Their focus was clearly towards capturing the attention of the poor millennials and so they did. They introduced an easy to use smartphone app to trade stocks. It even allows users to buy fractional shares. This is a very attractive feature especially for many youngsters who cannot buy the high-priced shares like Tesla, but they can buy a fraction of it. E.g. if Tesla shares are trading at 1000, an investor can purchase 1/10th of a share for the price of $100.

All these additional features with no brokerage charges! So, what is the catch? We will get to that in a minute. The smart phone app became really popular with the millennials when lock down was mandated. In the first quarter of this year alone, they signed up 3 million new clients. It now has 13 million customers surpassing a very established firm like Charles Schwab which was established in the early 70’s and has 12.3 million customers.

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They thrive on something called “surveillance capital”. Remarkably similar to Google and Facebook’s businesses model. They also offer free services. Are the services really free? Think about it. They collect our data, package it in different ways and use it for advertising – collecting top dollars.

The key point in this is, if the product or service is free, it means the consumer is the product.

Robinhood does something similar. If you study their legal disclosure, the company is routing most of its customers’ orders through hedge funds for execution.

One of the hedge funds that Robinhood uses is Citadel Securities - the world’s biggest fixed income market maker and a major player in retail equities market making. They have very sophisticated automated trade execution capabilities. Robinhood routes close to 70% of their orders through Citadel. So how does Citadel make money? They front run them. They buy the stock first, and they turn around and sell it to the unsuspecting Robinhood customers at a higher price.  All this happens at lightning speed. It is a minuscule profit that they make but with the high volume that they receive it really adds up. Just like the “house” in a casino, Robinhood and Citadel doesn’t lose any money. More the volume, the merrier they are.

Is this legal? Well, they have found ways to stay on the right side of law. No doubt, it is a nearly deceptive practice.

50% of Robinhood account holders have no experience with trading at all. The average age group is 30 and the average account size is $2000, whereas at E-trade it is close to 70,000 dollars and at Morgan Stanley, it is close to a million dollars. The customers at Robinhood have no idea what is happening.

So surely, they are not getting the best price on their trades. These fat cats are robbing from the poor to benefit themselves. Robinhood is pinching the poor to fatten the rich!

Robinhood makes money from their market makers as they pay Robinhood for the luxury of executing their orders. It is information for the market makers immediately and for future trades to come.

Last year, Robinhood was fined 1.25 million dollars by FINRA for allowing their brokers to front run their orders. But does that really matter for a company that is valued at 8 billion dollars. Citadel was fined 22 million dollars by the SEC in 2017 for misleading their clients.

Robinhood was intended to create a level playing field with the one percenters to benefit the less rich who couldn’t access the markets. Is that what is being achieved?

So, how can investors protect themselves from the cunning ways of Robinhood? Firstly, do not put market orders. Always put limit orders. If the market comes to your level your trade is executed. Secondly, do not put your stop-loss orders in the market. When the market maker can see an aggregate of orders at a particular level, they will invariably look to hunt you down.

So be smart in using this app. That way at least you will limit yourself from feeding the rich.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.

In February, when the whole world was falling apart and as the stock markets took a nosedive, we recommend four stocks to hold: Amazon, Facebook, Salesforce and DocuSign. All those stocks have done phenomenally well. It is not only these stocks that have done well. Stocks like Microsoft, Apple, Nvidia, Netflix to name a few and many other major tech stocks have also held their ground or gone higher. It was always not like this in previous crashes.

When the dot-com bubble was raging on Wall Street in 1999 the technology sector went up by almost 70%. In 2000 when the crash happened, the technology sector SPDR Fund (XLK) that tracks the 70 largest tech stocks in the S&P 500 was down 41% for the year.

And again in 2008 when the GFC happened in 2008, XLK plunged by the same 41% - 42%. But this time around something fundamental has changed. Instead of falling, after a brief bout of selling most big-name stocks have roared back.

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So, what is the fundamental change? Technology became mainstream. In the intervening years, many things changed. Now if you are leading an urban life you cannot do without technology. The pandemic further aided technology too. Some areas of technology which were struggling, took off to the stratosphere. Zoom is up 270% for the year. Most technology companies feed off one another but Amazon is an exception. The stock is up almost 50% for the year.

From a digital bookshop there is not much areas of daily life that we can go by without the presence of Amazon. They brought efficiency, innovation, productivity, and competition to the system. Their focus is not on profits. Profits will take care of itself. It is about market share, revenue, and competition. They still don’t pay any dividend, but don’t you miss not being invested in Amazon?

Look at Walmart. As cash rich as they are, if it was not for Amazon’s competition through technology they wouldn’t have quickly adapted and embraced to technology as they have done now and made tie ups in countries like India and China. Companies like Target and Walmart which are our “essentials” have stood their ground only because they have become more efficient through technology and gained edge on their competition. Look what happened to Toys R us and Block Busters. They never saw the coming change in product delivery, innovation, competition, and customer preferences. So, they became history.

Technology is ever changing. There is a lot to come through self-driving cars, 5G, IOT, AI, blockchain, CRISPR to name some which will soon become mainstream. New companies will emerge. There may not be much juice in investing in the established big technological names if you are looking for outsized returns. So, look for those gems that you will find if one is focused on their research.

As Ray Dalio of Bridgewater (the biggest hedge fund) has said in many of his interviews, “the companies that will survive in the future will be the efficient meat and potatoes companies for our daily life and others will be the innovators”. I will add one more point: companies who have low debt or are cash rich.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.

But yesterday, the Fed got a little worried about the banks. In a 4 to 1 vote the Fed suspended future stock buybacks and tied bank dividend payouts to a complicated formula. Those interested can google up to understand more about it. But why is the Fed doing all this? After this week’s stress test on major banks, the Fed is overly concerned and is being protective, as there is no clarity on how long the pandemic can go on.

In a nutshell, the FDIC and the Fed wants banks to take more risks to boost the economy. But they also put brakes on share buybacks and higher dividend payouts. This was something they should have done long time back. Remember Dick Fuld who earned over $500 million in salaries and bonuses without taking any responsibility for bringing Lehman Brothers down. Leading banking stocks fell hard yesterday and while Jamie Dimon was busy “taking a knee”. JPM stocks fell 5%.

Meanwhile Microsoft will close all its physical stores. Think it is a sensible move. It doesn’t have any product that one needs to stand in line to buy nor it does have a cult following like Apple for its products. The pandemic really helped them to understand they could very well sell their products better online than through a physical store. They will take a charge of $450 million in fourth quarter due to the closures of 116 stores but think it will pay off very soon.

Issues surrounding the pandemic are getting very political as COVID cases hit all time daily records in US. One of the biggest talking points out of this will be “mail-in voting”. If it happens the Republicans can forget about the elections. It will directly benefit the Democratic Party in a big way. Without any of this President Trump is shooting himself in his foot. Let’s analyse the markets.

Equities

For some time, we have been building up a story giving ample evidence for a topping pattern in the major indexes. We had three up days last week as to two down days for the week, but the Dow closed at its lowest level for the month.

We believe the corrective tops were seen on June 8th at 27,580 in the Dow and 3233 for the S&P 500. Yesterday’s move down was more telling as there were 4.75 stock down on the big board for everyone stock that was up. The down volume was 87% of the total volume. Monday could turn out be a sharp down day.

Bonds

There was clear rotation out of stocks into bonds yesterday. The patterns now argue for a move to 183^02 of Apr 22 or slightly higher before it tops out for the next leg of its down move.

Euro

The Euro could have ended a corrective up move to 1.1349 on June 23. It is particularly important that it stays below this high for its move down to the 1.1000 area.

Gold

As long as prices stay above 1747, gold can rise to 1800. A break below the 1747 should conclude that a top has been seen. So next week’s trading should be very crucial for gold.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.

As we outlined in the last report, markets are waking up to the expiry of the pandemic unemployment benefits, eviction reprieves, student loans and cash for small businesses. Many of them are expiring next month. There is no clarity on whether they are going to be renewed or would new measures be put in place. The Congress seems to be stalling on the idea of additional stimulus payments. People will look up to the Fed for more guidance.

In other news, IMF has a worsened global outlook. IMF expects a contraction of 4.9% this year. Due to the recent standoff between India and China, all products that are made in or originating from China will be labelled accordingly. By the way, Jack Ma is no longer the richest man in China. It is Pony Ma, the founder of Tencent. Putin is trying to make constitutional changes to stay on in power till 2036.

Equities

The psychology of a bearish corrective up move is to suck you in and make you believe that the market is still in an uptrend. We have given you umpteen evidence why this is a suckers’ rally.

What we did not mention before is that the major two indexes (Dow and S&P) has left an island reversal at the top on June 8th. Island reversals happen when markets trade to a high or a low with gaps at both ends. Normally they are trend reversal patterns.

Small retailer call buying is at an extreme. Extreme sentiment can remain extreme for a longer time than each of us can imagine. The fact that NASDAQ is trying to make new highs on every opportunity when others have stalled is added indication to be careful. In the coming days the force should be with you for the downside.

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Bonds

The sideways trading in bonds continues unabated. As mentioned before the high on Apr 22 at 183^02 and the low at 170^03 on Jun 05 are the watershed levels to watch.

Euro

Previous comments on Euro continues to hold.

Gold

Gold made new highs for the session and has yet to reach our advertised level of 1800. This could happen but it is not a must. Any move below 1670 should confirm the upside pressure is over.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.

Tomorrow will mark three-full-months since the Fed responded to the government stay at home orders with unprecedented polices that they have not introduced before in its almost 107-year history.

While the stocks are being fueled by this sea of liquidity from the Fed, what is not being addressed is that many of these emergency measures that the government has introduced will disappear soon. If the government does not introduce a second package to time it with the first one’s expiry the effects will soon be reflected in the stock markets too.

What were these measures? Let’s get to specifics. 1) Evictions by landlords had been temporarily waved off. That runs out on July 25th. 2) banks were supposed to give a six months break on mortgage payments if requested. It will run out by end of Oct. 3) student loan payments have been put on hold. It will run out by beginning of Oct. 4) Government sent out nearly 159 million payments of $1200. 5) Another 20 million became eligible for $600 per week for unemployment benefits. This will also run out by end of July.

April this year was the single most household increase income increase ever on records which was at 10.5%. This was also the month where millions of online accounts were opened at brokerage houses like Robinhood. Previous months rise in personal income have been much less than 1% or even negative as it was in March. At the same time, consumer spending plunged by 13.6% the highest ever in six decades. Have a look at the charts if you can for the last six years. The consumer spending and personal income run together like two entangled snakes and all of a sudden in April it diverges in the most dramatic fashion you can imagine.

Currently, the markets are at the mercy of how the second wave of pandemic is affecting the economy and how the injection of this liquidity on steroids by the Fed is playing out.

As I formulate this report, there are conflicting reports from Peter Navarro the chief negotiator in trade deals with China. It is not looking good. US intelligence officials grow increasingly confident that the coronavirus pandemic originated in a Wuhan laboratory.

Navarro added that the November election will boil down to three key issues “jobs, China, and law & order”. Now to the markets.

EQUITIES

The repeated sub-divisions in the wave structure is pointing to one thing. The corrective up move should end soon and the big move down move can start as early as today or tomorrow.

The Nasdaq has been an exception making new closing highs. The divergence with the other two major indexes is further evidence that the top is almost in sight.

BONDS

In bonds too we are caught up in corrective subdivisions. A move below the 05 June low at lower 170 should give more clarity to our bearish outlook.

EURO

Trend followers are heavily long the euro through futures and options. They are large speculators comprising of major hedge funds. Their strategy is to increase their positions as the markets increase or decrease their positions when markets fall or even go net short.

When these positions get to an extreme relative to their historic norm the trend is normally in its last stages before a reversal. This is not a short-term timing tool but provides good indication to our existing bearish view.

GOLD

Gold made a high of 1763.50 yesterday. While it did not make a new high the risks are aligned to making a new high around 1800 that we have mentioned many times through this report.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.

As we all know, the Fed stepped up to the situation very swiftly and drastically in much bigger ways than we could imagine, to counter the fall in asset prices and economic conditions. They dropped interest rates to zero in a jiffy, mind you, that decision was taken on a Sunday not at its usual FOMC meetings. They pumped in three trillion dollars in less than three months which they had not done in the last 8 years. The balance sheet has bloated to 7 trillion dollars and is expected to rise more.

Let’s take a small peek at what was the state of affairs before the pandemic hit us. All major economic indicators were contracting. GDP, capital spending, productivity, corporate profits, construction spending all were showing recessionary tendencies. No doubt, unemployment rate was at a 50 year low. It even tested 3.5% which is below Fed’s idea of full employment.

So, what kept the asset markets and economy up? It was consumer spending and financial engineering. Mainly share buybacks. Money never went into capital spending as it should have. Share counts went down to a 20 year low.

US is a very service-based economy and normally it constitutes 70% of the GDP but in 2019 it was around 90%. If you analyse more deeply around 80% of this growth in GDP was through non- essentials. What do I mean by that? Entertainments, leisure, theme parks, travel, restaurants etc. Low skilled, less educated, and low paid jobs. That is why despite having the lowest unemployment rate of all times, US did not have any wage growth.

So, when the pandemic hit us, these businesses got hit the most and now when the economy opens up, they will be the hardest to recover. Firstly, social distancing is anti-growth. The government has reconfirmed that they will not go into an economic shut down again. Probably that may the right thing to do. But people will. If the second wave of coronavirus virus gets out of control, businesses are not going to reopen. Capital spending will not take place or will be to a minimum. Mostly to meet the requirements of pandemic regulations. As it is, leverage was already high in the corporate sector before all this happened.

The very unfortunate thing and unique to this situation is that for all the largesse that the Fed and Treasury are doing, they will not get the desired results. The Fed cannot create income nor employment. They can only create conditions. It is the corporations and small businesses who can do that. The Fed must have moved from a risk-free interest rate to a no interest rate position but what is the use. Japan is a great example.

Consumer spending habits will change drastically. It already has. Saving rate has risen to 33%. Not that it will stay high at these levels. Households were not prepared for this. The pandemic was a wake-up call to many. So, it is more likely households will use the government handouts to repair their balance sheets and save more cash. Of course, there will be the odd millennials who will use it as monopoly money to punt the markets. We will hear about their fate soon.

The authorities are caught between a rock and a hard place. When something similar happened in the 1930’s, in terms of the markets the then President FDR created jobs through infrastructure spending. The Hoover dam and Golden Gate Bridge in SF are results of that. The current position is to pay people for not to work. How long can this continue?

One thing for sure the Fed will play a major role in all aspects of the economy and to a lesser extent the dollar will too. The dynamics of deflation, disinflation, inflation, and stagflation will become major talking points. I think the end result will be stagflation. That is totally a subject on its own, we will discuss another time. As Voltaire said in 1729, paper has to return to its intrinsic value which is zero.

Finally, the stock markets will gravitate towards the real economy. The liquidity driven prices will find an equilibrium. Equities will still be attractive, but one has to look for those ones that is adapting to the changing conditions.

It will be a different story if a vaccine is found or if an effective treatment is found to eradicate the virus. The delay in that process will determine the future of many businesses.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.

According to a revised interpretation of the Mayan calendar, the world is supposed to end today. We will see how that goes. But, more interestingly, today is the “Ring of Fire” solar eclipse. Depending on where you live, it is recommended that you don’t look directly at the Sun (google up for more specific details).

Friday was a fairly volatile day in the markets with quadruple-witching expiration. Renewed concerns about a recovery and COVID-19 tempered the market’s early enthusiasm.

Boston Fed President Rosengren said he thinks an economic rebound in the second half of the year will likely be slower than initially expected due to the continued spread of the virus. In the stock markets early gains turned into losses as fears of another resurgence of the pandemic gripped in many states across US. Apple decided to close retail locations again in Florida, Arizona, South and North Carolina.

Meanwhile, President Trump is going through a torrid week. While he is holding a campaign rally despite concerns over public health, it is reported that six of his volunteers are already infected with the virus. Around 100,000 supporters and Black Lives Matter protesters are to be in the area around the site of the rally.

The US savings rate rose to 33% in April, the highest level ever while consumer spending fell 13.6% which is also a record. The high-income Americans are hoarding their wealth. While online grocery sales have risen by 200% year over year, luxury goods sales could fall by 60% or more for the three months ending in June. With the stimulus checks of up to $1200 hitting millions of households, personal income has gone through the roof. Most of that money has found their way into punting the markets.

EQUITIES

On Friday, the S&P carried to 3156 but the high was not confirmed by the Dow. After repeated attempts to break the support at 3076, the index closed below that level by the end of the day. Believe both the major indexes are poised for further falls starting Monday.

BONDS

Bonds are undergoing some subdivisions but think prices should be capped under 178^15 for the next leg down.

EURO

Euro is playing to book. Strong support exists around 1.1100 and further out at 1.1025. Resistance at 1.1355 should cap the upside.

GOLD

After a lot of sideways trading, Gold closed at its highest level since May 20. As outlined before, our key levels to the topside are 1765 and 1800. While on the downside, we look for a break below 1670 the low on June 05.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.