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Sustainability and ESG Investing May Not be a Top Priority for those Hiring Portfolio Managers

A few of the winning categories in the stock market over the past two years have fallen from grace. The slide suggests that they had either been overbought or the demand changed for their products; it’s also possible they are now oversold. For example, high tech and disruptive tech were high flyers; they now are underperforming and seem to be “out of the rotation” of where investor money is flowing. Another category that saw money piling into it was ESG (Environmental, Social, Governance). This is a relatively new category that was so much in demand that many new funds were created to capitalize on the flow of cash. Many publicly traded companies even altered their business and their branding to capitalize on the expanded demand for stocks in these funds.

With the overall market declining and investors challenged to find companies on an upswing, are ESG labeled investments still getting attention?

 

ESG Scores

ESG scores are based on environmental, social, and governance factors that take into account corporate energy use, land use, emissions, employee satisfaction, business practices, and executive compensation. The popularity of funds that invest in ESG ranked companies had escalated as the new administration entered the White House in 2021. This is in part because there were big plans to recover from the pandemic-related slowdown with financial support for green or sustainable projects. ESG funds then experienced large and growing inflows of assets. With the increase in assets and a limited field of stocks to choose from, the category outperformed. As the above-average performance was recognized and reported on, it attracted more assets.

This caused companies that didn’t fit into the category to make changes that would provide them a decent ESG score. The list of acceptable companies from which fund managers can choose is still growing.  This creates a situation where there is an increasing number of names, while the amount going into these funds has slowed.

The ESG ratings themselves are provided by private companies that have earned a reputation in the business. They wield a lot of power as they dictate who can be included in a fund and who cannot. The better-known firms are MSCI (MSCI), the largest ESG rating company, Standard & Poor’s (SPGI) and Sustainalytics, owned by Morningstar (MORN). Investors, including fund managers, use these as a guide to screen stocks for inclusion in ESG and sustainable portfolios.

Performance

The year-to-date (YTD) S&P ESG Index (308 stocks) and the S&P 500 performance have tracked pretty close since the beginning of the year. There has only been a slight benefit to those earning the ESG index which is down 18.7% vs. 19.4% for the S&P 500.

Source: Koyfin

The YTD performance difference of just over 1%  represents a narrowing of the performance spread for the two indexes. As the graph below indicates since August 1, 2021, (one year after launch of the index) there is more than a 5% difference in return, favoring the ESG fund.

Source: Koyfin

Mood Change?

ESG funds and ratings have been under fire in 2022. This is in part related to the attention the Russian invasion of Ukraine brought to the category. Some critics question why ESG-labeled funds own companies such as Russia’s state-backed energy company Gazprom.

In a recent study by Seeward & Kissel they surveyed funds-of-funds, family offices, endowments, seeders, and other investors, the law firm discovered ESG considerations rank low as a priority when hiring managers. The Seeward & Kissel’s 2022 Alternative Investment
Allocator Survey indicated, that overwhelmingly the main criteria used are investment strategies and a track record of performance.

According to the survey over 40% said ESG and investment team diversity were the least important issues when sourcing portfolio managers. A full 90% answered that investment strategy was the most important factor and track record also ranked high on the list.

Daniel Bresler, a partner at Seeward & Kissel said, “We don’t think ESG is going away anytime soon, but it has been placed on the backburner because of concerns with Ukraine and markets going crazy.” Bresler also indicated he was surprised by the results showing how low the ESG category ranked in importance.

This week’s announcement that Tesla (TSLA) was ineligible and therefore cut from the S&P DJI ESG, has also caused confusion among onlookers who viewed the electric car company as the ESG “poster child.” At the same time, the strong position of Exxon Mobil (XOM) which moved up within the same S&P index has raised questions about methodology.

 

Take-Away

ESG is maturing and will have its place. The attention it received as the Biden Administration was laying plans for greener projects while helping rebuild infrastructure provided a high level of enthusiasm for the category. The overall market has turned somewhat sour and returns are now a stronger driver than an often misunderstood ESG and sustainability category. Along with the market weakness, the nature of rewarding some companies with a high ESG score and other seemingly less destructive companies with a lower score has reduced enthusiasm.

These perceived problems are likely just part of the growing pains of a category that will likely ebb and flow as the other investment categories, sectors, and companies do.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.investmentnews.com/major-outflows-hit-most-asset-classes-as-recession-woes-mount-221753

https://etfdb.com/esg-channel/how-long-will-esg-funds-rake-in-capital/

https://www.buyoutsinsider.com/strategy-and-performance-outpace-esg-and-diversity-in-manager-selection-survey-finds/

https://etfgi.com/news/press-releases/2022/04/etfgi-reports-esg-etfs-listed-globally-gathered-net-inflows-7-billion

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One Way to Keep the Investor Focus Needed to Succeed When Markets Turn

Keeping a clear head while all around you are losing theirs is key to trading and investing. I have a habit that helps with focus that I learned from my years as a chief investment officer responsible for the success of several billion invested in the public markets. I’ll share this with you. As I combed through headlines this morning, all of them pushed doom and gloom, this can cause partial investor “blindness. I didn’t bother to turn on the TV as I’m certain the emotionally charged market pundits are doing all they can to keep viewers engaged. They do this by emphasizing things that create fear.

Fear sells, and selling benefits their shareholders whether or not the information helps your investment decision-making or not. And making decisions to grow and protect your money is the essence of successful investment management.

Where You Could Look Instead  

I mentioned I didn’t turn on the TV this morning. For me, much of the TV market news are shows designed to keep you tuned in all day. They do this with emotional broadcasts and “breaking news” stories. It makes sense for them, they sell advertising, and the industry increases revenue by building viewership. But I admit I did tune in yesterday to watch my friend Eddie Ghabour, the author of The Commonsense Bull to see what he had to say. To his credit, Eddie owned Apple (APPL) and other tech stocks when everyone else thought they had no more room to run. To me, his is the voice of calculated reason. The two were discussing the comments Fed Chair Jay Powell made at a Wall Street Journal event concerning their resolve to fight inflation. I was surprised to hear the self-described commonsense bull stoking fear by saying, we’re in the “largest bubble of our lifetime,” and it’s going to burst as the Federal Reserve is “going to suck liquidity out of the system.” Whether this comes true or not, immersing oneself in this kind of talk will begin to prevent you from uncovering opportunities. And in every situation, there are opportunities.

It may seem obvious to say that data is unemotional. But it is less likely to create the kind of bias that prevents an investor from seeing what could be when viewed in black and white. Whether it’s TV journalists or professional headline writers, there’s a bias in reporting, a bias that is absent in raw numbers, and when done right, absent in genuine investment research.

Fortunately, we now all have systems, software, platforms, and computers to sort through technical data. We can learn quickly what stocks are trading counter to the market, what’s trading up on volume, what’s moving above its 50-day average, etc. These are the kind of things I like to look at,  finding what’s strong when everyone else is talking about the world falling apart. Then I make sure its normal performance isn’t a natural mirror image, in other words, it isn’t likely to go negative when the market turns positive. An example would be bond ETFs going up when stocks go down. Looking for companies that are strong and may have gained even more on a positive day is built in to most platforms and can isolate, without emotion, candidates to review while everyone else is being told we are doomed.

May 18, 2022, for Example

Within Channelchek there is a section to the left of the screen called Movers and Shakers. On a real-time basis, it filters through the 6000+ small and microcap stocks on Channelchek and provides users with those that have the largest gains, largest losses, and relatively most active. On this big down day, I wanted to see what was holding up and if they were all centered around a specific industry. It turns out there was no industry preference, but there was a long list of companies up 7% or more while the market was down over 4%.

Screenshot of Channelchek Movers and Shakers after close
May 18, 2022

From the quick list, I started with names I am most familiar with. In fact, I had just gotten research in my email on Garibaldi Resources (GGI:CA, GGIFF). As an added plus I am not opposed to increasing my exposure to gold. 

Then I looked at the most recent, decidedly unemotional, third-party research on this company. It stands to reason that letting a FINRA licensed analyst that specialized in the industry and knows the company through-and-through, is the best person to kick the tires and show what they are expecting.

Using this one company as an example: Garibaldi is a gold mining company that just released very positive exploratory results on one of their mines.  The indepth report explained that out of nine holes drilled to test for gold mineralization, eight came back with positive results. This could explain the strength of this stock, particularly in the gold sector which also outperformed on this day.

As a side note, I found it interesting that on a day that the U.S. markets were falling, all the overperforming stocks were listed (some co-listed) on a Canadian exchange. This isn’t insight you’re likely to get on CNBC or Fox Business News.

Sidelines

Money in the market should continually be swapped out for better opportunities, this is an especially good practice with tax-deferred accounts like IRAs.  Money on the sidelines, when inflation is running above 8%, is losing a lot of buying power. While dry-powder is helpful to have on-hand when you think the market has hit bottom, keep in mind that money is always moving someplace. And there are many companies with performance not-correlated to the companies that are driving index averages.

Take-Away

Sell-offs will always cause scary headlines and fearful hype from newscasters and publications. Individual and professional investors alike can lose focus when surrounded by doom and gloom forecasts. One way around this is reviewing mostly data and reading full stories from the more reputable sources, also look for quality research. Market research and equity research —  if done right it is devoid of emotion.

The example above is simple and basic, using only one tool to see where money is flowing to, rather than allowing myself to be bombarded with where it is flowing from. To be sure your brokerage account has an array of very sophisticated tools to bring ideas to the surface.

Register for Channelchek to receive equity research in your inbox before the opening bell each day.

Paul Hoffman

Managing Editor, Channelchek

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The Battle Between Bull and Bear Has Become Intense

A bull facing off with a bear is among the most entrenched icons and lore in stock market trading. Bull vs. bear icons can be found in almost any office that is involved in the stock market. Long ago, people came to use the terms “bullish” and “bearish” to reflect their thoughts on market direction, and the meanings are universally understood. In 2022 the memes of bulls and bears struggling with each other have reached a crescendo. After an incredibly long and strong market from Spring 2020 until year-end 2021, there has been no question we were in a bull market. As we entered 2022, the sentiment which drives markets has been less confident and decidedly more negative.

The terms are based on direction and overall sentiment, but over time, analysts have attempted to define what a bear market is. In recent years, a bear market has been defined as having fallen 20% or more from recent highs.

Source: Koyfin

The chart above shows the volatility index (%) against
the S&P 500 index (%). Since December 2021, the index has hit higher highs
and higher lows as the markets are wrestling with more negativity than prior
periods.

 

Bull and Bear Facing Off

In a bear market, share prices are on average dropping each week. This results in a downward trend that investors believe will continue; the belief, in turn, snowballs into an entrenched downward trend.

To date (May 18), none of the major indices have fallen 20% or more from their high. But for many in the markets, it feels as though they have. Investors had been velocitized by the swift gains over the prior years, so even sideways movement for a period would feel negative. The current 16% decline of the S&P 500 feels much steeper than it is. It has been held up by many strong up days showing there are still plenty of bottom-fishing bulls. This is the essence of the bull and bear facing off.

Bullish Position

The economy may seem to have the ingredients for a reduction in growth that could lead to a reduction in corporate earnings, but the most followed measurement, employment, isn’t showing signs of faltering. Confidence is created by knowing if one wants a job, they can get a job. Job growth and wages have been marching higher through most of 2022. So much so, that wage inflation is becoming a concern.

There is still ample stimulus in the system as a result of quantitative easing and low-interest rates. The Fed has discontinued adding stimulus in the form of bond purchases and has begun raising rates, but real rates are still negative, and the mopping up of money injected into the system is scheduled and will follow a slow timeline.

Consumers are still spending. Retail sales for April rose a seasonally adjusted 0.9% in April. Demand is strong for most goods and services, especially those involving leisure activities. With the consumer still looking to spend, the markets may hold up well.

Bearish Position

Fed Chair Jerome Powell gave a talk yesterday at the Wall
Street Journal’s Future of Everything Festival. During his talk, he discussed his resolve to bring down the 40-year high inflation rate and bring it in line with their 2% target range. He admitted that the landing might be bumpy, but he believes it can be done without causing a recession. A recession is generally defined as two consecutive quarters of negative growth (GDP). We are now halfway through the second quarter of the year. The first quarter, which came off a very strong 4^th quarter, showed the economy had negative growth of 1.6%. So we may already be in a recession. If job growth falters, it will become a problem.

The Fed is raising rates and draining stimulus with an eventual target of 2% inflation. This would seem to argue for aggressively applying of the economic brake pedal.

Higher rates increase costs for businesses that borrow money and slow down purchases for households that were planning on making a purchase on credit. For businesses, higher rates could cut into profits, and households may decide to curtail purchases because of the high cost of money (borrowing costs).

Take-Away

By definition, it is premature to call this market a bear market, yet it has ceased to be a bull market. On up days, the bulls come out in force and have driven the markets up by 2% or more in a trading session. This shows that there are many positive participants buying in at these lower prices. The bearish sentiment is in large part based on future expectations, not economic reports. The feeling is based on previous Fed tightenings and the heightened probability of entering a recession.

This market has continued to surprise over the previous decade, and the future won’t be any different. In addition to overall growth or recession, there is the potential for a rolling recession. This could play out where it affects companies that rely on low interest rates such as housing, while at the same time those that still prosper while the job market is good and continues to grow. Examples of this are sectors where people spend disposable income on things such as leisure, entertaining, or clothing. In the meantime, the bulls and bears are thrashing to determine how 2022 will play out in the markets.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.bea.gov/data/gdp/gross-domestic-product

https://www.wsj.com/articles/feds-powell-to-take-wsj-questions-on-inflation-and-economic-outlook-11652779802?mod=Searchresults_pos7&page=1

www.koyfin.com

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The Big Price Impact on Stocks After Warren Buffett’s Most Active Buying Spree

Warren Buffett and Berkshire Hathaway (BRK.A, BRK.B) were actively spending down the company’s large pool of cash last quarter, just as they promised during their recent annual meeting. This makes sense as some stock prices are lower than they have been in years, and a few sectors are showing they could have plenty of upside potential. It makes even more sense when you consider that Berkshire Hathaway was sitting on $144 billion in cash. The inflation rate is now running above 8% and eroding the value of every unearning penny.

Jumping into the market can be costly if wrong, but investor’s ‘dry powder’ is being eroded with increased costs by the day – finding a place for money to grow by at least the inflation rate would seem prudent. The analysts at Berkshire Hathaway are certainly aware of this.

The positive impact of Berkshire showing confidence in a company is often all that is needed to exceed the near non-earnings holding a cash position. Below we look at three Berkshire Hathaway changed positions as reported on May 16, and then compare the stock’s price moves versus the overall market.

Where Did They Gain Exposure

As revealed by the companies 13F filed on May 16, as of March 31 Berkshire Hathaway added Citigroup (C), Paramount Global (PARA), and sold Verizon (VZ). There were older positions added to as well, such as Chevron (CVX), and Activision Blizzard (ATVI). But for the purpose of showing the power of Buffett’s believing a stock is attractive, or in Verizon’s case, no longer attractive, we’ll take a look at the market moves of these companies as of 1pm the day after the 13F was made public.

Source: Koyfin

The above chart of Citibank, Paramount Global, and
Verizon from the beginning trading on Monday compares the stocks to the S&P
500 performance during the same short period.

 

The S&P, as reflected during the short period in this chart, beginning on the date of Berkshire’s 13F filing, shows the S&P 500 up 1.60%. This is substantial in a year when the index has mostly been delivering red to investors. Verizon was the most noteworthy sale of Buffett as they brought their position near zero. The company’s stock rose only 0.11%, well below the S&P benchmark performance.

As for the positions opened during the first quarter by Berkshire Hathaway, Citicorp shot up 8.28%. Paramount Global reacted even more strongly, rising double digits to 13.95%. 

Lessons

While an SEC-registered portfolio new holdings are kept close to the vest before reported in order to avoid insider trading problems, listening to what someone like Warren Buffett is saying at annual meetings and at other times can allow you to get a sense if they have been active, and in what industries. More important, is whether they are active buying or selling. For an investor that is holding a stock which a well-followed investor has decided to sell, can cause significant underperformance for at least the near term.

Other Pertinent Info from the 13F Filing

During the first quarter of 2022, the value of Berkshire’s US stock portfolio rose by 10% to $364 billion. Buffett had indicated the firm he manages has been struggling to find bargains in recent years. He blamed this on stocks swelling to record highs, fierce competition from private equity firms, and SPACs which increased competition and costs of acquisitions. Even Berkshire’s own rising stock price made it unappealing as a company stock buy-back.

A change of appetite took place in the first quarter of 2022. Berkshire bought $51 billion worth of equities and sold less than $10 billion in stocks. Its net cash reduction of $41 billion helped slash its cash pile by 28% to $106 billion. Q1 2022 marked one of the most active buying periods in Berkshire Hathaway’s history.

Take-Away

Well known, successful investors can either make a winner out of your holding or cause it to trade at a pace below the market. While knowing and trading on information before it is made public can get you in trouble, investors like Buffett do provide guidance. These hints as to their thinking and likely direction may help investors somewhat. This is why it always makes sense to know what they’re saying – it isn’t fun holding something they just reported sold, and the tailwind they create when you’re long the same company can be profitable.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.sec.gov/Archives/edgar/data/1067983/000095012322006442/xslForm13F_X01/primary_doc.xml

https://whalewisdom.com/filer/berkshire-hathaway-inc#google_vignette

www.koyfin.com

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Michael Burry’s Latest Portfolio Brings the FAANGS Out

On Monday, May 16, Michael Burry filed his company’s holdings report with the SEC. Relative to the previous quarter, there was significant reshuffling. While it’s rare to get an explanation of his thinking beyond an occasional tweet of warning or tweet of frustration, his quarterly positions report is worth reviewing. It lends a rare clue as to what the celebrated hedge fund manager is expecting.

Michael Burry’s thinking, reflected in Scion Asset Management’s 13F holdings (a/o March 31), are shown below. Following the holdings we offer company descriptions and some thinking related to a few of the holdings.

Source: WhaleWisdom

Why it Matters

The positions in Scions portfolio are usually few, quite deliberate, and not the result of herd thinking. During the prior quarter (Q4 2021), among the scant positions were two public prison stocks ($GEO and $CXW). While many pundits and YouTube “gurus” hazarded a guess as to what Burry may have expected to occur with crime, the positions may have had nothing to do with an expected need for jail cells. Following the stock tickers links above to the Channelchek reports discloses that public policy on for-profit prisons is in flux. The positions may have just been a play on policy direction.

Burry’s investment universe is broader than the average self-directed investor and even deeper than the average hedge fund manager. The positions report reflect just those required to be disclosed in an SEC 13F filing. With this in mind, out of the entire universe of public securities Scion could hold, there are only a dozen that Burry’s portfolio felt were worthy at the end of the first quarter. One is a Put position which effectively makes him short the stock and possibly expecting more red than green, but not necessarily.

 

 

Holdings Breakdown

Scion has a Put on Apple (AAPL) with contracts to control 206,000 shares. The portfolio is also long shares of two other megacap high-tech stocks adding to a similar notional amount. Of the three, based on price earnings ratio, Apple is by far the most expensive. Apple’s P/E is at 23.7 earnings, while Google/Alphabet (GOOGL) is trading at a much lower PE of 20.7x, and Facebook/Meta (FB) is even lower yet at 15.1x price to earnings. This AAPL Put may not be a bet against Apple as much as it is a play that FAANG stocks should trade with multiples more in-line with each other. If this is the case, he’s not looking to hit a home run, but instead looking for movement either down by Apple, or up by the two other FAANG stocks to net incremental capital gains.

Since the 4Q of 2021, he has held Bristol Myers Squibb (BMY).  Year-to-date 2022 the biopharmaceutical company is up 19% vs the S&P 500 which is down 9.8%. Discover Network C shares (DISCK) is his fourth largest by market value. The C shares of Discovery allow no voting rights. Discovery’s A shares allow one vote per share, and B shares 10 votes per share.

Moving down the list shows a very diversified portfolio of long positions including Cigna (CI) a health care insurer, Ovintiv (OVV) a Canadian based fossil fuel company trading at 8x earnings, and Nexstar Media (NXST) which is a media company that owns television broadcast networks not unlike DISCK.

Stellantis NV (STLA) is a Dutch automaker trading on the NYSE and London exchanges. It owns the Chrysler and Jeep brands as well as Alpha Romeo, Peugeot, and Maserati. STLA pays above-average annual dividends. It declared a dividend on February 25, with an ex-dividend date of April 19. The period covered in Scion’s 13F is through March 31. 

In the consumer discretionary category Scion’s portfolio held two companies month-end that stand to benefit as consumers fill their need to travel and play outdoors. Bookings.com (BKNG) which is a huge online travel website and retailer Sportsman’s Warehouse (SPWH) which is a small-cap value stock trading at only 3.75x earnings.

The last is a payment tech company called Global Payments (GPN). The company’s product line runs the full gamut of electronic merchant payment products.

 Take-Away

Dr. Michael J. Burry has an excellent record of spotting investment opportunities before the rest of the market. His picks are as disparate as the mortgage market in 2008 and GameStop (GME) in 2020.

The portfolio reported by the SEC on May 16, reflecting March 31 quarter-end holdings does not have a strong theme. The most talked-about position has been the Puts on Apple. As mentioned, that play may be more complicated and be a hedge involving other long holdings.

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Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.sec.gov/Archives/edgar/data/0001768023/000156761922010751/xslForm13F_X01/primary_doc.xml

https://whalewisdom.com/filer/scion-asset-management-llc#tabholdings_tab_link

www.koyfin.com

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Better Your Risk Management Investing Strategy with Protective Puts

The year 2020 and 2021, despite the coronavirus-related selloff, left most stock market investors with outsized gains. From January 1, 2020, through today (May 13), the S&P is up 20%. So while this year’s moves may be negative, many investors still have gains to either realize or protect. Realizing gains is easy; you pick your spot and sell out of your position. But what may not be easy is the taxes that may accompany those gains or parting with a position that you believe over the long term will excel. If you are confident the best place for your assets is your current position, protecting it with an options strategy may be the best way to protect against your downside, and only curtail your upside potential by the price of the protective options used as insurance.

Hedging Against Downward Moves

If you have unrealized capital gains, you are probably glad but may be an anxious trader or investor. Volatility, as measured by the VIX is at a level that is considered negative for stocks. Yet, if you believe stocks you own still have upside once we get through this period where covid, crypto, low unemployment, higher interest rates, and war can cause the prices on your holdings to swing in an unpredictable fashion, an options strategy may make sense for you.  

One method experienced investors employ is the protective put.

Image: Koyfin

What is a Protective Put?

There are two main types of options: put and call options. The buyer of a call has the right to buy a stock at a set price until the options contract expires. The buyer of a put has the right to sell a stock at a set price until the contract expires.

If you own a stock, a protective put position is created by purchasing put options on the name or something highly correlated to the stock. And, at a quantity that will roughly trade one to one with your position. The put allows the owner to sell the underlying stock at the price predefined in the options contract. This is the mirror trade to a covered call which involves selling the right to buy a stock owned. Investors that are more comfortable with covered call options can think of purchasing a put to protect a long stock position, much like a synthetic long call.

The benefit of a protective put strategy is it helps protect against losses during a price decline in the assets name, while still benefitting from capital appreciation if the stock increases in value. Of course, there is a cost to any insurance against big losses: in the case of a protective put, it is the price of the option. Essentially, if the stock goes up, you have unlimited profit potential (less the cost of the put options), and if the stock goes down, the put goes up in value to offset losses on the stock.

Removing the Mystery

Assume you own 100 shares of ABC Company at $50 per share from April 2020. The cost of this trade was $5,000.

The stock is now trading at $65 per share, and you think it might go to $70 or more. However, you are concerned about stablecoin problems and the Fed putting the kibosh on growth.

A protective put reduces risk if you maintain your position in the stock so you benefit if it reaches your $70 price target. At the same time, the put offers protection in case the market weakens or there is an unforeseen event with the company you own.

Example

Let’s say the stock is trading at $65, and suppose you’re tired of seeing your gains erode so you decide to purchase the 62 ABC Company October put option contract (the underlying asset is ABC Company stock, the exercise price is $62, and the expiration month is November) at $3 per contract (option price) for a total cost of $300 ($3 per contract multiplied by 100 contract shares).

If ABC continues to go up in value, your underlying stock position increases as normal and the put option falls “out of the money” (it can’t be exercised). For instance, if, at the expiration of the put contract, the stock reaches your $70 price target, you might then choose to sell the stock for a pretax profit of $1,700 ($2,000 profit on the underlying stock less the $300 cost of the option) and the option would expire worthless. It the stock went to $74, your overall net would be $2100. And you could realize it without having concerns about a sinking price.

But what if the price did get beaten up? If your fears about the market were realized and the stock was negatively impacted, your capital gains would be protected against a decline by the put.

Here’s how:

Assume ABC Corp. common shares declined from $65 to $55 prior to the option’s expiration. Without owning the put, if you sold the stock at $55, your pretax profit would be just $500 ($5,500 less $5,000). If you purchased the 62 ABC October put, and then sold the stock by exercising the option, your pretax profit would be $900. You could then sell the stock at the (put) exercise price of $62. As a result the profit from the put position would be $900. To calculate, use the $500 profit on the underlying stock, plus the $700 from the in-the-money put profit, less the $300 cost of that option. Compare this with a profit of $500 without the option contract.

The cost of the option doesn’t take much away from upside potential, by it protects against downside losses. If you think your stock price will not move in either direction, a put option may not benefit your strategy.

 

Circumstances to Consider Put Protection

Protective puts can be a useful strategy for traders and investors that expect a short- or intermediate-term decline in the price of a stock they own and have reasons not to sell. The reasons could be tax related, you may be somehow restricted from selling the shares, fierce volatility in the share price, it is exposure to the company you work for and selling is not yet permitted, building the position in thinly traded shares took time, etc.

Any one of these reasons might make it prudent to consider a protective put. Additionally there may be an event such as an earnings report that you expect will drive the price in ne direction or another, and you want to protect against the downside risk of that report.

 

Take -Away

Option protection in the form of puts comes at a cost that the investor needs to factor into their overall strategy. However, in volatile markets, knowing you’ll capture a large part of the upside if your stock moves up, and are protected from profit erosion if the stock declines allow for more overall comfort with the limited risk in the position.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.nerdwallet.com/article/investing/put-options

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Small-Cap Stocks and How They’re Different

Shares of public companies with a total market capitalization between $300 million to $2 billion are categorized as small-cap.

Market capitalization is determined by taking a stock’s share price and multiplying it by all of the outstanding shares. If the product comes to between $300 million and $2 billion, it fits the definition of small-cap.

Example ABC Company Share Price: $4.25 Shares Outstanding: 400 Million Market Capitalization: $4.25 x 400,00,00 = $1.7 Billion

The above example shows ABC Company trading at $4.25 per share. There are $400 million shares outstanding – by multiplying $4.25 by 400 million, it reveals the company has a market cap of $1.7 billion –  $1.7 billion is between $200 million and $2 billion, so it is categorized as a small-cap company.

Market-cap data is available for small-cap stocks on Channelchek and other websites that provide investor information on companies.

Why is it Important?

Investors generally view stocks in three size categories: large, mid, and small-cap. Some even add two other categories they call microcap and megacap.

Knowing a company’s size, measured by market capitalization, is useful information for investors, here’s why:

Small-cap companies can exist in any industry. The difference between the smaller company and those with larger capitalization in the same business is that smaller companies have an increased potential for growth. Smaller companies are also more prone to being acquired. A company that gets acquired usually does at a share price above market levels.  

Another possible benefit is small companies usually have a more focused business line which allows investors the ability to fine-tune their concentration. To understand this, take a small one-product company that gets FDA approval for the only drug it has been working on for years. Its share price would likely skyrocket. If a large-cap company like Johnson and Johnson got approval for a drug that is just as effective, the impact on J&J’s earnings would not be as impactful for the stock price.

This is because the larger J&J also sells many other products. The stock price of the small company typically would show a much greater impact. This is true of growth, earnings, profit, and market-cap which is watered down when you’re larger.

There are unique risks to small-cap companies as well. Take the company I just mentioned that has just one drug that received FDA approval. What if the drug was turned down? They don’t have other products they can sell to offset costs.

 Most larger company stocks were at one time small-cap stocks.

Performance

Small-cap stocks can also experience larger than average price swings. But, if you’re a long-term investor, it may be worth it.

In the past 20 years, the S&P SmallCap 600 index, a leading benchmark for small-cap stocks, has outperformed the S&P indexes for large- and mid-caps on an average yearly basis. During that period, the S&P’s benchmark small-cap index returned an average of *8.3% annually, compared to 8% and 6.3% from its mid- and large-cap indexes.

Because of their size, small-cap stocks have different risks and rewards for investors when compared to their larger counterparts.

Paul Hoffman

Managing Editor, Channelchek

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Will the Current Stablecoin Situation Hasten Regulation and Oversight?

A move toward regulating digital currencies is gaining momentum in the U.S., and elsewhere – stablecoins could be the first cryptocurrency to be handed a rulebook. The variety of Stablecoin that is designed with algorithms to provide one-for-one parity with the U.S. dollar value, are finding it difficult or impossible to remain pegged to the fiat currency. The strong onset of negative sentiment in the crypto markets has already caused some of these less speculative cryptocurrencies to “break-the buck.”  True oversight may be in the best interest of preserving these new asset types, but the loss of autonomy may undermine their purpose and popularity.

The Current Concern

The attraction of stablecoins is they are designed to maintain a fixed value yet still allow for payments without getting the banking system involved. The larger stablecoins, Tether (USDT-USD) and USD Coin (USDC), have maintained their dollar pegs. But another once rising star the “algorithmic” stablecoin called TerraUSD (UST) crashed as low as $0.23 on the dollar this past week. The current price (May 12) is approximately $0.46. The decline in value of UST-USD caused $10 billion in the stablecoin to evaporate. A related crypto token called Luna (LUNA) or Terra Luna caused even greater losses. Terra Luna is down 99.6% today. This is contributing to the selloff crypto speculators are seeing in other digital currencies such as Bitcoin (BTC).

Some are likening the Terra collapse to the “Lehman Brothers moment,” referring to the surprise collapse of the once investment bank. Lehman woke markets up as to the severity of the 2008 financial crisis. The domino effect spurred by its wake-up call signaled the beginning of the awareness to problems the banking system was dealing with.

Is it a Crisis?

Is this a crypto or stablecoin crisis? The Terra losses may be an isolated event that is confined to tokens that either have a different mathematical basis or are especially vulnerable to market volatility. But it highlights risks that have always been inherent in these assets and may indicate a need to evolve with or without the help of regulatory guidance and oversight. The usefulness of stablecoins is diminished if they become one of the more controversial types of traded tokens and payment methods.

Stablecoins are already causing concern among regulators and bankers because, among other things, the money supply is impacted by privately issued digital money. A run on a stablecoin could, in theory, lead to heavy selling in assets held in reserves, such as short-term commercial debt or other cash equivalents. There has also been concern since their growth in popularity that stablecoins are substitutes for Federal Reserve Notes. The problem could be that they bypass the system that measures capital flows in global transactions and other cross-border exchanges. This was recently highlighted as both Russia and Ukraine were able to get around any attempts to shut down exchanges of currency, of the crypto variety, into or moving outside the countries.

Regulation

U.S. Regulators and lawmakers have expressed other concerns related to protecting users of any type of non-regulated token. One is about the liquidity and quality of issuers’ reserve assets. Banks are structured and have oversight to make sure they can meet redemption requests. This is why we don’t have concerns about a run on banks any longer. Panic redemptions of stablecoins or other tokens could have the same economic unsettling impact as a run on banks.  

Tether considered the preferred stablecoin is still not transparent about its holdings. The company, based in the British Virgin Islands, issues a quarterly “assurance opinion” on its reserves from a Cayman Islands auditor. It shows more than 80% of its reserves were held in Treasurys, cash, certificates of deposit, and money-market funds at the end of December. Details about other holdings are barely defined. This includes $4.1 billion in “secured loans”; $3.6 billion in “corporate bonds, funds, and precious metals”; and $5 billion in “other investments,” including “digital tokens.”

To date, Tether has never refused a redemption.

The White House, for its part, wants coin issuers under federal supervision, potentially even carrying FDIC deposit insurance. Biden called on Congress to pass supervisory rules for stablecoins in a recent executive order.

Congress is also working on a variety of rules for stablecoins; a draft bill in the Senate would establish a process for banks and credit unions to issue stablecoins, among other measures.

Another concern of the house-of-cards variety is that crypto exchanges hold large amounts of Tether for market-making and trading liquidity. If Tether were to stop trading 1:1 with the U.S. Dollar, it could impact other crypto trading, which could impact crypto brokerages.

Take-Away

The future of independent stablecoins and other cryptocurrencies may hinge on what is occurring in these markets now. Stablecoins are now widely used as de facto dollars for cryptocurrency exchange. Tether, which has not shown signs of problems is widely used. So while stablecoins are only 12% of the cryptocurrency market, the trading volume is high.

Algorithmic-based coins now appear to be more vulnerable than those backed by assets such as Treasuries, CDs and cash equivalents. Those that are least transparent could also be valuable, but they will for now be considered riskier.

Paul Hoffman

Managing Editor, Channelchek

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Reinventing Your Trading as the Market Transforms Yet Again

Momentum traders were big gainers from the Summer of 2020 until January of 2022. Only a year ago, jumping onboard the Globalstar (GSAT), Gamestop (GME), or other meme stock freight train helped turn many accounts extremely green. That trade seems to be over for now, and traders and investors may now have to pivot. Just as they pivoted after the March 2020 selloff to find opportunity investing in FAANG stocks or following r/wallstreetbets conversations – the recent economic upheaval suggests another pivot may be required for investors to survive and thrive.

About the Market Selloff

While the activities of many retail investors quickly become running for cover when the market sells off, time should be dedicated to calmly looking at the big picture while remembering which products and services will have global appeal when the downward trend ends.

Lining up opportunities uncovered in the current carnage will prepare you to jump when the time is right.

This isn’t simple, it involves experiencing the anxiety of red days and recognizing the potential for future green. Some of the red stocks have become “on-sale” and should be further analyzed; others are approaching where they should have been valued all along. Work to determine which is which.

The markets have changed for now, going forward they will require the work they always used to require, and the rewards may not come as quickly or easily. But interesting companies still exist.

What I  Mean by “Interesting”

One company that seems to have its hand in everything that will be hot tomorrow, or maybe the day after, is Meta Materials (Nasdaq: MMAT). I’ll use it as an example as their earnings came out yesterday (May 10), and first quarter revenue was up 299%. This year the stock price has tumbled. Like most young tech companies, MMAT still operates at a loss; this example is not a recommendation one way or another.

Meta Materials was a company that flew under my radar until I learned about them at NobleCon18. They are involved in products that will help the builders of everything that we expect to see more of in the future. This includes:

• Making 5G work substantially better
• Resolving weather-related issues with automotive sensors
• Medical imaging and sensing enhancement
• Eliminating the need for expensive rare earth materials in touch screens
• And a lot more

Ken Rice, the COO and CFO of Meta Materials, said at NobleCon, “we didn’t leave the Stone Age because we ran out of rocks, we left the Stone Age because somebody invented bronze and figured out it was better…” The company is providing better materials to growing industries and is doing it with greater speed, lower cost, and improved scale. 

They have over 269 active or pending patents from which to benefit; it is not a patent portfolio held to trade, this was made clear when during the NobleCon presentation, the COO said they exist to “keep everybody out of our sandbox.”

Meta materials is an interesting company with the promise of trumping yesterday’s amazing high-tech building materials with better ones. Watch the NobleCon18 video to understand how Meta Materials can essentially produce the “cloak of invisibility.”

What to Look For

History has shown us a few things about the stock market. First, it has always come back and hit new highs. Second, it confounds those that require certainty, investors are better served by placing probabilities in their corner, and third, there is always a rotation, while money is leaving one industry or sector, it is moving to another.

Technology has been a sector where a product or invention that was incredible when released, becomes replaced by something even better in a dozen years or so years. Pay no more attention to old technology then new. Look at what tomorrow is likely to demand to be better, this is one smart place theme to start a search.

Take-Away

Markets go up and markets go down. If it were predictable, it would already be where it’s going. What is highly probable is tomorrow’s technologies are going to be replacements for today’s. And, tomorrow is coming, there’s nothing we can do about it.

For investors and traders that are seeing more red in their portfolio than they have since March 2020, look with a level head at the possibilities still around, read up on some of the 6000+ small companies available on Channelchek, subscribe to Channelchek’s YouTube channel and don’t rush into anything until you’ve got a handle on your odds of success.

Paul Hoffman

Managing Editor, Channelchek

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Meta Materials (MMAT) NobleCon18 Presentation Replay

Sources

https://feeds.issuerdirect.com/news-release.html?newsid=8330648170070524

https://channelchek.com/news-channel/Meta_Materials__MMAT__NobleCon18_Presentation_Replay

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With Negative Real Rates, What Sectors Have Historically Outperformed?

The “real interest rate,” is defined as the net amount earned less inflation on an interest bearing security. Real rates are now at a low the country hasn’t experienced since just after World War II. In fact, with the recent Consumer Price Index (CPI) spike to 8.5% from a year earlier, inflation is 6% to 7% higher than one year US treasury levels. This means the real return is a negative 6% to 7%.

When the more conservative investor using interest-bearing securities begins to see inflation outpacing their investments, as they are now (in most cases), they recognize their assets are losing buying power. Their investments are not paying enough to keep up with price rises and certainly not growing so they can be able to buy more later with their savings. These simpler investors, by holding on to treasury securities, CDs, or corporate bonds, are losing ground, this loss of usable wealth begins to cause investors to move down the risk curve.

Putting on Risk

Dr. Horstmeyer is a professor of finance at George Mason University’s Business School in Fairfax, Va. He and his team decided to collect hard data on this phenomenon and see how different asset classes perform when real interest rates turn negative and stay negative for a while.

What they found with their look back is that when real interest rates turn negative, the asset classes considered riskiest (emerging-markets stocks, small-caps, etc.) had done extremely well in the first half of the inflation/interest rate cycle. During this period, they outperform what’s considered safer assets by over 1.5 percentage points a month. Stretched out over several months with compounding, the investors have done well.

The performance benefit reverses to a degree for those invested in these assets into the second half of the cycle. On average, the riskier assets have underperformed by over a percentage point (monthly) in the second half of a negative-real-rate cycle. This does not suggest the investors fared worse by adding risk to their portfolio; it may indicate that many investors were prudent and did not let greed keep them in the riskier securities. The later investors exiting lost ground from earlier gains.

The Research

To investigate what happened in the past, Professor Horstmeyer and his research assistants Jaehee Lee and Natalia Palacios gathered interest-rate data (based on T-bills), inflation data, and mutual-fund-return statistics for various asset classes over the past 50 years. They examined periods since 1971 when real interest rates turned negative and stayed negative for more than a month.

The group identified seven periods like this – the average period length is 2.5 years. For each period, they labeled the first half and the second half. The researchers then compared performance; first half compared to second.

What Investors Should Note

They reported two findings that investors should be aware of. First, during the first half of a negative-rate cycle, the riskiest mutual funds performed best. Emerging-markets funds, US small-cap funds and international-stock funds averaged 1.96%, 1.13%, and 1.03% returns a month, respectively. This average monthly return is far superior to all other equities and far better than the average bond fund, which had average returns of 0.35% a month during this period.

Half-Way Point

The additional performance reversed as the cycles matured. In the second halves, the riskiest funds underperformed. For example, emerging-markets funds lost an average of 1.13% a month. So while investors were seeking risk in the first half, it appears they eventually faded away from it the longer as the US remained with a negative real interest-rate environment.

Where are We Now

According to their findings which is based on historical averages, the current negative-rate cycle began in the second quarter of 2020. This could mean, if the 50 year pattern holds true, many investors have shifted over to riskier assets already. Since we are still sitting with negative real rates in the cycle, approaching the third year, it’s impossible to know yet where the first half ends and the second begins. Thus, even if we haven’t fully hit the point where investors move out of riskier positions, judging by historical length and data, we’re likely close.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.bls.gov/cpi/#:~:text=CPI%20for%20all%20items%20rises,12%20months%2C%20not%20seasonally%20adjusted

https://www.wsj.com/articles/investment-negative-interest-rates-11651781476?mod=hp_jr_pos1

 

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Leveraged and Inverse ETFs Contain Extra Costs for Buy-and-Hold Investors

Exchange traded funds are a popular way to invest to gain exposure to an index or an industry sector. If you’re bullish on a sector, they take the work out of selecting individual stocks within that sector. Instead, an ETF allows you to be exposed to many stocks and earn the mixed return of its holdings (less mgmt. fee). This is a valid, and for some, prudent way to invest. It would seem to stand to reason then, with the market’s recent performance, that if you think the equitiies may be weak for a long period that you could invest in an inverse ETF, or even a 2x or 3x inverse. However, it isn’t that easy. There is great danger in these so-called “geared ETFs.” Traders should fully understand this danger so they don’t get caught.

Leveraged or geared ETFs are not invested the same way an index mimicking 1x ETF is. This difference limits their usefulness; they can serve effectively as a hedging tool short term but are likely to fail as a long-term investment play.

Background

The underlying financial tools in a leveraged or inverse ETF are reworked each day to deliver a set positive or negative multiple of the performance of an index. Individually their objective may be to attain the goal over a given time period, such as one day or one month. The most common of the currently listed geared ETFs, leverage factors are 1.5x, 2x, and 3x and inverse factors are -0.5x, -1x, -2x and -3x.

The vast majority of geared ETFs reset their exposure factors each day. This means that the stated leverage or inverse objective they aim for is within a single trading day, generally measured from the close of trading on one day to the close of trading on the next day.

The objective of a geared ETF with a daily reset is to provide that degree of leveraged or inverse exposure for that single period – not over longer (or even shorter) periods. (Similarly, a geared ETP with a monthly objective is designed to provide that leveraged or inverse exposure for a specified monthly period.)

Holding a geared ETF for a period that is shorter or longer than its objective can lead to performance that may deviate significantly from the daily objective. In other words, if you are invested in a 2x inverse S&P 500 ETF, and the benchmark falls 1% in 24 hours, the security should provide you with 2% in return. However if you hold the inverse leveraged ETF for two months and the S&P 500 average decline is 1%, you may have several percentage points eroded from your account assets. I’ll explain below. The investment product is not designed to provide twice the positive or inverse return of the index over longer periods.

Another example is an inverse ETF that seeks to deliver negative 1x the performance of the Nasdaq 100 Index. This ETF aims to deliver a return that is exactly the opposite of what the index returns (whether positive or negative) on a given day. If the Nasdaq 100 closes up 1.5 percent, the inverse ETF would aim to return a loss of 1.5 percent. If the index closes down 2 percent, the ETF should return a gain of 2 percent.

Why Don’t they Function Longer Term?

To achieve their expected returns, leveraged and inverse ETFs employ a range of investment strategies, including swaps, futures, and other derivatives in addition to possible long or short positions in securities.

Since geared ETFs are only designed to accomplish the stated leveraged or inverse objective on a daily basis, they don’t orchestrate their underlying financial instruments to accomplish anything different than that objective. It simply isn’t their goal. In fact, returns often differ significantly from the performance (or inverse of the performance) of their pegged benchmark over an extension beyond the stated period of time. This makes these products risky if they are held medium or long term, especially in volatile markets. While these ETFs can be held for periods that don’t align with their stated objective, generally, the position should be monitored closely and used by investors who understand what the products are designed for and how they incur costs to the longer-term holder – that performance is warped over extended periods.

The fund manager incurs a large daily cost by resetting the underlying instruments, far greater than a straight 1x ETF. Also, most of the underlying instruments incur futures decay as they move closer to their expiration date. Over one day this decay is accounted for in the daily mix, over a longer time period it is felt by the investor.

Things to Consider

Before committing money to any of these ETFs, clearly understand the specific leveraged or inverse ETF before investing in it. Be sure about your own purpose in committing money. Could the ETF accomplish or undermine your goal? Read the prospectus, and understand the objectives, risks, and costs.

When Might You Use a Geared ETF

Most of these ETFs are created to be used to hedge a portfolio or trading position overnight. Trading desks, institutional managers, and savvy retail investors with overnight positions may wish to protect against a large change in portfolio value while they are sleeping or through  weekend.

For example: If a trading desk is long $600,000 in stocks that would be expected to roughly track the Russell 2000, before the close they may protect the position from any big moves overnight by committing $200,000 to a 3x ETF of the index.  

Take-Away

Leveraged and inverse ETFs are designed as very short-term hedging and risk management tools. Investors that are considering a strategy to implement either short ETFs or leveraged should read the prospectus and understand the particular ETF thoroughly. Review the performance over a year versus the expected index.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.sec.gov/investor/pubs/leveragedetfs-alert.htm#:~:text=As%20discussed%20above%2C%20because%20leveraged,the%20index%20showed%20a%20gain.

https://www.finra.org/investors/insights/lowdown-leveraged-and-inverse-exchange-traded-products

 

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Winners and Losers in a Market Capitulation

Capitulation can occur on an individual level, but the term is typically used when so many market participants are giving up on their holdings that the stock market moves down as if a bottom has fallen out. The setup for capitulation is in place well in advance of the hours, days, or months that these market events happen. And unlike black swan events which are almost always surprises, market capitulation is characterized by a build-up, and then a release.

It’s also characterized by many investors questioning themselves for holding for so long and potentially letting a profit turn into a loss.

Capitulate Definition – to surrender often after negotiation of terms           The enemy was forced to capitulate unconditionally. -to cease resisting: ACQUIESCE           The company capitulated to the labor union to avoid a strike.                     -Merriam-Webster Online

Praying to the Gods of Breakeven

Market capitulation starts after the market has been strong and has rewarded risk-takers. Then stocks seem to be facing headwinds and average investor fears grow. But not by so much that they don’t keep assets in the market. At some point, while they are holding, and prices continue to decline, greed is overtaken taken by fear. That is to say, fear that their positions will never go back up. This fear is then accompanied by hope.

When all hope is lost, investors face what they believe to be reality and finally hit the sell button. They’re often so tired of the painful days that led them to that moment that they don’t care what the fill price is. This causes the market fall to accelerate, then masses holding positions on margin are also forced to sell. These margin calls help feed the accelerated market decline.

Later, like most financial market behavior, when the last person is done selling, there is only one direction the market can head. Up. While it may go sideways for a while, as recently as last year the market indexes hit all-time highs, this after many market capitulations that came before 2021. So up would seem to be the market’s natural long-term direction.

Seeing it Coming

Markets can come down much faster than they climb back up. So taking some risk off the table while the probability of a painful sell-off is increasing, is one way to spare yourself from the worst. This is tricky as people often “lose” more money in lost opportunity than ever lost permanently in the stock market. 

Market players tend to behave in a bear cycle similar to a person playing slots at a casino. The machine takes some money, takes some more money, then occasionally pays. This gives the player hope which convinces them to stay in their seat. Market participants also stay involved because they’re occasionally rewarded and they’d prefer not to miss out on regaining the amount they are down.  Investors may also stay involved because they know that out of every single market fall in history, the market has always come back and hit new highs.

Pay attention to the market’s technical signs if they indicate it may not hold up. Did it easily break through a support level? Is there greater volume on down days than up days? How far past its moving average has it declined?

Fundamental signs are also always worth paying attention to. Is joblessness rising, consumer confidence falling, are taxes being raised, or are interest rates causing money to be too tight for businesses to thrive?

If the market you’re involved in is showing either technical signs of weakening or fundamental factors working against it, the risks have increased.  

Using it to Your Advantage

Market professionals consider the capitulation phase as reflecting the bottom of the market’s price. If investors could identify when capitulation has taken place and it is exhausted fully, they could buy at the bottom. At the point of full capitulation, there are no sellers left, only buyers and the market’s bubble has burst and is set to reinflate.

Signs of Nearing Stock Capitulation

Since the capitulation phase reflects the bottom of a market’s decline, if investors could identify when capitulation has taken place, it would signal the ideal time to buy. As mentioned before, this is because everyone who wanted to sell the security has already done so, and only buyers are left.

The problem in identifying capitulation is that it is usually only visible in hindsight rather than in foresight.

Source: Koyfin

The one year chart above shows a slow march downward for 2022 for all S&P sectors except for oil (XLE) and utilities (XLU). No sector appears to have had the bottom fall out, and there are still investors whose positions are sitting well above what they paid for them. Newer positions however may now be at a loss. The longer the downward slide continues, the more likely individuals will give up hope and margin account holders will be called to sell their positions. This increases the likelihood of a short but sharp downward search for the bottom.

So far the 2022 move downward has been orderly and on a percentage basis not huge, but it is a real reminder that stocks go both up and down. It seemingly doesn’t show that capitulation is imminent or that it has already occurred.

Fundamentally the outlook for stocks is not one of disaster as labor markets are tight, and there is still a large amount of money in the system that the Federal Reserve has not begun to mop up yet. Also, company earnings are mixed to strong.

Crypto-Capitulation

Capitulation that occurs in cryptocurrency markets is often stronger than in equity markets. For example, Bitcoin had a precipitous drop starting on May 2, 2021 when it fell from $57,300. to $29,800. by July 17, 2021. This 40% drop was partially attributed to negative news coming out of China about Bitcoin mining. Capitulation is often more prevalent in speculative assets.

Bottom Line

If seeing the onset of capitulation and knowing when it is exhausted was easy, we’d all be rich. Since that isn’t the case, we can act prudently in a few different ways. Hedging one’s position using the futures market when they feel risk is increasing is one way. This can be effective both while holding a position as the market seems to be gaining downside momentum, or when the investor believes they have found the bottom but would like to protect any new investment.

It is important to remember that the overall indexes have always grown and reached new highs as the economy continues to expand.

Paul Hoffman

Managing Editor, Channelchek

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Is DiDi Dead Money for Investors?

Didi Global Inc. (DIDI) shareholders will vote on its delisting at a special meeting on May 23. The downhill ride in stock price since last June began when the SEC began a probe into the corporation’s IPO. The company also came under the dark cloud that other Chinese technology companies were under, as Beijing had been creating rigid regulations making it more difficult for them to operate. That regulatory campaign has slowed.

Didi (DIDI) says, subject to applicable Chinese regulations it is cooperating with the SEC investigation. The ride-sharing company’s own guidance on the situation is not reassuring, “We cannot predict the timing, outcome or consequences of such an investigation,” DiDi wrote in a report to shareholders.

The company stock fell 7% in after-hours trading Tuesday and is down another 5.75% at midday today (May 4).

Details of the SEC probe have not been made public. Gaps in some disclosures before the IPO is a likely area of SEC investigation. What is known is the company didn’t tell investors that Chinese officials had urged the company to delay the IPO as the government was worried about revealing sensitive information in the offering. DiDi was then being reviewed by Beijing as a cybersecurity threat to China. This occurred just days after going public. The long selloff that followed has not had a reprieve. The IPO raised $4.4 billion at $14 per share.

The new U.S. Securities and Exchange Commission scrutiny mounts as Chinese regulatory pressures have not fully subsided. In December, DiDi said it would apply to list on the Hong Kong Exchange. But in March, the company said that it would delist from New York before looking for a new public listing. This is to cooperate with Beijing’s cybersecurity probe.

Shareholders will vote on the delisting on May 23, but company directors and strategic investors like Tencent (TCEHY) and Softbank (SFTBY) are likely to push it through. Smaller self-directed investors, many of who are sitting with huge losses, may find their ownership is “dead money” for an undetermined amount of time once the company is delisted.

Take-Away

The U.S. Securities and Exchange Commission is investigating Didi Global Inc.’s troubled 2021 public offering when the Chinese ride-hailing company raised $4.4 billion only days before revelations of a Chinese probe into data security pummeled the stock.

Like many other Chinese tech companies, Didi has come under the spotlight from regulators both in China and the U.S. since the IPO. Action from U.S. regulators shows that the end is not yet in sight for shareholders of the stock.

The company has been in talks with the Cyberspace Administration of China about a fine and penalties.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://finance.yahoo.com/news/didi-global-says-faces-sec-220926186.html

https://www.wsj.com/articles/didis-u-s-road-trip-just-got-even-bumpier-11651663261?mod=djemheard_t

https://www.bloomberg.com/news/articles/2022-05-03/didi-global-says-it-faces-sec-investigation-related-to-u-s-ipo-l2qpduya

 

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