There’s a lot going on at present that’s sure to keep the wobble in equities this week – basically, the world’s gone bonkers and as usual it seems that everyone thought they knew what they were doing.

Guess what, they didn’t and here’s a few reasons why.

Same as 2000, but with Japanese characteristics.

The newly dubbed “NASDAQ Whale,” SoftBank appears to have been shorting the shorts.

On Friday, the FT reported SoftBank had been buying a massive cache of call options (the right but not an obligation to buy a share at a predetermined price) to the tune of $4 billion in option premia. That’s a massive number. Those that had sold the calls, which traders do to earn a premium, had been covering those calls, i.e., buying the underlying stock apparently to the tune of around $200 billion.

That level of buying in a concentrated group of tech stocks is literally massive.

To put that into context, in 2019 nearly all U.S. equities demand came from buybacks and stock repurchases, to the tune of $480 billion.

So, the NASDAQ Whale’s trading strategy has generated demand equivalent to around 40% of an entire year of equities demand – concentrated and targeted on a narrow raft of tech stocks.

Clearly a big driver of NASDAQ. and a potential artificial liquidity contagion into other markets and asset classes.

Add that to QE Infinity plus the $6 billion every day or so being churned in and out of the market by Robinhood app enabled gamblers sitting at home with not a lot to do in the past months, and you probably have your answer for why it won’t be different this time - just like 2000, but with Japanese characteristics.

Yep, it’s screwy and funky and all those things, but the most bizarre might be yet to come. What I mean is that the whale is probably still buying (or selling on at an incrementally higher price than that which it paid) and to the extent there are counterparties caught on the wrong side of their trades as prices move too far one way or the other, someone is going to lose BIG TIME.

No doubt there will be more to come here.

In short, if you don’t understand the game or who is playing it, why would you trade? The odds of being right in equities at this time are actually short, and you’d get better odds playing blacks and reds while you wait for the next opportunity.

Co-bots more representative than Tesla.

Tesla is down 17% as I write on Tuesday night, because it won’t be joining the S&P500 just yet, and perhaps it’s also being caused by Baillie Gifford trimming it’s holding by 1/3rd and potentially an unraveling of whale option trades (directly, or indirectly by traders needing to get out to shore up other affected positions).

But what a day for the shorts who couldn’t afford to stay short, to be out of their favourite trade.

Mind you, it was a slam dunk for circuit board tester and co-bot supplier Teradyne. Teradyne joined the Index, but Tesla did not.

Again, seems everyone thought a Tesla inclusion was a slam dunk for last Friday – but it wasn’t to be, well not yet at least.

Elon Musk did say weeks ago that his stock was overvalued, but on the other hand he also said the Cybertruck windows wouldn’t smash.

Phase One and Brexit.

Markets rallied two weeks ago on news of a possible U.S/Sino Phase One trade deal breakthrough. That was also meant to be a slam dunk according to market commentators. Nope. Wrong.

In reality, the two sides are miles away and it’s likely there won’t be a resolution before the November elections, if at all.

There is a great ideological rift between the east and west at present and a few election motivated tweets from the White House can’t compete with China’s rise to super-power status.

Know what’s really going on there? Nope. No one does. And if Biden wins in November who’s to say it will get better. He’s probably going to focus on other stuff, but who really knows.

And before I go, who called the recent Boris tantrum? Is he trying to rewrite the withdrawal agreement? Or, is he simply trying to trash it (like Trump and the curious Phase One trade deal) because he just didn’t like or believe in it in the first place? That’s probably more realistic than blaming it on a difference of interpretation in relation to the Irish border, but who really knows.

For Donald Trump and his smokescreen trade deal, we have to wait for November to see if he is returned to office. For Johnson, we wait for his imposed deadline at the European Council meeting on October 15.

Leverage, leverage everywhere.

Today, there’s so much leverage in the form of debt, derivatives, social media, fake news, and other platforms that artificially amplify and leverage an idea or an asset into something it’s not, that it’s exceedingly difficult to know what’s real and actionable.

Who knew about the NASDAQ whale?

However, as far as investment goes, if you don’t understand it don’t trade it. Options, derivatives and computer stop mechanisms are all in play and it’s literally a minefield.

As I write, the U.S. market just opened after the long weekend in the U.S. and all big tech names are down more than 3% with Tesla down 17% and many household names down 5%-7%.

U.S. 10 year yields are dropping today, probably as a result of safe haven buying out of equities, but there’s not a lot of hedge left there. Even 2 year note yields are down a little. So too is gold, oil and almost all key crypto assets. Seems like there’s a bunch of profit taking (and loss stopping) going on with some attempts at hedging through bonds.

There’s probably more opportunistic fishing to come, but make sure you know what you’re doing before you let out too much line in search of the bottom – because maybe there’s something else at work beneath the surface that you just can’t see.

Best wishes and stay safe.

Mike.

Next Level Corporate Advisory is a leading independent advisory firm with a multi-decade track record. We specialise in transformative M&A, IPO, growth capital, special situation and strategic corporate advisory solutions designed to take your business to the next level, in and out of Australia.

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Image attributions: Disney, Helen Norton, FT.