Who thought traders being in control of prices was a good idea again? 🙂 

With drops on the market overnight that have to make even a seasoned veteran wince, I’ll bring State of the Market forward and do the Scouting later today.

To cut to the chase – as I said in the last article – there is not much to actually do here beyond our usual gameplan of preparing a portfolio for the season ahead. I do not let the market movements dictate my trading or my assessments of value.

The fundamental basis for trading is the huge dividends on offer after this 100% increase. The value in the market is clearly there for players of real quality and as long as we stick within touching distance of rational value I remain very optimistic for the season.

However, even the most hard hearted of us always want an explanation when something like this is happening so let’s see if we can find one that has some substance.

*** 12pm UPDATE ***

We now have a statement from FI suggesting they are looking into unusual trading patterns overnight. So my wearing of the tin foil hat in the section below looks warranted!

This could mean that a trading group or whale tried to take advantage of the uncertainty to cause a panic, perhaps in hope of buying back cheaper after. This would not be at all surprising if someone tried to pull that.

They may regret it though. If FI can spot any manipulation that trader/traders may lose all their FI profits from all time and possibly even their initial deposit. This sort of thing is really, really not worth doing and can lead to very hot water.

Similar things happen in cryptocurrency etc but that’s completely unregulated. With FI the company are standing behind it and if someone is screwing with their market they are going to bring the pain.

These scams are only needed if you are bad at trading. It’s perfectly possible to make great money on FI whilst being a positive contributor to the market and it comes without the risk of an FI clamp down too.

Market Analysis

The first thing I looked at this morning is whether these drops are evenly distributed across all players or whether we can find patterns – are some types of player taking bigger hits than others?

The answer is yes. Whilst in a panic of this scale all players can be expected to take a hit, the worst of it is falling on the over hyped and over priced end of the market. Many of the better quality players that I’d generally consider the smarter traders out there would be holding are doing relatively well.

There are a few exceptions on either side of course.

To determine this I looked at my recent Pre-Season preview article series as this provides a recent categorisation of players into groups as I see it.

The “Core” Selections – the 28 players I considered to be solid holds for the season ahead have taken an average on paper loss of 10.3% off their Blue Button price over the last 7 days. (Obviously, many of these were picked up on bids for well under the old Blue Button price!) 

The 26 “Challengers” – those I think have the potential to really break through but have some kind of obstacle like rotation or a new club to settle in – a loss of 12.18% over 7 days.

But, the 41 players I considered to be overhyped/overpriced in the Big Hype/Little Substance series? An average loss of 18.34% – significantly more.

These are dirty numbers as for example Depay is in the “Core” list and has taken a big drop – but that is as much to do with negativity about a Barcelona move as the general trend. 

But the logic holds when you look at the players individually. 

If I pick out some players I’d consider to be “smart money” picks – i.e players that aren’t obvious trend fits but have performance quality that hasn’t been fully revealed and a good price – the picture is pretty solid. 

Insigne – just a 1% drop. Alberto. Less than 1%. Immobile 9%. Neuer a 4.27 rise. Hakan – 1.86% drop. Kramaric, less than 1% drop. Goretzka 2.3% drop. Marquinhos 2.6% drop. Cancelo 4.2% drop. 

All very modest and it is just my opinion but I’d generally say it is the smarter, calmer traders who are holding this sort of player because they are mainly hype free and are relying on underlying quality. That could be a reason why these holders aren’t panic selling them extensively – they believe in the value and have solid reasons to do so.

You can also find players in the Core or Challengers group who are not doing well. Kroos – a -22% drop. Brandt – a 33% drop! Dybala – a 21% drop. Griezmann – 27% drop. Parejo 18% drop. Eriksen – 19% drop. De Beek – 29% drop.

Age is clearly a big factor there – in a panic – age is something people will worry about so that makes sense. And then Eriksen/Brandt both have a lot to prove at their respective clubs. De Beek may be vulnerable after a recent surge and he is also unproven at United which will make people nervous.

Some valid reasons for concern there – but the question for traders is – are people being overly negative versus the price?

It’s also notable that the premium players are being savaged.

In the last State of the Market I mused that in all the uncertainty of the introduction of Order Books people may cluster into well known and popular (but not necessarily high quality!) selections. 

People often see the Sancho’s, Greenwood’s, Cherki’s, Neymar’s, Bruno’s or Bellingham’s as “safe havens” – something to go to when you aren’t sure what else to do. The theory being that they are so popular and “on trend” they are solid bets.

That musing has proven wrong, or at least covered up by bigger factors.

They have all done fairly badly – and with little distinction between those who justify their price and those who have a long way to go to prove it. Bruno and Neymar have been slammed just the same as Greenwood, Sancho or TAA. 

In something like Sancho, Greenwood or TAA there is going to be a lot of dumb money who never really understood the quality or value of those players – they were just going along with the price rise. You might have legitimate reasons to think money in these players is “smart” and fair enough – but it’s undeniable that lots of people are just following along with the price rise.

These are the sorts of traders who are going to be most bewildered by these drops and could be prone to panic because they don’t really have much basis for holding other than “but they kept rising in price before”. 

Equally, there will also be plenty of dumb money in a Bruno or a Neymar even though these premiums have shown they are at a rational value – you need all ends of the market to be co-operating to get to prices like that.

So even though Bruno and Neymar pretty clearly justify their value in this dividend structure, it doesn’t mean all the holders know that. 

And it’s not a surprise that these players aren’t going to be immune the same way someone like Hakan or Insigne have been so far. 

If you hold those two players the chances are you have at least some basic understanding of quality and value so it’s logical these players are holding up much better.

Why is this happening?

It’s really hard to pinpoint an exact reason – I’m not sure we really can. But it’s human nature to want an explanation. There will likely be more than one. 

The important thing is “What do we actually need to do?” and I’ll cover that at the end. But it be helpful if I speculate as to what is causing this drop.

Clearly Order Books rocked the boat. Even though we saw mainly on paper drops and portfolio values just got back in line with reality – many people struggle with that emotionally. It’s not nice to see for anyone and I think anyone who says they aren’t affected by it at all is probably lying. Or a psychopath.

This leads to plenty of self doubt and deep thoughts about “Why is this player really worth this again?”. For many players, particularly those who have been pumped heavily, there is not a good answer to that question.

There are two chief reasons as to why the “hyped” players are taking the brunt of this in my view.

Firstly, holders of such players are more likely to have limited understanding of what they are actually doing. And it makes them more volatile in their decision making. If you are the type to lump on 20% of your balance because Cherki came off the bench and BigLad1975 on Twitter posted a screenshot of him buying 10,000 shares… are you really the type who can mentally resist a panic sell when it’s going the other way? Probably not.

And secondly, for the smarter crowd who know that said hype player isn’t all that great but are just playing the game – you are also likely to exit the trade because you know that the dividends on offer aren’t going to back up that player. Dividends may have doubled but double nothing is still nothing.

It’s very difficult to dig in and stick to your guns in a panic if you’ve got no real reason to do that other than hype.

Contrast that with the holder of Hakan or Insigne or Goretzka. She probably knows they have real underlying quality and value prices that are well supported in this dividend structure. So that trader has a much easier time holding her ground and not letting the panic get to them.

Then you can get into the conspiracy theory end. I don’t think this is tin foil hat – it’s a fact that big Twitter account holders and trading groups try their best to manipulate the market – causing crashes and price rises. (EDIT: We now have a statement from FI and they think this is what has happened!).

And they will always target the “popular” sexy players that are easy to sell. Something like Bellingham or Cherki or Sancho or Bruno or Camavinga… easy targets because people will want to like them. 

So if these players are supported by a trading group or a whale they are naturally going to take a thumping if they move on or decide it’s all got too hot for them.

So, there are rational reasons you can find for why certain things are happening.

But in the end, situations like this in a market become chaos. It’s too simple to say “overpriced players are taking the worst hit because a lot of the shares are owned by dumb money and pumpers”. It’s true but it’s only part of the story.

Lots of players are taking hits, good ones and bad ones. Once a panic like this sets in people get irrational and start selling without a great deal of thought for real value. Many people are selling things for way less than they are rationally worth and it’s painful to watch.

At the end of the day, we can tie ourselves in knots trying to explain this kind of madness. It’s natural to want an explanation. But it’s not something we should dwell on – I can speculate as above on some general themes – but the important thing is what we actually do about it. 

What do we do?

Regular readers will have probably predicted my answer because it remains the same as a few days ago: nothing special.

Whilst it is rough watching for all of us to see drops of this scale – it does not change the fundamental value proposition.

Especially because we can’t trust what we are seeing here at all. It only takes one person to drop a price – it can bounce back so swiftly.

For example, if I wanted to drop Immobile’s price from £1.80 to £1.35 I could do it right now. Probably wouldn’t last very long because someone will snap that up! 

But it would happen and every holder of Immobile would see a drop in their portfolio value on paper. But did that really change the actual value of Immobile? Of course not.

In this dividend structure we can comfortably support £4-6 prices for good performance players, and up to £16 for quality premiums. We are so far below that threshhold it is unreal. And the more prices tumble the more value is created.

That value exists and it is inevitable that money will come in to exploit it. 

So, the focus just remains on setting up a high quality portfolio for the season ahead and nothing else.

If anything has changed it’s that even more value is opening up and if people are determined to sell things for less than they are worth, I’ll indulge them when I can. 

The absolute worst thing a trader can possibly do right now is let this emotion push them into selling good players too cheaply. 

I’m going to get started on the regular weekly Scouting now, better to control the things we can control which is the quality of our own portfolio rather than worry about what other people are doing.

We knew the introduction of Order Books was going to be bumpy. I personally did not expect it to be quite this bumpy. 

Regulars will know I am not a relentlessly optimistic person. I’ve been very cautious at times in 2020 in State of the Market – particularly ahead of corona. 

But the central value proposition remains there after this dividend increase and that is a solid reason to believe this will all settle down. 

I said last time I think this could be FI’s best ever season – one day of drops does not change that view.

Note: Because of the thirst out there for information today I’ve made this available publicly where as usually this regular feature is members only. I don’t do this too often and I am hoping members don’t mind if I do it on special occasions!

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