What to do if the Robinhood traders grip one of your stocks

Perhaps my most speculative holding is Centrus Energy (AMEX: LEU). I wrote about their predecessor back in 2013 (they went through a recapitalization and name change) and have been keeping track of them ever since.

I won’t get into the investing thesis (or valuation) but LEU is a uranium processor for nuclear fuel. They originally took nuclear missile warheads and reprocessed their uranium cores into fuel for nuclear power plants, but now they obtain their raw material through Russian and French sources.

However, given the current hype on anything nuclear-related, and especially considering that LEU is one of the few publicly traded companies that are into such businesses, over the past couple months they have received obvious retail activity:

We look at the chart and see a stock that has more than doubled, but also with a serious amount of stock volume (after the secondary offering, there is a float of about 11.3 million shares). Examining the social media, we see that there is clear retail activity.

During these periods of retail mania there are extreme ups and extreme downs. You see this in any stocks that were relatively inactive but then gain a mass following – the daytraders, speculators and short-term technical traders dive in, and then it causes intensive volatility when they jointly decide to buy and sell. These ups and downs are very difficult (if not impossible) to time, but this is where you get people on Youtube making daytrading videos as they scale in and out of such positions.

Sometimes it is right to bail out in these situations, and sometimes you just have to hold on for dear life and get used to the notion of seeing a position in your portfolio gravitate 10% a day. I guess we’re all Bitcoin holders these days, even when we’re not holding them.

AcuityAds Holdings – Part 2

Merry Christmas and Boxing Day everybody.

I can’t get enough of looking at AcuityAds (TSX: AT), which is one of the best TSX performers of the year.

I gave some brief thoughts back in October, questioning the $200 million market capitalization, but fast forward a couple months and look what happened – they quadrupled again!:

Look at the huge amount of volume since December 14th (quadruple over the previous few months of trading). Obviously this got on the radar of the daytraders and pancake flippers, but the straight-line accumulation since July looks to be a steady algorithmic “buy a little bit each day” without regards to price.

On November 16, 2020 the company did a bought deal offering (roughly 3.8 million shares with greenshoe) at $6.10, partly from the treasury and mostly from insiders.

Even the insiders sound surprised at all of this price action, which they been selling willy-nilly since September for roughly $3.50/share. One insider recently got out at $20.69/share, which was pretty damn good market timing considering he cashed out 500,000 shares out of his 542,462 share ownership at the time of sale.

Just imagine if you were one of those people that purchased the stock on December 21st for $22/share. Right now you’re sitting on a loss of 22% for four days of effort.

This is how volatility looks at market peaks. I’m not saying this will not go any higher and resume the course along the blue line that I drew on the chart above. But it is instructive how these kinds of stocks trade.

Note this post is devoid of any fundamental analysis of the company itself – I have no idea whether their technology warrants such price action or not. It could be the case they are the next Google. You’d never see it by reading their financial statements.

Suffice to say, no positions. Also, don’t take advice from people holding the much-worse performing (NYSE: AT) either.

End of year actions and rambling thoughts

Major holders of institutional money are likely on “autopilot” for Christmas so it is likely no major changes in investment policy decisions will be made until the new year, short of some geopolitical calamity.

Canadians have until December 29 to sell securities that are sitting in a loss position to claim a capital loss. Americans have until December 31st.

The real question I’m grappling with is how much more can monetary and fiscal policy continue to drag the powder keg up the hill before something breaks and it all comes tumbling down. Japan has shown the western world the way how you can run massive deficits for a very long period of time without catastrophic consequences. It might go on longer than most people think.

With the rampant speculatory valuations seen in many sectors (for two great examples, look at Peloton (PTON) and Chipotle (CMG) – yes, fast food that should be trading at over 100 times normalized earnings), there is quite clearly a degree of misallocation that hasn’t been seen in quite some time. The origins of such speculative fervor can likely in part be attributed to the supply-demand dynamics with passive indexation coupled with momentum – for example, the larger your market cap is, the more you will be included in the respective indicies. This creates price insensitive demand, and this is all too willing to be sucked up by the marketplace.

This could be the stock market equivalent of Chinese condominium towers being built in the middle of nowhere – to be sold as “stores of value” in absence of other opportunities. Maybe if you’re lucky, in a few years you can AirBnB and make a few RMB of income with it.

You can’t short them (what’s crazy can get crazier), you can’t long them (don’t know when the music will stop), all you can do is get them out of your mind. The mental return on brain damage is too low, although there is a huge gambling appeal which is witnessed by the whole locked-down millennial world discovering Robinhood and thinking they are stock-picking champions as they swap CERB money with each other, with the market makers skimming pennies a transaction. You don’t have to read me anymore, just pay attention to everything these TikTok millionaires do.

Relative performance managers that are indexed to the S&P 500 will have had to reach a +14% hurdle so far in order to justify their pay. Hypothetically, if they put their entire portfolio in Apple for the year, they’d be sitting on an 80% gain. Considering Apple is about 6% of the index, it makes you think about the other parts of the S&P that must be underperforming Apple. Something makes me think Uncle Warren B. was onto something when he ploughed nearly a hundred billion of his capital into Apple stock – it was his version of going into Bitcoin.

Managers indexed to the TSX will have seen a +3% gain this year. Your ticket to glory was Shopify, which did reasonably well during the COVID crisis, but had you held on from the beginning of the year to present, you would be up triple your original investment. My god, what do I do all this investment research for when these superior returns are just staring you so blatantly in the face?

I’ve done a cursory scan of the entire TSX on the loss side and earmarked and looked into a few issues that are of interest, but I’m not at all close to pulling the trigger on any of it.

In fact, when I look at my own portfolio, the most clearest speculative component is the one that is doing the best percentage-wise from cost. The most obviously “value” stock is not doing that well at all (you can probably take a guess which one this is).

For the past couple weeks, I have been trying to visualize how 2021 will emerge.

With infection rates, coupled with vaccinations to bring the SARS-CoV-2 episode to a close in 2021, people are going to have outlets for their money from avenues that were previously inaccessible. Travel, entertainment, socialization, etc., will continue to be demand sinks for consumer capital and this may have impact on the asset side. One big looming question is upon the restoration of the full slate of economic services available, will there be demand, especially after government stimulus programs run out? Or will there be wave, after wave, after wave, as long as central banks functionally pay for it by interest rate suppression? How long can this last?

Mutant SARS-CoV-2 Viruses, Perceived Risk, Actual Risk

This will be a slightly longer than usual post.

Here is a picture of the new strain of COVID-19 that the media is pumping up:

While this initially sent the markets into a panic (coupled with politicians panicking and shutting off the UK to the rest of the world), this global exercise in preying upon an utter lack of virology and immunology continues, and the true messages are coming out in the marketplace – it’s a nothing. You’d expect Carnival (CCL) or Royal Caribbean (RCL) to be a few percent down, but they’re not – down about 1% as I write this, which is market noise considering the S&P 500 is down for the day.

There are a significant number of people that actually think the news is a reliable source of information. Society has generally rewarded those that can think critically, but in this particular era, those that can are rewarded with mental health (i.e. you don’t have to live every day in fear of dying) and disproportionate gains in the financial marketplace.

So here is the story as I see it.

I am making an assumption that SARS-CoV-2 has to be the most globally tracked virus on the planet since HIV. Being a virus, it does mutate. Most people interpret the word “mutate” to be some sort of fictional character you see on fantasy movie, but a stealthy one that can’t be seen.

I’ll use HIV as an analogy for mutations. This was relevant for HIV as various anti-HIV drug cocktails started to lose their effectiveness as the surviving strains of HIV were resistant to various medications (this has more or less been eliminated with Viread and successors to the point where HIV concentrations are undetectable).

For SARS-CoV-2, just like all viruses, it has been mutating since day one. You can view a fancy map (you might want to do this on a higher powered desktop computer) of the various permutations.

Unlike the time when HIV was a real problem, today we have the advantage of rapid sequencing machines that can give a near real-time readout of viral genomes. Go look at the SARS-CoV-2 genome here.

I’m not a biologist or virologist or geneticist, but I understand enough of what I’m seeing to make a computer science analogy that what you’re looking at is assembly code for a program (virus). Even though I understand code and how assembly/machine language works from a very high level, if you give me a bunch of assembly code, I’ll have no idea what the heck it does (especially on x64 architecture!). Likewise, when looking at the various A-T, G-C base pairs, no clue.

A mutation changes the code slightly. Unlike in computer science where changing a line or two of code could break a program entirely (and indeed, the impact of such a change by a competent programmer can be predicted before hitting the “execute” button), in the biological world, changing a few lines of code has unpredictable impacts. In most cases, there is nothing seen.

Since I am using a lot of analogies in this post, it would be like measuring the performance response of your Toyota Corolla from the driver’s seat when you use 87 octane gasoline vs. the expensive 93 octane stuff.

The mechanism which SARS-CoV-2 is targeted with the Pfizer and Moderna vaccine uses a modified form of its spike protein in a manner which trains your immune system to recognize and fight it. Because the spike protein was identified early, they were able to create a vaccine in relatively quick order, early in 2020. It is only the clinical testing to prove effectiveness (and picking a proper dosage amount) that took time.

I would suspect that any mutations of the SARS-CoV-2 virus that changes the fundamental form of the spike protein to ‘evade’ immune response can also be identified fairly quickly and targeted with a vaccine. A virological cat and mouse game, so to speak.

Where else does this occur?

One example is with the seasonal flu shot vaccination.

Various strains of the flu (H1N1, H5N1, etc.) are picked based off of scientific judgement. Sometimes they pick wisely, sometimes they don’t. Unfortunately, it’s difficult to predict and measure after the fact.

It is like running an election campaign, and trying to ask yourself whether using message X helped you gain votes, lose votes or having no effect at all. You can’t “backtest” the election and run it again.

The claims of this new SARS-CoV-2 viral strain “may have increased the virus’ transmissibility by 70%” is most likely sensationalist, and a convenient political line to justify further sanctions on the populace. The underlying fact is that the virus has been mutating all the time.

Transmission is one factor, but more important is the severity the virus causes when you have it. Mutations, however, would have just as much of a chance of being less damaging than more damaging. In most cases, there is no impact clinically, similar to how HIV mutations caused AIDS.

Finally, we look at the overall clinical impact of SARS-CoV-2 infection.

British Columbia (and many other provincial/state jurisdictions) report COVID-19 statistics (search for “situation report” on this link).

In the most recent report, dated December 18, 2020, we have the following infection / ICU / death statistics to December 12, 2020:

There are differences between various regions (e.g. Alabama state will have a different profile than Washington State, in weather, demographics, etc.) but in all jurisdictions across the planet there is a very obvious trend – the number of people that SARS-CoV-2 kills is in line with the overall age morbidity. Hence in the chart above, the median age of death in British Columbia to COVID-19 is 86.

What we have been seeing over the past 9 months is healthcare dictated in a large part by political decree. Lockdowns, mandatory masks, and banning of spin and hot yoga, to name some. To name all of it would be the equivalent of the 613 decrees on the interpretation of the Jewish Torah. All of this is happening in real-time before us. Good luck being in perfect compliance!

Not surprisingly, when you get politicians making centrally planned decisions on how to deal with things, you get a very lowest common denominator response (i.e. everybody stop doing everything, except those that have curried the most favour with government). Political decisions made during this situation have likely added negative value to the whole overall situation, with relatively arbitrary and in many times contradictory instructions (e.g. the rationalizations of school openings vs. no outdoor social gatherings even of three people… oh, but it is OK to go walking together, as long as it isn’t a “social gathering” and you keep 2 meters apart!). No wonder why many people are going mentally ill – most are law-abiding citizens, but their minds can’t get around the fact that inherently the instructions are inconsistent and sometimes contradictory. Politicians behaving hypocritically adds fuel to the resentment fire.

Mainstream western societal culture has an expectation of zero risk. While this has driven safety improvements of all sorts, there is a diminishing return to the drive toward zero risk. An interesting paper to read is about risk and safety. When “one death is too many” is deemed to be the standard to live up to, you can be sure that this standard will be extremely expensive to implement.

Those jurisdictions with less exacting standards will inevitably gain huge competitive advantages of those that do not. There is obviously an optimal point of safety vs. cost, and we make this tradeoff all the time implicitly (e.g. when we get behind the wheel of a car, we are taking more of a risk than we perceive), but since COVID-19 is so front and center, there is a mass availability bias effect which overestimates the perception of risk.

There is a huge disconnection between the perception of risk and actual risk. People (and this includes governments, which are run by human beings that have the same flaws and have huge incentives to causing the fewest ripples which may compromise their position) react on perceptions, not actualities.

In the financial marketplace you can make a fortune when there is a situation where the perceived risk is high, but the actual risk is low. In fact, that is one of the main purposes of investment research – getting a feel of which risks and how much risk the market is pricing into a security versus your assessment of the actual risk of the financial instrument. When the perception of risk goes lower, the price will rise, regardless of whether the risk has changed or not.

My anticipation is that this “mutant strain” is a media construct that is designed to increase the perception of risk. The actual risk has not changed that much. From SARS-CoV-2, it remains very low.

Keep your wits and critical thinking minds on, since I do not anticipate this getting better until around April, and then there will be other fires to fight.

Availability Bias and financial markets

Seemingly half of the economy (tourism, restaurants, entertainment/sports, etc.) have been taken away with the onset of COVID-19.

So what else can people do when they are locked away in their basements? Invest in Bitcoin.

Because I mentioned Bitcoin, I will show you a chart on how much you’ve missed out:

Do you feel jealous? Resentful that others are making money while you’re not?

Just because I brought up the issue, it went into your attention and naturally you gravitate towards an availability bias – it is on your attention so it is of higher concern.

Here’s another issue.

Back on November 27th, you could have picked 9, 15, 35, 41, 42, 45, 46 on the Lotto MAX and claimed $55 million! You missed out! Feel regret? You can take solace in the fact that others did not win on the missed fortune that was available.

Or perhaps Trillium Therpeutics (TSX: TRIL) or AcuityAds (TSX: AT)?

You’re missing out!

What about Galaxy Digital (TSX: GLXY) or Electrovaya (TSX: EFL)?

Are you feeling resentful you’re not making these 500% gains in the markets?

I hope you see where I am getting at here – there are 1,340 securities on the TSX (common stock, preferred shares, warrants) that are trading. 617 of them had a positive price return. 413 of them had a price return of 10% or greater. Likewise, 416 of them had a price return of -10% or lower.

Everybody likes to talk about the grand slam home run that won the world series (here is a video for you Toronto people, albeit one away from a grand slam), but few talk about the hitter that can hit a consistent 0.300, or even worse, the person that gets called up from the minor leagues and gets 1 hit for 28 at-bats before the person he replaced got off the disabled list and said person got sent back down again.

While Bitcoin and Telsa are highly entertaining, they suck up attention in a manner that breeds resentment. Minimize the human psychology behind it by thinking about the feasibility of predicting the next Lotto MAX numbers (and all the more power to you if you can crack that algorithm!).