Author Topic: LC - end of Quarter effect  (Read 19450 times)

Fred93

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LC - end of Quarter effect
« on: December 27, 2014, 07:54:50 PM »
Long time investors in LC have noticed that the supply of loans moves between abundance and scarcity.  At the end of September loans were very scarce, so I did some analysis from historical data.  The history file had become quarterly by that time, so the most recent data I could look at stopped 6/30/2014.



Son of a gun.  On this chart, each dot represents the number of loans issued on a particular day.  There is a big weekly effect because no loans are issued on Saturday and Sunday.  To help visually ignore that, I added the red line, a 7-day moving average.   Looking at the red line, you can clearly see a month-end effect, and you can see that it was really a big deal in June!  June was heavily front-loaded, and then tapered off to almost nothing during the last week.  This doesn't look like a natural ebb-and-flow.  It looks sorta like an intentional clampdown.

I knew, simply because I had been in the market, that things bounced back in the beginning of July.  I also knew that the end of September saw a similar slowdown, which seemed to me to be even more severe, but I didn't have the data yet, so I anxiously awaited the history file update which would contain data thru September. 

Well, as we all know, when the September files arrived, they had been censored.  LC had removed all the day-of-month information.  That seemed to put an end to this sort of analysis, and I moved on to other things.  When December rolled around, investors were faced with another big dip in availability of loans, so I started to think about this again.  I asked LC about it, and they told me "Its a seasonally weak time of year."  Hmm.  Back to the history files, I realized that while with the new censored history file I can't visualize things like those last two weeks in June, I might be able to see something.  Here's a plot of loan volume by month.  Look at the gray curve first.  Its all the loans, independent of the market to which they are allocated.



The first thing we notice is that the gray curve has climbed steadily (very steady and smooth) for several years.  April and May are above trend, and then June (which we know had that last week almost shut down) is below trend.  Ok.  Not a big deal.  But then look what happens during the next three months!  July is huge at $433M.  August pulls back, and then September is way way down, as I had previously noticed.  These aren't natural variations in supply.  You can see three years of history in this chart, and such instability simply has never occurred before.  Interesting.

Those of you in the market know that the same thing happened in December 2014.  I don't know why this occurs, but like all humans, I can speculate.   June, September, December.  Those are end-of-quarter months.   The once smooth-as-glass curve now has giant quarterly gyrations.  Could it be that someone is trying to make the numbers come out nice and smooth for quarterly reports?   Why would they need to do this?  Didn't need to do it in prior years.

Lets look at quarterly loan volume...



Son of a gun.  In spite of the vicious gyrations, quarterly numbers come out smooth as can be.  Based on this, I can refine my speculation.  Perhaps early in the quarter they make investments, increase staff, initiate new sourcing projects, without a careful throttle on volume.  The goal of such an undertaking would be to learn what a particular marketing technique (joint ventures, advertising, etc) can do.  They do this knowing that they can always reel things in later in the quarter.

All speculation.  Its a story that fits the available data.  Its my theory and I'm stickin' to it. 

What does this mean for investors?  Presuming recent behavior continues, I think we should expect that loans will be abundant at the beginning of each quarter and scarce at the end of the quarter.  Maybe we just have to get used to it.

[soapbox on]
Now there's probably somebody at LC sayin' "Get a life!  Don't these people have better things to do?"  Well, I'll tell you why we care.  We're out here trying to invest, and suddenly we can't.  And... we don't know why.  We ask, and we get wallpaper  "Seasonally slow period" answers.  I'm a big fan of transparency.  This experience has been an example of LC's recent nontransparency.  Seems to me that some new management at LC must fear transparency.  As a result we recently see fields deleted from data, dates censored, and not-entirely-helpful answers to simple questions.  A great company like LC has nothing to fear from transparency.  I suggest you embrace it, as you did in your youth.  Its one of the things that made you special.  More difficult for a larger company of course, but should still be your guide.
[soapbox off]

Whew.  Ok, is there anything else we can observe in that data?  Yes.  Lets look at that monthly chart again, this time looking at the colored curves.

Until about 10/2013, the whole-loan market was small, and did not impact the size of the fractional loan market.  After that, the whole-loan market was allowed to grow so much that it compromised the fractional-loan market.  The size (not just the fraction, but the $ size) of the fractional market has fallen during all of 2014.  (not counting gyrations).  Fractional market investors of course fear crowding-out, and are always wondering to what degree this is occurring, and when the end will come.   Probably all overblown fears.  I for one have no idea what the correct relative sizing of these two markets should be, so if fractional is gonna be 1/3 maybe that's ok.



But look what happened during the forced slowdown in June 2014.  That came all out of the fractional market.  The whole-loan market was allowed to grow unhampered.  (ie blue curve down, while orange curve up)   In contrast, look at what happened in September 2014.  In this slowdown, the pain was shared.  Perhaps they corrected the earlier error.  That would be a good thing.  Of course many things are happening at once.  Institutional investors come and go, and try to invest in big lumps, so there's a lot we don't know. 

Will be interesting to see the numbers for December 2014.  This time the slowdown started earlier, around Thanksgiving, and also eased up earlier, just before Christmas.  I'm predicting January will be huge.

BruiserB

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LC - end of Quarter effect
« Reply #1 on: December 27, 2014, 09:20:13 PM »
I have tons of "not yet issued" loans now.....I expect a flood of issuances on Jan 2nd. I can appreciate them trying to manage their business, but this is getting ridiculous. It causes losses for us investors as our funds are tied up and it has to frustrate borrowers who are expecting their loans to issue.

LC may hide issuance dates now, but you can look at your own account history and see a dearth of issuances at the end of each quarter and a flood in the first few days of the next.


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Thatguybil

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Re: LC - end of Quarter effect
« Reply #2 on: December 27, 2014, 11:53:11 PM »
Thanks Fred!

gottodo1

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Re: LC - end of Quarter effect
« Reply #3 on: December 28, 2014, 02:11:38 AM »
Fred they are the 10th largest bank in the U.S.A they don't need to be transparent anymore. Awesome post though!

Lovinglifestyle

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Re: LC - end of Quarter effect
« Reply #4 on: December 28, 2014, 11:23:46 AM »
Love your explanations and graphs.  Very understandable!  Hope you do an update with this quarter's information when it comes.  Thanks!

BBingo

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LC - end of Quarter effect
« Reply #5 on: December 28, 2014, 12:07:15 PM »
Great analysis Fred! An excellent set of visualization as well.


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bobeubanks

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Re: LC - end of Quarter effect
« Reply #6 on: December 28, 2014, 01:16:00 PM »
Fred they are the 10th largest bank in the U.S.A they don't need to be transparent anymore. Awesome post though!

LC's business model is different from other banks. With traditional banks, there would be no particular reason for stock investors to want much more transparency. But LC has stock investors and loan investors. LC may well find that transparency to the loan investors is indeed important to their business.

Fred93

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Re: LC - end of Quarter effect
« Reply #7 on: December 28, 2014, 04:57:23 PM »
I have tons of "not yet issued" loans now.....I expect a flood of issuances on Jan 2nd. ... this is getting ridiculous. It causes losses for us investors as our funds are tied up and it has to frustrate borrowers who are expecting their loans to issue.

Same here.  I agree, frustrating and inconveniencing your customers is bad business policy.  Part of the value a business provides to its customers is consistency.

Imagine if you called your stock broker to buy some stock, and he said "Sorry, you have to wait 2 weeks so we can book this commission next quarter." ... or worse if he didn't tell you, but just delayed the transaction two weeks.   Imagine driving up to a gas station to fill your tank and being told "There's a two week waiting list at the end of this quarter, so we can smooth our earnings." 

BruiserB

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LC - end of Quarter effect
« Reply #8 on: December 28, 2014, 06:05:34 PM »
As much as I generally hate class action lawsuits and the lawyers who pursue them, this seems like Lending Club is just opening themselves up for future legal action.  As investors we give our money to Lending Club with the understanding that they will deploy it in a timely manner.  I am hoping they were doing this to get through the IPO period and to maybe insure a great 1st quarter as a publicly traded company, but I hope they wean themselves off of this. I don't really see the benefit anyway....at their current growth rate, it seems like they would still show excellent Q to Q growth even if they just let the business flow where it naturally would.


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Thatguybil

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Re: LC - end of Quarter effect
« Reply #9 on: December 28, 2014, 11:15:16 PM »
As much as I generally hate class action lawsuits and the lawyers who pursue them, this seems like Lending Club is just opening themselves up for future legal action.  As investors we give our money to Lending Club with the understanding that they will deploy it in a timely manner.  I am hoping they were doing this to get through the IPO period and to maybe insure a great 1st quarter as a publicly traded company, but I hope they wean themselves off of this. I don't really see the benefit anyway....at their current growth rate, it seems like they would still show excellent Q to Q growth even if they just let the business flow where it naturally would.


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Agreed. The time and energy spent on these book keeping add no value in the long run for anyone.
Lender, borrower or investor.

Randawl

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Re: LC - end of Quarter effect
« Reply #10 on: December 28, 2014, 11:17:44 PM »
Thank you for taking the time to put that together, Fred93!  I owe you a [<insert favorite beverage here>].




Fred93

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Re: LC - end of Quarter effect
« Reply #11 on: December 29, 2014, 01:20:35 AM »
...seems like Lending Club is just opening themselves up for future legal action.  As investors we give our money to Lending Club with the understanding that they will deploy it in a timely manner.

IANAL, so don't take this as authoritative, but I disagree.   I don't see how this behavior would make them guilty of violating any law, regulation, or contract.  It certainly violates our notion of how they ought to behave, but that doesn't make it illegal. 

Quote
...at their current growth rate, it seems like they would still show excellent Q to Q growth even if they just let the business flow where it naturally would.

That would certainly be my preferred approach. 

BBingo

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LC - end of Quarter effect
« Reply #12 on: December 29, 2014, 03:22:50 AM »
I do wonder whether, laid out in such plain terms, share holders of LC would take issue with the practice, or the SEC for that matter. I don't claim to be at all versed in what kinds of creative bookkeeping and business practices are/are not kosher, but that seems to be not only inconsiderate of the lenders, but also a blatant attempt to manipulate numbers, which if construed as an attempt to artificially buoy stock prices...


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rawraw

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Re: LC - end of Quarter effect
« Reply #13 on: December 29, 2014, 05:49:40 AM »
Fred they are the 10th largest bank in the U.S.A they don't need to be transparent anymore. Awesome post though!
I don't know by which metric you are using, but I doubt that ha ha.

thezfunk

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Re: LC - end of Quarter effect
« Reply #14 on: December 29, 2014, 11:16:06 AM »
Fred they are the 10th largest bank in the U.S.A they don't need to be transparent anymore. Awesome post though!
I don't know by which metric you are using, but I doubt that ha ha.

Stock valuation?