Warren Buffett last week called the stock market a church with a casino attached to it.
AI didn’t know how to interpret it, but he means investing is a hieratic pursuit. A commitment. Somber and serious. A casino is like a brothel – about self-gratification.
Look, I don’t love everything Warrant Buffett says. But he’s a serious person. As he said, paraphrasing, what’s the point of a one-day option? It’s not investing. It’s not even speculating. It’s purely gambling.
Yet every day the SEC stuffs more slots into the machine. This week alone, five two-times-leveraged ETFs began trading on more stocks (BMNG, BAIG, CRCG, DUOG, FIGG). They’ll draw money away from underlying equities BMNR, BBAI, CRWV, DUOL and FIG.
These aptly named Leverage Shares ETFs don’t own stocks per se. They pledge “collateral” to produce a 200% gain/loss on the underlying stocks. They use swaps as “economically similar substitutes.” There are hundreds of leveraged ETFs now.
And INTC is now a meme stock.
From Jan 2-Mar 30, INTC rose 4.5%. Since then, it’s up 146%.
It’s got characteristics like CAR, though not to that extreme. I’m not saying INTC will plunge from $843 to $160 like Avis has. INTC is booming on chip demand.
But.
We should know how it’s possible for stocks that are more than fully owned by somebodies to soar or plunge when those holders don’t buy or sell.
Remember May 6, 2010? Happened then too.
Short volume, the data set derived from the Alternative Uptick Rule, is the Trojan Horse of today’s stock market. From Apr 23 to May 4, short volume jumped more than 45% in INTC, equaling its gain (until yesterday). The supply of stock expanded to fit demand.
Stocks shouldn’t do that. But if not for that feature, stocks might routinely carom into programmed volatility halts that would interrupt automated rhythm (the intent of the rules but they don’t work).
As I’ve written so many times before, the SEC permits Demand to exceed Supply by stuffing the stock market full of options and ETFs that function like bellows, expanding and contracting to accommodate flows.
And the SEC permits market-makers to short stock to fill trades. (NOTE: Carefully read these Reg SHO rules, and you’ll see that this is not “naked shorting” but fulfillment of obligations.)
Why? The essential imprimatur of the stock market is that it not fail. That is, some mom or pop in Ottumwa, IA using a Schwab account better fill a trade.
Well. If Demand and Supply fluctuate to stabilize prices, is the price correct? Certainly you can’t trust a multiple of earnings to tell you anything. The stock market then ceases to be a church for the practitioners of the doctrine of investing and becomes instead a probabilistic enterprise. Like AI.
AI is by its pre-trained intent imprecise. It’s meant to transform inputs and generate outcomes. We humans are also imprecise, given to confirmation bias, subjectivity, context, ethics, morality, choice. And we built AI.
Now, why should you care that INTC is a meme stock?
Because it’s the 25th largest stock in the US market! It’s over $500 billion of market cap now, passing Costco (COST), neck-and-neck with Oracle (ORCL) like Golden Tempo and Renegade at the 152nd run for the roses in Louisville, KY.
It’s about to nip ASM Lithography (ASML) and maybe even Johnson & Johnson (JNJ), one of two triple-A rated firms left in the S&P 500 (along with MSFT).
I’m not saying it’s undeserved. Who knows? Whatever the fundamental drivers, the reason INTC is #25 now (it was for a period out of the 130 largest stocks) is structural.
Market Structure.
Is AMD a meme stock? Nope. It had falling Supply, 10.0 Demand, ahead of earnings after the close yesterday. Classic, structurally correct DIVERGENCE.
But when a $500 billion stock can be a meme stock, any stock can.
We didn’t know until May 6, 2010, but we had a Trojan Horse in the stock market then called “stub quotes.” Remember those? Brokers who didn’t really want to buy stock from you would put in an offer to sell a stock at $100,000, bid to buy at $0.01.
They were called stub quotes because they were just book entries. All the trading occurred between them. There was no intent to sell for $100,000 or buy at a penny.
It would never happen.
Oh, except it did.
During the flash crash of May 6, 2010, stocks including Accenture traded to a penny.
How could that happen? There were no “real” quotes between the market price and a penny. They were all machines. And they vanished.
Today, you can’t do that. Doesn’t mean all the quotes can’t vanish. But it’s far less likely.
So what’s the problem with fake stock – Short Volume? It creates the illusion of liquidity just as stub quotes did.
I write about these things because we’ve become blind to the limitations of physics. And we are exceeding physics in the stock market. We’ve had fantastic success helping companies navigate this market (ask us about the 20 things we’ll change for you). You can defy physics, beat the machines. But not until you know what’s going on.
