Weekly Market Comment: Friday, February 5th

Head in the clouds

Despite White House pressures to spend more money on stimulus, the U.S. added an estimated 49,000 jobs in January, sending the unemployment rate down to 6.3%. It’s still 10 million jobs short of the pre-Covid high water mark.

“The recovery is only stumbling along at this point”, said a senior Wall Street economist. Hey, there’s a global pandemic still going on. “Stumbling along” is relatively positive in this context.

Also, can’t help but feel optimistic when we hear of a company like LVMH order Tiffany workers back to the office two days a week. A sign of more confidence.

Contrast this with Canada’s economy where job losses took a turn for the worse at -213,000 last month and the unemployment rate popped to 9.4% from 8.8% in December. Lockdowns are economically painful.

Then we read how Air Canada, which twice has filed for bankruptcy in its history, says it can’t refund money for cancelled flights unless Ottawa gives them bailout money. It reminds us of the risk of moral hazard that can accompany government bailouts. While hugely useful and necessary for many Canadians and businesses hard hit, Canada probably can’t afford to keep compensating Air Canada. Certainly not for refusing to return customer funds for services not rendered.

Not all Canadian governments are inept

Alberta has enchanted one of our Covid-inflicted Legacy investments, mCloud Technologies, to move its corporate headquarters from B.C.

“While Rose Country” (Alberta’s nickname on license plates) knows it needs to repurpose its hydrocarbon-heavy economy to be as energy efficient and ESG as possible and mCloud has the potential to add hundreds of thousands of new connected devices to its AssetCare energy monitoring service. While we don’t know details, we are certain that mCloud’s management didn’t make the decision to move (including his own household) on the basis of rosy promises. Our assumption is that significant specifics were meted out such as the Premier’s office will direct business to mCloud and help them grow. The stock has recovered to over $3 per share, as the market is clearly sharing our enthusiasm for this deal.

‘Dothras check’ (Dothraki for “Be cool and ride well/Goodbye”)

This week, the Dothraki-like horde of WallStreetBets traders reading Reddit banned together to buy up the silver ETF SLV. It rose by as much as 17%, with scores of silver stocks rising in tandem.

That was Monday. By Tuesday, the positions fell just as quickly as they rose. Many posted on Reddit that they were not actually recommending SLV and that it was not an official WallStreetBets recommendation (if there existed such a thing).

This episode illustrates a few things. One is that WallStreetBets is not a homogeneous community, even though if they can instill unity they are more powerful. Also, many of them presumably had to sell something (GameStop, most likely) to free up cash to buy SLV. To afford a purchase in SLV would come at the negative detriment of GME stock. The fact that GME is down 80% this week is evidence of this dynamic. While some WallStreetBet investors made a lot of money, many of them are hurting, having chased the bubble too late (and yes, it was a bubble – of epic, rare proportions).

That’s how Ponzi schemes work: making or losing money is determined by your timing. Buy early and you do well; buy late and you will be left holding the bag with no greater fool to take your place.

As the financial casualties mount among some members of this community, so too will their unity and confidence splinter and dilute.

The upshot is that a new generation of young investors has just experienced what every good investor must: the real-time witnessing of the formation and bursting of a financial bubble. Learning to recognize these age-old psychologically driven events is worth its weight in gold. We regard ourselves as life-long students of bubbles and – as we wrote last week that “GameStop shares will suffer a similar fate” as Krispy Kreme and Tilray – we’re getting better at spotting these dangerous formations in real-time, and not just after the fact when it becomes obvious to everyone but too late.

By the way, Citron Research, which famously specializes in short-selling and has published splashy but smart research to support their trades, declared it would no longer share short-sell research with the public. Actually, its charismatic and always entertaining founder made it sound like they were done with short selling altogether, which is totally unrealistic and not to be believed for one second. Citron will continue to short companies they identify as overvalued but they’ll keep their cards close to their chest, lest the Redditers were to organize a fundamentals-be-damned posse to and string up another painful short-squeeze.

Instead, Citron said it will focus on the positive and share only long ideas. And why not? It’s easier to make money from the long side, just as it is easier to navigate life as an optimist.

Noteworthy links:

Musing Beyond The Markets

From the book “The Biggest Bluff: How I learned to Pay Attention, Master Myself and Win”, written by the brilliant social psychologist New Yorker writer and amateur-turned-pro poker player Maria Konnikova:

Imagine two players at a table. The cards are dealt. Each player must look at her cards and decide whether or not the cards on their own are good enough to bet. If she wishes to play, she must at minimum “call” the big blind. That is, place as much into the pot as the highest bet that already exists. She may also choose to fold or raise. But who knows what factors she’s using to base her decision? Maybe she has a premium hand. Maybe she has a mediocre hand but thinks she can outplay her opponent so chooses to engage anyway. Maybe she’s observed that the other player is conservative because she doesn’t play many hands, and she’s taking advantage of that image by opening up with worse cards than normal. Or maybe she’s just bored out of her mind.

Her reasoning, like her cards, is known only to her.

Each decision throws off signals and a good player must learn to read them. It’s a constant back-and-forth interpretive dance. How do I react to you? How do you react to me? More often than not, it’s not the best hand that wins; it’s the best player. Betting on uncertainty is one of the best ways of understanding it. And it is one of the best ways of conquering the pitfalls of our decision making processes in just about any endeavor.

It doesn’t take a gambler to understand why. In his “Critique of Pure Reason,” the German philosopher Emanual Kant proposes betting as an antidote to one of the great ills of society: false confidence and the ignorance of the probabilistic nature of the world. From a desire to see black and white, where we should rightly see grey. From a misplaced faith in certainty, the fact that to our minds 99% - even 90% - basically means 100%. Even though it doesn’t. Not really.

Kant offers the example of a doctor asked to make a diagnosis. The doctor reaches a verdict on the patient’s malady to the best of his knowledge. But that conclusion isn’t necessarily correct. It’s just the best he can do given the information he has and his experience in this particular area.

But will he tell the patient he’s unsure? Maybe. But more likely, if his certainty reaches a specific threshold - a different one for different doctors to be sure – he will just state his diagnosis as fact.

But what if he had to bet on it?

For an excellent Freakonomics episode featuring the author, click here.

Word of the Week

direwolf (n.) - A giant wolf in Game of Thrones that is actually named after a real breed of wolves that have been extinct for over 10,000 years. They are also the sigil for the Stark family and all six Stark children had their own direwolf at the start of the series.