AAs the stock market continues to climb quietly, a handful of opponents have expressed concern that stocks are becoming too speculative due to a number of factors. One such short seller is investment manager Jim Chanos, who recently warned retail investors who are late to the party that they could be stuck when the market tide turns.
With millions of people returning from work due to pandemic restrictions and changes in the way business is conducted over the past 18 months, the unprecedented rally of pandemic lows has attracted the attention of a historic number of new ones. retail investors looking to cash in on the stock market.
While some of these investors participate in more traditional and entrenched companies, many of them have been drawn to the more volatile and risky sectors of the market, hoping for huge returns in the short term. Pushed by the fodder of the Reddit room to speculate on stocks of struggling companies like AMC and GameStop, these late entrants think they know more than the pros and are willing to put their money on the line to prove it.
“The problem with involving more people, retailers, is that it always seems to happen towards the end of each cycle. Retail was not there in 2009 at the bottom. They weren’t there in 2002, after the dot-com bubble collapsed. They were definitely there in 1999, “Chanos, president and founder of Kynikos Associates said, Tuesday during CNBC’s” Squawk Box. “” So the problem in the last few cycles, in my opinion, is that we have promoters. and insiders and people who cash in really well while the retail buys. “
Another factor that could affect the stability of the stock market is that a deluge of companies entered the public markets to raise capital this year to take advantage of high prices and the appetite of retail traders. As the IPO market was in full swing, SPACs, or Special Purpose Acquisition Companies, which are essentially corporate containers formed to bring a limited company to the public, have seen historic growth as investors join in the fun, anticipating monstrous returns.
SPACs have been a staple for years, but were generally seen as a “last resort” for private companies with limited options to go public.
Today, however, PSPCs are rapidly gaining popularity, raising around $ 26 billion in January of this year in the United States, nearly a third of the record $ 83 billion collected by 248 PSPCs overall. from 2020.
Chanos isn’t the only one suggesting that SPACS is a problem.
“PSPCs are out-of-the-box offerings that you should leave on the shelf,” a Financial Times headline warned in December. SEC Chairman Jay Clayton has expressed similar reservations. The SEC was keeping a close eye on PSPCs, he said in September, in an effort to ensure that PSPC shareholders “get the same rigorous information that you get in marketing. an initial public offering ”.
“Wall Street also has a printing house in addition to the Fed. If you get the prices high enough, you will see a lot of equity issues not only from companies that can put it to good use, but all kinds of questionable business plans and outright scams, ”he said. Chanos explained. “That’s kind of where we are now. We are raising money for all kinds of things that are unlikely to be productive in the end, but which could line the pockets of the promoters who do.
ETF investors concerned about high stock prices and looking for a future decline might consider reverse ETFs. When stocks fell in July, the ProShares short S&P 500 (SH) gained nearly 1.75% on Monday, while other major indices fell. Another highly leveraged ETF, the Direxion Daily S&P 500 Bear 3X Actions (SPXS) rose 5.58% on the same day, catalyzed by its triple leverage.
It should be remembered that these strategies can be significantly riskier than other more traditional ETF games, and investors should carefully monitor their positions on a daily basis.
Going with the trend is often the safest bet for most investors, as Chanos, a longtime Tesla maverick, lost significant funds last year when the electric car maker exploded by more than 700%, forcing him to close his short position earlier this year.
In addition to SPACS and speculative equity stocks, Chanos also noted the mad rush of cryptocurrencies and other digital coins this year.
“When we start speculating on various different cryptos, questionable coins, the sixth SPAC that a guy releases, the 48th different EV charging company going public, that’s when things start to get. risky in my opinion, ”Chanos said. “We are well in this part of the cycle. I just think the last group of retailers to come is probably going to learn their hard lesson. “
While a number of opponents have expressed concerns about stock valuation and speculation, Chanos is a well-known shortseller on Wall Street with a long history of identifying fraud. He made a fortune betting against energy trading company Enron in 2000 after discovering deceptive accounting practices.
Chanos also recently made a short bet against Chinese coffee chain Luckin, which turned out to be very successful as it was discovered that the company’s COO had fabricated sales.
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