Reopening the World

While the media isn’t entirely sure about what happened last friday, and is still uncovering more and more information about Archegos and the reasons for them to have blown up, the market has certainly hinted at buying opportunities in the market. For a quick summary of what happened: Archegos Capital’s (a family office run by ex-hedge fund manager and now family office manager Bill Hwang) positions which were highly leveraged using total return swaps on his individual stocks. Hwang most likely used these kinds of swaps in order to hide the fact that he was holding large amounts of these positions. These swaps helped him mimic the economic environment of the stock that he had swaps on, but it restrained him from having voting rights in the company he invested in. Apart from hiding your thesis on specific companies, swaps also offer the opportunity to leverage to the max. Leverage can help create a high standard deviation portfolio, which means that it will have very high returns but also very large losses if the stocks move against you. Generally speaking, if you would like to have a high standard deviation portfolio, the best way to do so is by amplifying your positions using options rather than leveraging equity. This way, if your positions move against you, you won't have to face a margin call from your broker. Using leverage from multiple investment banks such as: Credit Suisse, Morgan Stanley, Nomura, Deuche, and others, Hwang was able to leverage himself to about 60-100 billion dollars—a 300-500% leverage. The large amount of block trading was caused by the banks from which Huang leveraged—as in order to protect themselves, they bought opposite positions to that of Hwang’s falling ones—. It's also worth noting that Bill Hwang is a Tiger Cub, which means that he is a mentee of the great hedge fund manager Julian Robertson. Robertson is one of the greatest hedge fund managers of all time, rivaling George Soros, Jim Simons, Paul Tudor Jones, and others. Robertson taught those who worked for him how to properly manage risk and apply his strategies in all markets. Tiger Cubs are the hedge funds that have been funded by Julian Robertson, which tend to have high returns. Bill Hwang is a Tiger Cub, starting out his hedge fund as Tiger Asia Management, the biggest hedge fund in Asia for some time. Hwang eventually had to shut his doors and convert to a family office when he was indicted for insider trading. Alas, Archegos was born. The Archegos sell off has presented itself with several buying opportunities. For those of you who have read Graham’s The Intelligent Investor, you may be familiar with “Mr Market”, a personification of the stock market. Graham’s central thesis behind “Mr. Market” is that he will offer you different prices for stocks depending on how he feels. Some days he may offer you Apple at 70 dollars, other days he may offer it at 400 dollars, it all depends on how he feels. In this case, “Mr. Market” has presented us with a very strong case to buy Discovery and Viacom CBS, two structurally sound stocks trading at a gross discount. While both have seen a drastic fall in stock price, nothing has changed within the fundamentals of the company.

Another Market that has spurred our interest is the homebuilder and real estate development market. As the economy reopens, so will the real estate market. This has to do with the fact that similar to gold and other hard assets, real estate is a hard asset. In the case of hard assets and inflation, homebuilders play a strong role. They also play a strong role in the reopening and economic growth play, we will see this thesis pay off not only in the United States, but internationally as well. We have therefore found several stocks make potential plays off of. Our first stock is RedRow (LON: RDW). Redrow is a British homebuilder, specializing in more suburban houses and houses for the middle and upper middle classes. Alongside building some architecturally pleasing properties, they have had pretty strong earnings in the past few years, and we expect that to continue throughout the coming years. It is also worth noting that Redrow is traded in London on the London Stock Exchange. Our next stock that can get strong exposure to the European builders market is the Spaniard Company ACS Group (BME: ACS). Similar to Redrow, ACS Group is traded in Europe, but instead of London, it's traded in Spain. ACS Group has had some pretty extraordinary earnings in the past few years. Instead of specializing in suburban houses and building houses for people, ACS has built massive infrastructural projects, including several dams, skyscrapers, and museums. ACS will correlate positively with all the spending that will happen across the world and presents itself with a lot of potential upside. The last european stock to present is Vinci SA, a French home building company specializing in suburban homes and middle and upper middle class housing. Similar to Redrow, they specialize in more luxurious housing, which will definitely be in demand in the coming years. In terms of American home builder exposure our first stock is Taylor Morrison (NYSE: TMHC), which is one of the largest homebuilders in the United States. They have a relatively small market cap of 4 billion dollars, with room to grow. The next stock is Century Communities (NYSE: CCS) another stock focused on home building, they have a market cap of 2 billion and have a long way to grow. The final stock is Plute Group (NYSE: PHM), they have a bit larger of a market cap of 13 billion dollars, but they have exposure to the southern migration that has been happening in the past couple of months. 

Our final take is on Australia, and their economy. We are very bullish on Australia and its economy. Their currency correlates strongly with the price of Iron, being one of their largest exports as well as having one of the largest market shares in the world of Iron ore. 98% of Iron goes towards making steel, steel is in high demand considering the fact that we are going to see a massive infrastructure boom in the United States as well as an infrastructure boom internationally. A lot of our infrastructure relies on steel, and it is definitely possible to see Australia boom in the coming years due to their supplies of iron ore. If you are a big currency trader, you might want to consider putting a AUD/USD trade, maybe going long some long term calls on Australian Dollar futures. Our favorite trade to make in this market is going long iron miners such as Fortescue Metals Group (OTCMKTS: FSUMF), BHP Group (NYSE: BHP), or Rio Tinto (OTCMKTS: RTNTF). The great thing about this kind of trade is that you will have very strong exposure to two kinds of theses: the Reopening trade, and the Hard assets trade. It's never a terrible idea to have exposure to international markets, especially when your thesis applies to international economies. We pitch buying a lot of these stocks because they have not been priced in yet.