"Your boss is an old friend of mine. Thus, I better give you the most important piece of advice on how this business really works. Everything depends on if there are more idiots than stocks or more stocks than idiots." -- Anecdote told by Andre Kostolany March 01, 2021
When do I know it’s time for an Update? When my 78-year-old Mother pops over to take her granddaughter out for ice cream and asks about GameStop. When my best friend from high school texts me and tells me he’s now day trading and asks if I’m doing it, too. That’s when.
The end of a bubble is obvious in hindsight, but it isn’t clear in the moment. There is no one event or indicator that signals the top of a bubble. It’s a process. First, the best valuation metrics approach historic levels. We’ll call this the Bubble Phase. It’s the after-party, and it’s still early. The band sounds great, the energy is electric, and everyone’s a little tipsy. After some time, we hit the Mania Phase. The small investor crashes the shindig and thinks he’s the life of the party as he pulls the last few drags from the cigarette butts on the floor, swills the dregs of whiskey left behind in dirty shot glasses, and starts snorting ground-up bull testes off the hood of one of the 37 Teslas parked outside. The final phase is the Anecdote Phase. This is when we start hearing crazy stories of out-of-work waitresses turning their $1,000 stimmie check into $100,000 using call options, our parents start asking us about GameStop, and our buddies think they can outwit Citadel, Goldman Sachs, and BlackRock at the trading game. Welcome to the Anecdote Phase!
At the bottom of a market, fear is rampant and investors believe risk is extreme at precisely the time risk is actually historically low and attractively priced. The inverse applies at the top. Today, investors think risk is low, stocks only go up, the Fed won’t let stocks fall, dips should always be bought, etc. We know how these stories end. We just don’t know when. In the Anecdote Phase,
the market is being driven by Caleb (above), who claims to not be a virgin…which is exactly what a virgin would say. Bubbles and manias thrive as long as new suckers/investors/marks can be found to keep the pump alive. This after-party has been raging for a while. I wonder how many Calebs are left.
The Anecdote Phase
A lot has happened in 7 months since I wrote about Sherrie who had “invested” her “stimulus savings” in HTZ somewhere around $3.00/share and was nursing a 50% loss but had no plans to sell the bankrupt company because she “always had good business with them and their community efforts.” The small investor horde has graduated from gambling on literally bankrupt companies to pumping up companies on life-support to astronomical levels as they wage war with billion-dollar hedge funds with large short positions. The Gettysburg of this latest assault was GameStop (GME). If you haven’t heard of it by now, I envy your ability to avoid the internet, a TV, and other human beings. To really understand what happened with GME (below) you need to know how shorting stocks and buying options work. You need to understand delta and gamma. You need to understand how clearing and settlement processes work. It helps to know what it means to pay for order flow, and you need to understand who the players are in these markets, what their incentive are, and how they make money. Notice how I didn’t mention sales, earnings, valuation, or the competitive landscape? We’re not going to dissect GME today. We don’t need to. Just look at the chart. That is not normal.
The GME pump-n-dump was brought to you with the help of the subreddit group, WallStreetBets. Reddit is a social media and discussion website that allows people to form online communities, ask questions, share ideas, pontificate, whine, beg, complain, advise, post memes, and generally waste time. WallStreetBets is one such community, and it has exploded to over 9 million members in recent weeks. Correction, they refer to themselves as “degenerates” and “retards”, not members. Please don’t cancel me. These are their own words, not mine. I have spent hours reading some of their posts so that you don’t have to. I am dumber for it and fear I may have suffered a mild aneurysm. I’m contemplating raising my fee to cover hazard pay. No, I didn’t bump into Caleb, but we all know he’s there.
WallStreetBets claims to be anti-Wall Street and seems to think they can stick it to the man by piling into the same stocks, riding them “to the moon” with “diamond hands” to get them “tendies.” I can’t tell the difference between their posts and the text exchanges between my 12-year old and her friends. The basic premise seems to be that they can teach Wall Street a lesson if they all buy the same stocks and never sell. They scream, “Don’t let the billionaires win!” and think that indiscriminately driving some stocks absurdly higher will keep the billionaires from winning. I’m admittedly not smart enough to grasp this sophisticated strategy. Yes, I understand that some hedge funds may be hurt if they were short the targeted stock, but what’s the worst case for them? If it wrecks their performance track record, they just sell their shop to another hedge fund and carry on, or they close up shop and reincarnate a year later under a new name. Maybe they have to cut back on their luxury car purchases for a year or buy a smaller private jet. Let’s not forget that other hedge funds owned GME and reaped huge gains from the manic buying. So, this whole “we’re going to teach Wall Street a lesson by driving some of their stocks to crazy high levels” is adorable. The only ones who really get hurt are the little guys who jump into these pumps late and ride them all the way down. Wall Street doesn’t lose. The little guy does. This retail mania…it isn’t normal.
Next up on our brief tour of the Anecdote Phase is perhaps the greatest living anecdote himself, Elon Musk. Musk is a fraud encased in a craze within a mania encapsulated in a bubble. He’s the poster child of this bubble, and I’ve long believed that the end of this bubble will coincide with the popping of Musk’s cult of personality and perceived infallibility. However, in the meantime, when a bubble incarnate tweets a few words, the Children of Elon listen and respond. Earlier this year, Musk tweeted “use Signal.” It should have been fairly obvious that he was referring to the messaging app, but investors plowed into a tiny company called Signal Advance Inc. (SIGL) and drove the stock up over 10,000% at its peak (see below). Of course, it subsequently collapsed, but it still incredibly remains 370% higher than before Musk’s two-word tweet. This is not normal.
Elon then started tweeting about Dogecoin (a cryptocurrency) on February 4th, saying he bought some for his son who he named X Æ A-XII. That’s not a typo. That’s his son’s name. That is not normal. Dogecoin doubled in the next few days, running from $0.04 to $0.08. Nothing fundamental changed in the world. Elon just tweeted. Dogecoin has since fallen 33% from its high. Not normal.
It isn’t just Elon and Doge. All of the cryptocurrencies, including Bitcoin, have had a huge move lately as people scramble to buy something they don’t understand only because it’s going up. We’ve talked about how cryptocurrencies are in some way the perfect bubble/mania asset because there is no way to put a value on it. It’s easy to justify a value of zero as well as near-infinity. I’ve yet to meet anyone who could succinctly and clearly articulate what cryptocurrencies are, how they are created, and why they have value. Doesn’t matter. They’re going up. BUY BUY BUY! Normal? No.
Want more? TikTok and YouTube are now filled with young, self-proclaimed investment gurus who have never seen a bear market. Some may have had the good fortune of dropping their government stimulus check into a high risk call option that paid off. Rather than equating that to a lucky outing in Vegas, they assume that the Divine has bestowed upon them great investment knowledge and foresight. Take Chad and Jenny (below), for example. They were asked how they made money while traveling. Chad answers, “So, basically, I just trade stocks on an app called Robinhood… Here’s my strategy in a nutshell. I see a stock going up and I buy it, and
I just watch it until it stops going up, and then I sell it. And I do that over and over, and it pays for our whole lifestyle.” They cracked the code! Only buy stocks that go up and sell them when they stop going up! You have to feel sorry for Citadel and Goldman and all of those hedge funds collectively spending billions of dollars on software and telecommunications equipment to steal fractions of a penny on each trade when all they need to do is buy stocks that go up. This is not normal.
Have you heard of SPACs (Special Purpose Acquisition Companies)? A SPAC is a shell company with no operating assets or business that raises money from investors to……..eventually………acquire………..…..some other company. Got that? You give them your money, hoping that they’ll make a smart acquisition with it. Today, you can invest in Colin Kapaernik’s SPAC to build brands with “meaningful and financial societal value” for a mere $287 million. You can also invest with former House Speaker Paul Ryan and his $300 million SPAC. A-Rod, Ciara, Jaz-Z, Serena Williams, and Steph Curry have all jumped on the SPAC wagon. Why the interest from these investment legends? The sponsors of these deals get a 20% stake in the deal they eventually cobble together. They have two years to find and make an acquisition and collect that 20% payday, or they have to return the money to investors, so there’s pressure to make a deal…any deal…..no, seriously….ANY POSSIBLE DEAL AND AT ANY PRICE. 144 SPACs have already gone public in 2021. This is not normal.
My final entry for the Anecdote Phase is CryptoArt. I’ve always believed that you should never invest in anything you couldn’t explain to a 10-year old or on the back of a napkin. I can’t do it with CryptoArt. I recall this starting in 2017 with CryptoKitties. That involved the breeding and trading of unique digital kittens based on blockchain technology. Just read that last sentence slowly a few times. What?! It looks like this space has “evolved” since then. You can research this for yourself, if interested. All I need to know right now is that I can apparently buy this unique collectible character (below) with proof of ownership stored on the Ethereum blockchain for a mere $60,828. This is not normal.
The Long And The Short Of It
The market is crazy overvalued thanks to the central banks and the self-reinforcing cycle of passive portfolio flows. The higher it goes, the harder the fall. I have no interest in owning the S&P 500, the NASDAQ Composite, or much of anything in bond land. The bubble has morphed into a mania, and the little guy is once again getting vacuumed into the greed vortex for a spin before getting spit out and beaten back a tax bracket or two. The examples and anecdotes I chose for this piece are a small fraction of what I’ve seen in recent months. This is NOT the type of activity you see in a healthy market or anywhere near the beginning of a bull market. This is froth, mania, desperation, greed, pride, envy, gluttony, Sleepy, Dopey, and Grumpy. We’re back to that year 2000 day-trading mentality of chasing a fast buck because everyone else is chasing everyone else who is chasing a fast buck. It’s the bastard child of the Mandelbrot Set and Greater Fool Theory. It isn’t normal.
Nevertheless, there have been pockets of tremendous value out there, and we’ve found them primarily in the commodity space. We have a significant holding in precious metals. In a world of quantitative easing, interest rate suppression, massive deficit spending, and spiraling debt, it strikes me as imprudent to not own gold, silver, and precious metal mining equities.
Our uranium holdings are now our largest position in most accounts, and uranium remains one of the most compelling opportunities I’ve seen in my career. We methodically built out our uranium holdings over the course of a year and a half, and our patience and diligence has recently been rewarded. There will be significant pullbacks along the way, but I expect a multi-year bull market in this space.
Our third largest position is in oil and gas producers and pipelines. We established this position primarily between late September and the end of October last year when the sector was hated and oil prices were under $40/barrel. I started my career as an energy analyst but had never owned Exxon (XOM) until September when we bought it for $35/share. There may not have been a more hated name in the market at that time, but it had a 10% dividend yield, and I felt confident that demand growth and supply destruction would drive oil prices much higher. A couple of our more speculative energy names are up 150-200% since late October. So far, so good on our oil/gas producers. Our tanker stocks have lagged, and we’ve taken advantage of that to gradually add to those names. I’ll have more details about all of these key positions in future writings, but I’m happy that we have a number of core theses at play that aren’t dependent on “not normal” investors making “not normal” investments for “not normal” reasons. Of course, should they choose to come to our playgrounds, we’ll be happy to supply them with shares at much higher prices.
Best,
Ken Bell, CFA, CFP, MBA, CryptoKitty Skeptic
Aspera Financial, LLC
The Market Rubbernecker is associated with Aspera Financial, LLC, an investment management and financial planning firm based in the Cary, Raleigh, and Durham area of North Carolina. This and all Market Rubbernecker missives and musings (written, oral, or mimed) are subject to the disclaimers, disavowals, and hindquarter-coverings found at www.asperafinancial.com/aboutrubbernecker.
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