More Fallout From The FTX Saga And Tech Layoffs Continue

TL;DR

• The fallout from the FTX saga continues as Sam Bankman-Fried’s companies all file for bankruptcy—it leaves a potential $10 billion shortfall to over one million creditors
• The tech sector layoffs continue with Amazon letting 10,000 workers go
• With layoffs coming from all angles, it appears that companies are positioning themselves for an upcoming recession
• Top weekly and monthly trades

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Major events that could affect your portfolio

So. FTX. In the immortal words of Ron Burgundy, that escalated quickly. What looked to be the case of a short term liquidity crisis has turned out to be (allegedly, just to be safe) one of the largest cases of corporate fraud the world has ever seen. Maybe the largest.

If you’ve not kept up to date with this, at this stage it looks like there has been serious mismanagement of client funds and a total lack of proper accounting and record keeping. Much of this remains to be confirmed, with analysts pulling together pieces of information from various sources.

The crux of the issue appears to be that FTX the platform has been taking client deposits and lending them to Sam Bankman-Fried’s trading company, Alameda Research. As collateral, Alameda Research put up FTX’s own cryptocurrency, FTT token, and then made big, risky bets with the borrowed client money.

Not only did Alameda Research appear to get a lot of these bets wrong, the currency they used for collateral, FTT, has now been almost wiped out. From a high of over $77 late last year, it’s now trading for around $1.50.

FTX, Alameda Research and dozens of other subsidiary companies have declared bankruptcy, leaving an estimated $10 billion hole in the books. Administrators believe there could be up to one million creditors. The contagion has spread to many other companies in the sector, and it’s likely that we’ve not heard the end of this story yet.

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The other big news this week has been more mass layoffs in the tech sector. It seems that the biggest companies in tech have held off the longest, but we’re now starting to see some of the most valuable businesses in the world looking to tighten their belts.

Meta recently announced they’d be laying off 11,000 workers across the globe, and this week Amazon have announced they’ll be downsizing to the tune of 10,000 jobs.

The cuts come despite positive news starting to seep in around inflation, with the headline figure coming in significantly below analysts estimates in October. It’s obviously not been enough to convince senior leadership that they can continue without bringing costs down.

Like many in the sector the layoffs come off the back of what was, in hindsight, over hiring during the pandemic. With lockdowns in force across the world and restaurants, bars, sports clubs and events all shut down, people spent more time at home and more money online.

Many companies hired on the expectation that this was to be the new normal, and have found themselves in a surplus now that life has returned back to how it was pre-pandemic.

This is combined with an uncertain economic outlook, in which marketing budgets and consumer spending is expected to fall. It means that in addition to the layoffs, many companies are also freezing new hiring, leading to a potentially awkward situation for the thousands of staff now out of work.

This week’s top theme from Q.ai

Layoffs tell a different story depending on the company making them. Sometimes it can mean a business is in danger and they’re trying to desperately stay afloat. Other times it can simply be about continuing to maximize shareholder value by keeping costs down.

That perception is often just the difference between a large company and a smaller one. Small or growing companies businesses are often less financially stable, with large headcount reductions potentially a sign of trouble. With big companies, that’s generally not the case.

Large companies tend to have more stable revenue, higher profit margins and less reliance on new clients or customers to stay afloat. It’s why they’re generally able to navigate difficult economic conditions better than growth companies, and why they’re often the last to announce layoffs.

Against this backdrop, we’ve created the Large Cap Kit. It seeks to take advantage of the potential outperformance of large cap stocks compared to small and mid-caps as economic conditions get choppy.

This is structured through the use of a pair trade which goes long on the 1,000 largest companies in the U.S. via a long position in the Russell 1000 ETF, while at the same time going short on the next 2,000 biggest through an investment in an inverse Russell 2000 ETF.

It means that investors can profit off the relative performance in large caps compared to small and mid-caps. Even if the overall market goes down or sideways, investors can profit as long as large caps hold up better.

Top trade ideas

Here are some of the best ideas our AI systems are recommending for the next week and month.

Hudson Technologies (HDSN) – The clean tech company is one of our Top Buys for next week with an A rating in our Quality Value and Growth factors. Revenue is up 78,2% over the last 12 months.

Heartbeam (BEAT) – The digital healthcare company remains our Top Short for next week with our AI rating them an F in Quality Value and Low Momentum Volatility. Net income was -$8.94 million in the 12 months to the end of June.

Fidelity National Information Services (FIS) – The fintech and financial services company is one of our Top Buys for next month with an A rating in our Quality Value factor. Revenue is up 7.1% over the past 12 months.

Biovie Inc (BIVI) – The pharmaceutical company is one of our Top Shorts for next month with our AI rating them an F in Quality Value and a D in Technicals and Low Momentum Volatility. Net income was -$30.96 million in the 12 months to September.

Our AI’s Top ETF trade for the next month is to invest in silver and Australian stocks and to short US Treasury Bonds. Top Buys are the iShares Silver Trust, the ProShares UltraShort 20+ Year Treasury and the iShares MSCI Australia ETF. Top Shorts are the iShares 1-3 Year Treasury Bond ETF and the iShares U.S. Treasury Bond ETF.

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