So, tech stocks then
We have all observed that tech stocks rather took off over the last couple of weeks. We also know they fell back considerably at the end of last week. The big question is why?
Well, the first instance of any market price change is that there’s been a difference in the number of people trying to buy or sell that specific thing. Sure, that’s 101 stuff but it is still true. As we’ve found out, Softbank has been buying into these stocks.
The Softbank whale
It was probably Zero Hedge that first spotted it, then the Financial Times confirmed with more detail. Softbank has large positions in many tech stocks. It has also been buying large quantities – truly huge – of call options on those same stocks:
Now it has also made a splash in trading derivatives linked to some of those new investments, which has shocked market veterans. “These are some of the biggest trades I’ve seen in 20 years of doing this,” said one derivatives-focused US hedge fund manager. “The flow is huge.”
It’s all large enough to move prices. As the FT reports they might have spent as much as $4 billion on those options, an amount giving rise to perhaps $30 billion of notional exposure. Yep, that’s enough to move options markets.
This level of buying will influence prices in more than one way. Firstly there’s the obvious point that someone’s buying a lot so therefore the price goes up, that 101 stuff. There’s also the idea that it’s Softbank buying. Sure, they’re not always right – look at WeWork and Wirecard – but they’ve been right often enough over the years to become as vast as they are. So, if they’re buying maybe there’s some good reason we don’t know about so let’s go buy.
There’s also the technical reason. Buying call options means someone is selling them – again with the 101 – and as prices rise as they have been some of those call writers are going to start covering their positions. That adds to the demand for the stocks, adding to the price and so a spiral can be created. This is how a market ramping operation works – and no, I am not accusing anyone of creating a ramp. Nor, just for the avoidance of doubt, am I suggesting a pump and dump.
So, what do we do about it?
What we want to know, of course, is what should we do about the fact that Softbank is skewing the tech stock market. Or, perhaps more pertinently, how do we make money out of what is happening?
That does, rather, depend upon what it is that Softbank is actually doing. If they simply think that big tech is something they want to own more of for the long term, that call options are a cheap way in, then great. We too, on this factoid alone, would like to own more big tech. There might be other reasons we wouldn’t but this specific one says buy.
But is that why? At which point a rather paranoid, possibly even Machiavellian story. Even if it is the one that trends toward my opinion of what is happening*.
My observation is that the end of this month sees the end of Softbank’s second reporting quarter of the year. I can – we all can – also observe that Softbank’s had more than one problem with their tech investments this year – WeWork and Wirecard were not notably profitable positions to be holding.
So, what can be done in such a situation? For a company the size that Softbank is it can become that whale. It’s possible – possible note – to make the portfolio come good simply by being a big buyer in the public markets. The mark to market day is coming in only a few weeks, substantial profits on those public holdings will be useful.
It’s possible to go further into the structuring of the Vision Fund and so on but not, I think, necessary.
I most certainly cannot say that this is the reason for the purchases. But it would be a tempting thing for such a company and fund to do.
Our decision tree
What we actually do here rather depends on what we believe about the situation itself. If we think that Masayoshi Son is just investing because he thinks big tech is the stock selection for him for the long term then it depends what we think of Son’s record here. Pretty good actually, he’s made some mistakes but the overall record is hugely value creating.
So, we should perhaps buy along with him, or perhaps just hold.
If we’re a little more cynical, like myself, then we might not believe that the purchases are entirely about building that long term position. There might be that half year mark to market date coming up that’s having an influence.
At which point our decision changes a bit. So, do we think that Son can keep the values up, report those big profits on positions an options? That would imply we remain long until the end of the month and look to take profits at that point.
Alternatively, perhaps he can’t. And the thing is, whales can move markets, they most assuredly can. It’s just very much more difficult for them to do so when the rest of the market knows they’re out there and who they are. The JP Morgan London whale in credit derivatives, the Bunker Hunts in silver, there’s been more than one in copper (a Sumitomo trader I think?) and so on. They all did rather well while they were influencing prices but no one had worked out who was doing that. They all also rather fell apart when people worked out what was being done and by whom.
So, that would imply that tech stocks – and given their influence the market indices themselves – are going to decline and we should get out now.
Clearly I tend to the more cynical side here. But I’ve got to emphasise that this is an opinion*. I suspect that the buying surge from Softbank is about being able to mark to market some good profits at the end of their second quarter. A “whale-style” operation, if successful, would enable that. Now that we all know about it I am unsure as to whether it will be possible to maintain the success. After all, the market as a whole always has more money than any one position taker.
The investor view
If you agree with that opinion of mine above then the answer is to be out of such stocks. Or, perhaps, buy a little insurance with some out of the money put options. Just a bit of insurance you understand. I certainly wouldn’t go on to advise going short as a whale thrashing around in a marketplace can cause a lot of damage to such positions.
If you don’t agree, if you think that Son and Softbank are buying simply because they think they’re good stocks to have and to hold well, why not mimic that portfolio allocation?
It really is your choice here. I’ve made clear my opinion.
*Yes, a bit vague, but there are such things as libel laws.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.