hosts transition to a lighter yet intriguing topic: the emerging securities fraud lawsuits centered around perceived decreases in burrito portion sizes at Chipotle. They explore how minor consumer grievances can escalate into significant legal and financial repercussions for corporations.

Key Points:

• Portion Size Controversy: Social media and consumer complaints have highlighted inconsistencies in Chipotle's burrito and bowl portions, leading to concerns about misleading statements regarding portion sizes.

  Matt Levine (14:33): "Some of these burritos skimp on the rice and beans."
  Katie Greifeld (15:59): "People have posted serious complaints about the size of Chipotle burrito bowls."

• Securities Fraud Implications: Levine explains how these complaints have the potential to be escalated into securities fraud lawsuits, arguing that discrepancies between stated and actual portion sizes could be construed as misleading investors.

  Matt Levine (19:12): "But like, what happens here is that these reports come out and the stock goes down a little bit."

• Legal and Financial Ramifications: The discussion highlights how even minor issues can lead to significant stock price fluctuations and potential class-action lawsuits, benefiting securities lawyers through multimillion-dollar legal fees.

  Katie Greifeld (20:07): "Maybe you settle it for like, you know, pennies on the dollar and you collect a multimillion dollar legal fee for bringing this lawsuit."

Notable Quotes:

• Matt Levine (19:02): "We did a thorough audit of our portions and we found that some stores were not putting enough in, and so we're putting more in everything."
• Katie Greifeld (21:06): "One of the things I think is great about Chipotle is if you come into the restaurant and you want a little more rice or you want a little more pico de gallo."

Insights:

• Consumer Influence on Corporate Practices: The case underscores the significant impact that consumer perceptions and social media can have on corporate reputation and stock performance.
• Legal Landscape for Corporations: Companies must navigate the complexities of public perception and regulatory scrutiny, where even seemingly trivial issues can lead to substantial legal challenges.

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3. Leveraged ETFs and the Berkshire Hathaway Example

Discussion Overview:
Levine and Greifeld shift focus to the financial instruments realm, specifically discussing the introduction of leveraged Exchange-Traded Funds (ETFs) tied to Berkshire Hathaway's Class B shares. They explore the viability, marketing appeal, and potential performance of such leveraged products compared to more volatile counterparts.

Key Points:

• New Leveraged ETF on Berkshire Hathaway: A South Korean brokerage, in collaboration with white label issuer Title, is launching a double-leveraged ETF tracking Berkshire Hathaway Class B shares. This is presented as an unconventional choice compared to the typically volatile stocks like Tesla or Nvidia that dominate the leveraged ETF market.

  Katie Greifeld (28:08): "One of South Korea's largest retail brokerages has teamed up with this white label issuer named Title to create a double leveraged fund that will track, if approved, class B shares of Berkshire Hathaway."

• Volatility and Performance Considerations: The hosts analyze how Berkshire Hathaway's relatively low volatility (~19% over 90 days) makes it a less exciting yet potentially more stable option for leveraged ETFs, contrasting it with high-volatility stocks that offer greater profit opportunities but also higher risks.

  Matt Levine (30:05): "With a not very volatile stock, you get less volatility drag."

• Market Saturation and Future Prospects: They discuss the rapid proliferation of ETFs, driven by decreasing launch costs and the ability to offer highly specific or niche products. This trend could lead to a market flooded with ETFs, potentially surpassing the number of publicly listed companies.

  Katie Greifeld (34:50): "We are approaching the point where there's going to be more US listed ETFs than US listed companies."

Notable Quotes:

• Matt Levine (32:12): "You can sue for anything. Not all these cases win, but like enough make money that like, it's a lucrative business for plaintiffs for securities lawyers."
• Katie Greifeld (33:03): "We chat to a lot of white label issuers because they're really interesting."

Insights:

• Innovation vs. Practicality: While leveraging Berkshire Hathaway offers a more stable investment, it lacks the high-octane appeal of more volatile stocks, potentially limiting its attractiveness to individual investors seeking significant returns.
• Proliferation of Financial Products: The ease of launching ETFs has democratized financial products, allowing for diverse and highly specialized investment vehicles, but also raising concerns about market saturation and investor confusion.

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Concluding Thoughts

Throughout the episode, Matt Levine and Katie Greifeld provide a nuanced exploration of how regulatory actions, consumer perceptions, and financial innovations intersect to shape the modern financial landscape. From the intricacies of merger arbitrage in a tightening regulatory environment to the unexpected rise of securities fraud lawsuits over burrito portion sizes, and the evolving ETF market, the hosts offer insightful commentary on the dynamic forces at play in finance today.

Final Insights:

• Interconnectedness of Markets and Regulations: The episode highlights the delicate balance between market activities and regulatory frameworks, emphasizing how changes in one can significantly impact the other.
• Consumer Influence and Corporate Accountability: Consumer feedback, amplified by social media, plays a critical role in holding corporations accountable, not just in product quality but also in their financial disclosures.
• Future of Financial Instruments: The ongoing innovation in financial products like leveraged ETFs showcases both the opportunities and challenges in creating investment vehicles that cater to diverse investor preferences while managing inherent risks.

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For more in-depth analysis and discussions on finance and Wall Street, subscribe to the Money Stuff Podcast on your preferred platform and stay informed with Matt Levine and Katie Greifeld.

Transcript

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[Matt Levine]

Hello and welcome to the Money Stuff Podcast, your weekly podcast where we talk about stuff related to money. I'm Matt Levine and I write the Money Stuff column for Bloomberg Opinion.

[Katie Greifeld]

And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.

[Matt Levine]

What are we talking about today?

[Katie Greifeld]

Armageddon?

[Matt Levine]

Arbogeddon.

[Katie Greifeld]

I hope I said that right. And then we're gonna.

[Matt Levine]

I apparently spelled it wrong in my new letter, but because it's not a real word, I'm not gonna correct it.

[Katie Greifeld]

That's good. There's an upside there. We're going to talk about securities fraud in the burrito market and then we're going to talk about leveraged Warren Buffett. Let's see how it goes. I didn't look at anything, so I don't know if I did that.

[Matt Levine]

We're doing great.

[Katie Greifeld]

I don't know if I did that in the right order, but it doesn't matter. I did it in order of your.

[Matt Levine]

Own interest, which is personal interest. Yeah, that's what we need. All right.

[Katie Greifeld]

I am intoxicated with power anyway. Merger arb. Armageddon.

[Matt Levine]

Armageddon. I think Armageddon is a term that is applied to something that happened in 2014.

[Katie Greifeld]

Got it.

[Matt Levine]

Doesn't matter. But yeah.

[Katie Greifeld]

Does the term Armageddon apply here?

[Matt Levine]

No.

[Katie Greifeld]

Yeah, the opposite. So why are we saying it's an Armageddon?

[Matt Levine]

Oh, no, we're not. So what happened is that there have been over the years bad things that happened to merger Arb firms. Most recently when the handbag deal blew up, which is. What is it? A tapestry. And Capri are the companies that. It's like a very narrow market segment definition which is like expensive but not very expensive handbags, as far as I can tell.

[Katie Greifeld]

It's like affordable luxury.

[Matt Levine]

Affordable luxury.

[Katie Greifeld]

Something like that.

[Matt Levine]

And so those companies dominate the market for affordable luxury. And so they announced a merger. Merger arbitrageurs loaded up on Capri stock, I think. And then the Federal Trade Commission sued to block the deal. A judge agreed at the FTC and blocked the deal. Capri stock fell like 49% and some merger arbs. They lost a lot of money.

[Katie Greifeld]

Yeah.

[Matt Levine]

And more generally, like in the last few years, the FTC has been gung ho on suing to block deals. Sometimes it has succeeded and the result of that is bad news for merger arbs. And some number of them have lost their jobs, according to a Wall Street Journal article that was published earlier this week.

[Katie Greifeld]

Yeah, I was messy. The headline of the Wall Street Journal article is that basically Armageddon potentially is over.

[Matt Levine]

Yeah, right. Armageddons have occurred. But like the assumption is that Donald Trump will unleash animal spirits in the merger market.

[Katie Greifeld]

That is the raging consensus right now. I don't know how many we're so back memes that you've seen over the past week, but that is most of my social media right now.

[Matt Levine]

M and A bankers didn't know that.

[Katie Greifeld]

I followed so many financial meme accounts, but apparently I do. And in light of that, it was interesting to see the tapestry and Capri deal fall apart. We're recording this on Thursday and the headline crossed this morning that they're walking away from the deal. And the reason that the companies gave was that it's in the best interest of both companies as the required closing condition of receiving necessary US Regulatory approvals was unlikely to be met by the outside date of February 10th. By February 10th, of course, there will be a new administration, at least in the White House.

[Matt Levine]

Yeah, that's cutting it close.

[Katie Greifeld]

It's a little close.

[Matt Levine]

Once you have a judge ruling that your deal is of antitrust violation, it's like hard to walk that back. It's not completely impossible, but it's hard and it's harder to do. And you know, three weeks after, you know, the new administration is inaugurated and it's a lot of uncertainty between now and then.

[Katie Greifeld]

Yeah, yeah. So I just, I liked this story. Cause it was a little bit of reality that there are going to be some lost causes when it comes to the deal landscape right now. After the election last week, you saw so many potential deal stocks just shoot up. I'm thinking about like Capital One and Discovery in particular, and I'm not commenting on those odds. But not all of those deals are going to go through. Some of them will die on the vine before things actually change.

[Matt Levine]

Right. There's like so much of a, like immediate psychological shift in how people see the new administration like even before it's in place. And my general sense is that the wheels grind kind of slowly and it is hard to reverse course. Now this is clearly an administration that is not a respecter of norms and procedures. And so the wheels will grind a little faster than they usually do. But. Right. Like once you have a court decision, it's pretty tough. The other thing that I think is weird is like everyone kind of assumes that this will be a far more merger friendly administration. And the backing of all these business people and bankers suggest that there's some reason to assume that. But JD Vance has praised Lina Khan, the head of the FTC who's been very militant about blocking big mergers. It's not obvious that a sort of heterodox, populist Republican administration will actually be that much more pro merger or that they'll be pro merger in all the ways that people want them to be. But you know, that is everyone's assumption. So here we are.

[Katie Greifeld]

Yeah, it's a good point. I do wonder, and I don't want to talk about politics, but I do wonder how much of a say JD Vance is going to have.

[Matt Levine]

Oh, none. None. But I'm not sure anyone is. Like there's going to be some random television personalities put in charge of the ftc and who knows what that person thinks, right? Like who knows, oh, Katie's pointing to herself. Katie, as a television personality, should be put in charge of the ftc. That's a good.

[Katie Greifeld]

It would be an honor to serve my country. Specific to Tapestry and Capri, though, you point out that it's a quick turnaround. Two weeks is not a lot of time. But also I wonder if one thing.

[Matt Levine]

That could happen is that like a deal gets dropped and it goes away and then like in six months they start negotiating again. Circumstances are changing. You have an argument that, oh, it's not anti competitive now and like you have a much friendlier FTC and you know, it all works out, but that's pretty risky for, you know, a jilted merger target. At that point.

[Katie Greifeld]

It does seem like Tapestry shareholders do not want this deal to happen though.

[Matt Levine]

Sure, yeah, yeah. I mean, like, if both sides wanted this deal to happen, like you say, we'll appeal and you know, there's a deadline at February 10th, but that doesn't matter. You can, you can mutually get together and waive the deadline, but if you don't want to mutually get together, then the deal's off, you know.

[Katie Greifeld]

Yeah, but also this is an 18 month saga. Like this deal has been going on for a long time. Things have been pretty good at Tapestry. Their earnings have been solid. They recently raised guidance for the year. Apparently the Coach brand is popping off and it seems like things have kind of been deteriorating at Capri during that time. So maybe there's a sigh of relief here.

[Matt Levine]

Oh yeah, definitely. It is often the case that when a deal is blocked and people are like, ah, it was blocked. Often what that means is that one side is kind of relieved it was blocked. Right. Like circumstances have changed and you no longer want to do the deal and you can't just back out of the deal. But if there's some regulatory impediment, you can do things like not agreed to extend the deadline and then there you are.

[Katie Greifeld]

Yeah, we gave it the good college try. It's just not going to work out.

[Matt Levine]

You guys, you know, you have an obligation to give it a. The words are like, use, you know, all reasonable best efforts, but then once you do that, you're done.

[Katie Greifeld]

Yeah.

[Matt Levine]

I do think that like, there's just the more general point of like the, you know, the merger arb business, which has been difficult but lucrative in the last few years. Right. So like merger arb I think of as like being sort of almost a market making business where like you're doing A lot of trades. Each trade has kind of a small spread. You make the spread, an expectation and every so often you get like absolutely run over on a deal like Tapestry Capri where like you lose, you know, 50% of your investment or whatever in a scenario where like Lina Khan is running the FTC and the FTC sues to block a lot of deals that then they lose in court. Like that's a really fun environment for merger Arp because you can do things like buy Target stock after the FTC sues and the stock has gone down and then the FTC loses and the stock goes up and you make a lot of money. It's like anything else. If you think of merger Arb as a market making business, then market makers make more money in volatile periods. And so if you have a volatile period where some mergers don't go through, some mergers do go through, some mergers get sued and they go down and then they go through and they go up. You can make a lot of money in this liquidity provision business where you buy stocks when the merger is announced and sort of sell them into the merger when the merger closes. So it's a good lucrative business, but it's also a business where you can get blown up. If you just make a couple of the wrong bets, you get blown up and you're out of the business. Whereas the assumption is that in a Trump administration there'll be a lot of mergers, so you'll have a lot of volume. If you think of it as a market making business, you'll have a lot of deals to do and they'll all go through. So you won't really have a lot of risk, you won't get blown up. The flip side of that is spreads will compress and you'll just make a sort of more modest profit. Profit and not make tons of money on each deal, but you'll have an easier life.

[Katie Greifeld]

What a pleasant and sedate landscape that sounds like. I kind of like the high octane.

[Matt Levine]

Yeah. I think that almost everything about financial markets and the world will be like less sedate under a Trump administration. But like, you know, merger Arab, it'll be like, yeah, they all go. They all close.

[Katie Greifeld]

Yeah.

[Matt Levine]

Or not. Or not. Right. Or there will be, you know, confounding expectations and they'll sue to block every deal.

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[Katie Greifeld]

Let'S get to the good stuff.

[Matt Levine]

What's that?

[Katie Greifeld]

Burritos. Burritos and how little meat is in Chipotle burritos.

[Matt Levine]

The lawsuit that we're going to talk about also points out that Some of these burritos skimp on the rice and beans.

[Katie Greifeld]

Unbelievable.

[Matt Levine]

It's not just the expensive, it's everything.

[Katie Greifeld]

I haven't been to a chipotle in like 15 years.

[Matt Levine]

When I worked at Deal Breaker, my job before this, we were upstairs from a Chipotle and there was a period where I ate a Chipotle like three times a week for months on end and probably never since then. What was your. I like a burrito with like a, like a regular burrito.

[Katie Greifeld]

Standard. Yeah, Regular guy.

[Matt Levine]

I think I got. I don't even remember what I. What meat I had in my. Probably.

[Katie Greifeld]

Was it a true burrito? Not a burrito bowl?

[Matt Levine]

I don't think I've ever eaten a burrito bowl.

[Katie Greifeld]

Wow. We're different people.

[Matt Levine]

I don't know. I find it off putting. It's like a very wrong salad.

[Katie Greifeld]

Yeah, it's like a salad, but more fun with less carbs than a burrito. But still a lot of more carbs than a salad because there's rice.

[Matt Levine]

The tortilla is so thin. How many.

[Katie Greifeld]

It would shock you.

[Matt Levine]

Anyway, I've never had a burrito ball, but I've had hundreds of or at least dozens of Chipotle burritos. Pretty good.

[Katie Greifeld]

What were the portion sizes like?

[Matt Levine]

I don't remember, but this was more than a decade ago and so I think they were ample. I think this was before Chipotle.

[Katie Greifeld]

Well, apparently things have deteriorated since then. If you spend any time on social media, this has been a long running issue. By long running issue, I mean at least a couple months.

[Matt Levine]

Yeah, it's been like a thing this year. I think maybe last year too, but I think it was really sort of took off in spring and summer of 2024. People on social. I'm not on the YouTube channels where people are like reviewing.

[Katie Greifeld]

You're on the YouTube wherever.

[Matt Levine]

TikTok, wherever people are going to post videos about their disappointment with their burritos. I'm not on those channels. No, but they exist and they're hugely influential. I guess some people have posted serious complaints about the size of Chipotle burrito bowls to the point that Wells Fargo equity research analysts went and did a study where I remember this, they ordered 75 quote, like for like burrito bowls across eight locations of Chipotle in New York City and found the smallest bowl was 13.8 ounces and the largest was 26.8 ounces.

[Katie Greifeld]

This had to be interns.

[Matt Levine]

I don't know. No.

[Katie Greifeld]

Sending them out to various locations and having them pick up.

[Matt Levine]

I Hear you, but like, I mean.

[Katie Greifeld]

Sounds like a summer project or something.

[Matt Levine]

Yeah, that's probably right.

[Katie Greifeld]

But what did they find?

[Matt Levine]

But also, like, I don't know, like, what a fun. You're an equity research analyst. Like, I'm going to get out of the building and order 75 burrito bowls. That's funny. I don't know.

[Katie Greifeld]

I don't know. Wells Fargo stock should fall because this is how their analysts are spending their time.

[Matt Levine]

But what, how are analysts supposed to spend their time?

[Katie Greifeld]

What groundbreaking conclusion did they find?

[Matt Levine]

The biggest bowl is twice as big as the smallest bowl.

[Katie Greifeld]

That's pretty bad.

[Matt Levine]

It's pretty bad, yeah. And it prompted endless, endless soul searching from Chipotle. The CEO on the July earnings call said, before I give an update on our five key strategies, I want to take a minute to address the portion concerns that have been brought up in social media. First, there was never a directive to provide less to our customers. Generous portion is a core brand equity of Chipotle. Okay, I don't know what that means. It always has been and always will be. With that said, getting the feedback caused us to relook at our execution across our entire system with the intention to always serve our guests delicious, fresh custard burritos and bowls with generous portions.

[Katie Greifeld]

Was this still Brian Nicholl?

[Matt Levine]

Yeah, yeah, yeah.

[Katie Greifeld]

By the way, if they make the Starbucks drinks smaller, I am going to riot.

[Matt Levine]

Sure, sure, sure, sure, sure, sure. Well, you'll sue.

[Katie Greifeld]

Yeah.

[Matt Levine]

We're getting away from the point, which is that, okay, people have complained about various small consumer indignities on the Internet forever. But like, there's this incredible modern technology, the securities fraud lawsuit, that allows you to turn this into a multi billion dollar lawsuit, right? You're like, oh, the portions of my burrito are too small. What can you do about it? You're a sue because your burrito is too small. You're going to have a class action. Everyone else's burritos too small. It's crazy, right? But, like, what happens here is that these reports come out and the stock goes down a little bit. Chipotle actually announces earnings. Like most recently, like the earnings for Q3, which they announced just a couple of weeks ago, and their earnings have an increase in cost of goods sold because they're putting more meat in the burritos.

[Katie Greifeld]

They're addressing the problem.

[Matt Levine]

We did a thorough audit of our portions and we found that some stores were not putting enough in, and so we're putting more in everything. That's not exactly what they said, but they're putting more in everything.

[Katie Greifeld]

It was implied.

[Matt Levine]

And so the stock goes down. Why does the stock go down? Well, it's an earnings release. There's a number of reasons the stock could go down. And one of them might be that the future cost of goods sold is higher. And another one might be that you worry that you've lost some brand value by getting yelled at for skimping on portions. All we know is the stock goes down. Right. And the stock goes down by like single digit number of percentage points, which translates into billions of dollars of losses. Right?

[Katie Greifeld]

Yeah.

[Matt Levine]

And so if you're a securities lawyer, you just like slap that in a lawsuit. They said the portions were big. In fact the portions were small. They were lying. It's fraud. The stock went down when the fraud came out. So everyone who bought the stock was defrauded out of, you know, billions of dollars.

[Katie Greifeld]

Yeah.

[Matt Levine]

And then you sue and then, you know, it's like kind of ridiculous, but like, maybe you settle it for like, you know, pennies on the dollar and you collect a multimillion dollar legal fee for bringing this lawsuit. It's amazing.

[Katie Greifeld]

It is amazing. And I'm excited to see how this turns out.

[Matt Levine]

I write all the time. Everything is securities fraud. It's like an amazing use of the American legal system to go after like really incredible complaints.

[Katie Greifeld]

Do you want to speculate on how it might shake out? Do you think that they're actually going to settle?

[Matt Levine]

I don't actually. I always like write about these people. When people file them, a lot of them do not go very far. Some of them settle.

[Katie Greifeld]

Yeah.

[Matt Levine]

I don't know. It takes you like an hour to write this complaint. It's so funny. And then maybe they settle it and you get a few million dollars.

[Katie Greifeld]

Well, if it does go that route, I wonder, does this set any precedent for what you could sue for?

[Matt Levine]

Like, I've been writing about this for years. I know, but like you can sue for anything if it's a public company, anything.

[Katie Greifeld]

If a company sells marbles, for example, and it says like, oh, people are loving the green marbles. And then on their earnings call they have to say, actually people didn't love the green marbles that much. You can sue for that.

[Matt Levine]

Of course.

[Katie Greifeld]

Wow.

[Matt Levine]

You can sue for anything. Not all these cases win, but like enough make money that like, it's a lucrative business for plaintiffs for securities lawyers.

[Katie Greifeld]

Well, I don't know, maybe if I don't, you know, become the next FTC head, this is something I could do. Brian Nicol knew that people were Upset about the Chipotle portion sizes. There was this amazing article by Fortune in late May. The headline is Chipotle CEO, our portion sizes aren't getting smaller, but you can get more food with a secret look. Do you remember this? Did this enter your sphere of knowledge?

[Matt Levine]

Tell me more.

[Katie Greifeld]

Okay. I'm so excited to tell you about this. In an interview with Fortune, Nickel said portions have not gotten smaller and offered disappointed customers seeking an even bigger burrito or bowl. A pro tip. Give the workers a secret look. This is a direct quote. One of the things I think is great about Chipotle is if you come into the restaurant and you want a little more rice or you want a little more pico de Gallo, Nicole told Fortune, who then widened his eyes slightly.

[Matt Levine]

And clean up that pico de gallo.

[Katie Greifeld]

Did I say that wrong? What did I say?

[Matt Levine]

I said pico de gallo.

[Katie Greifeld]

Did I really? Sorry. I can't believe I said that. Okay, if you want more cheese on your quesadilla or you want more jalapenos, this is a direct quote. One of the things I think is great.

[Matt Levine]

She's going to play the tape of himself.

[Katie Greifeld]

One of the things I think is great about Chipotle is if you come into the restaurant. If you. I'm gonna start saying that, though. We used to call it that in my family. One of the things I think is great about Chipotle is if you come into the restaurant and you want a little more rice or you want a little more pico de gayo. How do I say it?

[Matt Levine]

I think we're done.

[Katie Greifeld]

What is. Wait, how do I say it? Now I'm in my own head. Pico de gallo, Nicoll told Fortune, who then widened his eyes slightly and nodded his head. Usually our guys and women give them a little more scoop. So he was aware of the complaints. And I just love the suggestion of giving like a secret nod and like maybe a wink to one of the Chipotle workers.

[Matt Levine]

I just think it's like it is not a factory produced product that should have exactly the same weight each time. It's like you're talking to a person who's using a spoon. Right? You can do that. You could even say, could you bet a little more on that? I don't know. I haven't done this in 10 years. But it does seem like a thing you could do. And then Wells Fargo is going out. And I wonder if Wells Fargo controlled for the looks. There's maybe the 26 ounce ball was like they. They looked at the worker a little bit too intensely. And the worker's like, all right, here's some more.

[Katie Greifeld]

Yeah, we do need to know the methodology. Like, did they make right.

[Matt Levine]

Like one intern, like was making more eye contact than the other intern and got more.

[Katie Greifeld]

Did that interest in being smile perhaps or glare? Yeah, all of these can influence results. Maybe this is a good case for AI, you know, maybe if the robots major bulls, then you get a perfect measurement every time. But humans still rule this planet and this is just a byproduct of that.

[Matt Levine]

I think that we've said everything we need to say about this issue.

[Katie Greifeld]

I think I said too much poorly.

[Matt Levine]

I hope we're keeping most of that.

[Katie Greifeld]

We can keep some of it. I don't want to sound too much like a blubbering idiot. It's really hard being on TV because my worst instincts when it comes to pronunciation always win. Always win.

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[Katie Greifeld]

What do you think Warren Buffett's doing?

[Matt Levine]

Leveraging now what is Warren Buffet doing?

[Katie Greifeld]

He's probably not thinking about this strange ETF filing based off of Berkshire Hathaway.

[Matt Levine]

Tell me more.

[Katie Greifeld]

Okay, so one of South Korea's largest retail brokerages has teamed up with this white label issuer named Title to create a double leveraged fund that will track, if approved, class B shares of Berkshire Hathaway. So this is another leverage single stock etf. And I know that we've talked about them a lot, maybe more than the listeners want, but listen, this one is weird and interesting just because Berkshire Hathaway shares are so boring. Matt, this is like antithetical to the single stock leveraged wrapper.

[Matt Levine]

What is the purpose of the single stock leveraged wrapper? To me it is just marketing. Right? And so like it's fun. Yeah. But like if you have some like snazzy thing, you can be like, oh, a snazzy thing and then you get money and then like you.

[Katie Greifeld]

Yeah, well, I think the appeal like.

[Matt Levine]

This is not as snazzy as like Tesla because it's not that volatile. But it's like, yeah, like Warren Buffett over there. He's like being Warren Buffett.

[Katie Greifeld]

I don't know if that's snazzy.

[Matt Levine]

Snazzy is not the word, but like has some retail appeal to someone.

[Katie Greifeld]

Someone maybe to South Korean investors. Because in this article it is pointed out that individual investors from South Korea do follow and hold a lot of Berkshire shares. And they also love leveraged single stock ETFs, namely the Tesla ones. But this one is strange because, okay, you have the snazzy marketing thing, but the fun in it is watching it go up and down a lot. If you look at some of the numbers behind Berkshire, it's just not very exciting. The stock's 90 day volatility is like 19%. You compare that to Nvidia, Nvidia's is 59%. And then MicroStrategy, which is very popular in these wrappers, is like 98%. So it's not going to be exciting.

[Matt Levine]

Okay, so a couple of things first.

[Katie Greifeld]

Of all go on.

[Matt Levine]

Like making it a levered ETF makes it more exciting, right? Like there's some. No, like twice as exciting. There's some level of volatility and expected high returns from Berkshire Hathaway and you get twice as much in the thing.

[Katie Greifeld]

Instead of seven tenths of a percent. It went up 1.4%.

[Matt Levine]

Sure. The other thing though is that when we talk about these levered ETFs on very volatile stocks, they are a great one day gambling product, but they're a mess to hold for a long time because you have the volatility drag of if you hold them over time, you don't get necessarily three times the return of the underlying. You get some weird horrible thing that is often lower than the returns on the underlying. Not always, but often lower than like two times the returns on the underlying. With a not very volatile stock, you get less volatility drag. And it's a little bit, I'm sure they're not like this is a buy and hold forever product because it's, you know, it's a risky way to buy and hold forever. But it's like you could hold it for longer and probably get closer to two times the returns of Berkshire Hathaway than you would if you were holding, you know, a 2x microstrategies ETF for, for a year.

[Katie Greifeld]

Yeah, that's true. I mean, I was thinking about it like could it make sense as buy and hold? And then I was remembering all of our conversations about volatility drag.

[Matt Levine]

Right. It's just less so here. It's not, you know, eliminated, but it's, it's just less so here because it's a less volatile stock.

[Katie Greifeld]

If I had that much conviction about Berkshire Hathaway. And I'm a journalist, so I don't have any opinions, but I would just buy more shares of Berkshire Hathaway. Like instead of spending buying one share, maybe I would buy two shares. That's what I would do.

[Matt Levine]

Well, this is a way to buy two shares.

[Katie Greifeld]

Yeah, but that's going to cost me some money. This is a planned etf. We should note that it hasn't been launched. And tbd, if it does launch.

[Matt Levine]

Sure. We talked about. Well, whatever. Talked about that. AI. Warren Buffett etf.

[Katie Greifeld]

That was pretty cool. Yeah, we did.

[Matt Levine]

That's like a vague gesture in the direction of Warren Buffett. And also, AI, this is like just buying two shares of Berkshire Hathaway.

[Katie Greifeld]

Yeah. I will note this has been done before. There's a two times. No, no, no. There's a two times Warren Buffett ETF in Europe. It launched in 2022 and it has about $2.3 million in assets, which is not very much. And I don't know, you think about the marketing and obviously Warren Buffett is a name, but it's a name that doesn't seem to appeal to the cohort of individual traders who buy single stock ETFs.

[Matt Levine]

But maybe, maybe this is broadening that audience. Maybe this is like, you think you don't like levered single stock ETFs because they're on crazy stocks, but here is a levered single stock ETF on a nice little stock or a nice big stock. A nice calm Warren Buffety value investor.

[Katie Greifeld]

Steady Eddie. Yeah.

[Matt Levine]

I don't know. I'm not. It's not my idea.

[Katie Greifeld]

I'm excited to. With so many, with so many of these products, I am excited to see them launch and I am excited to then check on them in like six months.

[Matt Levine]

I just feel like technology and like, know how are going to progress to the point where you can like viably run a $5 million ETF, right. You can just be like, we offer a suite of 20,000 ETFs and you know, if each of them raises $5 million, it's fine. And then you can have whatever dumb thing you want. In any etf, you can have levered two times every single stock and if someone wants it, they, they. And like this is like the sort of thing, it's like less appealing than like Tesla and Nvidia for this thing, but like more appealing than like some stock you've never heard of. But, like, they're going to keep going down the list.

[Katie Greifeld]

Yeah. We are approaching the point where there's going to be more US listed ETFs than US listed companies.

[Matt Levine]

That's great.

[Katie Greifeld]

Which will be fun.

[Matt Levine]

And why should there be? It's like the power set of US listed companies. It's like every possible combination of companies.

[Katie Greifeld]

Is going to be leveraged and inverse.

[Matt Levine]

Leveraged, inverse. Every possible single stock, two stock, three.

[Katie Greifeld]

Stock, pair trade, seven stock. Yeah.

[Matt Levine]

23 stock. Any number.

[Katie Greifeld]

Oh my God. The sky's the limit. But I was chatting with some of my colleagues on my print team who cover ETFs with me at Bloomberg News. I don't know why I had such a preamble. And we chat to a lot of white label issuers because they're really interesting. They work with a lot of different clients. And we were talking about what it costs to launch an etf. Costs have come down mightily and depending on what your strategy is, you can launch an ETF for like 50 grand. And I heard that and I was like, why?

[Matt Levine]

Why don't you have an etf?

[Katie Greifeld]

Why don't I have an idea? And that also explains why we've just seen so many launches. It is just silly season out there, right?

[Matt Levine]

It's like barely a product. It's just a combination of stocks and you can just. Any combination you can dream of. You pay a small fee and then you can offer it and maybe people will be excited about it.

[Katie Greifeld]

There is some.

[Matt Levine]

We're not there yet, but we're getting there.

[Katie Greifeld]

There is some break even level of assets.

[Matt Levine]

Yeah, yeah, sure, sure, sure, sure, sure, sure. We're not there yet, but we're. This is like the future.

[Katie Greifeld]

The future is bright. We're going to have a ton of M and A. Every deal is going to go through and boy, we are just going to have thousands of ETFs and so much meat in our burritos.

[Matt Levine]

And that was the Money Stuff podcast. I'm Matt Levine.

[Katie Greifeld]

And I'm Katie Greifeld.

[Matt Levine]

You can find my work by subscribing to the Money stuff newsletter on Bloomberg.com.

[Katie Greifeld]

And you can find me on Bloomberg TV every day on Open Interest between 9 to 11am Eastern.

[Matt Levine]

We'd love to hear from you. You can send an email to moneypodlumberg.net Ask us a question and we might answer it on air.

[Katie Greifeld]

You can also subscribe to our show wherever you're listening right now and leave us a review. It helps more people find the show.

[Matt Levine]

The Money Stuff podcast is produced by Anna Mazarakis and Moses Anda.

[Katie Greifeld]

Our theme music was composed by Blake Maples.

[Matt Levine]

Brendan Francis Newnham is our executive producer.

[Katie Greifeld]

And Sage Bauman is Bloomberg's head of podcasts.

[Matt Levine]

Thanks for listening to the Money Stuff Podcast. We'll be back next week with more stuff.

[Katie Greifeld]

Thanks for listening to the Money Stuff Podcast. If you never want to miss a story, become a Bloomberg.com subscriber today. Check out our special intro offer right [e-mail] podcastoffer or click the link in our show notes. You'll also unlock deep reporting, data and analysis from reporters around the world.