Jun 9, 2021

9 min read

How to NOT lose your shorts to the New Kids on the Block?

You may think the new trading kids on the blocks are irrational, but the market can always stay irrational longer than you can stay solvent.

The short squeezes in meme stocks that are generated by the Reddit-inspired retail trading army are becoming a frequent occurrence these days. Of course, the “serious investors” who think they know everything about finance and that the retail traders are just lucky clowns armed with government stimulus cheques and working internet connections scoff at this phenomenon.

However, the retail trading army has a method to their madness i.e. they are searching for stocks which are heavily shorted and do not have enough liquidity for the “serious investors” who are short to exit in a timely fashion at a reasonable price. If this was being done by a hedge fund, there would be news articles celebrating the genius of the maverick investor who engineered billions of dollars in profits just from spotting this anomaly of markets and capitalising on it.

When this is being done by a legion of retail investors, the mainstream media calls it irrational and scoffs at the billions of dollars of losses inflicted on the hedge funds.

Consider this, the share price of AMC was about $2 in Jan and it is now about $55 (see chart below). In the period since Jan, the company has issued approximately $1.6 billion with the latest offering last week being 11.55 million shares ($587.4 million). Without this new supply, the stock price would have been substantially higher.

The way to lose your shorts is to be on the wrong side of asymmetry. You may think the new trading kids on the blocks are irrational, but the market can always stay irrational longer than you can stay solvent.

MARKET OBSERVATION

Coal Power

The entire strip of Spot Natural Gas futures are rallying hard and this is providing massive tailwinds for Coal as it becomes more economically viable as a base load power supply. Coal’s share of electricity generation jumped from sub 20% to nearly 25% in the US as energy providers switched out from Natural Gas. This entire macro backdrop should make for a killer year for coal producers — their ability to generate cash flow greatly improves at higher Nat Gas prices.

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DAY AHEAD

The Bank of Canada is expected to keep policy unchanged. Though it was the first of the major central banks to start tapering their bond purchasing programme, and will keep an upbeat tone, it will likely not increase the pace of tapering. A more hawkish than expected message will give the recently strong CAD impetus to rally more.

TRADING PLAN

1. Currencies: Keep short USD and long NZD, & CNH. Resistance for USDCNH is at 6.40–6.42 level, and it is a level to increase short positions as market price trades closer. Stay short USD and Long CNH & NZD.

2. Commodities: Uranium — Long Uranium and energy stocks. Stay patient and invested. A stock we recently added to our model portfolio rose nearly 15% yesterday and it will continue to rise in the days ahead! Access our Model Portfolio through our community membership to find out more about the stock.

Gold — Long Gold. Support for gold is at 1840–45. Stay long.

Key risks: Inflation fears which lead to higher US bond yields and a stronger USD.

3. Equities:

Equity Index: Long Nasdaq futures. Support is at 12,950–13,000. Goldilocks conditions will push stocks higher. Stay long and patient.

Single Stocks: Risk assets are grinding higher, and cash is trash. Don’t miss out on the asymmetric opportunities we have highlighted in our TrackRecord Model Portfolio.

Key risks : Higher US yields due to inflation fears and geopolitical worries are the key risks.

WHAT HAPPENED YESTERDAY

As of New York Close 8 Jun 2021,

MARKET MOVEMENTS

The U.S. Dollar Index increased +0.2% to 90.13. GBP was under pressure as the British government considered whether to delay removing most of its remaining coronavirus restrictions. In a speech in Sydney early this morning, Assistant RBA Governor Chris Kent said the central bank’s policy measures will continue to deliver “very stimulatory monetary conditions” until the economy returns to full employment and inflation is consistent with the target.
The US 2-year Bond yield decreased 2 basis points to 0.14%. 10-year yield fell by 4 basis points to 1.53%. The bond market feels ready to rally hard, pushing yields much lower as the market is heavily positioned for the inflation story, and a low inflation print will likely set off stops from leveraged punters who are hoping for the Federal Reserve to be wrong on inflation.
S&P 500 closed relatively unchanged on Tuesday after flirting with all-time highs during the session. The Nasdaq (+0.1%) and Dow Jones Industrial Average (-0.1%) closed mixed and little changed, while the Russell 2000 (+1.1%).
Meme stocks remained an entertaining sideshow for the market despite some participants voicing honest concerns about their unprecedented runs. Shares of Clover Health (CLOV 22.15, +10.12, +85.8%) and Wendy’s (WEN 28.87, +5.93, +25.9%) surged noticeably amid increased mentions on the WallStreetBets subreddit. CLOV was targeted as a short-squeeze opportunity.

HEADLINES & MARKET IMPACT

U.S. Senate passes sweeping bill to address China tech threat

Notable Snippet: The U.S. Senate voted 68–32 on Tuesday to approve a sweeping package of legislation intended to boost the country’s ability to compete with Chinese technology. The desire for a hard line in dealings with China is one of the few bipartisan sentiments in the deeply divided U.S. Congress, which is narrowly controlled by President Joe Biden’s fellow Democrats.

The measure authorizes about $190 billion for provisions to strengthen U.S. technology and research — and would separately approve spending $54 billion to increase U.S. production and research into semiconductors and telecommunications equipment, including $2 billion dedicated to chips used by automakers that have seen massive shortages and resulted in significant production cuts.

THEMATIC CONTEXT: “As we have been saying, we are in the era of great power competition and this has invoked a “Sputnik Moment” not seen in the US since the space race (with Russia), where there is no fiscal budget too large to ensure America wins and stays ahead. This is not just a novelty, but the nature of national security and maintenance of a “world order” the US has gotten too used to. Talk about hating change, this is one where no cost is too great. Expect infrastructure, cyclicals, commodities, energy and critical tech companies to outperform in the years or even decades ahead.” — 10th May 2021

Biden shifts infrastructure talks to new bipartisan group

Notable Snippet: President Joe Biden on Tuesday broke off talks on an infrastructure bill with a key Republican, instead reaching out to a bipartisan group, after one-on-one talks with Senator Shelley Capito were described as hitting a “brick wall.” Biden changed course after Capito, the leader of a group of six Senate Republicans handling the negotiations, offered $330 billion in new spending on infrastructure, far short of Biden’s reduced $1.7 trillion offer.

The two parties remain far apart on one of Biden’s major domestic policy goals, disagreeing on how much to spend, how to pay for it and even what constitutes infrastructure.

THEMATIC CONTEXT: “We suspect that inflation is going to be anything but transitory in the longer term as the trajectory of domestic and geopolitical policies are not in the interests of lowering costs through globalization, but one of protectionism and instigation to form new alliances. We have 1. Reshoring of supply chains and building up of strategic reserves, 2. Return of the Labour Union in America, 3. Unlimited Fiscal spending fuelled by the Sputnik Moment in tech and 4. Rise of economic factions that are not in sync with a US led unipolar world.” — 17th May 2021

Biden supply chain ‘strike force’ to target China on trade

Notable Snippet: The United States will target China with a new “strike force” to combat unfair trade practices, the Biden administration said on Tuesday, as it rolled out findings of a review of access to critical products, from semiconductors to electric-vehicle batteries. The “supply chain trade strike force,” led by the U.S. trade representative, is looking for specific violations that contributed to a hollowing out of supply chains that could be addressed with tariffs or other remedies, including toward China, White House senior director for international economics and competitiveness Peter Harrell told reporters.

THEMATIC CONTEXT: “The real threat to the U.S. in the future is not China, but rather the U.S. itself. The U.S. will bury itself. That’s because it has not yet realized that a big era is coming and the financial capitalism that the U.S. represents will reach its peak and then start falling. On the one hand, the U.S. has already taken full advantage of benefits that capital generates. On the other hand, via the technological innovation that the U.S. leads, the U.S. pushes the Internet, big data, and cloud computing to an extreme. These tools will eventually become the forces that end financial capitalism.
Taobao.com and tmall.com, both under the Alibaba company, registered 50.7 billion yuan (US$8.2 billion) in sales on November 11, 2014. A few weeks later, the total Internet sales plus the in-store sales in the U.S. market in the three-day Thanks-giving weekend was only 40.7 billion yuan (US$6.6 billion). The 50.7 billion yuan is only the sales for one-day on Alibaba, not including 163.com, qq.com, jd.com, and other online stores in China, nor including any physical store sales.
All Alibaba’s sales were done via Alipay (an electronic payment system). What does Alipay mean? It means that currency is out of the trade platform. The U.S. hegemony is based on its dollar. What is the dollar? It is a currency. In the future, when we stop using currency to complete sales, the traditional currency will be useless. Will the empire that is established on currency still exist? That is the question that the Americans should think about.
Today’s capital may disappear when currency disappears. When the production method changes along the line of 3D printing, the human world will step into a new social mode. At that time, China and the U.S. will stand at the same starting line of the Internet, big data, and cloud computing. The competition at that time will depend on who will be the first to step through this new door, not on who will press the other down. From this point of view, I say that the U.S. has chosen the wrong opponent.”
- “Qiao Liang PLA Major-General speech to the CCP: The U.S.’s Strategy of Shifting Focus to the East and China’s Strategy of Going to the West — China’s Strategic Choice in the Game between China and the U.S.,” April 15, 2015.