Tuesday Morning Reads
- China Asset Bubble Warning
- ‘A Humanitarian Crisis’
- Sizing Up the Wall Street Bets
- Investor Payouts and Job Cuts
- More Carats and Sparkle
- Sitting Out Super Bowl
- How Technology Ate The Stock Market
- Timeless Lessons From Today’s Mania
Here at Seeking Alpha, and for all of our readership, Wall Street Breakfast is colloquially referred to as "WSB," but a different type of WSB has been taking the market by the storm in recent weeks. What we're referring to is Wall Street Bets - the Reddit forum dedicated to "making money and being amused while doing it." The r/wallstreetbets subreddit and their army of day traders have been responsible for outsized moves in recent weeks for heavily shorted stocks like GameStop (NYSE:GME), Bed Bath & Beyond (NASDAQ:BBBY) and AMC Entertainment (NYSE:AMC). The community will pick an individual stock and run it up as a group, triggering a short squeeze and sending shares even higher. In today's "WSB" premarket movement: KOSS +88%; GME +20%; AMC +17%; CLVS +9%.
Thought bubble: Not all of the targeted buying campaigns are about busting the shorts. Some of the stocks the WSB crew are swiping for have been highlighted for their low valuation, like BlackBerry (NYSE:BB) or Palantir (NYSE:PLTR), but for the average trader, there has been more of an emphasis on flows over fundamentals. In fact, fundamentals may have gone out the window a long time ago as the retail investor becomes a more powerful collective force than the professional investor. Just think of Tesla (TSLA), whose market cap tops the nine largest automakers combined but makes a fraction of their cars and annual profits.
Could a Reddit forum bring the market down? As exciting as these moves are, they're only a sideshow. The ones that should be most alarmed are the ill-equipped financial professionals that could be disrupted by the populist forces. Once upon a time, short-selling firms would unveil a new position to great anticipation (think Citron), but from now on, that may just signal a massive incoming short squeeze. Some advice to the shorts from Mad Money's Jim Cramer: "Stop crowding into the same trades."
Takeaway: Retail trading is definitely changing the way markets function, but what really seems to matter is that we now have a stock picker's market for the first time since the dot-com bubble. That means stocks may be less sensitive to the broader economy than they used to be, while the professionals need to pay attention to a new generation of investors that entered the scene after the rise of commission-free trading. Instead of following many of the upgrades and downgrades on Wall Street, they're doing their own research on platforms like Seeking Alpha, and signaling a new era to the DIY investing atmosphere.
Companies have already raised $400B in the first three weeks of 2021, including $337B in corporate debt through Jan. 22 and a record $64B in IPOs and secondary share offerings. That's $170B above the average for this time of year, according to an FT analysis of Refinitiv data, and is one of the biggest hauls of the past two decades.
Driving the fundraising blitz: A wave of government and central bank coronavirus stimulus measures has flooded the capital markets. It's easy to borrow when interest rates are this low or raise equity with stock prices near all-time highs. That has companies thinking they should expand if they can or cash out.
Some of the money raised this year went to special acquisition companies, better known as "SPACs" or blank check companies. These are vehicles that raise money through an IPO so that they can buy or merge with another company. There's already 61 new SPACs this year that have raised just under $17B, adding to the 229 U.S. SPACs that raised $76B in 2020, which was dubbed the "year of the SPAC." While some are cautioning that their swelling popularity is unsustainable, others see the trends differently.
Quote: "Low interest rates, the flexible structure, and the two-year window to find a target before returning capital suggest the popularity of SPACs will continue in the near term," Goldman chief U.S. equity strategist David Kostin declared. "Importantly, we see little risk to public equity markets should investor enthusiasm for SPACs subside."
Leon Black is stepping down as CEO at Apollo Global Management (APO) following an independent review of his ties to the late financier and convicted sex offender Jeffrey Epstein. Black co-founded Apollo 31 years ago with Josh Harris and Marc Rowan (who will take over as CEO) and turned it into one of the world's largest private equity groups.
Apollo is also changing its corporate governance structure. The firm is doing away with shares with special voting rights that currently give Black and other co-founders effective control of the firm, and has proposed augmenting the board so that the majority of directors are independent. In recent years, it has also abandoned its partnership structure and became a corporation in 2019 like a number of its rivals have done. Removing the dual-class share structure would take it a step further, possibly allowing the company to be included in the S&P 500.
The fine print: Back in October, Apollo executives had warned that some investors had paused their commitments to the buyout firm's funds, awaiting the results from an investigation into Black's dealings with Epstein. The independent review, conducted by law firm Dechert LLP, found Black was not involved in any way with Epstein’s criminal activities, but he did pay him $158M for advice on tax and estate planning and related services between 2012 and 2017.
Quote: "I hope that the results of the review, and related enhancements... will reaffirm to you that Apollo is dedicated to the highest levels of transparency and governance," Black wrote in a note to Apollo fund investors.
Retail traders have been pouring into the markets over the last year, with little to spend their paychecks on and hopes of big gains, while stimulus measures and capital markets swimming in cash have led stocks to all-time highs. The Fed is also set to keep interest rates low tomorrow, and Fed Chair Jay Powell is likely to double down on easy money policies. With an unemployment rate of 6.7% in January, nearly 93% of the U.S. workforce now has jobs, though the service economy is still in terrible shape, including the travel, leisure, dining and sports industries.
Low interest rates have also made it easy to purchase a house, something Americans are doing as they flee the city in droves for the suburbs (think work stations, school space, etc.) Case in point: The SPDR S&P Homebuilders ETF (NYSEARCA:XHB) is up 160% since the pandemic lows seen in March 2020. Trends like stay-at-home life and hybrid work styles have also continued to propel the tech names and the Nasdaq to new heights.
States aren't likely to institute further lockdowns amid a broader vaccine rollout and they can't even afford it (federal funding may be coming soon). California Governor Gavin Newsom lifted his state's stay-at-home order on Monday, even though the infection rate is still pretty bad, and states appear to be finding that you can leave the economy in place if you keep the elderly and the at-risk at home.
But the pandemic is causing a sharp divide in class wealth. COVID-19 brought the sharpest rise in the U.S. poverty rate since the 1960s, according to a study by the University of Notre Dame. The poverty rate in the U.S. increased by 2.4 percentage points during the latter half of 2020, meaning an additional 8M people nationwide are now considered poor. In the same time frame, the collective wealth of America's 651 billionaires jumped by over $2.95T to over $4T, in a trend that's likely to trigger more discussions about equality in the economic sphere.
What else is happening...
Earnings season: GE (GE), J&J (JNJ) and Microsoft (MSFT) set to report.
Kimberly-Clark (KMB) raises dividend after beating Q4 expectations.
Merck (MRK) abandons pursuit of a vaccine amid lackluster trial data.
In Asia, Japan -1%. Hong Kong -2.6%. China -1.5%. India closed.
In Europe, at midday, London +0.9%. Paris +1.4%. Frankfurt +2%.
Futures at 6:30, Dow +0.2%. S&P +0.1%. Nasdaq flat. Crude +0.5% to $53.02. Gold -0.2% at $1852.20. Bitcoin -3.8% to $31913.
Ten-year Treasury Yield +1 bps to 1.05%
Today's Economic Calendar
8:55 Redbook Chain Store Sales
9:00 S&P Corelogic Case-Shiller Home Price Index
9:00 FHFA House Price Index
10:00 Consumer Confidence
10:00 Richmond Fed Mfg.
1:00 PM Results of $61B, 5-Year Note Auction