USDJPY

Just using interest rate parity.

Before the interest hike cycle, in early 2022, 1 dollar = 115 yen.

To make it simple, assuming USD interest rate is 5% and JPY is 0%.

If you exchanged 115 Yen [$1 worth of JPY] for USD and held USD for for 3 years, you should get $1.05^3.

If you hold Yen for 3 years, you shall have 115 Yen. So 115 Yen = 1.05^3 USD

1 USD = 99 Yen…


Real life is not like that.

In the real world, people exchange JPY for USD to earn higher yield, which created demand in the short-term.

That portion of USD can be deployed in the equity market, buying S&P 500 for example.

In this case, if you borrow Yen, you pay very little cost of capital (near zero), and you earned S&P 500 return.

Meanwhile, as everyone wants to do this kind of trade, and due to this imbalanced demand in the short term, USD will appreciate against JPY << this means you earn extra return when exchanging USD back to JPY (1USD = ~160JPY a few weeks ago, vs the 115 exchange rate 3 years ago).

In sum, you get S&P 500 return, you get USD appreciation return (~40% in 3 years), and you pay only JPY interest rate.

This is crazy.

Why would this happen? against the interest rate parity?

The other side of the trade seems to be those who are bearing the low rate of return on JPY… The savers in Japan I shall say.


this is also happening again in China?

The victims are obvious.. savers who are only paid 2-3% in China.

Current State of EV Market(cap)

EV is booming, in market cap and in sales.

1/ Three big markets, EU, China and US, account for more than 90% of global xEV volume; while xEV is just a bit more than 5% of global unit volume.

Global BEV+PHEV unit volume is expected to be 3.24 million in 2020, or a bit more than 5% of the overall ~60 million vehicle market globally.

Nearly 1.4 million BEVs and PHEVs were registered in Europe during 2020, 137 % more than in 2019

China alone contributed more than 1.3 million in unit volume.

US grew slow (~4%), with a bit more than 0.3 million units sold.

2/ Globally, industry valued at 8x 2022 revenue

Currently, EV companies globally have a market cap of ~$958 billion; Tesla accounts for ~2/3 of that.

Expected 2022 revenues of those EV companies sum up to $122 billion (Tesla accounts for half), while TTM revenues are ~$57 billion.

Overall EV/ ’22 Sales = 7.9x

If normalized margin is 20%, then the valuation indicates ~40x P/E.. where E is normalized 2022 level.

Source: this google sheet compiled by FT.

Increasing Yield & Multiples

US stock market is in a tough week as 10-year yield rises.

It’s interesting to review the CAPM formula and its relation with multiple.

Assumptions:

    • Market risk premium (MRP) = 6%
    • Before covid, risk-free rate = 10-year yield = ~2%
    • 10-year yield basically goes to 0.5% in 2020 and approaches now to 1.5%
    • Discount = Risk-free rate + MRP, assuming beta is 1
    • Earnings terminal growth rate = 3%
    • Earnings multiple = 1/(Discount – Terminal growth rate)
Risk-free rate Discount Multiple
2% 8% 20.0x
0.5% 6.5% 28.6x
1% 7% 25.0x
1.5% 7.5% 22.2x

When market was performing like it’s 1% but realized that it’s actually 1.5%, the correction is ~9%.

When market was performing like it’s 0.5% but realized that it’s actually 1.5%, the correction is ~22.5%.

JOYY After Sale of YY

JOYY (NASDAQ: YY) just announced on Feb 8 that “The sale by JOYY Inc. (“JOYY” or the “Company”) of its YY Live business to Baidu, Inc. is substantially completed”.

Without the China business, YY = BIGO, which has BIGO Live and Likee.

More importantly, investors are only valuing the BIGO Live business, while Likee is like a “bonus”.

To be more specific,

1/ BIGO is undervalued

JOYY has ~81 million ADS -> $9.7 billion market cap at $120 per ADS.
It also has some $3.5 billion cash/short investment and $1 billion convertible bond (conversion price 95.5 and capped at 127.87).

The sale price of YY China business is $3.6 billion.

JOYY still has 68.4 million Huya shares, which is worth ~$1.6 billion at $24 per share.

Therefore the enterprise value for BIGO is around $2.4 billion.

BIGO Live is a live streaming business with RMB 3.4 billion revenue in Q3 2020, so around $2.1 billion annually.

That is 1.1x sales multiple! Usually live streaming virtual gifts could be valued at 2-3x revenue.

Room to double!

2/ Market is not even valuing Likee, which is a legit business with 104 million MAUs in Q3.

Likee is popular. Some may even compare it with TikTok. The recent decrease is due to the ban in India but the rest of the growth will be fine.

3/ JOYY will become an true international company, and is poised to operate in a more flexible global manner, which should benefit its ex-China strategy.

Kuaishou Valuation

So the competitor of Douyin (TikTok) in China, Kuaishou (HKEX: 1024) just went IPO this week, now valued at ~$160 billion.

It’s a well-known app in China – with the current market sentiment, hypes around video-based social platforms, I should say I am not surprised about the valuation.

Here I provide one way to look at Kuaishou’s valuation:

Q3 revenue is ~$2.4 billion:

1/ ~50% comes from live-streaming (virtual gifts).

2/ The rest is from ads and e-commerce. I categorize them as “good” revenues that are fast growing (+200% yoy for ads) and stable.

For the first part, virtual gifts, we can use Huya (most revenue is from live-streaming) as a comp – about 3x annualized revenue.

For the second part, we can compare it with Snap, which trades at 25x annualized revenue. Kuaishou’s ads business (~$900 million in Q3) is at the same scale as Snap and grows faster – so some can argue to use 30x.

Therefore,

Kuaishou = virtual gifts business x 3 + ads & other business x 30

As virtual gifts is 50% now, we are talk about 16.5x revenue as a whole.

Annualize it: $2.4 billion x 4 x 16.5 = $158.4 billion


Virtual gifts business is debatable – while it’s 50% of revenue, it accounts for less than 20% of Kuaishou’s value if we use the above framework. So change it from 3x to 2x or 1x won’t affect much actually.

The Stories Behind RH

RH (NYSE: RH), known as Restoration Hardware, is kind of hot.

Its stock price is more than doubled in 2020 and increased by more than 5x from its March bottom.

What has changed?

1/ as the pandemic hit, people spend more time at their places – meanwhile they spend money to renovate their places.

2/ wealthy people can’t travel and don’t have much ways to spend – new luxury furnitures spending fulfills some of those void!

3/ RH is now a brand/lifestyle. It’s not just furnitures – RH has restaurants, plans to open hotels.

To put those in chart.. (light blue line is Wayfair and pink line is Hermès)

Wayfair = furniture website

Hermès = luxury brand

GameStop Is Like A Soros Play

A week of blogs about GameStop – why not.


Reflecting on the GameStop mania, I feel it’s more like a macro trade, e.g. how Soros broke Bank of England in 1992.

1/ hedge funds are like the role of Bank of England facing Soros (retail investors, etc.). It’s almost certain that they cannot cover the shorts in the near term – just like BoE couldn’t support fixed exchange ratio.

2/ HFs didn’t realize that reflexivity is so important… they are analyzing the company as if they are the outsiders. But as people realize their short/put positions, they can support both GamStop’s real business and its stock. HF’s participation changes the real world itself. Also, people’s decision of holing GME stock also changes their purchasing behaviors.

3/ social medias (reddit, twitter trending, etc.) are now playing a role like Draghi’s “whatever it takes” speech. When expectation is set, people’s decision change as well – it becomes self-fulfilling.

Retail Investors & Those Stocks Unavailable For Them To Buy

Didn’t believe I have the 4th blog on the recent stock price surge in GameStop, etc.

But here are 3 things to say.

1/ Platform restrictions

Yesterday, some restrictions were put on those stocks by TD Ameritrade and Charles Schwab (also owns TD Ameritrade; acquisition announced in Nov 2019). Robinhood also increased margin requirement on those stock to 100%.

Today, nearly all major stock trading platforms put restrictions on those stocks. Robinhood, notably, won’t show search result for those tickers/companies and only allow order to sell those position, including GME, AMC, KOSS, BBBY, BB, NOK, EXPR, etc.

Robinhood is under the spotlight, for its name and its innovation and mission to democratize investing. (See Robinhood CEO interview video at the end)

2/ Options that are still in play

I did a little excel calculation, only for call options that expire tomorrow (Jan 29), Feb 19, March 19 and April 16.

If GameStop closes at $300 tomorrow, and assuming all future calls are settled – the call options’ net value would be about $4.4 billion in total, and ~$1.7 billion for Jan 29 options alone.

What’s more crazy – the underlying stock count for those in-the-money call options expiring tomorrow are close to 10 million shares or 19% of the floating.

If GME closes at $200 tomorrow, those call options are worth $2.2 billion at least.

If GME closes at $400 tomorrow, those call options are worth $6.7 billion at least.

And there are more call options in other dates.

3/ Who is broke (don’t know)

In interviews and articles by brokers, (Robinhood, Webull, Interactive Brokers, etc.), they talked about clearing house requirement, etc.

It could also be the counter-party risk from the other side of those call options – as the Interactive Brokers Chairman said “so if there are $10-15 billion loss in there, somebody has to pay them. will they be able to pay is a big question”.

Don’t think people want to see some market makers or brokers or investment banks broke.

But – guess someone is or might be broke.


Robinhood CEO interview


Some further reading…

Webull CEO

ANTHONY DENIER: Well, it wasn’t our choice. Our clearing firm gave us a call and said we’re going to have to stop allowing new opening positions in the three names, AMC, GME, and KOSS. Highly volatile, and what happens is this is not a political decision. And unfortunately, it got political. I think, you know, I think it was once said that don’t let any good crisis go to waste. And that’s clearly what’s happening here.

And we’re seeing politicians jump on the bandwagon so they can get– so they can start trending on Twitter. But in reality, what’s going on is that there is a two-day settlement between if you buy the stock today, those brokerage firms that you bought that stock on have to fund that trade with the clearing central house called DTC for two whole days. And because of the volatility of stocks, DTC has made the cost of the collateral of the two-day holding period extremely expensive.

And we just can’t afford– well, we’re not a clearing firm, but our clearing firm simply cannot afford the cost to settle those trades. We cannot use customer funds to front that cost due to regulation. So the brokerages or the clearing firms have to go into their own pockets to do it. And they simply can’t afford the cost of that trade clearance. That is the reason why these stocks are coming off. It has nothing to do with the decision or some sort of closed room cigar– smoke-filled cigar room of Wall Street firms getting together to the dismay of the retail trader. This has to do with settlement mechanics of the market.

And:

ANTHONY DENIER: …There is no way that a customer would not be able to sell a position they hold. We are simply stopping opening of new positions. Liquidations can happen at any time. This is general market mechanics. We have customer protections in place. We would never stop a customer from being able to get out of a position. But currently, we are stopping customers from getting into a new position. And that has to do with it possibly.

Robinhood blog

Amid this week’s extraordinary circumstances in the market, we made a tough decision today to temporarily limit buying for certain securities. As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits. Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment. These requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously, including through the measures we have taken today.

Starting tomorrow, we plan to allow limited buys of these securities. We’ll continue to monitor the situation and may make adjustments as needed.

To be clear, this was a risk-management decision, and was not made on the direction of the market makers we route to.

Market Should Work

Although I believe there is a turnaround story for GameStop (NYSE: GME) and short squeeze is smart, it seems that the impact is more negative today. GME closed at $347.51 per share at 4pm, more than 4x the closing price I mentioned in Monday’s post. The negatives come from a few things:

1/ the story is not relevant to fundamentals now – however the healthiness of a functioning market depends on its ability to return to fundamental (in the long run).

2/ too much volatility + ripple effect of funds scaling back will cause additional chaos in the entire market. Some unnecessary negative feedback loop might form.

3/ people who entered the “casino” late probably won’t do well…

This mania may alert future participants/regulator, but may also set a bad example for markets globally.

The Case Of The Day – South Sea Company And GameStop

First last day of school for me!

In one of the courses today, we discussed the South Sea Company in 1720 in UK, when Sir Isaac Newton, representing “the smartest in the world”, didn’t do well in the stock market.

South Sea Company
Source: sovereignman.com

Also today, we saw news that Melvin Capital Management received $2.75 billion cash injection, as it has lost 30% in the first 3 weeks of 2021, due to its short bets including shorting GameStop (NYSE: GME). Melvin “had been one of the best performing hedge funds on Wall Street in recent years”, representing “the smartest of the smartest” in today’s world.

GameStop’s stock soared 245% in 2021 through Jan 22.

It closed at $6.68 on August 31, 2020, when Ryan Cohen revealed his 5.8 million shares purchase, or 9% stake. It closed at $76.79 today (Jan 25) – some 11.5x return if you buy at $6.68.

GameStop stock price in from Jan 19 – Jan 25 | Source: Yahoo Finance, author

The $2.75 billion cash includes $2 billion from Citadel and its partners, and $750 million from Point72. Melvin founder Gabe Plotkin was from Point72’s predecessor firm.


Takeaways:

1/ Predicting human behavior is much harder than physics or quarterly earnings.

2/ Leverage is the multiplier of actions.

3/ The “smartest” people might get it right – but lots of things can go wrong before that happens.