[Market Madness] Edition 0132
"Why do you hate money so much?"
What’s new
Administrative topics and an introduction
Well folks, it was certainly a week for the books. For anyone coming back to this edition in a decade or two, you’ll likely see a case study on the GameStop short/gamma squeeze in your finance studies. For everyone else, we can likely mark this moment as a learning point and move on. I’ve been racking my brain all week about what to say about this and how to say it; I think I’ve landed on a good tone and thought.
P.S. Check out the updated Behind the Madness via the button below! It is BEEFY and updated weekly.
P.P.S. I am working on another supplement page A Series of Financial Musings that will collect and comment on financial novels, learning threads, and research papers. Very much so a work in progress but it will be a good place to learn.
Let’s get into some stories.
Did you miss the last edition? No worries! Get it right here and catch up on the madness.
Fundamentals
Where did the markets end last week?
U.S. Indices 5 Day Performance
Dow Jones: -3.27%
S&P 500: -3.29%
NASDAQ: -3.48%
Asia and Europe 5 Day Performance
Nikkei 225: -3.38%
Hang Seng: -3.95%
FTSE 100: -4.29%
DAX: -3.18%
Rates, Spot Prices, and ‘Good to Knows’
Market Madness Portfolio: -3.40%
CBOE Volatility Index (VIX): 33.09
US 10 YR: 1.064%
Crude OIL: $52.17
Spot Gold: $1,846.72
TEDRATE: 0.14
LIBOR (3 month): 0.20500%
U.S. Dollar Index: 90.584
EUR/USD: $1.214
Pound/USD: $1.3699
USD/JPY: 104.707 JPY
USD/CNY: 6.425 CNY
Weekly update
An article by Christopher
Financial markets
There is no getting around it, folks, the markets got crushed this week. Volatility rose to a near high (back to October 2020) and this is giving the larger market the spooks. Volatility is a trigger for quant guys and other algorithm-based trading. I’m not a volatility (vol) expert, but I’ve been doing some reading on this topic and how it impacts the larger market. Usually when vol rises, there is market panic, but we’re not seeing overall market panic. We’re seeing raging mania across 10-20 stocks, which is causing a larger rollover effect of volatility.
Obviously, we need to watch this play out a little longer before we decide if the larger market is going to be impacted in the long term. However, most of the names behind the ongoing frenzy are considered systemically insignificant to the broader market, so many market experts assume this will be self-contained. Market volatility is not the headline of the week, so I will keep this short to get to the main show.
Economic data and stimulus
There were a few economic headlines this week, despite not being the ‘main event.’ Q4 GDP was released showing growth across those three months. However, the 2020 GDP number indicated that the economy shrank (4% versus 4.2% expected). Expectations continue to boast optimism for 2021 as far as the recovery is able to continue.
In tandem with the GDP figures were the consumer spending and savings numbers. Savings and incomes rose in December (with incomes rising for the first time in 3 months) and we saw spending decline, despite being the holiday season. Incomes rose partly due to the influx of new stimulus checks, and savings increased due to the continued weariness of consumers to go out and shop amid the ongoing pandemic. Jobless claims, both new weekly and continuing claims declined (847K new vs. 880K consensus and 4,771K continuing vs. 5,395K consensus).
Finally, and probably the most expected bit of news was the results from the latest FOMC meeting. Powell and team announced the holding of rates between 0.00% and 0.25%.
The decision means that the fed funds rate, which serves as a benchmark for a variety of consumer debt instruments, will remain anchored in a range between 0% and 0.25% and most recently was trading at 0.08%.
The Fed took the rate to zero in the early days of the Covid-19 pandemic and has left it there since. In recent months, officials have made their commitment to low rates even more aggressive, vowing not to start hiking even if inflation gets close to or slightly exceeds the central bank’s 2% target.
(excerpted from CNBC article)
If I can render any guess, we’re going to be in this target zone for quite some time.
Read more here, here, here, here, and here.
A tale of two streets
An article by Christopher
Now, the moment you’ve all been eagerly waiting for.
I’ve been going back and forth about posting an editorial/article about this whole story since it started. If I am being honest with you, these are the stories that make me want to quit finance. Not because of the missed opportunity or to take sides, but because people who know nothing about finance are acting like they’re the next Buffett. And if one day that becomes the case, then I will happily eat my words. For now, I will introduce some simple questions throughout this article that lay to bed any claim of legitimacy behind this whole trade (at least from where I sit).
A primer
The inner workings of what has happened and what led up to this week is much too long for me to get into here, and there are plenty of reputable (and way too many unreputable) sources where you can read the full story. I’d recommend this one for a quick and dirty of what happened and then this one, and any of the “read more” links below.
The short of the whole story is what many are calling a “David vs. Goliath” story; one which pits hedge fund Goliaths against individual investor Davids (joined together via Reddit page r/wallstreetbets (WSB) - which is not a place for the faint of heart or easily offended based on both the profanity and how users treat one another; but then again, being an inviting community was never their mission. And it is funny too because all the celebs who are touting the support for them would be cancelling them on any other public platform for how the group talks and acts).
Questions and commentary
With neither side showing any signs of giving in (although Hedge Funds have marked over $20 billion in losses so far in this game), the “battle” is likely to continue. All these individual investors want GameStop and other stocks like it to “go to the moon.” The question no one is addressing is “what happens when it gets there?” In many respects, $GME is already at the moon, at least compared to its price pre-mania (a mere $18 and change per share at the start of the year to over $325 as of Friday end of day).
Naturally, as all ‘big deals’ do, this whole situation has become politicized both by the mainstream news outlets and politicians themselves (something I never imagined seeing AOC and Ted Cruz take the same position on). Often, when news agents or politicians get involved in something they know very little about, they start to make slanderous comments without knowing the full situation or the actual true-to-life process.
So, since you asked for the behind the scenes on what happens before/after you place a trade (buying or selling), here’s what goes into it:
Now, this could come out being only partially correct (pending the truth behind liquidity concerns), but many have no insights into the ‘sausage making’ that goes into making all this market activity possible. Let’s put the tin foil hats away until we know more information, please.
Instead, what we have is whole swath of ignorant news anchors, celebrities, and individual retail traders calling the game ‘unfair.’ Now is the game actually unfair? I’d say yes (when comparing available resources for institutions versus retail traders), but not for the reasons they’ve outlined with trade restrictions and cash crunches. Those are part of the game, especially at the retail level, since you’re not on a trading floor, executing trades directly with a market maker and have some ability to name a price.
In addition to the previously stated question about what’s next, there is another equally pressing question on the minds of the curious: “What happens when all of this stock pumping goes to waste since it will have nearly zero impact on $GME’s Q4 2020 performance report in March?” All of this pumping, the fight against the hedge funds, was literally all for nothing from the lens of the actual operational performance of the company. This is important to consider because many of the supposed traders behind this pump are claimed to have a sense of nostalgia for GameStop and AMC (another target of major buying from the retail world), both companies that missed the modernizing train and have lost to more innovative, direct to consumer, and online companies. The first lesson in any business strategy class is “innovate or die.” If you miss the boat, you sink, and this is exactly where both GameStop and AMC sit.
Now many of these retail traders would’ve never taken a business strategy class nor understand the dynamics of a balance sheet of a firm, because their focus is on learning to do the one thing they need to in order to trade: buying options. I understand this is slightly condescending, since the originator of the squeeze idea on GameStop actually had some merit to his trade idea. Anything beyond that is herd mentality.
What’s next?
If this was never about GameStop, or AMC, or BlackBerry, or about taking profits from these inarguably successful trades, then what is the point? Many on the Reddit page argue that everyone must remain long on GameStop and cannot sell. It is also apparent that none of the hedge funds are going to give in either (and, truthfully, they have WAY more money than all the retail guys/gals put together; there is way more “old money” in the world than there is “new money”). And if the hedge funds don’t care, then who really are you sticking it to if you’re one of these retail investors?
For this to keep going, however, more and more retail investors need to keep buying (or short sellers cover their shorts). Otherwise, the stock price won’t go anywhere; something I don’t know if these retail investors fully grasp. It does not just magically keep going up because you tell it to.
Consequences
At this point is where I start to lay claim to the ‘reckless endangerment’ trades. I’ve been following the buzz on Twitter surrounding this whole situation, and what I’ve seen has made me quite disturbed. I’ve seen teens brag about taking reverse mortgages on their parents’ homes to buy more GameStop shares, students take their allocations for tuition and put it all on GameStop, hoping to 2-or-3x their notional before their payment comes due, and even taking their whole savings account and putting it all on GameStop.
Others are just plain reckless, buying shares of GME Resources Limited (Australian mining company) or GNE (instead of GME) or even SIGL (Signal Advance Inc., not the app) after Elon tweeted about the messaging app, Signal. The list goes on, trust me.
At what point do we need to put up some kind of barrier that stops people from making these dumb mistakes. But of course, anyone making these kinds of mistakes won’t admit to their own error; it is the market’s fault!
I’ve had this conversation at least 10 times over the course of the past week, and it always ends the same. There is no use case for $GME price at $325, I encourage you to play with the inputs to this model (kindly provided by Aswath Damodaran- P.S. watch his video on this topic) and see if you can find a series of model inputs that provide a $325 per share output.
So what?
I suppose all this is to say that some of these things really should be left to professionals and those who know more than just the bare minimum to trade. I do believe in democratization and easier access to investing, but there needs to be some kind of baseline understanding that should be expected. When this trade unwinds itself and the dust settles, a lot of these long holders who never want to sell will get washed out with the tide and we’ll all forget about this moment and move on.
And don’t even get me started on crypto lately…
Read/Watch more here, here, here, here, here, here, here, here, and here.
Quick Takes
To fill in the gaps
UniCredit picks new CEO. (via WSJ)
This whole $GME thing goes political. (via CNBC)
CEO of Apollo Global Management steps down amid Epstein ties. (via Axios)
Walgreens taps Starbucks COO as new CEO. (via CNBC)
Big week for earnings, especially in tech. (via Yahoo! Finance)
CDC calls for sweeping public transit mask mandate. (via CNBC)
WeWork looking to go public via a SPAC. (via WSJ)
China takes over U.S. as leader in Foreign Direct Investment (FDI). (via WSJ)
The psychology of the GameStop debacle. (via CNBC) *I am not posting many articles on this subject because many of them are just headline grabbers with no substance or logic.
General Banter
What’s on the minds of our editors and writers
Quote of the week: “I’m not selling. I’ll never sell. I’ll die before I sell.”
We also can’t forget about these: 🚀🚀🚀!
If you want to gamble, go to a casino.
Reader’s Corner
A place for suggestions for readers like you
The reader is asking you as nicely as possible to find accurate resources when it comes to investing and trading advice. I’ve seen way too many overnight “gurus” on youtube and tiktok and twitter. They don’t show you trades because they don’t have any. They’re just trying to be the next Tai Lopez.
I don’t show trades on here because a. I do not trade; I invest long term, and b. this platform is for education and awareness, not financial/investing advice. Seek a professional for that stuff.
Well done. You’ve made it through the madness. I’ve worked hard to ensure that you leave this page having learned something, and I hope that it benefits you in your daily adventure. Thank you again for checking in.
Do you like what you have read? If you know of anyone missing Market Madness, save them the trouble, and share it with them!
Check out Behind the Madness for all the cool links and sign ups I used to have at the bottom of the weekly edition. Updated weekly!
Check out A Series of Financial Musings for informative threads related to all kinds of financial learning points, novel retentions, and commentary on research papers.
GENERAL DISCLAIMER: All rights reserved to respective sources where I pull my information. I do not own or have vested interests in the websites where I get my news and information. Links are provided as credit and to provide additional context where readers might want more information outside of what is printed here on these sheets.
