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Carson Block thinks that investing sentiment is reaching ludicrous levels — and that could eventually fracture a market that he views as fragile.
“ ‘We’re at this point where stock markets are just ludicrous and with that ludicrosity is fragility. It’s going to break sooner or later, and on the back end of that, there’s going to be risk aversion.’ ”
The founder of San Francisco-based Muddy Waters, who made his name shorting Chinese stocks, told MarketWatch in a Monday-afternoon interview that the dust-up between a select group of individual investors using Reddit chat forums and a clutch of professional investors highlights the problems swirling in a market that has been buttressed by easy-money policies from the Federal Reserve and government aid to help stem the economic harm from the COVID-19 pandemic.
Asked if his view that markets are ludicrous centered on the hubbub surrounding retail trading that has fostered precipitous gains in shares of companies like GameStop Corp. GME, -30.77%, AMC Entertainment Holdings AMC, +0.30%, Koss Corp. KOSS, -45.31% and BlackBerry Ltd. BB, +3.76%, Block had a simple answer: “Abosolutely.”
“There’s no fundamentals that justify…a stock rising 15x where it was a few weeks ago,” Block said, referring to individual investors who congregate on sites like Reddit message boards and have been credited with boosting the share prices of struggling companies and in the process crippling short-selling hedge funds that had bet against those companies.
Block, a prominent short seller, said that last week it was as if some of the so-called meme stocks, championed by groups of individual investors, were taking away from liquidity in the broader market.
“We saw that degrossing of hedge funds and if you continue to see that…things can break every quickly.”
The advance in heavily shorted shares targeted by the army of individual investors has already been blamed for troubles with a number of funds.
Melvin Capital Management, one of the hedge funds seen at the center of the kerfuffle over GameStop, lost 53% on its investments in January, while Maplelane Capital ended January with a roughly 45% loss, The Wall Street Journal wrote, citing people familiar with the matters.
On top of that, famed short seller Andrew Left, founder of Citron Research, last Friday said he was altering his strategy, and would no longer publish short-selling reports.
Block said that Muddy Waters has been pivoting more toward long investing in recent years, but said that he still views his brand of short selling and pointing out malfeasance as useful.
“I believe at the end of the day, that the research that we produce has utility. It has led to eight delistings…and a [Justice Department] case against tariff evasion,” he said.
Ultimately, he said Muddy Waters would continue its work and that the market would determine whether it becomes uneconomical.
Beyond investing, Carson launched Zer0es.TV last year, with the intent of providing in-depth discussions about short selling and investing. In a recent video, he said that angst emanating from Redditors may also reflect pent-up frustration with COVID confinement and a desire to disrupt establishment structures as the gap between the wealthy and the impoverished widens.
He said that the new landscape of social-media-driven trading may result in pros being more nimble.
“We may just have to be more creative and smart in how we structure trades and manage risk,” he added, suggesting that pro investors may need to structure more complex trades to avoid being blown out of some positions.
Block said he’s not betting that the markets will break down soon, but warned that we are at a point in the cycle where anything can go wrong.
“We’re not in a tightening cycle, but there are a lot of things that can go wrong and can have a knock-on effect to the market, and a market that is very much tied to flows,” Block said.
“I’m not taking the view that it’s about to end soon,” he said.
On Monday, the market regained some of the ground lost in Friday’s drubbing, with the Dow Jones Industrial Average DJIA, +0.76%, the S&P 500 index SPX, +1.61% and the Nasdaq Composite Index COMP, +2.55% finishing solidly higher.
Block rose to fame in 2011 after he revealed fraudulent practices at Chinese forestry company Sino-Forest Corp., which ended up filing for bankruptcy the following year.
Block, on his Zer0es.TV webcast, said he has little doubt about where this ends for individual investors, and described popular trading platform Robinhood as selling their clients to market makers, who in turn pay them for customer information, known as payment for order flow.
“When you look at Robinhood, it’s the ultimate manifestation of the Silicon Valley model, right? You know, we are the products that are sold when you’re using Twitter, Gmail, etc.,” he said.
“I have no doubt where this ends, right … for retail — I mean, in tears.”
