The Reddit Army That's Crushing Wall Street And

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The Reddit Army That's Crushing Wall Street And Dave Hutchison, CERTIFIED FINANCIAL PLANNERTM 1720 E Calle Santa Cruz HUTCHISON INVESTMENT ADVISORS E-mail:[email protected] Phoenix Arizona 85022 Registered Investment Advisor website: www.hutchisonria.com Founded on a CPA Firm Background Fax (602) 955-1458 (602) 955-7500 The Reddit Army That’s Crushing Wall Street and Hedge Funds - February 2021 Reuters reports short-sellers had about $70.87 billion of estimated losses to cover, which rattled markets. CNN reported on 1/29/2021: WallStreetBets exploded into the mainstream, moving from the front page of Reddit to the front page of the New York Times and nearly every other major news site. The subreddit's short-squeeze shot up prices, captivating the minds and wallets of investors — both casual and institutional — and financial regulators. Remember day traders? Well, in the last couple of weeks, they have become famous in the US, But while millions are now discovering thanks to the Internet's Reddit forums. Using a WallStreetBets for the first time, it has been cartoonish approach to investing, young folks building momentum throughout the pandemic. have decided to approach the stock market like One can trace its epic rise to a perfect storm of it's a video death game, with a goal to take down favorable conditions: the exponential growth of the hedge fund billionaires. And guess what, they the app Robinhood and its no-fee options trading, have been somewhat succeeding! Of all the the extreme volatility Covid-19 brought to the goofy things to arise during a pandemic. markets, the stimulus checks mailed to millions of Americans, the lack of televised sports for much Mostly younger generation players, they picked of the year, and the unwanted free time stuck at stocks that had little fundamental value and drove home the pandemic has forced on many people. the prices skyward. As one commented on CNN, “There is no reason for anyone in their twenties And it's led WallStreetBets' evolution into an to imagine that their 401(k) is going to pay off in unprecedented force of retail-investing financial 50,60 years the way it did for their parents.” They radicalism, offering the allure of get-rich-quick want more instant gratification. gains to a rapidly expanding audience of millions. (5 million, at last count). Some hedge funds took notice and using margin took huge short positions, which lose potentially The site is a chaotic mix of memes, screengrabs an unlimited amount of value if the stock price of wild losses and gains, all unified under the goes up. As margin calls came, they were forced fighting guiding principle of betting as much to “cover” their short positions. They often had to money as you possibly can on the highest sell other holdings or get more cash to cover possible risks. stocks they had shorted at their astronomical That ethos on WallStreetBets not only prices – that had no fundamentals to justify their encourages risky trades, even trading the entirety price. of your net worth or portfolio in a single risky While the goal of the group was to show that small trade. This is real money. And any time you are retail investors could take down the big bad more interested in the game than the outcome, hedge funds, it has created ongoing chaos in that can be incredibly dangerous. other stocks that may have had to be sold to The Hedge Fund Losses – next page cover margin calls. This upset the broad markets resulting in large trading volume and volatility. Securities and advisory services offered through Cetera Advisors LLC, member FINRA/SIPC, a broker/dealer and Registered Investment Adviser. Additional Investment advisory services offered through Hutchison Investment Advisors a Registered Investment Adviser. Cetera is under separate ownership from any other named entity. The Hedge Fund Losses to the category they invest in and the risk taken While the investing game players are thrilled that (Alpha vs. Beta in investment terms) – not just they won the game (albeit potentially fleeting), raw returns. While the US has a significant caused margin calls and immediate need for COVID-19 risk, we have a comparatively stronger more capital for many hedge funds with short recovery potential than most global economies, positions, especially Melvin Capital. even those who have done better in fighting against the virus. A spokesman for Melvin Capital said that the firm, once among Wall Street’s best performers, is not US Small-Mid Caps often have the potential for collapsing. “The social media posts about Melvin faster growth, and with so many more smaller Capital going bankrupt are categorically false,” he companies than large, good research can said. Prominent hedge funds Citadel and Point72 potentially find hidden gems. Smaller companies' Asset Management extended a $2.75 billion stocks are often more volatile with less trading financial lifeline to the fund. Source: Reuters volume, but have rewarded investors over the 1/28/2021 long term. Earnings Outlook I avoid “dumb” index funds with no stock selection The earnings outlook continues to improve with based on individual company outlooks, or similar the anticipation of a successful vaccine war ETF’s (only make sense for traders, not against the COVID virus in the 2nd half of 2021. investors). For those seeking income or for the more conservative allocation in a diversified FactSet reports on 1/29/2021: “At this point in portfolio, I suggest various bond alternatives, time, more S&P500 companies are beating EPS without the interest rate risk of many bonds at this estimates for the fourth quarter than average and point in the economic cycle. beating EPS estimates by a wider margin than average.” FactSet reports that revenues are also Part of our "participate-yet-protect" strategy in a coming in above expectations. growth-oriented portfolio is to have alternative investments, so that in a significant equity market FactSet reports that if earnings continue to beat decline when you also need cash, you do not for all the S&P500 as good as initial reporting have to lock in large losses. Markets have always results, it will mark the fourth-highest percentage returned to new highs - only the timing is of S&P500 reporting positive earnings surprises uncertain. since FactSet began tracking this metric in 2008. Required Disclosures: Past performance does not assure However, companies relying on the travel future results. There is no assurance that objectives will be industry continue to be in distress, as well as a met. Investments in securities do not offer a fixed rate of return. few other sectors such as restaurants. Principal, yield, and/or share price will fluctuate with changes in market conditions, and when sold or redeemed, you may There is further positive potential from the receive more or less than originally invested. No system or massive rescue funding as well as large financial planning strategy can guarantee future results. investments in infrastructure and “green” Investors cannot invest directly in indexes. The performance technology to transform the energy sector. of any index is not indicative of the performance of any investment and does not take into account the effects of Of course, on the risk side is uncertainly about the inflation and the fees and expenses associated with investing. war on COVID, especially with the new strains. If The views and opinions expressed are as of the report's date clients want to adjust their portfolios to reduce and are subject to change at any time based on market or other risk, we can make individual recommendations. conditions. The material contained herein is for informational purposes only and should not be construed as investment, Action Plan Recommendations advice since recommendations will vary based on the client's I can discuss individually specific goals and objectives. Information is believed to be from reliable recommendations based on one’s sources; however, no representation is made as to its goals, objectives, and risk accuracy. Hutchison Investment Advisors, Inc. is an Arizona tolerance. registered investment advisor. Part II of Form ADV (Disclosure Statement) has been given to advisory clients and is available In general, I suggest investors have a diversified upon request, and is also at http://dhutch.news/RIADisclosure portfolio - often combining growth and value sector allocations - using managers with long- term track records of outperformance compared .
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