Entries from January 2021 ↓

The last laugh

Avaricious day traders, mostly young, often angry, definitely ageist and iconoclastic have been whacking financial markets. The combo of social media, fun trading apps, Covid quarantine boredom and a pervasive moister angst have detached many stock prices from the assets behind them. Suddenly, rules don’t matter.

Yesterday was all about GameStop. That saga continues. Plus an assault on silver, AMC, Blackberry, crypto and more. Plus Macerich.

That last company is the struggling owner of a bunch of second and third-tier US shopping centres which the pandemic has seriously bruised. The stock lost more than 80% of its value in the last few years which was understandable. Retails sucks.  It’s also been a heartache for the Ontario  Teachers Pension Fund, which owns a significant chunk of it.

Well, all that changed when the Reddit Wallstreetbets army targeted Macerich, inflating its value by 70% in a few days through a torrent of buying. Just ‘cause. The pension plan managers looked on in bemusement and wisely pressed the big shiny Sell button. Ka-ching! The schoolies just scored $500 million in unearned cash – a direct transfer of wealth from the pockets of the naïve moisters into the retirement accounts of aging, defined-benefit-pension-rich educators. In time Macerich will fade back into retail torpor. Hoodie losses will be epic. And the gods will chuckle.

By the way, did you read the comments posted here yesterday? Yup. All you need to know about how emotion and money mix badly. Apparently everybody now hates me. Finally.

Here’s what the Hoodies, the Redditers, hedges and, sadly, the steerage section of this pathetic blog have taught us. Or should.

The Robinhood/Reddit mob are not investors, of course. They’re gamblers. It’s a game. Under the guise of ‘sticking it to the man’ these folks are actually trying to make fast money without working for it. There’s nothing noble about being a pig. Taking a rabble of four or six million traders, hopped up on Internet chat, and throwing it against one security or asset to purposefully inflate its value is dangerous and irresponsible. It’s certainly not an ethical strike against boomers, market participants, brokers, investment funds or capitalism. But it is exploiting vulnerabilities in a system designed by people who never thought folks could be this stupid. Now we know.

What can go wrong?

Lots. Tons. The implications are large. Securities regulators are all over Reddit, Robinhood and the capital markets because what’s taking place sure smells like deliberate crowdfunding manipulation. The issue is simple: values purposefully detached from reality. This undermines market integrity where pricing is constantly scrutinized and adjusted (earnings reports, fundamental analysis, forward guidance, prospectuses, p/e ratios, macroeconomics, sector analysis – you know, the adult stuff). Yes, valuations get out of whack when investors make bets on the future, but this is new ground. This is inflation merely for the sake of creating notional wealth. Greed, personified. Turned into a video game.

The crowning achievement in this moronic, self-serving, narcissistic behavior is to cloak it in moral outrage. The abuse posted here yesterday because of (a) my day job and (b) my age was interesting. A whole bunch of people clearly think they’re victims, so it’s perfectly cool to slag their elders, victimize each other and screw up capital markets where most people’s family nesteggs, education funds and retirement bucks are housed. So they can be porcine.

How do you protect yourself from this gathering crapstorm of moister vitriol?

Don’t buy individual stocks, since volatility’s being fed and market turmoil guaranteed. The diversified ETF approach is vastly superior if you have these two goals: (1) not losing money, and (2) achievng a decent rate of return. Further achieve this with balance, holding fixed-income assets that will counterbalance short-term equity mayhem. And don’t day trade. In fact, don’t trade at all. Build a portfolio with the correct weightings between assets then rebalance once or twice a year. In between, live your life, love your dog and stay the hell off Reddit.

Oh, and if you came here to diss me, to say I jumped the shark, accuse me of being part of a corrupt system, claim I don’t understand investing, or shout I’m on the wrong side of history, just think of all those happy old secure teachers. They thank you. Me, too.

This blog isn’t called Greater Fool for nothing.

The revolutionaries

What came first? The app or the attitude?

The big story is not about GameStop, Blackberry, AMC or whatever single stock gets blown up next. It’s about sentiment and technology, and how both (especially the former) just made dabbling in individual equities more suicidal. Whatever the outcome, it will be drenched in the bodily fluids of a million (at least) newbie ‘investors.’

Let’s start with the app. Then the fuel. Then the fools.

The Street calls them Hoodies – those DIY investors (overwhelmingly young) who have downloaded the Robinhood app and turned instantly into day traders. There are millions and millions of them now, attracted by an application that feels like a video game, costs nothing and allows free trades. It’s fun. It’s instant. There’s no set of weird, detailed know-your-client questions. No adults in the room. A few clicks and you’ve bought some shares. Empowering, and powerful.

There are more Hoodies now than clients of Schwab and E-Trade combined. They’re frenzied, too, trading about 40 times more shares than users of those other platforms. In many cases they own a security for just a few days. Sometimes just a few minutes. Researchers have found the Hoodies move in herds, rushing into publicized stocks with no real knowledge of the underlying business, based on ‘most popular’ or ‘trending’ lists. Two-thirds of the investors end up losing money, since the equities that are inflated inevitably plop, leaving the last ones in stranded. It’s not investing. It’s rolling the dice.

As for the fuel, these days it’s Reddit’s Wallstreetbets discussion board. That’s where the oxygen came from to push a crappy video retailer (GameStop) from nothing into orbit. Up 1,700%. It happened with BlackBerry too, now AMC, and previously it was Tesla and Doordash. Even crypto is being goosed beyond Bitcoin, with Dogecoin being pumped and inflated  77% in a few hours. But a lot of Hoodies don’t actually know much about the companies or the currencies. They focus on the ticker symbol and push the buy button. A TickTok stock-tip vid the other day featured a moister giving the secret to his success: “I just buy stocks that are going up and when they stop going up, I sell them.”

What could possibly go wrong with that depth of understanding and experience?

Well, the consequences just started. On Wednesday brokers stopped giving margin for these trades, forcing the kids to use their cash, and on Thursday the GameStop orgy can to a halt as platforms (including Robinhood) pulled the plug after it touched $500 a share – the pinnacle of absurdity. Imagine if you were one of the horde that joined the party just as the cops were pulling up outside.

This is stock market insanity on an historic scale. More to come. But it’s the attitude that’s the real toxin. On this blog yesterday we were awash in comments like, “Stick it to the man!!,” and “Bring the big boys to their knees,” and this gem: “It’s a beautiful thing Garth, watching the fortunes of lifelong money movers ruined, embrace it, just like the prostitutes at the Capitol cowering before the mob, brings a tear to the eye.”

GameStop etc. is being heralded as a white-vs-dark, David-Goliath, retail-institutional, moister-Boomer, fintech-paleo war. The kids are digging it. Regulators and capital market professionals are having a cow. When a $1 billion company with dim prospects becomes a $24 billion corporation with dim prospects, every alarm bell goes off. As stock prices detach from either profits (like the banks) or the potential for them (like Tesla), everybody knows what comes next. Slaughter. It’s not the hedge funds shorting the stocks and being swarmed by the Hoodies that we care about. It’s the integrity of the financial system which backs the economy.

Do the Mills think they’re paying back ‘the man’ for making them go to uni for 14 years in order to graduate into a jobless pandemic-addled world when nobody can afford a house while their parents’ portfolios plump? Hmmm. Well then, it’s another fail.

Look what happened yesterday to those kids who bought GME at $500 a pop overnight. The smart money bailed. The stock crashed, gyrated and shocked. It dropped $200 a share in five minutes during the afternoon. It lost 45% of its value on Thursday. The rabble at the bottom learned what a Ponzi scheme is. Redditers may end up investigated for market manipulation, especially those insiders who lit the fuse. Quelle mess.

Securities trading rules exist for a reason. To curtail fraud, cheating, criminality and unethical behaviour, of course. But also to protect complete idiots, especially the greedy ones, from themselves. What have Reddit and the Hoodies proven? Yup, that more regs are needed. The stock market is not a casino, nor can it be allowed to become one. The advent of mass trading by ingénues gassed up by a social media rabble is a fresh threat – not just to a system where corps get financed in order to expand and create jobs – but to all the naïve players tricked into thinking they’re noble.

It’s not the first time markets have been rocked by technology. Telephone trading morphed into online discount brokerages, then came high-frequency trading, algos, quants, hedgies, now fintech, trading apps, the Reddit rabble, DEFI and web3.0.

Well, the kiddos are too young to have been in the market when the dot-com euphoria turned to dust, wiping out 80% of the value of tech darlings. And they weren’t yakking on chat boards when Bre-X went to the moon before being vaporized. They weren’t in existence when people lined Toronto’s Yonge Street to buy gold as it hit the highest-ever price point – and everyone said it would go up forever.

This is not investing. It’s not a revolution. It’s not even new. It’s financially-illiterate, greedy sheep being manipulated by the unscrupulous and the irresponsible. They’ll learn the way the suckas of the past did. And ‘the man’ once again will move in and try to corral human nature. Good luck with that.