From the Every Investor Will Get a Trophy File: Taper Tantrums Ahead?
Financial Times January 2021:
“The second support to be removed is expected to be a tapering of the Fed’s purchases of government bonds, to begin as early as this year, according to some predictions. Fed chair Jay Powell said this week that the central bank must be “very careful in communicating about asset purchases” because of the sensitivity among investors about the removal of support for the economy. Whatever the Fed does not buy will need to be bought by other investors and more supply, all else being equal, tends to mean lower prices and higher yields.”
From the, “I told this to My Daughter at $1200” File: Bitcoin
Research Affiliates January 2021: Regardless of the reason for BTC’s astronomical price movement, investors should resist the temptation to chase the price. Extreme fluctuations in price invalidate claims that BTC is a store of value. Neither is it a capital asset, merely an entry in a digital ledger. BTC does not generate cash flows, and its only real use is to sell to someone else. High transaction fees make it a poor currency and negate claims of fungibility. The price of BTC is nearly certainly a bubble and likely manipulated. Investors should proceed with extreme caution.
The Basket of Future Investor Hell
Just When You Thought Things Couldn’t Get More Stupid
There are three sectors of the stock market today:
- Large Cap Growth/Tech
- Small and Micro-Cap Stupid
- “Other” – (We own 29 of this sector.)
Read what we reprinted from Almost Daily Grant’s 01.25.2021 and decide which bucket is you.
For Posterity
With the S&P 500 jumping 74% since March to near a fresh high, scores of newly minted retail traders, including an active contingent on the Reddit WallStreetBets forum, throw their weight around. According to Bianco Research, an average 40.5 million in call options have traded over the past 10 days, a record figure and roughly double the 2019 baseline. Thanks to that cascade of new money in tandem with buoyant sentiment, price action in a handful of securities has taken a manic turn. Let’s review:
This morning shares in retailer GameStop Corp. soared as much as 145% to $159 per share, briefly reversed all those gains then finally finished at $77 each. That compares to $43 on Thursday afternoon, $17 three weeks ago and $5 in September. For context, GameStop is expected to generate $5.6 billion in revenue and $114 in negative free cash flow for the 12 months ending in January 2022, down from $9.3 billion in revenue and $483 million in positive free cash flow in fiscal 2016, while the average price target among the quartet of sell-side analysts compiled by Bloomberg stands at $14.
That epic rally was kicked off by the Jan. 11 announcement that former Chewy, Inc. co-founder Ryan Cohen would join the 37-year old retailer’s board of directors. Perhaps more importantly, the stock’s elevated short interest, last week exceeding the number of shares outstanding according to S3 Partners, provided kindling for the retail traders’ bonfire. Trading volume of 197 million shares on Friday represented 20 times the one-year average turnover, while today’s 176 million shares traded was nearly three times that of the SPDR S&P 500 ETF, which has $330 billion in assets compared to a $6 billion market cap for GME.
Then, too, that explosive move has dealt serious pain to conventional money managers caught offside. This afternoon, hedge fund Melvin Capital secured a $2.75 billion investment from Citadel LLC and Point72 Asset Management, to help the fund deal with losses including those from a short position in GameStop.
Sympathy seems to be in short supply among the newly-flush GME bulls. One user on the WallStreetBets page summarized the zeitgeist:
[F*ck] the shorts, [F*ck] fundamentals, this is a once in a lifetime opportunity.
Similar eye-catching action is visible across the Pacific. Shares in electric vehicle manufacturer China Evergrande New Vehicle Group, a division of the world’s most indebted property developer China Evergrande, jumped by as much as 67% after announcing plans to sell HKD $26 billion ($3.4 billion) worth of shares to an investor consortium. Nearly 81 million shares changed hands today, nine times the one-year average daily trading volume.
That brings the post-June rally in those shares to a cool 625%, leaving Evergrande auto with a $51 billion market cap. That not only tops the $44 billion market value for industry mainstay Ford Motor Co. but also the $28 billion market cap for China Evergrande, the owner of 68% of the E.V. hopeful, which has yet to commence commercial sales of its products. Nigel Stevenson, analyst at Hong Kong-based forensic accounting firm GMT Research, tells the Financial Times that most of the deal proceeds will accrue to the corporate parent, as its biggest cash outlay in 2019 was investment in properties under development. “Evergrande Auto remains a property company,” he concludes.
As the retail hordes are both emboldened with recent successes and soon-to-be-fortified with a capital infusion from forthcoming stimulus checks, other names come in for the GameStop treatment. This morning, iconic legacy smartphone maker-turned “intelligent security software” provider BlackBerry Ltd. shares spiked as much as 45% on 350 million share trading volume (nearly 30 times its one-year average), extending year-to-date gains to 170% and spurring the company to issue a press release declaring it is unaware of any “material change in its business or affairs” that would account for the stock surge.
Indeed, the fundamental picture remains less than exciting. BlackBerry, which has a current market cap of $10 billion, is expected to generate $1 billion in revenue and $130 million in free cash flow for the fiscal year ending in February 2022. For comparison, the company posted an $11 billion top line and $1.1 billion on free cash flow in fiscal 2013.
Anecdotal, rather than analytical information, may best explain the current phenomenon. This morning, one Reddit user reported a purchase of just over $100,000 worth of BlackBerry stock, writing that he “took [his] dad’s life savings. . . [and] told him It’s either retirement on a yacht or food stamps for him.”
