Tag: quicknote

Foreword

This is a quick note, which tends to be just off the cuff thoughts/ideas that look at current market situations, and to try to encourage some discussions.

As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.

If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.

Or COIN flipping you?

Coinbase just announced a $1.25b convertible bonds issue. These bonds mature in 2026 (5 years), and are convertible to class A stock (that’s the regular COIN that is being traded).

This is… weird?

Usually, when a company goes public, it is so that they can sell shares to the public and raise money. In that moment (traditionally an IPO, but Coinbase used a “DPO”, direct public offering, where it sells directly in the market instead of to market makers), the startup-soon-to-be-public-company is supposed to sell as many shares as it needs, so that it can fund itself until it becomes profitable, after which, it can fund itself perpetually.

Usually, a company does not need to raise debt, nor sell more shares for a while after it goes public, because, well, they generally have a good idea of how much cash they need, and with a marvelous invention called a calculator, they can generally figure out how much shares they need to sell in the IPO pretty accurately. To have to sell bonds so soon (Coinbase went public only about 1 month ago) is highly unusual.

Even more surprising, Coinbase’s DPO sold pretty well! Coinbase had expected to sell shares at around $250 a piece, but instead, it sold them at a high of $400 a piece (2). That’s a 60% upside! And since it’s a DPO instead of an IPO, Coinbase should have been able to keep that additional upside.

Even more even more surprisingly, the convertible bonds are being sold with basically no coupon — 0% – 0.5%. While the market will likely price it at some yield (by paying less than par for the bonds), generally the coupon is in the ballpark of the initial yield the issuer expects the bonds to sell at. Now, what are convertible bonds with basically no yield? Aren’t those just… options (1)?

So, again, why is a company, barely 1 month old in the public markets, selling options to the public?

Footnotes

1. Technically, warrants.
2. I found out after this post went out that Coinbase didn’t sell any shares in the DPO, only the insiders did. This is even more bizarre. A company of Coinbase’s size and operations, should be able to predict cash needs at least 2-6months in advance. So if they are raising cash because of a liquidity issue, then they should have known this months before the DPO. Why not just sell some shares in the DPO alongside the insiders? Or do the bond offering before the DPO (or bring on additional investors while it was still private)?
   1. It’s not a good look when insiders get to sell to the public at ~$400 a share, and then the public gets diluted almost immediately by the bond/option offering… after the stock already fell 30+% to ~$250.

Foreword

This is a quick note, which tends to be just off the cuff thoughts/ideas that look at current market situations, and to try to encourage some discussions.

While I try to stay away from politics, sometimes politics is just being a jerk and does things that affect our pretty, pristine (ahem) financial markets. This time we look across the pond, at the UK, specifically the Scottish elections.

As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.

If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.

Scottish elections 2021

The Scottish elections for 2021 has just ended, with all results having come in. The Scottish National Party (SNP) won 64 seats, 1 more than the previous 2016 elections, and just 1 seat short of an outright majority. More importantly, the Scottish Greens won 8 seats, up from 6 in 2016. Together, that’s 72 seats, an outright majority.

Why does that matter? Well, it turns out that both parties were heavily pro-independence (from the UK) in the last Scottish independence referendum in 2014. That time around, the vote was 55% against independence and 45% in favor.

With the improvements of fortunes by the SNP, Nicola Sturgeon, the leader of the SNP and the First Minister of Scotland, is making the case that another referendum is in order. And she sort of has a point — it does seem like the voters are leaning more towards independence, especially after the fiasco of Covid-19, and various other recent scandals plaguing the ruling Tories in London.

Bill Blain (another blogger I follow) has a take on this here. In that blog post, Blain lays out the point that this referendum matters, perhaps more than the Brexit one. In some sense I agree with him — if Scotland does indeed votes for independence, it’s going to make things interesting in the UK, if nothing else.

And now, here comes completely baseless speculation. As someone with a very obviously broken crystal ball, I cannot tell you what will happen. I can only guess, and I guess we’ll see what happens. A reminder that the following is based on the premise that Scotland does indeed hold a referendum, and the results are a strong yes mandate to independence — neither of these are guaranteed, but…

• Currently, the general view is that Scotland cannot stand on its own.
• However, crazier things have happened. Before their independence, many, too, thought that Singapore, Ireland, and a whole host of other nations could not stand on their own. These countries are still independent as far as I can tell.
• But more importantly, Scotland was strongly pro European Union, so there’s a good chance that an independent Scotland would seek to rejoin the EU.
• Which will make the whole issue of Brexit that much more contentious (yes, it’s “settled”, but they are still arguing about it).
• Right after Brexit the markets the world over took a huge dump.
• Most markets quickly rebounded, but GBPUSD remained heavily depressed.
  • Other than a brief period around early 2018, GBPUSD hasn’t seen its pre-Brexit-vote highs until very recently.
• The UK stock markets were also severely affected, trading mostly sideways since the vote till today, in part due to the uncertainty.
  • With many, many roller coaster moments every time there’s another news cycle about the latest UK/EU talks.

So, given what we have observed so far, it seems like if the Scots voted for a strong independence mandate, then,

• The Scottish land border with the UK will likely become an issue if Scotland also votes (and is accepted) to rejoin the EU.
• There will likely be another period of uncertainty in the UK stock markets, likely lasting for years (again).
• There’s a good chance that GBPUSD will take another huge dump, and then go into roller coaster mode for years (again).
• These are especially if the Remainers take up their cause again, and try to somehow undermine and/or force a renegotiation of the current Brexit deal between the UK and EU (which they’ll likely have to renegotiate anyway, due to Scotland’s land border).
• All of which suggests that maybe global stock markets will take another bath.
• Whether they’ll recover as quickly and as strongly as after the 2016 Brexit vote is unclear — stock markets the world around are a lot more fragile currently than in 2016.

What should I do!?

I don’t know. I’m a software engineer, remember? Also, all the above are hypotheticals. They may not happen.

But it’s just another “something interesting” to think about and watch out for.

Foreword

This is a quick note, which tends to be just off the cuff thoughts/ideas that look at current market situations, and to try to encourage some discussions.

As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.

If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.

Jumping ship

I have read from numerous sources over the past 2-3 weeks that large institutions (e.g: hedge funds) have been steadily selling out of their long positions. Today, Bloomberg joined in the party with this article: Nasdaq 100’s Worst Day Since March Sparked by Inflation Fears.

As noted in the prior quick note, this seems to be all related to how the market is gaming out expected higher inflation in the near future. My understanding is that the thought process goes along the lines of:

• Supply chain disruptions during Covid-19 resulted in reduced capacity.
• Fiscal policies are essentially massive transfer payments, which are affecting some workers’ need and/or willingness to go to work.
• A lot of lower paying and/or less desirable jobs are having trouble filling vacancies.
• All these results in reduced supply of goods.
• At the same time, reopening of the US markets is causing a spike in demand.
• The fact that consumers have been mostly huddled up at home for the past few months, and thus not spending money, means that they also now have more disposable income (on top of the transfer payments).
• All these result in increased demand of goods.
• Demand up, supply down, classic economics predicts increase in prices, i.e: inflation.
• The Fed is, nominally, supposed to react to increasing inflation via raising rates.
• At the same time, because the economy is improving, there is increased probability of a reduction in QE, which is, de jure, a form of monetary support for an economy in trouble.
• Since a large part of the stock market’s unrelenting rise over the past ~decade is based on both QE and lower-rates-forever, there are some who predict lower stock prices, at least in the near/medium term.

At the same time, there are technical issues at play — lower interest rates mean that the cost of carry (alternatively the “price” of money) is lower, and this generally encourages risk taking.

However, since the real economy is generally in the dumps (for many sectors/industries, in most of 2020), there is less incentive to invest in actual productive capacity, and so this excess risk taking tends to manifest in financial markets.

If interest rates does increase substantially, the cost of carry goes up, and these hot money flows may quickly dissipate.

Note that as of right now, this is mostly just conjecture. Interest rates have moved up slightly from the pits of 2020, but are still, objectively, pretty low compared to even the past 2-4 years.

Note also that at least for a large part of 2020, institutional players have severely underestimated the market’s resilience, especially in the face of retail traders who were willing to buy the dip, and thus dramatically outperformed the professionals. Will this be 2020 redux?

Foreword

This is a quick note, which tends to be just off the cuff thoughts/ideas that look at current market situations, and to try to encourage some discussions.

As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.

If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.

Reflation part 2?

Quick recap of what has happened (dates may be slightly off, entirely from memory):

• In September 2020, there was general sense that the markets could blow up, and we saw a fairly significant dip.
• In November 2020, the vaccines were approved and rollout started soon after.
  • Stocks saw a huge boost, and reflation stocks(1) in general saw the best gains.
• Around mid/late December to early/mid January, this shifted into overdrive, with a slight shift in the composition — instead of reflation stocks, meme stocks(2) started seeing ridiculous price growth.
• Of course, from mid February to around late March, meme stocks cratered, taking down the rest of stocks a little, though rest of stocks recovered fairly quickly and was on the up shoot again.
• Sometime around that time, the “reflation == higher interest rates == Fed hike = no free money = stocks dump” news cycle started, which saw a second dip in late March for all stocks, but that also quickly faded.
• And from then till last week, stocks have been on a tear upwards.

Then came this week.

Interest rates are going down, and at a fairly decent trot (since around mid last week). However, unlike the previous news cycle, reflation stocks seem to be mostly going up, with the exception of travel/hospitality stocks. Tech stocks are generally taking a beating. Meme stocks remain circling the toilet.

What does this all mean?

I’m guessing it’s less of a reflation trade, and more of a normalization trade.

• Stocks that were hit hard in 2020 are recovering,
• while stocks that folks were overly exuberant about (meme stocks, stay-at-home [aka tech] stocks) are mostly getting timeout.
• And through this all, travel stocks are dumping.

Which I think suggests that the market is pricing in things going back to normal, but ring-fencing out travel/hospitality stocks, because, well, travel of any form is still a hot mess, except maybe domestic US travel.

Footnotes

1. To me, reflation stocks are those that benefit from a more normal inflation/interest rate climate (i.e: ~2% inflation, ~2-3% 10y yields, etc.), where all economic activities are sort of normal (i.e: not depressed by Covid-19).
2. To me, meme stocks are those that benefit from internet hype, especially from retail traders, with very little fundamentals to back up the valuation nor hype.