Well, this was a curve ball that few of us expected: the good guys called small retail investors serving it up to the ‘bad guys’ known as hedge funds and short sellers. And this shoot out scared stock markets into worrying sell offs.
That’s what we saw in our market yesterday. Admittedly, however, it was probably the readings on the Dow Futures that turned a positive start into a negative close. But the worrying is deeper than we thought overseas, with the German DAX down 1.71%, the French CAC off 2.02% and the Dow, off 2.12% ahead of the close.
In case you’ve been sleeping for a couple of days or chilling out on holidays, let me run through what’s been happening. We’ve seen the revenge of the nerd investors, with a forum group on Reddit, the 12th most popular website in the world, colluding to take on short sellers who’ve been smashing companies, such as video store business GameStop, AMC and Bath Bed & Beyond.
The investing group travels under the nickname of WallStreetBets.
And while it’s great to see short sellers forced to buy stocks they’ve been shorting (which often creams small, long-term investors), the worry is this: where does a group of colluding buyers end? They could select companies to buy, make money and then dump them.
The Internet has made collective action very easy. We first saw this with the rise of crowd funding for start-up businesses and charitable endeavours. This market worrying screams that regulators have to get involved and the tweets of Elon Musk are underlining how one of the world’s most successful and followed ‘nerds’ has too much market power.
Of course, the likes of Warren Buffett, Ray Dalio and Paul Tudor Jones have a lot of market power, and this is a big issue for regulators to deal with. And it will mean that these regulators will have to get serious about the bad, market-manipulating behaviour of short sellers.
Either way, markets will be wary. In fact, short sellers will be exploiting this uncertainty and would, in part explain why stocks are falling on Wall Street as I write.
At one point, the Dow was off 720 points. Some of this drop came when the no-fee broker, Robinhood, said it would allow limited buying of the stock and other heavily shorted names after restricting access the day before. I suspect the broker reacted to heavy pressure to stop the nerd investors from Reddit. But, as I argued in Switzer Daily yesterday, Robinhood was likely to be targeted for legal action, as well as a mass exodus of its customers, undoubtedly with a rival copycat broker, who would’ve used this opportunity to steal from the rich Robinhood to give to themselves — a poor broker!
I hope this tells you why regulators will have to get involved, but how they de-democratize the Internet-affected or -infected stock market is anyone’s guess.
It looks like some big law firms will be rubbing their hands right now. It’s a story straight out of the TV shows Suits or Billions!
There are also concerns that this episode proves there’s too much borrowing or leverage in the market. In the US, smaller investors can more easily access options, which are often funded by loans, to give small investors a lot of firepower. One source I read also suggested that members of this investing group were using their stimulus cheques to invest and was a new age version of the “Occupy Wall Street” movement, that was big after the GFC crash.
“There’s way too much leverage in the system, and we’re starting to see signs that this excess leverage is going to be unwound in a way that will create headwinds for the stock market and other risk assets for more than just a few days,” said Matt Maley, chief market strategist at Miller Tabak. (CNBC)
The market has another possible concern about how good the vaccines will be. Johnson & Johnson’s offering has only shown 66% effectiveness. Its share price dropped over 4% on the news. Remember that some of the recent rise in the stock market has been linked to the expectation that effective vaccines would quicken the reopening of economies and boost business profits and jobs, which would be great for stock prices, as well as people!
Another take on all this is something that I’ve been saying — a pullback or correction is overdue. Since Joe Biden beat Donald Trump in early November, the local stock market is up 11% — that’s pretty big. Cautious profit-takers (before and during reporting season) often pocket profit around these times.
S&P/ASX 200 6 months
We’ll have to wait for regulators to act so I expect a few rough days next week.
Despite this, local shares ended in January, with a 0.3% increase. The S&P/ASX 200 Index lost 42 points (or 0.6%) to finish at 6607.4.
Thursday was the scariest day, with a 1.9% fall. But it could happen again if no acceptable action is taken by regulators. The commotion was worrying enough for the new US Treasury Secretary, Janet Yellen, to inform the media that she was monitoring developments.
Some tech and possibly over-hyped stocks, like Afterpay, have felt the pressure of this question mark over the effects of new age traders swarming over cool stocks like APT, Tesla and the FAANG, as well as WAAAX stocks.
The table chart below shows the notable winners and losers last week.
Kogan.com has been trading well but says it has a foreign exchange loss, which the company says will be “significant”!
Interestingly, some locally shorted stocks did well and then were beaten up again because of the Reddit investors.
“Funerals operator InvoCare dropped more than 8 per cent to $11.16, reversing the rally triggered by short covering on Thursday, when the stock rose nearly 6 per cent,” the AFR reported on Friday.
The three sectors to cop it this week were energy (which was off 10.64%), materials (down 6.97%) and IT (5.02% lower). The energy and material stocks have had a strong run up, so there’s some profit-taking. But when Wall Street threatens to have problems and vaccine news isn’t as positive as expected, then concerns about the economic recovery creep in and stock prices show it. Beach Energy dropped 4%, BHP lost 1.6%, Rio 3% and Fortescue 4%.
What I liked
- The weekly ANZ-Roy Morgan consumer confidence rating rose by 2.3% (the most in six weeks) to an equal 14-month high of 111.2 (long-run average since 1990 is 112.6).
- The ‘Current Economic Conditions’ sub-index jumped 9.1% to 2 points – the highest level since August 4, 2019. And the ‘future economic conditions’ sub-index climbed 5.9% to 16.1 points – the highest level since 2 June 2019.
- The NAB business conditions index lifted from 7 points to 28-month highs of 14.2 points (long-term average is 5.3 points). The employment conditions sub-index rose from -4.2 points to a 27-month high of 9.3 points.
- The International Monetary Fund (IMF) expects the global economy to expand by 5.5% in 2021, which is 0.3% higher than the October 2020 forecast. The global GDP forecast for 2022 was unchanged at 4.2%. The Australian economy is tipped to expand by 3.5% in 2021 (previous forecast: 3% and 2.9% in 2022 (previous forecast: 2.8%). But I reckon we’ll top these guesses from the IMF.
- This from Shane Oliver on US reporting season: “The US December earnings reporting season has now seen 34% of S&P 500 companies report so far, with results remaining strong. 82% of companies have so far surprised on the upside (compared to a norm of 75%) by an average 20% and 75% have beaten on revenue. As a result, consensus earnings expectations are getting revised up and are likely to end up back at pre-Covid levels.”
- The S&P/Case Shiller home price index in the US lifted 1.42% in November (survey: 1%).
- The US Conference Board consumer confidence index rose from 87.1 to 89.3 in January (survey: 89).
What I didn’t like
- The NAB business confidence index fell from a 31-month high of 12.7 points to 4.5 points in December (long-term average is 5.1 points) but this was affected by the lockdowns in Sydney in particular and Brisbane for three days, as well as border closures.
- This from the Fed: “The pace of the recovery in economic activity and employment has moderated in recent months.”
- The UK FTSE index slid 1.3% as the EU and AstraZeneca (minus 2.2%) disagreed over vaccine delivery delays.
- Eurozone economic sentiment was soft in January, but is remaining well up from its April low, despite the recent lockdowns.
- COVID-19 problems still dog Japan! Japan’s jobs market was pretty flat in December with unemployment unchanged at 2.9% and no change in the ratio of job openings to applicants but industrial production fell more than expected.
Just how stupid Internet traders can be!
A little known company called GME Resources in WA saw its share price soar 13% on Thursday because its ticker code was GME, which is the same code as the video store stock in the US that had WallStreetBets traders piling into. Once the penny dropped, its stock price slumped 20% to 6.8 cents.
US craziness is spreading and we can ‘thank’ the wonderfully weird wide world web for that.
Click here to register [1] for our first webinar of 2021 at 12:30pm AEDT next Friday. Medallion Financial Group’s Michael Wayne will join us to preview reporting season and answer your questions live.
The week in review:
- Last Saturday, I shone the spotlight on the five big winners and losers of the past week of trading, and in the Switzer Report earlier this week, I thought I’d see what the expert analysts think about these winning companies [2].
- Assuming you have the cash or can find the cash, the most important question to ask regarding Magellan’s partnership offer is “do you want to increase your exposure to global equities?” Paul Rickard takes you through the offer and whether you should invest in his article this week [3].
- Back in November, before the US Presidential election, James Dunn looked at two potential stocks for a Joe Biden victory, and this week he looked at a number of stocks that he feels could shine under President Biden [4].
- Tony Featherstone looked at 3 food stocks that COVID boosted: HelloFresh, Youfoodz and Marley Spoon [5].
- Tim Boreham brought us up to date with what’s happening in the fast food sector [6].
- In the first Buy, Hold, Sell – What the Brokers Say of the week [7], brokers issued 17 upgrades and 19 downgrades, and in the second edition [8] there were 6 upgrades and 6 downgrades.
- And in Questions of the Week [9], Paul Rickard answered your questions about Downer, IAG, Amcor, La Trobe Financial, lithium companies and the Magellan Partnership Offer.
Our videos of the week:
- Boom! Doom! Zoom! | January 28, 2021 [10]
- Stocks fund managers like: Nuix, Sezzle, Redbubble, Lynas and Telstra!! [11] | Switzer TV: Investing
- Will house prices rise by 30% and what regions are hot and getting hotter!? [12] | Switzer TV: Property
Top Stocks – how they fared:
The Week Ahead:
Australia
Monday February 1 – Purchasing manager indexes (January)
Monday February 1 – CoreLogic home value index (January)
Monday February 1 – Lending indicators (December)
Monday February 1 – ANZ job advertisements (January)
Tuesday February 2 – Weekly consumer sentiment index (January 31)
Tuesday February 2 – Reserve Bank interest rate decision
Wednesday February 3 – Reserve Bank Governor Lowe speech
Wednesday February 3 – Building approvals (December)
Wednesday February 3 – New vehicle sales (January)
Thursday February 4 – International trade (December)
Friday February 5 – Retail trade (December)
Friday February 5 – Reserve Bank Statement on Monetary Policy
Overseas
Sunday January 31 – China purchasing manager indexes (January)
Monday February 1 – China Caixin manufacturing index (January)
Monday February 1 – US ISM manufacturing index (January)
Monday February 1 – US Construction spending (December)
Wednesday February 3 – China Caixin services index (January)
Wednesday February 3 – US ADP employment change
Wednesday February 3 – US ISM services index (January)
Thursday February 4 – US Challenger job cuts (January)
Thursday February 4 – US Factory orders (December)
Friday February 5 – US Nonfarm payrolls (January)
Friday February 5 – US International trade balance (December)
Food for thought:
“The individual investor should act consistently as an investor and not as a speculator.” – Ben Graham
Stocks shorted:
ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before.
Chart of the week:
AMP Capital’s Shane Oliver shared the following chart that compares the earnings yield on shares to the 10-year bond yield, noting that “shares still provide a decent risk premium over bonds”:
Top 5 most clicked:
- My spotlight is on these 5 stocks [2] – Peter Switzer
- Magellan’s partnership offer – should you invest? [3] – Paul Rickard
- Stocks to shine from President Biden’s win [4] – James Dunn
- Questions of the Week [9] – Paul Rickard
- 3 food stocks that COVID boosted [5] – Tony Featherstone
Recent Switzer Reports:
- Monday 25 January: My spotlight is on these 5 stocks [13]
- Thursday 28 January: 3 food stocks that COVID boosted [14]
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.