Month: September 2022

Short seller Hindenburg Research, best known for publishing a scathing report on EV startup Nikola that culminated in the company’s founder and CEO currently in the midst of a criminal trial, followed up on its findings yesterday, revealing an angle to the story that included possible espionage, hacking and deception.

The short seller said in a 45-Tweet thread yesterday that shortly after its report on Nikola was released in late 2020, the company and the whistleblowers that helped it gather information were targeted by “an army of hackers and spies” – several of whom tried to identify whistleblowers involved the research.

The espionage efforts to unmask the whistleblowers, which Hindenburg attributes to Nikola founder Trevor Milton, were met by Hindenburg’s own team, who set up an elaborate sting operation, complete with hidden cameras, white hat hackers, pseudonyms and surveillance, to lift the cloak on those who were targeting them. 

After their Nikola report, Hindenburg says “a former Nikola employee had his phone account hacked and his messages & emails breached.” The same former also told the short seller “that the retired head of New York’s DEA office, James Hunt, was knocking on doors in Utah, flashing his DEA badge and asking former colleagues questions about him.”

The former Nikola employee later told us that the retired head of New York’s DEA office, James Hunt, was knocking on doors in Utah, flashing his DEA badge and asking former colleagues questions about him.

(4/x) pic.twitter.com/rMUJVij3Wt

— Hindenburg Research (@HindenburgRes) September 29, 2022

Then, a “key [Nikola] whistleblower” that the company was in touch with was targeted by a suspicious email from a “journalist” with a “too good to be true” offer for more dirt on the company.

The short seller suspected something nefarious was afoot and that the identity of their whistleblower was being targeted. So, instead of ignoring the outreach, they hired a technology expert, and offered to meet the solicitor in a New York City park. 

An email the whistleblower got included a link that “had hallmarks of a social engineering attempt, and possibly phishing”, Hindenburg wrote. 

In early October, whistleblower @InsiderNikola got an email from a woman named “Natalia” who claimed to be a journalist with access to The Guardian.

She emailed from a Gmail account with the username “Natalia007”.

(7/x) pic.twitter.com/J74iJgO59G

— Hindenburg Research (@HindenburgRes) September 29, 2022

At an agreed upon location in NYC, Hindenburg founder Nathan Anderson went undercover, wired with hidden cameras, and acted as though he was the whistleblower that the “journalist” was looking for. The “journalist” who had reached out to the company’s whistleblowers had promised to deliver another whistleblower of her own, complete with additional files on the company on a USB drive and documents in a manila envelope.

At the meeting, Hindenburg suspected they were being surveilled, so they set up their own counter-surveillance team. 

They were eventually met by a woman with “a strong Eastern European accent” who said she had come from Florida to introduce the team to another whistleblower. Eventually, that person showed up with a USB drive that he claimed had “lots of documents” on it.

The “whistleblower” pried for information from Anderson, asking about whether or not the short sellers had been in touch with the government.

Throughout our conversation, the “source” kept leaning in, cupping his ear, saying he was having a hard time hearing us. (Smooth, right?)

He was very interested in whether we’d spoken to the government, or to journalists.

(31/x) pic.twitter.com/7KkuPBjTaN

— Hindenburg Research (@HindenburgRes) September 29, 2022

The short sellers eventually unmasked themselves and revealed their identity and camera crew, and took possession of the USB drive. At that point, the spies began to panic, according to Hindenburg. 

“I’m not saying nothing else without my attorney…I have a right!” the Eastern European “journalist” told Hindenburg. The other man involved, disguised as the “journalist’s” whistleblower “up and bolted” from the table, the thread says. 

Hindenburg later found that “that there were at least 3 operatives in the park” surveilling them, one of which their team was able to get a photo of, as he openly recorded the meeting.

Hindenburg says they were able to identify several of the operatives involved in the counter-intelligence operation. The “journalist” was a used car saleswoman in Miami, they said. Her associate, acting as another Nikola whistleblower was a former DoD contractor with intelligence experience. 

They also said they were being surveilled by a car that was owned by a retired NYPD detective who works security.

The whistleblower whose identity was being targeted during the incident was the first witness at Nikola founder Trevor Milton’s trial, Hindenburg wrote. “His testimony was damning,” the thread concluded.

You can read the entire thread with the details of the sting, unraveled, at this link. 

By Simon White, Bloomberg Markets Live reporter and macro strategist

The price of deeper out-of-the-money insurance in equities is falling, implying lower demand for crash insurance. This suggests the market believes the Fed put is getting closer.

A conundrum all year has the been the relatively low level of the VIX despite equity markets being in a bear market. The VIX has been low relative to implied volatility, relative to longer-term volatility, and remains low compared to cross-asset volatility. Most notably, though, the VIX has been low — and continues to fall — versus at-the-money (ATM) volatility.

This is due to the price of further out-of-the-money (OTM) put options falling by more than options that are less out of the money. We can see this by looking the difference in volatility between 80% and 90% out-of-the­-money put options and see it has been falling.

As the VIX is a weighted average of all S&P options with approximately 1-month to expiry and that have a non-zero bid, the lower price of these deeper out-of-the-money options is keeping the VIX lower relative to at-the-money volatility than it otherwise would be.

Puts have still been in demand though. The put/call volume ratio has been rising, showing that investors are buying more puts relative to calls. But the put/call price ratio has been falling, showing that investors have been paying relatively less for those puts.
Investors have therefore not been paying up as much for crash insurance, and buying puts that are less out of the money.

The Fed is now well into its hiking cycle, and the market is inferring it believes the Fed put is getting nearer. Certainly, current oversold conditions suggest a short-term bounce is at hand.

But while excess liquidity remains depressed, it will be hard for the market to make new highs. The Fed put may be closer, but that does not mean the bear market is over.

The headline from the UMich Sentiment survey continues to be inflation expectations which fell once again in September’s final data to 4.7%.

However, that is above expectations of 4.6% and above the flash print of 4.6% from early September.

Source: Bloomberg

At 2.7%, median long run inflation expectations fell below the 2.9-3.1% range for the first time since July 2021.

Inflation expectations are likely to remain relatively unstable in the months ahead, as consumer uncertainty over these expectations remained high and is unlikely to wane in the face of continued global pressures on inflation.

But it does confirm the plunge in inflation expectations across other markets and surveys…

So having got that out of the way, the rest of the survey shows sentiment for consumers across the income distribution has declined in a remarkably close fashion for the last 6 months, reflecting shared concerns over the impact of inflation, even among higher-income consumers who have historically generated the lion’s share of spending.

Finally, the actual headline sentiment survey showed very little progress and in fact weakened intra-month with expectations sliding from 59.9 flash to 58.0 final.

The Chicago PMI survey plunged unexpectedly back into contraction in September (to 45.7 versus 51.8 expectation). That is the lowest print for the survey since June 2020…

Source: Bloomberg

None of the underlying components rose relative to last month:

• Prices paid rose at a slower pace; signaling expansion

• New orders fell at a faster pace; signaling contraction

• Employment fell and the direction reversed; signaling contraction

• Inventories rose at a slower pace; signaling expansion

• Supplier deliveries rose at a slower pace; signaling expansion

• Production fell and the direction reversed; signaling contraction

• Order backlogs fell and the direction reversed; signaling contraction

Just add it to the list of recession red flags…

After making landfall in southwest Florida on Wednesday afternoon and being downgraded to a tropical storm on Thursday traversing the central part of the state, Ian entered the Atlantic Ocean the overnight and strengthened into a Category 1 hurricane as it barreled toward South Carolina. 

Heavy rain and high winds are beginning to hit South Carolina and North Carolina coasts early Friday as the dangerous storm is located about 140 miles south-southeast of Charleston, South Carolina. The storm is moving north-northeast at 9 mph; Ian has maximum sustained winds of 85 mph.

“Hurricane-force winds are expected across the coasts of South Carolina and southeastern North Carolina beginning early Friday, where a hurricane warning is in effect.

“Hurricane conditions are possible tonight along the coasts of northeastern Florida, Georgia, and North Carolina where a hurricane watch is in effect,” Eric Blake, a forecaster at NHC, wrote in a daily update.

The Carolinas are expected to experience “life-threatening storm surge and hurricane conditions” today as the storm is expected to make landfall this afternoon.  

Mike Doll, a meteorologist at AccuWeather, said when the Ian makes landfall north of Charleston, areas can expect a 4-7 feet storm surge and rainfall totals up to 8 inches. 

According to a White House statement, President Biden declared an emergency in South Carolina and ordered federal assistance ahead of the storm’s landfall. 

Ian’s imminent South Carolina landfall comes after leaving a destruction trail across southwest Florida. Florida Governor Ron DeSantis said the storm unleashed a “biblical storm surge” that decimated city streets, buildings, and residential homes around the Fort Myers area. 

By Drew Singer, Bloomberg ECM reporter

The funding void created by this year’s stalled market for initial public offerings is getting deeper, leaving cash-hungry startups scrambling for backup plans.

Surging interest rates and repeated market volatility have forced many companies to postpone plans for US IPOs. New issues raised just $2.7 billion in New York in the past three months, the lightest third quarter since 2008, according to data compiled by Bloomberg that excludes special purpose acquisition companies.

This is the third weak quarter in a row and represents a dramatic change from just last year, when historically low interest rates supported record levels of IPO activity. Many of the companies that were planning to go public in 2022 shelved the idea as valuations tumbled in a volatile market, Goldman Sachs strategists including Ryan Hammond wrote in a note on Wednesday. As a result, IPOs have raised $137 billion less than they did at this point in 2021.

“The market for initial public offerings has frozen this year,” they wrote. “The jump in the cost of capital has reduced the valuation of all companies, public and private. But the impact has been particularly severe for fast-growing firms that typically comprise a significant share of annual IPO volume.”

So, companies have sought other ways to raise funds. Private funding rounds by some firms are accompanying a slew of mergers with either large conglomerates or a buyer among an army of deal-hungry SPACs.

Meanwhile, new plans to go public are being announced at their slowest rate in years. Just 64 companies filed for potential IPOs during the third quarter, according to data compiled by Bloomberg, the fewest in any quarter since 2009.

“We’re getting into the kind of market where people are just saying there’s capitulation,” David Ethridge, US IPO services leader at PricewaterhouseCoopers LLP, told Bloomberg this month. “They’re busy people, and maybe they don’t want to fight at the board level about getting the process started when we’re not hearing anything good about IPOs.”

The developments are weighing on a strong pipeline. Top IPO candidates include Mobileye NV — Intel Corp.’s self-driving unit — plus pandemic darling Instacart Inc. and social-media firm Reddit Inc., home of the influential WallStreetBets community of retail traders.

Intel this month scaled back its expectations for Mobileye’s valuation due to the broader market slump and might delay the listing until next year, according to people familiar with the process. Instacart, whose valuation also took a hit this summer, reportedly told investors that it wasn’t planning to issue many new shares in its IPO, which could happen as soon as the fourth quarter. Reddit’s listing also remains in limbo after previously targeting an IPO as soon as the first quarter of this year.

“People really don’t want to come to market when they could have gotten 20% more just a few months ago,” Georgetown University finance professor James Angel said in an interview. “We’re in a bear market and it feels like a recession is on its way. That means it’ll be a bumpy ride for the equity capital markets, and we probably wont see a lot of IPOs in these downdrafts.”

However, some of the smallest of firms in the market have provided an exception to the lull. An unusually frequent number of microcaps have delivered massive and often-fleeting price surges after conducting IPOs that typically raised less than $50 million apiece. This week, electric-vehicle charging firm Atlis Motor Vehicles Inc. traded as much as 918% above its offering price during its first two days as a publicly listed firm.

Nasdaq is increasing its scrutiny of smaller listings after the string of pops that also included a 32,000% rally in AMTD Digital Inc. and spikes in firms such as Forza X1 Inc. and Treasure Global Inc.

Despite the year’s broader downturn, many dealmakers expect deal flow to return once the market stabilizes. Bank of America Corp. Chief Executive Officer Brian Moynihan this month called the pipeline “very full,” while JPMorgan Chase & Co. President Daniel Pinto expressed caution about cutting bankers in case the market bounces back.

Others, however, are less optimistic.

“We’ve had a very mild bear market after many years of rallies,” Angel said. “I remember living through the 1970s. It could get a lot worse.”

It was all the way back in May when we first warned that a reversal of the “shortage of everything” bullwhip effect was coming, as soaring inventories (the result of covid-era overordering due to snarled supply chains) are about to hit a slowing economy brick wall, and prices are about to fall off a cliff as companies are forced to liquidate said inventories into a recession (see “Bullwhip Effect Ends With A Bang: Why Prices Are About To Fall Off A Cliff” from May 23), a point we also made repeatedly in the months that followed (“Bullwhip-Effect Reversal Is The Major Downside Growth Risk“; “The ‘Bullwhip Effect’ Will Frustrate The Fed“). And while the market largely ignored what was coming with the occasional exception…

Reverse bull whip effect strike again this time at NVDA which takes $1.3BN inventory charge: “Second quarter results are expected to include approximately $1.32 billion of charges, primarily for inventory”

— zerohedge (@zerohedge) August 8, 2022

… it wasn’t until last night’s Nike earnings “shock” that the full extent of the reverse bullwhip became apparent.

For those that missed it, NKE shares plunged some 10% overnight, their biggest post-earnings drop in 20 years, after the sportswear giant cut its margin outlook for the year while reporting precisely what we warned would happen as the reverse bullwhip effect kicks in, namely surging inventory, fueling worries over consumers’ ability to spend as inflation takes a toll. And even though all of this was perfectly visible for those who bother to look, the market was so shocked that Nike stock is in freefall this morning, suffering one of its biggest post-earnings drop on record.

And, as they always do after the fact, analysts slashed their targets on the retailer, saying that even a big brand like Nike isn’t immune to macro pressures, even if the longer-term outlook is rosier. Here is what analysts are saying:

Morgan Stanley (overweight, PT cut to $120 from $129)

• Analyst Alex Straton flags high macro and supply chain volatility, full- year numbers falling, and long-term targets pushed out
• While Nike’s discounted valuation feels fair, it also makes for a potentially attractive entry point for long-term investors

Guggenheim (buy, PT cut to $135 from $155)

• Analyst Robert Drbul continues to believe that many of the issues Nike is facing are transitory, including “bloated” inventory levels and supply/demand imbalance, with “significant” gross margin pressure

RBC (outperform, PT cut to $115 from $125)

• Excess inventories in North American have been the main “fear” among investors in recent weeks and months, writes analyst Piral Dadhania
• Nike’s results show that it too isn’t immune, with material inventory build, lower than expected gross margin and a guidance cut
• Keeps outperform rating on strong revenue growth and potential China recovery

Stifel (buy, PT cut to $110 from $130)

• Nike’s demand strength was overshadowed by ballooning inventories that will weigh on margin, analyst Jim Duffy says
• Among positives, highlights solid back-to-school, and better-than-feared Greater China results

Citi (neutral, PT $93)

• While the inventory buildup is mainly due to supply chain timing issues, Nike must walk a fine line between heavy liquidation sales and protecting the health of its brand near and longer-term, analyst Paul Lejuez writes
• Risk remains even for a strong brand like Nike, especially if macro environment weakness further

BMO Capital Markets (outperform, PT cut to $110 from $128)

• Analyst Simeon A Siegel notes Nike beat on revenues and EPS, missed margins and lowered its guidance

Jefferies (buy, PT cut to $115 from $130)

• Analyst Randal Konik notes Nike still has strong demand and remains attractive in the long term, but cuts its PT on near-term volatility
• Points to healthy top-line performance, EPS beat driven by cost discipline as positives for the quarter. Elevated inventories and below-consensus China sales were cited as negatives

Wells Fargo (overweight, PT $130)

• Analyst Kate Fitzsimons pointed to revenue upside and cost controls, but noted gross margin missed on outsize freight and logistics costs, FX headwinds and higher markdowns

Commenting on the collapsing price, Bloomberg technician William Maloney writes that NKE is in long-term downtrend from November peak; and is already well below the pre-pandemic high. Chartists will note that a potential initial support zone is $84- $86, and if $84 fails, next potential support $78, $81.

While it is unclear if NKE will plunge that far, one thing is certain: get ready for a whole lot of 50%-off deals on Nike sneakers.