Last Friday market players watched in fascination as $20 billion in block trades hit several media and Asian stocks. ViacomCBS (VIAC) , Discovery Inc. (DISCA) and IQIYI Inc. (IQ) were among several names that fell sharply as millions of shares were offered by Goldman Sachs (GS) and Morgan Stanley (MS) .
Over the weekend, the explanation for the dramatic action came to light. A family office called Archegos Capital Management LLC, operated by a trader with a checked past, Bill Hwang, suffered massive margin calls, resulting in the liquidation of its positions.
Archegos used instruments called swaps that allowed it to use margin of four or five times its capital. Also, swaps do not need to be disclosed in Securities and Exchange Commission (SEC) filings, so the market was unaware of the level of exposure carried on the books of the firm.
Several large brokers have exposure to this debacle. Both Nomura (NMR) and Credit Suisse (CS) warned that they face highly significant and material exposure. Nomura said it faces a possible $2 billion loss. Goldman Sachs and Morgan Stanley also are facing large losses.
The big question now is whether the fallout from this blow-up will continue. There are likely other funds using swaps in a similar manner. Brokers with exposure will rush to make sure they are protected, which may trigger more forced selling. It is still not know how much more selling needs to be done to unwind the Archegos trade.
The market has already been grappling with rotations, rebalancing and higher interest rates, so this liquidation is causing absolute chaos in some places. The market is trying to digest what is happening, and market players are on edge because they do not know how much more selling pressure there will be. On top of this, we still have a few more days to wrap up the first quarter of 2021, which was producing some pressures already.
The good news is that what is happening in the market is macro-driven. The fundamentals of most stocks remain unchanged and are improving as the economy swiftly starts to reopen. There are questions about valuations that are being exaggerated by the Archegos crisis, but many stocks are being punished without reason due to the chaos.
At this point, I view the selling pressure as an opportunity to put money to work. There is no significant bad news out there to cause a major correction. We are just going through a reset as the market moves to its next phase as the economy reopens. The unwinding of some crazy margin positions is short-term painful but a longer-term positive.
Market players are nervous here on Monday morning, but there are early signs of buying interest.