In a month in which individual stocks entered what can only be described as a crazed bubble fueled by chat room manipulators, it was a calm month for bonds and stocks as a whole.
In previous months we've seen big swings up and down in various fund categories, but recently things have calmed down somewhat. In January the biggest gainers were funds investing in energy or stocks in China, which were both up only around 5%. The worst category was Latin American funds, down just over 7%. We own funds in all three categories but were approximately flat for the month in our portfolios, which was a solid result relative to benchmarks. We hope it sets the tone for 2021.
It appears that all of the investment areas that have been lagging big-cap technology and growth are starting to catch up, while bigger U.S. stocks plateau at high levels. This has helped us in recent weeks, but it is leading to high valuations in many areas and might warrant a cut to our overall stock allocation. We've benefited from cutting way back on non-inflation adjusted bonds, as inflation-adjusted bonds are doing well now due to investors' fears of future inflation growth. This may lead us back to regular bond funds, which have had a lousy last few months and are becoming attractively priced (or relatively so, in a world in which nothing is particularly attractively priced).
You can't help but notice the massive speculative frenzy that seems to have moved from cryptocurrencies — now a bubble of over one trillion dollars — into businesses with questionable futures, such as mall-based video game retailer GameStop (GME) and movie chain operator AMC Entertainment (AMC). These stocks have been pumped but supposedly not dumped (at least, not by the new day traders as a group) in a likely ill-fated attempt to 'squeeze' professional short-sellers (and probably some ordinary gamblers) who have taken out massive short positions (selling stock they don't own and planning to buy back later at a lower price).
This is all mildly amusing; who doesn't want to see a small investor steal from a billionaire hedge fund manager? The scheme seems to be to profit by causing massive losses to the shorts having to cover their positions (buying shares back at a much higher price), allowing the day trader chat room mob to exit at higher prices. This last part is foggy.
While all this has made the shorting of likely business failures (the future Blockbusters and RadioShacks) a dangerous game, the mob's path to the exit seems questionable. New hedge funds may enter the trade, leaving the total short position unchanged as weaker hands exit (if funds exit at all, as some seem to be raising money to fight the chat roomers). There have also been reports of other hedge funds making hundreds of millions on the way up. Most recently, many of these so-called meme stocks (or stonks as they are known in chat room stock slang) have crashed back to earth. This raises the question — did hedge funds as a group make money on moves up and down, and were the actual manipulators crushed?
This new casinofication of investing (which frankly always had a casino element) is some sort of perfect storm brewing. Its causes include COVID-19 lockdowns, reduced opportunities for sports betting, and the increasing popularity of pocket casino investing at Robinhood, the millennials' app that encourages speculation by delivering 'free' trading with very unfree margin to small investor-gamblers.
Nothing is entirely new here, of course; just more, much more. In the late 1990s the SEC went after teenagers for pumping worthless penny stocks in chat rooms (on Yahoo and Raging Bull in those days, not Reddit) while Wall Street did its own questionable manipulating of hot dot-com IPOs.
The media and politicians seem to be siding with and promoting a David vs. Goliath story, while ignoring the probability of collapse when a company's prospects don't grow with its inflated stock price. (This is one problem Bitcoin gamblers don't have.) Then there is the possibility that illegal stock manipulation, long the preserve of big-time stock crooks, may have been carried out by other individuals who are finally getting their turn. While many large hedge funds are at least semi-crooked, such Ivan Boesky grade stock schemes are not the source of much of the gains.
The same media and politicians have largely ignored how Robinhood, the new day traders' favorite brokerage firm, chose a name for itself that implies the opposite of what it does, which is taking from the poor and giving to the rich. This includes profiting from bad price execution with kickbacks on 'free' trades (something all brokers do, but generally to a lesser extent), high margin costs, and lending short-sellers the very shares its customers want to boost, for sometimes huge lending fees (not shared with customers).
The media attention and the pending investigations seem to be about mysterious dark forces supposedly asking Robinhood to freeze trading in order to help the shorts. This is about as likely to be true as all the other mysterious global big-money conspiracies to be found on the internet. To be fair to Robinhood, they are responsible for the new zero commission world we all live in, which is a good thing, if you are mindful of the pitfalls.
If it seems to you that investing has become more about dodging conspiracy theories and investment bubbles, that's because it has. The last major boom in chat room stock bubbles didn't end well for the stock market in general. It fell just over 50%, while the hot stocks fell 80% or more, and the penny stocks went to zero, as all penny stocks eventually do.
There are two problems now. Unlike in 1999, you can't get 5% in safe bonds as an alternative to stocks. You have to make do with what will likely turn out to be a negative inflation-adjusted return. And while the biggest gains during a bubble are made just before it pops, we don't know if we are in the equivalent of early 1999 or late 1999. There is a fairly feasible story that we may be in for a post WW2-grade boom when COVID-19 restrictions dissipate that could drive stocks even higher.
New User? CLICK HERE!
In a month in which individual stocks entered what can only be described as a crazed bubble fueled by chat room manipulators, it was a calm month for bonds and stocks as a whole.
Our Conservative portfolio gained 0.36% and our Aggressive portfolio gained 0.20%. Benchmark Vanguard fund performances in January 2021 were as follows: Vanguard 500 Index Fund (VFINX), down 1.01%; Vanguard Total Bond Index (VBMFX), down 0.80%; Vanguard Developed Mkts Index (VTMGX), down 1.18%; Vanguard Emerging Mkts Index (VEIEX), up 2.93%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 0.00%. That is not a typo. The fund had a freakish zero return, correct to two decimal places. Maybe it was up or down .0001%.
In previous months we've seen big swings up and down in various fund categories, but recently things have calmed down somewhat. In January the biggest gainers were funds investing in energy or stocks in China, which were both up only around 5%. The worst category was Latin American funds, down just over 7%. We own funds in all three categories but were approximately flat for the month in our portfolios, which was a solid result relative to benchmarks. We hope it sets the tone for 2021.
It appears that all of the investment areas that have been lagging big-cap technology and growth are starting to catch up, while bigger U.S. stocks plateau at high levels. This has helped us in recent weeks, but it is leading to high valuations in many areas and might warrant a cut to our overall stock allocation. We've benefited from cutting way back on non-inflation adjusted bonds, as inflation-adjusted bonds are doing well now due to investors' fears of future inflation growth. This may lead us back to regular bond funds, which have had a lousy last few months and are becoming attractively priced (or relatively so, in a world in which nothing is particularly attractively priced).
You can't help but notice the massive speculative frenzy that seems to have moved from cryptocurrencies — now a bubble of over one trillion dollars — into businesses with questionable futures, such as mall-based video game retailer GameStop (GME) and movie chain operator AMC Entertainment (AMC). These stocks have been pumped but supposedly not dumped (at least, not by the new day traders as a group) in a likely ill-fated attempt to 'squeeze' professional short-sellers (and probably some ordinary gamblers) who have taken out massive short positions (selling stock they don't own and planning to buy back later at a lower price).
This is all mildly amusing; who doesn't want to see a small investor steal from a billionaire hedge fund manager? The scheme seems to be to profit by causing massive losses to the shorts having to cover their positions (buying shares back at a much higher price), allowing the day trader chat room mob to exit at higher prices. This last part is foggy.
While all this has made the shorting of likely business failures (the future Blockbusters and RadioShacks) a dangerous game, the mob's path to the exit seems questionable. New hedge funds may enter the trade, leaving the total short position unchanged as weaker hands exit (if funds exit at all, as some seem to be raising money to fight the chat roomers). There have also been reports of other hedge funds making hundreds of millions on the way up. Most recently, many of these so-called meme stocks (or stonks as they are known in chat room stock slang) have crashed back to earth. This raises the question — did hedge funds as a group make money on moves up and down, and were the actual manipulators crushed?
This new casinofication of investing (which frankly always had a casino element) is some sort of perfect storm brewing. Its causes include COVID-19 lockdowns, reduced opportunities for sports betting, and the increasing popularity of pocket casino investing at Robinhood, the millennials' app that encourages speculation by delivering 'free' trading with very unfree margin to small investor-gamblers.
Nothing is entirely new here, of course; just more, much more. In the late 1990s the SEC went after teenagers for pumping worthless penny stocks in chat rooms (on Yahoo and Raging Bull in those days, not Reddit) while Wall Street did its own questionable manipulating of hot dot-com IPOs.
The media and politicians seem to be siding with and promoting a David vs. Goliath story, while ignoring the probability of collapse when a company's prospects don't grow with its inflated stock price. (This is one problem Bitcoin gamblers don't have.) Then there is the possibility that illegal stock manipulation, long the preserve of big-time stock crooks, may have been carried out by other individuals who are finally getting their turn. While many large hedge funds are at least semi-crooked, such Ivan Boesky grade stock schemes are not the source of much of the gains.
The same media and politicians have largely ignored how Robinhood, the new day traders' favorite brokerage firm, chose a name for itself that implies the opposite of what it does, which is taking from the poor and giving to the rich. This includes profiting from bad price execution with kickbacks on 'free' trades (something all brokers do, but generally to a lesser extent), high margin costs, and lending short-sellers the very shares its customers want to boost, for sometimes huge lending fees (not shared with customers).
The media attention and the pending investigations seem to be about mysterious dark forces supposedly asking Robinhood to freeze trading in order to help the shorts. This is about as likely to be true as all the other mysterious global big-money conspiracies to be found on the internet. To be fair to Robinhood, they are responsible for the new zero commission world we all live in, which is a good thing, if you are mindful of the pitfalls.
If it seems to you that investing has become more about dodging conspiracy theories and investment bubbles, that's because it has. The last major boom in chat room stock bubbles didn't end well for the stock market in general. It fell just over 50%, while the hot stocks fell 80% or more, and the penny stocks went to zero, as all penny stocks eventually do.
There are two problems now. Unlike in 1999, you can't get 5% in safe bonds as an alternative to stocks. You have to make do with what will likely turn out to be a negative inflation-adjusted return. And while the biggest gains during a bubble are made just before it pops, we don't know if we are in the equivalent of early 1999 or late 1999. There is a fairly feasible story that we may be in for a post WW2-grade boom when COVID-19 restrictions dissipate that could drive stocks even higher.