If you spend some time on social media, you might have heard there was this great investment out there. It’s the stock of Bed Bath & Beyond, the bankrupt home furnishings company.
Well after it announced plans to liquidate over the summer, it was said the legendary Carl Icahn saw value in the stock that was set to disappear from the face of the earth. Its remaining parts were already sold to Overstock, shares delisted and about to go terminal in late September, meaning they would no longer exist even in a bucket shop broker’s trading account. And yet, Ryan Cohen, the billionaire activist investor who sold his stake last year, was allegedly ready to make another go of a business that had just been evaporated.
If you believed any of that, you might also believe in the latest Elvis sighting, of course. And yet, many people, taken by the armchair stock research of Reddit and X Spaces, threw money at a stock just before it was totally “eliminated” from the face of the investing planet.
That’s bad. What’s even worse is there are people who are supposed to be policing this stuff at the Securities and Exchange Commission and they’re not. Instead, Wall Street’s top cop, Gary Gensler, keeps tilting at windmills as if he’s Don Quixote, spinning the SEC’s wheels on useless initiatives like climate disclosures for public companies and fixing the plumbing of the stock market that doesn’t need fixing.
The madness of crowds, of course, has been eroding clear investment analysis since the beginning of time: the South Sea Bubble of 1720, the dot-com collapse of 2000 and the 2008 banking meltdown were among the most damaging in history, where small investors lost generational wealth on investing gimmicks, fads and frauds.
Ditto for the meme-stock craze of 2020 and 2021. Meme stocks were shares of troubled, often money-losing companies that caught fire when the Fed was printing money, the public was flush with stimmy checks, and markets only saw one direction and that was up.
Retail investors, utilizing their no-fee Robinhood accounts, thought they found the equivalent of gold — with free money and leverage, they could drive up shares of some of the most speculative stocks ever.
They could even create “short squeezes” on hedge funds that were betting against these companies, forcing them to cover their positions and drive up shares further. It all had the added benefit of putting at least one hedge fund, Melvin Capital, out of business and causing massive losses for others.
Speculators crushed
That little game worked for a while, but those days are now long gone. The hedge funds got smart and figured out they could trade around the madness of the meme crowd and strategically short the shares of these companies.
They made a fortune while meme investors soon got crushed.
What we have now is something far more dangerous because the irrational exuberance is on another level. Bed Bath & Beyond could never have made another penny for its shareholders for all the reasons listed above.
And sadly there are other wacko trades bouncing around the stock-touting circuit that could also explode in the face of people gullible enough to believe the social-media hype.
Mullen Automotive, a highly speculative EV maker trading at 19 cents, has a crazed Twitter/Reddit cheerleading squad that is quite active. Another troubled EV maker, Nikola, has a stock that is trading just above a buck, yet it too gets lots of traction with the delusional investing class.
Then there’s AMC, one of the OG’s of the social-media-led irrational exuberance. The struggling theater chain barely makes any money but its loyal investors, who call themselves the “Apes,” still love the stock. They think it’s only a matter of time before another short squeeze occurs and the stock heads “to the moon.”
Sorry, there would need to be a Taylor Swift “Eras Tour” movie blockbuster every week to dig AMC safely out of its balance-sheet mess. The smart money knows this: Shares are down 99% since hitting $72 in 2021. They closed Friday trading at $7.43, which translates to around 74 cents after you factor in the alchemy of a 1-for-10 reverse stock split.
This is all dangerous stuff brought on by the cultism found in today’s stock market.
Small investors are getting hosed by their own insanity, while some dubious stock pumpers who stoked the irrational exuberance made a quick buck.
Fortunately, there are real and simple solutions at the SEC’s disposal. In the case of Bed Bath & Beyond, Gensler could have ceased all trading in the stock the minute the company, over the summer, announced equity would be wiped out in its liquidation. He should be ready to do that when the next one appears.
With AMC and the others, Gensler could put management and stock pumpers on notice they will be held accountable for giving any false hope about the stocks’ prospects.
That’s if Gensler stops tilting at windmills and starts doing his job.
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