Posts tagged ‘gme’

Investors Ponder Stimulus Size as Rates Rise

Stock prices rose again last month in part based on passage optimism of a government stimulus package (currently proposed at $1.9 trillion). But the rise happened before stock prices took a breather during the last couple of weeks, especially in hot growth sectors like the technology-heavy QQQ exchange traded fund, which fell modestly by -0.1% in February. As some blistering areas cooled off, investors decided to shift more dollars into the value segment of the stock market (e.g., the Russell 1000 Value index soared +6% last month). Over the same period, the S&P 500 and Dow Jones Industrial Average indexes climbed +2.6% and +3.2%, respectively.

What was the trigger for the late-month sell-off? Many so-called pundits point to a short-term rise in interest rates. While investor anxiety heightened significantly at the end of the month, the S&P 500 dropped a mere -3.5% from all-time record highs after a slingshot jump of +73.9% from the March 2020 lows.

Do Rising Interest Rates = Stock Price Declines?

Conventional wisdom dictates that as interest rates rise, stock prices must fall because higher rates are expected to pump the breaks on economic activity and higher yielding fixed income investments will serve as better alternatives to investing in stocks. Untrue. There are periods of time when stock prices move higher even though interest rates also move higher
Take 2013 for example – the yield on the benchmark 10-Year Treasury Note climbed from +1.8% to 3.0%, while the S&P 500 index catapulted +29.6% higher (see charts below).

Similarly to now, during 1994 we were still in a multi-decade, down-trending interest rate environment. However, from the beginning of 1994 to the middle of 1995 the Federal Reserve hiked the Federal Funds interest rate target from 3% to 6% (and the 10-Year Treasury yield temporarily climbed from about 6% to 8%), yet stock prices still managed to ascend +17% over that 18-month period. The point being, although rising interest rates are generally bad for asset price appreciation, there are periods of time when stock prices can move higher in synchronization with interest rates.

What’s the Fuss about Stimulus?

One of the factors keeping the stock market afloat near record highs is the prospect of the federal government passing a COVID stimulus package to keep the economic recovery continuing. Even though there is a new administration in the White House, Democrats hold a very narrow majority of seats in Congress, leaving a razor thin margin to pass legislation. This means President Biden needs to keep moderate Democrats like Joe Manchin in check, and/or recruit some Republicans to jump on board to pass his $1.9 trillion COVID stimulus plan. If the bill is passed as proposed, “The relief plan would enhance and extend jobless benefits, provide $350 billion to state and local governments, send $1,400 to many Americans and fund vaccine distribution, among other measures,” according to the Wall Street Journal.

Valuable Vaccines 

Fresh off the press, we just received additional good news on the COVID vaccine front. The U.S. Food and Drug Administration (FDA) approved the third vaccine for COVID-19 by Johnson & Johnson (JNJ). This J&J treatment is also the first single-dose vaccine to be distributed, unlike the other two vaccines manufactured by Pfizer Inc. (PFE) and Moderna Inc. (MRNA), which both require two shots. Johnson & Johnson expects to ship four million doses immediately and 20 million doses by the end of March.

So far, over 50 million doses of the COVID vaccines have been administered, and the White House believes they can go from currently about 1.5 million injections per day to approximately 4 million people per day by the end of March. The combination of the vaccines, mitigation behavior, and a slow march towards herd immunity have resulted in encouraging COVID trends, as you can see from the chart below. However, the bad news is new COVID cases, hospitalizations, and deaths still remain above peak levels experienced last spring and summer.

Revived Recovery

Thanks to the improving COVID trends, a continued economic recovery driven by reopenings, along with fiscal and monetary stimulus, business profits and revenues have effectively recovered all of the 2020 pandemic losses within a year (see chart below).

Source: Dr. Ed’s Blog

But with elevated stock prices have come elevated speculation, which we have seen bubble up in various forms. With the rising tide of new investors flooding onto new trading platforms like Robinhood, millions of individuals are placing speculative bets in areas like Bitcoin; new SPACs (Special Purpose Acquisition Companies); overpriced, money-losing cloud software companies; and social media recommended stocks found on Reddit’s WallStreetBets like GameStop (GME), which was up +150% alone last week. At Sidoxia Capital Management, we don’t spend a lot of time chasing the latest fad or stock market darling. Nevertheless, as long-term investors, we continue to find attractively valued investment opportunities that align with our clients’ objectives and constraints.

Overall, the outlook for the end of this pandemic looks promising as multiple COVID vaccines get administered, and the economic recovery gains steam with the help of reopenings and stimulus. If rising interest rates and potential inflation accelerate, these factors could slow the pace of the recovery and limit future stock market returns. However, if you follow a systematic, disciplined, long-term investment plan, like we implement at Sidoxia, you will be in a great position to prosper financially over the long-run.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (March 1, 2021). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in MRNA, PFE, and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in GME, JNJ, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

March 1, 2021 at 12:20 pm 2 comments

Market Drops as GameStop Pops

The stock market started with a bang this year with the S&P 500 index at first climbing +3% in January before ending with a whimper and a monthly decline of -1%. This performance followed a strong finish to a wild 2020 presidential election year (the S&P 500 rose +16%). There has been plenty of focus on the coronavirus health crisis and vaccine distribution (100 million doses in 100 days), along with debates over a $1.9 trillion proposed relief package by newly elected President Joe Biden, but there has been another story stealing attention in the financial market headlines…GameStop.

If a global pandemic and a populist attack on the Capitol were not enough for investors, the Reddit (WallStreetBets) and Robinhood revolution coordinated a mass attack on privileged hedge funds and short sellers by squeezing out-of-favor stocks like GameStop (Ticker: GME) to stratospheric levels (up +1,625% to $325/share in January alone) causing an estimated $20 billion of losses for many wealthy elites. To put the meteoric rise into perspective, before GameStop shares reached $325, the stock was valued below $20/share last month and has climbed more than 100x-fold from a low $2.57/share nine months ago (see chart below).

Source: Investors.com (18-month chart)

What Exactly Happened?

Well, millions of users on the social media platform Reddit banded together on a forum called “wallstreetbets” (see graphic below). WallStreetBets was established in 2012 and had approximately 1 million subscribers at the beginning of 2021 – today it has more than 7 million subscribers. Millions of these anti-establishment WallStreetBets followers effectively colluded together to inflate the share price of GameStop by ganging up on the many short sellers who were betting that GameStop share price would drop. In other words, Reddit-Robinhood buyer gains led to short seller losses. One hedge fund in particular, Melvin Capital, lost billions of dollars on its GameStop short bet and saw its fund performance decline by a whopping -53% in one month…ouch!

The Reddit WallStreetBets forum may have served as the match in this wildfire, but in order to trigger an inferno, a brokerage account is needed. A trading platform allows individual traders on Reddit to level the playing field against the hedge fund professionals and short sellers. The fuel for the GameStop detonation was Robinhood, a fintech (Financial Technology) brokerage firm founded in Silicon Valley in 2013 by two Stanford University graduates. The mission of the company is to “democratize finance for all.” But let’s not forget what Thomas Jefferson noted, “A democracy is nothing more than mob rule, where fifty-one percent of the people may take away the rights of the other forty-nine.” The Reddit-Robinhood mob certainly proved this point.

Although Robinhood was initially seen as a saint in the free trading revolution, eventually many of the brokerage company’s disciples became disenfranchised. Many users subsequently turned on the company and considered Robinhood a villain that was rigging the system when CEO Vlad Tenev halted the ability of its 13+ million users to buy GameStop shares.

Many traders came to the conclusion that Robinhood was working to save the perceived hedge fund bad guys by the firm temporarily terminating user purchases in GameStop stock. Mr. Tenev blamed regulatory capital requirements as a reason for disallowing Robinhood-ers to buy GameStop last week, which was a major contributing factor to why the stock price plummeted by -44% on January 28th. The following day, Robinhood partially reversed its stance and subsequently allowed minimal daily purchases of one share.

How Does Short Selling Work?

In the stock market, you can make gains by buying shares that go up in price, or you can make profits by short selling shares that go down in price. If you buy a stock, the most money you could lose is -100% of your original investment. For example, if you invest $1,000 into GameStop stock by buying 50 shares at $20 each, if the stock price goes to $0, the most the investor/trader could lose is 100% of their $1,000 original investment.
On the flip side, if you short a stock, the potential losses are limitless. For example, if you (or a hedge fund manager) shorts $1,000 of GameStop stock by selling 50 shares short at $20 each, if the stock price goes to $60, the short seller just loss -200% of their original investment [($20/shr – $60/shr) X 50 shares] = -$2,000. If GameStop goes to $100, the short seller loses -400%, and if GameStop price goes to $220, the short seller loses -1,000%. As you can see, the higher the price goes, there are infinite potential losses of the investor, trader, or hedge fund manager. 

If a stock price continues to move higher, the only way for a short seller to stop the bleeding (i.e., close their short position or “bet”) is to buy shares. As a reminder, a buyer of stock closes their position by selling shares after they originally buy shares. A short seller closes their position by buying shares after they initially sell shares short. So again, if GameStop share price continues to move higher, the only way for GameStop short sellers to stop their losses is to buy more GameStop shares. This is the equivalent of pouring gasoline on a blazing fire because as millions of Reddit/Robinhood-ers are pushing GameStop’s share price higher almost every day, short selling hedge fund managers are left scrambling for the exits and forced to close their positions at even higher prices (i.e., larger losses).

What Does This All Mean?

Whether you are talking about speculation in Bitcoin, the rise of SPACs (Special Purpose Acquisition Companies), the increase in the number of IPOs (Initial Public Offerings), or the Reddit-Robinhood Revolution, risk appetite has been on the rise and long-term investors should proceed very cautiously. Just as many have experienced on trips to Las Vegas, big winnings can quickly turn to huge losses. Although it’s certainly fun to watch the individual Davids take down the hedge fund/short selling Goliaths, if the Reddit-Robinhood community gets too aggressive in its speculation, history shows us they will end up being the ones swimming in their tears or stoned to death.

If you need assistance navigating through all these land mines, please give us a call at Sidoxia Capital Management (949-258-4322) for a complimentary portfolio review.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (February 1, 2021). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in GME, AMC, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

February 1, 2021 at 4:25 pm Leave a comment


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