Sunday, March 19, 2023

How To Make Money On the Internet - And Raise the Ire of the SEC!

When you see someone touting a stock online these days - or tearing one down - chances are, they have an agenda.

On various online discussion groups, people trade "tips 'n tricks" to getting wealthy by buying and selling stocks, bonds, commodities, gold, old cars, comic books, crypto, and any other damn thing you can exchange cash for.   Granted, people have a right to free speech, and thus they have a right to communicate their opinion about the value of a company and whether they think the stock is going to go up or down.  Indeed, a whole industry exists of doing nothing but this - and making money from the ads between the shouting guy's prognostications.

But others are a little more nefarious.  You may recall a few years ago, people were hyping "Gamestop" stock and then "AMC" movie theater stock.  Both companies were in trouble, competing with online alternatives and in-home entertainment.  Neither was a "next big thing!" investment, as they were traditional brick-and-mortar companies with thin margins and a lot of competition. In fact, both were not doing very well.

A group of hedge fund managers bought shorts on the stocks - betting that the shares would go down in value over time, as these legacy companies struggled with new realities, much as Sears did.  And yes, these same hedge fund managers and short-sellers went online (or even on television) and told everyone why they felt the price of the stock was too highUsually, these short sellers do disclose their financial interests in these matters, however.  But not always.

Someone came up with a grand idea.  Suppose you could encourage a lot of people to buy and hold shares in these companies?  This would drive the share price up, which would screw the short-sellers, who would have to scramble to find shares to buy to support their short position - further driving up share prices.  It seemed like poetic justice - the "little guy" was getting back at institutional short-sellers, who were manipulating the market and raking in millions, nay billions, for basically doing nothing of value for the economy.

Although, wait for it.  3...2....1.... some economics professor will make a convoluted argument that derivatives traders are actually serving a useful function in the economy by hedging blah, blah, blah, whatever.  Maybe that makes sense in ECON 101, but in real life, it amounts to a small group of people making scandalous amounts of money without getting their hands dirty or even breaking a sweat.  And they can do this as they started out with a big pile of money and have the reach to manipulate markets.

But, whatever.

The point is, the "little guy" seemed to be winning, but no one really asked what was in it for the guy orchestrating this anti-short scheme.  I mean, he got thousands, perhaps millions of "followers" to buy a few shares of these stocks, so the price would go up.   Where do you think his position was on those stocks?  He makes money, while the small investor who bought one share or $500 worth of stock, loses a lot, when the "pump" turns to "dump" and eventually the market realizes there is no "there" there to these stocks in money-losing or near-bankrupt companies.

The same is true, of course, with crypto - you've never seen such hype online about this mythical "virtual investment."  It is the Senifeld of investments - and investment in nothing and about nothing.  But to hear the folks online tell it, the phrase "block chain" - if repeated five times in a row - will summon Bloody Mary, who will in turn take your $500 investment in "crypto" and make you a Billionaire.

To hear them tell it, this thing that has been around for over a decade, will take over "any day now" and become the new default currency of the world and be used in daily transactions to buy everything from a paper clip to a new car - or even your house!  You will get paid in "crypto" and pay your bills in "crypto" and Uncle Sam and the "big banks" can go sit on a tack!  Nah-Nah!

But none of that ever happened.  What happened is a few people who started these schemes, cashed out and made money off the backs of the small investors who bought a few hundred dollars' worth, thinking, "what have I got to lose?"  Answer: a few hundred dollars.

Others have much more to gain - those few hundred multiplied by the millions of chumps, worldwide.

The latest gag is the "run on the bank" meme, and the same folks who pushed GameStop and AMC theater stocks, are now claiming the entire banking system is on the verge of collapse and you should sell your banking stocks or take short positions in them.  The people hyping this idea - what do you think their position is?   Just saying.   Fool you once, shame on you.  Fool you three times - get a life!

"We have nothing to fear, but fear itself!" FDR once said.  He was commenting on the trend at the time of people reacting or over-reacting to the news and fearfully pulling money from banks (before FDIC insurance) causing them to fail.  What's more, farmers and businessmen were pulling back from investing, just as citizens were cutting back on spending, out of fear that things might get worse down the road.  Fear is the least useful emotion, and it is why, when these periodic "market adjustments" come along that they undershoot and overshoot by several months.

For example, the housing market is running on empty right now.  People are still paying top dollar for homes, even as high interest rates make the monthly payments more than the cost of renting.  For example, where we live, houses are selling for an astounding $800,000 when two years ago the same house sold for $500,000 - or less.  At today's interest rates, even with a 20% down payment, you are looking at over $4200 a month just to service the mortgage (and another $200 a month in insurance, plus taxes of close to $400 a month).  You could easily spend five grand a month to "own" such a house.

You could rent it for $3500 a month - or less.   So yea, we are in a bubble.  And from what I am reading, it is the same story in many other markets as well.  So why would people pay so much for a house?  A year ago when rates were in the 3% range, the monthly payment (and purchase price, ironically) would be far less.  At rates back then, the same house at the same price would cost under $3000 a month - you'd make money every month by renting it out.

So, markets are irrational.  People pay $800,000 today because the "comparables" and appraisals based on recent sales say that is what the houses are worth.  And since there are so few on the market, well, demand is high and supply is low, further skewing prices.

And on the flip side, the opposite is true.  We were buying foreclosure sales as late as 1998 - almost a decade after the bubble of 1989.   People react in fear, as I noted before, and demand shrinks and supply increases, particularly when so many foreclosure properties appear on the market at once.

The point is, markets are irrational.  And right now, I think we are in the "over-run" portion of the market, where people are still exuberant and somewhat in denial.   Credit card debts are climbing, but everyone can still make the minimum monthly payments.  Layoffs are starting, but so far, it is the "other guy" losing his job, not you and me.  So we kid ourselves we are not affected by it.

Getting back to bank stocks, the same effect is occurring - or some people would like to see it occur. They want you to react in fear and do something stupid, like cash in your IRA (and pay a 10% tax penalty as well as push you into a higher tax bracket).  People profit when you panic.

Will there be more bank failures? Well there are three so far - and those three specialized in risky markets - silicon valley startups and crypto.  And being "invested" in low-yield treasuries, they lose money if they have to sell those treasuries at a loss to pay back depositors if there is a run on the bank.  These failures were related to very specific circumstances with small, regional banks with very narrow customer bases.

People Profit when you Panic.  And I smell a rat when the same guy who said that Gamestop stock is "going places" is now telling me the international banking system is on the skids.  I mean, he lied before, why would he lie about this?  It's not like he isn't making money at this somehow, right?

Well, they are.  And getting back to the title of this entry, you could make a lot of money by pumping and dumping stocks, by going online and hyping them (or unnecessarily disparaging them) and make money on the upside and the downside.   Problem is, you will likely run afoul of the SEC.

I wrote before about a teenager in New Jersey who did this over a decade ago, before there was even "social media".  He bought a mailing list of millions of e-mail addresses, and then sent out an e-mail blast hyping penny stocks.  He made millions and when the SEC did come knocking with a six-figure fine, he just shrugged and said "let me get my checkbook!"   He and his friends had a good laugh about it the next day in study hall.

So, why don't we all do this?  Well, to be sure, there is risk involved.  You buy a stock to pump it, and if no one takes the bait, well, you are stuck with that stock.  With derivatives, it is even worse.  You "short" a stock and if it goes up instead, you may owe far more than your initial bet that you placed.

But overall, I would not recommend it, as you and I would likely get into legal trouble, or like I said, be just as likely to lose our shorts shirts.

On the other hand, you would be doing yourself - and everyone else - a big favor by not falling victim to these schemes.   When someone tells you to buy or sell a stock, it is certain that they stand to make money from the opposite action (which was the position they took).  There is no profit to be had, being the chump in a pump-and-dump.  So don't be a chump.

Why some of these social media sites even allow people to go online and hype or disparage stocks and other investments is beyond me. Whether it is Facebook, Twitter, Instagram, YouTube, or Reddit r/wallstreetbets, the effect is the same - you can manufacture an online Greek Chorus that will chant in unison, "Buy GME! Short BoA!" or whatever you want to manipulate the plebes into doing.

Hell, you could also get them to join Al Qaeda, BLM, the Nazi Party, Antifa,and become a January 6th insurrectionist all at the same time, as people - a lot of people - think that anonymous messages spread online are from real people like you and me, and not from nefarious actors with a lot of resources at their disposal and a very specific agenda.

Maybe the coming recession will be a wake-up call to people to stop believing every damn meme you read online.  Maybe, but I doubt it.  As the experience of the 1930's illustrates, economic hardship can push people into even more radical agendas.

Oh, well.

UPDATE:  After I wrote this, someone posted online, "How come everyone is telling me to sell my 'meme stocks' but no one is telling me to sell my bank stocks?"

So much to unpack here.  First of all, he doesn't own any bank stocks.  Second, no one is "telling" him to sell his 'meme' stocks because no one fucking cares about losers who waste money on scam investments.

It is like the guy who posts, "My Bitcoin wallet was hacked and I lost $300,000!" and everyone is supposed to be outraged, I guess.  The reality is, no one feels sorry for a greedy pig who "invested" in something sketchy with no backstop or regulation - specifically because they didn't want regulation - and then lose it all.  They specifically asked for this.

But the comment speaks volumes about how social media is used to manipulate weak minds.  They try to create a narrative that the forces of evil are trying to tell you what to do, and hey, Bank of America charged you a $17 bounce fee!  So why not get even with them by investing in Crypto?  That will show 'em!

You can see how it creates this us-versus-them mentality and how it fosters this pariah mentality as well.  People now identify with a nebulous online group of "friends" without even knowing who any of them are, if in fact many are just bot accounts or professional trolls.

It's kind of sad, really.  But this is how people end up as anti-vaxxers or conspiracy theorists or brides of ISIS....