The Revolution

I've been a market observer for over 20 years and I've seen some really crazy shit. This GME mania is right up there. People from all walks of life, including porn stars and rappers are joining "the revolution". A tweet from Cameron Winklevoss sums up the revolution perfectly "If you don't like the suits buy GME and AMC, if you don't like the bankers buy bitcoin". I'm not surprised that this frenzy has lasted this long because "clever contrarians"  have simply been adding fuel to fire. On Monday I read an article which said that for every short position in GME that was closed there was extremely strong demand from new short sellers. They were probably thinking "What an opportunity to make money off these fools"  Whoops! The clever contrarians got ran over and they became the fools! Such a thing is not uncommon when you have a mania. People see what looks to be clearly irrational behavior and they figure they could profit from its inevitable demise, but they underestimate the frenzy and end up adding more fuel to the fire as they are forced to capitulate. 

This will of course end badly. There's only so long you can keep a stock or asset inflated based on feelings or hype and you'd be incredibly naïve to think that all the "retards" as the WSB members call themselves,  are going to successfully cash out at the expense of the shorts. Some will no doubt, but most will end up being bag holders as they are being brainwashed to "hold the line"  and have "diamond hands",  Unjustified high prices will attract sellers and eventually they will overwhelm the buyers once there's no more greater fools left or weak shorts to squeeze. Notice I said weak shorts. Not all shorts can be squeezed easily as they may have hedges or strong hands.  

The action in GME and the like are further examples of the point I made about bitcoin in that its inflated value is based purely on speculative inflows underpinned by some delusional belief/notion that goes viral. Now, don't get me wrong. I have no sympathy for hedge funds who are getting raped shorting GME. The setup to squeeze them was brilliant but ultimately, fundamentals prevail.  All of this revolution talk is nonsense and can only end badly for the little guy. Expressing your dissatisfaction of wallstreet elites by artificially inflating certain stocks to ridiculous prices is not a viable long term strategy and can only end in tears for those who are now jumping on board.  The easy money was made initially with the squeeze that caught the shorts by surprise. Again, well done.  But now the cat is out of the bag as this story has gone mainstream. The end result of this will be that the vast majority of the naïve revolutionists who are getting in now will be holding the bag. That's really the bottom line here.  I suspect the frenzy will fizzle out this week.  

Retail army of traders taking pump and dump to a new level

 In my last post I talked about the power of the greater fool phenomenon. Don't for second think that whatever stocks you own which are preforming well are being purely supported by the good "fundamentals" you researched. There's almost certainly a significant degree of hot money momo flow that is supporting the stock too which will bail at the first hint of weakness. Hot money flow is no different than greater fool buying - people are buying only because the price is rising. So long as there's more buyers than sellers at a particular moment in time, the price of any asset regardless of its fundamentals will go up.  This is the notorious principle underlying a pump and dump scheme. Usually you see pump and dumps orchestrated by shady stock promoters or scammers like Wolf of Wallstreet types. But now thanks to a cocktail of social media, smart phone trading apps, free money from the government and unemployed millennials with time on their hands, stocks that a have a low float and/or high short base like GME can get highjacked by retail trading "cults".  At first the pros scoffed at them and most still do, but meanwhile the "smart money" is being left if the dust or worse getting raped being short. 

The stocks that are targeted doesn't necessarily have to have a high short base (although that would be ideal). So long as the float is small they can highjack the stock. And unlike with a pump and dump where there is usually misinformation/hype that suckers people into a buying a stock, the trading cults can simply target any random stock and highjack it with just the simplest of reasons like "the technicals looks good"  or "it's in a hot sector" or "let's squeeze the shit out the shorts" and that's it!  GME was an example of the latter. Then you got stocks like BB which have gone up for no apparent reason with the company officially making such announcement. 

Surely this must be a sign of euphoria, that the end of this run is near right? Well, not so fast. As I mentioned earlier, the "pros" are still scoffing this rather than behaving recklessly themselves. Although I would say there is indeed some indicators that bullish positioning is elevated, I don't get nearly the same sense of euphoria from them. Mind you, I'm not expecting the pros to engage in similar pump and dump behavior, but what I think will eventually happen is that the pros will capitulate and get fully invested into high flyer type stocks and find whatever rationalization to do so without always looking over their shoulder for the next correction like they are now. You can see evidence of this by the stubbornly elevated VIX which is quick to jump on the fist hint of weakness.

I said this before but it bears repeating. The one major thing missing for the ultimate top to be near is tight monetary and fiscal conditions. Such conditions right now are at the opposite end of the spectrum  and provide a fertile environment for this type of speculative activity to take place. While you can get nasty corrections, you simply don't get major bubble peaks until the authorities take away the punch bowl unless the economy unravels on its own accord without the usual trigger of tight money and fiscal. That simply doesn't  happen though. You can get periods of  a slowdown but not outright contraction. 

The question I'm wresting with is do we just keep melting up to the point of maximum all in or is there some sort of a shakeout first?  If the authorities just give the slightest of hints that the punch bowl will be taken away sooner than expected or the punch bowl will be less filled than expected, that would probably be a catalyst for a correction. Until then, embrace the action if you can do so intelligently while incrementally raising cash into strength.  It's very tempting to try and pick the top but just remember the pitfalls of trying to be the clever contrarian. However when in doubt just stay out. If know you're going to be a weak long it's best you don't get involved for you will get shaken out easily just like today's morning action. 

Bitcoin the ultimate greater fool play

It's quite amazing how far this bitcoin pyramid scheme has gone on for. A few weeks ago my dad asked me about bitcoin. The last time he asked me about an investment was silver back in 2011 when it was near $50...take that for what it's worth. Never under estimate the madness of crowds. There's books you could read about irrational crazes such as the tulip bulb mania and the south sea bubble. Bitcoin will probably go down as one of the biggest if not biggest bubble of all time. What's amazing is how the bitcoin bubble got  re-inflated after bursting about 3 years ago. That's incredible and I suspect part of the reason for this is that institutional money got more involved which is scary. 

If I could summarize the bullish thesis of bitcoin bulls it would be this: Bitcoin is the currency of the future because a) it has limited supply b) it is self governed by a decentralized system rather than a central authority which can print fiat currency at will c) you can transfer coins from one holder to another anonymously  d) it's the poster boy of blockchain technology.  All of this is fine and dandy but the problem is that bitcoin was created out of thin air by some random dude. It is not legal tender. The fact that it has limited supply is meaningless. My turds are of limited supply too, does that make them valuable? The fact that "the people" are saying bitcoin has a value given its current price does not validate it either. In Holland at the peak of the 1637 tulip bulb mania, tulip bulb prices fetched  $100-$500K in today's dollars before collapsing over 99+% in a few months, hence the price did not "validate" anything.  Just like with other manias, the price of bitcoin is purely supported by the speculative inflows of greater fools. These manias typically happen when a group of people are deluded into believing some pipe dream and it goes viral. Ultimately, you run out of suckers and the whole thing collapses. 

The fact that bitcoin uses  a clever technology,  no way justifies the bitcoin token itself to have any value. Again, it's not legal tender, it's simply a "token" created out of thin air. Anyone can come up with their own coin and they have. There's several dozens of other coins out there, one more worthless than the next. Although some merchants  are starting to accept crypto (mainly bitcoin), ultimately they have to convert to it to fiat currency for it to be useful and they are willing to take the risk of doing that....for now. Let's see how that changes when bitcoin collapses.   

One might argue that fiat money is also created out of thin air and so it too should be worthless. Well, there's a big difference. Fiat currency is enforced by the government as it is legal tender, It is also needed to pay taxes. As such, society has set it self up to offer labor, goods and services in exchange for fiat currency due to the confidence/enforcement of the government that issues it and the strength of the underlying economy itself.  It's not a perfect system as it is possible for the government to mismanage the economy causing the currency to lose value i.e. via inflation, but what's the alternative? Switch to bitcoin? Think about how silly and impossible that would be. You expect a government to relinquish its authority to manage the economy to an algorithm? To bitcoin miners?  How would anyone be able to get a "bitcoin" mortgage to buy a house? The limited supply of bitcoin is a mismatch for the ever increasing growth in the economy. It would be massively restrictive and deflationary. Why am I even wasting internet space discussing this? And what about the ridiculous power that is being consumed to mine bitcoin? As much as the entire country of Switzerland. What a totally asinine waste of resources. It's so fucking ridiculous. This is the "currency" of the future???? 

The fact that institutional money is getting involved in bitcoin makes it scary because now the general economy can become at risk when this thing collapses. There's apparently a lot of manipulation in bitcoin trading as there's little regulation. There's already been a notable number of frauds and theft. I think most  people are woefully underestimating the greater fool buying that is driving bitcoin. I turn your attention to a company called Signal Advance Inc. ticker SIGL. About 2 weeks ago Elon Musk tweeted favorably about messenger app Signal and it caused this stock to sky rocket from 0.60 to $70 in a couple of days even though it has absolutely nothing to do with app except for  having the name Signal. Now, I could understand if there was a one day misunderstanding/confusion but the fact that this stock is STILL trading 10 times higher  than it was prior to Elon's tweet 2 weeks later tells you something about how long stupidity and ignorance can linger on for in regards to any "asset" that's out there. We saw a similar stupidity in the trading of bankrupt Hertz in June. It was so stupid that Hertz tried to issue additional worthless shares to the suckers but lucky for them regulators blocked it. Too bad...they should have allowed it! These examples show you just how far greater fool buying can go. It can drive up prices of any asset regardless of its intrinsic worth even if that worth is 0. 

I strongly suspect bitcoin will end badly....again, and this time for good. But don't get me wrong. I'm not like the embittered, miserable SOB permabear types whos gets angry about things like this. I laugh about it. If you can make money on it good for you! I salute you. I'm not a jealous or envious man. 

I am also open for anyone to provide me with a convincing bullish case for bitcoin. Any takers? 

The folly of trying to be clever

I've been meaning to write this post for a while. I tend to approach the markets from a contrarian perspective. I try to be mindful of what others are doing and avoid or do the opposite of a trade that  becomes too popular. I don't like the thought of possibly being late to a crowded party and then be left holding the bag with the rest of the lemmings. I much  rather prefer trying to be one step ahead of everyone, arriving early to the next party. There's a certain satisfaction one gets using a contrarian approach. It makes you feel clever avoiding groupthink and doing what most others aren't and if you get it right it can be very lucrative.  On a personal level, I'm very much a contrarian. For instance, unlike most of my friends, I didn't let myself go. I'll be 44 this year and without trying to sound arrogant, I don't look or feel like a 44 year old. When new people I meet first realize my age I almost always get a surprised look on their face. I workout everyday for 45-60 minutes and I eat fairly clean.  I can still keep up with 20 somethings on the soccer pitch.  I do what most people my age don't do and I take pride in that. 

There is however pitfalls with contrarian thinking when it comes to financial markets. In order to be successful at taking a contrary approach you need to be mindful that there will be a period of time when the crowd is "right" and if you fail to appreciate that, your contrarian stance will prove too hasty which could lead to leaving big money on the table or even worse taking heavy losses betting against the crowd. It can be difficult to know just how far the crowded trade can go on for. You might think that everyone is all in only for there to be a new group of "suckers" that come to the party.. The other pitfall of contrarian thinking is being a contrarian just for contrarian sake. For example, taking a contrarian stance that grass will soon be non-green because everyone believes it's green is foolish. In financial markets a good example is when a company files for Ch 11 and the stock crashes since  it becomes fundamentally worthless. Taking a contrarian stance on such an outcome will prove futile aside from the temporary stupidity/ignorance that could happen like with Hertz stock in June. 

Then  there's also the possibility that you could be flat out wrong about a contrarian call whereby you think you're being a contrarian when in fact your thesis is being shared by many others too which therefore makes YOU the sucker. I think we've been seeing this type of phenomenon play out more so in recent times. The 2000-2002 and 2007-2009  big bear markets created a legion of bitter, cynical investors who vowed never to be a "sucker" again. I often call these folks the permabear trading community. After getting burned by bear markets they vowed never to be fooled again by "Wallstreet crooks" and blogs like zerohedge became popular.  The COVID crash may have added a bit more to this ilk but at the same time it minted a legion of newbie millennial traders. The perrmabear trading community scoffed at these millennials saying "just you wait and see, they're gong to learn a hard lesson!". The ironic thing is that the permabears you see today were once like the naïve, happy go lucky newbie millennial trader until they eventually turned to the dark side after getting burned. So what I suspect ending up happening is that many of the permabear trading community bet against the highflying stocks like TSLA thinking they are being clever contrarians and ended up just adding fuel to the fire making the so called "contrarian trade" not so contrarian after all.  So long as there's a greater fool, there's no limit as to how high or how long a stock/asset can go. Bearish bets placed against an asset are a potential source of buying power especially when being placed by weak holders like those of the permabear trading community tend to be. Eventually we'll get to the point where most of the permabear types will throw their hands up in the air and say "if you can't beat em, join em" or at the very least step aside. But this transition could take time. You might see the permabears back off for a while but on the first hint of notable weakness they come back, much like a crack addict who quits and then uses again a few weeks later. We saw this happen in the aftermath of 2008 crash.  

So in conclusion, be careful trying to play the contrarian for you may be early or not actually be one after all. If you are going to make a contrarian bet you need to make yourself a strong holder. Making a large bet with a "tight stop" is an example of what not to do. Come in with the expectation that you probably going to be early. If you're going to go long be prepared to handle ANY amount of paper loss which means you position your size accordingly. If you want to make a bet against a stock, I strongly advise to use (if possible) long dated  put options,  this way you can't be forced to cover if the position goes against you and you're giving yourself plenty of time for your thesis to pay off.  Don't buy options that will expire in a couple of months. Again, come in with the expectation that you will be early. 

Next post I will talk about bitcoin which was also a long time coming. 

Expectations have risen substantially coming into 2021

I've mentioned here more than once how important it is to keep tabs on expectations of market participants. You can quantify expectations to a degree by looking at earnings estimates, price target and such; you can also try to get a sense of what the narratives are from the pundits and media but in my opinion the most important thing to look at is what people are are actually doing with their money. People will only truly embrace expectations when they put their money where their mouth is. Post election there has definitely been a notable upward shift in expectations when you look at recent trends in fund flows, margin debt and IPOs/SPACs. You won't find a shortage of market watchers claiming how all of this is ominous for the market. I share these concerns but for now, it's a short to medium term concern. Is the market primed for a 10-20% correction? In my opinion yes. Conditions are such that the door is open to this. I felt a similar way coming into 2018 but my conviction level isn't as great  this time around. In my opinion, we could soon see something along the lines of what we saw in the spring/summer of 2010 whereby we had a massive relief rally given how the world didn't in fact come to end but then complacency/greed crept in too much and a cleansing of this froth was necessary which started off with the flash crash. 

On a longer term scale, there's still more room for more people to ""get in the pool". Yes, fund flows have  spiked, but that's coming off a period of chronic flat/negative flows for 2 years.  If you look back from when the bull market of 2009 began, equity fund flows have been pretty tepid generally since then. The speculative actions of millennial traders are not representative of the sentiment that exists from the baby boomers (who control far more money) and institutional money. Yes, sentiment is more bullish overall from these 2 groups of folks but it's not as extreme. The other thing that prevents me from believing we are near a major bull market top i.e. a la 2000 or 2007 is because monetary and fiscal policy are extremely accommodative now whereas it was restrictive then. And although the narrative has definitely shifted to a more positive tone, there's still lingering concerns in the back of most people's minds about COVID and the recovery and it probably wouldn't take much to inflame those fears. When you look at  the conditions near major bull market peaks of the past, it tends to be nothing but blue skies ahead. 

It's a very peculiar market we find ourselves in right. now. The excesses in SPACs/IPOs is clearly a red flag but normally you would see such behavior near the peak of an economic cycle i.e. a after a long period of low unemployment strong growth. Can it be possible for us to get a cleansing of this froth and yet have the bull market still be in tact? I think the answer is yes for the reasons I've already mentioned. Outside of COVID we've had some scary corrections since 2009, 2 of which were 20%. Those corrections proceeded periods of froth not unlike such as what we see now. So long as earnings in general don't collapse;, i.e. there's no financial crisis which leads to general mass deleveraging and bankruptcies,  any corrections that do happen, severe as they may be, should only remain just that - corrections and not the end of the bull market, simply because the fixed income markets don't provide an attractive enough alternative. 

I think it will be important to be tactical in the coming weeks/months but stick with long term high conviction themes i.e. clean energy and energy efficiency.