Whitney Tilson’s email to investors discussing GameStop’s dead cat bounce; stop the speculative and manipulative madness; and Munger’s Daily Journal annual meeting.
Q4 2020 hedge fund letters, conferences and more
GameStop's Dead Cat Bounce
1) The behavior of speculators these days boggles my mind...
Odey Discusses Howard Marks’ Astute Observation On Why Hedge Fund Alpha Is Increasingly Rare [January Letter]
According to a copy of the firm's January investor update which ValueWalk has been able to review, the Odey Asset Management Odey Special Situations Fund returned 7.7% in January, outperforming its benchmark, the MSCI World USD Index, by 8.7%. Q4 2020 hedge fund letters, conferences and more The $60 million fund, which Adrian Courtenay manages, Read More
Only a few weeks after losing more than 90% of their money as shares of GameStop (GME) – or "GameStink," as I've been calling it – collapsed from a peak of $483 to less than $40, they're at it again...
The stock rose 313% from an intraday low of $44.70 on Wednesday to an intraday high of $184.68 yesterday before closing at $108.73 – a 41% drop in a mere three hours!
There were similar bounces and crashes in other stocks in my "Short Squeeze Bubble Basket," most notably AMC Entertainment (AMC) and Koss (KOSS).
This mini-bubble is even more ridiculous than the initial one – these are classic "dead cat bounces." Mark my words: These three stocks will never again reach the highs they hit yesterday and will continue their collapses back to their fair values, which are much lower than today's levels.
This reminds me of what one of my investing mentors once told me – he called it the "law of twos and threes." What this means, he explained, is that every stock, on its way to zero, doubles three times and triples twice! (I do not think these three stocks are zeros, but the rule still applies.)
Stop The Speculative And Manipulative Madness
2) What's going on sickens me – it's high time that regulators cracked down on all the things that have turned our markets into casinos. My friend Doug Kass of Seabreeze Partners has some great ideas:
Stop the Speculative and Manipulative Madness by Introducing a Financial Transaction Tax and by Eliminating Weekly Stock Options
- Speculation is an almost constant condition – it has been going on through history
- But manipulative practices ruin our markets
- The introduction of a financial transaction tax and the elimination of near term (weekly) call options would help to eradicate the manipulation in our markets
- A financial transaction tax would also squash high frequency trading and front running (of order flow)
- Speculation, through market manipulation, sucks the oxygen out of our markets and builds a level of distrust that could, once again, as it did in prior speculative cycles, lead traders and investors to abandon our markets
- The SEC has the power and should move before it is too late
Speculation has been in our markets from the dawn of time. Nothing new there. But manipulative practices ruin our markets – and the options markets have become the straw that stirs the drink of today's speculative activity.
My solution to all of this is the implementation of a small financial transaction tax and for the elimination of near term (weekly) options.
As to those that believe in "caveat emptor" and laissez faire, I say the role of our capital markets is not to look the other way when markets are being manipulated, which builds distrust and alienates market participants.
Rather, the role of our capital markets is to raise and build capital – which helps provide industry with the money to hire and build, not to treacherously speculate by a small group of manipulators.
A financial transaction tax would serve to not only dent the manipulation and speculative activity in stocks like in GameStop, Koss, and the other shiny objects du jour but it would also produce a more fair and orderly market.
Importantly, this would improve the confidence of a fair and level playing field to most investors and traders. It would keep them in the game and not out of the game.
I suspect that the probabilities of a modest financial transaction tax are higher than the consensus expects.
In addition to the above recommendations, several other changes should be made:
- We need instant clearing of trades to avoid more brokerage capital shortfalls and other problems.
- Brokers and regulators should more strenuously enforce borrow and locate rules before a short position is put on.
- The reporting of short disclosures should be the same, and as transparent, as reporting long disclosures.
Here are some of Charlie Munger's comments about this yesterday at the Daily Journal (DJCO) annual meeting:
It's really stupid to have a culture which encourages as much gambling in stocks by people who have the mindset of racetrack bettors. And of course it's going to create trouble, as it did...
The frenzy is fed by people who are getting commissions and other revenues out of this new bunch of gamblers. And of course, when things get extreme, you have things like that short squeeze [in GameStop]...
I have a very simple idea on the subject. I think you should try and make your money in this world by selling other people things that are good for them, and if you're selling them gambling services – where you rake profits off the top, like many of these new brokers who specialize in luring the gamblers in – I think it's a dirty way to make money, and I think that we're crazy to allow it.
Charlie Munger's Daily Journal Annual Meeting
3) I'm glad Doug mentioned Munger...
During crazy times like these, it's more important than ever to listen to legends like him who've seen it all. And, as Doug noted, we're in luck, as Munger just hosted his Daily Journal annual meeting on Wednesday! I highly recommend that you listen to the entire two hours (posted on YouTube here – I suggest 2x speed), during which he fielded dozens of questions. It's amazing that he's so mentally sharp at the age of 97!
Here are some highlights:
- "Robinhood trades are not free. When you pay for order flow, you're probably charging your customers more and pretending to be free. It's a very dishonorable, low-grade way to talk. And nobody should believe that Robinhood's trades are free."
- Munger was asked whether he still identified "wretched excess" in the financial system – as he had warned of in February 2020 – and where he saw the excesses as most egregious in the current market. He replied: "It's most egregious in the momentum trading by novice investors lured in by new types of brokerage operations like Robinhood. And I think all of this activity is regrettable. I think civilization would do better without it."
- When asked why Warren Buffett dumped Wells Fargo's (WFC) stock from Berkshire Hathaway's (BRK-B) portfolio, but Munger didn't from the Daily Journal's, he replied: "There's no question that Wells Fargo has disappointed long-term investors like Berkshire. You can understand why Buffett got disenchanted with Wells Fargo. I think I'm a little more lenient. I expect less out of bankers than he does."
- On special purpose acquisition companies ("SPACs"): "The world would be better off without them. This kind of crazy speculation, in enterprises not even found or picked out yet, is a sign of an irritating bubble. The investment-banking profession will sell shit as long as shit can be sold."
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