He Lost $4 Million in a Blink

Wednesday, 9 September 2020
Melbourne, Australia
By Greg Canavan


After the Labor Day long weekend in the US, traders returned to their desks and hit the sell button.

The NASDAQ plunged 4%…

The S&P 500 tanked 2.8%…

The Dow fell 2.25%…

US crude was smashed 7.6%.

Bullion and bonds were the few assets that came through the day unscathed.

Electric car manufacturer Tesla Inc [NASDAQ:TSLA], the pinup stock for the post-COVID market lunacy, collapsed 21%.

Who would’ve thought?

Not ‘Davey Day Trader’, Barstool Sports owner turned stock market punter Dave Portnoy. I wrote about him in the 29 June edition of The Insider:

When the global shutdowns ended sports and sports betting, Portnoy turned to the stockmarket.

He bought airlines and cruise liners near the lows. And he’s made an absolute killing.

He says he has a couple of hard and fast rules.

‘1. Stocks only go up

‘2. When stocks falter, refer to rule one.

Portnoy is clearly mocking Warren Buffett with these rules.

And as absurd as they are, Portnoy isn’t a fool. He’s leveraging the stupidity of the stockmarket (thanks to the Fed) to promote himself and his company. It’s a stroke of genius.

In a live stream at the end of the day’s trade, Portnoy said he was down over $700K on the day, and had lost ‘$4 million in a [expletive] blink’, but he’s not selling. He’s still holding Tesla, because ‘he believes in Elon Musk’.

That’s what this whole bubble is about, dear reader: ‘Belief’. Because when price and fundamentals part ways, the only justification for buying or continuing to hold is that you ‘believe’ in something.

But as the famous saying goes:

It ain’t what you don’t know that gets you into trouble; it’s what you know for sure that just ain’t so.’

By the way, the reason for Tesla’s plunge was because it wasn’t included in the S&P 500, as expected. Maybe those selling Tesla went and piled into the even more speculative Nikola Corp [NASDAQ:NKLA]. It was up 40%!

The big tech stocks drove the selling in the NASDAQ. The FANG Index plunged 7%. But as you can see in the chart below, the correction is not even back to the 50-day moving average (the blue line). If the bubble is popping (and I think it is), these tech bellwethers have along way to fall.

Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

There’s an interesting backstory to this correction. It’s important to understand as you’re going to see a decent short covering rally in the next few days or weeks, and many will take it as a sign to get back in.

Last week, stories started to surface about someone buying a lot of out-of-the-money call options on big tech names. In other words, someone was betting big on ongoing price rises. As the Financial Review reported earlier this week:

The huge demand for calls has the effect of what traders call a gamma squeeze, which is like a short squeeze on steroids because of the leverage associated with options.

In effect, as investors bought these call options, those on the other side of the trade writing the calls were forced to buy more options or buy the underlying stock to hedge their positions. The scramble to buy may have created a melt-up in the stocks.

Add to this the legion of smaller players (and no doubt many professional fund managers) jumping on board this momentum trade, and you end up with a melt-up in the largest companies on the planet.

Up until last week, that is. Following last Thursday’s initial sharp sell-off, it was revealed that the Japanese tech conglomerate SoftBank was behind the options buying frenzy.

According to reports though, SoftBank only spent $4 billion on options, giving it notional exposure of about $30 billion. If we’re talking big tech stocks, that’s not a huge amount. Not enough to move the market as much as it has.

Chances are the actual exposure is much larger than ‘reported’.

Or if not, the short sellers know this is not a large position to attack, and force SoftBank to get out.

And if SoftBank closes its positions, the banks on the other side of the trade no longer need to hedge, and will therefore sell their long tech positions too.

And all those who were buying only because stocks were going up, will panic and sell as well…which will attract more short sellers betting on the age old ‘reversion to the mean’ trade.

In other words, it could get ugly.

But as I mentioned earlier, the shorts will cover and you’ll see a vicious rally.

That’s for down the track though.

As far as the Aussie market goes, ASX 200 futures indicated a 100-point loss today. At time of writing, the index is down more than that…132 points, or 2.2%.

Thanks to Victoria’s depression, Australia’s increasingly hostile relations with China, and news of a setback with the AstraZeneca vaccine, there are plenty of other reasons for Aussie stocks to be nervous.

Keep in mind though; the pockets of valuation madness are just that — pockets. They’re not widespread. There is plenty of good value out there right now, especially amongst ‘boring’ stocks with things like revenues and cash flows.

And for the bears out there waiting for better value, keep in mind that cheap valuations don’t come pretty. That is, when a stock is on a low PE, for example, it generally means there is significant earnings risk or economic uncertainty.

If you’re waiting for ‘things to improve’, you can bet you’ll be buying at a higher price.

In my view, the next three–six months will be a great buying opportunity in many select stocks. That’s going to be the focus of my advisory, Crisis & Opportunity.