MAGGIE LAKE: Hello, and welcome to the Real Vision Daily Briefing. It is Thursday, January 27th, 2022. I'm Maggie Lake here with Tommy Thornton of Hedge Fund Telemetry. And we have so much to talk about today. It has been another volatile day, another rocky day. Stocks turning around, now on a three-day losing streak.

And we've got a lot of movement across assets, so we are going to jump right in so we can try to squeeze as much as we can in and get Tommy's insights. But feel free to drop your questions in and we'll get to as many as we can. And Tommy, we were even talking right before we were on that there is an awful lot moving, an awful lot going on. Where do you want to start? Do you want to start with US equities?

TOM THORNTON: Sure, let's go. It's another day where we had this hope bounce, and it failed. And we closed almost on the lows and it's precarious. And I'm looking at a lot of my indicators that are getting oversold. Market sentiment is getting into that extreme zone down to the lows that we track, but here's the problem.

They can stay lower, sentiment that is, it's not a trigger, it's more of a condition. We have had some DeMark by set up nines, which is sort of the start of the true bull sequential countdown. But they can bounce on those nines, but if they don't bounce, we could start to see those red counts go down. And that continues to trend lower and then things get a lot uglier.

And markets typically, I don't want to yell fire at a house theater, but when they crash, they crash from oversold conditions. And today, we have Apple coming out, and I think everybody is expecting and hoping that Apple will save the day and bounce and have decent earnings and we can go with it. But the problem is, starting with JP Morgan, a lot of companies that have squishy earnings absolutely get hammered.

And we've seen that with Netflix, we watched a very sloppy conference call with Tesla last night where they said that they're not going to have any new models. They postponed putting out their $25000 car. And Elon even bizarrely said that they're going to have robo taxis this year. And he said that again and again and again, but that got hammered.

So, I think that right now, if we break to new levels lower, we could see those DeMark sequentials, that countdown 13 start, and that won't be necessarily a straight down shot, but it could be choppy for several more weeks.

MAGGIE LAKE: Yeah. And the problem is that people, we've seen volatility, we've seen declines, and people were thinking about buying the dip, looking for opportunity. And there are some places where the losses look like the kind of place you'd want to do that in. But if you bought the dip, you got killed again here at the end of the week. What can you say to people are trying to figure out what to do and how to time this?

TOM THORNTON: It's hard to time, and that's what I try to specialize in. It's hard to time when you have this steep of a decline and if anything, you can wait and be patient and let some things stabilize for some days, maybe a couple of weeks. And you can catch something a little bit easier when it starts to trend and build some support.

But right now, there's no support. We are really in a precarious risk off position. We're seeing anything that's not nailed down get sold. And you're seeing with the cryptos, and those still have risk to the downside, in my opinion, we had again, we had some DeMark by set up nines, which Raoul talked about, but those are on the daily. And on the weekly, we still have the sequential countdown in progress. And that, to me, is a bigger concern.

MAGGIE LAKE: Yeah. So, you're seeing technicals you don't like. And also, the one thing in that crypto space that's always been the outside risk is regulatory. And now, there's talk of perhaps something coming out of the White House. What are you hearing, and rank that in terms of the kind of risk that might present?

TOM THORNTON: They just reported, and that's why Bitcoin and I'll bet all of them started to fall apart late in the day on Barron's, I think it was, that there was going to be an executive action coming from the White House with regulations for cryptos and Bitcoin. And I think that a lot of bulls want regulation, and I think that would be maybe the best thing that could happen.

Unfortunately, you could have some difficulty in the near term, but regulation would be the best thing for Bitcoin. It would legitimize Bitcoin in many respects if it's going to be an asset that the SEC and the government gets behind.

MAGGIE LAKE: Yeah, rules of the road I think would be welcomed by a lot of people in collaboration with the industry, regulation that's forced coming from one side and perhaps protecting the powers that be in existing institutions is another one. And I think that's where the risk is. Again, these reports haven't been confirmed yet, but it shows there's a fragility in a risk-off environment if you start to get those headlines coming through. So, we'll continue to follow that story closely and bring any updates that we can get on it.

I want to go back to the equity market again. So, the technicals, you don't like it. You don't like the sentiment that you're seeing in some of the price action. If we're looking for further volatility, further downside, how much are we talking about? How painful could this be?

I saw your tweet the other day when you said it's the bottom, but not the buy. It's a bottom, but not the bottom. What should we be anticipating or what are you looking at? What's the downside risk in terms of percentage?

TOM THORNTON: Well, if the market's down roughly 10% and that's actually masking a lot of the serious damage with the average stock down a whole lot more. And that's because the mega cap names have held up and yes, the market was under pressure today, but I'm just going to look real quick. I have these baskets of banks and everything, and those were up across the board. So, Facebook, Amazon, Netflix, Google, the original FANG was up 60 basis points. Apple and Microsoft combined was up 58 basis points.

And so, those are masking a lot of the damage, and everybody knows that. We've seen it for several years, but if they start to give way, and look, Amazon did, Facebook. Has been beat up as well. You're going to see-- Google's off its high. Microsoft had a good report and guidance was okay, but that's still up its high.

If those give way and we have Apple coming up and Apple's the biggest, the best, and if the market doesn't like what they see, we could be down maybe 10% more. But I think we could break 4000 on the S&P. And if things get really, really ugly and I don't know if that's going to be combined with some geopolitical issue with Russia and Ukraine, some fund or bank or entity blowing up, that's possible.

I don't know, we could be in store for 3700, which 3700 is actually the SPY VWAP or right around there, the VWAP from the March low, so that's the volume weighted average price. So, we have basically that's an average price of what people have paid off the low. And that may seem a lot like, oh, that's nothing to worry about, but you also have to look at what in the last year has happened.

You've had the largest amount of inflows ever in one year and 20 years combined inflows into one year. That's a lot of money that if people start to see red and losses, they're going to say, I'm out, and they'll sell. So, I think that if we broke lower, we could get to that VWAP level just for the sake of a lot of supply would hit the market, a lot of people would liquidate and they'd get nervous.

And I don't think we've seen that yet. And I'll be honest, I really was very hopeful that we could get some decent bounce. I bought some long exposure and jumped out of it yesterday during the Fed and shorted some stuff. But honestly, this is a tactical market. It's tricky. If you're trading it, you don't need to be a hero. Keep your sizes smaller, allow some larger stops and try and stay in the game. This is not an easy market, even for pros.

MAGGIE LAKE: Yeah, especially as we have so many things going on at once. Tommy, you mentioned someone gets in trouble, you see some pain, and a lot of times this happens behind the curtain. We can't see it until it blows up or until something happens. We have a question from Achilles, I believe, sorry for mispronouncing that, from The Exchange. Tom, can you talk more about the potential implications of SoftBank on the market or is it already something that's happened?

Fill us in about this because you've been writing about it, and this is one of these headlines. It's incredibly important, but because there is so much news, so much going on, so many earnings economic data coming out that I'm not sure everyone's paying as much attention or is as aware as they should be. So walk us through what you're watching with SoftBank.

TOM THORNTON: Well, one thing that happened today that not a lot of people talked about was the Japanese market. The Nikkei was down hard and it broke a pretty substantial level and it's down 7% year over year. That's a lot for a big market like Japan. SoftBank is the third largest weight in the Nikkei, and they're down off their high about 55%. And that's in 2021 when almost every market in the world outperformed dramatically.

And if you look at their holdings, and they have huge concentrated weightings of Uber, WeWork, Alibaba, Grubhub, Compass, the real estate company. All of these are trading near their lows, if they're not on their lows. And here's the problem, and I can't go too far into this because we'll stay here for two hours. I could, but I've got to go to New York and have a dinner tonight.

But basically, they haven't sold enough stock that is SoftBank. And they're holding on to all these positions that are getting underwater and they're levered a lot. They have a huge amount of debt. In late 2019, they offered their employees up to $20 billion of leverage to put into their funds. It gets to a point where a lot of people will get margin calls with all these different stocks that they're in.

And they have some pretty sticky investors with a lot of sovereign wealth funds and a lot of them in the Middle East and they don't normally get nervous because they've got basically unlimited amounts of money, but they may be starting to sweat a little bit with what's happening. Today, just insane, their CEO came out and said, I'm leaving unless my compensation is $1 billion.

Now it takes, pardon my French. It takes balls to ask for a billion dollars in comp when your firm is imploding, and this guy was a telecom expert. He was the guy that came in to merge Sprint, T-Mobile, all of them. And he's a pretty significant guy. And he oversaw 48 companies in their portfolio and they have an internal rate of return that they reported last September of 85% that this guy says that that was their return.

Now I think that's complete BS because if you look at all the recent stuff that they've had, they have a huge position in DiDi. And that's about to get delisted and China has declared war on a lot of these tech companies. Right out of the gate, the next day after they were public, China came out and basically banned their DiDi's app. And China's government has basically, as I've said several times, declared war on these tech companies.

And Masa Son, the founder of SoftBank, he has 26% of SoftBank, and he's the type of guy that takes big risks on a lot of unicorns and startups, and I would imagine he's very levered. Also, they also own or have 40% in SoftBank of their telecom business that they spun off, and it trades in Japan. And that's down trading at its lows as well.

So, my view is that this is a real risk and there could be a lot of collateral damage of investors, companies when these things start to unwind. It hasn't blown up yet, but this is on my radar as a real risk.

MAGGIE LAKE: And it worries me when you talk about SoftBank because they are so big and their relationships snake throughout the financial system. Is it the kind of company that would present counterparty risk?

TOM THORNTON: Yeah, absolutely. Mizuno is one of their biggest banks. I'm sure Nomura, all of the Japanese banks have a little piece of this and they all have investors that are long SoftBank. Yeah, there's huge risk and that's the big risk in the banking system is if this thing starts to really unwind. This may be the boy who cried wolf type of situation, but the way I see it, this is a real risk to keep on the radar. Just put it on the asset liability side, I think this is the liability side on risk.

MAGGIE LAKE: Yeah, and again, worry when we have a lot of volatility in many places and things happening, and then if you have that on top of it, that's the cause for concern. And this is always when this happens, when we start to see-- speaking of outsized moves and things that can suddenly connect and they're not normally and the volatility we're seeing, nat gas today, in fact, Bo from the RV site, asked about that. People couldn't believe their screens. What was it? Up 70% at some point today? Hopefully, no one was on the other side of that. What's going on there?

TOM THORNTON: Well, there are a lot of people on the other side of that. That's why it went up as much as it did. And I have a lot of contacts and people that I chat with, and I was talking with a very smart natural gas trader based in Texas, and he said that their weather models that everybody watches in Europe went from warm to cold and then it got colder and Europe starts on that, it gets colder in Europe and then those models turn more cold than in the US.

I don't really understand it. But basically, he said that there was an expiration and there was someone selling five strike calls and in size, obviously, and that's what started it, exacerbated it and I guess we've learned that you don't want to sell calls naked in natural gas, just like that guy, the option seller guy several years ago who blew himself up and his clients.

MAGGIE LAKE: Yeah, well, hopefully that's not going to be a repeat, not particularly to that guy, but somebody who has this situation. We'll have to see. I want to go back to the US equity market for a moment, and we saw a little bit before we enter this really volatile period, in the beginning, we were seeing declines, but it looked like a rotation, a rotation out of tech, mega tech into value and a lot of conversations about flow.

Alf sat down and had a conversation with Robin Wigglesworth, and they were talking about the role of indexing in the market. Let's have a listen to that clip and then we'll talk about it on the other side.

ROBIN WIGGLESWORTH: Now this is the thing, right? I'm always think struck by the arguments of people that say these things seem to have such low view of markets. And I think markets work pretty dang well. Like, yeah, value has had a shocker for a decade. I saw a study that showed, with a lot of assumptions, it was the worst run for value stocks since basically stock markets were invented in Amsterdam in the 1600s, like a two-century drawdown. That's incredible, right?

But value has come back. But if index funds were so dominant, that wouldn't have happened. People say, well, Apple is the biggest company because index funds keep buying it, but Apple is an absolute cash machine, right? It just sells an insane amount, but actually not that highly valued.

Did Tesla jump by an amazing amount in 2020 because it was included in indexes and index funds have to buy it? Lots of people think so. But I think again, it's how the market can wrap itself up in these narratives, where I think a lot of Tesla bros essentially always want some excuse to buy Tesla.

And when Tesla finally turned a profit and became eligible for S&P 500 inclusion, they decided, well, obviously lots of dumb money is going to flow in, so we're going to push the stock up. And it went up by an insane amount in 2020. Around when the index funds actually added Tesla, was there a meaningful price up drift? No. You can say that we're taking advantage of, the index funds were the suckers at the table because they had to buy at this inflated price.

And that is true, but index funds also bought Lehman. They also bought WorldCom. They also bought Enron. They bought all sorts of crappy companies that went to zero. But they also bought all the Amazons, all the Apples. In practice, like you said, the data's pretty irrefutable across every asset class is certainly large cap equities. Indexing works in the long run, and it's really hard to fight that core data there.

MAGGIE LAKE: And that interview is available on Essential Plus and Pro. Tommy, what do you make of that?

TOM THORNTON: Well, he's right, and I'm a big fan of his. His books are fantastic and his writing is great. Look, I'm a little concerned about passive investing at this point. And he's right that you've had all these companies in the S&P and they've blown up Lehman, Enron, WorldCom, you name it. The problem I have right now is looking at Tesla.

They put Tesla in and it was almost a trillion dollars or 700 billion company, to go in and it captured a wide amount of weight in the index. My biggest concern about that is that you have a lot of stocks, the majority of stocks are such a small weighting, and then you have these five to seven mega cap stocks that do all the work.

MAGGIE LAKE: Yeah. And by the way, you've been very brave to take these views because you do talk about the risks that you see around Tesla. And a lot of people just don't want to deal with the blowback from the hardcore fans. So, I always applaud you for that.

TOM THORNTON: It's not personal. It's not personal. It's all technical.

MAGGIE LAKE: Yeah, exactly. What do you see, in terms of we've got the passive investing that's been a worry for some people, the kind of retail participation, increased retail participation now as we head in, it