Gray Monday

  • Friday recap: turbulence beneath the market’s surface
  • Mother of a margin call (and a hedge fund default)
  • “Counterparty risk”? “Contagion”?
  • The 1998 collapse of Long Term Capital Management
  • James Altucher on the EV market’s “big problem”
  • Great moments in automotive customer service, Canadian edition
  • A reader’s warm and fuzzy NFT comparison.

So it’s not exactly a new “Black Monday.” But in pockets of the market, there’s an awful lot of gray out there today.

As you might recall, we devoted a goodly portion of our digital ink last week to the wisdom of taking out “disaster insurance” in the event of a sudden market downdraft.

We even mooted the possibility that events might break in such a way that today would turn out to be a new “Black Monday”… and even if it didn’t, a well-chosen “disaster insurance” policy would keep you covered in the weeks and months ahead, protecting the rest of your portfolio in the event of a big market sell-off.

All of which makes the events of the last 72 hours… well, intriguing.

As the Dow and the S&P 500 both sailed to record closes Friday afternoon, there was turbulence beneath the market’s calm surface.

Several hot Chinese tech companies sold off hard. Here in the United States, two old-media companies — ViacomCBS and Discovery — both cratered 27% despite a glaring absence of company- or industry-specific news.

What they all had in common was ownership by a hedge fund called Archegos Capital Management. Archegos is run by a fellow named Bill Hwang, who learned his trade at the feet of the hedge-fund legend Julian Robertson.

Archegos ran into trouble last week. Deep trouble. Hwang had big concentrated positions in a handful of companies, and they were starting to go sour. Worse, those positions were leveraged; that is, he borrowed money in hopes of juicing the gains he expected to book. But as the losses deepened, his lenders wanted their money back.

In other words, a margin call.

It appears Hwang did what anyone does in the event of a margin call — sell the assets on his books that are the most liquid, to raise cash.

In his case, that’s the very stocks he was betting would rise. By one account, he dumped a total $30 billion of shares in a series of “block trades” — most if not all of it on Friday.

Over the weekend, the plot thickened. It turned out Hwang couldn’t meet all his firm’s margin calls. A default.

Which immediately raised the question: Who’s left holding the bag?

Early this morning, the Swiss banking giant Credit Suisse issued the following statement: “A significant U.S.-based hedge fund defaulted on margin calls last week by Credit Suisse and certain other banks.”

It wasn’t hard to put 2 and 2 together. At last check, Credit Suisse’s New York-traded shares are down 12% on the day. Also holding the bag — the Japanese giant Nomura, down nearly 14%. Other banks had lesser exposure, and aren’t selling off quite so hard.

For the moment at least, the damage is contained and has not spread to the stock market as a whole.

It’s an ordinary down day — the Dow off 0.4% as we write and back below 33,000… the Nasdaq off two-thirds of a percent, near 3,950… and the Nasdaq down just over three-quarters of a percent but still holding onto the 13,000 level.

Volatility as measured by the VIX is up to 21.5… but that’s still substantially lower than it was for the first 10 days of this month.

Precious metals are selling off, but not precipitously — gold at $1,711, silver at $24.60. Crude is steady at $60.80. Bitcoin has rallied from $55,000 early this morning past $58,000 at last check.

But the question lingers: Who else might be exposed to losses that we don’t know about yet? Where else does “counterparty risk” reside? And might the “contagion” yet spill over into the market as a whole?

There’s an eerie passage in The Wall Street Journal’s coverage this morning: “The spreading pain from Archegos revived memories on Wall Street of Long Term Capital Management.”

LTCM, a hedge fund, collapsed in spectacular fashion in 1998. Its failure threatened to take down the rest of the financial system with it.

As you might be aware, our own Jim Rickards had a front-row seat for LTCM’s collapse — not as one of the bigwigs whose “can’t-lose” trades blew up, but as the firm’s general counsel.

It was Jim who negotiated that rescue. LTCM was able to cover its losses and prevent contagion from spreading to the derivatives trades of 14 major banks. (No taxpayers were harmed in this bailout.)

Reminder from our discussion last week: LTCM’s collapse was the climax to a major sell-off in 1998, which hammered the Dow 18.2% in only seven weeks.

The trouble began in mid-July when Russia’s government took a bailout from the World Bank and International Monetary Fund. It wasn’t enough; Russia defaulted a month later, and that’s what got LTCM into trouble. The market bottomed at the end of August, staged a modest recovery and then tumbled again as LTCM circled the drain in late September.

Only after the ink was dry on the bailout Jim negotiated did the crisis finally pass… and the market could stage a sustainable recovery at the start of October. It went on to set one record after another during 1999.

One more time, we’ll ask: If you were in the market in the summer and fall of 1998, wouldn’t you have felt better if you had a “disaster insurance” trade in place? Something that protected you from the losses you took elsewhere in your portfolio? Something that in an extreme case could pay out 40 times your money?

We don’t know where the story arc of Bill Hwang and Archegos Capital will ultimately lead. But we do know today’s the day to take protective measures.

Don’t take it from us, though; click here and take it from Jim Rickards himself. After all, he knows what a market contagion looks like up close.

Take heed of the recent sell-off in electric vehicle stocks, warns our James Altucher.

“With stocks of electric vehicle (EV) manufacturers like Nio (NIO), Tesla (TSLA), Lordstown (RIDE) and Lucid (CCIV) each down 30% or more in the past month, it might be tempting to buy the dip in EV stocks.

“However, the EV market has a big problem: It’s massively underestimating operating risks AND competition… while overestimating the market size.”

Don’t get him wrong. James thinks EVs have huge long-term potential based on the flows of venture capital money that are his forte. It’s just that the incumbent automakers are moving quickly now.

“Just last week, BMW announced plans to launch its first full-size electric sedan — the i4 — later this year. This is just one of the 25 EV models the company plans to have for sale by 2023.

“Not to be outdone, rival Volkswagen is quickly transforming itself into an EV powerhouse, with estimates projecting the firm will outsell Tesla in the EV market as early as next year.”

James sees better prospects in the autonomous vehicle market, especially the companies that make lidar — short for “light detection and ranging.”

Some of those names are also down 30% from their highs… but he thinks they’re “one of the most underrated opportunities in the auto market.” Readers of Altucher’s Investment Network got a handful of names to consider in last week’s subscriber update.

For the record: At least one member of Congress is now invested in cryptocurrency.

The website CongressTrading.com keeps a close watch on every member’s financial disclosure forms… and it’s just perked up at the latest filing by Rep. Mark Green (R-Tennessee).

As of 13 days ago, Green owned between $1,001–15,000 of Ethereum Classic… and similar amounts of Basic Attention Token and Celo.

A flash in the pan, or the start of something big? We’ll stay on it. [Hat tip to our investment banking veteran Nomi Prins for spotting this item. Nomi has a new project she’s rolling out later this week; watch this space.]

Great moments in automotive customer service, Canadian edition: Honda is offering less-than-helpful advice for owners who just want to make it through another winter.

“I feel like I’m driving a three-season car that was not made for Canadian winters,” complains Jean-François Beaulieu, a Quebecer who owns a 2017 Honda CR-V EX-L SUV. Nor is he alone.

Seems the interior just doesn’t get warm once the temperature falls below about 14 degrees Fahrenheit, or -10 Celsius. The same problem appears to plague the 2018 CR-V as well as the 2016–2018 Civics with a 1.5-liter turbo engine.

“Honda says the lack of heat is part of a problem involving excessive engine oil dilution, and announced a vehicle update campaign in late 2018 that was supposed to fix it,” reports the state-owned CBC network. “The update included new software, an oil change and, in some cases, a new air conditioning control unit.”

But many owners say it didn’t work. So it seems Honda is advising them to… go for longer drives.

“Honda gave me tips to get heat, they suggested I don’t use Eco mode, I don’t turn the fan up too high… and try not to stop and start while driving,” says Calgary resident Cathy Haugen. [Emphasis ours.] “I asked why I needed tips. Shouldn’t I be able to just turn the heat on and have heat?”

For the moment, no resolution is in sight. Honda offered to settle a class-action lawsuit, but many owners rejected the terms…

“Dave, about last Friday’s 5: I would put NFTs in the same category as Pet Rocks and Beanie Babies,” a reader writes.

“Just my two cents……. which is what they’ll be worth in a few years.”

The 5: Well, a casual search reveals there is a Beanie Baby that cleared eBay a few days ago for $3,750… but we get your point.

We can see the appeal of something that’s “signed by the artist” digitally via the blockchain if we’re talking about Jack Dorsey’s first tweet… but when it’s just a video clip of another LeBron James dunk? Ehhhh…

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. As we mentioned last week, the U.S. stock market has leaped 74% from its corona-crash lows in March of last year. A report just out from Deutsche Bank says that’s the market’s best 12-month performance since 1936.

We got cold chills when we read that.

Because we know just enough market history to recall that stocks quickly went on to peak in March 1937. From there, it was down relentlessly — more than 50% over the next 12 months.

No, we’re not saying history is certain to repeat, or even rhyme.

But it’s one more reminder about the wisdom of taking out “disaster insurance” to protect your portfolio.

Take a look at this presentation while there’s still time; it comes down at midnight tonight.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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