Juggling Dynamite

Initial public offerings (IPOs) allow founders, early investors and investment bankers to capitalize on hype and cash-out by selling shares to the public.  Year to date, there have been $163 billion in IPOs in the US.  This surpasses the previous IPO record in 1999 (just before tech shares plunged 80% on average between 2000 and 2002).

In addition to selling shares to the public on newly listed companies, insider selling versus insider buying of shares at existing public companies reached a ratio of 58:1 last month.  Readings over 20:1 are considered a bearish sign indicating that corporate executives see cash as more valuable than their company shares.

Public appetite to buy companies at non-sensical valuations should cause pause for thinking people today.  For some sober assessment watch:  Doordash is the ‘most ridiculous of 2020 and holds no value’:  Analyst.

Selling customer order flow to predatory ‘high frequency’ traders should be illegal; instead, it has become a common, highly profitable practice among broker/dealers.  We become collectively weaker by helping financial predators to gorge on the ignorant and vulnerable.

Robinhood’s trading app designed to entice, addict and take advantage of the poor and unsophisticated is particularly egregious.  In the second quarter, high-frequency trading firms paid $180 million to buy Robinhood’s online trading customers’ order flow.  This was a 17% premium over the average paid to other firms for their customer order flow because Robinhood users are known to be ‘dumber’ and more profitable to front-run.

Read Matt Taibi’s expose Pandemic Villians:  Robinhood.  Here’s a taste:

The obvious problem is that a lot of these younger customers have no clue what they’re doing. “Retail investors don’t understand stocks, let alone options,” sighs Saluzzi. He compares the service to bringing amateur poker players to Vegas and seating them not at a table with old ladies and tourists, but with the best players in town. “It’s throwing them right in with the sharks,” he says.

Having been in the money management seat during the speculative manias of the late 1997-2000 and 2005-08, I did not expect to see a third even more extreme episode within the same 20-year period.  And yet, here we are.  Madness reigns once more.  On the upside, the opportunities in the inevitable next implosion promise to be as great or potentially even greater than the 50 to 80% liquidation sales that presented in the last two bear markets.  So, that’s something exciting to prepare for and look forward to.  In the meantime, as Chanos observes:  “Right now people are doing really dumb things with their money.”

Kynikos Founder & President Jim Chanos says people are doing really dumb things with their money, driving up share prices of companies based on narratives that are too good to be true. He also discusses his “painful” short in Tesla Inc. before the electric vehicle maker is added to the S&P 500, as well as his bet against IBM, which is his highest conviction short. He adds the Biden administration will not be anti-markets.  Here is a direct video link.