Motley Fool Hidden Gems Investing - South Korea vs. Naked Short Sellers

Episode Date: November 8, 2023

To stop some bad behavior, sometimes you have to stop letting people do other stuff too. (00:14) Bill Mann and Dylan Lewis discuss: South Korea banning borrowing shares to address issues with illegal naked short selling. Robinhood “normalizing” and becoming a little Buffett-like with its interest income. The big reaction to restaurant tech company Toast’s slight guidance adjustment, and what it bodes for growth stocks. (16:26) Mary Long caught up with Adecco Staffing's Senior Vice President Amy Glaser for a look at holiday hiring trends and rising part-time work. Check out our Stock Advisor Dividend Report at: www.fool.com/dividends  Companies discussed: HOOD, TOST Host: Dylan Lewis Guests: Bill Mann, Mary Long, Amy Glaser Engineers: Rick Engdahl, Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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i'm dylan lewis and i'm joined over the airwaves by motley fool analyst bill man bill back by popular demand two days in a row great to have you i'm not sure what i've done to deserve this but i'll take it dylan how you doing brother i'm good you know you were on vacation for a bit there and we missed you. And we wanted to show you just how much we missed you. That's really what it came down to. Let's run him into the ground. I'm glad I have you on today because I generally think of you as my person I turn to when I have a weird international story that I want to talk through. And Bill, boy, do I have an interesting international story for you. South Korea is banning trading on borrowed shares through

summer of 2024 for companies in its major indices after regulators have discovered what they're calling illegal naked short selling by several global financial institutions. Are you surprised to see this? No, they've done it before in South Korea. So I want to set the table just a little bit. This is a $1.7 trillion stock market. And the two companies that they've pointed to as having done badly are two really big banks. They're European banks, BNP Paribas and HSBC Holdings. And so $1.7 trillion stock market, the total amount of naked short-selling transactions they did was $40 billion won, which sounds bad, but then you do the exchange rate, $29 million worth of naked short sales. So a teeny, teeny percentage of the overall size of the market and the trading

volume in the market. So this feels more political than solving any real problem for me. Yeah, it feels a little bit like it's a blunt tool to be using to address the problem of that size. This is not the first time, as you mentioned, that short banning has come up in South Korea. They did it during the pandemic, and it seemed to have some particularly interesting effects on their stock market, one of them being it kind of moved a lot of the institutions out of the market and led to a lot more retail investors participating in the stock market there. Do you think that's maybe part of the political motivations with this? I think it's definitely – so I think it definitely has something to do with it. And so, interestingly enough, short interest in Korean stocks that trade as ADRs on the New York exchanges has skyrocketed since they made this announcement. So, a lot of the institutions that have shorts in place have moved them out of Korea and onto Korean companies that are outside of that market, trading in other markets.

Now, a lot of times people think of short selling as something that you are betting on a stock going down. In the institutional world, it usually is the case that they are trying to control risk or volatility by using a short to be paired with a long somewhere else. So there usually isn't even really a claim that a stock is going to go down on the institutional side. So it's a really weird story to me, but you're exactly right. Short selling in this country has kind of an unsavory reputation. I don't think it's deserved. I think it's a highly important component of stock trading. In Korea, it has a highly unsavory reputation. And sure, it is absolutely the case in South Korea that a couple of big banks have engaged in naked short selling. They shouldn't

do that. It could land you in jail in South Korea. But you're talking about something that is such a small component of the overall stock market. This is light masquerading as heat. Bill, I'm going to ask you for a second to pretend that you're a retail investor in South Korea, and you have plans to put money to work over the next year or two. We know that borrowed shares lead to the ability to short, and that creates some different dynamics and pressures in the market. If you see news like this, does this change your roadmap for how you put cash to work over the next year and a half or two years, knowing short selling probably comes back at some point? I guess it does in certain ways. As someone who is very interested in international

investing, I do think that one of the reasons why the United States offers one of the best investing environments in the world is because it is predictable. It's predictable in terms of how it is regulated, most importantly. There are very few days and times and circumstances under which the SEC or the NASDAQ or any of the other competent jurisdictions would wake up and say, surprise, right? So something like this happening in a large, credible market like Korea for me does actually overall lower my interest of investing in the Korean market. All right, let's bring things back over stateside. We've got earnings from two companies and some tough reactions to both. Toast and Robinhood both reported. Let's start with Robinhood, Bill. Shares down 15% since reporting Tuesday. And the story here to me seems to be less interest in stocks, less interest in crypto, less trading activity, less money for Robinhood. Is that basically what it amounts to? Right. Next story.

No, I mean, for the most part, that's it. I mean, Robinhood makes its money off of transactions, and that doesn't make them unique in the brokerage world, although a lot of other brokerages, the non-social brokerages, have a vastly more broad set of services that they provide, both to individuals and, more importantly, to institutions. Robinhood, I'm going to say this as someone who is not actually a fan of the social brokers, of the impact that they have on individual investors, trying to get you to trade more, trying to get you to hold more and more risky assets like Dogecoin and other nonsense. Robinhood is at a pre-pandemic level in terms of assets that their customers have left with the firm. That's actually a pretty good sign for them. Now, they make money off of transactions, so that is down. It's way down. They are a little bit like the Heelys of brokers. As long as things are hot, they're going to catch, you know, they're going to make plenty of revenue. But when that fad

goes the other direction, they're not. But I don't think where Robinhood is sitting right now is that bad. Let's unpack that a little bit. Yeah. So I think a lot of people would be surprised to hear you say that because generally more assets, more activity is part of the growth story for a business like that. Why do you feel like getting back to pre-pandemic levels is a good thing? Well, Well, I mean, ultimately, if you've got assets under management, that's a fuel for later activity, right? Like what's a disaster for a broker? A disaster for a broker is going to be manifested by assets leaving and not coming back.

So the fact that even as crypto has become no longer hot, you know, and things like the meme stocks are no longer really in that, you know, getting a whole lot of interest, which drove so much of the trading at Robinhood, the fact that they are holding the same level of capital means that they've got fuel for the fire later on. Now, we can debate whether that's good or bad, but those client assets being that high cannot be looked at as being a negative for Robinhood. I love looking at the brokerages because they are the microcosm of the investing environment and one of the easiest ways for us to check in on that. And I think I was kind of surprised. I hadn't looked at Robinhood in a little while, but you go back to the beginning

of this year and we saw something pretty dramatic flip with this business where it has traditionally been a transaction driven business. That's where the revenue has come from and very much state of the macro bill. We are seeing what they're able to do in terms of interest income and interest revenue start to tick up. And in this quarter, it was higher than what they were doing on the transaction side. Is that interesting to you? Is that ballast to you for a business like this? I love the fact that you've just made a Warren Buffett argument as it pertains to Robinhood. Yes, absolutely. Cash that is being held that is uninvested in securities amongst Robinhood's clients is money that they have the capacity to invest and generate a little bit of income.

So what you're talking about is the proverbial cash on the sidelines sitting at Robinhood. And yes, that the rise in interest rates and the ability to use other people's money to invest has actually benefited them and mightily so. I think, in fact, although the stock is down double digits today, so what I'm about to say may sound a little bit bizarre, it probably saved their quarter. Well, with it where it is, I mean, we're almost at all-time lows. You mentioned that we're essentially normalized for all that pandemic activity. Does this business start to become more interesting to you with where it is now? I mean, maybe. You know, again, if you consider yourself at the low ebb of a fad, that unquestionably at some point is going to come back.

And in the meantime, they can tick along and make some interest income. Maybe it is interesting to me. At some point, someone's going to come up with another Bitcoin-type product that people are going to say, I have to have, or I have to trade. And I would say that Robinhood is at the front of the line of companies that, by the way, have somehow managed to retain their credibility in a world in which FTX has blown up and crypto.com barely exists anymore. For whatever else you want to say about Robinhood. They have retained that credibility. So yes, I think it's a little hard for me to say, but yes, I would say that it is much more interesting at this point than it has

been in the past. All right, over to one more beaten up name, Toast. Shares of the restaurant tech company down 15% after earnings. Bill, I want you to walk me through this one a little bit. Top line, basically in line with expectations. They narrowed their guidance more or less within the range of the guidance that they had provided. The big adjustment, I guess, was at the high end, but it was like a $10 million adjustment. And this caused a 15% sell-off. Does this make sense to you? For a growth company, I guess it kind of does. I mean, Toast, we're almost going to have the exact same conversation that we did regarding Robinhood, because Toast, really, their results were down because traffic at their restaurants was down. Again, so on a cash-on-cash basis,

they make money based on the restaurants having significant transactions. So on a per-unit basis, their revenues were down. But on a total basis, they kept adding restaurants. They are at nearly 100,000 points of sale at this point, which is incredible for a company at Toast's point in its evolution. So yeah, Toast is yet another one of those companies where you have to say their customers love their product. Yeah. I look at them and I say, I don't think we're going back to the way that things were done before them. I don't know if they win out as the restaurant tech provider. It seems like there are a lot of things moving in that direction. But I guess, are we seeing some hesitancy here because of something that is

just kind of out of their control? Is this part of the consumer spend story or the general macro story? I think it is very much both of those two things. And look, it has to be pointed out that Toast is priced as a growth stock. When you see a company that has done okay, like Toast did this quarter, but their stock was priced for well more than okay, that's where you see the adjustment. It feels like Toast is doing badly, but come back to that first part. They did okay. They really did. They're not yet making money, which that's something that you'd like to see businesses do if you want to own them for the long term. But they're getting there. There is growth. This is not a dying company. And we are not going back to that sort of proto-socialist way of paying

our checks at restaurants. Toast is going to be a pretty significant part of that revolution. Whether they end up being one of the winners, I don't know. But you're talking about something where what existed in the past, we are not going back to. I want to go back to your point there about the growth stocks and just kind of the expectations. We're a good chunk of the way through earnings season, but we still have companies that are going to be reporting. And a lot of what we're talking about is going to continue to affect results that companies experience in Q4 and report in early 2024. Do you feel like that's just something we kind of have to still have in our head when it comes to these growth names,

that the results really need to back them up? And if there's any hiccups along the way, it's very possible they get punished. Yeah. Keep in mind that during the middle of 2023, at the point in time in which everyone was saying, oh, the U.S. is going to go into a recession, there's a 100% probability of it, that a lot of the growth stocks that had done really well in, say, 2021 suddenly caught a bid. And so they went up a lot on what seemed to be not much. So it's always the case with stocks that they are not a perfect mirror to how the businesses are doing. They are a mirror to how the businesses are doing multiplied by how we think they're supposed to be doing. And in the case of a company like Toast, the stock's down

today because the market thought they should be doing a little bit better than they are. But that doesn't mean that they're doing badly at all. They are on a path that seems pretty positive to me. Bill, appreciate you joining me today. Appreciate you playing a doubleheader this week. Listeners, Bill will be on every single episode next week, so you can look forward to that. You forgot about the bonus episode that's just me. And the bonus episode that's just Bill.

Bill's personal diary. Bill Mann, thank you so much for joining me. Thanks, Dylan. If you're a regular Motley Fool Money listener, you're probably a fan of Bill Mann, and I'm guessing you might be a fan of Dividend Stocks, too. Our analysts at Motley Fool Stock Advisor put together a list of five quality dividend payers that are also recommendations in our Stock Advisor service. This report is free to you as a Motley Fool Money listener with no purchase necessary. Just go to fool.com slash dividends and we'll email it directly to your inbox. That's fool.com slash dividends with an S.

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So I take that to mean that you've got a front row seat to what happens in the labor market. So I want to start because of that by talking a bit about the October jobs report that came out last week on November 3rd. Employers added about 150,000 jobs last month, which fell short of economists' expectations. The unemployment rate ticked up 0.1% month over month, hitting 3.9%. Lots of numbers. What's your headline takeaway on that? What does that mean? So I think although many people seemed a bit disappointed in the results, it was still a

strong showing. You know, we're coming off the September surge and those massive numbers. So although 150,000 may have been a bit of a disappointment to some, there's still lots of positivity in that report. Can you explain what the September surge is? I feel like we hear these 150,000 numbers. And for someone who just kind of taps in every now and then, that's hard to imagine in isolation. So how does that compare to what happened in September? Absolutely. So in September, we always see a spike in hiring. A number of reasons. One, some companies are starting to gear up for the holidays a little bit early, but it's also that time of year when kids have returned to school. So you see the return of caregivers over the summer

with their students or with their children and things like that. So you also see companies trying to finalize year-end hiring before their fiscal season wraps up. Yeah, and I want to talk more about that year-end hiring piece a little bit. We talk about seasonality in the job market. You mentioned September, you mentioned year-end hiring. Apart from those two jumps, I'm assuming, what other kind of seasonality markers do we see? We always see in quarter three and quarter four, those September surge bumps along with the holiday hiring. You also see pickups in the spring, especially with hospitality and event planning and things of those natures. In the summer, we see upticks with state parks and governments

that are opening their doors back up to others. And obviously tax season is another strong hiring season. So we'll begin in November and December gearing up for tax season on the accounting side as well. So for this past month in October, were there certain industries that saw a particular amount of growth more so than others? Healthcare continues to be booming and we expect that will absolutely continue. So healthcare, we're going to keep seeing month over month gains. We also saw some gains on the government side of the house. Education's been strong most recently. There was even a little bit of manufacturing uptick. I think a few people were disappointed at the transportation and warehousing numbers for October, but that really just goes into the

seasonal hiring component. And we're seeing a little bit of a delay in hiring of seasonal associates. Now that can be due to automation, digitization, productivity gains. People are finding ways to do things smarter and faster. So we'll still have that great hiring push for the holiday season. It just started in November this year, as opposed to October, which is what we've seen in prior years. So that's why we've kind of talked about the Bureau of Labor. When we said the jobs report. We talked about the Bureau of Labor Statistics report. ADP, which processes a lot of payroll data, they also publish a job report, as do other employment firms, research companies, et cetera. In your role, I'm sure you're really familiar with a lot of that data across

from, you know, whoever's publishing it. But you also, I would think, have access to a lot of on the ground data. So are you seeing any big disparities between data, what's on the ground, or between those different reports? I think what we see on the ground is this uptick in part-time workforce, and that really hasn't shown through in the jobs report numbers yet. You also see with revisions month over month, we see some variability there. So it mirrors what I'm seeing, still lots of opportunity out there, still jobs being added, but folks returning to the workforce and especially in part-time positions is something that's not fully translated into those reports yet. So I expect to see those numbers tick up over the upcoming months. Is there a place where we do

you see those part-time numbers reflected? In the reports, they're kind of buried in between some of the numbers. But I think the challenge is because it's industry by industry, geo by geo, there's not one concentrated sector where we see a big pop. And I think that creates to kind of some of the quietness related to those numbers. I feel like every time macro data comes out, recently despite warnings about a year ago of this recession kind of being around the corner in recent months every time macro data comes out things feel relatively positive the consumer's strong the market's resilient i'm not saying this to be a pessimist but there is a part of me that wonders like when is the shoe gonna drop i'm not gonna ask you to predict when or if it's gonna

drop but are there notable like more qualitative trends that you're seeing in the labor market that speak to sentiment rather than maybe what's reflected in the numbers? Yeah, I think that's a really great question, and I wish I had a crystal ball. But I do see wages and the fact that they're kind of losing steam is a bit of an indicator. At the end of the day, I still see positivity over the upcoming 12 months. So I'm not expecting a deep recession to happen anytime soon. But certainly wages dropping and candidates not being able to see those massive wage gains, especially when they jump from one employer to another, is a bit of a signal that the companies

are starting to feel some relief after three years of ongoing pressures to hike wages, offer signing bonuses, retention bonuses, things of that nature. So that's one trend. We continue to see it tick down just a little bit each month, and we will continue to see that. This part-time workforce that is applying for a lot of these seasonal job openings that are coming up. What do they look like? Are they full-time job? Do they have a full-time job on the side and they're trying to supplement that income with a part-time job? Is there a certain age group or demographic that these jobs really speak to? It's a little bit across the board. So we've got some folks that year after year come back and just pick up a weekend shift to earn extra holiday

money or pick up a couple four-hour shifts there. We are seeing an increased number of part-time workers. You've got to think if you're a warehouse manager, you have to train double, triple, quadruple the workforce to be able to open up those flexible shifts and part-time work. So in the past, that obviously wasn't their number one choice. It increases their costs. However, after COVID and as we see, you know, we now have five generations in the workplace for the first time in history, we see that the needs and wants of workers are different and they are needing to cater to those that really want that flexibility and the ability to pick their hours. So we're seeing a rise, obviously, for that. Folks that have never even considered picking

up a secondary job this year. We published a survey last year that said over 50% of the American workforce for the first time in history are considering picking up a secondary job this year because they're concerned about inflation and the ability to heat and eat this holiday season. As always, people on the program may own stocks mentioned, and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.