What a week last week. $GME was in the headlines and even CNBC offered a special hour to the perceived Chaos. Our own Mike Khouw was a voice of calm and reason on the weekly CNBC Options Action. I have found some questions and answers that will show that this Drama is just a part of life in the markets.
Please read Mark Gunther’s Article about $GME to get some deep insight to what is happening with the company and how it got to this position.
Last week, the market digested earnings announcement from some prominent companies. Technology companies are doing well as expected. Hospitality and People moving transportation companies are not. As this earning season gets under way, look to see how the companies are doing and not the number of hit or misses.
Here at the Options Edge we like to wait and let the price of the stock or market come to us to make the trade. The market is now off its high ~4%. When the S & P 500 drops to around 3466 (10%) we will re-evaluate. If you got scared with this pull back, then collect some cash, sell some assets, and hold cash. I have always said that CASH is a hedge against volatility and decreases BETA in a portfolio.
Happy Monday. Good Luck out there this week.
Global Spotlight
A celebration in Iran that could be used to send Washington a message. From Feb. 1 through Feb. 11, Iran will mark Fajr Decade, its annual celebration of the Ayatollah Ruhollah Khomeini’s 1979 return to Iran that culminated in the Iranian Revolution.
A budget for India in a time of pandemic. Indian Finance Minister Nirmala Sitharaman will present the national government’s 2021 budget on Feb. 1. India has been one of the countries hit the hardest by the pandemic, with the International Monetary Fund projecting an 8% decline in India’s real gross domestic product in 2020, according to its latest World Economic Outlook released Jan. 26.
The U.N.-backed Libyan Political Dialogue Forum votes on a new transitional government. The United Nations hopes the Feb. 1-5 process advances the U.N. roadmap for peace in Libya that would lead to Dec. 24 national elections.
An unusually competitive Pacific Islands Forum. The Feb. 3 leadership retreat will see a uniquely competitive appointment process for the position of secretary-general of the forum, which could shake up the grouping that encompasses 18 Melanesian, Micronesian and Polynesian states.
Stratfor.com
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Weeks Numbers
Review Last weeks numbers here.
Here is Jill Mislinski’s chart of the market week. Her approach combines several key variables in a simple readable format.
Juan Luque provides some words of wisdom from the Incline trading desk:
The S&P 500 finished this week with a loss of 3.31%. The news this week were mostly focused on the heavily shorted stocks chosen by the Reddit forum “Wallstreetbets”. The volatility created by the spike in some of these names pushed brokerages against the fence. The Energy sector posted the biggest loss in the week among all sectors in the index with over a 6.6% loss. The sector lost over 3% on Friday alone and started losing momentum as it moves along the leading quadrant. The Materials and Industrials sectors were down over 5% and 4% respectively and continue trailing along the weakening quadrant. The remainder sectors were also in red for what has been the worst week for the index since October.
Earnings
Source I/B/E/S data from Refinitiv
Aggregate Estimates and Revisions
- 20Q4 earnings are expected to be -1.6% from 19Q4. Excluding the energy sector, the earnings growth estimate is 2.2%.
- Of the 184 companies in the S&P 500 that have reported earnings to date for 20Q4, 84.2% have reported earnings above analyst expectations. This compares to a long-term average of 65% and prior four quarter average of 76%.
- 20Q4 revenue is expected to be 0.2% from 19Q4. Excluding the energy sector, the growth estimate is 3.4%.
- During the week of February 1, 112 S&P 500 companies are expected to report quarterly earnings.
If you find this post helpful, please pass along to the investment community. If you would like to see any additional information, drop us a line and let us know.
Of Note:
I found a great article with some common questions that are being asked about the GameStop $GME situation and some real answers. Not the overhyped answers that will generate clicks. It is an exciting time in a place where not much drama exists. Enjoy the show. If you have some calls or Stock. Manage your money and enjoy the win.
Will Congress get involved? Of course! This is a juicy opportunity to express concern about a matter of interest which many portray as worrisome.
The House and Senate committees that oversee the financial sector will hold hearings on the state of the stock market, giving lawmakers a chance to vent their anger and play up their anti-Wall Street credentials to constituents. The Hill.
Will any legislation result? No. This is a story about symbolism.
Are the Reddit folks engaging in something illegal? Almost certainly not. Cheering on a stock and urging others to join in is a normal practice with a long history. The difference is the reach of modern social media. Proving something like price manipulation would involve quite different actions with a clear central organization.
Is there something evil about short-selling? No. A market price for a security is the net result of investor opinions. Short positions in stocks are part of the process of price discovery. They may also be hedges against option holdings. The short seller may have an overall long position in the security.
How does this process work? Those seeking to sell short must first borrow the stock. Brokers lend shares of stock for this purpose, charging a fee. The fee is typically about 30 bps per year. For the Reddit Rebellion stocks the rate is ranging from 30% to as high as 80%. In general, you cannot sell a stock short without arranging a “borrow” in advance.
Why would investors make their stock available for lending? Most probably do not even know they have. It is a part of the brokerage agreement, definitely if you have a margin account. This is a major profit center for brokerages. That “no-fee” trading must be paid for somehow!
The short interest can be even larger than the float. Some who have secured a borrow may then lend these shares to someone else at a higher rate. Steve Sosnick, Chief Strategist at Interactive Brokers, has an excellent, detailed explanation of this phenomenon.
Do hedge fund losses represent danger to the entire financial system? No. One argument is that those with losses need to meet margin calls and may be forced to sell other holdings. This is a typical way a factual statement can be distorted. It was featured prominently on CNBC’s Friday night emergency special on this topic. Let us guess that the short seller’s losses are about $70 billion. The worldwide equity market value is over $100 trillion. Even if the entire losses had to be covered instantly, it would not require $2 trillion worth of selling, a conservative estimate of the decline in market value.
Is this like the Long Term Capital Management situation, which required a $3.625 billion bailout from big banks orchestrated by the NY Fed? No. The many differences include the following:
- Total global stock and bond markets now exceed $200 trillion.
- LTCM was operating with 25-1 leverage. They also had a side derivative book with a notional value of about $1.25 trillion.
- Many other funds were imitating the LTCM strategies, so they were part of a crowded trade.
- The rest of the Street understood the problem. There was no “friendly” help in exiting positions.
- Because of these factors, the banks were on the hook for amounts much larger than might seem obvious. This is why they were willing to join in the bailout.
