The World's Dumbest Investors Are Baaaaack
The world's dumbest investors are baaaaack... No one seems to be bearish these days... In a rational world, Bed Bath & Beyond would already be dead... Everyone is in on this secret except the 'meme stock' crowd...
'They're baaaaack!'...
If you're a pop-culture expert, you'll recognize that phrase.
Child actress Heather O'Rourke uttered those words in the 1986 movie Poltergeist II. Four years earlier, she said something similar about the evil spirits in the original Poltergeist.
And before long, everyone started saying the phrase and similar variations. The Chicago Tribune noted this trend in 1997. And the newspaper even poked fun at its own uses...
In fact, the phrase has turned up more than 100 times in many variations. For those keeping score, it breaks down to one "baack," 27 "baaack," 28 "baaaack," 25 "baaaaack," eight "baaaaaack," six "baaaaaaack," three "baaaaaaaack," one "baaaaaaaaack," one "baaaaaaaaaack" and one "baaaaaaaaaaaack." There are also several hyphenated versions.
So it should surprise no one that it's still being used more than 25 years later...
MarketWatch used the phrase recently to describe retail investors' return to the stock market...
The article noted that "all manner of risky assets have stormed higher." And it cited a recent report from investment bank JPMorgan Chase (JPM)...
The report noted that retail investors' stock market orders as a percentage of total market value reached 23% on January 23. That's a new all-time high.
The previous record was 22%. That occurred in the "meme stock" craze of 2020 and 2021.
Remember, a market order is when you just say, "Buy it right now at any price." Most experienced investors use limit orders, which direct their brokers to not buy for more than a certain price. That's a much safer way to invest.
Now, just imagine millions of these folks... all with tiny amounts of money in their accounts... buying stocks at any price... as greedily as ever.
They're not investors.
They're half-drunk casino gamblers. They're propping themselves up against the roulette table as the wheel spins and tells them if betting it all on black was a good idea or not.
These folks are once again trying to 'get rich quick' with meme stocks...
They're not bearish on anything these days.
Not garbage stocks. My favorite publicly traded garbage can, Cathie Wood's ARK Innovation Fund (ARKK), is up about 34% from its bottom on December 28, 2022.
Not tech stocks. The Nasdaq Composite Index is up around 16% since it bottomed the same day.
And not the S&P 500 Index, which accounts for roughly 80% of the market of U.S. stocks. The benchmark stock index is also up roughly 16% since its October 12, 2022 bottom.
In other words... it doesn't look like anybody is bearish.
The truth is, the bear market hasn't been very painful yet...
The S&P 500 fell around 25% from its January 3, 2022 all-time high through its October 12 low. That barely qualifies as an "official" bear market at all – a drop of 20% or more.
Now, the Nasdaq dropped further. It plunged more than 36% from its November 19, 2021 all-time high to its low last December. But as regular Digest readers know, this tech-heavy index has gotten hit much harder than that in previous bear markets.
Said another way... the current bear market's lowest lows are rookie numbers in the aftermath of the biggest financial mega-bubble of all time. We're only getting started...
The market has to bump those numbers up if it wants me to join in the search for a bottom.
If the S&P 500 were down 50% or more and the Nasdaq were down 65% or more, I might join in. Those types of drops are roughly the minimum levels I believe would finally clean out the "Great Unwashed," as MarketWatch called the frenzied horde of retail investors.
An old Wall Street adage says the market acts in a way that hurts the most participants. Has it done that so far?
Nope. It's still sucking them in. It has barely begun to wipe them out.
Folks react positively to any bullish price action. But I promise you...
The longer the speculative "animal spirits" remain alive in the hearts and brokerage accounts of this massive herd of poorly financed gamblers, the worse the ultimate outcome will be.
Bed Bath & Beyond's (BBBY) shareholders know what I mean...
The home-goods retailer has closed nearly half of the 950 stores it operated around this time last year. It has reported enormous losses. And shareholders have felt the pain...
Bed Bath & Beyond's share price was around $80 a decade ago. On January 6, it closed at $1.31 per share – its lowest point since 1992. And thanks to the recent "they're baaaaack!" surge from meme-stock buyers, it trades for about $2 per share today.
It's a typical meme stock. The business is heavily shorted and doomed to disappear.
The price action is typical of a meme stock, too. It spikes sharply several times on its way to all-time lows. Isn't it obvious that meme stocks are tailor-made for fleecing the most naive investors? Just look at Bed Bath & Beyond's chart over the past three years...
And the thing is, this already lousy outcome will soon get even worse...
In a rational world, we wouldn't be talking about Bed Bath & Beyond at all...
That's because it would've already declared bankruptcy and its stock would be long gone.
But anything is possible in the bizarro world where meme stocks like Bed Bath & Beyond can double in a single day. That happened last Monday, even though the business is dying.
The stock nearly doubled the day before it was saved (for now) with an injection of new capital...
A group of investors led by hedge fund Hudson Bay Capital got a sweetheart deal. They will supply the company with up to about $1 billion in cash to keep operating.
On Tuesday, Hudson Bay paid Bed Bath & Beyond $225 million for preferred stock that converts into common stock, as well as warrants to buy more preferred stock and common stock. And it agreed to pay the company as much as $800 million for more preferred stock if everything works out as planned.
I doubt the common-stock warrants will ever have any value. They give Hudson Bay the right to buy the stock for $6.15 per share. But as I said, the stock trades for around $2 per share right now and has been falling since the stock-offering deal was announced.
The preferred stock is the interesting part...
First of all, Hudson Bay gets it at a 5% discount. It paid $225 million for $237 million worth of preferred stock. And depending on what happens from here, the move could result in a much higher profit than 5% when Hudson Bay converts the preferred shares into common shares.
It can do that anytime it wants. And the higher the stock trades, the better the deal...
If it had exercised the preferred shares last Wednesday, the day after the deal, Hudson Bay could've made a 14% return in a single day. Not bad!
Let's avoid getting caught up in the details and keep the discussion simple...
Bed Bath & Beyond is selling preferred stock to Hudson Bay at a discount. And Hudson Bay can turn around and sell it into the stock market – to the meme-stock crowd and anybody else crazy enough to buy it – anytime it wants, likely at an instant profit.
If things go well for Bed Bath & Beyond, Hudson Bay will be able to buy a full $1 billion of the preferred stock, convert it to common stock, and sell it into the market for a (likely) instant profit.
Bed Bath & Beyond is doing it this way because it could never sell $1 billion worth of common stock, preferred stock, bonds, or anything else straight into the market.
If Bed Bath & Beyond announced that it planned to sell $1 billion of new stock, its share price would tank instantly as current investors feared dilution. Then, it wouldn't be able to sell a single share. And it would have no choice but to declare bankruptcy five minutes later.
Bed Bath & Beyond's market cap on Tuesday was around $350 million (after surging to $700 million on Monday). It's really hard to sell $1 billion of new equity – or even $237 million of it – when your market cap is $350 million.
The world is telling you, "Hey, you're not worth $1 billion. You're not even worth half that."
But the way Bed Bath & Beyond did it, Hudson Bay can run interference for them...
It can hide the moment when the securities hit the open market.
Bed Bath & Beyond knows exactly what it's doing. And it knows it's terrible for shareholders. It knows it's using the meme-stock crowd's utter stupidity against it. (I'd feel sorry for the meme-stock crowd if most of these folks weren't such obnoxious jerks on Twitter.)
That's the crux of it all...
The only reason this deal happened is that Bed Bath & Beyond is a meme stock. And as we've seen in recent years, meme stocks are prone to huge upswings in just a day or two.
Its share price shot up as much as 130% on Monday. The deal happened Tuesday. If you think that's a coincidence, please don't operate heavy machinery in your current condition.
Without huge trading volumes and insane price action, Bed Bath & Beyond's equity would be worthless. So it can thank the "they're baaaaack!" surge of the meme-stock crowd.
In other words, the world's dumbest investors kept this company's equity price up – which kept the company afloat – because they believed they were "sticking it to the man." But they're really just letting Bed Bath & Beyond issue stock to Hudson Bay on terms that virtually guarantee easy profits.
The exploitation of the meme-stock crowd is like a giant open secret...
These guys are the only ones who have yet to figure it out. The Wall Street Journal recently spelled it out for every financially aware person on the planet as plainly as I'm saying it to you...
The unusual financing deal was made possible by the high trading volumes in Bed Bath & Beyond, which is popular with meme-stock investors. The stock had rallied even as the company warned of bankruptcy that would wipe out shareholders. Movie-theater chain AMC Entertainment Holdings Inc. was able to take advantage of similar activity during the height of the Covid-19 pandemic to sell shares and avoid bankruptcy.
Again... if that's how they're going to stick it to the man, I'd like to work for the man.
They've done the opposite of what they say they want to do. They're putting easy profits in Hudson Bay's hands. And they're making the short squeezes they desire far less likely.
That's because the more stock Hudson Bay puts into the market as it converts preferred shares to common shares, the harder it will be for the meme-stock crowd to buy enough to run the price up.
The meme-stock folks are the victims of their own hubris over their early successes.
I bet very few of these people have actually made money in meme stocks. When all that volume changes hands at the top of a meme-stock run, it's not savvy investors buying in. It's a few lucky, extremely wealthy souls unloading onto the meme-stock crowd.
The great herd of unskilled, inexperienced, emotionally driven investors has once again demonstrated something that so many smart folks have said over the years. Most notably, as the father of security analysis Ben Graham said in his book The Intelligent Investor...
For indeed, the investor's chief problem – and even his worst enemy – is likely to be himself.
The meme-stock crowd never had any idea what it was doing. A few folks got lucky with winning bets on GameStop (GME), Bed Bath & Beyond, AMC Entertainment, and others.
But in the end, these investors were always doomed. That's because, as Graham might've put it, they were always buying low-quality securities during the most favorable market conditions.
It's hard to believe this meme-stock craze is still happening two years after it started...
I've occasionally thumped my chest about the fact that I first wrote about the ARK Innovation Fund on February 11, 2021 – the day before the exchange-traded fund peaked. It has fallen as much as 81% since then. And even after the recent rally, it's still down 74%.
Well, I guess I need to say it again...
The ARK Innovation Fund peaked two years ago, almost to the day. Two years, including the first year of a bear market, and yet... Bed Bath & Beyond can still raise equity capital.
It really is like the evil spirits in the Poltergeist films. The meme-stock crowd won't die!
I've been saying we're in the biggest mega-bubble in all recorded history for a long time. So I guess I shouldn't be surprised at how long it's taking Bed Bath & Beyond and its ilk to die.
In fact, I should've expected the biggest mega-bubble in all recorded history to require the most drawn-out, brutal, ongoing bear market slog. It's not your average bubble, after all.
It will constantly suck the suckers back in before cutting them off at the knees again. And eventually, it will beat up most investors enough to get rid of them for a decade or more.
Maybe it sounds like I'm simply feeding my own bearish narrative...
"The bear market hasn't been bad enough yet, so that just means it'll be worse than I thought."
I don't have the energy for emotional gymnastics. So I'll just urge you to make up your own mind.
I'm not predicting anything. I'm just telling you what it looks like to me. And I hope you'll prepare yourself for some nasty outcomes...
The desperation in the stock market is palpable.
Perhaps it's best explained by a new report from PYMNTS and LendingClub, which says 64.4% of U.S. consumers are living paycheck to paycheck right now. That's the highest percentage since March 2022.
Lower-income Americans aren't the only folks feeling the pinch, either. The report found that 8 million people making more than $100,000 per year are living paycheck to paycheck.
Fewer people are saving. And even if they are, it's less than before the COVID-19 pandemic.
Personal savings as a percentage of disposable income equaled around 9% before the pandemic. It spiked up to more than 30% as COVID-19 stimulus checks hit Americans' wallets and pocketbooks a few years ago. But now, it's just 3.4%. That's a huge drop.
This isn't a new development, either. Last October, the number of folks withdrawing money from their 401(k) accounts to cover a financial hardship hit a new all-time high.
People have been getting more and more desperate. And they're not idiots...
They know they'll run out of savings sooner or later. And when they're that desperate for a return on what little money they have left, they do stupid things in the stock market – like gamble on meme stocks.
But ultimately, they get further away from fixing their money problems. Instead, they're just incentivizing rich and sophisticated market participants to take advantage of them.
I believe regular Digest readers are a cut above the Great Unwashed. So please pass along this advice to anybody you know who might gamble on garbage like Bed Bath & Beyond...
Don't fall into the meme-stock trap. Don't be a careless, thoughtless speculator who buys garbage stocks with your hard-earned savings. You're a lot better than that.
Instead, prepare your portfolio for a wide variety of outcomes. Hold plenty of cash, high-quality stocks bought at sensible prices, and some gold and silver.
It might not be as exciting as buying meme stocks. But it's the key to long-term success.
New 52-week highs (as of 2/10/23): BorgWarner (BWA), iShares U.S. Aerospace & Defense Fund (ITA), Shell (SHEL), TFI International (TFII), and ExxonMobil (XOM).
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Good investing,
Dan Ferris
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February 13, 2023