Author: Finance Staff

Robinhood’s Long Nightmare Ahead

Business

Michael D’Angelo, Staff

cnbc

Robinhood can be accessed by retail investors anywhere from their mobile phone. Robinhood boasts giving investors autonomy over their finances with low barriers to entry and nonexistent brokerage fees.

The old English tale of Robinhood has been passed down for generations and describes a story of populism where a legion of men equipped with bow and arrow take from the rich and give to the poor. Fast forward to the 21st century and Robinhood is known as a discount brokerage firm used by many new investors and retail traders. You may have heard in the past few weeks that Robinhood was at the center of the GameStop saga or you caught their Superbowl ad during the game, chances are you have heard of the investing app. The news certainly is filled with Robinhood headlines lately. 

            Introduced in March 2015, the platform gained popularity with their approach of having no commission fee investing. The story of Robinhood began with Stanford roommates Baiju Bhatt and Vlad Tenev. Both worked on Wall Street for a period of time, designing software, until the two decided they needed a change. They founded Robinhood with the purpose of eliminating barriers for the little guy and democratizing investing. Since Robinhood’s inception, the app now boasts well over 10 million users, but the company has been struggling with a public relations nightmare since the start of the year. 

            When the pandemic began in March, many people with strong gambling tendencies turned to both the stock market and the internet. They chose Robinhood as their choice of brokerage and they flocked to a reddit forum known as Reddit Wall Street Bets (WSB). Headlines popped up from the Wall Street Journal, Forbes, and, most notably,  the Collegian about some of these traders and their impact on the financial markets. Robinhood was picking up some negative publicity at the time with complaints of slow software, minimal customer service support and hidden fees. They were even threatened with a lawsuit surrounding high frequency trading data and hedge funds. In addition, a Robinhood user committed suicide after an in-app glitch showed he was in the red for over $700k. Currently, Robinhood is faced with a pending lawsuit from the individual’s family. 

            But things went from bad to worse at the start of 2021. Users from Reddit WSB saw that hedge funds were heavily shorting GameStop (GME). Retail investors flocked to reddit and called for many to buy shares into GME. As many bought shares and GME’s stock price flew over $300 a share, Robinhood entered a cash crisis. They ran out of cash to clear trades with the Depository Trust Clearing Corporation (DTCC) and Robinhood changed orders of GME to sell only, after only a few days the stock price declined heavily. In that short period of trading, they were forced to raise $3.4 billion. 

            The world erupted and many were livid. They took to social media websites like Instagram, Reddit and Tik Tok preaching that Robinhood violated their rights to trade. The Federal Trade Commission (FTC) received more than 100 Robinhood related complaints between Jan. 24th to Feb 2nd and in response to the criticism, Robinhood issued a statement. They described a DTCC clearing issue and then aired a commercial during the Super Bowl promoting their slogan, “We are all investors.” The commercial did very little to help the company and many continued to complain over social media. 

            With a public relations nightmare on their hands, the company might be forced to postpone their plans to go public in the second quarter, but, as of now, Robinhood is in full swing to go public this year. They are currently valued at $20 billion or more. With the public’s frustration, Robinhood’s future is in question. If Robinhood is to continue on, they must update their customer service, apologize to the angry masses, and make right to achieve change in the financial sector.

dangelom2@lasalle.edu 

GameStop and Robinhood: Power to the investors

Business

Elizabeth McLaughlin, Staff

CNBC

GameStop stock reached an all-time high of $492.02/share on Jan. 28, 2021, putting Wall Street investors at risk of losing millions on shorts.

In January of 2019, GameStop (GME) was trading at $15. By January 2020, less than $5 per share. Shorting the stock of a company that becomes increasingly obsolete as we continue to redefine the digital age is widely regarded as a smart investment; that is why a lot of Wall Street investors felt confident in shorting GME. But on Jan. 28, 2021, GameStop reached an all-time high of $492.02—and those investors were taking on hemorrhaging losses. Who do they have to blame for initiating their downfall? Users from a Reddit forum called r/WallStreetBets.

These users conspired to drive up share prices of fledgling companies, yielding them significant profits while simultaneously stealing profit from Wall Street investors. When put that way, it sounds Robin Hood-esque. It then follows that these users waged their war via the online trading platform, Robinhood. This app aims to “democratize finance” by enabling anyone to buy and sell stocks and other securities. It was developed by two Stanford grads who built their own finance companies where they sold trading software to hedge funds. The app, which is designed to incentivize trading, makes trading simpler than ever. Robinhood transplants the stock market from the stuffy, befuddling environment of a traditional brokerage firm to your own personal smartphone. When a user makes a trade, an animation of confetti congratulates them, nudging them to keep trading. Robinhood’s design and objectives, combined with the economic effects of the pandemic, have prompted nascent investors to try their hand at the stock market. In the first quarter of 2020, Charles Schwab, TD Ameritrade, Etrade and Robinhood — the major online brokers — saw new accounts grow as much as 170 percent. The ease at which one can trade stocks is what allowed a group of Reddit users to wage an expensive attack on Wall Street.

Those on r/WallStreetBets started a trading frenzy, driving GME up 134 percent. On Jan. 11, GameStop announced three new directors to its board whose goals were to reposition GameStop in the modern video game retail environment; to save it from going under. For this reason, GME stock began to rise modestly. But once Redditors got a hold of it, its price rose so rapidly that they triggered automatic trading halts designed to stem market volatility.

Wide price swings and heavy volume fluctuations should prompt self-regulating organizations like the Nasdaq to take certain precautionary measures. But a bunch of lower-to middle-class citizens who decide to capitalize on financial literacy in any way they can — through a free subreddit rather than a pricey stock broker, for example — deserve access to the free market. Is this a battle between populists and institutions? Some of these “populists” have criticized those in the financial sector who have profited off of the coronavirus pandemic. The phrase “eat the rich” is quickly becoming a defining cultural statement; a memetic imitation of the frustration regarding 21st-century wealth inequality. Robinhood’s decision to restrict trading, effectively siphoning off profits from the everyman in favor of Wall Street hedge funds, is controversial.

Robinhood faces criticism on their trading restrictions not only from slighted day traders on Reddit, but also from Democratic and Republican politicians as well as the Securities and Exchange Commission (SEC). On Jan. 29, the commission released a statement that they will be investigating the situation with GameStop and that it will “closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.” Despite this, the Fed is not likely to get involved in the frenzy. For one thing, market fluctuations associated with GME, AMC and other similar stocks are not likely to impact the broader market. David Beckworth, an economist at George Mason University, said that fallout from GME means that “people would lose equity, but it wouldn’t lead to the problems of homes financed with mortgages and exotic mortgage securities.” In other words, the Fed has bigger fish to fry. Additionally, raising interest rates to change people’s expectations about the market would yield “a very high likelihood of causing a recession,” says Adam Posen, economics of the Peterson Institute for International Economics. “On the other hand, if you raise interest rates quite a bit, you are not by any means assured that you would pop the bubble.” 

The SEC promises to investigate Robinhood’s actions; politicians continue to tweet angrily at Robinhood executives and their cohorts; the Fed can’t and likely won’t do much. So what can be done? The SEC could evaluate its leverage and reporting requirements on firms like Robinhood. Doing so would protect retail investors who serve as the app’s product, not its users. Robinhood employs an order flow payment model — they sell accumulated trading histories of retail clients to earn a substantial amount of its revenue in lieu of commissions. “On top of that, trades are executed in dark pools, which lack transparency and regulatory oversight,” said a representative from the International Financial Law Review. If their goal is really to empower “the next generation of investors to take charge of their financial futures,” then it should allow those who use it to execute the trades they want, even if Wall Street hedge funds lose some money and have to reevaluate their trading strategies. On the evening of Feb. 1, Robinhood released a statement saying that they “didn’t want to stop people from buying stocks and [they] certainly weren’t trying to help hedge funds.” Whether or not that is true, one thing remains clear: these disgruntled Wall Street investors simply have to learn how to adapt.

mclaughline7@lasalle.edu

Amazon’s Founder, Jeff Bezos, to pass reins and step down as CEO

Business

Michael D’Angelo, Staff

BBC

Pictured above is former Amazon CEO Jeff Bezos delivering a speech discussing Amazon’s future to investors in 2019.

The infamous Jeff Bezos is stepping down from his position as CEO at e-commerce giant Amazon Inc. and will move into the role of executive chair starting in the third quarter. He is the richest man in the world with a net worth over $180 billion. He is a majority shareholder of Amazon and also owns the Washington Post and space company Blue Origin. Bezos will be replaced by Andy Jassy. 

Bezos is a Princeton alumni and began his career on Wall Street. He quit his job checking out balance sheets and investments in 1994 and opened Amazon.com in 1995. The company originally sold books on their website in the U.S. and other countries. Amazon went public in 1997 with an IPO price of $18 per share. The conglomerate has grown from a simple website selling books to a massive corporation that manages a video production segment, owns the Kindle reader, manages Amazon web services and owns Whole Foods. Amazon has plenty of room for potential growth in the future, and the stock price closed on Tuesday, Feb. 3, 2021 for $3,380 a share. The future is bright for Amazon and many consumers, from young college students to retirees, who love to purchase items on the site. 

Bezos is reportedly stepping down to focus on other business prospects and devote more time to Blue Origin, the Washington Post, Day 1 Fund and his Earth Fund. If you are wondering if you can buy stock in Blue Origin to chase earnings like Amazon, you are out of luck. The company was founded in 2000, is privately held and the business intends to transform space travel. Many rumors have circulated online that Bezos will compete with Elon Musk for space travel objectives. The Washington Post is a major news organization and Bezos bought the company in 2013 for $250 million. The Day 1 fund is Bezos philanthropic approach to life and the fund intends to create preschools for underdeveloped communities. Bezos’s earth fund is dedicated to providing grants to people who fight and provide solutions for climate change. As Bezos will leave Amazon to focus on other prospects, he will pass the reins onto Andy Jassy. 

Andy Jassy has been with Amazon for years and he assisted in developing Amazon Web Services (AWS) in 2003. He became CEO of AWS in 2016. Jassy, who is Harvard educated, came onto the scene with Amazon in 1997. AWS represents 10 percent of Amazon’s total revenue and they mainly compete with both Google and Microsoft. For the fourth quarter of 2020, AWS reported a 28 percent growth in sales but fell short of many expectations. Jassy would like to propel Amazon and grow the company. 

The future is looking exceptionally strong for Amazon; the company has the opportunity to continue as a highly profitable business for shareholders. In addition, time will only be able to tell the legacy of Jeff Bezos, as he strives to push human innovation further by pushing the limit of space travel with Blue Origin.  

dangelom2@lasalle.edu

Cathie Wood and ARK Innovation: the Newest Tech Bulls

Business

Michael D’Angelo, Staff

charlierose

Founder, Chief Executive Officer and Chief Investment Officer of ARK Invest, Cathie Wood (pictured above), is known on the street as a star stock-picker.

Chances are if you are a retail or an institutional investor you probably hold long positions in exchange traded funds (ETFs) or equities relating to the technology industry. Many investors want to chase the next hot technology company that is going to change the world while, preferably, garnering high returns. Some retail investors do not have the time, knowledge, energy and/or skill to pick their own individual stocks. Instead of picking stocks by themselves, investors turn to institutional fund managers to pick heavy stocks for them. Investors will purchase ETFs and mutual funds which track tech companies’ performance.

Many institutional fund managers create ETFs dedicated to following tech companies. A major ETF which tracks the tech heavy NASDAQ composite, QQQ is managed by Invesco. Vanguard manages VGT which focuses on information technology and State Street manages multiple funds dedicated to tracking various tech stocks’ market performance. 

The newest fund manager from the street to popularize tech fund management is Cathie Wood at Ark Investment Management, LLC. Wood is the real deal with managing portfolios. She holds the title of CEO and CIO of Ark Investment Management LLC. In the past, Wood worked as an assistant economist with the Capital Group in the late 70s, then as a managing director for Jennison Associates LLC and then as a limited partner for Tupelo Capital Services. Later she worked as a Chief Investment Officer at Alliance Bernstein. Wood joined ARK investment Management in 2014 and, as mentioned above, she holds the title of CEO and CIO. Wood certainly has plenty of experience in the industry and her fund returns are impressive. 

Wood managed the largest actively managed ETF in 2020 which is the Ark Innovation ETF. The ticker symbol of the ETF is ARKK. ARKK’s objective is to seek an increase in long-term capital growth by investing at least 65% of the company’s assets in American and foreign tech equities that will change the world around us. Ark calls world-changing equities, a “disruptive innovation.” 

Wood has been crushing the game since 2016 with the Ark Innovation ETF. A quick look at the prospectus for ARKK reveals the ETF returned at market value 66.47% for the year ended on July 31st, 2020. In 2019, the total market return was 12.27%, 52.38% in 2018, 43.72% in 2017, 4.9% in 2016 and from October 31st, 2014 to August 31st, 2015, the return was 0.50%.  As of December 31st, 2020, ARKK’s top 10 holdings were Tesla (10.8%), Roku (6.9%), CRISPR Therapeutics (5.5%), Square (5.3%), Teladoc Health (4.4%), Invitae Corp (4.1%), Zillow (3.1%), Pure Storage (2.8%), Proto Labs (2.8%) and Spotify (2.7%). ARKK closed January 26th at $141.38.

Ark maintains other actively managed ETFs like Ark Next Generation Internet ETF (ARKW), ARK Fintech Innovation ETF (ARKF), ARK Genomic Revolution ETF (ARKG), ARK Autonomous Technology and Robotics ETF (ARKQ), the 3D Printing ETF (PRNT) and ARK Israel Innovative Tech ETF (IZRL). All of these ETFs are dedicated to finding innovative companies with the objective of changing their respective industry and the world. 

Wood still has time to prove her stock picking skills and to return more money to her shareholders. Wood has expressed interest in creating a bitcoin ETF after bitcoin hits a $2 trillion market capitalization, and she has further expressed intent on creating an ETF dedicated to following space companies. The future is looking bright for both ARK and Wood. Time will only be able to tell the success of these companies and the bullish tech attitude of their founder.

dangelom2@lasalle.edu

Janet Yellen Confirmed as Next United States Treasury Secretary

Business

Elizabeth McLaughlin, Staff

The Washington Post

Janet Yellen, pictured above, was recently confirmed by the Senate in a bipartisan, 84-15 vote, making her the 78th Secretary of the US Treasury and first woman to hold the position.

She got her undergraduate degree in Economics from Brown University and then a PhD in the same field from Yale. From there, she taught economics as a professor at Harvard. After that, she researched international monetary policy as an economist with the Federal Reserve’s Board of Governors. She taught at London School of Economics and University of California, Berkeley. She was confirmed unanimously by the Senate to chair the Council of Economic Advisers under Bill Clinton. Then, she became the president and CEO of the Federal Reserve Bank of San Francisco, as well as a voting member of the Federal Open Market Committee. From there, she graduated to the vice chair of the Federal Reserve Board of Governors and eventually the chair of the Federal Reserve — the first female to hold that position. As if that weren’t enough, she became a distinguished fellow in residence at the Brookings Institution. She holds nine honorary degrees ranging from a doctorate in science to a doctorate in philosophy. Her name is Janet Yellen, and her most recent accomplishment to be added to an already long list is being confirmed as the newest secretary of the United States Department of the Treasury.

Janet Yellen is the first female treasury secretary and the first person ever to lead the three most powerful economic bodies in the United States government: the Treasury Department, the Federal Reserve, and the White House Council of Economic Advisers. She was confirmed by the Senate on Jan. 25 in a bipartisan vote of  84-15. In her role as Fed chair, Yellen was well-liked by both Democrats and Republicans. Her ability to appeal to both sides of the aisle will likely bode well for the Biden administration, which begins amidst unprecedented partisan tension.

Yellen is a Keynesian economist and considered by many to be a dove, which is another way of saying she is generally more concerned with unemployment than with inflation. She received criticism for keeping interest rates too low for too long in her capacity as chair of the Federal Reserve. Some of her opponents admit that she can act more as a hawk by hiking interest rates if necessary.

As Yellen steps into her role as treasury secretary, she inherits a hefty to-do list: propose and pass another fiscal stimulus bill, advise President Biden on carbon tax policy, maintain the dollar as the world’s international reserve currency, provide insight on long-term economic recovery post-Covid-19…the list goes on. Some of these issues may appear more immediately pressing than others — Americans have been waiting months for much-needed and adequate stimulus. Regardless, Yellen will play a key role in bolstering a floundering economy.

On Jan. 20, Yellen appeared before the United States Senate Committee on Finance to persuade lawmakers to pass President Biden’s $1.9-trillion Covid-19 relief plan. The plan includes increasing the minimum wage and expanding family and medical leave — two policies that do not have strong Republican support. Yellen believes that “we have a long way to go before our economy recovers,” so Congress must “act big” to support millions of struggling American families.

Another item on Yellen’s agenda is climate action. For years, Yellen has opined that climate change poses a risk to global financial stability indicating that she will “act big” on climate action in her role as treasury secretary. Her support for a carbon tax goes all the way back to her time as chair of the White House Council of Economic Advisers under President Bill Clinton. In addition, she co-founded a nonpartisan, international think tank called the Climate Leadership Council (CLC), which advocates for a carbon tax of around $40 a ton and increases 5 percent each year. In turn, this tax would filter back into American pockets in order to offset the costs of increased energy prices. Moreover, the CLC advocates for penalties on carbon-intensive products in the form of border-adjustable taxes on imports. The plan has drawn some criticism from progressive climate activists and groups and, perhaps deservingly so; ExxonMobil and Shell were quick to sign on as “founding corporate members” of the plan. Beyond that, Yellen plans on pushing for emissions reductions. She does not believe that a carbon tax alone is enough to address climate change and ensure global financial stability. In her capacity as treasury secretary, Yellen could establish a national green bank to encourage investment in sustainable infrastructure. She could also pressure international financial institutions to divest from fossil fuels.

Yellen’s bipartisan confirmation by the Senate represents a marked shift in the political and economic cultures we have grown accustomed to for the past four years. An exceptionally qualified expert with a robust resume has been appointed to a cabinet-level position with support from both parties. Her appointment is uncontroversial, expected, and comforting; three adjectives we could all use a little more of these days. The only thing lengthier than her impressive curriculum vitae? Her to-do list.

mclaughline7@lasalle.edu

Making Sense of Bitcoin: a Beacon or a Bubble for Investors?

Business

Michael D’Angelo, Staff

ABC7

Bitcoin’s meteoric rise coupled with uncertainty around where its value derives from as an asset has some analysts referring to it as a “faith-based” asset.

Bitcoin has maintained a strong presence in recent financial headlines. Some popular headlines mention an individual who lost his password to access millions of dollars’ worth of the cryptocurrency, bitcoin surging to an all-time high past $35,000 or financial pundits declaring bitcoin as the “next gold.” Certainly, if you are a retail or an institutional investor, the asset’s massive gains have certainly caught your attention.  

Bitcoin is a cryptocurrency which currently has the highest market value of any alternative coins. Bitcoin has an increasingly volatile trading history since its original inception and Bitcoin was created in 2008 by a mysterious figure known as Satoshi Nakamoto. Bitcoin operates as a cryptocurrency and the original goal was for individuals to make online purchases without a paper trail, much like if one uses physical cash in the real world to purchase something. Nakamoto designed the idea of bitcoin as a decentralized digital currency that anyone in the world can store on their computer with a public ledger of transactions. 

In the beginning, bitcoin was utilized for people to make illegal transactions online via the dark web. As the price gradually increased and then declined over the years, many speculators have jumped on the coin. Many bitcoin bulls view the coin as an alternative to gold and the coin serves as a hedge against inflation. 

The first Bitcoin transaction occurred in 2009 and Bitcoin was used shortly in 2010 for a real-world transaction when an individual utilized 10,000 Bitcoins to buy two pizzas in the state of Florida. Bitcoin’s price has fluctuated widely and since its inception the coin has grown over 8,500 percent. Bitcoin experienced a major bubble burst in 2017. Many professionals attribute this burst to an insurgence of billions of alternate coins flooding the cryptocurrency market. These new coins, known as the Initial Coin Offerings (ICOs), shaked the market. As of recent, many institutional investors entered the market. Square and MicroStrategy purchased Bitcoin while Fidelity and PayPal allowed the consumer to buy cryptocurrency on their websites. 

In addition to Bitcoin’s appeal to various investors, American financial regulators have taken an interest in the coin. Joe Biden’s Treasury nominee, Janet Yellen, stated on Tuesday that cryptocurrency transactions were used mainly for illicit financing. She is highly concerned with the relationship of Bitcoin and terrorism financing. 

As more and more people jump into Bitcoin and institutional investors dive in as well, they are only fueling a potential bubble just waiting to burst. Bitcoin is a classic example of the greater fool theory at play. The greater fool theory states that it is possible to make money by purchasing an asset then selling at a later date to another individual known as a “greater fool.” Retail investors are just diving into bitcoin to not miss the price increase. As the price grows, many do not want to be left out from the gains achieved in the past.

The current value of Bitcoin has no intrinsic value. Bitcoin is backed by nothing. In comparison to the American dollar, the dollar is backed by the full faith and credit of the American government. Bitcoin can also be debated on the grounds of inflation. Many will argue that the American dollar is becoming weaker and the Fed has allowed “too much money-printing.” This argument has been around for close to three decades and is not based in any factual evidence. Inflation is not a true primary concern amongst economists. For example, the Consumer Price Index (CPI), which is an average of a basket of prices for consumer goods and services, has not exceeded more than 5.6 percent since 2000 for all items. Since 2010, the CPI has not exceeded 4 percent for all items

As the price of Bitcoin will only increase, investors with all types of financial assets need to take a back seat and question the future of cryptocurrency and the potential of a bubble just waiting to burst. After all, they do say history repeats itself.

dangelom2@lasalle.edu