The Securities and Exchange Commission (SEC) just released its top enforcement priorities for the year. Rather than dig into systemic fraud in our markets, they’ll be regulating….confetti?
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According to a report out this morning on Reuters, the SEC will be focusing on:
”…behavioral prompts, differential marketing, game-like features…and other design elements or features designed to engage with retail investors on digital platforms.”
In plain English, they’re talking about the confetti some stock trading apps display when you make a trade. But that’s not all.
The SEC will also be regulating how funds can use certain words:
…funds with keywords such as “green,” “sustainable,” “ethical,” or “socially responsible” in their names will have to reflect an emphasis on these areas through their investing choices.
As if investors couldn’t simply look at the holdings and see if Exxon Mobil is there or not!
Combatting widespread financial fraud is nowhere in the SEC’s agenda.
Illegal naked short selling pervades our markets. Millions upon millions of trades fail to clear each day, especially in heavily shorted stocks like AMC Entertainment Holdings and GameStop.
But the SEC won’t be looking into that.
Despite $8 billion in losses on FTX, cryptocurrency regulation won’t be a focus for the SEC this year either. Why bother with that when the SEC could be requiring “a summary of registrants’ human capital resources,” whatever that is?
It’s no wonder author Jesse Eisinger called the feds “the chickensh*t club.”
The SEC is a toothless regulator. It busies itself with make-work, avoiding the real issues plaguing our markets.
Gary Gensler and the SEC need to start going after the real criminals.
What do you think of SEC enforcement? Leave a comment at the bottom and let me know!
Short sellers who have incurred hefty losses are actively trimming their positions, said Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners. Investors betting against stocks have racked up $81 billion of mark-to-market losses on short positions this month through Thursday after accumulating $300 billion in gains in 2022, Mr. Dusaniwsky said.
Markets have rallied this year, with meme stocks leading the way. As short sellers race to close their positions, their losses are likely to grow:
Signs that inflation is cooling have stoked bets among investors that the Federal Reserve will pivot from raising interest rates to cutting them as soon as the second half of the year. That has helped risky assets across the board rise. Especially risky corners of the market, such as stocks with high short interest, have rallied even more. Analysts say that has likely forced short sellers to close out bearish positions to cut their losses—resulting in what is known on Wall Street as a short squeeze.
Some of the most heavily shorted stocks have been among the best performers so far this year.
Meme stocks like AMC Entertainment Holdings, GameStop, and Bed Bath & Beyond are all up over 20%. The broader S&P 500 is up 6% for the year so far.
In addition to huge market losses, short sellers are also paying stratospheric interest rates to borrow shares. Rates to borrow AMC shares have ranged between 20% and over 100% per year in recent weeks.
It’s no wonder that some short sellers may be resorting to illegal tactics. There is evidence of widespread naked short selling in some heavily shorted stocks.
Common and preferred shares of AMC have seen millions of fails to deliver. These failed trades often occur when a short seller sells stock without borrowing it.
This is called naked short selling and it’s illegal under federal law. It’s also a powerful way to push down a stock’s price without paying any interest.
The coming months could push many short sellers to the brink.
A race to close out positions may cause heavily shorted stocks to rally further. Meanwhile, a more dovish Fed could cause a general market rally, adding to their losses.
Short sellers should avoid meme stocks like the plague. A heavily shorted stock with a passionate fan base is simply too hot to handle.
What do you think is next for short sellers? Leave a comment at the bottom and let me know!
South Korea has fined Citadel Securities for illegal stock trades made with high frequency algorithms. From a report out last night in Reuters:
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South Korea’s financial regulator has imposed a fine of 11.88 billion won ($9.66 million) on U.S.-based Citadel Securities, saying it disturbed the local stock market with high-frequency algorithm trading.
The Financial Services Commission (FSC) said in a statement released on Thursday the firm had distorted stock prices with artificial factors, such as orders on the condition of “immediate or cancel” and by filling gaps in bid prices.
These illegal trades were no isolated incident. Regulators found improper trades in thousands of stocks over a period of nearly a year:
The firm carried out such trading on an average of 1,422 stocks per day from Oct. 2017 to May 2018, totalling more than 500 billion won worth of trades, according to the statement.
Citadel’s illegal trades stand out as some of the most egregious ever in South Korea:
The Commission said it was the first time it had imposed fines on such high-frequency trading on the South Korean stock market, which has a high proportion of retail investors and little competition among algorithmic traders.
Citadel used strategies such as flash orders to gain an illegal advantage over other traders. This practice involves offering to buy or sell and then retracting the order in a fraction of a second.
Flash orders let you see the prices at which other traders are willing to buy or sell. This gives you an illegal edge over your competition.
In Korea, Citadel used these strategies to take advantage of mom and pop retail traders, which I find particularly heinous.
Citadel’s algos don’t stop in Korea.
The firm was recently fined by the US Financial Industry Regulatory Authority (FINRA) for frontrunning its customers. By placing trades ahead of customers, Citadel made money for its own account.
Breaking the law appears to be quite lucrative for Citadel.
Citadel Securities posted record revenues of $7.5 billion last year. Citadel’s hedge fund made even more, approximately $28 billion.
I think Citadel is using these illegal flash orders all over the world. They may also be using other illicit tactics we don’t know about yet.
After all, if you go to the trouble to create a program that can make you money, why not use it in as many places as possible?
The reality is that these speeding tickets will never stop Citadel. Fines in the millions are a cost of doing business for a multi-billion dollar operation.
Securities regulators worldwide should find out what exactly Citadel is doing in their markets. If they find more wrongdoing, they should simply ban the firm from trading for a period of years.
Nothing but a severe penalty will stop them.
Who says crime doesn’t pay?
What do you think is the future for Citadel? Leave a comment at the bottom and let me know!
Light Street Capital Management’s hedge fund tumbled 54% in 2022, according to a person familiar with the matter, one of the industry’s worst performances last year.
That drop rivals the 56% decline for Tiger Global Management, and is steeper than Lone Pine Capital’s 36% loss and Whale Rock Capital Management’s 45% slide.
Light Street was the classic crossover hedge fund. It made big bets on technology companies, both public and private.
Many of those bets were at eyewatering valuations. Tech was crushed in 2022, pushing many such funds to the brink.
What strikes me is how simple Light Street’s strategy was. Its biggest holdings were a who’s who of growth stocks:
Anyone could’ve bought Tesla and hoped for the best. Why should investors pay Light Street 2% of assets and 20% of gains to do what they could do themselves?
Light Street’s 54% loss is abysmal even compared to benchmarks. The S&P 500 lost 18% last year, while the NASDAQ lost 33%.
Investors could’ve bought index funds and avoided hundreds of millions in losses, not to mention outrageous fees.
Today, Google is the king of search. But is it about to be dethroned?
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The search giant seems to face a new competitor every day. ChatGPT launched on November 30, with Perplexity and Allsearch coming shortly thereafter.
The “page of links” is starting to look antiquated.
Meanwhile, with nearly 200,000 employees, Google has released nothing in response. But new reports indicate Google may finally release a competitor this spring:
In addition to an ethical AI chatbot such as LaMDA, Google is now planning to reveal 20 more AI-based products at its I/O conference scheduled for May 2023. ChatGPT has sparked worry about the use and viability of conventional search engines, as the chatbot aims to provide answers to searches instead of just giving relevant links to users.
Taking over 5 months to respond to a mortal threat to your business is unacceptable. Google should’ve worked day and night to produce a ChatGPT competitor within 90 days.
So what’s the holdup?
Google has shown wariness in revealing AI products and services, especially with the raging debate on the ethics of using AI, with the potential for bolstering biases present in training data. All current AI offerings by Google are heavily restricted in terms of what they can be used for.
Large companies are obsessed with risk. Meanwhile, startups have to release something or they’re dead in the water.
By the time Google does release a competitor, it may already be outdated. OpenAI’s GPT-4 may come out in the first half of this year.
I don’t know what GPT-4 will be capable of. But seeing the massive improvement between GPT-3 and ChatGPT, I expect it to be very impressive.
How fast you launch and iterate is especially important in AI because AI tools can improve at incredible speed. From a recent column by economist Tyler Cowen:
ChatGPT, the model released late last year, received a grade of D on an undergraduate labor economics exam given by my colleague Bryan Caplan. Anthropic, a new LLM available in beta form and expected to be released this year, passed our graduate-level law and economics exam with nice, clear answers.
Maybe Google will release a ChatGPT killer and blow us all away. But I expect to see it fall further and further behind, mired in complacency and risk aversion.
What do you think the future holds for Google? Leave a comment at the bottom and let me know!
For all its powers, ChatGPT has a fatal flaw: its training data only goes through 2021. Ask about anything recent, and it’s stumped.
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But a new tool lets you use the power of AI to find up-to-the-minute information. It’s called Perplexity AI, and it might be the best search engine ever.
Just a month old, Perplexity AI looks like a traditional search engine. But it uses AI to answer your question, instead of just providing links.
Its answers are pithier than ChatGPT’s — usually about a paragraph. And unlike ChatGPT, Perplexity cites its sources.
This helps us confirm the results are accurate. The lack of sources is a serious problem on ChatGPT, since it occasionally produces incorrect answers.
Let’s give this baby a test drive!
So Perplexity, how’s the market doing so far this year?
The answer isn’t perfect — it’s leaving off today’s return. But it’s accurate enough to be useful.
Meanwhile, ChatGPT is stumped:
Google doesn’t even seem to understand the question. It returns today’s performance only:
Let’s try something a little less time sensitive: what are the best selling albums ever?
Perplexity nails it, giving us a complete answer with excellent citations.
ChatGPT’s answer is restricted to US sales. It’s a decent response, but not as complete an answer as Perplexity’s.
In all, Perplexity seems better at answering questions than ChatGPT. But if you want to generate content, like a blog post or a screenplay, ChatGPT is the right choice.
I don’t think cold exposure protects you from catching the cold. And why Allsearch assumes cold plunges involve a race, I don’t know.
Meanwhile, it missed the benefits to alertness, sleep and hormone levels.
On to prompt # 2…
I decided to go with something more straightforward and historical. This time, Allsearch was on point.
Allsearch correctly notes that the USSR economy was in shambles, which led the government to collapse. Students are going to love using this for their papers!
For the 3rd and final prompt, I dug into the world of technology:
Again, Allsearch’s answer is excellent. It covers personal computing, the space race, and the computer revolution in business.
Where Allsearch beats ChatGPT hands down is in citing sources. If you want to know more about a topic, you have a reading list right there on the page!
You also trust results more when you see where they came from.
I think this is an amazing tool. The results aren’t perfect, but for a version 1.0, it does a great job.
Never one to miss an opportunity, I just contacted the creators to schedule a meeting. This might make a juicy investment. 🙂
What do you think of Allsearch and generative AI? Leave a comment at the bottom and let me know!
Last Thursday, I was preparing to judge a startup pitch competition. I thought to myself, “How can I make sure every startup hits the key points?”
Then, it came to me: a checklist!
Every time you pitch investors, you need to give them certain key pieces of information. Without those details, they may just move on to the next company.
Make sure that never happens to your business! Whenever you pitch, make sure you check off these 6 key elements:
1) Problem. What problem do you solve? For example, Uber solved the problem of expensive, hard to get taxi rides.
2) Solution. How do you solve that problem?
Uber makes it easy to get a ride with a simple smartphone app. You always know exactly what you’re paying and where your driver is.
3) Traction. Show us a chart of your revenue, broken down monthly or quarterly. Also, compute a growth rate using a tool like this.
Investors want to see a strong growth trend. Make absolutely sure you give them that, if at all possible.
Don’t have revenue yet? Show us monthly active users, signups, etc.
4) Market + Competitors. How big is your market? Who do you compete with?
I’m more interested in your competitors. Who do you lose deals to? Who do you beat for deals? And why?
Hint: “we don’t have any competitors” is rarely the right answer. Maybe no company does exactly what you do, but who is close?
5) Team. This is especially critical for early stage startups. At this point, there usually isn’t a ton of performance to sell.
So you have to emphasize the quality of the team. Why are these the best possible people to take on this challenge?
6) Ask. Here’s one of the strangest things I see: a founder telling a great story with solid traction, and then saying “thank you” and sitting down.
Umm, don’t you want something from us?
Never forget to tell the investors exactly what you’re asking for! Tell us how much you’re raising, at what valuation, and specify if that’s pre or post-money. (If the valuation includes the money you’re raising, that’s “$X post-money,” also referred to as “$X cap.”)
It’s also good to specify what type of fundraise you’re doing. Is it a SAFE, a priced round, or a convertible note?
Say something like this: “We are raising a $1 million SAFE at a $10 million cap.”
If you hit these 6 key elements, you’ll have a solid pitch that gives investors the details they need. You’ll also have a leg-up on other founders who provide incomplete or unhelpful information.
Best of luck on your fundraise!
Next, I asked ChatGPT to write an article on the same topic:
Here is its answer:
Raising money for a startup can be a daunting task, but having a solid fundraising pitch can make the process a lot smoother. Here is a checklist of items to include in your pitch to give investors a clear understanding of your business and why it’s worth their investment:
Problem: Clearly articulate the problem your business is solving and why it’s important.
Solution: Explain how your product or service addresses the problem and how it’s different from other solutions on the market.
Market size: Provide data on the size of the market you’re targeting and how you plan to capture a share of it.
Traction: Share any traction your business has already gained, such as customer testimonials, partnerships, or revenue.
Team: Introduce the team behind the business and highlight their relevant experience and qualifications.
Business model: Explain how the business will make money and provide financial projections.
Use of funds: Clearly outline how the funds will be used, such as product development, marketing, or hiring.
Ask: End your pitch by clearly stating the amount of funding you’re seeking and the terms of the investment.
Bonus: Show a clear path to exit and give an idea of what investors can expect to gain from the business.
By including these items in your pitch, you’ll be able to give investors a comprehensive understanding of your business and why it’s worth investing in. Remember to keep your pitch clear, concise, and visually engaging.
A strong pitch will also demonstrate that you understand your market, your customers, and your competition. It will also show that you have a clear vision, a solid team, a scalable business model and a sound plan for using the funds.
What strikes me most is how similar they are!
ChatGPT included all 6 of the items on my checklist. It also added 3 more.
For the most part, I think ChatGPT’s answer is excellent. Clearly stating a problem, showing how you solve it, and showing your traction are critical.
But at certain points, ChatGPT gets sidetracked. It suggests showing projections, which most investors discount pretty quickly.
It also tells us to show how the company will exit. This is wildly premature for most startups.
An exit is often 10 years off or more. There’s no telling how it will shake out.
What’s more, a founder who’s too focused on an exit is a red flag to investors.
Are they just looking for a quick win by flipping the company to Big Tech? If so, this will only be a small outcome for the VC’s.
Also, ChatGPT doesn’t provide examples. Examples are helpful in knowing how to frame a problem simply or how to describe the terms of your fundraise.
Moreover, ChatGPT lacks a personal tone. I describe experiences meeting actual founders, which a computer program can’t do.
Sometimes, you want a little of that human touch!
In all, ChatGPT’s writing was surprisingly good. But I think it has a way to go before it puts me out of business. 🙂
Which post did you like better, mine or ChatGPT’s, and why?
Tough times in startupland show no signs of ending. Venture funding fell 67% in December from a year earlier, according to a new report by S&P Global:
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The aggregate value of venture capital-backed funding rounds worldwide dropped 66.7% year over year in December 2022 to $19.71 billion, which is around the same level of annual decline seen in November 2022, according to S&P Global Market Intelligence data.
The number of completed rounds fell by 57%.
These grim stats match what I’m seeing in the market every day. Far fewer deals are getting done, and those that are take longer to close.
The weakest companies have left the market.
The $100 million “seed” rounds in crypto startups with no product or customers were everywhere in 2021. Now, those companies have either given up on fundraising or gone out of business.
The good news is that good companies are still getting funded. I’ve been a part of several multimillion dollar seed rounds in recent months.
These companies have annual revenues in the hundreds of thousands, growing fast. They also have a head start in huge markets.
Even for these companies, rounds take months to close and sometimes don’t fill completely.
If your startup doesn’t have rapidly growing revenue, your chances of raising today are slim. Instead, I’d focus on getting more customers first, which will make your fundraise much easier.
If you are fundraising, you want to raise enough to give yourself runway for two years at least. The 18 month standard I used in 2021 just isn’t enough in this bleak environment.
And don’t count on all that “dry powder” saving you. VC funds may be sitting on a lot of cash, but they’re also deploying more slowly.
The “VCs have a ton of dry powder to invest” narrative misses half the equation
The timeframe over which most funds are expecting to deploy capital has greatly increased to counteract having deployed way too fast in 2020-21
Thus their available capital per year has decreased
I stepped off the icy street into a bustling food hall. This is Urban Hawker — a Singaporean market that was one of Anthony Bourdain’s last projects.
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Hawker centers are everywhere in Singapore. The descendant of street stands, these food courts bring together people from all walks of life to enjoy dishes like chicken rice and pork noodles.
Singaporean hawkers were the first street food ever to win a Michelin star.
These humble stands selling some of the best food on earth captured the imagination of Anthony Bourdain. The chef and travel show host worked to bring hawker centers to his home, New York City.
The original plan called for a massive complex on Pier 57 in Chelsea. But negotiating the lease proved impossible, and the plan was abandoned.
Sadly, Bourdain committed suicide a few months later. It looked like his dream for a Singaporean market in America might never be realized.
But one of Bourdain’s partners, KF Seetoh, refused to give up.
In September of 2022, he opened Urban Hawker, the first Singaporean hawker’s market in the United States. While smaller than the original plan, it contains 17 stalls offering a wide variety of Southeast Asian specialties.
My friend and I circumnavigated the market, mesmerized. Everything looked so good!
“Let’s not get distracted,” I told her. “We have to make the right decision.” 🙂
We landed at Prawnaholic. Prawnaholic specializes in seafood noodle dishes, one of my favorites.
I ordered Singapore Char Kway Teow. The chef kindly substituted fish cakes for the pork, a thoughtful touch.
The dark noodles and glossy sauce had a deep, rich flavor. They reminded me a little of squid ink pasta, an Italian specialty.
The shrimp were perfectly tender, the fish cakes light and delectable.
My friend ordered an oyster omelette. She offered me a bite, and I couldn’t resist.
I thought I didn’t like oysters, but I was wrong! They were tender and delicious, not overcooked and chewy like so many others.
Next to our table were the beautiful cakes of Lady Wong. I only wished I had room — next time!
This is a market Anthony Bourdain would’ve been proud of. I only wish he could’ve sat there with us, eating and laughing.
What are your favorite restaurants in New York? Leave a comment at the bottom and let me know!
Tremendous 