The disgrace of Robinhood; Nikola Founder Trevor Milton Indicted; The implosion of Gaotu Techedu and the Chinese for-profit education sector; Beijing's threat to VIEs triggers Wall Street angst over China stocks; Hiking out
1) It's a sad day in the investing world as stock trading app Robinhood goes public. As I've written many times before, I think this company is an absolute disgrace and agree wholeheartedly with Charlie Munger, who said it's "beneath contempt."
Robinhood belongs in the Hall of Shame alongside e-cigarette company Juul and Oxycontin maker Purdue Pharma for pushing products that hurt people.
Robinhood's entire business model depends on further turning our markets into, as Munger put it, "gambling parlors" – encouraging people to speculate madly by day-trading options and worthless garbage that I've nicknamed Doggycoin (DOGE-USD) and GameStink (GME).
For more on Robinhood, see NYU marketing professor Scott Galloway's missive: Robinhood and iAddiction. What a truly brilliant sentence: "The company's mission to 'democratize finance for all,' is similar to Pablo Escobar saying his mission was to 'democratize cocaine.'"
It's 100% certain that this will end very badly – the only question is when and to what degree.
2) Electric-truck developer Nikola (NKLA) is crashing this morning thanks to this breaking news: Nikola shares slide premarket on report Founder Trevor Milton indicted for making false claims to investors. Excerpt:
Trevor Milton, founder of electric truck company Nikola, has been indicted on three counts of fraud by the U.S. Attorney's Office for the Southern District of New York for making "false and misleading statements" to investors regarding "nearly all aspects of the business," according to a grand jury indictment that was unsealed on Thursday.
The investigation came after short seller Hindenburg Research published a research report on the company that alleged that management had misled investors and overstated its internally developed battery and fuel-cell capabilities. The indictment said Milton, the one-time executive chairman of the company, had targeted retail investors, using social media, TV, print and podcast interviews.
Nate Anderson of Hindenburg Research adds:
Update: The SEC just filed parallel charges against Trevor Milton alleging he "engaged in a fraudulent scheme to deceive retail investors" and used his social media to "flood the market with false and misleading information about Nikola."
A huge shout-out to Anderson for his in-depth research and dogged pursuit of this house-of-cards company and crooked founder. I've been warning investors about the stock again and again since my September 11 e-mail, after Hindenburg released its first report, Nikola: How to Parlay An Ocean of Lies Into a Partnership With the Largest Auto OEM in America, which concluded that "we believe Nikola is an intricate fraud built on dozens of lies over the course of its Founder and Executive Chairman Trevor Milton's career."
Nikola's stock is down 60% since then (and 55% since I named it as one of the 25 stocks in my "Short Squeeze Bubble Basket" on January 27).
I'll repeat what I wrote in my e-mail that day:
As I've written many times before, I think short-sellers in general and activist short-sellers in particular are incredibly healthy for our markets – they uncover and expose fraud, hype, and overvaluation.
Their role is especially important today... With stocks soaring and easy-to-use trading platforms like Robinhood proliferating, more and more novice investors are being lured into risky stocks and types of investing, like trading options.
3) Speaking of short-sellers exposing fraudulent companies, my friend Carson Block of Muddy Waters Research absolutely nailed the implosion of Chinese education company Gaotu Techedu (GOTU). (It was formerly known as GSX Techedu with the ticker GSX.)
I covered this extensively starting in my May 20, 2020 e-mail (all of my e-mails are archived and searchable here). Block was early – underscoring how difficult short selling is – and the stock skyrocketed from $30 at that time to a high of $149 on January 27 during the peak of the mother-of-all-short-squeezes.
But I knew he was right, which is why it was another one of the 25 stocks in my "Short Squeeze Bubble Basket." That day was the peak, and it has since collapsed to $3.43, down a staggering 98%!
Interestingly, while Carson was right that Gaotu is a fraud, neither he nor I (nor pretty much anyone) anticipated the reason for the last leg of the stock's collapse: the Chinese government cracking down on the entire for-profit education sector: China Bans For-Profit School Tutoring in Sweeping Overhaul. Excerpt:
China unveiled a sweeping overhaul of its $100 billion education tech sector, banning companies that teach the school curriculum from making profits, raising capital or going public.
Beijing on Saturday published a plethora of regulations that together threaten to up-end the sector and jeopardize billions of dollars in foreign investment. Companies that teach school subjects can no longer accept overseas investment, which could include capital from the offshore registered entities of Chinese firms, according to a notice released by the State Council. Those now in violation of that rule must take steps to rectify the situation, the country's most powerful administrative authority said, without elaborating.
In addition, listed firms will no longer be allowed to raise capital via stock markets to invest in businesses that teach classroom subjects. Outright acquisitions are forbidden. And all vacation and weekend tutoring related to the school syllabus is now off-limits.
The regulations threaten to obliterate the outsized growth that made stock market darlings of TAL Education (TAL), New Oriental Education & Technology (EDU), and Gaotu Techedu (GOTU). They could also put the market largely out of reach of global investors. Education technology had emerged as one of the hottest investment plays in China in recent years, attracting billions from the likes of Tiger Global Management, Temasek Holdings, and SoftBank.
4) This is only one of many steps that the Chinese government has taken recently that has crushed Chinese stocks across the board. Here are some recent articles about this:
- China Tech Stocks Slump as Regulators Apply Fresh Pressure (Wall Street Journal)
- Beijing's threat to VIEs triggers Wall Street angst over China stocks (Financial Times)
- Why is China smashing its tech industry?
My take: This underscores why I've never invested in China.
I understand the reasons in favor of it, but it's the Wild West. I don't doubt that some people can invest successfully there, but those are likely to be folks who speak the language, have relationships and experience, etc. that I lack. I never like to be the sucker at the poker table...
If you want exposure to China, I suggest following the advice in this column by Jeff Sommer of the New York Times, investing in broadly diversified funds or U.S. companies who do a lot of business there: Invest in China, but Without Illusions. Excerpt:
I would be careful about buying individual stocks. But I do like the idea of participating in the growth of China's consumer market through fund portfolios, though I tilt toward index funds. Maintaining an indirect business connection with China, despite the ebb and flow of politics, seems to me humane and, potentially, lucrative.
But I've come to accept that I'm a die-hard globalist. If you can't abide this kind of thinking, I wouldn't lose sleep over it. Stay local in your investing, then. Yet be aware that Chinese spending is already so consequential that you will get some exposure to it anyway, through companies like Boeing (BA), Caterpillar (CAT), General Motors (GM), Ford Motor (F), and Nike (NKE). China is so important, it's impossible to ignore.
5) After climbing Mt. Whitney and Mt. Russell earlier this week (see Facebook posts here, here, here, and here), my guide Paul and I were planning to tackle Mt. Whitney again via the classic East Face route yesterday morning... But for the second time on this trip we decided not to head out because Paul didn't like what he was seeing in the skies and the forecast warned of possible thunderstorms. You don't want to be high up on an exposed route, with no way down other than to summit, if heavy rain or, worse yet, lightning hit!
So we hiked back out to Whitney Portal and drove to nearby Lone Pine for some much-needed rest, food, and cranking out this e-mail. Here's a picture from the hike down:
And here's me relaxing in the pool of our motel, with an arrow pointing to the top of Mt. Whitney (we started the day at the base):
Best regards,
Whitney
P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.