Tech slaughter continues, stocks tank in wild Tuesday Wall Street action
WASHINGTON – Monday began as a nicely positive day for US stock market fans. That is, before everything decided to go south near Monday’s 4 p.m. closing bell. Particularly big techs. What a disappointment. But as it turned out, Monday’s close was just a harbinger to the looming disaster that viciously emerged at Tuesday’s 9 a.m. opening bell. The tech slaughter continued, Big Time, as techs, particularly the big ones, cratered, causing much of the market to tank along with them.
All three major averages have been wildly off all day, although at 1:45 p.m. ET, the tech-heavy NASDAQ has suddenly decided to head for the green zone. It’s up a measly 0.06% as we write this. But it remains for us to see whether this feeble attempt at a tech rally can hold.
On the other hand, the Dow Jones Industrials, down well over 600 points earlier, remains down 462 points at the moment, a nasty loss of 1.33% on the day thus far.
More on Tuesday’s continuing tech slaughter
What’s going on here? ZeroHedge, as usual, has more than a clue. At least one ETF has been dumping big tech at an alarming clip. It’s complicated, so we’ll let the Tylers of ZeroHedge try to explain this to you, as some of this nonsense, frankly, is a bit beyond my pay grade.
The Tylers are addressing the increasingly controversial investment practices of an ETF Known as “ARK Innovation ETF,” (NYSE:ARKK). According to my online brokerage, here’s the fund’s strategy, couched in Wall Street bafflegab.
“The investment seeks long-term growth of capital. The fund is an actively-managed exchange-traded fund (“ETF”) that will invest under normal circumstances primarily (at least 65% of its assets) in domestic and foreign equity securities of companies that are relevant to the fund’s investment theme of disruptive innovation.
“Its investments in foreign equity securities will be in both developed and emerging markets. It may invest in foreign securities (including investments in American Depositary Receipts (“ADRs”) and Global Depositary Receipts (‘GDRs’) and securities listed on local foreign exchanges. The fund is non-diversified.”
Bold text emphasized by this reporter. “Disruptive innovation” essentially means investing in mostly tech companies that rattle the cages of traditional investors. This means stocks like Tesla, Roku, Square, Zillow, Spotify, Zoom… you get the picture.
“Disruptive innovation” = Tech slaughter on Wall Street?
Now, let’s get to the Tylers.
“As ARK readies itself for what could be another tumultuous day on Tuesday, with the firm’s assets dropping below $20 billion to their lowest level since January, more eyes are turning to how Cathie Wood [the fund’s manager] is steering her firm through the ‘rough seas.’
“ARK’s flagship fund [i.e., ARKK] was down another 5% in pre-market trading on Tuesday – falling below the psychological level of $100 per share – and has fallen for 9 of the past 10 sessions, according to Bloomberg, who noted that the decline ‘accelerated on Monday in the biggest slide in about seven weeks.’
“At this point, the ‘chicken and the egg’ argument between ARKK, shares of its components – notably heavily held (and potentially extremely overvalued) names like Tesla and Palantir – and the indicies where its components reside, becomes meaningful conversation and not just fodder.”
The Tylers offer the following chart, illustrating the ETF’s recent trajectory. It’s hard to project this oversized graphic in our format. But suffice it to say that the action commencing Monday (yesterday) and continuing through the first couple hours of Tuesday begins with the big downward spike on the chart that queues up Monday morning, commencing roughly beneath the “R” in ARKK.
Now back to ZH.
“In addition to Tesla selling off sharply Tuesday morning, as we noted, other key ARK holdings like Teladoc and Roku were down about 5% each in the pre-market session.
“To make matters potentially worse, it doesn’t appear as though Cathie Wood wants to simply batten down the hatches. ARK Invest appeared to continue its strategy of selling off risk-adverse tech names on Monday of this week, with the firm collectively selling off 30.4% of the Apple shares it held during Monday’s tech pullback. “
Well, that would explain this morning’s big Apple (NASDAQ:AAPL) dump.
“Bloomberg released the figures on Tuesday morning, noting that: ‘Ark Fintech [“financial technology”] Innovation ETF, Wood’s only fund that holds stake in Apple, sold 87,560 shares of the iPhone maker and now holds 200,387 shares, according to Ark’s website”.
“ARK also collectively sold 464,000 ADRs[*] in Roche, 463,721 ADRs in Baidu and 260,876 Takeda ADRs. The firm also sold 1.62 million shares of Opendoor and 557,955 shares of Virgin Galactic, Bloomberg noted.”
* (ADRs are the special format that permits American investors to trade selected foreign stocks on US exchanges. Roche (OTC:RHHBY) is a major Swiss pharma company. Baidu (NASDAQ:BIDU) is a Chinese version of Google that also offers product sales. Takeda (NYSE:TAK) is a major Japanese pharmaceutical company. And so forth.)
Cathie Woods’ exciting new strategy involving tech slaughter for tech gains
“The sale of Apple is noteworthy because it appears to be proof that ARK’s Cathie Wood is following through on her “strategy” of selling liquid big tech names in order to free up liquidity for smaller, illiquid and speculative names – a strategy we have written about numerous times over the last few months. Wood has also been turning around and ‘investing’ that liquidity into other ARK ETFs. For example, on Monday, Wood bought more of its own 3D printing ETF, PRNT, in its new ARKX Space Exploration ETF.
“On Friday of last week, with the NASDAQ volatile, Wood took to CNBC to say she ‘loved the setup’ heading into the new week, where so far her flagship fund is nearing a drawdown of almost 10% for the week.
“‘Oh, I love this setup,’ she told a bemused Wilfred Frost last week, although her shareholders who are down 30% in a few weeks probably don’t share her ‘setup’ love…”
All interesting. But here’s the “tell.”
“Wood also predicted a 25% to 30% compounded annual growth rate over the next five years. When asked about outflows, she said: “First of all, I don’t have to worry about redemptions. The ETF ecosystem is a beautiful thing for portfolio managers, I highly recommend it. The ETF ecosystem – they are facilitating our flows. And they are doing it many ways with algorithms and derivatives. We have experienced no problems. There has been hardly a disturbance in our spreads.’”
In other words, there’s a sucker born every minute, and I’m taking advantage of them all because I’m so smart. This is a classic hubris alert if there ever was one. Which leads up to ZH’s knockout punch.
“Then, in a stunning revelation that had not been made public previously, Wood admitted that [Bill] Hwang provided the seed capital for ARK: ‘So yes, he did provide the seed for our first four ETFs and we were very grateful to him.’”
As beleaguered tech investors may remember, it was this same Bill Hwang who’s cowboy style investing brought down Archegos, the huge family investment fund he ran. At least until he managed to tank the whole thing recently, leading to massive margin calls the fund couldn’t meet. Which, in turn, caused the initial tech stock turmoil this past March as forced sales (margin calls) of huge Archegos holding in tech started the damaging decline in that sector. And also damaged the reputation of big Swiss bank Credit Suisse and a few US banks as well, such as Morgan Stanley. The tech decline has persisted, with brief rays of sunshine, ever since, and included additional negative action last week as well.
And Hwang is the guy that passed his swashbuckling ways down to Ms Hubris of 2021, ARK’s Cathie Wood. The guy who launched Tech Slaughter 2021, V 1.0. How encouraging is this?
“…Wood’s risk management – like Hwang’s – might eventually be called into question. In March, we also noted when ARK Funds filed to allow for larger concentrations in names, including overseas ADRs.
“Investors have pulled $500 million from ARK’s flagship fund since the beginning of May. Could the rout continue?”
Well, you already know the answer to that one.
So where’s the SEC in all this? Right. You know that answer, too.
Are we staring Tech Slaughter 2021, V 2.0 in the face today?
(Note: This reporter holds shares in two stocks mentioned in this article, namely Apple and Roche.)