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Block Trade Mess reignites fierce debate over ‘leverage gone bad’
(Bloomberg) – What could be the biggest margin call in history sounds new alarm bells on Wall Street among those worried about hidden leverage and its potential to fry the financial system . Shares of Bill Hwang’s Archegos Capital Management launched a hunt for other areas of excess – from margin debt to options and bloated balance sheets – after stocks at the center of the fiasco plunged and investment banks warned of losses. Opinions in the markets vary: Hwang’s struggles are portrayed as everything from the first phase of a long overdue market to an isolated case of rampant risk-taking. While Wall Street may have bypassed a systemic cataclysm, the explosion is an example of “leverage gone bad” with ominous omens, said Sameer Samana, senior global market strategist at Wells Fargo Investment. Institute. overall has now been built into the system “in brokerage accounts, options and credit,” Samana said. “If a broader stock market pullback were to take shape, especially in the more widely held areas of tech and tech-related stocks, a much larger loosening would have to take place.” At least on Monday, the S&P 500 Index was barely registering the tribulations of the weekend, its rally of 57% since March 2020 intact. Margin Debt In recent weeks, as stocks hit new highs, investors have highlighted a worrying trend of brokers: the historically high levels (the numbers are carried over to a delay). What is sometimes lost in the discussion is that this debt almost always increases with the value of the shares. “Said Arthur Hogan, chief market strategist at National Securities Corp.” I don’t know if that would have been a clear signal as to what’s going on in some of these media actions and send a warning signal because you would have suspected that in a rising market, margin debt will be higher. But all the lenses of the phenomenon are not reassuring, according to Jason Goepfert, president of Sundial Capital Research. Assuming it will exceed $ 831 billion when this month’s figures are released in April, margin debt will have grown more than 70% year-over-year, one of the biggest expansions since 1931. This means the evolution of the debt from one year to the next. will have exceeded the year-over-year change in the S&P 500 by more than 20 percentage points for three consecutive months. “This type of excessive and persistent debt growth, both absolute and relative, has been a boogeyman for the coming back,” Goepfert wrote in a recent note to clients. “The most effective use of the data, both upward and downward, has been the rate of change, including against the S&P. And that’s why it becomes a much bigger concern. Options frenzy The options craze in the options market also fueled bubble warnings for most of the year. Buy contracts – in which bulls pay a fraction of the price of a stock to bet it will rise – have become the toys of newly created day traders, whose enthusiasm for short-term options is said to have fueled a series bullish feedback loops, in particular. “As you are in a bull market with a lot of liquidity, you start to have areas of overconfidence and some investors let their guard down,” said Keith Lerner, chief market strategist at Truist Advisory Services. “It suggests a level of overconfidence.” However, that call volume has eroded from the peaks in February suggests some of the product craze is waning. Over the past 20 days, more than 23.6 million calls have been traded on average on the US stock exchanges. While still historically high, this figure is down from nearly 29 million at the end of February. Credit risk written off Companies that have taken on debt have been rewarded by the equity market. Shares in a basket defined by their high leverage have gained more than 17% year-to-date, ranking them this year among the 17 quantitative styles tracked by Bloomberg. On the other side of the trade, profitability is one of the worst performing factors, with nursing losses of more than 5%. Data from Goldman Sachs Group Inc. tells a similar story: S&P 500 companies whose balance sheets are on track to beat those with stronger finances by more than 17 percentage points this quarter – the biggest margin of outperformance since at least 2006. Taken together, these statistics can be used to paint a picture of a market so sparkling that investors are willing to ignore any qualms. on credit risk. But it’s also true that these companies – some of the hardest hit by the coronavirus – stand to benefit the most from the so-called reopening of trade as vaccines are administered and economic activity picks up. With the combined power of government tax assistance and the Federal Reserve’s seemingly endless bond purchases, the weakest links in the stock market may have the biggest bounce. rescue rally, ”said Lerner de Truist. “Having the Fed with so much monetary stimulus and support makes investors more confident that it will not become systemic.” High leverage of hedge funds It is not only the Archegos of Hwang who have taken on borrowed money to carry out transactions. The average leverage of the 10 largest hedge funds reached 15.9 in June 2020, according to data from the Treasury Department’s Office of Financial Research. While that number is down from a high of 24.6 in June 2019, it is well above the average of 5 for the next 40 largest funds, which overshadows the amount of leverage. that Hwang was working with. Market participants estimate that total family office assets have grown from $ 5 billion to $ 10 billion, while total positions may have exceeded $ 50 billion. But if larger hedge funds can have more leverage than Archegos, it is important to consider what these funds are. are being leveraged, according to George Pearkes of Bespoke Investment Group. For example, it is much riskier to concentrate a smaller amount of leverage on a handful of stocks than it is to place a larger amount of borrowed money in instruments such as treasury bills or currencies. he declares. said Pearkes, a global macro strategist for the company. “And that’s usually what happens with larger funds.” For more articles like this, please visit us at bloomberg.com Subscribe now to stay ahead with the most trusted source of business news. © 2021 Bloomberg LP
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