Pulse of the Market - April 2021
Wow, what a month. Some unprecedented events that "no one saw coming". I'd like to discuss two important topics. 1) The dangers of margin and 2) The "Fake" All time High in the Market
The Margin Call of Bill Hwang and Archegos Capital
Greed is a terrible thing. Greed combined with an insane amount of debt is a ticking time bomb. Bill Hwang ran the hedge fund Archegos Capital, a "family office fund", which was levered up about 5x or more (aka taking on 5x the amount of debt per $1 of committed capital) through the backing of Morgan Stanley, Credit Suisse, Nomura Bank, and more.
What got him in trouble, subsequently margin called for $20 billion dollars (yes with a B) and the loss of his clients money and fortunes? Total return swaps or highly levered off the book derivative instruments. In general per the WSJ, "a Total return swap is a contract brokered by Wall Street banks that allows a user to take on the profits and losses of a portfolio of stocks or other assets in exchange for a fee. Swaps allow investors to take huge positions while posting limited funds up front, in essence borrowing from the bank." For a more in depth Bloomberg article on the situation read here
Even the Federal Reserve Chairman, Jerome Powell (JPOW), commented on the debacle via a 60 minutes interview (please watch the 2 min clip here). Just from watching this clip, I am not very confident this won't happen. Especially when Credit Suisse is in talks to sell their asset management arm to Blackrock for $4B after taking a $4.7B loss (FROM ONE CLIENT) even though the business only generated around $1B in total revenue. Great risk management Credit Suisse
The lesson from this epic failure is very clear: don't be on excessive amounts of margin. Being on margin when stocks are going straight up is insanity and people are already paying the ultimate price. Lastly, one of the stocks Hwang held billions in was Viacom ($VIAC). Really not sure why (he must really like cable television or Paramount plus). Take a look at the attached quick technical analysis chart given myself and some others started a swing position given it has been so beatdown by an enormous sell off
The "Fake" All Time High: Peeking under the Hood of the Market
I originally wrote about the rise of Bitcoin and talked about the main Bear Thesis points. While I do believe in Bitcoin as a hedge against the Federal Reserve for the long term (I have a 5% allocation), I would rather talk about it another time.
I'd like to discuss how the markets are at all time highs and look under the hood of the markets in general. In my opinion, the massive leverage in the markets over the last year alone was the biggest factor in this rapid move to all-time highs, not price discovery of undervalued business/ strong fundamentals (except for Gamestop- yes it was grossly undervalued). I am becoming increasingly worried about two things: those with massive leverage are about to be wiped out or the Federal Reserve (JPOW) may finally taper bond purchases and raise rates much quicker than expected (late 2022 vs 2024) given how strong GDP and the economy is expected to bounce back.
First let's take a look at the margin data. Here is the link to the FINRA margin statistics if you want to follow along : https://www.finra.org/investors/learn-to-invest/advanced-investing/margin-statistics . If you scroll through the data, you can clearly see the margin in the markets has increased dramatically over the last several years, and increased substantially from March 2020- March 2021. The increase alone from March 2020 (479B) to (822.5B) in March 2021 is almost 72%. That is absolute insanity. So even though margin debt rose, the last 2 months has been an absolute blood bath for high PE/ no revenue, speculative stocks. The rate of increase in margin debt over the last couple of months is decreasing at a high rate which to me means hedge funds are finally starting to feel the pain of high margin (1 interest rates of their margin debt) and are taking margin debt off the table. As such, liquidity is starting to dry up. Those who borrowed money aren’t borrowing as much anymore, which could end this final push higher before a much needed correction.
Next let's take a look at several record bond sales by the top major banks/ market makers this month. Bank of America, JPM, Citadel, and more
Bank of America: https://www.bloomberg.com/news/articles/2021-04-16/bofa-to-set-record-for-largest-bank-bond-sale-at-15-billion
Why sell billions in bonds all at basically the same time unless you are trying to deleverage or fear more of your degenerate clients are about to get wiped out? Yes, I realize they can just be selling bonds to take advantage of potential rising interest rates but that only plays more into the theory that liquidity will dry up. It reeks something under the hood of this market is not sitting well with these banks and I'd rather be a bit cautious then wait for them to reveal their hand.
Lastly, I am not trying to time the market. I know myself and most people are not smart enough to even do that. But I would rather be 15-25% cash (and definitely NOT be on margin) and only hold investments I am willing to invest in for 3-5 years minimum in case the party is really starting to wind down.
Final Thoughts/ Conclusions:
The deleveraging going on within this market is a huge signal funds are starting to take their winnings off the table. The casino (Federal Reserve) and the Pit Boss (SEC) are passing laws left and right (example Exchange Act Rule 15c3-3), basically forcing those either highly leveraged or those shorting stocks aggressively to take money off the table for the stability of the market since they must have collateral to back up their extremely risky bets. When the casino floorman tells the most degenerate gambler (aka the hedge funds) it's time to stop betting so much, that's usually a sign the party is starting to wind down (trust me I have been to Vegas 5 times). While I BTFD (bough the f*ck*ing dip) as Reddit would say back in mid/ late March aggressively (and generated solid alpha), the rapid upward appreciation and volatility of this move to all time highs is making me extremely worried more Hedge funds and even banks are going under (maybe Credit Suisse) and those with money/ big winnings are starting to the leave the equity market party.
Best,