A phrase that gets thrown around a lot in the business world is “due diligence”. While it technically refers to a legal standard of review that Elon Musk threw out the window when making his Twitter buyout offer, in colloquial speak, it tends to mean “look before you leap, because you have nobody else to blame.”
To be honest, though, DD is a bit of kayfabe that we’re all in on. To paraphrase Matt McConaughey,
nobody, whether you’re Warren Buffett or Jimmy Buffett (rest in peace), knows whether a stock is going up, down, sideways, or in circles. It’s a fugazi.
Tootski?
When we first start out looking at markets, though, it really does seem like some people know more than most. After all, it’s the most globalized industry in the world, and to cover up the vague bullshit that “finance” actually is, the veneer of professionalism is incredibly hard to pierce through. We start reading sell-side research, those pristinely formatted, insufferable analyst reports written by people who wish they had my literary ability and are stuck in a corporate role instead.
In another timeline, Taylor would have been a poster on WallStreetOasis about the same fucking Jane Street interview questions again and again. I could have been Taylor is what the banker should think every time he puts on Delicate while working on a model at 1 AM instead of at that dive bar on the East Side he could have been at. The leverage she used would be on SPX options instead of the weight of her commercial force.
And, of course, everyone knows the story of how Michael Burry was posting analysis way back when in blog post format and got a fund to bet against the house on.
Which brings me to Andrew Left, an odd specimen in the financial writing world that’s part trader, part fundamental analyst, part engagement baiter in some variable weighting. One of the first “alternative research” reports I found back in the day was this Citron Research report (which has been pulled in its original PDF form, for reasons that will become clear shortly) on MNST from 2016, which contains this fantastic passage and came with a short recommendation:
Amped-up valuation: Over the past five years MNST's market valuation is up 500% while its revenues are up 90%.
Let us start with the facts. Monster Beverage is not a technology company, nor is it scalable, and by no means can you ever call it disruptive (to your health maybe). Monster is not even the No. 1 player in the energy drink market. The Monster product is not even discernible to its customers as it is more about the marketing than the product... yet Wall Street has ignored reality.
Not exactly a great call! (Trading fundamentals in ZIRP was a terrible idea, but more at 11.) But that’s what happens when you put your opinions out there — sometimes, you’re going to end up with an egg on your face.
Left, who became infamous in internet trading communities for joining the Dark Side during the original GME saga, has been publishing this kind of “short research” for a long time, well before TSLAQ and any number of perma-bears. He even predates ZeroHedge, the blog that taught me how quantitative easing worked back in 2009. (It’s truly one of those if you know, you know things.) Indeed, he predates Twitter in how far back his engagement-bait writing style goes:
Look, trading is pretty boring. Not a lot goes on intraday in the finance world — it works on a scale far beyond real-time, or it’s so algorithmically driven that it’s beyond the human scale of time perception. So when the SEC came after him last month, it really rubbed me the wrong way — do we really think Andrew Left, a guy who trumps up his credentials like everyone does to drive engagement, is manipulating stocks with billions in market cap? He’s not a penny stock scammer in the slightest — he’s just another person putting stuff out there for people to read.
The Securities and Exchange Commission today announced charges against activist short seller Andrew Left and his firm, Citron Capital LLC, for engaging in a $20 million multi-year scheme to defraud followers by publishing false and misleading statements regarding his supposed stock trading recommendations.
The reason this post is titled as a follow-up to the last DFV post is because, in a legal enforcement sense, it’s very clear why Left was chosen as a target here.
It’s rare that I can’t get at least a pretty good idea of what’s going on after the information is public and contextualize it, but man, this is confusing…
Almost certainly, there is no possible way to cash out these options at anywhere near their theoretical intrinsic + extrinsic value — it is likely that any sort of liquidation would either kill the stock or the extrinsic value of the options. Which, given the amount DFV can push the stock, is not a bad trade if it lands in the money, but it’s certainly unprecedented territory.
I’m not going to link posts and discussions on X, but clearly, many people were salty about this; some called it insider trading, some called it illegal manipulation, and his brokerage even put out a press release stating that they were considering booting himself from the platform (which would obviously start a “Capital Riot”, what a terrible idea.)
That post, and my insider trading longform, explore why the “insider trading” angle doesn’t apply here. This post will address the market manipulation angle, because it’s very clear that regulators don’t like what DFV was doing. There’s nothing illegal about having enough clout to get people to pile a stock — in a sense, it’s immutable edge as long as you can convert attention to bid:
When Ackman or Soros or Buffett are shown to have taken new positions (as 13-F tracking is quite common to figure out who owns what, albeit on a delayed basis), the stock gets a bit of a “halo” effect. This is, in effect, a reflect of the institution’s/PM’s reputation — Softbank used to get a halo, but they don’t anymore (because they don’t pump up the entire US equity market single-handedly anymore.) This is the precursor to postmodern market attention/bid conversion, isn’t it? As an X follower of mine suggested, over time, it’s kind of a Discounted Clout Flow (riffing off the DCF model that is the basis of “valuation”, and frankly, I’m a little miffed I didn’t come up with this delightful term myself) when the information that one holds a position doesn’t pump the stock as much, if at all. If one’s own thoughts of placing a trade even with the knowledge that one has a halo effect constitutes MNPI and create a duty to abstain, all of financial media would cease to exist. It’s been perfectly legal to have “idea dinners” (an old hedge fund trope), “idea conferences”, say insane shit on CNBC, Bloomberg, or anyone who will give you a microphone (cc: Cathie Wood), post on stock forums (which is what got us here in the first place), and more.
Left, in this context, is a juicy target — he’s a known entity, a splashy headline, and certainly some of his actions were unscrupulous:
There’s nothing wrong with publishing a price target — it’s the kayfabe, the headline, just like a SELL/BUY/OVERWEIGHT/A-F rating from a sell-side report or a Michelin-star rating attached to a restaurant. It’s an advertisement — we know not to take it seriously because nobody knows why a stock price moves at its core. I tend to anchor my price expectations to liquidity points on charts, but there’s no logic beyond that other than “I know more people will trade in size there than at other points in the book.” Truly postmodernist market philosophy — it trades there because it trades.
One of my favorite quotes to remember about sell side research comes from David Einhorn, of all people:
This statement should be trivially observable on any given day in modern markets, with “upgrades” and “downgrades” comically following stock prices that we all know don’t really make sense. For example, SVB right as it was getting liquidated had precisely 1 “sell” rating:
My point isn’t that research analysts are useless — indeed, if you actually read their reports, they do actually comb through the financials that I’m much too lazy to do myself — but that none of these people have skin in the game or any real reason to put anything other than a buy rating on a stock, due to the fact that research is generally marketing for the banks to be able to pitch trades to clients (and then collect txn fees.)
No, the scruples come into question when one tries to use the publishing of a report as a catalyst for exit liquidity. From Black Edge by Sheelah Kolhatkar:
As this was happening, hedge funds were becoming increasingly important to the big banks because of the volume of trading they did. Their commissions became a major source of profit. The hedge funds demanded service in return for the hundreds of millions in fees that they paid, and the big firms started to do whatever they had to to keep them happy. The most aggressive hedge funds wanted to know if an analyst was going to downgrade or upgrade a stock before anyone else. A skilled trader—and even a not-so-skilled one—could turn that information into instant profits.
This is, decidedly, a phenomenon of the past— as the pervasive Jim Cramer or inverse Goldman memes exemplify, analyst price targets are more of a running joke than actionable information. Still, this does drive liquidity, on occasion, such that a position becomes tradable:
Look, objectively, I think this is shitty behavior. And for stocks like NVTA, VUZI, and others, there’s a convincing argument that he created his own exit liquidity. At the same time, when stocks like AAL, ROKU, and BYND, relatively frequently traded stocks in the low-volume pre-2020 days, are cited in this report, it’s hard for me to take it seriously. Andrew Left is not manipulating these stocks. It’s insane to attribute this kind of causality to a modern-day Jordan Belfort stock pitch newsletter. Furthermore, this isn’t a very good trading strategy. There’s a lot more risk that “real” size moves against you than the SEC attributes. And what exactly is wrong with following stock recommendations blindly? Isn’t the “Nancy Pelosi stock tracker” meme evidence of the fact that people literally don’t care what the logic is, they just want something to ape into? At what point in passive vs active do we completely absolve people of personal responsibility for being an idiot?
From a legal point of view, I have long had a gripe with assigning causality, usually in the form of bitching about shareholder class actions (longform to come on this):
A common warning I give out is to not ascribe narratives to stock moves (and caution against following people who consistently explain things after the fact because of course it was due to this and this). The system is too complex for the most part for there to be a definitive reason for every move. Proving causality of flows is notoriously hard and requires assumptions that defeat the purpose of ascribing a narrative — what is the proof that the stock moved due to X? It’s much easier to ascribe reasons to a trade. People buy a stock because they think it will go up. People sell stock for various reasons, including rebalancing, profit taking, and limiting exposure, but it still tells you something. People buy certain puts to hedge, etc…
In a court of law, however, you do have to show causality between the act you claim harmed you and the losses you suffered. I do understand why this has to be the case legally…
There are correlations as to how things work, obviously, but sometimes stock moves genuinely just don’t make sense. Take, for example, the day that Amazon’s acquisition of Whole Foods was announced — a classic merger arb trade is to long the target and short the acquirer, because of the difference in the cost of up-front capital for the acquisition versus the eventual forward cash flows of the absorbed company. But AMZN’s stock rose more than the valuation they were paying for Whole Foods!
And ultimately, Amazon and its investors may have gotten an even sweeter deal: Amazon stock rose more than 3% after it announced the deal, boosting the online retailer’s market value by about $14.5 billion—even more than the what it is spending to own all of Whole Foods
The meat of the case against Left that I think is legitimate comes down to the hidden compensation agreements to promote stocks. This is why I’m so careful, even as someone who makes basically nothing from writing all these newsletters, to point out that I don’t take any compensation for cross-posting/promoting my own work elsewhere or publicly disclose that I have a position in something (especially now that I’m trading again.) But to go after Left for publishing shitty research reports that aren’t actionable, well, the onus is on the individual reading it. Much like you wouldn’t take a politician at their word, why would you take a newsletter writer’s “analysis” at face value? The only thing I can conclude is that they want to chill individuals with influence over the markets, a weird perversion of the fact that the entire draw of the stock market is getting “One up on Wall Street.” By trying to simplify complex systems, we create systemic risk on a scale that nobody can comprehend. This is the entire point of the commentary I make on central banking being a “religion”, artificially subsidized of capital, and the other rambling I’ve done for nearly a decade at this point.
One of my favorite analyst reports ever comes from 2016, as well, when a strategist at Bernstein declared that “ETFs are Marxism”.
This really resonated with me back in the day — I have used the “collectively owned” argument as to why sector ETFs and passive investing are bad for liquidity, and in fact this is how every market trades at this point:
The best way to think about theoretical pricing (“valuation”) is that, you can have any sort of proprietary valuation you want, but the only thing that matters is whether you can get filled or not, whether it is an M&A deal or a call option. What we realize is that, beyond all the waxing poetic about the “philosophy of money” and “postmodern markets”, the only thing that matters anymore is “number go up”. You can call it (3,3), Marxism, “everyone dependent on the same trade”, or whatever you want, but the core point is that nobody values bid-side liquidity the same as ask-side liquidity at the moment, so all you can do is stay long with everyone else.
For the good of public dissemination of information, even though a vast majority is bullshit, lies, and scams, I think it’s important that Left beats the brunt of these accusations. I wouldn’t have learned anything without consuming all this commentary, whether Levine, ZeroHedge, FT Alphaville, or, yes, even Andrew Left. That’s the thing about trilogies — there’s one more sequel to come. But, for this one, I don’t know how it ends just yet.
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