Greed turns day traders’ "Kodak Moment" into nightmare

Mr. Kim is the Chief Operation Officer and Chief Compliance Officer for Kirr
Marbach & Co. LLC, an investment adviser based in Columbus IN. Please visit
www.kirrmar.com <www.kirrmar.com> .

“A hot stock doubles and then doubles again in a matter of
weeks. Thousands of people who have never invested in their lives suddenly
try to beat the market,” prefaced Jason Zweig in The Wall Street Journal
(WSJ). He wasn’t describing today’s chase for the next Tesla, but the peak
of one of the biggest manias in financial history that occurred during the
summer of 1720; a period known as the “South Sea Bubble.”

That August, shares in speculative favorites like the South
Sea Co. (+650% YTD), Royal Exchange Assurance (+1243%) and London Assurance
(+4220%) peaked, sweeping up royalty (King George I), scholars (Sir Isaac
Newton), merchants and tradesmen alike in their wake. Alas, all bubbles
eventually end and this one popped in September. By the end of 1720, the
stocks had fallen between 81% and 96% from their peak.

As Mark Twain said, “history doesn’t repeat itself, but it
does rhyme.” Fast forwarding three hundred years, people are still drawn to
“get rich, quick” schemes like moths to the flame.

The Trump administration wanted to identify companies that
could boost the manufacture of drugs in the U.S., reducing our reliance on
foreign suppliers. Trade adviser Peter Navarro led the effort and landed
on the Eastman Kodak Company (NYSE-KODK), which he subsequently assisted in
securing a $765 million loan from the U.S. International Development Finance
Corporation (DFC), to support the launch of Kodak Pharmaceuticals.

Kodak is a struggling photography company with a history in
chemicals and manufacturing, but only a tiny presence in pharmaceuticals.
Kodak filed for bankruptcy in 2012, then made a brief splash six years later
when it made a dubious attempt to recast itself as a cryptocurrency play by
lending its name to a digital currency (KodakCoin) and Bitcoin-mining
computer (Kodak KashMiner), causing its stock to triple for a hot second.

On Friday, July 24 KODK traded 75,000 shares and closed at
$2.10. Just after noon on Monday, July 27, stories were posted on the
websites of the ABC and CBS affiliates in Rochester based on a media
advisory Kodak had distributed about a Kodak initiative with the government
in response to the pandemic. The advisory, which quoted a spokesperson
saying the initiative “could change the course of history for Rochester and
the American people,” didn’t indicate the information wasn’t supposed to be
released publicly.

Kodak asked the stations to remove the stories from their websites (which
they did), but in the age of digital investment communities on Twitter,
Discord and Reddit, once the genie is out of the bottle, it’s impossible to
put him back in. KODK trading volume surged to 1.6 million shares and
closed at $2.62 (up 25% from the prior day).

The next morning, the WSJ reported Kodak would receive a government loan to
produce drug ingredients. Trading volume exploded to 284.7 million shares
and the stock reached an intraday high of $11.80. President Trump made it
“official” at his 5 PM press briefing, hailing it as “one of the most
important deals in the history of the U.S. pharmaceutical industries.”

Not surprisingly, speculative fever reached a peak the following day,
Wednesday, July 29. The stock traded as high as $60, as more than 100,000
users of the popular Robinhood trading app jumped in.

Alas, the three-day, $2-to-$60 rocket ship ride for KODK speculators proved
to be short-lived.

As it turned out, the agreement between the government and Kodak was
preliminary and far from a “done deal.” The SEC has opened an investigation
into how the company disclosed information and the fortuitous timing of
stock options granted to Kodak’s CEO Jim Continenza (1.75 million shares)
and other executives on July 27, representing a potentially ginormous
financial windfall. Additionally, the company is reviewing the well-timed
gift (3 million shares of KODK on July 29, valued at $116.3 million) by
board member George Karfunkel and his wife to a religious charity controlled
by Mr. Karfunkel, which could generate tens of millions of dollars in income
tax benefits for the couple.

On August 7 the DFC announced it was halting the loan, pending review of the
“troubling” allegations. Supporters of the deal are nowhere to be found.
KODK currently trades around $7.

Fear of missing out (FOMO) and the siren song of getting rich quick are
powerful motivators, but the way to make money in the stock market is
s-l-o-w-l-y. Try to hit singles and doubles and let the miracle of compound
interest put runs up on the scoreboard.

The opinions expressed in these articles are those of the author as of the
date the article was published. These opinions have not been updated or
supplemented and may not reflect the author’s views today. The information
provided in these articles does not provide information reasonably
sufficient upon which to base an investment decision and should not be
considered a recommendation to purchase or sell any particular stock or
other investment.