Payment for Order Flow Really Does Help Investors, Research Indicates

Citadel CEO Ken Griffin claims that even though they pay Robinhood to execute their trades, investors are getting a better deal than they would in public stock markets:

Citadel CEO Ken Griffin said Thursday that the system has been “very important to the democratization of finance. It has allowed the American retail investor to have the lowest execution cost they’ve ever had.”

Sounds hard to believe, right? I’m naturally skeptical they’re giving those small investors a worse price and keeping the difference. However, one of the few recent studies to analyze payment for order flow (PFOF) finds the opposite:

Focusing solely on execution prices, we find that the cost of liquidity on exchanges utilizing the PFOF model is 80 bps higher than on exchanges utilizing maker-taker pricing. Nevertheless, when taker fees are incorporated into the analysis, the cost of liquidity on the PFOF exchanges is 74 bps lower.

More here.

In other words, the prices the PFOF model gave investors were a bit worse, but when you consider the commissions they would’ve paid otherwise, they came out ahead. This study was limited to options, not stocks, but many Robinhood users trade options as well.

On the other hand, Citadel has been fined before for offering worse prices than public markets. Until we see a comprehensive data set on Citadel-completed trades versus comparable ones on public markets, this will remain a difficult question to answer. I know of no such data currently available to the public.

If Robinhood or Citadel came out with something like that, I think it would go a long way toward allaying the concerns of investors and regulators.

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Photo: Citadel CEO Ken Griffin. “Ken Griffin with computers” by insider_monkey is licensed under CC BY-ND 2.0

Palantir Is Losing $100 Million a Month With No End in Sight

Reddit’s Wallstreetbets loves Palantir Technologies, a Denver-based maker of data analytics software. The merry band of traders mention it more than any other stock, but the company has serious problems.

Big Losses

Palantir claims to make products that analyze data better than anyone else. If that’s true, why has the company never made a profit in 18 years?

“They’re massively unprofitable and they’ve never been able to figure it out,” [NYU Business Professor Scott] Galloway said, noting that it took Google three years to earn a profit, and Amazon seven.

Defense News

Revenue is increasing but losses are increasing much faster, as sales/marketing and general/administrative expenses explode. I don’t see how signing a few more government contracts is going to get them out of this.

In fact, Palantir spends more on sales and marketing than it does on R&D, per their latest quarterly report. This seems strange for a company whose whole value proposition is some technical “secret sauce”. Its sales and marketing expenses are massive, over half a billion dollars in just 9 months. Where is all this money going?

One clue from their latest quarterly filing:

we typically acquire new opportunities with minimal risk to our customers through short-term pilot deployments of our software platforms at no or low cost to them.

They provide costly free trials to customers, and that seems to be killing their financial results. But if that’s what customers are used to, can they move to another, more profitable model? That could be particularly difficult for a company that’s dependent on winning more and more business from the same group of customers. They’ve probably come to expect their free trial.

Dependent on Fundraising

Palantir claims to be a data analytics company but acts more like a fundraising machine. It has lost $3.8 billion and raised $3 billion, cumulatively. It’s also taken on debt to stem the bleeding.

You see this pattern very clearly in their 2020 report. They lose $1 billion in cash, issue $900 million in stock, and pile on $200 million in debt for good measure.

They have under $2 billion in the bank now and lost $1 billion in 9 months. Without new fundraising, that gives them 18 months until they’re broke. Maybe they can easily raise more funds. Maybe they can’t. Either way, a mature company should not be in such a precarious position.

I’m harping on the losses because this is not a new company beginning to build technologies and starting to scale. This is a mature business. It should be making money by now. Amazon and Google were well known for accepting some losses early in order to build and scale their business, but were still able to make a profit in just a few years.

What, Me Worry?

Another major risk is that their business is heavily concentrated in a few big government clients. If they lose one of those contracts, they could be in big trouble:

three clients — which Palantir did not name — accounted for almost a third of revenues.

Defense News

CEO Alex Karp doesn’t seem concerned, though. Maybe he’s too busy enjoying his $600,000 travel stipend to go…where exactly?

For more content on the Wallstreetbets phenomenon, try some of these:

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Photo: Palantir co-founder Peter Thiel. “Peter Thiel” by jdlasica is licensed under CC BY 2.0

When The Cat Who Supported Her Through Cancer Got Sick, Jessica Knew What She Had to Do

Jessica had battled a brain tumor for a decade and was finally feeling better. Her little cat Olive had stood by her throughout her treatment, and now they were relaxing together at their house in Harlem.

One weekend, Jessica couldn’t find Olive anywhere. She went down to the basement and heard faint meowing from the corner. Olive was very sick.

Jessica grabbed Olive and rushed for a taxi. Together, they headed to the Animal Medical Center (AMC) on New York City’s Upper East Side.

Dr. Kate Crecraft of AMC found that Olive had an extremely rare condition: a piece of grass had lodged itself in the sack around her heart (the pericardium). This was causing enormous fluid buildup and a life threatening infection.

Surgeons removed the blade of grass and treated the infection. After some TLC at home from her mom Jessica, Olive is feeling as good as ever!

Jessica finally had the chance to repay the friend who stood by her through her own illness. Now they’re together, healthy, and happy.

I found out about this story in a wonderful letter I received from AMC today. I know firsthand the good work they do; they saved my pet gerbil’s life multiple times. I wouldn’t want to take a pet anywhere else.

AMC is a marvel. There are departments of hematology, radiology, neurosurgery, everything the best human hospitals would have! But it all costs money, and as a nonprofit, AMC needs support from people like us.

If you want to be a part of incredible stories like this, please donate here.

How we treat these little animals says everything about us. Let’s enable more Olives to get well! When we heal them, we also heal the humans who love them.

The Miracle Particles Behind COVID Vaccines

The particles that the Pfizer and Moderna vaccines rely on are 1/1000th the width of a human hair. They’re called lipid nanoparticles, and they’re revolutionizing medicine as we speak.

The Pfizer and Moderna COVID vaccines work by sending mRNA to your cells. The mRNA tells the cells how to make proteins that block the virus. But you can’t send the mRNA on its own, because it would be repelled and flushed out through the kidneys.

The mRNA needs a wrapper, and that’s where the lipid nanoparticle comes in. The mRNA molecules are negatively charged and so are our cells. These two negatives push each other away. But, the nanoparticle can make it inside the cell.

Once inside the cell, the particle faces another barrier. The cell wraps it in a container called an endosome, because the cell doesn’t want to be contaminated. So, the lipid nanoparticle has to be specially designed to escape that endosomal prison.

Decades of research has gone into these particles, and they can now escape and spread the necessary information into the watery substance inside the cell (called the cytoplasm). Our commitment to funding basic science decades ago is paying off today in ways we could never have anticipated.

I learned a great deal about these incredible particles today at an online seminar hosted by the journal Nature with Kathryn Whitehead of Carnegie Mellon University and Yizhou Dong of Ohio State University. They gave some great perspective on the development of this amazing technology.

One thing Professor Whitehead mentioned was that despite concerns that the mRNA vaccines are too new and unproven to be safe, the lipid nanoparticles they use have existed for decades. In fact, she said she’s had research rejected for publication because these particles are considered too old hat!

I also finally learned why the vaccines have to be stored at such cold temperatures: molecules will start moving around too much once the temperature rises, so the lipid nanoparticles could come apart. Perhaps one reason Moderna’s vaccine doesn’t need quite as cold of storage is that they’ve been researching these particles for much longer than Pfizer/BioNTech, so their particles may be a bit more stable.

Beyond COVID, lipid nanoparticles and the mRNA therapies they’re a part of could be used for other viruses like the flu, Zika and Ebola. They may also be used as cancer immunotherapies. (This echoes what the co-founders of BioNTech said recently.)

These particles seem likely to underlie an entire new generation of medicines. I’ll be keeping a close eye on them, microscopic as they are!

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Photo: “2020_06_020100 – a human cell attacked by Covid-19” by Gwydion M. Williams is licensed under CC BY 2.0

There Could Be Another GameStop Short Squeeze, But Beware Weak Fundamentals

GameStop shares have come back to earth since the short squeeze a few weeks ago:

But this story may not be over. GameStop remains one of the most heavily shorted stocks in the entire market:

This tells me that the epic short squeeze could happen again. Many short sellers still have their position. Maybe they’re wary of closing it out for fear their buying would set the stock on another upward tear? (If you’re not familiar with short squeezes, see this post for a brief explanation.)

But Redditors should be careful because the fundamentals of this business are weak. And you don’t want to be stuck holding a rotten stock if the squeeze doesn’t happen.

GameStop has 5,000 stores. Why? Where do you buy toilet paper, pillows, or plates today? Probably online, and videogames are going the same way. Publishers are selling them directly to the public online, and in general, people are losing the habit of going to physical stores.

If you got your games virtually or delivered from Amazon when stores were closed, why would you go back to the store once it’s open? You’ve already been forced to build a new habit by the lockdowns, and people don’t change habits readily.

And let’s not blame the lockdowns for everything. COVID only accelerated an existing trend. GameStop’s business has been shrinking for some time, and losses were actually even bigger in 2019. From Nov 2019 to Oct 2020, sales dropped from $4.3 billion to $3 billion, per their latest financial report.

Management talks about increasing online sales, and has had some very real success in growing that business:

…e-commerce sales, which increased 257.4% and 432.9% in the current quarter and year-to-date periods, respectively, compared to the prior year periods.

But where is the discussion of abandoning all physical stores? Why do those 5,000 stores make any sense in today’s environment? It’s a business model created in another time that made sense then, but doesn’t today.

When one part of your business is growing very fast (e-commerce) and another is producing consistent losses (stores), it’s pretty clear what you need to do. But I don’t see a willingness at GameStop to make those hard choices.

I get the impression management is really trying. When things got really tough in spring 2020, the top executives and the board took big paycuts of 30-50% (generally larger than those taken by hourly staff) and sold the corporate jet. That’s the kind of self-sacrifice you want to see from top leadership in a crisis. But can they bring GameStop to a new business model? I don’t see a lot of evidence of that yet.

Two months ago, before it attracted the attention of Wallstreetbets, GameStop was trading around 15. It could easily return there, based on the fundamentals. Wallstreetbets better hope for that short squeeze, and soon.

P.S. Another big focus for the Reddit crowd has been pot stocks. See more info about why their position is weak, how favorite Sundial Growers may be headed for bankruptcy, and how insiders are taking big loans at Sundial.

P.P.S. Don’t you love that sign?

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Photo: “the Great Hedge Fund Hei$t” by eyewashdesign: A. Golden is licensed under CC BY-NC-ND 2.0

Big Loans at Almost No Interest for Sundial Insiders Are a Rip Off For Shareholders

They say the best way to rob a bank is to own one. Turns out that’s true for weed farms, too.

I came across an interesting piece of info deep in Sundial Growers’ financial statement. Two employees have taken out loans totalling $200,000 (CAD) from the company at almost no interest.

But first, if you’re not familiar, what is Sundial Growers? The Canadian cannabis company is a favorite of Reddit’s Wallstreetbets, but it’s losing a fortune and may not be around much longer (more info on that here and here).

These employees (presumably top executives, not low wage bud tenders) got these loans at between 0 and 1.5% interest. See this section of their financial report:

Good luck finding a personal loan at a bank that cheap. If a bank won’t loan these guys money at such low rates, why should the shareholder? This is a rip off for shareholders.

This is particularly egregious in a company that is losing a fortune and could be out of business soon. When employees are in danger of losing their jobs and the company is in danger of losing 100% of the shareholders’ money (the usual outcome in bankruptcy), low interest loans to insiders are particularly gross.

I’d avoid this stock like the plague. But do consider applying for a job there if you need a cheap loan! 🙂

For more about another Wallstreetbets favorite, Gamestop, check out this post.

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Photo: “Bear & Moneybags” by edenpictures is licensed under CC BY 2.0

How I Fall Asleep Instantly, Night After Night

I was chatting with some friends during the UFC fight on Saturday, and they both mentioned the same problem. Neither could fall asleep for at least an hour, night after night.

Many people I meet seem to have the same issue. They lay down, ready to get a good night’s rest, and wind up tossing and turning endlessly. Entirely too soon, the alarm clock sounds and they’ve lost out on precious time to restore themselves.

This stands out to me because I fall asleep instantly, night after night. Why do I seem to be (almost) immune to this common problem?

It’s because of the system I have around me that promotes sleep. I’m going to break that system down right now, so you can get the same benefits of health and relaxation that I do:

  1. Avoid screens for 30-60 minutes before bed time. The glowing, the clicking, the distraction, the endless stream of largely pointless information…none of this is conducive to winding down for the day. Instead, I like to read a physical book or magazine or chat with my wife. Although occasionally, I find a BBC nature documentary by David Attenborough lulls me right to sleep.
  2. Lower the lights. About 30-60 minutes before bed time, I dim the lights, generally to the lowest setting. This helps the wind down process. That gradual winding down gets me in the mood to sleep.
  3. No screens in the bedroom. Ever. Extra points if you turn your phone completley off a solid 30-60 minutes before bed. It’s so freeing!
  4. Sleep mask. A recent addition to my routine that has cut my middle of the night tossing and turning to almost 0. I didn’t think light affected my sleep much, but turns out it did!
  5. Humidity. In this drier part of the year, dry nasal passages tended to make it harder for me to breathe. Then, I’d wake up. When I got a humidifier, the problem was solved. And sure enough, if I forget to turn it on before bed, my labored breathing comes back!
  6. Physical exhaustion. I work out 5 times a week and also walk 4-8 miles in a typical day. This means that when I lay down, I’m exhausted and grateful to be off my feet! That goes a very long way to helping me sleep. It’s hard to sleep if you’re not really tired.
  7. Meditation/journaling. I usually do these in the morning, not the evening. But, they could easily be used at night if you’re struggling to relax. If thoughts are keeping you awake, you can get up and write them down. Then, they’re preserved and you can pick them all up tomorrow! But more likely you’ll never look at it again. 🙂
  8. Temperature. 60’s is generally best. But, my wife would turn blue if I kept the bedroom that cold. So, I’ll often sleep with just a sheet, even in the New Jersey winter. I find I fall asleep more easily and stay asleep longer.
  9. Bed. Not as important as you might think. But, I’ve taken no chances here either. I bought a Tempurpedic memory foam mattress 11 years ago and it’s still as good as the day I bought it. It wasn’t cheap: $1700. But there are memory foam mattress toppers you can get for far less. I’ve gotten great sleep in much less expensive beds, and as long as you’re comfortable, so can you!
  10. Shower before bedtime. The gradual lowering of your body temperature after you come out of a hot shower promotes sleep. If you want to take another in the morning, you always can and I sometimes do.
  11. Remove stress from your life. Easier said than done, I know! But you can gradually work toward a lower stress existence. I often found my work in tech stressful, so over a period of years I transitioned to running my own investment business instead. And I’m sleeping better than ever.

A lot of this system came out of the superb book Why We Sleep by Matthew Walker, PhD. He directs a sleep lab at the University of California-Berkeley and knows as much as anyone about the subject. He helped me enormously. If you want to understand sleep and improve your sleep, get this highly readable volume ASAP.

What I Don’t Do

Ambien. Dangerous and doesn’t provide real sleep. Unconsciousness and sleep aren’t the same thing.

What About Melatonin?

Not helpful for sleep unless you’re jet lagged according to the Walker book, but if you feel like it’s helping you, go for it! I do actually take 5 mg a day at around 8:30 pm generally, but I made that decision based on its possible ability to prevent COVID rather than sleep benefits.

And finally, when you get to lay down after a long day, enjoy it! Avoid anxiety over whether you’ll fall asleep.

Walker recommends an 8 hour “sleep opportunity.” I love that phrase because it focuses on what you can control (laying down), rather than what you cannot (falling asleep). If you’re there ready to rest, you’re doing what you can do.

Don’t worry too much if you can’t fall asleep sometimes, because that’s normal. Just keep giving yourself that opportunity to rest!

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Photo: “Baby sleeping POV” by robscomputer is licensed under CC BY 2.0

How I Know The Need Out There Is Real

I was at the grocery store recently when the woman behind me in line tried to return a pair of hubcaps.

There’s nothing wrong with them. I just need groceries more than I need hubcaps.

That’s what she said. The hubcaps cost $14. Fourteen dollars was the difference between her eating or not eating.

You may be picturing her in your mind. I’d wager your picture is wrong. She was a nicely dressed woman in her 50’s who would have fit right in at a corporate office. Perhaps she used to work in one.

“Like I said, there’s nothing wrong with them,” she repeated.

The store manager took pity on her and let her return the perfectly good hubcaps. In place of them, she slid a small pile of groceries down the conveyor belt.

It’s easy for us to make excuses. Isn’t this the government’s job? What about food stamps? But it’s easy for people to fall through the cracks of a system that’s largely indifferent to them. Paperwork gets lost, caseworkers don’t show up, appointments are all booked until three weeks from Tuesday, etc.

The economic devastation of this pandemic is very real. And it may be a lot closer than we think. I certainly didn’t expect it right behind me in line at the grocery in my well-off town.

How can we help? A favorite charity of mine is the Salvation Army. It provides food to people who have nowhere else to turn. You can donate here.

Have a great weekend and a happy Valentine’s day, everyone!

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Photo: “Swan, homeless, on Mission St.” by Franco Folini is licensed under CC BY-SA 2.0

Reddit’s Favorite Stock Is Losing a Fortune And May Be Headed for Bankruptcy

How do you lose money selling weed in a pandemic when everyone’s stuck at home? Sundial Growers, Inc. has found a way.

Sundial is the darling of Reddit’s Wallstreetbets. It’s mentioned far more than any other stock currently:

But popularity on Reddit may not save this failing business. It lost $176 million (CAD) in the first 9 months of 2020 (much more than in 2019), despite a growing cannabis market:

How? Part of the story is something called “inventory obsolence.” Sundial lost $38 million because of it in the first three quarters of 2020. Sounds like their weed isn’t selling and winds up sitting in warehouses until it’s no longer any good.

Revenue growth is minimal. Gross revenue only went from $51 million to $56 million, if you compare Jan-Sept of 2019 to 2020. Growth is poor enough that Sundial is actually shutting down parts of their grow operation. From their financial report:

Due to decreasing estimates for the size of the potential Canadian cannabis market, the Company has curtailed the number of flowering rooms being used for cultivation at its Olds facility.

The situation is so bad that the company may soon run out of money. Sundial had $21 million in cash left as of 9/30/20. They burnt $25 million in the first 9 months of the year. Are they gone 9 months after that (mid-2021)?

The one thing keeping them afloat is reprieves from lenders and selling more shares. They’ve done new share sales on a grand scale, which means you own less of the company:

Any delay or failure to complete any additional financing would have a significant negative impact on the Company’s business, results of operations and financial condition, and the Company may be forced to curtail or cease operations or seek relief under the applicable bankruptcy or insolvency laws.

And the patience of those lenders is already probably running out, since Sundial keeps violating its loan agreements with poor performance. Sundial is:

in non-compliance with its loan covenants (note 11a) as at December 31, 2019 and March 31, 2020.

Those lenders forced the sale, at a loss, of a major asset recently: the Bridge Farm, that was supposed to sell CBD to the UK market.

The overall picture is of a company selling off some operations, shutting down others, burning cash faster than they can get customers to burn their weed, and barely skirting bankruptcy.

My friends at Reddit might get lucky if they can pump up the price enough by getting other small traders to buy in. But the risk here is off the charts. It’s a fundamentally terrible business and it would be hard to even engineer a short squeeze like they did on GameStop. (If you’re not familiar with short squeezes, read this.)

Bottom line: the fundamentals are terrible and the technical factors aren’t much better. Pass on this one and live to fight another day.

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Killer Kittens Can Be Placated With Meat and Playtime, New Study Finds

It would be wise not to anger him.

Cats kill billions of animals yearly, but feeding them a meaty diet and providing lots of playtime can redirect them to less violent pursuits, a new study finds.

The mother of one cat in the study had seen her furry friend wreak havoc:

“We’ve had birds in the bedroom, rats in the paper bin, rabbits in the utility room, and several vermin that have died of fright,” says her owner, Lisa George from Cornwall, U.K.

But redirecting their prey drive to play, plus keeping them sated with meat, greatly reduced the body count:

the high-meat diet and playtime approaches had the most sweeping impacts, slashing all types of animals on the doorstep by 36% and 25%, respectively.

See the full study out today in Current Biology here.

A surprisingly large number of species have a prey drive. Our gerbil stalked, attacked and ate caterpillars, leaving only the legs. He also ripped the head off a cockroach and wisely left the remains for my wife to clean up rather than eating them.

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Photo: “killer kitty” by Ayeshah Ijaz is licensed under CC BY-NC-ND 2.0