Tag Archives: Financial markets

Short Sellers Lose $1 Billion on AMC

AMC stock has doubled in just ten days, extending a 13-fold rally this year:

Investors shorting the meme stock AMC Entertainment are estimated to have lost $1.23 billion over the last week as the shares rallied more than 116% since Monday, according to data from S3 Partners.

AMC was the most active stock on the New York Stock Exchange by far on Friday as more than 650 million shares changed hands. Its 30-day trading volume average is just above 100 million shares, according to FactSet.

With 450 million shares outstanding, the entire company changed hands nearly 1.5 times during Friday’s trading.

More here.

Some of the interest in AMC may be coming from traders rotating out of cryptocurrencies as those markets have fallen:

Pierantoni observed that just as selling of bitcoin and ethereum picked up, retail purchases of AMC jumped — as did the number of people buying risky but bullish call options popular among Robinhood investors.

The rally isn’t tied to fundamentals: AMC’s business is still struggling, with a net loss of over $400 million in the first quarter of 2021 and rent nearly three times as high as ticket revenue. But in a market where armies of retail traders suddenly band together to push up heavily shorted stocks, shorting anything is a fool’s errand. If a trader wanted to express a negative view, put options, where the downside is limited, are likely to be a safer bet.

I do wonder how long it will take the hedge funds to absorb this lesson. Numerous funds got torched on GameStop, with some losing a majority of their capital. And yet others seem to be lining up to get punched in the face on AMC stock. They would do well to remember the (perhaps apocryphal) words of John Maynard Keynes:

The markets can stay irrational longer than you can stay solvent.

Happy Memorial Day to my US readers, and a thanks to our brave veterans!

Dig into these posts for more on AMC:

Photo: “Police Stationed outside AMC Theater showing Joker film 4573” by Brechtbug is licensed under CC BY-NC-ND 2.0

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Fundrise

This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 and returns have been good so far. More on Fundrise in this post.

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Bitcoin Is Worth More than the GDP of Switzerland

Ah, Switzerland. Home of fine chocolate, discreet bankers and pharma giants. It’s one of the richest countries on earth per capita, and home to world-leading companies like Nestle and Novartis.

But this entire nation of nearly 9 million people with a history going back to the year 1300 has a GDP smaller than the total value of bitcoin, which has existed for just 13 years. The IMF pegs Swiss GDP at $824 billion, versus $921 billion for bitcoin.

The total value of all cryptocurrencies is over $2 trillion, comparable to the GDP of Italy, the number 8 economy worldwide.

These stats show just how accepted cryptocurrencies have become. They’ve gone from a fringe technology to a size comparable to the entire economy of major countries.

Will they someday pass the biggest GDP heavyweight, the United States?

Dig into these posts for more on bitcoin:

Photo: “Switzerland” by T@H!R – طاھر is licensed under CC BY-NC-ND 2.0

If you found this post interesting, please share it on Twitter/Reddit/etc. using the buttons at the bottom of the page. This helps more people find the blog! 

Save Money on Stuff I Use:

Fundrise

This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 and returns have been good so far. More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get your management fees waived for 90 days. With their 1% management fee, this could save you $250 on a $100,000 account. I will also get a fee waiver for 90-365 days, depending on what type of account you open.

iHerb

The only place I buy vitamins and supplements. I recently placed an order and received it in less than 48 hours with free shipping! I compared the prices and they were lower than Amazon. I also love how they test a lot of the vitamins so that you know you’re getting what the label says. This isn’t always the case with supplements.

Use this link to save 5%! I’ll also get 5% of however much you spend, at no cost to you.

Misfits Market

My wife and I have gotten organic produce shipped to our house by Misfits for over a year. It’s never once disappointed me. Every fruit and vegetable is super fresh and packed with flavor. I thought radishes were cold, tasteless little lumps at salad bars until I tried theirs! They’re peppery, colorful and crunchy! I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $10 on your first order. I’ll also get $10.

Beware the SPAC Cliff

Special Purpose Acquisition Companies, or SPACs, have become all the rage in the last year. These “blank check” companies raise money from investors and then look for a company to acquire. They’re multiplying like rabbits:

More than 300 such blind pools have come public so far this year according to SPACInsider, raising an aggregate $99 billion. That blows past the prior $83 billion, full-year record established in 2020. For context, the pre-coronavirus peak in aggregate IPO proceeds stood at just $64.8 billion.

More here (see the 4-9 post).

That means hundreds of companies all competing for the same pool of private acquisition targets. This has pushed up prices substantially, and SPACs may be overpaying for their acquisitions:

SPAC-sponsored deals took place at a median price of 12.9 times sales in the first three months of the year, more than triple the 4.1 times median price-to-sales ratio for non-blank check transactions.

SPACs typically have two years to find a company to acquire. If they succeed, the people who run the SPAC will get about 20% of the total value of the deal. If they don’t acquire a company, the party ends, and the money goes back to investors.

With hundreds of companies from this year and a backlog from previous years all searching for deals before their two year window is up, it’s no surprise they’re overpaying.

With 117 SPAC-related deals announced so far this year, 497 blank-check entities are currently seeking their own dance partner, according to Refinitiv, while only about a quarter of all SPACs listed in 2020 or 2021 have completed a transaction.

The clock is ticking: Entities that fail to find a merger target within two years are typically unwound, with promotors obliged to return capital to investors. “There is a lot of indigestion,” a senior bank executive tells the FT.

If the SPAC sponors buy an overpriced company, they still get 20% of the money. If they don’t buy anything, they don’t. What do you think they’ll do?

The incentives aren’t well aligned. If the SPAC sponors buy an overpriced company, they still get 20% of the money. If they don’t buy anything, they don’t. What do you think they’ll do?

Sure enough, overpaying for companies is leading SPACs to perform poorly. An index of SPACs is down about 20% from its peak earlier this year.

Expect to see more and more SPACs frantically overbid for deals as their two year cliff approaches. Bad for SPAC investors, good for private company shareholders.

For more on SPACs and financial markets, check out these posts:

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Photo: “YIELD TO THE MAN FALLING OFF THE CLIFF!” by Bods is licensed under CC BY-SA 2.0

The First Stock Trades On the Blockchain Just Happened

Credit Suisse and Nomura just did the first stock trades settled via blockchain technology:

This week Credit Suisse cut some US equities trades with the Nomura-owned broker Instinet, using blockchain. This technology has been used before to verify other kinds of transactions. But these trades were a “first” because settlement occurred in hours and not the two days needed with America’s Depository Trust and Clearing Corporation, the industry-owned utility that normally settles stock trades.

This long settlement period is inefficient and costly:

“This is an incredibly inefficient way to operate,” Charles Cascarilla, Paxos’s chief executive tells me, pointing out that $15bn to $30bn of industry capital and twice as much liquidity are tied up in DTCC systems.

The two day settlement period was the key factor behind Robinhood stopping buy orders for GameStop shares earlier this year. The price had become so volatile that it could move against Robinhood a great deal in those two days. Given that, brokers insisted Robinhood post a large amount of colatteral. That expense was too great, so instead, Robinhood blocked buy orders for the stock. In a world where trades settled in hours via the blockchain, this would be much less likely.

However, blockchain technology is incredibly energy hungry. If we moved the massive volume of stock trading onto it, I suspect the energy needed might be prohibitive. I think instant, or at the very least faster, trade settlement is likely. But I expect that to happen via more standard computer systems, rather than blockchain technology.

I think instant, or at the very least faster, trade settlement is likely. But I expect that to happen via more standard computer systems, rather than blockchain technology.

For more on blockchain technology and cryptocurrencies, check out these posts:

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Photo: “Crypto Kitties on Blockchain” by marcoverch is licensed under CC BY 2.0

The Tiny Village That Beat the Great Depression

Nestled in the Austrian Alps is the tiny village of Worgl. In 1932, as the world economy was in the depths of the Great Depression, Worgl too had fallen on hard times:

The Great Depression was in full swing and of its population of nearly 5000, a third were jobless, and about 200 families were bankrupt. The situation was desperate. The town would try anything.

What followed was one of the most radical economic experiments in history. The town created a new form of money. It was a lot like the standard Austrian schilling it replaced, except its value dropped by 1% every month. In a year, you’d have just 88.64 left of every 100 schillings.

This gave residents a strong incentive to stop hoarding currency, a natural reaction to a scary economic climate:

The speed that money changed hands (14 times higher than the national schilling) helped keep local businesses afloat and, in time, brought back the town’s lost jobs.

Soon, the town went from 1/3 jobless to full employment. Tax revenues boomed as people paid their bills in the new currency before it lost its value.

Worgl’s success attracted attention from its neighbors:

Things looked up for Worgl and [Mayor] Unterguggenberger. The town did so well that six neighbouring villages successfully copied the system and over 200 grew an interest in following suit.

Ultimately, the central bank shut down this experiment in a local currency. Shortly thereafter, unemployment shot right back up to where it was before Worgl’s mayor made this bold move to save his town.

It makes sense that Worgl would’ve rocketed ahead of nearby villages. Worgl essentially had (very) negative interest rates and a far more accomodative monetary policy than its neighbors.

Today too, lowering interest rates, even below zero, is a commonly used tactic to stimulate economic activity. The US Federal Reserve lowered interest rates substantially at the beginning of the COVID crisis, and Japan and much of Europe has had negative rates for years.

But despite the success of Worgl, the results of negative rates today are mixed. Negative rates might encourage consumers to spend, but they could also discourage banks from lending. After all, who wants to lend when you might have to pay for the privilege!

Worgl remains an interesting footnote to monetary policy. Whatever the applications to today may be, I applaud the bravery of those villagers who took a radical step to try to save their home.

For more on markets and the economy, check out these posts:

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Photo: “File:Pfarrkirche Woergl Osten.jpg” by Thom16 is licensed under CC BY-SA 3.0

This Is Why Credit Suisse Keeps Getting Punched in the Face

Credit Suisse keeps getting smacked. Let’s review a few of their recent scandals:

  • $4.7 billion charge for losses in trades with Archegos Capital Management, the imploding hedge fund
  • $1.5 billion loss likely in dealings with collapsed supply chain finance company Greensill Capital, just three weeks prior
  • Bonus scandal: Former CEO Tidjane Thiam spied on employees and was forced out in February 2020

So they’ve been busy! Why is this one company stumbling from cliff to quagmire?

A major factor appears to be its bifurcated business, which focuses on both asset management and investment banking, but is too small to be a big player in either market. So, in order to win business from its bigger competitors, it has to offer better terms and do worse deals.

In reality, the asset-management unit, which brought in Greensill, and the investment bank, which handled Archegos, were too small to square off with Wall Street giants. The bank tried to make more money from fewer clients than rivals with larger balance sheets and ended up overlooking risks, the executives said.

There were clear warning signs on both Archegos and Greensill.

There were clear warning signs on both Archegos and Greensill. Archegos founder Bill Hwang had been sanctioned by the SEC for insider trading and banned from handling client money, which is the entire reason he started Archegos in the first place. It was a family office, managing just his own family’s money, due to that SEC ruling. Credit Suisse thought the risk was limited because he wasn’t managing client money, but failed to consider what would happen to its own funds!

Greensill too had come under scrutiny early enough to avert problems, but nothing was done:

In 2019, members of the credit-structuring team escalated its alerts about Greensill to the bank’s reputational-risk committee, the person familiar with the funds said. They had become concerned Greensill might be taking operational shortcuts.

Interestingly, the dynamic of Credit Suisse agreeing to anything in order to win business from larger competitors was played out by its client Greensill as well:

Mr. Greensill signed up some big, credit-rated companies. To wrest those customers from big banks, Greensill had to offer competitive terms that didn’t make it much money, according to people familiar with Greensill’s business.

Credit Suisse seems to lack any internal controls whatsoever, and I strongly recommend investors avoid

Credit Suisse seems to lack any internal controls whatsoever, and I strongly recommend investors avoid it. We can also gain a broader lesson from this fiasco. If you’re a smaller company trying to get into a market, don’t do disadvantageous deals just to get some market share. You expose yourself to too many problems that will blow you up before you ever get a chance to compete with the big boys.

For more on Archegos, check out these posts:

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Photo: “Punch to the Face” by Ninja M. is licensed under CC BY-NC-SA 2.0

How to Lose $8 Billion in 10 Days

Archegos Capital Management, run by Bill Hwang, is imploding, racking up losses at a record pace:

Mr. Hwang alone lost approximately $8 billion in 10 days, a person familiar with the matter said, in what traders and investors say was one of the fastest losses of such a large sum they had ever seen.

Archegos borrowed massive sums of money to invest it in just a few stocks. Like addicts that get 10 oxycontin prescriptions from 10 different doctors, Hwang never revealed how deep in debt he was to the banks he dealt with:

Archegos was regularly putting up $15 of collateral to borrow $85, on the high end of leverage for stock-trading firms with similar strategies, said a banking executive familiar with the borrowing.

Archegos’s lenders say they were unaware of the extent of trades he was making with other banks, information that would have encouraged them to curb their lending.

The fact that Archegos used swaps, rather than owning shares directly, further obscured his activities. In the “contract for difference” swaps he used, the bank owns the shares while Hwang’s firm pays for the losses or receives the gains on the stock.

This is important because investors have to disclose to the SEC when they own over 5% of a company. Hwang would have had to make several such disclosures. But because he used swaps instead, none of that information was public, making it harder for banks to find out how heavily leveraged he was. This may have been by design.

A further odd wrinkle is that Hwang, the son of a pastor, suffused Archegos with religious fervor:

Mr. Hwang returned clients’ money in 2012 and turned his firm into an office to manage his family’s wealth. He named it Archegos, which, translated from Greek means “leader” or “prince of Christ.” A Christian ethos permeated the firm, with voluntary Friday morning Bible studies where a recording of Bible readings would play to music.

He tended to view gains as signs of God’s favor:

“Do I think God loves it? Of course!” Mr. Hwang said in a video, referring to his early investment in LinkedIn. “I’m like a little child looking for, what can I do today, where can I invest, to please our God?”

If Hwang had a religious certainty about his positions, he’d be all the more likely to hold them even as he lost money, expecting to be vindicated.

It strikes me how incredibly simple this one-time billionaire investor’s strategy was. Borrow a bunch of money and invest it in a few well-known stocks like Viacom. Anyone could do that if they had access to capital. There was no special sauce, and now Hwang is paying the price for his recklessness.

For more on Archegos and financial markets, check out these posts:

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Photo: “Gamble” by jetglo is licensed under CC BY-ND 2.0

Inside the Archegos Implosion: “We Don’t Know How Far the Tentacles Go”

Brokers are selling over $30 billion worth of positions in imploding hedge fund Archegos Capital Management, shaking markets. Wall Street does not know exactly how many positions the fund holds for two reasons:

  • It is very lightly regulated because it’s organized as a “family office,” rather than a typical hedge fund
  • Archegos didn’t actually own most of the stocks it took positions in, if any. Instead, it owned derivatives called “contracts for difference (CFD’s),” which have few disclosures.

Some experts liken the Archegos blow-up to the bankruptcy of Bear Stearns, which helped precipitate the financial crisis:

“We don’t know how far the tentacles go,” said Joe Saluzzi, co-head of trading at Themis Trading. “Early in the Bear Stearns crisis, the market was fine — until it wasn’t.”

Others are comparing the liquidation of the hedge fund’s positions to that of Long Term Capital Management (LTCM) in 1998, which caused severe market turbulence and ultimately required a bailout:

“This reminded me a lot of the Long-Term Capital situation,” Steve Sosnick, chief market strategist at Interactive Brokers, told Insider in an interview.

Long-Term Capital Management, a massive hedge fund staffed by famed traders and Nobel Prize-winning economists, employed such highly leveraged trades that it threatened to expose America’s largest banks to more than $1 trillion in default risks by 1998. The “genius” hedge fund nearly collapsed had it not been for a bailout package from the Federal Reserve and some major Wall Street banks.

However, Archegos’s positions appear to be far smaller than those of LTCM. Nonetheless, Archegos was very heavily leveraged:

Shrouded by the secrecy of CFDs, Hwang was able to build up almost $50 billion in stock positions on the back of the $5 billion to $10 billion that Archegos managed.

Perhaps the greatest source of worry for markets is uncertainty over exactly how many positions Archegos has and with which banks. This counterparty risk was a driving factor in the LTCM crisis in 1998 and the financial crisis of 2008:

…it seems clear that the banks didn’t realize until too late that they were holding similar positions, with malign implications for efforts to keep markets in those shares from falling further.

“You can have a suspicion that maybe this person is doing this trade with a bunch of other people,” said Jay Dweck, a former trading and risk-management executive at Goldman and Morgan Stanley and now consults for banks and hedge funds. “But no one knows the aggregate.”

In all, given the smaller size of the portfolio being liquidated and the current buoyant state of markets, I don’t expect any extreme shock from Archegos going under. I think the experience with LTCM, Bear Stearns, Lehman and others will also stand banks and regulators in good stead when dealing with Archegos. But you could see some choppiness for a while as we find out who is exposed to Archegos and wind down those positions.

Another possible outcome is stricter regulation, especially of these opaque family offices, which I think would be good for markets. Indeed, regulators are already scrutinizing hedge funds after the run-up in GameStop shares this year stung some with huge losses. From the WSJ:

The steep losses at Archegos come as a council of top U.S. regulators known as the Financial Stability Oversight Council is already scheduled to meet on Wednesday to discuss hedge-fund activity during the pandemic-triggered crisis.

For more on Archegos and markets, check out these posts:

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Photo: “Fire” by Mike Poresky is licensed under CC BY 2.0

Almost All SPACs Lose Money and They’ve Never Been More Popular

I came across an incredible stat today:

Citing data from Dealogic, Barron’s notes that there have been 302 domestic initial public offerings (80% of which are blank-check outfits) raising an aggregate $102.3 billion, so far this year through March 10. For context, the 2020 full-year tally registered at 457 IPOs raising $167.8 billion, while the tech bubble-era high-water mark of 547 IPOs and $108 billion in proceeds was set in 1999.

These newly minted public companies have distinguished themselves beyond simple size and number. According to data from Robert W. Baird, 81% of last year’s vintage were loss making, compared to a previous cyclical high water marks of 68% and 73% in 1999 and 2000, respectively.

More here (see the March 15 post).

So almost all IPOs are SPACs, they’re raising more funds than ever before, and almost none of these companies makes a profit. Even recently, money losers like WeWork were shunned by public markets. But the market seems to have thrown all standards aside.

For now.

For more on SPACs and markets, check out these posts:

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Photo: Major SPAC sponsor “Chamath Palihapitiya” by jdlasica is licensed under CC BY 2.0