SoftBank and the ESG Challenge

DISCLAIMER: This is not investment advice. Do not make any investment decisions based on the contents of this article. It expresses the author's opinion.

SoftBank and the ESG Challenge

In 1974 two brothers Herbert and Nelson Hunt inherited billions from their father H. L. Hunt, an oil tycoon. Anticipating rising inflation and the related rush-to-precious-metals safety they began stockpiling on silver. They acquired silver via direct purchases and futures contracts for which they took direct physical delivery for silver. As the price increased, they borrowed money from banks and leveraged up the buying, thus intensifying the impact. Known as the Silver Thursday, on March 27, 1980, the Hunt brothers missed a margin call. As the silver bubble burst, the market plunged, and silver dropped from nearly $49 to $11.   

In a similar way, in 1990's Hamanaka, aka Mr. Copper, a trader from Japan, cornered the copper market by buying sizable future contracts for Sumitomo, and controlled 5% of the global copper holdings. With that advantage he manipulated the prices and forced out investors who attempted to short the commodity. Eventually he was arrested, prosecuted, and convicted.

Forced out short investors .... Sounds familiar?

If you have been following the markets, you know that short positions in the US markets dropped to their lowest point in more than a decade. For tech stocks, it was at the or close to the lowest level since Goldman Sachs began tracking in 2004. The median S&P 500 stock short interest as a percentage of market capitalization dropped to 1.8% from an average of 2.4%. *

Did all the risks suddenly disappear? Did the world suddenly discover a burgeoning class to inspire sustained long-term increase in corporate earnings? What was driving the sudden surge in the market value?

We know the answers to the above questions. If anything, due to trade wars, coronavirus, and geopolitical tensions, the risks have risen. And the global negative impact of coronavirus economy will lead to sustained decline in demand. Then why such optimism in the market?

In a fast-developing story over the Labor Day Weekend SoftBank disclosed that it was the Nasdaq whale behind the gigantic US equity derivatives trades. The size of trades was record-making large for individual company trades. Once it was disclosed, it made many investors incredibly concerned – triggering a tech stock selloff.

The question is: are SoftBank’s actions unethical, or illegal, or both? I do not have a direct or comprehensive answer to this question. All I can say is that it sounds like a really desperate move – and desperation often leads to governance compromises.

But analyzing the trades and the market behavior with machine learning can hold the answer to what transpired.

What are your thoughts on this? Please share in comments section below.

* See Richard Henderson article Bets Against US Stocks Drop to 15-year Low as Market Rallies in Financial Times August 23, 2020