Bulls “Rush In” With More Stimulus On The Way

Speculation Still Alive And Well

My colleague Doug Kass made a critical observation this week:

“In my decades of investing experience, I have not seen such mindless and uninformed speculation as I have witnessed recently. Indeed, in nominal dollar terms (and led by retail traders, see chart below) it is far in excess of the dot.com boom.” 

He is correct. The interesting thing about this chart is that it explains the astronomical surge in small-cap stocks recently, which is far above any logical expectation of future earnings and economic growth. The reality is that retail traders have been speculating in very low-priced stocks where they can buy more shares versus large traders, who buy higher-priced shares with more liquidity. Such shows up in the deviation of the volume traded.

There is no fundamental basis to support the chart below. Small-cap “value", of which I would argue there is little value considering valuations are at historical extremes, is currently trading at near 4-standard deviations of the 1-year moving average. Such is a level never seen before and one not likely to resolve well.

As Doug notes:

“The Bible says (Proverbs 16:18) that ‘pride goes before destruction, a haughty spirit before a fall.’ Even William Shakespeare warned that ‘dreams are the children of an idle brain, begot of nothing but vain fantasy.’

Adopting a YOLO mentality (“you only live once”), speculation begot initially by analphabetic retail traders with little historical market perspective, and even less micro (individual company) knowledge. Using Robinhood and other commission free platforms and ‘Reddit’ as their investment research and communities, such is now spreading and is morphing into an institutional experience and phenomenon. 

Of course, I need to remind you of that vital point from John Maynard Keynes:

“The markets can remain irrational longer than you can remain solvent.”

A Boat Load Of Cash, No Place To Spend It

One of the reasons the market can certainly continue to “remain irrational” is from the “mountain of cash” in money market accounts.

No, this is not the “cash on the sidelines” argument which I debunked previously.

Following the pandemic, corporations drew down credit lines and hoarded cash due to economic uncertainty. Now, with expectations of recovery, corporations are once again beginning to deploy that cash.

The bad news is they are using those funds for share repurchases. While not necessarily bad, it is the “least best” use of the company’s cash. Instead of expanding production, increasing sales, acquiring competitors, or making capital investments, the money gets used for a one-time boost to earnings on a per-share basis.

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