To let the media tell it, every last tick of US equities’ epic surge from the late-March lows is attributable to an army of early-twentysomethings loading up on shares of bankrupt rental car companies and beleaguered cruise ship operators on Robinhood.
I’m just kidding. Or actually, I’m not totally kidding. We may not yet be in a full-blown bull market, but there is most assuredly a bull market in articles about speculative “manias”, “froth” and retail investors gone stark, raving mad.
In fact, one such article by Sarah Ponczek (whose work I do enjoy, by the way) was cited by Paul Krugman on social media Tuesday.
Huh. The stock rally is being driven by small investors snapping up things like cruise lines. Doesn't sound likely to end well. https://t.co/W6ZcCXMWKr
— Paul Krugman (@paulkrugman) June 9, 2020
It’s certainly true that some of the action is indicative of – how should I put this? – behavior so irrational it can’t even be attributed to “normal” retail investors, which leads one to believe we may be witnessing a new species of clueless speculator.
My good friend Kevin Muir (formerly head of equity derivatives at RBC Dominion, and better known for his exploits as “The Macro Tourist”) captured the mood with one of his signature memes (below – pardon the language).
Personally, I don’t spend too much time worrying about this kind of thing. I do think it’s important to monitor signs that the retail crowd is getting in too deep – there was evidence of that prior to the February 2018 meltdown catalyzed by the implosion of the VIX ETP complex, for example. But you can get a feel for that by monitoring trends in brokerage account creations and simple ETF flows.
If folks want to go out and take a shot at scoring triple-digit gains in the space of a week gambling on the equity of companies that have just filed bankruptcy, well, what can I (or anybody else) really say other than “Best of luck”?
It’s true that a rebound in airlines (for example) is indicative of the broader pro-cyclical rotation which is, in turn, a manifestation of reopening optimism. But you can’t take what you see illustrated below seriously.
Volume on American is running ~20x last year’s average and a pair of bankruptcies are trading like they just discovered a COVID vaccine. There’s no informational value in any of that, folks. It’s funny, sure. But that’s about it.
That kind of thing will end one of three ways for the people behind those trades: They’ll cash in their lottery tickets now, while they still can; they’ll lose all the gains on the next pullback; or, far less likely, they intend to hang on to the shares they bought for basically nothing because they have a longer-term thesis centered on a turnaround, in which case hats off to ’em. (Chesapeake dove as much as 74% Tuesday after surging 182% to start the week.)
More interesting to me is what banks are hearing from clients, and in that regard, BMO’s latest US rates sentiment survey is all but unanimous.
“A core theme of trading has been the remarkable resilience of the equity market despite a shuttered economy, historic job losses and civil unrest across the US”, the bank’s Ian Lyngen, Benjamin Jeffery, and Jon Hill write, summarizing the findings from a special question that accompanied their June poll.
“Our first special question showed a clear consensus for the driver behind the move; 73% offered the Fed as the inspiration behind the S&P 500’s impressive rally”, they go to note, adding that while “reopening optimism” was a frequent write-in responses, and although “labor market recovery”, “greater fiscal stimulus”, and “progress on COVID-19 treatment” also got some votes, “Powell was the clear front-runner in terms of receiving credit for the bid in risk assets”.
The survey was conducted prior to the release of the May jobs report, so one imagines “labor market recovery” would have received a bit more support from respondents had the numbers been known, but nevertheless, the message is clear.
While there is most assuredly a connection between Fed support (verbal and otherwise) and beleaguered corporates having access to capital markets (either in the form of new debt issuance or new equity), it’s safe to say the vast majority of the Robinhood accounts rolling the dice on something like Hertz are not the type of “investors” keen to parse the text of a Lael Brainard speech or listen to the latest Bloomberg Television interview with Mary Daly.
That said, there is some evidence to suggest more sophisticated players are getting yanked in too.
“Global banks are seeing renewed appetite from wealth management clients to borrow money to buy stocks as markets rebound”, Reuters said Tuesday, citing unnamed bankers, and adding that “overall debit balances in customers’ securities margin accounts in the US, which includes both retail and institutional margin lending, rose to $525 billion in April, up from $479 billion in March”.
And maybe these issues aren’t mutually exclusive. On that note, I’ll leave you with a couple of additional passages from Kevin Muir’s Monday missive.
I know there’s all sorts of accusations being tossed around that the Federal Reserve has emboldened a whole new generation of Robinhood-traders who are foolishly pushing up the most speculative stocks.
Yeah, I get it. It’s easy to blame the Fed. But I would like to take this moment to present an alternative theory.
Maybe the corona crisis merely interrupted an already-firmly-established speculative mania, and this is simply its return.
Read more: ‘From Meltdown To Stock Bubble In A Matter Of Weeks’ – Market Marvels At New Mania
that last line was a bit uncomfortable to hear … speculative binges end poorly, eventually.
There have been “flash crashes” like February 2018 or December 2018 (or August 2015 for that matter), but no sustained correction let alone a bear market. Easy for those who have only been investing since 2009 to imagine that the Fed can cure all ills and equities can return to their sustained inevitable grind ever higher with only a few technical glitches along the way. And so in their mind March 22 was no different. The Fed does not have clean hands in this. There have been very subtle suggestions that the current crisis is different but they have also been pedaling more than a little Hopium out the back doggie hatch.
I doubt the Robinhood traders did the cash flow modeling, but doing so in March would have given them confidence that many stocks would survive even a horrific 2020 (defined as near-zero revenues Mar-Sep then gradual recovery by mid 2021) and had anywhere from +50% to +100% upside to a rough estimate of fair value. That included at least three airlines, two cruise lines, multiple restaurant and retail chains, various beverage companies, some industrial names, etc. Then add CARES, Fed, May “reopening”, and the list of highly probable survivors grew in April-May. I doubt the Robinhood traders are now revisiting the models they didn’t build in May, but doing so would give them reasons to sell a few names, trim some others, but hold or even add to others. So I think some part of this rally is not silly at all. But other parts – Hertz and Cheaspeake and so on – I have no clue.
And they probably did not look at overall household debt, corporate debt and spreads (remember the Repo problems in October 19?), percentage of car payments more than 60 days delinquent, declining tax revenue at all levels of government etc. . . etc. . . all of which suggested in February that we were headed for a recession relatively soon, which, as it turns out, we were. Covid 19 has obliterated any serious discussion about whether there was a bubble in February let alone now.
The young have been flying and renting cars as they have been a sizable percentage of travel. They evidently plan on continuing in that lifestyle and believe it will come back.The only thing some people know about bankruptcy is that the President does it all the time so it can’t be that bad. Government gave them free money to do as they please. No bar or restaurant bills adding up. Too young to be perma-bears yet. And if you did actually start with 1200 early April and traded well enough, it is actually fun. All it takes is some people bragging on social media and away they go. There has been a whole movement of how to retire by 35, maybe they want out at 30.
I don’t think we have seen the end of this virus, the number of newly infected people in Phoenix has doubled in the last couple of weeks (since we reopened). If this also happens elsewhere, that may be the end of the party for a while.
Snapshot of “market” = all exchange-traded stocks at least $1BN market cap in the US (data as of yesterday close).
Market-cap weighted, stocks are -9.5% from their YTD high, +60.6% up from their lows
Small cap ($1BN to $5BN), median stock is -17.3% and +75.3%. By sector, most down in terms of the median stock are Energy -33.4% and +201.0%, Consumer Services -25.5% and +117.6%, Finance -20.9% and +71.7%.
Mid cap ($5BN to $10BN), median stock is -14.5% and +71.2%. By sector, most down in terms of the median stock are Energy -37.1% and +198.7%, Utilities +20.8% and +56.6%, Finance -19.8% and +65.6%.
Large cap ($10BN on up), median stock is -9.0% and +58.1%. By sector, most down in terms of the median stock are Energy -23.6% and +106.8%, Consumer Services +20.3% and +76.9%, Utilities -13.0% and +39.6%.
There is, as you’d expect, a lot of dispersion.
There are actually quite a lot of targets still out there, from a first cut on valuation.
The Robinhood traders probably won’t find most of them – I don’t see them coalescing around some obscure small-cap industrial name, some boring mid-cap utility, etc. OTOH, the problem you get down to more obscure stocks is “why does anyone have to care” which means you can wait longer to get paid. If you believe in a second wave of stock declines, these little-known names may not pay off before that, you might be stuck owning them into (gasp) 2021.
I’ve also been watching the DIX indicator from SqueezeMetrics, which has been showing high levels of dark pool buying. Exactly how that indicator works and how best to use it is beyond me, but it seems to be worth paying at least a little attention to.