by Louis Navellier
April 6, 2021
On Thursday, March 25, the Archegos Hedge Fund asked firms handling its capital swaps to develop a strategy to liquidate its holdings, which is why many Chinese ADRs and media stocks sold off violently.
Credit Suisse said that it was too early to quantify the full impact of the Archegos fund collapse but said it could be “highly significant and material” to its first quarter results. Specifically, Credit Suisse said, “A significant U.S. based hedge fund defaulted on margin calls made last week by Credit Suisse and certain other banks,” and added, “Following the failure of the fund to meet these margin commitments, Credit Suisse and a number of other banks are in the process of exiting these positions.” Nomura Holdings said one of its U.S. subsidiaries was subject to a “significant loss arising from transactions with a U.S. client.”
According to The Wall Street Journal, the Archegos Hedge Fund also apparently impacted Goldman Sachs, Morgan Stanley, and other big banking firms, who were quick to dump stocks affiliated with Archegos, which was apparently conducting capital swaps with Credit Suisse and other major banks, according to the WSJ article. The hedge fund would enter into “cash for difference” (CFD) arrangements for a fee, where they got the daily appreciation or depreciation of the stocks tied to the capital swaps. Unlike an option, where you have to pay a premium for betting on the direction of a stock, the problem in CFDs is unlimited liability, while with an option the investor’s liability is limited to the option’s price.
Now you know why I never recommend buying stocks on margin, since you never want to be in a position to be “forced” to sell stocks, like Credit Suisse and Nomura Holdings had to, due to margin calls.
The Archegos Hedge Fund fiasco is due largely to the fact that many big Wall Street firms did not know what positions the other firms had, so when they went to sell some big-name stocks, they “tripped” over each other. Ironically, since the Archegos Hedge Fund was registered as a “family” office, it was apparently exempt from reporting 13f filings, so its stock swaps were not disclosed.
Ironically, Goldman Sachs had previously refused to trade with Bill Hwang due to a previous hedge fund fiasco, but its compliance folks changed their minds and agreed to eventually work with Archegos. Since securities laws are all about disclosure, I suspect that family offices will subsequently be regulated.
In the midst of last Monday’s bad news, the good news was that Sunday night’s “Super Worm Moon” helped dislodge the massive container ship that was stuck in the Suez Canal, so commerce resumed. The Suez Canal controls approximately 15% of the world’s shipping and approximately 50 vessels per day use this critical waterway. Other containership captains have confirmed that the Suez Canal is difficult to navigate during high winds and it tends to silt up from blowing sand. As a result, containerships, which can act like big sailing ships in a crosswind, have to be especially careful when using the Suez Canal. There remains an acute shortage of shipping containers, which is why I recommend container stocks.
Navellier & Associates does not Nomura Holdings Inc (NMR), Goldman Sachs (GS), Morgan Stanley (MS) or Credit Suisse Group (CS). Louis Navellier does not own Nomura Holdings Inc (NMR), Goldman Sachs (GS), Morgan Stanley (MS) or Credit Suisse Group (CS).
Economic Indicators Lifted the Market Going into the Easter Break
As I mentioned on my Tuesday hotline, the Conference Board reported that day that its consumer confidence index surged to 109.7 in March up from 90.4 in February. The present situation component was especially strong, rising to 111 in March, up from 89.6 in February, while the expectations component was also strong, rising to 109.6 in March from 90.9 in February. There is no doubt that the $1,400 stimulus checks and debit cards that were sent out in March boosted consumer confidence, which is now back at pre-pandemic levels. As a result, I am expecting a big surge in March retail sales!
Another reason that consumers are in a good mood is that their homes continue to appreciate. On Tuesday, the S&P CoreLogic Case-Shiller National Home Price Index rose 11.2% in January, compared to a year ago. The home price appreciation rate is up from the 10.4% rate in 2020. There were only 1.03 million homes for sale at the end of January, the lowest inventory of homes for sale since those records commenced in 1982, so further home appreciation is likely, despite higher mortgage rates. The Phoenix and Seattle markets had the fastest home appreciation rates, at 15.8% and 14.3%, respectively.
In the jobs market, ADP announced on Wednesday that private payrolls soared 517,000 in March, the biggest monthly gain in six months. I should also add that ADP revised its February private payrolls up to 176,000 jobs from 115,000 previously estimated. Also notable is that manufacturers added 49,000 new jobs in March. New job creation was also strong at small, mid-sized, and large firms. There is no doubt that as Covid-19 restrictions are lifted, new job creation is bursting out all across America!
On Thursday, the Labor Department announced that new unemployment claims rose to 719,000 in the latest week, up from a revised 658,000 the previous week. Continuing unemployment claims declined to 3.794 million in the latest week, down from 3.87 million the previous week. Economists expected new unemployment and continuing claims at 675,000 and 3.75 million, respectively, so I suspect that unemployment claims will continue to decline in the upcoming weeks due to strong job creation.
While most markets were closed, the Labor Department announced on Friday that a whopping 916,000 new payroll jobs were created in March, the biggest monthly gain since August and substantially above economists’ consensus estimate of 675,000. Also, the January and February payroll reports were revised higher by 156,000 jobs – first, to 233,000 in January (from 166,000 previously estimated) and to 468,000 in February (from 379,000 previously estimated). The unemployment rate declined to 6% in March, a pandemic low, down from 6.2% in February. Especially encouraging, hotels and restaurants added 280,000 new jobs as many states lifted Covid-19 restrictions. Interestingly, average hourly earnings declined 0.1% in March, which is indicative that many lower-wage workers returned to the workforce.
The other big news on Friday was that the Institute of Supply Management (ISM) announced that its manufacturing index surged to a 37-year high (best since December 1983) of 64.7 in March, up from 60.8 in February. This was a big surprise, since economists were expecting the index to rise to 61.3. Some details were even more impressive, as the new orders component surged to 68 in March (up from 64.8 in February) and the employment component rose to 59.6 in March (up from 54.4 in February).
In the wake of the strong March payroll and ISM manufacturing reports, the Atlanta Fed raised its first quarter GDP estimate to a 6% annual pace, up from its previous 4.7% estimated annual growth rate.
The Biden Administration Considers Several Controversial Measures
The Biden Administration is reportedly working on a “health passport” for folks that have received the Covid-19 vaccination. Florida Governor Ron DeSantis is now threatening to sue the CDC if they do not allow cruise ships to resume their Florida operations by the summer. The CDC imposed a No-Sail Order in March 2020 and subsequent “Conditional Sailing Order” that prohibits cruise ship operations resuming before November 1. Although Governor DeSantis banned health passports in Florida, if the Biden Administration implements such passports, they would likely be adopted by the cruise ship industry.
The Biden Administration’s infrastructure plan, announced last Thursday, has bi-partisan support since they reduced the price tag from $3 trillion or more down to $2.3 trillion or less. However, there is still some infighting on “pork” projects embedded in the massive spending bill. Joe Biden was wise enough to pledge to work with Congress, so I suspect that some form of an infrastructure bill will be passed.
As far as raising taxes to “pay for infrastructure,” the proposed corporate tax increase was not a surprise, so there was no negative stock market reaction. Regarding individual income taxes and taxes on dividends as well as long-term capital gains, however, that remains much less certain. The most important factor is the tax rate on dividends and long-term capital gains, which could cause companies to cut their dividends.
For example, if the tax rate on dividends and long-term capital gains is increased from 20% to 28%, I do not believe there will be an adverse market reaction. However, if the qualified dividend tax rate rises to the old high of 39.7%, then companies will likely curtail their dividend payments, since they are already taxed at the corporate level; so they deserve to be taxed at a lower rate, since dividends are double-taxed.
I should add that many members of Congress were disappointed that the Biden Administration did not propose increasing the state and local tax (SALT) deduction from $10,000, since it hurts many high-tax (“blue”) states. As a result, I expect a lot of infighting in Congress about these proposed tax increases.