No one should be surprised at the Archegos blowup, given the ‘wild west’ nature of the swaps market, Heritage Capital’s Paul Schatz says

Trading floor
Inside a trading floor on the New York Stock Exchange

  • “Epic greed and euphoria” have led people to make mistakes and go “beyond irresponsible behaviour,” Paul Schatz said in an interview.
  • The swaps market needs to be regulated and funds must disclose more, the head of Heritage Capital said.
  • Cases like this and January’s GameStop saga paint a negative picture of money managers, he continued.
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The implosion of Archegos Capital over its derivative holdings that went sour should not come as a surprise to anyone, given the opaque and volatile nature of the swaps market in which the US hedge fund invested, Paul Schatz, president and founder of Heritage Capital, said on Monday.

Archegos Capital was forced to dissolve its holdings at the end of last week as it had become unable to meet margin calls from its lenders, sending major entertainment and tech stocks tumbling. The family office was facing financial difficulties even before then and various big banks had to tried to prevent a crisis by entering into swaps contracts with Archegos last week. This exposed its funds to volatile equities worth billions of dollars.

On Monday, Credit Suisse and Nomura announced that they would suffer significant losses after a US hedge fund was forced to liquidate its stock holdings when it could not meet margin calls from its lenders. Their share prices dropped significantly on Monday along with those of other major banks and the companies Archegos – which a number of media outlets confirmed was the fund in question – had previously held.

“The swaps market is, frankly, like the wild west,” Schatz told Yahoo Finance in an interview.

Years of super-cheap financing thanks to low interest rates set by central banks has fueled a record boom in investment, sending stocks to record highs and inflating the value of everything from cryptocurrencies, to junk bonds.

Schatz said this had led to “epic greed and euphoria” in the sector over the last six months. Paired with high levels of confidence and the hubris of investors, this inevitably leads to people making “egregious mistakes” and engaging in “beyond irresponsible behaviour” he continued, drawing lines between the current situation and cases like the 1998 Long Term Capital Management crisis, in which one of the world’s biggest hedge funds blew up, roiling markets and requiring government intervention.

Fund managers that own assets beyond a certain size must report their positions regularly to the US regulator. However, this does not apply to the type of swaps that Bill Hwang’s Archegos Capital used. Schatz said these were “essentially non-disclosed, undisclosed, secret derivatives”.

Schatz pointed out markets were already jolted once this year in January, when retail traders organized themselves through Reddit and bought up shares in GameStop, which resulted in skyrocketing prices and forced some institutional investors who had bet against the video retailer to close those positions, even at a loss.

Schatz predicts the public will continue to lose confidence in the stability of financial markets and regulators and politicians will get involved. “These large funds that have very little disclosure requirements like this certainly need to have more disclosure in the swaps market,” he said.

He said the problem with using swaps – a form of derivative – was positions being leveraged over and over again, without prime brokers being aware of what their competitors are doing – this “can become this ginormous pile of leverage that only takes the slightest little prick” to unravel.

“The swaps market should not exist the way it is. It fully should be brought on exchange, there should be better disclosure and there should be better protection for investors” Schatz said.

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‘It’s silly season’: Airbnb and DoorDash’s IPO rallies signal return of dot-com-era greed, strategists say

Airbnb IPO
The Nasdaq digital billboard in Times Square in New York on December 10.

  • Airbnb’s and DoorDash’s massive debut rallies suggest the IPO market is getting ahead of itself, top strategists said Thursday.
  • Airbnb spiked 115% when it began trading publicly for the first time on Thursday. DoorDash closed 86% higher in its Wednesday debut.
  • The first-day climbs revealed “euphoria and greed” last seen in the market during the dot-com bubble of the late 1990s, Paul Schatz, the president and chief investment officer of Heritage Capital, said.
  • “It’s silly season,” and investors need to differentiate between “a great company and a great price or value,” Rich Steinberg, the chief market strategist at the Colony Group, told Business Insider.
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Airbnb’s and DoorDash’s colossal post-IPO pops reveal unsustainable euphoria in the stock market, top strategists said.

Some of the year’s biggest initial public offerings took place this week, adding to an already record year for market debuts. DoorDash soared 86% when it began trading on Wednesday after raising $3.2 billion through its offering the day prior. Airbnb leaped 115% when it began trading Thursday afternoon, pushing its market cap above $100 billion and raising $3.5 billion.

The first-day rallies, while extraordinary, show “euphoria and greed” that’s likely not been seen in the stock market since the dot-com bubble of the late 1990s, Paul Schatz, the president and chief investment officer of Heritage Capital, said. Many investors are rushing to the new stocks, wanting to get in at any price, but such massive IPO bounces usually give way to similarly outsize losses, he added. 

“It’s silly season,” Rich Steinberg, the chief market strategist of the Colony Group, told Business Insider. “Investors need to distinguish the difference between a great company and a great price or value.”

Read more: 2 investment chiefs at John Hancock’s $692 billion investing arm say the post-COVID recovery might disappoint in 2021 – but investors can profit with these 3 strategies

Both strategists attributed some of that euphoria to the near-zero interest rates expected to stay put over the next three years. The Federal Reserve’s plan to hold rates at record lows leaves investors with fewer places to put their money, as the policy suppressed Treasury yields early in the pandemic. The Fed’s backstop of the corporate credit market placed similar pressure on bond yields.

The combination of near-zero interest rates, a “tsunami of liquidity,” and hundreds of billions in unallocated investor cash fueled the two buying sprees, Schatz said.

The week’s booms might be only the start. Investors could face “complete and utter mania” across the IPO market in the first half of 2021 as more firms look to tap the market while demand remains strong, the Heritage Capital president said. Investors should avoid trying to time such volatile debuts and instead be patient until stock prices better reflect firms’ fundamentals, he added.

“Being the last guy buying the opening of a hot IPO, at the height of this speculative excess in some of these names, typically does not end well,” Steinberg said. 

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Read the original article on Business Insider