“Never short a trend.” — Michael Sheimo (# 10 in my “List of 15 Nevers”, p. 218, “Maxims of Wall Street”)
Many analysts, including yours truly, believe the Fed’s low-interest rate policy has created a bubble on Wall Street.
Government spending is out of control (the national debt is approaching $28 trillion and rising fast). Meanwhile, the Federal Reserve has pushed interest rates down to almost zero again.
The money supply (M2) rose 26% last year, its fastest rate in a hundred years. But, Ludwig von Mises, the great Austrian economist, warned that easy money is not neutral. It creates an artificial boom, a bubble economy and potential chaos on Wall Street.
Where has that money gone? Bubbles are now starting to show up everywhere — stocks, bonds, real estate and even digital currencies like bitcoin.
Many investors may be tempted to short the market and profiting from a sharply sell off or crash. But timing is everything when it comes to selling stocks short.
A Historic Short Squeeze
Last week, a short seller at Citron Research was convinced that GameStop Corp. (GME), a popular gaming retail store, was ripe for a fall after having jumped from $5 a share to $30 a share in the past year.
Video games have been a hot market since the lockdown, and I have recommended them in my trading services recently.
But, being a retail outlet during the lockdown, GameStop continued to lose money last year and looked like a good candidate to short. It lost nearly half a billion dollars last year, closed some of its stores and has a book value of five bucks. Return on equity (ROE) is minus 57%!
Veteran traders on Wall Street apparently followed Citron’s advice and shorted the stock.
Politically Motivated ‘Revenge of the Nerds’
Enter Reddit, a social message-board platform for millions of young investors and a new generation of day traders. They often trade for free on Robinhood and decided to take on the big boys of Wall Street. The action also may be political, since the traders are acting in sympathy with the Occupy Wall Street crowd when the retail investor and the little guy felt left out while hedge funds and big banks were bailed out.
The traders began a concerted campaign to buy GameStop shares.
Suddenly, the short sellers were blindsided as the stock continued to rise, forcing the short sellers to cover their position. As a result, the stock shot up to more than $350 a share. (See the chart below.)
Sometimes, Wall Street can be like Las Vegas, a pure gamble. Those who bought GameStop feel like they have won the lottery, especially if they bought out-of-the-money call options!
Meanwhile, the short-sellers have been caught in a historic “short squeeze.” I’ve never seen one this bad in my entire career on Wall Street. So far, they’ve lost billions.
This may be the beginning of a dangerous new trend. The young and the restless are joining forces to promote other stocks. It reminds me of the title of my book in the early 1980s, “High Finance on a Low Budget.” Expect more chaos and the madness of crowds, and an anxious Biden administration looking for an opportunity to regulate and punish Wall Street.
Who Do You Call for Help?
Too bad the short-sellers didn’t consult my book of wisdom, “The Maxims of Wall Street.”
I have “A List of 15 Nevers” on pp. 217-218. #10 is “Never short the trend.” Another way of saying it: “Never short a momentum stock.”
It is almost impossible to pick the top in a raging bull market. Eventually, GameStop will fall from the sky, and the novice kids on the block are likely to be holding the bag when the dust settles.
But, alas, nobody knows when. As Jesse Livermore said, “The market does what it should do, but not always when.” (Found on p. 33 under “market timing.”)
Here’s another great quote from a Wall Street veteran, “I was once advised to short a stock that inevitably was going to announce bad news. But I was reluctant to short it because we were in a strong bull market that was lifting all stocks, good and bad.” (p. 177)
As Jerry Pogue famously said, “When the wind blows, even the turkeys will fly.” (p. 155)
Finally, this quote:
“Don’t waste your time short-selling. Show me the short-sellers’ yachts.” — Ron Baron
This short-seller nightmare is just another reason why you need to buy my book and keep it handy. There’s a reason why Alex Green calls it the “indispensable” Bible of financial advice, “a crash course in how to survive and profit in today’s volatile markets.”
As Dennis Gartman, a veteran trader and editor of the Gartman Letter, says, “It’s amazing the depth of wisdom one can find in just one or two lines from your book. I have it on my desk and refer to it daily.”
I have two pages of great quotes on “shorting the market.” See pp. 177-178. Also check out “market timing,” pp. 32-34. Plus, there are hundreds of more valuable gems that may make you a bundle or save your shirt.
The price is right! The new 10th-anniversary edition costs only $20 for the first copy and $10 for all additional copies. I sign and number every copy and mail them at no charge anywhere in the United States. If you buy a box of 32 copies, you pay only $300. To order, go to www.skousenbooks.com. I mail them the same day I get your order (while supplies last — only a few boxes are left in stock.)
Good investing, AEIOU,
You Blew It!
The New Virus: ABC News’ Biased Reporting and Yellow Journalism
Last month, on Dec. 17, I wrote a column entitled: “Whatever Happened to Objective Reporting of the News?” I addressed how major news outlets, except for C-SPAN, are dropping even the pretense of objective reporting.
You can read it here.
Once again, last Sunday, I saw another example: a blatantly biased reporter, George Stephanopoulos, asked leading questions to Senator Rand Paul about possible election fraud.
In ABC’s “This Week” program, Mr. Stephanopoulos started with this question: “This election was not stolen. Do you accept this fact?” That’s like asking a man, “When did you stop beating your wife?”
An objective reporter would have asked it this way: “Do you believe that the election was stolen?”
Sen. Rand Paul was gracious throughout the interview but did push back on the ABC anchor, complaining that he was not being a fair and impartial reporter like they used to be.
Sen. Paul castigates Stephanopoulos for claiming, “There are not two sides to this story; there was no voter fraud.” Paul retorts, “A true reporter does not insert himself into the story. There are always two sides to the story.”
Somehow in the current generation, many people reporting the news and conducting interviews seem to have political agendas, as well as lack respect for continuing the tradition of objectivity that had been a hallmark of good journalism in the past.