Another day of ‘blood on the streets’. Markets turned violently on the down side particularly the NASDAQ. This could be the start of much more.
We have been alluding to this scenario for a long time and we were wrong for sometime. But the ducks were lining up in various ways. First the breadth indicators, the put/ call ratio imbalance, the sentiment indicators heavily skewed towards bullishness, the ‘Robinhooders’ piling into anything that moves up, and finally the disconnect between the VIX and the S&P 500. We have been writing about all this for weeks. To top it all, we had the technical structure calling for a turnaround. But the real catalyst might be SoftBank.
Masayoshi Son is a maverick. He made truck loads of money by being invested in Alibaba. As to his investment in Alibaba, he probably understood the macro situation that was being played out in China better than anyone at the time of his investment or he was pure lucky to be at the right place at the right time.
Since then he has had a string of bad investments. The latest major one being the cash loss in WeWork for about $12.7 bio. May be he was trying to recover those losses through a major punt in the liquid markets. So he piled into the major tech stocks like Apple, Tesla, Microsoft and Amazon to the tune of around $4 bio and also bought call options for $4 bio giving a control of around $50 bio in exposure. This is what we call a ‘Texan hedge’. If the “NASDAQ whale is moving in a direction you can rest assured that there are others coat-tailing him too. That’s how a school of fish moves. Any way it looks like SoftBank is left holding some not so nice things now. With the elections coming closer and with only 55 days left let us turn to some politics.
In a prepared speech yesterday, President Trump laid out an agenda for the second term. This is very important as he laid out his path forward with China. Trump has been already talking about China’s takeover of Hong Kong, attacking Chinese companies that have been practicing unethical ways, the main one being Huawei, and announcing to the world that his team will hold China accountable for allowing the virus to spread around the world.
At the same time Secretary of State Pompeo has been out building a coalition (of global allies) against China. He has been preaching in Europe and in Asia how China is becoming a major threat ‘for the future of the free world’. He is calling for an alliance of like-minded democracies to “act now” against the regime of the Chinese Communist Party.
With this backdrop, Trump got more specific about the scale of the issues and how he will drive his political agenda. He said he would ‘make America into the manufacturing super power of the world’. He also said America will end their reliance on China. So it is not about moving the supply chain out of China but it’s about bringing it back to the US. On the virus front, he emphasized that he and his team will hold China responsible. Probably with that he may hold some leverage to get allies on his side at best for additional sanctions or at worst for military action.
Meanwhile there is a damning video out there connecting one too many dots relating to Biden’s son Hunter’s involvements in his Chinese investments and how that would pose a threat to US national security. There will be a lot of dirt thrown at each other by both parties and the election will gear up to be one of the most ugliest in living memory.
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.