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Monthly Market Commentary - January 2021

Robin Hood and Little John

MR. MARKET.

I believe everybody loves the legend of Robin Hood, well I do. As a kid I really liked the Disney cartoon version of this story, the one with Robin Hood as a sharp fox and Little John as a funny big brown bear (my favorite character). I consumed the VHS. Some thirty years later I watched it again (and again and again) with my kids on a DVD. Today we got the Disney+ streaming service but, my kids have grown up and they are interested in other things (Riverdale, Stranger Things and the likes). So, until recently, I was positively inclined towards the success of the RobinHood platform in the US and was curious to see if they could manage to get an IPO done this year. You know the basic business model, right? They give you access to trading US stocks and options for “free”. Take it from the rich and give it back to the poor. Nothing wrong with that. Another business, among many, that gives you something of value for “free” in exchange of your personal data. At the moment, people do not ask too many questions about the use of their data. The future might look different, but this is another topic. In not so “Sherwood Forest” style, the RobinHood platform sold the data for good money to financial firms; big hedge funds for the most part. That was the equilibrium until January of this year. Some million retail investors, aka the Little Johns of today, started moving as a mob across online platforms like Reddit/Wall Street Bets. One retail investor does not move the needle. A few millions do. In a matter of few trading sessions they started a fight against the most hated segment of the hedge fund industry: the short sellers. Almost bankrupt companies like GameStop and AMC started moving up 100%, 200%, 500%, 1000%. The professional fund managers had to cover these positions together with a lot of others because the general market forced a big short squeeze. For a few days, also the main indices suffered. No one likes to see such an imbalance in the market. When instability manifests itself, the most common behavior of investors is to reduce gross exposure, so they did. Fortunately, the situation has not evolved in a disaster. After a big stock market rally in 2020, cumulative short positions where already reduced in percentage terms and, although painful, no major fund blew up. On the settlement front, I did not read of any significant problem. The RobinHood platform had to raise some money in the short term to manage margins and the increased volatility and that was it. In the first days of February, things already got back to their usual correlations and equities rallied. My personal opinion is that, after a lot of talk and ink on the subject, we will shortly forget about it and move on. However, there are a few considerations I would like to take away. First, this episode is a clear sign that there is a lot of exuberance in the market. The volumes of calls on those “concept stocks” and the subsequent moves are a testimony that a lot of people approach markets like they usually approach a casino. After a long time, we hear again slogans like “YOLO” (You Only Live Once), supporting the idea that speculation will guarantee you big money. Second, these herd investing practices are not new. They are actually very old. You can read about them in chronicles of seventeenth and eighteen century stock markets in Amsterdam and London. In the excellent Kindelberger’s “Manias, Panics and Crashes – A history of financial crises”, there is evidence that “cornering” of markets was such a common practice in early twentieth century Wall Street that they had to introduce an ad-hoc legislation and a regulatory framework to control it. This process finally ended with the advent of the SEC. That is another relevant fact; these activities are illegal. The web moves much faster than regulators, but I really recommend anyone with such border line intentions to refrain from it. You do not want to mess with the SEC. Period. After what you read above you might get the impression that, like a modern Cato the censor, I am writing against the rebellious retail investors and in defense of the hedge fund elite. Quite the opposite. I want to be clear about this. I am not the kind of persons that consider the wide public as “minus habens”. As long as you play by the rules, you can speculate in whatever you want. My advice is to choose a fight you have a chance to win. Fighting against hedge funds is definitely a tough one. However, it is your life and your money, so good luck with that. I have a different approach to investments. Such approach based on fundamentals is becoming out of fashion, so I must adapt to current circumstances. That brings me to the very heart of the issue. Such behaviors are the result of current circumstances. Financial markets are simply too big compared to the underling economies. Monetary base is growing at unprecedented levels. Money has to go somewhere. At the end of the day, why should we point the finger against some retail investors pushing a bunch of stocks with no intrinsic value? I did a screen recently on companies with more than 5 bln USD in market cap (still a significant amount of money for my standards). In developed markets, there are hundreds of companies trading above 10 times trailing revenues for a total market cap of around 11 trillion USD. If we screen for companies trading above 40 times trailing revenues the total amount goes down but still to a meaningful 1.5 trillion USD. Is that more rational? Is it different because the recognized players, both active and passive, tell us it is so? I doubt it. Monetary and fiscal policies are as supportive as ever. Markets are trading at all-time highs and the sentiment is very bullish, these are facts. We are participating. We believe it is impossible to call a top. However, it is in such circumstances that we got to keep our eyes wide open and maintain portfolio flexibility at its maximum. The “Sheriff of Nottingham” might come some day; a bow and some arrows could not be enough to save the day.

Peppe Ganci, CFA


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