Month: January 2021

While hopes of a bipartisan COVID-19 economic stimulus plan appeared to fade on Saturday, the situation appeared more hopeful on Sunday, as Bloomberg reports that “ten Republican senators have proposed an alternative plan” which would cost approximately $600 billion, and which they claim has bipartisan support.

Among the signatories are Sens. Susan Collins (ME), Mitt Romney (UT) and Lisa Murkowski (AK).

“In the spirit of bipartisanship and unity, we have developed a Covid-19 relief framework that builds on prior Covid assistance laws, all of which passed with bipartisan support,” the Senators wrote in a Sunday letter addressed to President Biden.

“Our proposal reflects many of your stated priorities, and with your support, we believe that this plan could be approved quickly by Congress with bipartisan support.  We request the opportunity to meet with you to discuss our proposal in greater detail and how we can work together to meet the needs of the American people during this persistent pandemic.”

The GOP proposal includes $160 billion to expand vaccine development and distribution, testing and tracing, treatment and supplies, and the production and development of personal protective equipment (PPE). Also included is $4 billion for behavioral health and substance abuse services, which mirrors Biden’s plan. 

What’s more, the GOP Senators note that “billions of dollars remain unspent from the previous COVID relief packages” which can be reallocated to the new plan.

And according to Jared Bernstein, a member of Biden’s Council of Economic Advisers while appearing on “Fox News Sunday,” the Biden White House is “absolutely willing to negotiate.”

“Glad to hear from this letter that they’re on board, but we need to learn a lot more about it. Right now, we are in a position where delay and inaction are the enemy of moving forward,” he added.

On Friday, President Biden said “I support passing Covid relief with support from Republicans if we can get it. But the Covid relief has to pass — there’s no ifs, ands or buts,” before warning that an entire generation of children face weaker lifetime earnings thanks to the pandemic.

One of the ten Republicans who signed the letter, Bill Cassidy of Louisiana, said that the proposal comes to “about $600 billion,” seemingly confirming the $500 – $600 billion range pegged by one GOP aide – which notably pales in comparison to the $1.9 trillion stimulus Biden seeks.

According to Cassidy, stimulus payments would be as high as $1,000 and would be conducted in a more targeted fashion to weed out those who don’t actually need them. Biden, meanwhile, has proposed $1,400 checks – which would “top up” the $600 payments made in December.

The cooperation of at least 10 GOP Senators will be required to reach 60 votes in the chamber – the required number to pass bills under normal procedures, assuming all 50 Democratic Senators would be on board.

That said, if Republicans don’t play ball, Senate Majority Leader Chuck Schumer (D-NY) has threatened to move forward with a budget process that would allow 50 Democrats to pass certain parts of the Biden plan without GOP cooperation. That said, budget reconciliation has its limits.

According to Sen. Rob Portman (R-OH), one of the ten Republicans who signed onto the compromise proposal, reverting to reconciliation would add to the partisan divide in Washington.

“If you can’t find bipartisanship on COVID-19, I don’t know where you can find it,” Portman told CNN‘s “State of the Union,” adding that the Republican plan would have “all of the health care funding that President Biden has in his proposal.”

The other GOP Senators signed onto the bipartisan effort aside from Cassiday and Portman are: Susan Collins of Maine, Todd Young of Indiana, Mike Rounds of South Dakota, Lisa Murkowski of Alaska, Mitt Romney of Utah, Shelley Moore Capito of West Virginia, Jerry Moran of Kansas and Thom Tillis of North Carolina.

Submitted by Anonymous,

So you just “raided” your first company: A letter to non-professional traders

Congratulations to “WallStreetBets”. Gamma trading is fun and anyone who has traded the market for the past three decades saw this coming. As capital markets look toward Monday and what is “priced in” to GameStop, something bad is happening. And if nobody says something, the consequences will harm everyone.  

For background, I’m a portfolio manager who has been doing this since before 2009. This will be my third market cycle.  

Zero Hedge has written extensively on market manipulation, specifically in commodity markets and equities using “boiler rooms” and high frequency trading algorithms such as the infamous “ignition trades” much of this knowledge has not been properly communicated or shared with “wall street bets” retail traders. A short squeeze is legal, but when a coordinated attempt at price manipulation is attempted, then it can be defined as a dangerous offense. This is a grey area. If you are new to finance, please study up on what happened when previous traders have tried to “corner the silver market” or the infamous Volkswagen trade or LIBOR manipulation. Unwinding and the liquidity drains on the larger capital market to solve these trades are dangerous.

On a related topic, liquidity trades can have unintended consequences on other parts of the economy, such as when program trades in 1987 led to a flash crash.  

The capital markets work on a public hazard principle, much like driving a car. You drive safe to protect the other guy. You can drive fast, but the damage caused to the reputation of the market and confidence in counter party risk can be permanently damaged; just like a deadly car crash. And the margin of error, like extreme speeding can wipe you out in a second. A “flash crash” can wipe you out, be hedged and make sure you understand the math & market structure of these leveraged trades.

Retail investors must understand or should be made aware of that gamma trading depends on liquidity shortages and as we saw in the market action of Gamestop and other stocks today, this market structure is dangerous to everyone. Complacency on 50% moves upwards must also be monitored and expected losses of 50% or more must also be factored in before people invest; in much the same way people must make educated investments before making investments in options, where unlimited losses may happen, or stocks on margin.

The reason I say this to you is because every mania since 1918 has led to a major market crash over the past 100 years. In every major market crash, it was retail accounts being locked out which led to crippling economic losses amid the retail public who exuberantly placed their savings into the market.

Many people today complained about their retail accounts to “Robinhood” and “Ameritrade” being locked out for various unconfirmed reasons. However, if one were to “google” this is a very loud alarm bell of a market top.

In 1929, Joe Kennedy saw, was horrified and wrote to the WSJ that manias were encouraging retail traders to form trading clubs and were investing in “Insull Trusts” and hundreds of penny trade brokerages were emerging in New York to prey on their inexperience. The Insull Trusts were overleveraged assets, often real estate and utility companies which were propped up by stock buybacks and equity speculation. When the first market crash happened, which led to the Great Depression, it was the Penny Brokers, unable to satisfy retail accounts due to the brokerages own cash crunches which led to the infamous riots and wave of iconic “jumping” suicides in the weeks after the crash. Those were not bankers who killed themselves but wiped out retail punters as documented in many economic history books about the crash.

In 1998, again, after a euphoric mania the dot com bubble stocks gave way to the collapse of the tech sector, following the disaster of the “Pets.com” IPO. In the flash crash, retail investor accounts were locked. Preventing millions of “Freedom 55” investors (Generation X and Boomers) from trading out of their positions. Many of those households and their savings were wiped out. Those households which survived 1998’s market crash & recession only returned to their previous wealth level, after inflation adjustment in the early 2010’s. Faith in retail brokerages, market integrity and public trust in banks never recovered. Even to this day, legislation like “Glass Stegall” is spoken about, but nobody really remembers why or how it happened; or its consequences to those who suffered the most in 1998.

Like 1998, we have seen “Robinhood” and other retail traders allegedly start to moderate access to the stock market. Economists talk about an economic event called a “Minsky Moment”. Given the market signals, retail investors should review these economic signals before a Minsky moment happens in this momentum driven market.

I would not be shocked if “Robinhood” is the new Lehman Brothers and we are months away from a major crackdown on capital markets by regulators. I also suspect that should GME suffer a Minsky moment, the thin liquidity structures in our current market will trigger a major market move similar to 1987.

I will say I have not studied this specific issue to cause alarm, but if regulators are not watching this issue and its parallels to history, now they should be.

So be safe out there.

Reddit users are reporting issues with the website on Sunday morning, according to Downdector. The outage map appears widespread. 

Redditors began reporting issues around 0930 ET and appear heavily concentrated in the Northeast. 

Downdector Reddit 

Reddit Outage Map

While there is no official confirmation from the website of what is causing issues and outages for users, people on Downdector who are reporting the problems suggest “WSB (r/WallStreetBets) has bogged the server down.”

Others said, “reddit down again lol.” 

Someone else said, “This is the second time in less than 24 hours.” 

r/WallStreetBets has seen exponential traffic with millions of new subs over the last week. 

r/WallStreetBets Traffic

People are flocking to the stock market-centric forum because the group has allegedly sparked massive short covers in a handful of popular listed stocks, including GME and AMC. 

This weekend, we noted r/WallStreetBets’ next move could unleash the “world’s biggest short squeeze” in silver. 

Authored by Charles Hugh Smith via OfTwoMinds blog,

It didn’t have to be this way, but this is the reality we must now face: truth is fatal to fraud, and our entire financial-political system is a fraud.

The stock market has just been punctured by the thin blades of truth. It is fatally wounded but nobody dares notice. The wounds are barely visible, but the internal damage is mortal. The stock market is already stumbling and will soon crash.

The banquet’s participants ignore the faltering market because the rules are we never reveal the truth, or acknowledge it, or discuss it, no matter how obvious, because truth is fatal to fraud. So the stock market’s vital signs are in freefall but the conversation remains upbeat and light: stimulus, rapid growth in the second half, etc., all the patter of a carefully constructed illusion that fraud is forever as long as the truth never comes out.

Alas, the truth has emerged from the shadows, despite the silence of the insiders and the financial media. Here are the truths that have emerged like karmic genies:

1. The stock market is nothing but one giant fraud. The entire market is corrupt and rigged from the ground up. The fraud is systemic, designed into every tendril of the market. It was a useful deception to blame it all on “bad players,” but now the truth has been revealed: the market is nothing but a rigged game enriching insiders.

2. The Fed is a fraud. All the Federal Reserve has accomplished in 13 years of goosing the stock market is unprecedented wealth and income inequality as the fraud of the Fed has boosted the fraud of the market, which has fatally undermined America’s social and economic orders. Please read this short paragraph and let it sink in. Monopoly Versus Democracy (Foreign Affairs):

Ten percent of Americans now control 97 percent of all capital income in the country. Nearly half of the new income generated since the global financial crisis of 2008 has gone to the wealthiest one percent of U.S. citizens. The richest three Americans collectively have more wealth than the poorest 160 million Americans.

Thanks to the tightly bound frauds of the Fed and markets, the bottom 90% of Americans own essentially zero capital that produces income and the vast majority of all income gains since 2008 has been siphoned off by the top 0.1% (see chart below from the New York Times.) Three monopolists own more wealth than half the nation’s citizens.

Yet the fraudsters in the Fed laughably insist their policies haven’t created inequality on such a vast scale that is has destabilized the nation. The Fed’s credibility is zero, yet the financial media tiptoes around, proclaiming the glory of the Emperor’s illusory clothing.

3. America’s system of governance is a fraud. What can we say when powerful politicians are worth over $100 million and are active participants in the most speculative excesses of the stock market, Buying More Than $1 Million In Tesla, Disney And Apple Calls In December? Do we even need to ask where their interests lie?

What can we say about a regulatory system that immediately bails out the most corrupt and destructive financiers / speculators but stands aside when the public loses trillions of dollars? The financial regulatory system is a complete fraud, devoted to bailing out the biggest insiders while ignoring the losses of the bottom 99.9%. America’s financial regulations protect the corrupt, not the citizenry.

4. The wealth effect is a fraud. The Fed’s entire fraudulent policy holds that if the stock market is goosed higher by Fed rigging, the phantom wealth handed to the top 0.1% will magically trickle down and benefit the bottom 90% who own no productive capital.

There is no magic; the wealth effect is a fraud. If one $5 stock (GameStop) can be pushed up to $400 in a week, why not push every $5 stock to $400? This is the essence of the wealth effect: all capital is phantom capital, a fraud balloon awaiting a pin.

The wealth effect failed, the Fed failed, regulations failed, politics failed. But thanks to the Fed and the self-serving political class, the entire U.S. economy is now utterly dependent on this completely corrupt and destabilizing fraud–the stock market. If the stock market stumbles and collapses, the economy–now totally dependent on phantom capital –also stumbles and collapses.

It didn’t have to be this way, but this is the reality we must now face: truth is fatal to fraud, and our entire financial-political system is a fraud. The stock market is pale, and blood is seeping through the tuxedo, but the insiders, politicos and their toadies and apologists are nervously averting their gaze.

The market’s bleeding but it can’t possibly die, can it? Yes it can, and yes it will: truth is fatal to fraud, and the truth has escaped and is now free. We can’t unsee what’s behind the curtain.

*  *  *

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A powerful snowstorm will impact Mid-Atlantic and Northeast states on Sunday into Tuesday. More than 100 million people are in the path of this “monumental storm,” AccuWeather Chief Broadcast Meteorologist Bernie Rayno said over the weekend. 

As we noted last week, the storm already struck parts of California with torrential rain and heavy snow, depending on altitude, due to an atmospheric river emanating from over the Pacific Ocean.  

Rayno said “from the western shores of Lake Michigan, including Chicago and Milwaukee, across northern parts of Indiana and Ohio” will see 6-12 inches of snow by Monday. 

By Sunday morning, the snow has already begun to fall in the Baltimore–Washington metropolitan area. 

The impending Nor’easter could dump “most snowfall to Philly in five years,” said CBS Philly.

Winter storm warnings from Chicago to Richmond to Baltimore–Washington metropolitan area to New York City have already been declared. 

As we’ve continued to warn about this system and how impactful it could be, more accurate snow total forecast have been posted for the Northeast. 

“Biggest storm in 5 years?! Impending Nor’easter forecast to bring the most snow to Philly since Jan. 23rd, 2016,” tweeted CBS Philly’s Lauren Casey.

Across the Northeast, precipitation will increase in intensity overnight through Monday. 

Weather models are pivoting to much colder weather in the week ahead. Meteorologists at BAMWX are forecasting “a legit colder and wintry period is coming.” 

… and what does this mean for natural gas prices? Well, BAMWX models are suggesting “16-30 day outlook from Friday AM might turn out to do pretty well. This is the first time this season I’ve seen the NAEFS go cold like this in the 8-14 day. I think a legit cold & wintry pattern looms for much of February esp. from the Plains to Great Lakes to NE.”

With colder weather on the way, US-Lower 48 heating degree days suggests energy demand to heat commercial and residential structures will increase in the first half of February. 

Commodity traders could certainly view the shift in cold weather as bullish. 

BAMWX also forecasts a “big winter storm to track next weekend too!”

Goldman Sachs will be happy… 

 

We already knew that last’s weeks epic squeeze of the most shorted stocks was a disaster for Melvin Capital, which emerged as the first casualty of the reddit squeeze because, as we showed last Monday, it was heavily short precisely the stocks that exploded higher (mostly as pair trade offset to its retail longs such as Amazon and others) with its puts losing all value, even as the fund suffered further pain on its outright shorts.

And while we didn’t know just how much pain Melvin had suffered – especially after Ken Griffin’s Citadel (which is Robinhood’s top client and orderflow purchaser) and Steve Cohen organized a $2.75 billion bailout financing, we do now, because as the WSJ reported this morning, Melvin Capital lost 53% in January, as Gabe Plotkin (a former SAC Portfolio Manager), lost over $5.3 billion in one month.

In dollar terms, it means that Melvin lost a stunning $5.3 billion in just a few weeks thanks to r/wallstreetbets:

It started the year with about $12.5 billion and now runs more than $8 billion. The current figure includes $2.75 billion in emergency funds Citadel LLC, its partners and Mr. Cohen’s Point72 Asset Management injected into the hedge fund last Monday.

What is even more stunning is that it took just days for Citadel and Point72 to be underwater on their $2.75 billion rescue financing: “So far, Citadel, its partners and Point72 have lost money on the deal, though the precise scope of the loss was unclear Sunday.”

This also means that as the squeeze of GME and other companies continues, it is leading to billions in losses for the two funds and may explain why Robinhood – whose biggest customer is Citadel (as the WSJ separately reports 29% of Gamestop trading volume on Thursday was handled by Citadel, which means that Citadel is caught in an unprecedented conflict of interest) – was so quick to halt trading on Thursday and limit it to just one share on Friday.

With the fund now existing only on daily life support and the continued goodwill of Griffin and Cohen, it is hardly a surprise that it had to massively degross (i.e., sell all potentially problematic positions):

Melvin has massively de-risked its portfolio, said a client. People familiar with the hedge fund said its leverage ratio—the value of its assets compared with its capital from investors—was the lowest it has been since Melvin’s 2014 start. They also said the firm’s position-level liquidity, or its ability to exit securities in its portfolio easily, had increased significantly.

Alas, none of that matters. As we noted earlier today, the massive damage that some hedge funds sustained last week (and while some hedge funds indeed profited from the short squeeze, most lost money as Goldman noted last night “The typical US equity long/short fund returned -7% this week and has returned -6% YTD”) will now spark a massive redemption wave:

Here’s the problem: the short squeeze led to massive losses for some funds. It may or may not be over. But now come the redemption requests and funds will see billions cash out, forcing them to liquidate top longs (GS VIP basket)

Confirming this, the WSJ also wrote that Maplelane Capital – the hedge fund which we first said last week could be the next Melvin – ended January with a roughly 45% loss. It managed about $3.5 billion at the start of the year.

D1, which incidentally last August invested $200 million in Robinhood, ended the month down about 20%, was short AMC and GameStop, said people familiar with the fund. One of the people said D1 had exited both positions by Wednesday morning but that those were small drivers of losses. A more significant factor was shares of travel-related companies declining.

And while mounting redemptions are a clear problem, an even bigger problem is what happens to the short squeeze, because if it continues there is now a risk of a broader market selloff as Goldman cautioned last night, noting that “Unsustainable excess in one small part of the market has the potential to tip a row of dominoes and create broader turmoil.“

So what happens next? Well, as the WSJ correctly notes, as part of an aggressive overhaul to the hedge fund industry, “Fewer hedge funds are likely to highlight their bearish positions by disclosing put options…  Instead, funds may use Securities and Exchange Commission rules to keep confidential those positions, a tool activist investors have long used to build positions in companies quietly. More funds also may institute rules about avoiding thinly traded, heavily shorted stocks.”

Good luck with getting the SEC to agree to confidential “short only” idea dinners especially now that shorting hedge funds have emerged as public enemy #1.

Finally, for those wondering how the rest of the industry is going, here is the Top and Bottom 20 funds summary from the latest HSBC hedge fund report. We the strikingly bad performance by Renaissance – the most profitable and secretive hedge fund in the history of the world – especially notable although we are confident that the loss in the public-facing funds is more than offset by gains for the employee-only Medallion.

 

GLJ Research’s Gordon Johnson, who has been a consistent Tesla bear, has had time to review Tesla’s Q4 results and has published a note to clients noting that Tesla “lost money selling cars for the fourth straight quarter”. Johnson also points out that cost cuts have “slammed” Tesla’s margin. 

“Despite the fact Tesla sold 41,074 more cars in 4Q20 compared to 3Q20 (+29%), net profit fell $30mn QoQ,” he highlights. Johnson continues to point out the effects of price cuts on Tesla’s business:

“In short, we believe this is a “mystery” Tesla investors will likely need to come to grips with this year. Stated differently, we believe Tesla investors will have to decide if it matters if Tesla grows deliveries 50%/yr if it means net profits go down as sales increase – due to excessive price cuts as the competition is rendering TSLA’s cars irrelevant (we do not see this as a sustainable business model).”

He then asks a reasonable question about whether Tesla’s valuation makes sense, given the fact that the company’s CFO has outright disclaimed that Tesla won’t be able to rely on selling EV credits much longer:

“Stated differently, with Tesla posting a $130mn loss (excl. credits) on a record 180K in deliveries, guiding at least 749.325K deliveries on 1,050K of car capacity, expecting 1 semi to be delivered in 2021 – and the CFO outright exclaiming that the credits that have padded its net income are temporary and will go away – is owning Tesla better than owning all the other car companies combine.”

It’s a great question, but it’s been one the market has been able to ignore thus far, thanks to skyrocketing indices and out of the money call buying providing both the cover and the catalyst for Tesla’s current share price.

Johnson is right, however – at some point, reality will once again matter – the question is “when”. He notes that not only does sentiment have to continue for the share price to stay inflated, but that analysts and investors continue to have to make piece with Tesla’s ballooning A/R and other accounting anomalies.

“We remind our readers that all of this has to be accepted, despite: (1) $721mn in GAAP profit on the year vs. A/R growing from $543mn to $1,884mn (showing shareholders will likely never get “their money back” via a dividend, and Tesla does not generate cash but does generate mysterious IOU’s), (2) unit COGS flat 3Q20-to-4Q20, despite China cranking out 50% more cars (suggesting spreading fixed costs over more cars doesn’t help in audited quarters), and (3) FSD appearing years off any mass deployment.”

Finally, loud enough for the last shareholder standing in the back, Johnson plugs away at more fundamental arguments – including the fact that Tesla’s ROIC falls below the company’s cost of debt capital. 

Finally, looking to return-on-capital (“ROIC”), we note that on a last-twelve-month (“LTM”) basis, EBIT = $1,994mn, while LTM EBIT (excl. one-time credit sales of $1,580mn) = $414mn; thus, $414mn ÷ $20bn (i.e., TSLA’s total capital deployed) equates to a pre-tax ROIC of 2%, which is below the cost of TSLA’s debt capital. While this is the definition of (very) poor capital deployment, it also shows TSLA is not a software company, but rather an also-ran automotive maker – Microsoft’s ROIC in 2020 was 22.99%, and over the past 5yrs, Microsoft saw an ROIC low of 8.8%.

Authored by Zachary Stieber via The Epoch Times,

The latest round of stimulus checks led to GameStop stock surging, according to a money manager.

“I think wherewithal from governmental stimulus ultimately is really the cause,” Jeffrey Gundlach, a billionaire bond-fund manager, said during an appearance on Fox Business.

Congress passed and then-President Donald Trump signed late last year a fresh CCP virus relief package that included $600 checks to most Americans. The checks began being sent out on Dec. 29.

GameStop stock began surging last month, spurred by retail investors urging each other to buy on a Reddit subforum. Gundlach asserted the rise was due mainly to the relief package.

“In this case, thanks to primarily, I would say, governmental policy, there’s wherewithal among investors, if you want to call them that, or speculators, with government money being sprayed all over the place, with checks to people, that they have the wherewithal to put together into a real capital base. And in this case, there were 2.1 million people that somehow got organized on Reddit and managed to get about $20 billion of buying power,” he said.

Large gains came, in part, because of short positions taken by hedge funds essentially betting on the downfall of GameStop, a video game seller.

A stimulus check issued by the IRS to help combat the adverse economic effects of the CCP virus outbreak, is seen in San Antonio, Texas, on April 23, 2020. (Eric Gay/AP Photo File)

Some posts on the subforum, WallStreetBets, support Gundlach’s position. Users wrote that they used the stimulus money to invest. “A lot of us turned that 1,200 into way more than 1,200,” one wrote this week.

But others said they invested with funds unrelated to the stimulus.

Jeffrey Sherman, deputy chief investment officer at Gundlach’s DoubleLine Funds, meanwhile, told CNBC that the retail investors could see big losses if momentum changes on GameStop, AMC, and other stocks they’ve been buying.

“I don’t think it ends well,” Sherman said.

“It’s very, very strange. This is the euphoria of market tops. I’m not saying we’re going to have an imminent crash, but it definitely reeks of bubblish-type corrections.”

“This is something where it builds hubris,” he said. “It builds confidence, and then people will get reckless with their positioning.” he added. “These things just can’t continue to persist. It is some form of collusion. But I don’t know if it’s prosecutable.”

The Securities and Exchange Commission, the top financial regulator in the United States, said Friday it was reviewing recent trading volatility with the Financial Industry Regulatory Authority (FINRA).

“We will act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws,” it said in a statement. “The commission is working closely with our regulatory partners, both across the government and at FINRA and other self-regulatory organizations, including the stock exchanges, to ensure that regulated entities uphold their obligations to protect investors and to identify and pursue potential wrongdoing.”