You can’t make this stuff up. On Feb. 23, TradeSmith Daily said the following:
As we have explained repeatedly in these pages, the case for Buzz Lightyear valuations — “To infinity and beyond!” — is predicated on perpetually low interest rates. If you change that equation, the valuations are no longer sustainable.
Fast forward a week or two, and what do we see: Tech stocks with nonsense valuations getting hammered by the bond market, as spiking long-end yields blow up the “lower for longer” case like a botched SpaceX landing.
And like a premium slice of New York cheesecake, the irony is almost too rich: Even as we warn of “Buzz Lightyear” valuations — a tongue-in-cheek reference to silliness — the self-professed king of day traders is launching BUZZ, a social-media-algorithm ETF meant to capitalize on the retail mania.
As the old saying goes, they don’t ring a bell at market tops. But perhaps they launch ETFs.
As we write this note on the morning of March 4, BUZZ is getting ready to launch for trading. Meanwhile, on the day prior, March 3, the ARK Invest flagship ETF (ARKK) officially entered a bear market.
We should do a quick review of the retail mania’s royal family.
- Dave Portnoy, aka “Davey Day Trader,” is the self-professed king of day traders.
- Cathie Wood, the founder of ARK Invest, is the queen of technology stock investing (the Mary Meeker of the modern age, for those who remember the dot-com bubble).
- The ARK Invest family of ETFs is the magic castle; Tesla is the crown jewel and the ultimate source of ARK’s power; and Elon Musk is the emperor of stonks, who rules by tweeting memes.
If you don’t know what stonks or memes are, you might want to consider yourself lucky.
This is all part-and-parcel of the retail mania that unfolded over the past year, through a combination of zero-commission trading apps, “bored in lockdown” trading enthusiasm, near-zero interest rates, and trillions of dollars in monetary and fiscal stimulus.
But let’s get back to ARKK, the flagship ETF of the ARK Invest family.
The fact that ARKK has entered a bear market is extra meaningful because, first, rising long-end yields are the culprit; and second, Tesla entered a bear market just a few days prior.
On Feb. 12, ARKK closed at $156.58. On March 3 (yesterday), it showed a closing-basis decline of 20%, as shown via the chart below.
On Feb. 24, we noted that “the EV bull market is over,” noting that Tesla (TSLA) had gone full-on bear. Now ARKK has followed it to the same fate.
This is not coincidence, or a quirk of the calendar. It is the impact of rising interest rates at the long end of the curve, which are, in turn, a function of an accelerating U.S. recovery, with the Federal Reserve showing willingness to stand back.
Those long-end rates will almost certainly rise further — to the benefit of reflation plays but not to tech stocks — which makes it an exceptionally bad time to launch, say, a social-media-algorithm ETF designed to capitalize on the tech-heavy enthusiasms of retail message board traders.
But today’s planned launch of BUZZ, the new ETF in question, is perhaps not a calendar quirk either, because this is the kind of stuff that happens at “the end.” As a mania matures, and then gets long in the tooth, there is a rush to monetize it as aggressively as possible. That is what we are seeing today.
To lay out some details, BUZZ is the ticker symbol for the VanEck Vectors Social Sentiment ETF.
The ETF is designed to invest in stocks with “the most bullish investor sentiment and perception,” as defined by a proprietary algorithm that scrapes message boards, Twitter streams, and other forms of social media streams to accumulate stock mentions and vet them for sentiment.
(Social media sentiment is the data driver for our friends at LikeFolio. Founder Andy Swan says, “While I’m personally a big fan of Dave Portnoy and what he’s doing at Barstool Sports, this is not a project we are involved in. I’m concerned about both the methodology of stock selection and the high expense ratio [75bps] of the fund. That said, at LikeFolio we appreciate anything that shines a spotlight on the value of social data as a powerful tool for investors.”)
The ETF itself looks somewhat boring in its construction. It will officially target 75 holdings, with regular rebalancing (typically monthly) to keep each name at 3% of assets.
The launch of the ETF, though, was far from boring: It was a spectacular Twitter affair, powered by a launch video from Dave Portnoy (aka Davey Day Trader), who has a stake in the index provider behind the ETF.
Here is a quote from the “emergency press conference” launch video — which you can watch via Twitter here — to give you the flavor (viewer discretion advised):
“I can’t guarantee returns… but in 20 years, I haven’t lost. It takes a lot for me to put my reputation, my balls, on the line. I am doing it this time. Buzz ETF. Thursday. New York Stock Exchange. Is this big? It’s f–g huge.”
Not your ordinary ETF launch, to be sure! But then, Davey Day Trader is not your ordinary promoter. As the founder of Barstool Sports, Portnoy gained stock-trading fame (and millions of online followers) after switching to stock trading when sports were put on hold during the pandemic.
The concept behind BUZZ is actually not new. A version of the same concept — an ETF for stock selection based on social media sentiment — was launched roughly five years ago, and Van Eck has a tracker index based on the same idea.
The BUZZ 1.0 version was shut down in March 2019, however, due to lack of investor interest. (If an ETF does not achieve a critical mass of volume, it loses money for the provider via day-to-day execution costs and rebalancing costs.)
The BUZZ 2.0 version is presumably expected to succeed where 1.0 failed, however, because of Portnoy’s aggressive involvement, and that is a big part of the problem.
We more or less expect BUZZ to fail — possibly with a whimper, but possibly in a spectacular blow-up — for one of three reasons:
- Bull-market strategies don’t work in bear markets.
- BUZZ could self-destruct via conflicts of interest.
- Social media traders will learn to game the ETF itself.
The first possibility is the most straightforward: Bull market strategies don’t work in bear markets.
The backtested returns for BUZZ are spectacular, but they also represent the past five years, not the coming five years. If someone offered you the chance to retroactively put your nest egg into Tesla (TSLA) circa January 2016, with a holding period through year-end 2020, the move would be a no-brainer; if offered a similar deal for 2021-2025, not so much. (We see TSLA falling 50-70% from here, but who knows.)
It’s kind of a similar deal with BUZZ: What worked spectacularly well over the past five years is not likely to work so well over the next five — particularly if a slow-but-persistent rise in long-term yields has begun, as rolling fiscal stimulus efforts give a 1970s feel to a global economy inflating away its debts.
If it is, in fact, a plain old bear market that kills BUZZ, it would probably do so quietly: Investor interest in the ETF would simply fail to pass muster, and lack of profitability would lead to closure.
But BUZZ could also see fireworks on its way to oblivion, thanks to factors like the Portnoy effect, namely: What happens when an ETF that algorithmically picks stocks based on social media chatter — that is the chief idea — is openly promoted by someone who dominates the social media trading landscape?
Per Dave Nadig of ETF Trends, Portnoy’s involvement means that BUZZ “now crosses over into a weird quantum state.” Nadig then wonders aloud as follows:
“If Portnoy is arguably one of the most influential voices on Stock-Social-Media, how can he also be economically involved with an index that is supposed to track the very thing he personally influences, and quite dramatically at that?
“If he decides tomorrow, for whatever reason, that NadigPharma is the next stock to go to the moon, we’d expect him to do a bunch of videos and interviews and live streams and clubhouses and whatever else, talking about how NadigPharma was going to cure cancer and will go right to the moon (it isn’t, it won’t). And then NadigPharma gets added to the index because he does his Davey Day Trader shtick really well.
“It’s really quite easy to see how this becomes a sort of Post-Modern Ouroboros, where the hype train drives the stocks, which drives the index, which drives the fund, which drives the hype train all over again when the stock gets added, ad infinitum. And this brings to mind a whole pile of unanswered, and probably unanswerable, questions…”
Indeed, the whole thing seems bizarre: We’re surprised the SEC is fine with it.
Then, too, we have to wonder: What about the social media trading community, which can actually be quite intelligent at times — and which occasionally displays a sophisticated understanding of market mechanics, as evidenced by the GameStop saga?
Imagine, say, the Reddit army figuring out when BUZZ has to do its monthly rebalancing (a standard window of activity where shares are bought and sold to keep percentages in line with targets).
Then, because the behavior of BUZZ is based on social media activity — and the Reddit army can drive social media activity through force of collective will — imagine the Reddit army figuring out how to reflect the BUZZ algorithm’s buying and selling decisions back on itself in a kind of doom loop.
The idea that a social media community could turn a social-media-themed ETF into a self-destructing doomsday device sounds kind of crazy, except the Reddit army did something comparable with the “gamma squeeze” that almost drove GameStop shares into four-digit territory. (According to Thomas Peterffy, the founder and chairman of Interactive Brokers, the GameStop squeezers were minutes away from succeeding, and breaking the system, when broker restrictions shut them down).
And so, when it comes to the outlook for BUZZ, the would-be investor can pick their poison: Death via bear market; death via bizarro-world conflicts of interest between the promoter (Portnoy) and the promoted; or death via gaming at the hands of the gamers (the Reddit army and so on) whose sentiments were intended to be gamed in the first place.
It’s all very silly — another hallmark of manias toward the end. To infinity and beyond!