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Stocks broke key level in sell-off that signals potential for bigger correction

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Monday’s broad-based sell-off pushed stocks below important technical levels, signaling more pain ahead for the market.

“The story you just can’t avoid is the cracking leadership of this market,” said James Paulsen, chief investment strategist at Leuthold Group. In afternoon trading, 10 of 11 major S&P sectors were trading at correction levels Monday, 10 percent or more from their highs.

Consumer discretionary and technology shares, former market stars, were the worst hit Monday, with declines of more than 3 percent. The best performer was the defensive utilities sector, down only 1 percent, followed by real estate, off just a 1.5 percent.

Some tech names were especially hit. President Donald Trump’s criticism of Amazon drove that stock down more than 5 percent, and Intel was off nearly 6 percent on reports Apple would supply its own chips.

“If I look at the global markets, it’s really just the U.S. falling apart,” said Jeff Kleintop, chief global investment strategist with Charles Schwab. “It feels to me it’s a U.S. concentrated thing which makes me think it’s not as much related to trade as it is to technology and maybe regulatory headaches for some businesses coming out of D.C.”

Kleintop said the market has also been dependent on corporate buybacks, and those buyback programs at many companies are expected to be on hold ahead of earnings season, which starts with a slow trickle of reports next week.

“We might feel the impact of no buybacks,” he said. “Today is kind of the first day they go away.”

Alarm bells went off Monday when the S&P 500 closed below its 200-day moving average for the first time since the British voted to leave the European Union in June, 2016. The S&P closed at 2,581, off 2.2 percent.

The 200-day was at 2,589. The widely watched price trend indicator is simply the average of the closing levels of the last 200 sessions.

“We’ve broken it, and we’re sitting below it which shows real selling, and the longer we stay below, the more probability we at least test the Feb. 9 low at 2,530ish,” said Scott Redler, partner with T3Live.com.

The Dow and Russell 2000 also briefly dipped below their 200-day moving average, but the focus was on the S&P. Both also slid below their February lows, but the Dow, at one point down more than 750 points, recovered from that level.

A variety of factors weighed on stocks, as investors sought safety in bonds. That drove yields lower, with the 10-year at 2.72 percent and the 2-year at 2.23 percent. The dollar also fell, and the dollar index was just above the key technical level of 90.

“Volatility is driven by the combination of fears of a trade war and problems with technology and other things , including possible problems with Korea. This is normal. This is the way the market normally behaves. It’s not a surprise but at the end of the day , it’s got to be earnings that drive the market this year,” said Ed Keon, portfolio manager at QMA. Keon said the Chinese response to U.S. metals tariffs was harsher than expected.

The heightened volatility, after last year’s easy march higher for stocks, also sent the VIX up 18 percent Monday to just under 24. It has been as high as 25.72.

Strategists have varying views of how low the market can go before stabilizing and turning higher, but they all see earnings as the next catalyst—and it should be a good one. They also do not believe the market is entering a bear market yet.

According to Thomson Reuters, earnings for the S&P 500 are expected to be up about 18.5 percent in the first quarter, after a near 15 percent gain in the fourth quarter.

“I just think the market’s had a bit of a run of bad luck and after a long period of very strong returns and very dormant volatility, it seems the first step is to sell these days. It’s too bad because I think underlying this market, the fundamentals remain very strong,” said Michael Arone, chief investment strategist at State Street Global Advisors.

“I think what’s likely to happen is now we’ve broken trough the 200 day moving average for the S and P, a level it’s defended three other times, you could continue to see this volatility persist,” Arone said. “My expectation is that when earnings season kicks off in the next several weeks that could provide some support for the market since I expect earnings to be strong.”

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Morgan Stanley had $911 million loss in Q1 tied to Archegos meltdown

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Bill Hwang in 2012

Emile Warnsteker | Bloomberg | Getty Images

Morgan Stanley posted blockbuster results for the first quarter, but a single prime brokerage client cost the firm nearly $1 billion.

In its earnings results, Morgan Stanley said Friday it had a $644 million loss from a “credit event” for that client, as well as $267 million in related trading losses.

That client was Bill Hwang’s Archegos, Morgan Stanley CEO James Gorman said during a conference call with analysts, confirming what a person with knowledge of the situation told CNBC earlier.

While Morgan Stanley was the biggest prime broker to Archegos, other banks suffered larger losses. Credit Suisse, which CNBC has reported was the No. 2 broker to Archegos, took a $4.7 billion hit to unwind the losing bets and shuffled top managers because of the meltdown. Nomura said it could face $2 billion in losses.  

During his scheduled call with analysts to discuss the quarter, Gorman said Archegos owed it $644 million after its meltdown in late March.

“We liquidated some very large single stock positions through a series of block sales culminating on Sunday night, March 28,” Gorman said. “That resulted in a net loss of $644 million which represents the amount the client owed us under the transactions that they failed to pay us.”

He added: “Subsequently, we made a management decision to completely de-risk the remaining smaller long and short positions,” Gorman said. “We decided we would be out of the risk as rapidly as possible, and in so doing, incurred an incremental loss of $267 million. I regard that decision as necessary and money well spent.”

Morgan Stanley may have been misled by the family office, CFO Jon Pruzan said during the call. The bank held collateral for Archegos based on facts that turned out to be untrue, he said.

Archegos representatives could not immediately be located for comment. Its previous communications firm said it no longer represented the family office.

At least part of the Archegos loss was driven by the fact that Morgan Stanley had been an underwriter on ViacomCBS shares the previous week, so it held off selling a block of the company’s stock until Sunday, which caused the bank to be later in selling than others, Gorman said.

During the call, an analyst asked Gorman if the episode would change the firm’s approach to risk management in the prime brokerage business.

“I think we’ll certainly be looking hard at family office-type relationships where they are very concentrated and you have multiple prime brokers and frankly, the transparency and lack of disclosure relating to those institutions is just different” from hedge funds, Gorman said. “That’s something I’m sure the SEC is going to be looking at and that’s probably good for the whole industry.”

— CNBC’s Dawn Giel contributed to this report.

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‘Roaring Kitty’ stands to rake in millions on his GameStop options bet Friday

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The Reddit logo is seen on a smartphone in front of a displayed Wall Street Bets logo in this illustration taken January 28, 2021.

Dado Ruvic | Reuters

It could be a big payday for Keith Gill, the Reddit trading crowd’s favorite and the man who inspired the epic GameStop short squeeze.

Friday is the expiration date of Gill’s 500 call options contracts he bought at the beginning of 2021. Gill — who goes by DeepF——Value on Reddit and Roaring Kitty on YouTube — attracted an army of day traders who piled into the brick-and-mortar video game stock and call options, pushing the shares up 400% in a single week in January.

GameStop closed at $156.44 a share on Thursday, up 730% for the year. Assuming Gill still holds the contracts and sells them Friday, at a $12 strike price, he will make more than $7 million on his position (The options cost the buyer $10,000 in total.)

It’s unclear if Gill has already closed his position at a profit. His last update on Reddit’s r/WallStreetBets forum was on April 1, which showed 500 outstanding call options in a position worth more than $8 million at the time. (The post was not independently verified by CNBC so we are assuming that it is his actual account.)

Gill has also been holding 100,000 shares of GameStop, which he bought earlier this year at around $27 apiece, according to the screenshots he posts on Reddit. As of April 1, the stake gained more than $16 million. It wasn’t clear if he sold the shares this month.

The investor was a former marketer for Massachusetts Mutual Life Insurance. Through YouTube videos and Reddit posts, Gill encouraged a band of retail traders to squeeze out short selling hedge funds in GameStop.

The action got so wild at one point that brokerages including Robinhood had to restrict trading in the stock as it blew up their clearinghouse margin. The mania also led to a series of congressional hearings featuring Gill around brokers’ practice, and gamifying retail trading.

Gill owned 10,000 shares of GameStop at the end of 2020 and increased his holding to 50,000 shares in January and to 100,000 in mid-February. Judging from the updates he posted on Reddit, he never sold his GameStop stakes amid the monstrous short squeeze or in the aftermath.

The GameStop story is still far from over. Besides the scrutiny the saga brought on around retail trading, the company itself is in the middle of a transformation, hoping to capitalize on the massive rally in the stock price.

GameStop announced a $1 billion stock sale at the beginning of April to accelerate its e-commerce transition led by activist investor and board member Ryan Cohen, who is Chewy’s co-founder. The company also hired former Amazon and Google executive Jenna Owens as its new chief operating officer.

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Danish energy giant Orsted pivots to onshore wind in $684 million deal

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Closeup of a wind turbine nacelle on blue sky.

lupmotion | iStock | Getty Images

Orsted said Friday it had reached an agreement with Brookfield Renewable to purchase a 100% equity interest in the latter’s Irish and U.K. onshore wind business, Brookfield Renewable Ireland.

Orsted said the deal would see it enter Europe’s onshore market. In 2014 the company, which was then known as DONG Energy, divested its last activities in onshore wind to focus on the offshore sector.

According to Orsted, the agreement has an enterprise valuation of 571 million euros ($684 million), although this figure is subject to adjustments. The deal is slated to close in the second quarter of 2021.

Brookfield Renewable Ireland, or BRI, is headquartered in the Irish city of Cork and specializes in the development and operation of onshore wind farms.

Orsted described BRI as having “an attractive portfolio” which includes 389 megawatts (MW) in operation and under construction as well as a development pipeline of over 1 gigawatt (GW).

“In the US, we’ve built a strong onshore business with 4 GW in operation and under construction,” Orsted CEO, Mads Nipper, said in a statement.

“The European market for onshore wind power is expected to grow significantly in the coming years,” Nipper added.

He went on to state his firm’s acquisition of BRI would provide it with “a strong platform that expands our presence in onshore renewables to Europe.”

Europe is home to a well-developed wind energy industry. According to figures from WindEurope, 2020 saw 14.7 GW of wind energy capacity installed there.

The industry body says 80% of these installations were in the onshore sector, with total onshore capacity amounting to 194 GW.

In the U.S., onshore capacity stands at more than 122 GW, according to the American Clean Power Association. China, a dominant force in wind energy, boasts over 278 GW of onshore capacity, the Global Wind Energy Council says.

Capacity refers to the maximum amount that installations can produce, not what they are necessarily generating.

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