The Reddit
Group Movement is doing precisely what the US Fed has done ….. decouple the
market values of common stocks from their intrinsic values from company
fundamentals.
The Reddit
Group Movement’s investment in common stocks were driven by their desire to
punish hedge funds that sell common stocks of poorly-performing companies short
with the expectation that they can buy the common stock in the future at a
substantially lower price and thus make a nice profit. By selling common stocks short, these hedge
funds are not investing in the stock market but rather gambling that something
negative will happen to the company’s stock price.
The Reddit
Group Movement’s huge investment in these struggling companies have been very
successful in short-squeezing the hedge fund to buy the common stock at a much
higher price and take a huge loss rather than their expected profit.
The Reddit
Group Movement’s huge investment in these struggling companies have pushed the
stock prices of these companies so high that they are now monumentally
overvalued based on these companies’ actual and expected earnings and their estimated
discounted cash flows.
But it
doesn’t make any difference because stock market prices are based on buyers and
sellers. If there are more buyers than
sellers, the stock prices rise ….. and oh how there have been more buyers than
sellers so far in the Reddit Group Movement.
The overall
US economy really sucked in 2020 with a GDP decline of 3.5%, the worst decline since
1946.
But even
more importantly, when the books are all closed for 2020, the Total Gold-Standard
US GAAP Pretax Income of all US Companies Combined will decline by more than
10% and these will be audited numbers by highly-respected, independent CPA
accounting professionals. GDP numbers
are not nearly as accurate since they are simply the grinding out of so many
gigantic numbers with many assumptions baked into them by many economists.
So why has
the overall US stock market increased so much in such a horrible year
economically?
It has all
been driven by the actions of the US Fed which artificially increased the stock
market prices substantially above what their true intrinsic values are fundamentally.
First, the
US Fed has bought and is continuing to buy trillions and trillions of dollars
of US Bonds and of risky US Corporate Bonds.
What that
does is create liquidity ….. trillions and trillions of more cash available for
investors to invest.
And second,
the US Fed drove down short and intermediate-term interest rates on T-Bills and
on Notes to almost 0%. And the interest
rates on longer-term Notes and Bonds have followed suit in lock-step and thus have
also seen their interest rates drop precipitously.
So all of
the substantial increase in liquidity that the US Fed has created has gone into
the US stock market rather than into Debt Securities because the interest you
can earn on the Debt Securities is so incredibly miniscule.
And to top
it off, smart money sees beforehand that the result of this US Fed action will inevitably
create a huge increase in stock market prices since there will be so many more
buyers than sellers of common stock and thus beforehand this smart money goes
long on common stocks creating an even much more artificially-inflated common
stock market divorced from fundamentals.
And to put much more kindling on this fire, the many Technical Chart analysts push these stock prices of struggling companies to even higher levels by the strategies they use to quickly buy rising common stock prices and also ones that are breaking out.
The Reddit
Group is just showing how they can create artificially high common stock prices
just like the US Fed has.
The US Fed gets effusive praise for its actions but the Reddit Group gets vilified by many for doing simply the same thing. Go Figure!
