FT : Grayscale aims for possible loophole with new bitcoin ETF filing

Grayscale aims for possible loophole with new bitcoin ETF filing
If approved, the US-listed vehicle will invest in ‘spot’ bitcoin exchange traded products trading in other countries

Grayscale, manager of the world’s largest cryptocurrency fund, has long been stymied by regulators in its bid to convert its flagship vehicle into an exchange traded fund.

However, it may have found a ruse to partially circumvent the restrictions imposed by the US Securities and Exchange commission.

Grayscale has filed to launch a US-listed ETF that would partly invest in so-called “spot” bitcoin exchange traded products already up and running in other countries.

These ETPs invest directly in “physical” bitcoin, or track the cryptocurrency’s price synthetically — structures the SEC has so far not permitted.

Instead, the SEC has only allowed bitcoin ETFs that trade in futures contracts listed on the Chicago Mercantile Exchange, which is a regulated venue.

This stance has prompted Grayscale to sue the SEC for its refusal to allow the $16.9bn Grayscale Bitcoin Trust (GBTC), a private spot bitcoin trust, to convert to an ETF. A ruling is due by the end of the third quarter.

In the interim, though, Grayscale has filed to launch a Global Bitcoin Composite ETF, which would invest 40 per cent of its assets in spot bitcoin ETPs listed on “major non-US exchanges”, such as in Canada or Europe.

While there is no guarantee that the application will be approved, analysts believe it has a chance given that the overseas ETPs Grayscale is proposing to invest in are regulated securities — precisely the type of asset that the SEC has insisted crypto ETFs hold.

“Grayscale’s filing seems intended to push the envelope with the SEC by using the SEC’s own words against it to launch crypto ETFs,” said Bryan Armour, director of passive strategies research, North America at Morningstar.

“This seems like Grayscale is directly challenging the SEC’s past decision to allow bitcoin futures ETFs on one hand and on the other hand reject spot bitcoin ETFs,” he added.

Todd Rosenbluth, head of research at VettaFi, a consultancy, described the filing “as a creative way of Grayscale trying to offer US-listed product with some spot bitcoin exposure”.

“I think there is greater likelihood of Grayscale getting approval for this ETF than it getting the SEC to voluntarily approve a US-listed spot bitcoin only ETF, which is what Grayscale wants,” he added.

Rosenbluth believed the filing was an “acceptance of the reality that the SEC is not going to give [Grayscale] the green light”, to convert GBTC.

One point in Grayscale’s favour in its latest filing is that vast numbers of US-listed ETFs already hold regulated, non-US securities, mostly in the form of equities and bonds.

Indeed, at least one US ETF already holds foreign-listed spot bitcoin ETFs, appearing to set something of a precedent for the structure.

The $447mn Amplify Transformational Data Sharing ETF (BLOK) has positions in four Toronto-listed spot bitcoin ETFs, although they currently account for just 4.3 per cent of its portfolio, with the balance in stocks of companies involved in blockchain technology.

Grayscale is proposing that its 40 per cent exposure to spot bitcoin ETFs would be weighted equally between five underlying funds.

Rosenbluth also noted the “added irony” of Cathie Wood’s Ark Next Generation Internet ETF (ARKW) having a 6.8 per cent exposure to Grayscale’s GBTC trust, even though the SEC deems GBTC’s structure to be unsuitable for an ETF. The SEC declined to comment.

Even if Grayscale was to get approval for the Global Bitcoin Composite ETF, it is far from certain there would be a huge appetite for the fund, however.

It is proposing that the remaining 60 per cent of the portfolio would be invested in the equity of bitcoin mining companies. Armour was unconvinced there was much demand for such a structure.

“I don’t think investors benefit from access to a 60/40 portfolio of bitcoin miners and a global spot bitcoin fund of funds sleeve,” he said.

“The portfolio is confusing and will do a worse job tracking the spot bitcoin price than a bitcoin futures ETF, so I’m not sure this type of product adds any value aside from parsing out the SEC’s strategy for approving bitcoin-related ETFs.”

Rosenbluth agreed demand might be lacking, saying “combining bitcoin with other investments is not novel but has had limited interest”.

As evidence he cited the Global X Blockchain & Bitcoin Strategy ETF (BITS), which invests in the Global X Blockchain ETF (BKCH) and bitcoin futures, but which holds just $11mn. 

Rosenbluth noted that despite a strong bounce for bitcoin and crypto-related companies after last year’s sharp losses, with the currency itself up 61 per cent so far this year, “demand for ETFs exposed to bitcoin has been limited”.

“Investors seem sceptical the rally can persist and remember the challenges of 2022,” he added.

For instance, although the $1bn ProShares Bitcoin Strategy ETF (BITO), the largest bitcoin futures ETF, was up 57 per cent year to date as of May 12, it had only seen net inflows of $95mn, according to VettaFI’s data. This was not far ahead of the $75mn attracted by the $120mn ProShares Short Bitcoin ETF Strategy (BITI), which takes the opposite bet and is down 44 per cent year to date.

BKCH has returned 69 per cent so far this year but has seen net outflows of $2mn. Likewise the Invesco Alerian Galaxy Crypto Economy ETF (SATO) is up 68 per cent “and has seen no investor interest either”, Rosenbluth added.

Michael Sonnenshein, chief executive of Grayscale, was more bullish, however, arguing that “there is no question, coming out of the crypto winter, that investors’ appetite for crypto remains healthy. It has certainly not gone unnoticed by the crypto community that crypto has achieved some of the highest returns in 2023 to date.”

>>> US After Hours Summary: FTCH +16.8%, PLXS +0.7% higher on earnings/guidance;

After Hours Summary: FTCH +16.8%, PLXS +0.7% higher on earnings/guidance; DXC -5.7%, FLO -4.9%, AMAT -1.5% lower on earnings

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: FTCH +16.8%, PLXS +0.7%, GLOB +0.2%

Companies trading higher in after hours in reaction to news: CPE +1.6% (names new COO), KAI +0.6% (authorizes new $50 mln share repurchase program), GD +0.5% (awarded $490 mln U.S. Army contract), ADI +0.2% (CFO to step down, reaffirms its Q2 guidance), LMT +0.2% (awarded $750 mln and $444 mln US Air Force contracts), SAIC +0.1% (CEO to retire, names new CEO), NSC +0.1% (reaches deal with union on paid sick leave)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: DXC -5.7% (also names new CFO; also authorizes new $1 bln share repurchase program), FLO -4.9%, CVCO -3.9%, AMAT -1.5%, ROST -0.1%

Companies trading lower in after hours in reaction to news: UMH -2% (files mixed securities shelf offering), AMAM -1.9% (names new chairman), RDN -1.7% (names new CFO), ZG -0.3% (names new CFO), FTI -0.1% (awarded significant contract by Equinor), MU -0.1% (to bring extreme ultraviolet (EUV) tech to Japan)

FT : Carl Icahn admits he got bearish bet that cost $9bn wrong

Carl Icahn admits he got bearish bet that cost $9bn wrong
‘If I kept the parameters I always believed in . . .  I would have been fine,’ concedes activist

Carl Icahn has admitted he was wrong to make a huge bet that the market would crash after the ill-fated trade cost his firm nearly $9bn over roughly six years.

According to a Financial Times analysis, the prominent activist investor lost about $1.8bn in 2017 on hedging positions that would have paid out if asset prices had tumbled before losing a further $7bn between 2018 and the first quarter of this year.

“I’ve always told people there is nobody who can really pick the market on a short-term or an intermediate-term basis,” Icahn told the FT in an interview to discuss the analysis. “Maybe I made the mistake of not adhering to my own advice in recent years.”

Icahn Enterprises started aggressively betting on a market collapse in the aftermath of the 2008 financial crisis and became increasingly bolder in subsequent years, deploying a complex strategy that involved shorting broad market indices, individual companies, commercial mortgages and debt securities.

At times, Icahn’s notional exposure, the underlying value of the securities he was betting against, exceeded $15bn, regulatory filings show. “You never get the perfect hedge, but if I kept the parameters I always believed in . . . I would have been fine,” he said. “But I didn’t.”

Icahn Enterprises, the listed vehicle majority owned by the activist that allows retail investors to join in his wagers, reported a total of $4.3bn in short losses in 2020 and 2021 as markets quickly rebounded from the pandemic slump following the Federal Reserve’s huge stimulus.

“I obviously believed the market was in for great trouble,” said Icahn. “[But] the Fed injected trillions of dollars into the market to fight Covid and the old saying is true: ‘don’t fight the Fed’.”

The trades have left Icahn in a vulnerable position and threaten to undermine his status as one of the most feared activist investors on Wall Street.

Earlier this month, short seller Hindenburg Research released a report saying it believed the market value of Icahn Enterprises was inflated and its dividend was unsustainable. Shares of the company have fallen by more than 30 per cent since the report was published.

As Icahn’s short bets drained billions of dollars from his investment firm, he ploughed nearly $4bn of his own money into his publicly listed vehicle, filings show. That injection helped keep the firm’s internally calculated investment portfolio value relatively stable.

Icahn exposed himself to another risk by taking out a margin loan that was first disclosed in early 2022. Hindenburg’s report drew attention to the margin loan from Morgan Stanley, against which Icahn pledged 60 per cent of his stake in Icahn Enterprises as collateral.

Hindenburg argued this could lead to his business unravelling if the plunging stock price triggers a margin call that would force Icahn to liquidate some of his stake.

In a statement earlier this month that addressed Hindenburg’s allegations, Icahn Enterprises said Icahn was in “full compliance” with regards to all personal loans and announced a $500mn stock buyback authorisation in a bid to bolster its share price. With regards to its market valuation, the company said that “over time, [our] performance will speak for itself”.

Icahn told the FT that he had used the margin loan to make additional investments and had billions of dollars of cash outside of his public vehicle. “Over the years I have made a great deal of money with money,” he said. “I like to have a war chest and doing that gave me more of a war chest,” he added, referring to the margin loan.

Icahn Enterprises has warned that “a prolonged decline” in its stock price “could increase the likelihood of a foreclosure or forced sale” of Icahn’s stake if he was “subject to a ‘margin call’”.

Earlier this month, Icahn Enterprises revealed federal prosecutors in New York had contacted the company seeking information on its business, including corporate governance, valuations and due diligence.

Icahn’s bearish bets are the main reason his investment portfolio has lost money in every year since 2014. Over the roughly six year period that he lost $9bn on the short bets, the portfolio made about $6bn from his activist wagers, leaving the vehicle with an overall investment loss of nearly $3bn.

Separately, Icahn Enterprises generated $3.5bn of gains during the period by selling companies it controlled — including casinos and a railcar leasing business — that were held outside the investment portfolio.

The net asset value of Icahn Enterprises fell from $7.9bn in 2017 to $5.6bn this month. That poses a potential problem for Icahn, who has historically taken the large $8 a share annual dividend in stock rather than cash. This has caused the number of outstanding shares to more than double over the roughly six-year period, pushing its net asset value per share down from $33 to roughly $16.

Retail investors who took their dividends in cash would have received more than $40 a share during the same period.

As pressure on his firm mounts, Icahn has been forced to rein in his short bets just as some investors fear that a regional banking crisis and the debt ceiling stand-off could result in a sharp market sell-off.

“I still to some extent believe that this economy is not good and there are going to be problems ahead,” Icahn said. “We are still hedged, but not to the extent we were.”

>>> US Gapping down

Gapping down
In reaction to earnings/guidance:

  • BOOT -13.6%, LSPD -13.2%, CSCO -3.7%, MNRO -3.4%, SQM -3%, GRAB -2.8%, NGG -2.4%, STNE -2.3%, VSAT -2%, BABA -1.5% (also approves spin-off)

Other news:

  • NSTG -8.3% (TXG wins injunction in patent litigation with NSTG)
  • APLD -5.7% (files $175 mln mixed shelf securities offering)
  • GFL -3.5% (announces upsizing and pricing of secondary offering by selling shareholders)
  • EVGO -3% (prices offering of 29411765 shares of common stock at $4.25 per share)
  • OUST -2.6% (confirms the ITC has voted to institute an investigation into the unfair trade practices of Hesai Group (HSAI) based in Shanghai China and related entities)
  • MNMD -2.2% (announces enrollment milestone in Phase 2b trial of MM-120)
  • KALU -2.1% (Warrick mill union members ratify labor agreement)
  • FRPT -2% (advances operational improvement plan through Board changes; Current Director Walt George will be named Chair to replace retiring Charles Norris)

Analyst comments:

  • WTRG -1.5% (downgraded to Neutral from Buy at Northcoast)
  • MMP -1.2% (downgraded to Hold from Buy at Stifel)

>>> US Gapping up

Gapping up
In reaction to earnings/guidance:

  • DLO +15.7%, GOOS +13.5%, TTWO +12.8%, BBWI +9.5%, BEKE +6.6%, DOLE +4.6%, CSIQ +4.5%, ZTO +3.9%, EXP +2.4%, BOWL +2%, SNPS +1.9%, WMT +1.4%

Other news:

  • EYPT +10.5% (sold YUTIQ (fluocinolone acetonide intravitreal implant) 0.18mg to Alimera Sciences (ALIM))
  • SONY +4% (assesses partial spin-off)
  • CABA +3.8% (prices offering of 7.25 mln shares of common stock at $12.00 per share)
  • ACET +3% (Preclinical Data on ADI-270 at the American Society of Gene and Cell Therapy (ASGCT) 26th Annual Meeting)
  • TXG +2.8% (TXG wins injunction in patent litigation with NSTG)
  • SNOW +2.2% (in talks to buy search startup Neeva according to The Information)
  • UBA +2% (Regency Centers (REG) to acquire Urstadt Biddle Properties in all-stock transaction valued at approximately $1.4 bln)
  • FGEN +2% (topline data from Company's Phase 3 clinical study of roxadustat for treatment of anemia in patients receiving concurrent chemotherapy treatment for non-myeloid malignancies in China)
  • PLX +1.7% (is eligible to receive a $20 million milestone payment from its commercial partner Chiesi Global Rare Diseases)

Analyst comments:

  • ALB +2% (upgraded to Buy from Neutral at UBS)
  • DT +1.8% (upgraded to Buy from Neutral at BTIG Research)

ok

>>> US Early premarket gappers

Early premarket gappers

  • Gapping up:
    • DLO +16.4%, TTWO +11.8%, BBWI +6.5%, CARA +4.6%, MNMD +4.4%, SONY +4.3%, EXP +4.2%, DOLE +4%, ZTO +3.9%, CSIQ +3.3%, ACET +2.1%, BOWL +2%, SNOW +1.6%, SNPS +1.6%, KD +1.1%, SAP +0.9%, BEKE +0.9%, HOOD +0.8%, CABA +0.7%
  • Gapping down:
    • BOOT -14%, NSTG -7.1%, APLD -5%, CSCO -4.2%, OUST -3.9%, SQM -3.6%, GFL -3.2%, STNE -3.1%, VSAT -2.5%, NGG -2.2%, KALU -2.1%, FRPT -2%, EVGO -1.9%, LITE -1.4%, GTES -1.3%, TXG -1.2%, CB -1%, JNPR -0.8%, AVGO -0.7%, BWMN -0.7%

FT : Geely doubles stake in Aston Martin to 17%

Geely doubles stake in Aston Martin to 17%
Chinese group invests £234mn and becomes carmaker’s third- largest shareholder

Geely has doubled its stake in Aston Martin to 17 per cent, growing the Chinese carmaker’s influence over a company that it has long sought to own.

The group spent £234mn increasing its holding, making it the third-largest shareholder after the consortium of investors led by Aston Martin chair Lawrence Stroll, and Saudi Arabia’s Public Investment Fund, and placing it ahead of Mercedes-Benz.

Geely bought 42mn shares from Stroll’s consortium, and was issued with 28mn new shares at 335p each, a substantial premium over the current share price of 231p.

Geely will be given a seat on the board and has agreed not to increase its holding again until August 2024.

The carmaker has tried to buy Aston Martin several times in the past, including launching a rival bid to Stroll in 2020, and again last summer. It eventually bought a 7 per cent stake on the open market last September.

Geely chief executive Daniel Li told the Financial Times last week that the company “loves the brand” and wanted to “generate synergies” with its current business that includes Lotus and Polestar.

Stroll on Thursday said the deal gave Aston the chance to “access their range of technologies and components”.

>>> Europe : Brokers Upgrades & Downgrades - 18th of May 2023 V2(+)

>>> Up
* BH Macro Raised to Buy at Stifel (+)
* Freenet Raised to Neutral at Redburn (+)
* Heidelberg Materials AG Raised to Buy at Redburn (+)
* IDOX PLC Raised to Buy at Canaccord; PT 80 pence (+)
* Siemens Energy Raised to Buy at Citi; PT 29 euros
* Tecnicas Reunidas Raised to Overweight at Barclays; PT 14 euros
* YouGov Raised to Buy at Numis; PT 1,200 pence (+)

>>> Down
* A2A Cut to Hold at Intesa Sanpaolo; PT 1.87 euros (+)
* Amyris Cut to Hold at Jefferies; PT 65 cents
* BioPharma Credit Cut to Underperform at Jefferies
* Marks & Spencer Cut to Neutral at Citi; PT 170 pence
* Neste Cut to Sell at Redburn (+)
* Santander Cut to Market Perform at KBW; PT 4.26 euros
* Unicaja Cut to Underperform at KBW; PT 1.10 euros

>>> Initiation
* Advanced Medical Rated New Sector Perform at RBC; PT 285 pence

>>> Call
* ArcelorMittal, SSAB, Acerinox Are Citi’s Top EU Steel Picks
* Marks & Spencer Downgraded to Neutral at Citi on Demand Outlook
* Mitchells & Butlers Raised at Jefferies on Improving Outlook
* Santander and Unicaja Both Cut at KBW, UniCredit Still Top Pick
* Siemens Energy Margin Improvement Potential Sees Upgrade at Citi