Richard Dobatse, a Navy medic in San Diego, dabbled infrequently in stock trading. But his behavior changed in 2017 when he signed up for Robinhood, a trading app that made buying and selling stocks simple and seemingly free. Mr. Dobatse, now 32, said he had been charmed by Robinhood’s one-click trading, easy access to complex investment products, and features like falling confetti and emoji-filled phone notifications that made it feel like a game. After funding his account with $15,000 in credit card advances, he began spending more time on the app. As he repeatedly lost money, Mr. Dobatse took out two $30,000 home equity loans so he could buy and sell more speculative stocks and options, hoping to pay off his debts. His account value shot above $1 million this year — but almost all of that recently disappeared. This week, his balance was $6,956. “When he is doing his trading, he won’t want to eat,” said his wife, Tashika Dobatse, with whom he has three children. “He would have nightmares.” Millions of young Americans have begun investing in recent years through Robinhood, which was founded in 2013 with a sales pitch of no trading fees or account minimums. The ease of trading has turned it into a cultural phenomenon and a Silicon Valley darling, with the start-up climbing to an $8.3 billion valuation. It has been one of the tech industry’s biggest growth stories in the recent market turmoil. But at least part of Robinhood’s success appears to have been built on a Silicon Valley playbook of behavioral nudges and push notifications, which has drawn inexperienced investors into the riskiest trading, according to an analysis of industry data and legal filings, as well as interviews with nine current and former Robinhood employees and more than a dozen customers. And the more that customers engaged in such behavior, the better it was for the company, the data shows. Thanks for reading The Times. Subscribe to The Times More than at any other retail brokerage firm, Robinhood’s users trade the riskiest products and at the fastest pace, according to an analysis of new filings from nine brokerage firms by the research firm Alphacution for The New York Times. In the first three months of 2020, Robinhood users traded nine times as many shares as E-Trade customers, and 40 times as many shares as Charles Schwab customers, per dollar in the average customer account in the most recent quarter. They also bought and sold 88 times as many risky options contracts as Schwab customers, relative to the average account size, according to the analysis. The more often small investors trade stocks, the worse their returns are likely to be, studies have shown. The returns are even worse when they get involved with options, research has found. This kind of trading, where a few minutes can mean the difference between winning and losing, was particularly hazardous on Robinhood because the firm has experienced an unusual number of technology issues, public records show. Some Robinhood employees, who declined to be identified for fear of retaliation, said the company failed to provide adequate guardrails and technology to support its customers. Those dangers came into focus last month when Alex Kearns, 20, a college student in Nebraska, killed himself after he logged into the app and saw that his balance had dropped to negative $730,000. The figure was high partly because of some incomplete trades. “There was no intention to be assigned this much and take this much risk,” Mr. Kearns wrote in his suicide note, which a family member posted on Twitter. Like Mr. Kearns, Robinhood’s average customer is young and lacks investing know-how. The average age is 31, the company said, and half of its customers had never invested before. Some have visited Robinhood’s headquarters in Menlo Park, Calif., in recent years to confront the staff about their losses, said four employees who witnessed the incidents. This year, they said, the start-up installed bulletproof glass at the front entrance. “They encourage people to go from training wheels to driving motorcycles,” Scott Smith, who tracks brokerage firms at the financial consulting firm Cerulli, said of Robinhood. “Over the long term, it’s like trying to beat the casino.” At the core of Robinhood’s business is an incentive to encourage more trading. It does not charge fees for trading, but it is still paid more if its customers trade more. That’s because it makes money through a complex practice known as “payment for order flow.” Each time a Robinhood customer trades, Wall Street firms actually buy or sell the shares and determine what price the customer gets. These firms pay Robinhood for the right to do this, because they then engage in a form of arbitrage by trying to buy or sell the stock for a profit over what they give the Robinhood customer. This practice is not new, and retail brokers such as E-Trade and Schwab also do it. But Robinhood makes significantly more than they do for each stock share and options contract sent to the professional trading firms, the filings show. For each share of stock traded, Robinhood made four to 15 times more than Schwab in the most recent quarter, according to the filings. In total, Robinhood got $18,955 from the trading firms for every dollar in the average customer account, while Schwab made $195, the Alphacution analysis shows. Industry experts said this was most likely because the trading firms believed they could score the easiest profits from Robinhood customers. Vlad Tenev, a founder and co-chief executive of Robinhood, said in an interview that even with some of its customers losing money, young Americans risked greater losses by not investing in stocks at all. Not participating in the markets “ultimately contributed to the sort of the massive inequalities that we’re seeing in society,” he said. Mr. Tenev said only 12 percent of the traders active on Robinhood each month used options, which allow people to bet on where the price of a specific stock will be on a specific day and multiply that by 100. He said the company had added educational content on how to invest safely. He declined to comment on why Robinhood makes more than its competitors from the Wall Street firms. The company also declined to comment on Mr. Dobatse or provide data on its customers’ performance. Robinhood does not force people to trade, of course. But its success at getting them do so has been highlighted internally. In June, the actor Ashton Kutcher, who has invested in Robinhood, attended one of the company’s weekly staff meetings on Zoom and celebrated its success by comparing it to gambling websites, said three people who were on the call. Mr. Kutcher said in a statement that his comment “was not intended to be a comparison of business models nor the experience Robinhood provides its customers” and that it referred “to the current growth metrics.” He added that he was “absolutely not insinuating that Robinhood was a gambling platform.” ImageRobinhood’s co-founders and co-chief executives, Baiju Bhatt, left, and Vlad Tenev, created the company to make investing accessible to everyone. Robinhood’s co-founders and co-chief executives, Baiju Bhatt, left, and Vlad Tenev, created the company to make investing accessible to everyone.Credit...via Reuters Robinhood was founded by Mr. Tenev and Baiju Bhatt, two children of immigrants who met at Stanford University in 2005. After teaming up on several ventures, including a high-speed trading firm, they were inspired by the Occupy Wall Street movement to create a company that would make finance more accessible, they said. They named the start-up Robinhood after the English outlaw who stole from the rich and gave to the poor. Robinhood eliminated trading fees while most brokerage firms charged $10 or more for a trade. It also added features to make investing more like a game. New members were given a free share of stock, but only after they scratched off images that looked like a lottery ticket. The app is simple to use. The home screen has a list of trendy stocks. If a customer touches one of them, a green button pops up with the word “trade,” skipping many of the steps that other firms require. Robinhood initially offered only stock trading. Over time, it added options trading and margin loans, which make it possible to turbocharge investment gains — and to supersize losses. The app advertises options with the tagline “quick, straightforward & free.” Customers who want to trade options answer just a few multiple-choice questions. Beginners are legally barred from trading options, but those who click that they have no investing experience are coached by the app on how to change the answer to “not much” experience. Then people can immediately begin trading. Before Robinhood added options trading in 2017, Mr. Bhatt scoffed at the idea that the company was letting investors take uninformed risks. “The best thing we can say to those people is ‘Just do it,’” he told Business Insider at the time. In May, Robinhood said it had 13 million accounts, up from 10 million at the end of 2019. Schwab said it had 12.7 million brokerage accounts in its latest filings; E-Trade reported 5.5 million. That growth has kept the money flowing in from venture capitalists. Sequoia Capital and New Enterprise Associates are among those that have poured $1.3 billion into Robinhood. In May, the company received a fresh $280 million. “Robinhood has made the financial markets accessible to the masses and, in turn, revolutionized the decades-old brokerage industry,” Andrew Reed, a partner at Sequoia, said after last month’s fund-raising. Image Robinhood shows users that its options trading is free of commissions. Robinhood shows users that its options trading is free of commissions. Mr. Tenev has said Robinhood has invested in the best technology in the industry. But the risks of trading through the app have been compounded by its tech glitches. In 2018, Robinhood released software that accidentally reversed the direction of options trades, giving customers the opposite outcome from what they expected. Last year, it mistakenly allowed people to borrow infinite money to multiply their bets, leading to some enormous gains and losses. Robinhood’s website has also gone down more often than those of its rivals — 47 times since March for Robinhood and 10 times for Schwab — according to a Times analysis of data from Downdetector.com, which tracks website reliability. In March, the site was down for almost two days, just as stock prices were gyrating because of the coronavirus pandemic. Robinhood’s customers were unable to make trades to blunt the damage to their accounts. Four Robinhood employees, who declined to be identified, said the outage was rooted in issues with the company’s phone app and servers. They said the start-up had underinvested in technology and moved too quickly rather than carefully. Mr. Tenev said he could not talk about the outage beyond a company blog post that said it was “not acceptable.” Robinhood had recently made new technology investments, he said. Plaintiffs who have sued over the outage said Robinhood had done little to respond to their losses. Unlike other brokers, the company has no phone number for customers to call. Mr. Dobatse suffered his biggest losses in the March outage — $860,000, his records show. Robinhood did not respond to his emails, he said, adding that he planned to take his case to financial regulators for arbitration. “They make it so easy for people that don’t know anything about stocks,” he said. “Then you go there and you start to lose money.”
DDDD - Retail Investors, Bankruptcies, Dark Pools and Beauty Contests
For this week's edition of DDDD (Data-Driven DD), we're going to look in-depth at some of the interesting things that have been doing on in the market over the past few weeks; I've had a lot more free time this week to write something new up, so you'll want to sit down and grab a cup of coffee for this because it will be a long one. We'll be looking into bankruptcies, how they work, and what some companies currently going through bankruptcies are doing. We'll also be looking at some data on retail and institutional investors, and take a closer look at how retail investors in particular are affecting the markets. Finally, we'll look at some data and magic markers to figure out what the market sentiment, the thing that's currently driving the market, looks like to help figure out if you should be buying calls or puts, as well as my personal strategy. Disclaimer - This is not financial advice, and a lot of the content below is my personal opinion. In fact, the numbers, facts, or explanations presented below could be wrong and be made up. Don't buy random options because some person on the internet says so; look at what happened to all the SPY 220p 4/17 bag holders. Do your own research and come to your own conclusions on what you should do with your own money, and how levered you want to be based on your personal risk tolerance.
How Bankruptcies Work
First, what is a bankruptcy? In a broad sense, a bankruptcy is a legal process an individual or corporation (debtor) who owes money to some other entity (creditor) can use to seek relief from the debt owed to their creditors if they’re unable to pay back this debt. In the United States, they are defined by Title 11 of the United States Code, with 9 different Chapters that govern different processes of bankruptcies depending on the circumstances, and the entity declaring bankruptcy. For most publicly traded companies, they have two options - Chapter 11 (Reorganization), and Chapter 7 (Liquidation). Let’s start with Chapter 11 since it’s the most common form of bankruptcy for them. A Chapter 11 case begins with a petition to the local Bankruptcy court, usually voluntarily by the debtor, although sometimes it can also be initiated by the creditors involuntarily. Once the process has been initiated, the corporation may continue their regular operations, overseen by a trustee, but with certain restrictions on what can be done with their assets during the process without court approval. Once a company has declared bankruptcy, an automatic stay is invoked to all creditors to stop any attempts for them to collect on their debt. The trustee would then appoint a Creditor’s Committee, consisting of the largest unsecured creditors to the company, which would represent the interests creditors in the bankruptcy case. The debtor will then have a 120 day exclusive right after the petition date to file a Plan of Reorganization, which details how the corporation’s assets will be reorganized after the bankruptcy which they think the creditors may agree to; this is usually some sort of restructuring of the capital structure such that the creditors will forgive the corporation’s debt in exchange for some or all of the re-organized entity’s equity, wiping out the existing stockholders. In general, there’s a capital structure pecking order on who gets first dibs on a company’s assets - secured creditors, unsecured senior bond holders, unsecured general bond holders, priority / preferred equity holders, and then finally common equity holders - these are the classes of claims on the company’s assets. After the exclusive period expires, the Creditor’s Committee or an individual creditor can themselves propose their own, possibly competing, Restructuring Plan, to the court. A Restructuring Plan will also be accompanied by a Disclosure Statement, which will contain all the financial information about the bankrupt company’s state of affairs needed for creditors and equity holders to make an informed decision about how to proceed. The court will then hold a hearing to approve the Restructuring Plan and Disclosure Statement before the plan can be voted on by creditors and equity holders. In some cases, these are prepared and negotiated with creditors before bankruptcy is even declared to speed things up and have more favorable terms - a prepackaged bankruptcy. Once the Restructuring Plan and Disclosure Statement receives court approval, the plan is voted on by the classes of impaired (i.e. debt will not be paid back) creditors to be confirmed. The legal requirement for a bankruptcy court to confirm a Restructuring Plan is to have at least one entire class of impaired creditors vote to accept the plan. A class of creditors is deemed to have accepted a Restructuring Plan when creditors that hold at least 2/3 of the dollar amount and at least half of the number of creditors vote to accept the plan. After another hearing, and listening to any potential objections to the proposed Restructuring Plan, such as other impaired classes that don't like the plan, the court may then confirm the plan, putting it to effect. This is one potential ending to a Chapter 11 case. A case can also end with a conversion to a Chapter 7 (Liquidation) case, if one of the parties involved file a motion to do so for a cause that is deemed by the courts to be in the best interest of the creditors. In Chapter 7, the company ceases operating and a trustee is appointed to begin liquidating (i.e. selling) the company’s assets. The proceeds from the liquidation process are then paid out to creditors, with the most senior levels of the capital structure being paid out first, and the equity holders are usually left with nothing. Finally, a party can file a motion to dismiss the case for some cause deemed to be in the best interest of the creditors.
The Tale of Two Bankruptcies - WLL and HTZ
Hertz (HTZ) has come into news recently, with the stock surging up to $6, or 1500% off its lows, for no apparent fundamental reason, despite the fact that they’re currently in bankruptcy and their stock is likely worthless. We’ll get around to what might have caused this later, for now, we’ll go over what’s going on with Hertz in its bankruptcy proceedings. To get a clearer picture, let’s start with a stock that I’ve been following since April - Whiting Petroleum (WLL). WLL is a stock I’ve covered pretty extensively, especially with it’s complete price dislocation between the implied value of the restructured company by their old, currently trading, stock being over 10x the implied value of the bonds, which are entitled to 97% of the new equity. Usually, capital structure arbitrage, a strategy to profit off this spread by going long on bonds and shorting the equity, prevents this, but retail investors have started pumping the stock a few days after WLL’s bankruptcy to “buy the dip” and make a quick buck. Institutions, seeing this irrational behavior, are probably avoiding touching at risk of being blown out by some unpredictable and irrational retail investor pump for no apparent reason. We’re now seeing this exact thing play out a few months later, but at a much larger scale with Hertz. So, how is WLL's bankruptcy process going? For anyone curious, you can follow the court case in Stretto. Luckily for Whiting, they’ve entered into a prepackaged bankruptcy process and filed their case with a Restructuring Plan already in mind to be able to have existing equity holders receive a mere 3% of new equity to be distributed among them, with creditors receiving 97% of new equity. For the past few months, they’ve quickly gone through all the hearings and motions and now have a hearing to receive approval of the Disclosure Statement scheduled for June 22nd. This hearing has been pushed back a few times, so this may not be the actual date. Another pretty significant document was just filed by the Committee of Creditors on Friday - an objection to the Disclosure Statement’s approval. Among other arguments about omissions and errors the creditor’s found in the Disclosure Statement, the most significant thing here is that Litigation and Rejection Damage claims holders were treated in the same class as a bond holders, and hence would be receiving part of their class’ share of the 97% of new equity. The creditors claim that this was misleading as the Restructuring Plan originally led them to believe that the 97% would be distributed exclusively to bond holders, and the claims for Litigation and Rejection Damage would be paid in full and hence be unimpaired. This objection argues that the debtors did this gerrymandering to prevent the Litigation and Rejection Damage claims be represented as their own class and able to reject the Restructuring Plan, requiring either payment in full of the claims or existing equity holders not receiving 3% of new equity, and be completely wiped out to respect the capital structure. I’d recommend people read this document if they have time because whoever wrote this sounds legitimately salty on behalf of the bond holders; here’s some interesting excerpts: Moreover, despite the holders of Litigation and Rejection Damage Claims being impaired, existing equity holders will still receive 3% of the reorganized company’s new equity, without having to contribute any new value. The only way for the Debtors to achieve this remarkable outcome was to engage in blatant classification gerrymandering. If the Debtors had classified the Litigation and Rejection Damage Claims separately from the Noteholder claims and the go-forward Trade Claims – as they should have – then presumably that class would reject a plan that provides Litigation and Rejection Damage Claims with a pro rata share of minority equity. The Debtors have placed the Rejection Damage and Litigation Claims in the same class as Noteholder Claims to achieve a particular result, namely the disenfranchisement of the Rejection Damage and Litigation Claimants who, if separately classified, may likely vote to reject the Plan. In that event, the Debtor would be required to comply with the cramdown requirements, including compliance with the absolute priority rule, which in turn would require payment of those claims in full, or else old equity would not be entitled to receive 3% of the new equity. Without their inclusion in a consenting impaired class, the Debtors cannot give 3% of the reorganized equity to existing equity holders without such holders having to contribute any new value or without paying the holders of Litigation and Rejection Damage Claims in full. The Committee submits that the Plan was not proposed in good faith. As discussed herein, the Debtors have proposed an unconfirmable Plan – flawed in various important respects. Under the circumstances discussed above, in the Committee’s view, the Debtors will not be able to demonstrate that they acted with “honesty and good intentions” and that the Plan’s results will not be consistent with the Bankruptcy Code’s goal of ratable distribution to creditors. They’re even trying to have the court stop the debtor from paying the lawyers who wrote the restructuring agreement. However, as discussed herein, the value and benefit of the Consenting Creditors’ agreements with the Debtors –set forth in the RSA– to the Estates is illusory, and authorizing the payment of the Consenting Creditor Professionals would be tantamount to approving the RSA, something this Court has stated that it refuses to do.20 The RSA -- which has not been approved by the Court, and indeed no such approval has been sought -- is the predicate for a defective Plan that was not proposed in good faith, and that gives existing equity holders an equity stake in the reorganized enterprise even though Litigation and Rejection Damage Creditors will (presumably) not be made whole under the Plan and the existing interest holders will not be contributing requisite new value. As a disclaimer, I have absolutely zero knowledge nor experience in law, let alone bankruptcy law. However, from reading this document, if what the objection indicates to be true, could mean that we end up having the court force the Restructuring agreement to completely wipe out the current equity holders. Even worse, entering a prepackaged bankruptcy in bad faith, which the objection argues, might be grounds to convert the bankruptcy to Chapter 7; again, I’m no lawyer so I’m not sure if this is true, but this is my best understanding from my research. So what’s going on with Hertz? Most analysts expect that based on Hertz’s current balance sheet, existing equity holders will most likely be completely wiped out in the restructuring. You can keep track of Hertz’s bankruptcy process here, but it looks like this is going to take a few months, with the first meeting of creditors scheduled for July 1. An interesting 8-K got filed today for HTZ, and it looks like they’re trying to throw a hail Mary for their case by taking advantage of dumb retail investors pumping up their stock. They’ve just been approved by the bankruptcy court to issue and sell up to $1B (double their current market cap) of new shares in the stock market. If they somehow pull this off, they might have enough money raised to dismiss the bankruptcy case and remain in business, or at very least pay off their creditors even more at the expense of Robinhood users.
The Rise of Retail Investors - An Update
A few weeks ago, I talked about data that suggested a sudden surge in retail investor money flooding the market, based on Google Trends and broker data. Although this wasn’t a big topic back when I wrote about it, it’s now one of the most popular topics in mainstream finance news, like CNBC, since it’s now the only rational explanation for the stock market to have pumped this far, and for bankrupt stocks like HTZ and WLL to have surges far above their pre-bankruptcy prices. Let’s look at some interesting Google Trends that I found that illustrates what retail investors are doing. Google Trends - Margin Calls Google Trends - Robinhood Google Trends - What stock should I buy Google Trends - How to day trade Google Trends - Pattern Day Trader Google Trends - Penny Stock The conclusion that can be drawn from this data is that in the past two weeks, we are seeing a second wave of new retail investor interest, similar to the first influx we saw in March. In particular, these new retail investors seem to be particularly interested in day trading penny stocks, including bankrupt stocks. In fact, data from Citadel shows that penny stocks have surged on average 80% in the previous week. Why Retail Investors Matter A common question that’s usually brought up when retail investors are brought up is how much they really matter. The portfolio size of retail investors are extremely small compared to institutional investors. Anecdotally and historically, retail investors don’t move the market, outside of some select stocks like TSLA and cannabis stocks in the past few years. However when they do, shit gets crazy; the last time retail investors drove the stock market was in the dot com bubble. There’s a few papers that look into this with similar conclusions, I’ll go briefly into this one, which looks at almost 20 years of data to look for correlations between retail investor behavior and stock market movements. The conclusion was that behaviors of individual retail investors tend to be correlated and are not random and independent of each other. The aggregate effect of retail investors can then drive prices of equities far away from fundamentals (bubbles), which risk-averse smart money will then stay away from rather than try taking advantage of the mispricing (i.e. never short a bubble). The movement in the prices are typically short-term, and usually see some sort of reversal back to fundamentals in the long-term, for small (i.e. < $5000) trades. Apparently, the opposite is true for large trades; here’s an excerpt from the paper to explain. Stocks recently sold by small traders perform poorly (−64 bps per month, t = −5.16), while stocks recently bought by small traders perform well (73 bps per month, t = 5.22). Note this return predictability represents a short-run continuation rather than reversal of returns; stocks with a high weekly proportion of buys perform well both in the week of strong buying and the subsequent week. This runs counter to the well-documented presence of short-term reversals in weekly returns.14,15 Portfolios based on the proportion of buys using large trades yield precisely the opposite result. Stocks bought by large traders perform poorly in the subsequent week (−36 bps per month, t = −3.96), while those sold perform well (42 bps per month, t = 3.57). We find a positive relationship between the weekly proportion of buyers initiated small trades in a stock and contemporaneous returns. Kaniel, Saar, and Titman (forthcoming) find retail investors to be contrarians over one-week horizons, tending to sell more than buy stocks with strong performance. Like us, they find that stocks bought by individual investors one week outperform the subsequent week. They suggest that individual investors profit in the short run by supplying liquidity to institutional investors whose aggressive trades drive prices away from fundamental value and benefiting when prices bounce back. Barber et al. (2005) document that individual investors can earn short term profits by supplying liquidity. This story is consistent with the one-week reversals we see in stocks bought and sold with large trades. Aggressive large purchases may drive prices temporarily too high while aggressive large sells drive them too low both leading to reversals the subsequent week. Thus, using a one-week time horizon, following the trend can make you tendies for a few days, as long as you don’t play the game for too long, and end up being the bag holder when the music stops.
The Keynesian Beauty Contest
The economic basis for what’s going on in the stock market recently - retail investors driving up stocks, especially bankrupt stocks, past fundamental levels can be explained by the Keynesian Beauty Contest, a concept developed by Keynes himself to help rationalize price movements in the stock market, especially during the 1920s stock market bubble. A quote by him on the topic of this concept, that “the market can remain irrational longer than you can remain solvent”, is possibly the most famous finance quote of all time. The idea is to imagine a fictional newspaper beauty contest that asks the reader to pick the six most attractive faces of 100 photos, and you win if you pick the most popular face. The naive strategy would be to pick the faces that you think are the most attractive. A smarter strategy is to figure out what the most common public perception of attractiveness would be, and to select based on that. Or better yet, figure out what most people believe is the most common public perception of what’s attractive. You end up having the winners not actually be the faces people think are the prettiest, but the average opinion of what people think the average opinion would be on the prettiest faces. Now, replace pretty faces with fundamental values, and you have the stock market. What we have today is the extreme of this. We’re seeing a sudden influx of dumb retail money into the market, who don’t know or care about fundamentals, like trading penny stocks, and are buying beaten down stocks (i.e. “buy the dip”). The stocks that best fit all three of these are in fact companies that have just gone bankrupt, like HTZ and WLL. This slowly becomes a self-fulfilling prophecy, as people start seeing bankrupt stocks go up 100% in one day, they stop caring about what stocks have the best fundamentals and instead buy the stocks that people think will shoot up, which are apparently bankrupt stocks. Now, it gets to the point where even if a trader knows a stock is bankrupt, and understands what bankruptcy means, they’ll buy the stock regardless expecting it to skyrocket and hope that they’ll be able to sell the stock at a 100% profit in a few days to an even greater fool. The phenomenon is well known in finance, and it even has a name - The Greater Fool Theory. I wouldn’t be surprised if the next stock to go bankrupt now has their stock price go up 100% the next day because of this.
What is the smart money doing - DIX & GEX
Alright that’s enough talk about dumb money. What’s all the smart money (institutions) been doing all this time? For that, you’ll want to look at what’s been going on with dark pools. These are private exchanges for institutions to make trades. Why? Because if you’re about to buy a $1B block of SPY, you’re going to cause a sudden spike in prices on a normal, public exchange, and probably end up paying a much higher cost basis because of it. These off-exchange trades account for about one third of all stock volume. You can then use data of market maker activity in these dark pools to figure out what institutions have been doing, the most notable indicators being DIX by SqueezeMetrics. Another metric they offer is GEX, or gamma exposure. The idea behind this is that market markets who sell option contracts, typically don’t want to (or can’t legally) take an actual position in the market; they can only provide liquidity. Hence, they have to hedge their exposure from the contracts they wrote by going long or short on the stocks they wrote contracts to. This is called delta-hedging, with delta representing exposure to the movement of a stock. With options, there’s gamma, which represents the change in delta as the stock price moves. So as stock prices move, the market maker needs to re-hedge their positions by buying or selling more shares to remain delta-neutral. GEX is a way to show the total exposure these market makers have to gamma from contracts to predict stock price movements based on what market makers must do to re-hedge their positions. Now, let’s look at what these indicators have been doing the past week or so. DIX & GEX In the graph above, an increasing DIX means that institutions are buying stocks in the S&P500, and an increasing GEX means that market makers have increasing gamma exposure. The DIX whitepaper, it has shown that a high DIX is often correlated with increased near-term returns, and in the GEX whitepaper, it shows that a decreased GEX is correlated with increased volatility due to re-hedging. It looks like from last week’s crash, we had institutions buy the dip and add to their current positions. There was also a sudden drop in GEX, but it looks like it’s quickly recovered, and we’ll see volatility decreased next week. Overall, we’re getting bullish signals from institutional activity.
Bubbles and Market Sentiment
I’ve long held that the stock market and the economy has been in a decade-long bubble caused by liquidity pumping from the Fed. Recently, the bubble has been accelerated and it’s becoming clearer to people that we are in a bubble. Nevertheless, you shouldn’t short the bubble, but play along with it until it bursts. Bubbles are driven by pure sentiment, and this can be a great contrarian indicator to what stage of the bubble we are in. You want to be a bear when the market is overly greedy and a bull when the market is overly bearish. One of the best tools to measure this is the equity put / call ratio. Put / Call Ratio The put/call ratio dropped below 0.4 last week, something that’s almost never happened and has almost always been immediately followed up by a correction - which it did this time as well. A low put / call ratio is usually indicative of an overly-greedy market, and a contrarian indicator that a drop is imminent. However, right after the crash, the put/call ratio absolutely skyrocketed, closing right above 0.71 on Friday, above the mean put / call ratio for the entire rally since March’s lows. In other words, a ton of money has just been poured into SPY puts expecting to profit off of a downtrend. In fact, it’s possible that the Wednesday correction itself has been exasperated by delta hedging from SPY put writers. However, this sudden spike above the mean for put/call ratio is a contrarian indicator that we will now see a continued rally.
1D RSI on SPY was definitely overbought last week, and I should have taken this as a sign to GTFO from all my long positions. The correction has since brought it back down, and now SPY has even more room to go further up before it becomes overbought again
1D MACD crossed over on Wednesday to bearish - a very strong bearish indicator, however 1W MACD is still bullish
For the bulls, there’s very little price levels above 300, with a small possible resistance at 313, which is the 79% fib retracement. SPY has never actually hit this price level, and has gapped up and down past this price. Below 300, there’s plenty of levels of support, especially between 274 and 293, which is the range where SPY consolidated and traded at for April and May. This means that a movement up will be met with very little resistance, while a movement down will be met with plenty of support
The candles above 313 form an island top pattern, a pretty rare and strong bearish indicator.
The first line of defense of the bulls is 300, which has historically been a key support / resistance level, and is also the 200D SMA. So far, this price level has held up as a solid support last week and is where all downwards price action in SPY stopped. Overall, there’s very mixed signals coming from technical indicators, although there’s more bearish signals than bullish. My Strategy for Next Week While technicals are pretty bearish, retail and institutional activity and market sentiment is indicating that the market still continue to rally. My strategy for next week will depend on whether or not the market opens above or below 300. I’m currently mostly holding long volatility positions, that I’ve started existing on Friday. The Bullish case If 300 proves to be a strong support level, I’ll start entering bullish positions, following my previous strategy of going long on weak sectors such as airlines, cruises, retail, and financials, once they break above the 24% retracement and exit at the 50% retracement. This is because there’s very little price levels and resistance above 300, so any movements above this level will be very parabolic up to ATHs, as we saw in the beginning of 2020 and again the past two weeks. If SPY moves parabolic, the biggest winners will likely be the weakest stocks since they have the most room to go up, with most of the strongest stocks already near or above their ATHs. During this time, I’ll be rolling over half of my profits to VIX calls of various expiry dates as a hedge, and in anticipation of any sort of rug pull for when this bubble does eventually pop. The Bearish case For me to start taking bearish positions, I’ll need to see SPY open below 300, re-test 300 and fail to break above it, proving it to be a resistance level. If this happens, I’ll start entering short positions against SPY to play the price levels. There’s a lot of price levels between 300 and 274, and we’d likely see a lot of consolidation instead of a big crash in this region, similar to the way up through this area. Key levels will be 300, 293, 285, 278, and finally 274, which is the levels I’d be entering and exiting my short positions in. I’ve also been playing with WLL for the past few months, but that has been a losing trade - I forgot that a market can remain irrational longer than I can remain solvent. I’ll probably keep a small position on WLL puts in anticipation of the court hearing for the disclosure statement, but I’ve sold most of my existing positions.
As always, I'll be posting live thoughts related to my personal strategy here for people asking. 6/15 2AM - /ES looking like SPY is going to gap down tomorrow. Unless there's some overnight pump, we'll probably see a trading range of 293-300. 6/15 10AM - Exited any remaining long positions I've had and entered short positions on SPY @ 299.50, stop loss at 301. Bearish case looking like it's going to play out 6/15 10:15AM - Stopped out of 50% of my short positions @ 301. Will stop out of the rest @ 302. Hoping this wasn't a stop loss raid. Also closed out more VIX longer-dated (Sept / Oct) calls. 6/15 Noon - No longer holding any short positions. Gap down today might be a fake out, and 300 is starting to look like solid support again, and 1H MACD is crossing over, with 15M remaining bullish. Starting to slowly add to long positions throughout the day, starting with CCL, since technicals look nice on it. Also profit-took most of my VIX calls that I bought two weeks ago 6/15 2:30PM - Bounced up pretty hard from the 300 support - bull case looks pretty good, especially if today's 1D candle completely engulphs the Friday candle. Also sold another half of my remaining long-dated VIX calls - still holding on to a substantial amount (~10% of portfolio). Will start looking to re-buy them when VIX falls back below 30. Going long on DAL as well 6/15 11:30PM - /ES looking good hovering right above 310 right now. Not many price levels above 300 so it's hard to predict trading ranges since there's no price levels and SPY will just go parabolic above this level. Massive gap between 313 and 317. If /ES is able to get above 313, which is where the momentum is going to right now, we might see a massive gap up and open at 317 again. If it opens below 313, we might see the stock price fade like last week. 6/15 Noon - SPY filled some of the gap, but then broke below 313. 15M MACD is now bearish. We might see gains from today slowly fade, but hard to predict this since we don't have strong price levels. Will buy more longs near EOD if this happens. Still believe we'll be overall bullish this week. GE is looking good. 6/16 2PM - Getting worried about 313 acting as a solid resistance; we'll either probably gap up past it to 317 tomorrow, or we might go all the way back down to 300. Considering taking profit for some of my calls right now, since you'll usually want to sell into resistance. I might alternatively buy some 0DTE SPY puts as a hedge against my long positions. Will decide by 3:30 depending on what momentum looks like 6/16 3PM - Got some 1DTE SPY puts as a hedge against my long positions. We're either headed to 317 tomorrow or go down as low as 300. Going to not take the risk because I'm unsure which one it'll be. Also profit-took 25% of my long positions. Definitely seeing the 313 + gains fade scenario I mentioned yesterday 6/17 1:30AM - /ES still flat struggling to break through 213. If we don't break through by tomorrow I might sell all my longs. Norwegian announced some bad news AH about cancelling Sept cruises. If we move below $18.20 I'll probably sell all my remaining positions; luckily I took profit on CCL today so if options do go to shit, it'll be a relatively small loss or even small gain. 6/17 9:45AM - SPY not being able to break through 313/314 (79% retracement) is scaring me. Sold all my longs, and now sitting on cash. Not confident enough that we're actually going back down to 300, but no longer confident enough on the bullish story if we can't break 313 to hold positions 6/17 1PM - Holding cash and long-term VIX calls now. Some interesting things I've noticed
1H MACD will be testing a crossover by EOD
Equity put/call ratio has plummeted. It's back down to 0.45, which is more than 1 S.D. below the mean. We reached all the way down to 0.4 last time. Will be keeping a close eye on this and start buying for VIX again + SPY puts we this continues falling tomorrow
6/17 3PM - Bought back some of my longer-dated VIX calls. Currently slightly bearish, but still uncertain, so most of my portfolio is cash right now. 6/17 3:50PM - SPY 15M MACD is now very bearish, and 1H is about to crossover. I'd give it a 50% chance we'll see it dump tomorrow, possibly towards 300 again. Entered into a very small position on NTM SPY puts, expiring Friday 6/18 10AM - 1H MACD is about to crossover. Unless we see a pump in the next hour or so, medium-term momentum will be bearish and we might see a dump later today or tomorrow. 6/18 12PM - Every MACD from 5M to 1D is now bearish, making me believe we'd even more likely see a drop today or tomorrow to 300. Bought short-dates June VIX calls. Stop loss for this and SPY puts @ 314 and 315 6/18 2PM - Something worth noting: opex is tomorrow and max pain is 310, which is the level we're gravitating towards right now. Also quad witching, so should expect some big market movements tomorrow as well. Might consider rolling my SPY puts forward 1 week since theoretically, this should cause us to gravitate towards 310 until 3PM on Friday. 6/18 3PM - Rolled my SPY puts forward 1W in case theory about max pain + quad witching end up having it's theoretical effect. Also GEX is really high coming towards options expiry tomorrow, meaning any significant price movements will be damped by MM hedging. Might not see significant price movements until quad witching hour tomorrow 3PM 6/18 10PM - DIX is very high right now, at 51%, which is very bullish. put/call ratio is still very low though. Very mixed signals. Will be holding positions until Monday or SPY 317 before reconsidering them. 6/18 2PM - No position changes. Coming into witching hour we're seeing increased volatility towards the downside. Looking good so far
The Great Unwinding: Why WSB Will Keep Losing Their Tendies
I. The Death of Modern Portfolio Theory, The Loss of Risk Parity, & The Liquidity Crunch SPY 1 Y1 Day Modern portfolio theory has been based on the foundational idea for the past 3 decades that both equities and bonds are inversely correlated. However, as some people have realized, both stocks and bonds are both increasing in value and decreasing in value at the same time. This approach to investing is used pretty much in everyone's 401K, target date retirement plans, or other forms of passive investing. If both bonds and equities are losing value, what will happen to firms implementing these strategies on a more generalized basis known as risk-parity? Firms such as Bridgewater, Bluecrest, and H2O assets have been blowing up. [2,3] Liquidity has been drying up in the markets for the past two weeks. The liquidity crisis has been in the making since the 2008 financial crisis, after the passage of Dodd-Frank and Basel III. Regulations intended to regulate the financial industry have instead created the one of the largest backstops to Fed intervention as the Fed tried to pump liquidity into the market through repo operations. What is a repo?
A repo is a secured loan contract that is collateralized by a security. A repo transaction facilitates the sale and future repurchase of the security that serves as collateral between the two parties: (1) the borrower who owns a security and seeks cash and (2) the lender who receives the security as collateral when lending the cash. The cash borrower sells securities to the cash lender with the agreement to repurchase them at the maturity date. Over the course of the transaction, the cash borrower retains the ownership of the security. On the maturity date, the borrower returns the cash with interest to the lender and the collateral is returned from the lender to the borrower.
Banks like Bank of New York Mellon and JP Morgan Chase act as a clearing bank to provide this liquidity to other lenders through a triparty agreement. In short, existing regulations make it unfavorable to take on additional repos due to capital reserve requirement ratios, creating a liquidity crunch.[7,8,9] What has the Fed done to address this in light of these facts?
In light of the shift to an ample reserves regime, the Board has reduced reserve requirement ratios to zero percent effective on March 26, the beginning of the next reserve maintenance period.
II. Signs of Exhaustion & The Upcoming Bounce is a Trap, We Have Far More to Go A simple indicator to use is the relative strength index (RSI) that a lot of WSB is familiar with. RSI is not the be all and end all. There's tons of indicators that also are indicating we are at a very oversold point. SPY 1 Y1 Day RSI Given selling waves, there are areas of key support and resistance. For reference, I have not changed key lines since my original charts except for the colors. You can check in my previous posts. 247.94 has been critically an area that has been contested many times, as seen in the figure below. For those that bought calls during the witching day, RIP my fellow autists. The rejection of 247.94 and the continued selling below 233.86 signals to me more downside, albeit, it's getting exhausted. Thus, I expect the next area in which we start rallying is 213. SPY 10 Day/30 min Another contrarian indicator for buying calls is that notable people in finance have also closed their shorts. These include Jeffery Gundlach, Kevin Muir, and Raoul Pal.[11,12,13] III. The Dollar, Gold, and Oil As previously stated, cash is being hoarded by not only primary banks, but central banks around the world. This in turn has created a boom in the dollar's strength, despite limitless injections of cash (if you think 1 trillion of Repo is the ceiling, think again) by the Fed. DXY Despite being in a deflationary environment, the DXY has not achieved such levels since 2003. Given the dollar shortage around the world, it is not inconceivable that we reach levels of around 105-107. For disclosure, I have taken a long position in UUP. However, with all parabolic moves, they end in a large drop. To summarize, the Fed needs to take action on its own currency due to the havoc it's causing globally, and will need to crush the value of the dollar, which will likely coincide with the time that we near 180. If we are indeed headed towards 180, then gold will keep selling off. WSB literally screams bloody guhhhhhh when gold sells off. However, gold has been having an amazing run and has broken out of its long term channel. In times of distress and with margin calls, heavy selling of equities selling off of gold in order to raise cash. As previously noted, in this deflationary environment, everything is selling off from stocks, to bonds, to gold. /GC Futures Contracts 5 Y1 Wk What about oil? Given the fall out of the risk parity structure, I'm no longer using TLT inflows/outflows as an indicator. I've realized that energy is the economy. Closely following commodities such as light crude which follow supply and demand more closely have provided a much better leading indicator as to what will happen in equities. Given that, oil will also most likely hit a relief rally. But ultimately, we have seen it reach as low $19/barrel during intraday trading. /CL Futures Contracts 1 Y1 D IV. The Next 5 Years In short, the recovery from this deflationary environment will take years to recover from. The trend down will not be without large bumps. We cannot compare this on the scale of the 2008 financial crisis. This is on the order of 1929. Once we hit near 180, the Fed crushes the dollar, we are in a high likelihood of hitting increased inflation, or stagflation. At this point the Fed will be backed into a corner and forced to raise rates. My targets for gold are around 1250-1300. It may possibly go near to 1000. Oil could conceivably go as low as $15-17/barrel, so don't go all in on the recovery bounce. No matter what, the current rise in gold will be a trap. The continued selling in the S&P is a trap, will bounce, forming another trap, before continuing our painful downtrend. I haven't even mentioned coronavirus and unemployment until now. I've stated previously we are on track to hit around at least 10,000 coronavirus cases by the end of this month. It's looking closer to now 20-30,000. Next month we are looking to at least 100,000 by the end of the April. We might hit 1,000,000 by May or June. Comparison of the 2020 Decline to 1929 ------------------------------------------------------------------------------------------------------------------------------------------------ Chart courtesy of Moon_buzz tl;dr We're going to have a major reflexive rally starting around 213, all the way back to at least to 250, and possibly 270. WSB is going to lose their minds holding their puts, and then load up on calls, declaring we've reached a bottom in the stock market. The next move will be put in place for the next leg down to 182, where certain actors will steal all your tendies on the way down. Also Monday might be another circuit breaker. tl;dr of tl;dr Big bounce incoming. Bear trap starting 213. Then bull trap up around 250-270. We're going down to around 182. tl;dr of tl;dr of tl;dr WSB will be screwed both left and right before they can say guh. Hint: If you want to get a Bloomberg article for free, hit esc repeatedly before the popup appears. If it doesn't work, refresh the article, and keep hitting esc. Remember, do not dance. We are on the cusp of a generational change. Use the money you earn to protect yourselves and others. Financial literacy and knowledge is the key to empowerment and self-change. Some good DD posts: u/bigd0g111 -https://www.reddit.com/wallstreetbets/comments/fmshcv/when_market_bounce_inevitably_comesdont_scream/ u/scarvesandsuspenders - https://www.reddit.com/wallstreetbets/comments/fmzu51/incoming_bounce_vix_puts/ Update 1 3/22/2020 - Limit down 3 minutes of futures. Likely hit -7% circuit breaker on the cash open on Monday at 213 as stated previously. Do not think we will hit the 2nd circuit breaker at 199.06. Thinking we bounce, not too much, but stabilize at least around 202.97. Update 2 3/23/20 9:08 - Watching the vote before making any moves. 9:40 - sold 25% of my SPY puts and 50% of my VXX calls 9:45 - sold another 50% of SPY puts 9:50 - just holding 25% SPY puts now and waiting for the vote/other developments 11:50 - Selling all puts. Starting my long position. 11:55 - Sold USO puts. 12:00 - Purchased VXX puts to vega hedge. 2:45 - Might sell calls EOD. Looks like a lot of positioning for another leg down before going back up. It's pretty common to shake things out in order to make people to sell positions. Just FYI, I do intraday trading. If you can't, just wait for EOD for the next positioning. 3:05 - Seeing a massive short on gold. Large amounts of calls on treasuries. And extremely large positioning for more shorts on SPY/SPX. Will flip into puts. Lot of people keep DM'ing me. I'm only going to do this once. https://preview.redd.it/uvs5tkje1ho41.png?width=2470&format=png&auto=webp&s=c6b632556ca04a26e4e08fb2c9223bfcb84e0901 That said, I'm going back into puts. Just goes to show how tricky the game is. 3:45 - As more shorts cover, going to sell the calls and then flip into puts around the last few min of close. Hope you guys made some money on the cover and got some puts. I'll write a short update later explaining how they set up tomorrow, especially with the VIX dropping so much. 3/24/20 - So the rally begins. Unfortunately misread the options volume. The clearest signal was the VIX dropping the past few days even though we kept swinging lower, which suggested that large gap downs were mostly over and the rally is getting started. Going to hold my puts since they are longer dated. Going to get a few short term calls to ride this wave. 10:20 - VIX still falling, possibility of a major short squeeze coming in if SPY breaks out over 238-239. 10:45 - Opened a small GLD short, late April expiration. 10:50 - Sold calls, just waiting, not sure if we break 238. If we go above 240, going back into calls. See room going to 247 or 269. Otherwise, going to start adding to my puts. https://preview.redd.it/ag5s0hccxmo41.png?width=2032&format=png&auto=webp&s=aad730db4164720483a8b60056243d6e4a8a0cab 11:10 - Averaging a little on my puts here. Again, difficult to time the entries. Do not recommend going all in at a single time. Still watching around 240 closely. 11:50 - Looks like it's closing. Still going to wait a little bit. 12:10 - Averaged down more puts. Have a little powder left, we'll see what happens for the rest of today and tomorrow. 2:40 - Closed positions, sitting on cash. Waiting to see what EOD holds. Really hard trading days. 3:00 - Last update. What I'm trying to do here posting some thoughts is for you guys to take a look at things and make some hypotheses before trading. Getting a lot of comments and replies complaining. If you're tailing, yes there is risk involved. I've mentioned sizing appropriately, and locking in profits. Those will help you get consistent gains. https://preview.redd.it/yktrcoazjpo41.png?width=1210&format=png&auto=webp&s=2d6f0272712a2d17d45e033273a369bc164e2477 Bounced off 10 year trendline at around 246, pretty close to 247. Unless we break through that the rally is over. Given that, could still see us going to 270. 3/25/20 - I wouldn't read too much into the early moves. Be careful of the shakeouts. Still long. Price target, 269. When does the month end? Why is that important? 12:45 - out calls. 12:50 - adding a tranche of SPY puts. Adding GLD puts. 1:00 est - saving rest of my dry powder to average if we still continue to 270. Think we drop off a cliff after the end of the quarter. Just a little humor... hedge funds and other market makers right now. 2:00pm - Keep an eye on TLT and VXX... 3:50pm - Retrace to the 10 yr trend line. Question is if we continue going down or bounce. So I'm going to explain again, haven't changed these lines. Check the charts from earlier. https://preview.redd.it/9qiqyndtivo41.png?width=1210&format=png&auto=webp&s=55cf84f2b9f5a8099adf8368d9f3034b0e3c4ae4 3/26/20 - Another retest of the 10 yr trendline. If it can go over and hold, can see us moving higher. 9:30 - Probably going to buy calls close to the open. Not too sure, seems like another trap setting up. Might instead load up on more puts later today. In terms of unemployment, was expecting close to double. Data doesn't seem to line up. That's why we're bouncing. California reported 1 million yesterday alone, and unemployment estimates were 1.6 million? Sure. Waiting a little to see the price action first. Treasuries increasing and oil going down? 9:47 - Added more to GLD puts. 10:11 - Adding more SPY puts and IWM puts. 10:21 - Adding more puts. 11:37 - Relax guys, this move has been expected. Take care of yourselves. Eat something, take a walk. Play some video games. Don't stare at a chart all day. If you have some family or close friends, advise them not to buy into this rally. I've had my immediate family cash out or switch today into Treasury bonds/TIPS. 2:55pm - https://youtu.be/S74rvpc6W60?t=9 3:12pm - Hedge funds and their algos right now https://www.youtube.com/watch?v=ZF_nUm982vI 4:00pm - Don't doubt your vibe. For those that keep asking about my vibe... yes, we could hit 270. I literally said we could hit 270 when we were at 218. There was a lot of doubt. Just sort by best and look at the comments. Can we go to 180 from 270? Yes. I mentioned that EOM is important. Here's another prediction. VIX will hit ATH again. 2:55pm EST - For DM's chat is not working now. Will try to get back later tonight. Stream today for those who missed it, 2:20-4:25 - https://www.twitch.tv/videos/576598992 Thanks again to WallStreetBooyah and all the others for making this possible. 9:10pm EST Twitter handles (updated) https://www.reddit.com/wallstreetbets/comments/fmhz1p/the_great_unwinding_why_wsb_will_keep_losing/floyrbf/?context=3, thanks blind_guy Not an exhaustive list. Just to get started. Follow the people they follow. Dark pool and gamma exposure - https://squeezemetrics.com/monitodix Wyckoff - https://school.stockcharts.com/doku.php?id=market_analysis:the_wyckoff_method MacroVoices Investopedia for a lot. Also links above in my post. lol... love you guys. Please be super respectful on FinTwit. These guys are incredibly helpful and intelligent, and could easily just stop posting content.
Long Thesis - Progyny - 100% upside - High-growth, profitable company is the only differentiated provider in a large, growing, and underserved market. PGNY’s high-touch, seamless offering helps them stand out against large insurance carriers.
Link to my research report on PGNY Summary High-growth, profitable company is the only differentiated provider in a large, growing, and underserved market. PGNY’s high-touch, seamless offering helps them stand out against large insurance carriers. Covid-19 has shown the importance of benefits for employees and will continue to be the key differentiator for those thinking of changing jobs. According to RMANJ (Reproductive Medicine Associates of New Jersey), 68% of people would switch jobs for fertility benefits. For employers, Progyny reduces costs by including the latest cutting-edge technology in one packaged price, thereby lowering the risk of multiples and increasing the likelihood of pregnancy, keeping employees happy with an integrated, data-driven, concierge service partnering with a selective group of fertility doctors. Upside potential is 2x current price in the next 18 months. Overview Progyny Inc. (Nasdaq: PGNY), “PGNY” or the “Company”, based in New York, NY, is the leading independent fertility and family building benefits manager. Progyny serves as a value-add benefits manager sold to employers who want to improve their benefits coverage and retain and attract the best employees. Progyny offers a comprehensive solution and is truly disrupting the fertility industry. There is no standard fertility cycle, but the below is a good approximation of possible workflows: https://preview.redd.it/7aip8pna9zi51.png?width=941&format=png&auto=webp&s=7ef868a67eae10534bac254ab58fb3d4295aef37
Patient is referred to fertility center for evaluation for Assisted Reproductive Technology (“ART”) procedures, including in-vitro fertilization (“IVF “) and intrauterine insemination (“IUI”). Both can be aided by pharmaceuticals that stimulate egg production in the female patient. IVF involves the fertilization of the egg and sperm in the lab, while IUI is direct injection of the sperm sample into the uterus. Often, IUI is done first as it is less expensive. As success rates of IVF have increased, IUI utilization will likely fall.
Sperm washing is the separation of the sperm from the semen sample for embryo creation, and it enhances the freezing capacity of the sperm. Typically, a wash solution is added to the sample and then a centrifuge is used to undergo separation. This is done in both IUI and IVF.
Some OB/GYN platforms are pursuing vertical integration and offering fertility services directly. The OB would need to be credentialed at the lab / procedure center.
Specialty pharmacy arranges delivery of temperature sensitive Rx. Drug regimens include ovarian stimulation to increase the number of eggs or hormone manipulation to better time fertility cycles, among others.
Oocyte retrieval / aspiration is done under deep-sedation anesthesia in a procedure room, typically in the attached IVF lab. Transfer cycle implantation is done using ultrasound guidance without anesthesia. (Anecdotally, we have been told that only REIs can perform an egg retrieval. We have not been able to validate this).
Many clinics house frozen embryos on-site, while some clinics contract with 3rd parties to manage the process. During an IVF cycle, embryos are created from all available eggs. Single-embryo transfer (“SET”) is becoming the norm, which means that multiple embryos are then cryopreserved to use in the future. A fertility preservation cycle ends here with a female storing eggs for long-term usage (e.g. a woman in her young 20s deciding to freeze her eggs for starting a family later).
Common nomenclature refers to an IVF cycle or an IVF cycle with Intracytoplasmic sperm injection (“ICSI”). From a technical perspective, ICSI and IVF are different forms of embryo fertilization within an ART cycle.
ART clinics are frequently offering ancillary services such as embryo / egg adoption or surrogacy services. More frequently, there are independent companies that help with the adoption process and finding surrogates.
ART procedures are broken into two different types of cycles: a banking cycle is the process by which eggs are gathered, embryos are created and then transferred to cryopreservation. A transfer cycle is typically the transfer of a thawed embryo to the female for potential pregnancy. If a pregnancy does not occur, another transfer cycle ensues. Many REIs are moving towards a banking cycle, freezing all embryos, then transfer cycles until embryos are exhausted or a birth occurs. If a birth occurs with the first embryo, patients can keep their embryos for future pregnancy attempts, donate the embryos to a donation center, or request the destruction of the embryos.
The Company started as Auxogen Biosciences, an egg-freezing provider before changing business models to focus on providing a full-range of fertility benefits. In 2016, they launched with their first 5 employer clients and 110,000 members. As of June 30, 2020, the Company provided benefits to 134 employers and ~2.2 million members, year over year growth of 63%. 134 employers is less than 2% of the total addressable market of “approximately 8,000 self-insured employers in the United States (excluding quasi-governmental entities, such as universities and school systems, and labor unions) who have a minimum of 1,000 employees and represent approximately 69 million potential covered lives in total. Our current member base of 2.1 million represents only 3% of our total market opportunity.” The utilization rate for all Progyny members was less than 1% in 2019, offering significant leverageable upside as the topic of fertility becomes less taboo.
Fertility has historically been a process fraught one-sided knowledge, even more so than the typical physician procedure. Despite the increased availability of information on the internet, women who undergo fertility treatments have often described the experience as “byzantine” and “chaotic”. Outdated treatment models without the latest technology (or the latest tech offered as expensive a la carte options) continue to be the norm at traditional insurance providers as well as clinics that do not accept insurance. Progyny’s differentiated approach, including a high-touch concierge level of service for patients and data-driven decision making at the clinical level, has led to an NPS of 72 for fertility benefits and 80 for the integrated, optional pharmacy benefit. Typically, fertility benefits offered by large insurance carriers are add-ons to existing coverage subject to a lifetime maximum while simultaneously requiring physicians to try IUI 3 – 6 times before authorizing IVF. The success rate of IUI, also known as artificial insemination, is typically less than 10%, even when performed with medication. As mentioned in Progyny’s IPO “A patient with mandated fertility step therapy protocol may be required to undergo three to six cycles of IUI, which has an average success rate range of 5% to 15%, takes place over three to six months and can cost up to $4,000 per cycle (or an aggregate of approximately $12,000 to $24,000), according to FertilityIQ. Multiple rounds of mandated IUI is likely to exhaust the patient's lifetime dollar maximum fertility benefits and waste valuable time before more effective IVF treatment can be begun.” Success Rates for IVF IVF success rates vary greatly by age but were 49% on average for women younger than 35. The graph below shows success rates by all clinics by age group for those that did at least 10 cycles in the specific age group. As an example, for those in the ages 35 – 37, out of 456 available clinics, 425 performed at least 10 cycles with a median success rate of 39.7%. https://preview.redd.it/d2l5dtw89zi51.png?width=4990&format=png&auto=webp&s=5ff2ab9948b94419558a27ac861d4e498dce6713 Progyny’s Smart Cycle is the proprietary method the company has chosen as a “currency” for fertility benefits. As opposed to a traditional fee-for-service model with step-up methods, employers may choose to provide between 2 and unlimited Smart Cycles to employees. This enables employees to choose the provider’s best method. Included in the Smart Cycle, and another indicator of the Company’s forward-thinking methodology, are treatment options that deliver better outcomes (PGS, ICSI, multiple embryo freezing with future implantations). https://preview.redd.it/np577a389zi51.png?width=734&format=png&auto=webp&s=c061a2b24c8515890ba204479b4677893dabf755 As detailed in the chart above, a patient could undergo an IVF cycle that freezes all embryos (3/4 of a Smart Cycle), then transfer 5 frozen embryos (1/4 cycle each; each transfer would occur at peak ovulation, which would take at least 5 months) and use only 2 Smart Cycles. Alternatively, if the patient froze all embryos and got pregnant on the first embryo transfer, they would only use one cycle. Before advances in vitrification (freezing), patients could not be sure that an embryo created in the lab and frozen for later use would be viable, so using only one embryo at a time seemed wasteful. Now, as freezing technology has advanced, undergoing one pharmaceutical regime, one oocyte collection procedure, creating as many embryos as possible, and then transferring one embryo back into the uterus while freezing the rest provides the highest ROI. If the first transferred embryo fails to implant or otherwise does not lead to a baby, the patient can simply thaw the next embryo and try implantation again next month. Included in each Smart Cycle is pre-implantation genetic sequencing (“PGS”) on all available embryos and intracytoplasmic sperm injection (“ICSI”). PGS uses next-generation sequencing technology to determine the viability and sex of the embryo while ICSI is a process whereby a sperm is directly inserted into the egg to start fertilization, rather than allowing the sperm to penetrate the egg naturally. ICSI has a slightly higher rate of successful fertilization (as opposed to simply leaving the egg and sperm in the petri dish). Because Progyny’s experience is denominated in cycles of care, not simply dollars, patients and doctors can focus on what procedures offer the best return. 30% of the Company’s existing network of doctors do not accept insurance of any kind, other than Progyny, which speaks to the value that is provided to doctors and employers. For patients not looking to get pregnant, Progyny offers egg freezing as well. Progyny started as an egg-freezing manager, which allows a woman to preserve her fertility and manage her biological clock. As mentioned previously, pregnancy outcomes vary significantly and align closely with the age of the egg. Egg freezing is designed to allow a woman to save her younger eggs until she is ready to start a family. From an employer’s perspective, keeping younger women in the work force for longer is a cost savings. Vitrification technology has improved significantly since “Freeze your eggs, Free Your Career” was the headline on Bloomberg Businesweek in 2014, but we still don’t yet know the pregnancy rates for women who froze their eggs 5 years ago, but early results are promising and on par with IVF rates for women of similar ages now. From a female perspective, the egg freezing process is not an easy one. The patient is still required to inject themselves with stimulation drugs and the egg retrieval process is the same as in the IVF process (under sedation). The same number of days out of work are required. Using the SmartCycle benefit above as an example, the egg freezing process would require ½ of a Smart Cycle. The annual payment required to the clinic is typically included in the benefits package but may require out-of-pocket expenses covered by the employee. Contrary to popular belief, IVF pregnancies do not have a higher rate of multiples (twins, triplets, etc.), rather in order to reduce out of pocket costs, REIs have transferred multiple embryos to the patient, in the hopes of achieving a pregnancy. If you have struggled for years to get pregnant, and the doctor is suggesting that transferring 3 embryos at once is your best chance at success, you are unlikely to complain, nor are you likely to selectively eliminate an implanted embryo because you now have twins. There are several factors that are making it more likely / acceptable to transfer one embryo at a time, enabling Progyny’s success. https://preview.redd.it/48vk9gc69zi51.png?width=953&format=png&auto=webp&s=2c75a2771a1dd9a079074331b317451f076725ca From the Company: “According to a study published in the American Journal of Obstetrics & Gynecology that analyzed the total costs of care over 400,000 deliveries between 2005 and 2010, as adjusted for inflation, the maternity and perinatal healthcare costs attributable to a set of twins are approximately $150,000 on average, more than four times the comparable costs attributable to singleton births of approximately $35,000, and often exceed this average. In the case of triplets, the costs escalate significantly and average $560,000, sometimes extending upwards of $1.0 million.” “Progyny's selective network of high-quality fertility specialists consistently demonstrate a strong adherence to best practices with a substantially higher single embryo transfer rate. As a result, our members experience significantly fewer pregnancies with multiples (e.g., twins or triplets). Multiples are associated with a higher probability of adverse medical conditions for the mother and babies, and as a byproduct, significantly escalate the costs for employers. Our IVF multiples rate is 3.6% compared to the national average of 16.1%. A lower multiples rate is the primary means to achieving lower high-risk maternity and NICU expenses for our clients.” An educated and supported patient leads to better outcomes. Each patient gets a patient care advocate who interacts with a patient, on average, 15x during their usage of fertility benefits - before treatment, during treatment and post-pregnancy. The Company provides phone-based clinical education and support seven days a week and the Company’s proprietary “UnPack It” call allows patients to speak to a licensed pharmacy clinician who describes the medications included in the package (which contains an average of 20 items per cycle), provides instruction on proper medication administration, and ensures that cycles start on time. The Company’s single medication authorization and delivery led to no missed or delayed cycles in 2018. Previous conference calls have made note of the fact that the Company would like to purchase their own specialty pharmacy and own every aspect of that interaction, which should provide a lift to gross margins. This would allow PGNY to manage both the medication and the treatment, leading to decreased cost of fertility drugs. Under larger carrier programs, carriers manage access to treatment, but PBM manages access to medications, which can lead to a delay in cycle commencement. Progyny Rx can only be added to the Progyny fertility benefits solution (not offered without subscription to base fertility benefits) and offers patients a potentially lower cost fertility drug benefit, while streamlining what is often a frustrating part of the consumer experience. The Progyny Rx solution reduces dispensing and delivery times and eliminates the possibility that a cycle does not start on time due to a specialty pharmacy not delivering medication. Progyny bills employers for fertility medication as it is dispensed in accordance with the individual Smart Cycle contract. Progyny Rx was introduced in 2018 and represented only 5% of total revenue in 2018. By June 30, 2020, Progyny Rx represented 28% of total revenue and increased 15% y/y. The growth rate should slow and move more in line with the fertility benefits solution as the existing customer base adds it to their package. Progyny Rx can save employers 5% on spend for typical carrier fertility benefits or 21% of the drug spend. Prior authorization is not required, and the pre-screened network of specialty pharmacies can deliver within 48 hours. Additionally, PGNY has 1-year contracts, as opposed to 3 – 5 years like standard PBMs, but with guaranteed minimums, allowing them to purchase at discounts and pass part of the savings on to employers – another reason the attachment rate is so high. Large, Underpenetrated Addressable Market Total cycle counts are increasing (below, in 000s), including both freezing cycles and intended-pregnancy cycles. Acceleration in cycle volume is likely driven by a declining birth rate as women wait later in life to start a family, resulting in reduced fertility, as well as the number of non-traditional (LGBT and single parents). Conservatively, we believe cycles can double in the next 8 years, a 7% CAGR. https://preview.redd.it/y6y7jb559zi51.png?width=943&format=png&auto=webp&s=6cc5cdde7c6583d8e943d2675ad3b6ae85f818de Progyny believes its addressable market is the $6.7B spent on infertility treatments in 2017, but these numbers could easily understate the available market and potential patients as over 50% of people in the US who are diagnosed as infertile do not seek treatment. Additionally, according to the Company, 35% of its covered universe did not previously have fertility benefits in place previously, meaning there is a growing population of people who are now considering their fertility options. According to Willis Towers, Watson, ~ 55% of employers offered fertility benefits in 2018. A quick review of CDC stats and FertilityIQ shows a significant disparity in outcomes and emotions for those who are seeking treatment. While technology in the embryo lab is improving rapidly and success rates between clinics should be converging, there continue to be significant outliers. Clinics that follow what are now generally accepted procedures (follicle stimulating hormones, a 5-day incubation period and PGS to determine embryo viability) have seen success rates of at least 40%. There continue to be several providers that offer a mini-IVF cycle or natural IVF cycle. Designed to appeal to cost conscious cash payors, the on average $5,000 costs, is simply IVF without prescription drugs or any add-ons such as PGS. However, the success rates are on par with IUI and there is an abundance of patients over 40 using the service, where the success rates are already low. Additionally, success stories at these clinics frequently align with what is perceived as the worst parts of the process: One clinic offering a natural cycle IVF has a rating at FertilityIQ of ~8.0 with 60% of people strongly recommending it. This clinic performed 2,000 cycles in 2018 (the most recently available data from the CDC), making it one of the top 10 most active fertility center in the US. Their success rate for women under 35 was 23%, as opposed to the national average of 50% for all clinics. For women over 43, the average success rate for the most active 40 clinics in this demographic was 5.0% this clinics success rate was 0.4%. The lower success rate is likely due to the lack of pre-cycle drugs and PGS, but the success rate and the average rating is hard to understand. Part of this could be to the customer service provided by the clinic, or the perceived benefit of having to go into the office less often for check-ups when not doing a medication driven cycle. . Reviews from other clinics with high average customer ratings, but low success rates include: - “start of a journey that consisted of multiple IUI’s with numerous medications, but they were not successful.” - After an IVF retrieval, the couple had two viable embryos, both were transferred the next month” - “The couple started with a series of IUI treatments, three in total that were not successful.” - “After a fresh transfer of two embryos, again another unsuccessful cycle”. - “He suggested transferring 2 due to higher implantation rates, but there is increased rate of twins “ Valuation https://preview.redd.it/tqcykjm39zi51.png?width=6358&format=png&auto=webp&s=b63fd53c054ac5cbacaf9ccc734c7e73f0ea3c32 Progyny’s comps have typically been other high-growth companies that went public in the last two years: 1Life Healthcare (ONEM), Accolade (ACCD), Health Catalyst (HCAT), Health Equity (HQY), Livongo (LVGO), Phreesia (PHR), as well as Teladoc (TDOC). Despite revenue growth that outpaces these companies, PGNY’s revenue multiple of 4.4x 2021E revenue is a 40% discount to the peer group median. PNGY’s lower gross margin is likely limiting the multiple. However, Progyny is the one of the few profitable companies in this group and the only one with realistic EBTIDA margins. SG&A leverage is the most likely driver of increased EBITDA and can be achieved by utilizing data to improve clinical outcomes in the future, but primarily by increased productive of the sales reps, including larger employer wins and larger employee utilization. Perhaps the best direct comp is Bright Horizons (BFAM). BFAM offers childcare as a healthcare benefit where employees can use pre-tax dollars to pay for childcare. BFAM offers both onsite childcare centers built to the employer’s specification (owned by the employer and operated by BFAM), as well as shared-site locations that are open to the public and back-up sitter services. Currently, PGNY is trading at 4.4x 2021E Revenue, in-line with BFAM’s 4.3x multiple. I would argue that PGNY should trade significantly higher given the asset-lite business model and higher ROIC. Recent Results Post Covid-19, fertility treatments came back faster than anticipated, combined with disciplined operations, PGNY drove revenue and EBITDA above 2Q2020 consensus estimates. Utilization is still below historical levels, but management’s visibility led to excellent FY21 revenue estimates (consensus is around $555M, a y/y increase of 62%. 2Q2020 revenue increased 15% to $64.6M, and EBITDA increased 18% to $6.5M, primarily driven by SBC as the 15% revenue was not enough to leverage the additional G&A people hired in the last 18 months. The end of the quarter as fertility docs opened their offices back up for remote visits saw better operating margin. Despite the shutdown in fertility clinics during COVID-19, Progyny was able to successfully add several clients. “The significant majority of the clinics in our network chose to adhere to ASRMs guidelines, and our volume of fertility treatments and dispensing of the related medications declined significantly over the latter part of the quarter. . . Through the end of March and into the first half of April, we saw significant reductions in the utilization of the benefit by our members down to as low as 15%, when compared to the early part of Q1 were 15% of what we consider to be normal levels. In April, the New York Department of Health declared that fertility is an essential health service and stated that clinics have the authority to treat their patients and perform procedures during the pandemic. Then on April 24, ASRM updated its guidelines which were reaffirmed on May 11, advising that practices could reopen for all procedures so long as it could be done in a measured way that is safe for patients and staff.” Revenue increased by $33.8 million, 72% in 1Q2020. This increase is primarily due to a $19.0 million, or 47% increase, in revenue from fertility benefits. Additionally, the Company experienced a $14.8 million or 216% increase in revenue from specialty pharmacy. Revenue growth was due to the increase in the number of clients and covered lives. Progyny Rx revenue growth outpaced the fertility benefits revenue since Progyny Rx went live with only a select number of clients on January 1, 2018 and has continued to add both new and existing fertility benefit solution clients since its initial launch. Competition The only true competition is the large insurance companies, but, as mentioned previously, they are not delivering care the same way. WINFertility is the largest manager of fertility insurance benefits on behalf of Anthem, Aetna and Cigna and are not directly involved in the delivery of care. Carrot is a Silicon Valley startup that recently raised $24M in a Series B with several brand name customers (StitchFix, Slack) where they focus on negotiating discounts at fertility clinics for their customers, who then use after-tax dollars from their employers. Risks to Thesis Though there is risk a large carrier may switch to a model similar to Progyny’s, I believe it is unlikely given the established relationships with REIs at the clinic level, the difficulty of managing a more selective network of providers, and the lack of interest shown previously in eliminating the IUI. It is more likely a carrier would acquire Progyny first.
[Comic Books/Batman] A Death in the Family, or: How DC Comics Let a Phone Vote Kill Robin.
DC Comics has published literally thousands of Batman comics in the character's eighty-odd years of existence, but few are more infamous than A Death in the Family, when DC let fans decide whether Jason Todd, the second character to use the identity of Robin, lived or died. An apology in advance: many primary sources for this drama have been lost to the annals of history: this was the 1980s, the Internet wasn't really a thing yet, so fan discussion around comics mostly took place in Usenet newsgroups and comic book letter columns, both of which are very difficult to find archives of today. I've reconstructed the story as best as I can, but I wish I could find more quotes from fans at the time. Also, SPOILER WARNING. There are unmarked spoilers for Batman comics from the 1980s below this line. Don't say I didn't warn you.
Who was Jason Todd?
Jason Todd was a character introduced in 1983's Batman #357 by writer Gerry Conway and artist Don Newton and under the auspices of editor Len Wein, as a replacement for Dick Grayson as Robin. Grayson had outgrown the pixie boots and scaly shorts of the Robin identity, and graduated to his own identity as Nightwing, over in The New Teen Titans. But Conway felt that Batman still needed a Robin, so Todd was born:
Gerry Conway (writer, Batman and Detective Comics, 1981-1983): I always felt that Batman worked really well with a sidekick like Robin. My interest in the character was the version of Batman as a detective, the version of Batman as a guardian of Gotham. This was prior, I believe, to the deep-dive into the “dark knight” kind of concept of Batman, so, for that end, the idea of a younger sidekick who could bring out a little more levity in the character seemed useful. But Dick Grayson as a character had grown into a young adult and was integral to the Teen Titans series, and had his own life and his own storylines that were developing separately from Batman, and [he] couldn’t really play that secondary role that I was interested in exploring. 
Todd was introduced as the son of two acrobats who had been murdered by Batman's enemy Killer Croc, in a striking similarity to Dick Grayson's origin written forty years prior. Todd would officially become the new Robin in Batman #368, published February 1984, and would continue to go on adventures (written by Conway and then by Doug Moench) with Batman until 1986's Batman #400. During this period, he's probably best remembered for a. being involved in a custody battle between Batman and a vampire, and b. getting the drop on Mongul in the classic Superman story "For the Man Who Has Everything" by writer Alan Moore and artist Dave Gibbons. But then the Crisis happened, and everything changed for Jason.
You don't have a comic book company for almost fifty years without running into some hurdles along the way, especially where characters and continuity are concerned. In 1954, psychologist Frederick Wertham published Seduction of the Innocent, a book asserting that comic books were harming the children of the day, causing them to turn into delinquents. As a result, the bustling superhero genre of comics at the time slowed to a crawl, with most of DC's (then known as National Periodical Publications) characters, such as the Green Lantern and the Flash, ceasing publication and being replaced with comics about talking animals, romance stories, and giant alien monsters. Just a few short years later, in October 1956, creators Robert Kangher and Carmine Infantino would introduce a new version of the Flash in Showcase #4, and the Silver Age of comics had begun. Eventually, the Golden Age Flash was reintroduced, and it was established that the Silver Age characters resided on Earth-One, while the Golden Age characters were from Earth-Two. Everything was fine and dandy, until DC decided things had become too confusing and that they needed to kill their multiverse. In 1986, DC published one of the very first comic crossover events - Crisis on Infinite Earths, an earth-shattering story that pitted almost every hero in company history against the threat of the Anti-Monitor. The outcome was that all the characters and stories from Earth-One, Earth-Two, and several other alternate Earths that had appeared over the years were consolidated into a single, streamlined universe, and with that came changes for several other characters, Jason Todd among them.
The New Jason Todd
After Crisis, new blood was in the Batman editorial offices. Former Batman writer Denny O'Neil had taken over as editor of the Batman family of titles, and he had a different opinion on Robin than that of Wein and Conway before him.
O’Neil: There was a time right before I took over as Batman editor when he seemed to be much closer to a family man, much closer to a nice guy. He seemed to have a love life and he seemed to be very paternal towards Robin. My version is a lot nastier than that. He has a lot more edge to him. 
In keeping with the desire for a darker, edgier Dark Knight (it was the 1980s, after all), this version of Batman debuted without a Robin by his side. Dick Grayson was still Nightwing, but Jason Todd was nowhere to be seen. This darker interpretation of Batman was only solidified once Frank Miller put his touch on the franchise with "Batman: Year One" in Batman #404-407, and the standalone graphic novel The Dark Knight Returns, the impact of which cannot be understated.
The Dark Knight Returns was a pivotal moment in the formation of what we would consider a recognizably “modern” incarnation of Batman, someone who is brooding and dark, a loner who isolates himself from society to obsessively carry out his one man crusade by any brutally violent means necessary. It was also an important milestone for comics a medium when it landed on top of the Young Adult Hardcover New York Times bestsellers list—a feat it only qualified for thanks to its release as a trade paperback in bookstores. For the first time, mainstream audiences were zeroing in on Batman, and not because of a popular TV show or serialized movies, but because of a comic book. 2
Immediately following "Year One," O'Neil asked writer Max Allan Collins to reintroduce Jason Todd as Robin into the continuity, in a storyline titled "Batman: The New Adventures" starting in Batman #408. The new Todd was a delinquent orphan, caught by Batman when he tried to steal the tires from the Batmobile and taken in and trained to be the new Robin. At first, the change was controversial among the fandom, especially given the wildly contrasting takes between Mike W. Barr's softer portrayal of the Dynamic Duo in Detective Comics and the harsher portrayal from creators such as Collins, Jim Aparo, and Jim Starlin (best known now as the creator of Thanos) in Batman. But nobody was clamoring for his death yet, and the intensity of debates around the new Jason Todd, fought out through comic book letter columns, were milder in comparison to those around whether there should be a yellow oval on the Batsuit or not.  Over the next few years, fan hatred for Jason began to grow, as the new incarnation of the character was not only a replacement for a highly beloved character, but also had a lot of anger issues to sort through. But then came the boiling point - Batman #424, written by Starlin and pencilled by Mark Bright, released October 1988. In that story, Todd confronts Felipe, son of a South American diplomat who was heavily involved in the cocaine trade. Batman reasons that, because Felipe has diplomatic immunity, there's nothing he can do to stop him, but Todd thinks otherwise. Felipe falls from a skyscraper to his death, leaving Batman to wonder: "did Felipe fall... Or was he pushed?" (Starlin, for what it was worth, hated Todd from the get-go, and specifically wrote this story to play to the controversy:
Starlin: In the one Batman issue I wrote with Robin featured, I had him do something underhanded, as I recall. Denny had told me that the character was very unpopular with fans, so I decided to play on that dislike. 
He had also tried to have Todd killed beforehand, of AIDS:
Well, I always thought that the whole idea of a kid side-kick was sheer insanity. So when I started writing Batman, I immediately started lobbying to kill off Robin. At one point DC had this AIDS book they wanted to do. They sent around memos to everybody saying “What character do you think we should, you know, have him get AIDS and do this dramatic thing” and they never ended up doing this project. I kept sending them things saying “Oh, do Robin! Do Robin!” And Denny O’Neill said “We can’t kill Robin off”. 
A Death in the Family
By 1988, though, O'Neil had changed his tune. Alan Moore and Brian Bolland's The Killing Joke had left longtime supporting character Batgirl crippled and confined to a wheelchair, to major praise from fans and critics alike, and there was blood in the water. Sales for Batman were at levels not seen for over a decade thanks to the works of Miller and Moore, Tim Burton's Batman feature film was on the horizon, far removed from the camp aesthetic of Adam West and Burt Ward and entirely Robin-free, and fan hatred for Todd was at an all-time high.
Jenette Kahn (publisher, DC Comics, 1976-1989; president, 1981-2003; editor-in-chief, 1989-2003) : Many of our readers were unhappy with Jason Todd. We weren’t certain why or how widespread the discontent was, but we wanted to address it. Rather than autocratically write Jason out of the comics and bring in a new Robin, we thought we’d let our readers weigh in. 
O'Neil and his team of editors brainstormed how they could remove Jason from the story, and the answer was clear: kill him, just as Starlin had suggested time and time again. Recalling the success of a 1982 Saturday Night Livesketch in which Eddie Murphy let viewers vote via phone on whether he would cook or spare a live lobester, O'Neil proposed a similar system to Kahn, who loved the idea. So, A Death in the Family began in Batman #426, written by Starlin and illustrated by Jim Aparo. When Jason receives word that his missing mother is alive, he follows a set of leads across the world to find her, only to discover that she was being blackmailed by the Joker. Jason's mother hands him over to the Clown Prince of Crime, and that's how Batman #427 ends. On the back cover of that issue, DC ran a full-page ad, proclaiming: "Robin Will Die Because the Joker Wants Revenge, But You Can Prevent It With a Telephone Call" and giving two 1-900 numbers: one to call to save Jason, and one to kill him. Two versions of issue #428 were written and drawn. One where Jason lived, and another, where he died. Both went into a drawer in O'Neil's desk, and the fans would choose which one would ever see the light of day. The fans went rabid. One letter, published in Batman #428, read as follows:
"Dear Denny, I heard some of what you are planning for "A Death In the Family" story line, including the phone-in number wrinkle, and I don't want to take any chances whatsoever. Kill him. Your pal, Rich Kreiner."
From 9:00 in the morning on Thursday, September 15, 1988 until 8:00 in the evening on Friday, September 16, fans could call in to either of the two numbers for fifty cents a call and cast their vote. In the end, the votes were tallied: 5,271 voted for Todd to survive, and 5,343 voted for him to die. By a margin of 72 votes, Robin died in the pages of Batman #428, beaten to death with a crowbar by the Joker. The image of Batman cradling Robin's dead body became immediately iconic.
Fan reaction to the story was mixed, despite the seeming fervor for Todd's death and the blood that was on their hands. The letters pages for Batman #430 (1, 2) show a mixture of celebration over Jason's death, remorse over individuals' decisions to vote for death, and hope that Robin's absence would lead to more mature Batman stories in the future. However, every issue of A Death in the Family was a best-seller, and a collected edition was rushed out in early December of 1988, only a week after the final issue in the arc was released to stores. But now that the fan feeding frenzy was (mostly) over, the media feeding frenzy had begun. You don't just kill Robin and get away with it without media attention. USA Today and Reuters ran articles on the story, and DC was besieged with interview requests from radio and TV stations.
O’Neil: I spent three days doing nothing but talking on the radio. I thought it would get us some ink here and there and maybe a couple of radio interviews. I had no idea—nor did anyone else—it would have the effect it did. Peggy [May], our publicity person, finally just said, “Stop, no more, we can’t do anymore,” or I would probably still be talking. She also nixed any television appearances. At the time, I wondered about that but now I am very glad she did, because there was a nasty backlash and I came to be very grateful that people could not associate my face with the guy who killed Robin. 
Internally at DC, there were suspicions that the vote had been rigged in some fashion.
O'Neil: "I heard it was one guy, who programmed his computer to dial the thumbs down number every ninety seconds for eight hours, who made the difference." 
But regardless of whether it was or not, Jason Todd was dead, and he would remain dead for as long as O'Neil stayed at DC - long enough for the phrase to be coined: "nobody in comics stays dead except for Uncle Ben, Bucky, and Jason Todd." But he wouldn't remain dead forever.
Jason would be succeeded by a new Robin, less than a year after his death. In a crossover storyline between Batman and New Titans written by Marv Wolfman and illustrated by George Perez and Jim Aparo, entitled "A Lonely Place of Dying", the character of Tim Drake would be introduced. Unlike Todd and Grayson before him, Drake would challenge the assumptions made about the character of Robin - he figured out Batman's secret identity on his own, and deduced that Batman needed a Robin by his side, to ensure he wouldn't take unneeded risks. Gone were the short pants of yesteryear - Drake wore a full-body suit with an armored cape, and was more of a detective than a fighter. He debuted to mixed reactions, although fans soon grew to love him under the pen of Chuck Dixon, who would be one of the major architects of Batman in the 1990s. Todd would get a second chance at life seventeen years later. In 2005, writer Judd Winick wrote the storyline "Under the Hood," published in Batman #635-641, 645-650, and Annual #25. There, it's revealed that Todd returned to life thanks to an alternate version of Superboy punching reality (it's comics, don't ask) and the aid of R'as al Ghul's Lazarus Pits, and donned the identity of the crime lord the Red Hood in his quest for revenge against the Joker. Todd, as the Red Hood, persists as a popular character today, a lasting symbol of Batman's failure, as he operates as a pragmatic vigilante, willing to take risks Batman isn't. More recently, in July 2020, DC announced a Death in the Family animated interactive feature film in the vein of Black Mirror's "Bandersnatch" - again, viewers can choose whether Todd lives or dies, among other options. Edit: fixed a typo.
2020 Offseason Review Series: The Seattle Seahawks
Seattle Seahawks – 2020 Offseason Review Series
I. Basic Information
Seattle Seahawks – 45th Season, Eleventh under Pete Carroll, Ninth under Russell Wilson Division: NFC West 2019 Record: 11-5
Second in NFC West
Won Wild Card Weekend @ Eagles (17-9)
Lost Divisional Round @ Packers (23-28)
Welcome to the 2020 Offseason Review Series for the Seattle Seahawks. I hope you all are safe, healthy, that the scourge that is gripping the country does not affect you in the future. Like everyone, I want us all to maximize our potential to watch the NFL this year, so lets all do our part – wear a mask, wash your hands, don’t touch your face, avoid sick people, and encourage everyone you know to do the same as well. With that said, lets get into this eleven thousand post proper. After two years of rebuilding “turning” the roster since Pete Carroll jettisoned the Legion of Boom after the 2017 campaign collapsed, the Seahawks entered into the 2020 Offseason with a high bar to satisfy. They have one of the top two quarterbacks in the NFL (the most important position in sports) in Russell Wilson, the best MLB in the NFL in Bobby Wagner, both of whom are on track to be immortalized in Canton when they retire. They have two WRs that would soon be ranked in the NFL Top 100 – Tyler Lockett (65) and DK Metcalf (81). They have their head coach and general manager locked up for two more seasons. The pressure is on to make a deep playoff push sooner rather than later – Pete is the oldest head coach in the NFL and Wagner is on the wrong side of 30. The issues that plagued the roster seemed easily identifiable and solvable: (1) find additional players to rush the passer; (2) fix the offensive line (a common refrain for as long as I’ve drafted this post); and (3) increase competition for the right cornerback position. Everything looked on track to solve those issues as well – the Seahawks entered into the offseason with four picks in the first 3 rounds, including two second round picks and SIXTY MILLION in cap space… enough to sign, as Russell Wilson called for at the NFL Pro Bowl, a couple more superstars to put the team over the top. What did the Seahawks do with those picks and that money? That is what we are here to discuss.
III. Coaching Changes
The Seahawks made more changes than usual to the coaching staff than in most of the years that I’ve been writing this column. Most of those changes are localized to the bottom of the coaching roster, as the Seahawks return all six of their Director or higher members of the front office, and all three coordinator positions. Interesting and relevant changes are summarized below:
Addition – Alonzo Highsmith, Personnel Executive. Highsmith, who learned under Ted Thompson with John Schneider, logged 19 seasons with the Green Bay Packers player personnel department. By 2012, Highsmith was a Senior Personnel Executive for the Packers, and spent two years with the Browns from 2018-2019 as the Vice President of Player Personnel. He was let go when the Browns cleaned out Freddie Kitchens and John Dorsey. Highsmith worked with the team as a consultant for the 2020 draft and was hired full-time in June.
Addition – Steve Hutchinson, Football Consultant. The former first-round pick and soon-to-be Hall of Fame inductee also started work with the team in 2020, scouting offensive line talent at the Senior Bowl before being hired on full time to learn the scouting and player personnel ropes.
Addition – Aaron Curry, Defensive Assistant/Linebackers. Aaron Curry was a part-time assistant with the linebacker group last season, but was hired full-time for 2020. His LinkedIn states that he is responsible for quality control.
New Position – Brennan Carroll, Run Game Coordinator. Brennan Davis, son of Pete Carroll, has come a long way since Carroll hired him to serve as assistant offensive line coach back in 2015 with no background in coaching offensive linemen. The use of Run Game and Passing Game Coordinator has not been seen since the days of Bevell and Cable, when both of them split play calling duties. It remains to be seen how much impact Pete’s nepotism in promoting his son will have on the team, but it remains a point of concern, considering under Brennan, the offensive line has been a dumpster fire. Fortunately, when your father is the head coach you can fail upwards quite easily.
New Position – Austin Davis, Quarterbacks Coach. Austin Davis received a promotion from Offensive Assistant because Dave Canales (the previous QB coach) was promoted to Passing Game Coordinator. Austin Davis is still the most recent non-Russell Wilson QB to enter a regular season game (back in 2017!), and now he has to coach Russell Wilson, whom he backed up.
Retirement – Pat Ruel, Assistant Offensive Line Coach. The ten-year Seahawks vet and 47-year offensive line coach finally hung up his whistle, presumably because of COVID-19 related risks right before training camp was set to commence. Ruel is 69 and probably at high-risk for serious complications if he would catch the disease. Ruel was one of Pete’s USC coaches that followed him from college to the pros when he was hired.
IV. Free Agency (Players Lost/Cut)
The loss of Al Woods and Quinton Jefferson will be felt – as both played surprisingly well for the Seahawks even though the line itself, as a collective, was probably close to the worst in the NFL. Over 14 games, Jefferson had 3.5 sacks (second for the team overall), had 10 QB hits, had four tackles for loss, recovered a fumble, and deflected three passes. Al Woods did yeoman’s work for the Seahawks, providing a run-stopping solution on early downs when teams chose not to run at Clowney (for good reason), but still managed to recover two fumbles, rack up 32 tackles, and generate three tables for loss and a QB hit. Both have not been satisfactorily replaced, as discussed later. Taking a step back, one of the things that stands out to me over the many years that I’ve written this post and illustrates how far the Seahawks have fallen in terms of talent is that they used to be so loaded that their castoffs would go on to be starters for other teams. Players like Benson Mayowa, Spencer Ware, Jaye Howard, Robert Turbin all come to mind as players who were drafted and later released by the Seahawks when they were really rolling that went on to have successful careers elsewhere. Looking at the list above, most are not homegrown talent, and out of those that are – Fant, Ifedi, Thompson, and Britt… could we say that it is likely that any of them have a high likelihood of success elsewhere? Maybe Fant, but that is probably wishful thinking at best. The Seahawks are quite threadbare in terms of starting caliber depth players, which is partially due to the disastrous drafting done by Pete and John from 2013-2017. Gone are the days when the Seahawks releases would get swooped up right after release or snapped up on the waiver wire. V. Free Agency (Players Re-signed)
V. Free Agency (Players Re-Signed)
The highlight of the Seahawks re-signings was Jarran Reed. Reed was re-signed before free agency started to a 2 year, $23m contract that included a $10m signing bonus and $14.1m guaranteed (essentially the entire first year). However, after the contract details came out – he essentially signed a one-year deal because if he does not perform, he can be released with no dead cap in 2021. Everyone else was signed to minimum or RFA deals.
VI. Free Agency (New Players Signed or Acquired)
The first signing that Seattle made was to sign Greg Olsen to a one-year, $7 million contract. Olsen, who is now 35, has developed some injury concerns after logging nine straight seasons where he played every game, only playing in 16 games total between the 2017 and 2018 seasons and missing two games in 2019. With a longer than usual offseason with no OTAs, Olsen said that this offseason has been a dream for him, as he was able to give his body extra time to rest and recover. Brandon Shell signed a two-year, $11 million deal with the Seahawks, who signed George Fant to replace him. Shell played RT for the Jets, and had a 63.6 grade by PFF for the 2019 season, as he allowed seven sacks, and committed five penalties. He looks to be a marginal at best upgrade over former-RT Germain Ifedi, who committed thirteen penalties and allowed six sacks. Ifedi’s 2019 PFF grade was 56.2. BJ Finney signed a two-year $5.9 million deal. Finney looks to compete for spots at Center for the team. His main competition will be Joey Hunt, so perhaps he could be penciled in as the starter. He has played at other interior O-line spots as well, so his versatility and experience will be key in an offseason shortened by COVID. Pete Carroll, having exhausted all of the 2013 NFL first round reclamation projects, now turns to the 2015 NFL draft, bringing in known bust Cedric Ogbuehi, who signed a 3.3m one-year deal. Ogbuehi has not played more than 200 snaps in the past two seasons, looks to compete in what could be his last chance to make it in the NFL. Instead of re-signing Clowney or making a splash move to bolster the pass rush, the Seahawks brought back two former Seahawks – Bruce Irvin and Benson Mayowa in free agency. Bruce Irvin, who turns 33 this season, had career high sacks (8.5) for Carolina. His one-year contract is worth $5.5 million. Mayowa, who just turned 29, had career high sacks for Oakland (7.0). Mayowa’s one-year contract is worth $3 million. Carlos Hyde signed a 1-year, $2.75m contract in May to provide depth just in case Chris Carson and Rashaad Penny cannot start the season. Hyde underwent surgery in February to repair a torn labrum, but should be ready to start the NFL season.
VII. Free Agency Cost Roundup
Coming into Free Agency, the Seahawks had around $60 million in cap space to use as they saw fit. By the end of free agency, they had spent $53.4 million of that on new or returning players:
Jarran Reed $9.35m
Greg Olsen $6.9m
Bruce Irvin $5.9m
B.J. Finney $3.5m
Brandon Shell $3.475m
Quinton Dunbar $3.421m
Jacob Hollister $3.259m
Benson Mayowa $3.018m
Mike Iupati $2.5m
Cedric Obuehi $2.237m
Joey Hunt $2.1m
Branden Jackson $2.1m
David Moore $2.1m
Neiko Thorpe $887,500
Luke Willson $887,500
Phillip Dorsett $887,500
Chance Warmack $887,500
VIII. 2019 Draft + Grades
A. Draft Analysis
After Free Agency, the Seahawks entered into the 2019 NFL Draft with four picks in the first three rounds (three natural picks plus the Chiefs 2nd Round Selection at 64 because of the Frank Clark trade in 2019). With basket of riches that the team had rarely had, expectations were high that the Seahawks would address at least one of their two still-glaring needs in the offseason – offensive and defensive play in the trenches in the first round. At this point, the Seahawks believed they had solved their cornerback issue by trading for Quinton Dunbar, who had not been arrested yet – leaving two clear holes with a few chances to fill them. Let’s look at how desperate the Seahawks needed to be when it came to the trenches. Pro Football Focus ranked the Seahawks at 27th in terms of Offensive Line play following the 2019 regular season. The Seahawks gave up 48 sacks of Russell Wilson, his second highest total in his career, and the seventh straight that he had been sacked 41 times or more. On defense, the Seahawks were tied for second-lowest in terms of sacks in 2019, with only the 5-11 Dolphins having less. According to Pro Football Reference, the Seahawks only generated some form of pressure 19.3% of the time, good for 28th in the NFL and gave up 6.0 yards per play (6,106 yards on defense, total), good for a tie for second worst in the NFL. Yet, what position did they end up drafting with their most significant piece? A non-rush, inside linebacker. This was after they currently pay Bobby Wagner 18m APY (the Seahawks current MLB), retained WILL LB K.J. Wright for another year (costing the team $10,000,000 against the cap), brought in Bruce Irvin to play SAM LB on early downs (locking down all three LB spots for 2020), and drafted a Linebacker (Cody Barton) in the 2019 third round (the previous year!) to serve as the heir apparent to Wright. Where does Brooks see the field? Did we really spend a first rounder to burn a year of cheap club control to serve as a backup? While the Seahawks did make some good draft choices following the LB pick, spending a 1st round selection on a player that won’t immediately see the field in some capacity (with two, maybe three inked in starters ahead of him) is not a decision that should be lauded in any capacity.
B. First Round, Pick Number 27: Jordyn Brooks, LB, Texas Tech
This will become a broken record by the time you finish reading this post – but for Brooks, I like the player, but hate the cost and the thought process behind it. Brooks is an old school, run stopping, TFL-generating thumper LB. He rarely misses tackles. He had 20 TFLs. The Seahawks were absolutely horrendous at stopping the run last year (full details later in this post). It makes sense. He generates momentum stopping hits and has good burst to chase down the ball carrier. However, he isn’t going to be as great as Logan Wilson or Patrick Queen in dropping into a zone in coverage or picking up a TE or the RB for man coverage. Queen’s hips are more fluid, and Wilson is much more of a ballhawk. Brooks demonstrated some coverage ability in 2018, but expecting him to cover TE monsters like Kittle on the 49ers or Higbee/Everett on the Rams seems like a recipe for getting burned. In a division with modern high-powered offenses under young head coaches, I wonder about the value of the oldest head coach in the NFL drafting an old-school LB when the league is evolving. Brooks will always be compared to Queen especially, as he was drafted right after him by the Ravens.
C. Second Round, Pick Number 48: Darrell Taylor, DE, Tennessee
As much as I did not like the Brooks pick, I love the Darrell Taylor pick. I just hate that the Seahawks had to give up a third rounder to go get him, even though the Seahawks have a pretty good track record when they trade up for a player (Tyler Lockett, DK Metcalf, Jarran Reed, Michael Dickson) Love the player, hate the cost. Taylor is as close to a prototypical LEO that existed in the 2020 NFL draft, which was not full of twitched up DEs outside of Chase Young at the top. He has the burst off the edge that the Seahawks have been missing since Frank Clark was traded. Taylor has all of the potential to develop into an amazing edge rusher, but he is not refined enough to be expected to succeed right away. Indeed, when I watched his film and not his highlights where he was able to obliterate non-NFL level talent (seriously, watch him obliterate Mississippi State’s walk-on LT #79), he was routinely stonewalled by the cream-of-the-crop SEC tackles, like Georgia’s Andrew Thomas and Isaiah Wilson and Alabama’s Jedrick Wills, which does not bode well for the next level. However, if Pete and the rest of the coaching staff can sharpen his physical gifts, he could develop into a monster. He will also need to demonstrate that he can reliably stop the run to be a true three-down lineman for the Seahawks.
D. Third Round, Pick Number 69: Damien Lewis, OG, LSU
I thought the Seahawks got a steal when Damien Lewis was still around in the third, as I had a second-round grade on him. Lewis is a mauler that opened up huge holes in the run game and still provided value in the passing game, especially having to face the five and four-star monsters that most SEC teams have at DT. When LSU were pushing to go undefeated at the end of the year, Lewis was the best guard in college football from Week 11 onwards according to PFF. He didn’t stop there, as Lewis destroyed everyone at the Senior Bowl, winning almost 70% of his 1v1 drills according to PFF. While it will be hard for Lewis to fight his way into a starting role with no rookie mini-camp, no OTAs, and limited padded practices in training camp, I would not be surprised if Lewis was the starter by 2021.
E. Fourth Round, Pick Number 133, Colby Parkinson, TE, Stanford
Colby Parkinson is a physical freak. Dude stands at 6’7”, has a 32.5 inch vertical jump, and has 33” arms – a massive catch radius. He has stated that he plans to play at 260 pounds, adding around eight more pounds onto his frame. While his straight line speed is nothing that jumps off the page at 4.77 seconds in the 40 yard dash, he was a red-zone nightmare. His hands are amazing, as he did not drop a single pass in 2019. 48 targets, 48 catches. He wasn’t much of an in-line blocker, but he was willing and gave effort. His stock was sky high coming into 2019 after catching seven touchdowns, but poor QB play from Stanford lowered his stock considerably, especially as he only managed to catch one TD in 2019. If he had seven touchdowns again in 2019, I think he’s an early third rounder. He looked to be an interesting prospect for the Seahawks but broke a bone in his foot while working out, which required surgery. With the Seahawks tight end room looking crowded, it looks like Parkinson might have to “red-shirt” the year on the PUP list.
F. Fourth Round, Pick Number 144, DeeJay Dallas, RB, Miami
Dallas is a Pete Carroll running back – he runs angry. He wants to get into contact, and push through. Former teammate of Seahawks RB Travis Homer, Dallas will fight Homer for a role as the #3 RB behind Carson and Hyde with Penny starting the year on PUP. Dallas will also compete for special teams, likely on the coverage unit. Dallas was also a converted WR, so has a lot of tread left on his tires and could be a weapon out of the backfield, something that has been lacking for Pete Carroll’s RBs since Marshawn Lynch departed for the first time. Dallas doesn’t have the home run hitting speed that Penny brought to the team, but he has enough to hit a crease and make a big 10-20 yard gain.
G. Fifth Round, Pick Number 148, Alton Robinson, DE, Syracuse
The Seahawks love taking risks on physical gifts. Alton Robinson is a player that has all of the tools (prototypical size, length, power and speed), but had significantly underwhelming tape and a lot of off-the-field concerns. Robinson is a speed rusher that has a ton of juice off the snap and the hips to bend around the corner. If you watch his highlights, he looks like a first or second round pick. His flashes when he turns it on are everything that you want in a speed pass rusher. However, at this point, all he has is the speed rush, as his power moves are nonexistent. Watching his tape further illustrates his inability to re-direct inside as well, where he also looks disinterested (and sometimes outright loafs around) when not called to pass rush – especially if the ball carrier runs away from his side of the line. It must also be brought up that he was arrested and charged with second-degree felony robbery in 2016 (which led to his offer to Texas A&M being pulled) and alleged to have been involved in another similar robbery in 2015. The 2016 charges were later dropped in 2017.
H. Sixth Round, Pick Number 214, Freddie Swain, WR, Florida
Freddie Swain is a slot WR brought in to compete with Dorsett, Ursua, and others. He also looks to factor in as a kick/punt returner with his 4.4 speed. He isn’t the best route runner, but he made up for that with good hands and RAC ability. With the Seahawks spots after Lockett and Metcalf at #1 and #2 wide open for competition, Swain will get chances to carve out a spot for himself if he can quickly demonstrate that he can be reliable for Wilson.
I. Seventh Round, Pick Number 251, Steven Sullivan, TE/WR, LSU
Pete Carroll loves big targets. He’s always kept a big target around at the bottom of the WR depth chart, whether it’s Chris Matthews, Jazz Ferguson, or Tyrone Swoopes… if you’re big, you might have a shot in Seattle to stick around for a bit. While Pete and John already brought in Colby Parkinson, the Seahawks couldn’t resist doubling up and getting Sullivan, who is the definition of grit. His length (35.5 inch arms), explosiveness (36.5” vert, 4.6 40), and hands are intriguing tools. --------
I try to be realistic when it comes to the Offseason Review Series, because it is too easy for any writer to predict a successful campaign with homer goggles and the excitement (and subsequent dopamine hit) from offseason acquisitions. I myself have done so in the past – you only need to read my 13-3 prediction in 2017, a year where the team actually collapsed to 9-7. Thus, even when the Seahawks acquire elite talent, I have to take into account whether or not they can quickly fit into the scheme or if the coaching staff will try to force a square peg into a round hole. Who could have predicted that the Seahawks would try to make Jimmy Graham block when he was an elite pass catcher and red zone threat? It took Pete Carroll three years to figure that out! The Seahawks came into the offseason with two big holes on the roster, but had the potential to make this offseason one to rival 2013 when they put themselves over the top by adding two of the best pass rushers in free agency to add to the one pass rusher they already had. They had the money to be aggressive, but chose to patiently wait for Clowney and let the rest of the market pass them by. They also chose to completely re-build the offensive line in what turned out to be a COVID-shortened offseason, and their timidity in the defensive line market cost them the ability to sign proven, plug-and-play talent like Jack Conklin. Instead, the Seahawks frittered away their $60m nest egg on unproven and reclamation projects. Thus, both sides of the trenches are still gaping holes on the roster, and time will only tell if Russell Wilson can captain this ship and still make magic happen or if those holes in the vessel turn out to be on or below the waterline, and the season sinks. Time will only tell. I'd like to give a shout-out to Seahawks Twitter and the Seahawks Discord for being consistently awful, /NFL_Draft for hosting some of the best draft conversation, PlatypusOfDeath for hosting this thing, and all of you for reading it. Link to Hub.
HPE: Transition to As-a-Service and Path to All-Time Highs
COVID-induced demand pressures for enterprise hardware and recent execution issues have HPE shares trading at 4-year lows and down 41% YTD. However, HPE-as-a-Service strategy starting to show real momentum. Combined with advancements in edge-to-cloud infrastructure offerings, HPE among best values in large cap tech for investors looking to gain exposure to edge networking, distributed computing, and remote working trends. Here's why: Background What is HPE exactly? It is a question that HPE itself has found difficult to answer in the five years since splitting off from the original Hewlett Packard (HPQ). At the time of the split, HPE was more or less described as everything but the PCs and printers. It was a lot of hardware, software, services, but without a clear strategy on how to win in the age of the cloud. As other companies from the PC era, like Microsoft, Dell, and Intel, effectively pivoted their businesses to compete in the cloud and data center, HPE experienced a combination of false starts, missteps, and inconsistent execution. Following its most recent quarterly report in May, an earnings miss coupled with a new cost-cutting initiative sent shares down 10%. And the company now trades at levels not seen since early 2016. With HPE trading at less than 7x forward earnings, markets seem to be pricing in a low probability of a turnaround. However, despite difficulties in gaining traction as a standalone company, it may not be time to give up on HPE just yet. Revenue misses in six consecutive quarters and fears over another round of restructuring are distracting from early signs of success in HPE’s transformation to an as-a-service company. With the mega cap and hyper-growth tech trade looking a little overheated on a valuation basis, HPE could present an attractive way to gain exposure to multiple long-term technology trends – namely edge networking, distributed computing, and remote work – while also benefiting from a stabilization and recovery in enterprise hardware IT spend once the COVID-19 induced headwinds subside. Summary
Previous company pivots failed to position the company to succeed in the cloud era
Near-term, HPE remains subject to enterprise hardware demand pressures due to COVID-19
Past execution issues, inconsistent earnings, and multiple restructuring efforts are overshadowing momentum developing under HPE-as-a-Service strategy
Once enterprise hardware spend rebounds, HPE likely to show material improvements in financial performance and execution
HPE 3.0 is poised to expand margins, provide greater revenue stability, and grow earnings power on the back of major trends in networking, computing, and work
Assigning HPE a three-year price target of $35
HPE 1.0 and 2.0: How We Got Here HPE 1.0 When HPE was still part of the combined HPE-HPQ, the company had attempted to carve out share in the public cloud and was unsuccessful. Having shuttered that business in 2015, HPE sought to position itself as a more focused and agile end-to-end infrastructure solutions company. This was the strategic rationale behind the decision to merge its enterprise services division with CSC in 2017. The resulting DXC Technology became a pure-play IT services and consulting company. HPE then sold the majority of its enterprise software, database, and analytics offerings to UK-based Micro Focus. HPE 2.0 Around the time of the spin-merger with Micro Focus, HPE revealed its “HPE Next” strategy to fundamentally redesign the company over a three-year period. Although HPE stated its desire to streamline operations, optimize manufacturing, and improve its go-to-market approach, HPE Next was mostly workforce optimizations, or in other words: layoffs. HPE Next did contribute to improvements in EPS numbers from 1Q18 to 4Q19, but following a modest increase in revenue over the first four quarters under the plan, sales have been stagnant or lower in each of the subsequent reports. 2Q20 Earnings As part of HPE’s 2Q20 earnings release, the company announced yet another restructuring plan aimed at conserving capital, flexibility, and liquidity given the uncertainty surrounding the global pandemic. The cost-cutting calls for at least $1bn in targeted gross savings by 2022. Together with a 15% decline in revenues year-over-year when holding for currency fluctuations, analysts were quick to issue six downgrades. These numbers do not tell the whole story though. In the face of a tough pricing environment for hardware, gross margins were stable at 32% compared to last year. And several critical business segments showed signs of relative strength in light of the broader market context. HPE’s big data solutions grew 61% year-over-year, with storage services from the Nimble business unit jumping 20%. HPE’s edge networking segment that houses HPE Aruba only saw declines of 2%. And HPE’s flagship as-a-service offering, HPE GreenLake, saw its annual revenue run rate increase 17% to $520mn. HPE GreenLake is now the company’s best performing business according to CEO Antonio Neri. When considering HPE exited the quarter with a $1.5bn backlog, or 2x historical levels, it’s very likely that procurements were delayed or rescheduled rather than canceled. Because of this, once IT departments have greater visibility into the crisis, HPE should be poised to see a sharp recovery in its hardware-focused reporting segments. HPE 3.0: HPE-as-a-Service After years of difficulties defining its value proposition in the new computing landscape, HPE appears to have developed a distinct approach to leverage its networking, computing, storage, and software capabilities and bundle them into a fully integrated edge-to-cloud platform. The strategy, HPE-as-a-Service, aims to offer every single HPE product on a pay-per-use subscription basis by 2022. The company’s new IT equipment and services package, HPE GreenLake, takes a range of products selected by the customer and provides a simplified management console and on-demand toolkit for the entire hybrid cloud setup. As HPE further transitions towards the as-a-service model, HPE GreenLake, as well as its advancements in edge networking and performance computing, could lead to greater market share in multiple segments of hybrid IT spend. HPE GreenLake As enterprise IT becomes increasingly hybrid – i.e. a mixture of on-premise and off-premise computing power – organizations have seen management of these systems become more siloed. As a result, companies are seeing greater demands on their IT staff, inconsistent user experiences or application performance, or lower visibility or risk control across networks. HPE GreenLake is a bundled-service offering that enables customers to select only the capabilities that they need and to deploy them faster, with less management, and at a lower CAPEX risk. Through its metering features, GreenLake makes it much easier for companies to scale computing resources up or down, thereby enhancing flexibility while also allowing IT teams to offload management of hybrid cloud resources to HPE’s operations center. Once customers sign up for HPE GreenLake, they select from 15 cloud services like machine learning, virtual machines, big data, networking, storage, or compute. HPE promises to have the chosen services delivered and operational within 14 days. And GreenLake runs on top of existing Amazon AWS or Microsoft Azure cloud computing environments, making the transition seamless. According to HPE, GreenLake reduces time-to-market for IT deployments by 75%, reduces CAPEX by 40% once in-use, and delivers 147% return on investment and total payback within 12 months. Improving deployment efficiencies not only conserves staffing resources and expands business productivity, it reduces the need for companies to invest in IT infrastructure before they are ready. Because HPE GreenLake is pay-per-use, customers can prevent overprovisioning of resources and eliminate expenses associated with technology refreshes, all the while ensuring adequate posture to accommodate usage spikes when on-premise compute is not sufficient. Customer satisfaction for GreenLake is extremely high, with HPE reporting 99% retention rate for contract customers currently subscribed to the platform. The Edge, Distributed Computing, and Remote Work Even though COVID-19 sparked some near-term challenges for enterprise hardware demand, the pandemic has also accelerated much longer-term trends related to computing and working – trends that should benefit HPE. As companies increasingly leverage computing power at the edge, and as work becomes more and more distributed and remote, the comprehensive end-to-end edge networking platform developed by HPE Aruba and recently-acquired Silver Peak could lead to share gains in multiple end markets projected to grow for the rest of the decade. According to Cisco, by 2025, 75 billion devices will be connected to the internet. Between the combination of IoT and the growing number of user devices consuming larger amounts of content digitally, the global datasphere is forecasted to roughly triple by then. And at that time 75% of enterprise-generated data is expected to be processed at the edge. In a widely distributed computing environment with exponentially greater data loads, it will become even more vital for IT purchasers to invest in and maintain the right set of networking tools to compete in the future. HPE Aruba HPE Aruba provides a range of wired and wireless data center and edge networking solutions, including Wi-Fi 5 and Wi-Fi 6 products, access points and gateways, as well as network switches for both data center and edge locations. Although HPE Aruba has pushed into SD-WAN, historically its business has been driven by WAN and WLAN hardware and services. A WAN, or wide-area network (WAN) is a collection of local-area networks (LANs) or other networks that communicate with one another. A WAN is essentially a network of networks (like a much smaller internet). WLAN is simply a wireless LAN that connects computers and network devices wirelessly. While the enterprise WLAN market actually fell 2.2% year over year in Q1 2020 due to COVID-19, WLAN is forecasted to grow at over 20% annually the next five years on the back of technology refreshes associated with the new Wi-Fi 6 standard (enterprise WLAN was a $1.3bn market in Q1) and increased adoption of Internet-of-Things (IoT) devices. And HPE Aruba is currently the #2 leader in market share at 14.4% after Cisco at 45.7%. Perhaps where HPE Aruba is set to deliver the strongest results over the long-term, though, is in its newly announced edge networking architecture called the Edge Services Platform (ESP). Aruba ESP is the industry’s first AI-powered platform designed to unify, automate, and secure edge networking. Aruba ESP leverages artificial intelligence to simplify IT operations management as well as accelerate and automate troubleshooting in distributed IT environments. With built-in Zero Trust Security, ESP secures all access across your network. And the platform also provides unified infrastructure so that WLAN, LAN, and SD-WAN resources can be singularly monitored and optimized across branch, campus, remote, and data center locations. This is important because the promise of the edge is in the ability to more rapidly acquire real-time data so that it can be more quickly analyzed and acted upon. By deploying integrated networking and analytics at the edge, Aruba ESP can enable businesses to optimize process efficiency, boost security, and increase reliability. This capability removes the previous need to send data to a remote data center location or third-party company for analytics. Silver Peak HPE’s acquisition of Silver Peak is a great strategic investment to further build out its integrated edge product portfolio. With the strength of HPE Aruba in WAN/WLAN, HPE will soon be able to offer market-leading SD-WAN solutions alongside its AI-powered intelligent edge platform, making for a very compelling and comprehensive product suite for enterprise customers. SD-WAN, or software-define WAN, uses software to replicate (virtualize) functionalities that traditionally were housed within hardware. What this allows for is functions to then be remotely monitored and controlled. It makes network management simpler, bolsters security, and enables much more efficient network routing. Despite being one of the few remaining independent SD-WAN players, Silver Peak has carved out a spot near the top of the market. The company counts over 1,500 customer deployments for its Unity EdgeConnect™ SD-WAN edge platform, and Silver Peak is consistently among the five largest vendors with over 7% market share in a field that includes heavyweights such as Cisco and VMware. The SD-WAN sector hit $1.9bn in 2019, but industry estimates expect it to reach $8bn by 2025 – delivering compounded annual growth of nearly 35%. Having been named by Gartner as one of two leaders (alongside Cisco) in its SD-WAN magic quadrant for two consecutive years, a combined HPE Aruba-Silver Peak solution is primed to capture even more market share for enterprise customers would like to pursue a multi-vendor strategy or diversify away from over-reliance on Cisco. The Path to Gaining Share in Computing Composable Infrastructure HPE’s software-define infrastructure innovations extend to computing as well, namely with HPE Synergy which started shipping in early 2017. HPE Synergy is a new category of computing infrastructure designed to bridge non-cloud-native and cloud‐native applications. Non-cloud-native applications are applications that exist with persistent storage and usually have a fixed number of network connections. This contrasts with cloud-native applications which are designed for a cloud environment. As much as services are being shifted to the cloud, for some companies, applications have existed in non-native states for so long that it could be risky and costly to move to the cloud or could require significant time and resource planning. This is where composable infrastructure and HPE Synergy steps in. Composable infrastructure treats compute, storage, and network devices as pools of resources that can be tactically provisioned as needed depending on the requirements of distinct workloads. It can be instantly flexed to meet the needs of any application or any workload, and it is ideal for a hybrid cloud environment. DellEMC released its version of a modular composable server halfway through 2018, and a startup named Liqid is also in the space. Past studies have put average server utilization rates between 15-35% because typical server designs have fixed amount of resources provisioned against disparate application needs. In a study commissioned by HPE, enterprise data center respondents reported that only 45% of infrastructure was provisioned most of the time, leaving over half of a company’s valuable computing resources unused. Although converged and hyperconverged infrastructure also combine computing, networking, and storage, only composable infrastructure is not preconfigured for specific workloads. On top of that, composable is more scalable than hyperconverged which can be limited to 20-30 nodes. HPE Synergy thus greatly reduces dedicated IT staff time to deploy servers or install firmware, increases productivity, and lowers procurement and operating costs. HPE Synergy is estimated to deliver three-to-one return-on-investment for IT customers over a five-year period. With composable infrastructure projected to follow hyperconverged systems and hit nearly $5bn in sales by 2023, Synergy could provide HPE yet another competitive product advantage to carve out share in a healthier IT hardware procurement environment. HPE Cray Supercomputers and Big Data In addition to traditional IT infrastructure, product advancements in high performance computing also have HPE positioned to gain new customer wins and develop the reporting segment into a larger contributor to the top line over time. Although the term supercomputing has been around for a few years, for many it continues to be an abstract or futuristic concept without tangible applications for today. But as tens of billions of internet-connected machines come online over the next decade, the amount of structured and unstructured data being generated will become that much harder to translate into valuable or actionable insights. That is why supercomputing can play a major role in solving the most data-intensive challenges facing corporations and governments worldwide. The US and China have been engaged in heavy competition in recent years to create faster and faster supercomputers, and other countries like Japan are also starting to get involved. Currently supercomputers are used in the fields of life sciences, genomics, manufacturing, weather, and nuclear science. However, in the age of IoT and zettabyte-scale datasets, much more powerful computers will be necessary to fully take advantage of big data analytics and artificial intelligent capabilities. The fastest exascale-class supercomputer in the world today is an HPE Cray supercomputer named El Capitan. The system, which will be delivered to the US Department of Energy’s Lawrence Livermore National Laboratory by 2023, is 10x faster than the runner-up. This market is still extremely nascent, and supercomputing is only a portion of the 9% of HPE revenues generated by the High Performance Compute & Mission Critical Systems (HPC MCS) segment’s. But as the market becomes more mature, HPE GreenLake will provide a stronger ability to cross-sell supercomputing products to very large-scale organizations – a major advantage for HPE Cray compared to when it was a standalone company. Conclusion Recent weakness in HPE shares following Q2 earnings have largely priced-in near-term risks associated with COVID-induced demand pressures for enterprise hardware solutions. With shares down 41% YTD, the company is trading at 6.63X forward earnings and 0.44x sales. These multiples are both among the lowest levels relative to other large cap IT hardware peers such as Dell (10.99 forward P/E), Cisco (13.81 forward P/E), or IBM (11.16 forward P/E). Despite difficulty formulating an effective cloud strategy in the years following the split from HP, HPE has multiple growth drivers with exposure to critical long-term computing, networking, and working trends. As HPE further develops its business into a fully service-based, pay-per-use model, revenue and earnings should become increasingly stable and less subject to near-term demand shocks as has been seen so far in 2020. Although management’s cost saving plan announced in May was poorly received by the markets, strong sales visibility by virtue of the $1.5bn quarterly contract backlog means that HPE’s struggles will likely be short-term. Combined with cost reductions, as enterprise hardware spending picks back up, the company should experience gross margin improvements, earnings growth, and multiple expansion. Together with the more targeted approach as an edge-to-cloud infrastructure service provider, HPE currently presents one of the best values in large cap tech for investors looking to gain exposure to edge networking, distributed computing, and remote working trends over the next 5-10 years. You can find me on Twitter@BlackjacketCowhere I write about emerging technologies and long-term market trends. Thanks for reading!
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