🎙️ Trading Frenzies

[5 minutes to read] Plus: Hedge funds that changed the game

By Matthew Gutierrez and Shawn O’Malley

✌️ More evidence that the economy looks A-OK: The pace of corporate bankruptcy filings is falling.

After 2023, when we saw the highest number of bankruptcies since 2010, S&P Global Market Intelligence recorded just 36 bankruptcy filings in January, mostly in capital-inventive industries.

Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the three biggest stories in markets:

  • Why Nasdaq criticism is growing

  • The hedge funds that changed the game

  • Intuitive Machines’ stock surges after moon landing

All this, and more, in just 5 minutes to read.

POP QUIZ

Europe’s equivalent of the Magnificent 7 is known as the “GRANOLAS” with 11 leading European companies dominating its stock markets. What percentage of the STOXX 600 index’s market capitalization do the GRANOLAS comprise? (The answer is at the bottom of this newsletter!)

Chart of the Day

In The News

📊 As Trading Frenzies Grip Penny Stocks, Nasdaq Criticism Grows

Have you ever heard of Bit Brother? We hadn’t, but it’s symbolic of a mockery of the stock market. 

Once focused on tea products, it moved to cryptocurrency in 2021. Yet its shares are down over 99% since early 2020 after three reverse stock splits, consolidating the number of shares into fewer, proportionally more valuable ones. (They also do something else: artificially boost the price of a share.)

  • Then Bit Brother trading volume surged to billions of shares daily. Volume was 3.5 billion shares, or 28% of shares that moved in the stock market on Dec. 27. The stock was trading for about one penny per share.

  • Then, last month, Bit Brother did a 1,000-for-1 reverse split, which helped the company stay in the Nasdaq because its stock was back above $1

Sounds problematic, right? The Wall Street Journal reports that “it has become increasingly common for stocks with a low share price to experience huge bursts of trading volume. Fueling these frenzies are individual investors who use zero-commission trading tools to pile into stocks that get buzz on social media.”

Mockery: This system might be broken and, as WSJ reports, people blame Nasdaq, the listing exchange for most small public companies. Nasdaq requires companies to be delisted if their shares dip below $1 for some time (up to a year). So, many companies simply do a reverse split to stay listed. 

  • “These sub-dollar, high-volume stocks make a mockery of our stock market,” said one brokerage firm partner. “The primary listing market, in most cases Nasdaq, needs to tighten up their standards and reduce the amount of time needed for a delisting.”

  • Nasdaq makes money by listing companies. But it also delists companies when they don’t play by the rules, creating what many label a conflict of interest. 

From The Wall Street Journal

Why it matters:

When stocks trade so cheaply — a few pennies per share — day traders can make big bets, driving up volume, which put them on leaderboards of sites for traders such as Stocktwits. Then other traders pile in. 

  • The number of sub-$1 stocks has jumped to 493, most on Nasdaq. In early 2021, fewer than 12 traded below $1 a share. “Historically, these companies would have been delisted and gone to the OTC (over-the-counter) market,” one managing director noted.

  • Plus, reverse splits are getting very common: There were 495 reverse splits of exchange-listed stocks last year, up from 288 in 2022, and the most in the 20 years since S&P Global Market Intelligence has been tracking the data. 

Together With Simon & Schuster

The Holy Grail of Investing

Tony Robbins returns with the final book in his financial freedom trilogy by unveiling the power of alternative investments.

Robbins, and renowned investor Christopher Zook, take you on a journey to interview a dozen of the world’s most successful investors in private equity, private credit, private real estate, and venture capital.

They share their favorite strategies and insights in this practical guidebook. 

💭 The Holy Grail of Investing is available wherever books are sold.

💰 The Hedge Funds That Changed the Game

Citadel’s Ken Griffin

The big three hedge-fund titans, Steve Cohen, Izzy Englander, and Ken Griffin, don’t post 20% annual returns, but who needs to?

They’re making a lot of money on a hot new strategy, and that’s really all that matters to them. 

What strategy? Well, the days of a singular vision from one brilliant manager defining top hedge funds are dead, replaced by multimanager firms, which split up money across hundreds of specialized investment teams to generate returns uncorrelated to the broader market. 

Yet, multimanager firms aren’t, by definition, hitting home runs — Cohen’s Point72, Englander’s Millennium Management, and Griffin’s Citadel posted returns of about 10% last year. (The S&P 500 posted a 26% return while a broad hedge-fund index returned 7.5% last year.)

  • The top three’s competition really struggled last year, with many big hedge funds posting returns around 3% — less than what many retail investors earned on their cash.

Institutional gains: Still, large sums have flowed into multimanager firms, ballooning from $185 billion to $385 billion in the past five years, despite relatively quiet asset growth in the hedge-fund industry.

  • Big institutional investors like pensions and endowments prefer multimanager firms because they’re more like an institution than a trading shop, and the uncorrelated returns these funds offer are critical to a diversified portfolio. 

From The Wall Street Journal

Why it matters:

The top three firms aren’t taking new capital, but other firms are trying to copy their approach. Analysts say that much of the big three’s success boils down to skilled portfolio managers, and seasoned analysts in commodities trading.

Short and long: The hedge fund industry took off in the 1980s, thanks to star traders who made big bets, often “hedging” their portfolios to be “market neutral,” meaning they could profit regardless of whether stocks generally go up or down by betting on stocks they thought were undervalued and betting against overvalued ones (this is a vast oversimplification).

  • Famously, hedge fund legends inspired the industry with bold bets, like Paul Tudor Jones, who made $100 million on Black Friday in 1987, George Soros who earned $1 billion in 1992 betting against the British pound, and John Paulson who made $15 billion betting against the U.S. housing market in the 2000s.

  • As multimanager firms consume the hedge fund industry, we may see fewer and fewer noteworthy individual mavericks of finance.

More Headlines

📈 Carvana shares surge again after posting first-ever annual profit

📊 Reddit files to list IPO on NYSE under the ticker RDDT

📉 Private equity payouts at major firms plummet 49%

💉Moderna rises on Q4 results, positive guidance for 2024

⬆️ Japan’s stock market sets record high

👀 Online dump of Chinese hacking documents reveals pervasive Chinese surveillance effort globally

 🌔 Intuitive Machines’ Stock Surges After Moon Landing

While Nvidia’s stock has seemingly defied gravity lately, Intuitive Machines has actually done it, becoming the first private company to land on the moon on Thursday.

Intuitive Machines’ stock correspondingly jumped 36% — up over 300% in the past month.

  • Its moon lander became the first U.S. spacecraft to soft-land on the moon in over 50 years, shining a huge spotlight on the company and underpinning its stock price’s ascension.

It’s a rare SPAC success story — the company went public via the controversial special purpose acquisition company (SPAC) structure last year. While not entirely a success (its share price is still a fraction of its frenzied IPO peak), the successful moon landing by a corporation is an iconic moment in history and space travel.

  • Most other volatile SPAC stocks have failed to accomplish their lofty goals despite incredible hype across 2020 and 2021.

  • Still, in its first nine months as a public company, Intuitive Machines generated $49 million in revenue but reported over $50 million in operating losses.

Why it matters:

While space has largely been the domain of governmental organizations for decades, private firms like SpaceX and Intuitive Machines are flipping the paradigm upside down, which is much appreciated by NASA, whose budget is one-tenth the size of its peak during the Apollo program.

Instead, NASA can increasingly leverage the help of commercial enterprises in its missions, saving costs for itself.

  • As NASA Administrator Bill Nelson said, “Today, for the first time in the history of humanity, a commercial company — an American company — launched and led the voyage up there (to the moon.)”

But NASA hasn’t outsourced everything. It hopes to return American astronauts to the moon’s surface as early as September 2026.

Quick Poll

Would you ever give your money to a big hedge fund like Citadel?

Login or Subscribe to participate in polls.

Yesterday, we asked: What will the Fed do with interest rates this year?

—For team “leave unchanged,” a reader noted, “Unless a new problem emerges such as defaults, there is no reason to cut interest rates. Historically interest rates have been higher than where we are at today.” Another reader simply noted, “Inflation is too high.”

—As for cut once, “Inflation continues thus not many cuts until it is shown to be decreasing consistently."

—On team cut twice, “Banks are going to start failing if they don’t cut.”

TRIVIA ANSWER

The GRANOLAS, including GSK, Roche, ASML, Nestle, Novartis, Novo Nordisk, L’Oreal, LVMH, AstraZeneca, SAP, and Sanofi, account for roughly 25% of the entire STOXX 600 index. In the U.S., the Magnificent 7 make up about a third of the S&P 500.

See you next time!

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