Monday Morning Reads

Recovering from the worst week since October

Traders appear to be getting some more clarity on the trades that will be allowed this week after uncertainty over the transactions led to the market's worst week since October. Robinhood has limited stock restrictions to eight companies (users can still only buy one share of GameStop), while Interactive Brokers reopened trading in options for the volatile WSB/Reddit names. Flows that were also pulled from brokerages last week due to angst over restricted trading may also be coming back into the market, and futures are reflecting the renewed optimism: Dow +0.7%; S&P 500 +0.9%; Nasdaq +1.1%.

Analyst commentary: "The week's events may have turned markets on their heads, but fear indicators imply that we may have seen the worst of the degrossing," Jefferies wrote in research note. Barclays added that it's unlikely the ongoing short squeeze in a few stocks by retail investors has raised concerns of a broader contagion. "While we believe there is more pain to come we remain optimistic that it is likely to remain localized."

What else to watch: Stimulus is reentering the discussion, giving another boost to equities, as President Biden meets with the Republican lawmakers today to discuss proposals (see below). Another week of earnings is meanwhile on tap, with Thursday set to be the busiest day of the season. 99 S&P companies are set to report, including Alphabet (GOOG, GOOGL), Amazon (AMZN), Alibaba (BABA), Ford (F), Snap (SNAP), Exxon (XOM), Pfizer (PFE) and UPS (UPS). There will also be a bevy of economic data, ending with the January jobs report that will be published Friday.

Alternative COVID relief package

A group of 10 Republican senators led by Susan Collins of Maine is pitching a new coronavirus relief plan with a $600M price tag, less than a third the size of the Biden administration's $1.9T proposal. The GOP said their plan is more targeted, offering smaller paychecks to fewer Americans and stripping out a measure that would have raised the minimum wage, but includes additional unemployment benefit extensions.

Bigger picture: The low offer increases the likelihood that Democrats will seek to bypass Republicans to fund their proposal, and could further weigh on further cooperation between the two sides. A similar scenario was seen in 2020, when both parties were trillions of dollars apart for months, but only came together just before the Senate runoff election in Georgia. Biden has said the aid package is his top legislative priority and indicated he would pass it without bipartisanship support if needed.

Quote: "We have a virus crisis; we have an economic crisis. We have to get shots in people's arms. We have to get the schools reopened so that parents can go back to work. And we need to provide direct relief to families and businesses across the country who are really struggling here," said National Economic Council Director Brian Deese.

Biden will meet with the Republican senators at the White House this afternoon to discuss the alternative proposal, but also needs to get his party on board for the $1.9T stimulus package. Democrats have a narrow majority in the Senate - with VP Kamala Harris casting a tie-breaking vote - meaning Biden will require support from deficit-hawk Democrats from conservative states, like West Virginia's Joe Manchin and Montana's Jon Tester.

Consolidation in the oil and gas industry?

A report from the WSJ over the weekend suggested that the CEOs of Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) talked about a combination of the companies after the COVID pandemic took hold last year. The outbreak decimated oil and gas demand and put enormous financial strain on both firms. While the discussions were described as preliminary and aren’t ongoing, sources say they could come back in the future.

Statistics: The combined company's market value could top $350B and reshape the oil industry. Together, they would produce about 7M barrels of oil and gas a day, based on pre-pandemic levels, second only in both measures to Saudi Aramco. Only a handful of industry deals were completed last year, including Chevron's $5B takeover of Noble Energy and ConocoPhillips' (NYSE:COP) $10B takeover of Concho Resources.

Outlook: A merger of XOM anc CVX would be one of the biggest deals ever, but would likely face regulatory and antitrust concerns. Combining the oil majors would also reunite the two largest descendants of John D. Rockefeller's Standard Oil monopoly, which was broken up by U.S. regulators in 1911. Furthermore, President Biden has said climate change is one of the biggest crises facing the country and he would push for a "transition away from the oil industry."

Exxon is scheduled to report earnings on Tuesday, with a conference call at 9:30am EST. (113 comments)

GameStop squeeze: Is there a case for market manipulation?

Statement from the SEC: "The Commission is closely monitoring and evaluating the extreme price volatility of certain stocks' trading prices over the past several days to protect investors, to maintain fair, orderly, and efficient markets, and to facilitate capital formation."

"The Commission is working closely with our regulatory partners... to ensure that regulated entities uphold their obligations to protect investors and to identify and pursue potential wrongdoing. The Commission will closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities."

"In addition, we will act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws."

Bigger picture: While the SEC is just fact-finding now to see if anyone broke the law, the choice of words may suggest several parties are currently under the spotlight. That includes the WSB/Reddit crowd pumping highly shorted (and other) stocks, the extreme leverage of hedge funds, brokerages that halted trading to "closing positions only," as well as the opaque dealings of the market makers.

Will the regulatory efforts bear fruit? Even if potential defendants are identified, successful litigation against alleged individual market manipulators would be difficult for the SEC, said Duke Law School Prof. Gina-Gail S. Fletcher. The legal definition of "market manipulation" requires a showing that someone created "a false or misleading appearance of active trading," according to the Securities Exchange Act of 1934, and a bunch of people on Reddit saying they want to shoot a certain stock to the moon is probably not illegal. Courts are looking for fraud and misinformation, she added, but with GameStop (NYSE:GME), you have "irrational exuberance but don't seem to have a lot of fraud."

Bottom line: "I think they're going to struggle with it," Fletcher declared. "They don't really do a whole lot of market manipulation enforcement and it's a really hard crime to prove. The statutory provisions and the case law related to it are all over the place and they don't favor the SEC." (502 comments)

What else is happening...

Melvin Capital lost 53% in January on GameStop (GME) and bad positions.

Forget GameStop: Sports betting plays could have long-term value.

U.S. warns Myanmar as military seizes power in coup.

Moderna (NASDAQ:MRNA) looks to increase number of COVID vaccine doses per vial.

Today's Markets

In Asia, Japan +1.6%. Hong Kong +2.2%. China +0.6%. India +5%.
In Europe, at midday, London +1.3%. Paris +1.5%. Frankfurt +1.6%.
Futures at 6:20, Dow +0.7%. S&P +0.9%. Nasdaq +1.1%. Crude +0.8% to $52.59. Gold +0.7% at $1863.60. Bitcoin +1.3% to $34138.
Ten-year Treasury Yield -1 bps to 1.08%

Today's Economic Calendar

9:45 PMI Manufacturing Index
10:00 ISM Manufacturing Index
10:00 Construction Spending
2:00 PM Fed's Bostic Speech
3:15 PM Fed's Rosengren Speech