Month: October 2020

As we first discussed over a month ago, with a likely unprecedented volume of mail-in ballots, prospects for volatility enduring post-election day have rarely been higher, and is in fact higher today than a month ago when concerns about post-election vol initially spiked.

To be sure, back in July we reported that  according to Goldman’s David Kostin, the biggest concerns expressed by its clients is that a contested election could drag on, resulting in little clarity for weeks if not months, in a rerun of the contested 2000 election between Al Gore and George W. Bush, when it took a Supreme Court challenge and 34 days for the winner to be decided. This is what Goldman said then:

Health concerns and social distancing protocols suggest that more voters than ever will decide not to cast ballots at traditional polling stations on Election Day and instead vote by mail. In the case of a close election, it will take time to count – and invariably re-count – all the absentee and mail-in ballots. The deadline for each state to certify its result and finalize electors is December 8th (35 days after the election) or six days before the Electoral College convenes on December 14th (first Monday after the second Wednesday in December).

Echoing this, in early September, Deutsche Bank strategist Parag Thatte wrote that the pricing of VIX futures with November and December expiries are likely too sanguine that there will be a quick and clear outcome of the elections. In fact, if indeed the election won’t be resolved until mid-December (at the earliest), the kink needs to move by at least 2 months, presenting a major arbitrage opportunity. In retrospect, he was right.

Then on Sept 14, JPM’s chief equity strategist Misla Matejka joined this chorus of warnings about a contested election result, which he saw as the “worst-case scenario” for the market (Matejka also said it as the top risk for market performance into the year-end), adding that potential legislative paralysis could be “even more damaging” than Bush vs Gore for economy, as key stimulus measures to support economy might be delayed at a time when a fiscal stimulus deal already seems unlikely before the election.

And while early October experienced a brief period of inexplicable optimism that the election would be resolved quickly and painlessly (bizarre because if Trump does lose, it’s amazing that anyone thinks he would leave quietly and without a SCOTUS fight), fears – and in some cases outright panic – that a contested outcome after the election is once again the base case, have stormed back to center stage, only unlike 6 weeks ago when there was still some hope that a fiscal stimulus could get passed before the election, the most immediate concern now is that a delay in declaring a new president would also mean a delay in delivering more much needed pandemic aid. That, as Bloomberg writes and as the market action today confirms, will “disappoint investors who’ve been counting on additional stimulus in the wake of the election, regardless of who wins, to help the economy recover from its coronavirus-induced malaise. It would also let down those betting a Democratic sweep of both the White House and Congress will release a torrent of government spending.”

And as fears about a contested election soar, so does the hyperbolic rhetoric, and according to Daniel Ahn, BNP Paribas chief U.S. economist, there is a “terrifying risk” that an unresolved election could put investors in “completely uncharted territory.” Speaking to Bloomberg, Ahn said that “if there is a constitutional crisis, we believe that the loss of political credibility and standing of the United States as a stable country could threaten its status as a safe haven with unfathomable consequences for the economy and for markets.”

Which, of course, is nothing new and is precisely why Goldman’s clients were freaking out about a contested election all the way back in July, but the market’s soothing upward levitation successfully masked those fears… until this week when the plunge in stocks once again exposed all the terrors floating just below the surface.

And while some on Wall Street are hoping for the best and buying VIX puts – with put open interest now exceeding calls – on expectations that VIX will collapse after Nov 3, others are far less sanguine, such as Stefanie Miller, managing director at FiscalNote Markets, who said that an outcome that isn’t immediately known is both “severely underappreciated” and the most likely scenario.

“The Trump team has made it very clear that they intend to pursue as many legal avenues as possible to right the fraud they see inherent in the current system of mail-in/drop-off ballot casting,” Miller told Bloomberg, noting that this makes it very clear that it’s reasonable to anticipate delays if hundreds of thousands of ballots are in question.

Miller also said that without a clear winner, it would be very difficult to advance stimulus legislation through Congress during the weeks after the election (even assuming a Blue Sweep), which would coincide with the holiday season, jeopardizing a bounce in consumer spending and crippling the all important holiday spending season.

In short, Miller believes stocks could drop in all sectors as investors aren’t accounting for that.

So what kind of a drop are we talking? According to a Thursday note from Bank of America’s Michelle Meyer and Savita Subramanian, stocks could slide as much as 20% if there’s a contested election. This means that as soon as Wednesday once it emerges if the election will not have a clear winner, we could see a bear market.

“A landslide victory for either Trump or Biden and rapid election conclusion would likely be welcomed by markets while a severely contested election could see risk-off and drive 10-year rates materially lower”…

… and even though probability of a contested election has subsided  (or perhaps, acceptance of a contested election has increased) VIX futures still remain elevated, clearly discounting risks of a contested election.

The flipside, of course, is that “if markets sell off violently and the economic data deteriorate, we could see Washington facilitate the passage of stimulus even in a highly contentious environment.“

Others are similarly concerned (and likely selling now when they can, not when they have to): Brian Gardner, chief political strategist at Stifel Nicolaus last week cautioned that markets may not be taking into account a closer-than-expected election and outlined a range of market reactions if what he referred to as “chaos” were to prevail in the wake of the Nov. 3 vote.

He assigned a low-alert level if there’s a delay of a day or two, with a more serious alert level if in the event of something like what happened after 2000’s contest between George W. Bush and Al Gore. His risk escalated all the way to the off chance that Congress would decide the election amid widespread riots and civil unrest.

Wells Fargo analyst Mike Mayo chimed in too, warning that “markets may be in for a very choppy ride on Nov. 4 and possibly for much longer if it becomes clear that the election will be contested” adding that a disputed election could hurt bank stocks more than others, based on the three weeks after the disputed 2000 election, when banks shed 10% versus the broader market’s 5% drop, Mayo said.

Yet not everything will be a loser: some financial stocks would clearly benefit from volatility, mostly exchanges such as the Intercontinental Exchange Inc. and MarketAxess Holdings according to Frederick Cannon, global director of research at Keefe, Bruyette & Woods.

One ominous beneficiary would be cryptos as a contested election would usher in a period of extended volatility and might rattle people’s faith in government and fiat currencies, Cannon said in recent interview phone interview. “A loss of trust is good for gold and crypto,” Cannon said, although it we indeed have a bear market in a few days, the wholesale liquidation that follows will likely mean that everything is sold, as babies are thrown out not only with the bathwater but the bathtub itself.

Authored by Pat Buchanan via Buchanan.org,

Of the presidents in the modern era, many have been dealt a difficult hand by history, but perhaps none more so than Donald Trump.

In 1952, Harry Truman was in his third year of a stalemated war in Korea that was costing 200 American lives every week. He lost the New Hampshire primary to Sen. Estes Kefauver and decided to pack it in.

In 1968, Lyndon B. Johnson had also been challenged in New Hampshire, by Sen. Eugene McCarthy. And, he, too, had on his hands a seemingly endless Asian war if he was not prepared to escalate militarily and add hundreds of thousands more troops to the 500,000 already in Vietnam.

Like Truman before him, LBJ stood down.

In 1980, Jimmy Carter also had a challenge from within his party — Edward Kennedy. And for the entire last year of his presidency, 52 U.S. hostages were held in Teheran while Carter presided over an economy where the interest rates had hit 21% and inflation 13%.

Trump had no primary challenger. He had not taken us into any new wars. And he had begun 2020 with the U.S. economy firing on all cylinders. But it all crashed in March and April in the worst pandemic in a century, which destroyed his economy and has since consumed a quarter of a million American lives.

October of Trump’s reelection year saw a new wave of COVID-19 infections and the bottom fall out of the stock market.

Given the cards he has been dealt in 2020, and the hatred of the media he daily confronts, it is astonishing that Trump retains his energy and enthusiasm for the battle. Most presidents would have long ago been broken.

Thus it is that, four days before the election, Trump is decidedly the underdog. With the popular vote surely lost, Trump has to sweep almost all the battleground states – Florida, Georgia, North Carolina, Arizona, Ohio, Wisconsin, Michigan and Pennsylvania – while holding onto all the states he won in 2016. A tall order.

Should Joe Biden win, he would be, on Jan. 20, 2021, the oldest and most visibly enfeebled leader to win the presidency in the history of the republic, with the possible exception of Franklin Delano Roosevelt in 1945.

Biden would have to deal with an economy that, if the stock market remains a reliable lead indicator, may be tanking anew even as the COVID-19 epidemic consumes a thousand American lives daily.

And foreign policy, that lost issue of the campaign of 2020, will be clamoring anew for the president’s attention.

In the Asia-Pacific region, China is increasingly defiant of the U.S. and openly applying military pressure upon Taiwan, matching U.S. arms sales to the island with ever more direct threats.

Earlier this month, Beijing celebrated the 75th anniversary of China’s intervention in the Korean War, where its troops suffered heavy losses but caused most of the 36,000 U.S. dead in that conflict.

And, this fall, a war broke out in the South Caucasus that, if not contained, could draw in Russia, Turkey and Iran.

The conflict between Armenia and Azerbaijan over Nagorno-Karabakh — an Armenian-populated enclave contained wholly within Azerbaijan’s borders — has resisted efforts by Russia and the U.S. to mediate a truce. The Azeris appear determined to resolve the territorial dispute in the way Narendra Modi of India lately resolved the dispute with Pakistan over Kashmir.

Russia has an alliance with Armenia and bases inside. The Turks are supporting Muslim Azerbaijan, and, with the Israelis, have been providing the Azeris with modern weaponry such as advanced drones, which have taken a devastating toll on Armenian troops and armor.

On the cultural war front, France and Turkey, both members of the NATO alliance, are trading national insults over a crackdown on Islamists by President Emmanuel Macron after a Chechen Muslim beheaded a French teacher who used the Charlie Hebdo cartoons of the prophet as examples of protected speech and press freedoms in secular France.

Macron’s perceived attacks on Islam triggered a personal insult from Turkey’s President Erdogan. This led to the recall of the French ambassador to Turkey. The clash over the blasphemous cartoons and the beheading of the teacher have provoked anti-French demonstrations across the Muslim world.

In the latest affront, Charlie Hebdo published a cartoon of Erdogan lifting the burqa of a woman, similar to the cartoon of the prophet that precipitated the 2015 massacre at the Paris offices of Charlie Hebdo.

European nations are lining up behind France, while the leaders of Muslim nations such as Bangladesh and Pakistan are damning the French for tolerating the ridicule of their religious beliefs.

“I disapprove of what you say, but I will defend to the death your right to say it,” Voltaire is said to have responded to Rousseau.

That may reflect French values. But, as Kipling wrote, “East is East, and West is West, and never the twain shall meet, Till Earth and Sky stand presently at God’s great Judgment Seat.”

Short sellers have largely been riding high this year, with a handful of notable victories, including Nikola, Wirecard and Luckin Coffee. But for every example of a short play hitting the jackpot, it seems there are another five where the investor got burned. And even when investors’ independent research stokes the interest of federal regulators and prosecutors, sometimes, the company can still come out on top (as we learned from Bill Ackman’s unsuccessful bet against Herbalife).

But in a rare example of a firm fighitng back against a successful short-seller campaign, Bloomberg on Friday published a lengthy feature chronicling a legal battle involving Kyle Bass and his firm, hedge fund Hayman Capital, and a Texas-based REIT called United Development Funding, or UDF.

For the bulk of this year, Bass has focused his attention on attacking China’s assault on freedoms in Hong Kong (back in 2019, he unveiled a long-shot bet that Hong Kong’s currency peg to the dollar might break). But the lawsuit brought against Bass by UDF has implications for the broader industry. Like everyboyd else, hedge funds have a first-amendment right to publish reports, even anonymously, outlining allegations of fraud or other irregularities that have, for whatever reason, been withheld from shareholders.

So when Kyle Bass logged in to Harvest Exchange, a popular Seeking Alpha-type platform, and posted his report outlining allegations of fraud at UDF under a pseudonym (allegedly because he wanted readers to focus on the information, not the source), he didn’t feel like he was wading into some grey area.

UDFs’ shares tanked on Bass’s research, and after more than a year of pestering the SEC and the DoJ, an investigation into UDF was eventually launched, and the firm’s offices were raided, sending its stock even lower.

Bass’s firm made only $10 million on the trade, a sum that was “not worth the five years of aggravation” that Haymen spent investigating UDF, including doing some serious forensic accounting, hiring PIs and investigating development sites.

An analyst at Hayman brought the idea to Bass back in 2014, after Bass’s fund had suffered several consecutive years of underperformance. UDF raised money from investors and then loaned it out to developers at above-market rates. UDF had continued to pay strong dividends despite the damage wrought by the financial crisis, which aroused suspicion, Bass’s analyst said. 

Here’s more from Bloomberg:

Bass’s analyst, Parker Lewis, learned about UDF from a friend, but at the time it didn’t have any publicly traded securities. Months later a large REIT raising money for UDF disclosed accounting errors, which prompted an FBI investigation. That led Lewis to question whether UDF was hiding its true financial situation. After months of research, he locked onto an explanation: When borrowers struggled to repay their loans, UDF used cash raised by newer funds to pay investors in older ones. Sometimes the newer funds would buy pieces of loans owned by the older ones in an effort to ensure that cash was available. These actions allowed UDF to keep paying the sizable dividends investors had grown to expect, which meant that it could continue attracting new investments.

To Lewis, it looked like a Ponzi scheme. By then, one of UDF’s funds had listed on Nasdaq and was a potential short target. Bass dismissed Lewis’s idea at first as being too small and too local. But Lewis was persistent. They had a massive fraud in their sights, he argued.

Bass alerted the SEC – via Hayman’s general counsel – but after burning through millions just borrowing the shares to finance the short against UDF, Bass made his move in December 2015, when he published the abovementioned anonymous report, which immediately went viral. Short-seller Andrew Left, who runs Citron Research, warned that the stock could go to zero. Banks immediately started pulling credit lines, and business partners cut ties, including blocking UDF from a lucrative deal. Then, the FBI raided the firm’s offices. Two years later, five executives agreed to a civil settlement with the SEC, and moved on.

But clearly, Hollis Greenlaw, a former tax lawyer who is the founder and driving force behind UDF, has been nursing a grudge, and is now trying to exact his revenge on Bass in the courts.

And in a bitter twist for the short-seller, Greenlaw’s lawsuit triggered the SEC to launch an investigation into Bass and whether he “knowingly published” false information, as Greenlaw alleges. His lawyers are now trying to get the government to turn over more nonpublic communications detailing Bass’s role in sparking the investigation into UDF.

Bass and Hayman have dismissed Greenlaw’s allegations as a “nuisance lawsuit”. But the argument being made is certainly interesting at a time when social media companies, and our society at large, struggles to parse the implications, and even the substance, of “misinformation”.

Authored by Steve Watson via Summit News,

CNN clown Don Lemon directly compared supporters of President Trump to drug addicts during a live broadcast Thursday.

Lemon also laboured on the point that he has “had to get rid of” friends because of their support for Trump, particularly on the issue of not living in fear of COVID-19.

“I have many people who I love in my life. I come from a red state, and I’ve lived in several red states,” Lemon ranted.

“There are a lot of friends who I had to get rid of because they are so nonsensical when it comes to this issue. They have every single talking point that they hear on state TV and that they hear from this president. They repeated, and they are blinded by it,” the host continued.

“I had to get rid of them. They are too far gone. I will try and try and try. They’ll say something stupid, and I will show them the science and give them the information, and they still repeat those talking points,” he continued to froth.

How much does CNN’s Don Lemon hate Trump supporters? He equated them to addicts that he had to “get rid of” from his life.
“I just had to get rid of a lot of people in my life because sometimes you have to let them go. I think they have to hit rock bottom like an addict. Right?” pic.twitter.com/JC0EGg6ExO

— Nicholas Fondacaro (@NickFondacaro) October 30, 2020

Imagine disowning a friend because they have a different opinion. That is the kind of twisted mindset Lemon and his fellow CNN activists have.

“If you look at the information that we put up last night that showed you how red states taken over where the blue states were.” He continued to rant.

“People came in from bigger cities where there is more transmission, obviously where people are closer together. Now the red states are the problem. I just had to get rid of a lot of people in my life because sometimes you have to let them go,” Lemon said, speaking as if his ‘friends’ are stray cats.

“I think they have to hit rock bottom like an addict. Right? They have to want to get help. They have to want to know the truth,” Lemon said, comparing Trump supporters to drug addicts.

90% of those who support either Trump or Biden believe the country will imploded if their candidate loses. They’re both right about that. Both candidates are only looking after THEIR family’s interest. Who’s looking after your family’s interest?

Imagine finding yourself being Don Lemon’s friend, and then having him tell you he is getting rid of you. It would be a kind of confirmation that you are a normal human being after all.

Judging by his previous rantings, the man actively dislikes anyone who wants to spend their income on having ‘fun’, while looking down on everyone from his huge swank pad in Sag Harbor.

“They have to want to live in reality and want to be responsible not only for other people’s lives but for their lives. It is so sad,” Lemon ordained.

Such wise and philosophical words old sage.

“I don’t know if, after this, I will ever be able to go back and be friends with those people,” Lemon added, again making it clear that he has gotten rid of friends, which definitely explains why he doesn’t have any left.

“At a certain point, they’re too far gone, and I got to let them go. If they’re willing to come back and willing to live in the reality, then I will welcome them with open arms. I can’t do it anymore.”

Maybe, in reality, it was the friends who got rid of Lemon.

Robinhood’s account security issues look like they have just gone from “bad” to “worse”.

When reports about Robinhood hacks started making their rounds earlier this month, the company said it only affected a “limited number” of accounts. Now, it looks as though that may be far from the truth.

Upon investigation by Bloomberg, it was discovered that a marketplace on the dark web is selling alleged access to over 10,000 email login credentials for Robinhood accounts. The number of Robinhood e-mail accounts available for purchase outnumber other brokerages by a factor of “5 to 1”, according to the report. 

Eli Dominitz, chief executive officer of Q6 Cyber, an e-crime intelligence firm explained to Bloomberg why he thought Robinhood emails were so much more prominent: “If they feel that Robinhood gives them greater upside than trying to steal money from Bank of America, that’s what they’re going to do.” 

In other words, hackers likely think that Robinhood’s response is going to be lackluster. 

Robinhood offered up the following excuse: “It is not uncommon for cyber-criminals to target customers of financial-services companies by attempting to use information sourced from the dark web.”

Robinhood also said there were “no signs” that its systems had been breached. But, again, this appeared to be the same boilerplate response we saw earlier this month after many accounts were confirmed to have been breached. 

While dark web data being sold isn’t always accurate, it often is, Dominitz noted. One of the latest offers made on the marketplace for the tranche of 10,000 emails was for just $3.50 per email. 

One Robinhood user, Ryan Bordner, hired an identity theft protection service after being hacked in mid-August. They told him that his information was “among those whose email credentials were sold on the dark web.”

Recall, in mid-October we pointed out that 2,000 Robinhood accounts had been hacked, with some having funds siphoned off to external accounts. 

Days prior to that report, we published  a story about Robinhood users who had seen their accounts looted and were at their wits’ end with the company’s customer service. Many affected claimed they were unable to contact anyone at the company after logging into their accounts and seeing their funds withdrawn. Robinhood claimed it was only “a limited number” of accounts that had been affected. 

But full credit to Bloomberg: at the time, they noted that these users weren’t just one-offs, but rather part of a larger group of customers who had been compromised.

This now looks like it could be the case.

Some users said they saw no signs of hacking and had two-factor authentication enabled on their phones for extra protection. Soraya Bagheri is one such example. She had 450 shares of Moderna liquidated from her account and saw that $10,000 in withdrawals were pending. She tried to alert Robinhood, but instead got an email back saying the company would investigate and respond within “a few weeks”. In the interim, her money was gone. 

Bagheri said she contacted the SEC and FINRA alongside of three other users who had a similar problem. Two of the four users said that the SEC has sought more information from them. 

One user, Miah Brittany Laino, said that two factor stopped one person from accessing her account on September 13 and then, after following Robinhood’s suggestion to change her password, her account was still hacked. The next morning she woke up to a nightmarish barrage of messages: “It said ‘This stock sold. This stock sold. This stock sold.’ It’s like if you wake up at 4
a.m. and your house is on fire.”

She said she received no response from the company and was unable to find a customer service phone number. She got a call from Robinhood on September 25, she said, informing her someone had created a fake ID under her name to re-activate her account, which had already been locked down for security reasons.

Robinhood eventually restored her money and her stock, but she said she will likely leave the brokerage: “I don’t want to sell right now. But I’m not going to put any more money into it. I don’t really trust them.”

Another customer, Robert Riachi, said his account is still “in limbo”. He told Bloomberg that “thousands of dollars” had gone missing from his account and that the company assigned him 10 different case numbers, even after submitting his ID to try and straighten out the issue. He had four years of savings in his account and says he will move to Schwab when he gets his money back.

“I feel like my money could be put somewhere else, somewhere that has a human person that I can talk to. It’s kind of ridiculous that an investment app that’s handling people’s livelihoods, people’s money, has the audacity to make people wait several weeks to hear back anything,” he said.