Robinhood is Down and Reddit is a Terrible Place for New Investors

Yesterday was crazy. Multiple brokerages halted trading of GME, AMC, NOK and other heavily short squeezed stocks. Robinhood was the most egregious offender; it disallowed its customers to buy these stocks, but allowed them to sell. Halting buys put downward pressure on the price and allowed hedge funds with access to Robinhood’s order book to pick up shares in anticipation of a pop when customers were allowed to buy again.

It’s bad however you think about it.

The reason brokerages are giving for halting trading is they ran out of collateral. Specifically, in the case of Webull, the Depository Trust & Clearing Corp instructed its clearing firm, Apex that collateral requirements had increased by 100%. WeBull was forced to halt trading on certain stocks until they could meet collateral requirements. Schwab halted trading on some stocks too for the same reason.

Robinhood used to use Apex to clear its trades until 2018, but then switched to clearing its own trades in 2019. It appears as though they tapped banks for $1bn to cover increasing collateral requirements due to increased volatility. But they only stopped buying, not selling.

Robinhood derives 80% of its revenue by providing hedge funds access to its order book to execute client trades. These banks and funds pay hundreds of millions to execute trades placed by individuals and they basically front run these trades, making a small profit themselves. The loser is the investor. You think you’re making a commission free trade, but you’re not. You’re buying at above market prices and sending a few pennies to Robinhood and whatever bank or fund executed your trade. Schwab derives about 3% of its revenue from this practice for reference. Reminds me of a quote from Blow: “Hey, am I wearing lipstick…”

Their decision to halt buying, however, needs to be investigated. I have no idea how that doesn’t only benefit hedge funds and banks and hurts their customers. I guess we know who their real customers are. I’m going to buy some DogeCoin, hold it for a week. Then close my account and move my fun money to some other brokerage.

Is the SEC Investigating r/WallStreetBets?

No. In fact, while I think this subreddit is ‘interesting’, it has a few contradictions. The community has created a sort of language of their own, which is not very inclusive. I think the term ‘Gay Bear’ is one of the most egregious (the subreddit does not encourage anyone who thinks the market or a stock might go down). There are many, many others.

The biggest issue with the offensive language is that it is not inclusive. Normally I wouldn’t think this is a big deal because it is a subredit; subreddits are specifically not inclusive and cater to a niche group of anonymous people. If you don’t like what you see in a subreddit, stay away from it. That’s like most of the internet. However, r/WallStreetBets is now consistently on the top of the front page of Reddit. It is responsible for sparking the rallying cry of individual investors to take a stand against hedge funds who for since the dawn of their existence have quietly manipulated the markets in their favor by moving large chunks of capital around all while trying to convince the rest of the world they are on the other side of the trade.

And it’s working. There is speculation that Melvin Capital received $3bn from Citadel and Point72 to shore up its finances in the wake of closing out their short position on GME. r/WallStreetBets now has 2 million subscribers and every day users rally around buying GME to continue and force a short squeeze.

The narrative a few days ago was simple; buy the stock, don’t sell, and these hedge funds will be forced to buy a tremendous amount of stock to cover. Hold your positions, and make a fortune. I don’t pay for any services that allow me to see daily short interest, but my guess is that after Melvin Capital and Citron Research closed their positions the short interest is way down. However, people are still buying the stock. Remember the top shareholders of GME are institutional funds, including hedge funds run by a few really rich people, like Michael Burry and Ryan Cohen. I’m in no way saying they are bad guys, but they don’t need a donation from poor Millennials and I’m honestly not sure why so many Millennials want to give them money.

Brief aside: I know the F word is so taboo right now. Even uttering it on the internet can make you a target for trolls. That’s right, Fundamentals is actually a dirty word. However, they are still a thing and it will still determine long-term value. Every euphoria ends and every fad changes. History doesn’t repeat, but it rhymes. Some people will be on top of every next hype-cycle, but in order for it to be a hype cycle, that means a lot of late entrants will be transferring wealth to a few early entrants. So if you don’t know what to buy and don’t want to risk giving handouts to rich gamblers, buy something with strong fundamentals.

So, lastly, r/WallStreetBets is actually spreading disinformation. Well, here’s how I’m interpreting this video from the founder and previous moderator of the subreddit

“It’s been a constant thing for them for the past few years…there’s just a running joke, whenever things got kinda hot a little bit, they get a lot of attention, they set it private, it sends all sorts of speculation that the SEC is investigating them”

So, to be clear, this isn’t terrible behavior. Jaime Rogozinski goes on to say, “it’s complete bs” because no one would actually think setting a subreddit to private would actually protect them from the SEC. However, if you are just browsing Reddit, you may still think the SEC is investigating them. What follows is outrage that the system is working against the little guy. This is also fine, because, well, it is, but just not in this particular instance.

However, now that 2mm people are pushing specific stocks, the subreddit is branding buying GME with saying fuck you to the man and Wall Street. It’s really not the case. Buying GME makes a few early entrants, hedge funds and institutional funds super rich since they own the majority of the shares. Also, does the executive team of GME really deserver to get rich? The company failed over and over to move into the digital space and greatly mismanaged its cash.

GameStop literally asked it’s employees to dance on TikTok for an extra shift during Black Friday for a whopping $9.25 / hour (source). Do you really want to pump this stock now and reward GameStop’s management team?

So by inciting rage in uninformed investors by saying the SEC is investigating the little guy, r/WallStreetBets is effectively using disinformation to pump a no-good stock. I support more individuals buying stock, but don’t think that just because you have a RobinHood account and are buying GME or AMC that you are part of the solution. All people should open accounts, buy strong fundamental stocks that make a positive impact in this world and hold them for a long time. That’s how you build wealth. There’s literally no trick. You don’t need money managers, you don’t need to do extensive research. Low fee index and mutual funds run by ethical companies is just fine. If you know a little about a few stocks, go ahead and buy those. It’s literally all quite simple. I can’t believe more people know what a short squeeze is than they understand what P/E multiple is.

Weekly Rant and CRM

As I’m sure you’ve all noticed, I haven’t posted for a while. I started a new job, which is stressful. The worst part about working from home is not knowing what to work on. If at any time I don’t know what to do at work, there are tons of better options either in my apartment or just outside. I mean this is Los Angeles; no one works a 9-5 here. The sun just doesn’t allow it.

You’re all probably going to hate me, but I’m going to post my returns over the last month just so you don’t think I’m making this up. I apologize for not really posting what I was doing; I was busy and I got lucky. Well, actually, you should all really just invest in whatever stocks I mention in the last paragraphs of these posts. Things I tend to not think too hard about do a lot better than things I analyze. I’m stoked I posted I was selling GME; if I hadn’t I’d look like a dummy. That thing has been going way up. It’s almost certainly due to a short squeeze, however. I don’t expect it to last, but, as the old adage goes, ‘the market can stay irrational longer than you can stay solvent’. Though finally their earnings came out and they dropped 17%. So, here they are:

(Note: there was an outage in data collection on Personal Capital – the light blue line gains are much more steady, it didn’t actually go up in a day, but the starting and ending values are correct).

As I’ve mentioned before, most of my portfolio is boring and left in untouched index funds and stocks that probably won’t go bankrupt because of a bad tweet. The light blue line is my fun money account tied to this blog. At the end of my last post I mentioned buying FUBO and PLTR. I must have been having a good day because I fat fingered both orders and bought a bit more than I planned. Over the last two months (mainly the last 40 days) I’m up 52%. I didn’t view these bets as risky – IPOs rarely lose 50% of their valuation in the first month – and in this case I’m up about 2.5x. I’ll probably dump PLTR soon as the short-selling research firm Citron tweeted PLTR, ‘is no longer a stock, but a full casino’. Honestly, in this market, a well respected research firm calling a stock overvalued is more a buy signal than anything else. So, do what you want here.

I’m holding FUBO for the long-term; I think it’s way undervalued and its sports offerings are fantastic. If they actually get into online gambling their $1.8bn valuation can easily be $18bn. Hulu, Youtube, AT&T, Sling, you name it – none of them are positioned to corner sports and sports betting. When live events are back, I don’t see how Fubo won’t be all over sponsorships, organizing events, or even securing exclusive rights to a variety of niche sports with an immediate opportunity for global distribution, and, yes, sports betting market making. I’m not even going to do a full analysis here as it seems like a complete no-brainer. Put in an uncomfortable chunk of fun money and wait. I also pay $60 / month for Fubo and it’s fantastic (kidding I split the account).

My Option Plays This Week

I’m looking pretty hard at CRM – that’s Salesforce. They got crushed after announcing they were buying Slack for $27.7bn. And by crushed, I mean their market cap dropped $40bn. Just do the math on that. Also, Slack is a fantastic product and allows them to take on Microsoft directly. Microsoft already has a fantastic CRM system – Dynamics 365 – that integrates nicely with their BI tools, which are also state-of-the-art. 

Side note, Microsoft’s growth over the last 10 years is astonishing. I was a hater because their OS is terrible and I thought they were going to just slowly burn their Office products until Google usurped them. Quite the opposite. In short, they rapidly developed effective business technology for both nimble, high-tech startups and software services for large tech companies who have valiantly pivoted to providing cloud and digital services as a first touch point to customers.

Back to CRM. They beat their earnings estimate by more than double the forecast ($1.74 vs $0.75). This is an easy win for analysts to give them an upgrade based on both strong earnings and strong positioning into a new market for big business. I’d even add this stock to your ‘boring retirement’ funds. I’m not though. That’s not why we’re here. I’m going for call options. I’ll buy calls at probably $230 expiring 12/18 and then more at $250 expiring maybe January. If you make 30-50% gains in a week or two, count yourself lucky and sell. This isn’t a penny stock that’s going to double over night and give you a 4000% return.

Minus today (12/9), the market is still unusually happy, so don’t get bummed out if there’s a sharp drop in the next few months. As I’ve shown in prior posts, small businesses have little to no effect on the stock market, so despite how absolutely terrible shutdowns are affecting small businesses, more virus cases will likely not put a dent in the market. Quite the opposite probably. I’m not passing judgements on whether or not shutdowns are the right thing to do, they just mainly affect small businesses and 90% of stimulus dollars are aimed at big business. This is a bit cynical, but the more small businesses and people suffer economically due to prolonged shutdowns, the larger the stimulus will likely be. That money will probably be directed at shoring up loan defaults for big companies. It’s easier to get $100mm from the government than $10k if you know the right people.

Another side note: I love the phrase ‘Limousine Liberals’. I’m sure all you Republican readers know this phrase well and if you’re a Democrat, or lean that way and are not aware of this phrase, at least think about it. Narcissism manifests in many forms and I think it does more damage to claim and shame moral high ground while some politicians completely ignore it themselves. It marginalizes the rare public figure who actually wants to make a difference and is willing to use their brain, reason, and empathy to do so. I figure most of you readers are liberals, so for the benefit of both sides, I urge you all not to condone public figures who act like this, especially now that the country has a chance to change its image. If you really believe we are ‘battling for the soul of our nation’ (maybe Biden’s only sort of decent campaign slogans, which, in general, have really gone downhill…and shouldn’t they choose one instead of micro-target slogans…I hate politics), our leaders should be honest with their own souls first. And we should all do the same.

I don’t really enjoy the show Mad Money, but any stock that makes Jim Cramer mad – either because he doesn’t understand why it’s up so much, or because he doesn’t understand the valuation – is a buy signal. Again, this isn’t long-term investing advice, but no index fund is going to jump 50% in a day. To be fair, he did say buy MRNA at $20, and I did, so he forever has a soft spot from me.

I should also note I was buying NIO calls and RIOT calls. I’m not even going to write about these because doing that is literally the same as playing roulette – the house is more likely to win, but, hey, if your number hits, you’ll at least 4x your money. Anyone else have any good casino bets?

Last note. I basically always have a 2 -4 week put on VXX. I think it’s broken; it always goes down. You won’t make a killing and if there’s a sharp drop in the market, you’ll lose the farm. But that’s ok, VXX always comes back down. Just make another bet and collect easy money.

Anyone buying AirBnb or DoorDash? I like AirBnB because they don’t own real estate, yet are primed for the 2021 Covid recovery. While Marriott’s and Hiltons deal with loan defaults, property tax reassessments and a huge number of full time employees, AirBnb will just be hoteling more properties. Plus, what better way to start paying off mortgages that are behind a bit. Yes, this is all grim, but let’s be honest with where money is flowing these days.

Sorry I’m rambling today, I can’t look at numbers anymore. Hit me up with some good bets; I’ll likely have some cash to gamble with after I get out of PLTR. That said, I know a lot of people going long PLTR now, so who knows.