Thursday, June 11, 2020

Resurgence of Bubble

The U.S. has had three bubbles in 20 years: late 90s, 2005-2008, and the current one.

Each one has been bigger and crazier than the last.

Just the bear market bounce (April/May/June 2020) of this third bubble is crazier than any bubble before it:

Our correspondent @pdxsag (previously) writes in:
Today I had an epiphany that the markets — as they glory in their wanton, unchecked fraud — are now exhibiting the same dynamics as a crowd looking to riot.

As the Scholars Stage blog explained, riots are inherently a coordination problem. The same can be said for pump & dump schemes. If you consider investors as a motley crew of animal spirits, it would certainly stand to reason that at any point in time there exists a non-trivial number of investors that would gladly engage in blatant pump & dump stock manipulation. Their problem, of course, is how to coordinate. Like soccer hooligans looking for a riot, they need “an incident.”

If you’ve been dumb-founded by the stock runs in HTZ and CHK, it hopefully will make perfect sense when you realize that the bankruptcy filing is now the easily and universally understood “incident.” It’s akin to the sound of broken glass in a real riot. When a company files for bankruptcy protection pump & dump “entrepreneurs” quickly bid up the price to see if it "sticks.” If it’s not halted, if the exchanges and SEC make no effort to arrest the run then more traders jump on the stock driving the price higher still. Pretty soon it’s like a Macy’s being looted as hundreds of people are crashing into the stock looking to grab a quick buck and be gone. The daily volume when a stock is undergoing a viral pump & dump can be 10x of the float or more. Day traders, I suspect many of which are algos, are churning through blocks of shares not holding any individual shares for more than a few minutes at a time. Sure there is slippage with all that churn, but it’s important to not be caught holding the hot potato.

Another example of a now too obvious incident is the transparently fraudulent press release. In this market, where investors freely quip "Fraud is Alpha,” it stands to reason that a fraud-y press release is a clear signal from management to day traders that they are looking to play ball. Elon Musk has notoriously refined this to an art. In fact, today Tesla closed above $1000 for the first time ever on the back of a “leaked" email from Elon related to the development of the Tesla semi. The impetus has nothing to do with the business prospects of the semi, and everything to do with significant OTM call buying yesterday to get people’s attention and an incident today in the form of the leaked email.

We’ve seen similar incidents with various Covid vaccines news stories, press releases, and TV appearances by company CEO’s.

The markets are in one giant, late-stage pump and dump, and the regulators — like the police across many cities today — are overwhelmed and conspicuously enough to any bad actors looking for an easy looting, are standing-down.

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