Owning Bitcoin isn’t the Only Way to Invest in a Burgeoning Cryptocurrency Market

 

Bitcoin (BTC) in circulation just exceeded one trillion ($USD) in value.  Dogecoin (DOGE) is “heading to the moon” thanks to a strong Reddit community of investors and a few tweets from Elon Musk. In its short history, cryptocurrency has already made an impact on global markets.  And the investment community has taken notice.  Since you’re on Channelchek, you might be looking for the next outperformer like Bitcoin.  Does the lovable Shiba-Inu inspired crypto-coin that was started as a joke (DOGE) have the staying power to reach the stratosphere?  Time will tell.  But the direct holding of cryptocurrency isn’t the only way to benefit from its growth. Currency exchange platforms, blockchain providers, and crypto mining companies all represent their own unique investment opportunities.

Blockchain

Blockchain is the platform that serves as the backbone of cryptocurrency.  In the simplest terms, blockchain is a public electronic ledger.  Built around a peer-to-peer (P2P) system, multiple users create a series of records in the ledger.  These entries may be infinitely amended over time, but each entry is unchangeable.  This process creates complete transactional transparency. Every entry, and amendment, can be verified based on this transparency, and every entry is approved by consensus between the participants in the chain.  Basically, this platform has created an accounting ledger with no eraser and a nearly infinite supply of auditors.

While blockchain is still technically in its infancy, and its level of global adoption in the future is still in question, it has certainly gained traction in the past five years.  Beyond the rise in cryptocurrency popularity, larger public companies have implemented their own private blockchain systems to track internal processes, such as produce from farm to store (Wal-Mart) and diamonds from mine to authenticator to distributor (De Beers). 

 

Taal Distributed Information Technologies (TAALF)

TAAL Distributed Information Technologies is a company that provides a wide range of Blockchain/Crypto-related services, including transaction processing, pool management, data storage solutions, and blockchain computing. Their primary focus is on the global adoption of Bitcoin SV (original Bitcoin). TAAL’s vision is ‘New Innovations for the New Economy.”

TAAL recently announced a successful first phase deployment of blockchain computer power at their Alberta facility.  Part of their 2021 strategy, this first phase helps TAAL support transaction volume growth and meet scalability requirements, providing the computing power needed for enterprise clients to achieve business advantages using their processing services.   “We are pleased to mark this important first step in reaching our operational infrastructure milestone for 2021. Despite the global pandemic challenges, we have successfully begun TAAL’s next-generation blockchain infrastructure operations in Alberta, Canada on schedule. This brings online, trusted, compliant blockchain transaction solutions for global enterprise clients”, commented TAAL CEO, and Executive Chairman, Stefan Matthews,.

TAALF’s stock has experienced a nearly 500% increase over the past three months, reaching a 52 week high on February 18, 2021.

 

DMG Blockchain Solutions 
(DMGGF)

Straddling blockchain and mining sectors of crypto, DMG is a diversified cryptocurrency and blockchain platform company.  In the blockchain space, they offer a permissioned blockchain technology focused on developing enterprise software for supply chain management.  Other company focal areas include crypto mining, hosting services for mining clients, transaction fees, and data analytics. 

In January, DMG joined Marathon Patent Group (MARA) to launch North America’s first cooperative mining pool, Digital Currency Miners of North America (DCMNA).  The goal of DCMNA is to create North America’s first cooperative mining pool, and to help improve their financial performance.  As part of their role in this agreement, DMG will provide their patent-pending technologies to create transaction blocks that omit transactions identified as risky and those that might not meet OFAC standards. 

DMGGF has seen a substantial increase in share price over the past 3 months, reaching a 52 week high in February of 2021, trading at an average of over 3 million shares per day over the past 3o days.

 

HIVE Blockchain Technologies  (HVBTF)

Shareholders of HIVE Blockchain Technologies, Ltd. own a pure-play blockchain investment.  HIVE creates newly minted cryptocurrencies continuously on the cloud through their data center facilities in Canada, Sweden, and Iceland.

HIVE recently announced plans to expand their Ethereum footprint by 30% using 6MW of green energy to mine. This expansion involves a $9M investment in GPU chips and associated mining computers and refitting their Sweden facility.  As part of the announcement, HIVE proclaimed they would continue to “utilize cash flow to make opportunistic investments in ASIC and GPU new and next-generation mining equipment that can provide positive gross mining margins.”

HVBTF has seen a 500% increase in share price over the past 3 months, resting at a 52 week high in February 2021.

 

 

Cryptocurrency Mining

Cryptocurrency mining is a process where a computer (or a group of computers) complete a series of math equations as a computational task, generally processing other cryptocurrency transactions.  In exchange for their assistance in performing these tasks, the “miners” are rewarded cryptocurrency.  This process is akin to credit card processing fees.  The various frameworks required to process a credit card transaction, from bank fees to computational requirements, lead to transaction fees.  Generally, these fees are passed on to the merchant.  In cryptocurrency mining, the miners take on some of these computational requirements, allowing merchants to absorb a lower fee.

While home users can use their own PCs and electricity to participate in crypto mining, the payoff is generally small, and not outweighed by electricity and equipment cooling costs.  This is especially true as transaction processing demands increase.  In modern-day crypto-mining the majority of the work is done by data farms – large data rooms filled with GPU-rich computers with the single purpose of processing transactions.  (profit potential)

 

Hut 8 Mining Corp  (HUTMF)

Hut 8 Mining Corp focuses entirely on Bitcoin mining, operating 56 BlackBox datacenters (all operating at a maximum capacity of 65 MW) in Medicine Hat, Alberta, and another 38 operating at 42MW in Drumheller, Alberta. Hut 8 aims to provide a secure and simple way to invest directly in bitcoin.

In February 2021, they reached a milestone of 400 minters installed, following the scheduled delivery of the first batch of 5400 machines ordered in January 2021.   “Guaranteeing our access to new, cutting-edge mining equipment while market demand greatly outweighs supply has solidified our position as one of the only miners operating at full capacity, taking full advantage of today’s economics,” said Jaime Leverton, CEO, Hut 8.

In the past three months, HUTMF has surged over 800%, trading at a 30-day average of over 2M shares/day. 

 

Marathon Patent  Group  (MARA)

Marathon Patent Group is a digital asset company and one of the first Nasdaq-listed Cryptocurrency mining companies.  Marathon mines cryptocurrencies, with a focus on the blockchain ecosystem.  They currently operate a proprietary mining facility operating at 105 MW in Montana, as well 2000+ ASIC Bitcoin Miners at a co-hosted facility in North Dakota.

Marathon recently announced that 4000 miners had shipped from Bitmain to their Montana facility.  Once installed, their mining fleet will consist of over 6500 miners.  “This shipment of 4,000 S-19 Pro miners is the first of many we will be receiving from Bitmain in 2021 as we build towards becoming one the largest and most efficient miners in North America,” said Merrick Okamoto, Marathon’s chairman, and CEO.

Over the last 90 days, MARA has increased from just over $3.00/share to a February 19th closing price of $43.27. 

 

Voyager Digital (VYGVF)

Voyager Digital allows users to build their cryptocurrency portfolio by facilitating the purchase and trade of over 50 digital assets through the platform, which includes an app for Apple and Android smartphones.  Voyager offers users a layer of security with advanced fraud protection and FDIC insurance up to $250,000. 

Recent mergers and acquisitions have brought Voyager more users and have fueled high growth over the past few months.  Voyager recently announced that assets under management had surpassed $1.1 billion ($USD), up 500% from $230 million at the close of 2020.  “Voyager could not have reached this important milestone of AUM exceeding $1 billion without the support of our loyal community.  With our recent capital raises in 2021 totaling US$146 million and our strong cash balance of approximately US$156 million, Voyager is better positioned than ever to grow our team, expand internationally and offer new exciting products to our users. We thank all of our stakeholders for their support on this momentous occasion,” said Stephen Ehrlich, Co-founder, Director and CEO of Voyager.

VYGVF has jumped from just under $1/share in mid-November 2020 to over $15/share in mid-February, with daily volume steadily increasing over the same period.

 

Currency Exchanges

A cryptocurrency exchange is a platform that facilitates the exchange of cryptocurrencies for other assets, generally cash.  As in the exchange of any other currencies, the cryptocurrency exchange platform makes money through fees for acting as the intermediary. 

The majority of current cryptocurrency exchanges are centralized.  Centralized exchanges are backed and controlled by a company and provide security and stability for users on both ends of the transaction.  Still, and often because of the transactional fees associated with a centralized exchange, some users prefer a decentralized exchange, which allows for direct peer-to-peer transactions. 

 

Take-Away

Direct ownership of cryptocurrency is not the only way to gain exposure to what has been a growing and lucrative play. Technology companies that either mine or provide crypto or blockchain services would allow an equity investment in companies that stand to benefit from the increased acceptance and speculation in cryptocurrencies.

Channelchek can serve as an excellent resource to mine ideas and develop an understanding of small and microcap companies that could benefit from crypto growth.

---

The sectors and companies mentioned in this article represent a small sample of the various investment opportunities in the world of cryptocurrencies.  While recent results look positive, you should always know the risk before investing.  No investment decision should be made solely on this or any one article you read.  You are solely responsible for deciding whether any investment or transaction is suitable for you based upon your investment goals, financial situation, and tolerance for risk. You must seek independent professional advice to ascertain the investment, legal, tax, accounting, regulatory or other consequences before investing or transacting.

 

Suggested Reading:

Is the Small Firm Effect for Microcaps Real?

Interest Rate Impact on Investment Sectors

The Fed and MIT are Experimenting with Digital Currency

 

Sources:

https://www.computerworld.com/article/3191077/what-is-blockchain-the-complete-guide.html

https://www.taal.com/news/taal-alberta-facility-blockchain-computer-power/

https://www.globenewswire.com/fr/news-release/2021/01/05/2153647/0/en/Marathon-Patent-Group-and-DMG-Blockchain-Solutions-to-Form-the-Digital-Currency-Miners-of-North-America-DCMNA-and-Launch-North-America-s-First-Cooperative-Mining-Pool.html

https://www.hiveblockchain.com/news/hive-blockchain-announces-plans-to-expand-ethereum-footprint-by-30-using-6-mw-of-green-energy-to-mine-ethereum/

https://www.bitdegree.org/crypto/tutorials/how-to-mine-cryptocurrency

https://hut8mining.com/hut-8-equips-up-ready-to-match-the-momentum-of-bitcoin-adoption-with-the-successful-installation-of-its-first-batch-of-mining-equipment-on-schedule

https://www.marathonpg.com/news/press-releases/detail/1226/bitmain-ships-4000-antminer-s-19-pro-asic-miners-to

https://corporatefinanceinstitute.com/resources/knowledge/other/cryptocurrency-exchanges/

https://cointelegraph.com/news/voyager-token-vgx-gains-926-as-mergers-and-acquisitions-bring-new-users

https://www.investvoyager.com/pressreleases/voyager-digital-announces-assets-under-management-surpass-ususd1-1-billion

Stay up to date. Follow us:

Newrange Intersects New High-Grade Gold Zone at Pamlico Newrange Gold announced that continued Reverse Circulation (RC) drilling at the Pamlico Project in Nevada has discovered high-grade, oxide gold mineralization approximately 85 meters east of the Merritt Zone. Research, News & Market Data on Newrange Gold Watch recent presentation from NobleCon17

Comtech Telecommunications Awarded $2.8 Million Contract for High-Power Amplifier Systems Comtech Telecommunications announced that during its second quarter of fiscal 2021, its New York-based subsidiary, Comtech PST Corp., was awarded a $2.8 million contract for high-power amplifier systems from an international prime contractor. Research, News & Market Data on Comtech Telecommunications Watch recent presentation from NobleCon17

electroCore Announces Two-Year Extension of gammaCore(TM) Listing in the NHS Supply Chain Catalogue electroCore announced that gammaCore will continue to be listed in the NHS Supply Chain catalogue for an additional two years through June 3, 2023. Research, News & Market Data on electroCore

Stay up to date. Follow us:

Stay up to date. Follow us:

Midwest Energy Emissions Corp. will convert outstanding principal into shares of the Company’s common stock The Company will convert a total of $860,000 of outstanding principal into shares of the Company’s common stock at the Note’s conversion price of $0.50 per share. News and Market Data on Midwest Energy Emissions Watch recent presentation from NobleCon17

Gevo and Scandinavian Airlines System Amend $100 Million Fuel Agreement Gevo, Inc. and Scandinavian Airlines System have signed an amendment to increase SAS’s minimum purchase obligation to purchase sustainable aviation fuel to 5,000,000 gallons per year. Research, News and Market Data on Gevo Watch recent presentation from NobleCon17

Comtech Telecommunications Awarded Contract for 21.5m Radome Comtech Telecommunications announced that its Space & Component Technology Division was awarded a Q2 2021 follow-on order from a multinational infrastructure support company for a 21.5m radome. Research, News and Market Data on Comtech Watch recent presentation from NobleCon17

Stay up to date. Follow us:

Stay up to date. Follow us:

 

Two Ways High Performing Investment Portfolios Guard Against Losses

 

Are stocks overbought, or does the bull market have more to run? Sound arguments can be made for either side.

On the side that forecasts more stock market gains, they may point to earnings expectations. This makes sense since fewer pandemic-related restrictions are now leading to more business activity. Activity means earnings increases which normally equates to the stock market rising. On the bearish side, those that think the market is pricey and too risky may argue that interest rates have begun to move up from their historic lows. Higher rates add to the cost of doing business and serve to reduce consumer purchases. Additionally, stocks are an alternative for income investors that have left the bond market in hopes of a higher yield. As higher bond yields return, they may shed their stock market positions and return to the fixed income market.

Both bullish arguments and bearish positions have merit. This leaves investors with the decision to either leave a still booming stock market and possibly miss out on returns in exchange for near-zero interest or the potential for double-digit gains in equities. The double-digit returns, of course, may be negative double-digit to investors. It is basic physics that the higher something climbs, the further it has to fall. Both stocks and bonds are near priced near historic highs. This means they both have more potential downside than ever before.

Capturing Upside and Limiting Downside

Stocks have not exhibited any real weakness since late March 2020. The trend is still rapidly upward. People are putting more and more money in equities. The more money that goes in, the less money that can be used to help drive up prices later. And the more money that may run for cover later when an eventual selloff occurs.

Investors that expect an inevitable selloff will one day occur, but also that the market has more upside, could consider practicing a little defense. In today’s point-and-shoot world of stock trading both online and by phone app, many individuals don’t take the time to protect themselves from major losses. With the market continuously going up and quickly erasing any downward moves, investors have been rewarded for ignoring the fundamentals of risk management. The truth is, we don’t know when the big slide (or slow march) down will occur, but we do know we are closer to it than we were yesterday.

The two most basic methods for an individual to feel confident that their portfolio can still capture gains, without too much risk on the downside, are placing stop losses on their positions or buying puts. The stop losses cost the portfolio owner the erosion down to the Stop (sell price) only if hit. The cost of the Put is upfront and known even if it is never exercised which would be the case if the stock continued to perform well through the Put option’s expiration.

Using Stop Loss Orders

A stop-loss order gets you out of a stock you’re long when the price starts falling. If you’re short, a stop-loss buy order can be used. There are several types of stops you may use. A Hard Stop is when you set a fixed price that, if reached, triggers a market sell order. For example, you own “Company A” stock at $4.25; it is now trading at $7. Over the past few weeks, it has dropped to $6.50 several times but seems to have firm support there. To protect yourself if the stock should drop below that and keep going, you could set a hard stop a little below the $6.50 price. For example, If you set this stop loss at $6.30, an at-market sell order will be triggered when it hits $6.30.  In a world of commission-free trades, you may wish to quickly get back in at a lower price if it should drop considerably.

 

 

A Trailing Stop is a little different; it moves up with the stock price in a long position and down with the price in a short position. The order is spread to the price in terms of dollars or a percent difference. Using the example from above, if you set a trailing stop of 10% and Company A stock rises from $7.00 to $9.00, the trailing stop will move from the original $7 less $0.70 ($6.30) to $9 less $0.90 $8.10). The idea is more profit is captured when the stock does turn downward. A set dollar amount, rather than a percentage, can also be used for trailing stops.

Proponents of stop losses take comfort in their ability to protect the position from rapidly changing markets. Opponents could argue that both hard and trailing stops make temporary losses permanent. For an investor who is always monitoring their account and can trust their decision-making as moves unfold, they may feel a stop loss is not for them; they can stop losses on their own. Whether an investor uses them or not, once in a position, pre-planning various scenarios and actions you could take is critical to managing downside risk.  

At the end of the day, if you are going to have continued success as an investor, you have to be confident in your strategy. This means carrying through with your plan. The advantage of stop-loss orders is that they can help you stay on track and prevent your judgment from getting clouded with emotion.

Put Option

The S&P 500 declined in one out of every four years between 1926 and 2009. Then the “Great Financial Crisis” of 2008 cleared the way for years of stock market growth leading us to today’s heights. That is a very long barely interrupted growth trendline, historically. The most basic way for an investor to protect their upside gains is to take profits. One problem with this is what if the stock is still the best place for your money. After all, selling the stock means you have to do something else with the proceeds. When this is the case, locking in some of your gains, and holding the stock, can be done using the options market.

A common strategy is to buy a Put Option (a Put). This gives the holder the option of being able to sell stock at a certain price at a specific date in the future.  

For example, you own 100 shares of “Company B.” It has risen by 80% in a single year and now trades at $100. All the analysts covering the stock have price targets well in excess of $100, and the industry is experiencing a boom for the foreseeable future. But, who knows, some of these positives may already be built-in, and the bigger picture economy is questionable.  Or there could be a black swan event. To protect your profits, you could buy a Put on Company B with an expiration date six months into the future, and at a strike price (sale price) of $105, (slightly in the money). This option’s market value will fluctuate as you hold it with expectations, time to expiration,  and changes in the equities value. But, for the example, let’s say the option costs $600 ($6 per share). You now have the right (contractual ability) to sell 100 shares of Company B at $105.

If the stock drops to $90, the value of the Put will have risen significantly. At this point, you can sell the option for a profit to offset the decline in the stock price. Options do have expiration dates, at which time the contract for the counterparty to honor your ability to exercise the Put expires. It becomes an unused “insurance policy.”

Take-Away

With stocks and bonds trading at historic highs, being in either the equity or fixed income markets represents a greater potential for loss. There are tools and strategies which can protect you from extreme losses.

Getting completely out of any investment may not be the best plan. After all, everything has a cost, even doing nothing. Just think about the investors that stepped aside and went into cash during the first half of 2020, thinking, “it isn’t wise to be long during a pandemic.” They are likely worse off than if they had invested in a diversified mix of large and small-cap stocks. They didn’t get hurt by stepping aside, but they missed a huge run-up.

Investors that believe there is likely plenty of upside to a market index or particular stocks can still participate and capture much of it if it occurs. This, too, has a cost, but that cost serves as insurance against extreme losses.

Your broker can provide you with more detailed descriptions and various reasons when these strategies and other possible risk-limiting measures benefit your account. Each trading platform works differently, if you have questions you should contact a representative of your broker.

Paul Hoffman

Managing Editor, Channelchek

Suggested Reading:

Money Supply Drives Stock Market Performance

Can Small Investors Compete with Wall Street?

Seeking Alpha’s Paywall Causes Frustration

 

 

Stay up to date. Follow us:

 

What Marijuana Investors Can Learn from the GameStop Trading Frenzy

 

Late January’s meteoric rise of GameStop’s shares made headlines, but what should be made of it? And what can we learn from it for marijuana?

What happened with GameStop is a short squeeze. The same thing happened to Tilray in 2018, Volkswagen in 2008 and supermarket operator Piggly Wiggly in the 1920s.

While it is possible to profitably invest by selling whatever is rising at ever-higher prices for nonfundamental reasons, it is a tough zero-sum game where, by definition, someone must eventually lose.

Even the winner eventually loses as well when its trading counterparts run out of money or, as happened at Piggly Wiggly, when someone more powerful changes the rules of the game for their own benefit.

 

This article was originally published by MJBizDaily authored by Mike Regan who is the founder of MJResearchCo.com. Mike and fellow analyst Colin Ferrian are known for investment analysis and valuation of the cannabis industry. Reach them at mikeandcolin@mjresearchco.com.

 

Over the long term, MJResearchCo believes the highest and most reliable source of returns comes from the core function of capital markets – matching those who have more ideas than capital with those who have excess capital for a mutually beneficial deployment of capital at higher returns.

The focus should be on the fundamentals because that is what will drive true value creation over time in what we think is the most interesting secular growth theme of the next decade: legal cannabis.

But this does not mean we ignore price moves. You always need situational awareness to know when the game changes.

If you’re playing basketball with your friends, and 11 strangers in helmets and shoulder pads line up at half court, you need to realize you’re not playing basketball anymore and adjust your strategy.

If you continue to shoot three-pointers, you’re going to get tackled.

 

 

Fundamentals versus market mechanics: weighing versus voting

In Berkshire Hathaway’s 
1993 investor letter, Warren Buffett quoted his mentor, Ben Graham:

“In the short run, the market is a voting machine – reflecting a voter-registration test that requires only money, not intelligence or emotional stability – but in the long run, the market is a weighing machine.”

This is why opportunities to buy good companies at cheap prices exist. The “voting” of the market sells down something to below the value supported by fundamentals.

Over the short term, the value of a company is driven by whatever the last person wanted to pay for one share – and that can be for many reasons that have nothing to do with the fundamentals.

Unlike Buffett, we don’t bother judging the “intelligence” or “emotional stability” of the other side’s reasons.

For our purposes, we just want to understand why they’re offering those prices, even if we don’t agree with them.

Over the long term, the most solid support of a stock price is the fundamental profitability of the underlying business – the “weighing.”

If you can’t sell the stock (for example, because the public markets shut down or the company was private), the only return comes from the cash distributed to the equity owners in the form of dividends or share repurchases.

The best investors keep an eye on both the long-term fundamental “weighing” perspective and the near-term price moves from the “voting” perspective, and they buy good companies at low prices when the two diverge.

Companies weigh in with new capital issuance

Smart companies should have an idea of their own intrinsic worth and potential returns on existing and potential projects.

If the market bids up their stock, companies will issue new stock at high prices to fund those high-return projects.

In an ideal world, GameStop would sell as much new stock as it can after a tenfold increase in its market capitalization – which, ironically, would let them better fight their secular headwinds. But market dynamics probably prevent this.

Though not currently in a squeeze, cannabis stocks have traded up double digits (an average of 19% for U.S. operators and 55% on average for Canadian operators) after the Jan. 5 “blue wave” of Democrats’ wins in Georgia and Aphria’s better-than-expected earnings report.

With that investor enthusiasm, 18 companies have announced or issued $1.6 billion in new capital.

 

 

While some of this capital will be allocated into high-return new projects, some will be invested in disappointing projects – or even wasted on poor decisions and bad business models.

The key to determining that is the incremental return on invested capital (ROIC).

If the ROIC is high, the capital is used to expand high-return projects to the benefit of shareholders and the industry. Smart investors are happy about this.

Some projects could generate lower returns than expected, such as when excessive capital raises led to 
excessive cultivation capacity in Canada.

Ultimately, total supply was 2.5 times demand, which led to declines in cannabis prices that pressured margins and eventually reduced the returns on capital until new managers began to reduce excess capacity.

Or the capital might simply be spent on low-return luxuries for self-interested management at shareholders’ expense.

Determining which company is doing what kind of investments requires understanding the fundamentals of the business, the strategy, the uses of the new capital and the incentives and past behavior of management.

Over time, the only true value will be created by businesses providing desired services to paying repeat customers at good margins – not hoping to sell a never-profitable, low-ROIC business to a greater fool.

This article was originally published by MJBizDaily authored by Mike Regan who is the founder of MJResearchCo.com. Mike and fellow analyst Colin Ferrian are known for investment analysis and valuation of the cannabis industry. Reach them at mikeandcolin@mjresearchco.com.

 

 

Special Thanks to MJBizDaily
and MJResearchCo.com for allowing us to share this article with our readers.

 

Stay up to date. Follow us:

Ayala Pharmaceuticals Announces $25 Million Strategic Financing Ayala Pharmaceuticals, Inc. announced that it has entered into a definitive agreement for the sale of its equity securities in a private placement to institutional investors, including Redmile Group and SIO Capital Management. Research, News & Market Data on Ayala Pharmaceuticals Watch recent presentation from NobleCon17

EuroDry up 15% in early trading EuroDry recently reported a better than expected adjusted 4Q2020 EBITDA. Noble Capital Markets Senior Analyst Poe Fratt increased his price target on EDRY on February 18. Research, News & Market Data on EuroDry Watch recent presentation from NobleCon17

Kratos Receives $55 Million C5ISR System Product Award Kratos Defense & Security Solutions, a leading National Security Solutions provider, announced today that it has recently received an approximate $55 million, Single Award Indefinite Delivery, Indefinite Quantity (IDIQ) C5ISR product related contract from a National Security Customer. Research, News & Market Data on Kratos Defense & Security Solutions

Citius Pharmaceuticals up 20% in early trading Citius Pharmaceuticals (CTXR) recently announced a $76.5 million registered direct offering priced at-the-market. Closing is expected today. News & Market Data on Citius Pharmaceuticals Watch recent presentation from NobleCon17

Noble Capital Markets Initiates Research Coverge on Capstone Turbine Noble Capital Markets Senior Research Analyst Michael Heim initiated research coverage on Capstone Turbine Corporation, a leading provider of on-site generation and thermal solutions today. Access the full report, with rating and price target here Research, News & Market Data on Capstone Turbine Watch recent presentation from NobleCon17

Stay up to date. Follow us:

Stay up to date. Follow us:

 

Money Supply is Like Caffeine for Stocks

 

The growth of money supply over the past year is beyond comparison to any other point in history. Change in money in circulation has a fairly predictable impact on many areas of the economy. When it grows above the pace of the economy it impacts prices. This includes asset prices such as stocks and real estate. The impact on financial assets that provide income such as bonds is most often negative. Investors should be well-versed on the impact increased money in the economy has on investments.

Money Supply

“Money Supply” refers to the amount of money in circulation. This could include everything from physical currency, the amount of unused revolving credit, and short-term deposits such as checking and longer-term deposits in CDs. Money supply in effect is a measure of the purchasing power of a population. The economic law of supply and demand, says, the higher the money supply (easy money), the more difficult it is for the currency to retain its value. When any currency loses its value, it takes more of it to buy goods, services, even investments. The number of dollars it takes to buy something is inflated.

The growth can be shown to be directly correlated to increases in stock market valuation. When there is a greater amount of money available, there is more money to be put in stocks. Anecdotally, we saw an impact on stock prices each time a new stimulus check was approved (forward-looking investors) and again after they hit people’s accounts. The reason is basic; more money in circulation, with a roughly unchanged supply of equity to be owned, results in pushing the value of the equity up.

In the past year, money supply as measured by the widely quoted M2 data (cash, checking deposits, and easily convertible “near money”) are striking. As a reference, the money supply surge in 2020 exceeded any in the one-and-a-half centuries for which there is data. Between March and November, the measure of M2, jumped 24%. The steep rise has flattened a bit, but growth remains rampant into 2021.

Inflation

As prices move up (inflation), investors demand a higher return on their investments to make up for the erosion in purchasing power of their money. They reduce their investments in interest-bearing securities such as bonds until the yield reaches their future inflation expectations, plus some additional level of protection. Bond investors are particularly cautious because higher interest rates reduce the value of their comparatively lower yielding portfolio. This disincentive to invest in bonds, or lend in other ways, motivates more people to move more money into stocks. The trend that occurs with investors moving out of bonds and chasing superior equity returns, can become self-fulfilling. The more stocks rise and bonds fall, the more investors allocate their portfolio to include more equities. They are chasing return and it may snowball for them.

Stock Prices

Visually, the trend in Money Supply growth is shown below to coincide with the trend in stock market returns. As more activity and money flows into a market, that market naturally has a positive upward trend. Because of this, market analysts keep an eye on big changes in money as an indicator of the way the stock market will behave in the near future.

 

Money Supply (M2) Trend compared to Stocks (Nasdaq 100) trend since 2016. M2 has a smooth line as money in circulation has few bumps or dips. The trajectory over most time periods is mostly equivalent.

Take-Away

The growth trend of the overall ability to spend throughout the economy has been growing at rates not seen since the 1970s. That decade was known for its struggle to tame price increases. The annual inflation rate (CPI-U) measured in December 2020 was 1.4%. During the year inflation reached a high of 2.5%, in January and a low of 0.1 in May. The Fed forecasts a 2% CPI-U growth rate for 2021. Their open market operations, which include buying bonds and bond ETFs are ongoing. This injects money, directly into the system, and into the hands of investors (sellers). There are many factors impacting stock prices, this is one of those factors that is positive for equities.

About the Author:

Laila Jiwani is a freelance writer specializing in topics related to social finance and international economic trends. Currently based in Dallas, Texas, she is an Erasmus Mundus Joint Master’s Graduate and has worked for economic development organizations in the U.S., Morocco, Kenya, Pakistan and Kyrgyzstan.

 

Suggested Reading:

What Stocks do you Buy When the Dollar Goes Down?

Financial Markets Lifted Household Wealth to Record Levels

Expect 500,000 Fewer Births in 2021

 

Sources:

U.S. Inflation – CPI

Higher Inflation is Coming and it Will Hit Bondholders

 

 

 

Young Traders Confounding Wall Street Pros is Cyclical

 

Before there was WallStreetBets (WSB), before there was Robinhood, and even before Davey Day Trader, there were the SOES Bandits. This was the name given to the mostly 25 to 30-year-olds capitalizing on technology to make a few bucks. Twenty-five years ago the new styled day trader confounded the Wall Street establishment as a rise of individuals trading electronically for the first time took root. There was a perfect storm of ingredients that led to online trading rooms opening around the country offering a seat to anyone with money to trade and the desire to learn. The setup unfolded and the business of individuals trading stocks from office space with high-speed internet (not dial-up) had explosive growth. It was a huge disruptor to Nasdaq market makers among others. The old guard on Wall Street and business news scoffed at the profession, what else could they do, the new styled trader was costing firms money.

Technology Has Always Shifted Market Conditions

The setup in this case included three factors. The Small Order Execution System (SOES) was enhanced after the 1987 market crash to make sure the “little guy” had a better chance of their orders being executed. The internet had just become high speed in office buildings and shopping centers, and tech and dot-com stocks were continuing to rally.

What SOES did for smaller investors is automatically match up small trade orders if the order was at the best bid or offer and next up to be filled. There was no human accepting the order on the market-makers side. The stipulation required for a transaction to be auto-filled is it first had to be entered through the Small Order Entry System. The transaction was required to be for 1000 or fewer shares and the price per share, below $250. Institutions could not use SOES; licensed brokers transacting for themselves were also excluded. The system and the rules were intended to fix the problem that occurred in October 1987 when sell orders were left unfilled for small accounts. Market makers ignored the smaller transactions and worked to fill the larger orders first. This caused many smaller investors to not be able to get out of positions to prevent further losses. The limit as to how many times per day a SOES trader was permitted to place an order on the same ticker is five minutes. This prevented them from executing more than 1000 shares by sending them in quick succession. Once a trader places an order through SOES, they must wait at least five minutes to place another trade on the same stock through SOES. This did not prevent any trader from, on a good day with many setups that fit their plan, to not place hundreds of trades.

The Markets themselves generally run in cycles, and there is evidence in their being cyclicality to disruption of the established players every generation or so. The ingredients are the same, technology leading to better access, access inspiring creative ways to profit, established players flexing their muscle.

 

1867: Day Trading and the New Ticker Tape Instances of taking full advantage of technology for Day trading go back 150 years or more. Soon after the telegraph was invented, stock markets used the telegraph’s communication technology to create the first ticker tape. Ticker tape made it easy to communicate information about transactions occurring on the exchange floor with brokers. Before the internet and other global communication platforms were invented, brokers would try to live in close proximity to exchanges like the New York Stock Exchange, as it meant they were getting a steady supply of ticker tape with the most up-to-date information.

 

Young, informed, computer-savvy individuals working on Wall Street figured out how to take money out of the market using the SOES system and the growing access to high-speed internet connections. These SOES traders, soon dubbed the SOES Bandits quickly became responsible for 13% of the Nasdaq volume. Their main advantage was speed. SOES traders were placing trades electronically and receiving instant executions while their counterparties were using open outcry, in a trading pit.

The small guys had an edge with the technology they were using. These so-called Bandits became vilified by Wall Street, regulators, and the financial media as market destroyers. What they were really doing is preventing some of the profit that they were taking from going to where it would have gone before, the major Wall Street firms. Successful SOES traders were pulling thousands of dollars a day from the market. Although not everyone was successful, there were enough making 8 figure incomes to inspire masses to try the new career. Franchises and chains such as ALL-Tech Investments and Datek Online sprung up and there were rooms filled with casually dressed traders across the country in dimly lit rooms staring at CRT screens and placing trades online. Their presence annoyed the old guard.

 

An Advertisement for DATEK ONLINE from 1998

 

Blame, Ridicule, and Reality

SOES trading’s success was the result of how it interacted with fragmented order flow. They were essentially getting between the wall and the wallpaper for as low as a sixteenth or an eighth (decimalization began in 2001). The bandits’ speed advantage is what provided their edge. While market makers were yelling in a trading pit and discussing transactions over the phone, a bandit had the novel ability to get in and out of a stock with the click of a button.

SOES bandits were blamed by Wall Street, the financial media, and regulators for reducing liquidity, widening spreads, and increasing market volatility. The day traders were mostly short-term momentum players that tried to go home with no positions at the close.  They would jump in long as prices were rising and wrestle with the uptick rule when placing a trade to go short while prices were falling. The narrative in the news and expressed anxiety that SOES traders were contributing to ‘unnatural’ market trends that weren’t based on fundamental factors.

Studies since have found the opposite may be true. Instead of increasing market volatility, they concentrated price changes into shorter time periods. Instead of a trend taking an hour to unfold, it might have taken 15 minutes with the SOES traders behind it. Prices adjusted faster, and their activity enhanced market efficiency.

There was also another reason; the stock markets price discovery system is considered to have improved, market makers weren’t trading their own accounts, therefore they weren’t as highly incentivized to produce price discovery in the way an individual, trading their own assets are.

 

 

Take-Away

On Jan. 25, 1915, telephone service from coast to coast was opened up to the public for the first time. Imagine the advantage the traders had that originally thought to use this technology to capitalize on the discrepancies between the New York Stock Exchange and the Los Angeles Exchange. An online search did not uncover any groups complaining about anyone in 1915 using the phone to make money trading stocks. The search did not uncover any laws written to prevent the use of the new technology in this way. Instead, what occurred is efficiencies sprang from it and the markets traded tighter.

The SOES system coupled with the technology of high-speed internet availability changed the markets during the 90s allowing many more people to transact directly and at a reduced cost. Markets have since produced more pronounced drops and longer trends. Market participants needed to adapt to this change and others or go out of business. That’s the case with all businesses. The Small Order Execution System methods became less profitable for each trader as competition grew with the swelling ranks of newer Bandits. Market-makers, to their chagrin, tightened up their orders and were more diligent all-around. As computers became more common throughout Wall Street, the Nasdaq removed the SOES system advantage (2000).  

Discovering ways to use technology to pull money from the market is 150+ years old. The most recent incarnation of confounding and upsetting the Wall Street old guard is online communities including Reddit, StockTwits, and the Robinhood traders. With increased intensity, they have been following their own rules and using technology to exploit situations. This is part of the ongoing cycle of change in the business. The subreddit group WallStreetBets (r/wallstreetbets), is doing what has been done before. They are taking improved communication and more robust trading technology, combining the two and trying to place winning trades. Everyone involved, with money on the line, will adapt and soon lower the success rate of the current novel trading methods.

It’s a cycle; technology happens, younger more tech adept then adopt and find their spot, establishment adapts and adjusts to the new activity, the more powerful flex their muscles and again gain the upper hand.

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading:

Emotions, Markets, and Mayhem (Faith in Cycles)

Contango, ETFs, and Alligators

How Good are Experts at Predicting the Market

Sources:

Father of Day-Trading Sought To Be Investors’ Advocate

Datek Advertisements

Bad Boys of Capitalism

Watch Out Stock Market Here Come the SOES Bandits

The Trading Profits of SOES Bandits

Stay up to date. Follow us:

Stay up to date. Follow us:

 

Seeking Alpha Subscribers are Seeking Answers About Their New Paywall Policy

 

It’s been one month since Seeking Alpha suddenly began charging users to see more than a “certain number” of articles each month. Seeking Alpha’s abrupt policy change at the turn of the year was a surprise to some of the long-time readers of their crowd-sourced articles and discussion boards.

In a post that was made available to their 15.2 million readers on December 31^st, Seeking Alpha told their free subscribers about a dramatic change that would take effect four days later. The notification informed that as of January 4^th, all non-paid users would have “limited access to in-depth news and analysis.” There’s some confusion over how “limited” to some long-time readers (how many free articles wasn’t defined). More than a month later the announcement has received just 12 likes, and hundreds of insults, humorous jabs, and negative comments. Comments for the original post have been turned off, but commenting sprung up across other forums and is one of the most discussed topics on the investment website.

 

  Seeking Alpha Note to Subscribers, Full Text Here

 

Freemium to Paywall

Unlike mainstream news and market research providers such as Barron’s and The Wall Street Journal, the insight gained by Seeking Alpha visitors is provided by contributors that are primarily investors and buy-side industry professionals. This is an important differentiator over mainstream investment news which is largely funded by sell-side advertisers. This is thought to skew their reporting. 

Seeking Alpha had been based on a freemium model. The site and most articles were free to all who wanted access. A paid subscription “Pro” level of service was added in 2018.  This level allowed access to a full library of content on each ticker including a small selection of articles by their most popular contributors. These articles were only available free for a few days after published, then behind the Pro paywall.  Today, what was once available to all at no cost, is $29.99 per month. Seeking Alpha still has a very stripped down bare bones “Basic” level. And their Pro level service now boasts VIP service and no ads for $199.99 per year.

Comparisons

Well researched ideas that investors can use, especially if they are insights a little ahead of the mainstream can be invaluable. It is up to each investor to determine their needs, their trust level, and to what extent they will find enough ideas over time to make paying for any provider worthwhile. The jump from $0.00 to $29.99 is still tough to swallow. For many readers the subscription may be worth every penny, for most of the 15-17 million unique visitors each month, they will likely find other providers of insight for their needs. Visitors to Channelchek spiked in January and still continue the well-above-average pace. As a free equity research platform, it may have been one of the beneficiaries.

It’s hard to calculate the ROI of an investment tool or information provider. But the costs are clear and measurable.  By comparison, the Wall Street Journal charges $19.49 per month, more than 10 dollars less. Barron’s, without any discounts, will cost readers about the same as Seeking Alpha’s $30.  Neither of these well-respected sources has monitoring tools and available data similar to Seeking Alpha.  The average visitor spends 6 minutes on the crowd-sourced articles, which is higher than Barron’s, The Wall Street Journal, or The Economist.

 

 

Take-Away

If the goal of Seeking-Alpha is to seek additional revenue, this change may very well accomplish that for them.  With 15-17 million visitors, they can retain a small fraction paying for the same service and become more profitable. If the goal is to serve their long-time loyal visitors and advertisers, the change in their business model will make this more difficult.

Suggested
Reading:

Will Janet Yellen be Good for Investors

Why is Bitcoin Plummeting

Will the US Continue to Subsidize Alternative Energy?

Sources:

New Paywall Feedback SA

Seeking Alpha Contributor Change 2018

Important Update for Seeking Alpha
Users December 2020

Seeking Alpha Wikipedia

Seeking Alpha Why do we Have to Pay

Seeking Alpha Subscription Info

Stay up to date. Follow us:

Stay up to date. Follow us:

 

Understanding the Robinhood Class Action Lawsuit

 

No Fluff- Just Facts

On Thursday (January 28, 2021) a class action lawsuit was filed against Robinhood, the stock-trading and investing firm, in a New York federal court.

On Wednesday (January 27, 2021) Robinhood unilaterally removed certain stocks from its trading platform, among them Gamestop (“GME”). The removal prevented Robinhood customers from buying, selling, or even searching for GME on the Robinhood app.

The lawsuit alleges that “Robinhood breached its Customer Agreement by…failing to disclose that its platform was going to randomly pull a profitable stock from its platform…” Also alleged is that Robinhood violated Financial Industry Regulatory Authority (“FINRA”) Rule 5310.01 by “failing to respond at all to customers’ placing timely trades — and outright blocking customers from trading a security.” Rule 5310.01 requires that investing firms “must make every effort to execute a marketable customer order that it receives promptly and fully.”

The class action Complaint is comprised of four “Causes of Action”: (I) Breach of Contract; (II) Breach of the Implied Covenant of Good Faith and Fair Dealing; (III) Negligence; and (IV) Breach of Fiduciary Duty and was lodged against Robinhood Financial LLC, Robinhood Securities, LLC, and Robinhood Markets, Inc. (collectively “Robinhood”). The “Relief” sought is also in four parts: (1) damages for class members’ ongoing losses incurred by their inability to sell GME on Robinhood’s platform; (2) attorney’s fees and costs; (3) punitive damages, and (4) an immediate injunction requiring Robinhood to reinstate GME on its trading platform.

The injunction request was mooted on Friday with GME’s reinstatement to Robinhood’s platform and resumption of customers’ unfettered ability to trade it.

Although Thursday’s lawsuit was filed in the United States District Court for the Southern District of New York by Attorney Alexander Cabeceiras, it was filed in the name of class member representative, Brendon Nelson, from Massachusetts.  Alleged is that aggregate claims exceed five million dollars in damages, exclusive of attorney’s fees and costs, and that there are more than 100 putative members. A jury trial has been requested. The case has been assigned to United States District Judge Jesse M. Furman.

“DoNotPay,” an app previously marketed as a “streamlined” way for consumers to “get refunds and cancel subscriptions,” expanded its services on Thursday to add a feature allowing users to apply to join the New York lawsuit against Robinhood.  DoNotPay charges an annual fee of $36.00 to access its app. DoNotPay is not the only way to join the New York class action.

Other lawsuits against Robinhood may follow, and a second class action lawsuit is currently being organized by the law firm ChapmanAlbin, LLC, based in Cleveland, Ohio.

The filing of multiple lawsuits – including multiple class actions – against the same defendant involving the same subject matter is not uncommon in the United States, and is neither prohibited nor illegal. Given the nationwide expanse of its customer base, Robinhood could be sued in any state or federal court (its exposure outside the U.S. is beyond the scope of this article).  Multiple lawsuits by the same person against the same defendant over the same subject matter, however, are essentially prohibited, and would thus preclude Robinhood consumers from joining more than one lawsuit.

When substantially identical suits are filed in competing federal courts, the “first-to-file” or “first-filed” rule is often applied. The “rule” is not an actual, statutory rule, but a longstanding doctrine of comity whereby a federal court in which a substantially identical action is filed has discretion to stay, dismiss, or transfer the second-filed case in deference to the first-filed case. While the authority of a federal court to dictate what another federal court cannot due is unsettled, its authority over a state-filed action usually goes unchallenged.

If another lawsuit was initiated against Robinhood in any state court, the matter could (and would likely) be immediately removed (kicked up) by Robinhood to federal court.

 

 

Competing federal class actions presents a variety of challenges and options for Robinhood. There is no one-size-fits-all approach.  One option is for Robinhood to separately defend each action, triggering res judicata (Latin for “thing decided”) and claim preclusion principles borne from the Full Faith and Credit Clause of the United States Constitution, and thus a race-to-the-finish scenario: the first action to reach judgment on the merits, whether that be by settlement or through litigation (i.e., disposal by way of a court’s ruling on a motion to dismiss or summary judgment, or by way of a jury trial), is generally conclusive as to all class members despite any competing litigation that is still pending. Whether the first judgment wholly precludes or halts another lawsuit depends on the overlap between the claims asserted and the classes (the more overlap between the two, the more impactful the judgment and vice versa).

Within the race-to-the-finish is the race-for-class-certification. Rule 23 of the Federal Rules of Civil Procedure dictates whether a federal class action may be “certified” and thus even permitted to go forward. Certification is not automatic nor is it “a given.” Rule 23 states that “[a]t an early practicable time after a person sues…as a class representative, the court must
determine by order whether to certify the action as a class action.” Proving that Rule 23’s requirements have been satisfied can be tedious, costly, and time-consuming. Consequently, “at an early practicable time” can mean the class certification ruling is stayed or held in abeyance while the court instead rules on a motion which is outcome determinative (dispositive) to the case substantively, such as a motion to dismiss or motion for summary judgment.

Robinhood’s response to any lawsuit, regardless of where that lawsuit is filed, will likely be a dispositive motion based upon the terms and conditions contained in its 33-page, singled-spaced “Customer Agreement” last updated June 2020. To use Robinhood’s free app and gain access to the Robinhood trading platform, customers must enter the Customer Agreement and agree to those terms and conditions.

Germane to the NY lawsuit allegations is Paragraph 16, “Restrictions on Trading,” which states: “I understand that Robinhood may at any time, at its sole discretion and without prior notice to Me: (i) prohibit or restrict My access to the use of the App or the Website or related services and My ability to trade, (ii) refuse to accept any of My transactions, (iii) refuse to execute any of My transactions, or (iv) terminate My Account.”

Also germane is Paragraph 38, “Arbitration,” which states: “This Agreement contains a pre-dispute arbitration clause…by signing…the parties agree [that] [a]ll parties to this Agreement are giving up the right to sue each other in court, including the right to trial by jury…“

The preclusive effect of a settlement creates an incentive among competing class counsel to be the first to reach a settlement. Authority to reach a settlement on behalf of class members depends on whether an order of class certification has been obtained. A defendant facing or potentially facing numerous class actions, such as Robinhood, has incentive and implied bargaining leverage with whichever counsel it chooses to negotiate as the first deal cut may be binding on all Robinhood consumers, yet leave counsel for the non-deal-making class out entirely.

 

About the Author:

Denese Venza, Esq. is an attorney and freelance writer licensed to practice in both state and federal courts in Florida and West Virginia. The information contained in this article is provided for informational purposes only, is not legal advice, and should not be construed as legal advice on any subject matter.

 

Suggested Reading:

Short-Sellers vs GameStop Buyers

Will
Robinhood be Fined on Charges of Gamification?

Can Small
Investors Compete With Wall Street?

 

Stay up to date. Follow us:

Stay up to date. Follow us:

 

What Silver Investors Should Know About its Tendency to Go Parabolic

 

Silver Captures the Attention of the Reddit Army

Over the last week, the silver market became a focus of organized retail investors on Reddit’s WallStreetBets. After following a strategy of mobilizing investment in heavily shorted companies to trigger a short squeeze, interest in the silver market and associated equities has increased with #SilverSqueeze trending on Twitter. This past weekend (Jan.30-31), coin dealers were having a hard time keeping up with demand, and online retailers APMEX and JM Bullion are sold out of many of their silver bullion products. On January 31, APMEX released a statement stopping the sale of silver on its website due to a surge in new customers. It stated that once markets closed on January 29, demand hit as much as six times a typical business day and more than 12 times a normal weekend day. Pure-play silver miners enjoyed strong price performance last week with First Majestic Silver Corp. (NYSE, AG, Not Rated) up over 25% on January 28.

Silver has Experienced Parabolic Moves Before

Notably, silver experienced big moves in 1974, 1980, 1998, and 2011. Below is a silver price chart sourced from www.kitco.com.

 

Source: KITCO

Interestingly, moves in silver prices and the silver to gold ratio were topics discussed during the NobleCon17 natural resource panel. Mr. Robert Archer, founder of Great Panther Mining Limited (NYSE American, GPL, Not Rated) and CEO of Newrange Gold Corporation (OTC, NRGOF, Outperform), had some interesting observations on silver’s parabolic price moves. He observed that silver tends to follow a hockey stock pattern and generally falls ~50% after hitting the peak of the hockey stick before moving up again. He mentioned that this pattern was repeated 4 or 5 times during the last silver bull market. Click here for the replay. As of January 29, the gold to silver ratio was 68.7 times based on closing futures prices yet still above the long-term average.

CFTC Positions and the Physical Market

 Looking at the Commodity Futures Trading Commission Commitments of Trader (COT) weekly report dated January 26 for option and futures combined, compared to the prior week (January 19), producers, processors, and users increased both long and short positions by 143 and 2,074, respectively, with each representing contracts of 5,000 troy ounces. Swap dealers’ long positions declined by 116 while short positions increased 653. Managed money represented an increase in long positions of 306 and a decline in short positions of 2,521. Other categories showed an increase in long and short positions of 259 and 744, respectively, versus the prior week. The change in open interest was -2,937. Given the recency of the greater than usual silver interest, the next published report may be more instructive.

Take-Away

While the outlook for silver appears bullish based on a favorable fundamental backdrop, the recent interest from retail investors will likely accelerate the movement to the upside. Both silver and gold prices are driven by investment demand, although silver has an industrial component and may benefit from a rebound in economic activity in 2021. Silver prices are generally more volatile than gold, and investors should exercise caution on parabolic moves in the metal. While targeting the silver market does not have the same level of precision as triggering a short squeeze on a heavily shorted stock, the silver market is smaller than that for gold, and as history suggests, sudden growth in demand will likely result in short-term gains. Now that Reddit’s WallStreetBets has made a name on GameStop Corp. (NYSE: GME), they could have an outsize influence in the market now that a lot of people may follow their lead. However, as the Hunt brothers learned 41 years ago, going after an entire market can be difficult. As they did at that time, the Federal Reserve can selectively increase margin requirements which could temper speculative forces in the present market.

 

Channelchek Users Can Find Research and Data on Metals and Mining Companies Here

 

Stay up to date. Follow us:

Stay up to date. Follow us:

 

Sources:

A Short Squeeze on Silver from Reddit’s WallStreetBets Continues, KITCO, Gary Wagner, January 29, 2021.

APMEX
Statement on Current Market Conditions, APMEX Inc., Ken Lewis, CEO, January 31, 2020.

Unprecedented Silver Demand Forcing Bullion Dealers to Stop Taking Orders Before Market Opens, KITCO, Neils Christensen, January 31. 2021.

Disaggregated Commitments of Traders – Options and Futures Combined, Commodity Futures Trading Commission, January 26, 2021.

 

Can Brokers Level the Playing Field for Individual Investors?

 

An interview with Alan Grujic, founder of All of Us Financial

With the dramatic change in technology over the last 30 years, it is now hard to imagine that at one time if a self-directed investor wanted to know how their stock was performing they’d have to sit in front of their TV and watch to see if the price scrolled across the ticker on the bottom of their screen. This access to prices, while the market was open, was an improvement over a few years earlier when they had to wait for the stock listing in the morning paper.

Technology has brought about many improvements in the way individuals participate in the financial markets. It has dramatically helped remove many disadvantages between the playing field of small investors and large and institutional players.

During the second half of January 2021, the issue of a level-playing field became front-page
news. The widely reported and hotly debated issue surrounds stocks that were popular short-sell positions among big-money players, and the “unionization” of individuals and their attempt to capitalize on what was seen by them as opportunity. Channelchek had published an article in April of 2020 about a unique broker investing app that launched in May of that year. I had plans to circle back just before income tax date in April of this year for an update. I moved the date up for the interview with Alan Grujic, CEO and Founder of All of Us Financial because I thought he could offer useful insight today into what self-directed investors should expect on the road to fairer competition and equal access.

All of Us is a trading platform for individuals. It shares a portion of each of its revenue streams with its customers. The CEO, Alan Grujic, is a trader, investor, and has built trading systems for bulge bracket investment firms. As an investor in Facebook before it went public, he has a unique take on the power in the information of collective users. Grujic believes that information can be distilled and shared with customers in a useful way. After he saw the trading app Robinhood build a community, then not determine what can be captured for the community benefit, Grujic decided to build what is his third financial company, All of Us Financial.

 

Below is Channelchek’s complete interview with Alan Grujic:

 Channelchek (PH):  Alan, I think if we grabbed nine friends and we played nine innings of baseball against the Dodgers, you and I would expect to lose in a big way. I’d think the loss would be less about our equipment than the practice and expertise of our opponents.  How level is the playing field in terms of equipment between the “pros” and the “amateurs” in the investment markets? 

 All of Us (AG):  The playing field isn’t level yet. Here’s how I see it and why I started this company. Technology, and the platform business model in particular, are really empowering. When you and I were young, at first, we didn’t have access to any basic information. Then even when we did, with say, a Charles Schwab account, we had to pay a whole bunch of money to execute a trade.

So this is how we’re empowered. The very first step to providing a level playing field is having information. I’m a professional trader. I have actually backtested terabytes of decades of data on models that have made hundreds of millions. So although it’s different than it used to be, I’m confident when I say, based on technical indicators I’ve backtested, they mostly don’t work. This doesn’t mean they aren’t useful as information to bring context into decisions. But not as a primary decision tool.

So, the first part of a level playing field is having the same information as everybody else. Then, if they’re more skilled, they’re still going to beat you, but you have to at least be equipped the same. We’re getting there, and active managers are now having a hard time beating the index because they don’t have superior information. This will continue to evolve, but we have come a long way toward having equally good information.

Let’s use Reddit as an example. Data from social media provides information that wasn’t initially being accessed by the incumbents. But if you watched closely at the GameStop transactions through the equities and options markets, there were large professionals that must have been capturing the activity and weighing it because they placed large profitable options trades.  So, while a bunch of retail guys saw the short interest and decided they’d line up and go long, a couple of professionals quickly bought options based on that information; they understood the value of paying attention to social media activity. So, all information is valuable.

The next challenge becomes expertise. This is the second thing you need. And this expertise can nowadays be delivered powerfully and at scale via data science and automated information and tools. And of course, that also is not enough because the nature of all this information is so hard to process. So, if you have the information and expertise, the third thing you need is the capacity to do something with it in ways that can process the huge amounts of data and information, you need infrastructure and processing capability. Those catering to individual investors aren’t there yet.

The solution is for technology platforms to do what Facebook is doing for themselves. I was an early investor in Facebook, before they went public, the power of Facebook is understanding the value of the customer information. So, the solution for customers is for brokerages to do something customers can’t do on their own. Provide the technology, tools, features, all the fancy machine learning that does the heavy lifting for these customers as a group, and then synthesize all of this information in useful ways for them.  Then, clearly, a million customers with a platform that does all of these things for them can be in the same order of magnitude as powerhouse hedge fund managers. Amassing information can certainly level the playing field.

In addition to the three I’ve mentioned, here are two additional things you also have to have.  Access, if you don’t have access, for example to certain IPOs or private market investments, you aren’t even on the same field. Finally, the last leveler is influence. Individuals can’t negotiate what Warren Buffet did during the financial crisis or when he made a great deal to buy OXY. For these last two, platforms can aggregate individual customers’ value in order to negotiate and express access and influence on their behalf.

If you have these five, you are theoretically on a level playing field; you just have to be as good as the other players.

 

Channelchek (PH): You launched your broker app in May 2020; there are many popular apps and online access to markets, why would someone use All of Us rather than another provider?

 

Alan Grujic, (January 28, 2021)

All of Us (AG):  There’s a lot of money being thrown at customer acquisitions in this business. If you think in terms of spending, there are a few examples of others spending several years of annual customer value in acquiring customers, almost 20% of customer lifetime value. Tastytrade just did a billion-dollar deal with IG out of Europe. They’re very aggressive. So why start another one? As an early investor in Facebook, I saw and know the power of creating tools that leverage social information for economic value. From this perspective, and having previously hired one of the Robinhood founders straight out of school, I was even more intrigued, I was watching Robinhood and thinking, this demonstrates the way people wish to have user experience delivered to them, but it also lends itself to so much more, and we also need to speak with people in the way they want to be spoken to, but of course we can say so much more. There isn’t anything inherently wrong with what they’re doing, or anyone else is doing. What if we [All of Us Financial] delivered modern tools for customers, delivered them value through sharing in our economics, did it with radical transparency, and didn’t just think of how to benefit ourselves?

The how I want to do that answers why someone would decide to have an account here; what I’m doing is creating something that is very powerful at scale. People that have a relationship here understand they will never get this with the other firms because it is not those firms’ intention. Those benefits aren’t part of their business model for growth.

This requires growth; until we’re bigger, we can’t yet provide a couple of the things I mentioned in the first question, like influence and access. When you’re bigger, you have more pull that you can use to benefit your customers, but only if that is what you plan was as a company in the first place, to use the greater scale to achieve these things.

If people have information through full company transparency, what they don’t have now at other brokerages, and if the business model aligns with customers where the firm promises to share every revenue stream with them, then this is actually the right way to build a Facebook meets Robinhood investment app where very powerful stuff is being done with the larger community and then delivered in a way that is really valuable and also enjoyable to customers. If it’s done in a social way and you show them that you’re going to act in their best interest.

A customer has the following values to this firm: they have assets that are going to generate revenues for them. Their data has value that is going to generate revenue. Their time activity, that would be watching ads or giving opinions, will generate common value. Customers have our promise that we will share in every revenue stream, that’s where we provide something different. It’s nice to say, “trust us,” but customers can also verify as we’re totally transparent.

We report on our platform exactly how much revenue we make from each customer, how much we’ve shared with them, and we promise to always share at least some amount of every revenue stream.

 

Channelchek (PH):  A lot of people seemed surprised to learn all of the ways that a “free” brokerage account earns money for the broker. Do you think a broker owes it to the customer to be transparent about the various ways they make money?

 All of Us (AG):  Yes, and at a granular level. I think customers should understand the components of how we make money. People make decisions based on having good information. It’s silly for people to expect firms to not make money off of their business; if they didn’t exist, the benefit of their service wouldn’t exist. What’s reasonable? Well, if you know what everybody is making, then you can make an informed decision as to what’s fair.

 

 

Channelchek (PH):  All of Us Financial seems more paternal than its older competitors; I know one of the things you were doing to encourage investors to think in terms of risk-adjusted returns was the SharpeShooter Challenge (named from the Sharpe ratio), paying out a reward each month. Can you give specifics on how it’s measured?

 All of Us (AG):  One of the things I think is helpful if you can show everybody how the overall platform is doing. Everybody talks about the Robinhood retail guys and wonder if they’re getting hurt or winning.  Instead of talking about it, maybe customers have the right to know what the performance of the group is doing. This lets the customer evaluate success across the platforms. So what we do is we publish our overall platform return.

Another thing that is helpful if I’m a customer of a platform I want to know how well I’m doing relative to everyone else. It serves as a benchmark. This information sharing is something you have to opt-in to. I thought it would be fun to reward people for doing well. The SharpeShooter Challenge encourages opting-in, which I think helps the overall experience of customers.  I didn’t want the contest to encourage people to take crazy risks in order to win best performance. So, as a former hedge fund manager, I was measured on performance net of risk, measured as volatility. I want to impress on people, your return is what you’re here to do, but your risk determines whether you’re going to last long-term. We use the Sharpe ratio, so we reward someone each month on return divided by portfolio volatility (return%/Volatility%). We are trying to raise awareness that while return is obviously good, volatility is an indicator of risk, which it is generally desirable to lower as much as possible.

 

Channelchek (PH):  You opened your doors to customers a few months after COVID-19 hit the U.S. I am sure that was concerning. What impact do you think the pandemic has had on interest in self-directed investing?

 All of Us (AG):  I remember sitting there thinking, this is really bad luck, launching a company into a pandemic. Then as we all know, this became a popular thing, our industry grew like crazy as a result of it. In hindsight, it makes sense, but it wasn’t obvious when the pandemic hit.

 

Channelchek (PH):  What are individual investors most in need of, regardless of whether it’s self-deprived or just not available to them?

 All of Us (AG):  There are a lot of great charting packages. They don’t need more charting packages or more people running basic robo-advisory algorithms. Good tools for these exist. What’s missing now is there is a lot of value in their collective information. What we will do when we reach and get beyond 10,000 customers is machine learn on that. And by the way, we are radically transparent here as well, showing how many customers we have right on the platform. I’ve done valuable machine learning within the first two companies I had; the theory is if you can look at a large enough sample size of independent customers, then take a look at their collective information and the errors that cancel out, you will be left with enriched information. That’s what retail customers need, synthesized data science that is in an easily digested format.

Another important thing, we need to give them information and access to private markets with supporting education. This is beginning to happen, but far from equal access at this point.

 

Channelchek (PH):  The markets have been pretty strong since you opened your doors for business? Are you at all concerned that newer investors may have built up false confidence?

 All of Us (AG):  Yes. That could become a real problem. I think the way to solve that to give information on context. I don’t know if you can convince people because there’s always the “this time it’s different” feeling. So, that may not be enough. We’ve been on an upward trend for a long time. The concerns at the turn of the century of Y2K caused them to flood the economy with liquidity, causing a bubble which was followed by a halving of the market. Then we went down about 50% again during the credit crisis a short time later, that was quite a bit of pain happening twice in a short period, and we have been moving up for a long time since as on a long-term basis, we were probably due for some good times. So a lot of people haven’t seen a prolonged downturn. It’s going to be hard to convince them that it can happen.

What I learned early on is when the market is giving you money, you have to take it. Because most of the time, it’s not. Participating when the market is rallying makes up for long periods when it’s just up and down or sideways. But investing is hard; it’s vexing because you will get caught if you’re not cautious. If you’re young and you’ve never seen it, you’ve been rewarded for not being cautious. I don’t know how to fully solve this one.

 

Channelchek (PH):  What’s in store for the year ahead?

 All of Us (AG):  The roadmap for this year is to add out product sets. To do another improvement based on our customer feedback in order to make their experience better. And we plan to grow past 10,000 customers so we can start doing meaningful data science. That’s all we want to tackle this year. It’s a fair bit.

 

Take-Away

There were quite a number of things I learned about Alan Grujic during our lengthy conversation before, after and during the interview. I’d summarize them by saying that he’s a problem solver. This seemed to be at the foundation of why he started his investment app platform. Finding solutions to problems others may not even realize exist work their way into his planned approach to each of the aspects of the online brokerage.  He aims to either provide what isn’t currently being done, or offer better than what currently exists. He also places a high priority on empowering individuals. The firm’s business model involves social empowerment and using its valuable collective data to benefit those on the platform.  He likened what has been happening with Reddit as a step toward social empowerment for individuals that falls in the “trial and error” stage in the industry. Alan likened what is happening with the subreddit group as part of the road for investors toward a level playing field. He said, “There’ll be several trial and errors in the evolution, and people shouldn’t dismiss this [Reddit/GameStop]. They should realize this is an expression of a business model leading to collective empowerment in investing.”

 

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading:

Millennials
Could Use Help With Investing

Trading Technology Continues to level the playing Field for Investors

Will Janet Yellen as Treasury Secretary be Good for Investors?

 

Stay up to date. Follow us:

Stay up to date. Follow us:

 

Personal thanks to Alan Grujic at All of Us Financial for his time

 

 

The Polarized Opinions Surrounding the GameStop Short Squeeze

 

Gamestop (GME) short-sellers have been handed a lesson in taking on a short position without a plan. At least that’s one way to look at what’s being called the most painful short-squeeze in history. But there are many ways to look at the GME short; it is as polarizing as so many other events we’ve seen in the past 24 months. Events where people line up to choose sides. This includes unaffected people, even those that still can’t explain a “short stock position” yet are vehemently arguing for or against the activities that lead to the GameStop short-squeeze.

Most of the short positions are hedge funds and other institutional investors. Those buying GameStop now at what is considered excessive prices are viewed as newbies treating the stock market as a game. The headlines, quotes, and reporting below are from various media outlets, print, TV, online video channels, bloggers, vloggers, and a few social media posts. There is a good deal of emotion surrounding this historic event, including those who cheer it and those looking to the regulators asking them to make sure this can’t happen again.

If you’re well versed in going long and short stock, skip over the next two paragraphs (show them to your less informed friends).

What is Shorting a Stock?

When an investor buys a stock, the potential for upside, in theory, is unlimited. If the price keeps rising, the cash it can put in their pocket increases as well. Speculators that expect a decline in the value of a company’s shares sell stocks they don’t own (short sale) to buy it back later at a lower price. This is known as covering their shorts. The potential for gain is finite in that it can only be as much as the initial trade’s sale price.  Conversely, if the price goes up after they sold a stock in expectation of covering at a lower price, their potential for loss is as infinite as if they owned it and it kept rising.

Disciplined traders with well-defined stop-losses don’t have greater risk, whether long or short. Stock market participants that are willing to let their shorts move far against them because they are “sure” the stock will go down and that they will reap the rewards could suffer if they hold too long.  If faced with further price increases, they have this difficult question, “do I close out my position, take the loss and redeploy my resources someplace else, with less than I started, or do I continue to hold the short position despite my original misjudgment?”

Davey vs. Goliath

The shorting activity that had taken root by Monday (Jan. 25) had grown tremendously Tuesday in after-hours trading after Elon Musk posted on Reddit, which fueled dramatic price moves (Musk’s company TSLA was a popular short by hedge funds last year). The message posted on the subreddit board (wallstreetbets) suggested support for the buyers; he later amplified the message on Twitter

Many news outlets first reported the GameStop stock activity as a Davey vs. Goliath story. U.S. News and World Report spread a widely distributed Associated Press article titled “Smaller Investors Face Down Hedge Funds, as GameStop Soars”  The article published on Monday held the view that “A head-scratching David and Goliath story is playing out on Wall Street over the stock price of a money-losing video game retailer.”  One Bloomberg article characterized the short-sellers as not motivated by greed, but instead “…engaged in an anger-driven uprising against the establishment.” The Bloomberg headline read: “GameStop is Rage Against the Financial Machine.

Political commentator Dan Bongino who is a large investor in the social media platform Parler, even had something to contribute. Parler’s fate is uncertain in their battle against Amazon and Apple, among others.  Bongino put his own spin on what’s happening. In his daily podcast, The Dan Bongino Show (Episode 1444), Dan described it as “Wall Street elites in meltdown mode.” He took glee in the coordination and tactics used by the masses in what he labeled “A war of attrition between the elites and the great unwashed.”

Part of the polarizing is the natural conflict between generations.  Older generations don’t always cede control as quickly as younger generations may want. In contrast, younger generations find their own methods and rules for acting in an adult world. This GME story is being reported in that way by some. A Reddit moderator of wallstreetbets titled a post, “How’d you guys manage to win so big it made these old guys drown in their tears?” It is a lengthy post that ends in this way:

“…That fuzzy sensation you are feeling is called
RESPECT, and it is well earned. Wall Street no longer dismisses your presence
anymore. The smart ones know that you guys do things differently and will adapt
in ways to accommodate you and how you as the next generation want things done.
You should all be proud of yourselves.

Your time is now.

On behalf of the Mod team,

Make that money and be the change you want to see.”

 

 

Market Manipulators to be Dealt With

The articles and support of the “small guy” flexing their collective muscles are giving way to stories describing the dangers of coordinated trading. The SEC, Nasdaq, U.S. Treasury Secretary Yellen, and even online brokerage firms discussed actions they would take.

In an opinion piece published by MarketWatch on Wednesday (Jan. 27), Jeremy C. Owens wrote, “Reddit’s WallStreetBets is really the same old story — a concerted effort of market manipulators who will get rich and surely destroy some unwitting participants in the process.”

Stock Broker TD Ameritrade blocked some trades on Wednesday in GME according to a notification received by some clients. The SEC said late Wednesday that it is monitoring the “volatility in the options and equities markets” and “working with our fellow regulators to assess the situation,” according to The Wall Street Journal.

Regulators were urged in recent weeks by “tipsters” to review statements made on message boards and social media to determine whether there was fraud in plain sight. The Biden Administration’s economic team is “monitoring the situation,” White House Press Secretary Jen Psaki told reporters Wednesday afternoon regarding GameStops activity. The Securities and Exchange Commission (SEC) also released a statement Wednesday evening saying they are “aware of and actively monitoring the on-going market volatility in the options and equities markets.”

 

Movement in GME vs. S&P 500 since January 1, 2021

 

Nasdaq’s CEO Adena Friedman told CNBC Thursday they actively monitor social media chatter and will halt stock trading if the content it sees matches with “unusual activity in stocks.” Bloomberg reported that Wells Fargo had banned its advisors from making stock recommendations on GameStop.  

“The Internet” Weighs In

It was clear that many social media posters were also piling on — not by buying GME, but by posting memes. To be sure, many of them were not involved in the stock market but had to quickly learn in order to understand the buzz going on around them.

 

 

 

These Tweets are just a small sampling found on only one social media platform. The number of comments, retweets, and “Likes” measure in the hundreds of thousands.

Take-Away

Interactive Brokers Chief Strategist Steve Sosnick referred to short sellers, in general, as a “curious bunch” who profit through “courage and careful research.” But as the Reddit/GME battle continues, he warned, “many” could quickly “find themselves swamped.”  Sosnick also commented that no one can withstand an investor “tsunami.” He seems to be more than aware of the skills required.

Whether or not you’re involved in Gamestop, you can use what is happening to professional money managers as a lesson and a reminder not to let losses get too far away from you. Unexpected events occur, pandemics, contango, disasters, accounting fraud, legislative changes, and competition. There is also the dreaded “tape bomb” where someone of prominence says something unexpected that unravels your reason for holding the position in the first place. Part of being in any position is having an exit plan. The reason for the exit plan is to know what to do when you were “more sober” neither cheering your gains or agonizing over losses.

It’s also a reminder of how power shifts in the market. It is only recently individuals enjoy free trades, true equity research, increased communication, and screening software. Throw in a few stimulus checks, and perhaps some power has shifted away from Wall Street for now.

 

Suggested Reading:

Investment
of Excess Corporate Cash

Contango,
ETFs, and Alligators

How
Good are Experts at Predicting the Market

 

Stay up to date. Follow us:

Stay up to date. Follow us:

 

Sources:

SEC Statement Ongoing Market Volatility

AMC GME Stock Market card

GameStop Short Interest Float

Reddit WallStreetBets – How’d You Guys Manage to Win so Big?

GameStop Jumps on Elon Musk Tweet

Frenzied GameStop Surge

Rage Against the Financial Machine

GameStop WallStreetBets

Investors Face Down Hedge Funds

GameStop Reuters

Nasdaq Monitors Social Media