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2024-05-18 07:00 by Karl Denninger
in Market Musings , 258 references Ignore this thread
So About Those 'Meme Stocks'
[Comments enabled]

.... hope you didn't.

Nice spike in GME the other day with most of it in the pre-market when you, likely, were either sleeping or not paying attention.  Someone managed to get trades off at $80; as I pen this its trading $34.  That's a 58% loss in two days.  Ouch.

AMC's even worse; it traded pre-market that same day at $13.30; sucks to be you if you're the bagholder on that one because as I write this its trading $5.30.  That is a 60% loss in two days.  Whoever thought that was a "buy" at $13.30..... well, not so much right?

That this sort of reaction still occurs tells me everything I need to know about the general tenor of the market right now.  Despite people claiming there is some sort of "balance" between Greed and Fear, and its on the "Fear" side right now, uh.... no.

The VIX is trading under 13.  That's not fearful -- at all.

Inflation is still running double the Fed's claimed target and yet the S&P tags all time highs.  Uh, no, that's not fear.

Every time I've shaken my head in the "new media" world where everything runs on social media (spamming someone's email is so yesterday) by the violent (usually upside) reactions to this rumor or that, or even worse what is likely someone going through six VPNs to try to bail themselves out of a bad position I think I've seen the "best and brightest" of such insanity and, of course, this means it can't continue.

Then it not only continues -- it accelerates.

Now tomorrow or in a few days (when this publishes) once again these stocks may spike higher.  Does this make them a buy?  No -- it makes them the equivalent of lottery tickets.  They're not being bought because of some material, single-firm change in their operating results or lines of business, that is, because the value of the underlying company has changed.  They're being bought because someone thinks someone else will pay more.

I've often heard that "Wall Street is like a casino" and in some cases that's arguably true.  But a casino has known odds that you can look up or calculate yourself.  21, dice, roulette and similar are all games of chance in that even the most-correct strategy will never result in you having a mathematical advantage.  That doesn't mean you can't win at such a game but it does mean that if you win it is by chance, not by skill.

Poker is the one exception in a casino but the house still maintains a "rake" which is a tax on every pot.  Therefore you not only need to be better than the other players you must be better by enough to overcome the tax.  If you are, however, then over time you can indeed can win in the context of the other players over time (over enough time everyone gets the same number of deuces and aces.)  Thus, assuming a game of skill is of interest to you that's the only choice in a casino.

But now consider two players at that Texas Hold'em table who are able to communicate and collude.  You're going to get destroyed because that is more than enough "tilt" to overcome virtually any skill differential you might otherwise have.  This does happen although casinos make an honest effort to prevent it (its very bad for business if it gets around that this occurs in their card room.)

That's akin to what we have now in equity markets: Not only are people playing games such as what just occurred but what's worse is that some of it may be organized in that there is an allegation out of the Senate that government data was systematically leaked early to certain players in the markets.

None of that is chance or skill -- its cheating.  And as is the case in Vegas its illegal in the markets as well.

As I've discussed for years fines do nothing in situations like this because the parties responsible are never personally forced to disgorge them in an amount that is sufficient to ruin the guilty parties.  Thus only jail is a sufficient deterrent in that prison time has serious deterrent value no matter who wealthy you are.

Don't expect any of that to happen soon though, but at current valuations do be aware that the sort of movements and losses you can easily take if you're on the wrong side of these moves are both wildly exaggerated and, if that Greed factor does turn to Fear they're far more likely to be spikes to the downside.