Choose Language
January 28, 2021
NewsThe big squeeze: Where will the game stop?
This week, headlines are mostly occupied by an apparent siege on Wall Street by a legion of retail investors. Day traders - marshalled via a message board called WallStreetBets on the Reddit social media platform – have collectively bid-up potential victims of Wall Street short-sellers. Against a backdrop of already-effervescent asset prices, certain firms saw the value of their shares break free from all laws of gravity, without much fundamental basis. Shares in 59 companies on the Russell 3000 rose by more than 10% on Wednesday as the index itself declined almost 3%.
The showstopper is GameStop, an American brick-and-mortar video game store with pallid sales growth, due to reduced footfall from the pandemic and the fact that players can download games from the comfort of their homes. On Wednesday, while America’s three flagship stock indexes sank, GameStop closed 134% higher, pushed a little further by a tweet of encouragement from Elon Musk. For context, the company’s stock hovered around $18 at the beginning of January and has rallied to over $345.
The next company with a broken wing to be bid-up by the new movement was the Cinema operator AMC Entertainment, whose business model is currently in the basement as Coronavirus containment measures persist. With the hashtag #SaveAMC trending on Twitter, the company saw its share price rise by some 200% on Wednesday.
Another company targeted by the collective is BlackBerry, a nostalgic brand that harks back to the early days of smartphones. BlackBerry said in a statement that it was not aware of any undisclosed corporate developments that would account for the increase in the price or trading volume of its shares.
Then there is Nokia which also seems to have been swept into the fold. Shares of the communications infrastructure supplier have soared (including by roughly +50% on Wednesday, marking the firm’s largest one-day gain since it listed in 1991), even if the company said it has no news to explain the rally.
The attempted short-squeeze has shaken markets and forced renowned hedge funds to close their shorts, leaving them billions-of-dollars out of pocket.
It seems that the motivations of day traders are twofold: On one hand, this appears to be some kind of Occupy Wall Street 2.0, with main street targeting what they perceive as the Wall Street elite. On the other hand, the momentum is simply enticing and many have jumped on the bandwagon in the hope of making a quick buck. History will judge if this fascinating story is the beginning of a more prolonged standoff between institutional and retail investors, or more broadly, another technological disruption (perhaps highlighting ageist contrasts).
How are they doing it?
Retail investors, using commission-free trading apps, have been able to have such an outsized impact on prices, not by buying the stocks directly, but by buying call options. Option strategies and embedded gearing created self-reinforcing mechanism, pushing prices even higher, exacerbated by short-sellers rushing to close their positions. Many of the names targeted had such high levels of short exposures meaning that the exit door from those positions was too small, a classical scarcity phenomena.
What happens next?
No bubble can inflate infinitely and if those that have emerged on markets don’t deflate gently, retail investors – some of whom have invested their savings – are playing a high-stakes game of poker and could endure painful losses. Already on Thursday, certain names underwent sharp corrections and Interactive Brokers and Robinhood trading apps halted trading on GameStop, AMC, BlackBerry and other names.
We do not however, foresee a broad-based market crash. Monetary policy is very accommodative (and was held steady by the Fed yesterday), the vaccine roll-out is well underway (allowing the economic recovery to proceed), and more fiscal support is in the pipeline.
It is worth noting research showed that the last time American households received stimulus cheques from the government, many treated the handout like some kind of Monopoly money, taking their chances on the stock market. It seems that the Community Chest is set to swell further, with American households potentially set to receive another $1400 in the mail if Joe Biden’s fiscal rescue package works its way through Congress. This cash could again make its way to equity markets.
“Do not pass go, do not collect $200”
The question is whether the US regulator will step in. US law bars the dissemination of false or misleading information with the aim of manipulating investors into buying or selling securities. At Wednesday’s Fed meeting, Jerome Powell declined to comment on individual stocks, but according to reports, the SEC as well as Janet Yellen – the newly appointed Treasury Secretary - and the White House are monitoring the activity around these improbable high-flying stocks. The SEC has to decipher whether discussions on WallStreetBets represent legitimate discussion about a stock’s prospects or market abuse. The anonymity offered by Reddit may not offer the ringleaders an automatic get-out-of-jail free card if the regulators decide to crack down.
Our approach
The frenetic mood contrasts with the institutional mood, with most big players still prudent in their risk exposure. At BIL, we are long-term investors, basing our investment decisions on thorough, fundamental analysis. We refrain from speculation and apply a disciplined investment process, thereby mitigating behavioural biases, including herd mentality, the extrapolation of trends, overconfidence and so on… We steer clear of such trades, and rely on a well-diversified strategy (across regions, sectors and asset classes), aiming to deliver long-term capital preservation / appreciation.
Disclaimer
All financial data and/or economic information released by this Publication (the “Publication”); (the “Data” or the “Financial data
and/or economic information”), are provided for information purposes only,
without warranty of any kind, including without limitation the warranties of merchantability, fitness for a particular
purpose or warranties and non-infringement of any patent, intellectual property or proprietary rights of any party, and
are not intended for trading purposes. Banque Internationale à Luxembourg SA (the “Bank”) does not guarantee expressly or
impliedly, the sequence, accuracy, adequacy, legality, completeness, reliability, usefulness or timeless of any Data.
All Financial data and/or economic information provided may be delayed or may contain errors or be incomplete.
This disclaimer applies to both isolated and aggregate uses of the Data. All Data is provided on an “as is” basis. None of
the Financial data and/or economic information contained on this Publication constitutes a solicitation, offer, opinion, or
recommendation, a guarantee of results, nor a solicitation by the Bank of an offer to buy or sell any security, products and
services mentioned into it or to make investments. Moreover, none of the Financial data and/or economic information contained on
this Publication provides legal, tax accounting, financial or investment advice or services regarding the profitability or
suitability of any security or investment. This Publication has not been prepared with the aim to take an investor’s particular investment objectives,
financial position or needs into account. It is up to the investor himself to consider whether the Data contained herein this
Publication is appropriate to his needs, financial position and objectives or to seek professional independent advice before making
an investment decision based upon the Data. No investment decision whatsoever may result from solely reading this document. In order
to read and understand the Financial data and/or economic information included in this document, you will need to have knowledge and
experience of financial markets. If this is not the case, please contact your relationship manager. This Publication is prepared by
the Bank and is based on data available to the public and upon information from sources believed to be reliable and accurate, taken from
stock exchanges and third parties. The Bank, including its parent,- subsidiary or affiliate entities, agents, directors, officers,
employees, representatives or suppliers, shall not, directly or indirectly, be liable, in any way, for any: inaccuracies or errors
in or omissions from the Financial data and/or economic information, including but not limited to financial data regardless of the
cause of such or for any investment decision made, action taken, or action not taken of whatever nature in reliance upon any Data
provided herein, nor for any loss or damage, direct or indirect, special or consequential, arising from any use of this Publication
or of its content. This Publication is only valid at the moment of its editing, unless otherwise specified. All Financial data and/or
economic information contained herein can also quickly become out-of- date. All Data is subject to change without notice and may not be
incorporated in any new version of this Publication. The Bank has no obligation to update this Publication upon the availability of new data,
the occurrence of new events and/or other evolutions. Before making an investment decision, the investor must read carefully the terms and
conditions of the documentation relating to the specific products or services. Past performance is no guarantee of future performance.
Products or services described in this Publication may not be available in all countries and may be subject to restrictions in some persons
or in some countries. No part of this Publication may be reproduced, distributed, modified, linked to or used for any public or commercial
purpose without the prior written consent of the Bank. In any case, all Financial data and/or economic information provided on this Publication
are not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be
contrary to law and/or regulation. If you have obtained this Publication from a source other than the Bank website, be aware that electronic
documentation can be altered subsequent to original distribution.
As economic conditions are subject to change, the information and opinions presented in this outlook are current only as of the date
indicated in the matrix or the publication date. This publication is based on data available to the public and upon information that is
considered as reliable. Even if particular attention has been paid to its content, no guarantee, warranty or representation is given to the
accuracy or completeness thereof. Banque Internationale à Luxembourg cannot be held liable or responsible with respect to the information
expressed herein. This document has been prepared only for information purposes and does not constitute an offer or invitation to make investments.
It is up to investors themselves to consider whether the information contained herein is appropriate to their needs and objectives or to seek advice
before making an investment decision based upon this information. Banque Internationale à Luxembourg accepts no liability whatsoever for any investment
decisions of whatever nature by the user of this publication, which are in any way based on this publication, nor for any loss or damage arising
from any use of this publication or its content. This publication, prepared by Banque Internationale à Luxembourg (BIL), may not be copied or
duplicated in any form whatsoever or redistributed without the prior written consent of BIL 69, route d’Esch ı L-2953 Luxembourg ı
RCS Luxembourg B-6307 ı Tel. +352 4590 6699 ı www.bil.com.
Read more
More
September 30, 2024
BILBoardBILBoard October 2024 – Harvest season
Executive Summary As autumn approached, we saw increased volatility on capital markets. Bad days were swiftly followed by significant rallies, and like the leaves currently...
September 23, 2024
Weekly insightWeekly Investment Insights
Last week, we had the news that the iconic brand Tupperware had filed for bankruptcy. So dominant was the company in its heyday that when...
September 9, 2024
NewsWhat lies behind recent trends in the...
At 6.4%, the Eurozone unemployment rate currently sits at its all-time low, but the picture varies from country to country. Labour market trends will influence...
August 28, 2024
BILBoardBILBoard September 2024 – The stars a...
August brought sky gazers a rare blue supermoon; the next won’t occur until 2037. It also brought what will hopefully prove to be a once-in-a-blue-moon...