Thursday Morning Reads

Thursday Morning Reads







A new era of trading?

Wall Street on Wednesday logged its worst day since October despite many catalysts that could have been utilized by traders. On the surface level, things appeared to be positive for equities, like the unwavering support of the Federal Reserve. While the central bank flagged a moderating recovery, Chairman Jay Powell made clear the U.S. central bank was nowhere near exiting massive support for the economy, left benchmark interest rates near zero and repeated a pledge to maintain its bond buying program at the current pace of $120B of purchases per month. U.S. stock index futures still fell again overnight: Dow -0.4%; S&P 500 -0.7%; Nasdaq -1%.

Coronavirus vaccine delays and a much-anticipated pullback from all-time highs can serve as an excuse to book profits, but worries are growing. Dealers said highly leveraged investors need cash to cover losses elsewhere as retail investors involved with the WSB Reddit channel continue to shift the power dynamics on Wall Street. While some may dismiss what's going on as an irrelevant "gamification" of stock trading, the instability could create broader market losses and upend the traditional trading model. Flows vs. fundamentals, momentum vs. value, day trading vs. investing are hot topics that are set to trend this year as wild retail investor enthusiasm plays out in the markets.

Case in point: About 44 circuit breaker halts were triggered in the first two hours of trading on Wednesday as volatility reigned high at cult favorites GameStop (NYSE:GME), AMC Entertainment (NYSE:AMC), Express (NYSE:EXPR), Bed Bath & Beyond (NASDAQ:BBBY), Nokia (NYSE:NOK) and Koss (NASDAQ:KOSS). Halts give traders time to digest news and adjust their trades over the typical five-minute pause, but have done little to help smooth rapid movement generated by the WSB Reddit army. The wild swings also saw online brokerages like Robinhood (RBNHD), Charles Schwab (NYSE:SCHW), E*Trade (NASDAQ:ETFC) and TD Ameritrade (NASDAQ:AMTD) hit by extended service disruptions.

Thought bubble: The mob mentality on WallStreetBets is stirring regulatory and legal concerns, as well as the attention of the White House. Treasury Secretary Janet Yellen is monitoring the situation, while the SEC is looking into the short and gamma squeezes that are sending some shares sharply higher. Brokerages have even restricted trading and options activity in GameStop, and Nasdaq (NASDAQ:NDAQ) CEO Adena Friedman suggested that her exchange could halt trading activity if a stock was targeted by internet users, which would enable investigations into possible manipulation and allow investors to "recalibrate." (75 comments)

How (and if) GameStop mania will come to an end

Many of the professionals on Wall Street don't think GameStop (NYSE:GME) can hold on to its wild gains, but then again, most of them didn't see the war with the retail bros coming. Premarket: GME +21% to $420/share.

"The price action is completely divorced from fundamentals. It's a relatively small universe of retail investors that are pushing around a relatively small universe of stocks so at the end of the day, this Reddit army, they don't have the wherewithal to sustain these big losses," said Jason Katz, a managing director and portfolio manager at UBS. "It's not going to be the institutions left holding the bag. It's the kids on my basketball team asking me about how options work."

"We've equipped people with the tools to be able to do something. And they did," said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York, though others are cautioning the strategy is not sustainable. "The Reddit army should prepare for stricter rules and regulation shortly, which should kill the idea that what happened with GameStop will happen with others," wrote Edward Moya, senior market analyst at Oanda.

What should GameStop and AMC (NYSE:AMC) management do during the wild ride? "My advice to those CEOs would be that, at times like this, your company is not your stock and your stock is not your company," said Tilray CEO Brendan Kennedy, whose stock spiked 1,400% in a 2018 short squeeze. "Keep it all in perspective as these very unusual market dynamics are taking place.

Outlook: "A lot of these heavily shorted stocks running up... and that always leads to some degrossing. Look, this is a health development, in my view," said Michael Wilson, chief U.S. equity strategist at Morgan Stanley. "We're still very bullish about the economy this year and we’re very constructive on equities going into 2021. But let's be honest, we've had a heck of a move and we've discounted a lot of good news and so a good consolidation is exactly what we need." (51 comments)

Tech earnings

Strong earnings reports from Apple (AAPL) and Facebook (FB) did little to boost sentiment after the bell on Wednesday, while Tesla (TSLA) missed analyst expectations, and the three tech powerhouses sold off.

Apple (-2.4% premarket) - The iPhone maker reported its largest revenue on record at $111.4B, with sales in every product category rising by double-digit percentage points. The blowout quarter also saw big results at Apple's services business, which the company has highlighted as a growth engine, as well as significant growth in China. However, it didn't give a formal guidance for the upcoming quarter, and executives said sales growth from AirPods and other wearables will decelerate. (128 comments)

Facebook (-1% premarket) - The social network disclosed falls in daily usage at home, but global growth boosted numbers. Earnings beats were also swept aside as the company warned about the impact from Apple's privacy changes and called the latter a "significant competitor." Pandemic trends could also hurt its advertising business and it may not be able to grow as quickly in the second half of 2021. (27 comments)

Tesla (-5% premarket) - The EV maker knocked out another profit and floated a 50% deliveries growth target, but that wasn't enough to impress. Earnings missed analyst expectations, though revenue beat estimates, and some other announcements were made. Tesla talked subscriptions, software licensing and its 4680 battery on a conference call and said it expects its two new factories in Texas and Germany to come online this year. (200 comments)

GDP data puts stimulus in the spotlight

All eyes this morning will be on the Commerce Department's snapshot of fourth-quarter gross domestic product amid a resurgence in coronavirus infections across the country. GDP is expected to have slowed to an annualized rate of 4% vs. the historic 33.4% expansion seen in the July-September period, as the nation emerged from the severe lockdowns instituted during the early stages of the coronavirus crisis. While it's a skewed comparison, the U.S. in 2020 is forecast to record its worst performance since WWII and well below pre-pandemic levels.

Why it matters: The GDP figure could drive renewed efforts towards additional stimulus relief. The Biden administration has already unveiled a recovery plan worth $1.9T, though some lawmakers have balked at the price tag or questioned the direction of funds, following the $900B package passed at the end of December. Economists expect growth to further slow down in the first quarter of 2021, before picking up speed into summer as more Americans get vaccinated.

Other things to watch: The Labor Department will release data on weekly jobless claims, as well as new home sales data for December. The U.S. goods trade balance is also due out for that month, along with wholesale inventory figures, and don't forget about the latest earnings parade. McDonald's (MCD), Altria (MO), American Airlines (AAL), Visa (V) and Mastercard (MA) are all scheduled to report Q4 results.

Will vaccines work against COVID mutations?

Health officials and researchers have been racing to determine whether COVID-19 vaccines will work against new variants as governments across the globe roll out jabs they hope will reopen schools and businesses. A new Pfizer (NYSE:PFE) laboratory study has found that coronavirus mutations identified in the U.K. and South Africa strain had only small impacts on the effectiveness of antibodies generated by the company's vaccine.

The fine print: The research is preliminary, has yet to be peer-reviewed, and was only tested only a subset of mutations found in the variants (not the variants themselves). The researchers also didn't assess whether their results were statistically significant.

The findings are still consistent with other preliminary results reported in recent weeks by several research groups, but precautions are being taken. Moderna (NASDAQ:MRNA) has said it would develop a booster shot for the South Africa variant, while President Biden restricted travel from South Africa and re-established a ban on most incoming travel from Europe, the U.K. and Brazil.

Outlook: White House health advisor Dr. Anthony Fauci said Pfizer and Moderna's vaccines could be easily adapted to target new strains of the virus, something the drugmakers are already working on. "We're already trying to stay one or two steps ahead of the game so that if, in fact, we have a situation where the South African strain is prevalent here... you want to really get ahead of it from a protection standpoint."

What else is happening...

Toyota (TM) takes back auto sales crown from Volkswagen (OTCPK:VWAGY).

Reddit group WallStreetBets is public again after briefly going private.

AstraZeneca (AZN) and EU at loggerheads over COVID-19 vaccine supplies.

Exxon (XOM) planning board, other changes as activists ratchet up pressure.

Morgan Stanley dives into winners/losers in greener federal energy policies.

Today's Markets

In Asia, Japan -1.5%. Hong Kong -2.6%. China -1.9%. India -1.1%.
In Europe, at midday, London -1%. Paris -0.1%. Frankfurt -0.7%.
Futures at 6:20, Dow -0.4%. S&P -0.7%. Nasdaq -0.1%. Crude -0.2% to $52.76. Gold -0.1% at $1842.80. Bitcoin +0.5% to $31403.
Ten-year Treasury Yield flat at 1.01%

Today's Economic Calendar

8:30 Initial Jobless Claims
8:30 International Trade in Goods (Advance)
8:30 Retail Inventories (Advance)
8:30 Wholesale Inventories (Advance)
8:30 GDP Q1
10:00 New Home Sales
10:00 Leading Indicators
10:30 EIA Natural Gas Inventory
11:00 Kansas City Fed Mfg Survey
1:00 PM Results of $62B, 7-Year Note Auction
4:30 PM Money Supply
4:30 PM Fed Balance Sheet

Known to most as Uranium Pinto Beans, Jason has more than 15 years under his belt of trading stocks, options and currencies. His expertise primarily lies in chart analysis, and he has a strong eye for undervalued stock. Because he’s got the ability to identify great risk/reward trades he usually enjoys taking the path less traveled and reaping the benefits from the adventure.

He is a co-founder of Option Millionaires, and he is best known for his weekly webinars with Scott, as well as his high level training webinars and charts found in the forums.

More Posts by UPB: View All | Private Twitter Feed: Access Now! (For Diamond Members)