Somebody Did Something Stupid (Again)

I hope you don’t own any shares of Discovery or Viacom/CBS. Each of these stocks paid a visit to the ole woodshed last week. 

Now, If you did own either of these, well, 2021 had been very kind to them — up until last week. 

Viacom started the year at just under $40 a share. It peaked exactly a week ago at $100. 

Discovery was $30 on New Year’s Day. Last Monday, it printed $78 just as the invitation to the woodshed was being delivered.

On Friday, both Viacom and Discovery lost 27%, closing at $48 and $41, respectively. 

Two stocks. Twenty-seven-percent drops each. On the same day. Coincidence? Heh, heh, heh… of course not.

Now, to be fair, a Wells Fargo analyst did cut his ratings for both Viacom and Discovery recently. As you might guess, those downgrades were prompted by rather lofty valuations, which will happen when mostly stagnant stocks double in three months. 

If you’ve ever owned stock in a company that was downgraded on valuation concerns, maybe it sold off a bit, maybe it didn’t. It’s not uncommon for the people with the money to disagree with the analyst, and money always wins. 

I mean, I gotta take off my shoes to count the number of downgrades Tesla has received. Seems like one of those short funds — Citron or Muddy Waters — gave Tesla a $35 price target. Ha! How’s that working out? 

But 27% in a day? And dropping from $100 to $48 in four days after a downgrade? Yeah, that’s unusual…

Somebody Did Something Stupid (Again)

Back in my wayward youth, on a sweltering Richmond, Virginia summer night, a couple of friends and I jumped a fence at a neighborhood pool to go for a swim. Two of them had been there before and said, “The only thing is don’t jump off the diving board. The neighbors will hear and call the cops.”

So I said, “I’m jumping off the diving board.” 

They were right. The cops came. Our fun pool night ended badly because I did something stupid. 

This is how most good times end, and strangely enough, the magnitude of the stupid is directly related to how much fun everyone is having. 

Fifteen years ago, every American with a pulse was having a great time. Home valuations were cooking. Dubya was sending everybody checks. The S&P 500 jumped 50% in two years and darn near broke above the internet-bubble highs. 

But noooooo! That wasn’t enough for the a-hole investment banks and their mortgage bond divisions. 

“Wouldn’t it be fun to sell mortgage bonds that are guaranteed to beat historical default rates, crush housing prices, and bring the global financial system to its knees?”

Yeah, I’m still bitter.

So I’m not going to call co-CEO of Archegos Capital Management Bill Hwang a stupid man. After all, he did start Tiger Asia Management. But I will tell you that Mr. Hwang just did something really, really stupid…

The Reddit Effect?

Turns out Mr. Hwang was pretty much solely responsible for the ramp jobs at Viacom and Discovery (plus a couple other stocks). Apparently, his buying was so relentless that traders were actually wondering aloud about who was doing it. 

He was leveraged up to his earballs, using swaps, options, whatever, and of course, margin. 

I can only imagine what Mr. Hwang’s brain was telling him. I’m guessing it was mostly “awesome” and “you’re the man.” Maybe his brain didn’t wanna ruin the party by pointing out that if you’re highly leveraged in a concentrated trade and the market figures it out, you’re going to get a whacking.

Kinda like those smarty-pants hedge funds who were so arrogant about their GameStop shorts.

One thing I’ve noticed about stupid: It travels in packs. You’d think nobody would wanna hang out with stupid, but it’s kinda the opposite. And frankly, that has me a bit worried.

The smart money people are not gonna want to hang around marauding packs of stupid. They won’t be counterparties in any way. Because when there’s a whole lot of stupid going on, funds fail and capital goes POOF!

Stock prices and bull markets are always about liquidity. Don’t worry about the story (that’ll get made up along the way). And when liquidity dries up, the cascade of margin calls, sharp sell-offs, and fund failures can follow.

Heck, it nearly happened over GameStop, for cryin’ out loud. 

As Warren Buffett once said, “You don’t find out who’s swimming naked until the tide goes out.”

That’s something you can’t unsee. So I’m going to tread lightly here because I’m well aware that I can’t un-lose money.

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.