submitted by UncleRyan79 to UncleRyanAZ [link] [comments]
I post these editorials in the morning because before bed and early are when I do my best slow thinking. They are actually hard for me to post because they make me feel a little vulnerable, though I'm not sure why - or why still. I used to just delete them about an hour after I posted them. I get up before dawn so I doubt any of you caught it. Then I started leaving them and saying I would delete them later. Either they had a time sensitive stock "idea" or just something I changed my mind on later. Then people asked me to stop doing that.
I try to be more selective about what I post and make sure it has real value to learns like I do. These posts get the least Up-votes so I know they are not read as much because those are generally good "I've read this" checks to know whats popular. They are always at the bottom of the sorted lists and I'm lucky to get one comment.
But the comments I do get are usually profound ones like "I can't believe no one explained it that way to me.. I finally get it". That was me. I never got things the way other people did. Since I was a kid. I had to find people who taught me things in a way that I understood. Now I think I have advantages for the way my brain learns a little differently, whether I shaped it or not. But it doesn't make it any easier to know that when most people read your stuff they just don't care about half of it. But now I know that's them not me.
I finally realized like me, some people don't learn like I do, so this part of my content does not interest them and that's just fine with me. I really started this sub to help my fellow slow thinkers. The people who can read something like this and extrapolate some hidden value that I might be trying to get across. That's who I am anyway. And as long as every once in a while, I get a note that says I helped someone see something new for the first time, then I'll keep trying different tactics to get through to different minds. If you don't like them, just skip anything labeled "Opinion".
Yesterday I posted the content from our Guest Mentor, John Chao. For our Q&A I let him do his own editing so he chose what words he bolded. The only one I added bold to out of the whole thing was this sentence that he came up with in the moment.
"To be a consistently profitable trader, we need to be disciplined like a professional athlete."
One of my favorite novels of recent years was a book called The Art of Racing In the Rain. It has since become a movie, and one I quite like. It's about a dog who's owner is a race car driver, told through the dogs perspective. The owner meets a girl and a lot happens, but without spoiling it, there's some health crisis that occurs, which is probably what made me connect to it so much.
The dog's owner, a racer named Denny Swift, is not a big guy. He wasn't in the book either. But he was sharp. Sharp physically and mentally. He was alert and wired and ready to go. But he was also cool and calm and the longer he raced the more cool and calm he appeared on the outside while on the inside he was corralled team of horses waiting to be let out to pasture whenever he needed them. All the terrible struggles and victories he faced seemed minor because he was always cool - always ready.
I had one bad group/mentor that I regret. It actually was not a bad service, but it was just pay-to-win setup. I had no control over what I bought. I did place my orders, but they picked the stocks and prices. I never took a trade for a while because it made me feel so sick. They posted winning members trades on a Facebook, sort of like I have been posting our member's great trades recently. I was sure it was a scam. I thought, they are only posting the good ones. It bet that's like 5%. I spent all my time finding new ways to get angry at other people, when I was just angry at myself for wasting all this money that I was already hurting for from a horrible loss streak.
I actually have been angry about that until this morning when I was talking to a new member about possibly posting a good trade she had, but she wanted to "wait for a better one". (Good for you!) In the shower this morning, my best slow thinking time of day, I asked myself, am I just like that guy who ran that service? I don't charge money but the effect is still the same. Maybe I don't want to be famous or rich from this mentoring but I do want a big following of people committed to independence. So am I selling out in a way? I then emotionally re-processed what I went through with that paid service.
I stayed about a month, even though I paid for a year because it was 50% off, and I was not making good choices at the time. Every day I got a tip and every day I didn't take it because I felt like it was resigning to the fact that I would not make it as a trader. I went to the Facebook every day and kept reading those winning trade recaps. I was furious. I wanted my money back but I knew I made the decision and it was one I wanted to live with. After a couple weeks I took one trade. I made back all the money I paid for the course and deleted my account. This was less than 5 years ago
That was the last time I spent money on anything that I did not know exactly what it was and how it would help me be independent. I did not resign myself again after that day though I came close many times again. I took desperate measures to get back above PDT and it hurt but I did it. I can feel my heart rate increasing as I type this and had to get up to walk around, that's how traumatic it was. I had already taken some really quality education before this, for over a year. I already knew cycles, waves, divergences. I knew how to race. I just hadn't done it enough and thought I should be Denny Swift, the racer from the book, without having his ten thousand laps.
To me the stock market is a race track. The scans I give out, or watchlists anyone else does, are race cars. They are great tools in the right hands, but like a new racer who's tires were not changed by a team the driver trusts, they are just as likely to crash it as make a clean lap. They read the books and watched the videos. But they haven't raced enough. They should have gone 5 miles and hour, but they went 60. They could gone for one lap, but they went for two. They don't have the best gear and don't even know what the best gear is. Is there even a best set of gear for everyone or do they need to study more books to find out what their best gear is? There's tons of race cars and they all work just fine. If you can't drive one yet, switching to another one won't help.
I think I'm finally over that bad program I paid for at one of my lowest moment in trading. But, boy, did it take a while to figure that one out. If you took anything from this post, or are new to trying to find the hidden message then let me help you this time. Notice all the links I put about a Nobel-prize-winning-book that helps you determine if you are a slow or fast thinker and how not figuring that out can hold you back for life. Notice how I actually figured out what my most thoughtful time of day is (in the shower) and I know what to think about during those few minutes to get more out of it. I know what foods literally cause me to make poorer choices when I trade. I mention a novel I read because I thought it might be insightful to my life and now my trading. I can't race a car, I've never watched Nascar, and I rarely drive myself anymore. I have health problems that make just getting out of bed feel like a long hard race most days.
But even on my worst days, my mind is sharp. And if I'm not well enough to exercise one day, I'm probably reading about how to improve my exercise for the next day. I never miss and opportunity to improve myself and apply learning in everything I do. My mind is a corralled team of horses and I am always ready to meet a challenge with full force and commitment because I am prepared.
I was born a thoughtless baby just like you. I had more disadvantages then most but I want the mind of a racer, not that helpless trader I was a few years ago, so I work at it constantly. It's contagious and addictive and I love it so much more than sitting around waiting for things to change when I know they rarely do.
skotlaroc is one of our members and someone who has made more progress than most. He can't race full speed yet but his racer's mind is developing rapidly and when he's ready I am confident he will crush it. One reason he is making such progress, and others like him, though its not always apparent when we they are the ones driving, he talks to me and other trades constantly. He happens to be in Australia and trades the ASX which puts him at a huge disadvantage because he doesn't trade the tickers I talk about, his market has totally different volatility and his market opens when mine closes.
But rather than give up he learned how to drive on a wet track. Rather than be upset about the time difference he uses it to his advantage with my weird sleeping schedule. Since he is going to bed when I am waking up, he actually figured out that that my (Ryan's) slowest thinking time is before dawn and right before I turn off my screens at night so he always catches me then to get my more insightful feedback. He probably doesn't even know he did this but he knew how to get the most out of a situation by figuring it ut. He's making choices and his team of horses is growing in his mind and his car is revving up on the track. He just has to survive long enough until he can take his off the speed limit control and go full speed with a full team of horses in his engine.
I don't want you to think I don't have fun and just work all day. I work a lot because I love it and the only thing I do more than trade right now is this community. But I get my ego handed to me by a 10 year old every day at 3:00.
I bought the Cadillac of bubble machines to add excitement to our squirt gun fights.
And even go down the slide I put in last year for her.
I still play first persons shooters when a good one comes out, I watched the second season of Umbrella Club twice and I probably have more THC in my blood than your teenage children.
But everything I do is deliberate and thoughtful. It doesn't mean I always work hard or work it all. I just know that life is finite and mine probably more than most. I will never again waste one minute feeling sorry for myself or blaming other people for anything when I can choose to use that time to try to resolve what got me upset in the first place.
I know most people who take my scans never look at the code to learn, even though I say this is its purpose. I know people buy things I just post a ticker of, which is why I rarely do. I see oh so many people talk to me about concepts and they are showing they understand them but then I click their names I still see them still posting on other reddit's asking complete strangers "what do you guys think about XYZ?"
I woke up to a new message from skotlaroc this morning before 3:00am. His market had closed so he was done for the day. I told him I was going to get some coffee and to leave me an update on his trading. He knows he is at risk of being posted about if he talks to me. just don't judge us for our typo's at that time of day.
You notice he doesn't tell me how much money he made or lost because I don't care what he does in a day. I care what he does in a year. What I can tell you is that is the dialogue of a racer in him. Neither of us are Denny Swift's and I might have a faster lap time, but he knows how to drive and that's all that matters. He slowed down now so he can control the car better. He can always go faster later
I've said this before, and it's not just hyperbole: the quality of people in this group and the promise of this community is far higher than anything else I have been involved in by a huge margin. I think we have a lot of real racers here. Just don't crash the car before you take your thousand laps.
Good Luck. Buckle Up.
submitted by dhsmatt2 to wallstreetbets [link] [comments]
Just about how I feel
Alright ladies and Gentleman- Many of you gambled with me on a purple earnings play and it didn't quite materialize as expected - I hope many of you purchased some of the lower more conservative debit spreads as they should be profitable still.
I took some time on earnings day, after hours to unload some shares as well as warrants with the expectation that the sell off would push us down to around 20.00, it appears that the selloff is mostly done as we've dropped about 4.5 from Thursday intraday peak.
I have begun selling cash secured puts for September expiration, 20.00 strike As I do not believe purple will drop past 18.65, which is the breakeven point for those puts.
Awesome quarter but not as awesome as expected
Alright, even though Purple didn't come close to my 225M estimate, it still had an amazing quarter in terms of fundaments. Purple achieved about 122M in revenue in Q1 and 165M in revenue in Q2, that is an impressive feat, especially considering they appeared to shutdown operations for a couple of weeks and that created deferred orders for Q3.
Adjusted earnings of 60+ cents per share, this excludes one time charges. This is actually an impressive number and beat many of the analysts expectations. The headlines showing the miss reported on GAAP, not adjusted.
Joe Megibow indicated that PRPL would have about 1B in capacity by the end of 2021, that is definitely an excellent reason to hold your investment or look for an entry.
After the call there were still price upgrades from almost every analyst as the year over year growth is very very impressive, especially for a manufacturing company.
Tip ranks price targets as of 11PM eastern
I believe the worst of the sell off is over and I expect that we will likely trade in the 21-25 dollar range from now until the next earnings. I have since exited about 60K shares of stock and about 60K warrants as I believe cash secured puts are a better play for the next couple of months. I will be selling puts for 20.00. on my remaining shares I will be selling covered call with 30 strikes.
I am also still holding my 22.5/25.00 debit spreads for October and I will hold my 25/30 and 25/35 debit spreads for January as I believe November could be a very very good earnings as the stock price will hopefully trade only slightly up and the accrual for warrants will be much smaller.
Revenue possibilities for Q3.
I believe that Q3 max revenue will likely be in the 200 Million range. This is due to PRPL running full production for 12 weeks instead of 10 and the additional 7th machine that is available for the entire quarter rather than just a single month of the quarter.
I believe that Purple will not quite achieve 200M in revenue because there will be a shift into wholesale that will push down top line, slightly, this is based on the comments from the calls. I believe purple will likely only achieve about 15% more revenue in Q3 than Q2, which is still impressive. This is my quick envelope calculation.
It is still early but I expect somewhere in the 180-190M range and gross Margin around 46-47%.
I was optimistic that this quarter would push us to a point where we could clean up the warrant situation but it appears that we will have another quarter of accruals and reversals. I was asked by u/indonesian_activist to detail the capital structure, I will try to do that in a follow on post as it is not as clean as I'd like but I don't believe it is a show stopper as the company is still producing healthy amounts of cash, gross margin improvement and market share improvement.
The capital structure is also promising because the founders still have a large stake in the company. Founder led companies are very very good.
My positions before and through earnings
No I didn't sell anything before the call. The first transaction In my account on 8/13 is selling warrants for 5.00 (which is cheaper than they are going for now and cheaper than they went for at any other time that earnings day). i was hoping to re-purchase if the stock plummeted, which it didn't so it cost be about 75K between shares and warrants.
I've broken down my first trade details and then shown a summary of every subsequent purchase. This is probably the last time I will go into this detail because it's time consuming, but i held every penny through earnings.
First After hours trade on 8/13, just above 8/12.
First trade is the 509.98 shown above, each following trade is above- goes from newest to oldest as the list goes down.
Current Position as of tonight
I sold 400 CSP contracts on Friday and I sold my 22.5 calls for about 1.00 on Friday as well as they were almost as expensive as the day I bought them. I am now holding a naked position as I have -2910 25.00 PRPL calls in the market.
I am holding the remainder of my calls and debit spreads.
I hope you guys made out ok- most of the more conservative spreads are still net positive. I will not lie about my moves but I also am not going to post my moves real time as sometimes they are time sensitive.
God speed Autists. Do your own research- I learned all my investing skills through Tik Tok.
|Ed Dickson||TE||Free Agent|
|Justin Britt||C||Free Agent|
submitted by IsNullOrEmptyTrue to wallstreetbets [link] [comments]
Listen up autists because you are about to get your ass saved by this knowledge I'm about to drop on you. Because today we're going to learn about hedging strategies. I've noticed that some of us may be confused on how to limit downside risk.
For those of you lazy bananas just waiting for the TLDR, well here it is:
First, let's get clear on what a hedge refers to. According to Investopedia:
A hedge is an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security.
Believe it or not, but options are not just for playing the market like casino chips.
In fact, they can be used in combination with regular stock, or along with other assets, to reduce risk and maximize returns.
Options accomplish 2 primary things:
Shit happens quickly, as we saw Friday. Unless you fart magic you're not going to predict when it will shift. Luckily, you don't need to with these simple tricks.
Trick #1: The Straddle
It is not just what your wife does to the neighbor while you film. It is also what you can use when you don't know whether witches will appear as promised, or if stone cold warlocks will grab your balls and squeeze them for max pain.
A long straddle is a combination of buying a call and buying a put, both with the same strike price and expiration. Together, they produce a position that should profit if the stock makes a bigly move either up or down.
As you can see, the the above scenario may come in handy for days like Monday where we are all basically 50/50 whether it will be upsies or downsies.
It is the Schrodinger's cat of options plays. Except, either of the two states will result is an alive portfolio.
Literally can't go tits up, unless you suffer from IV crush, or it goes sideways..
Which leads us to:
A short straddle is an options strategy comprised of selling both a call option and a put option with the same strike price and expiration date. It is used when the trader believes the underlying asset will not move significantly higher or lower over the lives of the options contracts.
Use the above scenario when the underlying asset is trading inside a defined range.
Be careful, because any escape up or down will mean certain doom.
You should be aware that selling a call and a put implies that you own shares of the underlying security, otherwise you will be on the hook to purchase if it goes the wrong direction.
When it comes to buying straddles you need a decent amount of cash to buy both a call and put for the same strike price.
Also, what if you are certain that the stonk will go up but still want some downside protection?
That leads us to:
Trick #2: The Strangle
A strangle is an options strategy where the investor holds a position in both a call and a put option with different strike prices, but with the same expiration date and underlying asset. A strangle is a good strategy if you think the underlying security will experience a large price movement in the near future but are unsure of the direction. However, it is profitable mainly if the asset does swing sharply in price.3Example:
Say Friday you decided to hedge on witches and bought an SPY 3/20 $280c like a retard.
Had you also purchased an SPY 3/20 210p you may have come out ahead, or at least retained your principal.
The long strangle, also known as buy strangle or simply \"strangle\", is a neutral strategy in options trading that involve the simultaneous buying of a slightly out-of-the-money put and a slightly out-of-the-money call of the same underlying stock and expiration date. Long Strangle Construction.
Just as with straddles, strangles can go long or short. To retain a position on a security that you expect to trade sideways you can use the short strangle.
The short strangle, also known as sell strangle, is a neutral strategy in options trading that involve the simultaneous selling of a slightly out-of-the-money put and a slightly out-of-the-money call of the same underlying stock and expiration date.
Maximum profit for the short strangle occurs when the underlying stock price on expiration date is trading between the strike prices of the options sold.
At this price, both options expire worthless and the options trader gets to keep the entire initial credit taken as profit.4
Trick #3: Selling Call Options
A covered call is an options strategy involving trades in both the underlying stock and an option contract. The trader buys (or already owns) the underlying stock. They will then sell call options for the same number (or less) of shares held and then wait for the option contract to be exercised or to expire.
This is the most basic way to profit from your portfolio in a situation where the stock may not move up in price. That way you can keep your shitty JNUG shares and earn money while they slowly move down to $1. Just sell an OTM call, but make sure that you have at least 100 shares of JNUG for each contract sold otherwise you'll have a margin call if it goes up beyond your strike price.
Trick #4: Credit Spread
The call credit spread is a bearish to neutral options trading strategy that capitalizes on theta decay and downward price moves in the underlying asset. It is comprised of a short call and a long call, and is sometimes also referred to as a “bear call spread.”
The call credit spread option strategy also works in minimally rising markets, as the trade will be entirely profitable if the underlying asset closes below short call strike price at option expiration.5
Stock XYZ is trading at $50 a share.
Take care to review the below resources and watch some YouTube to fully understand these plays before partaking. It is important that you understand how to properly leverage and control for risk to avoid a massive GUH when you fuck up.
Implied Volatility on SPY and Other Assets - Important Info
One of the most practical applications of the above strategies is to
Hedge vega (the quantifiable proxy for IV on option pricing). Vega represents the change in an option value for a 1% change in IV.
If you autists aren't taking the bare minimum protections to hedge against downside risk, especially for VIX then you have no-one to blame but yourself if you get pinched.
Take a read of the post(s) I mention above and be sure to ask any silly questions below if you get stuck. Remember, there are no silly questions, just silly people. Thanks and goodnight.
As each person’s definition of what “Ethical” means differ and there is no black-and-white definition of “ethical”, it is important to understand that some trade-offs have to be made.submitted by SirBanterClaus to UKEthicalInvesting [link] [comments]
In this Ethical/SRI Criteria Series, we take a look at some of the most popular Responsible Investment (e.g. Ethical, ESG, Sustainable, Impact Investing) funds and their "Ethical" investment criteria to help you make better fund selections to align with your own values.
L&G Future World ESG Developed Index Fund
The Future World funds are for investors who want to express a conviction on environmental, social and governance (ESG) themes. The funds extend LGIM’s approach to sustainable investing across a broad array of asset classes and strategies.
Future World is a natural evolution of what Legal & General Investment Management (LGIM) has always done – it reflects its culture and is aligned with its investor clients’ values. It seeks to identify long-term themes and opportunities, while managing the risks of a changing world.
Investors are increasingly recognising that ESG factors play a crucial role in determining asset prices, and helping to identify the companies that will succeed in a rapidly changing world – the winners of the future. As a result, sustainable investing is very much here to stay.
Hence the Future World Fund range helping to bring investments that incorporate ESG principles into the mainstream. The fund range include:
The objective of the Fund is to provide a combination of growth and income by tracking the performance of the Solactive L&G Enhanced ESG Developed Index (the “Benchmark Index”).
LGIM's approach rests on three pillars: long-term thematic analysis, the integration of ESG considerations and active ownership.
It believes that well-managed companies are more likely to deliver sustainable long-term returns. Assessing companies on their management of environmental, social and governance (ESG) issues is an important element of risk management, and therefore part of investors’ fiduciary duty.
Companies are intrinsically linked to the economies and societies in which they operate. Investors are collective owners of companies and LGIM therefore believes that it has a responsibility to the market as a whole. By incorporating ESG factors into investment decisions, LGIM believes investors can gain an element of protection against future risks and the potential for better long-term financial outcomes.
Future World "Protection List" (Negative Screening)
Through the Future World fund range companies are incentivised to operate more sustainably allowing clients to go further in integrating ESG factors into their investment strategy.
Companies are incorporated into the Protection List if they fail to meet minimum standards of globally accepted business practices. Across the LGIM-designed Future World funds, securities issued by such companies will not be held or exposure to them will be significantly reduced. The Future World Protection List includes companies which meet any of the following criteria:
There are a number of international conventions and treaties that have been developed with a view to prohibiting or limiting the use and availability of these weapons. The manufacture or production of such weapons is illegal in a number of jurisdictions globally and the involvement of companies in such weapons brings reputational risk and censure.
LGIM uses data for the identification of companies involved in the manufacture or production of controversial weapons provided by a well-known and highly respected ESG data provider.
Companies that are involved in the manufacture or production of cluster munitions, antipersonnel landmines, and biological and chemical weapons will be incorporated into the Future World Protection List. Companies incorporated into the list are involved in the core weapons system or components or services of the core weapons system considered to be tailor-made and essential for the lethal use of the weapon. Additionally, if companies are involved in the production, maintenance/service, sale/trade or research and development in relation to the core weapons system, they will also be incorporated into the list.
LGIM uses data for the identification of companies in breach of the principles provided by a well-known and highly respected ESG data provider.
Companies that are in breach of at least one of the UNGC principles for a continuous period of three years (36 months) or more will be considered to be persistent violators of the UNGC principles and incorporated into the list.
LGIM uses data for the identification of pure play coal companies provided by a well-known and highly respected ESG data provider.
Companies which derive a significant proportion of their revenues from the mining of bituminous or lignite coal, development of mining sites for bituminous or lignite coal, or the processing of bituminous or lignite coal are considered to be pure coal companies and will be incorporated into the Future World Protection List.
LGIM ESG Scoring (28 metrics) & Tilted indices
LGIM uses a proprietary ESG scoring methodology based on 28 metrics to score and monitor companies, across Environmental, Social and Governance factors, plus an extra Transparency factor - see below. It uses these scores to design ESG-aware tilted indices which invest more in those companies with higher scores and less in those which score lower, while retaining the investment profile of a mainstream index. The ESG Score is aligned to LGIM's engagement and voting activities.
28 Key Metrics used to calculate ESG Score
1. Carbon emissions intensity
LGIM considers the carbon dioxide emissions that a company produces directly (‘Scope 1’) or is indirectly responsible for through its purchased energy (‘Scope 2’). The sum of these emissions is divided by the companies’ revenue. This provides a measure of the carbon emissions intensity of a company’s activities, adjusted by company size and applicable across different sectors. Data on indirect emissions from companies’ supply chain and use of sold products (‘Scope 3’) is not used.
Companies whose carbon emissions intensity is less than the global median will receive a higher score, whereas companies with more carbon-intensive activities will receive a lower score. Carbon emissions data is provided by Trucost.
2. Carbon reserve intensity
Carbon reserves are reserves of fossil fuels (oil, coal and gas). Companies owning such reserves present investors with two long-term risks. First, if all known fossil fuel reserves were burnt, the associated carbon emissions would lead to a dramatic rise in global temperatures and extreme weather events. This would cause unprecedented disruption for companies’ operations and supply chains, in addition to the significant human costs from forced migration, water stress and pressures on global food supply. The second risk, which is partly a reaction to the first, is that the value of fossil fuel assets may significantly reduce, due to the ongoing energy transition accelerated by policy and technological trends.
Companies with very large fossil fuel reserves or with very carbon-intensive reserves (e.g. coal, tar sands) are more at risk from this change.
This metric looks at the embedded carbon in the fossil fuel reserves owned by a company, divided by a company’s market capitalisation, to adjust for company size. This represents a carbon reserves intensity score for a company. Carbon reserves data is provided by Trucost.
3. Green revenues
The transition to a low-carbon economy presents investment opportunities. New technologies are already leading to new revenue streams in sectors from agriculture to infrastructure and energy, with further innovation anticipated as the world develops alternatives to our current approach to energy and natural resources.
Companies who derive revenues from low-carbon services and technologies are assigned a green revenue score, in proportion to the percentage of company revenue derived from ‘green’ activities. This is applied as a positive uplift to the companies’ score.
Companies that may have a lower score due to their exposure to carbon emissions are rewarded if they have revenue exposures to green sources. This is intended to encourage companies to drive innovation and provide solutions to the energy transition.
LGIM follows its data provider’s classification of green revenue streams, but exclude carbon trading, gas- and nuclear-related activities.
Currently, many companies’ disclosures are not sufficiently granular enough to identify green revenue streams. LGIM encourages companies to improve disclosures in this area.
Green revenues data is provided by HSBC.
Themes: Social Diversity and Human Capital
Social Diversity: LGIM believes that companies that are representative of their employees and society, which bring together a diversity of views, backgrounds, values and perspectives, have a better track record of innovation, decision-making and culture.
Having diverse companies also has macroeconomic benefits, as all talent within an economy is effectively utilised.
Gender has been chosen as a proxy for social diversity within a company. Data on gender is globally reported, provides an easily measured way to review total workforce and management levels, and can also serve as an indicator for a company’s overall approach, as companies with strong approaches to gender diversity are also likely to have a commitment to other types of diversity.
LGIM recognises that some companies and sectors face challenges in attracting a diverse group of employees. Therefore, by looking at diversity across the different levels within a company, we seek to capture the development of a pipeline of talent. The social diversity theme tracks four indicators, looking at the percentage of:
4. Women on the board
5. Women at executive level
6. Women in management
7. Women in workforce
Across all four indicators, LGIM considers 30% gender diversity as a minimum standard, with companies below this threshold receiving negative scores. LGIM believes this represents a turning point within organisations, creating a critical mass that can influence change and impact the culture and practices of companies.
Having diversity across the workforce is important for the culture of the organisation and an indicator of the future talent pipeline for management. However, LGIM ESG scores that in most sectors and regions, gender representation is higher in the general workforce than it is at more senior levels.
Social diversity data is provided by Refinitiv.
Human Capital - Policy & Incidents: People are the most important assets for any company. Attracting and retaining the best talent, motivating them to be innovative, efficient and committed to the goal of the company is key for future success. A number of indicators can allow investors to get a sense of how companies manage the risks and opportunities associated with their workforce. LGIM has chosen to use the strength of companies’ social policies, checked against social incident rates, as proxies for how companies value, respect and support their employees and workforce, and how they promote a healthy and engaging work culture.
LGIM utilises four human capital indicators to capture whether companies have sufficient policies in place with regards to below. Across each policy category, companies who are deemed to have no formal policies in place receive a negative score. Companies with a formal policy in place receive a neutral score. Finally, companies with adequate to strong policies receive positive scores.
8. Bribery and corruption policy
Occurrences of bribery and corruption can indicate issues related to culture and employees; LGIM looks for reassurance that companies are managing these risks by implementing appropriate policies.
9. Freedom of association policy
The ability of employees to freely form and join unions is a key component of a healthy work culture.
10. Discrimination policy
Attracting and supporting a diverse and inclusive workplace is critical to creating a working culture with diversity of thought to support decision-making. A strong policy against discrimination is a key element to achieving this objective.
11. Supply chain policy
The strength of the supply chain is critical for most companies and it is a crucial component of applying consistent social standards across the businesses globally. LGIM expects companies to have strong policies for their supplier relationships.
LGIM also incorporate incidents into this theme, as a high level of material incidents may indicate that current policies are either of poor quality or insufficiently enforced. As such, it considers:
12. Employee incidents
13. Business ethics incidents
14. Supply chain incidents
A penalty is applied to companies’ Human Capital policy score depending on the severity of the incident.
All human capital indicators are provided by Sustainalytics.
Themes: Investor rights, board composition and audit quality
Board composition - The board of directors is the primary structure setting corporate strategy and direction, overseeing management’s performance and approving the use of investor capital. Having the right composition at the top of a company is an essential element of its success. Maintaining strong corporate governance through a high quality and independent board dilutes the risk of power being concentrated in one or a few people in an organisation and ensures there are appropriate levels of accountability.
This theme is composed of data on three indicators:
15. Independence of the chair
The chair leads the board, setting agendas for the discussion and ensuring the board has the right people and the right information required to make the best decisions and hold management accountable. As set out in our global voting policy, LGIM therefore expect the chair to be independent upon appointment and throughout their tenure. LGIM assesses whether the chair is currently an executive or has been a former executive of the company. A high score is attributed to an independent chair.
16. Independent directors on the board
An independent board is critical in overseeing the management and capital of a company. LGIM acknowledges that the structure of boards varies between companies and countries. As set out in LGIM's global voting policy, it believes that having a minimum of at least 30% independent directors is an essential safeguard for minority shareholders. Companies that fall below this threshold are penalised, whilst companies with a majority of independent directors are rewarded with top scores.
17. Board tenure
Regular refreshment of the board contributes to a continued independent board with the relevant skillsets. Regular refreshment can also assist in questioning established best practices and avoid ‘group think’. However, LGIM equally recognises the value of retaining corporate knowledge within a board, therefore do not wish to see too frequent change. LGIM's methodology reflects its global voting policy in that a lower score is attributed to boards with very high or very low board tenure.
Audit oversight - Having accurate and reliable financial information is the bedrock of investment decision-making and effective corporate governance.
Investors expect companies to demonstrate and explain the established processes and procedures to ensure the independence and robustness of the internal and external audit functions, and the level of oversight from the board.
18. Audit committee expertise
The audit committee plays a vital role in safeguarding investors’ interests. LGIM expects all companies to have at least three independent members on the audit committee, including a “financial expert” as defined by the US Securities and Exchange Commission’s rules following the Sarbanes-Oxley Act. Companies who fail to meet this minimum standard are penalised.
19. Non-audit fees paid to auditors
The extent to which auditors conduct non-audit work (i.e. consulting, IT support, etc.) for an audit client is an important proxy for independence.
Auditors should not audit their own work, and the higher margins available on the non-audit work may affect their willingness to negatively mark the accounts. LGIM does not expect excessive non-audit work to be conducted by the company’s external auditors, as this will bring into question the independence of their judgment. In line with LGIM's global voting policy, the scoring methodology penalises companies when non-audit fees exceed 50% of the companies’ audit-related fees.
20. Audit opinion of the accounts
An auditor’s opinion provides a view into the extent to which a company’s financial statements represent a "true and fair" view of a company's financial performance and position. From a score perspective, LGIM only assumes that a company is compliant when the opinion is “unqualified” (i.e. a company’s financial statements are fairly and appropriately presented, without any exceptions, and in compliance with accounting standards). All other auditor opinions result in a negative score.
Investor rights - The ability of shareholders to vote is an important mechanism in the public equity markets, to demonstrate dissent and align the interests of the company and management to that of the owners. In contrast, a diminished ability to hold corporates to account weakens fundamental checks and balances.
Investor rights are therefore assessed based on two data points:
21. Free float
The greater the number of shares held by disbursed shareholders (free float), the greater the opportunities for shareholders to use their voice for influence and impact. LGIM encourages companies to have a free-float of at least 50%.
22. Equal voting rights
LGIM subscribes to the principle of ‘one share, one vote’, as control of a company should be proportional to the risk being borne by investors. LGIM believes this is both a fundamental right of shareholders and an essential feature of good corporate governance. Without it, investors lack the ability to influence the companies they own and have a say in how their capital is being used.
Companies are tested against three criteria:
In addition to the traditional E, S and G metrics, LGIM also assesses companies on their overall transparency. Without access to comprehensive corporate data, investors are unable to properly assess material risks and opportunities related to their investments.
23. ESG reporting standard
Analysing the company's overall reporting on ESG matters and the extent to which it conforms to international standards as well as best practices.
24. Verification of ESG reporting standards
Assessing whether the company’s sustainability report has been externally verified according to a report assurance standard.
25. Carbon Disclosure Project (CDP) disclosure
Responding to relevant CDP questionnaires is an established best practice in carbon emissions reporting
26. Tax disclosure
Assessing whether the company reports taxes paid in each country of operation. The best score requires full country-by-country reporting, a moderate score is given for when some but not all taxes are disclosed, whilst a low score indicates that tax disclosure is happening in only a few or none of the countries of operation.
27. Director disclosure
Assessing the level of disclosure regarding board directors, including directors’ biographies. This information is critical for investors in order to assess the skillsets and relevant experience of director nominees and the overall quality of the board of directors.
28. Remuneration disclosure
Disclosure of executive pay policy and practices is critical to allow proper analysis of the alignment between pay and performance and to ensure that the quantum of pay is both reasonable and within market standards.
Score calculation - Each of the 28 data points are assessed and scored, creating a sub-score at the theme level.
Individual themes are then aggregated to form the environmental, social, governance and transparency scores.
Companies’ final ESG scores are presented between 0 and 100. A high-scoring company will have met most of our criteria for best practice; a company scoring 0 has not met any of LGIM's minimum expectations and represents a very significant concern.
Scores are updated twice a year in March and September.
LGIM's Global ESG Scores of companies - March 2020 can be found here
LGIM's objective is to effect positive change in the companies and assets in which it invests, and for society as a whole. In 2019, LGIM focused on:
Future World Funds: Climate Impact Pledge
As one of the largest asset managers in Europe, LGIM seeks to use its scale to ensure companies are playing their part to accelerate the transition to a low-carbon economy. The investment risks surrounding climate change have become so urgent that, for the first time, LGIM is going beyond solely engaging with companies in order to hold them to account on the issue.
In December 2015, 195 governments agreed in Paris to limit the increase in the average global temperature to well below 2°C above pre-industrial levels. The Climate Impact Pledge represents LGIM's commitment to address climate change by engaging directly with the largest companies in the world, which are crucial to meeting the 2°C Paris target. The companies will be assessed rigorously for the robustness of their strategies, governance and transparency.
Companies that fail to meet its minimum standards (ESG Scoring) will be removed from, or not invested in, our range of Future World funds, subject to the disinvestment process. In all other funds where LGIM cannot divest, it will vote against reappointing the chair of their board of directors, to ensure LGIM are using one voice across all of our holdings.
The companies covered by the pledge include market leaders in sectors ranging from resource mining to finance. LGIM's assessment takes into account whether they have a corporate statement that formally recognises the impact of climate change; whether they are fully transparent on their carbon contribution; how climate considerations are embedded within the corporate strategy; and whether the board composition is diverse and robust enough to drive innovation and change. LGIM will rank companies based on these criteria, and engage directly with them to improve their rankings. LGIM will also make public the names of some of the best and worst performers, alongside examples of best practices that LGIM would like to see adopted more widely.
Disinvestment Process - If companies fail to meet these criteria, and if after a period of engagement, the company has not addressed the areas of concern, LGIM will either not invest or exclude the company from active Future World funds ("Protection List"), and reduce or divest the company from Future World index funds.
In the Future World index funds, LGIM will make sure the impact of divestment is no more than the tracking error disclosed in the fund’s prospectus. That could mean it will have to retain some investment in companies that do not meet its criteria in order to avoid tracking error. LGIM believes this combined approach of ranking, publicising, voting and divestment can send a powerful message to all companies that their investors are serious about tackling climate change.
Summary: LGIM's proprietary ESG Scoring using 28 key metrics of Global Companies is very impressive to see - it ensures that this is done in-house and not reliant on third-parties, hence it is more transparent and can be amended to match evolving views. I've taken the opportunity to use these ESG Scores and match them up with the L&G Future World ESG Developed Index fund's top 10 holdings below.
In addition, the width and depth of the metrics encompasses many important factors, and the fund would effectively penalise those firms with low ESG scores by tilting exposure to those with higher ESG scores. Though there's a lot of detail, I'm surprised that what's missing is the weightings between the environmental, social, governance and transparency factors (i.e. is each factor weighted equally or is E more important than say T?).
In addition to this, there is a Negative Screening overlay ("Protection List") and Active Voting/Engagement to compliment the process. For a low-cost passive/index tracking fund, this is all very good to see (and quite rare as most simply have a negative screen) and would certainly please those cost-conscious responsible investors.
Having said that, the fund size is still relatively small and the fund lacks a long track record - though this may not be a big concern for an index tracking fund.
Fund Size: £126.8m as at 31/05/2020
Number of Holdings: 1292
OCF: 0.25% as at 30/09/2019
Target benchmark: Solactive L&G Enhanced ESG Developed Index
Top 10 Holdings & LGIM ESG Scores
For this week's edition of DDDD (Data-Driven DD), we're going to look in-depth at some of the interesting things that have been doing on in the market over the past few weeks; I've had a lot more free time this week to write something new up, so you'll want to sit down and grab a cup of coffee for this because it will be a long one. We'll be looking into bankruptcies, how they work, and what some companies currently going through bankruptcies are doing. We'll also be looking at some data on retail and institutional investors, and take a closer look at how retail investors in particular are affecting the markets. Finally, we'll look at some data and magic markers to figure out what the market sentiment, the thing that's currently driving the market, looks like to help figure out if you should be buying calls or puts, as well as my personal strategy.submitted by ASoftEngStudent to wallstreetbets [link] [comments]
Disclaimer - This is not financial advice, and a lot of the content below is my personal opinion. In fact, the numbers, facts, or explanations presented below could be wrong and be made up. Don't buy random options because some person on the internet says so; look at what happened to all the SPY 220p 4/17 bag holders. Do your own research and come to your own conclusions on what you should do with your own money, and how levered you want to be based on your personal risk tolerance.
How Bankruptcies WorkFirst, what is a bankruptcy? In a broad sense, a bankruptcy is a legal process an individual or corporation (debtor) who owes money to some other entity (creditor) can use to seek relief from the debt owed to their creditors if they’re unable to pay back this debt. In the United States, they are defined by Title 11 of the United States Code, with 9 different Chapters that govern different processes of bankruptcies depending on the circumstances, and the entity declaring bankruptcy.
For most publicly traded companies, they have two options - Chapter 11 (Reorganization), and Chapter 7 (Liquidation). Let’s start with Chapter 11 since it’s the most common form of bankruptcy for them.
A Chapter 11 case begins with a petition to the local Bankruptcy court, usually voluntarily by the debtor, although sometimes it can also be initiated by the creditors involuntarily. Once the process has been initiated, the corporation may continue their regular operations, overseen by a trustee, but with certain restrictions on what can be done with their assets during the process without court approval. Once a company has declared bankruptcy, an automatic stay is invoked to all creditors to stop any attempts for them to collect on their debt.
The trustee would then appoint a Creditor’s Committee, consisting of the largest unsecured creditors to the company, which would represent the interests creditors in the bankruptcy case. The debtor will then have a 120 day exclusive right after the petition date to file a Plan of Reorganization, which details how the corporation’s assets will be reorganized after the bankruptcy which they think the creditors may agree to; this is usually some sort of restructuring of the capital structure such that the creditors will forgive the corporation’s debt in exchange for some or all of the re-organized entity’s equity, wiping out the existing stockholders. In general, there’s a capital structure pecking order on who gets first dibs on a company’s assets - secured creditors, unsecured senior bond holders, unsecured general bond holders, priority / preferred equity holders, and then finally common equity holders - these are the classes of claims on the company’s assets. After the exclusive period expires, the Creditor’s Committee or an individual creditor can themselves propose their own, possibly competing, Restructuring Plan, to the court.
A Restructuring Plan will also be accompanied by a Disclosure Statement, which will contain all the financial information about the bankrupt company’s state of affairs needed for creditors and equity holders to make an informed decision about how to proceed. The court will then hold a hearing to approve the Restructuring Plan and Disclosure Statement before the plan can be voted on by creditors and equity holders. In some cases, these are prepared and negotiated with creditors before bankruptcy is even declared to speed things up and have more favorable terms - a prepackaged bankruptcy.
Once the Restructuring Plan and Disclosure Statement receives court approval, the plan is voted on by the classes of impaired (i.e. debt will not be paid back) creditors to be confirmed. The legal requirement for a bankruptcy court to confirm a Restructuring Plan is to have at least one entire class of impaired creditors vote to accept the plan. A class of creditors is deemed to have accepted a Restructuring Plan when creditors that hold at least 2/3 of the dollar amount and at least half of the number of creditors vote to accept the plan. After another hearing, and listening to any potential objections to the proposed Restructuring Plan, such as other impaired classes that don't like the plan, the court may then confirm the plan, putting it to effect.
This is one potential ending to a Chapter 11 case. A case can also end with a conversion to a Chapter 7 (Liquidation) case, if one of the parties involved file a motion to do so for a cause that is deemed by the courts to be in the best interest of the creditors. In Chapter 7, the company ceases operating and a trustee is appointed to begin liquidating (i.e. selling) the company’s assets. The proceeds from the liquidation process are then paid out to creditors, with the most senior levels of the capital structure being paid out first, and the equity holders are usually left with nothing. Finally, a party can file a motion to dismiss the case for some cause deemed to be in the best interest of the creditors.
The Tale of Two Bankruptcies - WLL and HTZHertz (HTZ) has come into news recently, with the stock surging up to $6, or 1500% off its lows, for no apparent fundamental reason, despite the fact that they’re currently in bankruptcy and their stock is likely worthless. We’ll get around to what might have caused this later, for now, we’ll go over what’s going on with Hertz in its bankruptcy proceedings. To get a clearer picture, let’s start with a stock that I’ve been following since April - Whiting Petroleum (WLL).
WLL is a stock I’ve covered pretty extensively, especially with it’s complete price dislocation between the implied value of the restructured company by their old, currently trading, stock being over 10x the implied value of the bonds, which are entitled to 97% of the new equity. Usually, capital structure arbitrage, a strategy to profit off this spread by going long on bonds and shorting the equity, prevents this, but retail investors have started pumping the stock a few days after WLL’s bankruptcy to “buy the dip” and make a quick buck. Institutions, seeing this irrational behavior, are probably avoiding touching at risk of being blown out by some unpredictable and irrational retail investor pump for no apparent reason. We’re now seeing this exact thing play out a few months later, but at a much larger scale with Hertz.
So, how is WLL's bankruptcy process going? For anyone curious, you can follow the court case in Stretto. Luckily for Whiting, they’ve entered into a prepackaged bankruptcy process and filed their case with a Restructuring Plan already in mind to be able to have existing equity holders receive a mere 3% of new equity to be distributed among them, with creditors receiving 97% of new equity. For the past few months, they’ve quickly gone through all the hearings and motions and now have a hearing to receive approval of the Disclosure Statement scheduled for June 22nd. This hearing has been pushed back a few times, so this may not be the actual date. Another pretty significant document was just filed by the Committee of Creditors on Friday - an objection to the Disclosure Statement’s approval. Among other arguments about omissions and errors the creditor’s found in the Disclosure Statement, the most significant thing here is that Litigation and Rejection Damage claims holders were treated in the same class as a bond holders, and hence would be receiving part of their class’ share of the 97% of new equity. The creditors claim that this was misleading as the Restructuring Plan originally led them to believe that the 97% would be distributed exclusively to bond holders, and the claims for Litigation and Rejection Damage would be paid in full and hence be unimpaired. This objection argues that the debtors did this gerrymandering to prevent the Litigation and Rejection Damage claims be represented as their own class and able to reject the Restructuring Plan, requiring either payment in full of the claims or existing equity holders not receiving 3% of new equity, and be completely wiped out to respect the capital structure. I’d recommend people read this document if they have time because whoever wrote this sounds legitimately salty on behalf of the bond holders; here’s some interesting excerpts:
Moreover, despite the holders of Litigation and Rejection Damage Claims being impaired, existing equity holders will still receive 3% of the reorganized company’s new equity, without having to contribute any new value. The only way for the Debtors to achieve this remarkable outcome was to engage in blatant classification gerrymandering. If the Debtors had classified the Litigation and Rejection Damage Claims separately from the Noteholder claims and the go-forward Trade Claims – as they should have – then presumably that class would reject a plan that provides Litigation and Rejection Damage Claims with a pro rata share of minority equity.
The Debtors have placed the Rejection Damage and Litigation Claims in the same class as Noteholder Claims to achieve a particular result, namely the disenfranchisement of the Rejection Damage and Litigation Claimants who, if separately classified, may likely vote to reject the Plan. In that event, the Debtor would be required to comply with the cramdown requirements, including compliance with the absolute priority rule, which in turn would require payment of those claims in full, or else old equity would not be entitled to receive 3% of the new equity. Without their inclusion in a consenting impaired class, the Debtors cannot give 3% of the reorganized equity to existing equity holders without such holders having to contribute any new value or without paying the holders of Litigation and Rejection Damage Claims in full.
The Committee submits that the Plan was not proposed in good faith. As discussed herein, the Debtors have proposed an unconfirmable Plan – flawed in various important respects. Under the circumstances discussed above, in the Committee’s view, the Debtors will not be able to demonstrate that they acted with “honesty and good intentions” and that the Plan’s results will not be consistent with the Bankruptcy Code’s goal of ratable distribution to creditors.
They’re even trying to have the court stop the debtor from paying the lawyers who wrote the restructuring agreement.
However, as discussed herein, the value and benefit of the Consenting Creditors’ agreements with the Debtors –set forth in the RSA– to the Estates is illusory, and authorizing the payment of the Consenting Creditor Professionals would be tantamount to approving the RSA, something this Court has stated that it refuses to do.20 The RSA -- which has not been approved by the Court, and indeed no such approval has been sought -- is the predicate for a defective Plan that was not proposed in good faith, and that gives existing equity holders an equity stake in the reorganized enterprise even though Litigation and Rejection Damage Creditors will (presumably) not be made whole under the Plan and the existing interest holders will not be contributing requisite new value.
As a disclaimer, I have absolutely zero knowledge nor experience in law, let alone bankruptcy law. However, from reading this document, if what the objection indicates to be true, could mean that we end up having the court force the Restructuring agreement to completely wipe out the current equity holders. Even worse, entering a prepackaged bankruptcy in bad faith, which the objection argues, might be grounds to convert the bankruptcy to Chapter 7; again, I’m no lawyer so I’m not sure if this is true, but this is my best understanding from my research.
So what’s going on with Hertz? Most analysts expect that based on Hertz’s current balance sheet, existing equity holders will most likely be completely wiped out in the restructuring. You can keep track of Hertz’s bankruptcy process here, but it looks like this is going to take a few months, with the first meeting of creditors scheduled for July 1. An interesting 8-K got filed today for HTZ, and it looks like they’re trying to throw a hail Mary for their case by taking advantage of dumb retail investors pumping up their stock. They’ve just been approved by the bankruptcy court to issue and sell up to $1B (double their current market cap) of new shares in the stock market. If they somehow pull this off, they might have enough money raised to dismiss the bankruptcy case and remain in business, or at very least pay off their creditors even more at the expense of Robinhood users.
The Rise of Retail Investors - An UpdateA few weeks ago, I talked about data that suggested a sudden surge in retail investor money flooding the market, based on Google Trends and broker data. Although this wasn’t a big topic back when I wrote about it, it’s now one of the most popular topics in mainstream finance news, like CNBC, since it’s now the only rational explanation for the stock market to have pumped this far, and for bankrupt stocks like HTZ and WLL to have surges far above their pre-bankruptcy prices. Let’s look at some interesting Google Trends that I found that illustrates what retail investors are doing.
Google Trends - Margin Calls
Google Trends - Robinhood
Google Trends - What stock should I buy
Google Trends - How to day trade
Google Trends - Pattern Day Trader
Google Trends - Penny Stock
The conclusion that can be drawn from this data is that in the past two weeks, we are seeing a second wave of new retail investor interest, similar to the first influx we saw in March. In particular, these new retail investors seem to be particularly interested in day trading penny stocks, including bankrupt stocks. In fact, data from Citadel shows that penny stocks have surged on average 80% in the previous week.
Why Retail Investors Matter
A common question that’s usually brought up when retail investors are brought up is how much they really matter. The portfolio size of retail investors are extremely small compared to institutional investors. Anecdotally and historically, retail investors don’t move the market, outside of some select stocks like TSLA and cannabis stocks in the past few years. However when they do, shit gets crazy; the last time retail investors drove the stock market was in the dot com bubble. There’s a few papers that look into this with similar conclusions, I’ll go briefly into this one, which looks at almost 20 years of data to look for correlations between retail investor behavior and stock market movements. The conclusion was that behaviors of individual retail investors tend to be correlated and are not random and independent of each other. The aggregate effect of retail investors can then drive prices of equities far away from fundamentals (bubbles), which risk-averse smart money will then stay away from rather than try taking advantage of the mispricing (i.e. never short a bubble). The movement in the prices are typically short-term, and usually see some sort of reversal back to fundamentals in the long-term, for small (i.e. < $5000) trades. Apparently, the opposite is true for large trades; here’s an excerpt from the paper to explain.
Stocks recently sold by small traders perform poorly (−64 bps per month, t = −5.16), while stocks recently bought by small traders perform well (73 bps per month, t = 5.22). Note this return predictability represents a short-run continuation rather than reversal of returns; stocks with a high weekly proportion of buys perform well both in the week of strong buying and the subsequent week. This runs counter to the well-documented presence of short-term reversals in weekly returns.14,15 Portfolios based on the proportion of buys using large trades yield precisely the opposite result. Stocks bought by large traders perform poorly in the subsequent week (−36 bps per month, t = −3.96), while those sold perform well (42 bps per month, t = 3.57). We find a positive relationship between the weekly proportion of buyers initiated small trades in a stock and contemporaneous returns. Kaniel, Saar, and Titman (forthcoming) find retail investors to be contrarians over one-week horizons, tending to sell more than buy stocks with strong performance. Like us, they find that stocks bought by individual investors one week outperform the subsequent week. They suggest that individual investors profit in the short run by supplying liquidity to institutional investors whose aggressive trades drive prices away from fundamental value and benefiting when prices bounce back. Barber et al. (2005) document that individual investors can earn short term profits by supplying liquidity. This story is consistent with the one-week reversals we see in stocks bought and sold with large trades. Aggressive large purchases may drive prices temporarily too high while aggressive large sells drive them too low both leading to reversals the subsequent week.
Thus, using a one-week time horizon, following the trend can make you tendies for a few days, as long as you don’t play the game for too long, and end up being the bag holder when the music stops.
The Keynesian Beauty ContestThe economic basis for what’s going on in the stock market recently - retail investors driving up stocks, especially bankrupt stocks, past fundamental levels can be explained by the Keynesian Beauty Contest, a concept developed by Keynes himself to help rationalize price movements in the stock market, especially during the 1920s stock market bubble. A quote by him on the topic of this concept, that “the market can remain irrational longer than you can remain solvent”, is possibly the most famous finance quote of all time.
The idea is to imagine a fictional newspaper beauty contest that asks the reader to pick the six most attractive faces of 100 photos, and you win if you pick the most popular face. The naive strategy would be to pick the faces that you think are the most attractive. A smarter strategy is to figure out what the most common public perception of attractiveness would be, and to select based on that. Or better yet, figure out what most people believe is the most common public perception of what’s attractive. You end up having the winners not actually be the faces people think are the prettiest, but the average opinion of what people think the average opinion would be on the prettiest faces. Now, replace pretty faces with fundamental values, and you have the stock market.
What we have today is the extreme of this. We’re seeing a sudden influx of dumb retail money into the market, who don’t know or care about fundamentals, like trading penny stocks, and are buying beaten down stocks (i.e. “buy the dip”). The stocks that best fit all three of these are in fact companies that have just gone bankrupt, like HTZ and WLL. This slowly becomes a self-fulfilling prophecy, as people start seeing bankrupt stocks go up 100% in one day, they stop caring about what stocks have the best fundamentals and instead buy the stocks that people think will shoot up, which are apparently bankrupt stocks. Now, it gets to the point where even if a trader knows a stock is bankrupt, and understands what bankruptcy means, they’ll buy the stock regardless expecting it to skyrocket and hope that they’ll be able to sell the stock at a 100% profit in a few days to an even greater fool. The phenomenon is well known in finance, and it even has a name - The Greater Fool Theory. I wouldn’t be surprised if the next stock to go bankrupt now has their stock price go up 100% the next day because of this.
What is the smart money doing - DIX & GEXAlright that’s enough talk about dumb money. What’s all the smart money (institutions) been doing all this time? For that, you’ll want to look at what’s been going on with dark pools. These are private exchanges for institutions to make trades. Why? Because if you’re about to buy a $1B block of SPY, you’re going to cause a sudden spike in prices on a normal, public exchange, and probably end up paying a much higher cost basis because of it. These off-exchange trades account for about one third of all stock volume. You can then use data of market maker activity in these dark pools to figure out what institutions have been doing, the most notable indicators being DIX by SqueezeMetrics.
Another metric they offer is GEX, or gamma exposure. The idea behind this is that market markets who sell option contracts, typically don’t want to (or can’t legally) take an actual position in the market; they can only provide liquidity. Hence, they have to hedge their exposure from the contracts they wrote by going long or short on the stocks they wrote contracts to. This is called delta-hedging, with delta representing exposure to the movement of a stock. With options, there’s gamma, which represents the change in delta as the stock price moves. So as stock prices move, the market maker needs to re-hedge their positions by buying or selling more shares to remain delta-neutral. GEX is a way to show the total exposure these market makers have to gamma from contracts to predict stock price movements based on what market makers must do to re-hedge their positions.
Now, let’s look at what these indicators have been doing the past week or so.
DIX & GEX
In the graph above, an increasing DIX means that institutions are buying stocks in the S&P500, and an increasing GEX means that market makers have increasing gamma exposure. The DIX whitepaper, it has shown that a high DIX is often correlated with increased near-term returns, and in the GEX whitepaper, it shows that a decreased GEX is correlated with increased volatility due to re-hedging. It looks like from last week’s crash, we had institutions buy the dip and add to their current positions. There was also a sudden drop in GEX, but it looks like it’s quickly recovered, and we’ll see volatility decreased next week. Overall, we’re getting bullish signals from institutional activity.
Bubbles and Market SentimentI’ve long held that the stock market and the economy has been in a decade-long bubble caused by liquidity pumping from the Fed. Recently, the bubble has been accelerated and it’s becoming clearer to people that we are in a bubble. Nevertheless, you shouldn’t short the bubble, but play along with it until it bursts. Bubbles are driven by pure sentiment, and this can be a great contrarian indicator to what stage of the bubble we are in. You want to be a bear when the market is overly greedy and a bull when the market is overly bearish. One of the best tools to measure this is the equity put / call ratio.
Put / Call Ratio
The put/call ratio dropped below 0.4 last week, something that’s almost never happened and has almost always been immediately followed up by a correction - which it did this time as well. A low put / call ratio is usually indicative of an overly-greedy market, and a contrarian indicator that a drop is imminent. However, right after the crash, the put/call ratio absolutely skyrocketed, closing right above 0.71 on Friday, above the mean put / call ratio for the entire rally since March’s lows. In other words, a ton of money has just been poured into SPY puts expecting to profit off of a downtrend. In fact, it’s possible that the Wednesday correction itself has been exasperated by delta hedging from SPY put writers. However, this sudden spike above the mean for put/call ratio is a contrarian indicator that we will now see a continued rally.
TechnicalsMagic Markers on SPY, Daily
With Technical Indicators, there’s a few things to note
My Strategy for Next Week
While technicals are pretty bearish, retail and institutional activity and market sentiment is indicating that the market still continue to rally. My strategy for next week will depend on whether or not the market opens above or below 300. I’m currently mostly holding long volatility positions, that I’ve started existing on Friday.
The Bullish case
If 300 proves to be a strong support level, I’ll start entering bullish positions, following my previous strategy of going long on weak sectors such as airlines, cruises, retail, and financials, once they break above the 24% retracement and exit at the 50% retracement. This is because there’s very little price levels and resistance above 300, so any movements above this level will be very parabolic up to ATHs, as we saw in the beginning of 2020 and again the past two weeks. If SPY moves parabolic, the biggest winners will likely be the weakest stocks since they have the most room to go up, with most of the strongest stocks already near or above their ATHs. During this time, I’ll be rolling over half of my profits to VIX calls of various expiry dates as a hedge, and in anticipation of any sort of rug pull for when this bubble does eventually pop.
The Bearish case
For me to start taking bearish positions, I’ll need to see SPY open below 300, re-test 300 and fail to break above it, proving it to be a resistance level. If this happens, I’ll start entering short positions against SPY to play the price levels. There’s a lot of price levels between 300 and 274, and we’d likely see a lot of consolidation instead of a big crash in this region, similar to the way up through this area. Key levels will be 300, 293, 285, 278, and finally 274, which is the levels I’d be entering and exiting my short positions in.
I’ve also been playing with WLL for the past few months, but that has been a losing trade - I forgot that a market can remain irrational longer than I can remain solvent. I’ll probably keep a small position on WLL puts in anticipation of the court hearing for the disclosure statement, but I’ve sold most of my existing positions.
Live UpdatesAs always, I'll be posting live thoughts related to my personal strategy here for people asking.
6/15 2AM - /ES looking like SPY is going to gap down tomorrow. Unless there's some overnight pump, we'll probably see a trading range of 293-300.
6/15 10AM - Exited any remaining long positions I've had and entered short positions on SPY @ 299.50, stop loss at 301. Bearish case looking like it's going to play out
6/15 10:15AM - Stopped out of 50% of my short positions @ 301. Will stop out of the rest @ 302. Hoping this wasn't a stop loss raid. Also closed out more VIX longer-dated (Sept / Oct) calls.
6/15 Noon - No longer holding any short positions. Gap down today might be a fake out, and 300 is starting to look like solid support again, and 1H MACD is crossing over, with 15M remaining bullish. Starting to slowly add to long positions throughout the day, starting with CCL, since technicals look nice on it. Also profit-took most of my VIX calls that I bought two weeks ago
6/15 2:30PM - Bounced up pretty hard from the 300 support - bull case looks pretty good, especially if today's 1D candle completely engulphs the Friday candle. Also sold another half of my remaining long-dated VIX calls - still holding on to a substantial amount (~10% of portfolio). Will start looking to re-buy them when VIX falls back below 30. Going long on DAL as well
6/15 11:30PM - /ES looking good hovering right above 310 right now. Not many price levels above 300 so it's hard to predict trading ranges since there's no price levels and SPY will just go parabolic above this level. Massive gap between 313 and 317. If /ES is able to get above 313, which is where the momentum is going to right now, we might see a massive gap up and open at 317 again. If it opens below 313, we might see the stock price fade like last week.
6/15 Noon - SPY filled some of the gap, but then broke below 313. 15M MACD is now bearish. We might see gains from today slowly fade, but hard to predict this since we don't have strong price levels. Will buy more longs near EOD if this happens. Still believe we'll be overall bullish this week. GE is looking good.
6/16 2PM - Getting worried about 313 acting as a solid resistance; we'll either probably gap up past it to 317 tomorrow, or we might go all the way back down to 300. Considering taking profit for some of my calls right now, since you'll usually want to sell into resistance. I might alternatively buy some 0DTE SPY puts as a hedge against my long positions. Will decide by 3:30 depending on what momentum looks like
6/16 3PM - Got some 1DTE SPY puts as a hedge against my long positions. We're either headed to 317 tomorrow or go down as low as 300. Going to not take the risk because I'm unsure which one it'll be. Also profit-took 25% of my long positions. Definitely seeing the 313 + gains fade scenario I mentioned yesterday
6/17 1:30AM - /ES still flat struggling to break through 213. If we don't break through by tomorrow I might sell all my longs. Norwegian announced some bad news AH about cancelling Sept cruises. If we move below $18.20 I'll probably sell all my remaining positions; luckily I took profit on CCL today so if options do go to shit, it'll be a relatively small loss or even small gain.
6/17 9:45AM - SPY not being able to break through 313/314 (79% retracement) is scaring me. Sold all my longs, and now sitting on cash. Not confident enough that we're actually going back down to 300, but no longer confident enough on the bullish story if we can't break 313 to hold positions
6/17 1PM - Holding cash and long-term VIX calls now. Some interesting things I've noticed
6/17 3:50PM - SPY 15M MACD is now very bearish, and 1H is about to crossover. I'd give it a 50% chance we'll see it dump tomorrow, possibly towards 300 again. Entered into a very small position on NTM SPY puts, expiring Friday
6/18 10AM - 1H MACD is about to crossover. Unless we see a pump in the next hour or so, medium-term momentum will be bearish and we might see a dump later today or tomorrow.
6/18 12PM - Every MACD from 5M to 1D is now bearish, making me believe we'd even more likely see a drop today or tomorrow to 300. Bought short-dates June VIX calls. Stop loss for this and SPY puts @ 314 and 315
6/18 2PM - Something worth noting: opex is tomorrow and max pain is 310, which is the level we're gravitating towards right now. Also quad witching, so should expect some big market movements tomorrow as well. Might consider rolling my SPY puts forward 1 week since theoretically, this should cause us to gravitate towards 310 until 3PM on Friday.
6/18 3PM - Rolled my SPY puts forward 1W in case theory about max pain + quad witching end up having it's theoretical effect. Also GEX is really high coming towards options expiry tomorrow, meaning any significant price movements will be damped by MM hedging. Might not see significant price movements until quad witching hour tomorrow 3PM
6/18 10PM - DIX is very high right now, at 51%, which is very bullish. put/call ratio is still very low though. Very mixed signals. Will be holding positions until Monday or SPY 317 before reconsidering them.
6/18 2PM - No position changes. Coming into witching hour we're seeing increased volatility towards the downside. Looking good so far
In the emerging bear market of 2000, many people were hurt by stock losses, and a large number of these losses were made worse because people didn’t manage the responsibilities involved with margin trading. If you buy stock on margin, use a disciplined approach. Be extra careful when using leverage, such as a margin loan, because it can backfire. Margin trading refers to the practice of using borrowed funds from a broker to trade a financial asset, which forms the collateral for the loan from the broker. Trading on margin is when you borrow funds from your broker to buy more shares than you would with your own cash. The shares you purchase act as collateral for the loan. Margin trading has been around for decades and there's a good reason for that. Margin accounts offer flexibility to investors, who use the strategy to take advantage of market opportunities by Margin trading involves buying and selling of securities in one single session. Over time, various brokerages have relaxed the approach on time duration. The process requires an investor to speculate or guess the stock movement in a particular session.
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