Melvin Capital is maybe the first — but certainly won’t be the last — hedge fund hammered out of business as markets wean themselves off the heroin of cheap money that has propelled stocks and just about everything else for the past two-plus years.
Hedge-fund investors, even those who run train wrecks like Melvin, do have a way of making it through tough times. They still have their homes in the Hamptons or Miami as collateral, and often much more than a few million bucks stashed away for a rainy day.
So don’t cry for the big guys taking it on the chin. The question is, do the average investors who became day traders in recent years and chased the bubble in crypto, meme stocks and other inflated assets deserve our sympathy?
Yes, hedge funds and market pros are capitulating, a fancy Wall Street word for surrendering to the reality that stocks or any of our bubble-induced assets are overvalued and you need to sell fast. But these wanna-be hedgies are generally holding on hard by using their “diamond hands” on crypto, meme stocks and everything that kept going straight up over the past year. They’re providing a buffer to the institutional selling, meaning that as bad as things are on the Nasdaq, S&P, crypto and a lot more, they could be even worse if/when the little guy starts selling.
Do they know something the rest of us don’t? They think so, which is why they’re the last ones out of this market. And it’s why we shouldn’t be hand-wringing about their losses. They had it coming in spades.
Among the biggest absurdities arising from the Fed-induced market bubble of the past two years is how many of these novice traders thought they were smarter than the market pros. They piled into stocks during the pandemic shutdowns because there was nothing better to do. And who can blame them? The Fed was pumping astronomical amounts of liquidity into the system, making stock trading a no-lose proposition.
Drinking the Kool-Aid
It also distorted reality. Retail, armed with Reddit message-board “research,” drank the Kool-Aid. The meme-stock frenzy that began in January 2021 seemed to prove their point. Small investors rallied together to snap up stocks of money-losing companies the hedge funds bet against.
They sent shares of troubled businesses such as AMC Entertainment and GameStop to the moon. And big losses among the pros, who were shorting those stocks, eventually forced Melvin out of business.
The smart move if you were one of these retail types would be to realize this was a once-in-a-lifetime event, and proceed with caution. After all, anyone can be like Warren Buffett when Jerome Powell is printing money. I’m sure some did. But many more bought the fallacy that the market could only go up.
Last year, when AMC traded in the high-$70 range, some retail bought more, believing it was going to $1,000. Plenty of them have been holding on ever since as shares of AMC fell to where they are today — around $12. Many are still predicting another short squeeze that will send AMC back to the $70s. They also think crypto is coming back, along with the rest of the tech names that have been getting hammered.
It’s what the 19th-century journalist Charles Mackay called “the madness of crowds.” The reality that they’re ignoring now is that the Fed is putting consequence back into the markets, raising interest rates and taking money out of the financial system.
It’s purposely slowing the economy, possibly even creating a recession, to tame inflation.
The markets are adjusting to the reality that corporate earnings will be getting squeezed, thus stocks need to sell off. The hedgies get it; retail doesn’t yet.
‘Diss union’ at SEC
It’s easy to see why public companies don’t like SEC Chair Gary Gensler: He’s heaping on them all sorts of new, useless, costly and woke regulations involving the environment, etc., that have nothing to do with their core mission of enhancing shareholder value.
He’s got no friends among GOP House and Senate members because he’s taking an agency that’s supposed to protect small investors from stock crooks and transforming it into an enforcement arm of the Elizabeth Warren wing of the Democratic Party.
Now you can throw the SEC’s labor union into the mix of Gensler haters.
It represents all non-management employees. Union leadership says Gensler’s far-reaching agenda is making their life a living hell, Fox Business’s Eleanor Terrett reports. They are complaining there’s not enough time in the day to implement all the new rules and edicts he’s pushing.
Making matters worse, Gensler and his team are forcing them to take vacation days this year, a use-it-or-lose-it ultimatum. The union is asking Gensler to allow members to push their vacation time off to 2023 to better manage their workload. He isn’t budging, setting the stage for an unusual battle between a progressive Biden appointee and a progressive-friendly public-employee union.
Gensler’s office didn’t return a call for comment on why he can’t just get along with people.