The world of finance, constantly looking for rules and laws that it can break in order to make more money, may have encountered the only law that cannot be broken: the law of attraction.
Over the past few weeks and months, nearly every financial asset has been back on Earth after high-altitude flights.
That includes traditional stocks and bonds, which spent most of 2022 in the red. But cliched assets like cryptocurrencies, non-fungible tokens (NFTs), blank check companies, or SPACs, and meme stocks like GameStop, have taken the biggest hits.
Unicorns are soldered, their reins pulled, their horns hammered with a croquet hammer….realism starts fast.
– Joshua M. Brown
So you also have “story stocks” – those that are traded on more popular predictions or big guesswork than traditional financial analysis.
They include stakes in companies that have risen by providing goods or services that have seen high demand during the pandemic — for example, sports bike maker Peloton, which has sweated 93% from its peak of $171.09 in January 2021, and Zoom Video Communications . , down 85% from its peak of $588.84 in October 2020.
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Then there’s electric car maker Tesla, which is perhaps the most prominent stock in the market today. Tesla shares the trade largely on its followers’ belief in the wisdom of its CEO, Elon Musk. In trading Wednesday, shares fell $66 to $734, down 41% from a peak of $1,243.49 on Nov. 4.
The price shock at Tesla could have any of several causes, as I wrote last month. Among them is concern about Musk flirting with a new game, Twitter, which he is proposing to buy in part by borrowing against his Tesla shares in a way that could force him to sell some shares if the price continues to fall. (Bloomberg has estimated this point at $740, which means a margin call may already have been issued.)
Or maybe the market finally realized that Tesla’s stock was overpriced in relation to its actual financial prospects.
Put it all together, and investors large and small may feel they have nowhere to hide.
As Joshua M. Brown of Ritholtz Wealth Management put it in his blog The Reformed Broker, “Puppet is done with unicorns, pull the reins, hammer their horns with a Crockett hammer….realism enters fast.”
He notes that the buzzwords that were prevalent only a year ago — “unlimited growth, addressable mass market, enterprise-backed, innovative, groundbreaking, Web 3, transformative, disruptive” — are no longer uttered with an explicit view.
Some of the carnage reflects factors in the markets as a whole. Investment risk increases in tandem with rising interest rates, which results in strong corporate sales winds and higher thresholds for corporate profitability.
Financial regulators such as central banks and the US Securities and Exchange Commission are moving to tighten rules on investments that initially appeared to fall outside their purview, such as cryptocurrencies and SPACs. As social distancing practices ease, investors who have played the markets out of boredom may return to other forms of entertainment.
In a broad market, dips may simply be part of a natural cycle in which periodically excessive enthusiasm is balanced by gloom.
The downdraft process has almost reduced some stars of modern fads to the status of an unpopular character. One is investment director Cathy Wood, whose ARK Investment Management was the perfect vehicle for stakes in New Economy companies. The ARK Innovation exchange fund, which retail investors can take advantage of Wood’s picks, peaked at $132.50 on June 30. The closing price on Wednesday was $36.93.
Since many of these new investments have been touted as counter-cyclical alternatives to traditional stocks and bonds – and will rescue investors from a bear market – it is appropriate to examine how they failed to deliver on that promise.
Let’s examine some of them one by one.
In early 2021, a handful of stocks in failed companies suddenly gained new life. Movie company AMC Entertainment, which has been trading in low singles digits, reached $72.62 on June 2. 28, 2021.
GameStop has become the symbolic “meme stock,” meaning it’s been pumped up by online stock pickers with a story to tell. The central thread was related to the idea that short sellers, who borrow shares for the purpose of selling and eventually buying them at a lower price to return to lenders, constitute an illicit burden in the stock market.
GameStop has been a favorite of short films because its brick-and-mortar business model seems to have left it nowhere to go but down.
The meme story confirmed that the short sellers were essentially rich hedge funds exposed to a “short squeeze,” as the stock rises, forcing short positions to buy back at a price Top Price, which puts them in red. This means that buying at GameStop was a way for the little guy to put it on the guy.
Another point was that GameStop had come under the control of Ryan Cohen, the visionary investor who was going to lead the company into new technology.
None of these allegations have been realized. GameStop is still losing money — more in the last quarter, which ended Jan. 31, $147.5 million, than in any other quarter following Cohen’s arrival.
On January 25, I looked at GameStop’s stock price and predicted that the fashion was over. GameStop closed at $100.15 the day before. On Wednesday, as I type these words on my screen, stocks closed at $81.33, down more than 13% on the day.
This does not mean that GameStop may not show some life. At the end of March, it rose again to $165, before resuming its sliding trajectory. It could happen again. But the investment capital available to retail to support a sustainable step forward appears to be dwindling.
That’s because all the meme stocks that have ridden the wave of popularity during the pandemic have taken a big hit. The index of 37 meme stocks compiled by Bloomberg has hit a record low in the past few days, down 63% from its January 2021 peak.
The army of small do-it-yourself investors that stormed the market early in 2021, when it seemed like the only entertainment venue still open, entered the woodshed. That’s according to Morgan Stanley, who calculates that all of the gains made by day traders since the start of 2020 have now been quelled.
Their experience is much worse than that of the buy-and-hold investors who stayed in Standard & Poor’s 500 shares during that time — despite the recent fainting, the S&P 500 is still up about 21.5% since January 1, 2020.
As for another player in the meme stock game, the commission-free broker Robinhood Markets through which many meme investors placed their orders, the price action signals the madness ebb. Robinhood peaked at $85 on August 4, shortly after its initial public offering. Wednesday, it fell to $8.15.
These coins that rely on computer algorithms and blockchain technology, a way to keep data records out of the control of central banks and other institutions, are always said to be “going into the mainstream” of investment and finance.
This trend is almost an illusion. This is partly because no one has made a case for a sustainable and consistent interest in cryptocurrencies – that is, no one has a good answer to the question: “Why is that?”
Renaming the Crypto.com Arena in downtown Los Angeles NBA and NHL “Crypto.com Arena” does not make it legitimate; It is an advertising ploy by a cryptocurrency marketing company.
The desire of Wall Street firms such as JPMorgan Chase & Co. And Goldman Sachs is mostly unresponsive to the demands of its wealthy clients to provide them with a way to get into cryptocurrencies while still crazily (hopefully) getting out before the inevitable crash. Companies are happy to do this and collect fees in the meantime.
Wealthy people can afford a flyer. Not the average family. As John Reed Stark, the former head of the Securities and Exchange Commission’s Internet Enforcement Office, warned in a recent interview with Vice, “It’s their financial future, their children’s future, their family’s future, their home.”
Fidelity Investment’s idea of letting people put bitcoin into their 401(k) retirement accounts has been met with attack by the Department of Labor, with one official calling it the product of “a lot of hype.”
“For the average American, the need for retirement savings in old age is great,” Ali Khawar, whose department oversees retirement plans, told the Wall Street Journal. “We’re not talking about millionaires and billionaires who have too many other assets to pull off.”
It is always dangerous to confuse marketing with value. For example, anyone who invested $1000 in a bitcoin fund – let’s say ProShares Bitcoin Strategy ETF – on October 28, when Crypto.com first showed its “Fortune Favors the Brave” commercial starring Matt Damon, would get $468 today. (Thanks to Jon Schwartz from The Intercept for this useful metric.)
NFTs, SPACs, etc.
Almost every investment idea that seems absurd will eventually collapse, sometimes falling faster than it rose.
Irreplaceable tokens, which are digital representations that are presented as being unique and thus having the virtue of rarity, are a good example. NFT does not give any ownership of anything but the digital file, which may be a picture of an object already owned by someone else. Someone has mocked the NFT marketplace for allegedly selling NFT images of individual restaurants in Olive Garden, but it’s this kind of parody that gets the bottom line on target.
The NFT market has surged on a wave of frantic claims that it will reshape the market for creative things and bring riches to starving musicians and artists. In January, TV host Jimmy Fallon and celebrity Paris Hilton joined forces with the NFTs on Fallon’s “The Tonight Show.” The market has now collapsed.
The NFT of Twitter co-founder Jack Dorsey’s first tweet (which reads: “Just setup twttr”) was sold to a Malaysian executive for $2.9 million in March 2021. The owner put it up for sale last month, hoping to raise $50 million. The highest bid was under $14,000.
Investors also flee from blank check companies known as Special Purpose Acquisition Companies, or SPACs. The heyday of these shell companies, intended to raise funds, usually in the hundreds of millions, for rallies that only promised to merge with another yet to be determined company sometime in the near future, is over. At its peak, it attracted figures such as Donald Trump, leading some investors to question its integrity.
Last year, the number of SPAC companies that completed deals with target companies nearly tripled from the previous year to 613 and the amount raised in those deals nearly doubled to $162.5 billion, according to market service SPAC Research. So far this year, only 66 deals have been closed, for a meager $11.5 billion.
Bloomberg reported that Goldman Sachs, Bank of America, Citigroup and other banks are withdrawing from the plumber’s market or shrinking. Among the reasons were tight regulations from the Securities and Exchange Commission, which saw SPACs as tools to circumvent disclosure rules applied to traditional initial public offerings. Moreover, the investment market conditions that are not conducive to initial public offerings are also weighing on SPAC companies.
The lesson from all of these declines becomes clearer with each passing day. Wall Street banks will pump out any investment idea if they believe it can fuel demand, no matter how short the lifespan may be. But when the fun is over, the music stops, the vortex stops – pick your metaphor – the people left empty-handed are the ones who couldn’t play in the first place.
Stark, in his interview with Vice, spoke as a man who has seen all of this before, not once but many times.
“It’s a giant, get-rich-quick scheme,” he said of the world of new investment hardware. “But the bottom line is that people invest because they think there are going to be some bigger fools out there to pay more than they did.”