Do Not Fear Archegos

In this year’s Note 7 of The Kelly Letter, sent February 14, I wrote:

“The Reddit/Robinhood combo looks like a passing media obsession. Soaring and crashing stocks are not new. Day trading, coordinated action, short squeezes, option plays, insider information, and all manner of influence have pressured the market from its inception. The only shiny object here is that some people discuss stocks on Reddit and trade them on Robinhood. This provides a veneer of newness over what is actually timeless trading activity.”

This week, analysts switched from blaming small traders to blaming big ones.

The guilty party is hedge fund Archegos, supposedly responsible for recent volatility. CNBC said the fund “sent shockwaves through Wall Street,” and The Wall Street Journal said it “set off a storm in the stock market.”

The fund liquidated some $20B worth of holdings last Friday after Morgan Stanley and Goldman Sachs, lenders to the fund, demanded that it sell shares to cover losses in Viacom stock. In a typical ripple effect, other institutions connected to Archegos, including Credit Suisse and Nomura, warned that they would suffer losses.

This, too, is as as old as the market itself. We could write up the story with blanks in place of company names and reuse it every couple of years.

Yet, analysts say the Archegos incident represents a threat to stocks.

Steen Jakobsen at Saxo Bank wrote in an email: “Billions of dollars in block trades went through on Friday. And there is uncertainty over how much more of the hedge fund’s holdings remain and could hit the market this week.”

Paul Donovan at UBS Wealth Management wrote in an email that “investors are looking with some concern at the prospect of further large sales hitting financial markets.”

Maybe so, but we could say as much every week. It should come as no surprise to market participants that stock traders trade stocks, whether from small individual accounts at Robinhood or big institutional accounts like Archegos. Neither represents anything new to the market, nor at face value any reason to be any more concerned than in any other week.

As usual, we don’t need the story.

Prices are fluctuating due to a number of known and unknown factors, as always. The fluctuation is all that matters, not the stories to explain it. There is never a systemic threat. Great price declines are met with rescue efforts, which spur recoveries, and our plans take advantage of such cycles—automatically, using price-change reaction alone.

Nobody is breaking the market.

To his credit, Donovan wrote as much later in his email, noting that Archegos sales have been relatively minor. “Does this have any economic implications? Probably not. Some parts of the financial system may experience losses, but it seems unlikely that this will threaten the financial system’s stability.”

Conclusion: Do not fear Archegos.

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