The Fed Pushes the Envelope; AAII Investor Sentiment Survey; How I made 22x on DWAC in four days... and still lost money; Ebix: This House of 'Cards' Seems to Have a Glaring Fake Revenue Problem; Why are there so few top U.S. men's tennis players?
1) What a crazy market...
To fight the 40-year inflation highs, the Fed yesterday raised interest rates by 0.75%. This is the largest hike since 1994, and the market responded by rallying hard yesterday... and then crapping out today. Go figure...
Here's a good summary of what the Fed is trying to do from the Wall Street Journal's "Heard on the Street" column today: The Fed Pushes the Envelope. Excerpt:
In short, they expect to guide the economy to a soft landing that comes with a tolerable amount of pain. A good outcome, if they can pull it off.
That will be difficult, especially considering how difficult it remains to understand what is going on in an economy still shuddering from the paroxysms of the pandemic. The housing market has already been clearly weakened by the sharp increase in mortgage rates, while a shift back toward services spending and high gasoline prices have begun to weigh on sales at many retailers. But the job market is strong, and demand for workers appears quite high, while households still have a lot of money in the bank.
The best outcome all around in the months ahead would be for inflation to start cooling before the Fed ratchets rates much higher. A string of consumer price readings – not just one or two – clearly showing that inflation is moving back toward the central bank's 2% target might convince policy makers they can raise rates at a more leisurely pace.
But if inflation keeps coming in hot, that isn't going to happen. And the risk of the Fed pushing the economy into a recession will only grow.
My take: I have no idea where the market is going in the short term, but all the negativity out there makes me cautiously optimistic.
For example, the latest AAII Investor Sentiment Survey shows that investor bearishness is at nearly double historical levels, close to its 52-week high, which is generally a good contra-indicator:
2) In yesterday's e-mail, I highlighted the plunge in my least favorite stock, Digital World Acquisition (DWAC).
On Tuesday, I closed out a DWAC put position I had purchased last Friday for a gain of 22 times my money. Even with that spectacular outcome, I've still lost money betting against this stupid stock.
How is that possible? Allow me to explain...
I long ago identified DWAC as a worthless piece of garbage, first writing about it in my October 22 e-mail.
I finally decided to put my money where my mouth was on January 24, when, with the stock at $67 per share, I paid $43,250 for puts on 25,000 shares of DWAC ($1.73 each) with a $30 strike price that expired in two months (March 18). (I wish I'd just shorted the stock, but it was impossible to get the borrow.)
Buying such deep-out-of-the-money puts was obviously a risky bet... But, for reasons outlined in previous e-mails, I thought the SEC was likely to block DWAC's merger with Truth Social, which would immediately send the stock to around its cash value of $10.
I still think that's likely, but I made two mistakes: timing and sizing.
Regarding the former, I obviously got the timing very wrong, as the SEC hasn't acted nearly five months later. And wagering $43,250 on such a speculative position was far too much.
So, after the puts expired worthless, I decided that a better way to manifest my thesis was to buy $1,000 worth of one-week, out-of-the-money put options every Friday.
I was generally able to buy $25-strike puts for $0.10 – and every week for the past three months, they expired worthless...
You can see why I didn't write about what I was doing in my daily – I didn't want anyone else to suffer the drip torture I was experiencing!
But then the stock crashed 28% to close at $27.30 on Tuesday, and even though they expired in three days and were still quite a bit out of the money, the 10,000 puts (100 contracts) I'd bought on Friday spiked to $2.20 during the day, so I sold, making a quick $21,000 profit.
So I'm still in the hole betting against DWAC, but a lot less than I once was...
The lesson here is one I've repeated many times: With few exceptions (most notably the strategy my colleague Enrique Abeyta follows in his Empire Elite Options newsletter, which you can learn more about right here), investors are better off avoiding options. The embedded leverage can be dangerous and, as I've proved with DWAC, it's hard to be right on the stock and get the timing right.
I currently have no position in DWAC, though I'm looking for a reasonably priced borrow to short it...
3) This morning, Nate Anderson of Hindenburg Research released another scathing report on a dicey company...
The target is India-focused payment services company Ebix (EBIX): Ebix: This House of 'Cards' Seems to Have a Glaring Fake Revenue Problem. The stock fell by as much as 41% this morning. Excerpt:
- The company is planning a $4.5 billion IPO of its 100% owned Indian subsidiary, EbixCash, implying an imminent quadrupling of Ebix's enterprise value. Ebix stock initially tore 75% higher on news of the planned IPO but has since fallen back to pre-IPO-announcement levels.
- Ebix reported revenue growth of 71% during the 2-year period of 2019-2021, driven largely by sales of prepaid gift cards. Without its gift card division, Ebix's sales would have declined by 32% in the period.
- At EbixCash (the subsidiary it plans to IPO) the gift card division accounted for 82% of 2021 revenue.
- For Ebix, the IPO is a race against the solvency clock: the company has $643.9 million in debt coming due in February 2023 and only $75.9 million in cash and cash equivalents as of last quarter end. It hopes to deploy $350 million in proceeds from the IPO to pay down debt...
- We think a substantial portion of EbixCash's gift card revenue is non-existent. Consequently, we expect the EbixCash IPO will flop or fail. Given Ebix's massive near-term debt load in a rising rate environment, we see significant solvency risk over the next 12 months.
A few thoughts:
a) Ebix has long been a target of short sellers. Both Fraser Perring of Viceroy Research Group and Mads Thamsborg of Bodenholm Capital pitched it at my Kase Learning Shorting Conference on December 3, 2018. I've posted their presentations here and here.
b) I love the in-depth research Anderson and his team do:
- EbixCash's subsidiary lists 970 supposed EbixCash independent distributors. We called every one of them: 403 didn't pick up, 527 told us they didn't sell Ebix cards, and 40 (~7% of those who picked up) told us they sold the cards. Many who sold the cards told us they were selling fewer now than prior to the pandemic, contrary to Ebix's claims.
c) Experienced short sellers look for "tells" that indicate likely fraud. This is one of the best I've ever seen:
If that guy isn't a crook, then I'm a monkey's uncle!
4) At my dinner last week with Patrick McEnroe (see my June 8 e-mail), who was General Manager of USTA Player Development from 2008 to 2014, someone asked why there were so few U.S. men among the top players in the world, but far more women...
He said, in a word, "money."
For the most athletic young men in the U.S., they see the riches being made by stars in basketball, football, baseball, hockey, etc. Tennis might not even make the top 10. In most other countries, however, tennis is often No. 2, behind only soccer.
For American women, however, tennis is by far the most lucrative sport – McEnroe said nine of the 10 highest earning female athletes in the world are tennis players.
That statistic is a little out of date, but his point is correct. According to this Forbes article, The Highest-Paid Female Athletes Score A Record $167 Million, in 2021, five of the top 10 earning women were tennis players, led by Naomi Osaka ($53 million or $57 million, depending on the source), Serena Williams ($35 million or $46 million), and Venus Williams ($11 million). Garbiñe Muguruza was No. 5 and Ashleigh Barty was No. 8.
Osaka and Serena were the only two women in the top 100 earning athletes in the world, according to this article: The World's Highest-Paid Athletes 2022: LeBron Scores $127 Million.
This chart shows that the No. 1 earning female athlete in the world was a tennis player each of the past 10 years (Maria Sharapova 4, Serena Williams 4, Osaka 2):
Best regards,
Whitney
P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.