Equities Rise in Yet Another Volatile Session

Dow: +0.99% | Nasdaq: +0.50% | S&P: +0.98%

Catch Up Quick

• Leaders of the SEC, U.S. Treasury, Federal Reserve and other major financial organizations are "monitoring" / "assessing” the GameStop ($GME) situation

• Both Alexandria Ocasio-Cortez and Ted Cruz have criticized Robinhood over its GameStop ($GME) trading freeze, in rare ideological alignment

• Leon Cooperman, billionaire hedge fund manager, weighed in on GameStop Reddit speculators: “I’m not damning them, but it will end in tears”

• The U.S. economy grew at a 4% in the Q4 2020

• Qualtrics, the Utah-based experience management company being spun out of SAP, raised $1.55B in its IPO

• Walgreens ($WBA) will hire outgoing Starbucks COO as new CEO

• The SBA approved 400K new Paycheck Protection Program loans worth $35B

• Nearly 90K households have moved out of San Francisco since the start of the coronavirus pandemic

• Fed chair Jerome Powell pushed back on idea that ultralow interest rates and huge bond purchases have created asset bubbles

• Chamath Palihapitiya, an early Facebook executive & founder of Social Capital, is very seriously considering a run for Governor of California

• Robert Downey Jr. is raising two VC funds focused on startups in the sustainability realm

• The U.S. has imposed a temporary freeze on its arms sales to Saudi Arabia and is scrutinizing purchases by the UAE

• Apple ($AAPL) announced it made $111B…in one quarter

• Prices for brand name drugs in the United States averaged 3.44x higher than prices in other nations (Axios)

• Allstate ($ALL) agreed to sell its life insurance unit to Blackstone for $2.8B

Thought of the Day

• During the past 5 days, the stock market has been an especially hot topic of discussion across the internet, with GameStop ($GME) up ~350% and AMC Entertainment ($AMC) up ~200% over the period (despite heavy losses today)

• As we discussed on Tuesday, the crazy price action was mechanically driven by a short squeeze, in which an initial upward surge in price of a highly shorted stock caused a snowball effect → short sellers raced to cover, resulting in acute upwards pressure → prompting more shorts to cover → resulting in a powerful cycle of buying activity

• Furthermore, to recap, what is interesting is that the initial upward surge (and much more hype-induced purchasing) came from internet goers on Reddit

• Meanwhile, the short sellers, frantically covering bearish positions to minimize losses, were mostly hedge funds, such as Melvin Capital → thus, a battle between Wall Street and Main Street (everyday retail investors) has surfaced

• On one hand, it is cool to see Main Street be on the dominant side of the equity market transaction dynamic, as many people on the internet have come together to induce immense buying volume on a select group of stocks

• Just like how singular institutional block trades can move markets (especially if volume is thin → i.e. after hours trading), Main Street has discovered that asset prices can in parallel be predictably influenced by many small trades

• While this is technically illegal (market manipulation), since there are dozens of thousands of perpetrators, direct legal action is not plausible

• Additionally, while many hedge funds have called on the SEC to bring order, Wall Street deploys many techniques to “legally” manipulate stock prices (i.e. high frequency traders who front run retail order flow, as we have discussed, with the help of the Robinhood platform, which we have also long deemed an unsustainable business model)

• However, on another side of the coin, popularizing this market activity jeopardizes the integrity of equity markets themselves, which over 50% of Americans rely on to achieve retirement goals and financial stability

• UBS Portfolio Manager on the situation (paraphrased):

  “It’s a relatively small group of Reddit users pushing around a relatively small number of stocks. At the end of the day, they don’t have the wherewithal to sustain potential losses…(though right now) it’s not the institutions holding the bag, it’s the kids on my basketball team asking me how options work”

The Bottom Lines

• A bold yet interesting solution to the Wall Street / Main Street clash? → having separate exchanges for institutions and retail investors

• In this fashion, “smart money” could invest based on fundamentals (which would thus be more closely linked to asset prices), financial theories, the efficient market hypothesis, etc., while retail traders could participate in an less regulated fashion without getting bullied

• Functionally speaking, this is very possible; though, it may not be a realistic option due to financial system entrenchment → an interest idea regardless

• Leave a comment (below) and let us know what you think!

  Leave a comment