Penny Stocks Are Booming, Which Is Good News for Swindlers; Microcap Confidential; New ETF designed to track Reddit-driven social-media buzz; Stimulus checks invested in stocks; Why bitcoin is going higher; Greetings from Joshua Tree National Park
1) Another day, another area of the market I need to warn my readers about...
Penny stock trading rose 2,000% last month from the same month a year ago. From the New York Times: Penny Stocks Are Booming, Which Is Good News for Swindlers. Excerpt:
Penny stocks – the name given to more than 10,000 tiny companies like SpectraScience (SCIE)– have been around forever, but they're booming as small investors flood the market. And this time around, social media is fueling the craze. Whether traded to fend off the boredom of pandemic living or to turn a quick profit, these dirt-cheap but risky shares are another frontier in a world where meme stocks like GameStop gained overnight stardom, Dogecoin morphed from a joke cryptocurrency to a hot investment and a digital artwork known as an NFT sold for $69 million.
It's part of a "massive surge" in retail trading reminiscent of the 1920s, when amateurs flooded into the stock market before the 1929 crash, said Tyler Gellasch, a former Securities and Exchange Commission official who leads the nonprofit Healthy Markets Association.
"The only relevant historical precedent seems to increasingly be the days before the Great Depression," he said.
Penny stocks occupy a low-rent district of Wall Street, a world rife with fraud and chicanery where companies that don't have a viable product, or are mired in debt, often sell their shares. Traded on the lightly regulated over-the-counter, or O.T.C., markets, penny stocks face fewer rules about publishing information on financial results or independent board members. Wall Street analysts don't usually follow them. Major investors don't buy them.
But last month, there were 1.9 trillion transactions on O.T.C. markets, an increase of more than 2,000 percent from a year earlier, according to data from the Financial Industry Regulatory Authority, a self-regulatory group that oversees brokerage firms.
The lack of oversight makes penny stocks easy targets for scammers, which has long accounted for their unsavory reputation. But risk can also be a draw for thrill seekers or those who fear they've missed a market boom that is creating wealth all around them.
Be careful! I never thought I'd say this, but listen to fraudster Jordan Belfort:
"Everyone wants to get rich," said Jordan Belfort, whose memoir, The Wolf of Wall Street, detailed his debauched life as cheap-stock kingpin, complete with helicopter crashes, sunken yachts, and copious quaaludes. "And they want to get rich quick."
Mr. Belfort, now a motivational speaker and writer living in Los Angeles, presided over Stratton Oakmont, one of the notorious "boiler rooms" that manipulated penny stocks to prey on unwitting retail investors before it went out of business in 1996.
"We all want to believe in Santa Claus, the Tooth Fairy and Bernie Madoff," he said.
Just as they were in Mr. Belfort's heyday, penny stocks remain the backbone of schemes to part newbie traders from their cash. Consider one perennially popular racket: the pump and dump.
In the world of microcaps, some tiny stocks certainly do very well – but they're few and far between. It's critical know what you're doing... or have a good guide.
Speaking of which, my friend Joel Litman of Empire Financial Research's sister company Altimetry has an excellent newsletter, Microcap Confidential, which I highly recommend. In this under-policed corner of the market, Joel and his team help their subscribers find the tiny stocks with massive upside potential... and avoid the traps from the charlatans.
You can learn more about Microcap Confidential right here.
2) Here's another sign of foolishness in the markets: Barstool Sports founder Dave Portnoy released a video backing a new ETF designed to track Reddit-driven social-media buzz. Excerpt:
In a video posted on Twitter on Tuesday, the Barstool Sports founder Dave Portnoy promoted an exchange-traded fund set to launch on the New York Stock Exchange this Thursday.
The VanEck Vectors Social Sentiment ETF is designed to track sentiment on platforms like Reddit, StockTwits, and Twitter to fuel its holdings. The ETF will trade under the ticker symbol BUZZ.
"There is a new ETF launching that I'm a part of, that I'm putting my face behind, my reputation behind," Portnoy said in the video.
3) Despite widespread foolishness and speculation, I don't think we're at (or even near) a market top, for reasons I outlined in three e-mails last week (here, here, and here). Here's another reason I think stocks are going higher:
4) My skepticism regarding bitcoin is well-known, but I think the crypto is going higher as well.
It's becoming more widely available, as this Bloomberg article notes: Morgan Stanley to Offer Rich Clients Access to Bitcoin Funds. And, as this related article shows, small increases in demand can boost bitcoin's price significantly: Have $93 Million? You May Be Able to Boost Bitcoin's Price by 1%. Excerpt:
JPMorgan Chase strategists have estimated that institutional flows into Bitcoin are up 20% in dollar terms this quarter from the prior period, while retail has increased 90%. And that intake may be moving the price of Bitcoin more than it would some other assets, according to strategists at Bank of America including Francisco Blanch and Savita Subramanian.
"Bitcoin is extremely sensitive to increased dollar demand," the BofA strategists said in a note Wednesday. "We estimate a net inflow into Bitcoin of just $93 million would result in price appreciation of 1%, while the similar figure for gold would be closer to $2 billion or 20 times higher. In contrast, the same analysis for the 20-year-plus Treasuries shows that multibillion money flows do not have a significant impact on price, pointing to the much larger and stable nature of the U.S. Treasuries markets."
P.S. Here's a funny blurb The Daily Show did on bitcoin: Jordan Klepper and Smugly's Crypto Crash Course.
5) Greetings from Joshua Tree National Park in Southern California!
I'm here for a week with my professional guide (and now great friend), Paul Koubek, with whom I climbed 36 days over three trips out West last year. The highlight was our four-day conquering of The Nose of El Capitan in Yosemite National Park (see my June 22 e-mail for pictures of it).
In the winter, California's hard-core "dirtbag climbers" head south to Joshua Tree, so we've joined them, staying in Paul's van at the campground here. Here are some pictures...
Best regards,
Whitney