- Extreme market conditions often beget extreme market events, and Archegos Capital's blow-up mirrors the GameStop/Melvin Capital ballyhoo that started Q1.
- There are more immediate questions that come out of this: how did this happen, and what does it mean for other stocks with big moves?
- And there are more lasting questions to address about what this means for where we are as a market overall.
It was just a few weeks ago that we asked Hedgeye's Andrew Freedman what might be catalyzing the major moves in Viacom (VIAC) and Discovery (DISCA) shares to start the year. At the time, Viacom was steaming through the $80s and Discovery through the $70s, in a stretch where it seemed they added a few percent to the share price every day. The issue with something like that isn't that the companies couldn't be worth that much - they were both long-time media value traps, but there's certainly a case to be made that the value is there. It's that the rationale for that value hadn't really changed, and minor announcements or expected moves aside, nothing had really changed between March 2021 and, say, November 2020. So what gave?
Everybody following the market knows the answer by now, which is that Bill Hwang and Archegos Capital were behind the stocks. Employing a great deal of leverage, they became marginal buyers of the stocks and owners of a large percentage of the economic interest in those companies, as well as GSX (GSX), a battleground of a name, and Baidu (BIDU), something in between a battleground and a value trap. Which worked until it didn't, with perhaps the issuance of shares by Viacom to capitalize on the move breaking the whole strategy.
There are immediate effects of these moves, as shareholders of these names will understand. On today's The Razor's Edge, Akram's Razor and I discuss those immediate effects and how a single entity could have been responsible for so much market activity. But we also get into whether this suggests broader reverberations or the effect of leverage in a bunch of other names. After GameStop (GME) showed the power of coordinated little investors - at least that's the headline story - are copycats appearing across the market? And does it matter when indices continue to power to new highs? Click play above to listen in.
- 2:30 minute mark - The Archegos and GameStop echoes
- 10:00 - The scaling of the short squeeze strategy
- 13:30 - Lone actor or market reflexivity at work?
- 16:00 - What fundamentally changed during COVID for these sorts of names
- 21:30 - The lack of an exit strategy
- 27:00 - Aftershocks of this action
- 33:00 - Adjusting to an elevated valuation environment and the leverage factor
- 39:00 - The company and prime brokers’ perspective on this situation
- 45:00 - Where do we go from here
- 54:00 - The danger of consensus
- 1:00:00 - Time to make weight for certain stocks
This article was written by
Analyst’s Disclosure: I am/we are long PD, TWTR, GRUB, SFIX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Daniel Shvartsman is long PD, TWTR, GRUB/TKWY, and SFIX. Akram's Razor is long WDAY, PD, TWTR, and GPRO. Nothing on this podcast should be taken as investment advice.
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