EC Game Over, Man

Newsletter guys never really come out and say something with conviction. You have to be careful of your reputation, you know.

Also, you are never 100% sure of anything, so you always hedge. Having said all that, I am pretty sure that we just experienced a near-term top in stocks, which could develop into a protracted bear market.

What could follow is some kind of moralizing discussion about central banks and liquidity. I will skip that for now.

But if you want to spend some time talking about the policy implications, we have handed out a lot of cash in the last year in the form of stimulus checks, PPP loans, and enhanced unemployment benefits.

People spent less, paid down debt, and increased their savings. They are flush with cash. It would be naïve to think that this won't find its way into the stock market.

The View from the Top

This is true and has always been true throughout the entire history of the stock market: Retail piles in at the top, which is what’s happening right now. I am hearing stories of schoolteachers trading GameStop (GME).

Source: Tom Toro

I am getting old. I have high cholesterol, somewhat high blood pressure, a knee surgery, thyroid issues, and a host of other health problems.

But the nice part about getting old is that you get to see a few cycles.

I would have less conviction about calling the top if I hadn’t seen what happened in the dot-com bubble. I was there for it at Ground Zero, in San Francisco in 1999.

Things are different, but still the same in many ways.

Retail participation in the stock market has increased dramatically. Thirty seconds ago, I heard from a guy who said that he knew of someone trading options on AMC Entertainment Holdings (AMC), the almost-bankrupt movie theater operator.

This is an adult swim—get out of the pool.

Popular hedge fund shorts are going up, and popular hedge fund longs are going down as they unwind their positions. It’s a mass murder of market-neutral players. I haven’t seen anything like this since the quant meltdown of 2008.

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William K. 4 weeks ago Member's comment

That cartoon at the top is perfect! And so very accurate as well. The problem with following herd instincts is that the wisdom is no smarter than a steak!

My thinking is that the greater the rise the deeper the fall, and this time will be no exception. Unfortunately the damage will undoubtedly spray beyond the participants.

Certainly the thinking to go for value rather than growth is best most of the time, especially for those whose timing may not yet be perfected.

So thanks for a posting that backs up my thinking about the current fiasco.

Dan Nicholson 4 weeks ago Member's comment

The $GME fiasco has been making my head spin. On the one hand, the stock keeps going up and I want to jump on the band wagon. But there is a reason these stocks were shortened - the financials simply don't support these prices and it won't last. Honestly, I don't know if some of these companies will even survive the pandemic without filing for chapter 11.

Bindi Dhaduk 4 weeks ago Member's comment

Agreed. I find the entire situation mind boggling. It makes me want to get out of investing all together.

Flat Broke 4 weeks ago Member's comment

Lol, yes William, the comic certainly fits this situation and worthy of a laugh!

William K. 3 weeks ago Member's comment

I found the cartoon to be not only appropriate but also a very accurate summary of reality, except that I would replace "study history" with "Learn From History."