Leverage ‘can rip your arms off,’ former TD Ameritrade boss says in warning to meme-stock retail traders

Joe Moglia
Joe Moglia, former CEO of TD Ameritrade and current chair of FG New America Acquisition.

  • “Leverage on the way up is a great thing. Leverage on the way down can rip your arms off,” former TD Ameritrade CEO Joe Moglia tells retail traders in meme-stocks in a CNBC interview.
  • Brokerage firms and financial houses dealing with retail investors must be better at educating their clients about the risks of leverage or using loans from brokers to buy stocks.
  • Moglia on Thursday addressed retail investors as AMC shares have rallied sharply in the last two weeks.
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Using leverage, or borrowing money to buy stocks, can pay off for retail investors participating in the explosive rallies in AMC Entertainment, GameStop and other so-called meme stocks but they need to be aware that those trades can quickly turn and burn them financially, the ex-head of TD Ameritrade said in a CNBC interview on Thursday.

“My biggest concern is what’s going on with the individual investor … and that they’ve got to be able to understand when they use leverage what that really means,” Joe Moglia, a former CEO and chairman of the online discount brokerage, told CNBC’s “Squawk Box”.

In using leverage, or margin trading, investors borrow cash from their brokerage companies to buy stocks and pledge securities in their accounts as collateral. Margin trading increases buying power and expands profits.

“Leverage on the way up is a great thing. Leverage on the way down can rip your arms off,” Moglia said, referring to losses that can hit investors when a stock price falls. He said investing platforms and other market professionals need to improve upon educating individual investors who day trade about the risks they face from market declines and how to handle them.

“A quick example: if you bought AMC at $10, and it goes to $20, is that not enough of a profit? It goes to $30, it goes to $40. At what time do you start to trim that position or, in effect, get rid of the position altogether? There are things that we’ve got to do a better job of with day traders,” said Moglia, who is the current chair of FG New America, a blank-check company, or SPAC, that targets opportunities in the fintech industry.

Moglia spoke as retail investors have launched AMC’s price up by more than 500% since late May in defending the movie-theater chain’s shares against hedge funds selling the stock short. The rally is reminiscent of the January boom in GameStop’s price as retail investors battled hedge funds betting against the video-game retailer’s stock. GameStop shares eventually retreated sharply from an all-time high of $483 apiece.

Investors can be vulnerable when the value of the stocks they’ve purchased drops significantly. Those declines can trigger margin calls, or demands by brokers for clients to repay some of the money they borrowed. Brokers can liquidate a client’s assets to cover the debt if they fail to meet a margin call.

Retail investors have lately overpowered short-sellers betting against AMC. Short-sellers lost nearly $3 billion on Wednesday alone as AMC’s share price more than doubled, according to data from analytics firm Ortex.

“What we’ve got to be conscious of is, at some point, the market is going to turn around. The technicals are going to wear out and [retail investors have] got to be prepared for a down move in that. But so far, I think they’ve pry made a little bit of money,” Moglia said.

Investors this year are borrowing all-time high amounts against their portfolios, with margin debt reaching $847 billion at the end of April, according to data from brokerage industry regulator FINRA.

Retail trading volumes, meanwhile, have been climbing on the back of growth in commission-free brokerage accounts and user-friendly trading apps and as millions of Americans forced to stay home because of COVID-19 turned to the stock market to make money.

Moglia said retail day traders overall should learn more about long-term investing strategies which can enhance discipline.

“If they love what they’re doing and they get burned a bit, that shouldn’t send them away from the market although I recognize that’s a risk. That should tell them they need a better education, a better understanding that day-trading alone is not going to be good enough to ride out the ups and downs of what’s going on with the economy and the markets over the next several years.”

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Cathie Wood and Anthony Scaramucci discussed institutional investment in digital assets, brushed off bitcoin’s ESG woes, and warned investors about excessive leverage in a recent interview. Here are the 10 best quotes.

Cathie Wood
Cathie Wood is the CEO and chief investment officer of ARK Invest, which runs three of the highest-returning stock ETFs of the last three years.

  • Bitcoin bulls Cathie Wood and Anthony Scaramucci sat down for an interview with Bitcoin Magazine last week.
  • The pair praised bitcoin as a crypto “reserve currency,” but warned investors of the risk of leverage.
  • Scaramucci said he sees bitcoin hitting $100,000 by the end of 2021. Here are the 10 best quotes.
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Crypto bulls Cathie Wood of Ark Invest and Anthony Scaramucci of Skybridge Capital sat down for an interview last week with Bitcoin Magazine.

The pair praised digital assets, brushed off recent environmental concerns, and talked about their start in the crypto space during the conversation.

They also warned cryptocurrency investors to be careful with excessive leverage, with Scaramucci calling the practice a “knife in the steering wheel of your sports car.”

Here are the 10 best quotes from the interview, lightly edited and condensed for clarity:

Cathie Wood

  1. “Our conviction in bitcoin has only increased over the years. And I think the big exclamation point for me, in the early days, was my mentor Art Laffer…we were collaborating on a white paper and I said ‘Art, how big could this be.’ And he said, ‘well, how big is the US monetary base,’ at that time, it was $4.5 trillion today, it’s closer to $7.5 trillion, and so we ran with it and haven’t regretted it for one minute since.”
  2. “Bitcoin is the reserve currency of the crypto-asset ecosystem. It is the flight to safety currency. And I do believe that’s still the case.”
  3. “Beware, from a leverage point of view, you can lose everything out there in crypto if you’re a leveraged player. So buyer beware, be careful, but hang on for a beautiful ride.”
  4. “Putting bitcoin mining into a solar powerwall merchant power ecosystem so that it could absorb all the extra energy coming from the sun after the powerpack is filled up. That would add a new dimension of economics to this ecosystem and would encourage homeowners and utilities to add more solar than otherwise would be the case. So it’s actually going to accelerate the movement into renewables. I think that’s what’s going to bring institutions back.”
  5. “I think we used a million Monte Carlo simulations to figure out if institutions start going in, where will they go? Well, they’ll tiptoe in….according to those simulations, in order to maximize the Sharpe ratio, an institution might move towards 6% of a portfolio in bitcoin. In order to minimize volatility and enjoy the increased return associated with crypto, that percentage might be more like 2.5%.”

Anthony Scaramucci

1. “When I came out of the White House and got blown into Pennsylvania avenue, the first thing I did was buy the URL skyrbridgebitcoin.com. Why? It became very clear to me in my short stay in Washington that we would eventually be digitizing US currency…but I have to confess I was still very cautious. So I had a checklist, and there were three things on the list. Number one: were there at least a hundred million users…number two: what was the US regulatory landscape…was it going to be accepted clearly here…third thing was the storage…can I store it safely…where there are layers of insurance.”

2. “We’re embracing the volatility. Remember, volatility may not be a measurement of risk if you understand fundamentally what you own. You can use the volatility and the manic depression of the market to take advantage of the markets.”

3. “If you’re going from $4.5 trillion of dollar volume to $7.5 trillion of dollar volume…you just got taxed, ladies and gentleman. You know, the government didn’t impose it on you, but they secretly did it through the central bank…your purchasing power has eroded.”

4. “My first bitcoin was super hard to buy; that was my story, but once I owned my first bitcoin and I realized what was going on, I’m like ‘oh my god, I don’t own enough of this.’ So every month, I try to buy a little bit more for myself or my family.”

5. “Long-term, there’s no reason why this can’t be a half a million-dollar coin. But I do think you can still get to $100,000 this year just knowing what I know about demand and potential saturation levels. But I do want to emphasize what Cathie said about leverage…I’m going to remind everyone about something Warren Buffet said about leverage. It is a dagger coming out of the steering wheel of your sports car. And you’re traveling down an icy road in the winter, so when you need to hit the brakes, that’s when leverage is going to hurt you the most.”

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Nomura to tighten financing for hedge fund clients in the wake of Archegos blowup, new report says

Nomura
  • Nomura is tightening financing for some hedge fund clients, per Bloomberg sources.
  • Japan’s largest brokerage is facing an estimated $2 billion loss due to the Archegos collapse.
  • Nomura will limit margin financing exceptions for hedge fund clients in order to prevent another blowup.
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Nomura is reportedly tightening financing for some of its hedge fund clients in the wake of the $20 billion collapse of Archegos Capital.

Japan’s largest brokerage is facing an estimated $2 billion loss due to the family office blowup, according to unnamed Bloomberg sources.

The Archegos collapse started when the family office, run by Bill Hwang, used total return swaps to take on leverage and place concentrated bets on a handful of stocks like ViacomCBS and Discovery.

Then a decline in share prices sparked a massive margin call that Archegos was unable to meet, leading banks to liquidate the family office’s assets.

The result was combined losses of $10 billion for global banks, according to estimates from JPMorgan.

Now in order to prevent similar blow-ups in the future, banks are taking action to reduce risk associated with hedge fund clients. The Securities and Exchange Commission has also opened an investigation into the matter.

Specifically, Nomura is tightening leverage for some clients that were previously granted exceptions to margin financing limits, Bloomberg said, citing people with direct knowledge of the matter.

The Japanese firm is the second bank to take action after the Archegos collapse.

Credit Suisse said earlier in the week that it will change margin requirements on swap agreements to dynamic from static after the collapse. Dynamic margin requirements force clients to post more collateral as positions move down, rather than setting a fixed margin requirement at the onset of the leverage contract.

Before the Archegos implosion, Nomura had been hitting on all cylinders with net income reaching a 19-year high for the nine months ended in December.

Now though, the bank has been forced to cancel the planned issuance of $3.25 billion in senior notes and share prices are down roughly 20% from March 26 highs.

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Regulators need to look at leverage in the prime brokerage business at the center of the Archegos meltdown, Guggenheim’s Millstein says

Jim Millstein
  • Jim Millstein of Guggenheim Securities said regulators should look into the prime brokerage business.
  • The co-chairman noted that lenders face increased risk when hedge funds use excessive leverage.
  • Millstein doesn’t believe the Archegos collapse presents a “risk to the financial system,” however.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Guggenheim’s co-chairman Jim Millstein believes regulators should keep an eye on leverage in the prime brokerage business at the center of the Archegos meltdown.

In an interview with Bloomberg on Tuesday, Millstein said that the Financial Stability Oversight Council, which was formed under the Dodd-Frank Act of 2010, should “take another look at the prime brokerage business and the kinds of leverage that’s being extended both through the derivatives markets and directly.”

The prime brokerage business is a bundled package of services offered by investment banks, wealth management firms, and securities dealers to hedge funds that allows them to borrow securities and cash.

Millstein discussed how “regulation T,” a collection of provisions that govern margin requirements for retail investors, doesn’t apply to family offices and hedge funds.

“Clearly family offices, hedge funds, other institutional investors clients of the prime brokerage business have been able to obtain much more significant leverage than the average investor, and so, and obviously there are risks associated with it,” Millstein said.

The co-chairman added that “when you’re highly levered against individual names and not terribly diversified you do run a significant risk of an effective margin call.”

Millstein said that this type of leverage not only puts hedge funds at risk, but lenders as well. If lenders are unable to liquidate collateral positions or cover derivate exposures fast enough there can be significant losses.

What Millstein is describing is exactly what happened to Credit Suisse, among others, after the recent Archegos collapse.

Credit Suisse said it will have to absorb a $4.7 billion write down due to its Archegos exposure. For reference, the investment bank’s total net income for 2020 was roughly $2.9 billion.

The firm has faced significant fallout after its Archegos losses with numerous top execs stepping down including the head of investment banking Brian Chin and the chief risk and compliance officer Lara Warner, as well as Paul Galietto, the head of equities sales and trading.

Millstein also agreed with his colleague Scott Minerd who said that another Archegos-like implosion is “highly likely” moving forward.

When asked if the Archegos blow-up might lead to reverberations for the markets as a whole, Millstein pointed out that there is still “an enormous amount of monetary and fiscal stimulus” in the system and more could be on its way with President Biden’s Infrastructure bill.

The co-chairman said he doesn’t believe the Archegos collapse represents a “risk to financial stability” based on the relative size of the hedge fund and current market conditions.

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Billionaire investor Chris Sacca mocks ‘Robinhood bros’ for being reckless: ‘Stonks never go down!’

chris sacca
  • Venture capitalist Chris Sacca dismissed amateur traders’ huge gains in 2020 as the product of lucky timing in a recent tweet.
  • “To everyone who got into trading stocks this year, I have a little hard truth for you: You’re not actually that good at it,” the billionaire founder of Lowercase Capital and former “Shark Tank” star said.
  • Sacca mockingly praised day traders in a follow-up tweet after weathering backlash for his comments.
  • “To the angry Robinhood bros who got into trading stocks this year: I was wrong. You’re amazing,” he said. “Stonks never go down!”
  • Sacca has repeatedly underscored the risks of trading stocks and other assets such as Bitcoin, especially with borrowed money.
  • Visit Business Insider’s homepage for more stories.

Newbie traders who scored massive windfalls in 2020 simply got lucky, billionaire investor Chris Sacca said in a recent tweet.

“To everyone who got into trading stocks this year, I have a little hard truth for you: You’re not actually that good at it,” the former “Shark Tank” star and founder of venture-capital firm Lowercase Capital said. “You just caught a wild bull market. Take some money off the table.”

Read more: Wall Street’s biggest firms are warning that these 7 things could crash the stock market’s party in 2021

Sacca’s comments were met with swift backlash. Dave Portnoy, the Barstool Sports founder who became the face of a new generation of day traders earlier this year, told Fox Business that he doesn’t know who Sacca is, but the investor “sounds like a sore loser and an idiot.”

The Lowercase chief – an early investor in Twitter, Uber, and Instagram – responded to the criticism with a sarcastic tweet ridiculing Robinhood users, one of the most popular trading apps.

“To the angry Robinhood bros who got into trading stocks this year: I was wrong. You’re amazing. This has nothing to do with the market. It’s all you and your mad skillz. Don’t take profits off the table. Double down, on margin. Borrow everything you can. Stonks never go down!”

In internet slang, stonks is a deliberate misspelling of stocks.

Read more: BANK OF AMERICA: Buy these 16 medtech stocks with strong fundamentals that are set to soar post-pandemic

Sacca – who made his fortune in the early 2000s then lost a huge chunk of it when the dot-com bubble burst – has repeatedly cautioned amateurs about trading risks, particularly with borrowed money.

“What percent of retail ownership of crypto is supported by leverage? What about stocks? I am beyond worried about the debt lessons that a generation of app traders weren’t around to learn a cycle ago,” Sacca replied to a December 26 tweet by Bitcoin bull Mike Novogratz underscoring the risks of excessive leverage.

“Don’t borrow to trade stocks/BTC,” Sacca tweeted a few hours later.

Read more: The founder of the world’s first vegan ETF explains how her market-beating fund is naturally built to include the pandemic’s biggest winners – and why industry titans like Facebook and Uber fit the bill

Sacca has issued similar warnings in the past.

“I’m here to tell you that trading millions of dollars you don’t have is a thrilling way to ruin your health and financial future. Fun!” he tweeted in November 2019.

“Investing is a great way to make money. Trading is a great way to lose it. Do yourself a favor and hide your “Stocks” app forever,” Sacca tweeted in 2013.

Sacca and his wife and business partner, Crystal, shifted their focus from day-to-day investing to tackling issues such as climate change, voter suppression, and criminal justice reform in early 2017.

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