I wrote a little bit about the mechanics of shorting stock and naked shorting of stock. Some version of what I described in Scenario C happened to a hedge fund called Melvin Capital. Melvin Capital was heavily short GameStop (GME). The price rose rapidly and it sounds like they didn’t have enough money to close their position. According to the New York Post, “Hedge funds Point72 Asset Management and Citadel gave a $2.75 billion capital infusion to Melvin Capital earlier in the week, enabling it to close out that position with a large loss.”
Remember that name: Citadel. Citadel is a huge client of the trading platform Robinhood. Robinhood sells trading information to Citadel.
The retail traders on Robinhood trade for free. On platforms like Google, Facebook and Twitter where you get something for free you are the product.
Citadel is Robinhood’s customer. Without clients like Citadel Robinhood doesn’t make any money. So there is motive for Robinhood to want to keep Citadel happy.
Was there any hanky-panky between Citadel and Robinhood? Did Citadel tell Robinhood to halt trading so a hedge fund they sank billions into could close their positions? I don’t know. I don’t have evidence that this happened. But the motive is definitely there. Motive by itself isn’t sufficient though.
Should someone look into what happened? Don’t worry: Treasury Secretary Janet Yellen is on it! She is the first female Treasury Secretary and she is on the case.
Treasury Secretary Janet Yellen
Former Fed Chair and now Treasury Secretary Janet Yellen did very well for herself while between jobs. She has made at least $7.2 million in speaking fees. This number includes some $800,000 paid to her by Citadel. The same Citadel who is a huge client of Robinhood and bailed out Melvin Capital.
But guess what, despite what I think is a clear conflict of interest. Treasury Secretary Janet Yellen will be presiding over a regulatory hearing regarding the GameStop saga. So what are the chances that the Hedge Funds come out the loser in all this? I don’t think they are very good.
I don’t think regulations help that much anyway. Many do more harm than good. But let’s say you believe we need strong financial regulation. How is that supposed to happen when the regulators are getting millions from the people they are supposed to be regulating?
If anything happens, I suspect some of the more prominent “redditors” will be accused of something and trotted out as the scapegoats and the hedge funds will get away free. Even though the hedge funds were the ones who lost money due to them having poor risk management and being incredibly short a stock.
I’m not an attorney but from an ethical perspective I don’t see how the redditors buying the stock did anything wrong in seeing hedge funds were over-short a stock and taking advantage of what Melvin Capital were doing.
So what is the Lesson Here?
This is just one example of how the foxes are guarding the hen house.
Going back to the GameStop drama: some people probably made money buying GME but as of writing this it is back under $55. I suspect most redditors lost money on GME. GME peaked at around $483. I’d like to know how many people knew to buy GME at say $20 or less and then decided to sell at $400 or even $300.
Maybe some of the folks who lost money on the GME trade believe it was worth it just for the chance to stick it to a hedge fund. As for myself I’m not in favor of cutting off my nose to spite my face.
It is really hard to bet against the house at their own game and win. The hedge funds are too powerful and they pay the regulators’ speaking fees. Even the folks in the “big short” of 2008-2009 were gutsy insiders.
That is one of the reasons why I like a 10-20% allocation to physical gold and silver. Despite manipulation in the futures markets for these commodities, you are still opting out of the tradition financial system.
I try to avoid being political on this site or at least be apolitical. For example I did not endorse either United States presidential candidate. However, government and politics has so permeated nearly every aspect of our lives in the United States it is impossible to discuss finances and the economy without being at least somewhat political.
Voting outcomes in key swing states are left unknown. But there are a limited number of outcomes with respect to who controls the government. If one party controls the house, senate and presidency, that party (or team) has the opportunity to make sweeping changes to the legal and regulatory framework of the country, with some check on what they can do enforced by the judicial branch/supreme court.
The current balance of power in the United States house of representatives is 232 blues to 197 reds with one libertarian and five vacancies.
Although the results are not finalized we know the blue team will retain control of the house of representatives with something like 227 members (218 are required for a party to control the house). Net the red team will have picked up some seats. Some of the elections are still in counting limbo but those numbers will not change by more than 2-3 seats. So until the next election cycle in 2022 the blue team is guaranteed to continue to control the house.
The current United States senate party division breaks down at 53 red, 45 blue, and 2 independents aligned with the blue team. In other words effectively 53 red 47 blue.
Current senate race results show 48 red and 47 blue. Current forecast predict a 49-49 split with one toss up and one runoff. 51 seats are required to have control of the senate. In the event a vote in the senate is tied, the vice president is the deciding vote. So if the senate does come down to be a 50-50 split, whichever party controls the White House will also control the senate.
Of course there is also the presidency which is up for grabs. I’m inclined to believe that Biden will be declared the next president, regardless of who was actually elected because I think the blues are probably better at “counting” votes. But Trump could still win. Either way this leaves just a few possible scenarios for control of the government.
Remember, if the senate is 50-50 splite, which is possible, control of the senate would go with the team with people in the White House.
Scenario 1: Trump Presidency with Red Team Control of the Senate
In this case there will continue to be a lot of gridlock. There will be a small(er) stimulus bill and some legislation but for the most part not a lot will change. This is the scenario we’ve been in for the past 2 years. Trump could still pull off a victory if he wins Georgia and then if lawsuits could uncover enough voter fraud to turn the right combination of Michigan, Wisconsin and Pennsylvania back to him. It isn’t looking good for Trump but it is also possible that Arizona or Nevada, if they ever finish counting votes, could go to Trump.
Scenario 2: Trump Presidency with Blue Team Control of the Senate
I think this would result in even more gridlock. Congress would not have enough votes to override presidential vetos because that requires a 2/3 vote in both houses. So there would be a lot of back and forth of the blue controlled congress blaming and vilifying Trump and vice versa.
Scenario 3: Biden Presidency with Red Team Control of the Senate
In this scenario Biden is president (at least ceremonially) and Harris is VP. The red team would need to have at least 51 seats. I think this is the most likely scenario but it is by no means certain. Even though at this time I think Biden will be declared president (or if you’re feeling romantic elected) Trump could still pull off some type of upset.
In the senate, to get to 51, the red team would need to win Alaska (seems likely), and one of the Georgia seats (which also seems likely). Then, they would need to win the Georgia run-off on January 5 of 2021, which seems possible.
Note: Explanation of the Georgia run-off can be found here.
North Carolina is being called as a tossup or advantage red team (depending on the source), the red team candidate is currently in the lead by over 96,000 votes with 97% reporting.
If NC does go to the red team candidate and both Georgia seats do as well the red team could get to a 52-48 majority in the Senate.
I think there would be moderate gridlock because Biden was a senator for many, many years and has relationships with the senators and I think the red team senators are much more likely to compromise and go along with the blues. Not only that, but the blues would only need one or maybe two reds to come over to their side and then Vice President Harris could vote to break ties.
Scenario 4: Biden Presidency with Blue Team Control of the Senate
I think this is the second most likely scenario. Again we’re assuming a Biden/Harris administration. Biden would be president but I’m not sure who would be the de facto president in this case.
Blue team would need to win Arizona (seems likely), North Carolina (which is listed as leaning that way). These two would get them to 49, then they’d need to win the Georgia seat (which is listed as a toss-up, although the red is up by over 90,000 votes). This would get them to 50, plus Vice President Harris gets 51. They could also win the Georgia run off election which would get them to 51 even without Harris.
In this scenario the blue team would have the power to implement lots of changes. They could implement the green new deal, raise taxes, increase regulations, expand the affordable care act, provide medicare for all, restrict gun ownership and anything else really. They would probably be limited only by their fear of voter backlash in the next congressional election cycle.
A blue government might be limited in some instances by the supposedly conservative Supreme Court (which is 5-4, since Roberts tends to side with the liberal Justices). However, they could try to implement their plan to stack the supreme court and appoint as many new justices as needed to prevent having their laws struck down as unconstitutional. I don’t know enough about this to have an opinion if they would be successful or not.
What it all might mean
If what I estimate to be the most likely scenario does indeed come to pass the US will face a Biden presidency with a blue controlled house and red controlled senate.
The president has a lot of control over foreign policy. Doubtless the US will be cozier with China and Iran and markets don’t seem to like trade wars, so that would be positive for stocks. However, when there were trade wars, the Federal Reserve has stepped in to be accommodative and the markets love stimulus.
Although purportedly neutral, the president appoints the head of the Federal Reserve and in my opinion (despite protestations of neutrality) the Federal Reserve will do what the president wants for the most part.
While bad for the economy, artificially set rates are great for presidents because they goose asset prices and the stock market is used as a proxy for how the economy is doing.
I doubt there will be a stock market crash, as fiscal stimulus will be used to prop up asset prices. I do expect deficits to continue to grow unchecked and I think gold and the right foreign stocks will do well.
Worst Case Scenario
With a Biden presidency and blue team ruled congress a lot of socialist policies will be implemented. Higher taxes, a stricter COVID-19 response, wealth redistribution and increased government regulation. I think this will be negative for the economy with the middle and lower classes hurting the most. Alternative energy companies and select industries would do well in the US, but gold and foreign stocks would also benefit.
Depending on where you get your news you might think the fossil fuel industry is going the way of the dinosaur. This combined with other factors have made investments in oil and gas companies like Exxon Mobil (XOM) and Royal Dutch Shell (RDSB) unpopular.
I’m long XOM and RDSB and I think these companies are undervalued and will produce solid returns over the next 10-20 years.
Why would I invest in these companies when oil and gas industry are dying?
The fact of the matter they aren’t dying. The demand for oil and gas is increasing. You might not guess that from the price of oil and natural gas.
Natural Gas prices have cratered over the last 10 years Oil prices have also trended down from the 2007 high of 140
The reason for these price declines is because the supply of oil and gas is so robust. The reason I know that is because as prices are falling, consumption of oil and gas continues to increase. When supply increases faster than demand prices will fall.
It is important thing to understand the world continues to consume more and more energy. 2009 was an exception to that rule and 2020 will be as well but the long term trends over the past 10 years and going back as far as I have data is that energy consumption keeps going up. Oil and gas consumption keeps going up as well on an absolute basis.
But the lockdown induced economic slowdown of 2020 will not last forever. Eventually the world will learn to live with the virus and the demand for energy will continue the long term trend of growth.
So what technology will be used to meet that demand? The trend has been an increase in energy coming from solar and wind. But they remain niche players on the global scene. As of 2019 Solar accounts for 1.11% of global energy consumption and wind accounts for 2.18%. These small industries have indeed been growing dramatically. The amount of terawatt-hours (TWh) of energy provided by solar went up 1,937.5% and wind went up by 292%.
On an absolute basis since 2010 the largest source of growth has actually been natural gas. Gas also had the largest increase on a relative basis, growing from 22.49% of energy consumption to 24.23%. However, coal and oil still remain the largest sources of energy and while they are shrinking on a relative basis they are both still growing on an absolute basis.
Date Source: https://ourworldindata.org/grapher/energy-consumption-by-source-and-region?stackMode=absolute&time=earliest..latest
The biggest loser since 2010 has actually been nuclear power. Nuclear has declined on both an absolute and relative basis. Nuclear provided 5.14% of global energy as of 2010 and has dropped down to 4.27%. On an absolute basis it has dropped from providing 7,219 TWh of energy and as of 2019 is down to 6,923 TWh. But even though nuclear energy consumption is declining, nuclear still provides more energy than solar and wind combined.
I think these trends will continue over the next 10 years. Solar and wind will continue to grow on a relative and absolute basis. But I think the relative growth they pick up will largely be from coal and perhaps in small part from nuclear unless the attitude towards nuclear technology changes. I believe natural gas will continue to grow on a relative and absolute basis. I further believe oil will continue to increase on an absolute basis but may stay relatively flat to downward on a relative basis. Coal will continue to decline on a relative basis and might even start to decline on an absolute basis as well.
Wind and solar are definitely in more of a growth mode, as you can see from those huge numbers, than the oil industry. But gas is also in growth mode. I do like alternative energy companies like Next Era Energy (NEE). While NEE is in the wind and solar space they also provide power using natural gas and nuclear. I’m looking for a buying opportunity and looking for value in the alternative energy sector as well.
But that doesn’t change the fact that oil and gas stocks are trading at steep discounts and oil and gas consumption is still in an uptrend. As billion hypocrite Warren Buffet once said be “fearful when others are greedy, and greedy when others are fearful.”
There is a lot of fear in the oil and gas industry so it might be time to be greedy.
The COVID-19 pandemic is a great tragedy and an unprecedented event in modern history. In the midst of countless negatives–one positive is this market selloff presents a buying opportunity.
As someone who has been overweight cash over the past few years I’ve been looking a selloff like this to be able to increase my exposure to the markets.
I can’t predict when the market will bottom or I would just buy in then. So I want to go over three strategies one could use to enter this market.
COVID-19 case Plateau
It is possible that when the number of active COVID-19 cases plateau that will also be around the time the market bottoms out.
Active Cases in the US continue to climb
As of now the active cases in the US have continued to climb. At some point this will plateau, as it already has in places like South Korea.
Active Cases in South Korea Plateaued in mid-March
Modified Dollar Cost Averaging
This method attempts to capture market exposure at given price levels.
To do this, first determine how much you’re planning on investing. Then break than into a series of price levels. For example, if you’re planning on investing $3,000 at three different price levels, you’d be investing $1,000 per price level.
Price levels could be something like the % fall from the prior peaks drop. So when the market falls 30% from peak, you invest $1,000, when it falls 40%, another $1,000 and if it falls 50% the remaining $1,000.
For example, the S&P 500 peaked at 3393 on 19 February. So $1,00 would be invested at the 30% drop level of 2375, a 40% drop would mean buying in at 2036, 50% would be 1696.
The downside to this is that the market might never fall 40% or 50%. If this happens one wouldn’t buy into the market at these levels and money would be left uninvested. It could also of course fall more, in which case one would have bought in at a higher level.
Looking at the previous bear markets of the past 2 decades, the bottom of markets is not made after just a 35% drop in 33 days.
Given that the number of COVID-19 cases in the US continues to climb I don’t believe the market has bottomed yet. The market has rallied about 14% off of the 23 March lows, but I believe the market will give up these gains and make a new low.
Of course I can’t know for sure.
Good Old Dollar Cost Averaging
This is probably the simplest and most basic method. This is buying a set dollar amount of shares on a set schedule. Such as $100 on the first of each month. When prices are lower, more shares will be purchased and when prices are higher, fewer shares will naturally be purchased.
The downside to this method is that if one has any reasonable belief that the market will fall more, then one is buying in at a higher price than is necessary.
Despite the rally over the past few days, major US indices like the S&P 500 are still down some 23% from the 19 February high.
Of course it’s impossible to know with certainty.
COVID-19 Selloff Buying Opportunity
Gold has been a decent hedge thus far. Gold is up 3% since the 19 February high compared to the S&P 500 which is currently down over 27%.
In the 2000 dot com crash markets didn’t bottom for for nearly two and half years. The 2007-2008 great recession market drop took about 500 days. We are less than 2 months into this crash.
We are certainly living in interesting times. While this has been a sharp and violent selloff, it presents a buying opportunity, if not now at some point over the next few months or years. I personally think the markets will fall lower, perhaps to the 40-50% level before beginning to climb again.
If you have ever had a stock broker chances are it will soon be Charles Schwab.
Back when I traded more actively I tried different brokers. I had a Scottrade account a Thinkorswim account and I also had a Evertrade account. I never singed up for a Charles Schwab or a TIAA account but I now (or perhaps soon will) have both. TIAA bought Evertrade and Chuck Schwab is in talks to buy TDAmeritrade.
Of course there will doubtlessly be some regulatory hurdles in place to ensure the acquisition won’t go through unless the right palms are greased.
Brokerage Gobbling
There has been a lot of consolidation in the brokerage industry over the years with one gobbling up another. Thinkorswim and Scottrade were both gobbled up by TDAmeritrade (which is an amalgamation of other acquired brokers like TD Waterhouse, Ameriprise, Fiserv and others).
Well there is always a bigger fish and now Charles Schwab is in talks to buy TDAmeritrade.
It isn’t clear how and even if consumers will benefit from all of this consolidation. While TDAmeritrade, Schwab and others recently announced commission free trading, it seems as though once a lot of the competition is eliminated the remaining 3-4 brokers will have more power to charge traders fees with few alternatives.
The Federal Reserve Balance sheet is back above $4 trillion for the first time since February of 2019.
This is more evidence that the US Government will monetize the national debt.
Monetizing the debt is when the government conjures money out of thin air “expanding the money supply” (in what amounts to legal counterfeiting) in order to pay the money it owes.
Monetizing the debt this puts downward pressure on the value of dollars and hence makes everything more expensive in what is described as price inflation, all else equal.
Is the Fed Monetizing the Debt?
The Federal Reserve has indicated that it would not monetize government debt.
“The Federal Reserve will not monetize the debt.” – Fed Chair Ben Bernanke
The reasoning goes that because they intend to shrink their balance sheet they aren’t just conjuring money created out of thin air.
But this is dependent on balance sheet normalization. Indeed, starting under Fed Chair Janet Yellen and accelerating under Fed Chair Jerome Powell the balance sheet had been trending down from the January 2015 high–at least until August 2015.
But as of 28 October 2019 the Fed’s balance sheet is back above $4 trillion. As humans we tend to place greater significance on large whole numbers when in fact there is nothing special about $4 trillion. But the point is that the Federal Reserve balance sheet began to tick back up starting in September of 2019.
Was the balance sheet declining from $4.5 trillion in January of 2015 down to $3.7 trillion in August of 2015 the extent of the “normalization” process?
The S&P 500 is making all time highs, everything is supposed to be wonderful in the economy, and yet starting back in September the Fed’s balance sheet is growing again, quite rapidly in fact as evidenced by the steepness of the chart.
How can the Fed ever normalize if they can’t do it after 10 years of stock market growth?
The above chart only goes through 2018. But it does show that the Fed’s balance sheet is correlated with the S&P 500. Despite the balance sheet tapering off slightly from 2016 onward through mid 2018 the S&P 500 continued to grow, until it sold off rather significantly in December.
Since December the S&P 500 has rallied back and achieved new highs. All told, the S&P 500 has gone up nearly 350% since the March 2009 lows.
An intrepid investor who purchased the S&P 500 in the dark days of March 2009 would have done very well. However, I believe this artificial “growth” is really a bubble blown by the Federal Reserve.
If this “growth” has been fueled by the Fed’s monetary policy, then the Fed can’t even normalize without also tanking the markets.
Combine this with trillion dollar annual budget deficits and $23 trillion in national debt, the US simply doesn’t have any ammunition to fight the next economic downturn, at least not without seriously compromising the value of the dollar.
Source: https://usdebtclock.org/
US stocks have been the investment strategy for the past ten years. But this is the longest period of economic expansion in the history of the United States.
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