TRANSCRIPT: Market Update [mar’21] – Busts, Billionaires and Boats

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TRANSCRIPT:

Welcome to Compare Return. This week’s episode is our March 2021 market review. It’s been a crazy month in markets for March this year and there’s been a few key things happening that I want to talk to you about in this week’s episode.

The first thing is the tech crash. Tech has been on an absolute rip for the past 180 days. A lot of people have been saying that it’s overpriced and overvalued. Well, this week we’ve seen a correction in that sector.

The second thing I wanted to talk about, is Bill Huang and the Archegos fund crash. This actually is a very interesting story. We’re probably going to hear a lot more about this and we might even do a whole separate video on it. Effectively what’s happened is one of the world’s biggest hidden fortunes has been wiped out overnight. Which is absolutely crazy.

The third thing we’ve seen is the Suez Canal incident with the with the boat being stuck in the canal and what that means. For that story we’re actually going to bring you a special guest, so make sure you stay tuned and see that interview later on in this episode.

Without further ado let’s get started with the tech crash. What happened, why did it happen and what’s going to happen next. Well, since the NASDAQ highs on February 12th, the index has gone down minus 6.3 percent (that’s the tech composite index), and the S & P 500 (which is large blue cap type companies) has gone up 1.4 percent. So now for the first time in a long time we’ve seen a direct inverse correlation between the broader large cap companies in the stock market and the tech companies. This could be for a few reasons. Some experts in the field are saying that it’s people taking profits out of the tech sector – they’ve made their three-four-five hundred percent return so they’re starting to take a little bit of that cash off the table. Other people are saying that it’s institutional or Wall street money making a bit of a pivot. Pivoting away from the tech companies and into value companies. Value companies (which is your larger companies, your Johnsons and Johnsons and Coca-Cola’s) – all have been hammered since COVID started. What this means now is they think there might be some good buying in there. And some opportunistic buying as we see things like the vaccine come along for recoveries from COVID, and we also see things starting to get back to the new normal (whatever that may mean).

This does present mom and pop investors with a unique opportunity to snap up some fantastic buys in the tech sector at a discounted price. There are definitely opportunities out there. Remember when people are being fearful – be greedy, and when people are being greedy – be fearful.

Some key take-homes here is: two ETF’s for you (or baskets of stocks). The first one is ARKG – Ark Genomic Revolutions. That’s down 23.8 percent from its all-time high, and we’ve also got QCLN (which is a green renewable energy fund) which is down 24.4 percent. These have been fantastic performers over the past few years so being able to buy them at a bit of a discount might be appealing to some people.

Okay, on to Bill Huang and the Archegos fund collapse – one of the world’s biggest fortunes which was wiped out overnight. What happened? Why did it happen? And what’s going to happen next? Well, what happened is effectively there was a family run fund which had about 10 billion on its books. It had been making lots of leveraged plays. What that means is effectively they might be putting five dollars in the market but saying that five dollars is leveraged to be worth fifty dollars. If markets go up by one percent, the fund might go up by 10 percent (so it’s leveraged 10 times). But what that also means is if it goes down by one percent – you lose 10 percent. What that means is that if you happen to get a 10 percent drop in the markets you’ve actually lost 100 percent of your money and that’s what’s going on in very rough layman’s terms.

In the broader market this actually affected 30 billion dollars of liquidated positions, which is massive. Two of the banks, Nomura and Credit Suisse were at the centre of this. They were loaning the Archegos fund and Bill Huang money. Obviously since there’s no more money to be paid back, these banks are stuck footing the bill.

Who is Bill Huang?  He was actually one of the prodigies who studied after fund-managing titan Julius Robertson. Anybody who has been in finance for a long time will know him. He managed to turn 8.8 million dollars into 22 billion dollars. So, he’s one of the best fund managers in the world. He was ‘Tiger Capital’. Effectively any of the proteges who worked under him when he finished working and closed down his funds (Julian Robertson that is) were called ‘Tiger Cubs’. These were his young fund managers where he chose to set off little funds that he’d put 25 million in. Bill Huang was known as a tiger cub in the industry and came off the back of that. With low interest rates and easy money coming along, Bill went out and borrowed a lot of money and used leveraged positions. Since the market had a correction, this hit him and triggered all the stop losses and basically made the whole fund collapse.

Why this is an interesting story is this is a family fund. It’s not like managed funds you might see in the UK or Australia. It’s not like ETF’s you might see in the US. A family fund is basically like a private fund. What that means they don’t have to do as much reporting to the authorities. This means that the broader market doesn’t know what they’re up to. If he’s holding a whole heap of companies – a massive position – he might be one person propping up a whole company and you just never know. A lot of the guys on wall street are crying and screaming out, saying “this isn’t right, we need to change the legislation so that if you have over x amount of money, all your positions need to be reported so that everyone else in the market can know what you’re doing.”

I’ve got a chart for you here which shows you some of the companies which were affected.  We see some really big names, people like Discovery, Viacom and Shopify. A lot of these guys are down 60 percent – which is crazy. GSX as well. Personally, I’ve had positions in a few of these companies (just to let everyone know) and I’m taking a loss on these as well. For the rest of us, it just means that effectively, if you’re holding some of those companies – bad luck. But if you don’t yet it could be a good buying opportunity.

Okay, now on to our final story of the day, which is the Suez Canal situation. On today’s episode we have a special guest which is Steve Eagle. Steve runs a business called How to Buy Australian Made and is an expert in all things shipping, logistics, costing, pricing and the whole gamut of how to take a product to market.

Ryan: Welcome Steve

Steve: Thanks for having me Ryan, good to be here.

Ryan: Thanks for coming along mate, I really appreciate it. Why don’t you tell us a little bit about  what your particular skill set is?

Steve:  You could say I’m a product development specialist. In terms of my career – 22 years manufacturing and helping apply those skills now to small business.

Ryan: Obviously, the big topic for this week is the Suez Canal and the situation with the shipping   gluts, or blockages, as you might want to call it. Do you want to tell us a little bit about that?

Steve:  A really interesting story over the last week, and unless you’ve been hiding under a rock  you’ve probably heard about this boat called the Evergiven, which was jammed in the Suez and blocking that waterway. That’s a huge problem for global freight which is already under stress off the back of 2020 with all the flights being  taken out of the air. Sea freight was already under pressure and a problem like this stopping 12 percent of global freight moving through the Suez Canal is exacerbating that.

Ryan: We saw last year when COVID first came around – the contango going on with oil – the futures cost of oil dipping below – which is what caused that crash. That was basically a lot of VLCC’s (which are the very large crude carrier tankers). I don’t know whether there was many VLCC’s caught up in the Suez Canal situation. Are you familiar with that particular area of the market?

Steve: There were and actually a lot of the boats that were caught up were natural gas and petroleum tankers. That route specifically ships a lot of Middle Eastern oil into Europe. That’s the majority of the trade that happens there in terms of energy. The massive problems for those guys that we actually measured was that over a three-day period the cost of contracting oil had tripled. So, a huge impact there.

A lot of the companies producing oil and looking to send that to Europe were left with the hard decision, do they absorb the cost and wait in line and hope that the problem gets solved? Or do they divert and actually go around the Horn of Africa and up to Europe that way? Obviously, massive expense and delay with both options. That expense and delay was measured at one point by the Suez Canal Port Authority at being 400 billion dollars an hour in terms of lost trade.

Ryan: We saw that last year with the charter rates. The day rates on the VLCC carriers going from 15 to 16 thousand dollars, all the way up to over a hundred thousand dollars. If the charter rates are now rising again and you’ve got a situation where you either go around the horn of Africa or wait for the Suez Canal, that’s obviously going to be a lose-lose situation for the oil companies. But when you’re the one on the receiving end of those charter rates… it’s fantastic that we’ve got companies like  TK, Frontline, DHT and Euro Nav. Just to name a few companies who have broad and wide shipping entities or verticals within their companies. Probably hitting every single one of those. So, a bit of a win for those companies finally.

Steve: This immediate problem of the spiking cost is one thing, but there’s also going to be a lingering problem as well with fulfilling a backlog, if you like, of freight that can’t happen while these boats are out on the water waiting to do their passage through the Suez Canal. What’s happened there is it’s created a vacuum in the freight industry where these boats would normally be in circulation. They’d be going from the origin port to the destination port, unloading their cargo, reloading then back and constantly in this to and fro.

While these boats have been stuck waiting for the Suez Canal to be cleared, they obviously can’t trade any other goods. So, there’s a huge amount of freight (and in the energy sector as well) that’s just being, if you like, sucked out of the system until this problem gets solved.

What that does is create a backlog in production because now the people producing have to make the call. Do we produce and store on land? Or do we contract a really expensive VLCC to help us do it that way and look at the way to go through that. It’s unclear at this point where the penny will land and who’s going to actually carry the bag on this one. In terms of petrol and energy products, it’s normally the consumer unfortunately. I think we’ll start to see oil prices and energy prices in Europe particularly start to spike over the next month or two months.

Ryan:  We’ve already seen a rise in the oil price and we’re looking at also a potential future spike in demand. As we see a return to normal – vaccinations coming from COVID, so talking about COVID now, people are going to be up in the air more often. We already had a lot of the refineries at maximum capacity, we had a lot of the boats full of crude already and we had a lot of the warehouses already stocked up on crude because we had all this all the demand sucked out of the market. Now that we’re seeing demand start to come back into favour and we’re seeing a rotation towards recovery industries, this couldn’t have come at a more  interesting time Steve.

Steve: That’s really true and while air travel is resuming, it’s a long way off capacity. There’s a very big difference between what’s happening now in air travel and air cargo as opposed to what was happening in 2019.  The authority for international travel in Europe who monitor air traffic have said that demand for flights is about 80 percent lower than what it was pre-COVID. So even though travel is opening, the demand is not there in terms of the commercial level that we’re used to. What this means for cargo and freight specifically, is that all of that air freight that would happen in the belly of passenger aircraft is no longer available. It depends on who you listen to but it’s somewhere between a 50 and 70 percent drop in availability. Now the reason that this is important is because air freight is obviously faster than sea freight. Most small businesses and micro businesses are now doing very well with their online strategies because of COVID. The demand in online sales and online retail has just shot up, some people estimate it’s been pulled ahead by five years.

But most of that relies heavily on air-cargo to actually fulfill the order. If I buy something on Amazon, at that point I’m a consumer. I’m expecting that I’ll receive it in a few days. That’s now an impossibility. In many cases companies are planning to use sea freight to fill that that gap. There’s really no easy way out, and the cost is still ramping. We see in our USA business, as an example, some of our fashion outlets there are reporting back to us that they’ve had a 600 percent increase in freight. It’s a really critical issue for online businesses.

Ryan: As we know markets look forward so what we typically see is especially Wall Street costing a lot of this in. If we look at baskets like the Jets ETF (which is a basket of the American Airline carriers) shooting back up 30 to 40 percent over the last couple months, if we see the oil price doubling over the last couple of quarters as well… we obviously saw that Wall Street was ramping up for this big recovery and then bam, this situation hits them right in the head. I can see this being an absolute field day for day-traders who are looking at the candlestick charts, the resistance lines, and everything that’s going on at the moment. If nothing else, it’s going to cause a ton of volatility.

I guess that leaves us with the question for your clients and for the businesses you run, Steve. What’s the solution? How do you fix these kind of things and how do you prevent this from happening?

Steve: That sector is in the retail market of a physical product. That’s where I operate and spend a lot of my time. The solution is not an easy one for these businesses. Especially if you consider lots of people who were displaced out of the workforce last year, they had their conditions changed, they had to work from home, they had hours reduced and maybe even lost jobs. A lot of these people turned to online business to try and diversify their income. So, how do I shore up my income and become a bit more independent from the workforce and start to look after myself in that way?

Amazon was a great solution for a lot of people. Shopify, Ebay… these kinds of solutions are where people went to in the majority. The risk for these businesses is that it’s very hard to control your margin if you’re trading in that way. Especially in an environment where things like sea freight and air freight are climbing out of control and you really don’t have any input. You’re a subject to the market if you’re in that space. A strategy that we’re seeing work really well and get very good results is to localise your supply chain. Look for a way to find local product in the domestic market where you’re selling, or in the domestic market where your business operates – to try and find local producers. I deal with a lot of Australian businesses so there’s a lot of Australian made in a lot of the products that I deal with and we’re seeing fantastic results there.

Some companies are even able to price match Chinese rates in production with Australian manufacturers. That would have been an impossibility even three or five years ago, but we’re now seeing that work very well. The overall message here is look local to see if you can find local partners for your manufacturing or for your production. Then you can compete globally with that product while also stabilising your business model, by not being exposed to the things like international freight or currency fluctuations, which I’m sure will come out.

Ryan: You’ve actually hit on one of Ray Dalio’s classic lessons, which is the best way to manage a risk is to take that risk off the table completely. If the shipping is the risk in this, then taking shipping off the table is always going to fix that risk.

Steve: That’s exactly it and this is something that is becoming easier and easier for business to do. A lot of business, before COVID 19 hit, had to happen face-to-face. You had to go visit the factory, you had to go and visit the trade show and build the relationships that way. A lot of that now is facilitated online through things like Zoom (as we’re on right now). We’ve been able to contract (in our business) Fortune 500 companies – purely on zoom meetings in the last 12 months. Now I hazard to guess that that would never have happened. You’d never have been able to pick up a Fortune 500 company as a client purely on emails or zoom meetings in an environment prior to it. So, there are some ways that this is an advantage. Being clever and having a good online strategy with domestic product in your product catalogue is really a good way to go.

Ryan: Steve, thank you very much for your insight. It’s always a rare opportunity to be able to speak with an industry expert such as yourself and get the behind-the-scenes story on what’s going on in the market.

Steve: Thanks a lot Ryan, it’s great to speak with you on Compare Return.

Ryan: That has been the March 2021 market review. I hope you enjoyed and thanks for staying to the end. As always like and subscribe and share this video with your friends. This isn’t to be seen as being financial advice, this is simply for educational purposes. If you are going to be making any investments based on what we’ve discussed today, please speak to a professional or make sure you’re doing your own research. Thanks, and have a good day!

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