Yes, There IS A Crash Coming


by Karl Denninger, Market Ticker:

How do I know?

Because the shoe-shine boy bull**** is going on again.

Don’t get me wrong — I love the money to be made in the last phase of a blow-off like this and those with iron balls can make plenty of money on a crash too.  Just be careful with anything that can get you in margin trouble and for the love of God do not short (or sell naked calls!) against anything spiking.

The two that have really gotten my attention of late are GME and BB.  BlackBerry, as you know if you’ve read my column for a while, really does have something that the market is paying attention to now after several years.  Chen has managed to turn the company into a security software suite powerhouse and while the wins so far are small in size the names he has those wins with are not. And — the firm is hiring, which nobody does when they’re in financial trouble (well, other than bankruptcy lawyers.)


GME, on the other hand, has been turned into a pawn shop for used gaming consoles and cartridges/DVDs by online delivery to basically every platform out there.  It’s a company with literally no value seeing wild double-digit increases in price daily for the last week or so.  They have no PE, their EPS is negative 4 bucks and change (and across ~70 million shares that’s damned impressive at roughly a third of a billion being put in the bonfire a year!) and with under half a billion in cash and under $200 million a year in operating cash flow well, you do the math.

I can’t figure out why anyone thinks this firm has a future.  Then again Pets.Com was going to be the big thing too, you know, along with My****Buddy.Com, MyBlowUpDoll.Com and similar schemes back in 1999.

How’d all that work out for you?

Do recall I ran a real company with a 43% pretax operating margin and no debt selling Internet service during that time..

The fuel for these sorts of moves all comes out of forced buy-ins and margin calls that get generated by the spikes, which fuels more movement in the direction of the original move.  If you’re short and get a margin call you’re forced to buy in at whatever price you must pay, and of course that forced buying makes the price go up even more.  If you’re short synthetic (e.g. via options) then it can get even worse since options need not represent a physical share available to be delivered where at least allegedly, a short sale has to be borrowed first. And in the options market unlike when you buy and a hold a stock for every long there is a short of exactly the same size, and vice-versa.  As such for every winner in options there is a loser of equal size, unlike stocks themselves where if you don’t own something that goes up you lost opportunity rather than money.

Of course with this going on option premiums are through the roof, so don’t even think about that, other than perhaps some sort of straddle or other spread where you can dampen the impact of that.

If you’ve had a nice run in the market (and who hasn’t on the long side this last year post-April?) be careful.

Markets take an escalator up but often jump out the window along with stock brokers on the way down.

Who remembers this?

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