THE DAILY EDGE: 28 JANUARY 2021

Demand for U.S. Durable Goods Eased in December Orders for long-lasting products rose for eighth straight month in U.S., though the 0.2% rise was the smallest since the summer

(…) New orders for nondefense capital goods excluding aircraft—or so-called core capital-goods orders, a closely watched proxy for business investment—increased 0.6% in December from the previous month, to $71.8 billion. The gain was also smaller than in recent months. (…)

New orders for transportation equipment weighed on last month, falling 1%. Orders for commercial aircraft and parts dropped sharply, driven primarily by a decline in net orders at Boeing Co. , according to economists. (…)

Excluding transportation, a category that can be particularly volatile, overall durable-goods orders increased 0.7%. (…)

Core orders are up 8.4% YoY, +13.9% annualized in Q4 (table from Haver Analytics):

This is a lot more than a pandemic rebound. The last 3 quarters, including the Q2 drop, are up 10.4%.

Fed Holds Policy Steady as Economy Stumbles ‘The pandemic still provides considerable downside risks,’ Fed Chairman Powell says

(…) The central bankers hope the setback is temporary and have signaled they have no intention of pulling back from their policies until the economy—and in particular the job market—recover. “There are people out there who have lost their jobs. It is essential that we get them back to work as quickly as possible,” Mr. Powell said. (…)

“We think it’s going to be a struggle,” Mr. Powell said. “The pandemic still provides considerable downside risks to the economy.” (…)

Mr. Powell signaled tacit support for additional spending measures from Congress, saying they would “help households and businesses weather the downturn as well as limit lasting damage to the economy that could otherwise impede the recovery.” (…)

The central bank estimates U.S. economic output will grow 4.2% in 2021 and the unemployment rate will drop to 5% by year’s end from 6.7% in December. The Fed sees the jobless rate falling further to 4.2% by the end of 2022. (…)

Mr. Powell also played down the risk of a dangerous asset bubble. The home-price rise, for example, was in part a one-time event associated with the pandemic, he said. “There was a lot of pent up demand,” he added. “The price increases are unlikely to be sustained.” (…)

True, but not necessarily because the pandemic will end. House prices have increased at twice the rate of growth in average earnings since 2015 and only lower mortgage rates have kept affordability manageable. Current home prices are 3-4% above trend which is 15% above the trend in wages (recent average wage data is distorted by the disproportionate decline in the number of low wage employees).

Here’s one way of looking at pent-up demand:

WSJ’s Justin Lahart:

In his post-meeting press conference Wednesday, Fed Chairman Jerome Powell said the central bank isn’t close to countenancing tapering yet, and that when it is ready to talk about it, it will do so well in advance of “a pretty gradual taper.” It is an easy thing to say now, but if in the months ahead things really start looking better, figuring out how to get its taper messaging right could be one of the Fed’s biggest challenges.

NBF tells us that rising home prices are a global phenomenon:

As today’s Hot chart shows, over the four quarters leading to Q3, housing prices in OECD countries have risen at a rate of 6.4%. That’s the biggest increase in 15 years despite a very challenging economic context. Among the 32 countries for which data is available, only two experienced price declines (Colombia and Ireland) and those pullbacks were less than 1%. Income support programs put in place by governments combined with interest rate cuts have allowed real estate prices to swell during this recession. This development signals a positive wealth effect for homeowners that has spared the banking system from losses. These unique conditions bode well for the economic recovery if the pandemic can indeed be brought under control this year.

GameStop Mania Reveals Power Shift on Wall Street—and the Pros Are Reeling Internet-fueled amateurs, on platforms like Reddit and Discord, are piling into stocks, bragging about gains and banding together to intensify moves

(…) Long-held strategies such as evaluating company fundamentals have gone out the window in favor of momentum. War has broken out between professionals losing billions and the individual investors jeering at them on social media. Meanwhile, the frenzy of activity is stirring regulatory and legal concerns, as well as the attention of the Biden administration. (…)

Bearish investors who took short positions have lost $23.6 billion this year through the close of trading Wednesday on GameStop alone, according to financial analytics company S3 Partners, including $14.3 billion on Wednesday when the stock price jumped 135%, its largest percentage increase in history, to a record $347.51. (…)

“They never have in the movies some guy sitting on a hill in Brisbane sitting in his pajamas. That’s how I’m trading. I’m trading sometimes at Safeway buying groceries. I’ve traded at a traffic light.” (…)

He said if he had realized how lucrative trading could be, he wouldn’t have sprung for his online law or undergraduate degree. “Please tell the wolf of Wall Street that the pigeon of San Francisco is gonna eat your lunch,” he said.

Noah Williams, a 36-year-old Atlanta resident, said he has earned close to $150,000 in cash from his GameStop options positions over the past two weeks, allowing him to pay off more than $43,500 of outstanding student loan debt. He currently holds about 1,100 shares of GameStop, he said, after starting to buy shares at $16 in the fall. He has continued purchasing shares in the months since with profits from his GameStop trades.

“I think the big takeaway is, fundamentals do not apply to retail traders,” said Mr. Williams. “It’s all about sentiment. The only reason why Tesla is worth what it is is because people believe in that company.” (…)

Some brokerages, including Charles Schwab & Co., TD Ameritrade Holding Corp. and Robinhood Markets Inc. have also been increasing margin requirements—or the amount that investors can borrow to execute trades—for GameStop and AMC, a move typically done when volatility or risk for a security changes. (…)

On Jan. 19, a Twitter account identifying itself as moderators for WallStreetBets posted that the forum had long been dismissed, but “we are also now a powerful force to be taken seriously.” Some users have expressed concern that the Securities and Exchange Commission would act if users appeared organized. On Discord, in a chat room linked to WallStreetBets, a user on Tuesday posted, “Guys, we need to pump $GME. Everyone buy 1000 shares in exactly 60 seconds.” [That was more than $100k] (…)

“When [short seller] Citron got involved, that’s when I think I wanted more involvement,” said Danny Faiella, a 33-year-old house painter in Hilo, Hawaii, who trades between jobs and has poured about $3,500 into GameStop stocks and options. He has been buying calls tied to GameStop since November—positions that rapidly jumped in value as the stock soared—and ramped up the trade after Mr. Left revealed his position. “I find value in the stocks that he now shorts.” (…)

The volume of trading and the high number of outstanding, short-dated call options in GameStop has astonished Wall Street veterans. More than 2 million options contracts tied to GameStop changed hands Friday, the most on record. Options volumes for AMC hit a high on Monday. (…)

On Jan. 27, more than 39 million bullish calls changed hands, making it the most active day for such bets in history. (…)

Many traders have been questioning whether users who have been posting about the company and urging others to buy shares and calls could be considered a “group” by the SEC’s definition. That designation could require regulatory disclosures for investors acting together on a particular stock and at certain thresholds restrict trading and require a return of some short-term profits.

Hedge funds and their clients also have been asking whether the activity could be considered market manipulation. (…)

“If it is just folks whipping each other into a frenzy on the internet, it is hard to find a violation,” Mr. Bennett [a former enforcement chief at the Financial Industry Regulatory Authority] said. “But if you have people putting information out on a website, and these are stock pickers selling into the frenzy and they are not disclosing that, it can be fraud.” (…)

Securities and regulatory lawyers say neither market manipulation nor group cases, particularly in the context of anonymous internet posters, are easy to make. The former raises the question of whether the SEC has the will to go after individual investors or require a short seller to file suit and open up its own books for discovery, they say. (…)

And there is Sen. Elizabeth Warren (D., Mass.):

For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price,” she said. “It’s long past time for the SEC and other financial regulators to wake up and do their jobs — and with a new administration and Democrats running Congress, I intend to make sure they do.

FYI: $GME short int is $10.64B; 71.88M shs shorted; 139.73% of Float; 58.29% S3 SI% Flt; 38% fee & rising. Shs shorted up +1.61M shs, +2.30%, over last 30 days & up +787K shs, +1.11%, last week. Shorts down -$23.82B in 2021 mark-to-market losses; down -$14.52B on today’s +137% move. (Ihor Dusaniwsky, head of S3 Partners which provides daily short interest tracking in real-time notes)

Bloomberg’s John Authers:

• The following chart, provided by Societe Generale SA’s chief quantitative strategist Andrew Lapthorne, shows volumes in the most-shorted stocks going back a decade. The explosion in the past year is remarkable:

• The following chart compares the performance of small-caps in the Russell 2000 index, depending on how heavily they have been short-sold. The 5% that have the least short interest have actually fallen slightly for the year. The 5% with the greatest short interest are up more than 50%. This is unprecedented:

• More than 800,000 new users joined r/wallstreetbets in the last 24 hours
• “I’m rooting for AMC, I’m rooting to put the hedge funds out of business,” Portnoy says. (…) Meanwhile, other heavily-shorted Reddit names like Macy’s and Dillard’s also jump.
• US stock trading volumes soar past 2008 peak in Reddit battle More than 23bn shares changed hands on Wednesday as amateur investors tussle with hedge funds
• GameStop Mania Goes Global as Retail Traders Gang Up on Shorts
• Tesla’s Stock Is the Original GameStop
• Tesla Slumps 8% After First Results as a Blue Chip Disappoint
• GameStop Is a Bubble in Its Purest Form It is tempting to see GameStop’s soaring stock as merely the result of clownish behavior in a chat room. That would be a mistake.

(…) Warren Buffett attributed to his mentor, Ben Graham, the line that “in the short run, the market is a voting machine—reflecting a voter-registration test that requires only money, not intelligence or emotional stability—but in the long run, the market is a weighing machine.”

The absence of emotional stability on r/WSB is obvious and has worked out beautifully for buyers of GameStop so far. But when the stock is weighed, many will be found wanting, as they always are in bubbles.

As to Noah Williams’ assertion that “fundamentals do not apply to retail traders”, he may well be right for now but his thinking carries low odds when considering the last 100 years. The sad reality is that fundamentals tend to carry on longer than retail traders do.

The new retail traders will also need to get smarter about what they actually buy and sell. Many frenzied traders seeking to squeeze the shorts on AMC Entertainment, the troubled cinema chain, mistook it for AMC Networks, a streaming company, which saw its stock go viral during 3 days before coming back to earth. Ouch! Nobody’s bragging about that!

THE RETAIL MANIA IS HERE

US households’ equity allocation has risen to record highs, surpassing its previous high seen at the beginning of 2000 at the peak of the dotcom bubble. The picture points to an overextension with US households. This “picture” is needless to say re-enforced about the latest actions in terms of increased small-lot call volume and aggressive buying of loss-making companies. This implies that assessing the behavior of the household sector is important for the equity market outlook from here. Signs that US retail investors are stepping back from their recent equity buying could point to peaking of their equity allocation and thus have negative implications for the equity market going forward. (The Market Ear)

Goldman Strategist Joins Chorus Saying Buy the Dip in Stocks Strategists are lining up to recommend buying the dip in stocks, anticipating that more stimulus and a global economic recovery from the pandemic will bolster equities.

(…) “This should be seen as a correction in a new equity cycle, and it’s likely that recovery when it comes back again will be led by more cyclical and value parts of the market,” Peter Oppenheimer, chief global equity strategist at Goldman Sachs, said on Bloomberg Television. Markets will climb on a strong economic and profits recovery, he added. (…)

One concern is that a lot of hedge funds are getting burned by their shorts and may be face margin calls, forcing them to sell some of their long positions. Axios reports that “Hedge funds are shedding billions, with losses suffered over the past few days possibly ranking as career worsts for some. Point 72 is down as much as 15% this month, while D1 Capital is down 20%, people familiar said.”

Bloomberg’s Joe Weisenthal:

Maybe something will change with the price of call options going forward. Maybe something will change with the nature of shorting. Whatever it is, the possibility that such a thing can happen — and the awareness among individual traders that they can possibly make something like this happen again, especially with smaller or less-liquid securities — is now always with us, and could leave a permanent mark, as investors fear the possibility of getting GameStopped.

John Authers: Outside the GameStop Bubble, Stocks Have Concerns

(…) Doubts are deepening over the “reflation trade,” which took hold after the successful vaccine results were announced last November, and stepped up after Democrats won back control of the Senate in early January. This isn’t a big reversal, but on a number of measures it appears investors need more confirmation that reflation is actually happening before they move further. (…)

The reason can be given in one word: coronavirus. With new variants crossing the world, and growing understanding of the difficulties involved in vaccinating the population, there is a growing understanding that we need to wait to be sure that reflation is here. If virus mutations take hold before enough people can be vaccinated, then hopes of a return to normal by summer will be dashed. Powell made clear that nothing mattered more than the virus and the vaccine; it is impossible to disagree.

TECHNICALS WATCH

Technicians say that yesterday’s selling was not intense with down volume only 47% of total Up/Down volume. But that may be because the mob kept buying:

• In 11 Hours of Pure Mania, 100% Stock Gains Popped Up Everywhere Even as the broader stock market sank, shares loved by day traders on Reddit soared.

The S&P 600 Small-Cap Index lost only 0.3% yesterday, supported by the mob. BTW, GME is now bigger than more than 200 companies in the S&P 500.

As of yesterday, charts courtesy of CMG Wealth:

• 13/34–Week EMA Trend still intact even though extended:

• S&P 500 Index vs. 50-Day & 200-Day Moving Average Cross:

COVID-19

Pfizer Study Suggests Shot Will Work Against Variants The study found that coronavirus mutations identified in the U.K. and South Africa had only small impacts on the effectiveness of antibodies generated by Pfizer’s Covid-19 vaccine.

• U.S. Hospitalizations Down for 15th Day in a Row

Data: The COVID Tracking Project, state health departments. Map: Andrew Witherspoon/Axios

• But the U.S. is still averaging roughly 165,000 new cases per day, meaning the virus is still spreading largely unchecked.
• Nationwide, new cases are now at about the same level they were at in mid-December — down from their peak, but still a lot. (Axios)