Robinhood Market Made Bursting Bubbles Wall Street’s Obsession

Bloomberg
Nasdaq Market Site in the Times Square area of New York, U.S. Bloomberg | James Alexander Michie

The Nasdaq Market Site in the Times Square area of New York, U.S. Photographer: Demetrius Freeman/Bloomberg

Tuesday afternoon, a smallish Chinese real-estate firm, ticker symbol DUO, went crazy on the Nasdaq. Out of the blue, in a vacuum of news, depositary receipts of the Shenzhen-based outfit shot up 13-fold, taking its market capitalization to $4 billion.

Nobody had a definitive reason why. But people could guess. Its name: Fangdd Network Group Ltd., sounds like the acronym for that amalgamation of American megacaps, the “Faangs,” comprising Facebook Inc. and others. Those shares were rallying, and it was easy to believe people had gotten it into their heads that Fangdd could — somehow — move along with them.

A lot of the stock market has this tinge of late. Get people to believe that other people will believe that a stock will go up, and fear-of-missing-out will take over. More than 15,000 retail clients of the Robinhood investing app added DUO to their account last week, a phalanx of day traders marching to war.

Newly minted equity experts in chat rooms, enticed by ever-falling fees, empower themselves and push shares of companies with not much profit into the stratosphere — sound familiar? Comparisons between today and the dot-com bubble write themselves, in the era of the Robinhood market. Whether this episode ends like that one has become an obsession of Wall Street.

“Retail participation is at levels we haven’t seen in 20 years,” said Benn Eifert, managing partner of QVR Advisors. “In terms of the most dramatic rises in speculative behavior that’s generating many of the strangest outcomes in markets right now, it’s Robinhood-centric.”

Everyone knows the dot-com bubble ended badly — in a two-year bear market that cut the value of the U.S. equity market in half. Then again, it took years for warnings to come true that people would pay a price for blind speculation. The Nasdaq 100 doubled in 1999 — fortunes were made for people who sold at the top. How many will pull that off this time is a question that haunts this and every speculative episode.

Just because small-time investors are a presence doesn’t mean they’re wrong. To date — even with Thursday’s walloping — the lion’s share of their trades have been money makers. Stocks surging now are the ones that fell the most in February and March — evidence to some observers of a healthy buy-low bent. And while expected earnings may not justify the moves, buying equities when the Federal Reserve has all but guaranteed rock-bottom interest rates through 2022 may be a perfectly logical decision.

Asked if the Fed was inflating markets on Wednesday, Chairman Jerome Powell said the central bank’s focus is the economy, the labor market and inflation, rather than the movement of asset prices in any direction.

“The Fed doesn’t believe, and shouldn’t believe, that it can forecast the stock market, and therefore recognize a bubble in real time,” said Princeton University economist Alan Blinder, a former Fed vice chairman, in a Bloomberg Television interview. “They’re pretty easy to recognize after the fact, after they burst. But, in real time, in a predictive way, pretty much impossible.”

Also: it’s not like people never get punished for hitching on to rallying stocks. A day after jumping 395%, Fangdd Network gave about four-fifths of the gain back. And the whole market gave up $2 trillion of value when the S&P 500 lurched almost 6% a day later.

Still, by conventional measures, valuations are stretched, even after Thursday’s drop. The benchmark’s 12-month forward price-earnings ratio at 21.6 still ranks among the highest in two decades. Versus company sales, the Nasdaq Composite Index is trading around the most expensive levels since at least 2001. Then again, if the dot-com crash is the standard, prices would have to go significantly higher to match that episode.

How crazy did it get this week? This is a market where a company with forecasts for almost no revenue jumped above a $30 billion market-cap partly because it used inventor Nikola Tesla’s first name as its own. Small Chinese firms that trade in the U.S. surged on no news, with percentage gains in the triple digits. Bankruptcy stocks are the flavor of the day, shares doubling left and right, with Hertz Global Holdings Inc. the poster child.

Over three days, just weeks after filing for bankruptcy, Hertz surged 577%. The next session, the struggling car-rental company fell 39% in the first 15 minutes of trading, only to erase those gains and trade positive at one point in the day. By the end of the week, Hertz got approval from a bankruptcy judge to let it sell up to $1 billion of new shares that are potentially worthless. The stock jumped 37% Friday.

Trading volume in Hertz shares has surged in June — 63 times what was usual in 2019. The number of Robinhood users holding the stock has swelled to 160,000 — that’s roughly 100,000 more than just a month ago, according to website Robintrack, which uses the brokerage’s data but isn’t affiliated with it. Near 140,000 Robinhood users now hold Nikola Corp, more than do Netflix Inc.

“It is definitely a sign of a bubble,” said Matt Maley, chief market strategist for Miller Tabak. “That’s another sign of froth — people deciding, ‘I just need to bet, therefore I’ll bet on anything.’ And even though they don’t know anything about the stock market, they’re betting on it now. You’ve also seen that pick up in the options market, which is obviously a lot more speculative than the regular market.”

Retail money is taking a bigger share of volume. Small-account trades, those with $2,000 or less in investment, have increased to 2.3% of the total, up from 1.5% at the beginning of the year, data compiled by Goldman Sachs show. A similar trend showed up in the options market, with one-contract transactions surging to 13% from roughly 9%. They’re relentlessly bullish. The smallest of traders bought more than 14 million speculative call options in the week ended June 5, according to Sundial Capital Research. That’s a record, by far.

Traders are taking to chatrooms to hype stocks and brag about their winnings, reminiscent of the late 20th century. Users of a Reddit forum called r/wallstreetbets, or r/WSB for short, have shown an astonishing capacity to move prices. Back in February, companies including Virgin Galactic Holdings Inc. and Plug Power Inc. went berserk after being mentioned on the board.

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Source: Sarah Ponczek and Vildana Hajric | Bloomberg

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