The Reddit Rally – Thoughts on the Current Market Volatility
What has transpired in the markets during the last week of January is an ironic twist to 2008. We examine.
There is something to be said about the recent developments in heavily shorted names from a historical sense. During the 2008 financial crisis, changes in the way that the shorting of stocks could take place (SEC abolished the uptick rule) let short-sellers maul companies in a modest degree of financial difficulty – so to speak, not letting their heads up for air as the stocks were pushed lower. This aggressive short-selling prevented companies that were salvageable, via a capital raise, from executing one at a price that either didn’t basically wipe out long term shareholders or alternatively no capital raise at all, leading to bankruptcies or forced sales (like Bear Stearns, for example). So there were real businesses wrecked by the hedge fund crowd. Maybe some of them needed wrecking, others, I am not so sure that is a fair comment.
The old expression is “bulls make money, bears make money, but pigs get slaughtered”- and this seems relevant here.
Thus it is not a small irony that aggressively shorted positions in stocks that have already shed the vast bulk of historical market value, like GameStop, AMC, etc. may lead to capital holes, forced sales, and possibly some covering by hedge funds that held large short positions. GameStop is the most extreme of these as it had 140% of shares sold short as of the last report. I have been doing this for a long time and actually did not know a short interest >100% was legally possible (evidently it is).
The old expression is “bulls make money, bears make money, but pigs get slaughtered” – and this seems relevant here.
After the experience of the last ~14 years, where retail activity in the stock market fell to very low if not invisible levels of participation, it is enjoyable (for myself) to see retail back in the market in a big way. It had become a pros versus pros market, and very influenced by hedge fund-type thinking and the Novocaine drip of index investing, which from my vantage point had become not very fun at all. Buying an index fund by definition means you don’t have much conviction in any stock specifically or any voice in the process of capital allocation and price discovery that is such a necessary function in capital markets. So I welcome it.
That said, this has turned into an overt exercise in speculation as of late January, in effect speculating on how much more speculating speculators may engage in – kind of like speculating3. No that won’t end very well at all…
Stay disciplined and try to focus on fundamentals.
Any characteristics included are for illustrative purposes and accordingly, no assumptions or comparisons should be made based upon these ratios. Statistics/charts and other information presented may be based upon third-party sources that are deemed reliable; however, Cambiar does not guarantee its accuracy or completeness. As with any investments, there are risks to be considered. Past performance is no indication of future results. All material is provided for informational purposes only and there is no guarantee that any opinions expressed herein will be valid beyond the date of this communication.
The specific securities identified and described do not represent all of the securities purchased or held in Cambiar accounts on the date of publication, and the reader should not assume that investments in the securities identified and discussed were or will be profitable. All information is provided for informational purposes only and should not be deemed as a recommendation to buy the securities mentioned.
Any illustrative models presented in this communication are based on a number of assumptions and are presented only for the limited purpose of providing a sample illustration of Cambiar’s investment process. Any sample illustration is inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond Cambiar’s control. Any sample illustration is not intended to represent the performance of any investment made in the past or to be made in the future by any portfolio managed or advised by Cambiar. Actual returns may have no correlation with the sample illustration presented herein, and the sample illustration is not necessarily indicative of any Cambiar investments. It should not be assumed that Cambiar’s investment recommendations in the future will accomplish its goals or will equal the illustration provided herein. A more detailed description of the assumptions utilized in any of the simulations, models, and/or scenario analyses is available upon request.