30.03.2020 – Special Report. Now it’s getting exciting: the hedge fund Archegos in the USA has turned over. Its backers have liquidated huge equity positions in a firebrand sale. The question now is whether the fund’s exit puts an end to the imbalance. Or whether we are witnessing a devastating chain reaction.
Cheap money leads to imbalances
Told you so: For some time now, we have been warning here that cheap central bank money is increasingly flowing into equities all over the world, that risk appetite is increasing and that bubbles are forming. In addition, a lot of capital is flowing to addresses that are perhaps not as solid as they look. This pessimistic scenario has just come true. Chinese high-tech stocks plummeted and so did American media stocks.
Archegos goes under
Archegos is history: the website is down, the Financial Times did not reach anyone there. Both Bloomberg and the FT confirmed that it was Archegos that triggered a sell-off in some shares at the end of last week. According to them, the events created uncertainty among brokers – who were puzzling over which positions might still be sold off. Behind Archegos Capital Management is Bill Hwang, who has already achieved sad notoriety. His hedge fund Tiger Asia gave its investors their money back in 2012 when he admitted fraud with Chinese bank shares. He paid a $44 million fine and was banned from the Hong Kong stock exchange.
Released for shooting
The trigger for the end of Archegos: ViacomCBS just carried out a capital increase and issued fresh shares worth 3 billion dollars. Last week, Viacom therefore lost around 50 per cent of its value in just four days. This triggered a cascade of margin calls, reported the Financial Times. The financing banks threw blocks on the market at discount prices: Morgan Stanley hawked Farfetch, Discovery, Baidu and GSX Techedu worth 13 billion dollars. And Goldman Sachs put $6.6 billion worth of Baidu, Tencent Music Entertainment and Vipshop Holdings on sale. It also dumped $3.9 billion in ViacomCBS and iQiyi, Goldman wrote to its clients.
Maybe just profit taking
After all, since the beginning of the year Viacom’s share price had risen by around 170 percent. The group’s plan to shift more content to the Paramount + pay platform in the wake of the general audience erosion was increasingly met with doubts by analysts – there have already been eleven downgrades this year. This raises the question of whether this was just profit-taking: After all, Viacom has quadrupled in value since last October, said analyst Michael Hewson of CMC Markets on Sunday. So maybe we will see a nice recovery rally after the bloodbath.
Perhaps also a sector rotation
Or we may see a major sector rotation that can really hurt Wall Street and especially Big Tech: Out of the well-run Corona lockdown trades, into the hopefully rebounding old economy. Barclays strategist Emmanuel Cau said: “It may have hurt a number of funds that were overly exposed to these trades.
Impact hits for major banks
These are the lessons from the affair: First, in the event of an impending crash, the darlings from the previous bull market will be dumped. Which is likely to ruin many small investors who got in on the recommendation of chatter on social media. This is how the bubble deflates.
Secondly, a failure of a large fund causes a chain reaction. The question is whether a bank will soon topple over as well. Then we will experience a veritable crash that will eat into the overall market. And lo and behold: as the “Wall Street Journal” reported today (Monday), the two big banks Credit Suisse and Nomura Holdings warned that they are threatened with massive losses from deals with a US client. Nomura cited around 2 billion dollars. Both stocks slid sharply south. Neither mentioned a name. But the WSJ, of course, immediately made the cross-connection to Archego’s Capital Management.
We are curious to see whether this was just a singular event, or whether with Archegos the first domino in the series has toppled – the first canary in the mine, so to speak. And whether the market is now reacting bearishly out of caution against further distress selling. Bullish support buying of own shares by the affected companies is also possible. Bernstein Bank is keeping an eye on the matter for you – we wish you successful trades and investments!
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