Tsunami Warning

(I have a friend who once ran serious money for a family office, focused entirely on buying bonds in odd lots. He didn’t need to find odd lots, as they had plenty of money. He could simply get 1 to 2% more yield for the little bit of extra work.)

Over time, “odd lot” trading became a sign of amateur activity, to the point some used it as a contrary indicator. More odd lot activity meant uninformed people were entering the market and a top was approaching.

By the 1990's, back office technology had made the whole round lot preference obsolete. Brokers stopped caring how many shares you traded. In effect, a “round lot” became one share. But now it is even less. Robinhood and many other trading platforms let users trade fractional shares, as little as 1/1,000,000 of a share. I believe this may be more consequential than is generally recognized.

Look at the share prices for of some of today’s top companies: Apple (AAPL) has been around $130. In the old round-lot world, you would have needed $13,000 to trade it efficiently. Now you need less than a penny. This vastly expands the universe of people who can trade Apple shares. And Apple is low-priced compared to some other popular names like Tesla (TSLA) around $750, or Amazon (AMZN), which is over $3,000 per share.

We have, without really noticing, severed the connection between share price and liquidity. This matters in ways I think we may not fully understand. Combine it with game-like mobile apps that let people buy and sell in individually tiny amounts that add up to the big numbers once reserved for giant institutions. And without any kind of institutional decision-making process to constrain rash moves.

Further add trillions in government cash payments, often to people with time on their hands because they are unemployed, and who need ways to generate income. Of course, some turn to stock trading. It’s an attractive “side hustle” for a time when Uber driving is less attractive. If all you have is $100, that’s okay.

In the bigger picture, all those small accounts add up to enormous sums of hair-trigger money. Some of it has much higher risk tolerance. The app users don’t see it as a nest egg to preserve. In their minds, it’s more like buying gas to get to work—something you have to burn. The whole concept of a stock being overvalued or undervalued doesn’t apply. They just want it to move.

Where all this leads is uncertain, but I suspect it won’t be good.

A Key Difference

One of the first rules my mentors taught me: All it takes to create a bull market is for buyers to show up. All it takes to create a bear market is for the buyers to disappear. Just reading the zeitgeist, I don’t think they’re going to disappear for a while.

Dave Rosenberg at Rosenberg Research has also been following these inflows, and finds them problematic. He added another perspective in his latest monthly chartbook. The line in this chart shows current equity exposure in the AAII Asset Allocation Survey going back to 2002.

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Disclaimer:The Mauldin Economics website, Yield Shark, Thoughts from the Frontline, Patrick Cox’s Tech Digest, Outside the Box, Over My Shoulder, World Money Analyst, Street Freak, Just One ...

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Adam Reynolds 2 months ago Member's comment

Bullish?