What My Short Sales, The Fed, Robin Hood, And Aaron Judge Have In Common

Oct. 04, 2022 12:04 AM ETAAPL, AMZN, GOOG, HOOD, TSLA11 Comments
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O. Young Kwon
465 Followers

Summary

  • Today (Sep. 30), the two-top news of Wall Street Journal are 1) The Stock Market, and 2) Aaron Judge hit his 61st HR.
  • The great Short-Seller Whitney Tilson published two classic short-sale articles in Dec. 16, 2010 & Feb. 11, 2011.
  • Since the Mid-2010s, my investing and trading have worked out nicely with short sales.
  • Who's going to blink first? The Fed? Or the Market? The market will do, not the Fed, as nine years ago.
  • The Fed makes global peace through the most trusted, most peaceful, and most powerful global central banking ability.

Wall street sign in New York with New York Stock Exchange background

naphtalina/iStock via Getty Images

September 30, 2022

Today (Sep. 30), the two-top news of Wall Street Journal are: 1) The Stock Market on the unusual front page (not on Business Section) and 2) Aaron Judge hit his 61st Home Run (reporting by Jason Gay and Tim Brown):

Stocks Decline As Bond Turmoil Spread: U.S. stocks fell Thursday, sending the S&P 500 to a new low to the year, as the worst bond market rout in a generation, up-ended markets and investors wrested anew, with worries about a global slowdown.

The decline jolted investors who enjoyed a short-lived stock rally on Wednesday. Treasury yields settled at some of their highest levels of the year. The Dow joined the S&P in a bear market, defined in Wall Street parlance as a drop of 20% or more from a recent high, and both indexes continued to fall on Tuesday.

On Thursday, S&P 500 dropped 78.57 points, or 2.1%, to 3640.47. The Dow industrials slid 458.13 points, or 1.5%, to 29225.61, giving up much of the previous day’s gains. The tech-heavy Nasdaq pulled back 314.13 points, or 2.8%, to 10737.51.

Stocks have been under pressure all year. Decades-high inflation has thrown consumers and businesses for a loop. Central banks overdo it and tip the economy into recession. On Wednesday, the Bank of England announced an emergency bond-big-purchases to help stabilize U.K. bond prices. That moves sparked a roller-coaster day for the benchmark 10-year U.S. Treasury moves. Its yields climbed above 4% for the first time in more than a decade, only to end with its biggest one-day drop since 2009. (The WSJ, Sep. 30, 2022, pp. A1 & A2)

Aaron Judge hit his 61st Homer: Wednesday he hit his 61st Home Run in Toronto. It's the most anyone’s hit in the American League, ever, tied with the late Yankee Roger Maris, who hit a tormented, Babe Ruth-topping 61 in 1961…Judge, who grew up in California, reacting for Giants, has never been associated with performance-enhancing drugs…(Jason Gay, the WSJ, Sep. 30, 2022, p. A14)

Now Comes the Task of Hitting No. 62: Aaron Judge is in the Triple Crown chase, batting .313 with 61 HR and 130 RBI. (Tim Brown, ibid)

The Events of Three Days (September 21, 22, and 23 2022)

Two weeks ago, three-day events: 1) on Sep. 21 (Wednesday) the Fed’s another-75-basis-point-(0.75% or 75 bp)-over-night-lending-rate increase, 2) on Sep. 22 (Thursday, which happens to be my 56th anniversary) one of my deeply-underwater-equity-(HOOD)’s shoot (+12% from the closing price ($9.92) to the intraday-high price ($11.1)), and on Sep. 23 (Friday) S&P 500 Index’s continuing slide (-1.72%, closing at $3,693 which is barely higher than a bottom ($3,636 on Jun. 17, 2022)) towards bear market territory.

These three events (the Fed’s rate increase, Robin Hood’s prices, and S&P 500 movements) are not only related to each other somewhat differently (i.e., the Fed and S&P are very closely, while HOOD just remotely with the others) but also the weights are extremely different: 1) The Fed’s action is closely watched by all global central banks and investors, 2) S&P 500, as an important leading indicator and the bear market referee, acutely concerns all investors (bears or bulls), and 3) HOOD’s ups and downs are cared about only by HOOD’s owners and investors, and some speculators, but to me its weight is enormously high.

The Focus

The article focuses on the three topics: I) My early experience with short sales in the early 2010s, II) explaining how to trade in short-terms (anywhere between a couple of seconds and a few sessions) since the mid-2010s, and III) the role of the Fed domestically and globally.

In The Early 2010s

The great Short-Seller Whitney Tilson published two classic short-sale articles in Dec. 16, 2010 & Feb. 11, 2011: The former described why he shorted NFLX and the latter depicted painfully why he bought it back. Both articles were completely out of the fence because, to my knowledge, he is the only contributor on SA to do so.

He wanted to share his investment thesis in depth and describe why, at a stock price of $178.50 and a market cap of $9.3 billion, he thought it's an exceptional short idea. Following his post, I immediately shorted it because:

One is that there is almost no chance of takeover, which I considered very carefully. If my call is correct, I do not incur any heavy cost to carry my short positions for a long term (3 to 12 months) because it didn’t pay dividends.

The second thing is its short ratio became much lower, around 20, compared to several weeks ago (over 30). Who knew a bull trap happened and collapsed in a few weeks? I was a long-term player, with reasonable bets, either longs or shorts. I was short NFLX. (My comment)

In Feb. 2011, he decided to end the short. In more than 12 years of managing money professionally, he couldn’t recall an instance in which he paid more than 20x his estimate of normalized, current year earnings for any stock – and this had worked very well for us – so he wouldn’t be buying Netflix anytime soon. But just because he didn’t think it’s a good long didn’t make it a good short.

Since the Mid-2010s

My two short-term (between a few seconds and a few sessions) trades (with 5% of capital), anchored by two well-diversified ETF portfolios and one annuity account (with the 95% remaining capital), has performed very efficiently until 2020 when the current government has carried out its new fiscal policy.

Recently short-sale activities have mounted, resulting in augmented market volatility, which I have benefited from, as a market-neutral trader. I have taken a capital gain immediately after the market value of any holding exceeds the threshold (+1%). As a consequence, almost all of the holdings are under water.

I call my holdings as “Prisoners of War ('POW')” because all holdings were at least once a highflyer, but wounded by a variety of attacks, including shorting. The holdings are pretty resilient against a sharp plunge in general. Another excellent characteristic of “POW” is that they save me income taxes by allowing me to get a tax-harvest.

HOOD (Robin Hood), mentioned above, is one of them: The cost base is about $30 and recently has moved around $10. On Sep. 22 it jumped (+12% from the closing price ($9.92) to the intraday-high price ($11.1)) so I took a windfall capital gain ($258.65). It was an unexpected gift for my anniversary.

Remembering two words (“Robin” and “Hood”), my happiness quite multiplied. The former was the name of a WS worker who edited my thesis draft, mostly writing NYU Professor Machlup’s dictation in the late 1979s.

The latter is the name of the highest mountain on the West Coast, located in OR, where there is snow on the top all year around. We wished to view Hood clearly during about a dozen air round trips from NY to OR, but only once fulfilled it.

The Great Recession and The Pandemic Recession

The 2008-2009 Great Recession (December 2007 – June 2009) and the 2020 Covid-19 recession (February 2020 – April 2020) were different in three aspects.:

1) The first was that the 2008-2009 one was severest after the Depression while the 2020 one was the shortest one in history.

2) The second aspect was that the former was due to the defaults of U.S. subprime mortgages while the latter was due to the pandemic, which started in China.

3) The third aspect is that inflation was low during the Great Recession while inflation was pretty high in January 2020 (2.48%) and February (2.33%) but lower in March (1.54% and fell sharply in April (0.33%). In the aftermath of the two-month recession, inflation came back far higher than the Fed’s target (2%) and is still not slowing down yet.

There were, however, also two common features between two recessions:

1) One was that both recessions were global in character, even though the causes were different.

2) The other was that they brought a revival of Keynesian policy and some variations of the Phillips curve - the Friedman-Phelps Phillips curve, the Extended Phillips Curve, the Moore Phillips curve, and "Fischer-Yellen Phillips curve." The new and fundamental monetary (and fiscal) policy continues to evolve not only in both recessions but also in the aftermath.

A Few Scratches in A Bear-Market Territory

S&P 500 INDEX Prices From Sep. 23, 2022 To Sep. 30, 2022

DATE

OPEN

HIGH

LOW

CLOSING

CHANG %

Sep. 30

$3,634.15

$3,871.23

$3,585.62

$3,585.62

-1.51%

Sep. 29

$3,687.15

$3,681.34

$3,613.09

$3,640.47

-2.11%

Sep. 28

$3,652.68

$3,734.02

$3,645.04

$3,719.04

1.97%

Sep. 27

$3,686.11

$3,714.06

$3,626.27

$3,647.29

-0.21%

Sep. 26

$3,691.95

$3,713.57

$3,647.05

$3,655.04

-1.03%

Sep. 23

$3,728.27

$3,716.56

$3,649.57

$3,693.23

-1.72%

Author's Table. (Data Source: Seeking Alpha)

NOTE: The Italics are new lows.

As shown in the above table, although the bear army (comprising short sellers (“SS”), AI-Powered Auto Machine (“APAM”), bears, and most media) attacked the market fiercely all year, trumpeting an imminent crash (like the 2007 – 08 one). The market, however, had just a few scratches, including one closing price on Sep. 30, and two intraday prices on Sep. 30 and Sep. 27 during the last six sessions.

Some “SS” pitched a dirty ball to “APAM” to make the bad market worse, putting some bearish words, such as “depression” or "pivot" or "Volcker". It’s a really unethical trick. What happened in the last hour on Friday was that all bears roared amid a temporary retreat of most bulls, resulting a short moment of an off-balanced market, tilting to a bear market.

Where Are We Now?

Economic growth and inflation are historically moving together. But if inflation reaches a certain level and a certain rate, the Fed raises interest rates, the economic growth weakens, business cycles make a peak due principally to a hike in costs, a Recession starts, then a Bear Market follows.

A recession means an NBER recession, and a bear market is based on the criteria: the negative 20% of S&P 500’s closing price, and the negative status continues for longer than six months.

What is the Fed doing?

The Fed has improved their inflation forecasting in the five-years ahead (or longer), by perhaps an “AI-powered-small-New-Keynesian model” (developed by Tae-young Doh and A. Lee Smith of the Kansas City Fed). They published a paper, titled “A New Approach to Integrating Expectations into VAR Models,” published in Dec. 2018, and revised in Feb. 2022.

The Fed would simulate the Terminal (or natural or neutral) rate because the rate can’t directly observe from the market. The rate is computed as 4.5%, which doesn't influence inflation either upper or lower.

The Fed’s current-rate-increasing schedule is to reach the 4.5% terminal rate by the end of the year from 3.25% (the current upper range) to 4.5%: 75 bp (Nov. 2) and 50 bp (Dec. 14). Nobody is comfortable in this rate campaign because the Fed encountered a never-had case and attempted to sail on a not-charted sea.

The sticky inflation is very hardly curved now so we hope to tame inflation securely by getting a garden-variety recession early (perhaps in the middle of 2023) rather than a severe one later (i.e., in 2024).

We have to have a recession sooner or later. Note that a recession is not just bad; its role is very productive because a recession corrects any problems incurred during an expansion.

In my opinion, the market will continue to move in a tight range along the bear-market surface in October, will resume a bear-market rally after mid-terms, regardless of which party will gain more seats, and then the market perspective would be mainly dependent on the monetary policy and various external facts.

Finally, the Fed has led the global central banks through the continuous rate hikes. The good thing is the leadership of the Fed strengthen. The bad news is the responsibility of the Fed becomes much heavier.

Who will blink? The Fed? or the Market?

The same question was asked nine years ago on Aug. 29, 2013. Who is blinking now? It's the market, not the Fed. because not only the recent data points show a weak but steady economic growth with a topping inflation outlook, but also the Fed can’t be able to spare the ongoing process to tame inflation.

The Last Resort for the Global Peace

The most difficult question at this moment (when Russia built troops in the western border after the Syria airstrike from Iran, China refused the judgement of the international court on the South China Sea, and Russia and China demonstrated their joint military capability at sea) is how to discourage them?

The above quote is from one of my articles on Aug. 23, 2014, eight years ago. Here again, history repeats itself. What is your answer to the above question? The situation in 2014 was more aggressive in the challenge of R & C and more close relationship between R & C than now!

There are three economic systems - capitalism, socialism, and communism. Each one has its own merits and deficiencies. History clearly shows that capitalism is much better than the others. Therefore, we have to make capitalism stronger rather than weaker (by putting less regulation not more, and reducing a big government hand on the economy -- setting priorities on industry, environment and consumer protection, subsidies, and so on, and micro-managing them. The government's hand is far less efficient than an "invisible hand" or laissez-faire on the economy.

This is another quote from the same article. We have to search for the best and right answer to the question. In my firm opinion, it is this:

The Fed is the last resort to make the world safe, by deterring the foolish and dangerous aggression from R & C and others. How? Through the most trustful and most peaceful and most powerful global central banking ability of the Fed.

The Conclusion

The Fed is the front runner in the global central banks. Any front runner in spots (like Aaron), or in business (i.e., GOOG, AMZN, AAPL, or TSLA) is pressured and very solitary. Hence, we try to support the Fed rather than criticize it one way or the other.

My dozen core ETFs are:

·

Vanguard Total Stock Market ETF (VTI)

· Schwab U.S. Broad Market ETF (SCHB)

· Vanguard Total Bond Market ETF (BND)

· Schwab U.S. Aggregate Bond ETF (SCHZ)

· Vanguard Short-Term Inflation-Protected Securities Index ETF (VTIP)

· Schwab U.S. TIPS ETF (SCHP)

· Vanguard Total International Stock ETF (VXUS)

· Schwab International Equity ETF (SCHF)

· Vanguard ETSE Emerging Market ETF (VWO)

· Schwab International Small-Cap Equity ETF (SCHE)

· Vanguard International Bond ETF (BNDX)

· SPDR Barclays International Treasury Bond ETF (BWX)

(Note: Trading all ETFs and individual securities online are free in Charles Schwab and TD Ameritrade.)

Three virtues – patience, optimism, and diligence – make life fulfilled, as does investing successful.

This article was written by

O. Young Kwon profile picture
465 Followers
O. Young Kwon, a NYU Ph.D. in Economics (1980), had worked in the security industry for ten years as a Registered Investment Adviser (RIA). He taught Macroeconomics (CUNY, Staten Island) and Statistics (Rutgers, Newark) during 1979 to1981. In the first half of 1980s, he, as a full-time Research Associate, researched at the Center for International Business Cycle Research (CIBCR) (with Geoffery H. Moore) on business cycles, growth cycles, international indicators, composite indexes, and forecast of business conditions and inflation. Prior to his academic career, he was an Economist/Bank Supervisor at the Bank of Korea (the Fed's counterpart) for ten years (1963 - 73). In 1971, he visited the Federal Reserve Bank of New York, sent by the Bank of Korea: He studied the long-run central banking in the computerized environment. He had been a conservative investor, targeting a reasonable investment goal (inflation plus 5%), by setting well-diversified portfolios with Vanguard and Charles Schwab Exchange-Traded (Mutual) Funds (ETF) in the long run (5 to 7 years) until 2020, as shown in my various 20 articles.In recent years, significantly increased market volatility induced mainly by the more frequent online trading pattern, however, forces investors towards somewhat aggressive trading to gain more or lose less. It is a very serious challenge to conservative investors like him. He has traded in very short terms, based primarily upon his (manual) real - time framework. It successfully provides him with the turning points in a given session. Now, he has invested in very-short terms (anywhere between a few seconds and a couple of sessions) in two trading accounts in Charles Schwab and TD Ameritrade (whit 40% of his nest egg).  He also has had two internet savings in Marcus: Goldman Sachs with (the remaining 60%), earning 1.7% of the annual percentage yield (APY) which is daily compounded and FDIC protected. (if you're an investor older than 70, my portfolio might be right for you in the current market condition). He studied at NYU under Oskar Morgenstern (Economic History, Game Theory), Wassily Leontief (Input-Output Theory), Fritz Machlup (International Finance and Trade), William J. Baumol (Economic Theory and Operations Analysis), M. Isaq Nadiri (Macroeconomic Theory), and Edward Wolff (Econometric Modelling). He worked on various research projects: The input-Output Framework of the U.S. Economy (Leontief), U.S. Productivity Measurements (Nadiri), Knowledge Distribution (Machlup), Firms, Games, Decisions (Baumol), and U.S. Household Spending and Saving Behavior (Wolff). His Doctoral Thesis under Machlup (1980): Theory of Foreign Exchange and Economic Policy.(UCONN MA in Economics 1975, Seoul Nat'l U BA in Economics 1963, Kyung-gi H 1958. Pohang M 1955, and Pohang E 1952 for His Dear Alumni & Friends)

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

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