Pinballs and pinstripes

This is not an article I thought I’d be writing.

But fate intervened.

It concerns a man I ought never to have heard of under normal circumstances.

He first appeared on my Twitter feed, as a ranting young American day trader glorifying his own enormous gains from betting on airlines, cruise lines and travel companies. Carnival, Delta – the worst hit by the corona crash, that kind of thing.

I thought it was a joke, and quite a good one. It was so over the top, so full of irony and caricature that it couldn’t be serious… could it?

He rips into Warren Buffett: “Why would you listen to Old Man Buffett?? He’s washed up. In terms of who is the better investor right now, it’s clearly me. I am the captain now.”

His mantra is “stocks only go up”. That’s rule one.

“Airline stocks go up twenty percent every day. EVERY DAY. Day trading is SO EASY. I’m up 290k today and I’m pissed because I sold SO MUCH. Only losers sell. Winners push all their chips to the middle”.

This is Dave Portnoy, founder of Barstool Media, and now founder of DDTG, Dave’s Day Trader Global. #DDTG.

Rule one is stocks only go up.

And when asking if you should buy or sell stocks, see rule one.

Here are his two latest tweets, ready for Monday morning’s open:

Source: Dave Portnoy, on Twitter

The story goes that he’d only ever bought one stock in his life before, but with no sports to report or bet on, he logged in to his old E*Trade account, and got it going.

And now he’s got an army of day traders hanging on his every word, piling into stocks he mentions.

Self-fulfilling prophecy? Yes, to a certain extent it is – because his army of followers is piling into every stock he mentions. Together, they’re going big into airlines, cruise lines, all the worst affected and most volatile stocks caught up in the pandemic’s fallout.

But it’s more than that.

It’s also potentially financial crime.

Here at Southbank Investment Research, we are regulated by the Financial Conduct Authority (FCA), the UK’s main regulatory body (alongside the Prudential Regulatory Authority (PRA), which does the biggest firms).

There are guidelines like you can’t buy a stock and then tell all your readers to buy it and then sell it, and then rules which make sure it doesn’t happen. Because volume moves prices, and we can direct volume.

For example, we can’t buy anything which any editor is planning on recommending, or has recently recommended (in the last three days).

That’s to stop us profiting from our own advice, aka “front running”.

Someone got jailed for hacking our systems in another country and doing exactly that.

So what is the rule for Dave Portnoy? He’s a media CEO with a big following, not an FCA-regulated investment advisory body (or in the US it would rightly be the Securities and Exchange Commission (SEC)).

He never tells people to buy anything, he only screams glory into the camera about HOW MUCH GOD DAMN MONEY HE’S MAKING BETTING ON AIRLINES.

Every day, they go up TWENTY PERCENT, because DAY TRADING IS SO GOD DAMN EASY.

You get the idea…

But the evidence shows that people are piling into the stocks he mentions, whether he is explicitly recommending them or otherwise.

One recent video made a token attempt at a compliant “all opinions do not represent Barstool Media and do not constitute advice to buy or sell any security”.

But the evidence is that they absolutely are doing that. So what’s the rule?

If I go into a store wearing a t-shirt saying that I absolutely intend to pay for my shopping and then walk straight over to the car, load up and head off, does that excuse me?

What about if I walk around brazenly inciting hatred and terrorism to all listeners, but with a subtle disclaimer proclaiming that what I am saying does not constitute advice to purchase or detonate explosives.

Mr Portnoy himself certainly knows the connection between his videos and tweets and volume increases on stocks he mentions, as he’s shared articles which point it out.

Either way, as a regulator you’d imagine they’ve noticed, and have a decision to make.

If this is okay, then it opens it up to any unscrupulous private individual to hype up and suck people into bidding up the shares they themselves own.

The other question is whether he’s actually being serious. My first instinct was that this was surely a joke account, and if so, it’s genuinely funny stuff (at least it was until people started taking his non-advisory “advice”).

But then I noticed other people taking it seriously so now I’m a bit confused.

Now, the more it goes on and the sillier it gets, the more I’m returning to my original conviction. I think this is one big joke on all the Wall St “pinstripes” as he calls them, and he’s loving it.

It’s rattled the establishment for sure – with Bloomberg, the Financial Times and even Jim Cramer running stories on him.

With tweets like this, how can it not be a joke?

Source: Dave Portnoy, on Twitter

 And this…

Source: Dave Portnoy, on Twitter

Or this…

Source: Dave Portnoy, on Twitter

But you can check it out and make your own mind up. Perhaps you’ll give up reading my pathetic predictions, and pile into Hertz’s latest stock offering instead…

Also – everyone is talking about Robinhood at the moment – but I had never stopped to think how a platform that offers commission-free trading actually makes money.

Well, the answer is interesting.

Robinhood gets paid a miniscule amount (0.000026 cents or something like that) for every trade that it passes on to its trade execution venue – called a “broker dealer”.

You probably don’t realise but a lot of trading platforms use this kind of model – getting people to sign up by enlisting clients with followers who get them to sign up, pocketing a neat commission in the process.

So when you see trading schemes, educational courses, strategies and the like – that’s usually the gambit. They get paid per customer and more if their customers deposit and trade more.

That’s how they’re really making money.

And Robinhood is exactly the same. It’s essentially a magnet, sucking people in with free commission and the secret is that its clients aren’t its source of revenue, it’s coming from the opposite end of the vale chain. Its clients aren’t clients at all, but a commodity, like gold in a mine.

Changes the way you think about stuff like that, or at least it does for me. And we don’t do that by the way, we have no affiliation with any broker whatsoever.

All this leads into a final point – that day trading, and Robinhood, and millennials trading have all seen huge upsurges since the crash. How about this one:

Source: Joseph Mauro on Twitter

In many ways, it’s commendable – all these people who people think are morons waited until after the crash and then made the most contrarian bets available. And it’s the opposite of buying at the top, because as with Hertz, they’re buying literally bankrupt companies. Doesn’t get more contrarian than that!

But I wonder if that’s the real reason, or whether perhaps it’s because governments are giving out free money, to people who aren’t working, and haven’t got any sport to bet on.

As ever, the generally accepted principle seems to apply here, that the last people into the market get stung the worst, and it’s always the most vulnerable retail investors.

That’s because only after a ten-year bull market does investment make it into the popular narrative with “record bull run” headlines and “buy the dip never fails” and “stocks only go up” mantras permeating popular culture, through acolytes like Dave Portnoy.

This seems to be ticking all the boxes of a final, speculative, negligent melt-up, while the fortnight where value stocks outperformed also highlighted a shift in investor sentiment.

Both things seem like part of the process of a bear market, and suggest that this is not over yet. Look at this incredible table charting the swings of the S&P 500 during the Great Crash of 1929:

Source: Anatomy of the Bear, by Russell Napier

It’s from a book I’m hoping to review for you, hopefully next week if I can get through it in time.

1929 was unlike any other, but it’s important to remember that these things can be far worse than almost anyone imagines.

Just look at those two big rallies, which surely will have convinced many that the worst was behind them. But in each case, there was well over 50% more to go before the bottom.

And we are clearly living in extreme times, so don’t count it out.

With markets starting to slide again, make sure you’re prepared for the absolute worst, not the optimistic worst.

If you want help with that, my colleague Nickolai Hubble’s work can be that help.

Find it here.
All the best for now,

Kit Winder
Editor, UK Uncensored

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