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Business

Morgan Stanley May Bet on Bitcoin in $150 Billion Investment Arm

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A $150 billion Morgan Stanley investing arm known for its prowess in picking growth stocks is considering adding Bitcoin to its list of possible bets.

Counterpoint Global, a unit of Morgan Stanley Investment Management that’s racked up wins in mutual-fund rankings, is exploring whether the cryptocurrency would be a suitable option for its investors, according to people with knowledge of the matter. Moving ahead with investments would require approval by the firm and regulators.

Morgan Stanley’s affirmation would put the heft of an almost-century-old marquee Wall Street name behind a volatile asset class that’s still struggling to win acceptance in much of the traditional financial industry. But a four-fold jump in four months has stoked customers’ interest, making the digital asset even harder to ignore.

After catching the attention of hedge fund moguls including Alan Howard and Paul Tudor Jones, cryptocurrencies have recently made headway with more mainstay firms such as Mastercard Inc. and Bank of New York Mellon Corp. Just this week, Tesla Inc, the leading maker of electric cars, also got behind Bitcoin with a $1.5 billion investment and plans to start accepting the cryptocurrency as payment.

A spokeswoman for Morgan Stanley declined to comment. The review could ultimately result in Morgan Stanley opting to stay away from Bitcoin. Previous rallies in the cryptocurrency have also attracted flurries of Wall Street interest only to fizzle.

Read more: Mastercard to allow some crypto in digital asset boom

Much of the industry’s skepticism centers on Bitcoin’s unpredictable price swings and the lack of things it can buy more than a decade since its creation. But faithful followers have felt vindicated this year. Billions of dollars have been pouring into the cryptocurrency through vehicles including the Grayscale Bitcoin Trust.

Even institutional investors, barred by the rules of their funds from holding Bitcoin directly, have turned to such trusts. For Wall Street firms, an inability to offer Bitcoin to those clients raises the risk of losing them to other managers. That may spark fresh discussions in the industry about opening up to the asset.

Counterpoint Global, led by Dennis Lynch, has expanded with a simple-sounding mantra of betting on unique companies whose market value can increase significantly. Enthusiasts would argue that approach fits well with Bitcoin.

The group oversees about 19 funds, of which five delivered gains in excess of 100% in 2020. Its mutual funds have consistently made the top tier of rankings in recent years. Last year’s unusually high returns were aided by bets on companies benefiting from the pandemic, such as e-commerce and streaming entertainment. Prominent investments included Amazon.com Inc., Shopify Inc., Slack Technologies Inc., Zoom Video Communications Inc. and Moderna Inc.

Despite its size, the group relies on concentrated investments and has stakes in just about 200 companies.

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Business

Despite surging stocks and home prices, U.S. inflation won’t be a problem for some time

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When America’s amusement parks and baseball stadiums no longer must serve as COVID-19 mass vaccination sites, some investors believe that households pocketing pandemic financial aid from the government might start to splurge.

While a consumer splurge could initially boost the parts of the economy devastated by the pandemic, a bigger concern for investors is that a sustained spending spree also could cause prices for goods and services to rise dramatically, dent financial asset values, and ultimately raise the cost of living for everyone.

“I don’t think inflation is dead,” said Matt Stucky, equity portfolio manager at Northwestern Mutual Wealth Management Company. “The desire by key policy makers is to have it, and it’s the strongest it’s ever been. You will see rising inflation.”

Wall Street investors and analysts have become fixated in recent weeks on the potential for the Biden Administration’s planned $1.9 trillion fiscal stimulus package that targets relief to hard-hit households to cause inflation to spiral out of control.

Economists at Oxford Economics said on Friday they expect to see the “longest inflation stretch above 2% since before the financial crisis, but it’s unlikely to sustainably breach 3%.”

Severe inflation can hurt businesses by ratcheting up costs, pinching profits and causing stock prices to fall. The value of savings and bonds also can be chipped away by high inflation over time. 

Another worry among investors is that runaway inflation, which took hold in the late 1970s and pushed 30-year mortgage rates to near 18%, could force the Federal Reserve to taper its $120 billion per month bond purchase program or to raise its benchmark interest rate above the current 0% to 0.25% target sooner than expected and spook markets.

At the same time, it’s not far-fetched to argue that some financial assets already have been inflated by the Fed’s pedal-to-the-metal policy of low rates and an easy flow of credit, and might be due for some cooling off.

U.S. stocks, including the Dow Jones Industrial Average
DJIA,
+0.09%,
S&P 500 index
SPX,
+0.47%
and Nasdaq Composite
COMP,
+0.50%
closed on Friday at all-time highs, while debt-laden companies can now borrow in the corporate “junk” bond, or speculative-grade, market at record low rates of about 4%.

Read: Stock market stoked by stimulus hopes — what investors are counting on

In addition to rallying stocks and bonds, home prices in the U.S. also have gone through the roof during the pandemic, despite the U.S. still needing to recoup almost as many jobs from the COVID-19 crisis as during the worst of the global financial crisis in 2008.

This chart shows that jobs lost to the pandemic remain near to levels seen in the aftermath of that last crisis.

Job losses need to be tamed


LPL Research, Bureau of Labor Statistics

Fed Chairman Jerome Powell said Wednesday that he doesn’t expect a “large or sustained” outbreak of inflation, while also stressing that the central bank remains focused on recouping lost jobs during the pandemic, as the U.S. looks to makes serious headway in its vaccination program by late July. 

Treasury Secretary Janet Yellen on Friday reiterated a call on Friday that the time for more, big fiscal stimulus is now.

“Broadly, the guide is, does it cost me more to live a year from now than a year prior,” Jeff Klingelhofer, co-head of investments at Thornburg Investment Management, said about inflation in an interview with MarketWatch.

“I think what we need to watch is wage inflation,” he said, adding that higher wages for upper income earners were mostly flat for much of the past decade. Also, many lower-wage households hardest hit by the pandemic have been left out of the past decade’s climb in financial asset prices and home values, he said.

“For the folks who haven’t taken that ride, it feels like a perpetuation of inequality that’s played out for some time,” he said, adding that the “only way to get broad inflation is with a broad overheating of the economy. We have the exact opposite. The bottom third are no where near overheating.”

Klingelhofer said it’s probably also a mistake to watch benchmark 10-year Treasury yields for signs that the economy is overheating and for inflation since, “it’s not a proxy for inflation. It’s just a proxy for how the Fed might react,” he said.

The 10-year Treasury yield
TMUBMUSD10Y,
1.209%
has climbed 28.6 basis points in the year to date to 1.199% as of Friday.

But with last year’s sharp price increases, is the U.S. housing market at least at risk of overheating?

“Not at current interest rates,” said John Beacham, the founder and CEO at Toorak Capital, which finances apartment buildings and single family rental properties, including those going through rehabilitation and construction projects.

“Over the course of the year, more people will go back to work,” Beacham said, but he added that it’s important for policy makers in Washington to provide a bridge for households through the pandemic, until spending on socializing, sporting events, concerts and more can again resemble a time before the pandemic.

“Clearly, there likely will be short-term consumption increase,” he said. “But after that it normalizes.”

The U.S. stock and bond markets will be mostly closed on Monday for the Presidents Day holiday.

On Tuesday, the only tidbit of economic data comes from the New York Federal Reserve’s Empire State manufacturing index, followed Wednesday by a slew of updates on U.S. retail sales, industrial production, home builders data and minutes from the Fed’s most recent policy meeting. Thursday and Friday bring more jobs, housing and business activity data, including existing home sales for January.

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Business

How you can retire at 50 by investing in the stock market

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Many Americans aren’t doing the math on their retirement.

More than 75% of people planning to retire haven’t calculated how much money they will need before taking the leap, according to the 2020 Four Pillars of the New Retirement study by investment company Edward Jones.

Luckily, CNBC crunched the numbers, and we can tell you how much you need to save to get $50,000 of passive income every year in retirement. 

First, some ground rules. The numbers assume you will retire at 50, have no money in savings now and plan to put away a substantial amount of your income to reach your goal. 

For investing, we assume an annual 4% return when you are saving. We do not factor in inflation, taxes or any additional income you may get from Social Security and your 401(k).

In retirement, we use the “4% rule,” which is a general principle that says you can comfortably withdraw 4% of your portfolio every year. 

It is important to note that with the recent market volatility, there is a risk you’ll have to lower your spending percentage in the future.

Check out this video to get a full breakdown of the numbers.

More from Invest in You:

How Walmart and other big companies are trying to recruit more teenage employees
Americans are more in debt than ever and experts say ‘money disorders’ may be to blame
How much money do you need to retire? Start with $1.7 million

Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.

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Business

Disney, HubSpot, Cloudflare, Coherent: What to Watch When the Stock Market Opens Today

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Here’s what we’re watching ahead of Friday’s trading action.

—U.S. stock futures edged lower Friday, putting the S&P 500 on track to end the week with muted gains after notching its ninth record closing high for 2021.

Futures tied to the S&P 500 slipped 0.3%, pointing to a drop after the opening bell. Contracts linked to the Nasdaq-100 Index edged down 0.3%, suggesting that technology stocks may also slip. Read our full market wrap.

What’s Coming Up

—The University of Michigan’s consumer sentiment index for the opening weeks of February, due at 10 a.m. ET, is expected to inch up to 80.8 from 79.0 at the end of January.

Market Movers to Watch

—All hail Baby Yoda. Walt Disney  shares were up 0.9% ahead of the bell after the entertainment giant reported a first-quarter profit, as its flagship streaming service, Disney+, added more than 21 million new subscribers during the period. But the pandemic continued to zap results in the company’s movie-distribution and theme-park segments.

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Business

Robinhood slammed by parents of trader who killed himself last summer

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“If he had been able to get a hold of somebody…he would be alive today,” Dan told CNN Business in an interview.

The Kearns family is suing Robinhood for the wrongful death of their son, who — like a growing number of novice traders — turned to the free trading app for access to sophisticated financial instruments such as options.

The tragedy has drawn attention to the potential dangers of the free-trading boom that Robinhood and its gamified platform have helped set off.

“It’s almost like he martyred himself just to save us from what he thought would be a huge financial burden, which of course, isn’t the case,” Dan said.

Robinhood under fire

Alex Kearns’ Robinhood account showed a negative balance of $730,000 — far more money than he had to his name, according to the lawsuit.

“Anyone would be in a state of panic to see those numbers on their screen,” his mother, Dorothy, said in the interview.

Alex did not realize that his negative balance would have been erased by the exercise and settlement of options he held, the family said. He didn’t really owe that staggering sum.

“He shouldn’t have been allowed to trade these complicated options in the first place. He had no training, no income, no qualifications, to make those sophisticated trades,” Dan said.

The lawsuit, which describes Alex as a “true goofball with a terrific sense of humor” and a “heart of gold,” argues that Robinhood lures inexperienced investors to take big risks — without providing the necessary customer support and investment guidance.

In a statement, Robinhood said that to determine eligibility for options trading, the company assesses customers’ investment experience and knowledge, investment objectives, and financial information such as income. For existing customers, Robinhood said it considers their trading activity on the platform.

Robinhood added that they “always seek to comply with applicable” rules and regulations from the Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA).

After the Kearns lawsuit, Robinhood said it made a series of improvements to its options offering, including by providing guidance to help customers, updates on how it displays buying power and live voice support for customers with open options positions.

“We were devastated by Alex Kearns’ death,” Robinhood said. “We remain committed to making Robinhood a place to learn and invest responsibly.”

Robinhood has come under fire in recent weeks for temporarily suspending purchases of GameStop (GME) and other stocks favored by an army of traders on Reddit. The controversial step prompted calls for an investigation and Congress to schedule hearings.

Frantic search for answers

The nightmare for the Kearns family began on June 11, 2020, when the holder of the options Alex had sold exercised his options, obligating the 20-year-old to buy the underlying security, according to the lawsuit.

At 11:01 pm that evening, Robinhood notified Alex Kearns by email that his account was restricted, meaning he couldn’t make new trades or withdrawals, the lawsuit said. Minutes later, another email indicated he was required to purchase over $700,000 in shares as part of the options trade, according to the lawsuit.

Even though Alex thought he could lose only $10,000 maximum, after seeing the Robinhood app he believed he had somehow lost $730,000, the lawsuit said.

Desperate for answers, Alex emailed Robinhood for help three times that night and the next morning, the family said.

At the time, Robinhood fielded customer support requests exclusively over email, Dan said.

Robinhood did not reply to questions from CNN Business about its customer support.

Alex never heard back from Robinhood beyond auto-generated replies, according to the lawsuit. He took his own life on June 12.

“I was appalled,” Dan said about learning his son tried and failed to get help from Robinhood. “It really hurt, to be honest, because…I knew what he was going through. I was just visualizing what he was going through when he was writing the notes and seeing those emails, not being able to reach out to anybody.”

‘He needed a little help’

Before he died, Alex left a note indicating his confusion about the options trades and explaining that he did not want to die.

“The puts I bought/sold should have cancelled out, too, but I also have no clue what I was doing now in hindsight,” Alex wrote, according to the lawsuit. “There was no intention to be assigned this much and take this much risk, and I only thought that I was risking the money that I actually owned.”

Alex’s parents expressed frustration that their son didn’t have a way to communicate more quickly with Robinhood.

“He’s in a complete state of panic. He needed a little help. I think that’s all it would have taken to calm him down,” Dan said.

In addition to wrongful death, the complaint filed by the Illinois family accuses Robinhood of negligent infliction of emotional distress and unfair business practices. The damages they are seeking will be determined at a later date.

Changes at Robinhood

Alex’s parents expressed hope that their lawsuit will bring awareness to some of the risks that come with trading on Robinhood.

After Alex’s death, Robinhood CEO Vlad Tenev and former co-CEO Baiju Bhatt wrote that they were “personally devastated by this tragedy” and promised to make improvements to their platform.

“We’re grateful for that message. And he backed up those words with a very sizable donation to suicide prevention,” Dan said, referring to Tenev. “I believe he is remorseful about it and sorry for our situation.”

The company announced in June it was making a $250,000 donation to the American Foundation for Suicide Prevention and urged people in trouble to reach out for help.

Robinhood said this week that recent changes include new financial criteria and revised experience requirements for new customers seeking to trade advanced options strategies and plans to expand that to other situations. Robinhood also changed its system to escalate emailed support requests from some options traders and provide live voice support for customers with open options positions.

The Kearns family expressed support for those changes, but they said Tenev and Robinhood, need to take more action, including additional phone support.

“I don’t think he’s made adequate progress to protect immature novice investors like my son,” Dan said.

Asked to respond to those who would argue that Alex was ultimately responsible for the investment decisions he made, Dorothy said this wasn’t a matter of her son gambling away too much money.

“It would be different if he made investment decisions and he lost a lot of money based on those decisions and he took his life,” she said. “It would still be tragic, but we would not be here today…because that would have been his fault.”

Instead, Dorothy said she believes Robinhood bears responsibility for leaving her son confused and without answers.

“If he would’ve gotten a response from Robinhood, or if there was some sort of disclaimer on the screen,” she said, “it wouldn’t have been a problem.”

To get help, call the National Suicide Prevention Lifeline at 1-800-273-TALK (8255). There is also a crisis text line. For crisis support in Spanish, call 1-888-628-9454.

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Business

More than 17,000 investors defrauded in Ponzi-like scheme, SEC says

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The lawsuit alleges that David Gentile, owner and CEO, Jeffry Schneider, owner of GPB Capital’s placement agent Ascendant Capital, and Jeffrey Lash, GPB Capital’s former managing partner, used investors’ own funds to pay out monthly distributions to investors instead of putting them toward customers’ investments. GBP Capital was also charged with violating whistleblower protection laws.

The investors were told their 8% monthly distributions would be fully covered by profits of the portfolio’s companies, despite the executives knowing about its shortfalls. But in reality, the investors were at least partially paid with funds from new investors.

The defendants allegedly falsified financial statements and created back-dated performance guarantees to show an income that did not exist.

GPB claims it has acted in good faith while managing investors’ funds.

“GPB denies these allegations and intends to vigorously defend itself in court where, for the first time, the firm will be able to present significant evidence in its favor,” the company said in a statement to CNN Business.

New York state also filed a lawsuit against GPB on Thursday.

New York Attorney General Letitia James also filed a lawsuit against GPB Capital and the three executives for defrauding investors out of more than $700 million. Over 1,400 New Yorkers invested more than $150 million on promises for generous monthly distributions.

“We won’t let Wall Street fat cats get away with breaking the rules, as they pilfer New Yorker’s wallets in the meantime,” James said in a statement.

The complaint also charged the defendants with misappropriating funds. Investor funds were spent on subsidizing private planes, luxury travel and millions of dollars funneled into personal and family bank accounts, New York AG alleges. The lawsuit alleges Gentile even bought a Ferrari with investor funds.

Along with the Office for the Eastern District of New York and SEC, numerous states from Alabama to New Jersey also filed their own lawsuits against GPB Capital.

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Wall Street firm linked to Robinhood is going to war with the SEC to derail Flash Boys exchange IEX

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The timing of Citadel’s 77-page court filing Tuesday was unrelated to the recent market turbulence. Citadel Securities filed its intention to sue in October and the two sides agreed last fall to a February 2 deadline for a brief.

Known as D-Limit, IEX says the order type is designed to help protect investors from predatory trading strategies. Short for discretionary limit, IEX says D-Limit acts like a regular limit order except when the exchange’s algorithms predict a price is about to change. A limit order is an order to buy or sell a stock at a determined price or better.

However, Citadel Securities is arguing D-Limit does the opposite of protecting investors. In 77 pages of court documents filed Tuesday, Citadel Securities accused the SEC of having “ignored” evidence that retail investors would be “harmed” by the D-Limit order. The firm cited its own analysis that found more than half of its trading activity on IEX was on behalf of retail investors, not for its own profit.

Citadel Securities, a major source of revenue for Robinhood is owned by billionaire Ken Griffin.

To make its case about how retail investors can be harmed by D-Limit, Citadel Securities compared it to shopping at a store.

“Imagine a grocery store that has deliberately installed extra-long conveyor belts on its checkout lines,” the company argues in the filing. In theory, the store could use that extra time to determine if any items have sold out at rivals’ stores.

“If so, the store’s computers quickly raise its own price before your item reaches the cashier,” the filing says.

The SEC did not respond to a request for comment. IEX said it looks forward to responding to the Citadel Securities filing and pointed to public trading data that it says shows D-Limit delivers better trading results and pricing to investors.

‘Predatory’ trading strategies

The claims by Citadel Securities come despite the fact that last year Republicans and Democrats at the SEC unanimously approved the rule, which was also backed by large pension funds and asset managers like T. Rowe Price.
D-Limit was even blessed by Better Markets, the tough-on-Wall-Street nonprofit run by Dennis Kelleher, who was on President Joe Biden’s transition agency review team.

IEX’s D-Limit, along with the exchange’s other technology, can “protect investors against predatory” trading strategies, Lev Bagramian, senior securities policy advisor at Better Markets, told CNN Business in an email.

Kelleher said D-Limit would shield investors specifically from Citadel Securities — and by extension hurt the firm’s booming revenue.

“Presumably that’s why Citadel vehemently opposed IEX’s D-Limit order type,” Kelleher said.

IEX was founded in March 2012 by former Wall Street executive Brad Katsuyama, a central character in Flash Boys, which made the case that high-speed traders are preying on mom-and-pop investors. IEX was approved as an exchange in August 2016.

“Despite the current environment,” Katsuyama told CNN Business in a statement, “Citadel has followed through on their attempt to reverse the SEC’s approval of an innovation that is designed to protect all investors from predatory trading strategies.”

A Citadel Securities spokesperson pointed to an October statement in which the firm said the SEC “failed to properly consider the costs and burdens imposed by this proposal that will undermine the reliability of our markets and harm tens of millions of retail investors.”

Although D-Limit won unanimous support from the SEC, some companies warned the agency in comment letters not to approve the rule.

Nasdaq, a rival exchange to IEX, slammed D-Limit as “nothing more than a thinly veiled attempt by IEX to bolster its dismal market quality for displayed orders.”

Elizabeth Warren raises questions about Robinhood, Citadel

The lawsuit comes as scrutiny intensifies on Citadel Securities in the wake of the Reddit-driven market volatility and Robinhood’s controversial decision to temporarily suspend purchases of GameStop (GME), AMC (AMC) and other stocks backed by WallStreetBets.
Treasury Secretary Janet Yellen summoned federal regulators to look into the market turbulence this week and lawmakers have called for an investigation.

Robinhood, which championed the free-trading business model that is now common in the industry, has repeatedly said that its trading restrictions on GameStop were driven by soaring financial requirements during the market volatility, not at the behest of Wall Street firms hurt by the GameStop rally.

But Warren, a Democrat from Massachusetts, said Robinhood’s trading limits on small investors “raises troubling concerns about its relationship with large financial institutions that execute its trades.”

Specifically, Warren pointed to Robinhood’s ties to Citadel Securities.

‘You’re the product’

Like other brokerages, Robinhood gets paid to route orders to market makers, a controversial practice known as payment for orderflow. In December alone, Robinhood generated about $12.4 million by routing orders to Citadel Securities, according to disclosure forms.

Critics say it is only free to trade on Robinhood because the app sends orders to market makers, enabling them to trade ahead of those retail flows.

“With anything that’s free, you’re the product,” Mark Yusko, CEO of hedge fund Morgan Creek Capital Management, told CNN Business earlier this week.

Last year FINRA, Wall Street’s self-regulator, fined Citadel Securities $700,000 for trading ahead of customer orders. FINRA said that over a two-year period Citadel Securities delayed certain equity orders from clients — while continuing to trade those same stocks in its own account. Without admitting or denying the findings, Citadel accepted and consented to the FINRA action.
Another entity owned by Griffin, the hedge fund Citadel, provided a $2 billion bailout to GameStop short-seller Melvin Capital Management after its bets blew up.

Both Citadel Securities and Citadel the hedge fund denied any role in Robinhood’s decision to stop purchases of GameStop.

In a statement, Citadel Securities said it has not “instructed or otherwise caused any brokerage firm to stop, suspend or limit trading or otherwise refuse to do business.”

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Business

Asian markets retreat as caution sets in

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TOKYO — Asian shares mostly fell Thursday as caution set in over company earnings reports, recent choppy trading in technology stocks and prospects for more economic stimulus for a world battling a pandemic.

Japan’s Nikkei 225
NIK,
-1.03%
slipped 0.5% in early trading, while South Korea’s Kospi
180721,
-1.90%
dropped 1.6%. Australia’s S&P/ASX 200
XJO,
-0.87%
slipped 0.6%. Hong Kong’s Hang Seng
HSI,
-1.35%
lost 1.2%, while the Shanghai Composite
SHCOMP,
-1.38%
was down 1%. Stocks rose in Indonesia
JAKIDX,
+0.63%
and Malaysia
FBMKLCI,
-0.25%
but fell in Singapore
STI,
-1.29%
and Taiwan
Y9999,
-0.43%.

Also on market players’ minds is the global vaccine rollout, which is becoming more organized in the U.S., but yet to play out in much of Asia, except for China, where the pandemic started.

“As the rally waned for the U.S. market, Asia markets can be seen left to their own devices into the Thursday session, and it appears that investors may be locking in some of the recent gains,” said Jingyi Pan, a senior market strategist for IG in Singapore.

Wall Street ended with modest gains, with the S&P 500
SPX,
+0.10%
inched up 3.86 points, or 0.1%, to 3,830.17, after swinging between a gain of 0.6% and a loss of 0.3%. The tiny gain extended the benchmark index’s winning streak to a third day.

The Dow Jones Industrial Average
DJIA,
+0.12%
gained 36.12 points, or 0.1%, to 30,723.60. The tech-heavy Nasdaq
COMP,
-0.02%
slipped 2.23 points, or less than 0.1%, to 13,610.54. The index had briefly been above its all-time high set last week.

Energy, communications and financial stocks helped lift the market. Those gains were primarily kept in check by declines in companies that rely on consumer spending and technology stocks.

GameStop and other recently high-flying stocks notched modest gains Wednesday. GameStop
GME,
+2.68%
rose 2.7% and AMC
AMC,
+14.71%
climbed 14.7%. The stocks have been caught up in a speculative frenzy by traders in online forums who seek to inflict damage on Wall Street hedge funds that have bet the stocks would fall. GameStop plunged 60% on Tuesday, and AMC Entertainment lost 41.2%.

“There’s a tug of war that’s been brewing for a week or so now, that markets are ripe for a correction and whether the events of last week are a precipitating event,” said Jamie Cox, managing partner at Harris Financial Group.

Stocks have been mostly rallying this week, an encouraging start to February after a late fade in January as volatility spiked amid worries about the timing and scope of another round of stimulus spending by the Biden administration, unease over the effectiveness of the government’s coronavirus vaccine distribution and turbulent swings in GameStop and other stocks hyped on social media.

That volatility has subsided this week, with Wall Street focusing mainly on corporate earnings reports while it keeps an eye on Washington for signs of progress on a new aid package.

Democrats and Republicans remain far apart on support for President Joe Biden’s $1.9 trillion stimulus package, but investors are betting that the administration will opt for a reconciliation process to get the legislation through Congress.

In energy trading, benchmark U.S. crude
CLH21,
+0.63%
gained 15 cents to %55.84 a barrel. Brent crude
BRNJ21,
+0.51%,
the international standard, added 6 cents to $58.52 a barrel.

In currency trading, the U.S. dollar
USDJPY,
+0.13%
inched down to 105.02 Japanese yen from 105.06 yen.

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Business

GameStop stock is plummeting but the Reddit rebellion is just beginning

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That’s partly due to trading restrictions from Robinhood and other brokers on how many shares of volatile stocks like GameStop, AMC (AMC), Express (EXPR) and Nokia (NOK) that retail investors can purchase in a single stock at a time.

But heavily shorted stocks could wind up rallying again. In fact, on Tuesday Mark Cuban urged members of Reddit’s WallStreetBets community to stay the course with stocks like GameStop.

“I have no doubt that there are funds and big players that have shorted this stock again thinking they are smarter than everyone on WSB,” the Dallas Mavericks owner and Shark Tank investor said on a Reddit AMA. “I know you are going to hate to hear this, but the lower it goes, the more powerful WSB can be stepping up to buy the stock again.”
After all, retail investors have proven that they can push hedge funds around — and they are likely to start focusing on other stocks and commodities that they think can (and should) move higher.

“Social investing is not going away,” said Kerim Derhalli, CEO and founder of Invstr, a trading app. “This is a powerful commercial trend and we are just at the beginning of it. People have more information and power.”

Younger investors have taken control of the market

Derhalli pointed out that as younger investors increasingly start buying and selling stocks, the market will need to adapt. He said the rise of other popular stocks, such as Tesla (TSLA) and Beyond Mea (BYND)t are due partly to Millennials and Gen Zers investing in brands that they know and like.

“Younger retail investors are in touch with changes taking place. They understand consumer trends because they are the ones making and creating them,” Derhalli said. “There are some Millennials making a lot of money and there are hedge funds pissed off that retail investors have joined the game and are beating them at it.”

Yet a number of Wall Street veterans are concerned that this won’t end well for smaller investors.

They point to the dot-com/tech stock collapse in 2000 as a sign of what can happen when retail investors get too excited and lose focus of fundamentals such as sales and earnings — not to mention valuations.

Back then, the trading frenzy was built on message boards like Raging Bull and Yahoo Finance as opposed to Reddit and Twitter.

“This is troubling and disconcerting. It could be like March 2000 all over again,” said Richard Smith, CEO of The Foundation for the Study of Cycles, a research firm.

“What this has done more than anything is expose how gamified the stock market environment is, and it will hopefully have people ask questions about whether or not this is how we want markets to work,” Smith added.

If average investors wind up getting burned by stocks like GameStop, that could lead to less confidence in Wall Street and the wider market.

Some lesser experienced investors may just give up on owning stocks altogether — as many individuals did after the 2000 crash and again when Lehman Brothers imploded in 2008.

“The market is going to be destabilized. Too many people will lose money. Fewer people will participate in the stock market — not more,” said Sergey Savastiouk, founder and CEO of Tickeron, an artificial intelligence platform for traders and investors.

“What’s going on with GameStop and AMC is like driving without a license,” he added.

This time might actually be a little bit different after all

But there are some major differences between now and two decades ago — not to mention the Great Financial Crisis of 2008-2009, a time when social media and free online trading weren’t as ubiquitous as they are now.

Average investors can now trade more efficiently and in a cost-effective manner thanks to no-fee brokerage firms such as Robinhood — a move that essentially forced all the other major brokerages to drop commissions.

The rise of fractional trading (i.e. owning a set dollar amount of a high-priced stock like Amazon or Alphabet) and the popularity of index ETFs also makes it easier for investors to buy small pieces of many stocks.

And Reddit’s megaphone is significantly louder and more influential than the old chat boards of the late 1990s.

“This trend will not end anytime soon. There are some investors who play in the individual stock arena just the one time. But there is a fear of missing out,” said Gust Kepler, founder and CEO of BlackBoxStocks, a trading software firm.

“That may not sound much different from the late 1990s with day traders, but now social media augments the ability for groups of investors to band together and share information in real time,” Kepler added.

Along those lines, even Smith of the Foundation of Cycles expressed begrudging admiration for the Reddit traders who figured out how to stick it to the short sellers.

“I have respect for those who saw what was going on, how it worked and exploited it,” he said. “But what value has been created?”

Stocks like GameStop and AMC aren’t increasing in value because they’re producing high revenue and profit, paying big dividends or adding significant juice to the economy by creating thousands of jobs.

But that misses the point. There is no rule that says investors should only buy large blue chip companies. Some investors are growing tired of buying safer, passively run index funds and want to gamble.

“Individual investors are often thought to be risk averse. But not all of them are,” said Josh White, a finance professor at Vanderbilt University and former SEC economist. “Some have a preference for what’s more like a lottery.”

“They may actually lose often but every now and then they will hit a home run like GameStop,” White said. “As long as there is that one big hit that takes place, people will keep gambling.”

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Business

Tesla’s dirty little secret: Its net profit doesn’t come from selling cars

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Eleven states require automakers sell a certain percentage of zero-emissions vehicles by 2025. If they can’t, the automakers have to buy regulatory credits from another automaker that meets those requirements — such as Tesla, which exclusively sells electric cars.
It’s a lucrative business for Tesla — bringing in $3.3 billion over the course of the last five years, nearly half of that in 2020 alone. The $1.6 billion in regulatory credits it received last year far outweighed Tesla’s net income of $721 million — meaning Tesla would have otherwise posted a net loss in 2020.
“These guys are losing money selling cars. They’re making money selling credits. And the credits are going away,” said Gordon Johnson of GLJ Research and one of the biggest bears on Tesla (TSLA) shares.

Tesla top executives concede the company can’t count on that source of cash continuing.

“This is always an area that’s extremely difficult for us to forecast,” said Tesla’s Chief Financial Officer Zachary Kirkhorn. “In the long term, regulatory credit sales will not be a material part of the business, and we don’t plan the business around that. It’s possible that for a handful of additional quarters, it remains strong. It’s also possible that it’s not.”

Tesla also reports other measures of profitability, as do many other companies. And by those measures, the profits are great enough that they do not depend on the sales of credits to be in the black.

The company reported 2020 adjusted net income, excluding items such as $1.7 billion stock-based compensation, of $2.5 billion. Its automotive gross profit, which compares total revenue from its car business to expenses directly associated with the building the cars, was $5.4 billion, even excluding the regulatory credits sales revenue. And its free cash flow of $2.8 billion was up 158% from a year earlier, a dramatic turnaround from 2018 when Tesla was burning through cash and in danger of running out of money.

Its supporters say those measures show Tesla is making money at last after years of losses in most of those measures. That profitability is one of the reasons the stock performed so well for more than a year.

But the debate between skeptics and devotees of the company whether Tesla is truly profitable has become a “Holy War,” according to Gene Munster, managing partner of Loup Ventures and a leading tech analyst.

“They’re debating two different things. They’ll never come to a resolution,” he said. Munster believes critics focus too much on how the credits still exceed net income. He contends that automotive gross profit margin, excluding those sales of regulatory credits, is the best barometer for the company’s financial success.

“It’s a leading indicator,” of that measure of Tesla’s profit, he said. “There’s no chance that GM and VW are making money on that basis on their EVs.”

The future of Tesla

Tesla’s lofty stock performance — up 743% in 2020 — makes it one of the most valuable US companies in the world. Yet the 500,000 cars it sold in 2020 were a sliver of more than 70 million vehicles estimated to have been sold worldwide.

Tesla shares are now worth roughly as much as those of the combined 12 largest automakers who sell more than 90% of autos globally.

What Tesla has that other automakers don’t is rapid growth — last week it forecast annual sales growth of 50% in coming years, and it expects to do even better than that in 2021 as other automakers struggle to get back to pre-pandemic sales levels.

The entire industry is moving toward an all-electric future, both to meet tougher environmental regulations globally and to satisfy the growing appetite for EVs, partly because they require less labor, fewer parts and cost less to build than traditional gasoline-powered cars.

“Something most people can agree on is that EVs are the future,” said Munster. “I think that’s a safe assumption.”

While Tesla is the leading maker of electric cars, it faces increased competition as virtually every automaker rolls out their own EVs, or plan to do so. Volkswagen has passed Tesla in terms of EV sales in most of Europe. GM said last week it hopes to shift completely to emissions-free cars by 2035.

“The competition is rendering Tesla’s cars irrelevant,” said GLJ’ Resarch’s Johnson. “We do not see this as a sustainable business model.”

Other analysts contend Tesla’s share price is justified given how it can benefit from the shift to electric vehicles.

“They’re not going to stay at 80-90% share of the EV market, but they can keep growing even with much lower market share,” said Daniel Ives, a technology analyst with Wedbush Securities. “We’re looking at north of 3 million to 4 million vehicles annually as we go into 2025-26, with 40% of that growth coming from China. We believe now they are on the trajectory that even without [the EV] credits they’ll still be profitable.”

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