The market is dead. Long live the market.
Last week was a lot of fun. Most of us lost money, I’d imagine, but think about all the friends we gained along the way (if we consider the SPACs we bought now near NAV to be friends).
Simply put, if you’ve been under a rock, the U.S. Treasury 10 Year - 2 Year Constant Maturity Yield went full on $GME recently:
Bond yields across the board are up, sparked by investor fears of medium term inflation. I’m still quite a beginner in the macro domain, so I’ll leave it at that mainly. The reason why bond yields matter in U.S. Equities is the concept of growth multiples—when bonds pay out comparably to the dividend yield of the S&P 500 for example, the increased risk of owning high-growth names like $PTON versus the marginal return becomes less enticing. This is why this year the high-flying Nasdaq and of course the meme regime perennial favorites ($TSLA, SPACs) have been positively whacked.
I’m going to change course a bit and move my weekly forecast simply to Substack. I’ve been ruminating over whether I should continue predictions at all, given that people tend to put a lot more stock in the meaning of my words than I would like them to (as I joke, the reason I play small positions is because I know how wrong I can be).
Let’s take a forward look at the market from the Sunday vantage point:
Bitcoin
I’m going to avoid recommending Bitcoin plays, because to understate it my knowledge of the crypto field is a bit under par. I’m hoping to expand my knowledge in the segment rapidly, but at the same time, my last and only bullish klaxon on Bitcoin seemed to call the literal top.
Interestingly in the sell-off scenario, the Bitcoin market seems at current remarkably stable. It’s difficult to tell except anecdotally if Bitcoin is a good predictor of market behavior or simply a coincident indicator. While it in 2020 seemed to precede selloffs in the broader market (as a risk-off indicator), the jury is out how it will perform since its late-October disconnect in 2021.
In general, I expect if the market selloff continues due to bond yields or whatever the flavor of the month is to see increased downward momentum in Bitcoin and the crypto sector. As the most abstract version of the growth meme (NFTs being the *chef’s kiss* of abstract futurist mysticism), Bitcoin despite positioning as an alternative to fiat is very much enmeshed in the same speculative factors driving the ARK/Nasdaq/SPAC bubble.
However, it is likely inevitable given no real significant change to monetary policy that Bitcoin continues its march higher, although I’d be lying if I could tell you a good bottom. It would be interesting however to observe the converse here (stocks continue to selloff, Bitcoin continues to rise) and very telling of a more general macro shift in the crypto market.
SPACs
If you have a beloved memefolio like me, last week may have felt like someone put your stocks in front of a firing squad. As noted by Chief of Pump Chamath on Twitter:
As I’ve noted in Twitters past, the danger of buying garbage (in this case most SPACs) is not in the act of buying it, but in convincing yourself it isn’t garbage. One only needs to consider the story of Virgin Galactic ($SPCE) — a space tourism company founded in 2004 by Sir Richard Branson which not only has never done the tourism part of its name, but hasn’t actually successfully been to space either. Despite this:
Wee. From a SPAC valued at $10/share (likely generous based on the lolamentals), at its peak Virgin Galactic hit over $60/share—again without a product or even successful test of which to speak of.
That said, I’m still remarkably optimistic on the SPAC regime. I’ve always avoided the SPACs far above net asset value (lol CCIV for a recent example) in favor of the lesser known names (ALTU, BFT, etc. - not recommendations but prior/current holdings) which tended to stay closer to the ground. This, pre-merger, provides an excellent example of an asymmetric risk/reward return—until the merger vote (this is critical), the SPAC cannot really sink lower than $10/share. It may for short periods of time, but one can effectively treat it as a long call option on the company’s future. If you believe in the concept or at least in the future of the Meme Regime, last week’s dip provides an excellent time to acquire names you truly believe will be the companies of tomorrow (as long as they’re close to the NAV!).
GME
I’d truly be remiss if I didn’t mention the $140 elephant in the room, our darling Gamestop. Last week, my call was primarily for a theta week (e.g. GME staying in its ridiculously volatile range) which more or less happened. Interestingly, however, we saw fairly sustained upward momentum at the tail end of the week, no doubt buoyed by the 0 day options effect which initially provided GME the juice.
Overall, I’m still bullish on GME. I’ve explained why before. An observation I noted on Twitter with regards to meme stocks is they tend to settle at a range higher than the initial level (for the second round of GME, this was the $40-50 range) when there’s still significant chance for upward momentum. This is because in meme stock cases, we can fall back to a bastardization of the Merton credit risk model — in essence if we assume the true value of the company is zero or near zero, the stock itself should simply be priced like a call option at the zero strike. Based on this rationale, a meme stock settling at a higher price range has higher assumed optionality (chance of moving up/mooning) than one at a lower range, and we should also assume this decays over time (indeed, we observed this as GME slowly fell from $50 to $40 in February).
Last week’s price behavior on GME leaves me bullish because although we didn’t see the same gamma squeeze theatrics, there is still very real and perhaps sustainable demand on the ticker. I do not have a position currently, but made a few pennies selling puts—first at the critical $40 price level (under the Merton risk analogy) and then at the riskier $95 level. I’ll be looking for GME this week to continue its upward trajectory, but don’t see obvious signs of a beloved gamma squeeze just yet. This may change with its earnings soon.
TSLA and the ARK
If you haunt the FinTwits, top of mind last week was the Icarus-level fall of ARK and its crown jewel, Tesla.
From its highest to its lowest last week alone, Tesla moved over 20%:
ARKK suffered similarly:
For many, this was a reckoning long awaited. Many in the financial sphere point to certain well, ill advised strategies undertaken by Cathie and her firm, including a practice of selling liquid names (e.g. $ROKU, $TSLA) to prop up illiquid names. This may or may not explain some of the interesting correlation patterns among ARKK’s holdings:
As @choffstein explained in an excellent video, ARKK’s meteoric rise is partly explained simply by record inflows into the ARK ETFs. Unlike a normal hedge fund, you can’t close an ETF to new money, and given the prospectus of the ARK funds, much of the inflows end up in pretty illiquid, small-cap names.
In many of ARK’s holdings (across its ETFs and replicating portfolios) ARK is a major holder of the available float. This is historically a problem, and gets worse when redemptions hit. As redemptions occur, not only does it provoke selling across the basket, but to avoid the perils of illiquidity (e.g. trying to sell stock quickly in illiquid holdings will get front-run and adversely selected against) this causes larger sales in liquid names. This, over time, leads the whole portfolio to become more illiquid and increases the severity of perturbations.
Will ARK survive? Judging by the continuous flow of call delta into Tesla on Friday (visualized via nopechart.com) even as it dipped to the mid-500s, I think it’s still too early to sign ARK’s death warrant (or even Tesla’s).
Do I think they’ll continue to get battered? Heck yes. Do I want to be the girl buying puts at the bottom again? Nope.
Final Thoughts
From the Sunday night futures, this week looks to be a continuation of last week’s rocky tape tantrum. My positioning at current is short on tech (rather, I collared my Microsoft longs — sold calls, bought puts) and to scalp gamma. Hunch is we see a repeat of volatility rising and dying similar to the dramatic kabuki of VIX last week.
That said, gun to my head I can’t really imagine a sustained selloff taking place. This may change with continued weakness in the growth names, but given the relative outperformance of the non-meme’d mega-caps (MSFT, GOOG, FB) — the tech companies that seem to matter market weight-wise — I think it’s a bit too early to sign the death warrant of tech and rise of the value trade. I can’t say I’d be happy to be wrong here, but it wouldn’t surprise me either.
My call again is just renewed long gamma, and playing sporadically long vega as the situation arises. Intraday we may tend to see spikes in our darling VIX which, based on the implied correlation of stocks may be either a wolf warning or a good chance to fade the rip. At the same time, I’m bolstering my memefolio, and continuing to buy select names I believe in close to NAV as we dip (or not). I do believe in a recovery round here, and I specifically believe in a few names even for long term bagholding.
Cheers, and best of luck on the markets.
Lily