Market Watch Weekly | 29 January 2021| Game Stop
Aarinder Lidder - Jan 30, 2021
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Hello and welcome to my first weekly newsletter from Kamal Lidder at Canaccord Genuity Wealth Management. In this week’s newsletter, I will be discussing what has occurred in investment markets for the week and what to look out for in the days and weeks ahead.
This week was turning out to be one where it was largely going to be the same as usual for markets up until about Wednesday. The narrative was that markets had been pushing towards recent highs or all-time highs. The S&P 500 or the US market was still in a bullish mood into the New Year. According to the news headlines, the market was rallying because of optimism surrounding the global economy, the vaccine roll out, Joe Biden becoming the new president and he mentioned that he was putting in place a form of stimulus. So all of that was adding to an air of euphoria and causing this upward momentum in equity markets.
Tech stocks were starting to show signs of playing catch up. They had been lagging since the Fall but rather than leading the market as they did in early 2020 during the early lockdown and the pandemic, they were the laggards. We wanted to see some rotation into those stocks rallying to increase this area. This would be a reason to take the market to the next leg higher after seeing some good ratings in value plays and cyclical sectors. This was going to be the narrative and then like most things in investing something happened, it starts to change and that's what makes it exciting.
This week, one of the big stories has been the GameStop share price; while the wider market has been going sideways, the S&P500 has hit new highs. In contrast, the share price of GameStop had risen 1700% this month! This is an incredible number. GameStop is a US retailer and they sell computer games. What happened was a hedge fund came out on record to say they were shorting this company. The hedge fund felt it was in terminal decline as they have many physical shops and they thought the share price was essentially heading to zero.
The hedge fund started to short the share price, which means betting against the share price of GameStop. If you want to short the share price of a company then a hedge fund will go to another large investor that owns many of these shares and they will borrow them. For example, let’s say the price is $10 per share, they borrow those shares and pay a fee to do so. They will sell them into the market for $10 and I have a contract to give the shares back to the person or the company they borrowed them from at a particular time in the future, but when they borrow those shares they are hoping for the price to fall to let’s say $5. They then buy the shares back at the $5 rate therefore giving back the shares that they already borrowed, and they keeping the difference.
In this example, you can see the hedge funds can make huge amounts of money, but of course there is some people who think this is unethical by placing large bets on the share price by shorting it.
Now elsewhere Reddit obviously has lots of forums and investors who are quite vocal about the things that they support. Reddit users started to take exception to this. GameStop was one of their favourite’s shares they like for whatever reason. GameStop started to gain an army of investors to battle back against this shorting tactic on the share price. With the advent of commission free trading, it means that more people can do this, they can do it very cheaply and at times, they can use leverage when they buy.
Therefore, what started as a group of investors starting to buy those shares to try and drive up the share price grew into almost a movement. The reason they started to buy them was effectively to drive up the share price that turned into a David and Goliath scenario. This would effectively bankrupt the hedge fund. As more and more people buy, demand for the shares goes up and it becomes more and more expensive. The hedge funds must then buy back the shares of GameStop at much higher prices, creating large losses and they do this to prevent themselves from going bust. So the more they buy the higher the share price goes becoming almost like a vicious circle causing what is called a short squeeze, which in turn can cause the share price to suddenly rocket. So many retail investors have been piling into this for whatever reason not on fundamentals just to prove a point effectively and to fight back against Wall Street.
There is an argument that Wall Street has be doing this to people for years anyway. The retail armchair investors are fighting back, with the likes of RobinHood, which is one of the platforms that gives commission free trading, allowing them to cause this short squeeze. The armchair investors have kept pushing and pushing and as a result the hedge funds are trying to unravel these bets they've made, losing huge sums of money. This results in them having to borrow money from other places to stay liquid or to fund the shorts in order to keep them going. It is causing incredibly unusual behaviour in markets. Interestingly in this particular stock, we saw some of the largest trading volumes in markets since the financial crisis in 2008.
You may think that this is all largely irrelevant to you, as you may not buy GameStop. However, there is another piece to this that will affect the average investor. In order for the hedge fund or somebody who is shorting the market to try and stay liquid and maybe continue some of those bets, they have to fund those bets against the market. They will have to sell other stocks such as their long term holds to effectively say liquid long enough in order for their short bets to come to fruition. Hoping they could beat the retail investors and cause the stock price to collapse. If they start selling other things and it turns into the sale of many things then this will have broader implications for the overall market. Larger pension funds and institutional money managers are starting to take notice.
This has started to cause a bit of nervousness in equity markets as a sort of car crash for Wall Street. It’s kind of ironic that Wall Street is moaning about this given the fact that this is the tactic they've employed for years to make huge profits themselves and now they are feeling nervous.
On Wednesday the US stock market suddenly had its worst day since October and markets dropped 2.5%. The S&P 500 ended the week lower by 2.5% wiping out all of its year to date returns; we saw similar things at the NASDAQ.
Accordingly to the news it’s not just GameStop that has caused a bit of a market wobble, the US Federal Reserve spoke this past week and Jerome Powell said that the Fed wasn't rushing to print any more money which obviously the market doesn't like. It was not anything too hawkish, but the market clearly didn’t like it. There was also concern that Joe Biden's stimulus package is likely to be delayed and a delay in the global vaccine rollout. This as it seems is causing some fear in the overall markets.
The VIX which is known as the fear gauge on Wall Street. It is a measure of future volatility on the S&P 500. It gives you a good sense when that number goes up the market is starting to become fearful and that that number has leapt by about 40% and currently around 32%. Anything above 30% is showing signs of stress and if you see that then don't be surprised if we're going to see a few more market wobbles in the days and weeks ahead. Some of those narratives that the markets been banking on start to look a little bit shaky, plus we are seeing some very extreme behaviour being driven in stocks like GameStop.
People even started buying an Australian mining company just because the ticker, which is the thing that identifies the stock, is very similar to that of GameStop. In approaching the end of January we were looking very optimistic but now suddenly the market is quite nervous and flat for the year.
In other news I am delighted to announce that Aarinder Lidder (Indy) has joined my team at Canaccord. He has recently emigrated from the UK, where he worked for two of the largest investment firms as an Investment Advisor. He brings a wealth of knowledge and experience to our business. He has a sincere passion and enthusiasm for this industry. Combined we are able to offer our clients more than 25 years’ experience in the financial service industry.