There is this informal English idiom that best described what happened to US market on Wed, 18 Dec 2024.
It is "damned if you do, damned if you don't".
When Fed chair Mr Jerome Powell confirmed the -0.25% interest cut officially, thought the suspense that was keeping everyone hanging by a thread will turn into a rally.
Instead, market crashed big time: (see above)
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DJIA: -2.58% (-1,123.03 to 42,326.87).
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S&P 500: -2.95% (-178.45 to 5,872.16). Posted 6 new 52-week highs and 27 new lows.
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Nasdaq: -3.56% (-716.37 to 19,392.69). Tech index recorded 80 new highs and 264 new lows.
On NYSE, declining issues outstripped advancers by a 9.489-to-1 ratio.
On Nasdaq, decliners beat advancers by 5.46-to-1 ratio.
Wednesday’s trading volume on US exchanges was 18.59 billion shares, compared with the 14.36 billion average for the full session over the last 20 trading days.
It was indeed a volatile day !
The Fed Chair Has Spoken.
Market was turbulent because Mr Powell:
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Revised 2025 outlook for rate cuts, indicating 2 reductions, down from 4 forecasted in September 2024.
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Said that the central bank would be looking for progress on inflation, noting that US’s 12-month inflation have been moving sideways.
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Sort of confirmed that the best solution is for the Fed to continue working to get inflation back down to its target so wages can catch up, restoring consumers’ confidence about US economy.
The Fed reduces the number of interest cuts to keep potential inflation at bay.
This is in direct response to anticipated fallout (increased prices, reduced trade, retaliation, reduced economic growth, job losses) from tariffs that the Trump administration is going to impose.
Despite wanting to do good, US traders did not take too kindly to the plan.
Bitcoin Disallowed.
One other thing that Mr Powell mentioned, rattled the crypto industry.
He confirmed:
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The central bank is not looking to add bitcoin to its balance sheet.
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“We’re not allowed to own bitcoin,
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US’s Federal Reserve Act lays down what the Fed can own, and the current committee is not looking for a law change.
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That’s the kind of thing of thing for Congress to consider, but we are not looking for a law change at the Fed.
Mr Powell clarified the Fed’s position, owing to returning president Donald Trump’s verbal diarrhea about creating a strategic reserve of Bitcoin.
Bitcoin.
And just like that Bitcoin fell, around the time of the Fed’s press conference and later in the evening (US time). (see above)
Not a lot, around -2.4% overall. It did fall below the $100,000 price level on Thu, 19 Dec 2024, around 2:30am US time.
However, it has since recovered from that low point.
Company Holding BTC.
The same could not be said for US listed company, holding bitcoin as its strategy.
Case in point - $MicroStrategy(MSTR)$. (see above)
On Wednesday, the business intelligence listed company fell -9.52% (or -$36.78) to end the day at $349.64 per share. (see above)
Did the fall happened because of Mr Powell’s clarification OR comments from MSTR’s Executive Chairman Michael Saylor, looking to adjust its financing plan to improve value for shareholders.
Michael Saylor’s BTC Strategy.
MSTR has a significant amount of convertible debt, and Mr Saylor wants to use this debt more efficiently.
MSTR is also focused on acquiring more Bitcoin, with a goal of spending $42 billion over the next 3 years.
To fund these purchases, MSTR has been selling convertible debt and issuing stock.
While this strategy has led to a significant increase in MSTR's stock price, investors are concerned about the long-term viability of MSTR's Bitcoin strategy.
Worst Case Scenario.
What happens in a 50% Bitcoin correction?
A 20%-30% Bitcoin correction is relatively common, a 50% drop, though less frequent, is not unprecedented.
Such scenario would have severe implications for MSTR:
(1) Asset value decline:
A -50% Bitcoin correction would reduce the value of MSTR’s holdings from $31.2 billion to $15.6 billion, wiping out $15.6 billion in value.
This would trigger substantial impairment charges, eroding shareholder equity.
(2) Stock volatility:
Historically, MSTR’s stock reacts more aggressively than Bitcoin to price movements due to its leveraged exposure.
A 50% Bitcoin drop could result in a 60%-80% decline in MSTR stock price.
(3) Debt and dilution risks:
MSTR’s ability to refinance debt or issue equity would be significantly hampered during a downturn.
Existing shareholders could face heavy dilution if MSTR needs to issue stock at depressed prices.
(4) BTC yield fragility:
Even if Bitcoin per share remains stable, the real value of the holdings would decline significantly, exposing the limitations of BTC yield as a performance metric.
Now that you know MicroStrategy’s game plan, still keen to invest in this company ?
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Do you think US market will stage a recovery today, with reality settling in ?
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