Tencent Music NYSE:TME which is basically like Spotify NYSE:SPOT in China, plunged 33% on Friday. In addition, shares of Viacom NASDAQ:VIAC plunged 50% over the last week! What exactly is going on? Other big Chinese tech names like online tutoring and constant target of short sellers, GSX TechEd NYSE:GSX as well as Discovery NASDAQ:DISCA and Baidu NASDAQ:BIDU and video streaming giant NASDAQ:IQ also saw big declines. This price action is truly unprecedented, because all of these stocks, especially viacom, have large market caps and they didn't release any news during this time.
So the Wall Street Journal and Bloomberg have been reporting that major banks like Goldman SachsNYSE:GS and Morgan StanleyNYSE:MS have been forcibly liquidating the holdings of big family office, called Archegos. Archegos is the family office of a famous investor, Bill Hwang. Apparently Deutsche Bank NYSE:DB and UBS were also serving as prime brokers to Archegos and were lending it cash and stocks. Before this crisis, it was estimated that Archegos was managing around 10 billion dollars.
The details are still murky and not a lot of information has come out, but apparently the forced selling in the aforementioned shares totaled 30 BILLION DOLLARS! media reports indicate (although we can't verify this) that Archegos was using complex swap arrangements to build up stakes of 10% or even more of some of these companies. One of the reasons the fund used swaps was probably so that it didn't have to file additional regulatory disclosures. Most importantly though is that it seems there was an immense amount of leverage in the strategy that Archegos was pursuing.
Only the bankers involved in this story really know what happened, but it's likely that some of the bets Archegos made (whether long or short we don't know) went sideways and the banks forcibly dumped his shares before they would be on the hook for the losses.
The sizes of some of these block trades were just astounding. The Wall Street Journal just reported that on Friday Morning Goldman Sachs sold 100 million shares of Tencent Music for 1.8 billion dollars and Morgan Stanley followed in the afternoon with 36 million more shares that sold for around 600 million dollars. That's some weight on the tape. There was also fierce selling of Viacom and the other aforementioned names last week.
It's likely that the banks were able to sell some part of these massive holdings to their other hedge fund clients, but a substantial amount were probably just dumped on the market at whatever price people were willing to take.
It's probable that these stocks will recover somewhat over the coming days, especially because the declines are attributable to forced selling.
Media reports indicate that the forced selling is mostly over, but anyone thinking about rushing into these discount stocks should consider that maybe this story isn't quite over yet.
Please let me know if you ever find out: what was the total TRS (Total Return Swap) exposure to ViacomCBS or DIscovery as a percent of their starting market caps when Hwang first entered those trades! I want to get a plumb on the elasticity of demand in those shares!
TigerBrokers
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@kiers, Absolutely we will keep an eye out. However, media reports are now indicating that Hwang had accounts with multiple prime brokers, so it's possible that we won't know for sometime.
kiers
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@TigerBrokers, ...thanks! It's a perfect test tube case where we can look at % stock appreciation divided by % of notional (long) outstanding derivative IN THE ABSENCE OF ANY OTHER NEWS OR EVENTS!! A great look at elasticity to benchmark for future! BTW, corporate insiders KNOW their shares' elasticities b/c they "buy back" their shares.......but this info is NEVER MADE PUBLIC!!
imDRAWN
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I was wondering about this. Thanks for the background Info :)