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INSTITUTIONS PLAY CHESS NOT CHECKERS

What if I told you that institutional traders had algorithms for your emotions, and that the first hour of trading was known as the fool's hour?

What if I told you that they deliberately push stocks above resistance and below support lines - only to suck you into the trade, before kamikaze nose-diving the stock through your stop loss to get you in the middle of your emotions, so that you would revenge trade? Sound and Feel familiar?

While this may seem sadistically unfair and farfetched at the same time, please believe institutional money has a playbook and it’s centered around seeking liquidity from the retail trader.

It’s almost like institutional traders are sitting in front of a minority report futuristic-type rig, with retail triggers lighting up like heat signatures when the not so smart money trades are placed.

This would lead the most simple-minded person to ask, is the game rigged? Or is it just another form of legalized manipulation of first-hand information and technology, where the biggest block trades win?

It's like a scene out of the movie, Trading Places, where Eddie Murphy and Dan Aykroyd are laughing profusely in the trader’s bullpen, after scoring a huge windfall clutching each other, yelling and laughing out loud, Got em’!

Institutional traders must love these social media gurus who make more money off of selling chart setups and unqualified advice than they do trading stocks.

They love to talk about price action and taking just one trade a day when it all sounds like one big episode of Jeremey McGuire screaming, “Show me the money!”

So, it’s all one big circle jerk. Institutional traders take advantage of the retail traders, and those who suffer from the better-than-average effect—the so-called alpha retail traders, lead the beginner traders with empty promises to a land where unfulfilled sheep get slaughtered.

And if it sounds like an episode of Mad Max, Wall Street is way more sadistic. Just think of Wall Street as an insiders-only club where they pretend to be highborn and above the snakes that slither on the ground, when in fact, they are the largest data anacondas in the world. They have access to all your trades, stop losses, limit orders, and for you—the Risky Randy types—even the price that will trigger your margin calls.

To Wall Street, you’re just the blind squirrel trying to get a nut, and not only are they moving the goalpost daily, but they are gaslighting you to believe you actually have a shot to win.

REVENGE OF THE RETAIL TRADER

It’s not enough that you have to watch out for the institutional traders, the quant firms, and their algorithms, but you have to watch out for the predatory short sellers.

Short sellers are a different breed of investor. Their whole intention is to profit from your despair and the downside of a company, and if they have to lie, cheat, and manipulate a good company’s stock to do it–then so be it.

Here is how it works. When you’re shorting a company, you have to borrow the shares from your brokerage, and you must have a margin account with enough equity to facilitate the short. When you are short, you make money as the company goes down.

For example, let’s say Tesla misses their delivery number, so you short 100 shares of Tesla at $351 a share. Tesla drops to $345 a share, which gives you an unrealized profit of $600.

In order to take advantage of the six-point drop or $600 gain, you would have to buy to cover the 100 shares of Tesla at $345 a share to realize the $600 gain.

Now mind you, shorting a stock is extremely dangerous…Here is why. When shorting a stock, your upside is to 0. This means if you short Tesla at $351 a share; theoretically, your upside is limited to 351 points. If Tesla goes down to zero, you make a $35,100 profit; although highly unlikely, nothing is impossible.

Now on the flip side, your downside is unlimited because, theoretically, Tesla can go upward to infinity…again, highly unlikely. This leads me to my next topic, short squeezes!

Let’s say there is a rumor that Tesla is fudging their delivery numbers, inflating them by 70%. Short sellers would immediately swarm in and start building a short position, expecting to short on rumor and cover on news.

Here is where a short squeeze could potentially, take place. Let’s say the short sellers put on such a dramatic short, that it takes 10 or more days to cover.

So let’s assume hypothetically, 1 billion shares were shorted or 28% of the floating supply. Tesla trades 89 million shares a day, so if you divide one billion by 89 million, it will take approximately 22.47 days to cover (since half the volume are sell orders; technically, they can only sell 44.5 million shares daily).

Now suppose the rumor was false and the news hits the tape…headline: Tesla's Deliveries Verified, and the shares skyrocket 10%. This means that the short sellers would have paper losses in the billions and counting.

To stop the hemorrhaging, they would have to buy to cover based on the daily volume at higher prices. Now, keep in mind, based on the size of the short (1 billion shares), the stock will be propelled higher since the influx of panic-covering (buying) forces the stock higher and higher each day.

This is exactly what happened with GameStop in 2021, but instead of the short sellers winning, the short sellers (Melvin Capital) got crushed.

It was discovered that Melvin Capital and other hedge funds had shorted 140% of the 260 million GameStop outstanding shares, which equates to a short of 364 million shares (Naked short).

WallStreetBets caught wind of this and started buying up the shares. The stock started to climb and institutions scrambled all over the street to cover their shorts, but not before Melvin Capital booked $6.8 billion in losses or (53% of their assets under management) forcing them to liquidate and return the remaining money back to their investors, and close their doors.

The classic David versus Goliath saga ended with Reddit’s WallStreetBets, a consortium of retail investors, smashing the big bad Wolf.

In my opinion, there are two types of short sellers. There’s (1) the one that exploits an open weakness in a particular area of the market, like Michael Burry of Scion Capital or Bill Ackman of Pershing Square Capital and (2) one who attempts to impale a company with false accusations and manufactured data.

The latter are the Wall Street hitmen who attack companies at will under the slogan, Where I create smoke there is fire.

Take, for instance, Prescience Point Capital Management, a small firm that specializes in shorting; fabricated a report that Enphase Energy, Inc., a supplier of distributed solar power components, was fudging its numbers.

This report was false and unsubstantiated. The report released, on June 17, 2020, alleged that at least $205.3 million of Enphase’s 2019 U.S. revenue was fabricated along with a significant portion of its international revenue.

Prescience Point Capital Management even went as far as to state that Enphase's financial statements were pure fiction.

This is not Enphase's first brush with the nefarious firm. They made similar allegations in 2018. The second allegation immediately triggered the ambulance chasers and created a class action lawsuit in the U.S. District Court for the northern district of California in San Jose.

The accusations almost always start with a disgruntled ex-employee who feels unjustly terminated. In this case, Prescience Point Capital Management said, based on a communication with the ex-employee in India, that Enphase Energy was using their India operation to cook the books at the direction of the U.S. executive team.

This triggered a 26% drop in the stock; I remember it as clear as day. The stock opened at 52.15 a share and closed at 39.04 a share.

When this happens, your first reaction should be to wait and see if either Wall Street or the company would come out and defend against the allegation, because you never make a decision out of indecision or emotion.

And that’s exactly what happened…the CEO Badri Kothandaraman debunked the accusation. Enphase reported a strong second quarter and their shares went from the June 17, 2020 low of 37.81 to a high of 189.41 by December 28, 2020, but not before the short seller, Prescience Point Capital Management, made their bag of money off of a premeditated manipulative lie.

Today’s environment seems to be a hotbed for these types of allegations. More recently, Hindenburg Research’s hit piece on Super Micro Computers accounting practices and the website, The Information, refurbished old information about NVDA Blackwell servers overheating two days before their November 20th third-quarter earnings report...

True or false, bad timing or not…Wall Street hates uncertainty and traders often shoot first and ask questions last, allowing short sellers to benefit from false accusations regardless of the truth.

THE DATA IS THE ONLY THING THAT MATTERS

The manufacturing PMI numbers hit on Monday, December 2nd. Let’s understand what the reports mean exactly.

First, there is the manufacturing PMI (Purchase Manager’s Index) numbers. This report incorporates survey results provided by manufacturing firms throughout the country.

The manufacturing PMI is what they call a diffusion index; it is used to measure the breadth of changes in a particular economic variable. In plain English, it measures the changes in a particular part of the economy, in this case manufacturing.

The survey includes new orders, inventory and production levels, supplier deliveries, and employment.

If the PMI number is 50 or over, this means the manufacturing sector is in expansion. If the manufacturing PMI number is under 50, this means manufacturing is in contraction.

The manufacturing sector has deep implications on the economy. A decline in manufacturing can lead to job losses and increased unemployment rates; in turn, hurting spending as fewer people have jobs.

Manufacturing is a key driver of economic growth or GDP; the healthier the manufacturing the healthier the economy, as it produces more economic output.

A major disruption in manufacturing can stifle the supply chain. This can cause inflation pressure as there could be too much demand chasing too few supplies; therefore, causing prices to rise.

A decrease in manufacturing can negatively impact logistics and transportation. The closest example is the 2020 pandemic.

Next, The Institute of Supply Management (ISM) Manufacturing PMI number.

This survey is based on purchase and supply executives in over 400 industries. The method of measurement is the same; if 50 or over, manufacturing is in expansion, and if under 50, manufacturers are contracting.

The Service PMI; this survey is collected from over 400 executives in the private sector. Service companies, again - same method of measurement. The Difference between Services PMI and Manufacturing PMI is the difference between goods and services.

When we see service in expansion (over 50), we see consumers more willing to spend on services. When we see the contrast between service being up and manufacturing being down - this translates that consumers are less likely to spend on goods or high-priced items, as declining manufacturing may affect incomes, but they are willing to spend on service when it comes to leisure and enjoyment

The ISM Non-Manufacturing PMI is almost identical to the service PMI, but instead of surveying 400 executives in the service sector, the ISM surveys 370 purchasing and supply executives in over 62 different industries. Understanding data coming in from the economy is important because you can’t be successful in the stock market without it.

YOU CAN’T DO NEW THINGS WITH OLD THOUGHTS….INTEL???

Speaking of which...Intel, the beleaguered chip maker, suffered another blow of uncertainty in what looks like a forced ousting of their CEO, Patrick P. Gelsinger, effective December 1st, vacating his CEO position and stepping down from the company’s Board of Directors.

According to a Yahoo source, the board had lost confidence in Gelsinger, deciding a change was necessary for 2025. In the meantime, their CFO, David Zinsner, and head of the Client Computing Group, Michelle Johnson, are interim CEO’s while they search for a permanent CEO to do the heavy lifting.

Intel is the perfect example of a company that was once dominant that grew complacent. At its peak in the ’90s, Intel controlled 90% of both the global microprocessor market for PCs and server CPU market. Instead of pushing the boundary on engineering and innovation, they rested on their laurels and left the door open for companies such as AMD and NVDA to take market share.

In fact, one of Intel's famous missteps was not acquiring NVDA back in 2005 when Paul Otellini, their long-time CEO, proposed a $20 billion acquisition. The board rejected the takeover sighting Intel's poor record at integrating companies.

Adding insult to injury, on November 7, 2024, Intel was replaced by NVDA in the Dow Jones and compounding their misfortune, they have failed to produce a competitive AI offering to compete with the AI Godfather, NVDA.

They are even being beaten by their smaller competitors. AMD’s 3rd quarter 2024 data center revenue surpassed Intel's 3rd quarter 2024 data center revenues (3.5 billion to 3.3 billion for the first time). And if you look at their numbers, it seems they are going backward not forward, especially with the loss of Pat Gelsinger, which promotes a degree of uncertainty over the initiatives laid out on their 3rd quarter conference call.

They are cutting 15% of their workforce, they have paused their dividend, their margins are shrinking, revenue is down, and they are spending big trying to catch up and stay relevant in a market that is quickly lapping them at every turn. They are calling it restructuring; I am calling it a major overhaul at best. They have to do way more than slap some lipstick on this pig to get this dog to hunt.

The chart says it all…

The numbers are horrendous; revenues are declining, their numbers are negative, margins are shrinking, and they are hemorrhaging cash chasing a moving target

Intel is expected to regain positive free cash flow in 2025, but due to their failure to innovate they are missing the AI revolution. By the time they have an offering, NVDA could be on its 4th or 5th AI generation chip - add it to the fact that NVDA has a strangle hold on the market with their CUDA software, which was created in 2006 and has over five million developers using it.

AMD is in a distant second with their ROCm software, created in 2010, and Intel's oneAPI, created in 2018, is not even in the race. The AI ship has sailed without Intel. Perhaps down the road, they will be a major player in the U.S. Foundry Market, like Taiwan Semi-conductor, but that remains to be seen, and the street wants their pound of flesh, if this is to be investable again.

A FAIR EXCHANGE AIN’T NO ROBBERY…

Did one person's inability to afford the high cost of healthcare trigger the murder of UnitedHealthcare’s CEO Brian Thompson? It is no big secret that insurance costs are skyrocketing across the country.

The United States has one of the highest healthcare costs in the world. According to CMV.gov in 2022, U.S. healthcare spending reached $4.5 trillion, which breaks down to $13,493 per person; that is more than twice as much as other wealthy countries.

Relative to the size of our economy, healthcare costs have increased over the past few decades—from 5% percent of GDP in 1962 ($603.64 billion) to 17% in 2022 ($25.46 trillion), which if you compare both numbers looks insane.

If you ask why, they will say due to the aging population. The 65 and older population has increased over the past several years, rising from 14% to 17% between 2012 to 2022 and is expected to rise to 21% by 2032.

And while the rise in costs seems justifiable to insurance companies, the cost of insurance for a family is skyrocketing. In some cases, insurance is more expensive than some people’s rent.

The average annual cost of insurance for a family in 2024 is $25,572 or $2,131 per month. So, the question remains…How can a person or family live with the high cost of insurance?...the increasing cost of shelter?... and the cost of food and energy, while simultaneously investing for their future?

 Answer: THEY CAN’T!

According to the U.S. Bureau of Labor Statistics (BLS), the average monthly expenses for an American household in 2024 was $6,440 monthly or $77,280 per year net, which represents a 5.9% increase from 2022.

In order to net $77,280, you need an annual income of $102k in a tax bracket of 25%, and even so you are just barely making it.

In the United States, the average income is $114k per household, which means families are planning on perfect and hoping nothing increases or goes wrong, especially with 65% of Americans living paycheck to paycheck.

There are two economies—Wall Street and Main Street; and Wall Street is out of touch with reality. They are quick to tout the consumer as being resilient and strong, but when you get to the heart of the average individual Americans’ financial economics…they are barely…making it.

The consumer is suffering from incremental price increases yearly, even though wages grew in October by 4.6% - outpacing inflation at 2.6%, the first time since January 2023. Real hourly earnings only increased by 1.4% year-over-year from October 2023 to October 2024, which opened the door for Trump, under the slogan, Anything has to be better than what we have now.

A great majority of Americans are living between thin margins, feeling disenfranchised by what feels like a financial rape, and on top of this they cannot afford to get sick, which probably explains the unfortunate demise of UnitedHealthcare’s CEO, Brian Thompson. As an American, all we want is a fair shake not a financial shakedown because a fair exchange is no robbery.

Thank you for reading and again please like, comment, and share with your tribe and follow me on Facebook, Instagram, and Tiktok.

Kevin Davis Founder of Investment Dojo and Author of The C.R.E.A.M. Report

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