Carson Block believes that investment sentiment is reaching ridiculous levels, and this could end up fracturing a market it considers fragile.
San Francisco-based founder Muddy Waters, who made his name short of Chinese stocks, told MarketWatch in a Monday afternoon interview that the dust between a select group of individual investors using forums Reddit chat and a group of professional investors highlights problems in a market that has been bolstered by Federal Reserve easy money policies and government aid to help curb the economic damage from the COVID-19 pandemic.
He was asked if his view that markets are ridiculous focuses on the hustle and bustle surrounding retail that has fueled hasty gains in shares of companies like GameStop Corp. GME,
AMC Entertainment Holdings AMC,
Koss Corp. KOSS,
and BlackBerry Ltd. BB,
Block had a simple answer: “Absolutely.”
“There are no fundamentals to justify … a stock that increases 15 times in the same way it did a few weeks ago,” Block said, referring to individual investors who focus on sites like Reddit’s message boards and who they have been credited with raising the share prices of distressed firms and processing short-selling hedge funds that had bet against these firms.
Block, a prominent short-term seller, said last week it was as if some of the so-called meme stocks, defended by groups of individual investors, were removing liquidity from the wider market.
“We saw this degradation of hedge funds and if you keep seeing that … things can break down quickly.”
The advance in very short stocks led by the army of individual investors has already been accused of problems with various funds.
Melvin Capital Management, one of the hedge funds seen at the center of the GameStop discussion, lost 53% of its investments in January, while Maplelane Capital ended January with a loss of approximately 45%, write The Wall Street Journal quoting people familiar with the matter.
In addition, famed short salesman Andrew Left, founder of Citron Research, said last Friday that he was changing his strategy and would no longer publish short sale reports.
Block said Muddy Waters has been pivoting more toward investment for years in recent years, but said he still considers his short-selling brand and pointing out the flaws to be useful.
“At the end of the day, I think the research we produce is useful. It has resulted in eight casualties … and [Justice Department] case against tariff evasion, ”he said.
Ultimately, he said Muddy Waters would continue his work and the market would determine if it becomes cheap.
Beyond investing, Carson launched Zer0es.TV last year, with the intention of offering in-depth discussions on short-term selling and investing. In a recent video, he said the distress emanating from Redditors could also reflect the accumulated frustration with the confinement of COVID and the desire to break down the structures of the establishment as the gap between the rich and the poor widens. impoverished.
He said the new landscape of social media-based commerce can make professionals more agile.
“We may just need to be more creative and intelligent in the way we structure operations and manage risk,” he added, suggesting that professional investors may need to structure more complex operations to avoid being kicked out of some positions. .
Block said he is not betting that markets will break soon, but warned that we are at a time in the cycle when anything can go wrong.
“We’re not in a stress cycle, but there are a lot of things that can go wrong and that can have an incidental effect on the market and a market that is closely tied to flows,” Block said.
“I’m not thinking it’s about to end,” he said.
On Monday, the market regained some of the ground lost during Friday’s beheading, with the DJIA Dow Jones Industrial Average,
the S&P 500 SPX index,
and the Nasdaq Composite Index COMP,
ending solidly higher.
Block rose to fame in 2011 after revealing fraudulent practices to Chinese forestry company Sino-Forest Corp., which ended up filing for bankruptcy the following year.
Block, in his online broadcast of Zer0es.TV, said he has no doubt about where this ends for individual investors and described the popular trading platform Robinhood as selling its customers to market makers, who in the they in turn pay for the customer information, known as pay-per-order. flow.
“When you look at Robinhood, it’s the ultimate manifestation of the Silicon Valley model, right? You know, we’re the products that sell when you use Twitter, Gmail, and so on. “, he said.
“I have no doubt where this ends up, well … for retail, I mean, in tears.”