Skin in the game...
March Madness is usually all about a bunch of young men and women running up and down the basketball court – changing direction every 35 seconds – with their own survival on the line. Rarely does the stock market provide more surprise endings than the NCAA tournament, but today we’re back to dogs and cats sleeping together. For years I’ve argued that the only way genius fails is when position size gets too large. Last Friday, Bill Hwang (billionaire and famed equity investor) / Archegos Capital started defaulting on margin calls because of being over-leveraged in a handful of positions. They blew up. Nobody knows the full extent of the Archegos damage, but it’s multiples of the Long-Term Capital Management (LTCM) fiasco. I’ve found the vast majority of hedge fund managers to be smart, articulate, and engaging – but often clueless with respect to strategy, diversification, non-correlation, position size, randomness, risk management, and trading. The scariest part to me is that they’re just managing other people’s money, and in fact have very little ‘skin in the game’.
Entrepreneurship thrives on having: ‘skin in the game’. thredUP went public last week. The co-founders James Reinhart and Chris Homer were classmates in HBS – 12 years ago when thredUP was initiated. They started with men’s wear – gravitated to baby clothes – and landed on women’s wear. James’ vision has been the same since nearly the beginning, and much of the team has stayed together for the entire journey. A few other lessons that they reinforced:
- Retail = Detail: When you sell product, every penny matters and must be counted. Obsessing over the details is critical.
- Improve 1% EVERY week: You never ‘flip a switch’ and see significant economic improvement. Chart a path for consistent improvement, and eliminate any inefficiencies using appropriate goals and metrics.
- Balance your Market(s): Supply and demand are linked. Growing demand too quickly will cause you to run short on supply and vice versa. Regulations and incentives help to keep your marketplaces in balance as they scale.
- Use your BOD: Recruit a BOD with vastly different opinions, personalities, and backgrounds. Your BOD is a place to test ideas, get feedback, and gauge your decisions. To get the most out of your BOD – give ‘em some: ‘skin in the game’.
The Market is RISKY:
It’s darn risky out there – just ask Archegos capital. The good news is that with all the sector rotation that’s going on in the market – capital is not leaving the market; it’s merely rotating. With an additional $5T in new capital being printed by our FED, growth is not that scarce anymore; however, interest rates and risk are rising.
The talk is that Bill Hwang’s Archegos Capital had to liquidate their entire $15B fund due to it being leveraged over 5X and focused on: Chinese tech giants BIDU, TME, VIPS; and broadcasting stocks VIAC and DISCA. Their demise was triggered when the new stock issuance by VIAC was rejected by the broader market. The fund’s single mis-step prompted a liquidation spiral that has its investors (like Credit Suisse and Nomura Holdings) feeling the heat. The banks told Archegos that it needed to put up more money in order to maintain its positions. Archegos defaulted on the margin call which basically says: "IOU but I can’t pay you". So, banks started selling off Archegos' positions to meet the minimum equity requirements for the margin account (and recoup some of their losses). Unfortunately, the banks' damage-control is causing collateral damage to their retail investors.
Use this as a warning shot to take a look at risk levels surrounding your own portfolio, because: “Yes Virginia, markets can move lower.” What keeps me up at night is crypto-currency. Bitcoin was born into and remains mostly within the retail sector, but that is changing. The ‘talking heads’ spent the last decade explaining how the NASDAQ out-performed the S&Ps, but failed to explain how crypto beat ‘em all by a factor of 10. There are several ‘crypto indexes’ out there, and I know who is NOT following any of them = financial advisors and institutions. That’s why it’s RISKY!
InfoBits:
- Airbnb and Vrbo are overloaded with reservations…. After so long in quarantine, the hottest vacation destination is: ‘anywhere but here’.
- 225 is the number of SPACs… that have gone public this year (nearly 4 per weekday) – raising more than they did in all of 2020.
- Volkswagen America may be changing its name... to VOLTS-wagen.
- For the 1st time ever in 2020… the value of beer imported into the U.S. was greater than the value of the imported wine.
- The newsletter industry is red-hot right now: Newsletters are doing so well that Substack just got another $65m at a $650m valuation.
- Allbirds, the wool sneaker maker… was most recently valued at $1.6B.
- Chipotle invested in driverless delivery company Nuro: Self-driving burritos are coming.
- Spotify just bought Clubhouse rival: Locker Room… to get in on the live social audio trend.
- Fortune 500 execs are urging their corporate peers… to fight new Georgia and other Republican voting restrictions.
- Google is speeding up its office reopening… putting real limits on future WFH.
- Discord (the talking and texting app) is in talks… to be acquired by Microsoft. It also can be used for: voice-interviews, book clubs, and karaoke.
- Apple is adding 2 new Siri voices… including Gilbert Gottfried.
- Miley’s giving away $1m in stock to fans via Cash App… becoming the first individual ever to pull off an instantaneous sale of shares at this scale.
- Amazon is transitioning employees away from remote work this summer… with most of its staff back in the office by the fall.
- Consumer confidence surged in March… as Americans grew more optimistic about the economy and labor market.
- The housing market is crazier than it’s been since 2006. To quote one agent: “It’s exhausting, heartbreaking for buyers, and a final celebration for sellers.”
Crypto-Bytes:
- Remember when Goldman predicted a Crypto-Crash… and NOW (after it’s gone up 10X in 3 years) it’s offering it to clients. How time flies when you’re having…
- Visa will allow the use of the cryptocurrency USD Coin… to settle transactions on its payment network. Another sign of the growing acceptance of digital currencies by the mainstream financial industry.
- Silvergate Bank will extend bitcoin-backed loans… to investors who custody their crypto with Fidelity.
- PayPal will allow users to checkout with crypto… at any of its 29m online merchants. They will automatically convert bitcoin (BTC), ether (ETH), bitcoin cash (BCH) and litecoin (LTC) to U.S. dollars and deliver to merchants.
- Galaxy Digital, a digital asset merchant bank… is preparing for a U.S. listing. The Mike Novogratz-founded firm has been on a growth spurt, having expanded into mining and launching an exchange-traded fund in Canada.
- Chipotle Mexican Grill said it will be giving away… $100,000 in free burritos and/or $100k in Bitcoin to players of its “Burritos or Bitcoin” game – which simulates trying to recover a lost crypto key.
- Investment giant BlackRock… is trading Bitcoin futures.
- Cryptocurrency exchange Coinbase will start trading April 14th … following its direct listing.
Last Week:
Monday: On Friday, CENX and AA had outsized moves, and AEI (after falling for quite some time) went out flat. So, I’ll be watching: CENX, AA, and AEI right off the bat. We were red across the board until we got word that the ship which was stuck in the Suez Canal had been freed – then everything moved higher. Don't forget this is a Holiday shortened week, as the market is closed for Good Friday. Since our two infrastructure plays have stalled out, I’m watching XRAY. If it gets over $62.15, I think it can challenge the recent highs at $64.
Tuesday: The current market complaint is that the 10-Year hit 1.75. I’m thinking – just you wait until it goes higher and our FED announces their Yield Curve Control project with a new QE version of the twist. In Market-land, DISCA is trying to hold up. I could see going in early at $44.20. X is looking good again and with the big infrastructure bill – I will take it over $25.
Wednesday: We're beginning to hear some of the components of Biden's new bill, including the $2T to $3T price tag. There's money for roads and bridges, mfg. and R&D – with tax hikes supposedly paying for it. Note: There's a lot of talk about them implementing a mileage tax based upon how far you drive. I believe this will be pushed hard, because with the overall push to electric vehicles – gasoline sales will fall. Included in the price of gasoline are numerous taxes which are supposed to go into funds for road upkeep. With that income dwindling, they'll impose a tax on how far you drive. The ADP payroll report is out and they say payrolls increased by 517K in March. So, is the bulk of the month/quarter end selling over, and has that new quarter positioning started? Yes. There was a bit of ‘sell the news’ concerning the infrastructure bill. I’m looking at: AMD > $78.30, VALE > $17.30, and TSLA has more to run – I’m sure of it.
Thursday: So, the S&P hit another all-time high. Yawn. With trillions more newly digitized dollars coming, the market has little to do but go up. They really liked getting the S&P over 4,000 and they haven't backed down. They have swung into the techs in a big way, and I think that's going to have some staying power. With that in mind, I'm going to take on some contracts of the May $120 calls on the XLK (technology ETF). They’re currently priced at $16, but with the XLK at $135 – you’re already $15 in the money. I will also take FCEL over $15.50.
Marijuana’s Coming… and Big Tobacco / Big Alcohol know it!
- New York is about to legalize MJ… but it will be a year until you can buy it. And they have plans to tax wholesale cannabis transactions based upon THC %.
- A loophole in the MJ law… is called Delta-8. Delta-8 is causing retailers to rush to cash in on a regulatory gray area.
- Ohio’s medical marijuana market is strengthening… but issues such as restrictive patient-purchase limits, low patient participation and insufficient cultivation capacity linger. The market is appealing because of its limited licensing structure, large population (12m), and prospects for adult-use legalization in the not-so-distant future.
- The RTD’s (Ready-To-Drink) beverages are coming… Consumers place higher importance on sensory aspects than anything else when choosing a beverage. Flavor is #1, then cocktail type, and alcohol base. The list is:
o ‘Lightness’ in flavor,
o Premium spirit-based,
o Sparkling,
o Organic, sophisticated, pure ingredients, and/or caffeinated,
o Drink anywhere / anytime,
o 12-packs, and an
o ABV range between 4.1% and 7%
- Sen. Schumer pushed the Senate on Pot Legalization… as a draft bill is being finalized to remove cannabis from the list of controlled substances, and tax and regulate it on the federal level.
- New Mexico lawmakers approve $350m rec-legal marijuana bill … that the governor is expected to sign. Retail sales will start no later than April 1, 2022. TAM = $125m in Yr1 and $350m by Yr4.
- Adult use legalization is such a big deal in NYC… because reaching Wall Street and Madison Avenue will dramatically encourage public acceptance and new investment capital.
Next Week: Traders Are Ignoring Risk?
Uncertainty is at Market Highs: The S&Ps cracked above the 4,000 level – at all-time-highs, but we stayed within the expected move. A lot of the uncertainty that I’m feeling has to do with Correlation Chaos. But it’s NOT about: What anyone Thinks, but rather about What they Know.
Does that mean everything is up – because it’s NOT: The small cap index (IWM) is nowhere near its all-time-high (ATH). The NAS is not near its ATH, but did begin to regain some of its previous dominance. For a large portion of the week the advance / decline line was around 50/50 and sometimes 40/60 even when the indexes were moving higher.
Volatility is being Crushed in the S&Ps: Since the onset of COVID, we are (by far) at the lowest level of volatility (VIX). The VVIX (the volatility of the volatility index) is also at its lowest point in a year. However, we have a massive volatility contango forming where future risk (out 2 months) is over 20% higher than current risk. This means if you’re pricing options 1 month out = they’re cheap. But if you’re pricing options 3 months out = they’re expensive. So act accordingly.
Volatility in the Russell & NAS: Volatility in the IWM and in the QQQs is almost twice that of the S&Ps. I guess somebody forgot to tell tech and the small caps that the global pandemic is over. That means that your option trading strategy for elements within the S&P should be different than for stocks within the NAS and/or the Russell.
Bonds Bid w/ Financials Bid: Bonds ticked higher on the week (interest rates went down) and surprisingly the financials rallied. Keep an eye on this behavior.
Correlation Chaos:
- Inflation: If we assume that inflation is coming and the market is responding in kind, then:
- Oil: The price of oil (with inflation moving higher) should be increasing, and it is.
- Metals: With inflation, the price of gold should be moving higher – and it has NOT. BUT maybe that’s because Bitcoin is the new gold.
- Crypto: With inflation, and Bitcoin being the new gold – Bitcoin should be rising and it is. The U.S. Dollar should be falling - is it?
- U.S. Dollar: The dollar is rising - darn.
- Inflation: This Correlation Chaos, is throwing a damper on the inflation trade. Therefore, until most of these indicators start leaning in their natural ‘inflationary’ direction(s) - we need to expect chaos.
- Bonds: We lost an asset class due to our FED. There is a floor under the bonds, below which our FED will not allow the bonds to go. Therefore, there is a natural ceiling on interest rates.
- A Missing Asset Class (Bonds): When you remove an asset class, you will experience Correlation Chaos within a marketplace and that is exactly what is going on. That is why traders are aggressively ignoring risk.
Traders are aggressively ignoring risk:
- Bill Whang’s Archegos goes up in Flames. As the chart of VIAC shows, Bill Whang’s Archegos blew up because of the VIAC secondary offering that was not well received. Honestly, it’s Bill’s responsibility to know and foresee this market reaction, and to NOT be overweight that product. But he decided to ‘go blindly into this good night’ and the results speak for themselves.
- Credit Suisse (CS) was directly impacted by Archegos – down 30% on the week.
Low returns make funds do horrible things:
- The ARK Funds (ARKK) – managed by Cathie Woods – are getting demolished. The emotional act of being down can cause incredibly intelligent people to do ridiculously horrible things – such as concentrated equity risk.
- I guarantee that there is another Bill Whang / Cathie Woods out there … and the major banks are going to start to clamp down hard on them. What bothers me is NOT the stock positions that these funds carry, but rather the dangerously leveraged derivative positions. That’s where the next ‘blow-up’ will happen, and that is being forecast via the SRVIX indicator.
SRVIX is seeing near record highs:
- SRVIX is an institutional level interest rate swap volatility index that is almost at an all-time-high.
FED Put is in:
- The FED is looking to backstop any future bond sell-offs (interest rate increases), and the market is reacting accordingly.
- The market advantage here is: Assuming our FED is keeping volatility down – you will be able to sell longer-duration premium in products that have relatively high volatility (sell at a high price) and off-set that risk by buying short-duration volatility in the VIX (at a much lower price).
- The Edge is in the sale of the premium due of Correlation Chaos.
SPX Expected Move:
- Last Week EM = $59.65 (4-day week)
- Next Week = $57.96 Expected Move
Tips:
HODL’s: (Hold On for Dear Life)
- Bitcoin (BTC = $58,900 / in at $4,310)
- Bitcoin Cash (BCH = $560 / in at $170)
- CTI BioPharma (CTIC = $2.54)
o Sold Apr. $3 CCs for income.
- Electramericcanica Vehs (SOLO = $4.93)
o Sold Apr. $5 CCs for income.
- Express Inc (EXPR = $3.97)
o Sold Apr. $4 and $5 CCs for income.
- Ethereum (ETH = $2,050 / in at $310)
- Grayscale Ethereum (ETHE = $18.84 / in @ $13.44)
- Grayscale Bitcoin Trust (GBTC = $50.86 / in @ $9.41)
- Hyliion (HYLN = $10.99 / in @ $0.32)
- Infinity Pharma (INFI = $3.32)
o Sold Apr. $3 and $4 CCs for income.
- Inovio Pharma (INO = $9.48)
o Sold Apr. $10 CCs for income.
- Litecoin (LTC = $205 / in @ $191)
- Opko Health (OPK = $4.38)
o Sold Apr. $4 CCs for income.
- Sandstorm Gold (SAND = $7.04)
o Sold Apr. $7 CCs for income.
- SOS Limited (SOS = $6.09)
o Sold Apr. $7.50 CCs for income.
- VisLink Tech (VISL = $3.18)
o Sold Apr. $2.50 and $5 CCs for income.
- VivoPower (VVPR = $10.37)
o Sold the August $12.50 CCs for income,
Thoughts: Yes, even hedge funds get margin calls. Archegos Capital made leveraged bets too big for its wallet, and last week the big banks that held those bets liquidated them. Stocks like VIAC and DISCA were involved, and were taken to the woodshed. The banks dropped too, in expectation of taking losses on Archegos’ positions. GS was one of those banks. History suggests, GS won’t be letting customer woes put it out of business anytime soon, and will likely continue to make piles of money. That’s why a trader might consider GS’s sell-off a bullish opportunity. GS reports earnings on April 14, and that could add some price volatility, but its IV rank is only 9%, which points to debit spreads. If you think GS might continue to rally in the next few weeks and are willing to take risk through earnings, the long call vertical that’s long the $325 Call and short the $335 Call in the May expiration is a bullish strategy that has a 63% probability of making 50% of its max potential profit before expiring.
Follow me on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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