The stock market is supposedly a reflection of the world it inhabits, the distillation of the considered wisdom of the crowd, expressed through buying and selling companies’ shares.
To invoke a famous metaphor reflective of a less enlightened time, the economist John Maynard Keynes likened the market to a beauty contest in which competitors try to pick the prettiest faces from a group of photographs. The winner is the person who selects the most popular choice, who may not be the one he or she finds most attractive. Similarly, picking winners in the stock market in the short term can depend on guessing which ticker symbol will catch the crowd’s fancy.
Typically, that will mean jumping on the new-new thing, such as technology or cryptocurrencies. Or, sometimes, investing to participate in societal trends, which seems to be the case in the surge in micro-cap stocks of companies owned by African-Americans or that serve black communities.
This has come amid a striking change in public opinion on race relations in America. Greg Valliere, chief U.S. strategist for AGF Investments, quotes veteran Republican pollster Frank Luntz as saying, “In my 35 years of polling, I’ve never seen opinion shift this fast or deeply. We are a different country today than just 30 days ago.”
While Corporate America is taking steps in reaction to the recent protests, including cosmetic ones—like removing Aunt Jemima pancake mix or Uncle Ben’s rice from supermarket shelves—shares of some black-owned companies are being frantically bid up.
Once again, it appears the action is being driven by day traders, many new to the stock market, on platforms such as Robinhood, as I reported here nearly a month ago.
For instance, the class A shares of
(ticker: UONE), a multimedia company that operates radio broadcasters targeting primarily African-American listeners, increased nearly 20-fold in the past week, to $36.30. Trading volume surged as high as 57 million shares Thursday; a month ago, fewer than 10,000 shares changed hands on an average day. The
D shares (UONEK) saw an even bigger jump in volume, as they hit $4.15 Friday from 88 cents a week earlier.
Both series of shares have been at the top of the popularity list on Robintrack.net, a website that tracks the trading on Robinhood.
In fact, Robintrack has become closely watched by hedge funds and retail punters alike. Topping its chart Friday was
(BYFC), a black-owned Los Angeles savings and loan. Its stock price rocketed up 95% last week, on weekly turnover of 170 million shares, versus the typical tens of thousands. Similarly,
(CARV), which serves New York’s African-American community, saw its shares soar sixfold last week on a similar surge in volume.
Do these huge moves somehow reflect real, long-overdue concern about the economic disparities that affect African-Americans? Or do they reflect speculators’ dreams of profiting from a change in the zeitgeist? The hope is for the former, but the suspicion is that the latter is more likely.
While the impact of app-based day traders on the overall market is open to debate, the effect on their favorite stocks is clear. Nowhere is this more apparent than the bizarre tale of Hertz Global Holdings (HTZ), detailed here last week. The bankrupt car rental company wanted to sell worthless common stock that had been bid up by these punters. The offering was withdrawn after the Securities and Exchange Commission started reviewing it. This suggests, says KDP Investment Advisors analyst Michael Cazayoux, that the plan “was little more than an effort by Hertz to pick Robinhood’s pocket, [rather] than a good-faith effort to emerge from bankruptcy with the existing equity reinstated.”
Day-trading can have tragic consequences. A 20-year-old student died by suicide June 12 after seeing a $730,000 negative balance in his account, Forbes reports. The loss apparently resulted from a complex options trade. The student’s suicide note, Forbes added, stated that he had “no clue” about how it was supposed to work.
At a minimum, the extreme moves in stocks batted around by bettors who would normally be wagering on sports suggests the degree of speculative fervor in the market. Still, the major averages posted their fourth gain in the past five weeks, despite concerns about increasing coronavirus cases. For now, that’s the wisdom of the crowd. These days, however, crowds make me nervous.
More Up and Down Wall Street:Beware Fed Bond Buying’s Unintended Consequences
Write to Randall W. Forsyth at email@example.com