Easy Money

Those of you who are of a certain age will no doubt remember the iconic scene in the original - I can’t believe I need to say “original” - Ghostbusters movie, where Dr. Peter Venkman, played by Bill Murray, warns the mayor of NYC that the city is headed for a disaster of “biblical proportions.”

To punctuate the point, he ends his soliloquy by listing a series of potential and horrific outcomes, concluding with, “human sacrifice, dogs and cats living together…”

We’re already at that biblical disaster point in the market, we just don’t realize it yet.

And the “cats and dogs living together” are former busboys, office workers, and third-year college students turned day traders.

Take a look at just a few of the stories written in the past week.

  • Young Adults Turn to Stock Trading in the Wake of the Market’s March MeltdownBarron’s

  • “Bored” Millennial Day Traders Boost Airline ETFs Assets 2,930%Bloomberg

  • Day Traders Have Driven Stock-Market Euphoria to an 18-year highMarkets Insider

Even the king of financial media ass clowns, Jim Cramer, has weighed in on the topic, and – uncharacteristically – gets it right.

  • “It’s not investing” – Cramer Issues a Warning to Young People Day Trading in Speculative StocksCNBC

The poster boy for this new breed of stock market gunslinger is, of course, Dave Portnoy, founder of Barstool Sports.

  • Barstool Sports Dave Portnoy Is Leading an Army of Day TradersBloomberg

It’s hard to get an accurate estimate of how Portnoy has been doing, but after a tough start in which he was down in the high six-figures, he came roaring back with the market, though not quite in pace with it.

As crazy as it seems, this deluge of newbie day traders is not unprecedented.

We’ll look at some of the stocks the Johnny-come-lately crowd has been piling into a little bit later in the “Market Review” section, but first, stick with me for a moment while I tell you a story.

I promise it will be worth it.

Throughout my financial career, I have continually witnessed examples of other people that I have known being ruined by a failure to respect risk. If you don’t take a hard look at risk, it will take you.

 – Larry Hite, Market Wizards

The way of the successful investor is normally to do nothing - not until you see money lying there, somewhere over in the corner, and all that is left for you to do is go over and pick it up

– Jim Rogers

If you weren’t there to witness the market in the ‘90s, it’s almost impossible to accurately convey a sense of how it acted.  

The best way I can explain it is to imagine that the market was a person.

A person on meth.

But a special type of meth. The good meth. The type that gets you amped up but doesn’t make you crash.

Where you just get higher and higher, until you lose all touch with reality.

And if that’s the analogy we’re sticking with here, then the Nasdaq was on the Walter White meth.

The “Blue Sky” meth.

Not unlike the dynamic we’re seeing play out in the current market, tech stocks outperformed everything in the ’90s, with the Nasdaq rising 774% over the course of the decade compared to only 314% for the Dow.

But even as amazing as those numbers are, they disguise some insane moves in the individual stocks that made up the composite. For example;

AOL went up 70,626%.

EMC went up 83,456%.

DELL went up 91,863%.

To illustrate just how sick those numbers are, if you dropped five grand into DELL on the last trading day of 1989 and took a ten-year nap, you’d have woken up with $4.5 million in your account.

Attracted by these mega returns and a market that only went up, it became commonplace for secretaries and schoolteachers to quit their jobs, fund a brokerage account with their life savings, and start day trading for a living.

A lot of crazy trades were done during those wild days, but I’m going to tell you about the craziest one I know of personally.

A friend of mine – who today is a veteran trader, but back then was a total newbie – decided that BRCM (Broadcom, now AVGO) was going to go on a run.  

It wasn’t a particularly unlikely theory as tech stocks had no problem running twenty, thirty, sixty, even one hundred points in a day.

My friend had a full-time job, but like many folks caught up in the mania, he “traded” while he was at work, and he had been stalking BRCM for a long time – which back then meant two days.

He had also done a ton of research on it – which meant he saw a segment about the company on the Nightly Business Report.

And he felt he had a good feel for the stock and an edge when trading it – which meant his buddy had told him it was “hot.”

Due diligence complete, he wasn’t about to pussyfoot around, and decided to go all-in.

He spent the morning buying the stock on every pullback until he had maxed out his day trading buying power, accumulating five-thousand shares in the process.

For perspective, a drop of just a few points - which BRCM could easily have done in seconds - would have wiped out his whole account, and more, as he was trading on margin.

This was a guy who was making $45K a year, but he had no fear.  

No cares in the world.

No reason to think that his position would go anywhere but up.  

So much so that he set a series of limit sell orders for a thousand shares each, laddered at ten-point intervals.

Then he did the craziest thing ever.  

He turned off his computer.

And went to lunch.

Just like that, with no stop orders in place.

Remember, this was back before smartphones and the ability to monitor and trade your positions while away from your desk.

He just walked away from his positions and went to lunch.

I think he had a club sandwich.

When he got back to work, he turned on his computer, logged into his brokerage account, and checked his open orders.  

He had none.  

And just like that, he’d made a cool $150K on his lunch break.

We’re obviously not at the same extremes now as we were then - that type of market environment will likely never be seen again.

But we’re seeing some eerily similar behavior as those with the least market knowledge and experience pile into penny stocks, story stocks, and of course, tech stocks, with dreams of making millions.

So much so that one of the guys who was there in the ‘90s – and made a killing – Mark Cuban, is sounding a warning, saying the current boom in day trading reminds him of the dot-com bubble.

“This certainly feels just like it,” said Cuban in a recent interview. “Novice traders, some of whom are making leveraged bets on risky stocks, are doing the same thing they did in the late ’90s.

Like him or not – I don’t particularly – Cuban made one of the greatest all-time trades in the ’90s, one with the exact opposite risk profile of my friend’s.

In 1998, Yahoo bought Cuban’s company, Broadcast.com, for $5.7 billion in stock. He received 14.6 million shares, which were trading at $95.00, valuing his cut at $1.4 billion.

But there was a rub.

Part of the deal required a lockup period – one year - in which Cuban was barred from selling any of his shares.

In addition, tax law restricted him from an outright hedge of his position, for example, by buying Yahoo puts, during the lock-up.

But Cuban did his due diligence.

The tax rules allowed him to trade any index that contained less than 5% of Yahoo as one of its component stocks. So he found one comprised of <5% Yahoo, and the rest, all tech stocks – which would act almost exactly like Yahoo.

And he shorted the hell out of it, the idea being that if his shares tanked before the lock-up ended, he’d recoup a like amount on the index short.

However, the market held steady, the lock-up ended, and Cuban then proceeded to apply the pièce de résistance to this trade.

With the help of Goldman Sachs, he created an option collar on his position, shorting (selling) 146,000 Yahoo calls with a strike price of $205 and buying 146,000 puts with a strike price of $85 – all with a three-year expiration.

This meant his downside loss was capped at $85 a share, but his upside was $205 – giving his position a potential value of more than $3 billion.

And the beauty of this hedge was that it cost him nothing to construct - it was free - as the proceeds from the sale of the calls paid for the puts.

After selling a majority stake in Barstool to Penn National Gaming in January – for equity and cash – Portnoy was worth about $100 million based upon the stock’s price of around $26.

After the first rebound from the coronavirus crash, which took Penn’s stock as low as $3.82, Portnoy said his net worth had been, “Cut in half, maybe more now,” which means it was probably cut by 75% or more at the depths of the drop.

Obviously, hedging is not in his nature, but as Penn has bounced back to pre-COVID levels, it looks like he dodged a bullet – at least for now.

At first, it looked like Cuban might have made a mistake with his hedge, as Yahoo hit an all-time high of $237 in January of 2000 – far above his $205 call options.

But by 2002, when the options expired, Yahoo had hit single digits and Cuban would have lost more than 85% of his money.

Fun Fact: Jeff Bezos lost 95% of his wealth when the bubble burst, though things seem to have worked out okay for him.

Cuban’s mindset was all about respecting downside risk, despite the intensely risk-off nature of the market at the time.

It was about the long term. Being in the game not just today, but tomorrow, next year, and forever.

Portnoy’s, eh, not so much.

Sure, he’s playing the part, using trading to continue to build out his brand while sports are on hiatus, but in the process, he’s playing pied piper, leading a whole new generation of lambs to the market slaughter.

By midweek this week, Portnoy was up roughly $750,000, or 25%, on the $3 million he started with, during a period when the S&P 500 was up 43%.

Then came Thursday.

He’s now back to break even.

Which at some point, is going to look like a win to a lot of people.

Okay, let’s get to the charts…

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Thanks for reading this week’s edition of The Lund Loop.

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Talk to you soon.


P.S. It should go without saying - but I’ll say it anyway - all opinions expressed in The Lund Loop are my own personal opinions and don’t reflect the views of my employer, any associated entities, or other organizations I’m associated with.

Nothing written, expressed, or implied here should be looked at as investment advice or an admonition to buy, sell, or trade any security or financial instrument. As always, do your own diligence.