The Bag Holder

361 Capital Market Commentary | March 29th, 2021

It looks like the bag holders will be Credit Suisse, Nomura, and whoever else bought those big blocks of ViacomCBS. Expect some more names to pop up in the future because you don’t just vaporize $5 billion in liquid equities without a few folks getting singed. While the billions of dollars in pain should be concentrated in the hands of the biggest card players (because of their use of off-balance sheet swaps and derivatives) end holders of those shares could also be hard hit as the swaps were based on the price of common stocks. But then again, the prices of those same shares screamed upward for the previous three months. Is it beginning to feel a bit like a casino yet?

Fundamental investors are just observers here because they likely sold out of the affected stock positions in Q4 when the valuations ran beyond ridiculous levels. When the stocks hit price targets, you booked gains and it felt great. Then, many of the stocks doubled. There was no way that the Reddit/Retail crowd could have lifted the stocks because it would have taken billions of dollars. But then we found our answer this weekend when some big prime brokers fessed up to billions of dollars in losses due to their leveraged clients blowing up. Welcome to SpongeBob’s Revenge, the newest gut-wrenching theme park ride reserved for those credit-optional bankers who just became new members of the largest-trading-losses-ever club.

While this might be the end of the Archegos Capital trading loss, it won’t be the end of losses due to the extension of trading credit. Interest rates are low, and portfolios are wound up on leverage. This weekend caused an all hands-on deck review of clients and their trading portfolios. By next weekend, banks will have pulled back on some trading lines and some clients will have dialed down their risk taking. If you want to know which assets will likely get dialed down, then look no further than those assets that have been the best-performing over the short, near and long term.

The market had a smell to it last week and now we found the source of the stench. High beta, momentum and small caps were rolling over, while recent IPOs, SPACs, biotech and Reddit stocks also waned. It sure feels like risk wants to take a pause. Remember back when investors tripped over themselves to buy SNOW after its IPO? Well now they have moved onto the super sexy steel sector: X, NUE, STLD. Not your great, great grandfather’s first stock, no this is the new and improved U.S. steel and prices for what it makes, and what it trades at, are both going up and to the right.

What is causing the market angst besides ultra-leveraged investors drilling big black holes in banker and portfolio manager books? Worries about higher interest rates, higher inflation, higher taxes, and a stronger U.S. dollar are the easiest things to point fingers at. But as retail trading has become more important to moving prices, don’t forget that as the economy opens up and traders leave their homes (or Mom’s basement), they won’t be spending as much time slinging leveraged option positions or portfolios. It’s springtime, and love is in the air with anxious bartenders ready to grease the scene. (See Miami, FL.) Also, baseball starts this week, and we can go to the games once we get the vax. There will be other things to do rather than basement trade.

Keep an eye on credit. Time will tell if Archegos is the next Bear Stearns, or if it is just a lesson for some poor credit and risk decisions. So far today, the credit markets look good with high grade and low grade both outperforming Treasuries. It is a short week due to Good Friday and it will be an interesting one with possibly the biggest Non-Farm Payrolls number on record on a day that the stock market is closed. We could print a seven-figure number. Estimates are in the 600k to 800k range, but anything is possible. It’s also the end of the 1st quarter, so portfolios will be looking to window dress their positions (have more fun ViacomCBS) and factor/style-driven funds will be looking to rotate. Given what we know, some factors will see record changes to their positioning. Yes, we’re looking at you momentum style factor.

Note to Readers: In January, Hamilton Lane announced their intention to acquire 361 Capital with the closing expected to occur on or about April 1st, 2021. Starting next week, the Weekly Research Briefing will be delivered on Tuesdays. In addition, you might notice some changes to the look of the Weekly Research Briefing, but rest assured, Blaine Rollins will continue as the author, sharing his must-read news of the week.

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A reminder about investing with leverage…


“If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.” (also W.B.)

Some banks got rid of their exposures last week. But Credit Suisse and Nomura both lost 10-15% of their equity values today on the weekend’s announced news.

“A significant U.S.-based hedge fund defaulted on margin calls made last week by Credit Suisse and certain other banks. Following the failure of the fund to meet these margin commitments, Credit Suisse and a number of other banks are in the process of exiting these positions. While at this time it is premature to quantify the exact size of the loss resulting from this exit, it could be highly significant and material to our first-quarter results, notwithstanding the positive trends announced in our trading statement earlier this month”
– Credit Suisse (CS)

“Nomura Holdings, Inc. today announced that on March 26, 2021, an event occurred that could subject one of its US subsidiaries to a significant loss arising from transactions with a US client. Nomura is currently evaluating the extent of the possible loss and the impact it could have on its consolidated financial results. The estimated amount of the claim against the client is approximately $2 billion based on market prices as of March 26. This estimate is subject to change depending on unwinding of the transactions and fluctuations in market prices.”
– Nomura (NMR)


Who said derivatives aren’t fun?

Just secretly slinging around 10% slices of a corporation like they were cornhole bags. Ah, the joys of being a public company.

According to people familiar with the fund, the highly leveraged Archegos took big, concentrated positions in companies and held some positions via swaps. Those are contracts brokered by Wall Street banks that allow a user to take on the profits and losses of a portfolio of stocks or other assets in exchange for a fee.

The use of swaps allowed Mr. Hwang to maintain his anonymity, even as Archegos was estimated to have had exposure to the economics of more than 10% of multiple companies’ shares. Investors holding more than 10% of a company’s securities are deemed to be company insiders and are subject to additional regulations around disclosures and profits…

The episode reignites debate over whether the use of swaps presents a market vulnerability.


Pretty sure that a $5 billion trading loss gets you a slot in the top five of all time…

It is still unclear exactly where Archegos Capital fits into the annals of spectacular hedge fund blow-ups. But the early signs are that it will probably prove the biggest since Long-Term Capital Management’s collapse in 1998.

The saga erupted into the open last Friday, when Goldman Sachs and Morgan Stanley broke cover and started dumping multibillion-dollar positions in US and Chinese stocks. They did it on behalf of an unnamed investment fund that had failed a “margin call” — essentially a demand to put up more collateral against its trades.

That sparked an epic whodunnit across markets, with Archegos — an obscure, remarkably opaque investment group run by Bill Hwang, a former Tiger Management hedge fund manager with a chequered past, quickly identified as the primary party involved. By Monday, Credit Suisse and Nomura were admitting that they would probably lose billions of dollars in the fallout.



Tweet from @awealthofcs

If anyone ever tries to tell you that the stock market is efficient or rational just hand them these two charts…

ViacomCBS and Discovery

The public markets have gotten less efficient and more volatile as fundamental investors become a smaller share of the investor base…

In US equities, passive funds are now roughly as large as the actively managed investment universe after a decade of rampant growth, while retail investors now account for nearly as much as all mutual and hedge fund trading combined.

Griffin highlighted how an oblique tweet of a McDonald’s ice cream cone and a frog emoji from Ryan Cohen, a big GameStop shareholder, appeared to be the spark for a doubling of the stock’s price in one afternoon in February.

“The fact that the tweet of an ice cream cone can move markets will be the subject of academic study for years,” Griffin said. “It represents a dynamic where certain stocks are now almost exclusively owned by retail and passive funds. You’ve taken out active investors who focus on traditional metrics in valuing an equity.”


If it’s Monday, then that must mean U.S. airlines are raising guidance again due to better-than-expected weekend bookings…



A new Monday also means a hike to GDP forecasts…

Tweet from @carlquintanilla

Chase’s card volumes are lifting off…

Must have been all that patio furniture that I bought this weekend. Luckily I found some in stock and not touring the Suez Canal.

Chase consumer card spending tracker

Do you still need proof that guys will stop trading stocks and leave the basement?

The owner of Victoria’s Secret raised its quarterly profit forecast for the second time this month after seeing an “unusual” shopping surge triggered by the latest round of stimulus checks and relaxing of Covid-19 restrictions.

L Brands Inc., which also owns the Bath & Body Works chain, now expects earnings of 85 cents to $1 a share for the period that runs through April, the company said Friday in a statement. The new forecast, coming just two weeks after L Brands boosted the outlook to as much as 65 cents a share, far outpaces the 52-cent average of analyst estimates compiled by Bloomberg.

It’s an early sign that the stimulus package will have a meaningful impact on the beaten-down retail sector, which has impatiently waited for economic shutdowns to end and struggling consumers to get more cash. The pandemic has had an uneven impact across categories, with clothing sales falling sharply while home goods and grocery demand rose.


If you need to sell a used car, now is your time. If you need to buy a car, then I am sorry for you…

@biancoresearch:The latest surge (Dec to Feb) was after the $600 stimmy checks went out in December. Coming is a base effect (when the YoY gets compared to April) and $1,400 stimmy checks. Good thing we have no inflation.
@zerohedge: Here It Comes: Used Car Prices Soar 3% In Just The Last 2 Weeks

The Manheim Index of Used Car Prices

Will we get a seven figure non-farm payroll number on Good Friday?

If not this month, then it will happen another time as restaurants go on a hiring spree ahead of summer.

The Manheim Index of Used Car Prices

The Philly Fed has launched…

@UPFINAcom: The Philly Fed manufacturing survey from March reached the 2nd highest reading ever. This data goes back to the late 1960s.. 58.9% of businesses said general business activity was up from February. Just 7.1% said it was down.

Philadelphia Fed Business Outlook

Manufacturing backlogs leads to increased hiring plans…

Kansas City Fed Manufacturing

Steelcase says that they are very busy…

“The project opportunities we track and the customer RFPs we received saw double-digit increases in February versus January, and our customer visits to Grand Rapids, including both physical and virtual visits, more than doubled. And those trends have continued through the first few weeks in March. So, our salespeople are very busy. Our pricing and quoting people are busy. And our leadership team is busy as customers want to know how we see the new workplace emerging. We’re hearing the same thing from the design firms we work with. They are busy and expect to continue to get busier through the spring.” – Steelcase (SCS) CEO Jim Keane


As does the rebound in the Architectural Billings Index…

Billings index points to CRE improvement

What if operating margins launched higher throughout 2021?

Many businesses have cut back and learned to operate with less. This analyst note says that Darden will be raising wages, but it also suggests they could do more with fewer workers. I bet a lot of businesses will be doing the same. So, if raw material costs can be managed, margins could explode.

Darden highlighted staffing as its greatest challenge, as well as one of its most significant competitive advantages, and what we view as a key driver of potential upside for the top & bottom lines. To further strengthen its employee proposition, DRI announced plans to raise wages to ensure all hourly employees earn $10+ beginning 3/29, with subsequent floors planned for January 2022 (to $11) & January 2023 (to $12). We do not expect the increases to be broad based in nature, noting hourly employees already earn $17+ on average today, including $20+ for servers & bartenders, with raises likely to apply to a subset of non-tipped workers.

(Credit Suisse)

Two very relevant commodities to China: steel rebar and pork…

SHFE Steel Rebar Futures

Good thing food prices are removed from the core inflation numbers…

Yeah, I know, nothing to joke around with. COVID shortages and plenty of bad weather on our blue marble are to blame. Keep an eye on all food prices here.

Food prices up 27% past 9 months


The maker of Cheerios is planning for 3% inflation. And KB Homes only laughs at current inventories…

“Well, certainly, at a high level, we are preparing for higher inflation…for the full year, we are still expecting about 3% inflation…inflation is very broad-based and it’s actually global. So we are seeing it across the globe we are seeing inflation and it’s broad-based across commodities, across logistics, across things like aluminum and steel.”
– General Mills (GIS) CEO Jeff Harmening

“As to overall market conditions, supply remains tight with existing home inventory down nearly 30% year-over-year. Resale home availability is sitting at record low levels, representing two-month supply and further below that level in many of our markets. This, combined with the underproduction of new homes over the last decade has resulted in supply being virtually nonexistent.”
– KB Home (KBH) CEO Jeff Mezger


But they said San Francisco would become a ghost town…

@IAPopov: San Francisco rent rebounds coming in hotter and sooner than we expected. With vaccine rollouts and office reopenings accelerating, the pendulum is starting to swing back.

Rent Rebound

Long-term market-based inflation expectations continue to move higher…

US 10yr Breakeven

Not just in the U.S. but also in the Eurozone…

Germany 10yr Breakeven

Value stocks tend to act well during bond yield rallies…

Value Rallies along with Bond Yield

Speaking of value, the transports are breaking out to all-time highs…

Dow Jones Transportation Average

Homebuilder ETFs are also breaking out and most of their non-retail components tend to have value multiples…

@JackDamn: The Home Builders ETFs are up tapping new all-time highs today. $ITB and $XHB both up about +3% today, and +22% YTD.

Homebuilders ETFs

Earnings estimates continue to rise which is great (and necessary) news for stocks…

Earnings estimates

Time to rotate your style factors!

Momentum Funds and ETFs may see the biggest turnover in their history this quarter and you may not recognize the holdings by the end of the week. Moving In: REITs, banks and media. Moving Out: Zoom, Peloton and Docusign.

Momentum Composition

Tech stocks have begun to see outflows…

I wonder how much will be given back after 5 years of monster inflows?

Tech Stocks

A good piece in Barron’s with Tony Sacconaghi talking tech valuations…

“Look, momentum is a really powerful thing, and during growth markets you can make hay,” Sacconaghi says. “That’s the environment we’ve had.” Tech stock returns have been driven by a combination of accommodative Federal Reserve policies and the accelerated adoption of technologies during the pandemic.

But investor behavior is shifting. Tech shares have underperformed the broad market by about four percentage points this year, according to Sacconaghi. The most expensive names are running 10 points behind and the stocks at the other end of the valuation spectrum—the cheapies—have beaten the market by about 6%. “In short, what went up is indeed starting to come down,” he writes.

This corrective process could last awhile. Sacconaghi’s data, which stretches back 50 years, shows dramatic underperformance for companies trading at a high multiple of sales. He looked at the returns of stocks carrying price-to-sales multiples of 15 or higher. From 1970 to 2020, those trading at 15-plus sales spent the next three- and five-year periods, with average relative returns of minus 18% and minus 28%, respectively.

At 20 times sales, the three- and five-year returns are even worse. In fact, the higher the valuation, the worse the long-term returns.


Pricey Stocks, Bad Returns

It’s not just valuations, but investors no longer want to own ‘from home’ stocks…

Spring hasn’t been kind to stock-market highfliers.

The sectors that benefited most from the pandemic-inspired shift to working from home have fallen hard since late January, as rising interest rates pushed investors into investments promising surer returns. Hot technology firms and blank-check merger companies have tumbled from their highs, pushing the Nasdaq Composite Index down 8% from its latest record close last month…

After their long run-up, many once-hot stocks are “very vulnerable to a continued correction,” said Andrew Slimmon, managing director and portfolio manager at Morgan Stanley Investment Management. He said multiples remain stretched even after recent selling.

Conditions couldn’t have been much better for growth stocks last year. The collapse of interest rates made investors willing to wait well into the future for potential profits, while the coronavirus pandemic boosted the outlook for companies that were in a position to provide in-home entertainment or help people stay connected virtually.


Big Losers

It looks like risk-off across the board to me…

Risk Off

Saturday Night Live even did a skit with the riskiest of all asset classes this weekend…

“[NFT] is an alternative digital emerging asset. I don’t think we could find many more risky categories of assets at this point. I think it’s probably, at this stage, akin to going into the casino. You know you’re going to spend money but maybe you’re doing it for enjoyment, for the experience. If you win, you’ve got lucky and I think it’s the way we need to think about it at this point; it’s in its initial phase… What I think we’ve seen increasingly over the past few months is people trying to register NFT-based ownership over other people’s copyrighted tweets… We’ve seen many instances of artists having their works effectively plagiarized by people minting NFTs of their work even though they weren’t the creators…I do expect NFTs to be some of the bedrock economic infrastructures within the virtual economy as it emerges over the next ten years, especially as that virtual economy begins to emerge out into the real world.” – BNP Paribas CEO John Egan


Kevin, they obviously were attracted to its dividend yield…

I’ve had some strange experiences in my career as a journalist. But nothing even remotely prepared me for the experience of watching total strangers competing to spend hundreds of thousands of dollars for a picture of my words.

A few weeks ago, I decided to write a column about the rise of nonfungible tokens, the hottest craze in the cryptocurrency world, with a meta twist: I would turn the column itself into a NFT and put it up for auction, with the proceeds going to The New York Times’s Neediest Cases Fund…

After more than 30 bids, the auction ended at 12:32 p.m. Eastern time, with a winning bid of 350 Ether, or about $560,000. A few minutes later, after the auction platform had taken its cut, nearly $500,000 in cryptocurrency landed in my digital wallet. I was stunned. Congratulatory texts and media requests started pouring in. My colleagues joked about stiffing the charity and slipping off to the Cayman Islands. My editor said I shouldn’t expect a raise.

The whole ordeal was surreal, and it raised the question: Why would anyone spend the price of a high-end Lamborghini on a picture of my words? After all, the NFT was just a cryptographic signature linked to an image of a column that anyone could read on The Times’s website, albeit with a few bonus perks.


The New York Times

So, Amsterdam is now the capital of European equity trading…

European equity markets opened on Jan. 4 to a once-in-generation, “big bang” shift. Nearly all of the trading volume in shares of European companies that was handled in in the U.K. bolted to the EU. London soon lost its crown to Amsterdam as the continent’s top place to buy and sell shares.


Amsterdam Rising

Warren Buffett offers to save Texas from future power disruptions…

Is there anything that Warren doesn’t do besides extend buckets of credit to hedge fund managers?

Warren Buffett’s Berkshire Hathaway Inc. is proposing an $8.3 billion plan to help Texas avoid a repeat of February’s blackouts: Building a lot of new natural gas plants.

The conglomerate is asking state lawmakers to approve a plan for a new company that would add about 10 gigawatts of gas plants and emergency gas storage, according to a presentation seen by Bloomberg. The Texas grid operator would control the plants and could tap them to prevent blackouts like the one that left more than 4 million homes and businesses in the dark.

“We really want to make sure that this never happens again. So we’re really wanting to partner with the state,” Chris Brown, chief executive officer of Berkshire Hathaway Energy Infrastructure Group, said in an interview. “The proposal is simple: state residents should have a reliable source of backup power.”…

Under the proposal, Texas power customers would pay a fee to cover the costs of the plants. In exchange for making the investment, Berkshire is proposing to earn a 9.3% rate of return, which would need to approved by state regulators…

The additional capacity created by Berkshire would ensure that no customer would be without power for more than three hours, the company said. The Texas Reliability Corp. would offer a $4 billion performance guaranty provided by an investment graded counterparty.


I won the COVID-19 vaccine lottery on Friday…

Almost gave up after three days of hitting refresh on the Colorado website. But all the dots turned green for me on Friday when Walgreens released several hundred appointments during the 6am hour. All of us who qualified here at the firm grabbed a slot and I got my Pfizer vax the next day. I think that the happiest job in America right now must be the nurses who give out the shots. Can’t wait to go back and see her in four weeks.



mRNA has provided us with miracle COVID-19 vaccines, but this might only be just the beginning for its science…

Synthetic mRNA, the ingenious technology behind the Pfizer-BioNTech and Moderna vaccines, might seem like a sudden breakthrough, or a new discovery. One year ago, almost nobody in the world knew what an mRNA vaccine was, for the good reason that no country in the world had ever approved one. Months later, the same technology powered the two fastest vaccine trials in the history of science…

In the case of the coronavirus that causes COVID-19, mRNA vaccines send detailed instructions to our cells to make its distinctive “spike protein.” Our immune system, seeing the foreign intruder, targets these proteins for destruction without disabling the mRNA. Later, if we confront the full virus, our bodies recognize the spike protein again and attack it with the precision of a well-trained military, reducing the risk of infection and blocking severe illness.

But mRNA’s story likely will not end with COVID-19: Its potential stretches far beyond this pandemic. This year, a team at Yale patented a similar RNA-based technology to vaccinate against malaria, perhaps the world’s most devastating disease. Because mRNA is so easy to edit, Pfizer says that it is planning to use it against seasonal flu, which mutates constantly and kills hundreds of thousands of people around the world every year. The company that partnered with Pfizer last year, BioNTech, is developing individualized therapies that would create on-demand proteins associated with specific tumors to teach the body to fight off advanced cancer. In mouse trials, synthetic-mRNA therapies have been shown to slow and reverse the effects of multiple sclerosis. “I’m fully convinced now even more than before that mRNA can be broadly transformational,” Özlem Türeci, BioNTech’s chief medical officer, told me. “In principle, everything you can do with protein can be substituted by mRNA.”


It’s too bad that Disney doesn’t have any casting power for its new shows…

There will only be about 1 billion people who will turn in to watch this new series. #WhyDidntIPutAllofMyNetWorthIntoDisney1YearAgo?


And finally…

Don’t forget to look for next week’s issue arriving on Tuesday, April 6. Have a great week!

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