Ouch.. That hurt. Again
It seems that one very large family office had to liquidate some of their positions on Friday and the end result was Viacom B and Discovery were down over 25% for the day and substantially more for the week.
This concerns me a little. Not that I have any skin in the game as far as either company is concerned, but to see the precipitous drops in two very large, very solid companies get pounded just because some shareholder needed to liquidate is a little odd.
Now if a different type of institution, for example, a large mutual fund or even a Berkshire Hathaway perhaps were forced to liquidate one of their major holdings, I could see the negative impact and so would everyone else but Archegos Capital?
They had a margin call. They are a hedge fund disguised as a family office. It happens. However, several things in this scenario stick out.
One, It is hard to tell what kind of hedging strategy they had and how it went wrong but let’s just say they wrote some sophisticated option positions and it got to the point that they needed to unwind those positions. They unwound the stock position by selling into an empty buy-side. Meaning, they needed to raise cash and none of the buyers that have been buying ViacomB for weeks, were there. Amazingly, they decided to take the week off.
Just weird. Think about it this way. You have been buying a stock at the 80-100 dollar level two weeks ago and it is now trading at lets say 58 dollars a share. Why wouldn’t you buy significantly more at this level or at any level above it? Is there something wrong with the company that wasn’t wrong two weeks ago and now you are concerned? Well, you put your money where your mouth was two weeks ago and now you turned mute?
Two, This is more of a market structure problem. The nature of markets is simple. Upward momentum is long and tiresome (unless your GME) but downward momentum is fast and painful. Whatever the algorithm and quant guys saw in ViacomB changed when the momentum was downward. So, to facilitate a strong and quick downward move, these buyers cancel their interest and leave voids. Those voids need to be hurdled by the seller (or sellers) and that just exacerbates the situation.
I do think there was something else afoot and lets be very clear, I am not conspiracy theorist at all. I think almost everything that happens in regards to trading of equities has a fairly simple explanation. The challenge is finding out what that explanation is.
Maybe, just maybe, we are seeing that top I have been talking about for the last month. Overreaction to news events or structural events ( the reduction of a position by a large stakeholder is an example) is typical of toppy markets and I do think we are in a very Toppy market.