Too much speculation, too little stability in the face of a COVID rebound.
That's all I can say about Monday. It's a revolt of the buyers, mixed with a strong belief that the Delta variant will take away all the upside of the speculative economy. The toll? It's on the industrials, particularly the transports, the oils and more importantly, the speculative stocks that have brought so many people to this market who, frankly, are unaware of the risks of stocks.
I think that speculation has been ignored as a risk factor in this market. But it is prevalent, whether you look at the most actives, or you check Reddit, or you examine all of the deals being floated, which are signs of speculation in itself. I don't see a lot of blue chips coming public or being bought by SPACs.
What's getting speculated on? Let's start with initial public offerings themselves. This week, 19 are slated to occur. That, alone, is ridiculous. The brokers are asking accounts to sell stock in other holdings, so they can buy new stock on the deals. They are pleading with them, reminding them that they got in on the hot deals now they have to buy the cold ones. It is a winning call, because you can guilt the buyers. They simply can't be counted on next time around if they don't commit to this cycle's dogs.
OK, they aren't all horrid. There are ones that I know and use, like Kaltura (KLTR) , for on-demand video software as a service solutions and Outbrain, an online marketing company with catchy headlines, but then there's Couchbase, data base tech for application developers or Gambling.com, digital marketing for the online gaming industry, and Xponential Fitness with 1,750 studios and Infrastructure Holdings, which has a learning management program. Each in itself could be good to buy, but their verticals are almost all saturated. We don't need any of these companies to come to the market, especially all the small biotechs and analytics platforms.
They are coming though, because they know they can, there is enough money to get everything done, even if it means selling good stuff to buy iffy stuff. They need us more than we need them. They can't be stopped, unless the buyers simply revolt and tell the syndicate desks no thank you.
I have always said that the only real thing that can kill the bull, besides rapid raises of interest rates by the Fed, is speculation and these deals are almost all speculative. When you consider that we have had 638 deals this year for a cumulative $217 billion vs. last year's 140 deals worth $46,735 billion at this time last year, you know the enormity of the situation.
What are the other signs of speculation running out of steam? I would start with the meme stocks. We are all tired of them "running" stocks higher every day. So many people are onto them, now that the execs are ready with insider sales as was the case with Corsair (CRSR) , the high-end gaming hardware company that got memed to $40 and then fell right back to $30. We have seen a whole host of meme stocks give up their gains quickly, which tells you that the faith in these stocks is simply going away.
We know now that Robinhood, which has a huge amount of losses, is coming public in two weeks, just the wrong time, as we are being overwhelmed with stock. We do not need a new one that will come public at a valuation of about $35 billion. The company, which is trying to raise $2 billion, not that much when you think about its total valuation, will most likely be set up to win, because it is allocating between 20% and 35% for individuals who used Robinhood. But if it fails, if it breaks price, it could be disastrous for the market.
Perhaps the most revolting aspect of this era of speculation is in little stocks, too small to mention here, little "nobody" stocks that spike in volume continues unabated. You aren't going to see this selloff truly end, until individuals realize that this so-called strategy of suckering in people to stocks and then banging them out as soon as they run, is maybe the most insidious of all and must be scrutinized by the SEC as sophisticated pump and dumps.
Then there's the heart of speculation: Cryptocurrency. It looks like that bitcoin had a parabolic move, but got crushed just about the time that non-fungible tokens became the rage. Looking back, we do see a rather unclothed emperor in these non-fungible tokens pushed by rich people into some sort of thing that made everyone overpay for everything. Can anyone recall fungible tokens? Are there any bids out there?
Speaking of bids, have you noticed how low bitcoin is and how it seems to be hanging by a thread? Once again a sign of speculative excess. I like bitcoin, but I want to see it wrenched out before I get in again.
There is some real risk to the entire system from cryptocurrency having to do with stablecoin, the crypto-like money fund. Tether, the biggest one, with more than $50 billion in value, is supposed to be backed by the best pieces of paper, a lot money funds, but they won't tell us what they own and I fear that it is B-rated Chinese bank commercial paper, as I never heard of any desk that sells it to them.
What if there are sudden redemptions? I know the that the full faith and credit of the United States sure doesn't stand behind it; no wonder the Treasury convened a working group to discuss the instability of the stable coins.
There was a ton of speculation in oil, and with no OPEC agreement, the default setting of tight supply would have taken it to $100. Now there's a cascade with this deal as the longs bailed and all of the speculative excess in oils big and small is gone. Another good thing for the market.
Finally there are the stocks that trade at multiples to sales not earnings. Those always take a hit here and after a while, cause a lot of collateral damage to stronger stocks including FAANG plus Microsoft (MSFT) , which is exactly what's happening again.
So what do you do? I think you watch as the speculators get blown to kingdom come, while the pandemic stocks come back and the big industrials try to bottom. Do not be sucked in by the fact that some strategists are calling for a 10% to 20% decline. We have already seen those declines for many stocks and those are the best ones to buy. The rails, the aerospace plays, except for Boeing (BA) , which I expect to have a bad quarter and most importantly, the infrastructure investments that make so much sense here because they have fallen so hard.
Finally pick a bank. They have been crushed and they had good earnings. They are hostage to the ever-roaring 10-year Treasury and one day the 10-year will reverse and start going down when the variant is conquered.
So, to sum up, this is a selloff that's hitting the most speculative stocks as well as the stalwarts in FAANG plus M. Once the speculators are blown out and the stocks that are down huge start rallying along with those that that have already started, then we can find a tradeable bottom. We are close, but the speculators endure. These tortured souls can leave gracefully now, or get margined out when things really turn against them.