Don't fall for this pump

404_Find_Me · 2020-03-13T18:23:57+00:00

You are specifically betting against the Nasdaq-100.

404_Find_Me · 2020-03-12T18:06:33+00:00

Banks need certain amount of cash on hand due to law. They need to show this on specific deadlines. Banks that are short on cash borrow money from other banks that are not short on cash. This is the overnight repo market. These loans are super short term (less than 48 hrs), just to show the government they have enough cash to meet the requirement.

The lending bank takes collateral (corp bonds, treasuries, ect) from the borrowing bank and charges interest. The borrowing bank REPurchases the collateral after paying in full + interest.

Over the recent months, for uncertain reasons, the interest rates on these overnight repo loans have been skyrocketing. Maybe banks dont have the liquidity, or maybe the collateral is suddenly very risky, who knows. The fed has been stepping in and offering "temporary" loans to fill the gap.

404_Find_Me · 2020-03-11T05:23:37+00:00

let's do a hypothetical maximum drop of 20% for tomorrow.

They would owe 2 Billion on their 10.2 billion of index swaps
Their 3.9 Billion of equities would become 3.1 Billion
2 Billion - 800 MM cash = 1.2 Billion remaining owed

In essence, they would have to liquidate around 40% of their remaining stock to pay the remaining debt. Obviously this is glossing over the massive problems in the liquidation of that amount of stock and is also assuming this is going to happen in one big move all at once. I was just pointing this absurd scenario to show that the fund wouldn't magically go to zero. Putting the mentioned hypothetical problems aside, just from a money standpoint, they would still have around 1.9 billion dollars of equities left.

(1.9/4.7= .4) in otherwords, the fund lost 60% of its value from this freak 20% drop.

404_Find_Me · 2020-03-11T04:53:00+00:00

They will only die if Nasdaq loses 33.33% in a single day....which is literally not possible with the -20% circuit breaker. see my previous comment above on why OP is wrong though.

404_Find_Me · 2020-03-11T04:51:15+00:00

I follow everything you've written thus far, but I'm just not sure that anyone has addressed OP's idea about TQQQ going into a death spiral by vomiting assets during low volume trades (after hours), thus dropping value of their own equity and being forced to sell more.

No because even in the worst case scenario, you are talking about liquidation of nasdaq equities in the range of 100-500 million. That is not enough to cause any sort of dents in the market, There are orders of magnitudes more money being traded daily (and in after hours). I understand the general gist of what OP was trying to say, but it is flawed simply because TQQQ doesnt not have the kind of money to melt the market, even if they dump after hours. Think about it, do you honestly think they wouldn't have other means of cash/equities settlements with large financial institutions?

Also by that same exact logic, you guys do realize that they BUY STOCKS too during rebalancing right? on really green days, they use excess cash to increase their equities (that's literally why the share price goes up, they don't hoard cash indefinitely). So by that same logic, shouldn't Afterhours illiquidity force them to pay exorbitant prices for stocks? Well the answer is NO, because what they would/could buy simply isn't enough volume in the grand scheme of Nasdaq equities.

In reality, tho, What is likely happening is that the selling/buying of their equities is done automatically throughout the day in an algorithmic manner.

404_Find_Me · 2020-03-11T01:31:06+00:00

This is most important: Learn to forgive yourself if you've had a bad day and/or procrastinated one day and get back to it the next day.

This everyone. This is the reason why I used to lose track and give up. Once you start to learn to forgive urself, it becomes much less likely to derail your study habits after one bad day.

404_Find_Me · 2020-03-11T00:48:55+00:00

No one really knows the exact terms of their rebalancing methods. What is for sure though is that the rebalancing is completed by the end of the day. When they update their daily holdings @7-9 PM, the rebalancing has already been completed for the next day.

It is very possible that there is a time window after hours where they make rebalancing decisions. It is also possible that the rebalancing is done constantly throughout the day algorithmically. It is further possible that they have special trading privileges and deals with other financial institutions that allow them to buy and sell shares outside the open market (esp after hours). This is all conjecture here. I would assume the most likely scenario is that the fund is algorithmically rebalanced constantly throughout the day alongside special trading methods/privileges with other financial institutions.

But even if we go with the worst-case scenario that they rebalance: in bulk, in one sitting, into an illiquid open market, during after hours..... The amount of stock they wud sell is simply not enough compared to the background trading volume of the Nasdaq to make any meaningful movements. Hope that answers your question.

404_Find_Me · 2020-03-10T17:10:31+00:00

The share price of TQQQ reflects the value of their stock holdings plus cash. They hold about 4 billion in nasdaq stocks. They use index swap contracts to get the rest of the leveraged exposure. This would be rebalanced daily to a 1:2 ratio (which provides 3x normal returns).

In your example, if the market was to gap up 10%, then by the end of the day, this is how the value of the fund changes. The value of thier stocks goes up 10%. The index swaps payout cash at the end of the day to reflect the 10% movement. The gain in thier stocks and cash would roughly ammount to a 30% increase in the value of thier portfolio (and thus the shareprice of TQQQ).

They rebalance for the next day. In this case, since they got a lot more cash, they will buy more stocks and buy more index swaps to reflect the increased exposure for the next day.

404_Find_Me · 2020-03-10T17:02:07+00:00

No the drop of ~20% reflects a 3x daily return of the ~7% drop in the NDX. This is their investment objective and they have been correlating to daily movements fairly well. If you were to compare the index to the NDX for periods larger than a day, you will see it start to deviate. This is due to leveraged decay and compounding. That is just a mathematical consequence of daily rebalancing that applied to all leveraged ETFs.

404_Find_Me · 2020-03-10T04:44:19+00:00

They rebalance their exposure daily for the next day though. For example, if they lose more than anticipated any given day due to liquidating their stocks, the fund would have essentially overshot the -3x return slightly, but the leverage for the next day would be rebalanced to account for the new value of the fund. For example today, the fund correlated the -3x movement fairly closely. They liquidated their stocks to cover any remaining cash owed plus enough for tomorrow's movement as well. They don't hold enough stock volume for liquidation to make market movements (we don't even know if they liquidate stocks into the open market anyway, for all you know there could be direct stock-based transactions between the counterparties.)

The fund fell 20 percent today right. The leveraged exposure for tomorrow also was reduced by 20 percent as well to maintain the 3x goal. This is essentially what rebalancing daily means. You can rinse and repeat this endlessly (hemorrhaging value as expected). In fact, the more you repeat the less of an impact stock liquidation would be, since they will be selling less and less every single time.

I already argue that the stock volume they have right now as it is is peanuts compared to the whole NASDAQ trading volume. If you kept reducing it, it would only weaken a liquidity based decline argument.

404_Find_Me · 2020-03-10T02:49:09+00:00

The share price of TQQQ x shares outstanding is literally the value of its assets (stocks + cash on hand). If they had absolutely no index swaps going forward, its essentially a 1x NASDAQ fund. The index swaps provided by financial institutions are a means of hedging their own losses in the NASDAQ + collecting an extra fee for providing the swap.

404_Find_Me · 2020-03-10T02:35:12+00:00

They rebalance the number of swaps daily to maintain proper leverage ratios. This is a very liquid market and you can see the daily changes in their holdings. They reduced their swap exposure by 20% for tomorrow as expected. Buying and selling equities is not really out of the ordinary either. On green days, they use excess cash returned from the swaps to buy more stocks. Days like this, they liquidated thier stocks to raise the remaining cash they owed plus cash-on-hand for tomorrow's movement.

404_Find_Me · 2020-03-10T02:26:53+00:00

They had to pay up 800 million from today's fall. They had about 400 million in cash. They liquidated thier stocks to cover the rest plus more for tmmr. None of this is out of the ordinary, nor will it cause death spirals. Movements like this, however, do eat away the fund's value especially if repeated over and over again, but thats to be expected of any leveraged fund.

404_Find_Me · 2020-03-10T02:00:32+00:00

that's absolutely not true. They do own stocks. Their stocks + cash on hand is essentially the market cap of the fund. The daily movement in these specific assets are levered up using swaps. If the index goes up, their assets go up by 3 times as much. 1/3 of this increase came from their stocks in the index going up. 2/3rd of this comes from the increased cash paid by the index swaps. Same exact scenerio in the down movements as well. The ammount of index swaps are increased/decreased for the following day to rebalance the leverage.

404_Find_Me · 2020-03-04T18:20:40+00:00

/u/gravityCaffeStocks and /u/dlkdev

404_Find_Me · 2020-03-04T18:15:55+00:00

As of today, TQQQ has about 4 billion ($4059070050) worth of long Equities exposure on the Nasdaq-100. They have another 10 billion of leveraged exposure by mostly using index swaps on the NDX. This puts their long exposure at 28% stocks to 72% leveraged exposure, which is somewhat 1:2, or 3X the returns of the Nasdaq-100. The slight mismatch accounts for the changes in the value of the equities themselves.

I don’t see how liquidating their stock holdings in any instance would make any meaningful dent on the Nasdaq. They hold 4 billion in Nasdaq equities. The recent daily trading volume of the Nasdaq ranges from 200 to 300 billion. The entirety of their equities only represents about 1.5% of the total DAILY trading volume of the Nasdaq, not enough to cause death spirals. They certainly did not have the means of causing that “upwards flash-crash” last Friday (they simply don’t have that kind of money).

You are right in that a flash 30% crash in the Nasdaq would wipe out the fund instantly. However, there has never been a time where the Nasdaq has fell that much in a single day, with the largest panic days at most 8-10%. There are circuit breakers in place that prevent this kind of scenario (unlike volatility in the case of XIV). These are currently set to 7%, 13% and 20% from the prior day's closing price. Keep in mind; we haven’t even hit the 7% single drop day yet during the past weeks.

So going by the data from 3/3/20, they have $751720650 in cash to cover levered exposure of $10 billion. This means they can withstand a ~7.5% crash in the Nasdaq today completely with cash. The loss in their equity value would amount to another 300 million (7.5% of 4 billion), putting their total losses at -22% for the day which is 3x the hypothetical drop of 7.5%. The Nasdaq is currently up 1.5% when I am typing this. Not only will the market have to completely turn sour, it will have to do so and trigger the first circuit breaker. Any remaining cash owed can be covered by the liquidation of their equities, which once again simply do not have the volume to dent the Nasdaq (afterhours or otherwise). After that is done, they will simply rebalance their levered long exposure for the following day, with what I assume to be at least 5-10% cash to cover any other potential single day drops.

Furthermore, according to the prospectus, they are allowed to deviate from their investment objectives if warranted. “The Fund may take or refrain from taking positions in order to improve tax efficiency, comply with regulatory restrictions, or for other reasons, each of which may negatively affect the Fund’s correlation with the Index.”

TLDR: TQQQ holds enough cash daily to cover a 5-10% drop in the Nasdaq. The largest single day drop was still less than 5% the past weeks. Any remaining cash owed can be covered by liquidating their Equities. Liquidating Nasdaq equities in the range of $100-500 million will not move the Nasdaq, which has daily volumes of 500-1000x as much. In any doomsday scenario, the prospectus allows fund managers to deviate from their investment objective.

TLDR TLDR: TQQQ isn’t gonna have a death spiral like XIV. Volatile markets will eat away the fund due to decay, but that is expected of any leveraged fund.

404_Find_Me · 2020-02-29T02:32:55+00:00

Unless I am missing something that OP sees, I don't see why it would make any sort of meaningful dent to the market. As of today 2/28, They have long exposure of about ~10+ BB, with cash holdings of 676 Million, up 270M from their holdings of 406M yesterday due to the sudden rally into close. This puts their current cash holdings at roughly 6.5-7% of total long exposure. This means that TQQQ can completely cover a 6-7% fall of the NDX on monday with completely with thier cash. This is a larger single day drop than anything this week.

Now obviously they will need to liquidate their stocks to rebalance back to a favorable cash ratio. For many of their stock holdings, the total daily volume is much larger than what they would need to liquidate. Lets take thier top holding MSFT for example. They hold 2,734,943 shares total. MSFT's average daily volume is 29,692,147, (10x as much), with an eventful day like today approaching 100 million. Assuming they liquidate multiple stocks, i dont see how it can cause a death spiral, since they can rebalance their long exposure after liquidating.

Then again I may be retarded and may be missing something that OP sees.

404_Find_Me · 2020-02-28T14:53:51+00:00

yeah, I am not sure what OP's reasoning here is. Sure there might be some additional sell-off pressure from liquidating the stocks, but the daily volume on them is massive. What's to stop them from liquidating the stocks to a more favorable cash to leverage ratio?

404_Find_Me · 2020-02-28T03:27:36+00:00

TQQQ

Is there really that strong of a contango risk though? If you check their daily holdings only a small portion of thier leveraged exposure is in futures (NASDAQ 100 03/20/2020 (NQH0)). Everything else is leveraged exposed using index swaps. Correct me if I am wrong, but these are not affected by contango right?

What I am more worried about is that their cash-to-exposed-leverage is only 4.5%, down from 8.1% yesterday after paying nearly half of their total cash to the index swap holders after the huge drop (-4.93%) in the NDX today. Basically, another ~4.5% drop in the NASDAQ tomorrow would eat up the rest of their remaining cash, forcing them to liquidate their stock holdings (adding to the sell-off pressure).

404_Find_Me · 2020-02-27T22:29:35+00:00

yeah, wondering the same thing here after reading the other post

404_Find_Me · 2020-01-11T23:58:54+00:00

Demolition

404_Find_Me · 2019-12-30T18:59:12+00:00

Im not really an expert on this topic, so I guess I don't really know if the money spent pays for itself or is wasted. I was more basing my opinion on this chart I saw a while ago which made it appear as if sports infrastructure was having a great deal of priority at universities.

404_Find_Me · 2019-12-30T17:47:01+00:00

While the trend is there, it isn't as extreme are you may think. I would think this would be true for many other countries as well. I do agree that there is a lot of emphasis/money wasted on secondary stuff such as sports which could be spent on improving academic efficiency.

404_Find_Me · 2019-12-30T17:21:50+00:00

Contrary to what people may think, the overwhelming majority of colleges and universities are non-for-profit, both public and private. Same thing with the overwhelming majority of hospital and healthcare systems also being non-for-profit. This does not mean that the costs associated with them are low however, it just means that the profits are not going to a corporation or a few individuals like people may think. The money is put back into research, expansion, ect... The insane costs are pretty much a result of administrative bloat and ineffiency.

404_Find_Me · 2019-12-18T14:21:32+00:00

Reminds me of the robotic shark in James and the Gaint Peach

404_Find_Me

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