I got my first job when I was fourteen. It was at The Mountain Air in San Luis Obispo, the single best ski shop between San Francisco and LA. I started out just tuning skis in the back, but I eventually got to run the whole rental shop.
When I was a freshman in high school, working in the back was no big deal, but by the time I was seventeen, I really wanted to work the counter of the rental shop, signing up new renters and taking in equipment for repair. Why? Because San Luis is a college town, plain and simple.
That meant that all of the other ski techs in the back were Cal Poly students, and they all really liked Moosehead beer. (Why Moosehead? I have no idea.) I was able to become very popular with them because I would start charging a rush charge on all repairs pretty early in the week, and the rush charge was always a twelve pack of Moosehead.
Providing a decade’s worth of Moosehead every winter to the guys in back (and to myself) was a great perk, but there were other reasons to work out front. For example, many, many beautiful college-aged women came into The Mountain Air to rent ski equipment, particularly before spring break. I was always very shy in high school, but I transformed into Mr. College Ski Guy at work and somehow got dozens of older girls to go out with me.
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I still like working out front; that part hasn’t changed much throughout my life. And I was a great ski tech-- you could pretty much break your ski in half, and I could still fix it. Same with my work now-- I am very good at getting under your portfolio’s hood and making it run better, but the part of my work that I really enjoy is interfacing with clients, working with them in a way that uplifts them.
That being said, there are a lot of things going on in the back of the shop lately that give me pause for concern. All frothy markets follow the same pattern: They're impossible to resist, they last a lot longer than anyone expects, and they eventually burst. Signs of froth are everywhere.
Shares in an over-the-counter traded U.S. healthcare company Signal Advance soared to $70 from 70 cents in under a week after Signal was mistaken for an unlisted texting app also called Signal that Tesla founder Elon Musk had tweeted about, saying “use Signal.”
Special purpose acquisition companies, or SPACs, are following the typical IPO cycle, where the best deals come first, followed by a growing wave of lesser and lesser deals until the market eventually implodes. It should not be forgotten that over 330 companies went public in the dot-com era of 1999 through 2000, and only a handful survived.
UBS recently reported that retail investors’ participation in U.S. equity order flows increased to nearly 20% in 2020 from just 15% in 2019, yet orders from long-only funds fell to 6.4% last year from 9.7% in 2019. Not only that, but there are signs that those retail players are moving to trade derivatives, especially single-stock options (derivatives that allow holders to buy shares at pre-determined prices). According to the Options Clearing Corporation, volumes of such option contracts surged last month to 60.1 million-- that’s almost triple their January 2020 levels.
Last week, the S&P's Oscillator reached 5, an overbought level that historically is an indicator of nearing a market top. Additionally, the NYSE bullish percent index went over 77; we normally expect reversals form a level above 70. It’s all adding up.
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So, I don’t see a lot here in the back of the shop that makes me want to stay here.
I mean, don’t get me wrong. I’d love to start up an electric vehicle company and get it to a billion dollar valuation before ever selling even a few thousand cars. I’d love to get my hands on every single IPO just so that I can watch retail investors give me a 50% premium above the offering price on Day 1. I’d love to introduce the next great fintech “revolution” with yet another take on free services that aren’t really free.
But we have maybe twenty systematic strategies all solving for the same signals, designed by the same PhD’s from the same schools (i.e. MIT and Cal Tech), all chasing the same 5,000 stocks, just in different proportions. It’s the same capital, chasing the same assets and strategies, with the same mindset. And the longer it goes on, the more crowded the room gets and the more narrow the exit becomes.
Of course, it has been an awesome party, and I can understand why people are still clamoring to get in. Alt-coins, SPAC’s, cannabis-- heck, we’re even inventing new “assets” just for the purpose of digitally securitizing them and reselling them to the new guy who just showed up. This party is raging.
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Normally, when leaving this kind of party with one of the girls I met at The Mountain Air, it would be the sort of exit that resulted in skinny dipping in the pool at the Madonna Inn or belly shots on a bar in Tijuana, but I’m older now. That was how I left the party in 1999. This time, though, I’m going to slip quietly out the door and just try to make it home safely to bed.
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