While You Were Sleeping
Although the equity market posted a relatively flat January performance and interest rates remained relatively unchanged across the curve during the month, for anyone watching the news about GameStop (GME), Reddit and Robinhood it is fairly apparent that we truly live in interesting times.
In our All Quiet On The Western Front (available at www.sixtyguildersresearch.com under Thematic Research) we highlighted the increased popularity of Reddit and Robinhood as a sign of market euphoria that is bound to not end well. We noted at the time “The improved access to trading platforms such as Robinhood (transforming stock investing into a game-like phone app) and “information” (using the term very loosely) through forums such as Reddit (r/wallstreetbets and others) that turn analysis into the equivalent of an electronic cocktail party where the most recent tips, rumors, speculations, and outright misinformation become gospel, are creating a tinder box of speculation.”
This tinder box, in a matter of a couple of weeks banded a myriad of investors to go long (often through very little actual capital deploying trades such as deep out of the money call options) heavily shorted, small market cap stocks such as GME, pressuring “smart money” hedge funds to start covering their shorts and lose a lot of money in the process. It is probably no coincidence, that Robinhood cuts its margin interest rate by 50% mid-January, right before this drunk orgy started playing out.
While we are amused to sit back and enjoy watching the “pros” taken for a ride by the “little guys” (though neither term may be quite accurate), we do view these events as one more sign of a market top. The real culprit of course is the money printing Federal Reserve, that appears to be asleep behind the wheel.