by Jason Bodner
June 7, 2022
Stocks, particularly growth stocks, have been feeling the burn ever since the middle of November. I’ve been talking a lot lately about how this market pressure was due to margin calls. I even showed you some charts of how margin debt balances correlate highly to equity prices. As stocks go up, margin goes up – and both have gone up tremendously since 1997. (For more details, see our free special report).
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
But as stocks come down, margin also must come down. Let’s just revisit those charts here:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
In that report, I told you how I believed that, come June, we would start seeing stories about hedge funds blowing up. Right on cue, I saw this June 3rd tweet from Jim Cramer which confirms this theory:
One fund he might be talking about is Tiger Global Management. This storied hedge fund launched in 2001 and managed by Chase Coleman III has had a long history of offering superb returns. According to Bloomberg, Tiger Global has offered an average annual return of 20% since inception through 2020.
Needless to say, that performance is excellent. And performance like that attracts assets. One recent report shows assets under management (AUM) at $95 billion. That’s a lot of money. But it seems like the good times have come to an end, at least for 2022. After a rare down year last year (-7% in 2021), 2022 has been downright dismal for Global. It was down 34% in Q1 and 52% through the end of May, according to The Wall Street Journal (“Tiger Hedge Fund’s Loss Widens to 52%,” June 3, 2022). In addition, says The Journal, “The firm’s long-only fund lost 20.6% in May, bringing its losses for the year to 61.7%.”
You may wonder why I’m harping on one hedge fund’s suffering. While I don’t have margin statistics for the fund, we do know many of the stocks that the fund was invested in. According to hedgefollow.com, we know the fund’s top 50 holdings. Since November 19th, the peak date of the QQQ (the NASDAQ tracking ETF), the average return of those 50 stocks is abysmal: down 48% as a group.
According to TechCrunch, as of May 10th, Global lost $17 billion, likely more by now, after the lows were put in on May 24th for QQQ. No matter how you slice it, Global has dropped close to $20 billion since this tech rout began. Let that number sink in for a moment… $20 billion is equivalent to:
- 487,804 1-year U.S. college educations at an average cost of $41,000 per year
- 121,951 4-year U.S. college educations
- 20 million iPhone 13s
- 425,622 Tesla Model 3’s
- 5 million average 1-month mortgage payments of $1,487 (1.12 million years of mortgage bills)
- Enough to buy 47,214 homes in the U.S. at an average home price sale of $423,600 (source: Fed)
Since January 1st, 2022, Global has been losing $5.5 million an hour, or $91,600 per minute. These losses are monumental, to say the least. Now it’s not a far stretch to imagine that as these shares came under pressure and Global’s performance came under pressure, the downward spiral followed. If there was any leverage used on these positions, then margin calls would surely have come. Given rates at effectively zero and easy money pumped in by the central banks, the use of margin debt would be hard to resist.
Again, you may think I’m picking on one hedge fund specifically, but in other articles in recent weeks, I pointed out that likely starting in June we would read stories of several hedge fund blowups. In recent weeks, we also heard that Melvin Capital is shutting its doors. These two firms combined had AUM over $100 billion. I believe we will read of more hedge fund blowups to come during the next few weeks.
Whether or not we discover more implosions, hedge funds have suffered in a big way. Any suffering has been amplified by the amount of leverage they use. The silver lining is that I believe most margin calls are likely behind us. I agree with Jim Cramer’s assessment that margin clerks had a big hand in the carnage.
The natural question is: Where does that leave us?
With Margin Calls Behind Us, the Next Move is Likely Up
With margin calls behind us, forced selling has moved out of the system. There are indications creeping out that the economy is stabilizing. Former Fed chair Janet Yellen believes peak inflation might have occurred in March. Current Fed chair Jerome Powell believes peak inflation might have occurred in April.
Either way, there are indications that energy prices have peaked. There are positive signs in the airline industry, as Delta Airlines (DAL) revised its forecasted earnings higher, saying revenues are returning to pre-pandemic levels. Sony, one of the world’s largest manufacturers of electronics, indicated that they are ramping up production of their immensely popular game console PS5, citing easing supply chain issues.
Employment numbers are strengthening overall, indicating there is much recovery that has taken place. According to ADP, there are currently 1,000,000 more workers in the economy than in February of 2020, before COVID, even though an estimated 1,000,000 (perhaps half of them workers) died from COVID.
The current Fed funds target rate is 0.75% to 1.00%. Should we encounter three more rate hikes of 50 basis points each – as is largely expected – the Fed’s target rate would be 2.25% to 2.50%. That is the pre-COVID level, and still far below the mean rate of 3.5% since 1990.
I believe that over the next few months, stocks will consolidate and volatility will fall. I also believe Q4 will see a nice lift in equities as investors realize they overestimated Fed tightening worries.
Before you succumb to the negative news, just know we survived one hell of a storm recently. And as Paolo Coelho said: “The more violent the storm, the quicker it passes.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
President Biden Appointed a “Fall Guy” (Gal) for High Inflation
Income Mail by Bryan Perry
A New Agriculture Income Strategy to Hedge Food Inflation
Growth Mail by Gary Alexander
A Hyper-Active Fed Makes Mid-Term Elections More Profitable
Global Mail by Ivan Martchev
Market Close to Meeting Scylla, Date with Charybdis Still Uncertain
Sector Spotlight by Jason Bodner
Big Hedge Funds Begin to Collapse – Right on Schedule
View Full Archive
Read Past Issues Here
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT
Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner
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