For once, it wasn’t the big dogs that turned Wall Street on its head… Instead, it was the little guy who caused the Archegos Capital Management hedge fund to collapse.
Last Friday we witnessed a mysterious block trading spree caused by the massive implosion of the hedge fund Archegos Capital.
Very similar to the GameStop “stonk” fiasco, this hedge fund collapse is a good reminder of the dangers of over-leveraging your account.
ViacomCBS, Discovery, Fox and other major media stocks crashed Friday as Wall Street banks made margin calls to Archegos. And since it wasn’t able to pay up, this forced an epic trade block sale as the hedge fund unwound all of its bets.
Which — in this time of easy money borrowing — was a terrifying amount. Both ViacomCBS Corp. (Nasdaq: VIAC) and Discovery Communications Inc. (Nasdaq: DISCA) were down more than 25%
But before we dive more into this tangled web of a nightmare amid the Archegos Capital collapse with Joy of the Trade’s Jeff Zananiri, let’s quickly cover what we expect to see in the markets this week.
The Archegos Capital Collapse and Aftermath
Guys, the first thing we need to keep in mind today is that we have a fragmented trading week on our hands thanks to the big Easter holiday weekend.
So things are going to appear to be a bit lackluster for the most part — nobody should try to be a trading hero this week.
But we do still have some data coming out Thursday and Friday that could cause some commotion in the stock market.
And so far this week we’ve seen the Dow Jones make new March highs. But this is nothing to write home about since it was done on tepid volume from the holidays coming up.
However, at the end of the close today, you might get some fireworks — and that’s partly because of the hedge fund meltdowns we first started to see last Friday.
Jeff’s been focused on what that means for the investors lining up, and how to calibrate his gameplan to avoid potential landmines.
He’s also noticed that homebuilders and transportation stocks have been ripping higher — and look to continue to do so — after today’s announcement.
President Joe Biden outlined his $2 trillion infrastructure proposal this morning that’s supposed to help reshape the U.S. economy over the next 15 years.
But what’s most interesting to him — especially amid a pandemic — is people’s appetite for borrowing and lending money hasn’t waned at all.
Archegos Capital’s collapse is a prime example of that.
Long story short, the guy behind Archegos was trying to manufacture an extra length of return on stocks that were being heavily pushed up by momentum. But then he got hit with margin calls.
A margin call happens when an investor’s margin account falls below a certain amount, usually due to a losing trade. When this happens, the broker will demand that the investor put more money or securities into the account to bring up its value.
This guy had four prime brokers: Credit Suisse, Nomura, Morgan Stanley and Goldman Sachs.
These brokers had a meeting one day and realized just how much leverage a single hedge fund had in the market currently — seven times the normal amount.
Archegos Capital had zero money it could put anywhere, so this gave the brokers the opportunity to sell stock on Wall Street at a massive scale.
And so we saw everything unfold in a dramatic fashion on Friday.
But what if we told you the names that got hurt the most from the Capital Management collapse were about to make a major comeback on this pullback? And that there was even more to the story than investors originally realized?
For an even deeper look into the Archegos Capital collapse and the negative correlation between the energy sector and the U.S. dollar, check out our video below.
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