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Is Robinhood a Prime Target for Acquisition During Weak Markets?

Whether or not Robinhood ($HOOD) is acquired by FTX, (the crypto exchange owned by billionaire Sam Bankman-Fried), or it attracts another suitor or remains a publicly-traded company, there are some things investors should know. Yesterday, a Bloomberg article suggested FTX is exploring whether it might be able to acquire Robinhood Markets, Inc. (June 27); they already own 7.6% of the company. Sam Bankman-Fried denied having interest. But, there is still some surprising data that investors in the company and users of the brokerage app should be aware of, as it could impact future price moves.

The investing app paved the way for free online trading, it then became a public company almost a year ago. At the time, there was still a strong wave of new investors eager to profit from the bull market in stocks and cryptocurrencies. The share price for the initial public offering came out at $38. By year-end, HOOD sank to about $18 per share. It is now trading near half the level it was at the beginning of 2022. 

The company went public with a market value of $32 billion; it now has a total market cap of $7.8 billion. 

Source: Koyfin

Robinhood Markets’ decline in price has been dramatic. The brand is well recognized, and the userbase, though shrinking, is more loyal than others. If it has lost customers, they were primarily the recreational investors and lower value users. Regardless, client trading is down; revenue for the most recent quarter was $299 million, or near half of what it was when Robinhood went public. Stimulus checks that in many cases were used to initially fund retail trading accounts are no longer being sent by the government; in fact inflation, in part caused by stimulus programs, may be the reason many are closing their accounts to reallocate the funds to necessities.

Many of the employees that found motivation in their own equity stake after the public offering have seen their valuations plummet. They might welcome a buyout. Using Morgan Stanley’s (MS) 2020 purchase of E*Trade Financial as a rule of thumb, Robinhood could be worth five times revenue, or $8 billion. One key employee that may wish to cash out as earnings have been trending down is Robinhood’s founder Vlad Tenev. His incentive package is tied to the price per share. To reach his maximum payout of $4.7 billion, HOOD shares would have to go from the current $9 range to $300 per share. As this seems unlikely, the founder may wish to cash out as high as possible and move on.

Other companies, if they served Robinhood’s customers, may be able to capitalize on synergies. According to Bloomberg’s story on FTX, a cryptocurrency exchange founded by Sam Bankman-Fried is considering how to make a bid. Today, an email by SamBankman-Fried, says he is not. But this does not mean the app isn’t attractive to suitors. Two other firms that could make good use of Robinhood’s retail traders (according to Reuter’s) are Goldman Sachs (GS) and JPMorgan (JPM), to complement and distribute their various savings and wealth products.

A buyer would still need optimism and confidence. Robinhood’s revenue mostly comes from paid-order
flow. The Securities and Exchange Commission suggested this source of revenue has potential conflicts of interest. Still, only 12% of the company’s top line comes from selling trade orders. Another activity that has recently slowed is trading in cryptocurrency. When added, it was expected to be a source of growth.

Take Away

Robinhood benefited from the upward momentum of the markets and went public at a great time to capture a very good price for the company. The markets have weakened, and the value of the company may have reached a point where a stronger company with enough synergies may target it to make the acquisition worthwhile. Despite the denial by FTX, acquiring companies is a cat-and-mouse game, don’t count anyone out.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.bloomberg.com/news/articles/2022-06-27/bankman-fried-s-ftx-said-to-be-seeking-path-for-robinhood-deal#xj4y7vzkg

https://www.sec.gov/Archives/edgar/data/1783879/000162828021013318/robinhoods-1.htm

https://www.reuters.com/markets/deals/bankman-frieds-ftx-seeking-path-buy-robinhood-bloomberg-news-2022-06-27/

https://www.reuters.com/breakingviews/robinhood-0-would-start-look-cheap-2022-06-27/

 

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The Final Trading Hours as the Russell Indexes Will Have Changed on Monday

One of the most active trading days of the year is upon us. The last Friday in June is the day index funds totaling $12 trillion are realigning their portfolios. This is because the FTSE Russell
indexes reformulate after the close of business on the 24th and reset upon the opening bell on Monday, June 27^th, with new components. This creates a challenge for those managing
Russell Indexed funds like the Russell 3000, Russell 2000, Russell 1000, and subdivisions, including value stocks. All will change their components which makes this a very busy day for managers of funds that mimic the various indexes. 

Investors in a stock market which is substantially weaker than it was at the beginning of the year, and even much lower than at the beginning of May when the market-cap ranks by the FTSE Russell may find the last hour of trading to whipsaw both widely traded names and less followed companies.

The remix activity in the past has been toward the end of the Friday trading session, just prior to the reconstitution beginning which is at the start of the next trading day.

The resulting buying and selling just before the remix is final, may not only cause price swings but adds to very high volume. Total trading volume on the last Friday in 2021 topped 16 billion shares, putting it among last year’s busiest sessions.

The preliminary lists of Russell 3000 additions and deletions give investors a good idea of some of the stocks that will likely be on the move. Nearly 300 stocks will join the Russell 3000 index. The list of names moving into the Russell 3000 includes Airbnb (ABNB), Bumble (BMBL), Coinbase Global (COIN),  and  Harte Hanks (HHS). It is going to be more heavily weighted in energy and consumer discretionary companies as a result of their performance over the past year.

Roughly 300 stocks are also being removed from the Russell 3000, including Citizens (CIA), Genius Brands International (GNUS), Ideanomics (IDEX), and Kirkland’s (KIRK).

If you’re a participant or even a spectator to the activity, watching the company formerly known as Facebook, Meta (META.O) could provide a good lesson in what recategorizing can do. Meta will be moved to the Russell 1000 value index (.RLV), the index for investors to gauge how value stocks are trading. Facebook/Meta is perceived to be trading at a discount to its fundamentals. The Russell 1000 will experience a greater weighting in energy stocks (.RLG) as a result of strength in many of the related companies.

The Russell MidCap Growth index (.RMCCG) will move up to 5.1% of the index from 3.3% before the reconstitution.

The impact on $12 billion in portfolios creates a high duty of care for FTSE Russell. They are transparent in how they select stocks, they share the information they garner on “Rank Day,” Russell then gives itself weeks to sort through for errors, all the while market participants are aware of what to expect on the last Friday (and perhaps the beginning of trading on Monday).

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.forbes.com/advisor/investing/russell-index-rebalancing/

www.koyfin.com

https://www.ftserussell.com/products/indices/russell-us

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Are Michael Burry’s Twitter Predictions on Point?

I’m bullish on Michael Burry Articles. The demand among investors and other readers is intense. Even those published
two years ago on Channelchek are consumed by new readers each day. And each time he deletes
his Twitter (TWTR) account, even more traffic is driven to those stories. The hedge fund manager, medical doctor, and subject of the movie, “The Big Short,” has again deleted his Twitter account after highlighting through various tweets, how ahead of the curve he has been with his predictions. 

As an investor with a cult-like following, Burry is best known for having predicted the 2008 mortgage crisis, and more significantly, how to line up trades to profit from it. Anecdotally, it seems he’s more comfortable predicting
downside. This year he began suggesting the U.S. economy may succumb to a similar fate. Throughout 2022, with growing concern, Burry has been consistently warned of a painful recessionary period ahead, and has held investments in prisons, military contractors, and has shorted Apple (AAPL), and placed big bets against U.S. Treasuries.

As with his short on the mortgage markets, Burry is usually early with his predictions. Others in the investment world tend to disregard his early warnings well ahead of events that often have eventually unfolded as he predicted. Based on his tweets, this lack of being believed frustrates the successful fund manager. This is likely why he refers to himself on Twitter as Cassandra
B.C.  In Greek mythology, Cassandra was a Trojan priestess with the gift of accurately prophecizing the future. However, she was also cursed with no one ever believing her prophecies – Cassandra was instead described as insane.

It is typical for Burry to disable his Twitter account after tweeting some of his more emotional tweets. He does this and then resurfaces with those tweets deleted. Recently deleted posts show Burry believes that fake Twitter accounts use his tweets. Specifically, he suggests bots and others pump asset purchases as comments on his posts. This helps them boost whatever it is they are trying to pump. He gives the reason for deleting his account as a way to discourage misuse of his famous tweets,“But it’s breathtaking, this religion of real and fake people. The speculation probably tops anything in history,” he wrote.

He is no fan of cryptocurrency. “If you don’t know how much leverage is in crypto, you don’t know anything about crypto, no matter how much else you think you know,” he tweeted. This is a similar cry to his posts in April 2020 when he predicted the U.S. would suffer from runaway inflation. He was also critical of the wisdom of the meme stock frenzy, which skyrocketed the prices of a few nostalgic stocks.

After last May’s CPI numbers, Burry tweeted, “Transitory, no. Peak, no. To the moon? If you mean a cold dark place.” As per Burry, inflation broke the weakest sector with “no buyers for MBS.” His prophecy that inflation numbers have not yet peaked this year and says the mainstream news that are reporting a strong dollar are looking at it incorrectly. In his
measurement system, the dollar is weak. is being heeded by some of his followers, the reduced value of the dollar spending power the inflation of May is not yet at its peak has created profound fear among the masses, as they are already dealing with the reduced disposable income coupled with increasing gasoline prices and other everyday use items.

It was in June 2021 Burry posted, “When crypto falls from trillions, or meme stocks fall from tens of billions, #MainStreet losses will approach the size of countries. History ain’t changed.” While scoffed at the time, and certainly there were many who got in, got out, and grew their accounts back then, but those that held are seeing a lot of red due to both the crypto selloff and the unwinding of the meme stock trade, not to mention the overall market performance. 

Burry’s latest exit from Twitter was after a warning for the rest of 2022. He indicated unfathomable pain. While there is already pain in the market and on main street, his forecast is in addition to what may be a recession this year,  a reduction in savings rates, 41-year high inflation rates, relative dollar weakness, and markets down between 23% and 31%. 

Take Away

Dr. Michael Burry has again tweeted
about doom and complained that people aren’t listening. It is worth understanding his expectations and deciding whether they are viable and if there is action you as an investor should take. Articles surrounding his expectations and his portfolio holdings are widely read by investors. Sign up for Channelchek emails to stay in touch with these stories and many others.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.newtraderu.com/category/michael-burry/

https://markets.businessinsider.com/news/stocks/big-short-michael-burry-inflation-interest-rates-housing-market-mortgages-2022-6 

https://www.tipranks.com/news

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Investors Always Have to Play the Cards They’re Dealt

Keeping your cool when faced with options that affect your investments will more likely translate into making better decisions. But often, when a stock goes against us or a bear market takes a bite out of our portfolio, we forget we have options. This could lead to doing nothing, doubling down at the wrong time, or unloading everything for a loss – then swearing we’ll never invest in another stock for as long as we live. Investors do have options; what is important is to look at where you are and not let the change in your portfolio remove good judgment.

Your Own Soft Landing

Investors are looking for ways to shield their portfolios after stocks gave back 10% so far in June alone. This followed a slow erosion throughout the year that amounted to another 10% or more. Just this Monday, the S&P 500 closed more than 20% lower than the highs reached at the start of 2022. Investors have come to define a bear market as a 20% decline from highs that would place us in a bear market. But it gets even more intense, on Wednesday, the Federal Reserve instituted the largest rate increase since 1994 in an attempt to hit the brakes on an economy that has become inflationary. 

Aside from the market which is anticipating the Fed will be successful at creating a slowdown, the market may already be in a recession. First quarter GDP declined by 1.5%, putting us at risk of being in one already the first half of this year. However, Fed Chairman Powell indicated in his statement this week that the economy had accelerated during the second quarter. Concern is still high among investors, economists, business owners, and households about the path of the economy, or more accurately what the path means for them and what they may do now to have their own “soft landing.” There is a lot of fear bordering on panic across all the stakeholders in a healthy economy.

For investors, this elevated fear can cause questionable investment moves. Below are three typical moves investors have made when their once healthy portfolio took a bad turn. Just knowing them and also that others have lived through similar cycles could lead to better thought processes for an investor.

Doing Nothing – The deer in the headlights approach of just watching an oncoming car that may hit it is not uncommon. You want to do something but you’re frozen. For some, this occurs because each time they move to do something, they see signs that conditions may change. With so much going on in any economy, it is always possible to see anything you want to see.

It may make sense for investors that have experienced this to predefine actions they will take if certain events occur. For example, if the stock decreases in value faster than the S&P 500 index over the next week I will sell X.XX%. If the stock outperforms the S&P 500 index in the coming week, I will retain my holding and then watch for the same circumstances the following week.

Having a rules-based system to guide you or show you when your money is not employed in the best place can help prevent indecisiveness.

Hit the Sell Button on Everything – Individual investors tend to sell after an economic downturn is already priced into equity markets. Selling when stocks are 20% cheaper than they had been and below where you were once comfortable buying them locks in your loss. Getting rid of the paper loss allows the investor to not have to worry or watch it anymore. They bite the bullet and deal with it by making it go away. What caused the pain can’t hurt them any longer.

The decision is based more on figuring out how to stop the worry. If the same investor had missed buying the same stocks and was now looking at them down double digits, they may find the positions attractive. But, the red in their account does not allow for the same, clear, less emotionally clouded disposition for decision making.

The solution is to forget about where you bought it and decide if it is the best place for your money within your investment time horizon. If you believe you can get a better return elsewhere, then move. If you think the potential is strong and better than the alternatives, stop worrying about it.

Most humans are wired to have perfect bad timing when investing. They will watch something go up and wish they had bought it. About the time they give in and buy, the stock has peaked. The same happens with selling; when the holding is losing value, people tend to watch and not sell until it is near the end of its decline.

Doubling Down – With a long enough time horizon or a large enough pool of reserves, doubling down in a diversified portfolio has always paid off. However, sometimes it has taken 30 years. In recent history, the recovery time has been much shorter.

If you are looking to add to losing positions, approach with caution, and know, that the reality is you’re looking to find the bottom when the bottom may not be reached for another year. Average in if you can, spread your risk.

Take-Away

Knowing that the market moves in cycles and having faith that this time it is the same as other times helps one have a clear head to make investment decisions going forward.

Simplifying options and making a plan help the thought process and the implementation of investment moves. Any move should be weighed against the risk of inflation eating away at savings, credit card debt costing more than any investment return expectations, and making sure losses are never so big that you don’t have capital set aside for the next long-lived wave upward.

Paul Hoffman

Managing Editor, Channelchek

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Investors and Traders that Jumped in Early to FTSE Russell Trade May Have Gotten Soaked

How has the stock market sell off impacted the FTSE Russell Reconstitution? A sudden rise in a stock’s price is almost always demand-related. And demand for a few hundred stocks has been expected to come a week from Monday when the market opening bell rings on June 27. The FTSE Russell 3000 will include 300 new names for the next year or more. The FTSE Russell will also be recalibrating its Microcap Index. Fund managers that manage index funds tied to these benchmarks will need to eliminate their holdings in what is exiting the index related to the fund they manage, and on a balanced weighting, take on some new names to their holdings. Hedge funds and individual investors know this and it has become popular to front-run the late June shift in demand. But an unexpected selloff might be gunking up investor strategies.

Background

Inclusion in a major market index is exciting for the management of a publicly held company, while it can cause dislocations and wild price swings that may not wind up with the stock price being higher, they can count on higher trading volume, which increases liquidity and reduces bid/ask spreads. 

For investors, since the 1990s, it has signaled a period where hedge funds and individuals alike try to take advantage of the short-term dislocations and adjustments. It’s important for all involved to remember that much of the list of names included or excluded for the first time in a Russell Index may just be moving from one index classification to another. In these cases, it may be difficult to gauge whether there will be higher demand or lower. Market forces also play a large part; the market has been bearish recently, so performance is relative.

Source: Koyfin

Reconstitution June 2022

There is no indication of how monetary policy, inflation, investor appetite, and market weakness is going to affect the final days of the rebalancing. The Russell 3000 Index (shown above using VTHR) is down 11.12% since rank day. The Russell 2000 is down 9.99%. Rank day is when the FTSE Russell looks at all stock’s closing prices and determines the top 3000 stocks by market value.

For investors and traders that were looking to, and even have acted to cash in on an early entry strategy, and even portfolio managers that got an early start rebalancing, they may have been caught by all the fall off in the markets; some may have even amassed oversized losses.

Typical Pre-Rebalance Day Strategy

The basics of the strategy involves buying up shares in companies slated for inclusion in an index and selling short the companies about to be removed. Trillions of dollars in passive investment funds like Mutual funds and ETFs are designed to mimic these indexes. Knowing this, traders, hedge funds, and savvy individuals have noted the changes announced by Russell weeks in advance, purchases some of those expected to be added, and then wait until late June and early July to sell these positions. The result over the years has at times been significant, with high probability of price moves. The added stocks on average rise and the deleted stocks wane. 

Not Your Typical June

This strategy has been around a while, but it has gotten crowded over the past five years. Investors and traders in 2022 may need to temper their enthusiasm with this rebalance. This year there may already be far more than average that are holding stocks in these names that will soon be lined up to unwind. This could cause weakness in the very stocks purchased to rise. Plus, investors may already be down double digits in these names.

Source: Koyfin

The nearly 300 stocks scheduled to join the index on June 27 include Airbnb (ABNB), Lucid Motors (LCID), SoFi Technologies (SOFI) , WeWork (WE), and many others that have gone off a cliff this month. The S&P 500 and Russell 3000 are each down 9%.

It’s not the first time the index-rebalance trade has soaked participants. In 2020, specialists in the strategy started off in disarray as fallout from COVID-19 late Spring altered many of the rebalance participants that hedge funds had presupposed. What was strong became weak and what was weak became strong just before the rank date.

Take Away

There are investors that look to determine which companies may be added to an index and which may be removed. Although being right doesn’t always mean huge gains, the rewards, on average, make this a legitimate approach for stock picking. This year the Russell 3000 index may have undermined strategies to get in early unless those that got in early shorted stocks being removed.

The sell off prior to the June 27 reopening could leave many who looked at their Russell Index play as a short term holding taking a huge loss, or keeping the money tied up while hoping for a 30% rally. Tax considerations aside, if any holding becomes dead money for any length of time, while there are better opportunities, taking a loss should be considered.

Be careful out there.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.ftserussell.com/press

https://www.businessinsider.com/overcrowded-index-rebalance-trade-leads-to-losses-for-hedge-funds-2022-6#

https://www.sec.gov/fast-answers/answersindiceshtm.html

 

Sources

https://twitter.com/elonmusk/status/1501449525831081987

https://www.cnbc.com/2022/06/14/bitcoin-plunge-spells-trouble-for-michael-saylors-microstrategy.html

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Market Leverage Swings Both Ways

There is a direct correlation between large increases in margin debt and increases in stock prices. This makes sense since the increased borrowed money allows higher demand for stocks. The uptrend and borrowing may even feed on itself for a while. If the market later unwinds, as it sometimes does, investors may find themselves required to shore up their accounts financially or sell affected positions. This mechanism, called a margin call, can have overall market implications, especially if it’s widespread and impacts widely held stocks. In the past, there have been major stock market events associated with sharp declines in leverage. According to recent FINRA data, margin has been decreasing since last year.

Some Data

Margin debt dropped by $20 billion in May from April to $753 billion, according to FINRA. FINRA is charged with oversight over brokers in the U.S. . Margin debt peaked in October 2021 at $936 billion. The following month it began to decline. The Russell 2000 and the Nasdaq 100 both peaked in November. The small-cap index is now down 31.5% from its high, and the Large Cap Nasdaq 100 is down 32.5% from its November high.

There are also other forms of margin debt, it is smaller in size, but these figures are more difficult to attain accurate information on. They could include opening a brokerage account with revolving credit, even home equity loans, personal loans, and bank securities-based lending.

Forced selling in widely held stocks is likely to have impacted names like Amazon (AMZN), down 45% from its high, Netflix (NFLX), down 76% from its peak, and Meta (META), which slid 57% from its high, Nikola (NKLA) is down 93%, and even Peloton (PTON) experienced a 94% decline.

Some Charts

Data Source: FINRA

Margin debt nearly doubled from March 2020 to November 2021 as borrowing reached its high. The levels have now shaved 20% from the highest balance. Below is a Nasdaq chart of the same period. The trend closely tracks the change in margin outstanding in brokerage accounts overseen by FINRA.

Source: Koyfin

Some Insight

Margin has an impact on market movements, just as any other factor that may increase or decrease cash available to invest. These factors could include stimulus checks, taxes, increased household costs, higher employment situation, etc. Investors should keep aware if margin debt levels are higher than normal and growing or shrinking – especially when the market begins to lose ground. The same is true for investors that see increased use of margin debt at an increased rate. This could create momentum on the upside.  

For investor insights and to explore and discover lesser-known opportunities, sign up for
emails from Channelchek.

Paul Hoffman

Managing Editor, Channelchek

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Source

https://www.finra.org/investors/learn-to-invest/advanced-investing/margin-statistics

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Cowboys and Cryptocurrency

Is Michael Saylor of MicroStrategy ($MSTR) a “cowboy?” Many entrepreneurs are. But, the founder mindset often has blinders to risk; some only see possibilities. As CEO of the publicly traded software company he founded, Saylor is responsible for the purchase of $3.97 billion in bitcoin ($BTC.X), much of it by employing leverage. Bitcoin ownership is well outside of the software business realm. Since 2020, when MSTR first speculated on the cryptocurrency, it rose by 700% and Saylor’s company’s value rose in tandem. It must have been an exhilarating ride for management and investors. But the same “horse” that took them on that ride, may hurt them this go-around.

Source: Koyfin

Before engaging or enraging cryptocurrency believers, here’s another recent example of a company CEO rolling the dice: AMC Theaters spent
$27.5 million to buy 22% of a goldmining company. Since $AMC’s purchase, gold has declined 6.35%, and the company they purchased Hycroft Mining Holdings (
HYMC), is down 8.70%.

Bitcoin, over the last five days, is down 28.5%. Stepping back from the crypto hype, it’s worth exploring and understanding what Michael Saylor, and so many others have placed so much faith in. Specifically, at its most basic, what is cryptocurrency?

The Lure and Lore of Bitcoin

The seeds of bitcoin and other cryptocurrencies were first planted on Halloween in 2008. On that day a nine-page theoretical paper published by an unknown author named Satoshi Nakamoto was released. The impact of this theory was brought to life and has since caused some to become billionaires, even more people, to become millionaires, and quite a few to lose tens of thousands or much more through their speculation. It’s like trick-or-treat via blockchain.

Human behavior is not always rational. There are few people that can be in a crowd where  “everyone is doing it” and not feel peer pressure to take part in whatever “it” is they’re doing. This is/was especially true when there have been big rewards for some, but certainly not all involved. Sometimes you’re late for the game and have to recognize the game may be over. It would have been nice to have speculated and then attained billionaire status in just a dozen or so years. But you may have to find another avenue for that. The crypto-zillionaires will always be part of the lore and mystique of bitcoin. But looking under the hood, and forgetting any previous hype, the idea of any large investment in crypto should leave most people scratching their heads in confusion.

Let’s discuss the author’s credentials. No one had ever heard of Satoshi Nakamoto when it was published. Even today, no one can identify this person. It is unknown whether the theory was created by a group of people, one person, or even a government entity. It is a mystery that remains unsolved. Does that sound like something worth investing $1,000 or more in?

The paper was called Bitcoin: A Peer-to-Peer Electronic
Cash System. It described for the first time a decentralized digital “currency” without central bank administration. Essentially what the paper proposed and later helped create was something that could possibly be used as currency instead of greenbacks or any other traditional currency. To date, it has barely become used as a currency, even in El Salvador where it is one of the national currencies. Each bitcoin that enters the blockchain is created by solving complicated math problems known as “Bitcoin mining.” Solve the math problem, and you have created a Bitcoin. Alternatively, you may exchange your native currency (hard-earned dollars) for this new currency that is barely accepted by any retailer and exists only on a ledger in cyberspace.

Up until 2010, the price of a Bitcoin, expressed in U.S. dollars, was under a penny. It jumped to 8 cents that year. Had you purchased Bitcoin after this huge leap, let’s say $0.80 worth, you’d have had something valued at over $600,000 in early 2021. This is because the price of one Bitcoin had jumped to over $60,000 a piece in just over ten years. So $10 in Bitcoin purchased back then would have provided you with well over a million if exchanged back to dollars in 2021.

Bitcoin and Cryptocurrency Today

Late last year, it would have cost you $64,000 for a single bitcoin; six months later (today), about $22,500. Is the current price a bargain, will the trend continue, and will MicroStrategy get a margin call that requires them to dump a billion worth of the asset into the market? How many other companies have crypto on their balance sheets may be weighing down their Net-Asset-Value (NAV)? The MicroStrategy story is probably causing people who sit on corporate boards to reevaluate whether it’s responsible to be holding or accepting payment in bitcoin, ether, Doge, or any other non-legal tender.

Bitcoin is currently trading at $22,400, MicroStrategy’s crypto holdings are now worth $2.9 billion. That translates to an unrealized loss of more than $1 billion. But, the company may face a required margin call, they’d then have to commit more funds to avoid losses on holdings that they enhanced with borrowed cash (margin).

Bitcoin and Cryptocurrency’s Future

Bitcoin is undergoing a brutal sell-off which has it approaching exchange rates not seen since December 2020. The market conditions have become erratic, with the crypto lending firm Celsius halting withdrawals on Monday (June 13). Celsius cited “extreme market conditions.” Also worth remembering is that a stablecoin recently broke the buck.

This is not intended to be a eulogy for bitcoin or any other cryptocurrency. As with most markets, stocks, real estate, gold, beany babies, etc., what lies ahead is never certain. Early investors are usually the bigger winners or losers in anything. But crypto now seems to have its back up against the ropes, central banks are coming down on it, regulators like the SEC are exploring ways to tighten what they see as the potential to abuse it, and those that are invested in it are questioning their own holdings. This all started as a theoretical paper, it is only backed by the belief that it is worth something, if that belief fades, so will its value.

Please leave any comment or discussion under this article on our Twitter Account.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://twitter.com/elonmusk/status/1501449525831081987

https://www.cnbc.com/2022/06/14/bitcoin-plunge-spells-trouble-for-michael-saylors-microstrategy.html

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Should ARK Invest Apply a Little More Caution?

Individual fund managers come in as many different risk types as there are types of highway drivers. Some will try to get where they are going as fast as possible, even if this risks everything, and others will always drive cautiously slow. Others change their driving based on perceived conditions at the time. ARK Invest was reportedly founded by Cathie Wood after she regularly disagreed with her former employer over her lack of caution. Her boss at Alliance Bernstein recently told the Financial Times that “her biggest blind spot is managing risk and volatility.” In fairness to them both, there are two ways to run managed funds, the first is to always stay fully invested in your advertised style and let those that enter and exit change their exposure based on their own risk tolerance, and the second is to occasionally take your foot off the accelerator if there appears to be the potential to crash. Like the little old lady from Pasadena, Cathie Wood can’t take her foot off the accelerator.

Source: Koyfin

A couple of months ago, Ms.Wood was the keynote speaker at an investment conference in South Florida. Her company’s flagship fund ARK Innovation (ARKK) was down about 50%, and some of her better-known aggressive positions in future-looking tech companies like Coinbase and Robinhood had been proving themselves to be disappointments. Despite ARKKs huge fall-off in performance, she was greeted as a keynote with the kind of awe and adoration bestowed on rock stars. At the event, she doubled down on her support for her holdings. Wood had previously been forecasting that ARK Invest funds would deliver annualized returns of 15%; in April, from the podium, she told investors, “Now we think 50 percent.”

If you get in the car with a driver that insists on driving 110 mph regardless of the road conditions, you may get to where you’re going faster than driving with anyone else, you may also not ever make it.

Since her prediction of a 50% return by year’s-end, ARK Innovation is down another 34 percent.

The firm still has substantial assets under management (AUM), more than $16 billion. Her aggressive optimism and success, especially during the pandemic, had caused her AUM to have once grown to $60 billion. Almost all of her funds are full speed ahead in the riskiest investments on the market, including cryptocurrency and other new tech. Last fall, she put a $500,000 price target on bitcoin, a few months later, as bitcoin’s price sank, she raised her forecast to $1 million. In fairness, she could still be right, but her funds have lost ground over those that have been more cautious.

Wood still keeps her head down and continues pushing through any adversity, be it criticism or a market sell-off, as though she believes she’s fighting a righteous battle. “Truth will win out,” she repeatedly said on her firm’s monthly webinar in May.

For individual and even institutional investors, when investing in a fund, it’s important to recognize if the driving responsibility is on you, or on the manager. That is to say, don’t count on the manager taking risk-off in volatile markets, or putting risk on during bullish conditions. There are managed funds that hold completely true to their style and funds that try to create the best performance within the guidelines of their prospectus. The managed funds at ARK Invest would seem to be all in, all the time.

Take-Away

The benefit of placing money in a managed fund is you have a professional fund manager. One of the benefits of being active in selecting individual stock positions yourself is you can refine your portfolio more toward your own risk tolerance and adjust it at any time.

If you do place some of your assets in a fund, make sure you know what you’re buying. There are people who have watched the stock market take off only to realize their manager had been maxed out in cash and they missed the move and others that presume that their portfolio manager knew when the market was stormy and sidelined some riskier positions. 

It’s your money, know the driver, or be the driver.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://empirefinancialresearch.com/articles/rally-in-cathie-woods-fund-avoid-arkk-these-contrarian-indicators-suggest-the-bottom-is-in-my-35th-high-school-reunion

https://ark-invest.com/articles/market-commentary/innovation-stocks-are-not-in-a-bubble/

https://www.morningstar.co.uk/uk/

https://www.thestreet.com/technology/cathie-wood-makes-a-very-bold-prediction-about-tesla

https://www.cnbc.com/video/2022/04/29/watch-cnbcs-full-interview-with-ark-invests-cathie-wood.html

https://www.bloomberg.com/news/articles/2022-06-07/cathie-wood-s-asset-plunge-is-biggest-among-etf-issuers-in-2022

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Last Week’s Russell Inclusion List Will be Tweaked on Friday

This evening (June 10) and next Friday are days the FTSE Russell Index sets aside in their annual Russell 3000 reconstitution to check their
work. On these two Fridays, The Russell posts updates to its equity index reconstitutions that had been announced last Friday. These updates and adjustments to the original lists provided could occur for a number of reasons. The reactions to stock prices impacted could be strong as these announcements (when they occur) are less predictable and not surrounded by hundreds of other companies being added or deleted. The adjustment announcements will be after 6 pm ET on June 10 and June 17. Below are some of the reasons that FTSE Russell may adjust their newly included companies just a week or two after the initial announcement.

Possible Reasons for Adjustments from the FTSE Russell
Equity Index Guidelines:

• If an incorrect Closing Price was used, the index would determine if the index constituent still fits within the index, if not, it would replace the company.

• It is possible for them to have used an incorrect or ineligible company and added it. If discovered, the index would change out the ticker and replace it with the next in line.

• The currency used to evaluate the company’s market cap may have been incorrect. In this case, the error would have either overstated or understated the market cap. It is recalculated and Russell would re-order where the company stands in relationship to others.

• Dividend ex-dates can throw a monkey wrench into calculations if not caught. The additional two Fridays give The FTSE Russell a chance to eye any oversights and adjust the index representation.

• If there is a dividend and the incorrect amount was used to calculate, this would be backed out and recalculated. These would be redone and the company would be slotted accordingly.

• Ticker Symbol Change, Facebook, or now say Meta just had a ticker symbol change to match the name change. While this company was already included in the larger index, the ticker will be changed to reflect the new identifier.

• If there is a change in the company (ie: merged, acquired, large divestiture) prior to the third Friday in June, the combined/divided market-cap(s) will be recalculated and positioning adjusted. If both companies were included, it might make room for the inclusion of one more.

A complete list of the Russell index additions announced on June 3, 2021 with the preliminary add-ins can be found here. Many of the companies have already experienced “out of the ordinary” activity in their shares.

Take Away

The annual reconstitution is a significant driver of dramatic shifts in repositioned company stock prices as index portfolio managers have their required holdings adjusted for them. The initial list from FTSE Russell is largely accurate and has a big impact on stocks. Any revisions from there could provide opportunity.  It’s worth paying attention to.

Paul Hoffman

Managing Editor, Channelchek

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In a Declining Stock Market, SPACs Could Offer Protection

Let’s say you and a bunch of other investors pool your money and hire an acquisitions expert. This dealmaker uses the large amount of cash raised as leverage to help negotiate a great deal to acquire an existing business. The agreement with the dealmaker is, if he finds something interesting, you will all get to vote on his moving forward for you. If the vote is yes to move forward, and somehow you’re still not interested, you can individually have your money back (less expenses, plus interest earnings).

The risk is that you and the others are tying up money that may have been invested elsewhere (although you can still sell at secondary market levels). In exchange for tying up your money while the expert searches for an acquisition on the group’s behalf, if an acquisition is found you get to opt-in or out, or as mentioned, sell shares if the proposed acquisition creates a spike in share price (potential to profit). If you opt-out, or if an acquisition is not found, the agreement is you get your money back adjusted for expenses and income.

This is the essence of a Special Purpose Acquisition Company or SPAC. Participants in the original SPAC IPO may set themselves on the path to a number of decisions and opportunities along the way. In the end, they may find themselves with the question that Let’s Make a Deal players are asked by the host, “Do you want to keep the cash, or take what’s behind the curtain?” 

Keeping the Cash

As an example, two years ago the largest SPAC ever funded had an IPO at the unusual entry price of $20 per share. Typically SPAC IPOs are priced at $10 per share. There were 200 million shares at $20 sold during the IPO. The sponsor and stockholders agreed to a two-year period within which the sponsor has to target and move toward acquiring a target – or distribute to shareholders the funds held in escrow to make the purchase. 

This SPAC, Pershing Square Tontine Holdings- Class A (PSTH), is now approaching the date when it may be required to distribute the money held in escrow back to current holders of the stock. According to Part I of their Balance Sheet as of March 31, 2022 (SEC 10-Q), the Class A common stock, subject to redemption then had a value of $4,004,044,295. This is an increase from the end of the prior quarter and in excess of the $4 billion that original shareholders paid in.

If the sponsors of PSTH and Chairman and Founder of the hedge fund Pershing Square Tontine Holdings, Bill Ackman, don’t find a match in the next few weeks, they will have to distribute what is likely still over $4 billion held in escrow. This will roughly equal the $20 per share paid at the original IPO. This escrow is effectively a floor on market losses for SPAC investors that get in at the beginning and make decisions on any merger and ownership as they arise.

The money tied up for up to two years does have an opportunity cost. For example, during the duration that PSTH holders took a two-year SPAC ride and now could net almost exactly where they began, the S&P 500 rose 16%.

Behind Curtain #2 and #3

While the S&P did rise 16% since this particular stock went public, the mood of the stock market has since turned and the broader market has suffered losses of 18% so far in 2022.

Original holders of the example SPAC (Pershing Square)  may have hoped for the opportunity to one-day hold shares in stock of a world-changing company with a great future. But there are other owners as well that held it for other reasons. The stock from its first trading day rose and eventually reached a high in February 2021 of $34. For those trading the SPAC IPO, they could have beaten the market despite Pershing’s lack of success in finding an acquisition.

Since July 2021, the stock has been trading below the $20 IPO price, the capital paid in by stockholders has been earning interest in escrow, and any likely distribution may be in excess of where it has been trading for almost 12 months. This would outperform the 2022 S&P 500 returns by nearly 20%.

 

Take Away

Players chosen from the audience of Let’s Make a Deal are provided with an initial prize, often an envelope containing a few hundred dollars. They are then asked if they want to take a chance on something that may be bigger but could be worse. Their risk is limited in that they can always opt-out and know what they have (cash), or if they continue to take a chance, they may wind up with more than they came with.

SPACs are unique with a differing set of risks and potential rewards. A well-chosen name, trading secondarily near or under the original IPO price, limits the investors’ risk in a way other common stock purchases cannot. There is still potential upside as any talk of a merger or actual merger will move the price, but its price movements have low correlation to the overall market. This could be helpful with high volatility.

Particularly noteworthy, especially in a bear market, unlike the overall market potential, there is protection against it dropping substantially.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://pstontine.com/wp-content/uploads/2020/07/Pershing-Square-Tontine-Holdings-Ltd.-Announces-4000000000-Initial-Public-Offering-at-20.00-Per-Share.pdf

https://sec.report/Document/0001193125-22-143641/#tx317290_5

https://sec.report/Document/0001398432-20-000084/

https://www.nasdaq.com/articles/pershing-square-tontine-holdings-ltd-class-a-shares-close-in-on-52-week-low-market-mover-9

https://stockanalysis.com/stocks/psth/statistics/

https://www.businesswire.com/news/home/20220609005951/en/Pershing-Square-Holdings-Ltd.-Announces-Transactions-in-Own-Shares—9-June-2022

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Image Credit: Amtec Photos (Flickr)

Great Economic News is Spooking the Stock Market, Here’s Why

Any concern that Fed governors may have harbored that they might overtighten at an inopportune time with an already weakening economy probably ended today. The Labor Department’s employment report released Friday gave them the green light. In fact, the Fed may be even more motivated to stick to its aggressive “back-to-the-future” mindset.

Background

The BLS posted its employment report (June 3), which showed the U.S. economy created 390,000 jobs in May. The unemployment rate held steady at 3.6%. Economists had expected fewer jobs created. This provides evidence for them to work from. It confirms that demand for employees is still outpacing supply and hiring remains competitive.

We’re in a period of stock market history where good economic news is bad news for stocks and bonds and bad news provides relief for markets. In the case of this report, it likely means the Federal Reserve remains on track to raise its key interest rate by 0.50% in June, July, and possibly September.

While job growth has slowed from the 500,000-plus average pace year-over-year, the Consumer Price Index is running at over 8%. There is agreement both from the current Administration in Washington and among market pundits that soaring prices are a huge concern for the nation. President Biden went on record this week in an op-ed posted in the Wall Street Journal and a meeting he had with Fed chair Powell that price increases have caught the attention of the White House.

Good vs. Bad Definitions

Payrolls are still 822,000 below their pre-Covid 19 levels, and the overall jobless rate is only 0.1 percentage point above where it stood in March 2020. At any other time, monthly payroll gains over 200,000 would be considered a strong labor market. In addition, the latest Job Openings and Labor Turnover Survey for April, reported earlier this week, showed 1.9 job vacancies for every unemployed person. This means there are almost two jobs for every job seeker.

The markets sold off on this news. Both the Nasdaq dropped by well over 2%, the S&P by 1.5% and the small-cap Russell 2000, and large Dow Industrials by less than 1%. The reason they are selling off on economic strength is it means rising interest rates becomes more certain. The higher rates will provide better fixed income choices for investors and increase costs for many businesses that will be borrowing at the higher rates.

Other Concerns

At the same time, the Fed has begun the process of winding down its $8.5 trillion dollar balance sheet. The employment data suggests monetary tightening is only just beginning, and businesses face greater headwinds.

The reduction of the balance sheet requires the Fed to allow bonds it owns to mature without the Fed reinvesting alike amount. For June (already accomplished) and July, the Fed is letting $47.5 billion mature without reinvesting. The needs of the U.S. Treasury have changed little so it will have to find new buyers for new bonds near this amount.

Take-Away

Bad economic news is usually bad for equities. Currently, the market is looking for the Fed to have a reason not to raise rates and drain money from the economy. Today’s unemployment number may have emboldened the Fed to act aggressively. The stock and bond markets also are mindful that less money in the economy means fewer investment dollars. The price of anything is a balance of scarcity. As dollars become more scarce asset prices may also retreat.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.bls.gov/news.release/empsit.nr0.htm

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Image Credit: Andrew (Flickr)

The Case Against an NFT Marketplace Employee that Allegedly was Front-Running

New markets allow new chances for manipulation, rigging, or just good old-fashioned trading on insider information. While the regulatory agencies are still trying to define where they fit in the blockchain asset explosion, some on the inside might already be exploiting what they know may have already defined their role. The Department of Justice has charged a former OpenSea employee in the first-ever NFT insider trading case on Wednesday (June 1).

The allegations concern insider trading in NFTs on the OpenSea platform, the largest online marketplace for the purchase and sale of NFTs. In violation of the employers rules and his duty of trust and confidence to customers and OpenSea, the allegations are that he exploited inside information of what NFTs would be featured on OpenSea’s homepage. The allegations also imply he did this for his own personal benefit.

The employee was in part responsible for selecting NFTs to be featured on OpenSea’s homepage. OpenSea is said to have been properly responsible by keeping confidential the identity of featured NFTs until they were featured on its homepage. After an NFT was posted on OpenSea’s homepage, the market price for that NFT, and for other NFTs created by the same artist, usually increases substantially.

From about June 2021 to at least September 2021, The employee is accused of using OpenSea’s confidential business information about what NFTs were going to be featured on its homepage. He secretly purchase dozens of NFTs shortly before they were featured. After those NFTs were featured on OpenSea, the employee sold them at profits of two- to five times his initial purchase price. Anonymous digital currency wallets were used to conceal the fraud, according to reports.

The person charged is a 31-year-old from New York City. The charges are wire fraud and money laundering, each of which carries a maximum sentence of 20 years in prison. The sentences are prescribed by Congress, however, any sentencing of the defendant will be determined by a judge.

This case is being prosecuted by the Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Thomas S. Burnett and Nicolas Roos are in charge of the prosecution.

His alleged crimes were uncovered by Twitter “sleuths” that were able to identify the owner of the anonymous accounts. The employer said in a statement that it was aware of insider trading. Opensea has since implemented new policies to prevent future insider trading among its employees.

The charges contained in the Indictment are merely accusations, and the defendant is presumed innocent unless and until proven guilty.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.justice.gov/usao-sdny/pr/former-employee-nft-marketplace-charged-first-ever-digital-asset-insider-trading-scheme

https://markets.businessinsider.com/news/currencies/nft-insider-trading-charge-doj-former-opensea-employee-crypto-2022-6

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Image Credit: K-State Research and Extension

Firearm Stocks Spike After Mass Shootings as Investors Dismiss the Chance of Tightening Gun Laws

The day after an armed 18-year-old entered the Robb Elementary School in Uvalde, Texas, and shot dead 19 children and two teachers, the share prices of gun and weapons manufacturers jumped.

A week on, and the market rally of gun stocks following the latest mass shooting hasn’t subsided. As of the close of trading on May 31, 2022, the stock price of weapons-maker Sturm Ruger was up more than 6.6% since May 23, the day before the shooting. For Smith & Wesson, the jump was even more marked, with shares up over 12% from the stock price prior to the mass killing in Uvalde.

Source: Yahoo Finance

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It was written by and represents the research-based opinions of Brad Greenwood, Associate Professor of Information Systems and Operations Management, George Mason University.

But that relationship – a mass shooting followed by a spike in gun industry stocks – wasn’t always the case. My colleague Anand Gopal and I studied the impact of 93 mass shootings on the stock price of publicly listed firms from 2009 to 2013. We found that, contrary to what happens now, mass shootings in that period were followed by a drop in share price for Smith & Wesson and Sturm Ruger, the two gun companies still publicly listed in the U.S.

So why has that changed? The answer may lie in how hopes of legislation over tighter restrictions on gun sales have dwindled over the last decade. The takeaway is investors no longer seem to worry so much about the chances of tightening firearms regulation when assessing the long-term viability of gun manufacturers in the aftermath of mass shootings.

Let’s look at the factors that influence the valuation of such stocks after mass shootings. First you have increasing demand for weapons. Research has shown that gun sales go up after a high-profile shooting as Americans “arm up,” both out of a perceived concern for their safety and fear of tighter restrictions.

The thinking is simple: “I better buy firearms while I still can, before legislation makes it harder for me to do so.” This increased demand would, on its own, spur the market price of gun and ammunition manufacturers by providing an unanticipated financial windfall.

But then you have the counter factor: Any talk of tighter rules on gun sales puts at risk the long-term viability of the companies by curtailing future cash flows. The business model of gun-makers, after all, is to sell increasing numbers of firearms to the public. Any ban or restrictions on what types of weapon you can purchase – or even who can buy a firearm – would limit their ability to increase profits.

In the period we looked at, investors seemed to lean into this fear of future legislation more, as seen in the reduced valuation of publicly listed firearm companies after mass shootings. Our research showed that the mass shootings from 2009 to 2013 resulted in a penalty imposed on firearms stocks over a two-, five- and 10-day window. That is to say, a mass shooting would be followed by a cumulative abnormal drop in share price over that period. The penalty worked out to around 1.25% over a five-day period.

Interestingly, even over the years we looked at, things began to change. The negative stock market response to mass shootings tapered off in the later years of our study, suggesting that the threat of any regulatory measures was not as keenly felt by investors.

Inaction over gun control at the federal level – and the loosening of regulations among some states – in the years since our work has seemingly led to a rebalancing of the two main factors at play. Yes, there is still the surge of demand for gun sales after mass shootings. But the fear over potential regulations over gun sales has seemingly abated.

 

The surge in the stock price of Smith & Wesson and Sturm Ruger after the Uvalde school shooting provides strong correlational evidence that firearm stocks now rise after such events. A similar effect was seen after the 2018 mass shooting at the Marjory Stoneman Douglas High School in Parkland, Florida.

But there is a problem when it comes to saying outright that there is a link. One of the things in the statistical model we used in our research no longer works. The reason: There are simply too many mass shootings in the U.S. They occur with such frequency that we can no longer implement this kind of analysis looking at the effect of isolated incidents and the stock market effect on gun companies.

In fact, according to the Gun Violence Archive, there were 18 more mass shootings in the U.S. in the seven days after the Uvalde shooting.

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