Dear Reader,
There are so many incredible things happening in the world of technology, biotechnology, and investing on a daily basis. Sometimes it can be hard to decide what to write about.
Today wasn’t one of those days.
A confluence of social media, a market distortion, and a desire to get the upper hand over Wall Street resulted in one of the most incredible market moments that I’ve ever seen in my 35 years as an investor.
Here it is in one chart:
For those that don’t know GameStop, it is the video game equivalent of Radio Shack for electronics or Blockbuster for movie rentals. The company has been in bad shape for a long time. And it’s floundering in a world where video games are now mostly downloaded online or purchased on Amazon.
How did this happen? Pretty simple actually.
Day traders on a social media forum called WallStreetBets on the Reddit platform noticed a massive short position taken by hedge funds in GameStop. They figured if enough people got together and bought GameStop, they could “squeeze” the hedge funds out of their positions. That would force a massive run-up in the share price.
And that’s exactly what happened.
GameStop was trading around $17.90 a share on the first trading day of the year. At its peak this morning, it traded as high as $483 a share. For those who simply got lucky and bought at the right time, that’s a more than 26x return within a month.
This has nothing to do with fundamentals, analysis, or the underlying assets of GameStop. Normal investors figured that they could beat Wall Street at their own game… and they did.
And what happened next was also interesting. Another social media platform that hosted the WallStreetBets server banned the group. The “justification” was that users engaged in hate speech and spread misinformation.
What is befuddling is that hateful, foul, crass, and crude language is everywhere on Reddit, Discord, and Twitter. It is so ever present that it is sadly normal.
These platforms are using double standards to pick and choose which individuals or groups they want to ban, censor, and ultimately “cancel.”
The White House took notice and commented on the GameStop situation. And the Securities and Exchange Commission (SEC) even had to step in to say:
We are aware of and actively monitoring the ongoing market volatility in the options and equities markets and, consistent with our mission to protect investors and maintain fair, orderly, and efficient markets, we are working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants.
This really made me laugh. Why?
More than 100% of GameStop’s available float (the number of shares available for trading) was being shorted by hedge funds. How is that possible?
Technically, it’s not. Short selling requires the short seller to borrow shares from someone. The short seller sells those borrowed shares to someone else, with the liability of having to eventually buy back those shares.
But “naked short selling” is something that bad actors on Wall Street have done for years to fleece normal investors. By selling short shares that don’t exist, they ultimately drive down the share price, forcing retail investors to sell out their positions.
And then the short sellers buy back the stock for pennies on the dollar at a great profit. It is nothing but market manipulation. And it enables a transfer of wealth from normal investors to Wall Street.
It is a disgusting practice that should be impossible. But sadly, it is not.
And that’s why it is so ironic that the SEC is contemplating taking action against retail investors. Many from Wall Street are suggesting that this kind of activity needs to be shut down. They’re saying it’s pure market manipulation.
I guess from Wall Street’s perspective, it isn’t fair for retail investors to take the other side of the trade and screw up a perfectly good naked short sell.
How bad did it get?
Melvin Capital, a hedge fund that took a massive short position in GameStop, lost 30% of its funds just this month. The run-up in GameStop’s share price forced Melvin Capital to close out its short position at a massive loss.
The damage was so bad that two other famous hedge funds, Citadel and Point72, had to step up with $2.75 billion in capital to save Melvin Capital from collapsing.
Retail investors are joining together. They’re sharing investment ideas and beating hedge funds at their own game.
While I’m not a fan of pure speculation (gambling), there is nothing wrong with discussing investment ideas and buying a stock with the potential for a short squeeze.
And banning or censoring opinions about stocks on the basis of misinformation? You’ve got to be kidding me. There isn’t a single recommendation I’ve made that wasn’t disputed by at least a handful of others.
One of the most hated recommendations I ever made was when I recommended Tesla two and a half years ago. Several people told me how wrong my analysis was. Of course, there were many experts on Wall Street shorting the stock.
Was my analysis misinformation? Should it be banned because many disagreed with it?
Just because an opinion is different from the prevailing discourse does not mean that it should be censored or banned. It also does not mean that it is misinformation.
And for what it’s worth, Tesla is now up more than 15x since I first recommended it.
Now let’s turn to today’s insights…
We have been closely following Uber’s efforts to shore up its finances in recent months.
It started back in July when Uber announced plans to sell a portion of its long-haul trucking business. And it continued in November and December when Uber spun off its self-driving unit and its air taxi unit, Uber Elevate.
And now Uber is looking to spin out Postmates X. This is the robotics division of Postmates that Uber acquired last July for $2.65 billion. Here’s a look at the Postmates X delivery robot:
Postmates X Delivery Robot
Source: Ouster
These moves are all about stopping the bleeding.
Right now, Uber is $8 billion in debt, and it burned through more than $4 billion in cash last year. That’s not sustainable. It is why the company is scrambling to get rid of every money-losing division that’s not tied to its ride-hailing and food delivery marketplaces.
Fortunately for Uber, there is light at the end of the tunnel after this latest move.
Current projections now show that Uber will only burn through $1.3 billion in cash this year. And looking down the road, Uber is on track to turn free cash flow positive in 2022 and 2023. That’s when the company’s operations will start making money instead of losing it.
So Uber’s difficult decisions these last seven months are going to pay off.
It’s a shame that Uber had to get rid of some future gems in the process. Both the autonomous driving unit and the long-haul trucking business showed great promise. And the work Uber was doing on air taxis was quite interesting.
The good news is that Uber will still have access to the technologies developed inside these divisions.
You might recall that Uber couldn’t sell any of these units directly. No company would buy them at a reasonable price.
For that reason, Uber had to pay Aurora to take its self-driving division. And it had to pay Joby Aviation to take its air taxi unit. In exchange, Uber received an equity stake in each company. The same will almost certainly be the case with Postmates X.
Those equity positions will keep Uber connected to the work being done within its former divisions. And Uber will likely be able to license these technologies or create a marketplace for those services in the future, should it choose to do so.
It has been interesting to watch Uber’s laser-focused efforts to shore up its finances. I took issue with calling these asset divestments “sales.” After all, they didn’t raise any much needed capital for Uber.
Uber had to use its precious cash to get the assets off its balance sheet. That hurts in the short term. But in the long term it reduces overall operational expenses and improves gross margin.
And that means Uber may in fact become an investment target for us at some point in the near future. I will continue to watch the company closely going forward.
Japan just announced that it will ban the sale of vehicles using an internal combustion engine (ICE) after the year 2035. That’s just 14 years away. After that point, all vehicles in the country will need to be electric vehicles (EVs).
This caused Toyota, Honda, and Nissan – Japan’s iconic carmakers – to lash out. The carmakers said this ban would cause Japan’s auto industry to collapse. And they pointed to the fact that 2.55 million ICE vehicles were sold in 2019 compared to 1.4 million hybrids and just 37,000 EVs.
Of course, Japan made this move to promote clean energy, which I fully support. But we must ask the question… How “clean” are EVs?
It is easy to see that ICE vehicles put out exhaust while EVs do not. But we can’t forget that EV batteries must be charged by electricity. And that means the source of a country’s baseload power generation determines whether EVs are truly “clean.”
As regular readers know, I lived and worked in Japan for nearly two decades as a high-technology executive. I was there at the time of the Fukushima nuclear meltdown. And I saw firsthand how dangerous old nuclear fission energy technology can be.
I also saw how Japan overreacted and shut down many of its nuclear reactors after Fukushima. This was applauded in politically correct circles at the time. But nobody seemed to talk about what the country’s alternative supply of power would be.
Let’s have a look at how Japan feeds its electrical grid. Here’s a chart of the sources for Japan’s energy consumption in 2019:
Today, 40% of Japan’s baseload power comes from petroleum. Burning oil, in other words. 26% of its energy production comes from coal – the dirtiest source of energy we have.
And 21% of Japan’s power comes from natural gas. I was in Japan when this was all happening. Japan replaced the carbon-free emissions from its nuclear power plants with natural gas, oil and coal.
Put it all together and 87% of Japan’s energy comes from “dirty” carbon sources.
Unless this changes, Japan’s EVs won’t run on “clean energy” at all. If they are powered by burning coal, one could argue they will be dirtier than traditional internal combustion engines.
So this goal to eliminate traditional ICE vehicles won’t make any sense until Japan gets its act together when it comes to power production.
I would advise the country to invest heavily in nuclear fusion – not fission. While the third and fourth generations of nuclear fission technologies are very safe and free of carbon emissions, I just don’t see this as realistic in Japan given what happened at Fukushima.
Nuclear fusion, however, is 100% clean energy without any of the risks of our old nuclear power plants. And it can produce energy without radioactive waste. With a fusion energy source, Japan’s EVs could actually be “clean.” And that would make me very excited.
As we discussed earlier this month, my prediction is that the technology will be ready within the next five years. We have a lot to look forward to.
We’ll wrap up today with a topic that’s a bit “brainy.” But please stick with me. This technology has immense implications.
Quantum entanglement is a core principle of quantum physics. It refers to a phenomenon that exists when two or more particles are linked. If the quantum state of one particle changes, so does the quantum state of the other(s).
We have known about this principle for decades now. But we tend to consider quantum entanglement in relation to particles in the same location.
That’s fairly easy to understand. Essentially, if something changes with one particle, that change is reflected in the particle right next to it as well.
But what happens if the linked particles are separated from each other? Does the principle hold true if two entangled particles are miles apart? We’ve written before about experiments testing this theory.
And incredible research out of Nanjing University just gave us another clear demonstration of the answer.
A team just took two entangled photons, separated them and placed them on drones. The team then flew these drones in opposite directions and beamed the photons across a distance of 1 kilometer (km).
From there, the team measured the state of the photons to see if they would remain entangled. And sure enough, they did. Any change in one photon would be reflected in the other despite being roughly a kilometer apart. Amazing.
And this has tremendous implications.
The team demonstrated that information can be “teleported” across space instantly using quantum entanglement. We can effect a change on one particle to have it instantly relayed to the other particle. And we can do this wherever it happens to be. This is true even if it’s on a moving object like a drone.
This opens the door to 100% secure communications and information transfer. Think about it…
When Google demonstrated quantum supremacy in 2019, the cybersecurity industry went into a scramble. They knew that the entire world’s encryption software would be obsolete in a matter of years.
Those involved with bitcoin and the blockchain space know how important encryption is to a digital asset’s network. And encryption is also what secures all of our online purchases and mobile banking transactions.
We’ve recently seen many social media platforms censor communications that they deem unacceptable. This has led many people to look for more secure messaging platforms.
Well, this research on quantum entanglement demonstrates how we can use quantum networks to transfer information instantly. And it enables us to do so in a way that cannot be hacked, intercepted, or censored. This is quantum encryption.
Every industry on the planet would benefit from the secure networks that quantum encryption could deliver.
We’re in for a big year in quantum computing. In fact, I predict that there will be a major breakthrough within the next 11 months.
Regards,
Jeff Brown
Editor, The Bleeding Edge
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The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
