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Business

Carl Icahn Losing $900 Million a Day

May 23, 2023 tremendousblog 2 Comments

Corporate raider Carl Icahn has lost $15 billion since the release of an exposé by Hindenburg Research. That’s over $900 million a day.

The Hindenburg Report

Hindenburg claims that Icahn’s holding company, Icahn Enterprises, is structured like a Ponzi scheme. Repeated share sales support an unusually high 28% dividend.

In brief, Icahn has been using money taken in from new investors to pay out dividends to old investors. Such ponzi-like economic structures are sustainable only to the extent that new money is willing to risk being the last one “holding the bag”.

Hindenburg also alleges that Icahn Enterprises inflates the values of its assets. Since the release of the report on May 2, the stock has fallen by nearly half in just 16 trading days, costing Icahn billions.

From Bloomberg:

“He’s never been humiliated like this,” says Mark Stevens, Icahn biographer and founder of consulting company MSCO.

A History of Losses

Icahn Enterprises stock has lagged for years, weighed down by huge losses. Again from Bloomberg:

It’s hard to argue about Icahn’s lackluster performance of late. This has been a lost decade for Icahn Enterprises stock. The price has fallen more than 60% over the past 10 years, while the S&P 500 has gained about 153%. Dividends have made up some of the difference: Icahn Enterprises has handed stockholders a total return of about 6%. But the S&P has returned roughly 206%.

Icahn made massive bets that a financial crisis was coming. When those short bets didn’t pan out, he lost billions.

Icahn Enterprises’ Future

Now, federal prosecutors are investigating Icahn Enterprises. So far, no charges have been filed.

I don’t know if Icahn acted improperly. But I do know that a 28% dividend isn’t sustainable.

This means you’re paying out the entire value of the company every 3.5 years. This would be an incredible strain even for the most profitable companies.

For a business making big losses, it’s impossible.

I also disagree with Icahn’s bets on a financial crisis. Although crashes come and go, the long term trajectory of markets, technology, and humanity is upward.

Financial engineering and short bets can work — sometimes. But the better approach is to buy great businesses for the long term and bet on the future.

“Never bet against America.” – Warren Buffett
2021 Berkshire Hathaway Annual Letter

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Druck on the Coming Debt Crisis

The AI Gold Rush

‘There’s a Lot of Agony Out There’: Munger on CRE

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Business, Politics

Druck on the Coming Debt Crisis

May 17, 2023 tremendousblog 3 Comments

Stan Druckenmiller and George Soros made over $1 billion shorting the British pound. Now Druck is turning his sights to another mismanaged nation: the United States.

At a recent keynote address at USC, Druckenmiller sounded the alarm about ballooning entitlements.

“If I wasn’t so worried about the country I’d be salivating over the opportunities this could set up.”
Stanley Druckenmiller

Today, we spend 40% of our tax dollars on programs for seniors. By 2043, that will be 60%.

How do we pay for that? There are two main options: cut spending or raise taxes.

But the changes required would be huge.

Druckenmiller reckons we’d need to cut spending by 35% starting today and maintain that lower level forever. If we don’t want to do that, we could raise taxes 40% — permanently.

“Expect this trend to continue…absent radical policy changes.”
Stanley Druckenmiller

The last of the baby boomers retire soon. We’ve promised them benefits that will soon crowd out all other federal spending.

No defense, no education, no bridges, no nothing.

So how do we fix it?

Druckenmiller calls for big entitlement cuts. He supports ending payments to wealthier seniors and cutting cost of living adjustments (COLAs).

Means testing is a great place to start. People like me don’t need a government check.

And as painful as ending or reducing COLAs may be, it can happen anyway. State pensioners here in New Jersey haven’t had a COLA in 12 years, and the sky hasn’t fallen.

We must also raise eligibility ages. I see no problem with Social Security’s full benefit beginning at 75 (rather than 70) and Medicare at 70 (currently 65) for younger people like me.

I never expected to get a cent out of these programs anyway. Most young people don’t.

Reining in benefits is the one chance to salvage something for future retirees. If we don’t do something now, there will be nothing left for younger generations.

“You’re screwing seniors, you’re just screwing the future seniors. Why do they get a dollar and you get zero?”
Stanley Druckenmiller

I’m confident that we’ll muddle through to a solution. It will probably involve some combination of benefit cuts and tax increases.

“…if it can’t go on forever it will stop.”
Herbert Stein, economist

What do you think the future holds for entitlements and the US economy? Leave a comment and let us know!

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The AI Gold Rush

‘There’s a Lot of Agony Out There’: Munger on CRE

From $10 Billion to Zero — Late Stage Ice Age

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Business

Don’t Wanna Pay 216%? How About a Naked Short?

March 23, 2023 tremendousblog 2 Comments

Cost to borrow shares of AMC Entertainment holdings went through the roof today. From a report out just this afternoon on InvestorPlace:

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The cost to borrow (CTB) fee for AMC Entertainment (NYSE:AMC) has skyrocketed to 215.80% today, up by more than 100% from the reading of 101.76% on March 10. Yesterday’s closing CTB fee reading clocked in at 211.41%. Meanwhile, between March 10 and today, AMC stock has fallen more than 10%. What’s going on?

The CTB represents the yearly fee that short sellers must pay to borrow shares. A higher fee could represent increased short seller demand while a lower fee could represent lower demand. A higher fee could also signal a scarcity of available short shares. Still, AMC’s exorbitant CTB fee could actually be seen as a positive for AMC stock shareholders.

Let’s say you want to short AMC. But you don’t want to pay 216% a year interest because…uh…no one does.

But don’t worry! There’s a dandy alternative.

How about a naked short?

With a naked short, you don’t even have to borrow the shares at all! Instead of 216% interest, how about 0%!

Pretty sweet, right?

One small problem. It’s against the law.

There is strong evidence of massive naked shorting in AMC stock. Fails to deliver hit nearly 12 million shares in the latest SEC report.

That’s absolutely staggering, even for AMC. And keep in mind, most stocks have few if any fails to deliver.

Why are tons of trades failing?

To close a short sale, you need to borrow some shares. But it’s kinda hard to do that right now, at 216% interest.

So why not just cut some corners and naked short? It’ll just wind up a fail to deliver and get swept under the rug.

There’s likely a crime here in plain sight. But for it to matter, the SEC needs to act.

But before shorts laugh at the SEC and pop a bottle of Dom, they should think about the risks.

Half of Wall Street is betting that AMC will crash if APE shares convert. This share conversion dilutes AMC stock holders.

But conversion isn’t certain. And even if it happens, AMC shares have jumped after prior dilutions.

In a way, that makes sense.

Yes, you own a smaller piece of the company after dilution. But this heavily indebted company now has far more capital.

That makes the risk of bankruptcy increasingly remote.

I have no idea where AMC or any other stock is going.

But I do know that people don’t like paying 216% interest. And to avoid it, they just might break the law.

After all, what could happen?

Do you think the SEC will act? Leave a comment and let us know!

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More on markets:

AMC Shorts Lose $180 Million So Far This Year

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Executives Dumped Shares Shortly Before First Republic Rescue

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Business

Interest Rate Time Bomb May Kill Hedge Funds

March 20, 2023 tremendousblog 4 Comments

As March began, hedge funds placed one of their biggest bets of all time. It may be their undoing.

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Traders placed the largest bet in history on increasing short term interest rates. But as a banking crisis spreads, rates may fall, exposing them to huge losses.

From a report out this morning in Reuters:

Hedge funds face huge losses on their record bet that the Fed will go full steam ahead with its aggressive interest rate-raising campaign, after some of the most abrupt and violent swings in U.S. rates and bond market pricing in living memory.

Commodity Futures Trading Commission (CFTC) data shows that speculators held the largest ever net short position in three-month SOFR rate futures in the week ending March 7, only a few weeks after amassing a record short position in two-year Treasuries futures.

Now, their trade is deeply underwater:

Implied rates then plunged as much as 200 basis points in a week as traders drastically redrew their Fed outlook. The two-year Treasury yield posted its biggest fall since the Black Monday crash of 1987, and U.S. bond market volatility surged the most since Lehman’s collapse.

Many funds have already lost 10% of their assets or more so far this month. And as bank after bank fails, the bleeding may get even worse.

A month ago, most of us thought the Federal Reserve would keep raising rates. Inflation was the priority.

Now, with a cascade of bank failures, the Fed may cut rates to stop the crisis. Markets are predicting the Fed will lower rates this summer.

The question for the Fed this morning isn't whether to hike 25bp or 50bp this week. It's when do they start cutting rates, at least according to fed funds futures, which have priced out rate cuts and priced in rate cuts as soon as June. pic.twitter.com/ROHatlStkx
— Lisa Abramowicz (@lisaabramowicz1) March 20, 2023

Already, hedge funds are going bust.

Adam Levinson’s Graticule Asia lost 25% this year, most of it in a few days after the SVB collapse. The fund has closed its doors.

As an investor, sometimes I think I know where markets are heading. But I never put too many eggs in one basket.

I’m playing with my own money. But most hedge funds aren’t.

And it’s not hard to tell.

What do you think will happen to these funds?

More on markets:

Executives Dumped Shares Shortly Before First Republic Rescue

SVB Fallout

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Business

Shorts Are Covering Even Faster than Jan ’21

February 6, 2023 tremendousblog Leave a comment

Short sellers are running for the exits as markets rally. Short covering has hit its highest level in over 7 years, according to a Financial Times report:

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Equity markets have risen sharply so far this year, led by many of the speculative stocks that were clobbered hardest during 2022’s global sell-off. Many of the funds that profited from the rout have found themselves poorly positioned for the rebound, which has recently accelerated as investors sensed that interest rates were close to peaking in many major economies.

The resulting flurry of short covering — when investors buy back stocks they had been betting against to limit their losses — was the largest since November 2015, according to a Goldman Sachs note to clients seen by the Financial Times.

Short sellers tend to pile into the same, heavily shorted stocks. When they rush to close their positions, this can cause a short squeeze.

A short squeeze happens when many short sellers all try to buy at once to close their positions. This can cause a stock’s price to skyrocket.

Short squeezes in stocks like AMC Entertainment Holdings and GameStop in 2021 took down hedge funds including Melvin Capital. Today, those same stocks are some of the year’s best performers.

Despite big increases in heavily shorted stocks, short sellers still have massive exposure. AMC’s short interest has dipped only slightly, remaining at a lofty 29%.

This indicates such stocks could have a lot of room to run. Short sellers will have to buy many more shares to close out their positions.

Shorts are also facing some of the heaviest retail buying in history. Retail buying hit an all-time high of 23% of all stock buys, according to a recent Forbes report.

Retail investors are the biggest buyers of many heavily shorted stocks, including AMC and GameStop.

Over a month ago, I predicted a market rally in 2023. I guess the hedge funds missed that post. 🙂

If the Fed remains dovish, I expect many more losses for short sellers. 2023’s short squeezes could make 2021 look almost quaint.

What do you think the future holds for short sellers? Leave a comment at the bottom and let me know!

More on markets:

Major Hedge Fund Down 54% — Survival in Doubt

SEC Refuses to Address Massive Fraud in Markets

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Business

Short Sellers Down $81 Billion in 2023

January 30, 2023 tremendousblog 2 Comments

Well, that was fast! With 2023 less than a month old, short sellers have already lost $81 billion.

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Many are running for the exits. From a new report from The Wall Street Journal:

Short sellers who have incurred hefty losses are actively trimming their positions, said Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners. Investors betting against stocks have racked up $81 billion of mark-to-market losses on short positions this month through Thursday after accumulating $300 billion in gains in 2022, Mr. Dusaniwsky said.

Markets have rallied this year, with meme stocks leading the way. As short sellers race to close their positions, their losses are likely to grow:

Signs that inflation is cooling have stoked bets among investors that the Federal Reserve will pivot from raising interest rates to cutting them as soon as the second half of the year. That has helped risky assets across the board rise. Especially risky corners of the market, such as stocks with high short interest, have rallied even more. Analysts say that has likely forced short sellers to close out bearish positions to cut their losses—resulting in what is known on Wall Street as a short squeeze.

Some of the most heavily shorted stocks have been among the best performers so far this year.

Meme stocks like AMC Entertainment Holdings, GameStop, and Bed Bath & Beyond are all up over 20%. The broader S&P 500 is up 6% for the year so far.

In addition to huge market losses, short sellers are also paying stratospheric interest rates to borrow shares. Rates to borrow AMC shares have ranged between 20% and over 100% per year in recent weeks.

It’s no wonder that some short sellers may be resorting to illegal tactics. There is evidence of widespread naked short selling in some heavily shorted stocks.

Common and preferred shares of AMC have seen millions of fails to deliver. These failed trades often occur when a short seller sells stock without borrowing it.

This is called naked short selling and it’s illegal under federal law. It’s also a powerful way to push down a stock’s price without paying any interest.

The coming months could push many short sellers to the brink.

A race to close out positions may cause heavily shorted stocks to rally further. Meanwhile, a more dovish Fed could cause a general market rally, adding to their losses.

Short sellers should avoid meme stocks like the plague. A heavily shorted stock with a passionate fan base is simply too hot to handle.

What do you think is next for short sellers? Leave a comment at the bottom and let me know!

More on markets:

Major Hedge Fund Down 54% — Survival in Doubt

Citadel’s Illegal Trades — The Tip of the Iceberg?

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Photo: AMC CEO Adam Aron

Business

Citadel’s Illegal Trades — The Tip of the Iceberg?

January 27, 2023 tremendousblog 7 Comments

South Korea has fined Citadel Securities for illegal stock trades made with high frequency algorithms. From a report out last night in Reuters:

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South Korea’s financial regulator has imposed a fine of 11.88 billion won ($9.66 million) on U.S.-based Citadel Securities, saying it disturbed the local stock market with high-frequency algorithm trading.

The Financial Services Commission (FSC) said in a statement released on Thursday the firm had distorted stock prices with artificial factors, such as orders on the condition of “immediate or cancel” and by filling gaps in bid prices.

These illegal trades were no isolated incident. Regulators found improper trades in thousands of stocks over a period of nearly a year:

The firm carried out such trading on an average of 1,422 stocks per day from Oct. 2017 to May 2018, totalling more than 500 billion won worth of trades, according to the statement.

Citadel’s illegal trades stand out as some of the most egregious ever in South Korea:

The Commission said it was the first time it had imposed fines on such high-frequency trading on the South Korean stock market, which has a high proportion of retail investors and little competition among algorithmic traders.

Citadel used strategies such as flash orders to gain an illegal advantage over other traders. This practice involves offering to buy or sell and then retracting the order in a fraction of a second.

Flash orders let you see the prices at which other traders are willing to buy or sell. This gives you an illegal edge over your competition.

In Korea, Citadel used these strategies to take advantage of mom and pop retail traders, which I find particularly heinous.

Citadel’s algos don’t stop in Korea.

The firm was recently fined by the US Financial Industry Regulatory Authority (FINRA) for frontrunning its customers. By placing trades ahead of customers, Citadel made money for its own account.

Breaking the law appears to be quite lucrative for Citadel.

Citadel Securities posted record revenues of $7.5 billion last year. Citadel’s hedge fund made even more, approximately $28 billion.

I think Citadel is using these illegal flash orders all over the world. They may also be using other illicit tactics we don’t know about yet.

After all, if you go to the trouble to create a program that can make you money, why not use it in as many places as possible?

The reality is that these speeding tickets will never stop Citadel. Fines in the millions are a cost of doing business for a multi-billion dollar operation.

Securities regulators worldwide should find out what exactly Citadel is doing in their markets. If they find more wrongdoing, they should simply ban the firm from trading for a period of years.

Nothing but a severe penalty will stop them.

Who says crime doesn’t pay?

What do you think is the future for Citadel? Leave a comment at the bottom and let me know!

More on markets:

Major Hedge Fund Down 54% — Survival in Doubt

Tiger Global Losing $185 Million a Day

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Business, Technology

Major Hedge Fund Down 54% — Survival in Doubt

January 26, 2023 tremendousblog 11 Comments

In a brutal year for hedge funds, few have suffered more than Light Street Capital. The fund lost 54% in 2022, over $1 billion.

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From a report out last night in Bloomberg:

Light Street Capital Management’s hedge fund tumbled 54% in 2022, according to a person familiar with the matter, one of the industry’s worst performances last year.

That drop rivals the 56% decline for Tiger Global Management, and is steeper than Lone Pine Capital’s 36% loss and Whale Rock Capital Management’s 45% slide.

Light Street was the classic crossover hedge fund. It made big bets on technology companies, both public and private.

Many of those bets were at eyewatering valuations. Tech was crushed in 2022, pushing many such funds to the brink.

What strikes me is how simple Light Street’s strategy was. Its biggest holdings were a who’s who of growth stocks:

Anyone could’ve bought Tesla and hoped for the best. Why should investors pay Light Street 2% of assets and 20% of gains to do what they could do themselves?

Light Street’s 54% loss is abysmal even compared to benchmarks. The S&P 500 lost 18% last year, while the NASDAQ lost 33%.

Investors could’ve bought index funds and avoided hundreds of millions in losses, not to mention outrageous fees.

No wonder the California Public Employees Retirement System (Calpers), one of the most astute investors in the market, hasn’t invested in hedge funds since 2014.

The future for Light Street is bleak. It cannot charge a performance fee again until it more than doubles its fund.

That’s extremely hard to do. And without those juicy performance fees, the best traders will leave.

This is the kind of spiral that took down Melvin Capital. Light Street could be next.

I’m a huge bull on technology. But no stock is a good buy at any price.

What do you think the future holds for hedge funds? Leave a comment at the bottom and let me know!

More on markets:

Tiger Global Losing $185 Million a Day

Is SBF Laundering Money As We Speak?

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Photo: Glen Kacher, Founder of Light Street Capital

Business, Technology

Hedge Funds Lose Billions as FTX Implodes

November 22, 2022 tremendousblog 3 Comments

Hedge funds trusted crypto exchange FTX with billions of dollars. Now, they stand to lose it all.

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Some funds have lost most of their assets and may cease to exist. From a report out overnight in the Financial Times:

Hedge funds have billions of dollars stuck on failed cryptocurrency exchange FTX and could face years of waiting to recover anything at all from a marketplace they once believed to be one of the industry’s most reliable bets.

“I lost my investors’ money after they put faith in me to manage risk and I am truly sorry for that,” tweeted Travis Kling, founder of Ikigai Asset Management, which has a “large majority” of its hedge fund’s assets stuck on FTX. “I have publicly endorsed FTX many times,” he added. “I was wrong.”

Other funds, such as Galois Capital, had half or more of their assets on FTX. It could take years to recover those assets, if they’re recoverable at all.

Crypto exchanges typically hold customers’ money longer than stock brokers. This leaves customers more exposed to problems at the exchange.

To add insult to injury, hackers may be looting what little money FTX has left. A series of abnormal transactions have vacuumed hundreds of millions out of the bankrupt exchange.

Rather than place their trust in FTX, hedge funds should’ve used a service like Coinbase Custody.

Coinbase Custody puts customer assets in segregated cold storage. Its parent company is US-based.

As a public company, Coinbase has to make disclosures FTX would never dream of. And it even has SOC 2 security certification.

An exchange like Coinbase is a real, grown-up company. FTX was an amphetamine-fueled commune in a questionable jurisdiction.

But hey, why not trust them with billions in your investors’ money?

I expect to see a lot of the funds that did business with FTX shut down. It’s hard to trade when all your money’s gone.

Investors big and small should be careful about who they do business with. Stick to companies in reputable jurisdictions with the right controls in place.

It turns out the brave new world of crypto is a lot like the old world: full of scammers. Buyer beware.

After the implosion of FTX, who do you think is next? Leave a comment at the bottom and let me know!

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