Carson Block thinks investment sentiment is reaching ridiculous levels – and that could ultimately break a market he sees as vulnerable.
San Francisco-based founder Muddy Waters, who made a name for himself by shorting Chinese stocks, told MarketWatch in a Monday afternoon interview that the metabolism between a select group of individual investors using Reddit chat forums and a group of professional investors is causing problems. in a market underpinned by affordable Federal Reserve policies and government support to contain the economic damage caused by the COVID-19 pandemic.
Asked whether his view that markets are ridiculous is centered on the buzz around the retail industry, leading to massive gains in stocks of companies like GameStop Corp. GME has led,
AMC Entertainment Holdings AMC,
Koss Corp. KOSS,
and BlackBerry Ltd. BB,
Block had a simple answer: “Absolutely.”
“There are no fundamental factors to justify … a stock that is up 15x from a few weeks ago,” Block said, referring to individual investors congregating on sites like Reddit message boards who are having corporate stock prices in trouble. stimulated. crippling short-selling hedge funds that had bet against those companies.
Block, a prominent short-seller, said last week it was like some of the so-called meme stocks, defended by groups of individual investors, were taking away liquidity in the broader market.
“We’ve seen this breakdown of hedge funds and if you keep seeing that … things can break every now and then.”
The rise of highly short-short stocks targeted by the army of individual investors has already been blamed for problems with a number of funds.
Melvin Capital Management, one of the hedge funds at the center of the game over GameStop, lost 53% on its investments in January, while Maplelane Capital ended January with a loss of about 45%, The Wall Street Journal wrote, referring to people who are familiar with the business.
In addition, famed short-seller Andrew Left, founder of Citron Research, said last Friday that he was changing his strategy and would no longer publish short-selling reports.
Block said Muddy Waters has turned more to long-term investing in recent years, but said he still sees his brand of short selling and points to felony as beneficial.
“Ultimately I believe that the research we produce is useful. It has resulted in eight deletions … and one [Justice Department] case against rate evasion, ”he said.
Ultimately, he said that Muddy Waters would continue its work and that the market would determine whether it becomes uneconomic.
In addition to investing, Carson launched Zer0es.TV last year, with the intent of providing in-depth discussions on short selling and investing. In a recent video, he said that Redditors’ fears may also reflect pent-up frustration over COVID incarceration and a desire to disrupt established structures as the divide between the rich and the poor widens.
He said the new landscape of social media-powered commerce could make professionals more agile.
“We may need to be more creative and smarter in the way we structure trades and manage risk,” he added, suggesting that professional investors may need to structure more complex trades to avoid being blown out of some positions.
Block said he is not betting markets will collapse anytime soon, but cautioned that we are at a point in the cycle where everything could go wrong.
“We’re not in a tightening cycle, but there are a lot of things that can go wrong and have a knock-on effect on the market, and a market that is strongly tied to flows,” Block said.
“I don’t think it will end anytime soon,” he said.
On Monday, the market regained some of the ground lost in Friday’s beating, with the Dow Jones Industrial Average DJIA,
the S&P 500 index SPX,
and the Nasdaq Composite Index COMP,
finish firmly higher.
Block rose to prominence in 2011 after exposing fraudulent practices at Chinese forestry company Sino-Forest Corp., which went bankrupt the following year.
Block said on his Zer0es.TV webcast that he has little doubt about where this ends for individual investors, describing the popular trading platform Robinhood as selling their customers to market makers, who in turn pay them for customer information, also known as payment for order flows.
“If you look at Robinhood, that’s the ultimate manifestation of the Silicon Valley model, right? You know, we are the products that are sold when you use Twitter, Gmail, etc., ”he said.
“I have no doubt where this ends, right … for the retail industry – I mean, in tears.”