Welcome to the seventh unCached. In stories this week: stocks, Nikola, the FCC, and facial recognition technology.
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The unCached Team
Finance Gamblers Take Over the Market by Ben Owens, Harvard ’21
Stocks Always Go Up: This is, of course, not always true. But in recent weeks, many stocks and ETFs with questionable fundamentals have jumped in value, in ways that seem to defy logic and common sense. These bizarre upswings appear to be a result of retail investors buying large amounts of stock rather than coordinated institutional action.
“Boredom Markets Hypothesis”: Why are so many individuals signing up to trade stocks? One of my favorite authors, Matt Levine, has a theory he calls the “Boredom Markets Hypothesis.” Essentially, during this period without sports betting (because sports leagues were postponed), casino action, and other forms of high-risk entertainment, people with a gambling itch have to put their money somewhere. The clear choice is to download Robinhood, deposit some cash, and make some commission-free bets. Even non-gamblers are bored staying at home every day, and the stock market offers a fun and exciting outlet. What else would you do with your $1200 stimulus check?
JETS: The airline ETF JETS has had an almost 3,000% increase in assets since March as individuals rushed to buy a risky but potentially lucrative investment. According to the CEO of JETS’ issuer, over 30,000 Robinhood users currently own the ETF. Funnily enough, these non-institutional investors have made a profitable bet, whereas Warren Buffett himself has missed out on the over 50% rise in JETS over the last month after he sold his entire stake in airline stocks.
Hertz: You might view the situation with rental car company Hertz as either hilarious or concerning, but no matter your perspective, it is certainly bizarre. Hertz filed for bankruptcy on May 22. Between then and June 8, its stock rose almost 900%. (It has since declined significantly.) What usually happens with a bankrupt company is that the creditors of the company end up owning it after reorganization, meaning that the shareholders (the former owners) lose their stake. In other words, thousands of investors are buying stock that will most likely be worthless. But that's not all. Hertz is now planning to sell up to $1 billion worth of new shares. Its market cap is $400 million, which means Hertz is selling stock worth more than twice the current value of the entire company while the company is bankrupt, and it expects people to buy. It really is a crazy time to be in the markets.
Other ETFs and stocks that have experienced a large surge in retail investing include the newly-issued sports betting ETF BETZ (with 8,600 Robinhood buying it in its first two days of existence), JCPenney (which, like Hertz, is bankrupt yet experienced an almost 500% rise from May 19 to June 8), and Whiting Petroleum (whose stock is up almost 400% since announcing bankruptcy on April 1).
The unCached Take: Why would anyone buy airline stocks when everyone is staying home? Who would buy the stock of a company that is literally bankrupt? The answer seems to be that retail investors have decided to take a risk and bet on a rapid economic recovery, or at least bet that they can sell at the top before other retail investors realize the bubble is about to burst. There's a reason you generally don't see institutional investors clamoring for bankrupt stocks, and that reason is that in the long run it's an obviously unprofitable strategy. But we all need entertainment, and I personally think the stock market is pretty fun; just don't put too much money into Hertz or you might end up regretting it.
Business Tesla’s Other Half by Ben Owens, Harvard ’21
Nikola: A new tech startup has entered the scene. Like Tesla, Nikola is named after Nikola Tesla. Like Tesla, Nikola is an electric vehicle company. Like Tesla, Nikola’s stock has crazy volatility—since completing a reverse merger on June 4 to become publicly listed with stock ticker NKLA, its stock has risen over 100%. Also like Tesla, Nikola’s fundamentals are questionable compared to its valuation. At its peak a few days ago, Nikola’s market cap exceeded that of Ford, even though its projected revenues for 2020 are—wait for it—zero.
So what does Nikola do? Nikola mainly develops electric heavy-duty trucks; small ones will be powered by electricity and large trucks will be powered by hydrogen fuel cells (which produce water as exhaust rather than harmful carbon dioxide). In the future, Nikola also plans to develop smaller trucks, such as the Badger pickup truck, and to establish a network of hydrogen fuel stations across the U.S. and Canada. Nikola will be battling with Tesla for electric truck supremacy—Elon Musk now says he is prepared to go “all out” on production of the Tesla Semi, Tesla’s own long-haul truck.
Why the hype? Clearly, people are excited about Nikola. Part of the hype may be that Nikola is reminiscent of an early-stage Tesla; as noted above, they share a lot of similarities. Investors who missed out on the Tesla train can now hop onboard with Nikola and hope it replicates some of Tesla’s gravity-defying stock leaps.
The unCached Take: Nikola seems to be a promising company with potential to become one of the major players in truck manufacturing, as more and more companies switch to environmentally friendly (read: cheaper in the long run) transportation. Keep an eye out for how Nikola fares in the years ahead. With regard to its stock, I wouldn’t touch it with a ten foot pole; see this video for a description of all the red flags.
Politics Fines, Funding, and 5G: This Week at the FCC by Charles Simonds, Yale ’22 (edited by Bryan Owens, Yale '21)
What’s Ajit Pai up to this week? The Federal Communications Commission’s been busy lately. On Tuesday, the FCC proposed a $225 million fine against health insurance telemarketers for violating the Telephone Consumer Protection Act. On the same day, it clarified rules to accelerate the deployment of 5G networks by preventing local municipalities from blocking or delaying 5G upgrades to previously existing cell towers. And recently, the FCC has announced procedures for the Rural Digital Opportunity Fund, an initiative to expand internet access to all Americans.
What is the rural digital opportunity fund? The FCC is offering up to $16 billion for telecom companies to develop infrastructure for commercial voice and broadband service in rural areas. According to the FCC’s statistics, while 97% of Americans living in urban areas have access to high-speed fixed service, that number falls to 65% for those living in rural areas and 60% for those on tribal lands. This auction is designed to bridge the “digital gap,” bringing high-speed internet to underserviced areas at competitive prices.
Telecom companies aren’t the only ones involved… SpaceX, the company that sent two astronauts to the ISS last week, is also constructing Starlink, a constellation of low-Earth-orbit (LEO) satellites that would provide high-speed Internet to the entire globe. While the FCC was initially skeptical of the ability of LEOs to provide the low latencies required to enter the auction, on Wednesday they accepted Starlink’s eligibility for the auction, provided Elon Musk can demonstrate that his system actually works.
The unCached Take: In recent years, the public has pushed back against the FCC’s repeal of net neutrality. While public outcry has died away, for some it is a reminder that the FCC may not be acting in the public interest. While the new funding project sounds good on paper, we should make sure that underserviced areas actually do get the service they need at fair prices and that big telecom companies don’t take the money and run.
Technology IBM Exits Facial Recognition Market Over Ethical Concerns by Charles Simonds, Yale ’22 (edited by Bryan Owens, Yale '21)
Not a New Issue: Facial recognition has always been a controversial topic. Asides from concerns of mass surveillance violating individual privacy and being used as a tool for social control, facial recognition is surprisingly racist. A study by the National Institute of Standards and Technology (NIST) in 2019 found “empirical evidence” of bias in facial recognition algorithms, which routinely misidentified minorities, women, and children at higher rates than middle-aged white men. As a result, several cities (notably in the San Francisco Bay Area) have banned the use of facial recognition technology; Boston is considering a similar ban this week.
The unCached Take: Are these corporations paying more lip service to the current political climate to optimize their public image? Or are they taking a genuine step towards addressing systemic racism? While IBM, Amazon, and Microsoft are household names, there are dozens of other facial recognition technology suppliers across the globe; only federal regulation can ensure that this technology is not abused in the United States. At the moment, however, these corporations pressuring Congress to enact such regulation is a good thing, although whether it is stringent enough is yet to be seen.
Ben Owens, a junior computer science major at Harvard, is fascinated with business and the inner workings of the finance world.
Bryan Owens, a junior computer science major at Yale, is an avid reader of finance and tech news. Charles Simonds is a sophomore at Yale studying economics and philosophy. He writes about the cultural, economic, and ethical aspects of news stories.