Month: October 2020

Tina and the V, K, and L Recovery

I’m going to break with my usual pattern of gambling and talk a bit more about a broader portfolio strategy. I started investing in options this year for a few reasons – 1. Vegas isn’t fun right now, 2. there is (was) gold out there and 3. TINA. Ahh TINA. For those of you who don’t know who, or what, TINA is, its a silly acronym for There is No Alternative. With markets at all-time highs, the largest stimulus package in history and the general feeling that things are not alright, there seems to be no safe place to invest today for the long-term. Are we under threat of inflation, deflation, a second dip, the lost decade similar to Japan, or being pushed towards extremism and class segmentation via the winners and the losers of this pandemic? Yeah, all of those things, but you don’t have to worry about most of them. We are certainly not in a state of TINA. Normal investments still function despite the wackiness of this market.

The K Shaped Recovery

There’s been a lot of talk about a V Shaped recovery. Softbank had a hilarious 10K that showed how their investments were going to recover.

Well isn’t that a pretty picture? Does everyone else feel like the world is doing this? Some of you do probably, others don’t. It’s utter fantasy for most Americans. We are most likely going to experience both the L Shaped recovery and the K Shaped recovery. I say we are going to experience both because when you aggregate all economic activity, we are likely in for a slow and steady recovery. However, when you break down the recovery by industry, you see a much different story. Industry would be known as a control variable in a regression, and control variables can uncover very important underlying trends that invalidate aggregate trends and conclusions. Here’s what an L-Shaped recovery looks like.

In all likelihood, forecasts for the Covid-19 recovery are much too rosy. Compared to other recessions we are more likely to recover more slowly as illustrated by the Bloomberg chart above. But let’s look at what is most likely happening if you control for industry.

That chart isn’t even quite right. Tech is significantly outperforming even where it was prior to the recession and the S&P is slightly up or even on the year. Other industries are very much struggling and many will never recover.

The stock market, especially stock market indices, are not great indicators of the economic health of Americans. Albeit this blog is about investing, so maybe that’s not of interest, but let’s see how Americans are actually doing. It’s important to reconcile what we see, feel, and hear to economic indicators and eventually to how we invest.

Here are a few charts that show the chasm of our time. Check out tracktherecovery.org. Really cool interactive charts. Here are a few I made on the site:

It’s a pretty sad chart. Higher income, probably white collar workers are working comfortably from home, while lower income folks are experiencing large decrease in wages; wages are still down 17.5% from pre-lockdown times. From a moral and more compassionate standpoint, we need a second stimulus to support small businesses and those who lost their jobs or wages due to haphazard quarantine restrictions. Here’s a chart showing how small businesses have faired:

These charts are pretty self explanatory. Regarding investing opportunities, it’s important to remember indices like the Dow, S&P, and Nasdaq do not include any of these small business and are generally not experiencing anywhere near the same struggles as local businesses. As Americans, we see small businesses struggle every day: been to restaurant or salon recently? So go support small business, but don’t freak out over your portfolio.

Don’t Fear the Election

In short, I’m not afraid of any instability regarding a contentious election. This isn’t a political blog, but I think it’s no secret Biden is winning at the polls. It’s also no secret both candidates, one more loudly than the other, expect issues counting votes, which could delay the results and potentially put the election in the Supreme Court’s hands. I’m also not freaking out about that.

A Bloomberg article is showing the market is pricing in a Biden win. I’m trying not to be political, but there are believable arguments that a Democratic or Republican party win would be good for the markets. If the Dems win, increased tax revenues paired with increased public spending could help speed recovery, especially in areas that have been slow to recover (it’s not the New Deal, but that worked, didn’t it? Don’t say it didn’t, just don’t). If the Republicans win, it will likely be more of the same lax policies and lower corporate taxes. We know the market likes that (see K Shape above).

Here’s my play going into the election. I’m not selling anything. I’m currently short VXX options expiring 10/30. I’m well in the money now, so at or near expiration I’m either going to actually exercise or just reverse my position and go long VXX in case the election is the shit show these politicians have promised us. A smooth transition of power will most likely be a non-event for the market. Long VXX gives you a nice hedge against chaos. If VXX doesn’t spike, sell on the 4th and take out what you can. Hedging means losing money to protect against unlikely, but possible, events. Remember that.

What the market really needs is for Congress to pass a large stimulus bill. Amazingly, while Republicans have been dragging their feet over concerns of printing too much money and increasing the size of government, Trump recently broke ranks and suggested his own stimulus package, albeit it was completely implausible and overtly political. He made his point: the market wants another stimulus. That means Trump wants it. The Dems want it by default. So, I’d stay long equities through the election. I recently took out a long position in Apple and Google and I have calls that are printing on NIO. By the way, if you’re wondering how to find stocks that move 10% per day, go no further than r/wallstreetbets and scan the comments for something not completely ridiculous. There is no good advice there, but you’ll at least find what is likely to move. Then check out the fundamentals and see if you can stomach puts on things like Gamestop or calls anything that looks like Tesla.

What is UP with GameStop?

So now that I have some time on my hands and a gambling itch that is ready to be scratched, let’s have a look at some of next week’s plays. I’d usually put some kind of disclaimer that would call for caution, but if you’re like me, when you read back this sentence all you see is ‘put’ and ‘call’. So let’s take that hard earned money and bet on some ponies.

Ticker GME. If you read no further, just short this one. If you don’t know what GameStop is, good for you, you’re not a nerd who escapes his/her life in the virtual world of games (like me). GameStop is a video game, consumer electronics and gaming merchandise retailer. They operate 5,500 stores across the US and Europe (and other small countries) and they derive 47% of their revenue from reselling used games. Kids around the world bring their used games to GameStop and trade them in for new ones. Sounds great in theory, except they rip you off more than selling your used car to a dealer when buying a new one. Poor kids, but hey, now’s our time to exact that sweet, sweet revenge.

Their financials actually are not actually terrible. Their assets ($2.4bn) cover their short term liabilities ($1.3bn). They’ve lost money the last three years and while they are not burning money, it’s certainly smoldering. Here’s a chart of their stock performance directly from their 10k in February

It only gets worse from here. They are a retail operation during Covid. They actually got in trouble for remaining open in many states despite quarantine orders. Here is a high level look at their financials:

Ok, so I know what you’re all thinking – IT’S PRICED IN! Well, sort of, look at their recent stock movement:

Yup, that’s a spike people. I know I’m writing this a little late as it dropped today. I bought October 23rd puts first thing this morning, so apologies this is late, but this is still a great long-term short and here’s why.

Sony and Microsoft are releasing next generation consoles WITHOUT a disk drive. Quite literally: Games Stopped [being released physically]. That’s their whole business. So while their balance sheet is ok, retail rents are extremely cheap right now, and people won’t stop buying used games today, there’s no saving this one.

There are two recent precedents for saving a dying company: Kodak and Hertz. And those are two of the most marvelous and heroic cons / financial wizardry I’ve ever seen. Andrew Sullivan has done a plenty fine job tearing these transactions apart, so I’ll spare any additional verbiage, but here’s the short version.

In May 2020 Carl Icahn said “Icahn’t take any more losses” (so sorry) and dumped his 39% stake in the company for a $2bn loss. He’s still rich don’t worry. Hertz filed for bankruptcy and then Robinhood traders started buy its stock in droves. So much so the stock soared 500% and Hertz almost got approved to issue $500mm in new stock to cover their liabilities. It didn’t go through because 1. buying the stock would be a straight transfer of wealth from idiots to debt holders and 2. we really can’t let companies in bankruptcy issue stock to the general public because they will actually buy it. That said, some people made an absolute killing picking up shares for nothing and selling at the top.

Now for Kodak. In 2017, in the midst of the Crypto-Craze, which played an important part in my life, announced the Kodak coin. Sure, no one buys cameras with film anymore, but what if you could buy a camera, and film, with a KodakCoin and see it on the Block Chain?! How exciting! Stock soars 300%.

In July 2020 Kodak announced they were getting into the vaccine game, claiming they would make the ingredients used in generic drugs to fight the corona virus. How virtuous. Stock skyrockets like 7x. Don’t believe me? Here’s the chart:

Honestly, I know Kodak looks like an obvious short, but these guys will do literally anything. I’m not touching it. Truly epic though. Also, just think that our vaccines will be mixed with the same liquid that develops film. I can’t wait to get mine!

So how will GameStop jump the shark? Partner with Microsoft! GameStop entered a multi-year partnership with MSFT to “use Microsoft’s Dynamics 365 portfolio of cloud applications to help run its back-end and in-store operations”. Oh, and they’re going to use Teams for store communication and they will add Xbox All Access to its offerings (which are what exactly again?) to Xbox Game Pass Ultimate Players. I’m having trouble understanding what I just wrote / quoted. I play games and this adds literally zero value to my life. I’m just going to buy games on my console like the rest of the civilized world. I’m also getting a PS5, but that’s another story.

This is a classic example of a savvy biz-dev person cutting a name-brand deal that offers zero economics to GameStop and free marketing for Microsoft. They probably paid the Jefferies analyst to write a bullish report, saying, and I quote, the partnership “at least partially remov[es] a headline risk that GameStop loses all value from software sales as they shift from physical to digital.” In case you didn’t know, an ‘analyst’ on the research desk of an investment bank is actually the most senior position (and well paid).

Let’s examine that quote – GameStop is “shift[ing] from physical to digital”. How? The console is the store. Why would Microsoft offer better economics to GameStop than to themselves? Even if they did, how would GameStop manage to make any margin whatsoever? Also, I’m struggling to see how ‘partially removing a HEADLINE risk that GameStop loses all its value’ is bullish.

Beware the Short Squeeze

When a stock that has been shot in both legs, it’s shoulder and somewhere on the torso, but then receives a huge shot of adrenaline, it can cause a serious stir in the capital markets. Anyone who wrote calls is now stuck having to deliver shares they never expected to deliver. Also, anyone caught short – meaning you are shorting the stock – is going to receive a margin call. In both cases, anyone short needs to buy shares on the open market and very quickly there is an environment where there are more buyers than sellers. Yes, this applies to GameStop. And this is what is currently happening.

But if the world is at all reasonable, which we all know it’s not, the stock will come crashing down to reality. So on the morning of October 9th I bought short term expiration puts. As the stock continues to slide, well if, I will add to that with more long-term puts, finally exacting my revenge. I am hoping to take bundles of cash from the companies that took pennies from me as a child.

I’m only sort of kidding. I never actually wish the demise of any company. This is merely an amusing blog, but it’s never lost on me people will lose jobs as the great capitalist machine gobbles up one industry in favor of another. Or I could be wrong, and in that case, I lose money.

Also quick note. I’m generally long biotech right now: CTLT, NVAX, CRSP, ALLO, SGMO, VKTX, EDIT, NTLA. I also bought Palantir at IPO and FUBO at IPO. Keep an eye on Fubo. They announced they might get into sports betting. If that happens, r/wallstreetbets will skyrocket that thing to wherever TSLA is at the moment. I just bought and figured I’d do the research later, if at all.