 we are recording. So hey everyone, we are on Tuesday the second of March. It's about midday, not too much going on in the markets really. We have Eddie Donmez on and we are going to have a chat about a couple of things really, this all instigated by questions in the room this morning about the ARC ETFs and then Eddie's thankfully jumped on and we then very quickly got into talking about the rotations between green energy and you know oil producers and yeah I mean Eddie the floor is yours. Yeah so we're talking EV and ARC and ARC's obviously been the dream over the last kind of year or so. It's attracted billions in new flows. Cathie Wood kind of couldn't do any wrong I think as far as the market was concerned I think fueled by tons of factors right I think discount rates being at zero, interest rates being at zero, the emergence of retail kind of involvement in markets, gamification of retail and then Elon Musk all these kind of the mood music and the sentiment was really everything going for Cathie Wood right? She sold some pretty interesting stories with genomics and electric vehicles and these huge addressable markets and you know I'm a huge fan of her, I really like her thinking, she's very transparent both with ETFs but also her kind of like open source research so she you know she speaks on tons of podcasts about all her research analysts that are industry experts you know they're all over Twitter being challenged by professors and you know industry experts on their research and all their research published you know publicly even their models and things like that so you know you've got to admire her kind of I guess Ray Dalio's radical transparency and the transparency of what she's doing you know she publishes all of her trades daily all of the ARC holding so that's ARC, K, ARC, G you know all those different ETFs you know she publishes all of those every day but as we saw very recently with yields rising you know Pears and I have spoken about this and Anthony and Pears have spoken about this but if you want to check out a video of why yields rising is bad for stocks just check out the Amplify live video also talked about different forms of valuation and how that affects kind of stocks but in short more speculative cash flows further in the future lots of uncertainty for example we don't know what's going to go on here in the current day two months from now with COVID and things like that so basically when companies are super speculative they're betting on cash flows or being profitable in 2025, 2030, 2040 and you know the world's uncertain inflation can happen COVID can happen anything can happen so there's cash flows depending on you know where they are in that kind of time frame the further are they out the more risky they are so less kind of less guarantee of the valuation today and investors are paying a huge amount for future valuations. So something we were talking about was you know I mean I agree completely I think you know I showed ARC ETFs to some of my friends who work in tech and they were instantly on it like in it on it wanted more and I'm sure you know when's a good time to get in well it depends on you know as we were talking about it depends on your time horizon and similar to the mortgage story you know if you're in a 30-year contract what do you care what the underlying asset market does in five years time, 10 years time you don't really and these things are cyclical but if you're you know if you're buying these things on margin that can essentially go to zero on you and go negative on your on your balance so then that's a different story but if you're buying these things outright you're going to be you're going to be doing fine over the term but I mean I suppose some questions I mean just to play devil's advocate to probably both of us there I mean you know these are there's a lot of cool stocks in there there's a lot of like really sort of you know millennial type of attractiveness to it you know but is there value right now is there value? Yeah so I look they're great sexy stories basically and there's going to be you know the lots of cynics right that you know seeing Kathy we're doing being extremely successful and kind of selling the dream just like we see kind of lake stage, SPACs and things like that you know it's very difficult to determine who's going to be super valuable right you know if you're looking at all the holdings are all the holdings going to be you know the the google's and facebook's and amazon's the world probably not right but that's survivorship that's going to you know she's going to pick her winners and pick her losers as kind of time comes on but the market will pick the winners and losers as well as that. So it's difficult to determine but I think what's great about her she's so transparent and she she makes lots of assumptions and if this happens if x happens if y happens if it's policy if it's markets if it's monetary fiscal company execution then this is going to be achieved and she was she was dead right with tesla and you know will she have another call like this again who knows could could be no right I think there was a lot of especially need to have another yeah like this again is the question you know exactly so she attracted so many flows into etfs and tesla was a huge winner of that but from the cynical perspective and what we saw when yields rose very recently as we saw these kind of these funds the the favourites tank pretty much they were they were there was huge short interest lots of you know selling volumes and this is to do with essentially the liquidity of the etfs right so yeah exactly but this is and this is what Kathy was is saying and this is what she did in march was she loves these opportunities and you know this is her talking about of course but she sells the googles and amazons and you know those large cap names she basically views them as cash so she just puts in you know that they'll trade sideways or up you know a couple of percent but she sells those names on these dips to buy those small cap names you know and that's yeah though she buys the gene editing she buys the autonomous taxis she buys the teledocs and all of those names well they have a lot of growth and upside potential whereas you know we're facing into 10 years here where you know all these googles and top tier blue chip techs are just going to go sideways i mean i think apple is going to continue to innovate out of its skin as it tends to do but you know they're the the rest of them i think are facing a lot of headwinds with you know policy changes in eurozone you know antitrust committees in the u.s so if you're in social it's not going to be such a smooth next 10 years for you yeah i mean we could do a whole another you know recording of hours about all of those names but i think it's really interesting how she views them as cash basically and they're her her treasuries almost and then she sells those to enter opportunistic dips in the more speculative names but i do want to kind of get to what happened really last week why they sold off so dramatically we talked about the cash flows and things like that but the concern from participants and this is can get really kind of quite technical so i'll try and keep it as high level as possible just for for all of us but the concern is with these big ETFs right 43 percent according to some some researches arcs total equity holdings are in stocks in which the firm owns at least 10 percent of all shares outstanding right so that's a huge amount of ownership in very small companies basically with with very low liquidity if we're talking about kind of overall volumes of some of the teslas and things like that so as tim you'll know more than anyone liquidity's always there when you don't need it and not there when you do need it right so during these downturns where the market sells off or you know the speculative names unravel all these different types of things these less less liquid stocks get hit disproportionately to the rest of the market because the the float is is smaller right same is very similar to what we saw with kind of the books are a little thinner which actually is quite it's basically like you're just spread can can be huge because that you might liquidity wise you might have a huge gap between where the volumes are on the on essentially on the ladder so if it takes out one level it's going to just drop a huge amount to meet volume at the next level down so yeah thin markets can be vicious yeah and especially with those those low volume ones is like you said you know that it can drop dramatically and then you need to find the bid somewhere but who knows where that that market and it doesn't necessarily I think when you're observing that happening it can give the impression that the move and the fundamental shift that a much bigger fundamental shift as I play when actually it's just a lot of gapping around and finding volume and price discovery and things like that so yeah so this is so what happened last week was because these you know it's very transparent right what similar to USO right they knew investors knew in April when the oil price went negative and you can talk a bit more about this later that you know they were they were buying the they knew the contracts that the the fund was buying right and so when the oil price tank they could almost front run that trade on on USO but what we saw was we saw a huge amount of redemptions from the ETFs outflows basically from from the arc ETFs where you know fund managers you know obviously it's been up gone up 100% or 39% annually for the last since it's inception in 2014 and yield spiked and they kind of you know ran to the doors and pulled all of a lot of flows from that ETF and when there's kind of redemptions then this is where the problem is is when there's a discount to the nav the net asset value of the underlying stocks and they're super illiquid and it's very obvious what they own right then there's going to be redemptions there and then that's going to exacerbate the moves particularly in those kind of lower volume stocks just to really try and keep a boil down simplicity it's kind of like a self-fulfilling prophecy domino effect that can kind of eat itself similar if you a good example is Balmageddon and the portfolio insurance but from February 2018 I'll post that link in the room later. Yeah do you want to talk about USO and how that kind of is kind of similar to what we saw with you know when the oil price tanked? Yeah I mean so USO essentially was more is more the nav as in the net asset value of USO is more constituted on the front month futures on M123 months 1 2 and 3 in front of cash so the spot market is the price right now to exchange that then you have the front month which is 30 days forward delivery from today theoretically and then 60 days and 90 days and so USO was pretty pretty much well is always pretty much very heavy on months 1 and 2 in the front and they would represent at points about 23% of the global futures on NIMEX in WTI and so essentially they that's what their net asset value is and so when you had oil going below zero you had people saying oh well hold on a sec USO is trading at like 20 and oil is now printing at minus 30 I don't think I want to own this anymore and so you have people exiting the USO ETF and therefore you have USO selling then because you have people exiting the ETF then it also means that USO are essentially then selling futures contracts in months 1 and 2 and 3 in front so what you get is it's similar when an underlying asset in this case it's oil for USO or say Tesla for ARC was ARC F for ARC K then you get flight to the door and then the fund managers themselves have to then execute sales in the underlying so it's like this self-feeding thing and it only really stops and it only really stops until the fund managers say all right I'm done liquidating we're now holding a core position I'm not willing to let that core position go I think that's a perfect explanation I think what's also interesting about that was everyone knew USO's position right and more importantly their limitations so it was the CFTC's rules on those position limits on the futures contracts so when the market saw that opportunity they all piled in to push the fund to those limits right because they knew that that was their their position and then that exacerbated the forces even more and then that's what's then oil so so essentially yeah people yeah yeah that's it it gets a bit tricky actually because there was people exiting USO and then it flipped once oil went negative actually then it turned inverse the people piling in to USO which essentially then saw USO buying a ton of June options and of course the it was the or sorry it was the April contract that went negative and and so then they just were like we're not even entertaining buying May risk here because we don't know what the hell is going to happen we're going to just jump straight to June for USO from month futures buying and so then you see the turn occur then people go from net selling USO holdings to to being massive net buyers because it's it's at zero and what the result of that the FT had a great video up from one of their journalists near the time but they've since offline that I'm going to try and get them to put it back up but she did a very in-depth example of how USO was constituted and how they actually had to reorganize the pricing on on how their their their the USO's price and after that happens so it was very interesting stuff yeah and I think we can you know different to USO but again comparable to the the arc stuff is GameStop as well right when people so if you're short like Melvin Capital were in a very illiquid name and everyone knows that you're short and then investors can just pile in and then it's a self-fulfilling prof prophecy when you get the short squeezes and then the gamma squeezes and then you know it really exacerbates and this is if we bring it all the way back to arc it says investors yanked 465 million from the arc innovation fund according to Refinitiv and if there's more redemptions then that's going to lead her to sell the liquid holdings like the Amazons the you know whether a big large cap tech they're they're holding and then there's a there's a squeeze and then there's a self-fulfilling prophecy when that can actually affect the you know the wider market so also unwind the illiquid holdings so this makes sense as to why I saw a tweet yesterday about the Wall Street Bets guys effectively going to try and target Amazon now because they know that Kathy Wood if she gets pushed to the breakpoint on some of her more tech like Tesla for example let's use Tesla if you get densely selling on Tesla she's going to have to unwind other positions to then buy other stuff and rebalance her funds and so people are going to put a put a short squeeze on Amazon yeah so that's insane yeah I mean look we've got to draw the line somewhere I think look yeah Amazon and GameStop they're very different right so when you're trying to play a do a play on GameStop which is super liquid they couldn't do more different yeah so you know that's a bit more wild I mean I would say I'd love to see that I think that would be very impressive if they did but that's a different story I think they're just kind of fantasizing there unlike GameStop where you can actually that you resort because the volume is so low but but yeah right I think I think that's probably more more than we wanted to discuss but so interesting I think all of sure just before we yeah I mean let's let's let's see but there and then we'll we'll go on and have our chat about green energy and whatnot in a second brilliant thanks Eddie cheers thanks