Market Risk Management
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GameStop brouhaha helps drag the markets down for the week
(29 Jan 2021) There are so many moving parts with respect to the GameStop (GME $325) story, each one fascinating in its own right, that we need to focus on the issue in bite-sized pieces. The latest turn of events has to do with trading app Robinhood tapping into its $1 billion lifeline and putting its IPO on hold. In an effort to maximize potential revenue, especially since the firm's customers trade fee and commission free, Robinhood cut out the intermediary, acting as custodian for accountholder funds. Considering the massive amount of losses that could potentially pile up in trading the types of options offered on the platform, and because of recent volatility in the likes of GME, the Depository Trust & Clearing Corp (DTCC) and other clearinghouses raised their capital requirements, forcing Robinhood to scramble for the additional funding. A frustrated Vlad Tenev, CEO and founder of the platform, explained that compliance with the firm's financial obligations was not open for negotiation, leading to the decision to limit trading on fifty stocks (as of Friday afternoon). This angered everyone, from the Reddit army responsible for going after the short sellers to the likes of AOC and Ted Cruz on Capitol Hill—the unlikeliest of allies on any issue. We actually feel kind of bad for Robinhood, which quickly turned from hero to villain. As for the GameStop trading—the irrationality that drove a stock worth about $10 up to $483 in a matter of a few weeks, it helped the market turn negative for the week, the month, and (hence) the year. Our biggest fear, however, is not spillover into the broader markets, it is how the ham-handed government will decide to regulate the actors, which really means regulating the rest of us innocent bystanders. |
Shades of '99: An Elon Musk tweet about one company leads to a 6,450% gain in another
(12 Jan 2021) On the 6th of January, Signal Advance (SIGL $39) was a $6 million micro-cap consulting firm for emerging technologies. Putting its size in perspective, it would need to grow by about 50 times to be considered a small-cap. The company has never turned a profit, and there is nothing to indicate that it ever will. An investor would have to have a screw loose to place even the smallest amount of money in SIGL shares. And then came Elon Musk’s tweet. The tweet was succinct: “Use Signal.” Musk was talking about a cross-platform encrypted messaging service he uses. Unfortunately, a certain group of gamers decided that Musk was talking about Signal Advance, and they began gobbling up SIGL shares on their Robinhood or other trading apps, driving the price from $0.60 to $38.70 per share in the matter of two trading days. Signal, the app company, is a privately-held entity. Not one modicum of rational thought or the most basic of research, just jump in like Pac Man gobbling up ghosts. It must be nice having money to throw into the abyss. The reckoning is coming, and the laziest of investors will pay the biggest price. Back in 1999, we remember getting calls about a tech company named InfoSpace (INSP at the time). The company is still around, though now under the name Blucora (BCOR). It would be an enlightening exercise to check out a long-term chart of those shares.
(12 Jan 2021) On the 6th of January, Signal Advance (SIGL $39) was a $6 million micro-cap consulting firm for emerging technologies. Putting its size in perspective, it would need to grow by about 50 times to be considered a small-cap. The company has never turned a profit, and there is nothing to indicate that it ever will. An investor would have to have a screw loose to place even the smallest amount of money in SIGL shares. And then came Elon Musk’s tweet. The tweet was succinct: “Use Signal.” Musk was talking about a cross-platform encrypted messaging service he uses. Unfortunately, a certain group of gamers decided that Musk was talking about Signal Advance, and they began gobbling up SIGL shares on their Robinhood or other trading apps, driving the price from $0.60 to $38.70 per share in the matter of two trading days. Signal, the app company, is a privately-held entity. Not one modicum of rational thought or the most basic of research, just jump in like Pac Man gobbling up ghosts. It must be nice having money to throw into the abyss. The reckoning is coming, and the laziest of investors will pay the biggest price. Back in 1999, we remember getting calls about a tech company named InfoSpace (INSP at the time). The company is still around, though now under the name Blucora (BCOR). It would be an enlightening exercise to check out a long-term chart of those shares.
Don't look now, but the volatility index is suddenly down to 27
(01 Jun 2020) The volatility index, or VIX, measures the implied expected volatility of the US stock market; hence its nickname, the "fear gauge." The higher the figure, on a scale of 0 to 100, the higher the level of concern. Considering the fear gauge rose all the way to 66.96 at the height of the financial meltdown, it would have been hard to imagine that number being eclipsed. Then came the pandemic. In the middle of March, as the markets were in free fall, the VIX climbed all the way to 82.69. At the time, we mentioned that any semblance of normalcy couldn't be expected until the VIX fell back to within a reasonable distance from its long-term average of 18.59. Don't say it too loudly, but our little fear monitor has suddenly dropped to 27.51. Still elevated, but certainly a more comforting level. While the so-called economic experts continue to throw cold water on the idea of a v-shaped recovery, the fear gauge looks to be giving us the flip side of that argument.
(01 Jun 2020) The volatility index, or VIX, measures the implied expected volatility of the US stock market; hence its nickname, the "fear gauge." The higher the figure, on a scale of 0 to 100, the higher the level of concern. Considering the fear gauge rose all the way to 66.96 at the height of the financial meltdown, it would have been hard to imagine that number being eclipsed. Then came the pandemic. In the middle of March, as the markets were in free fall, the VIX climbed all the way to 82.69. At the time, we mentioned that any semblance of normalcy couldn't be expected until the VIX fell back to within a reasonable distance from its long-term average of 18.59. Don't say it too loudly, but our little fear monitor has suddenly dropped to 27.51. Still elevated, but certainly a more comforting level. While the so-called economic experts continue to throw cold water on the idea of a v-shaped recovery, the fear gauge looks to be giving us the flip side of that argument.
Don't let the market's odd reaction to an Iranian attack allow you to become complacent. (08 Jan 2020) We've seen a lot of counter-intuitive behavior in the markets over twenty-two years of managing assets, but that doesn't mean they can't still surprise. For example, we expect a temporary pullback in stocks—especially high-growth names—at some point in the first quarter. We also expect, as our headline image might suggest, that the catalyst will come from the Middle East. So, after watching Dow futures fall over 400 points as Iran was lobbing missiles at bases in Iraq which house US troops, we figured the catalyst was set in motion. The tragic icing on the cake of our anticipated scenario was a deadly 737 crash over Iran. Oil and gold would spike the next day (today), while the markets would plummet. Instead, the Dow ended the session up 160 points, and both oil and gold prices fell. Granted, the president's remarks helped, as did some tweets coming from Iran, but an about face in such a short amount of time was impressive. We've seen this movie before. Just when it seems as though the Teflon market is impervious to bad news, it tends to pull out a bat and wallop investors. We continue to remain positive on the markets for 2020 (actually, we have become more bullish since fall), but we will have frightening pullbacks. In our Outlook 2020 report we comment that "a 10% pullback at some point in Q1 seems reasonable." Of course, just when the hyperbolic headlines begin to foment mass selling, markets make a u-turn and regain old highs. And that is part of the beauty of the stock market. Although my background is in finance, in hindsight I would have loved to get a secondary degree in psychology. From the arrogance of EMH (efficient market hypothesis) to the fear that peaks as the market troughs, an investor can be very successful by being a contrarian and not following the crowd. With the amount of data we now have available at our fingertips, and all of the "experts" telling us what it means, that has never been a more relevant statement.
Yes, the stock market can survive a 3.25% 10-year, but expect certain segments to get hit
(23 Apr 2018) It has been a rough decade for fixed-income investors. Where they once found 7% AA-rated bonds, 5% tax-free munis, and 4% money market rates with ease, they now take undue risks (which many don't even realize) in corners of the equity market they wouldn't have considered before the financial crisis. In a search for yield (after all, many fixed income investors live on the income generated from their portfolio), a flood of money has been pumped into real estate investment trusts (REITs), utilities, master limited partnerships (MLPs), and high-yielding equities to fill the income void left by falling rates. There is a lot of news right now surrounding the 10-year Treasury's upward push to a 3% yield—a level not seen since 2014. With the constant fear-mongering about the stock market within the financial press, we can expect a lot of investors to jump ship when rates get back to a palatable level. The concern shouldn't be whether or not a 3.25% 10-year will seize up business lending (it won't); the real concern is which investments will be jettisoned as yield-hounds run for the exits. For Penn Wealth clients, this will be the focus of our Spring, 2018 Portfolio Reviews. For others, take a look at your own holdings and define which positions hold the most risk for a rising rate environment.
(23 Apr 2018) It has been a rough decade for fixed-income investors. Where they once found 7% AA-rated bonds, 5% tax-free munis, and 4% money market rates with ease, they now take undue risks (which many don't even realize) in corners of the equity market they wouldn't have considered before the financial crisis. In a search for yield (after all, many fixed income investors live on the income generated from their portfolio), a flood of money has been pumped into real estate investment trusts (REITs), utilities, master limited partnerships (MLPs), and high-yielding equities to fill the income void left by falling rates. There is a lot of news right now surrounding the 10-year Treasury's upward push to a 3% yield—a level not seen since 2014. With the constant fear-mongering about the stock market within the financial press, we can expect a lot of investors to jump ship when rates get back to a palatable level. The concern shouldn't be whether or not a 3.25% 10-year will seize up business lending (it won't); the real concern is which investments will be jettisoned as yield-hounds run for the exits. For Penn Wealth clients, this will be the focus of our Spring, 2018 Portfolio Reviews. For others, take a look at your own holdings and define which positions hold the most risk for a rising rate environment.
Over the past 120 quarters, this has only happened 9 times
(04 Apr 2018) The beauty behind asset allocation is the concept that different asset classes tend to move in different directions. Bond values, for example, typically have an inverse correlation to the general stock market. That is why you will often see bonds getting hammered when the market is on a bull run, and vice versa. Sometimes you will see both stocks and bonds rallying together, as was often the case during the Fed's long tightening cycle. Unfortunately, neither of those scenarios played out in the first quarter of 2018. Looking back over the last thirty years, or 120 full quarters, there have only been nine times in which the stock market and the bond market both posted losses. Add to this yet another relatively non-correlated asset class—real estate—getting hammered, and you have a pretty rough quarter. Let's throw commodities in the mix as well, as a general basket of raw materials fell about 1% over the first three months of the year. What did perform in the green? Gold was up slightly over 1%, and the price of oil rose, meaning we paid more at the pumps.
(04 Apr 2018) The beauty behind asset allocation is the concept that different asset classes tend to move in different directions. Bond values, for example, typically have an inverse correlation to the general stock market. That is why you will often see bonds getting hammered when the market is on a bull run, and vice versa. Sometimes you will see both stocks and bonds rallying together, as was often the case during the Fed's long tightening cycle. Unfortunately, neither of those scenarios played out in the first quarter of 2018. Looking back over the last thirty years, or 120 full quarters, there have only been nine times in which the stock market and the bond market both posted losses. Add to this yet another relatively non-correlated asset class—real estate—getting hammered, and you have a pretty rough quarter. Let's throw commodities in the mix as well, as a general basket of raw materials fell about 1% over the first three months of the year. What did perform in the green? Gold was up slightly over 1%, and the price of oil rose, meaning we paid more at the pumps.
Credit Suisse is about to liquidate this exchange traded note, and investors should learn from the experience
(06 Feb 2018) No matter what tiny little corner of the market an investor wants to trade—or speculate—in, odds are there's an investment vehicle to facilitate those desires. Take XIV, the VelocityShares Daily Inverse VIX Short-Term ETN. Did you get that? Once you digest all of the parts to that name, you come up with a play on the lack of volatility in the markets. Certainly, the volatility index was muted in 2017, as the Dow and S&P 500 hit record after record. If an investor wanted to take advantage of that calm, he or she might have pulled the trigger on this note. And, indeed, the investment nearly doubled between summer of 2017 and January 23rd of 2018, topping out around $145 per share. Then the correction hit. As markets were busy falling over 5% between Friday and Tuesday morning, want to venture a guess what happened to XIV? Try this on for size: it was down 92.5%, to $7.60 per unit. The reasons had to do with the arcane inner workings of the vehicle which, when battle-tested for the first time, failed miserably. The bloodbath was so overwhelming that Credit Suisse announced it would liquidate the investment on February 20th. The lesson? Don't just assume that the wizards of smart, with their advanced mathematical degrees and quantitative models, know what they are doing. If you don't understand something you are invested in, it can cost you dearly.
(06 Feb 2018) No matter what tiny little corner of the market an investor wants to trade—or speculate—in, odds are there's an investment vehicle to facilitate those desires. Take XIV, the VelocityShares Daily Inverse VIX Short-Term ETN. Did you get that? Once you digest all of the parts to that name, you come up with a play on the lack of volatility in the markets. Certainly, the volatility index was muted in 2017, as the Dow and S&P 500 hit record after record. If an investor wanted to take advantage of that calm, he or she might have pulled the trigger on this note. And, indeed, the investment nearly doubled between summer of 2017 and January 23rd of 2018, topping out around $145 per share. Then the correction hit. As markets were busy falling over 5% between Friday and Tuesday morning, want to venture a guess what happened to XIV? Try this on for size: it was down 92.5%, to $7.60 per unit. The reasons had to do with the arcane inner workings of the vehicle which, when battle-tested for the first time, failed miserably. The bloodbath was so overwhelming that Credit Suisse announced it would liquidate the investment on February 20th. The lesson? Don't just assume that the wizards of smart, with their advanced mathematical degrees and quantitative models, know what they are doing. If you don't understand something you are invested in, it can cost you dearly.
(09 Aug 2017) The Great Recession's ten year anniversary.
It really is hard to believe it has been a full decade. Just as Americans had forgotten about the great tech bubble burst of 2001/2002, we got slammed with yet another "black swan" event (weren't those events only supposed to pop up every three or four generations?): the Great Recession. The massive banks that kept the world's financial gears lubed—Lehman Brothers, Bear Stearns, Wachovia, et al—were actually failing, never to be revived. It was on Thursday, 09 Aug 2007, that the French bank BNP Paribas froze the assets of three investment funds due to an inability to value thinly-traded derivatives made up of subprime mortgages. The cat was out of the bag. Nobody would buy the garbage securities any longer. Thus, the massive and unprecedented failure in the banking system. Plenty has been done to prevent this particular black swan from being seen again, but don't think others aren't lurking out there. $1 trillion in student loan debt. $1 trillion in unsecured credit card debt. A $20 trillion national debt. Don't let fear guide you, however. Use proper asset allocation based on your own risk tolerance to take advantage of market opportunities while mitigating risks. Take the Risk Portfolio Analysis (click the link and go about halfway down the page) to find your own unique risk number.
It really is hard to believe it has been a full decade. Just as Americans had forgotten about the great tech bubble burst of 2001/2002, we got slammed with yet another "black swan" event (weren't those events only supposed to pop up every three or four generations?): the Great Recession. The massive banks that kept the world's financial gears lubed—Lehman Brothers, Bear Stearns, Wachovia, et al—were actually failing, never to be revived. It was on Thursday, 09 Aug 2007, that the French bank BNP Paribas froze the assets of three investment funds due to an inability to value thinly-traded derivatives made up of subprime mortgages. The cat was out of the bag. Nobody would buy the garbage securities any longer. Thus, the massive and unprecedented failure in the banking system. Plenty has been done to prevent this particular black swan from being seen again, but don't think others aren't lurking out there. $1 trillion in student loan debt. $1 trillion in unsecured credit card debt. A $20 trillion national debt. Don't let fear guide you, however. Use proper asset allocation based on your own risk tolerance to take advantage of market opportunities while mitigating risks. Take the Risk Portfolio Analysis (click the link and go about halfway down the page) to find your own unique risk number.