Market Recap January 29

Monday – Dow (37) to 30,960 Nasdaq +92 to 13,636 (record high) and the S&P +14 to 3,855 (record high). The Nasdaq and the S&P set new records today while the Dow traded relatively flat. Seven of the eleven S&P sectors traded higher today led by Utilities, Consumer Staples, and Technology with energy the worst of the laggards…20% of the S&P reports earnings this week including Microsoft (MSFT), Johnson and Johnson (JNJ), American Express (AXP), Starbucks (SBUX), Verizon (VZ), Lockheed Martin (LMT) and General Electric (GE) on Tuesday, Facebook (FB), Apple (APPL), Tesla (TSLA), AT&T (T), Boeing (BA), on Wednesday, McDonalds (MCD), Visa (V), Comcast (CMCSA), Mastercard (MA), Southwest Air (LUV), American Air (AAL) on Thursday and finally Chevron (CVX), Caterpillar (CAT), and Eli Lilly (ELI) on Friday. In economic news, Consumer Confidence is released on Tuesday, the Federal Reserve will release their statement on interest rates on Wednesday (no changes are expected), Durable Goods is released on Wednesday, and on Thursday, Weekly Jobless Claims and Q4 GDP will be released…The 10-year U.S. Treasury yield fell 5bp to a 10-week low of 1.038% in response to poor economic data from Germany which suggested the possibility of a double dip recession in the Eurozone…The Senate confirmed Janet Yellen as Secretary of Treasury, the first female in the history of our nation to hold the position. Speaking of the Senate, the chamber continues to be in paralysis as the current minority leader, Mitch McConnell (R-KY) refuses to whip the 60 votes needed for a procedural vote that would turn the leadership over to the Democrats, unless Senate Majority Leader Schumer agrees to keep the arcane Senate tradition, known as the filibuster, in place. As Schumer has refused to do so, the GOP are still chairing all committees in the Senate despite losing the election. The only tool open to Democratic leadership is to exercise a vote to eliminate the filibuster right now and they are short at least two votes (Manchin D-WV, Sinema D-AZ). This means all legislation will be placed on hold until this problem is resolved, including additional stimulus. This could potentially weigh on the market if this drama drags out over time….

Tuesday – Dow (22) to 30,937 Nasdaq (10) to 13,626 and the S&P (5) to 3,849. A relative yawner of a day that ended with all three indices down slightly. Only five of the eleven S&P sectors traded higher, led by Real Estate and Consumer Staples. Energy and Materials brought up the rear…Microsoft (MSFT) kicked off the big tech earnings season today post close, beating earnings expectations by 23% and beating revenues expectations by 7.2%. The stock traded up 3.7% post close…Johnson and Johnson (JNJ), on their earnings call beat expectations and said they expect to release their Phase III Covid-19 vaccine data early next week. Emergency Use Authorization should follow within two to three weeks based on the experiences of the Moderna (MRNA) and Pfizer/BioNTech (PFE/BNTX) vaccines…Starbucks reported better earnings but missed on revenues and announced its CEO will leave to join Walgreens in the same role…

Wednesday – Dow (633) to 30,303 Nasdaq (355) to 13,270 and the S&P (99) to 3,750. All three indices opened lower and kept going today. All eleven sectors of the S&P traded down today. The Fed announced no changes to interest rates but did nothing to tamper fears that they may reduce their bond buying program soon. The Fed’s announcement led to another leg down in the market. However, the overwhelming consensus was that the retail buying frenzy in Bed Bath Beyond (BBBY), AMC Entertainment (AMC), and especially GameStop (GME) (see story below), are forcing hedge funds that are short these stocks to sell other holdings to raise cash to meet margin calls on their short positions…Boeing (BA) missed earnings and fell 4% during normal trading hours…Apple crushed their numbers, reporting their first $100 billion quarter with revs at $111 billion vs expectations of $103 billion and earnings of $1.68 vs expectations of $1.41. The stock traded down 3.2% after hours…Facebook (FB) beat earnings and revenue expectations but warned that changes in Apple’s iOS14 could hurt its advertising business. The stock traded down 2% post close…Tesla missed their earnings expectations but beat on revenues. The stock traded down 5% in after-hours trading.

Thursday – Dow +300 to 30,603 Nasdaq +66 to 13,337 and the S&P +36 to 3,787. The retail rebellion against short sellers was dealt a severe blow today when in an unprecedented move, Robinhood, a popular retail client brokerage application, suspended purchases of both options and equities of 13 different highly shorted securities on their platform including, GameStop (GME -44%), AMC Entertainment (AMC -56%), Bed Bath Beyond (BBBY -36%), American Air (AAL +9), and BlackBerry (BB -41%). Most of those names, deprived of buying firepower on the Robinhood and Interactive Brokers (which also instituted restrictions on purchases) platforms, fell precipitously today, negating any need for short sellers to raise additional cash to meet margin requirements on their short positions. As a result, investors bought the dip in the markets brought on by the last two sessions, and all three indices traded higher, including all eleven S&P sectors. Last night’s great tech earnings helped as did a surprise dip in Jobless Claims which came in at 847k vs expectations of 875k and last week’s print of 914k…Earnings: McDonalds (MCD -0.09%) missed both top (revenues) and bottom (earnings per share) line expectations with its European segments dragging down overall results, Visa (V +1.67%) beat top and bottom-line expectations, Comcast (CMCSA +6.57) reported record internet customers and 33 million new Peacock subscribers, Mastercard (MA +2.8%) beat top and bottom-line expectations, Southwest Air (LUV) lost money over a full year for the first time since the Nixon administration, American Air (AAL +9.3%) lost $8.9 billion in 2020 and Q4 revenues dropped 64% year over year…Good Novavax (NVAX) Covid-19 vaccine news; the company’s vaccine proved 89% effective in a 15,000 person study in Britain. The bad news, against the new South African strain it was only 49% effective. More good news: Johnson and Johnson (JNJ) is expected to report on its Phase III Covid-19 vaccine trial results on Monday. An EMA (emergency use authorization) could be forthcoming prior to the end of February….

Friday – Dow (620) to 29,982 Nasdaq (266) to 13,070 and the S&P (73) to 3,714. Today’s market relapse was predicated on two different issues: concern over long term market stability relating to the ongoing short squeeze in the “Reddit Rebellion,” as well as disappointment with the efficacy of the Novavax and Johnson and Johnson Covid-19 vaccine studies. For the second time this week all eleven S&P sectors traded down with Energy and Technology the two worst performers. The short squeeze was back in play today as Robinhood brokerage tapped massive lines of credit overnight in order to comply with capital requirements and resumed allowing purchases of GameStop (GME +67%) and AMC Entertainment (AMC +53%) both of which promptly resumed their seemingly never-ending rally…On the vaccine front, the more nuanced view of both of these new vaccines was that yes, they are not as effective especially against the new variants however, the data proves that they are effective in keeping those inoculated alive and out of the hospital. In addition, both companies will add several millions of doses into the supply chain by the spring.

The week in review…Dow (1014) or (3.2%) Nasdaq (473) or (3.5%) and the S&P (127) or (3.3%). It was the worst week for the markets since the fall of last year. Earnings on balance were good especially in tech. Q4 GDP was 4% which normally is a great number but missed expectations of 4.2%. Jobless claims were not as bad as expected. And, we received what I would term great news on the vaccine front¹. However, there was only ONE story this week…

A fascinating battle is being waged on Wall Street, the likes of which has not been seen before. GameStop (GME) a brick-and-mortar video game and console retailer had been trading below $10/share since April of 2019. It, like many other retailers, find themselves attacked by larger retailers (Target, Walmart, and Amazon) and by the companies whose products they sell (Sony, Microsoft, Nintendo) as those companies have started selling digital games directly to owners of their consoles, cutting out GameStop. The stock started percolating in the fall when it became public that Ryan Cohen’s investment firm (he is the former CEO of Chewy, an online pet food retailer), had taken an ownership stake. On January 11th it was announced that Ryan Cohen and two of his former colleagues from Chewy would be joining the board of directors of GameStop. The stock popped. In the meantime, many hedge funds on the street had heavily bet against the company by taking large short positions.² 

A subgroup on the social media application, Reddit, called WallStreetBets, adopted GameStop as part of a “stick it to the man”, populist type movement and suddenly there was a swell of retail buying pushing the stock higher. Last Thursday, Andrew Left of Citroen Research, which was short GME, came out negative on the stock saying the stock was worth $20/share (at this time the stock was trading around $43). The Reddit group (which is just a bunch of unrelated people writing on a blog encouraging each other to continue to buy) doubled down and continued buying, effectively ripping off the faces of the short sellers (the stock closed last Friday afternoon at $65). Melvin Capital, which has returned 30% annually since 2014, was short GameStop, down 30% and required a cash infusion rescue of $2.75 billion by two other hedge funds. Tuesday, the trend continued with the stock trading up an amazing 92% to close at $147.98/share and post close traded up another 42% to $209.26/share. Wednesday the stock rallied another 134% or $199 to close at $347/share.

An interesting piece to this puzzle is that the majority of buyers are not buying the actual GameStop equity, they are buying call options (the right to buy the equity in the future at a set upon price). When one buys a call option, the buyer only pays the premium to buy the option which may be only a few dollars a share with a minimum 100 shares purchase. If the price of the equity goes higher, the call option will appreciate and then the buyer can liquidate the position and pocket the difference in the price of the option without ever owning the underlying equity. Behind the scenes though, the brokers who sell the options must hedge their exposure, usually about 40% of their exposure and thus on a single contract that represents 100 shares, the broker must buy 40 shares. Multiply those 40 shares by the millions of contracts traded and you have a self-fulfilling cycle of buying. The Reddit group, WallStreetBets is not just affecting GME but is also working on AMC (AMC), Bed Bath and Beyond (BBBY) and American Air (AAL). Oh yes, and Wednesday it was revealed that beleaguered Melvin Capital finally closed out its short on GME, acknowledging a massive loss.

On Thursday, Robinhood and Interactive Brokers suspended all purchases of 12 names that WallStreetBets had focused on and in which there was significant buying interest. Both brokers did so most likely because they were insufficiently capitalized and needed time to source additional lines of credit before allowing additional purchases. Indeed, news broke on Friday morning that Robinhood raised $1 billion overnight in order to allow them to comply with regulatory requirements and lift the trading restrictions. GME and AMC, after falling precipitously on Thursday, resumed their incredible rallies today (GME +67% and AMC +53%). Robinhood is now in the crosshairs of Congress as there was a hue and cry on social media that Robinhood was taking their ball and going home because the little guys were finally winning at the game and the hedge funds were crying foul (see billionaire hedge fund manager Leon Cooperman’s incredibly tone-deaf interview on CNBC’s FastMoney Halftime on Thursday³). The real question is what is the end game of the members of WallStreetBets? GameStop is probably still going to succumb to the massive market forces arrayed against it and AMC faces questions regarding its future versus streaming and the public’s reticence to go back to the movies in a post Covid world. Who is left holding the bag when these stocks inevitably come back to earth?

1 JNJ Covid-19 efficacy of 72% vs moderate and severe infections in the United States and no hospitalizations or deaths.

2 Shorting Stock is a bet that the value of a stock will fall. The investor borrows the shares from their broker and sells them anticipating that the stock will fall in price. The hope is that they can buy the shares back cheaper, once the stock falls, return the shares to the lender, and pocket the difference.

3 Coopermans’s rant https://www.cnbc.com/2021/01/28/leon-cooperman-on-gamestop-reddit-speculators-im-not-damning-them-but-it-will-end-in-tears.html

IMPORTANT SAFETY NOTE: the Harvard trained epidemiologist that sounded the early alarm on Covid-19 last year, Dr. Eric Feigl-Ding has noted that the new variants of the virus, the UK strain, B.1.1.7 and the South African strain, 501Y.V2 are 60% more transmissible than “standard” Covid-19. Whether these strains are more deadly remains to be seen but regardless, if more people are infected, more people will die. As such, he is warning against cloth masks and urges the public to buy and wear the 4-5 ply masks which provide maximum protection, knowns as N95 masks. These are in rare supply right now, but the FDA has approved via an emergency use authorization, Chinese made KN-95 masks (which Dr. Feigl-Ding also recommends). As of last weekend, they were still readily available on Amazon at around $1.30-$1.60 per mask. If you cannot source these, or while you are waiting for your order to arrive, it is recommended that you wear two cloth masks.

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