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Strategic Insights

Volume 10, Edition 4 | January 25 - January 29, 2021

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The Big Squeeze

Doug_Walters Doug Walters | Articles

Read Time: 3:30 min

Retail investors got the better of hedge fund managers this week. But steer clear. This is not investing.

Contributed by Doug Walters , Max Berkovich , Aleksey Marchenko

If you are like most, you probably spent part of this week wondering why everyone was suddenly talking about GameStop. The video game retailer, whose business model is struggling to find a route to profitability, found itself at the center of a “Retail Squeeze.” In a dramatic turn of the tables, some hedge funds overnight were at the mercy of everyday retail investors.

More details on this drama are in our headlines below, but first, let’s be clear, this has nothing to do with investing. This is market manipulation. GameStop is not worth anywhere near its current market value. Nobody should consider hopping on board this game with any retirement money. If you have money set aside for entertainment that you were going to blow in Vegas, then have at it, but be prepared to lose it all. We always say we do not predict; we prepare. However, the end of the GameStop story is quite predictable. Early investors will start cashing in at some point, and the shares will start to fall; hard.  It is not all that different than a Ponzi scheme. Those that get in early and get out early might do well. But at some point, there will not be enough new buyers to keep propping up the shares, and it will all come crashing down. Steer clear.

For the most part, all of this is a bit of a sideshow now, as it is isolated to a few stocks. But it is vaguely reminiscent of the dot.com bubble and had investors nervous this week. There are absolutely some segments of the market that are well above their average valuation. But there are also large swaths of the stock market which are not expensive at all. Many stocks have been hurt by the pandemic and will benefit significantly as the economy returns to normalcy. Within those, we still see opportunities for investors.

-3.5%

U.S. 2020 GDP

U.S. real GDP declined 3.5% in 2020, the worst year for the U.S. since the end of World War II.

Headlines This Week

Blowing Bubbles 

  • Fed Chairman Jerome Powell stated that the Fed is monitoring asset prices and does not see any financial stability issues. 
  • Investors do not see monetary policy likely to change any time soon, which is accommodative to U.S. equity markets. 
  • While some parts of the stock market are in bubble territory, there is plenty of value left in other parts of the market.  

Looking Back 

  • Fourth-quarter Gross Domestic Product (GDP) has decreased by 2.5% vs. last year.  
  • For the entire year 2020, real GDP (adjusting for inflation) decreased on average by 3.5%, compared with a 2.2% increase in 2019.  
  • The 3.5% decline marks the worst year for the U.S. since the end of World War II. 

Lost in the Shuffle 

  • Over 36% of companies within the S&P 500 index have reported earnings. 
  • The major contributors to earnings growth were Materials, Technology, and Financials sectors. 
  • The Energy and Industrials sectors reported a decline in earnings.  
  • Though Apple Inc. (AAPL) reported what CNBC called a “blowout quarter,” and Microsoft Corp. (MSFT) reported 17% revenue growth, it was lost in the news thanks to the  

Squeeze Game

  • With the help of a Reddit messaging board, a deep value bet on GameStop (GME) snowballed into a revolution.  
  • The biggest hedge funds are posting massive losses on their short bets on GameStop and many other heavily shorted stocks.  
  • Some brokerages like Robinhood, TD Ameritrade, Merril Lynch, and Interactive Broker blocked their users from buying GameStop and other culprit stocks, turning the short squeeze into a revolution between retail investors and hedge fund institutions. 
  • This highly entertaining drama is not all fun and games, as big losses from hedge funds may be spilling over into forced liquidations of the big popular stocks. In addition, many of these retail investors will likely lose money, and potentially a lot, if they took on margin.
  • Other companies caught up in the squeeze are AMC Entertainment (AMC), BlackBerry Ltd. (BB), Bed Bath & Beyond (BBBY), Nokia OYJ (NOK), Express Inc. (EXPR), Koss, Inc. (KOSS), and National Beverage Corp. (FIZZ).

The Week Ahead

Possible Negativity Abroad

The Bank of England (BoE) will reveal its findings of their long-awaited study into the impact of negative interest rates when the Bank meets on Thursday.

  • It will be a busy day for the BoE as this will be what is deemed a “Super Thursday” with the latest economic projections, a press conference by the governor of the Bank, and an interest rate decision all being released.
  • Comments from policymakers and the head of the Bank suggest that it is unlikely rates will head into negative territory, at least in the short term.
  • Confirmation of the decision to keep rates positive is likely to boost the strength of the pound.
  • From a domestic point of view from here at home, a stronger pound is likely to continue the weakening of the US Dollar that has been occurring since last year.

Full Steam Ahead!

House Democrats intend to move forward next week to pass a budget resolution.

  • This will be the first step in the reconciliation process to allow Democrats to approve President Biden’s Covid-19 relief bill without Republican support.
  • Speaker Pelosi and House Democrats intend to move quickly to deliver the $1.9 trillion aid package.
  • Markets will keep a close eye on the process to determine if the full amount of aid will be delivered or a watered-down version necessary to gain bipartisan support.

Eurozone Woes

The preliminary Gross Domestic Product numbers for Q4 of the Eurozone will be released on Tuesday.

  • The economy is forecasted to have contracted by 1.8% in the quarter, partially undoing the impressive growth of 12.5% in the third quarter of 2020.
  • Additionally, the EU Consumer Price Index numbers for January will be released on Wednesday, with forecasts predicting 0.4%.

Earnings Parade

Earnings season continues with particular focus on big tech and pharmaceuticals next week with Amazon (AMZN), Alphabet (GOOG, GOOGL), Merck (MRK) and Pfizer (PFE) reporting.

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Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets over $1.6 billion.

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