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GameStop Helps Explain Robinhood’s Free Stock Trades

February 4, 2021 By E.J. Smith

As I explained to you yesterday in Money 101: There’s a Reason Family Always Comes 1st, when something is free, you’re probably the product being sold. Sold to whom? Well, in the case of GameStop, for example, Robinhood sold high-speed traders customer order flow as reported in the WSJ back in December: Robinhood Financial LLC has agreed to pay $65 million to settle regulatory claims that it didn’t sufficiently disclose its business deals with high-speed trading firms, the Securities and Exchange Commission said Thursday. The fine is a setback for the fast-growing company, which has helped … [Read more...]

Fidelity #1: GameStop Gets Stopped Out By Robinhood

January 29, 2021 By E.J. Smith

Robinhood made the grave mistake of cutting back trading yesterday. Why is this important? Because, for example, if someone places a market trade and the broker limits trading, your order might not be executed. You might even think you’re already out of the position but in reality you’re not because the platform limited trading.The next thing you know the stock has dropped by some crazy percentage and you’re still in it. If you’re going to play with the big boys then get aligned with a big boy platform like Fidelity Investments. This is not a game. And it’s why Fidelity remains #1 in my … [Read more...]

Retail Investors Go Unicorn Hunting

January 28, 2021 By Jeremy Jones, CFA

James Bianco explains the dramatically changing investing preferences of the public, writing: There is no one definitive measure to show this shift, but the signs are unmistakable. Trading in individual stock options has been booming to new records, according to data from the Options Clearing Corporation. This has been led by purchases of options to buy stocks in lots of 10 contracts or fewer. Nearly 15 per cent of all trades are for one contract. Penny stocks have recently caught the fancy of investors. In December 2020, they traded 1tn shares, according to data firm SentimenTrader. That … [Read more...]

Valuations Reminiscent of Dot-Com Crash in 2000: Part II

January 27, 2021 By E.J. Smith

You read yesterday about the online forums where traders are encouraging each other to invest in stocks, and creating a tug of war between them and hedge fund managers that is driving some stocks to dot-com bubble level valuations. The trading storm created by these online rumor mills is taking a toll on online trading platforms, report Justin Baer and Peter Rudegeair in The Wall Street Journal. They write: “These outages generate annoyance among investors in the short term,” said William Trout, director of wealth management at Javelin Strategy & Research. “Longer-term, outages call … [Read more...]

The Bull Raids are Wreaking Havoc on Wall Street

January 27, 2021 By Jeremy Jones, CFA

This is a new dynamic. We’ve referenced GameStop (see here and here) and other stocks with high short interest being targets of message board traders before, but we haven’t seen coordinated action with this kind of an impact before. Instead of investing based on company fundamentals, traders in GameStop are trying to squeeze short investors. A short squeeze is when an investor who shorts a stock is forced to buy it back because the price has risen so much. In pre-market trading early this morning GameStop shares traded as high as $365. Ten days ago the stock was selling for $20. Short … [Read more...]

Valuations Reminiscent of Dot-Com Crash in 2000

January 27, 2021 By E.J. Smith

Are you paying attention to what’s happening here? I’m talking about the tug-of-war between hedge funds and day traders with shares of GameStop. "The rally has been fueled by investors encouraging each other on social media to pile into GameStop shares and options," reports the WSJ. "The buying pressure has led money managers to switch out of substantial bets that the stock would fall, investors and analysts said. This resulted in a short squeeze, in which rising prices prompt investors to buy back shares they had sold short to cut their losses, pushing the stock higher still.” From the … [Read more...]

Capital Is Too Cheap

January 26, 2021 By Jeremy Jones, CFA

The global capital markets are booming. The FT reports that companies have raised $400 billion in debt and equity over the first three weeks of the year. That exceeds the average for this time of year by $170 billion. And it’s not just a debt boom that's being fueled by the global central banks robbing savers and retirees with ultra-low interest rates. Equity markets are white-hot as well. Speculative activity in the stock market has reached levels not seen since the height of the dot-com bubble. Stocks don’t often double, triple, and quadruple over the course of a few days or weeks for … [Read more...]

Corporations Rush to Reap Equity Windfall

January 22, 2021 By Jeremy Jones, CFA

With equity valuations at or near record levels by many measures, publicly traded corporations are racing to sell shares into the market. Karen Langley reports at The Wall Street Journal: Public companies have been taking advantage of a hot stock market by issuing shares at record pace in January. U.S.-listed companies have conducted 57 follow-on stock offerings this year through Wednesday, raising $12.35 billion. Both numbers are records for this point in the year, according to Dealogic data going back to 1995. Many of the offerings have been from small pharmaceutical and other … [Read more...]

Investors Are Being Conditioned Not To Recognize the Danger

January 27, 2021 By Jeremy Jones, CFA

The Financial Times reports on comments by Seth Klarman comparing investors to frogs in slowly boiling water who can't feel the change in temperature until it's too late, writing: Seth Klarman, the founder of hedge fund Baupost Group, has told clients central bank policies and government stimulus have convinced investors that risk “has simply vanished”, leaving the market unable to fulfil its role as a price discovery mechanism. The private letter to investors in his fund, seen by the Financial Times, amounts to a damning critique of market behaviour by one of the world’s foremost value … [Read more...]

Whether Through Audacity or Ignorance, Stock Fundamentals Are Being Ignored

January 19, 2021 By Jeremy Jones, CFA

James Mackintosh reports at the Wall Street Journal that stock fundamentals are being ignored by investors. It's not clear whether the cause is an influx of new investors who are ignorant of fundamental analysis, or heightened appetite for risk. Whatever it is, it's probably unsafe for the market. Mackintosh writes: Sometimes it’s hard to argue that market capitalism has any chance of correctly allocating money to the companies that can use it best. Case in point: Stock-market performance this year has been driven by the raw share price, with lower-priced stocks doing better and higher-priced … [Read more...]

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