WASHINGTON, September 12, 2014 – Warning: Long article ahead. If you’ll forgive the vulgar analogy, trading the market this week has been a little like getting sloppy seconds. No matter what position you undertake, it’s increasingly likely to disappoint.
News past, present and future has been converging into a messy and indistinct picture for those few remaining individual investors who, like the Maven, are hunkered down in the trenches.
As more of us succumb to the realization that we might indeed have to head off to Galt’s Gulch fairly soon, we—the few, the proud, the deranged—are still bravely battling the HFTs, the algos, Vlad “The Impaler” Putin, the Islamofascists, the Scottish separatists, the lying financial media, and that North American Slough of Despond also known as Obamanation.
We must be nuts.
Some of us may be looking to get bailed out by getting in on the upcoming Alibaba (proposed symbol, BABA) IPO, slated to be priced late next week. Word is that the issue is already oversubscribed, which means that even now, not even institutions that want a certain number of shares are likely to get them all.
What that means for small fry like you and the Maven is actually far simpler. We’re not going to get any shares of Alibaba. Worse, the usual amateur backup tactic of going out into the aftermarket for BABA’s sloppy seconds may be as much a loser’s game as it was when small investors tried that during Facebook’s (FB’s) disastrous first day of open trading.
Chasing a hot property like this one after the privileged classes start flipping their shares for outrageous profits is almost always a loser’s game, but the little guys sucker into it almost every time. The Maven actually performed this exercise publicly in these columns as an experiment on the day of Facebook’s IPO. Sure enough, it was red ink city in rather short order, more or less proving the point at least anecdotally.
The larger question here is, why do only the rich, statistically, get a heaping helping of hot IPO shares while retail investors rarely get any, having to settle for the sloppy seconds of other, less popular IPOs? The answer is pretty straightforward. Profit and outright greed on both sides of the trade.
We’ve explained how this works in these columns before. IPO issues, hot and otherwise, are actually bought in their entirety at a negotiated price by those brokerage firms operating together as lead underwriters and underwriters, a temporary business arrangement that back in the day was known as “the syndicate.”
Smaller brokerages, including retail firms like Schwab, were and are also invited into the game, not as underwriters but as part of the “selling group,” opening the doors for even greater distribution (and buying pressure) for the issue at hand.
But have no doubt: the lead underwriters made and still make the final allocation of shares. Not surprisingly, their own institutional and—to a lesser extent—individual customers always get priority if an IPO begins to heat up.
So far, so good. If your firm is at risk, you’re certainly entitled to more of the goodies if the going gets good.
The problem begins, even at the lead underwriting firms, if the issue starts getting super-hot. Then, allocations tend to shift, sometimes dramatically, to large corporate and individual investors (like hedge funds or bigwigs like, say, Carl Icahn). The reason is simple. These large buyers of shares are major customers of any given firm. Hot issues they can flip for outrageous and nearly risk-free profits are really a gift, a bribe, almost, for remaining with the current investment house.
It’s a little bit like Las Vegas casinos treat their cherished “whales,” the big-time bettors who bring money, glamor and prestige to the likes of Bellagio et. al. Whales often get free suites, free booze, you name it. The money they spend each time they show up in the house, win or lose, is massive compared to the tiny amount the hoi-polloi lose on the slots and at the roulette wheel.
So every possible inducement is offered by the house to these whales so they’ll show up and spend. A lot. The loss leaders like the free champaign (and sometimes free girls) generally end up as a fine investment for the house. Whales are worth cultivating and generally contribute much greater profitability to a given casino’s bottom line than you or the Maven can on a weekend visit.
Unfortunately, while this practice is logical, profitable, and makes incredibly good business sense, it also discriminates—severely—against those of us who aren’t fortunate enough to be “whales.” It’s how the rich get richer.
We have little problem with the casinos, actually. It’s your choice whether you go to Vegas (or your local casino) or not. Unless you’re a compulsive gambler, this is made money, so what the hey?
But in the investment world, we’re often dealing with junior’s college funds, our retirement funds and IRAs, stuff that really matters. It’s not mad money. We need it and we need more of it, particularly in this Obamanation economy where the rich get even richer because they’re smart enough to donate only to Democrats’ campaigns. (Which also keeps them off the IRS s___t list.)
Regularly giving these robber barons the lions’ share of the obscene, free profits that often accrue to those who get shares of hot IPOs is yet another reason for the rise of the oligarchy and the fall of the middle class in this country. Small investors who are nimble and well-read can still make some money in this very treacherous and rigged market environment. But they rarely get a chance to grab the brass ring of a hot IPO.
An example: The only hot IPO the Maven got his hands on in recent memory was a miraculous 100 shares of the Twitter (TWTR) IPO. Holding onto it and not flipping it until its initial surge was complete—roughly a 5-week hold before selling—netted the Maven a handy 116% profit. Imagine doing this with a lot more shares and doing it many times each year. You get the picture.
But typically, neither you nor the Maven can get any of these IPOs on the offering, which, BTW, also comes commission free on the allocation. That the Maven got even a paltry 100 shares of TWTR was a miracle. The wealthy clients of the big investment banks don’t have to sweat getting hundreds and thousands of times more shares in such issues.
It all stinks. But there you have it. And, to wax political for a moment, that’s what all small investors are going to continue to get if they keep voting for any Democrat or—just as bad—RINO Republicans who act like populist conservatives but sell themselves to the 1% just as regularly as the faux-socialist Dems. It’s all why nothing bad ever happens to the 1% while you and the Maven are netting, in inflation-adjusted dollars, not a heck of a lot more than were in the 1980s.
We urge you to think about this in November. If things keep going the way they are, we’ll soon wish we had the same mind-set as the survivalists that the cable channels love to laugh at each year.
Not much today. In much the same way that the market “melted up” over much of the summer, it’s been “melting down” this week, on allegedly low volume but on a relentless pace. The alleged low volume that makes veteran investors like the Maven suspicious here could be misleading.
In the past, even small moves up or down on large volume were an early indication of a convincing change in the fortunes of a given stock or average. On the other hand, even big moves in a stock were highly suspect if not much trading volume was involved.
Now we are told that trading volume is historically low. But we wonder, “How can this be?” Big investors like Soros, Icahn, Buffett and many others have been coining money in these markets since 2008. And among other things, they’re not doing it with 100 share allocations of Twitter stock.
There is volume in this market. It’s just that we no longer see it. Whether it’s moving across trading desks in a single firm or hidden in one of many so-called “dark pools” that trade off-exchange, we are increasingly suspicious that we’re not seeing a lot of trades. They’re being placed, but they never show up on our home computers.
There’s no evidence that the Federal regulatory agencies are doing anything about this, or anything at all to restore transparency and confidence in the markets.
After all, well-paid government regulators know that even greater riches await them at Wall Street firms, particularly after they’ve put in their 20 years with the Feds and can double-dip those swell government pensions you and I will never get. So why would they bother to piss off the Wall Street bigwigs they hope to work for, thus endangering the potential of really fat bonuses and salaries—pay packages that make even their outrageously taxpayer-funded Federal paychecks look like paupers’ wages.
We continue to monitor our good-sized position in Yahoo! (YHOO), one we mentioned in a recent article as a good proxy for the Alibaba shares we won’t get, as YHOO owns a goodly chunk of BABA and is riding along with it as the excitement builds. But getting into this now, late in the game, might not be a big win for anyone who might want to give this Alibaba back door a try.
We’re currently up about 17% on our position, which we’ve been building since the third week of August. YHOO is currently trading around $42, which is about where analysts estimated it might go in advance of the Alibaba offering. Whether to hold the whole position through the offer next week or start peeling it off now is a big question for us.
We obviously have no clue as to how much Alibaba will pop next week or how others using YHOO as a proxy will trade. But our trigger fingers are getting itchy.
Meanwhile, we continue to add to our position in SH, the short S&P 500 ETF. It’s a slow mover and we’re slightly down on the position. But if the market really tanks, this should prove a decent hedge on long positions we want to continue holding during any downdraft.
The double-short S&P 500 ETF, SDS, is considerably juicier when things go bad. But unless you’re at your machine from 9:30 a.m. EDT to 4 p.m. M-F, you could get very quickly hosed on these shares. If you want to play in this dangerous arena and still hold a 9-5 job, it’s best to suck it up and go with a full service brokerage firm, directing your broker to watch these shares like a hawk.
We don’t think these short ETFs are a very good idea for small investors, frankly. But when you’re playing against the HFTs, the algos, and the 1%, these shares are a useful if distasteful portfolio management tool if you understand how truly dangerous and fast moving they are.
Aside from these current moves, we’ve gone about 30-40% cash at this point. Much of the merchandise appears overpriced at this point, and with the Middle East, the Ukraine, and our porous Southern border all flashing continuing danger signals, anything at all could set off a cascade of red ink at this point.
As we learned in 2007-2009, cash is king in such environments, even if you get about a penny of interest per $1,000 in dry-dock. But with international events enmeshed in uncertainty, with QE guaranteed to terminate next month, and with the dollar strengthening dramatically against the Euro, risk remains high, and cash remains a good option.
Have a great weekend.
*Cartoon by Branco, reprinted via permission from LegalInsurrection.