Market Outlook: Beware Of Levered Up Hedge Funds
In the thirty years that I’ve been factoring the macroeconomic and geopolitical trends of the US and world into my analysis of what to buy and sell and when to do it, this is probably the cloudiest outlook I’ve ever had for the economy. I’m shocked at how binary the two most likely outcomes are right now, with impending doom on the one hand and impending boom on the other hand. As the stock and bond markets begin to try to price in the US and global economies opening back up, I am increasingly getting butterflies in my stomach that we could be facing unseen risks to the economy and stock market. Just yesterday, the Center for Disease Control released a travel advisory warning against all travel to Canada. This warning was for all travelers, including people already vaccinated because of the high risk that Covid-19 variants could potentially present to them. Now add in the challenges of getting vaccines to people in poorer and/or less developed countries and you can see that we might not be in the final innings of the pandemic like the stock market seems to be pricing in.
In addition to the risks presented by the Covid pandemic, I am beginning to think that something that has been previously brushed off by the market like inflation fears or oversupply of new issues like SPACs or even some unforeseen black swan event like a large hedge fund blowing up could trigger a market selloff in the near future. If you missed it, two weeks ago a $10 billion dollar hedge fund named Archegos Capital imploded when their levered up portfolio faced margin calls from their prime brokers. Through a series of shady contracts between Archegos and banks such as Credit Suisse and Nomura Holding’s, Archegos was able to synthetically hold large unreported position in companies such as Viacom, Discovery, Baidu, Tencent and Farfetch with five-to-one leverage. When the banks began to liquidate Archegos’ positions in these companies they immediately began to crash. Viacom went from over $100 a share to around $40 in a couple of days. Obviously this is not some penny stock collapsing, this is a real multi-billion dollar company that was cut in half overnight by one hedge fund.
What is concerning about this to me is the question of is this an isolated event by a reckless hedge fund manager or is this something that has become commonplace in the hedge fund industry. Remember back to the housing crash that started the Great Recession. Shady mortgage derivatives were not a big deal until they became a Big Deal. Are stocks such as Facebook, Amazon, Tesla, and Google being propped up by a bunch of billion dollar hedge funds levered up on off balance sheet equity swap contracts? I do not know the answer to that question and because I don’t, it has me losing a little bit of sleep over it. I do not like it when I lose sleep over investments that I have made and when I do, it is a good signal to me that it might be a good time to take risk off the table and trim some of the big winners that we have had and maybe even sell some of the ones that are underperforming.
Let me be clear, this is not a call to go out and sell everything. This is a call to take a look at your portfolio, and evaluate how much risk you have on at the moment. Have you neglected to trim some of our huge winners? Are you over-invested in the Space Revolution? Do you have a large position in a company that causes you to lose sleep? If the answer to any of the these questions are yes, then it is probably a good time to take a little off today.
With all of that said, I could be wrong. This bubble blowing bull market might rage on for three more years without looking back. But this is where investing for the next 10,000 days requires us to take a look at the risk/reward of our current environment and make investment decisions based on that analysis. I feel the risk of 10-20 percent downside is much higher than missing out on 10-20 percent upside at this moment. And that is why I am trimming some today.
On a brighter note, I am still constantly researching everything that I consider Revolutionary. As you know, the Space Revolution has been one of my biggest focus areas. I know some of you are down 10-20 percent on some of our space holdings. We are early adopters and sometimes that is the price you pay to be early in a trend. My thesis has not changed, in fact I feel stronger than ever that the Space Revolution will become a Trillion dollar market in the next five to ten years.
The Space economy is going to grow 5-10 times over the next five to ten years and I am obsessed with trying to find the best companies for us to invest in. The problem with trying to invest in the Space industry right now is that it’s still at least a year or two before going mainstream. A lot of the Space companies that have come public in the first quarter are questionable and Space stocks have been underperforming so far this year. If you know anything about my approach to investing, you know that I wait for the opportunity to load up on my favorite long-term Revolutionary stocks when the markets are ignoring them. Investing in Space at this early stage — call the top half of the first inning of The Space Revolution — is obviously riskier in some ways than buying stocks that already have long-term cash flow. But the upside potential probably more than makes up for that risk, as long as we carefully stay on top of this as The Space Economy develops.
Check out this webcast that I watched this week that features a few of the CEO’s of our space stocks. It is very informative although I did not like the performance of some of the CEOs on the panel.
We will do this week’s Live Q&A chat at 10am ET tomorrow (Friday), in the TWC Chat Room or just email us your question to support@tradingwithcody.com.
