Like most investors I know, you may have subconsciously held the following beliefs:
- Buying stocks is noble because it funds innovation, growth and prosperity.
- “Short selling” stocks is evil.
I agree with #1…but I’m here today to dispute #2’s misconception.
See, now I know why “short selling” stocks don’t seem noble. The sight of a powerful Wall Street trader making billions of dollars in profits while Grandma loses 50% of her 401(k) is sickening.
But that’s not all.
Considering this…
In 2015, Harvard law graduate and Wall Street insider Steve Eisman found himself eligible for the lead role in a blockbuster movie. big short.
(Source: The Big Short – 2015 wall street journal.)
Those who saw the film may have been jarred to see Steve Eisman scraping it during the Great Financial Crisis of 2008.
But if you look deeper, you’ll see that Steve wasn’t. cause Great financial crisis. (Short sales are rare. cause Stocks crash. )
In fact, he was about to expose such things!
You see, in January 2007, Steve Eisman was invited to meet a man named Wing Chau. Chow was heavily involved in packaging subprime mortgage debt into secured debt (aka “CDOs”).
Essentially, Chau was able to lump together the riskier subprime mortgage debt into a CDO. CDOs have been labeled as “low risk” by reputable rating agencies such as Moody’s.
He then sold them for billions to unsuspecting investors.
And these unsuspecting investors weren’t the greedy hedge funds you have little sympathy for. Many of them were pension funds, managing millions of American retirees. …including “Grandma”.
Long story short, after meeting with Chow to hear what he was up to, Steve called the CDOs “dog scum” and vowed to cut them short.
The rest is history. Steve Eisman, John Paulson, Michael Barry, James Mai and a few others shorted the toxic CDOs that Wing was pedaling as a “safe” investment.
Soon, the surface of these “safe” investments collapsed … short sales made billions … and The entire US financial system — the system that allowed Wing and other villains to push toxic investments into Grandma’s retirement fund — came under intense scrutiny.
or Dear Steve Eisman and his short-selling colleagues, Hero of this story… no An “evil” villain, in which short sellers are portrayed lazily.
These short sales catalyzed one of the most influential Wall Street reforms of 21 years.st century.
Unfortunately, 15 years after the Great Financial Crisis, the system has found a workaround.
Again, toxic assets are creeping into everyday Americans’ retirement funds, whether they like it or not.
You can be 99% certain that you are now exposed to such assets.
Worse, there is little you can do to avoid it.
but there teeth what you can do to fight back.
But before we get to that, we need to understand how Wall Street has changed since 2008 and why it still fails to protect us from this problem.
dodd frank law
The Dodd-Frank Wall Street Reform and Consumer Protection Act was Congress’ answer to Wall Street’s greed and reckless behavior.
It was meant to protect Grandma from Wing Chun and everyone else trying to sell “dog crap” to unsuspecting investors.
If it works, it will prevent a systematic catastrophe like the Great Financial Crisis from ever happening again. And most of the time it seems to work.
Yes, there are criticisms of Dodd Frank. Some argue that this is too strict and will make it more difficult for US financial institutions to be competitive.
However, the US financial system the following Safer than 2007. far Safer.
For example, Steve Eisman himself recently spoke about the state of the US banking system in 2023 compared to 2007.
At the time, major US banks were highly leveraged. This meant they were heavily indebted for their investments and didn’t have enough money for emergencies.
On average, banks were leveraged between 30:1 and 40:1. Now, thanks to the Dodd-Frank Act, we’re back in the 10:1 range.
I like how Iceman puts these numbers into context. he said: If you’re using 30:1 or 40:1 leverage, all it takes to destroy you is ‘ Pebbles. ‘ If you only have 10:1 leverage… meteor”
So think about all this for a second…
Here in 2023 we have a disrupted bear market in equities and bonds…we face a 90% chance of facing a recession…and inflation is throwing a curveball the likes of which we have not seen in over 40 years. increase.
My point is that it never easy environment for investors.
But it could be worse. As in 2008, it may call into question the toxicity and fragility of the entire US financial system. we are notDodd Frank and the misunderstood shortseller who “called a foul” on one of the most unjust and unsustainable circumstances in modern financial history.
For that, we should all be grateful!
But unfortunately, I’m currently seeing a similar scenario unfold…
Is history repeating itself?
One of the saddest things about the 2008 financial crisis was the more or less toxic CDOs. coercion In grandma’s retirement portfolio.
I know it’s controversial to say that, but I’m afraid the exact same thing is happening today. you — I already own it.
Are there any that track the S&P 500? Mutual funds, exchange-traded funds, or even “target date” funds via 401(k) providers?
If you answered yes, you are exposed to the company I am referring to.
The committee that determines which stocks are included in the S&P 500 added the company to the index in 2020.
in short, Was (and still is) in stock badly Overrated. In the month before being added to the index, he was trading at more than 20 times his price-to-earnings multiple of the S&P 500.
I don’t know about you, but it seems as reckless as rating agencies labeling toxic mortgage CDOs as “low risk” in 2007.
Either way, the stock instantly became a top 10 holding in the index because of its nosebleed valuation.
And whether you or grandma were aware of it or agreed with it… you started owning stock in this company since December 2020 — so assuming you have money in the S&P 500 fund To do.
next big short
You should be aware of the above. $7 trillion The value of retirement savings is tied to the S&P 500 index.that is tons of money. And given that the stock has already halved from its highs, it’s a massive loss for an unsuspecting investor!
Of course, this means that the stock’s “nosebleed” valuation has fallen somewhat since its addition to the S&P 500 Index.
Still, my analysis shows that the stock is still five to seven times higher than its peers.
As you can imagine, I have done a lot of research and due diligence on this company.And you can probably say that too i’m aiming for it for my own big short.
In fact, my team and I put together a presentation with all the details on Tuesday, February 14th at 1pm…
I call it “The Next Big Short”. surpass the size of CDO market in 2007.
Thankfully, I believe this damage will not be the “systemic” impact CDOs had during the Great Financial Crisis.
But given that this stock is one of the largest holdings of all S&P 500 funds, we feel obligated to at least warn about this situation.
Many successful Wall Street “short sellers” have already bet on this stock, as have my subscribers.
Whether or not you still believe that shorting stocks is “evil,” the recommendations I’ll be sharing next Tuesday could help you hedge your exposure to this extremely overpriced stock.
You don’t have to fall victim to Wall Street’s latest scheme. As stocks like this unwind, there are smart ways to profit.
Now, using such methods, I am making an even greater percentage profit than short selling did in 2008. none of the unlimited risk involved in shorting stocks.
And if risk-only trades with the potential for 20x return on your initial investment appeal to you, join my next Big Short. presentation Required.
nice to meet you,
Adam Odell Chief Investment Strategist, money and market
When the dotcom bubble of the 1990s finally burst, I was just starting my career. I still remember being surprised by all the meaningless things.
Remember the Palm Pilot?
Before the iPhone and BlackBerry, there were Palm Pilot personal digital assistants (PDAs).
It wasn’t very useful…it was basically a glorified digital address book and calendar.
Palm was publicly traded, 5% of shares traded freely. The rest was owned by its parent company…his 3Com Corporation, a stocky “old tech” equipment maker.
It was the 1990s… no one wanted to own a dinosaur company that made legacy technology equipment like 3Com. New technology or bust!
And here’s where things got weird.
Palm’s market value in early 2000 was $53 billion, more than General Motors, Chevron and even McDonald’s at the time. 3Com had a market capitalization of just $28 billion. Despite owning 95% of Palm.
The market basically keeps 3Com’s price negative $22 billion.
This may be remembered as the most ridiculous pricing in the centuries-long history of the stock market.
Palm’s IPO soared from $38 on the first day to $165 in one day. It didn’t make sense.
However, Larry was short-lived. By that afternoon, PALM had dropped to his $95 and changed.
Anyone who could have known what the situation was would have committed absolute murder by shorting the stock… while exposing the insanity in one fell swoop.
Like Adam, I am not naturally weak. But I do take the opportunity to sell short from time to time.
There is no problem even if it is shorted. It’s not mean…it’s not unpatriotic…it’s certainly not sinister.
As Adam points out, the real damage to investors usually comes from unscrupulous hucksters on the long side, not the short side. Short selling actually plays an important role in the market.
First, it provides liquidity. If you want to buy stock, you need someone to sell it to you. It doesn’t just appear magically. You must have a partner. Short sellers take advantage of the other side of the trade.
It also helps expose fraud. Hindenburg Research claimed to have found evidence of massive fraud in a business controlled by Indian billionaire Gautam Adani. If true, they may have saved prospective investors from falling into the trap.
But perhaps most of all, short selling helps imbue the conversation with a voice of reason. If the price simply doesn’t make sense, the short seller can make a profit simply by fixing a market that has fainted. Palm’s IPO is one of countless examples of insanity.
That’s what Adam wants his subscribers in his next big short.
As Adam told you today, he set his sights on troubled companies that don’t have a business with that valuation.
He’s already making enough money for his subscribers…but he believes more profits are coming.
When Adam reveals it in a new presentation next Tuesday, you can learn which stock it is and how you can join the short side with far less risk and far greater rewards. be sure sign up here and secure a seat.
nice to meet you,
Charles Sizemore Editor-in-chief, The Banyan Edge