[Market Madness] Edition 0141
Q1 Quarrels
What’s new
Administrative topics and an introduction
Well folks, cheers to the end of a WILD first quarter. It has been a really interesting and memorable quarter, in a lot of respects. 2021 Q1 felt more like 2020 Q5 than a whole new year. As I say, there is never a dull moment, or never a dull moment for very long.
In all the chaos of the quarter, I forgot to mention that we’ve passed one year of Market Madness! Thank you all for being a part of this journey. We’ve changed things a lot since edition 1, but it is still the same goal at its core. Diving into this mission on 03/29/2020 was one of the best decisions I could have made.
At a bird’s eye view, we saw the S&P cross 4,000, the NFP report for March was incredible, and Archegos lost over $8 billion at 500-700% leverage.
*I updated the Archegos section after a reader informed me my reporting on the estimated losses was incorrect. They have since been fixed. Thank you and apologies for any errors.
Let’s get into some stories.
Did you miss the last edition? No worries! Get it right here and catch up on the madness.
Fundamentals
Where did the markets end last week?
U.S. Indices 5 Day Performance
Dow Jones: +1.64%
S&P 500: +2.84%
NASDAQ: +3.88%
Asia and Europe 5 Day Performance
Nikkei 225: +2.94%
Hang Seng: +3.72%
FTSE 100: -0.02%
DAX: +3.32%
Rates, Spot Prices, and ‘Good to Knows’
Market Madness Portfolio: +3.05%
CBOE Volatility Index (VIX): 17.33
US 10 YR: 1.720%
Crude OIL: $61.24
Spot Gold: $1,734.82
TEDRATE: 0.18
LIBOR (3 month): 0.19975%
U.S. Dollar Index: 93.011
EUR/USD: $1.1761
Pound/USD: $1.3829
USD/JPY: 110.67 JPY
USD/CNY: 6.5646 CNY
Weekly update
An article by Christopher
Financial markets
Stocks were a hot topic in Q1 2021 and helped provide the fuel for an unforgettable first quarter. A lot happened in this quarter. We started it with an insurrection and a short squeeze on GameStop, and we ended it with one of the largest margin calls / family office blowups ever. Action, drama, suspense, there was something for every palette.
The week for US stocks started off a little choppy, as concerns of the Archegos blowup grew across different banks, but was quickly dismissed as a mostly self-contained incident. The rest of the week was categorized with positive upward momentum, with tech leading the way. The S&P 500 crossed above 4,000 for the first time (on April 1st of all days…) and they even took Friday off for Good Friday. It would’ve been nice to see how stocks took to the NFP report on Friday, but maybe this upcoming week will incorporate those positive sentiments.
Inflation remains a buzz-word in certain pockets of finance and market professionals, but it remains speculation at this point. To some, there is clear writing on the walls. To me, it is too early to say.
Bonus Reads:
Economic data and stimulus
It was a big week for economic news. We should start with the good news. The NFP (non-farm payroll) report, put out by the Bureau of Labor Statistics, for the month of March was incredible. The Street was looking for 660K and the print came in at 916K new jobs created in March; truly incredible. I had a great conversation with David Belle this week after the print, and we came to some interesting conclusions related to this report moving forward. Labor force participation is still 2% lower than pre-pandemic levels, suggesting more people are still not included in the workforce than before the onset of COVID 19. We’re also still seeing people in the part-time for economic reasons category (people who want full time employment, but are settling with part time as that is all they can find) hover above 10%. A final note worth considering is the degree of seasonality associated with the boon of new jobs. In the states, we’re entering spring, and the warmer months usually bring on a level of temporary jobs for those summer months. The hope, obviously, is that these jobs are permanent placements and not just temporary, but the data is still inconclusive on this part. On the back end of the jobs report, we saw US Treasuries rise, with the US 10YR breaking above 1.7%.
The other side of the labor coin was this week’s weekly jobless claims number, coming in higher than expected. The print came in at 719K, and the Street was expecting 675K. This print comes as a slight disappointment relative to the surprisingly low print the week before. The positive is that it is on the lowest side of the jobless claims reports we’ve seen. The bigger picture, NFP, shows some general increase promise, whereas the smaller picture, weekly jobless claims, paints something a little different. The end goal is for these to align with one another, in the positive direction, before we start really celebrating economic recovery.
The last piece of US-centric economic news was the surprisingly positive Consumer Confidence report. The report marked its third month of consecutive gains and hitting the highest point since before the pandemic. The rise tells us that more Americans are expressing optimism about the coming months with respect to business and labor market health.
Elsewhere in the world, the Ever Given was freed from the Suez. While a celebratory moment, it is merely just the beginning step to get the global supply chain back on track. The blockage is setting back many deliveries and leaving docking yards jam-packed with lines of boats floating in the oceans. Some estimates had about 400+ ships waiting to pass through the Suez while the Ever Given was still stuck. Now, at full capacity, the canal can only pass 50 ships per day, elongating the backlog further. This slowdown is causing a lot of shortages, pinching factories who are working on all cylinders to keep up with the red hot manufacturing demand.
No, I did not forget about Joey B’s infrastructure plan and tax proposal. I think it’s too early to render a decision on it, and the waves of partisan divide over it are not worth covering currently. We will get to it when the actual details get more solid.
Bonus Reads:
ADP Private Payroll readout. (via CNBC)
IMF Calls for Global Wealth Redistribution to Avert Societal Breakdown - The Heisenberg Report
If Enough People Read This, Hyperinflation is Coming Next Week - The Heisenberg Report
Manufacturing Demand. (via CNBC)
Sometimes, you just blow up
An article by Christopher
I’d be remiss to overlook the Archegos debacle, so we will briefly go over the highlights. Archegos Capital is a private, family office investment firm that became the center of its own demise last weekend and into the early half of this past week. Bill Hwang, the head of Archegos is surrounded by controversy after his firm was forced to liquidate after being unable to meet its commitment on a margin call. In the days since, we’ve seen a number of big Street banks sells shares of companies held by Archegos as part of swap contracts. Banks like Credit Suisse and other financial firms like Nomura both took large haircuts (major losses) on positions related to Archegos’ default. The initial news broke last Friday and over the weekend a week ago from Morgan Stanley offering large blocks of shares out in the open market for purchase. In the following days, we came to find out that Archegos had defaulted, and everything had to go. In a not so good way, the story is extravagant, and a tale for the ages. In others, it forces the Street to revisit risk appetite, due diligence, and the regulation behind swaps.
I’m not going to get into the details on the swap contracts here; they’re incredibly complex financial tools and not needed for the purposes of this publication. The way Archegos set up its book of swaps, they were able to be hidden from 13F filings with the SEC, disguising the risk. As we got further out from the point of implosion, we came to learn a lot more about what Hwang was really doing. It turns out he was using the same collateral for a multitude of different swap contracts all across the Street, a major no-no. We’ve been here before, but the players are different. It is a topic that no one wants to discuss; loopholes in the system that allow smart people to either win really big or lose really big depending on which side of luck you’re on. That I will save as a story for another day.
Reports are suggesting that this process allowed Hwang to get 700% leverage on his positions. This story is still uncovering itself, (although the mainline news media beat the thing to death, per usual) but it looks like the current total of Bill’s losses are about $8 billion. Sometimes, you just blow up.
Read more here, here, here, here, and here.
Bonus Reads:
Sometimes, You Blow Up - The Heisenberg Report
Panic Goes Missing In Archegos Flameout. Fed, Alcoholics Blamed - The Heisenberg Report
Quick Takes
To fill in the gaps
U.S. and Iran to resume nuclear talks. (via WSJ)
High Frequency Traders seek satellites for faster internet connection. (via WSJ)
An aside on the swap business in the wake of the Archegos blow up. (via FT)
Taiwan Semiconductor Management Co. puts $100 billion into the market to offset potential output delays. (via WSJ)
U.S. auto sales push ahead, despite supply constraints. (via WSJ)
VWs April Fool’s joke. (via CNBC)
Goldman Sachs reports its ‘close’ to offering BTC and other crypto to its wealth management clients. (via CNBC)
Coursera IPO pops off! (via CNBC)
Deliveroo gives London one of its worst IPO debuts. (via Bloomberg)
The Fed and Sun face off, literally. (via Pirates of Finance)
Microsoft wins major VR deal with U.S. Army, priced at $21.9 billion over 10 years. (via CNBC)
A follow up on the Greensill fallout. (via FT)
A well-researched company analysis on Roblox. (via The Irreverent Investor)
General Banter
What’s on the minds of our editors and writers
Readers knew all this, because it’s in the “Behind the Madness” page, but I had a nice little moment of Twitter fame with this one:
Reader’s Corner
A place for suggestions for readers like you
The reader might enjoy this twitter thread, looking ahead for the VC universe:
What I’m Reading:
Options, Futures, and Other Derivates (10th edition) [for education]
Vanishing Games by Roger Hobbs [for interest]
Well done. You’ve made it through the madness. I’ve worked hard to ensure that you leave this page having learned something, and I hope that it benefits you in your daily adventure. Thank you again for checking in.
Apologies, readers - I made an error in interpretation for Bill Hwang's losses -- it was in the ballpark of $8 billion, not the inflated figure I represented earlier (likely including the mass leverage he was taking on).