Robbing Hoods

Yesterday saw the mania to reap quick profits in Tesla reach a short term crescendo. The news on Monday morning that 40,000 Robinhood no-fee brokerage accounts added the stock to their holdings marked a peak for this heavily shorted, concept stock. After rallying nearly 9% in the morning, TSLA closed down on a vicious downdraft into the close that has followed through this morning. Welcome to risk taking kids.

Was that the growth stock peak? Does this mean a leadership change is immanent?

'No' is the short answer. The basic construct of the market needs to change for a durable rotation into the lagging cyclicals. I don't think this morning's JP Morgan 'good' earnings news will do the trick either. The rotation away from leading to lagging sectors will need a generalized correction first - one that is accompanied by a change in the current environment of weak economic growth. That can only come from a change in tone in the discussion.

Robert Shiller's book "Narrative Economic" argues major economic events and their corresponding stock market leadership themes are a function of the 'narrative' of the day. He argues that firmly entrenched opinions, conveyed and repeated in the news of the day, form the basis for a belief based construct that drives behaviours. Seems like behavioural economics to me.

Determining the behaviours of others in advance of the formation of same, is the holy grail that underpins my market thoughts. So how can I expect these thoughts to change if the powerful narrative of - 'easy money driving unfettered risk taking' - is still dominating the motivations of a new investor class. The average age of market participants is dropping fast and these new investors have yet to be truly 'burned', despite yesterday's reversal.

I believe that the 'Robinhood effect' is real even though it accounts for a small proportion of existing stock investment. You need to know a bit more about the plumbing underneath the market before you can appreciate this insight.

Robinhood, the broker not the mythic do-gooder, is built on the foundation of high frequency trading (HFT). The advent of computer based trading completely changed the nature of stock execution in the early 2000s and it has expanded due to new brokerage models that have arisen to capitalize on this fact. The rapid increase in the market share of no-fee brokerage accounts, albeit from a small base, has been spectacular. The newly homebound millennial investor has ample time and appetite to trade the market. And the adoption rate at Robinhood Financial, the leading purveyor, has soared during the pandemic quarantine era.

Orders entered in many these app-based brokerage systems are routed to 'execution only' dealers, many of them primarily HFT driven. These 'market maker' firms use flow sensitive algorithms to profit from market movements that are generated from these orders. And these flows exaggerate the volumes, giving the illusion of liquidity. Having control of orders from such a dominant source such as Robinhood and other firms like them, generates effectively riskless profit.

The brokerage firms are directly compensated from these profits in a quasi legal kick-back system of 'pay-for-flow' agreements. Robinhood Financial was fined $1.25MM in 2019 for not ensuring 'best execution' for their unsuspecting clients after FINRA investigated the practice. Suspiciously, no prohibition against the practice of receiving order flow compensation accompanied this slap of the wrist. I'm guessing Robinhood spends more on designer coffee at their head office.

'Rob from the Uninformed and give to Us' should be their new motto. But I digress.

This goes to the heart of the phrase that "the market is a voting machine in the short run but weighing machine in the long run'. A disproportionate amount of the current rally is based currently on the marginal flows stemming from financially speculative motivations. The rise in the popularity of passive index ETFs only exacerbates this effect.

I'm still waiting for them to roll out the 'weighing machine', thank you very much. That day won't be pretty at these market valuations.

What does all this say about the market mania that is currently masking the growing rot in the global economy? Nothing really. Playing the mega cap growth favourites is like a video game where you can shoot at anything and get away with it. The fact that TSLA has a market cap greater than all the world's car companies combined (with a tenth of their sales) isn't relevant. Just follow the herd and check your brains at the door.

Manias always last longer than sober minds can rationally comprehend - this one included. So I am sitting out this market like the retired curmudgeon that I aspire to be.

Anybody else notice that bond yields are still heading south?

Risk Model: 4/5 - Risk On

Yah, I know what it says - risk on. But what risk? The same one that just just made instant bag-holders of 40,000 TSLA buyers yesterday morning? No thanks model - I'm not biting.

All the pissing and moaning in the world won't make the market suddenly drop into our collective laps. The Fed has seen to that. The recent bad news on the battle against Covid19 has limited effect this market. Powell & Co. (the world's largest investment firm, based in Washington) has seen to that. It won't work trying to talk the market into a comforting level of undervaluation accompanied by improving fundamentals. The narrative has to change.

This bifurcation of growth versus value performance will continue a while longer in my view. The 'bad news' from a re-shut down economy recently has prolonged the agony of the value investor yet again this month. Call me when it's all over.