We Have Reached The Silly Phase of the Bull Market

Have we entered a new bull market? Was the 35% pullback in the S&P 500 in March the fastest bear market in history? Or is this just a continuation of the bull market that started in 2009, interrupted by a rather large correction? Bull markets and bear markets are about behavior, about the human emotions of fear and greed. While we got a brief bout of fear in March, greed has since overwhelmed all sense, common and otherwise. What we’re seeing in the casino…er, market….today is not beginning of a bull market behavior.

What has been going on in markets over the last two months is the most glorious episode of human greed I’ve seen since 1999. I know there will be plenty who pooh-pooh that comparison but the speculative trading and the ignorance of those doing it is exactly the same. There are silly things going on, new “traders” doing stupid things and getting away with it because that’s what happens in the end stages of a bull market that has been going on for a decade.

Hertz, the rental car giant, filed for bankruptcy on May 22 and its stock hit a low of $0.40 a few days later. Earlier this week it traded as high as $6.25. That’s a gain of over 15 times your money if you bought at the low. In 12 days. Did Hertz cancel its bankruptcy? Did Hertz get a last-minute rescue from the Trump administration? No and no. Hertz is still bankrupt. And my quick math says they have $19 billion in debt and maybe $15 billion in assets. The stock is almost certainly worth zero. And yet hundreds of millions of shares are changing hands every day. This is not investing.

And Hertz isn’t the only stock fools are buying in hopes of finding a bigger fool to take it off their hands at a higher price. Chesapeake Energy was a penny stock and on the verge of delisting from the NYSE earlier this year before executing a 1 for 200 reverse split. Its unsecured bonds trade for less than 10 cents on the dollar. The stock tripled one day this week and at its peak had a market cap of $750 million. The stock is, like Hertz, likely worthless. This isn’t investing either.

The IPO market is also heating up with 8 deals priced last week, two of which were SPACs, Special Purpose Acquisition vehicles or what we used to call blank check companies. SPACs have no business, offering investors a chance to participate in an acquisition of some operating company sometime in the future. SPACs used to be things hawked by penny stock firms but after a decade long bull market, they have become respectable, I guess. You might get lucky like the people who bought VectolQ, a SPAC run by the former Vice Chairman of GM. VectolQ merged recently with Nikola, a company that plans to sell pickup trucks powered by fuel cells. The stock has run up from $12 in late April to $90 before backing off a bit. The company has a market cap of about $25 billion – about the same as Ford – and – supposedly – $10 billion in pre-orders for its truck. What it doesn’t have is any revenue which it hopes to start generating sometime next year. Nikola stock is, to be generous, speculative.

Among the other new offerings, last week was Zoom Info which priced at $21 and proceeded to double on day one. It’s now up 138% in 4 days. Zoom at least has an actual operating business with revenue of $350 million last year –  on which they managed to lose $51 million. Market cap? $19 billion because, you know, they’re “building for the long term”. Growing into that market cap may redefine “long term”.

To get a real handle on the speculative activity you need to wander over to the options market. Option traders bought a stunning 35.6 million new call option positions last week with over half of that coming from small traders buying fewer than 10 contracts. According to Jason Goepfert of Sentimentrader, the last time that happened was in 2000. For those of you too young to remember, that was the top of the dot com bubble. With everyone buying calls, the equity-only put/call ratio has fallen below 0.4. Who needs downside protection when the market goes up every day?

Particularly galling – at least to me – is that some portion of this speculation was funded by taxpayers. Some of those stimulus checks Congress sent out – $290 billion of them – ended up in Robinhood or ETrade accounts. A recent WSJ article quoted an out of work 22-year-old woman who put a portion of her stimulus check into her Robinhood account:

It was basically free money, so, you know, I decided to play around with it,” she said. “You might lose some, you might win some. It’s like a gambling game.

She doubled her money trading stocks so now she’s shifting to options because “you can make a pretty good amount of money in one day”.

“It was basically free money” pretty much says it all I think. For a lot of people, those stimulus checks were just “free money”, a windfall which they treat differently than money they actually had to work for. Why not take a shot on a lottery ticket like Hertz or Chesapeake? What have you got to lose? You’ve got a stimulus check funded brokerage account and your enhanced unemployment benefits last until the end of July. How much do you want to bet those benefits get extended? Anyone believe there won’t be another round of checks? In an election year?

These young “investors” are just as cocky as the dot com day traders back in the day. In the comments section of the same WSJ article I cited above, a 35-year-old said of veteran investors:

Maybe they just lost touch with the general public or don’t know enough about technology to properly invest in this new digital economy. Either way, stop making excuses.

I heard that in 1999 too, that anyone who wasn’t buying into the madness that was the dot com boom just didn’t understand. They were old fogies who didn’t understand the “new economy”. Only it turned out that the new economy was a lot like the old one where revenue, profits, and solid balance sheets turned out to be fairly important.

This is the silly phase of the bull market. It will end eventually and all these new “investors” will discover that it isn’t easy and stocks don’t just go up. But until it does, it’s free money. Enjoy it while it lasts kids.